Security and Purchase Agreement dated August 24, 2005 among Laurus Master Fund,
      Ltd., the registrant and subsidiaries of the registrant identified therein


    

      Exhibit
        10.9

       

       

      SECURITY
        AND PURCHASE AGREEMENT

       

      LAURUS
        MASTER FUND, LTD.

       

      


       

      


       

      MAGNETECH
        INTEGRATED SERVICES CORP.,

       

       

       

      MAGNETECH
        INDUSTRIAL SERVICES, INC.,

       

      MARTELL
        ELECTRIC, LLC,

       

       

       

      


       

      


       

      and

       

      


       

      


       

      HK
        ENGINE
        COMPONENTS, LLC

      HK
        MACHINED PARTS, LLC

      HK
        WESTON
        PROPERTIES, LLC

      HK
        CAST
        PRODUCTS, LLC

       

      Dated:
        August 24, 2005

       

      



      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


       

      TABLE
        OF CONTENTS

       

      


      
        	 	 	
                Page

              
	 	 	 
	
                1.

              	
                General
                  Definitions and Terms; Rules of Construction

              	
                1

              
	 	 	 
	
                2.

              	
                Loan
                  Facility

              	
                2

              
	 	 	 
	
                3.

              	
                Repayment
                  of the Loans

              	
                5

              
	 	 	 
	
                4.

              	
                Procedure
                  for Loans

              	
                5

              
	 	 	 
	
                5.

              	
                Interest
                  and Payments

              	
                5

              
	 	 	 
	
                6.

              	
                Security
                  Interest

              	
                7

              
	 	 	 
	
                7.

              	
                Representations,
                  Warranties and Covenants Concerning the Collateral

              	
                7

              
	 	 	 
	
                8.

              	
                Payment
                  of Accounts

              	
                10

              
	 	 	 
	
                9.

              	
                Collection
                  and Maintenance of Collateral

              	
                10

              
	 	 	 
	
                10.

              	
                Inspections
                  and Appraisals

              	
                11

              
	 	 	 
	
                11.

              	
                Financial
                  Reporting

              	
                11

              
	 	 	 
	
                12.

              	
                Additional
                  Representations and Warranties

              	
                12

              
	 	 	 
	
                13.

              	
                Covenants

              	
                22

              
	 	 	 
	
                14.

              	
                Further
                  Assurances

              	
                29

              
	 	 	 
	
                15.

              	
                Representations,
                  Warranties and Covenants pf Laurus

              	
                30

              
	 	 	 
	
                16.

              	
                Power
                  of Attorney

              	
                31

              
	 	 	 
	
                17.

              	
                Term
                  of Agreement

              	
                32

              
	 	 	 
	
                18.

              	
                Termination
                  of Lien

              	
                32

              
	 	 	 
	
                19.

              	
                Events
                  of Default

              	
                32

              
	 	 	 
	
                20.

              	
                Remedies

              	
                35

              


      


      
        
          
          

        

        
          i

          
            

          

        

        
          
          

        

      


      


      
        	 	 	
                Page

              
	 	 	 
	
                21.

              	
                Waivers

              	
                35

              
	 	 	 
	
                22.

              	
                Expenses

              	
                36

              
	 	 	 
	
                23.

              	
                Assignment
                  by Laurus

              	
                36

              
	 	 	 
	
                24.

              	
                No
                  Waiver; Cumulative Remedies

              	
                37

              
	 	 	 
	
                25.

              	
                Application
                  of Payments

              	
                37

              
	 	 	 
	
                26.

              	
                Indemnity

              	
                37

              
	 	 	 
	
                27.

              	
                Revival

              	
                38

              
	 	 	 
	
                28.

              	
                Borrowing
                  Agency Provisions

              	
                38

              
	 	 	 
	
                29.

              	
                Notices

              	
                39

              
	 	 	 
	
                30.

              	
                Governing
                  Law, Jurisdiction and Waiver of Jury Trial

              	
                40

              
	 	 	 
	
                31.

              	
                Limitation
                  of Liability

              	
                41

              
	 	 	 
	
                32.

              	
                Entire
                  Understanding

              	
                41

              
	 	 	 
	
                33.

              	
                Severability

              	
                42

              
	 	 	 
	
                34.

              	
                Captions

              	
                42

              
	 	 	 
	
                35.

              	
                Counterparts;
                  Telecopier Signature

              	
                42

              
	 	 	 
	
                36.

              	
                Construction

              	
                42

              
	 	 	 
	
                37.

              	
                Publicity

              	
                42

              
	 	 	 
	
                38.

              	
                Joinder

              	
                42

              
	 	 	 
	
                39

              	
                Legends

              	
                43

              


      

       

      



      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      


       

      


      SECURITY
        AND PURCHASE AGREEMENT

       

      This
        Security and Purchase Agreement is made as of August 24, 2005 by and among
        LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),
        Magnetech Integrated Services Corp., an Indiana corporation (“the
        Parent”),
        and
        each party listed on Exhibit
        A
        attached
        hereto (each an “Eligible
        Subsidiary”
        and
        collectively, the “Eligible
        Subsidiaries”;
        the
        Parent and each Eligible Subsidiary, each a “Company” and collectively, the
“Companies”).

       

      BACKGROUND

       

      The
        Companies have requested that Laurus make advances available to the Companies;
        and

       

      Laurus
        has agreed to make such advances on the terms and conditions set forth in
        this
        Agreement.

       

      AGREEMENT

       

      NOW,
        THEREFORE, in consideration of the mutual covenants and undertakings and
        the
        terms and conditions contained herein, the parties hereto agree as
        follows:

       

      1. General
        Definitions and Terms; Rules of Construction.

       

      (a) General
        Definitions.
        Capitalized terms used in this Agreement shall have the meanings assigned
        to
        them in Annex
        A.

       

      (b) Accounting
        Terms.
        Any
        accounting terms used in this Agreement which are not specifically defined
        shall
        have the meanings customarily given them in accordance with GAAP and all
        financial computations shall be computed, unless specifically provided herein,
        in accordance with GAAP consistently applied.

       

      (c) Other
        Terms.
        All
        other terms used in this Agreement and defined in the UCC, shall have the
        meaning given therein unless otherwise defined herein.

       

      (d) Rules
        of Construction.
        All
        Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to
        this
        Agreement are incorporated herein by reference and taken together with this
        Agreement constitute but a single agreement. The words “herein”, “hereof” and
“hereunder” or other words of similar import refer to this Agreement as a whole,
        including the Exhibits, Addenda, Annexes and Schedules thereto, as the same
        may
        be from time to time amended, modified, restated or supplemented, and not
        to any
        particular section, subsection or clause contained in this Agreement. Wherever
        from the context it appears appropriate, each term stated in either the singular
        or plural shall include the singular and the plural, and pronouns stated
        in the
        masculine, feminine or neuter gender shall include the masculine, the feminine
        and the neuter. The term “or” is not exclusive. The term “including” (or any
        form thereof) shall not be limiting or exclusive. All references to statutes
        and
        related regulations shall include any amendments of same and any successor
        statutes and regulations. All references in this 


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      Agreement
        or in the Schedules, Addenda, Annexes and Exhibits to this Agreement to
        sections, schedules, disclosure schedules, exhibits, and attachments shall
        refer
        to the corresponding sections, schedules, disclosure schedules, exhibits,
        and
        attachments of or to this Agreement. All references to any instruments or
        agreements, including references to any of this Agreement or the Ancillary
        Agreements shall include any and all modifications or amendments thereto
        and any
        and all extensions or renewals thereof.

       

      2. Loan
        Facility.

       

      (a) Revolving
        Loans.

      


      (i)
        Subject to the terms and conditions set forth herein and in the Ancillary
        Agreements, Laurus may make revolving loans (the “Revolving
        Loans”)
        to
        Companies from time to time during the Term which, in the aggregate at any
        time
        outstanding, will not exceed the lesser of (x) (I) the Capital Availability
        Amount minus (II) such reserves as Laurus may reasonably in its good faith
        judgment deem proper and necessary from time to time based on the occurrence
        of
        significant business developments of any Company (the “Reserves”)
        and
        (y) an amount equal to (I) the Accounts Availability minus (II) the Reserves.
        The amount derived at any time from Section 2(a)(i)(y)(I) minus
        2(a)(i)(y)(II) shall be referred to as the “Formula
        Amount.”
        The
        Companies shall, jointly and severally, execute and deliver to Laurus on
        the
        Closing Date the Revolving Note and a Minimum Borrowing Note evidencing the
        Revolving Loans funded on the Closing Date. From time to time thereafter,
        the
        Companies shall jointly and severally execute and deliver to Laurus immediately
        prior to the final funding of each additional $4,000,000 tranche of Revolving
        Loans allocated to any Minimum Borrowing Note issued after the date hereof
        (calculated on a cumulative basis for each such tranche) an additional Minimum
        Borrowing Note evidencing such tranche, substantially in the form of the
        Minimum
        Borrowing Note delivered by the Companies to Laurus on the Closing Date.
        Notwithstanding anything herein to the contrary, whenever during the Term
        the
        outstanding balance on the Minimum Borrowing Note shall be less than the
        Minimum
        Borrowing Amount (such difference being referred to herein as the “Transferable
        Amount”)
        to the
        extent that the outstanding balance on the Revolving Note should equal or
        exceed
        $1,000,000, that portion of the balance of the Revolving Note that exceeds
        $1,000,000, but does not exceed the Transferable Amount, shall be segregated
        from the outstanding balance under the Revolving Note and allocated to and
        aggregated with the then existing balance of the next unissued serialized
        Minimum Borrowing Note (the “Next
        Unissued Serialized Note”);
        provided that such segregated amount shall remain subject to the terms and
        conditions of such Revolving Note (including the repayment provisions of
        the
        Revolving Note) until a new serialized Minimum Borrowing Note is issued as
        set
        forth below. The Next Unissued Serialized Note shall remain in book entry
        form
        until the balance thereunder shall equal the Minimum Borrowing Amount, at
        which
        time a new serialized Minimum Borrowing Note in the face amount equal to
        the
        Minimum Borrowing Amount will be issued and registered as set forth in the
        Registration Rights Agreement (and the outstanding balance under the Revolving
        Note shall at such time be correspondingly reduced in the amount equal to
        the
        Minimum Borrowing Amount as a result of the issuance of such new serialized
        Minimum Borrowing Note). Notwithstanding anything to the contrary contained
        in
        this Agreement or the Ancillary Agreement, the aggregate principal amount
        of all
        Minimum Borrowing Notes issued shall not exceed $7,000,000 without the consent
        of the Parent. 


      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      


      (ii)
        Notwithstanding the limitations set forth above, if requested by any Company,
        Laurus retains the right to lend to such Company from time to time such amounts
        in excess of such limitations as Laurus may determine in its sole
        discretion.

       

      (iii)
        The
        Companies acknowledge that the exercise of Laurus’ discretionary rights
        hereunder may result during the Term in one or more increases or decreases
        in
        the advance percentages used in determining Accounts Availability and each
        of
        the Companies hereby consent to any such increases or decreases which may
        limit
        or restrict advances requested by the Companies, provided that in the case
        of
        any such decrease in the advance percentages the events giving rise to such
        decrease and Laurus’ use of such discretion are attributable to a significant
        change in the assets, liabilities, condition (financial or otherwise),
        properties, operations, prospects or Eligible Accounts in the reasonable
        good
        faith judgment of Laurus.

       

      (iv)
        If
        any interest, fees, costs or charges payable to Laurus hereunder are not
        paid
        when due, each of the Companies shall thereby be deemed to have requested,
        and
        Laurus is hereby authorized at its discretion to make and charge to the
        Companies’ account, a Loan as of such date in an amount equal to such unpaid
        interest, fees, costs or charges.

       

      (v)
        If
        any Company at any time after three (3) days written notice to such Company
        from
        Laurus (provided however that such written notice to such Company shall not
        be
        required in the event that an Event of Default has occurred and is continuing)
        fails to perform or observe any of the covenants contained in this Agreement
        or
        any Ancillary Agreement, Laurus may, but need not, perform or observe such
        covenant on behalf and in the name, place and stead of such Company (or,
        at
        Laurus’ option, in Laurus’ name) and may, but need not, take any and all other
        actions which Laurus may deem necessary to cure or correct such failure
        (including the payment of taxes, the satisfaction of Liens, the performance
        of
        obligations owed to Account Debtors, lessors or other obligors, the procurement
        and maintenance of insurance, the execution of assignments, security agreements
        and financing statements, and the endorsement of instruments). The amount
        of all
        monies expended and all costs and expenses (including attorneys’ fees and legal
        expenses) incurred by Laurus in connection with or as a result of the
        performance or observance of such agreements or the taking of such action
        by
        Laurus shall be charged to the Companies’ account as a Revolving Loan and added
        to the Obligations. To facilitate Laurus’ performance or observance of such
        covenants by each Company, each Company hereby irrevocably appoints Laurus,
        or
        Laurus’ delegate, acting alone, as such Company’s attorney in fact (which
        appointment is coupled with an interest) with the right (but not
        the
        duty) from time to time to create, prepare, complete, execute, deliver, endorse
        or file in the name and on behalf of such Company any and all instruments,
        documents, assignments, security agreements, financing statements, applications
        for insurance and other agreements and writings required to be obtained,
        executed, delivered or endorsed by such Company.

       

      (vi)
        Laurus will account to Company Agent monthly with a statement of all Loans
        and
        other advances, charges and payments made pursuant to this Agreement, and
        such
        account rendered by Laurus shall be deemed final, binding and conclusive
        unless
        Laurus is notified by Company Agent in writing to the contrary within thirty
        (30) days of the date each account was rendered specifying the item or items
        to
        which objection is made.


      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      


       

          (vii)
        During the Term, the Companies may borrow and prepay Loans in accordance
        with
        the terms and conditions hereof. 

       

          (viii)
        If
        any Eligible Account is not paid by the Account Debtor within ninety (90)
        days
        after the date that such Eligible Account was invoiced or if any Account
        Debtor
        asserts a deduction, dispute, contingency, set-off, or counterclaim with
        respect
        to any Eligible Account, (a “Delinquent
        Account”),
        the
        Companies shall jointly and severally (i) reimburse Laurus for the amount
        of the
        Loans made with respect to such Delinquent Account plus an adjustment fee
        in an
        amount equal to a fifteenth of one percent (0.15%) of the gross face amount
        of
        such Eligible Account or (ii) immediately replace such Delinquent Account
        with
        an otherwise Eligible Account.

       

      (b) Receivables
        Purchase.
        Following the occurrence and during the continuance of an Event of Default,
        Laurus may, at its option, elect to convert the credit facility contemplated
        hereby to an accounts receivable purchase facility. Upon such election by
        Laurus
        (subsequent notice of which Laurus shall provide to Company Agent), the
        Companies shall be deemed to hereby have sold, assigned, transferred, conveyed
        and delivered to Laurus, and Laurus shall be deemed to have purchased and
        received from the Companies, all right, title and interest of the Companies
        in
        and to all Accounts which shall at any time constitute Eligible Accounts
        (the
“Receivables
        Purchase”).
        All
        outstanding Loans hereunder shall be deemed obligations under such accounts
        receivable purchase facility. The conversion to an accounts receivable purchase
        facility in accordance with the terms hereof shall not be deemed an exercise
        by
        Laurus of its secured creditor rights under Article 9 of the UCC. Immediately
        following Laurus’ request, the Companies shall execute all such further
        documentation as may be required by Laurus to more fully set forth the accounts
        receivable purchase facility herein contemplated, including, without limitation,
        Laurus’ standard form of accounts receivable purchase agreement and account
        debtor notification letters, but any Company’s failure to enter into any such
        documentation shall not impair or affect the Receivables Purchase in any
        manner
        whatsoever.

       

      (c) Minimum
        Borrowing Amount.
        After a
        registration statement registering the Registrable Securities (as defined
        in the
        Registration Rights Agreement) has been declared effective by the SEC,
        conversions of the Minimum Borrowing Amount into the Common Stock may be
        initiated as set forth in the respective Minimum Borrowing Note. From and
        after
        the date upon which any outstanding principal of the Minimum Borrowing Amount
        (as evidenced by the first Minimum Borrowing Note) is converted into Common
        Stock (the “First
        Conversion Date”),
        (i)
        corresponding amounts of all outstanding Loans (not attributable to the then
        outstanding Minimum Borrowing Amount) existing on or made after the First
        Conversion Date will be aggregated in accordance with Section 2(a)(i) and
        (ii)
        the Companies will issue a new (serialized) Minimum Borrowing Note to Laurus
        in
        accordance with Section 2(a)(i), and (iii) the Parent shall prepare and file
        a
        subsequent registration statement with the SEC to register the shares of
        common
        stock into which such subsequent Minimum Borrowing Note is convertible as
        set
        forth in the Registration Rights Agreement.

       

      (d) Term
        Loan.
        Subject
        to the terms and conditions set forth herein and in the Ancillary Agreements,
        Laurus shall make a term loan (the “Term
        Loan”)
        to the
        Parent (for the benefit of Companies) in an aggregate amount equal to
        $3,000,000. The Term Loan shall be advanced on the Closing Date and shall
        be,
        with respect to principal, payable in consecutive 


      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      


      monthly
        installments of principal commencing on March 1, 2006 and on the first day
        of
        each month thereafter, subject to acceleration upon the occurrence of an
        Event
        of Default or termination of this Agreement. The first twenty-nine principal
        installments shall each be in the amount of $100,000 and the thirtieth and
        final
        installment shall be in an amount equal to the unpaid principal balance of
        the
        Term Loan plus all accrued and unpaid interest thereon. The Term Loan shall
        be
        evidenced by the Term Note

       

      3. Repayment
        of the Loans.
        The
        Companies (a) may prepay the Obligations from time to time in accordance
        with
        the terms and provisions of the Notes (and Section 17 hereof if such prepayment
        is due to a termination of this Agreement); (b) shall repay on the expiration
        of
        the Term (i) the then aggregate outstanding principal balance of the Loans
        together with accrued and unpaid interest, fees and charges and; (ii) all
        other
        amounts owed Laurus under this Agreement and the Ancillary Agreements; and
        (c)
        subject to Section 2(a)(ii), shall repay on any day on which the then aggregate
        outstanding principal balance of the Loans are in excess of the Formula Amount
        at such time, Loans in an amount equal to such excess. Any payments of
        principal, interest, fees or any other amounts payable hereunder or under
        any
        Ancillary Agreement shall be made prior to 12:00 noon (New York time) on
        the due
        date thereof in immediately available funds.

       

      4. Procedure
        for Revolving Loans.
        Company
        Agent may by written notice request a borrowing of Revolving Loans prior
        to
        12:00 noon (New York time) on the Business Day of its request to incur, on
        the
        next Business Day, a Loan. Together with each request for a Revolving Loan
        (or
        at such other intervals as Laurus may request), Company Agent shall deliver
        to
        Laurus a Borrowing Base Certificate in the form of Exhibit
        B
        attached
        hereto, which shall be certified as true and correct by the Chief Executive
        Officer or Chief Financial Officer of Company Agent together with all supporting
        documentation relating thereto. All Revolving Loans shall be disbursed from
        whichever office or other place Laurus may designate from time to time and
        shall
        be charged to the Companies’ account on Laurus’ books. The proceeds of each
        Revolving Loan made by Laurus shall be made available to Company Agent on
        the
        Business Day following the Business Day so requested in accordance with the
        terms of this Section 4 by way of credit to the applicable Company’s operating
        account maintained with such bank as Company Agent designated to Laurus.
        Interest will begin to accrue on such Revolving Loans on the day the applicable
        Company receives the proceeds of such Revolving Loan. Any and all Obligations
        due and owing hereunder may be charged to the Companies’ account and shall
        constitute Revolving Loans.

       

      5. Interest
        and Payments. 

       

      (a) Interest.

       

      (i) Except
        as
        modified by Section 5(a)(iii) below, the Companies shall jointly and severally
        pay interest at the Contract Rate on the unpaid principal balance of each
        Loan
        until such time as such Loan is collected in full in good
        funds in
        dollars of the United States of America.


      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      


       

      (ii) Interest
        and payments shall be computed on the basis of actual days elapsed in a year
        of
        360 days. At Laurus’ option, Laurus may charge the Companies’ account for said
        interest.

       

      (iii) Effective
        upon the occurrence of any Event of Default and for so long as any Event
        of
        Default shall be continuing, the Contract Rate shall automatically be increased
        as set forth in the Notes (such increased rate, the “Default
        Rate”),
        and
        all outstanding Obligations, including unpaid interest, shall continue to
        accrue
        interest from the date of such Event of Default at the Default Rate applicable
        to such Obligations. 

       

      (iv) In
        no
        event shall the aggregate interest payable hereunder exceed the maximum rate
        permitted under any applicable law or regulation, as in effect from time
        to time
        (the “Maximum
        Legal Rate”),
        and
        if any provision of this Agreement or any Ancillary Agreement is in
        contravention of any such law or regulation, interest payable under this
        Agreement and each Ancillary Agreement shall be computed on the basis of
        the
        Maximum Legal Rate (so that such interest will not exceed the Maximum Legal
        Rate). 

       

      (v) The
        Companies shall jointly and severally pay principal, interest and all other
        amounts payable hereunder, or under any Ancillary Agreement, without any
        deduction whatsoever, including any deduction for any set-off or
        counterclaim.

       

      (b) Payments;
        Certain Closing Conditions.

       

      (i) Closing
        Payment; Grant Shares.
        Upon
        execution of this Agreement by each Company and Laurus: (x) the Companies
        shall
        jointly and severally pay to Laurus Capital Management, LLC a closing payment
        in
        an amount equal to three and six tenths percent (3.60%) of the Total Investment
        Amount (the “Closing
        Payment”);
        and
        (y) the Parent shall issue to Laurus 6,163,588 fully paid and non-assessable
        shares of Common Stock (the “Grant
        Shares”).
        The
        Closing Payment and Grant Shares shall be deemed fully earned on the Closing
        Date and shall not be subject to rebate or proration for any
        reason.

       

      (ii) Unused
        Line Payment.
        None.

       

      (iii) Overadvance
        Payment.
        Without
        affecting Laurus’ rights hereunder in the event (x) the Loans exceed the Formula
        Amount (each such event, an “Overadvance”)
        without the written consent of Laurus, all such Overadvances shall bear
        additional interest at a rate of 1.0% per month for all times such amounts
        shall
        be in excess of the Formula Amount and (y) an Overadvance exists following
        the
        receipt by the Companies of the written consent of Laurus, all such Overadvances
        shall bear additional interest at a rate mutually acceptable to Laurus and
        Parent for all times such amounts shall be in excess of the Formula Amount.
        All
        amounts that are incurred pursuant to this Section 5(b)(iii) shall be due
        and
        payable by the Companies monthly, in arrears, on the first business day of
        each
        calendar month and upon expiration of the Term. 

       

      (iv) Expenses.
        The
        Companies shall jointly and severally reimburse Laurus for its expenses
        (including reasonable legal fees and expenses) incurred in connection with
        the
        preparation and negotiation of this Agreement and the Ancillary Agreements,
        and
        expenses incurred in connection with Laurus’ due diligence review of each
        Company and its 


      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      


      Subsidiaries
        and all related matters. Amounts required to be paid under this Section 5(b)(iv)
        will be paid on the Closing Date and shall be $51,500 for such expenses referred
        to in this Section 5(b)(iv), plus the cost of local real estate counsel for
        Laurus.

       

      6. Security
        Interest.

       

      (a) To
        secure
        the prompt payment to Laurus of the Obligations, each Company hereby assigns,
        pledges and grants to Laurus a continuing security interest in and Lien upon
        all
        of the Collateral. All of each Company’s Books and Records relating to the
        Collateral shall, until delivered to or removed by Laurus, be kept by such
        Company in trust for Laurus until all Obligations have been paid in full.
        Each
        confirmatory assignment schedule or other form of assignment hereafter executed
        by each Company shall be deemed to include the foregoing grant, whether or
        not
        the same appears therein. 

       

      (b) Each
        Company hereby (i) authorizes Laurus to file any financing statements,
        continuation statements or amendments thereto that (x) indicate the Collateral
        (1) as all assets and personal property of such Company or words of similar
        effect, regardless of whether any particular asset comprised in the Collateral
        falls within the scope of Article 9 of the UCC of such jurisdiction, or (2)
        as
        being of an equal or lesser scope or with greater detail, and (y) contain
        any
        other information required by Part 5 of Article 9 of the UCC for the sufficiency
        or filing office acceptance of any financing statement, continuation statement
        or amendment and (ii) ratifies its authorization for Laurus to have filed
        any
        initial financial statements, or amendments thereto if filed prior to the
        date
        hereof. Each Company acknowledges that it is not authorized to file any
        financing statement or amendment or termination statement with respect to
        any
        financing statement without the prior written consent of Laurus and agrees
        that
        it will not do so without the prior written consent of Laurus, subject to
        such
        Company’s rights under Section 9-509(d)(2) of the UCC.

       

      (c) Each
        Company hereby grants to Laurus an irrevocable, non-exclusive license
        (exercisable upon the termination of this Agreement due to an occurrence
        and
        during the continuance of an Event of Default without payment of royalty
        or
        other compensation to such Company) to use, transfer, license or sublicense
        any
        Intellectual Property now owned, licensed to, or hereafter acquired by such
        Company, and wherever the same may be located, and including in such license
        access to all media in which any of the licensed items may be recorded or
        stored
        and to all computer and automatic machinery software and programs used for
        the
        compilation or printout thereof, and represents, promises and agrees that
        any
        such license or sublicense is not and will not be in conflict with the
        contractual or commercial rights of any third Person; provided, that such
        license will terminate
        on the termination of this Agreement and the payment in full of all
        Obligations.

       

      7. Representations,
        Warranties and Covenants Concerning the Collateral.
        Each
        Company represents, warrants (each of which such representations and warranties
        shall be deemed repeated upon the making of each request for a Revolving
        Loan
        and made as of the time of each and every Revolving Loan hereunder) and
        covenants as follows:

       

      (a) all
        of
        the Collateral (i) is owned by it free and clear of all Liens (including
        any
        claims of infringement) except those in Laurus’ favor and Permitted Liens and
        (ii) is not 


      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      


      subject
        to any agreement prohibiting the granting of a Lien or requiring notice of
        or
        consent to the granting of a Lien.

       

      (b) it
        shall
        not encumber, mortgage, pledge, assign or grant any Lien in any Collateral
        or
        any other assets to anyone other than Laurus and except for Permitted
        Liens.

       

      (c) the
        Liens
        granted pursuant to this Agreement, upon completion of all filings and other
        actions necessary to perfect such liens in the Collateral under applicable
        law,
        constitute valid perfected security interests in all of the Collateral in
        favor
        of Laurus as security for the prompt and complete payment and performance
        of the
        Obligations, enforceable in accordance with the terms hereof against any
        and all
        of its creditors and purchasers and such security interest is prior to all
        other
        Liens in existence on the date hereof.

       

      (d) no
        effective security agreement, mortgage, deed of trust, financing statement,
        equivalent security or Lien instrument or continuation statement covering
        all or
        any part of the Collateral is or will be on file or of record in any public
        office, except those relating to Permitted Liens.

       

      (e) it
        shall
        not dispose of any of the Collateral whether by sale, lease or otherwise
        except
        for the sale of Inventory in the ordinary course of business and for the
        disposition or transfer in the ordinary course of business during any fiscal
        year of obsolete and worn-out Equipment having an aggregate fair market value
        of
        not more than $200,000 and only to the extent that (i) the proceeds of any
        such
        disposition are used to acquire replacement Equipment which is subject to
        Laurus’ first priority security interest or are used to repay Loans or to pay
        general corporate expenses, or (ii) following the occurrence of an Event
        of
        Default which continues to exist the proceeds of which are remitted to Laurus
        to
        be held as cash collateral for the Obligations.

       

      (f) it
        shall
        defend the right, title and interest of Laurus in and to the Collateral against
        the claims and demands of all Persons whomsoever, and take such actions,
        including (i) all actions necessary to grant Laurus “control” of any
        Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
        Chattel Paper owned by it, with any agreements establishing control to be
        in
        form and substance satisfactory to Laurus, (ii) the prompt (but in no event
        later than five (5) Business Days following Laurus’ request therefor) delivery
        to Laurus of all original Instruments, Chattel Paper, negotiable Documents
        and
        certificated Stock owned by it (in each case, accompanied by stock powers,
        allonges or other instruments of transfer executed in blank), (iii) notification
        of Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution
        of litigation against third parties as shall be prudent in order to protect
        and
        preserve its and/or Laurus’ respective and several interests in the Collateral.


       

      (g) it
        shall
        promptly, and in any event within ten (10) Business Days after the same is
        acquired by it, notify Laurus of any commercial tort claim (as defined in
        the
        UCC) acquired by it and unless otherwise consented by Laurus, it shall enter
        into a supplement to this Agreement granting to Laurus a Lien in such commercial
        tort claim.

       

      (h) it
        shall
        place notations upon its Books and Records and any of its financial statements
        to disclose Laurus’ Lien in the Collateral.


      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      


      (i) if
        it
        retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon
        Laurus’ request such Chattel Paper and Instruments shall be marked with the
        following legend: “This writing and obligations evidenced or secured hereby are
        subject to the security interest of Laurus Master Fund, Ltd.” Notwithstanding
        the foregoing, upon the reasonable request of Laurus, such Chattel Paper
        and
        Instruments shall be delivered to Laurus.

       

      (j) it
        shall
        perform in a reasonable time all other steps requested by Laurus to create
        and
        maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject
        only to Permitted Liens.

       

      (k) it
        shall
        notify Laurus promptly and in any event within ten (10) Business Days after
        obtaining knowledge thereof (i) of any event or circumstance that, to its
        knowledge, would cause Laurus to consider any then existing Account as no
        longer
        constituting an Eligible Account; (ii) of any material delay in its performance
        of any of its obligations to any Account Debtor; (iii) of any assertion by
        any
        Account Debtor of any material claims, offsets or counterclaims; (iv) of
        any
        material allowances, credits and/or monies granted by it to any Account Debtor;
        (v) of all material adverse information relating to the financial condition
        of
        an Account Debtor; (vi) of any material return of goods; and (vii) of any
        material loss, damage or destruction of any of the Collateral.

       

      (l) all
        Eligible Accounts (i) represent complete bona fide transactions which require
        no
        further act under any circumstances on its part to make such Accounts payable
        by
        the Account Debtors, (ii) are not subject to any present, future contingent
        offsets or counterclaims, and (iii) do not represent bill and hold sales,
        consignment sales, guaranteed sales, sale or return or other similar
        understandings or obligations of any Affiliate or Subsidiary of such Company.
        It
        has not made, nor will it make, any agreement with any Account Debtor for
        any
        extension of time for the payment of any Account, any compromise or settlement
        for less than the full amount thereof, any release of any Account Debtor
        from
        liability therefor, or any deduction therefrom except in the ordinary course
        of
        its business consistent with historical practice. 

       

      (m) it
        shall
        keep and maintain its Equipment in good operating condition, except for ordinary
        wear and tear, and shall make all necessary repairs and replacements thereof
        so
        that the value and operating efficiency shall at all times be maintained
        and
        preserved. It shall not permit any such items to become a Fixture to real
        estate
        or accessions to other personal property.

       

      (n) it
        shall
        maintain and keep all of its Books and Records concerning the Collateral
        at its
        executive offices listed in Schedule
        12(aa)
        except
        as noted on Schedule
        12(aa).

       

      (o) it
        shall
        maintain and keep the tangible Collateral at the addresses listed in
Schedule
        12(aa),
        provided, that it may change such locations or open a new location, provided
        that it provides Laurus at least thirty (30) days prior written notice of
        such
        changes or new location and (ii) prior to such change or opening of a new
        location where Collateral having a value of more than $200,000 will be located,
        it executes and delivers to Laurus such agreements deemed reasonably necessary
        or prudent by Laurus, including landlord agreements, mortgagee agreements
        and
        warehouse agreements, each in form and substance satisfactory to Laurus,
        to
        adequately protect and maintain Laurus’ security interest in such
        Collateral.


      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      


      (p) Schedule
        7(p)
        lists
        all banks and other financial institutions at which it maintains deposits
        and/or
        other accounts, and such Schedule correctly identifies the name, address
        and
        telephone number of each such depository, the name in which the account is
        held,
        a description of the purpose of the account, and the complete account number.
        It
        shall not establish any depository or other bank account with any financial
        institution (other than the accounts set forth on Schedule
        7(p))
        without
        Laurus’ prior written consent.

       

      8. Payment
        of Accounts. 

       

      (a) Each
        Company will irrevocably direct all of its present and future Account Debtors
        and other Persons obligated to make payments constituting Collateral to make
        such payments directly to the lockboxes maintained by such Company (the
“Lockboxes”)
        with
        MFB Financial or such other financial institution accepted by Laurus in writing
        as may be selected by such Company (the “Lockbox
        Bank”)
        pursuant to the terms of the certain agreements among one or more Companies,
        Laurus and/or the Lockbox Bank dated on or about the date hereof. On or prior
        to
        the Closing Date, each Company shall and shall cause the Lockbox Bank to
        enter
        into all such documentation acceptable to Laurus pursuant to which, among
        other
        things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily
        basis
        and deposit all checks received therein to an account designated by Laurus
        in
        writing and (b) comply only with the instructions or other directions of
        Laurus
        concerning the Lockbox. All of each Company’s invoices, account statements and
        other written or oral communications directing, instructing, demanding or
        requesting payment of any Account of any Company or any other amount
        constituting Collateral shall conspicuously direct that all payments be made
        to
        the Lockbox or such other address as Laurus may direct in writing. If,
        notwithstanding the instructions to Account Debtors, any Company receives
        any
        payments, such Company shall immediately remit such payments to Laurus in
        their
        original form with all necessary endorsements. Until so remitted, such Company
        shall hold all such payments in trust for and as the property of Laurus and
        shall not commingle such payments with any of its other funds or
        property.

       

      (b) At
        Laurus’ election, following the occurrence of an Event of Default which is
        continuing, Laurus may notify each Company’s Account Debtors of Laurus’ security
        interest in the Accounts, collect them directly and charge the collection
        costs
        and expenses thereof to Company’s and the Eligible Subsidiaries joint and
        several account.

       

      9. Collection
        and Maintenance of Collateral.

       

      (a) Laurus
        may verify each Company’s Accounts from time to time, but not more often than
        once every six (6) months, unless an Event of Default has occurred and is
        continuing, utilizing an audit control company or any other agent of
        Laurus.

       

      (b) Proceeds
        of Accounts received by Laurus will be deemed received on the Business Day
        of
        Laurus’ receipt of such proceeds in good funds in dollars of the United States
        of America to an account designated by Laurus. 

       

      (c) As
        Laurus
        receives the proceeds of Accounts of any Company, it shall (i) apply
        such
        proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
        all such remaining proceeds (net of interest, fees and other amounts then
        due
        and owing to Laurus 


      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      


      hereunder)
        to Company Agent (for the benefit of the applicable Companies) upon request
        (but
        no more often than twice a week). Notwithstanding the foregoing, following
        the
        occurrence and during the continuance of an Event of Default, Laurus, at
        its
        option, may (a) apply such proceeds to the Obligations in such order as Laurus
        shall elect, (b) hold all such proceeds as cash collateral for the Obligations
        and each Company
        hereby grants to Laurus a security interest in such cash collateral amounts
        as
        security for the Obligations and/or (c) do any combination of the
        foregoing.

       

      10. Inspections
        and Appraisals.
        At all
        times during normal business hours, Laurus, and/or any agent of Laurus shall
        have the right to (a) have access to, visit, inspect, review, evaluate and
        make
        physical verification and appraisals of each Company’s properties and the
        Collateral, (b) inspect, audit and copy (or take originals if necessary)
        and
        make extracts from each Company’s Books and Records, including management
        letters prepared by the Accountants, and (c) discuss with each Company’s
        directors, principal officers, and independent accountants, each Company’s
        business, assets, liabilities, financial condition, results of operations
        and
        business prospects. Each Company will deliver to Laurus any instrument necessary
        for Laurus to obtain records from any service bureau maintaining records
        for
        such Company. If any internally prepared financial information, including
        that
        required under this Section is unsatisfactory in any manner to Laurus, Laurus
        may request that the Accountants review the same.

       

      11. Financial
        Reporting.
        Company
        Agent will deliver, or cause to be delivered, to Laurus each of the following,
        which shall be in form and detail acceptable to Laurus:

       

      (a) As
        soon
        as available, and in any event within ninety (90) days after the end of each
        fiscal year of the Parent, each Company’s audited financial statements with a
        report of independent certified public accountants of recognized standing
        selected by the Parent and acceptable to Laurus (the “Accountants”),
        which
        annual financial statements shall be without qualification and shall include
        each Company’s balance sheet as at the end of such fiscal year and the related
        statements of each Company’s income, retained earnings
        and cash
        flows for the fiscal year then ended, prepared, if Laurus so requests, on
        a
        consolidating and consolidated basis to include all Subsidiaries and Affiliates
        of each Company, all in reasonable detail and prepared in accordance with
        GAAP,
        together with (i) if and when available, copies of any management letters
        prepared by the Accountants; and (ii) a certificate of the Parent’s President,
        Chief Executive Officer or Chief Financial Officer stating that such financial
        statements have been prepared in accordance with GAAP and whether or not
        such
        officer has knowledge of the occurrence of any Default or Event of Default
        hereunder and, if so, stating in reasonable detail the facts with respect
        thereto;

       

      (b) As
        soon
        as available and in any event within forty five (45) days after the end of
        each
        quarter, an unaudited/internal balance sheet and statements of income, retained
        earnings and cash flows of each Company as at the end of and for such quarter
        and for the year to date period then ended, prepared, if Laurus so requests,
        on
        a consolidating and consolidated basis to include all Subsidiaries and
        Affiliates of each Company, in reasonable detail and stating in comparative
        form
        the figures for the corresponding date and periods in the previous year,
        all
        prepared in accordance with GAAP (without footnotes), subject to year-end
        adjustments and accompanied by a certificate of the Parent’s President, Chief
        Executive Officer or Chief 


      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      


      Financial
        Officer, stating (i) that such financial statements have been prepared in
        accordance with GAAP (without footnotes), subject to year-end audit adjustments,
        and (ii) whether or not such officer has knowledge of the occurrence of any
        Default or Event of Default hereunder not theretofore reported and remedied
        and,
        if so, stating in reasonable detail the facts with respect thereto;


       

      (c) Within
        thirty (30) days after the end of each month (or more frequently if Laurus
        so
        requests), agings of each Company’s Accounts, unaudited trial balances and their
        accounts payable and a calculation of each Company’s Accounts and/or Eligible
        Accounts, provided, however, that if Laurus shall request the foregoing
        information more often than as set forth in the immediately preceding clause,
        each Company shall have thirty (30) days from each such request to comply
        with
        Laurus’ demand; and

       

      (d) Promptly
        after (i) the filing thereof,
        copies of the Parent’s most recent registration statements and annual,
        quarterly, monthly or other regular reports which the Parent files with the
        Securities and Exchange Commission (the “SEC”),
        and
        (ii) the issuance thereof, copies of such financial statements, reports and
        proxy statements as the Parent shall send to its stockholders.

       

      12. Additional
        Representations and Warranties.
        Each
        Company hereby represents and warrants to Laurus as follows:

       

      (a) Organization,
        Good Standing and Qualification.
        It and
        each of its Subsidiaries is a corporation, partnership or limited liability
        company, as the case may be, duly organized, validly existing and in good
        standing under the laws of its jurisdiction of organization. It and each
        of its
        Subsidiaries has the corporate, limited liability
        company
        or partnership, as the case may be, power and authority to own and operate
        its
        properties and assets and, insofar as it is or shall be a party thereto,
        to (i)
        execute and deliver this Agreement and the Ancillary Agreements, (ii) to
        issue
        the Notes and the shares of Common Stock issuable upon conversion of the
        Notes
        (the “Note
        Shares”),
        (iii)
        to issue the Warrants and the shares of Common Stock issuable upon conversion
        of
        the Warrants (the “Warrant
        Shares”),
        (iv)
        to issue and sell the Grant Shares, and to (v) carry out the provisions of
        this
        Agreement and the Ancillary Agreements and to carry on its business as presently
        conducted. It and each of its Subsidiaries is duly qualified and is authorized
        to do business and is in good standing as a foreign corporation, partnership
        or
        limited liability company, as the case may be, in all jurisdictions in which
        the
        nature or location of its activities and of its properties (both owned and
        leased) makes such qualification necessary, except for those jurisdictions
        in
        which failure to do so has not had, or could not reasonably be expected to
        have,
        individually or in the aggregate, a Material Adverse Effect.

       

      (b) Subsidiaries.
        Each of
        its direct and indirect Subsidiaries, the direct owner of each such Subsidiary
        and its percentage ownership thereof, is set forth on Schedule
        12(b).

       

      (c) Capitalization;
        Voting Rights.

       

      (i) The
        authorized capital stock of the Parent, as of the date hereof, consists of
        200,000,000 shares of Common Stock, par value $0.01 per share, of which
        97,330,006 shares are issued and outstanding (excluding the Grant Shares
        to be
        issued to Laurus 


      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      


      pursuant
        to this Agreement), and 20,000,000 shares of preferred stock, par value $0.01
        per share, none of which is outstanding. The authorized, issued and outstanding
        capital stock of each Subsidiary of each Company is set forth on Schedule
        12(c).

       

      (ii) Except
        as
        disclosed on Schedule
        12(c),
        and
        other than: (i) the shares reserved for issuance under the Parent’s stock option
        plans; and (ii) shares which may be issued pursuant to this Agreement and
        the
        Ancillary Agreements, there are no outstanding options, warrants, rights
        (including conversion or preemptive rights and rights of first refusal),
        proxy
        or stockholder agreements, or arrangements or agreements of any kind for
        the
        purchase or acquisition from the Parent of any of its securities. Except
        as
        disclosed on Schedule
        12(c),
        neither
        the offer or issuance of any of the Notes or the Warrants, or the issuance
        of
        any of the Note Shares, the Warrant Shares or the Grant Shares, nor the
        consummation of any transaction contemplated hereby will result in a change
        in
        the price or number of any securities of the Parent outstanding, under
        anti-dilution or other similar provisions contained in or affecting any such
        securities.

       

      (iii) All
        issued and outstanding shares of the Parent’s Common Stock: (i) have been duly
        authorized and validly issued and are fully paid and nonassessable; and
        (ii) were issued in compliance with all applicable state and federal
        laws
        concerning the issuance of securities.

       

      (iv) The
        rights, preferences, privileges and restrictions of the shares of the Common
        Stock are as stated in the Parent’s Certificate of Incorporation (the
“Charter”).
        The
        Note Shares and the Warrant Shares have been duly and validly reserved for
        issuance. When issued in compliance with the provisions of this Agreement
        and
        the Parent’s Charter, the Securities will be validly issued, fully paid and
        nonassessable, and will be free of any liens or encumbrances; provided,
        however,
        that
        the Securities may be subject to restrictions on transfer under state and/or
        federal securities laws as set forth herein or as otherwise required by such
        laws at the time a transfer is proposed.

       

      (d) Authorization;
        Binding Obligations.
        All
        corporate, partnership or limited liability company, as the case may be,
        action
        on its and its Subsidiaries’ part (including their respective officers and
        directors) necessary for the authorization of this Agreement and the Ancillary
        Agreements, the performance of all of its and its Subsidiaries’ obligations
        hereunder and under the Ancillary Agreements on the Closing Date and, the
        authorization, issuance and delivery of the Notes, the Warrant and the Grant
        Shares have been taken or will be taken prior to the Closing Date. This
        Agreement and the Ancillary Agreements, when executed and delivered and to
        the
        extent it is a party thereto, will be its and its Subsidiaries’ valid and
        binding obligations enforceable against each such Person in accordance with
        their terms, except:

       

      (i) as
        limited by applicable bankruptcy, insolvency, reorganization, moratorium
        or
        other laws of general application affecting enforcement of creditors’ rights;
        and

       

      (ii) general
        principles of equity that restrict the availability of equitable or legal
        remedies.


      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      


      The
        issuance of the Notes and the subsequent conversion of the Notes into Note
        Shares are not and will not be subject to any preemptive rights or rights
        of
        first refusal that have not been properly waived or complied with. The issuance
        of the Warrants, the subsequent exercise of the Warrants for Warrant Shares,
        and
        the issuance of the Grant Shares are not and will not be subject to any
        preemptive rights or rights of first refusal that have not been properly
        waived
        or complied with. 

       

      (e) Liabilities.
        Except
        as listed on Schedule
        12(e),
        neither
        it nor any of its Subsidiaries has any liabilities, except current liabilities
        incurred in the ordinary course of business.

       

      (f) Agreements;
        Action.
        Except
        as set forth on Schedule
        12(f):

       

      (i) There
        are
        no agreements, understandings, instruments, contracts, proposed transactions,
        judgments, orders, writs or decrees to which it or any of its Subsidiaries
        is a
        party or to its knowledge by which it is bound which may involve: (i)
        obligations (contingent or otherwise) of, or payments to, it or any of its
        Subsidiaries in excess of $200,000 (other than obligations of, or payments
        to,
        it or any of its Subsidiaries arising from purchase or sale agreements entered
        into in the ordinary course of business); or (ii) the transfer or license
        of any
        patent, copyright, trade secret or other proprietary right to or from it
        (other
        than licenses arising from the purchase of “off the shelf” or other standard
        products); or (iii) provisions restricting the development, manufacture or
        distribution of its or any of its Subsidiaries’ products or services; or (iv)
        indemnification by it or any of its Subsidiaries with respect to infringements
        of proprietary rights.

       

      (ii) Since
        December 31, 2004 (the “Balance
        Sheet Date”)
        and
        except as listed on Schedule
        12(f),
        neither
        it nor any of its Subsidiaries has: (i) declared or paid any dividends, or
        authorized or made any distribution upon or with respect to any class or
        series
        of its capital stock; (ii) incurred any indebtedness for money borrowed or
        any
        other liabilities (other than ordinary course obligations) individually in
        excess of $200,000 or, in the case of indebtedness and/or liabilities
        individually less than $200,000, in excess of $400,000 in the aggregate;
        (iii)
        made any loans or advances to any Person not in excess, individually or in
        the
        aggregate, of $100,000, other than ordinary advances for travel expenses;
        or
        (iv) sold, exchanged or otherwise disposed of any of its assets or rights,
        other
        than the sale of its Inventory in the ordinary course of business.

       

      (iii)For
        the
        purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness,
        liabilities, agreements, understandings, instruments, contracts and proposed
        transactions involving the same Person (including Persons it or any of its
        applicable Subsidiaries has reason to believe are affiliated therewith or
        with
        any Subsidiary thereof) shall be aggregated for the purpose of meeting the
        individual minimum dollar amounts of such subsections.


      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      


      (g)Obligations
        to Related Parties.
        Except
        as set forth on Schedule
        12(g),
        neither
        it nor any of its Subsidiaries has any obligations to their respective officers,
        directors, stockholders or employees other than:

       

      (i) for
        payment of salary for services rendered and for bonus payments;

       

      (ii) reimbursement
        for reasonable expenses incurred on its or its Subsidiaries’
        behalf;

       

      (iii) for
        other
        standard employee benefits made generally available to all employees (including
        stock option agreements outstanding under any stock option plan approved
        by its
        and its Subsidiaries’ Board of Directors, as applicable); and

       

      (iv) obligations
        listed in its and each of its Subsidiary’s financial statements.

       

      Except
        as
        described above or set forth on Schedule
        12(g),
        none of
        its officers, directors or, to the best of its knowledge, key employees or
        stockholders, any of its Subsidiaries or any members of their immediate
        families, are indebted to it or any of its Subsidiaries, individually or
        in the
        aggregate, in excess of $50,000 or have any direct or indirect ownership
        interest in any Person with which it or any of its Subsidiaries is affiliated
        or
        with which it or any of its Subsidiaries has a business relationship, or
        any
        Person which competes with it or any of its Subsidiaries, other than passive
        investments in publicly traded companies (representing less than one percent
        (1%) of such company) which may compete with it or any of its Subsidiaries.
        Except as described above, none of its officers, directors or stockholders,
        or
        any member of their immediate families, is, directly or indirectly, interested
        in any material contract with it or any of its Subsidiaries and no agreements,
        understandings or proposed transactions are contemplated between it or any
        of
        its Subsidiaries and any such Person. Except as set forth on Schedule
        12(g),
        neither
        it nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness
        of any other Person.

       

      (h) Changes.
        Since
        the Balance Sheet Date, except as disclosed in any Schedule to this Agreement
        (including Schedule
        12(h))
        or to
        any of the Ancillary Agreements, there has not been:

       

      (i) any
        change in its or any of its Subsidiaries’ business, assets, liabilities,
        condition (financial or otherwise), properties, operations or prospects,
        which,
        individually or in the aggregate, has had, or could reasonably be expected
        to
        have, a Material Adverse Effect;

       

      (ii) any
        resignation or termination of any of its or its Subsidiaries’ officers, key
        employees or groups of employees; 

       

      (iii) any
        material change, except in the ordinary course of business, in its or any
        of its
        Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity,
        warranty or otherwise;


      
        
          
          

        

        
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      (iv) any
        damage, destruction or loss, whether or not covered by insurance, which has
        had,
        or could reasonably be expected to have, individually or in the aggregate,
        a
        Material Adverse Effect;

       

      (v) any
        waiver by it or any of its Subsidiaries of a valuable right or of a material
        debt owed to it;

       

      (vi) any
        direct or indirect material loans made by it or any of its Subsidiaries to
        any
        of its or any of its Subsidiaries’ stockholders, employees, officers or
        directors, other than advances made in the ordinary course of
        business;

       

      (vii) any
        material change in any compensation arrangement or agreement with any employee,
        officer, director or stockholder; 

       

      (viii) any
        declaration or payment of any dividend or other distribution of its or any
        of
        its Subsidiaries’ assets;

       

      (ix) any
        labor
        organization activity related to it or any of its Subsidiaries;

       

      (x) any
        debt,
        obligation or liability incurred, assumed or guaranteed by it or any of its
        Subsidiaries, except those for immaterial amounts and for current liabilities
        incurred in the ordinary course of business;

       

      (xi) any
        sale,
        assignment or transfer of any Intellectual Property or other intangible
        assets;

       

      (xii) any
        change in any material agreement to which it or any of its Subsidiaries is
        a
        party or by which either it or any of its Subsidiaries is bound which, either
        individually or in the aggregate, has had, or could reasonably be expected
        to
        have, individually or in the aggregate, a Material Adverse Effect;

       

      (xiii) any
        other
        event or condition of any character that, either individually or in the
        aggregate, has had, or could reasonably be expected to have, individually
        or in
        the aggregate, a Material Adverse Effect; or

       

      (xiv) any
        arrangement or commitment by it or any of its Subsidiaries to do any of the
        acts
        described in subsection (i) through (xiii) of this Section 12(h).

       

      (i) Title
        to Properties and Assets; Liens, Etc.
        Except
        as set forth on Schedule 12(i),
        it and
        each of its Subsidiaries has good and marketable title to their respective
        properties and assets, and good title to its leasehold interests, in each
        case
        subject to no Lien, other than Permitted Liens.

       

      All
        facilities, Equipment, Fixtures, vehicles and other properties owned, leased
        or
        used by it or any of its Subsidiaries are in good operating condition and
        repair
        and are reasonably fit and usable for the purposes for which they are being
        used. Except as set forth on Schedule
        12(i),
        it



      
        
          
          

        

        
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      and
        each
        of its Subsidiaries is in compliance with all material terms of each lease
        to
        which it is a party or is otherwise bound.

       

      (j) Intellectual
        Property.

       

      (i) It
        and
        each of its Subsidiaries owns or possesses sufficient legal rights to all
        Intellectual Property necessary for their respective businesses as now conducted
        and, to its knowledge as presently proposed to be conducted, without any
        known
        infringement of the rights of others. There are no outstanding options, licenses
        or agreements of any kind relating to its or any of its Subsidiary’s
        Intellectual Property, nor is it or any of its Subsidiaries bound by or a
        party
        to any options, licenses or agreements of any kind with respect to the
        Intellectual Property of any other Person other than such licenses or agreements
        arising from the purchase of “off the shelf” or standard products.

       

      (ii) Neither
        it nor any of its Subsidiaries has received any communications alleging that
        it
        or any of its Subsidiaries has violated any of the Intellectual Property
        or
        other proprietary rights of any other Person, nor is it or any of its
        Subsidiaries aware of any basis therefor.

       

      (iii) Neither
        it nor any of its Subsidiaries believes it is or will be necessary to utilize
        any inventions, trade secrets or proprietary information of any of its employees
        made prior to their employment by it or any of its Subsidiaries, except for
        inventions, trade secrets or proprietary information that have been rightfully
        assigned to it or any of its Subsidiaries.

       

      (k) Compliance
        with Other Instruments.
        Except
        as set forth in Schedule
        12(k),
        neither
        it nor any of its Subsidiaries is in violation or default of (x) any term
        of its
        Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
        indenture, contract, agreement or instrument to which it is party or by which
        it
        is bound or of any judgment, decree, order or writ, which violation or default,
        in the case of this clause (y), has had, or could reasonably be expected
        to
        have, either individually or in the aggregate, a Material Adverse Effect.
        The
        execution, delivery and performance of and compliance with this Agreement
        and
        the Ancillary Agreements to which it is a party, and the issuance of the
        Notes
        and the other Securities each pursuant hereto and thereto, will not, with
        or
        without the passage of time or giving of notice, result in any such material
        violation, or be in conflict with or constitute a default under any such
        term or
        provision, or result in the creation of any Lien upon any of its or any of
        its
        Subsidiary’s properties or assets or the suspension, revocation, impairment,
        forfeiture or nonrenewal of any permit, license, authorization or approval
        applicable to it or any of its Subsidiaries, their businesses or operations
        or
        any of their assets or properties. 

       

      (l) Litigation.
        Except
        as set forth on Schedule
        12(l),
        there
        is no action, suit, proceeding or investigation pending or, to its knowledge,
        currently threatened against it or any of its Subsidiaries that prevents
        it or
        any of its Subsidiaries from entering into this Agreement or the Ancillary
        Agreements, or from consummating the transactions contemplated hereby or
        thereby, or which has had, or could reasonably be expected to have, either
        individually or in the aggregate, a Material Adverse Effect, or could result
        in
        any change in its or any of its Subsidiaries’ current equity ownership, nor is
        it aware that there is any basis to assert any of the 


      
        
          
          

        

        
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      foregoing.
        Neither it nor any of its Subsidiaries is a party to or subject to the
        provisions of any order, writ, injunction, judgment or decree of any court
        or
        government agency or instrumentality. There is no action, suit, proceeding
        or
        investigation by it or any of its Subsidiaries currently pending or which
        it or
        any of its Subsidiaries intends to initiate.

       

      (m) Tax
        Returns and Payments.
        It and
        each of its Subsidiaries has timely filed all tax returns (federal, state
        and
        local) required to be filed by it. All taxes shown to be due and payable
        on such
        returns, any assessments imposed, and all other taxes due and payable by
        it and
        each of its Subsidiaries on or before the Closing Date, have been paid or
        will
        be paid prior to the time they become delinquent. Except as set forth on
        Schedule
        12(m),
        neither
        it nor any of its Subsidiaries has been advised:

       

      (i) that
        any
        of its returns, federal, state or other, have been or are being audited as
        of
        the date hereof; or

       

      (ii) of
        any
        adjustment, deficiency, assessment or court decision in respect of its federal,
        state or other taxes.

       

      Neither
        it nor any of its Subsidiaries has any knowledge of any liability of any
        tax to
        be imposed upon its properties or assets as of the date of this Agreement
        that
        is not adequately provided for. 

       

      (n) Employees.
        Except
        as set forth on Schedule
        12(n),
        neither
        it nor any of its Subsidiaries has any collective bargaining agreements with
        any
        of its employees. There is no labor union organizing activity pending or,
        to its
        knowledge, threatened with respect to it or any of its Subsidiaries. Except
        as
        disclosed on Schedule
        12(n),
        neither
        it nor any of its Subsidiaries is a party to or bound by any currently effective
        employment contract, deferred compensation arrangement, bonus plan, incentive
        plan, profit sharing plan, retirement agreement or other employee compensation
        plan or agreement. To its knowledge, none of its or any of its Subsidiaries’
        employees, nor any consultant with whom it or any of its Subsidiaries has
        contracted, is in violation of any term of any employment contract, proprietary
        information agreement or any other agreement relating to the right of any
        such
        individual to be employed by, or to contract with, it or any of its Subsidiaries
        because of the nature of the business to be conducted by it or any of its
        Subsidiaries; and to its knowledge the continued employment by it and its
        Subsidiaries of their present employees, and the performance of its and its
        Subsidiaries contracts with its independent contractors, will not result
        in any
        such violation. Neither it nor any of its Subsidiaries is aware that any
        of its
        or any of its Subsidiaries’ employees is obligated under any contract (including
        licenses, covenants or commitments of any nature) or other agreement, or
        subject
        to any judgment, decree or order of any court or administrative agency that
        would interfere with their duties to it or any of its Subsidiaries. Neither
        it
        nor any of its Subsidiaries has received any notice alleging that any such
        violation has occurred. Except for employees who have a current effective
        employment agreement with it or any of its Subsidiaries, none of its or any
        of
        its Subsidiaries’ employees has been granted the right to continued employment
        by it or any of its Subsidiaries or to any material compensation following
        termination of employment with it or any of its Subsidiaries. Except as set
        forth on Schedule 12(n),
        neither
        it nor any of its Subsidiaries is aware that any officer, key employee or
        group
        of employees intends to terminate his, her or their employment with it or
        any of
        its 


      
        
          
          

        

        
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      Subsidiaries,
        as applicable, nor does it or any of its Subsidiaries have a present intention
        to terminate the employment of any officer, key employee or group of
        employees.

       

      (o) Registration
        Rights and Voting Rights.
        Except
        as set forth on Schedule 12(o),
        neither
        it nor any of its Subsidiaries is presently under any obligation, and neither
        it
        nor any of its Subsidiaries has granted any rights, to register any of its
        or
        any of its Subsidiaries’ presently outstanding securities or any of its
        securities that may hereafter be issued. Except as set forth on Schedule 12(o),
        to its
        knowledge, none of its or any of its Subsidiaries’ stockholders has entered into
        any agreement with respect to its or any of its Subsidiaries’ voting of equity
        securities.

       

      (p) Compliance
        with Laws; Permits.
        Except
        as disclosed in Schedule
        12(p)
        or
        another Schedule to this Agreement, neither it nor any of its Subsidiaries
        is in
        violation of the Sarbanes-Oxley Act of 2002 or any SEC related regulation
        or
        rule (to the extent they apply to the Parent or any of its Subsidiaries)
        or any
        other applicable statute, rule, regulation, order or restriction of any domestic
        or foreign government or any instrumentality or agency thereof in respect
        of the
        conduct of its business or the ownership of its properties which has had,
        or
        could reasonably be expected to have, either individually or in the aggregate,
        a
        Material Adverse Effect. No governmental orders, permissions, consents,
        approvals or authorizations are required to be obtained and no registrations
        or
        declarations are required to be filed in connection with the execution and
        delivery of this Agreement or any Ancillary Agreement and the issuance of
        any of
        the Securities, except such as have been duly and validly obtained or filed,
        or
        with respect to any filings that must be made after the Closing Date, as
        will be
        filed in a timely manner. It and each of its Subsidiaries has all material
        franchises, permits, licenses and any similar authority necessary for the
        conduct of its business as now being conducted by it, the lack of which could,
        either individually or in the aggregate, reasonably be expected to have a
        Material Adverse Effect.

       

      (q) Environmental
        and Safety Laws.
        Except
        as set forth in Schedule
        12(q),
        neither
        it nor any of its Subsidiaries is in violation of any applicable statute,
        law or
        regulation relating to the environment or occupational health and safety,
        and to
        its knowledge, no material expenditures are or will be required in order
        to
        comply with any such existing statute, law or regulation. Except as set forth
        on
Schedule
        12(q),
        and
        except as used by it in the normal and customary operation of its business
        for
        manufacturing, processing, maintenance and landscaping activities, no Hazardous
        Materials (as defined below) are used or have been used, stored, or disposed
        of
        by it or any of its Subsidiaries or, to its knowledge, by any other Person
        on
        any property owned, leased or used by it or any of its Subsidiaries. For
        the
        purposes of the preceding sentence, “Hazardous
        Materials”
        shall
        mean:

       

      (i) materials
        which are listed or otherwise defined as “hazardous” or “toxic” under any
        applicable local, state, federal and/or foreign laws and regulations that
        govern
        the existence and/or remedy of contamination on property, the protection
        of the
        environment from contamination, the control of hazardous wastes, or other
        activities involving hazardous substances, including building materials;
        and

       

      (ii) any
        petroleum products or nuclear materials.


      
        
          
          

        

        
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      (r) Valid
        Offering.
        Assuming the accuracy of the representations and warranties of Laurus contained
        in this Agreement, the offer and issuance of the Securities will be exempt
        from
        the registration requirements of the Securities Act of 1933, as amended (the
        “Securities
        Act”),
        and
        will have been registered or qualified (or are exempt from registration and
        qualification) under the registration, permit or qualification requirements
        of
        all applicable state securities laws. 

       

      (s) Full
        Disclosure.
        It and
        each of its Subsidiaries has provided Laurus with all information requested
        by
        Laurus in connection with Laurus’ decision to enter into this Agreement. Neither
        this Agreement, the Ancillary Agreements nor the exhibits and schedules hereto
        and thereto nor any other document delivered by it or any of its Subsidiaries
        to
        Laurus or its attorneys or agents in connection herewith or therewith or
        with
        the transactions contemplated hereby or thereby, contain any untrue statement
        of
        a material fact nor omit to state a material fact necessary in order to make
        the
        statements contained herein or therein, in light of the circumstances in
        which
        they are made, not misleading. The financial projections and other estimates
        attached as Schedule
        12(s)
        were
        based on its and its Subsidiaries’ experience in the industry and on assumptions
        of fact and opinion as to future events which it or any of its Subsidiaries,
        at
        the date of the issuance of such projections or estimates, believed to be
        reasonable. 

       

      (t) Insurance.
        It and
        each of its Subsidiaries has general commercial, product liability, fire
        and
        casualty insurance policies with coverages which it believes are customary
        for
        companies similarly situated to it and its Subsidiaries in the same or similar
        business.

       

      (u) Financial
        Statements.
        Except
        as set forth on Schedule
        12(u),
        the
        audited consolidated balance sheet, income statement, statement of retained
        earnings and statement of cash flows of the Parent and its Subsidiaries as
        of
        and for the fiscal years ended December 31, 2004 and 2003, and the interim,
        unaudited consolidated balance sheet, income statement, statement of retained
        earnings and statement of cash flows of the Parent and its Subsidiaries as
        of
        and for the six months ended June 30, 2005, have been prepared in accordance
        with GAAP applied on a consistent basis during the periods involved (except
        (i)
        as may be otherwise indicated in such financial statements or the notes thereto
        or (ii) in the case of unaudited interim statements, to the extent they may
        not
        include footnotes, may be condensed and/or exclude year-end adjustments)
        and
        fairly present in all material respects the financial condition, the results
        of
        operations, retained earnings and cash flows of the Parent and its Subsidiaries,
        on a consolidated basis, as of, and for, the periods presented in such
        statements.

       

      (v) Intentionally
        Deleted. 

       

      (w) No
        Integrated Offering.
        Neither
        it, nor any of its Subsidiaries nor any of its Affiliates, nor any Person
        acting
        on its or their behalf, has directly or indirectly made any offers or sales
        of
        any security or solicited any offers to buy any security under circumstances
        that would cause the offering of the Securities pursuant to this Agreement
        or
        any Ancillary Agreement to be integrated with prior offerings by it for purposes
        of the Securities Act which would prevent it from issuing the Securities
        pursuant to Rule 506 under the Securities Act, or any applicable
        exchange-related stockholder approval provisions, nor will it or any of its
        


      
        
          
          

        

        
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      Affiliates
        or Subsidiaries take any action or steps that would cause the offering of
        the
        Securities to be integrated with other offerings.

       

      (x) Stop
        Transfer.
        The
        Securities are restricted securities as of the date of this Agreement. Neither
        it nor any of its Subsidiaries will issue any stop transfer order or other
        order
        impeding the sale and delivery of any of the Securities at such time as the
        Securities are registered for public sale or an exemption from registration
        is
        available, except as required by state and federal securities laws.

       

      (y) Dilution.
        It
        specifically acknowledges that the Parent’s obligation to issue the Grant Shares
        and the shares of Common Stock upon conversion of the Notes and exercise
        of the
        Warrants is binding upon the Parent and enforceable regardless of the dilution
        such issuance may have on the ownership interests of other shareholders of
        the
        Parent. 

       

      (z) Patriot
        Act.
        It
        certifies that, to the best of its knowledge, neither it nor any of its
        Subsidiaries has been designated, nor is or shall be owned or controlled,
        by a
“suspected terrorist” as defined in Executive Order 13224. It hereby
        acknowledges that Laurus seeks to comply with all applicable laws concerning
        money laundering and related activities. In furtherance of those efforts,
        it
        hereby represents, warrants and covenants that: (i) none of the cash or property
        that it or any of its Subsidiaries will pay or will contribute to Laurus
        has
        been or shall be derived from, or related to, any activity that is deemed
        criminal under United States law; and (ii) no contribution or payment by
        it or
        any of its Subsidiaries to Laurus, to the extent that they are within its
        or any
        such Subsidiary’s control shall cause Laurus to be in violation of the United
        States Bank Secrecy Act, the United States International Money Laundering
        Control Act of 1986 or the United States International Money Laundering
        Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify
        Laurus if any of these representations, warranties and covenants ceases to
        be
        true and accurate regarding it or any of its Subsidiaries. It shall provide
        Laurus with any additional information regarding it and each Subsidiary thereof
        that Laurus deems necessary or convenient to ensure compliance with all
        applicable laws concerning money laundering and similar activities. It
        understands and agrees that if at any time it is discovered that any of the
        foregoing representations, warranties and covenants are incorrect, or if
        otherwise required by applicable law or regulation related to money laundering
        or similar activities, Laurus may undertake appropriate actions to ensure
        compliance with applicable law or regulation, including but not limited to
        segregation and/or redemption of Laurus’ investment in it. It further
        understands that Laurus may release confidential information about it and
        its
        Subsidiaries and, if applicable, any underlying beneficial owners, to proper
        authorities if Laurus, in its sole discretion, determines that it is in the
        best
        interests of Laurus in light of relevant rules and regulations under the
        laws
        set forth in subsection (ii) above.

       

      (aa) Company
        Name; Locations of Offices, Records and Collateral.
        Schedule 12(aa)
        sets
        forth each Company’s name as it appears in official filings in the state of its
        organization, the type of entity of each Company, the organizational
        identification number issued by each Company’s state of organization or a
        statement that no such number has been issued, each Company’s state of
        organization, and the location of each Company’s chief executive office,
        corporate offices, warehouses, other locations of Collateral and locations
        where
        records with respect to Collateral are kept (including in each case the county
        of such locations) and, except as set forth in such Schedule
        12(aa),
        such
        locations have not changed during the 


      
        
          
          

        

        
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      preceding
        twelve months. As of the Closing Date, during the prior five years, except
        as
        set forth in Schedule
        12(aa),
        no
        Company has been known as or conducted business in any other name (including
        trade names). Each Company has only one state of organization.

       

      (bb) ERISA.
        Based
        upon the Employee Retirement Income Security Act of 1974 (“ERISA”),
        and
        the regulations and published interpretations thereunder: (i) neither it
        nor any
        of its Subsidiaries has engaged in any Prohibited Transactions (as defined
        in
        Section 406 of ERISA and Section 4975 of the Code); (ii) it and each of its
        Subsidiaries has met all applicable minimum funding requirements under Section
        302 of ERISA in respect of its plans; (iii) neither it nor any of its
        Subsidiaries has any knowledge of any event or occurrence which would cause
        the
        Pension Benefit Guaranty Corporation to institute proceedings under Title
        IV of
        ERISA to terminate any employee benefit plan(s); (iv) neither it nor any
        of its
        Subsidiaries has any fiduciary responsibility for investments with
        respect to any plan existing for the benefit of persons other than its or
        such
        Subsidiary’s employees; and (v) neither it nor any of its Subsidiaries has
        withdrawn, completely or partially, from any multi-employer pension plan
        so as
        to incur liability under the Multiemployer Pension Plan Amendments Act of
        1980.

       

      13. Covenants.
        Each
        Company, as applicable, covenants and agrees with Laurus as
        follows:

       

      (a) Stop-Orders.
        It
        shall advise Laurus, promptly after it receives notice of issuance by the
        SEC,
        any state securities commission or any other regulatory authority of any
        stop
        order or of any order preventing or suspending any offering of any securities
        of
        the Parent, or of the suspension of the qualification of the Common Stock
        of the
        Parent for offering or sale in any jurisdiction, or the initiation of any
        proceeding for any such purpose.

       

      (b) Listing.
        Following the date on which the SEC has declared effective the initial
        registration of the Common Stock under the Exchange Act, the Parent shall,
        no
        later than sixty (60) days after such declaration of effectiveness, secure
        the
        listing
        or quotation, as applicable, of the Grant Shares and the shares of Common
        Stock
        issuable upon conversion of the Notes and exercise of the Warrants on a
        Principal Market selected by the Parent (subject to official notice of issuance)
        and, until one year after all obligations under the Notes have been paid
        in
        full, the Parent shall maintain the listing or quotation, as applicable,
        of its
        Common Stock on the same or another Principal Market, and will comply in
        all
        material respects with the Parent’s reporting, filing and other obligations
        under the bylaws or rules of the National Association of Securities Dealers
        (“NASD”)
        and
        such Principal Market, as applicable. 

       

      (c) Valid
        Issuance.
        It
        shall take all necessary action and proceedings as may be required and permitted
        by applicable law, rule and regulation, for the legal and valid issuance
        of the
        Securities to Laurus.

       

      (d) Reporting
        Requirements.
        Until
        one year after all obligations under the Notes have been paid in full, it
        shall
        timely file with the SEC all reports required to be filed by the Company
        pursuant to the Exchange Act and refrain from terminating its status as an
        issuer required by the Exchange Act to file reports thereunder even if the
        Exchange Act or the rules or regulations thereunder would permit such
        termination. 


      
        
          
          

        

        
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      (e) Use
        of
        Funds.
        It
        shall use (i) up to $5,522,443.78 of the proceeds of the Loans to refinance
        its
        existing senior credit facility and (ii) the remainder of the proceeds of
        the
        Loans and the proceeds of the Warrants and the Grant Shares for general working
        capital purposes.

       

      (f) Access
        to Facilities.
        It
        shall, and shall cause each of its Subsidiaries to, permit any representatives
        designated by Laurus (or any successor of Laurus), upon reasonable notice
        and
        during normal business hours, at Company’s expense and accompanied by a
        representative of Company Agent (provided that no such prior notice shall
        be
        required to be given and no such representative shall be required to accompany
        Laurus in the event Laurus believes such access is necessary to preserve
        or
        protect the Collateral or following the occurrence and during the continuance
        of
        an Event of Default), to:

       

      (i) visit
        and
        inspect any of its or any such Subsidiary’s properties;

       

      (ii) examine
        its or any such Subsidiary’s corporate and financial records (unless such
        examination is not permitted by federal, state or local law or by contract)
        and
        make copies thereof or extracts therefrom; and

       

      (iii) discuss
        its or any such Subsidiary’s affairs, finances and accounts with its or any such
        Subsidiary’s chief executive officer and/or chief financial
        officer.

       

      Laurus
        agrees to, and to cause its Affiliates to, maintain the confidentiality of
        and
        not disclose any material, non-public information concerning the Parent or
        its
        Subsidiaries or other Affiliates, unless required by applicable law or legal
        process (and in such event shall provide the Parent prompt notice of such
        required disclosure), to not trade in any of the Parent’s securities on the
        basis of such material, non-public information, and to otherwise comply with
        federal securities laws, rules and regulations.

       

      (g) Taxes.
        It
        shall, and shall cause each of its Subsidiaries to, promptly pay and discharge,
        or cause to be paid and discharged, when due and payable, all lawful taxes,
        assessments and governmental charges or levies imposed upon it and its
        Subsidiaries’ income, profits, property or business, as the case may be;
        provided, however, that any such tax, assessment, charge or levy need not
        be
        paid currently if (i) the validity thereof shall currently and diligently
        be
        contested in good faith by appropriate proceedings, (ii) such tax, assessment,
        charge or levy shall have no effect on the Lien priority of Laurus in the
        Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall
        have
        set aside on its and/or such Subsidiary’s books adequate reserves with respect
        thereto in accordance with GAAP; and provided, further, that it shall, and
        shall
        cause each of its Subsidiaries to, pay all such taxes, assessments, charges
        or
        levies forthwith upon the commencement of proceedings to foreclose any lien
        which may have attached as security therefor.

       

      (h) Insurance.
        It
        shall bear the full risk of loss from any loss of any nature whatsoever with
        respect to the Collateral. It and each of its Subsidiaries shall keep its
        assets
        which are of an insurable character insured by financially sound and reputable
        insurers against loss or damage by fire, explosion and other risks customarily
        insured against by companies in similar business similarly situated as it
        and
        its Subsidiaries; and it and its Subsidiaries shall 


      
        
          
          

        

        
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      maintain,
        with financially sound and reputable insurers, insurance against other hazards
        and risks and liability to persons and property to the extent and in the
        manner
        which it and/or such Subsidiary thereof reasonably believes is customary
        for
        companies in similar business similarly situated as it and its Subsidiaries
        and
        to the extent available on commercially reasonable terms. It and each of
        its
        Subsidiaries will jointly and severally bear the full risk of loss from any
        loss
        of any nature whatsoever with respect to the assets pledged to Laurus as
        security for its obligations hereunder and under the Ancillary Agreements.
        At
        its own cost and expense in amounts and with carriers reasonably acceptable
        to
        Laurus, it and each of its Subsidiaries shall (i) keep all their insurable
        properties and properties in which they have an interest insured against
        the
        hazards of fire, flood, sprinkler leakage, those hazards covered by extended
        coverage insurance and such other hazards, and for such amounts, as is customary
        in the case of companies engaged in businesses similar to it or the respective
        Subsidiary’s including business interruption insurance; (ii) maintain a bond in
        such amounts as is customary in the case of companies engaged in businesses
        similar to it and its Subsidiaries’ insuring against larceny, embezzlement or
        other criminal misappropriation of insured’s officers and employees who may
        either singly or jointly with others at any time have access to its or any
        of
        its Subsidiaries assets or funds either directly or through governmental
        authority to draw upon such funds or to direct generally the disposition
        of such
        assets; (iii) maintain public and product liability insurance against claims
        for
        personal injury, death or property damage suffered by others; (iv) maintain
        all
        such worker’s compensation or similar insurance as may be required under the
        laws of any state or jurisdiction in which it or any of its Subsidiaries
        is
        engaged in business; and (v) furnish Laurus with (x) copies of all
        policies
        and evidence of the maintenance of such policies at least thirty (30) days
        before any expiration date, (y) excepting its and its Subsidiaries’ workers’
        compensation policy, endorsements to such policies naming Laurus as “co-insured”
        or “additional insured” and appropriate loss payable endorsements in form and
        substance satisfactory to Laurus, naming Laurus as lenders loss payee, and
        (z)
        evidence that as to Laurus the insurance coverage shall not be impaired or
        invalidated by any act or neglect of any Company or any of its Subsidiaries
        and
        the insurer will provide Laurus with at least thirty (30) days notice prior
        to
        cancellation. It shall instruct the insurance carriers that in the event
        of any
        loss thereunder, the carriers shall make payment for such loss to Laurus
        and not
        to any Company or any of its Subsidiaries and Laurus jointly. If any insurance
        losses are paid by check, draft or other instrument payable to any Company
        and/or any of its Subsidiaries and Laurus jointly, Laurus may endorse, as
        applicable, such Company’s and/or any of its Subsidiaries’ name thereon and do
        such other things as Laurus may deem advisable to reduce the same to cash.
        Laurus is hereby authorized to adjust and compromise claims. All loss recoveries
        received by Laurus upon any such insurance may be applied to the Obligations,
        in
        such order as Laurus in its sole discretion shall determine or shall otherwise
        be delivered to Company Agent for the benefit of the applicable Company and/or
        its Subsidiaries. Any surplus shall be paid by Laurus to Company Agent for
        the
        benefit of the applicable Company and/or its Subsidiaries, or applied as
        may be
        otherwise required by law. Any deficiency thereon shall be paid, as applicable,
        by Companies and their Subsidiaries to Laurus, on demand.

       

      (i) Intellectual
        Property.
        It
        shall, and shall cause each of its Subsidiaries to, maintain in full force
        and
        effect its corporate existence, rights and franchises and all licenses and
        other
        rights to use Intellectual Property owned or possessed by it and reasonably
        deemed to be necessary to the conduct of its business.


      
        
          
          

        

        
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      (j) Properties.
        It
        shall, and shall cause each of its Subsidiaries to, keep its properties in
        good
        repair, working order and condition, reasonable wear and tear excepted, and
        from
        time to time make all needful and proper repairs, renewals, replacements,
        additions and improvements thereto; and it shall, and shall cause each of
        its
        Subsidiaries to, at all times comply with each provision of all leases to
        which
        it is a party or under which it occupies property if the breach of such
        provision could reasonably be expected to have a Material Adverse
        Effect.

       

      (k) Confidentiality.
        It
        shall not, and shall not permit any of its Subsidiaries to, disclose, and
        will
        not include in any public announcement, the name of Laurus, unless expressly
        agreed to by Laurus or unless and until such disclosure is required by law
        or
        applicable regulation, and then only to the extent of such requirement.
        Notwithstanding the foregoing, each Company and its Subsidiaries may disclose
        Laurus’ identity and the terms of this Agreement to its current and prospective
        debt and equity financing sources.

       

      (l) Required
        Approvals.
        It
        shall not, and shall not permit any of its Subsidiaries to, without the prior
        written consent of Laurus, (i) create, incur, assume or suffer to exist any
        indebtedness (exclusive of trade debt) whether secured or unsecured other
        than
        (x) operating leases to the extent constituting indebtedness, (y) Purchase
        Money
        Indebtedness not to exceed $200,000 in the aggregate principal amount
        outstanding at any time for the purchase of vehicles which indebtedness may
        be
        secured solely by Purchase Money Liens, (z) each Company’s indebtedness to
        Laurus, (xx) as set forth on Schedule 13(l)(i)
        attached
        hereto and made a part hereof and (yy) indebtedness in addition to the other
        indebtedness permitted in this clause (i) not to exceed $250,000 in aggregate
        principal amount outstanding at any time, so long as such indebtedness referred
        to in this clause (yy) is either (I) unsecured or (II) subject to a security
        interest subordinated to the security interest of Laurus with respect to
        the
        Obligations, on terms and conditions satisfactory to Laurus; (ii) cancel
        any
        debt owing to it in excess of $200,000 in the aggregate during any 12 month
        period; (iii) assume, guarantee, endorse or otherwise become directly or
        contingently liable in connection with any obligations of any other Person,
        except the endorsement of negotiable instruments by it or its Subsidiaries
        for
        deposit or collection or similar transactions in the ordinary course of
        business; (iv) directly or indirectly declare, pay or make any dividend or
        distribution on any class of its Stock or apply any of its funds, property
        or
        assets to the purchase, redemption or other retirement of any of its or its
        Subsidiaries’ Stock outstanding on the date hereof, or issue any preferred
        stock; (v) purchase or hold beneficially any Stock or other securities or
        evidences of indebtedness of, make or permit to exist any loans or advances
        to,
        or make any investment or acquire any interest whatsoever in, any other Person,
        including any partnership or joint venture, except (x) travel advances, (y)
        loans to its and its Subsidiaries’ officers and employees not exceeding at any
        one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries
        so
        long as such Subsidiaries are designated as either a co-borrower hereunder
        or
        has entered into such guaranty and security documentation required by Laurus,
        including, without limitation, to grant to Laurus a first priority perfected
        security interest in substantially all of such Subsidiary’s assets to secure the
        Obligations; (vi) create or permit to exist any Subsidiary, other than any
        Subsidiary in existence on the date hereof and listed in Schedule
        12(b)
        unless
        such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus
        as
        either a co-borrower or guarantor hereunder and such Subsidiary shall have
        entered into all such documentation required by Laurus, including, without
        limitation, to grant to Laurus a first priority perfected security interest
        in
        substantially all of such Subsidiary’s assets to secure the Obligations; (vii)
        directly or indirectly, prepay any indebtedness (other than 


      
        
          
          

        

        
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      to
        Laurus
        and in the ordinary course of business), or repurchase, redeem, retire or
        otherwise acquire any indebtedness (other than to Laurus and in the ordinary
        course of business) except to make scheduled payments of principal and interest
        thereof and except for the conversion of certain indebtedness owed to John
        A.
        Martell by the Parent into Common Stock as described on Schedule
        12(c);
        (viii)
        enter into any merger, consolidation or other reorganization with or into
        any
        other Person or acquire all or a portion of the assets or Stock of any Person
        or
        permit any other Person to consolidate with or merge with it, unless
        (1) such Company is the surviving entity of such merger or consolidation,
        (2) no Event of Default shall exist immediately prior to and after giving
        effect
        to such merger or consolidation, (3) such Company shall have provided
        Laurus copies of all documentation relating to such merger or consolidation
        and
        (4) such Company shall have provided Laurus with at least thirty (30) days’
        prior written notice of such merger or consolidation; (ix) materially change
        the
        nature of the business in which it is presently engaged; (x) become subject
        to
        (including, without limitation, by way of amendment to or modification of)
        any
        agreement or instrument which by its terms would (under any circumstances)
        restrict its or any of its Subsidiaries’ right to perform the provisions of this
        Agreement or any of the Ancillary Agreements; (xi) change its fiscal year
        or
        make any changes in accounting treatment and reporting practices without
        prior
        written notice to Laurus except as required by GAAP or in the tax reporting
        treatment or except as required by law; (xii) enter into any transaction
        with
        any employee, director or Affiliate, except in the ordinary course on
        arms-length terms and except for the granting of an option to John A. Martell
        to
        convert the Parent’s indebtedness to him into Common Stock as described on
Schedule
        12(c);
        (xiii)
        bill Accounts under any name except the present name of such Company; or
        (xiv)
        sell, lease, transfer or otherwise dispose of any of its properties or assets,
        or any of the properties or assets of its Subsidiaries, except for (1) the
        sale
        of Inventory in the ordinary course of business and (2) the disposition or
        transfer in the ordinary course of business during any fiscal year of obsolete
        and worn-out Equipment and only to the extent that (x) the proceeds of any
        such
        disposition or transfer in excess of $150,000 in any fiscal year of the Parent
        are used to acquire replacement Equipment which is subject to Laurus’ first
        priority security interest or are used to repay Loans or to pay general
        corporate expenses, or (y) following the occurrence of an Event of Default
        which
        continues to exist, the proceeds of which are remitted to Laurus to be held
        as
        cash collateral for the Obligations. 

       

      (m) Reissuance
        of Securities.
        The
        Parent shall reissue certificates representing the Securities without the
        legends set forth in Section 40 below at such time as:

       

      (i) the
        holder thereof is permitted to dispose of such Securities pursuant to Rule
        144(k) under the Securities Act; or

       

      (ii) upon
        resale subject to an effective registration statement after such Securities
        are
        registered under the Securities Act.

       

      The
        Parent agrees to cooperate with Laurus in connection with all resales pursuant
        to Rule 144(d) and Rule 144(k) and provide legal opinions reasonably necessary
        to allow such resales provided the Parent and its counsel receive reasonably
        requested representations from Laurus and broker, if any, as well as any
        other
        information reasonably requested by the Parent or its counsel.


      
        
          
          

        

        
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      (n) Opinion.
        On the
        Closing Date, it shall deliver to Laurus an opinion acceptable to Laurus
        from
        each Company’s legal counsel. Each Company will provide, at the Companies’ joint
        and several expense, such other legal opinions in the future as are reasonably
        necessary for the conversion of the Notes and the exercise of the
        Warrants.

       

      (o) Legal
        Name, etc.
        It
        shall not, without providing Laurus with 30 days prior written notice, change
        (i) its name as it appears in the official filings in the state of its
        organization, (ii) the type of legal entity it is, (iii) its organization
        identification number, if any, issued by its state of organization, or (iv)
        its
        state of organization. In addition, without providing Laurus with 7 days
        prior
        written notice, the Parent will not amend its certificate of incorporation,
        by-laws or other organizational document. Parent has notified Laurus that
        it
        intends to change its corporate name to “MISCOR Group, Ltd.”; the foregoing
        30-day notice period shall not apply to this name change, and Parent shall
        notify Laurus two business days before the effective date of this name change.
        

       

      (p) Compliance
        with Laws.
        The
        operation of each of its and each of its Subsidiaries’ business is and shall
        continue to be in compliance in all material respects with all applicable
        federal, state and local laws, rules and ordinances, including to all laws,
        rules, regulations and orders relating to taxes, payment and withholding
        of
        payroll taxes, employer and employee contributions and similar items,
        securities, employee retirement and welfare benefits, employee health and
        safety
        and environmental matters.

       

      (q) Notices.
        It and
        each of its Subsidiaries shall promptly inform Laurus in writing of: (i)
        the
        commencement of all proceedings and investigations by or before and/or the
        receipt of any notices from, any governmental or nongovernmental body and
        all
        actions and proceedings in any court or before any arbitrator against or
        in any
        way concerning any event which could reasonably be expected to have singly
        or in
        the aggregate, a Material Adverse Effect; (ii) any change which has had,
        or
        could reasonably be expected to have, a Material Adverse Effect; (iii) any
        Event
        of Default or Default; and (iv) any default or any event which with the passage
        of time or giving of notice or both would constitute a default under any
        agreement for the payment of money to which it or any of its Subsidiaries
        is a
        party or by which it or any of its Subsidiaries or any of its or any such
        Subsidiary’s properties may be bound the breach of which would have a Material
        Adverse Effect.

       

      (r) Margin
        Stock.
        It
        shall not permit any of the proceeds of the Loans made hereunder, the Grant
        Shares, the Warrants or any Note to be used directly or indirectly to “purchase”
        or “carry”“margin stock” or to repay indebtedness incurred to “purchase” or
“carry”“margin stock” within the respective meanings of each of the quoted terms
        under Regulation U of the Board of Governors of the Federal Reserve System
        as
        now and from time to time hereafter in effect. 

       

      (s) Offering
        Restrictions.
        Except
        for stock or stock options granted to its employees, officers or directors,
        and
        except for the granting of an option to John A. Martell to convert the Parent’s
        indebtedness to him into Common Stock as described on Schedule
        12(c), neither
        it nor any of its Subsidiaries shall, prior to the full repayment or conversion
        of the Notes (together with all accrued and unpaid interest and fees related
        thereto), (x) enter into any equity line of credit agreement or similar
        agreement or (y) issue, or enter into any agreement to issue, 


      
        
          
          

        

        
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      any
        securities with a variable/floating conversion and/or pricing feature which
        are
        or could be (by conversion or registration) free-trading securities (i.e.
        common
        stock subject to a registration statement). In addition, before the time
        that
        the Common Stock is first quoted or listed, as applicable, on a Principal
        Market, the Parent shall not, without the written consent of Laurus, issue
        any
        Common Stock to any Person other than (i) pursuant to any options, warrants,
        other convertible securities or other obligations to issue shares of Common
        Stock outstanding on the date of this Agreement as disclosed to Laurus in
        writing, (ii) up to 5,000,000 shares of Common Stock pursuant to any equity
        incentive plan for directors, officers and employees adopted by the Parent,
        (iii) pursuant to conversion or exercise, as applicable, of the Notes or
        the
        Warrants, (iv) up to 500,000 shares of Common Stock to members of the Board
        of
        Directors of Parent or any Eligible Subsidiaries, or (v) to John A. Martell
        in
        connection with the conversion of certain indebtedness owed to him by the
        Parent
        as described on Schedule
        12(c).
        

       

      (t) Authorization
        and Reservation of Shares.
        The
        Parent shall at all times have authorized and reserved a sufficient number
        of
        shares of Common Stock to provide for the conversion of the Notes and exercise
        of the Warrants.

       

      (u) Financing
        Right of First Refusal.

       

      (i) Until
        all
        obligations under the Notes have been paid in full, Laurus shall have a right
        of
        first refusal to provide any Additional Financing (as defined below) to be
        issued by any Company and/or any of its Subsidiaries (the “Additional
        Financing Parties”),
        subject to the following terms and conditions. From and after the date hereof,
        prior to the incurrence of any additional indebtedness which has a
        convertibility feature (an “Additional
        Financing”),
        Company Agent shall notify Laurus of such Additional Financing. In connection
        therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed
        Term Sheet”)
        to
        Laurus setting forth the terms, conditions and pricing of any such Additional
        Financing (such financing to be negotiated on “arm’s length” terms and the terms
        thereof to be negotiated in good faith) proposed to be entered into by the
        Additional Financing Parties. Laurus shall have the right, but not the
        obligation, to deliver to Company Agent its own proposed term sheet (the
        “Laurus
        Term Sheet”)
        setting forth the terms and conditions upon which Laurus would be willing
        to
        provide such Additional Financing to the Additional Financing Parties. The
        Laurus Term Sheet shall contain terms no less favorable to the Additional
        Financing Parties than those outlined in Proposed Term Sheet. Laurus shall
        deliver to Company Agent the Laurus Term Sheet within ten Business Days of
        receipt of each such Proposed Term Sheet. If the provisions of the Laurus
        Term
        Sheet are at least as favorable to the Additional Financing Parties as the
        provisions of the Proposed Term Sheet, the Additional Financing Parties shall
        enter into and consummate the Additional Financing transaction outlined in
        the
        Laurus Term Sheet. 

       

      (ii) Until
        all
        obligations under the Notes have been paid in full, it shall not, and shall
        not
        permit its Subsidiaries to, agree, directly or indirectly, to any restriction
        with any Person which limits the ability of Laurus to consummate an Additional
        Financing with it or any of its Subsidiaries.

       

      (v) Certain
        Controls.
        After
        the Company has registered its Common Stock with the SEC under the Exchange
        Act,
        it shall, to the extent required by the Exchange Act, the Sarbanes-Oxley
        Act of
        2002 or any related SEC regulation or rule:


      
        
          
          

        

        
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      (i) maintain
        disclosure controls and procedures (“Disclosure Controls”) designed to ensure
        that information required to be disclosed by the Parent in the reports that
        it
        files or submits under the Exchange Act is recorded, processed, summarized,
        and
        reported, within the time periods specified in the rules and forms of the
        SEC;
        and

      


      (ii) maintain
        internal controls over financial reporting designed by, or under the supervision
        of, its principal executive and principal financial officers, and effected
        by
        its Board of Directors, management, and other personnel, to provide reasonable
        assurance regarding the reliability of financial reporting (“Financial Reporting
        Controls”) and the preparation of financial statements for external purposes in
        accordance with GAAP, including that:

       

      (1) transactions
        are executed in accordance with management’s general or specific
        authorization;

       

      (2) unauthorized
        acquisition, use, or disposition of the Parent’s assets that could have a
        material effect on the financial statements are prevented or timely
        detected;

       

      (3) transactions
        are recorded as necessary to permit preparation of financial statements in
        accordance with GAAP, and that its receipts and expenditures are being made
        only
        in accordance with authorizations of the Parent’s management and board of
        directors;

       

      (4) transactions
        are recorded as necessary to maintain accountability for assets; and

       

      (5) the
        recorded accountability for assets is compared with the existing assets at
        reasonable intervals, and appropriate action is taken with respect to any
        differences.

       

      (iii) The
        Parent and its Subsidiaries shall ensure that there is no weakness in any
        of the
        Parent’s and its Subsidiaries’ Disclosure Controls or Financial Reporting
        Controls that is required to be disclosed in any of the Exchange Act Filings
        following the implementation thereof. 

       

      14. Further
        Assurances.
        At any
        time and from time to time, upon the written request of Laurus and at the
        sole
        expense of Companies, each Company shall promptly and duly execute and deliver
        any and all such further instruments and documents and take such further
        action
        as Laurus may request (a) to obtain the full benefits of this Agreement and
        the
        Ancillary Agreements, (b) to protect, preserve and maintain Laurus’ rights in
        the Collateral and under this Agreement or any Ancillary Agreement, and/or
        (c)
        to enable Laurus to exercise all or any of the rights and powers herein granted
        or any Ancillary Agreement.
        Laurus
        agrees to comply with applicable securities laws in connection with the transfer
        of the Securities.


      
        
          
          

        

        
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      15. Representations,
        Warranties and Covenants of Laurus.
        Laurus
        hereby represents, warrants and covenants to each Company as
        follows:

       

      (a) Requisite
        Power and Authority.
        Laurus
        has all necessary power and authority under all applicable provisions of
        law to
        execute and deliver this Agreement and the Ancillary Agreements and to carry
        out
        their provisions. All corporate action on Laurus’ part required for the lawful
        execution and delivery of this Agreement and the Ancillary Agreements have
        been
        or will be effectively taken prior to the Closing
        Date.
        Upon their execution and delivery, this Agreement and the Ancillary Agreements
        shall be valid and binding obligations of Laurus, enforceable in accordance
        with
        their terms, except (a) as limited by applicable bankruptcy, insolvency,
        reorganization, moratorium or other laws of general application affecting
        enforcement of creditors’ rights, and (b) as limited by general principles of
        equity that restrict the availability of equitable and legal
        remedies.

       

      (b) Investment
        Representations.
        Laurus
        understands that the Securities are being offered pursuant to an exemption
        from
        registration contained in the Securities Act based in part upon Laurus’
        representations and warranties contained in this Agreement, including, without
        limitation, that Laurus is an “accredited investor” within the meaning of
        Regulation D under the Securities Act. Laurus has received or has had full
        access to all the information it considers necessary or appropriate to make
        an
        informed investment decision with respect to the Notes, the Warrants and
        the
        Grant Shares to be issued to it under this Agreement and the Securities acquired
        by it upon the conversion of the Notes and the exercise of the
        Warrants.

       

      (c) Laurus
        Bears Economic Risk.
        Laurus
        has substantial experience in evaluating and investing in private placement
        transactions of securities in companies similar to the Parent so that it
        is
        capable of evaluating the merits and risks of its investment in the Parent
        and
        has the capacity to protect its own interests. Laurus must and is financially
        able to bear the economic risk of this investment including without limitation
        the entire loss of this investment.

       

      (d) Investment
        for Own Account.
        The
        Securities are being issued to Laurus for its own account for investment
        only,
        and not as a nominee or agent and not with a view towards or for resale in
        connection with their distribution.

       

      (e) Laurus
        Can Protect Its Interest.
        By
        reason of its, or of its management’s, business and financial experience, Laurus
        has the capacity to evaluate the merits and risks of its investment in the
        Securities and to protect its own interests in connection with the transactions
        contemplated in this Agreement, and the Ancillary Agreements. Further, Laurus
        is
        aware of no publication of any advertisement in connection with the transactions
        contemplated in the Agreement or the Ancillary Agreements.

       

      (f) Accredited
        Investor.
        Laurus
        represents and warrants that it is an accredited investor within the meaning
        of
        Regulation D under the Securities Act.

       

      (g) Shorting.
        Neither
        Laurus nor any of its Affiliates or investment partners has, will, or will
        cause
        any Person, to directly engage in “short sales” of the Parent’s Common Stock as
        long as any Note shall be outstanding and for a period of one year after
        all
        obligations under the Notes have been paid in full.


      
        
          
          

        

        
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      (h) Patriot
        Act.
        Laurus
        certifies that, to the best of Laurus’ knowledge, Laurus has not been
        designated, and is not owned or controlled, by a “suspected terrorist” as
        defined in Executive Order 13224. Laurus seeks to comply with all applicable
        laws concerning money laundering and related activities. In furtherance of
        those
        efforts, Laurus hereby represents, warrants and covenants that: (i) none
        of the
        cash or property that Laurus will use to make the Loans has been or shall
        be
        derived from, or related to, any activity that is deemed criminal under United
        States law; and (ii) no disbursement by Laurus to any Company to the extent
        within Laurus’ control, shall cause Laurus to be in violation of the United
        States Bank Secrecy Act, the United States International Money Laundering
        Control Act of 1986 or the United States International Money Laundering
        Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall promptly
        notify
        the Company Agent if any of these representations ceases to be true and accurate
        regarding Laurus. Laurus agrees to provide the Company any additional
        information regarding Laurus that the Company deems necessary or convenient
        to
        ensure compliance with all applicable laws concerning money laundering and
        similar activities. Laurus understands and agrees that if at any time it
        is
        discovered that any of the foregoing representations are incorrect, or if
        otherwise required by applicable law or regulation related to money laundering
        similar activities, Laurus may undertake appropriate actions to ensure
        compliance with applicable law or regulation, including but not limited to
        segregation and/or redemption of Laurus’ investment in the Parent. Laurus
        further understands that the Parent may release information about Laurus
        and, if
        applicable, any underlying beneficial owners, to proper authorities if the
        Parent, in its sole discretion, determines that it is in the best interests
        of
        the Parent in light of relevant rules and regulations under the laws set
        forth
        in subsection (ii) above.

       

      (i) Limitation
        on Acquisition of Common Stock.
        Notwithstanding anything to the contrary contained in this Agreement, any
        Ancillary Agreement, or any document, instrument or agreement entered into
        in
        connection with any other transaction entered into by and between Laurus
        and any
        Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
        not
        acquire stock in the Parent
        (including, without limitation, pursuant to a contract to purchase, by
        exercising an option or warrant, by converting any other security or instrument,
        by acquiring or exercising any other right to acquire, shares of stock or
        other
        security convertible into shares of stock in the Parent, or otherwise, and
        such
        options, warrants, conversion or other rights shall not be exercisable) to
        the
        extent such stock acquisition would cause any interest (including any original
        issue discount) payable by any Company to Laurus not to qualify as portfolio
        interest, within the meaning of Section 881(c)(2) of the Internal Revenue
        Code
        of 1986, as amended (the “Code”)
        by
        reason of Section 881(c)(3) of the Code, taking into account the constructive
        ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
        Acquisition Limitation”).
        The
        Stock Acquisition Limitation shall automatically become null and void without
        any notice to any Company upon the earlier to occur of either (a) the Parent’s
        delivery to Laurus of a Notice of Redemption (as defined in the Notes) or
        (b)
        the existence of an Event of Default at a time when the average closing price
        of
        the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
        the
        immediately preceding five trading days is greater than or equal to 150%
        of the
        lowest Fixed Conversion Price (as defined in the Notes) then in effect under
        the
        Notes.

       

      16. Power
        of Attorney.
        Each
        Company hereby appoints Laurus, or any other Person whom Laurus may designate
        as
        such Company’s attorney, with power to: (i) endorse such Company’s name on any
        checks, notes, acceptances, money orders, drafts or other forms of



      
        
          
          

        

        
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      payment
        or security that may come into Laurus’ possession; (ii) sign such Company’s name
        on any invoice or bill of lading relating to any Accounts, drafts against
        Account Debtors, schedules and assignments of Accounts, notices of assignment,
        financing statements and other public records, verifications of Account and
        notices to or from Account Debtors; (iii) verify the validity, amount or
        any
        other matter relating to any Account by mail, telephone, telegraph or otherwise
        with Account Debtors; (iv) do all things necessary to carry out this Agreement,
        any Ancillary Agreement and all related documents; and (v) notify the post
        office authorities to change the address for delivery of such Company’s mail to
        an address designated by Laurus, and to receive, open and dispose of all
        mail
        addressed to such Company. Each Company hereby ratifies and approves all
        acts of
        the attorney. Neither Laurus, nor the attorney will be liable for any acts
        or
        omissions or for any error of judgment or mistake of fact or law, except
        for
        gross negligence or willful misconduct. This power, being coupled with an
        interest, is irrevocable so long as Laurus has a security interest and until
        the
        Obligations have been fully satisfied.
        Notwithstanding anything to the contrary contained in this Section 16, this
        power of attorney shall only be exercisable following the occurrence and
        during
        the continuation of an Event of Default, except with respect to the filing
        of
        financing statements, in which case such power of attorney shall be exercisable
        on and after the date hereof.

       

      17. Term
        of Agreement.
        Laurus’
        agreement to make Loans and extend financial accommodations under and in
        accordance with the terms of this Agreement or any Ancillary Agreement shall
        continue in full force and effect until the expiration of the Term. At Laurus’
        election following the occurrence of an Event of Default, Laurus may terminate
        this Agreement. The termination of the Agreement shall not affect any of
        Laurus’
        rights hereunder or any Ancillary Agreement and the provisions hereof and
        thereof shall continue to be fully operative until all transactions entered
        into, rights or interests created and the Obligations have been irrevocably
        disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
        shall release its security interests at any time after thirty (30) days notice
        upon irrevocable payment to it of all Obligations if each Company shall have
        provided Laurus with an executed release of any and all claims which such
        Company may have or thereafter have under this Agreement and all Ancillary
        Agreements 

       

      18. Termination
        of Lien.
        The
        Liens and rights granted to Laurus hereunder and any Ancillary Agreements
        and
        the financing statements filed in connection herewith or therewith shall
        continue in full force and effect, notwithstanding the termination of this
        Agreement or the fact that any Company’s account may from time to time be
        temporarily in a zero or credit position, until all of the Obligations have
        been
        indefeasibly paid or performed in full after the termination of this Agreement.
        Laurus shall not be required to send termination statements to any Company,
        or
        to file them with any filing office, unless and until this Agreement and
        the
        Ancillary Agreements shall have been terminated in accordance with their
        terms
        and all Obligations indefeasibly paid in full in immediately available
        funds.

       

      19. Events
        of Default.
        The
        occurrence of any of the following shall constitute an “Event
        of Default”:

       

      (a) failure
        to make payment of any of the Obligations when required hereunder, and, in
        any
        such case, such failure shall continue for a period of five (5) days following
        the date upon which any such payment was due; 


      
        
          
          

        

        
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      (b) failure
        by any Company or any of its Subsidiaries to pay any taxes when due unless
        such
        taxes are being contested in good faith
        by
        appropriate proceedings and with respect to which adequate reserves have
        been
        provided on such Company’s and/or such Subsidiary’s books;

       

      (c) failure
        to perform under, and/or committing any breach of, in any material respect,
        this
        Agreement or any covenant contained herein, which failure or breach shall
        continue without remedy for a period of thirty (30) days after the occurrence
        thereof;

       

      (d) any
        representation, warranty or statement made by any Company or any of its
        Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
        or document delivered pursuant to the terms hereof, or in connection with
        the
        transactions contemplated by this Agreement should prove to be false or
        misleading in any material respect on the date as of which made or deemed
        made;


       

      (e) the
        occurrence of any default (or similar term) in the observance or performance
        of
        any other agreement or condition relating to any indebtedness or contingent
        obligation of any Company or any of its Subsidiaries beyond the period of
        grace
        (if any), the effect of which default is to cause, or permit the holder or
        holders of such indebtedness or beneficiary or beneficiaries of such contingent
        obligation to cause, such indebtedness to become due prior to its stated
        maturity or such contingent obligation to become payable;

       

      (f) attachments
        or levies in excess of $200,000 in the aggregate are made upon any Company’s
        assets or a judgment is rendered against any Company’s property involving a
        liability of more than $200,000 which shall not have been vacated, discharged,
        stayed or bonded within thirty (30) days from the entry thereof;

       

      (g) any
        Lien
        created hereunder or under any Ancillary Agreement for any reason ceases
        to be
        or is not a valid and perfected Lien having a first priority
        interest;

       

      (h) any
        Company or any of its Subsidiaries shall (i) apply for, consent to
        or
        suffer to exist the appointment of, or the taking of possession by, a receiver,
        custodian, trustee or liquidator of itself or of all or a substantial part
        of
        its property, (ii) make a general assignment for the benefit of creditors,
        (iii) commence a voluntary case under the federal bankruptcy laws (as now
        or
        hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
        a
        petition seeking to take advantage of any other law providing for the relief
        of
        debtors, (vi) acquiesce to without challenge within ten (10) days of the
        filing
        thereof, or failure to have dismissed within thirty (30) days, any petition
        filed against it in any involuntary case under such bankruptcy laws, or (vii)
        take any action for the purpose of effecting any of the foregoing;

       

      (i) any
        Company or any of its Subsidiaries shall admit in writing its inability,
        or be
        generally unable, to pay its debts as they become due or cease operations
        of its
        present business;

       

      (j) any
        Company or any of its Subsidiaries directly or indirectly sells, assigns,
        transfers, conveys, or suffers or permits to occur any sale, assignment,
        transfer or conveyance of any assets of such Company or any interest therein,
        except as permitted herein;


      
        
          
          

        

        
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      (k) any
        “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of
        the Exchange Act, as in effect on the date hereof), other than the Holder,
        is or
        becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under
        the Exchange Act), directly or indirectly, of 35% or more on a fully diluted
        basis of the then outstanding voting equity interest of the Parent (other
        than a
“Person” or “group” that beneficially owns 35% or more of such outstanding
        voting equity interests of Parent on the date hereof), (ii) the Board of
        Directors of the Parent shall cease to consist of a majority of the Board
        of
        Directors of the Parent on the date hereof (or directors appointed by a majority
        of the Board of Directors in effect immediately prior to such appointment
        or by
        any “Person” or “group” that beneficially owns more than fifty percent (50%) of
        the outstanding voting equity interests of Parent on the date
        hereof)
        or (iii)
        the Parent or any of its Subsidiaries merges or consolidates with, or sells
        all
        or substantially all of its assets to, any other person or entity other than
        an
        entity that is party to this Agreement (other than Laurus);

       

      (l) the
        indictment or threatened indictment of any Company or any of its Subsidiaries
        or
        any executive officer of any Company or any of its Subsidiaries under any
        criminal statute, or commencement or threatened commencement of criminal
        or
        civil proceeding against any Company or any of its Subsidiaries or any executive
        officer of any Company or any of its Subsidiaries pursuant to which statute
        or
        proceeding penalties or remedies sought or available include forfeiture of
        any
        of the property of any Company or any of its Subsidiaries; 

       

      (m) an
        Event
        of Default shall occur under and as defined in any Note or in any other
        Ancillary Agreement;

       

      (n) any
        Company or any of its Subsidiaries shall breach any term or provision of
        any
        Ancillary Agreement to which it is a party, in any material respect which
        breach
        is not cured within any applicable cure or grace period provided in respect
        thereof (if any);

       

      (o) any
        Company or any of its Subsidiaries attempts to terminate, challenges the
        validity of, or its liability under this Agreement or any Ancillary Agreement,
        or any proceeding shall be brought to challenge the validity, binding effect
        of
        any Ancillary Agreement or any Ancillary Agreement ceases to be a valid,
        binding
        and enforceable obligation of such Company or any of its Subsidiaries (to
        the
        extent such Persons are a party thereto);

       

      (p) an
        SEC
        stop trade order or Principal Market trading suspension of the Common Stock
        shall be in effect for five (5) consecutive days or five (5) days during
        a
        period of ten (10) consecutive days, excluding in all cases a suspension
        of all
        trading on a Principal Market, provided that the Parent shall not have been
        able
        to cure such trading suspension within sixty (60) days of the notice thereof
        or
        list the Common Stock on another Principal Market within sixty (60) days
        of such
        notice; 

       

      (q) The
        Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
        required by the Notes and this Agreement, if such failure to deliver Common
        Stock shall not be cured within two (2) Business Days or any Company is required
        to issue a replacement Note to Laurus and such Company shall fail to deliver
        such replacement Note within fifteen (15) Business Days; or


      
        
          
          

        

        
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      (r) The
        Parent’s failure to cause the Common Stock to be quoted or listed, as
        applicable, on a Principal Market on or before the date that is 210 days
        after
        the date of this Agreement. 

       

      20. Remedies.
        Following the occurrence of an Event of Default, Laurus shall have the right
        to
        demand repayment in full of all Obligations, whether or not otherwise due.
        Until
        all Obligations have been fully and indefeasibly satisfied, Laurus shall
        retain
        its Lien in all Collateral. Laurus shall have, in addition to all other rights
        provided herein and in each Ancillary Agreement, the rights and remedies
        of a
        secured party under the UCC, and under other applicable law, all other legal
        and
        equitable rights to which Laurus may be entitled, including the right to
        take
        immediate possession of the Collateral, to require each Company to assemble
        the
        Collateral, at Companies’ joint and several expense, and to make it available to
        Laurus at a place designated by Laurus which is reasonably convenient to
        both
        parties and to enter any of the premises of any Company or wherever the
        Collateral shall be located, with or without force or process of law, and
        to
        keep and store the same on said premises until sold (and if said premises
        be the
        property of any Company, such Company agrees not to charge Laurus for storage
        thereof), and the right to apply for the appointment of a receiver for such
        Company’s property. Further, Laurus may, at any time or times after the
        occurrence of an Event of Default, sell and deliver all Collateral held by
        or
        for Laurus at public or private sale for cash, upon credit or otherwise,
        at such
        prices and upon such terms as Laurus, in Laurus’ sole discretion, deems
        advisable or Laurus may otherwise recover upon the Collateral in any
        commercially reasonable manner as Laurus, in its sole discretion, deems
        advisable. The requirement of reasonable notice shall be met if such notice
        is
        mailed postage prepaid to Company Agent at Company Agent’s address as shown in
        Laurus’ records, at least ten (10) days before the time of the event of which
        notice is being given. Laurus may be the purchaser at any sale, if it is
        public.
        In connection with the exercise of the foregoing remedies, Laurus is granted
        permission to use all of each Company’s Intellectual Property. The proceeds of
        sale shall be applied first to all costs and expenses of sale, including
        attorneys’ fees, and second to the payment (in whatever order Laurus elects) of
        all Obligations. After the indefeasible payment and satisfaction in full
        of all
        of the Obligations, and after the payment by Laurus of any other amount required
        by any provision of law, including Section 9-608(a)(1) of the UCC
        (but only
        after Laurus has received what Laurus considers reasonable proof of a
        subordinate party’s security interest), the surplus, if any, shall be paid to
        Company Agent (for the benefit of the applicable Companies) or its
        representatives or to whosoever may be lawfully entitled to receive the same,
        or
        as a court of competent jurisdiction may direct. Each Company and Laurus
        acknowledge that the actual damages that would be incurred by Laurus after
        the
        occurrence of an Event of Default would be difficult to quantify and that
        such
        Company and Laurus have agreed that the fees and obligations set forth in
        this
        Agreement would constitute fair and appropriate liquidated damages in the
        event
        of any such termination.

       

      21. Waivers.
        To the
        full extent permitted by applicable law, each Company hereby waives (a)
        presentment, demand and protest, and notice of presentment, dishonor, intent
        to
        accelerate, acceleration, protest, default, nonpayment, maturity, release,
        compromise, settlement, extension or renewal of any or all of this Agreement
        and
        the Ancillary Agreements or any other notes, commercial paper, Accounts,
        contracts, Documents, Instruments, Chattel Paper and guaranties at any time
        held
        by Laurus on which such Company may in any way be liable, and hereby ratifies
        and confirms whatever Laurus may do in this regard; (b) all rights to notice
        


      
        
          
          

        

        
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      and
        a
        hearing prior to Laurus’ taking possession or control of, or to Laurus’ replevy,
        attachment or levy upon, any Collateral or any bond or security that might
        be
        required by any court prior to allowing Laurus to exercise any of its remedies;
        and (c) the benefit of all valuation, appraisal and exemption laws. Each
        Company
        acknowledges that it has been advised by counsel of its choices and decisions
        with respect to this Agreement, the Ancillary Agreements and the transactions
        evidenced hereby and thereby. 

       

      22. Expenses.
        The
        Companies shall jointly and severally pay all of Laurus’ reasonable
        out-of-pocket costs and expenses, including reasonable fees and disbursements
        of
        in-house or outside counsel and appraisers, in connection with the preparation,
        execution and delivery of this Agreement and the Ancillary Agreements, and
        in
        connection with the prosecution or defense of any action, contest, dispute,
        suit
        or proceeding concerning any matter in any way arising out of, related to
        or
        connected with this Agreement or any Ancillary Agreement. The Companies shall
        also jointly and severally pay all of Laurus’ reasonable fees, charges,
        out-of-pocket costs and expenses, including fees and disbursements of counsel
        and appraisers, in connection with (a) the preparation, execution and delivery
        of any waiver, any amendment thereto or consent proposed or executed in
        connection with the transactions contemplated by this Agreement or the Ancillary
        Agreements, (b) Laurus’ obtaining performance of the Obligations under this
        Agreement and any Ancillary Agreements, including, but not limited to, the
        enforcement or defense of Laurus’ security interests, assignments of rights and
        Liens hereunder as valid perfected security interests, (c) any attempt to
        inspect, verify, protect, collect, sell, liquidate or otherwise dispose of
        any
        Collateral, (d) any appraisals or re-appraisals of any property (real or
        personal) pledged to Laurus by any Company or any of its Subsidiaries as
        Collateral for, or any other Person as security for, the Obligations hereunder
        and (e) any consultations in connection with any of the foregoing. The Companies
        shall also jointly and severally pay Laurus’ customary bank charges for all bank
        services (including wire transfers) performed or caused to be performed by
        Laurus for any Company or any of its Subsidiaries at any Company’s or such
        Subsidiary’s request or in connection with any Company’s loan account with
        Laurus. All such costs and expenses together with all filing, recording and
        search fees, taxes and interest payable by the Companies to Laurus shall
        be
        payable on demand and shall be secured by the Collateral. If any tax by any
        Governmental Authority is or may be imposed on or as a result of any transaction
        between any Company and/or any Subsidiary thereof, on the one hand, and Laurus
        on the other hand, which Laurus is or may be required to withhold or pay,
        the
        Companies hereby jointly and severally indemnifies and holds Laurus harmless
        in
        respect of such taxes, and the Companies will repay to Laurus the amount
        of any
        such taxes which shall be charged to the Companies’ account; and until the
        Companies shall furnish Laurus with indemnity therefor (or supply Laurus
        with
        evidence satisfactory to it that due provision for the payment thereof has
        been
        made), Laurus may hold without interest any balance standing to each Company’s
        credit and Laurus shall retain its Liens in any and all Collateral.
        Notwithstanding the foregoing, in connection with a litigation between Laurus,
        on the one hand, and one or more Companies, on the other hand, the
        prevailing party in such action, as determined by the applicable court, shall
        be
        entitled to attorneys fees actually incurred, and costs and necessary
        disbursements incurred, in each case, in connection with any such
        action.

       

      23. Assignment
        By Laurus.
        Laurus
        may assign any or all of the Obligations together with any or all of the
        security therefor to any Person which is not a competitor of any



      
        
          
          

        

        
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      Company
        and any such transferee shall succeed to all of Laurus’ rights with respect
        thereto. Upon such transfer, Laurus shall be released from all responsibility
        for the Collateral to the extent same is assigned to any transferee. Laurus
        may
        from time to time sell or otherwise grant participations in any of the
        Obligations and the holder of any such participation shall, subject to the
        terms
        of any agreement between Laurus and such holder, be entitled to the same
        benefits as Laurus with respect to any security for the Obligations in which
        such holder is a participant. Each Company agrees that each such holder may
        exercise any and all rights of banker’s lien, set-off and counterclaim with
        respect to its participation in the Obligations as fully as though such Company
        were directly indebted to such holder in the amount of such
        participation.

       

      24. No
        Waiver; Cumulative Remedies.
        Failure
        by Laurus to exercise any right, remedy or option under this Agreement, any
        Ancillary Agreement or any supplement hereto or thereto or any other agreement
        between or among any Company and Laurus or delay by Laurus in exercising
        the
        same, will not operate as a waiver; no waiver by Laurus will be effective
        unless
        it is in writing and then only to the extent specifically stated. Laurus’ rights
        and remedies under this Agreement and the Ancillary Agreements will be
        cumulative and not exclusive of any other right or remedy which Laurus may
        have.

       

      25. Application
        of Payments.
        Except
        as provided in Section 3.3 of the Revolving Note, Section 4.3 of the Minimum
        Borrowing Notes and Section 4.3 of the Term Note: (a) after the occurrence
        and
        during the continuance of an Event of Default, each Company irrevocably waives
        the right to direct the application of any and all payments at any time or
        times
        hereafter received by Laurus from or on such Company’s behalf; and (b),
        notwithstanding whether or not an Event of Default has occurred and is
        continuing, each Company hereby irrevocably agrees that Laurus shall have
        the
        continuing exclusive right to apply and reapply any and all payments received
        at
        any time or times hereafter against the Obligations hereunder in such manner
        as
        Laurus may deem advisable notwithstanding any entry by Laurus upon any of
        Laurus’ books and records.

       

      26. Indemnity.
        

       

      (a) General
        Indemnity.
        Each
        Company hereby jointly and severally indemnify and hold Laurus, and its
        respective affiliates, employees, attorneys and agents (each, an “Indemnified
        Person”),
        harmless from and against any and all suits, actions, proceedings, claims,
        damages, losses, liabilities and expenses of any kind or nature whatsoever
        (including reasonable attorneys’ fees and disbursements and other costs of
        investigation or defense, including those incurred upon any appeal) which
        may be
        instituted or asserted against or incurred by any such Indemnified Person
        as the
        result of credit having been extended, suspended or terminated under this
        Agreement or any of the Ancillary Agreements or with respect to the execution,
        delivery, enforcement, performance and administration of, or in any other
        way
        arising out of or relating to, this Agreement, the Ancillary Agreements or
        any
        other documents or transactions contemplated by or referred to herein or
        therein
        and any actions or failures to act with respect to any of the foregoing,
        except
        to the extent that any such indemnified liability is finally determined by
        a
        court of competent jurisdiction to have resulted solely from such Indemnified
        Person’s gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
        RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
        ASSIGNEE OR THIRD PARTY BENEFICIARY OR 


      
        
          
          

        

        
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      ANY
        OTHER
        PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
        EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
        HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY
        ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
        HEREUNDER OR THEREUNDER.

       

      (b) Vertical/Key
        Command Indemnity.
        Each
        Company and each of its Subsidiaries, successors and assigns hereby agrees
        to
        fully indemnify, hold harmless, reimburse and defend each Indemnified Person
        against any and all claims, costs, expenses, liabilities, judgments,
        obligations, losses or damage, including without limitation reasonable attorneys
        fees, incurred by or imposed upon any Indemnified Person which results, arises
        out of, or is based upon any charges or claims by Vertical Capital Partners,
        Inc., Key Command International Corp., or any of their corporate parents,
        subsidiaries, affiliates, successors, assigns, officers, directors, employees,
        representatives or agents (collectively, the “Vertical Persons”) concerning in
        any manner the transactions related to this Agreement and/or the Ancillary
        Agreements, including without limitation any and all introductions, negotiations
        or discussions among any Indemnified Person, any Vertical Person , any Company,
        any Subsidiary of any Company and/or any successor or assign of any Company
        or
        any Subsidiary of any Company, prior to the entering into of this Agreement
        and/or the Ancillary Agreements, except to the extent that any such indemnified
        liability results solely from any commitment or agreement actually made by
        any
        Indemnified Person to any Vertical Person. 

       

      27. Revival.
        The
        Companies further agree that to the extent any Company makes a payment or
        payments to Laurus, which payment or payments or any part thereof are
        subsequently invalidated, declared to be fraudulent or preferential, set
        aside
        and/or required to be repaid to a trustee, receiver or any other party under
        any
        bankruptcy act, state or federal law, common law or equitable cause, then,
        to
        the extent of such payment or repayment, the obligation or part thereof intended
        to be satisfied shall be revived and continued in full force and effect as
        if
        said payment had not been made.

       

      28. Borrowing
        Agency Provisions. 

       

      (a) Each
        Company hereby irrevocably designates Company Agent to be its attorney and
        agent
        and in such capacity to borrow, sign and endorse notes, and execute and deliver
        all instruments, documents, writings and further assurances now or hereafter
        required hereunder, on behalf of such Company, and hereby authorizes Laurus
        to
        pay over or credit all loan proceeds hereunder in accordance with the request
        of
        Company Agent.

       

      (b) The
        handling of this credit facility as a co-borrowing facility with a borrowing
        agent in the manner set forth in this Agreement is solely as an accommodation
        to
        the Companies and at their request. Laurus shall not incur any liability
        to any
        Company as a result thereof. To induce Laurus to do so and in consideration
        thereof, each Company hereby indemnifies Laurus and holds Laurus harmless
        from
        and against any and all liabilities, expenses, losses, damages and claims
        of
        damage or injury asserted against Laurus by any Person arising from or incurred
        by reason of the handling of the financing arrangements of the Companies
        as



      
        
          
          

        

        
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      provided
        herein, reliance by Laurus on any request or instruction from Company Agent
        or
        any other action taken by Laurus with respect to this Section 28.

       

      (c) All
        Obligations shall be joint and several, and the Companies shall make payment
        upon the maturity of the Obligations by acceleration or otherwise, and such
        obligation and liability on the part of the Companies shall in no way be
        affected by any extensions, renewals and forbearance granted by Laurus to
        any
        Company, failure of Laurus to give any Company notice of borrowing or any
        other
        notice, any failure of Laurus to pursue to preserve its rights against any
        Company, the release by Laurus of any Collateral now or thereafter acquired
        from
        any Company, and such agreement by any Company to pay upon any notice issued
        pursuant thereto is unconditional and unaffected by prior recourse by Laurus
        to
        any Company or any Collateral for such Company’s Obligations or the lack
        thereof.

       

      (d) Each
        Company expressly waives any and all rights of subrogation, reimbursement,
        indemnity, exoneration, contribution or any other claim which such Company
        may
        now or hereafter have against the other or other Person directly or contingently
        liable for the Obligations, or against or with respect to any other’s property
        (including, without limitation, any property which is Collateral for the
        Obligations), arising from the existence or performance of this Agreement,
        until
        all Obligations have been indefeasibly paid in full and this Agreement has
        been
        irrevocably terminated.

       

      (e) Each
        Company represents and warrants to Laurus that (i) Companies have one or
        more
        common shareholders, directors and officers, (ii) the businesses and corporate
        activities of Companies are closely related to, and substantially benefit,
        the
        business and corporate activities of Companies, (iii) the financial and other
        operations of Companies are performed on a combined basis as if Companies
        constituted a consolidated corporate group, (iv) Companies will receive a
        substantial economic benefit from entering into this Agreement and will receive
        a
        substantial economic benefit from the application of each Loan hereunder,
        in
        each case, whether or not such amount is used directly by any Company and
        (v)
        all requests for Loans hereunder by the Company Agent are for the exclusive
        and
        indivisible benefit of the Companies as though, for purposes of this Agreement,
        the Companies constituted a single entity.

       

      29. Notices.
        Any
        notice or request hereunder may be given to any Company, Company Agent or
        Laurus
        at the respective addresses set forth below or as may hereafter be specified
        in
        a notice designated as a change of address under this Section. Any notice
        or
        request hereunder shall be given by registered or certified mail, return
        receipt
        requested, hand delivery, overnight mail or telecopy (confirmed by mail).
        Notices and requests shall be, in the case of those by hand delivery, deemed
        to
        have been given when delivered to any officer of the party to whom it is
        addressed, in the case of those by mail or overnight mail, deemed to have
        been
        given three (3) Business Days after the date when deposited in the mail or
        with
        the overnight mail carrier, and, in the case of a telecopy, when
        confirmed.


      
        
          
          

        

        
          39

          
            

          

        

        
          
          

        

      


      
        Notices
          shall be provided as follows:

        
          	 	 	 	 
	 	
                  If
                    to Laurus:

                	 	
                  Laurus
                    Master Fund, Ltd.

                  c/o
                    Laurus Capital Management, LLC

                  825
                    Third Avenue, 14th Fl.

                  New
                    York, New
                    York 10022

                  Attention:
                    John E. Tucker, Esq.

                  Telephone:
                    (212) 541-4434

                  Telecopier:
                    (212) 541-5800

                
	 	 	 	 
	 	
                  If
                    to any Company, or Company Agent:

                	 	
                  Magnetech
                    Integrated Services Corp.

                  1125
                    S. Walnut Street

                  South
                    Bend, Indiana 46619

                  Attention:
                    John Martell

                  Telephone:
                    574-234-8131

                  Facsimile:
                    574-232-7648

                
	 	 	 	 
	 	
                  With
                    a copy to:

                	 	
                  Barnes
                    & Thornburg LLP

                  600
                    1st
                    Source Bank Center

                  100
                    North Michigan

                  South
                    Bend, Indiana 46601

                  Attention:
                    Richard L. Mintz, Esq.

                  Telephone:
                    574-237-1166

                  Facsimile:
                    574-237-1125

                
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 


        

        


        or
          such
          other address as may be designated in writing hereafter in accordance with
          this
          Section 29 by such Person.

         
30. Governing
        Law, Jurisdiction and Waiver of Jury Trial. 

       

      (a) THIS
        AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
        AND
        ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
        TO
        CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES
        OF
        CONFLICTS OF LAW.

       

      (b) EACH
        COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
        IN
        THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
        TO
        HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE
        HAND,
        AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
        ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
        AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED,
        THAT
        LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
        HAVE
        TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
        NEW
        YORK; AND FURTHER 


      
        
          
          

        

        
          40

          
            

          

        

        
          
          

        

      


      PROVIDED,
        THAT
        NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM
        BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
        THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
        OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS.
        EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
        IN
        ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES
        ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
        IMPROPER VENUE OR FORUM
        NON CONVENIENS.
        EACH
        COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
        PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
        SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
        MAIL
        ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT
        SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S
        ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS,
        PROPER
        POSTAGE PREPAID.

       

      (c) THE
        PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
        APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
        OF
        THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
        TO
        TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
        WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/OR ANY
        COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
        RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,
        ANY
        ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

       

      31. Limitation
        of Liability.
        Each
        Company acknowledges and understands that in order to assure repayment of
        the
        Obligations hereunder Laurus may be required to exercise any and all of Laurus’
        rights and remedies hereunder and agrees that, except as limited by applicable
        law, neither Laurus nor any of Laurus’ agents shall be liable for acts taken or
        omissions made in connection herewith or therewith except for actual bad
        faith,
        gross negligence or willful misconduct .

       

      32. Entire
        Understanding; Maximum Interest.
        This
        Agreement and the Ancillary Agreements contain the entire understanding among
        each Company and Laurus as to the subject matter hereof and thereof and any
        promises, representations, warranties or guarantees not herein contained
        shall
        have no force and effect unless in writing, signed by each Company’s and Laurus’
        respective officers. Neither this Agreement, the Ancillary Agreements, nor
        any
        portion or provisions thereof may be changed, modified, amended, waived,
        supplemented, discharged, cancelled or terminated orally or by any course
        of
        dealing, or in any manner other than by an agreement in writing, signed by
        the
        party to be charged.
        Nothing
        contained in this Agreement, any Ancillary Agreement or in any document referred
        to herein or delivered in connection herewith shall be deemed to establish
        or
        require the payment of a rate of interest or other charges in excess of the
        maximum rate permitted by applicable law. In the event that the



      
        
          
          

        

        
          41

          
            

          

        

        
          
          

        

      


      rate
        of
        interest or dividends required to be paid or other charges hereunder exceed
        the
        maximum rate permitted by such law, any payments in excess of such maximum
        shall
        be credited against amounts owed by the Companies to Laurus and thus refunded
        to
        the Companies.

       

      33. Severability.
        Wherever possible each provision of this Agreement or the Ancillary Agreements
        shall be interpreted in such manner as to be effective and valid under
        applicable law, but if any provision of this Agreement or the Ancillary
        Agreements shall be prohibited by or invalid under applicable law such provision
        shall be ineffective to the extent of such prohibition or invalidity, without
        invalidating the remainder of such provision or the remaining provisions
        thereof.

       

      34. Survival.
        The
        representations, warranties, covenants and agreements made herein shall survive
        any investigation made by Laurus and the closing of the transactions
        contemplated hereby to the extent provided therein. All statements as to
        factual
        matters contained in any certificate or other instrument delivered by
or
        on
        behalf of the Companies pursuant hereto in connection with the transactions
        contemplated hereby shall be deemed to be representations and warranties
        by the
        Companies hereunder solely as of the date of such certificate or instrument.
        All
        indemnities set forth herein shall survive the execution, delivery and
        termination of this Agreement and the Ancillary Agreements and the making
        and
        repaying of the Obligations.

       

      35. Captions.
        All
        captions are and shall be without substantive meaning or content of any kind
        whatsoever.

       

      36. Counterparts;
        Telecopier Signatures.
        This
        Agreement may be executed in one or more counterparts, each of which shall
        constitute an original and all of which taken together shall constitute one
        and
        the same agreement. Any signature delivered by a party via telecopier
        transmission shall be deemed to be any original signature hereto.

       

      37. Construction.
        The
        parties acknowledge that each party and its counsel have reviewed this Agreement
        and that the normal rule of construction to the effect that any ambiguities
        are
        to be resolved against the drafting party shall not be employed in the
        interpretation of this Agreement or any amendments, schedules or exhibits
        thereto.

       

      38. Publicity.
        Each
        Company hereby authorizes Laurus to make, subject to Section 13(f) and to
        any
        limitations that the Parent determines to be necessary or appropriate to
        comply
        with applicable publicity or disclosure restrictions arising in connection
        with
        the registration of the Common Stock under the Securities Act, appropriate
        announcements of the financial arrangement entered into by and among each
        Company and Laurus, including, without limitation, announcements which are
        commonly known as tombstones, in such publications and to such selected parties
        as Laurus shall in its sole and absolute discretion deem appropriate, or
        as
        required by applicable law.

       

      39. Joinder.
        It is
        understood and agreed that any Person that desires to become a Company
        hereunder, or is required to execute a counterpart of this Agreement after
        the
        date hereof pursuant to the requirements of this Agreement or any Ancillary
        Agreement, shall become a Company hereunder by (a) executing a Joinder Agreement
        in form and substance 


      
        
          
          

        

        
          42

          
            

          

        

        
          
          

        

      


      satisfactory
        to Laurus, (b) delivering supplements to such exhibits and annexes to this
        Agreement and the Ancillary Agreements as Laurus shall reasonably request
        and
        (c) taking all actions as specified in this Agreement as would have been
        taken
        by such Company had it been an original party to this Agreement, in each
        case
        with all documents required above to be delivered to Laurus and with all
        documents and actions required above to be taken to the reasonable satisfaction
        of Laurus.

       

      40. Legends.
        The
        Securities shall bear legends as follows;

       

      (a) The
        Notes
        shall bear substantially the following legend: 

       

      “THIS
        NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
        BEEN
        REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
        STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
        OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
        THE
        ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
        UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
        REASONABLY SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP. THAT SUCH
        REGISTRATION IS NOT REQUIRED.”

       

      (b) The
        Grant
        Shares and any shares of Common Stock issued pursuant to conversion of the
        Notes
        or exercise of the Warrants shall bear a legend which shall be in substantially
        the following form until such shares are covered by an effective registration
        statement filed with the SEC:

       

      “THE
        SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
        SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
        THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
        THE
        ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
        AND
        APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
        SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP. THAT SUCH REGISTRATION
        IS
        NOT REQUIRED.”

       

      (c) The
        Warrants shall bear substantially the following legend:

       

      “THIS
        WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
        NOT
        BEEN 


      
        
          
          

        

        
          43

          
            

          

        

        
          
          

        

      


      REGISTERED
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
        LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
        MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
        OF AN
        EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES
        OF
        COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION
        OF COUNSEL REASONABLY SATISFACTORY TO MAGNETECH INTEGRATED SERVICES CORP.
        THAT
        SUCH REGISTRATION IS NOT REQUIRED.”

       

      [Balance
        of page intentionally left blank; signature page follows.]


      
        
          
          

        

        
          44

          
            

          

        

        
          
          

        

      


       

      


       

      IN
        WITNESS WHEREOF, the parties have executed this Security and Purchase Agreement
        as of the date first written above.

      


      


      
        	 	 	 	
                MAGNETECH
                  INTEGRATED SERVICES CORP.

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 President
&
                CEO
	 	 	 	 
	 	 	 	 
	 	 	 	
                MAGNETECH
                  INDUSTRIAL SERVICES, INC.

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 President
	 	 	 	 
	 	 	 	 
	 	 	 	
                MARTELL
                  ELECTRIC, LLC

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 President
	 	 	 	 
	 	 	 	 
	 	 	 	
                HK
                  ENGINE COMPONENTS, LLC

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 Manager
	 	 	 	 
	 	 	 	 
	 	 	 	
                HK
                  MACHINED PARTS, LLC

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 Manager
	 	 	 	 
	 	 	 	 


      


      
        
          
          

        

        
          45

          
            

          

        

        
          
          

        

      


      


      
        	 	 	 	
                HK
                  WESTON PROPERTIES, INC.

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 Manager
	 	 	 	 
	 	 	 	 
	 	 	 	
                HK
                  CAST PRODUCTS, LLC

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                John A. Martell
	 	 	
                Name:

              	 John
                A. Martell
	 	 	
                Title:

              	 Manager
	 	 	 	 
	 	 	 	 
	 	 	 	
                LAURUS
                  MASTER FUND, LTD.

              
	 	 	 	 
	 	 	
                By:

              	 /s/
                David Grin
	 	 	
                Name:

              	 David
                Grin
	 	 	
                Title:

              	 Director


      

      



      
        
          
          

        

        
          46

          
            

          

        

        
          
          

        

      


       

      Annex
        A -
        Definitions

       

      “Account
        Debtor”
        means
        any Person who is or may be obligated with respect to, or on account of,
        an
        Account.

       

      “Accountants”
        has the
        meaning given to such term in Section 11(a).

       

      “Accounts”
        means
        all “accounts”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, including: (a) all accounts receivable, other
        receivables, book debts and other forms of obligations (other than forms
        of
        obligations evidenced by Chattel Paper or Instruments) (including any such
        obligations that may be characterized as an account or contract right under
        the
        UCC); (b) all of such Person’s rights in, to and under all purchase orders or
        receipts for goods or services; (c) all of such Person’s rights to any goods
        represented by any of the foregoing (including unpaid sellers’ rights of
        rescission, replevin, reclamation and stoppage in transit and rights to
        returned, reclaimed or repossessed goods); (d) all rights to payment due
        to such
        Person for Goods or other property sold, leased, licensed, assigned or otherwise
        disposed of, for a policy of insurance issued or to be issued, for a secondary
        obligation incurred or to be incurred, for energy provided or to be provided,
        for the use or hire of a vessel under a charter or other contract, arising
        out
        of the use of a credit card or charge card, or for services rendered or to
        be
        rendered by such Person or in connection with any other transaction (whether
        or
        not yet earned by performance on the part of such Person); and (e) all
        collateral security of any kind given by any Account Debtor or any other
        Person
        with respect to any of the foregoing. 

       

      “Accounts
        Availability”
        means
        up to ninety percent (90%) of the net face amount of Eligible
        Accounts.

       

      “Additional
        Financing Parties”
        has the
        meaning given to such term in Section 13(u).

       

      “Affiliate”
        means,
        with respect to any Person, (a) any other Person (other than a Subsidiary)
        which, directly or indirectly, is in control of, is controlled by, or is
        under
        common control with such Person or (b) any other Person who is a director
        or
        officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii)
        of
        any Person described in clause (a) above. For the purposes of this definition,
        control of a Person shall mean the power (direct or indirect) to direct or
        cause
        the direction of the management and policies of such Person whether by contract
        or otherwise.

       

      “Ancillary
        Agreements”
        means
        the Notes, the Warrants, the Registration Rights Agreements, each Security
        Document and all other agreements, instruments, documents, mortgages, pledges,
        powers of attorney, consents, assignments, contracts, notices, security
        agreements, trust agreements and guarantees whether heretofore, concurrently,
        or
        hereafter executed by or on behalf of any Company, any of its Subsidiaries
        or
        any other Person or delivered to Laurus, relating to this Agreement or to
        the
        transactions contemplated by this Agreement or otherwise relating to the
        relationship between or among any Company and Laurus, as each of the same
        may be
        amended, supplemented, restated or otherwise modified from time to
        time.


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      “Balance
        Sheet Date”
        has the
        meaning given such term in Section 12(f)(ii).

       

      “Books
        and Records”
        means
        all books, records, board minutes, contracts, licenses, insurance policies,
        environmental audits, business plans, files, computer files, computer discs
        and
        other data and software storage and media devices, accounting books and records,
        financial statements (actual and pro forma), filings with Governmental
        Authorities and any and all records and instruments relating to the Collateral
        or otherwise necessary or helpful in the collection thereof or the realization
        thereupon. 

       

      “Business
        Day”
        means a
        day on which Laurus is open for business and that is not a Saturday, a Sunday
        or
        other day on which banks are required or permitted to be closed in the State
        of
        New York.

       

      “Capital
        Availability Amount”
        means
        $7,000,000.

       

      “Charter”
        has the
        meaning given such term in Section 12(c)(iv).

       

      “Chattel
        Paper”
        means
        all “chattel paper,” as such term is defined in the UCC, including electronic
        chattel paper, now owned or hereafter acquired by any Person.

       

      “Closing
        Date”
        means
        the date on which any Company shall first receive proceeds of the initial
        Loans
        or the date hereof, if no Loan is made under the facility on the date
        hereof.

       

      “Closing
        Payment”
        has the
        meaning given such term in Section 5(b)(i).

       

      “Code”
        has the
        meaning given such term in Section 15(i).

       

      “Collateral”
        means
        all of each Company’s property and assets, whether real or personal, tangible or
        intangible, and whether now owned or hereafter acquired, or in which it now
        has
        or at any time in the future may acquire any right, title or interests including
        all of the following property in which it now has or at any time in the future
        may acquire any right, title or interest:

       

      (a) all
        Inventory;

       

      (b) all
        Equipment;

       

      (c) all
        Fixtures;

       

      (d) all
        General Intangibles;

       

      (e) all
        Accounts;

       

      (f) all
        Deposit Accounts, other bank accounts and all funds on deposit
        therein;

       

      (g) all
        Investment Property;

       

      (h) all
        Stock;


      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      


      (i) all
        Chattel Paper;

       

      (j) all
        Letter-of-Credit Rights;

       

      (k) all
        Instruments;

       

      (l) all
        commercial tort claims set forth on Schedule
        1(A);

       

      (m) all
        Books
        and Records;

       

      (n) all
        Intellectual Property;

       

      (o) all
        Supporting Obligations including letters of credit and guarantees issued
        in
        support of Accounts, Chattel Paper, General Intangibles and Investment
        Property;

       

      (p) (i)
        all
        money, cash and cash equivalents and (ii) all cash held as cash collateral
        to
        the extent not otherwise constituting Collateral, all other cash or property
        at
        any time on deposit with or held by Laurus for the account of any Company
        (whether for safekeeping, custody, pledge, transmission or otherwise);
        and

       

      (q) all
        products and Proceeds of all or any of the foregoing, tort claims and all
        claims
        and other rights to payment including (i) insurance claims against third
        parties
        for loss of, damage to, or destruction of, the foregoing Collateral and (ii)
        payments due or to become due under leases, rentals and hires of any or all
        of
        the foregoing and Proceeds payable under, or unearned premiums with respect
        to
        policies of insurance in whatever form.

       

      “Common
        Stock”
        means
        the shares of stock representing the Parent’s common equity
        interests.

       

      “Company
        Agent”
        means
        the Parent.

       

      “Contract
        Rate”
        has the
        meaning given such term in the respective Note. 

       

      “Default”
        means
        any act or event which, with the giving of notice or passage of time or both,
        would constitute an Event of Default.

       

      “Default
        Rate”
        has the
        meaning given such term in Section 5(a)(iii).

       

      “Delinquent
        Account”
        has the
        meaning given such term in Section 2(a)(viii).

       

      “Deposit
        Accounts”
        means
        all “deposit accounts” as such term is defined in the UCC, now or hereafter held
        in the name of any Person, including, without limitation, the
        Lockboxes.

       

      “Disclosure
        Controls”
        has the
        meaning given such term in Section 13(v)(i)

       

      “Documents”
        means
        all “documents”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including all bills of lading,
        dock



      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      


      warrants,
        dock receipts, warehouse receipts, and other documents of title, whether
        negotiable or non-negotiable.

       

      “Eligible
        Accounts”
        means
        each Account of each Company which conforms to the following criteria: (a)
        shipment of the merchandise or the rendition of services has been completed;
        (b)
        no return, rejection or repossession of the merchandise has occurred;
        (c) merchandise or services shall not have been rejected or disputed
        by the
        Account Debtor and there shall not have been asserted any offset, defense
        or
        counterclaim; (d) continues to be in full conformity with the representations
        and warranties made by such Company to Laurus with respect thereto; (e) Laurus
        is, and continues to be, satisfied with the credit standing of the Account
        Debtor in relation to the amount of credit extended; (f) there are no facts
        existing or threatened which are likely to result in any adverse change in
        an
        Account Debtor’s financial condition; (g) is documented by an invoice in a form
        approved by Laurus and shall not be unpaid more than ninety (90) days from
        invoice date; (h) not more than thirty percent (30%) of the unpaid amount
        of
        invoices due from such Account Debtor remains unpaid more than one hundred
        fifteen (115) days from invoice date; (i) is not evidenced by chattel paper
        or
        an instrument of any kind with respect to or in payment of the Account unless
        such instrument is duly endorsed to and in possession of Laurus or represents
        a
        check in payment of an Account; (j) the Account Debtor is located in the
        United
        States; or if such Account Debtor is not located in the United States, the
        Accounts of such Account Debtor be insured by Export-Import Bank of the United
        States; provided,
        however,
        Laurus
        may, from time to time, in the exercise of its sole discretion and based
        upon
        satisfaction of certain conditions to be determined at such time by Laurus,
        deem
        certain Accounts as Eligible Accounts notwithstanding that such Account is
        due
        from an Account Debtor located outside of the United States; (k) Laurus has
        a
        first priority perfected Lien in such Account and such Account is not subject
        to
        any Lien other than Permitted Liens; (l) does not arise out of transactions
        with any employee, officer, director, stockholder or Affiliate of any Company;
        (m) is payable to such Company; (n) does not arise out of a bill and hold
        sale
        prior to shipment and does not arise out of a sale to any Person to which
        such
        Company is indebted; (o) is net of any returns, discounts, claims, credits
        and
        allowances; (p) if the Account arises out of contracts between such Company,
        on
        the one hand, and the United States, on the other hand, any state, or any
        department, agency or instrumentality of any of them, such Company has so
        notified Laurus, in writing, prior to the creation of such Account, and there
        has been compliance with any governmental notice or approval requirements,
        including compliance with the Federal Assignment of Claims Act; (q) is a
        good
        and valid account representing an undisputed bona fide indebtedness incurred
        by
        the Account Debtor therein named, for a fixed sum as set forth in the invoice
        relating thereto with respect to an unconditional sale and delivery upon
        the
        stated terms of goods sold by such Company or work, labor and/or services
        rendered by such Company; (r) does not arise out of progress billings prior
        to
        completion of the order; (s) the total unpaid Accounts from such Account
        Debtor
        does not exceed twenty-five percent (25%) of all Eligible Accounts; (t) such
        Company’s right to payment is absolute and not contingent upon the fulfillment
        of any condition whatsoever; (u) such Company is able to bring suit and enforce
        its remedies against the Account Debtor through judicial process; (v) does
        not
        represent interest payments, late or finance charges owing to such Company,
        and
        (w) is otherwise satisfactory to Laurus as determined by Laurus in the exercise
        of its sole discretion. In the event any Company requests that Laurus include
        within Eligible Accounts certain Accounts of one or more of such Company’s
        acquisition targets, Laurus shall at the time of such request consider such
        inclusion, but any such inclusion shall be at the sole option of Laurus and
        shall at all times be subject to the 


      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      


      execution
        and delivery to Laurus of all such documentation (including, without limitation,
        guaranty and security documentation) as Laurus may require in its sole
        discretion. 

       

      “Eligible
        Subsidiary”
        means
        each Subsidiary of the Parent set forth on Exhibit
        A hereto,
        as the same may be updated from time to time with Laurus’ written
        consent.

       

      “Equipment”
        means
        all “equipment” as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including any and all machinery,
        apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other
        tangible personal property (other than Inventory) of every kind and description
        that may be now or hereafter used in such Person’s operations or that are owned
        by such Person or in which such Person may have an interest, and all parts,
        accessories and accessions thereto and substitutions and replacements
        therefor.

       

      “ERISA”
        has the
        meaning given such term in Section 12(bb).

       

      “Event
        of Default”
        means
        the occurrence of any of the events set forth in Section 19. 

       

      “Exchange
        Act”
        means
        the Securities Exchange Act of 1934, as amended.

       

      “Financial
        Reporting Controls”
        has the
        meaning given such term in Section 13(v)(ii).

       

      “First
        Conversion Date”
        has the
        meaning given such term in Section 2(c).

       

      “Fixtures”
        means
        all “fixtures” as such term is defined in the UCC, now owned or hereafter
        acquired by any Person.

       

      “Formula
        Amount”
        has the
        meaning given such term in Section 2(a)(i).

       

      “GAAP”
        means
        generally accepted accounting principles, practices and procedures in effect
        from time to time in the United States of America.

       

      “General
        Intangibles”
        means
        all “general intangibles” as such term is defined in the UCC, now owned or
        hereafter acquired by any Person including all right, title and interest
        that
        such Person may now or hereafter have in or under any contract, all Payment
        Intangibles, customer lists, Licenses, Intellectual Property, interests in
        partnerships, joint ventures and other business associations, permits,
        proprietary or confidential information, inventions (whether or not patented
        or
        patentable), technical information, procedures, designs, knowledge, know-how,
        Software, data bases, data, skill, expertise, experience, processes, models,
        drawings, materials, Books and Records, Goodwill (including the Goodwill
        associated with any Intellectual Property), all rights and claims in or under
        insurance policies (including insurance for fire, damage, loss, and casualty,
        whether covering personal property, real property, tangible rights or intangible
        rights, all liability, life, key-person, and business interruption insurance,
        and all unearned premiums), uncertificated securities, choses in action,
        deposit
        accounts, rights to receive tax refunds and other payments, rights to received
        dividends, distributions, cash, 


      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      


      Instruments
        and other property in respect of or in exchange for pledged Stock and Investment
        Property, and rights of indemnification.

       

      “Goods”
        means
        all “goods”, as such term is defined in the UCC, now owned or hereafter acquired
        by any Person, wherever located, including embedded software to the extent
        included in “goods” as defined in the UCC, manufactured homes, standing timber
        that is cut and removed for sale and unborn young of animals.

       

      “Goodwill”
        means
        all goodwill, trade secrets, proprietary or confidential information, technical
        information, procedures, formulae, quality control standards, designs, operating
        and training manuals, customer lists, and distribution agreements now owned
        or
        hereafter acquired by any Person.

       

      “Governmental
        Authority”
        means
        any nation or government, any state or other political subdivision thereof,
        and
        any agency, department or other entity exercising executive, legislative,
        judicial, regulatory or administrative functions of or pertaining to government.
        

       

      “Grant
        Shares”
        has the
        meaning given such term in Section 5(b)(i).

       

      “Hazardous
        Materials”
        has the
        meaning given such term in Section 12(q).

       

      “Indemnified
        Person”
        has the
        meaning given such term in Section 26.

       

      “Instruments”
        means
        all “instruments”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including all certificated securities
        and all promissory notes and other evidences of indebtedness, other than
        instruments that constitute, or are a part of a group of writings that
        constitute, Chattel Paper.

       

      “Intellectual
        Property”
        means
        any and all patents, trademarks, service marks, trade names, copyrights,
        trade
        secrets, Licenses, information and other proprietary rights and
        processes.

       

      “Inventory”
        means
        all “inventory”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including all inventory, merchandise,
        goods and other personal property that are held by or on behalf of such Person
        for sale or lease or are furnished or are to be furnished under a contract
        of
        service or that constitute raw materials, work in process, finished goods,
        returned goods, or materials or supplies of any kind, nature or description
        used
        or consumed or to be used or consumed in such Person’s business or in the
        processing, production, packaging, promotion, delivery or shipping of the
        same,
        including all supplies and embedded software.

       

      “Investment
        Property”
        means
        all “investment property”, as such term is defined in the UCC, now owned or
        hereafter acquired by any Person, wherever located.

       

      “Laurus
        Term Sheet”
        has the
        meaning given such term in Section 13(u).

       

      “Letter-of-Credit
        Rights”
        means
“letter-of-credit rights” as such term is defined in the UCC, now owned or
        hereafter acquired by any Person, including rights to payment or



      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      


      performance
        under a letter of credit, whether or not such Person, as beneficiary, has
        demanded or is entitled to demand payment or performance.

       

      “License”
        means
        any rights under any written agreement now or hereafter acquired by any Person
        to use any trademark, trademark registration, copyright, copyright registration
        or invention for which a patent is in existence or other license of rights
        or
        interests now held or hereafter acquired by any Person.

       

      “Lien”
        means
        any mortgage, security deed, deed of trust, pledge, hypothecation, assignment,
        security interest, lien (whether statutory or otherwise), charge, claim or
        encumbrance, or preference, priority or other security agreement or preferential
        arrangement held or asserted in respect of any asset of any kind or nature
        whatsoever including any conditional sale or other title retention agreement,
        any lease having substantially the same economic effect as any of the foregoing,
        and the filing of, or agreement to give, any financing statement under the
        UCC
        or comparable law of any jurisdiction.

       

      “Loans”
        means
        the loans under each Minimum Borrowing Note, the Revolving Note and the Term
        Note and shall include all other extensions of credit hereunder and under
        any
        Ancillary Agreement.

       

      “Lockbox
        Bank”
        has the
        meaning given such term in Section 8(a).

       

      “Lockboxes”
        has the
        meaning given such term in Section 8(a).

       

      “Material
        Adverse Effect”
        means a
        material adverse effect on (a) the business, assets, liabilities, condition
        (financial or otherwise), properties, operations or prospects of any Company
        or
        any of its Subsidiaries (taken individually and as a whole), (b) any Company’s
        or any of its Subsidiary’s ability to pay or perform the Obligations in
        accordance with the terms hereof or any Ancillary Agreement, (c) the value
        of
        the Collateral, the Liens on the Collateral or the priority of any such Lien
        or
        (d) the practical realization of the benefits of Laurus’ rights and remedies
        under this Agreement and the Ancillary Agreements.

       

      “Maximum
        Legal Rate”
        has the
        meaning given such term in Section 5(a)(iv).

       

      “Minimum
        Borrowing Amount”
        means
        Four Million Dollars ($4,000,000).

       

      “Minimum
        Borrowing Notes”
        means
        that certain Secured Convertible Minimum Borrowing Note dated as of the Closing
        Date made by the Companies in favor of Laurus evidencing the Minimum Borrowing
        Amount and each other Secured Convertible Minimum Borrowing Note made by
        the
        Companies in favor of Laurus which evidences the Minimum Borrowing Amount,
        as
        each of the same may be amended, supplemented, restated and/or otherwise
        modified from time to time.

       

      “NASD”
        has the
        meaning given such term in Section 13(b).

       

      “Next
        Unissued Serialized Note”
        has the
        meaning given such term in Section 2(a)(i).


      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      


      “Note
        Shares”
        has the
        meaning given such term in Section 12(a).

       

      “Notes”
        means
        the Minimum Borrowing Notes, the Term Note and the Revolving Note made by
        Companies in favor of Laurus in connection with the transactions contemplated
        hereby, as each of the same may be amended, supplemented, restated and/or
        otherwise modified from time to time.

       

      “Obligations”
        means
        all Loans, all advances, debts, liabilities, obligations, covenants and duties
        owing by each Company and each of its Subsidiaries to Laurus (or any corporation
        that directly or indirectly controls or is controlled by or is under common
        control with Laurus) of every kind and description (whether or not evidenced
        by
        any note or other instrument and whether or not for the payment of money
        or the
        performance or non-performance of any act), direct or indirect, absolute
        or
        contingent, due or to become due, contractual or tortious, liquidated or
        unliquidated, whether existing by operation of law or otherwise now existing
        or
        hereafter arising including any debt, liability or obligation owing from
        any
        Company and/or each of its Subsidiaries to others which Laurus may have obtained
        by assignment or otherwise and further including all interest (including
        interest accruing at the then applicable rate provided in this Agreement
        after
        the maturity of the Loans and interest accruing at the then applicable rate
        provided in this Agreement after the filing of any petition in bankruptcy,
        or
        the commencement of any insolvency, reorganization or like proceeding, whether
        or not a claim for post-filing or post-petition interest is allowed or allowable
        in such proceeding), charges or any other payments each Company and each
        of its
        Subsidiaries is required to make by law or otherwise arising under or as
        a
        result of this Agreement, the Ancillary Agreements or otherwise, together
        with
        all reasonable expenses and reasonable attorneys’ fees chargeable to the
        Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in
        connection therewith.

       

      “Overadvance”
        has the
        meaning given such term in Section 5(b)(ii).

       

      “Payment
        Intangibles”
        means
        all “payment intangibles” as such term is defined in the UCC, now owned or
        hereafter acquired by any Person, including, a General Intangible under which
        the Account Debtor’s principal obligation is a monetary obligation.

       

      “Permitted
        Liens”
        means
        (a) Liens of carriers, warehousemen, artisans, bailees, mechanics and
        materialmen incurred in the ordinary course of business securing sums not
        overdue; (b) Liens incurred in the ordinary course of business in connection
        with worker’s compensation, unemployment insurance or other forms of
        governmental insurance or benefits, relating to employees, securing sums
        (i) not
        overdue or (ii) being diligently contested in good faith provided that adequate
        reserves with respect thereto are maintained on the books of the Companies
        and
        their Subsidiaries, as applicable, in conformity with GAAP; (c) Liens
        in
        favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently
        contested in good faith by appropriate proceedings, provided that adequate
        reserves with respect thereto are maintained on the books of the Companies
        and
        their Subsidiaries, as applicable, in conformity with GAAP; and which have
        no
        effect on the priority of Liens in favor of Laurus or the value of the assets
        in
        which Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money
        Indebtedness to the extent permitted in this Agreement and (f) Liens specified
        on Schedule
        2
        hereto.


      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      


      “Person”
        means
        any individual, sole proprietorship, partnership, limited liability partnership,
        joint venture, trust, unincorporated organization, association, corporation,
        limited liability company, institution, public benefit corporation, entity
        or
        government (whether federal, state, county, city, municipal or otherwise,
        including any instrumentality, division, agency, body or department thereof),
        and shall include such Person’s successors and assigns.

       

      “Principal
        Market”
        means
        the NASD Over The Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ
        National Market System, American Stock Exchange or New York Stock Exchange
        (whichever of the foregoing is at the time the principal trading exchange
        or
        market for the Common Stock).

       

      “Proceeds”
        means
“proceeds”, as such term is defined in the UCC and, in any event, shall include:
        (a) any and all proceeds of any insurance, indemnity, warranty or guaranty
        payable to any Company or any other Person from time to time with respect
        to any
        Collateral; (b) any and all payments (in any form whatsoever) made or due
        and
        payable to any Company from time to time in connection with any requisition,
        confiscation, condemnation, seizure or forfeiture of any Collateral by any
        governmental body, governmental authority, bureau or agency (or any person
        acting under color of governmental authority); (c) any claim of any Company
        against third parties (i) for past, present or future infringement of any
        Intellectual Property or (ii) for past, present or future infringement
        or
        dilution of any trademark or trademark license or for injury to the goodwill
        associated with any trademark, trademark registration or trademark licensed
        under any trademark License; (d) any recoveries by any Company against third
        parties with respect to any litigation or dispute concerning any Collateral,
        including claims arising out of the loss or nonconformity of, interference
        with
        the use of, defects in, or infringement of rights in, or damage to, Collateral;
        (e) all amounts collected on, or distributed on account of, other Collateral,
        including dividends, interest, distributions and Instruments with respect
        to
        Investment Property and pledged Stock; and (f) any and all other amounts,
        rights
        to payment or other property acquired upon the sale, lease, license, exchange
        or
        other disposition of Collateral and all rights arising out of
        Collateral.

       

      “Proposed
        Term Sheet”
        has the
        meaning given such term in Section 13(u).

       

      “Purchase
        Money Indebtedness”
        means
        (a) any indebtedness incurred for the payment of all or any part of the purchase
        price of any fixed asset, including indebtedness under capitalized leases,
        (b)
        any indebtedness incurred for the sole purpose of financing or refinancing
        all
        or any part of the purchase price of any fixed asset, and (c) any renewals,
        extensions or refinancings thereof (but not any increases in the principal
        amounts thereof outstanding at that time).

       

      “Purchase
        Money Lien”
        means
        any Lien upon any fixed assets that secures the Purchase Money Indebtedness
        related thereto but only if such Lien shall at all times be confined solely
        to
        the asset the purchase price of which was financed or refinanced through
        the
        incurrence of the Purchase Money Indebtedness secured by such Lien and only
        if
        such Lien secures only such Purchase Money Indebtedness.

       

      “Receivables
        Purchase”
        has the
        meaning given such term in Section 2(b).


      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      


      “Registration
        Rights Agreements”
        means
        that certain Registration Rights Agreement dated as of the Closing Date by
        and
        between the Parent and Laurus and each other registration rights agreement
        by
        and between the Parent and Laurus, as each of the same may be amended, modified
        and supplemented from time to time.

       

      “Revolving
        Loan”
        shall
        have the meaning given such term in Section 2(a)(i).

       

      “Revolving
        Note”
        means
        that certain Secured Revolving Note dated as of the Closing Date made by
        the
        Companies in favor of Laurus in the original principal amount of $7,000,000,
        as
        the same may be amended, supplemented, restated and/or otherwise modified
        from
        time to time.

       

      “SEC”
        has the
        meaning given such term in Section 12(d).

       

      “Securities”
        means
        the Grant Shares, the Notes, the Warrants and the shares of Common Stock
        which
        may be issued pursuant to conversion of such Notes in whole or in part or
        exercise of such Warrants.

       

      “Securities
        Act”
        has the
        meaning given such term in Section 12(r).

       

      “Security
        Documents”
        means
        all security agreements, mortgages, cash collateral deposit letters, pledges
        and
        other agreements which are executed by any Company or any of its Subsidiaries
        in
        favor of Laurus.

       

      “Software”
        means
        all “software” as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, including all computer programs and all supporting
        information provided in connection with a transaction related to any
        program.

       

      “Stock”
        means
        all certificated and uncertificated shares, options, warrants, membership
        interests, general or limited partnership interests, participation or other
        equivalents (regardless of how designated) of or in a corporation, partnership,
        limited liability company or equivalent entity whether voting or nonvoting,
        including common stock, preferred stock, or any other “equity security” (as such
        term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
        by the SEC under the Exchange Act).

       

      “Stock
        Acquisition Limitation”
        has the
        meaning given such term in Section 15(i).

       

      “Subsidiary”
        means,
        with respect to any Person, (i) any other Person whose shares of stock or
        other
        ownership interests having ordinary voting power (other than stock or other
        ownership interests having such power only by reason of the happening of
        a
        contingency) to elect a majority of the directors or other governing body
        of
        such other Person, are owned, directly or indirectly, by such Person or (ii)
        any
        other Person in which such Person owns, directly or indirectly, more than
        50% of
        the equity interests at such time.

       

      “Supporting
        Obligations”
        means
        all “supporting obligations” as such term is defined in the
        UCC.


      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      


      “Term”
        means
        the Closing Date through the close of business on the day immediately preceding
        the third anniversary of the Closing Date, subject to acceleration at the
        option
        of Laurus upon the occurrence of an Event of Default hereunder or other
        termination hereunder.

       

      “Term
        Loan”
        shall
        have the meaning set forth in Section 2(d).

       

      “Term
        Note”
        means
        that certain Secured Convertible Term Note dated as of the Closing Date made
        by
        the Companies in favor of Laurus in the original principal amount of $3,000,000
        as the same may amended, supplemented, restated and/or otherwise modified
        from
        time to time. 

       

      “Total
        Investment Amount”
        means
        $10,000,000.

       

      “Transferable
        Amount”
        has the
        meaning given such term in Section 2(a)(i).

       

      “UCC”
        means
        the Uniform Commercial Code as the same may, from time to time be in effect
        in
        the State of New York; provided, that in the event that, by reason of mandatory
        provisions of law, any or all of the attachment, perfection or priority of,
        or
        remedies with respect to, Laurus’ Lien on any Collateral is governed by the
        Uniform Commercial Code as in effect in a jurisdiction other than the State
        of
        New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in
        such other jurisdiction for purposes of the provisions of this Agreement
        relating to such attachment, perfection, priority or remedies and for purposes
        of definitions related to such provisions; provided further, that to the
        extent
        that UCC is used to define any term herein or in any Ancillary Agreement
        and
        such term is defined differently in different Articles or Divisions of the
        UCC,
        the definition of such term contained in Article or Division 9 shall
        govern.

       

      “Warrant
        Shares”
        has the
        meaning given such term in Section 12(a).

       

      “Warrants”
        means
        that certain Common Stock Purchase Warrant dated as of the Closing Date made
        by
        the Parent in favor of Laurus, to purchase up to 7,352,941 shares of Common
        Stock at an exercise price of $0.34 per share (subject to adjustment as provided
        therein), as the same may be amended, restated, modified and/or supplemented
        from time to time.


      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      


       

      Exhibit
        A

       

      Eligible
        Subsidiaries

       

      


       

      Magnetech
        Industrial Services, Inc., an Indiana corporation

       

      Martell
        Electric, LLC, an Indiana limited liability company

       

      HK
        Engine
        Components, LLC, an Indiana limited liability company

       

      HK
        Machined Parts, LLC, an Indiana limited liability company

       

      HK
        Weston
        Properties, LLC, an Indiana limited liability company

       

      HK
        Cast
        Products, LLC, an Indiana limited liability company


      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


       

      Exhibit
        B

       

      
        Magnetech
          Integrated Services Corp.

        
          Borrowing
            Base

          
            8/22/2005

          

        

      

       

      

        
          	
                   

                	
                  (000's)

                	
                  Magnetech

                	
                  Martell

                	
                  HK
                    Engine

                	
                  Combined

                
	 	
                  Accounts
                    Receivable per 08/22/05 Agings

                	
                  $4,251
                    

                	
                  $3,182
                    

                	
                  $1,928
                    

                	
                  $9,361
                    

                
	 	
                  Ineligibles

                	 	 	 	 
	 	
                  Past
                    Due accounts (> 90 days)

                	
                  619
                    

                	
                  248

                	
                  326

                	
                  $1,193
                    

                
	 	
                  Cross-age
                    (>30% past due)

                	
                  152
                    

                	
                  25

                	
                  52

                	
                  $229
                    

                
	 	
                  Credit
                    Balances > 90 days

                	
                  82
                    

                	
                  71

                	
                  4

                	
                  $157
                    

                
	
                  a
                     

                	
                  Retention
                    Billings

                	 	
                  394

                	 	
                  $394
                    

                
	
                  b
                     

                	
                  Less:
                    Uninsured Foreign

                	
                  0
                    

                	 	
                  1097

                	
                  $1,097
                    

                
	 	
                  Contra
                    Offset-4 a/c-see last page of A/R aging

                	
                  0
                    

                	 	 	
                  $0
                    

                
	
                  c
                     

                	
                  Cash
                    Sales-Ohio (# CASHBO) 1-90 days

                	
                  0
                    

                	 	 	
                  $0
                    

                
	 	
                  Total
                    Ineligibles

                	
                  $853
                    

                	
                  $738
                    

                	
                  $1,479
                    

                	
                  $3,070
                    

                
	 	
                  Eligible
                    Accounts Receivable

                	
                  $3,398
                    

                	
                  $2,444
                    

                	
                  $449
                    

                	
                  $6,291
                    

                
	 	
                  Proposed
                    Advance Rate

                	
                  90.0%

                	
                  90.0%

                	
                  90.0%

                	
                  90.0%

                
	 	
                  Available
                    Accounts Receivable

                	
                  $3,058
                    

                	
                  $2,200
                    

                	
                  $404
                    

                	
                  $5,662
                    

                
	 	 	 	 	 	 
	 	
                  Inventory
                    per 07/31/05 F/S

                	
                  $5,198
                    

                	
                  $43

                	
                  $1,728

                	
                  $6,969
                    

                
	 	
                  Ineligibles

                	 	 	 	 
	 	
                  Work-in-Process
                    Inventory

                	
                  2,486
                    

                	
                  0
                    

                	
                  408
                    

                	
                  $2,894
                    

                
	 	
                  Excess/Slow-Moving
                    

                	 	 	 	 
	 	
                  Supplies/Packaging

                	 	 	 	 
	 	
                  Other

                	 	 	 	 
	 	
                  Other

                	 	 	 	 
	 	
                  Other

                	 	 	 	 
	 	
                  Other

                	
                   

                	
                   

                	
                   

                	
                   

                
	 	
                  Total
                    Ineligible

                	
                  $2,486
                    

                	
                  $0
                    

                	
                  $408
                    

                	
                  $2,894
                    

                
	 	
                  Eligible
                    Inventory

                	
                  $2,712
                    

                	
                  $43
                    

                	
                  $1,320
                    

                	
                  $4,075
                    

                
	
                  d
                     

                	
                  Proposed
                    Advance Rate

                	
                  0.0%

                	
                  0.0%

                	
                  0.0%

                	
                  0.0%

                
	 	
                  Available
                    Inventory

                	
                  $0
                    

                	
                  $0
                    

                	
                  $0
                    

                	
                  $0
                    

                
	 	 	 	 	 	 
	 	
                  Total
                    Availability

                	
                  $3,058
                    

                	
                  $2,200
                    

                	
                  $404
                    

                	
                  $5,662
                    

                
	
                  e
                     

                	
                  Add
                    Term Loan 

                	 	 	 	
                  3,000
                    

                
	 	 	 	 	 	
                  8,662
                    

                
	 	 	 	 	 	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	 	
                  Excess
                    (Deficit) Availability

                	 	 	 	
                   

                


        

        


         

        


         

        
          	
                  a

                	
                  Martell
                    is an electrical contractor that undertakes large construction
                    jobs as a
                    sub-contractor and often bills on a progress (estimated % of
                    completion)
                    basis. Most invoices include a 10% retention factor plus the
                    final billing
                    at the end of the job is also treated as a retention by the Company's
                    customers.

                


        

         

        
          	
                  b

                	
                  There
                    are no advances to be made against inventory included in this
                    transaction.

                


        

         

        
          	
                  c

                	
                  [list
                    any additions]

                


        

         

        
          	
                  d

                	
                  [describe
                    any fees to be deducted]

                


        

         

        


         

        
          	
                   

                	
                  Wire
                    Request

                	
                   

                
	
                  Amount:

                	 	
                  $

                
	
                  Bank
                    Name:

                	 	 
	
                  Account
                    Name:

                	 	 
	
                  ABA#:

                	 	 
	
                  Account
                    Number:

                	 	 


        

        


         

        
          	
                  The
                    undersigned hereby certifies that all of the foregoing information
                    regarding the Eligible Accounts and Eligible Inventory are true
                    and
                    correct on the date hereof and all such Accounts and Inventory
                    listed as
                    Eligible are Eligible within the meaning given such term in the
                    Security
                    Agreement dated 8/24/05 between Borrower and Laurus Master Fund,
                    Ltd.

                
	 
	
                  BORROWER

                
	 
	 
	
                  By:
                    _________________________________

                
	
                  Name:

                
	
                  Title:

                


        

        


         

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

      

    

     

    
      

        Schedules
          to Security and Purchase Agreement

         

        


         

        The
          Schedules attached hereto constitute the Schedules to that certain Security
          and
          Purchase Agreement (the “Agreement”), by and among LAURUS MASTER FUND, LTD.,
          MAGNETECH INTEGRATED SERVICES CORP. and certain other parties. All capitalized
          terms used in these Schedules but not defined herein shall have the meanings
          set
          forth in the Agreement. Any matter or item disclosed on one Schedule shall
          be
          deemed to have been disclosed on any other Schedule where such disclosure
          could
          be deemed or would be required.

         

        


         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(b) 

         

        SUBSIDIARIES

         

        Magnetech
          Integrated Services Corp

        Capital
          Stock as of 7/20/05

         

        SCHEDULE
          12(b)

        SCHEDULE
          12(c)

         

        
          	 	
                  Type

                	
                  Authorized

                	
                  Issued

                	
                  Outstanding

                
	 	 	 	 	 
	
                  Magnetech
                    Integrated Services Corp

                	
                  Preferred

                  Common

                	
                  20,000,000

                  200,000,000

                	
                  97330006*

                	
                  97330006*

                
	 	 	 	 	 
	
                  Magnetech
                    Industrial Services Inc.

                	
                  Common

                	
                  1,000

                	
                  1,000

                	
                  1,000

                
	 	 	
                  100%
                    owned by Magnetech Integrated Services Corp

                
	 	 	 	 	 
	
                  Martell
                    Engine Components, LLC

                	
                  Membership
                    Interest Shares

                	
                  100

                	
                  100

                	
                  100

                
	 	 	
                  100%
                    owned by Magnetech Industries Services Inc.

                
	 	 	 
	
                  HK
                    Engine Components, LLC

                	
                  Membership
                    Interest Shares

                	
                  100%
                    owned by Magnetech Integrated Services Corp

                
	 	 	 
	
                  HK
                    Machine Parts, LLC

                	
                  Membership
                    Interest Shares

                	
                  100%
                    owned by HK Engine Components LLC

                
	 	 	 
	
                  HK
                    Weston Properties, LLC

                	
                  Membership
                    Interest Shares

                	
                  100%
                    owned by HK Engine Components LLC

                
	 	 	 
	
                  HK
                    Cast Products, LLC

                	
                  Membership
                    Interest Shares

                	
                  100%
                    owned by HK Engine Components LLC

                


        

        


        *Includes
          50,000 shares to be issued to Jackson Steinen (Adam Gottbetter) in the
          near
          future.

        



        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        


        SCHEDULE
          12(c)

         

        CAPITALIZATION:VOTING
          RIGHTS

         

        


         

        See
          attached excel SCHEDULE 12(c) 

        


        The
          Company intends to establish a Stock Option Plan, Restricted Stock Purchase
          Plan
          and Performance Share Plan in the near future. The Company may issue options,
          restricted stock, or performance shares for up to 5,000,000 shares of its
          common
          stock in connection with such plans.

         

        As
          of
          July 20, 2005, the following warrants and convertible debentures were
          outstanding:

         

        
          	1.  	
                  4,500,000
                    common stock purchase warrants issued in conjunction with a private
                    stock
                    offering with an exercise price of $0.0001 per share, pursuant
                    to a
                    certain Warrant Agreement by and among Magnetech Integrated Services
                    Corp., Magnetech Industrial Services, Inc. and Strasbourger Pearson
                    Tulcin
                    Wolff Incorporated (the “Warrant Agreement”). The exercise price and
                    number of shares of common stock purchasable upon exercise of
                    the warrants
                    may be subject to adjustment under the terms of the Warrant Agreement
                    as a
                    result of the transactions contemplated
                    hereby.

                


        

         

        
          	2.  	
                  4,255,601
                    common stock purchase warrants issued in conjunction with a private
                    debt
                    offering with an exercise price of $0.001 per
                    share.

                


        

         

        
          	3.  	
                  6,182,992
                    common stock purchase warrants issued in conjunction with a private
                    debt
                    offering with an exercise price of $0.001 per
                    share.

                


        

         

        
          	4.  	
                  11,821,108
                    shares of common stock are reserved for issuance upon conversion
                    of the
                    debentures issued in conjunction with a private debt
                    offering.

                


        

         

        After
          the
          closing, the Parent intends to grant a Conversion Option to John A. Martell,
          pursuant to which Mr. Martell would have the option to convert any or all
          of the
          Company’s indebtedness to him into shares of its common stock at a conversion
          price of $0.10 per share.

         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(e)

         

        LIABILITIES

         

        


         

        
          	
                  Lender

                   

                	
                  Amount

                   

                	
                  Interest
                    Rate

                   

                	
                  Encumbrances

                   

                
	
                  MFB
                    Bank

                   

                	
                  $5,500,000

                   

                	
                  Prime
                    + .375%

                   

                	
                  All
                    assets

                   

                
	
                  Note:
                    MFB to be paid off at closing.

                   

                
	 	 	 	 
	
                  Debentures

                   

                	
                  4,025,000

                   

                	
                  6%

                   

                	
                  All
                    assets

                   

                
	
                  John
                    Martell

                   

                	
                  $3,000,000

                   

                	
                  Prime
                    -1%

                   

                	
                  Unsecured

                   

                
	
                  John
                    Martell

                   

                	
                  $
                    150,000

                   

                	
                  -

                   

                	
                  Unsecured

                   

                
	
                  Patricia
                    Minehardt

                   

                	
                  $
                    20,000

                   

                	
                  -

                   

                	
                  Unsecured

                   

                


        

        


         

        Note:
          Above continuing Lenders are subject to a Subordination Agreement with
          Laurus.

         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        


         

        SCHEDULE
          12(f)

         

        AGREEMENTS

         

        OUTSTANDING
          INDEBTEDNESS

        (As
          of
          June 26, 2005)

         

        


         

        
          	
                  Lender

                   

                	
                  Amount

                   

                	
                  Interest
                    Rate

                   

                	
                  Encumbrances

                   

                
	
                  MFB
                    Bank

                   

                	
                  $5,500,000

                   

                	
                  Prime
                    + .375%

                   

                	
                  All
                    assets

                   

                
	
                  Note:
                    MFB to be paid off at closing.

                   

                
	 	 	 	 
	
                  Debentures

                   

                	
                  $4,025,000

                   

                	
                  6%

                   

                	
                  All
                    assets

                   

                
	
                  John
                    Martell

                   

                	
                  $3,000,000

                   

                	
                  Prime
                    -1%

                   

                	
                  Unsecured

                   

                
	
                  John
                    Martell

                   

                	
                  $
                    150,000

                   

                	 	
                  Unsecured

                   

                
	
                  Patricia
                    Minehardt

                   

                	
                  $
                    20,000

                   

                	
                  -

                   

                	
                  Unsecured

                   

                


        

         

        Note:
          Above continuing Lenders are subject to a Subordination Agreement with
          Laurus.

         

        In
          conjunction with the initial purchase of assets from Delta Star Electric,
          Inc.,
          the Company was assigned two patents for lifting magnets. The assignment
          required that the Company produce a working prototype within three years.
          The
          Company did not produce a working prototype and will re-assign the patents,
          as
          required.

         

        



        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        


        SCHEDULE
          12(g)

         

        OBLIGATIONS
          TO RELATED PARTIES

        (As
          of
          June 26, 2005)

         

        


         

        
          	
                  Lender

                   

                	
                  Amount

                   

                	
                  Interest
                    Rate

                   

                	
                  Encumbrances

                   

                
	
                  John
                    Martell

                   

                	
                  $3,000,000

                   

                	
                  Prime
                    -1%

                   

                	
                  Unsecured

                   

                
	
                  John
                    Martell

                   

                	
                  $
                    500

                   

                	
                  -

                   

                	
                  Unsecured

                   

                
	
                  Patricia
                    Minehardt

                   

                	
                  $
                    20,000

                   

                	
                  -

                   

                	
                  Unsecured

                   

                


        

        


         

        The
          Company intends to grant a Conversion Option to John A. Martell, pursuant
          to
          which Mr. Martell would have the option to convert any or all of the Company’s
          indebtedness to him into shares of its common stock at a conversion price
          of
          $0.10 per share.

         

        


         

        The
          Company leases real property from the following related parties:

         

        


         

        
          	
                  Lessor

                   

                	
                  Address

                   

                	
                  Expiration
                    Date

                   

                	
                  Monthly
                    Rent

                   

                
	
                  JAM
                    Summer Properties LLC

                	
                  Hammond,
                    IN

                	
                  /2/10

                	
                  $7,500

                
	 	 	 	 
	
                  JAM
                    Bev Properties LLC

                	
                  Boardman,
                    OH

                	
                  5/5/12

                	
                  4,400

                
	 	 	 	 
	
                  JAM
                    Walnut Properties LLC

                	
                  South
                    Bend, IN

                	
                  5/5/12

                	
                  $7,200

                
	 	 	 	 
	
                  JAM
                    Hutson Properties LLC

                	
                  Mobile,
                    AL

                	
                  3/1/06

                	
                  $4,100

                


        

        



        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        


        SCHEDULE
          12(h)

        


        CHANGES

         

        
          	
                  1.

                	
                  In
                    March 2005 the Vice President of Operations for Martell Electric,
                    LLC
                    resigned and was replaced in April
                    2005.

                


        

         

        
          	
                  2.

                	
                  The
                    Company issued Debentures in 2005. The Debentures are convertible
                    into
                    approximately 11,821,108 shares of common stock of the Company.
                    In
                    connection with the issuance of the Debentures, the Company also
                    issued
                    50,000 shares of common stock and warrants for up to 10,438,593
                    shares of
                    its common stock.

                


        

         

        
          	
                  3.

                	
                  In
                    connection with the acquisition of certain assets of Hatch & Kirk,
                    Inc. and HK Castings, Inc. in March, 2005, the Company has or
                    will issue
                    up to 330,000 shares of its common stock.


                


        

         

        
          	
                  4.

                	
                  In
                    April 2005, the Company negotiated an increase in its line of
                    credit with
                    MFB Bank from $3,000,000 to $5,500,000. Note: MFB Bank to be
                    paid off at
                    closing.

                


        

         

        
          	
                  5.

                	
                  The
                    Company plans to establish a Stock Option Plan, a Restricted
                    Stock
                    Purchase Plan and a Performance Share Plan in the near future.
                    The Company
                    may issue options, restricted stock, restricted or performance
                    shares for
                    up to 5,000,000 shares of common
                    stock.

                


        

         

        
          	
                  6.

                	
                  Effective
                    August 2005, the Company or its Subsidiaries intends to enter
                    into
                    Employment Contracts with the following
                    executives:

                


        

         

        
          	 	
                  a.
                    John Martell-CEO and President-Magnetech Integrated Services
                    Corp.
                    

                


        

         

        b.
          Richard Mullin-Vice President and CFO-Magnetech Integrated Services Corp.
          

         

        c.
          William Wisniewski-Vice President-Magnetech Industrial Services, Inc.


         

        d.
          Anthony Nicholson-Vice President-Martell Electric, LLC

         

        e.
          Cullen
          Burdette-Vice President-HK Engine Components, LLC

         

        
          	
                  7.

                	
                  Magnetech
                    Industrial Services, Inc. is involved in negotiations for a new
                    collective
                    bargaining agreement with IUE-CWA Local 1001 at its Indianapolis
                    facility.
                    Two collective bargaining agreements expired in April and June,
                    2005 in
                    Huntington, WV and Hammond, IN. The Company and the collective
                    bargaining
                    units are working without a contract until such time as an agreement
                    can
                    be reached at each location.

                


        

         

        
          	
                  8.

                	
                  The
                    Company entered into a $500,000 Commercial Fleet Lease line of
                    credit with
                    Ford Motor Credit Company for the lease of automobiles and trucks.
                    Total
                    commitments under this arrangement at July 20, 2005 was approximately
                    $160,000.

                


        

         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(i)

         

        TITLE
          TO
          PROPERTIES AND ASSETS; LIENS

         

        


        
          	
                  1.
                    

                	
                  MFB
                    Bank holds a blanket security interest in all of the assets of
                    the Parent
                    and/or Magnetech Industrial Services, Inc., Indiana financing
                    statements
                    #200400010073835, 200500004282689 and 200500004282467. Note:
                    Lender to be
                    paid off at closing.

                


        

         

        
          	
                  2.
                    

                	
                  The
                    Company has granted a security interest in all assets of the
                    Company to
                    secure payment of the Company’s indebtedness under the Debentures. Note:
                    Debenture holders are subject to a Subordination Agreement with
                    Laurus.

                


        

         

        
          	
                  3.
                    

                	
                  Magnetech
                    Industrial Services, Inc. equipment leases/financing statements
                    as
                    follows:

                


        

         

        a.
          Toyota
          Motor Credit Corporation - leased forklift, Serial #68232; Indiana financing
          statement #20020003805050.

        b.
          Toyota
          Motor Credit Corporation - leased forklift, Serial #77921; Indiana financing
          statement #200200003741433/2004000005321946.

        c.
          Toyota
          Motor Credit Corporation - leased forklift, Serial #62974; Indiana financing
          statement #200200003696684. 

        c.
          Citicorp Leasing, Inc. - leased forklift, Serial #P232L.

        d.
          Neopost Leasing - leased postage meter, Serial #1J35BAI.

        e.
          Baldor
          Electric Company (“Baldor”) - inventory, equipment and goods manufactured by or
          distributed by Baldor and all related accounts receivable, Indiana financing
          statement #200400011179661. The security interest is limited to outstanding
          obligations between Baldor and Magnetech Industrial Services. Without the
          prior
          written consent of Laurus, the Company will not incur obligations to Baldor
          outstanding at any one time in excess of $350,000.

        
          	 	
                  f.
                    Doble Engineering Company - capital lease for relay test set
                    (F2253 with
                    F2910 and F2875).

                


        

        g.
          Railmotive, Inc.- capital lease for Taylor forklift, Serial
          #C7P3343A.

        h.
          Ford
          Motor Credit Company-$500,000 Commercial Fleet Lease Line covering the
          following
          vehicles: Vin#1FAFP53U75A129930, 1FMYU93125K063245, 1FTRF12205NB69231,
          1FTYR14U55PA49754, 1FTYR14U55PA49782, 1FMZU73K95UA60727, 1FMZU73K45UA66399,
          1FMZU73K25ZA39155.

        
          	 	
                  i.
                    United States Steel LLC -- Electric motors and electro-lifting
                    magnets
                    owned by United States Steel and delivered to the Company’s plant for
                    repair and service; Indiana Secretary of State File Numbers
                    200100004549227 and 200100004549661

                


        

        
          	 	
                  j.
                    LaSalle Bank National Association - Inventory owned by Headco
                    Industries
                    and delivered to the Company on consignment and all proceeds
                    thereof;
                    Indiana Secretary of State File Number
                    200300004806881.

                


        

        
          	 	
                  k.
                    Taylor Leasing - leased forklift.

                


        

        



        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        AmSouth
          Leasing Corporation also has a financing statement on file with the Indiana
          Secretary of State (File Number 200200005391204). All amounts owed by the
          Company to AmSouth have been paid in full and no further amounts are owed
          by the
          Company to AmSouth with respect to such financing statement. The Company
          will
          use its best efforts to obtain the termination of this financing statement
          within ten (10) days after the closing. 


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(k)

         

        COMPLIANCE
          WITH OTHER INSTRUMENTS

         

        Pursuant
          to the Registration Rights Agreements entered into by the Parent in connection
          with the Debenture offering and described on Schedule 12(o), the Parent
          agreed
          to use its reasonable best efforts to file an S-1 Registration Statement
          to
          register its shares of common stock underlying the debentures and the warrants
          by April 30, 2005. In the event the Parent did not file the registration
          statement by such time, the Parent agreed to pay the debenture and warrant
          holders liquidated damages equal to 1% of the total issued share capital
          of the
          Parent. However, the Parent is not required to pay such liquidated damages
          if
          the Parent provides the debenture and warrant holders with a certificate
          signed
          by the Chief Executive Officer of the Parent (“CEO Certificate”) stating that in
          the good faith judgment of the Board of Directors of the Parent, it would
          be
          seriously detrimental to the Parent and its stockholder for such registration
          statement to be filed due to a material pending transaction or other issue
          and,
          therefore, it is essential to defer the filing. The Parent has not yet
          provided
          the CEO Certificate to the debenture and warrant holders, but intends to
          do so
          in the near future. Nevertheless, a debenture and warrant holder could
          claim
          that the Parent was in breach of the agreement. 

         

        The
          Registration Rights Agreements entered into by the Parent in the private
          placement of its common stock also required the Parent to use its best
          efforts
          to file the registration statement within a certain period of time. A CEO
          Certificate has been sent to these shareholders.

         

        Pursuant
          to that certain Placement Agency Agreement dated April 26, 2004 between
          the
          Parent and Strasbourger Pearson Tulcin Wolff Incorporated (“Strasbourger”), the
          Board of Directors of the Parent was to be increased to 5 members following
          the
          closing of the first private placement offering, with 2 members designated
          by
          Strasbourger. The Parent has not yet increased the size of the Board or
          appointed Strasbourger’s designees to the Board, but intends to do so after the
          closing. 

         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(l)

         

        LEGAL
          PROCEEDINGS

         

        
          	
                  1.

                	
                  Square
                    D Company v. James Van Handel and Magnetech Industrial Services,
                    Inc.,
                    U.S. District Court, E.D. Wis. (Green Bay Division), Case No.
                    04-C-775.

                


        

         

        
          	 	
                  Magnetech
                    also is Cross-Claim Plaintiff in this matter.


                


        

         

        
          	
                  2.

                	
                  Jupiter
                    Aluminum Corporation v. Konrad Electric, Inc. v. Magnetech Industrial
                    Services, Inc., Lake Superior Court, Cause No.
                    45D10-0411-PL-00153

                


        

         

        
          	
                  3.

                	
                  Gary
                    Electric Services, Inc., v. Konrad Electric, Inc. v. Magnetech
                    Industrial
                    Services, Inc., Lake Superior Court, Cause No.
                    45D05-0409-CC-00252

                


        

         

        
          	
                  4.

                	
                  Wood
                    Group Generator Services, Inc. v. Magnetech Industrial Services,
                    Inc, U.S.
                    District Court, S.D. W.V. (Huntington Division), Civil No.
                    3:04-1319.

                


        

         

        
          	
                  5.

                	
                  Magnetech
                    Integrated Services Corp., et al v. Hatch & Kirk, Inc., St. Joseph
                    County Superior Court, Cause No.
                    71D06-0506-PL-00208.

                


        

         

        Note:
          None of the above legal proceedings are expected to have a materially adverse
          impact on the financial condition of the Company.

         

        Threatened
          Litigation

        


        
          	
                  6.

                	
                  In
                    conjunction with the acquisition of certain assets from Hatch
& Kirk
                    on March 7, 2005, the Company received a letter dated March 18,
                    2005 from
                    Gardiner & Rauen's attorney requesting the Magnetech "make
                    arrangements to interplead the amount demanded [$162,658] in
                    order to
                    avoid any further involvement in the litigation." Gardiner & Rauen
                    claims that they are due brokers’ commissions for work performed on behalf
                    of Hatch & Kirk.

                


        

         

        
          	
                  7.

                	
                  Further
                    in conjunction with the acquisition of certain assets from Hatch
&
                    Kirk on March 7, 2005, JaMARQ, Inc.'s attorney sent a bulk sales
                    letter
                    dated March 23, 2005 to the Company. We responded indicating
                    that
                    Maryland's Bulk Sales Act was
                    inapplicable.

                


        

         

        
          	
                  8.

                	
                  By
                    letter dated August 9, 2005 to Andrew Ro at Laurus and John Martell,
                    Vertical Capital Partners, Inc. claimed that it is entitled to
                    a payment
                    of $250,000 and warrants for 1,000,000 shares of common stock
                    of the
                    Parent, exercisable at Laurus’ lowest exercise price, at the closing of
                    the transactions contemplated by this Agreement.
                    

                


        

         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(m)

         

        TAX
          RETURNS and PAYMENTS

         

        None.

         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(n)

         

        EMPLOYEES

         

        Collective
          Bargaining Agreements:

        


        
          	
                  1.

                	
                  Magnetech
                    Industrial Services, Inc. is party to a collective bargaining
                    agreement
                    with the International Union of Electronic, Electrical, Salaried,
                    Machine
                    and Furniture Workers, and Communication Workers of America (AFL-CIO).
                    The
                    Agreement expired April 30, 2005 but both parties agreed to extend
                    the
                    current agreement to August 1, 2005. Both parties are working
                    without a
                    contract until such time as a new agreement can be
                    reached.

                


        

         

        
          	
                  2.

                	
                  Magnetech
                    Industrial Services, Inc. is party to a collective bargaining
                    agreement
                    with Local Union 697, IBEW. The agreement expired June 26, 2005.
                    The union
                    is working without a contract. The parties have agreed to non-binding
                    mediation to reach agreement on a new
                    contract.

                


        

         

        
          	
                  3.

                	
                  Magnetech
                    Industrial Services, Inc. is party to a collective bargaining
                    agreement
                    with Local Union #1392, IBEW. The agreement expires May 31,
                    2007.

                


        

         

        
          	
                  4.

                	
                  Magnetech
                    Industrial Services, Inc. is involved in negotiations for a new
                    collective
                    bargaining agreement with IUE-CWA Local 1001 at its Indianapolis
                    facility.

                


        

         

        


         

        CONTRACTS

         

        
          	
                  5.

                	
                  The
                    Company or its Subsidiaries intend to enter into Employment Contracts
                    with
                    the following executives:

                


        

         

        
          	 	
                  a.
                    John Martell-CEO and President-Magnetech Integrated Services
                    Corp.
                    

                


        

         

        b.
          Richard Mullin-Vice President and CFO-Magnetech Integrated Services Corp.
          

         

        c.
          William Wisniewski-Vice President-Magnetech Industrial Services, Inc.


         

        d.
          Anthony Nicholson-Vice President-Martell Electric, LLC

         

        e.
          Cullen
          Burdette-Vice President-HK Engine Components, LLC

         

        
          	
                  6.

                	
                  The
                    Company intends to establish a Stock Option Plan, a Restricted
                    Stock
                    Purchase Plan and a Performance Share Plan in the near future.
                    The Company
                    may issue options, restricted stock, or performance shares for
                    up to
                    5,000,000 shares of its common stock in connection with such
                    plans.

                


        

         

        
          	
                  7.

                	
                  Magnetech
                    401(K) Plan & Trust

                


        

         

        
          	
                  8.

                	
                  Magnetech
                    Bargaining Units 401(K) Plan &
                    Trust

                


        

         

        
          	
                  9.

                	
                  Magnetech
                    Flexible Benefits Plan

                


        

        



        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        
          	
                  10.

                	
                  After
                    the closing of the transactions contemplated by this Agreement,
                    the
                    Company intends to grant a Conversion Option to John A. Martell,
                    pursuant
                    to which Mr. Martell would have the option to convert any or
                    all of the
                    Company’s indebtedness to him into shares of its common stock at a
                    conversion price of $0.10 per
                    share.

                


        

         

        


        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(o)

         

        REGISTRATION
          RIGHTS and VOTING RIGHTS

         

        The
          Company is obligated to register for resale shares of its Common Stock
          that:

        


        a) were
          issued upon the conversion of shares of Series A Preferred Stock issued
          by
          Magnetech Industrial Services, Inc. in a private offering occurring in
          February
          2004; 

        


        b) 
          were
          issued in a private offering that commenced in May 2004; 

        


        c) are
          issuable upon conversion of warrants and subordinated convertible debentures
          issued in a private offering that commenced in January 2005; 

        


        d) were
          issued to Jackson Steinem Inc.; and

        


        e) are
          issuable upon conversion of outstanding warrants issued to Strasbourger
          Pearson
          Tulcin Wolff Incorporated (“Strasbourger”) or its designees pursuant to the
          Company’s placement agency agreements with Strasbourger.

         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(p)

         

        COMPLIANCE
          WITH LAWS; PERMITS

         

        None.

         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(q)

         

        ENVIRONMENTAL
          and SAFETY LAWS

         

        None.

         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(s)

         

        FULL
          DISCLOSURE

         

        None,
          except to the extent the financial projections have been revised as provided
          in
          the attached excel spreadsheet.

        


         

        Magnetech
          Integrated Services Corp.

        EBITDA

        2002
          through 2006

        (000’s
          Omitted)

         

        Schedule
          12(s)

         

        
          	 	
                  2002
                    Actual

                	
                  2003
                    Actual

                	
                  2004
                    Actual

                	
                  2005
                    Forecast

                	
                  2006
                    Forecast

                	
                  Revised
                    2005 Forecast

                	
                  Revised
                    2006 Forecast

                
	 	 	 	 	 	 	 	 
	
                  Net
                    Income

                	
                  (1,238)

                	
                  (1,137)

                	
                  (189)

                	
                  883

                	
                  3,290

                	
                  (370)

                	
                  2,200

                
	
                  Interest

                	
                  117

                	
                  188

                	
                  183

                	
                  1,620

                	
                  2,660

                	
                  1,700

                	
                  2,750

                
	
                  Depreciation

                	
                  212

                	
                  303

                	
                  431

                	
                  809

                	
                  1,250

                	
                  700

                	
                  1,250

                
	
                  Amortization

                	
                  20

                	
                  20

                	
                  20

                	
                  13

                	
                  -

                	
                  13

                	
                  -

                
	 	 	 	 	 	 	 	 
	
                  EBITDA

                	
                  (889)

                	
                  (626)

                	
                  445

                	
                  3,325

                	
                  7,200

                	
                  2,043

                	
                  6,200

                


        

        


        Note:

        


        2005
          Forecast is revised downward due to the following:

        


        
          	 	
                  -

                	
                  Initial
                    forecast assumed the balance of H&K would be acquired in May 2005.
                    That acquisition will not take place. Also, the initial forecast
                    assumed
                    we would begin shipping product to Alstom in July. This represents
                    new
                    business we expected to add to HK Engine Components. Shipments
                    did not
                    commence until August and will likely ramp up slower in 2005
                    than
                    expected.

                


        

        


        
          	 	
                  -

                	
                  The
                    financing process and S-1 vs. reverse merger process has taken
                    considerably longer than expected. This has had a negative impact
                    on
                    operations.

                


        

        


        


        2006
          Forecast is revised downward due to the following:

        


        
          	 	
                  -

                	
                  As
                    noted above, the second phase of the H&K acquisition did not take
                    place.

                


        

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(u)

         

        SEC
          REPORTS and FINANCIAL STATEMENTS

         

        None.

         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          12(aa)

         

        COMPANY
          NAME; LOCATIONS of OFFICES, RECORDS and COLLATERAL

         

        Magnetech
          Integrated Services Corp

        Capital
          Stock

        As
          of 7/31/05

        


        SCHEDULE
          12(aa)

        


         

        
          	 	
                  State
                    & Org. I.D. #

                	
                  Location
                    of Chief
                    Exec. Officer

                	
                  Warehouses
                    & Other Locations

                	
                  Collateral

                	
                  Books
                    & Records

                
	
                  Magnetech
                    Integrated Services Corp

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	 	 	
                  All
                    other books & records 

                
	 	 	 	 	 	 	 
	
                  Magnetech
                    Industrial Services Inc.

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  1825
                    Summer Street

                  Hammond,
                    IN 46320

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  551
                    W. Merrill Street

                  Indianapolis,
                    IN 46225

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  1200
                    Hutson Drive

                  Mobile,
                    AL 36609

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  821
                    Bev Road

                  Boardman,
                    OH 44512

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  1019
                    Seventh Ave.

                  Huntington,
                    WV 25701

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  1029
                    Seventh Ave.

                  Huntington,
                    WV 25701

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  4007
                    Richard Road

                  N.
                    Little Rock, AR 72117

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  3496
                    E. 83rd Place

                  Merrillville,
                    IN 46410

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	
                  Martell
                    Electric, LLC

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	
                  1125
                    S. Walnut St. South Bend, IN 46619

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  53971
                    N Park Ave

                  Elkhart,
                    IN 46514

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	
                  HK
                    Engine Components, LLC

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	
                  9411
                    Earley Drive

                  Hagerstown,
                    MD 21740

                	
                  Inventory,
                    PPE 

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  384
                    US Highway 19 S

                  Weston,
                    WV 26452

                	
                  Inventory,
                    PPE, Land & Building

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	 	 	 	
                  4500
                    9th Avenue, NE

                  Suite
                    300 #56

                  Seattle,
                    WA 98105

                	
                  PPE
                    

                	
                  Shipping
                    & receiving documentation

                
	 	 	 	 	 	 	 
	
                  HK
                    Machine Parts, LLC*

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	 	 	 	 
	 	 	 	 	 	 	 
	
                  HK
                    Weston Properties, LLC*

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                  South
                    Bend, IN 46619

                	 	 	 	 
	 	 	 	 	 	 	 
	
                  HK
                    Cast Products, LLC*

                	
                  Indiana

                	
                  1125
                    S. Walnut St.

                	 	 	 	 


        

        


         

        *
          sub of
          HK Engine Components LLC, no separate location.

         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          13(l)(i)

         

        REQUIRED
          APPROVALS

         

        Existing
          Indebtedness:

         

        
          	
                  Debentures

                   

                	
                  $4,025,000

                   

                	
                  6%

                   

                	
                  All
                    assets

                   

                
	
                  John
                    Martell

                   

                	
                  $3,000,000

                   

                	
                  Prime
                    -1%

                   

                	
                  Unsecured

                   

                
	
                  John
                    Martell

                   

                	
                  $
                    150,000

                   

                	 	
                  Unsecured

                   

                
	
                  Patricia
                    Minehardt

                   

                	
                  $
                    20,000

                   

                	
                  -

                   

                	
                  Unsecured

                   

                


        

        


         

        Note:
          Above continuing Lenders are subject to a Subordination Agreement with
          Laurus.

         

        Ford
          Motor Credit Company-$500,000 Commercial Fleet Lease Line covering the
          following
          vehicles: Vin#1FAFP53U75A129930, 1FMYU93125K063245, 1FTRF12205NB69231,
          1FTYR14U55PA49754, 1FTYR14U55PA49782, 1FMZU73K95UA60727, 1FMZU73K45UA66399,
          1FMZU73K25ZA39155.

        


         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        ANNEX
          A -
          DEFINITIONS

         

        SCHEDULE
          1(A)

         

        COMMERCIAL
          TORT CLAIMS

         

        Magnetech
          Industrial Services, Inc. is a cross-claim plaintiff in Square D Company
          v.
          James Van Handel and Magnetech Industrial Services, Inc., U.S. District
          Court,
          E.D. Wis. (Green Bay Division), Case No. 04-C-775.

         

        


         

        


         

        


         


        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        


        SCHEDULE
          2

         

        LIENS

         

        Other
          Permitted Liens:

         

        
          	
                  1.

                	
                  Liens
                    described on Section 12(i).

                


        

         

        
          	
                  2.

                	
                  Liens
                    relating to the outstanding indebtedness of the Company subject
                    to a
                    Subordination Agreement with Laurus set forth on Schedule 12(f),
                    other
                    than the security interest of MFB Bank which will be released
                    upon pay-off
                    of the indebtedness owed to MFB Bank upon the closing of the
                    transactions
                    contemplated hereby. 

                


        

         

        
          	
                  3.

                	
                  Title
                    of a lessor under a capital or operating
                    lease.

                


        

         

        
          	
                  4.

                	
                  Zoning,
                    entitlement and other land use and environmental regulations
                    by any
                    governmental or regulatory authority.


                


        

         

        
          	
                  5.

                	
                  Other
                    imperfections in title, charges, easements, restrictions and
                    encumbrances
                    which would not reasonably be expected to result in a Material
                    Adverse
                    Effect.