SECURITY AGREEMENT

      This Security Agreement is made as of September 7, 2005 (this "Agreement")
by and among GSSF MASTER FUND L.P. ("GSSF"),  AMERICAN TECHNOLOGIES GROUP, INC.,
a Nevada 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 GSSF make  advances  available to the
Companies; and

      GSSF 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.


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<PAGE>

      2. Note.

      (a)  Subject  to the terms and  conditions  set  forth  herein  and in the
Ancillary Agreements,  GSSF shall make a Convertible Note to the Companies in an
amount  equal to $250,000  (the "Note") in the form  attached  hereto as Exhibit
"B".  The Loan shall be advanced on the Closing  Date and shall be, with respect
to principal, payable on the terms set forth therein.

      3.  Repayment of the Loans.  The Companies  shall pay all amounts  payable
hereunder, under the Loans, or under any Ancillary Agreement prior to 12:00 noon
(New York time) on the due date thereof in immediately available funds.

      4. [Omitted]

      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.

            (ii) Interest and payments  shall be computed on the basis of actual
days elapsed in a year of 360 days. At GSSF's option, GSSF may charge 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 each  (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.


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<PAGE>

      (b) Payments; Certain Closing Conditions.

            (i)  Closing/Annual  Payments.  Upon  execution of this Agreement by
each Company and GSSF,  the Companies  shall jointly and severally pay to GSSF a
closing payment in an amount equal to three and  three-quarters  percent (3.75%)
of the Total Investment Amount. Such payment shall be deemed fully earned on the
Closing Date and shall not be subject to rebate or proration for any reason.

            (ii) [Omitted]

            (iii) [Omitted]

            (iv) Financial  Information Default.  Without affecting GSSF's other
rights and  remedies,  in the event any Company  fails to deliver the  financial
information  required  by  Section  11 on or before  the date  required  by this
Agreement,  the Companies  shall jointly and severally pay GSSF an aggregate fee
in the amount of $250.00 per week (or  portion  thereof)  for each such  failure
until such failure is cured to GSSF's satisfaction or waived in writing by GSSF.
All amounts that are incurred pursuant to this Section 5(b)(iv) shall be due and
payable by the  Companies  monthly,  in arrears,  on the first  business of each
calendar month and upon expiration of the Term.

            (v) Expenses.  The Companies  shall jointly and severally  reimburse
GSSF for its reasonable 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 GSSF's
due  diligence  review of each  Company  and its  Subsidiaries  and all  related
matters.  Amounts required to be paid under this Section 5(b)(v) will be paid on
the Closing Date.

      6. Security Interest.

      (a) To secure the prompt payment to GSSF of the Obligations,  each Company
hereby assigns, pledges and grants to GSSF 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 GSSF, be kept
by such Company in trust for GSSF 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  GSSF  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 GSSFGSSF 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 GSSF and agrees that it
will not do so  without  the prior  written  consent  of GSSF,  subject  to such
Company's rights under Section 9-509(d)(2) of the UCC.


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<PAGE>

      (c) Each  Company  hereby  grants  to GSSF 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 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  GSSF's  favor  and
Permitted  Liens  and  (ii) is not  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  (other  than as
expressly permitted under this Agreement) or grant any Lien in any Collateral or
any other assets to anyone other than GSSF and except for Permitted Liens.

      (c) the Liens granted  pursuant to this Agreement,  upon completion of the
filings and other  actions  listed on Schedule  7(c) (which,  in the case of all
filings and other documents referred to in said Schedule, have been delivered to
GSSF in duly executed form) constitute valid perfected security interests in all
of the  Collateral  in favor of GSSF 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
other than Permitted Liens.

      (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  $100,000  and only to the  extent  that (i) the
proceeds of any such disposition are used to acquire replacement Equipment which
is  subject to GSSF's  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 GSSF to
be held as cash collateral for the Obligations.


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<PAGE>

      (f) it shall  defend the right,  title and  interest of GSSF 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 GSSF "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 GSSF, (ii) the prompt (but in no event later
than five (5) Business Days following GSSF's request therefor)  delivery to GSSF
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 GSSF's interest in Collateral at GSSF's request,  and (iv) the institution of
litigation  against  third  parties as shall be prudent in order to protect  and
preserve its and/or GSSF's respective and several interests in the Collateral.

      (g) it shall  promptly,  and in any event  within five (5)  Business  Days
after the same is acquired by it, notify GSSF of any  commercial  tort claim (as
defined in the UCC)  acquired by it and unless  otherwise  consented by GSSF, it
shall enter into a supplement to this Agreement  granting to GSSF 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 GSSF's Lien in the Collateral.

      (i) if it retains  possession  of any  Chattel  Paper or  Instrument  with
GSSF's consent,  upon GSSF's 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 GSSF Master Fund,  L.P."
Notwithstanding the foregoing, following the indefeasible payment in full of all
obligations and  liabilities  owing by the Companies to Laurus Master Fund, Ltd.
(the "Laurus Debt"), upon the reasonable request of GSSF, such Chattel Paper and
Instruments shall be delivered to GSSF.

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

      (k) it shall  notify  GSSF  promptly  and in any  event  within  three (3)
Business Days after obtaining knowledge thereof (i) of any event or circumstance
that, to its knowledge,  would cause GSSF to consider any then existing  Account
and/or  Inventory  as no longer  constituting  an  Eligible  Account or Eligible
Inventory,  as the case may be; (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
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 loss,
damage or destruction of any of the Collateral.


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<PAGE>

      (l) 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.

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

      (n) it shall  maintain and keep the tangible  Collateral  at the addresses
listed in Schedule 12(bb), provided, that it may change such locations or open a
new  location,  provided  that it provides  GSSF 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 $50,000
will be  located,  it  executes  and  delivers  to GSSF such  agreements  deemed
reasonably   necessary  or  prudent  by  GSSF,  including  landlord  agreements,
mortgagee  agreements  and  warehouse  agreements,  each in form  and  substance
satisfactory  to GSSF,  to  adequately  protect  and  maintain  GSSF's  security
interest in such Collateral.

      (o)  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 GSSF's prior written consent.

      (p) All Inventory manufactured by it in the United States of America shall
be produced  in  accordance  with the  requirements  of the  Federal  Fair Labor
Standards Act of 1938, as amended and all rules,  regulations and orders related
thereto or promulgated thereunder.

      8. Payment of Accounts.

      (a) Following the  indefeasible  payment in full of the Laurus Debt,  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  Frost  National  Bank or such  other  financial  institution
accepted  by GSSF 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,  GSSF and/or the Lockbox Bank. On or prior to the Closing Date,  each
Company  shall  and  shall  cause  the  Lockbox  Bank to  enter  into  all  such
documentation  acceptable  to GSSF 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 GSSF in writing  and (b)
comply only with the  instructions  or other  directions of GSSF  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 GSSF may direct in writing.  If,  notwithstanding the instructions to
Account  Debtors,  any  Company  receives  any  payments,   such  Company  shall
immediately  remit  such  payments  to GSSF 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 GSSF and shall not  commingle  such
payments with any of its other funds or property.


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<PAGE>

      (b)  Following  the  indefeasible  payment in full of the Laurus Debt,  at
GSSF's  election,  following  the  occurrence  of an Event of  Default  which is
continuing,  GSSF may notify each Company's  Account  Debtors of GSSF's 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) GSSF may verify each  Company's  Accounts  from time to time,  but not
more often  than once every  three (3)  months,  unless an Event of Default  has
occurred and is continuing or GSSF believes that such  verification is necessary
to preserve or protect the Collateral, utilizing an audit control company or any
other agent of GSSF.

      (b) Proceeds of Accounts  received by GSSF will be deemed  received on the
Business Day after GSSF's  receipt of such  proceeds in good funds in dollars of
the  United  States of  America to an  account  designated  by GSSF.  Any amount
received by GSSF after 12:00 noon (New York time) on any  Business  Day shall be
deemed received on the next Business Day.

      (c) As GSSFGSSF receives the proceeds of Accounts of any Company, it shall
(i) apply such proceeds, as required, to amounts outstanding under the Note, and
(ii) remit all such remaining proceeds (net of interest,  fees and other amounts
then due and owing to GSSF  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,  GSSF,  at its  option,  may (a) apply such
proceeds to the Obligations in such order as GSSF shall elect, (b) hold all such
proceeds as cash  collateral for the  Obligations and each Company hereby grants
to GSSF 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,
and upon reasonable notice (provided that no such prior notice shall be required
to be given in the event GSSF  believes  such access is necessary to preserve or
protect the Collateral or following the occurrence and during the continuance of
an Event of Default) GSSF,  and/or any agent of GSSF 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 GSSF any  instrument  necessary for GSSF 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 GSSF,  GSSF may  request  that the  Accountants
review the same.


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<PAGE>

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

      (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  GSSF  (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 GSSF 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 GSSF 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,  subject to
year-end adjustments and accompanied by a certificate of the Parent's President,
Chief  Executive  Officer  or Chief  Financial  Officer,  stating  (i) that such
financial  statements  have been  prepared in accordance  with GAAP,  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 GSSF so requests),  agings of each Company's  Accounts,  unaudited
trial  balances and their  accounts  payable and a calculation of each Company's
Accounts,  Inventory and/or Eligible Inventory,  provided, however, that if GSSF
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 GSSF's 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.


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<PAGE>

      12.  Additional  Representations  and  Warranties.   Each  Company  hereby
represents and warrants to GSSF 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 Convertible Note and the shares of
Common  Stock  issuable  upon  conversion  of the  Convertible  Note (the  "Note
Shares"),  (iii) to issue and grant the Option  and the  shares of Common  Stock
issuable  upon exercise of the Option (the "Option  Shares"),  (iv) to issue the
Warrant and the shares of Common Stock issuable upon  conversion of the Warrants
(the "Warrant  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 1,010,502,000 of which 1,000,000,000 are shares of Common Stock,
par value $0.001 per share,  99,776,704  shares of which of which are issued and
outstanding and 10,502,000 are shares of preferred  stock,  par value $0.001 per
share of which  378,061  shares  of Series A  preferred  stock  are  issued  and
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),  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 Note,
the Options or the  Warrants,  or the  issuance of any of the Note  Shares,  the
Option Shares or the Warrant  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.


                                       9
<PAGE>

            (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,  the  Option  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 Note,  the Options and the Warrants  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.

The  issuance of the Note and the  subsequent  conversion  of the Note 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 and the  subsequent  exercise of the Warrants for Warrant 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.   Neither  it  nor  any  of  its  Subsidiaries  has  any
liabilities,  except  current  liabilities  incurred in the  ordinary  course of
business and liabilities disclosed in any Exchange Act Filings.

      (f)  Agreements;  Action.  Except  as set  forth on  Schedule  12(f) or as
disclosed in any Exchange Act Filings:

            (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 $75,000 (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.


                                       10
<PAGE>

            (ii) Since June 30, 2005 (the "Balance  Sheet Date")  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
$50,000 or, in the case of indebtedness  and/or  liabilities  individually  less
than $50,000,  in excess of $100,000 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.

            (iv)  The  Parent  maintains   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.

            (v) The Parent makes and keeps books,  records, and accounts,  that,
in  reasonable  detail,  accurately  and fairly  reflect  the  transactions  and
dispositions  of its  assets.  It  maintains  internal  control  over  financial
reporting ("Financial Reporting Controls") 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 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;


                                       11
<PAGE>

                  (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.

            (vi)  There is no  weakness  in any of its  Disclosure  Controls  or
Financial  Reporting  Controls  that is required to be  disclosed  in any of the
Exchange Act Filings, except as so disclosed.

      (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 or disclosed in any of the Parent's Exchange Act Filings.

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
Exchange  Act  Filing  or in any  Schedule  to this  Agreement  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;


                                       12
<PAGE>

            (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;

            (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).


                                       13
<PAGE>

      (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 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.  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 Note 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.


                                       14
<PAGE>

      (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 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 in the Exchange Act Filings or 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  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.


                                       15
<PAGE>

      (o) Registration Rights and Voting Rights. Except as set forth on Schedule
12(o) and except as disclosed in Exchange Act Filings, 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)  and  except as
disclosed in Exchange Act Filings,  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.  Neither it nor any of its Subsidiaries
is in violation of the  Sarbanes-Oxley Act of 2002 or any SEC related regulation
or rule or any rule of the Principal Market promulgated  thereunder 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.  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), 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


                                       16
<PAGE>

            (ii) any petroleum products or nuclear materials.

      (r) Valid  Offering.  Assuming  the  accuracy of the  representations  and
warranties of GSSF  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 GSSF
with all  information  requested by GSSF in connection  with GSSF's  decision to
enter into this  Agreement,  including  all  information  each  Company  and its
Subsidiaries  believe is reasonably  necessary to make such investment decision.
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 GSSF 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.  Any financial projections
and other estimates provided to GSSF by it or any of its Subsidiaries 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) SEC Reports and Financial Statements.  Except as set forth on Schedule
12(u), it and each of its Subsidiaries has filed all proxy  statements,  reports
and other  documents  required  to be filed by it under the  Exchange  Act.  The
Parent has  furnished  GSSF with copies of: (i) its Annual Report on Form 10-KSB
for its fiscal years ended December 31, 2004; and (ii) its Quarterly  Reports on
Form 10-QSB for its fiscal  quarters ended March 31, 2005 and June 30, 2005, and
the Form 8-K  filings  which it has made  during  its  fiscal  year 2005 to date
(collectively,  the "SEC Reports").  Except as set forth on Schedule 12(u), each
SEC Report was, at the time of its filing,  in substantial  compliance  with the
requirements  of its  respective  form  and  none  of the SEC  Reports,  nor the
financial  statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material fact
or omitted to state a material fact  required to be stated  therein or necessary
to make the statements  therein,  in light of the circumstances under which they
were made,  not  misleading.  Such  financial  statements  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 or may be condensed)  and fairly  present in all
material  respects the financial  condition,  the results of operations and cash
flows of the Parent and its  Subsidiaries,  on a consolidated  basis, as of, and
for, the periods presented in each such SEC Report.


                                       17
<PAGE>

      (v) Listing. The Parent's Common Stock is listed or quoted, as applicable,
on the Principal  Market and satisfies all  requirements for the continuation of
such listing or  quotation,  as  applicable,  and the Parent shall do all things
necessary for the continuation of such listing or quotation, as applicable.  The
Parent has not received any notice that its Common Stock will be delisted  from,
or no longer quoted on, as applicable,  the Principal  Market or that its Common
Stock  does  not  meet  all  requirements  for such  listing  or  quotation,  as
applicable.

      (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 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 shares of Common Stock upon conversion of the Note and exercise of the
Options and the Warrants are 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  GSSF  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
GSSF 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 GSSF, to the extent that they are within its or
any such Subsidiary's  control shall cause GSSF 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
GSSF if any of these representations, warranties and covenants ceases to be true
and accurate regarding it or any of its Subsidiaries. It shall provide GSSF with
any additional  information  regarding it and each Subsidiary  thereof that GSSF
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,  GSSF may
undertake  appropriate  actions  to ensure  compliance  with  applicable  law or
regulation, including but not limited to segregation and/or redemption of GSSF's
investment  in it. It further  understands  that GSSF may  release  confidential
information  about it and its  Subsidiaries  and, if applicable,  any underlying
beneficial  owners,  to  proper  authorities  if GSSF,  in its sole  discretion,
determines  that it is in the best  interests of GSSF in light of relevant rules
and regulations under the laws set forth in subsection (ii) above.


                                       18
<PAGE>

      (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 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 GSSF
as follows:

      (a) Stop-Orders.  It shall advise GSSF,  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.  It shall  promptly  secure  the  listing or  quotation,  as
applicable,  of the shares of Common Stock issuable upon  conversion of the Note
and exercise of the Options and the Warrants on the Principal  Market upon which
shares of Common Stock are listed or quoted, as applicable, (subject to official
notice of issuance) and shall maintain such listing or quotation, as applicable,
so long as any other  shares of Common  Stock  shall be so listed or quoted,  as
applicable.  The Parent shall maintain the listing or quotation,  as applicable,
of its Common  Stock on the  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 exchanges, as applicable.


                                       19
<PAGE>

      (c) Market Regulations. It shall notify the SEC, NASD and applicable state
authorities,  in  accordance  with  their  requirements,   of  the  transactions
contemplated  by this Agreement,  and shall take all other 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 GSSF and
promptly provide copies thereof to GSSF.

      (d) Reporting Requirements.  It shall timely file with the SEC all reports
required to be filed  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.

      (e) Use of Funds.  It shall use the  proceeds of the Loans  solely to fund
the transactions  contemplated by the Acquisition  Documentation and for general
working capital purposes.

      (f)  Access  to  Facilities.  It  shall,  and  shall  cause  each  of  its
Subsidiaries to, permit any representatives designated by GSSF (or any successor
of GSSF),  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  GSSF in the  event  GSSF  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 directors, officers and Accountants.

Notwithstanding  the  foregoing,  neither it nor any of its  Subsidiaries  shall
provide  any  material,  non-public  information  to GSSF  unless  GSSF  signs a
confidentiality  agreement and otherwise  complies with Regulation FD, under the
federal securities laws.

      (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 GSSF 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.


                                       20
<PAGE>

      (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 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 GSSF 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 GSSF, 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 GSSF with (x) a copy
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 GSSF as
"co-insured" or "additional  insured" and appropriate loss payable  endorsements
in form and substance  satisfactory to GSSF,  naming GSSF as lenders loss payee,
and (z) evidence that as to GSSF 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  GSSF 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 GSSF and not
to any Company or any of its  Subsidiaries  and GSSF  jointly.  If any insurance
losses  are paid by check,  draft or other  instrument  payable  to any  Company
and/or  any  of  its  Subsidiaries  and  GSSF  jointly,  GSSF  may  endorse,  as
applicable,  such Company's and/or any of its Subsidiaries'  name thereon and do
such other things as GSSF may deem advisable to reduce the same to cash. GSSF is
hereby authorized to adjust and compromise claims. All loss recoveries  received
by GSSF upon any such insurance may be applied to the Obligations, in such order
as GSSF 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;  provided;  however,  any loss recoveries received by GSSF arising
from the damage or  destruction  of  Collateral  may be used by the Companies to
repair,  restore or replace such Collateral,  as the case may be, so long as the
fair market  value of any such  Collateral  damaged or  destroyed  in any single
incident is less than $25,000 and the fair market value,  in the  aggregate,  of
all such Collateral owned by Borrower and damaged, destroyed or condemned during
any twelve-month period is less than $50,000.  Any surplus shall be paid by GSSF
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
GSSF, on demand.


                                       21
<PAGE>

      (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.

      (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 GSSF,  unless  expressly  agreed  to by GSSF 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 GSSF's 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 GSSF, (i) create,  incur,
assume or suffer to exist any  indebtedness  (exclusive  of trade debt)  whether
secured or unsecured  other than each Company's  indebtedness to GSSF and as set
forth on Schedule 13(l)(i)  attached hereto and made a part hereof;  (ii) cancel
any debt owing to it in excess of $100,000 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

                                       22
<PAGE>

long as such  Subsidiaries  are designated as either a co-borrower  hereunder or
has entered  into such  guaranty and  security  documentation  required by GSSF,
including,  without  limitation,  to  grant to GSSF 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 GSSF as
either a  co-borrower  or guarantor  hereunder  and such  Subsidiary  shall have
entered  into all  such  documentation  required  by  GSSF,  including,  without
limitation,  to grant to GSSF 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 to GSSF and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any  indebtedness  (other than to GSSF and in the  ordinary  course of business)
except to make  scheduled  payments of principal  and interest  thereof;  (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 (A) (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 GSSF copies
of all  documentation  relating  to such  merger or  consolidation  and (4) such
Company  shall have  provided GSSF with at least thirty (30) days' prior written
notice of such merger or  consolidation  or (B) (1) such merger or consolidation
results  in the  indefeasible  payment  in full of all  Obligations  (including,
without  limitation,  all early  termination  and prepayment fees required to be
paid  hereunder  and  under  the terms of the  Ancillary  Agreements),  (2) such
Company shall have provided  GSSF copies of all  documentation  relating to such
merger or  consolidation  and (3) such Company shall have provided GSSF at least
thirty  (30)  days'  prior  written  notice  of  such  early  prepayment  of the
Obligations;  (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 GSSF 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;  (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,  (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
are used to acquire  replacement  Equipment  which is  subject  to GSSF's  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 GSSF to be held as
cash collateral for the  Obligations;  and (3) the sale of real property so long
as the Company Agent has received the prior written consent of GSSF with respect
to such sale, which consent shall not be unreasonably  withheld,  provided that,
(x) the Company Agent provided GSSF not less than thirty (30) days prior written
notice of such sale,  (y) such sale is on  commercially  reasonable  terms in an
arms-length  transaction and (z) all proceeds of such sale are remitted directly
to GSSF to repay the Obligations in such order as GSSF shall elect.


                                       23
<PAGE>

      (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 GSSF in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide  legal  opinions  necessary  to allow
such resales  provided the Parent and its counsel receive  reasonably  requested
representations from GSSF and broker, if any.

      (n) Opinion.  Each  Company  will  provide,  at the  Companies'  joint and
several expense,  such legal opinions in the future as are reasonably  necessary
for the conversion of the Note and the exercise of the Warrants.

      (o) Legal Name,  etc. It shall not,  without  providing  GSSF 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,
(iv) its state of organization  or (v) amend its  certificate of  incorporation,
by-laws or other organizational document.

      (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 GSSF 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  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.


                                       24
<PAGE>

      (s)  Offering  Restrictions.  Except as  previously  disclosed  in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to its
employees or directors,  neither it nor any of its Subsidiaries  shall, prior to
the full  repayment or  conversion  of the Note  (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,  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).

      (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 Note and  exercise  of the  Options and the
Warrants.

      (u) [Omitted]

      14.  Further  Assurances.  At any  time and  from  time to time,  upon the
written request of GSSF 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 GSSF may  request (a) to obtain the
full benefits of this  Agreement and the Ancillary  Agreements,  (b) to protect,
preserve and maintain  GSSF's rights in the  Collateral and under this Agreement
or any Ancillary Agreement,  and/or (c) to enable GSSF to exercise all or any of
the rights and powers herein granted or any Ancillary Agreement.

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

      (a)  Requisite  Power  and  Authority.  GSSF 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 GSSF's 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
GSSF,  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.  GSSF understands that the Securities are
being  offered  pursuant to an  exemption  from  registration  contained  in the
Securities  Act  based in part upon  GSSF's  representations  contained  in this
Agreement,  including, without limitation, that GSSF is an "accredited investor"
within the meaning of Regulation D under the  Securities  Act. GSSF 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 Note to
be issued to it under this Agreement and the Securities  acquired by it upon the
conversion of the Note.


                                       25
<PAGE>

      (c)  GSSF  Bears  Economic  Risk.  GSSF  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.  GSSF must bear the economic risk of this  investment  until the
Securities are sold pursuant to (i) an effective  registration  statement  under
the Securities Act, or (ii) an exemption from registration is available.

      (d)  Investment  for Own Account.  The Securities are being issued to GSSF
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) GSSF Can Protect Its Interest.  GSSF represents that by reason of its,
or of its management's, business and financial experience, GSSF has the capacity
to  evaluate  the  merits  and  risks of its  investment  in the  Note,  and the
Securities and to protect its own interests in connection with the  transactions
contemplated in this Agreement,  and the Ancillary Agreements.  Further, GSSF is
aware of no publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Ancillary Agreements.

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

      (g)  Shorting.  Neither  GSSF  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.

      (h) Patriot Act. GSSF  certifies  that,  to the best of GSSF's  knowledge,
GSSF has not been  designated,  and is not owned or controlled,  by a "suspected
terrorist"  as defined in Executive  Order 13224.  GSSF seeks to comply with all
applicable  laws  concerning  money  laundering  and  related   activities.   In
furtherance of those  efforts,  GSSF hereby  represents,  warrants and covenants
that:  (i) none of the cash or property that GSSF 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 GSSF to any
Company to the extent within GSSF's control, shall cause GSSF 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.  GSSF  shall
promptly notify the Company Agent if any of these  representations  ceases to be
true and  accurate  regarding  GSSF.  GSSF  agrees to provide  the  Company  any
additional  information  regarding  GSSF that the  Company  deems  necessary  or
convenient  to ensure  compliance  with all  applicable  laws  concerning  money
laundering and similar  activities.  GSSF  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,  GSSF may undertake appropriate actions to ensure
compliance  with  applicable  law or  regulation,  including  but not limited to
segregation  and/or redemption of GSSF's investment in the Parent.  GSSF further
understands  that  the  Parent  may  release  information  about  GSSF  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.


                                       26
<PAGE>

      (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  GSSF  and  any  Company   (and/or
Subsidiaries or Affiliates of any Company),  GSSF 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 GSSF 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 GSSF of
a Notice of Redemption (as defined in the Note) 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  Fixed
Conversion Price (as defined in the Note).

      16. Power of Attorney.  Each Company  hereby  appoints  GSSF, or any other
Person whom GSSF 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  payment  or  security  that  may  come  into  GSSF's
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) on or after the occurrence and during the continuation of an
Event of Default,  notify the post office  authorities to change the address for
delivery  of such  Company's  mail to an  address  designated  by  GSSF,  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  GSSF,  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 GSSF has a
security interest and until the Obligations have been fully satisfied.

      17. Term of Agreement. GSSF's 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 GSSF's election following the occurrence of an Event of Default,
GSSF may terminate this  Agreement.  The  termination of the Agreement shall not
affect  any of  GSSF's  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,  GSSF 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 (i)  provided  GSSF with an executed  release of any and all
claims which such Company may have or thereafter  have under this  Agreement and
all Ancillary Agreements and (ii) paid to GSSF an early payment fee in an amount
equal to (1) five  percent (5%) of the Total  Investment  Amount if such payment
occurs prior to the first anniversary of the Closing Date, (2) four percent (4%)
of the  Total  Investment  Amount if such  payment  occurs on or after the first
anniversary  of the  Closing  Date and prior to the  second  anniversary  of the
Closing Date and (3) three percent (3%) of the Total  Investment  Amount if such
termination  occurs  thereafter  during  the Term;  such fee being  intended  to
compensate GSSF for its costs and expenses incurred in initially  approving this
Agreement or  extending  same.  Such early  payment fee shall be due and payable
jointly and severally by the Companies to GSSF upon  termination by acceleration
of this Agreement by GSSF due to the  occurrence and  continuance of an Event of
Default.


                                       27
<PAGE>

      18.  Termination  of Lien.  The Liens and rights granted to GSSF 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.  GSSF 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
three (3) days following the date upon which any such payment was due;

      (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 fifteen (15) 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;


                                       28
<PAGE>

      (f)  attachments or levies in excess of $100,000 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 $100,000  which shall not have been
vacated,  discharged,  stayed or bonded  within  thirty (30) days from the entry
thereof;

      (g) any change in any  Company's or any of its  Subsidiary's  condition or
affairs (financial or otherwise) which in GSSF's reasonable, good faith opinion,
could reasonably be expected to have a Material Adverse Effect;

      (h) 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;

      (i) any  Company or any of its  Subsidiaries  or any  Guarantor  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;

      (j) any Company any of its  Subsidiaries  or any Guarantor  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;

      (k) 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;

      (l) 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) 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 any Company  (other than a
"Person"  or  "group"  that  beneficially  owns 35% or more of such  outstanding
voting equity  interests of the  respective  Company on the date hereof) or (ii)
the Board of Directors of the Parent shall cease to consist of a majority of the
Parent's  board of  directors  on the date hereof (or  directors  appointed by a
majority  of the  board  of  directors  in  effect  immediately  prior  to  such
appointment);

      (m) 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;


                                       29
<PAGE>

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

      (o) 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);

      (p) any Company or any of its  Subsidiaries  or any Guarantor  attempts to
terminate,  challenges  the validity  of, or  its/her/his  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);

      (q) 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  thirty (30) days of
the notice thereof or list the Common Stock on another  Principal  Market within
sixty (60) days of such notice;

      (r) the Parent's  failure to deliver  Common Stock to GSSF pursuant to and
in the form required by the Convertible Note 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 GSSF and such Company shall
fail to deliver such replacement Note within seven (7) Business Days;

      (s) a default or event of default  shall  have  occurred  under any of the
Acquisition Documentation which is not cured during any applicable cure or grace
period; or

      (t) the failure of the  Companies to at all times  maintain a cash balance
in a deposit  account,  with  respect to which GSSF shall have a first  priority
perfected security interest, in an amount not less than $3,000,000.


                                       30
<PAGE>

      20. Remedies.  Following the occurrence of an Event of Default, GSSF 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,
GSSF shall retain its Lien in all  Collateral.  GSSF 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 GSSF 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 GSSF at a place  designated by GSSF 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 GSSF for storage
thereof),  and the right to apply for the  appointment  of a  receiver  for such
Company's property. Further, GSSF may, at any time or times after the occurrence
of an Event of Default,  sell and deliver all Collateral  held by or for GSSF at
public or private sale for cash,  upon credit or  otherwise,  at such prices and
upon such terms as GSSF, in GSSF's sole discretion,  deems advisable or GSSF may
otherwise  recover upon the Collateral in any commercially  reasonable manner as
GSSF, 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  GSSF's  records,  at least ten (10) days
before  the time of the event of which  notice is being  given.  GSSF may be the
purchaser at any sale, if it is public.  In connection  with the exercise of the
foregoing  remedies,  GSSF 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 GSSF elects) of all Obligations.  After the indefeasible  payment
and  satisfaction  in full of all of the  Obligations,  and after the payment by
GSSF of any other amount  required by any  provision of law,  including  Section
9-608(a)(1)  of the UCC (but only after GSSF has  received  what GSSF  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.  The
Companies shall remain jointly and severally  liable to GSSF for any deficiency.
In addition,  the  Companies  shall jointly and severally pay GSSF a liquidation
fee ("Liquidation  Fee") in the amount of five percent (5%) of the actual amount
collected  in  respect  of  each  Account  outstanding  at  any  time  during  a
Liquidation Period".  For purposes hereof,  "Liquidation Period" means a period:
(i) beginning on the earliest date of (x) an event  referred to in Section 19(i)
or 19(j), or (y) the cessation of any Company's business; and (ii) ending on the
date on which GSSF has actually  received all Obligations due and owing it under
this Agreement and the Ancillary  Agreements.  The Liquidation Fee shall be paid
on the date on which GSSF collects the applicable  Account by deduction from the
proceeds thereof. Each Company and GSSF acknowledge that the actual damages that
would be incurred by GSSF after the  occurrence  of an Event of Default would be
difficult  to quantify  and that such Company and GSSF have agreed that the fees
and obligations set forth in this Section and 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 GSSF on which such  Company  may in any way be  liable,  and
hereby ratifies and confirms whatever GSSF may do in this regard; (b) all rights
to notice and a hearing prior to GSSF's  taking  possession or control of, or to
GSSF's replevin, attachment or levy upon, any Collateral or any bond or security
that might be required by any court  prior to allowing  GSSF 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.


                                       31
<PAGE>

      22. Expenses.  The Companies shall jointly and severally pay all of GSSF's
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 GSSF's  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) GSSF's obtaining performance of the Obligations
under this Agreement and any Ancillary  Agreements,  including,  but not limited
to, the  enforcement  or defense of GSSF's  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 GSSF 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 GSSF's  customary bank charges for all bank
services (including wire transfers)  performed or caused to be performed by GSSF
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 GSSF.  All such
costs and expenses  together with all filing,  recording and search fees,  taxes
and  interest  payable by the  Companies  to GSSF 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 GSSF on the other  hand,
which GSSF is or may be  required  to  withhold  or pay,  the  Companies  hereby
jointly and  severally  indemnifies  and holds GSSF  harmless in respect of such
taxes,  and the Companies  will repay to GSSF the amount of any such taxes which
shall be  charged  to the  Companies'  account;  and until the  Companies  shall
furnish GSSF with indemnity therefor (or supply GSSF with evidence  satisfactory
to it that due provision for the payment  thereof has been made),  GSSF may hold
without  interest any balance  standing to each Company's  credit and GSSF shall
retain its Liens in any and all Collateral.

      23.  Assignment  By GSSF.  GSSF may assign  any or all of the  Obligations
together  with any or all of the  security  therefor  to any Person and any such
assignee  shall succeed to all of GSSF's rights with respect  thereto;  provided
that GSSF shall not be permitted to effect any such  assignment  to a competitor
of any Company unless an Event of Default has occurred and is  continuing.  Upon
such  assignment,  GSSF  shall  be  released  from  all  responsibility  for the
Collateral to the extent same is assigned to any transferee.  GSSF 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  GSSF and such  holder,  be entitled  to the same  benefits as GSSF 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.


                                       32
<PAGE>

      24. No Waiver; Cumulative Remedies. Failure by GSSF 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 GSSF
or delay by GSSF in exercising the same, will not operate as a waiver; no waiver
by GSSF will be  effective  unless it is in writing  and then only to the extent
specifically  stated.  GSSF's rights and remedies  under this  Agreement and the
Ancillary  Agreements will be cumulative and not exclusive of any other right or
remedy which GSSF may have.

      25. Application of Payments.  Each Company  irrevocably waive the right to
direct the  application  of any and all payments at any time or times  hereafter
received  by GSSF  from or on such  Company's  behalf  and each  Company  hereby
irrevocably agrees that GSSF 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  GSSF  may  deem   advisable
notwithstanding any entry by GSSF upon any of GSSF's books and records.

      26.  Indemnity.  Each Company hereby  jointly and severally  indemnify and
hold GSSF, 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  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 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.

      27.  Revival.  The Companies  further agree that to the extent any Company
makes a payment or  payments  to GSSF,  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.


                                       33
<PAGE>

      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 GSSF 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.  GSSF shall not incur any
liability  to any  Company as a result  thereof.  To induce GSSF to do so and in
consideration  thereof,  each  Company  hereby  indemnifies  GSSF and holds GSSF
harmless from and against any and all liabilities, expenses, losses, damages and
claims of damage or injury  asserted  against GSSF by any Person arising from or
incurred  by  reason  of the  handling  of  the  financing  arrangements  of the
Companies  as provided  herein,  reliance by GSSF on any request or  instruction
from  Company  Agent or any  other  action  taken by GSSF with  respect  to this
Paragraph 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 GSSF to any
Company,  failure of GSSF to give any Company  notice of  borrowing or any other
notice,  any  failure  of GSSF to pursue to  preserve  its  rights  against  any
Company,  the release by GSSF 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 GSSF 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 GSSF that (i) the  Companies
have  one  or  more  common  shareholders,  directors  and  officers,  (ii)  the
businesses and corporate activities of the Companies are closely related to, and
substantially  benefit,  the business and corporate activities of the Companies,
(iii) the  financial  and other  operations  of the Companies are performed on a
combined basis as if the Companies  constituted a consolidated  corporate group,
(iv) the  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.


                                       34
<PAGE>

      29. Notices.  Any notice or request hereunder may be given to any Company,
Company  Agent or GSSF 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.

Notices shall be provided as follows:

      If to GSSF:              GSSF Master Fund L.P.
                               c/o _____________________
                               Attention:  ________________
                               Telephone:  _______________
                               Facsimile:  ________________

      With a copy to:          ____________________
                               Attention:     __________________
                               Telephone:     __________________
                               Facsimile:     __________________

      If to any Company,
      or Company Agent:        American Technologies Group, Inc.
                               PO Box 90
                               Monrovia, California 91016
                               Attention: Dr. Gary Fromm, CEO
                               Telephone: (626) 357-5000
                               Facsimile: ___________________

      With a copy to:          Sichenzia Ross Friedman Ference LLP
                               1065 Avenue of the Americas, 21st Floor
                               New York, New York 10018
                               Attention:     Gregory Sichenzia, Esq.
                               Telephone:     (212) 930-9700
                               Facsimile:     (212) 930-9725

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


                                       35
<PAGE>

      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 GSSF, 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 GSSF 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
PROVIDED,  THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE
GSSF 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
GSSF.  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 GSSF, 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.


                                       36
<PAGE>

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

      32.  Entire  Understanding;  Maximum  Interest.  This  Agreement  and  the
Ancillary  Agreements  contain the entire  understanding  among each Company and
GSSF  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  GSSF's
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 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 GSSF 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 GSSF 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
<PAGE>

      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 GSSF to make  appropriate
announcements  of the  financial  arrangement  entered  into by and  among  each
Company  and  GSSF,  including,  without  limitation,  announcements  which  are
commonly known as tombstones,  in such publications and to such selected parties
as GSSF  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  satisfactory  to GSSF,  (b) delivering
supplements  to such  exhibits and annexes to this  Agreement  and the Ancillary
Agreements  as GSSF 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 GSSF and with all documents and actions  required above
to be taken to the reasonable satisfaction of GSSF.

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

      (a) The Note 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  AMERICAN
      TECHNOLOGIES GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."

      (b) Any shares of Common Stock issued  pursuant to  conversion of the Note
or exercise of the Options or 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:


                                       38
<PAGE>

      "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 AMERICAN TECHNOLOGIES GROUP,
      INC. THAT SUCH REGISTRATION IS NOT REQUIRED."

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

      "THIS OPTION AND THE COMMON  SHARES  ISSUABLE UPON EXERCISE OF THIS OPTION
      HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR
      ANY APPLICABLE  STATE  SECURITIES LAWS. THIS OPTION AND THE OPTION MAY NOT
      BE SOLD,  OFFERED FOR SALE,  PLEDGED OR  HYPOTHECATED IN THE ABSENCE OF AN
      EFFECTIVE  REGISTRATION  STATEMENT  AS TO THIS  OPTION  OR THE  UNDERLYING
      SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
      OR AN OPINION OF COUNSEL REASONABLY  SATISFACTORY TO AMERICAN TECHNOLOGIES
      GROUP, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."

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

      "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
      HAVE NOT BEEN 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 AMERICAN TECHNOLOGIES GROUP, INC. THAT
      SUCH REGISTRATION IS NOT REQUIRED."

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


                                       39
<PAGE>

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


                                       AMERICAN TECHNOLOGIES GROUP, INC.


                                       By:
                                             -----------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                             -----------------------------------


                                       NORTH TEXAS STEEL COMPANY, INC.


                                       By:
                                             -----------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                             -----------------------------------


                                       OMAHA HOLDINGS CORP.


                                       By:
                                             -----------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                             -----------------------------------


                                       GSSF MASTER FUND, L.P.


                                       By:
                                             -----------------------------------
                                       Name:
                                             -----------------------------------
                                       Title:
                                             -----------------------------------


                                       40
<PAGE>

                              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.

      "Acquisition  Documentation"  means the Share  Purchase  Agreement  by and
among the Parent  and  Sellers  dated as of  ________,  2005 and all  documents,
instruments and agreements entered into in connection therewith.

      "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 Note,  the Options,  the Warrants,  the
Registration Rights Agreements,  each Security Document, each Guaranty Agreement
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 GSSF,  relating to this Agreement or to the  transactions
contemplated by this Agreement or otherwise relating to the relationship between
or among any Company and GSSF, 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).
<PAGE>

      "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 GSSF 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.

      "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.

      "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;

      (i) all Chattel Paper;

      (j) all Letter-of-Credit Rights;

      (k) all Instruments;


                                       2
<PAGE>

      (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 GSSF 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.

      "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
12(f)(iv).

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

      "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  GSSF's
written consent.


                                       3
<PAGE>

      "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.

      "Exchange Act Filings"  means the Parent's  filings under the Exchange Act
made prior to the date of this Agreement.

      "Financial  Reporting Controls" has the meaning given such term in Section
12(f)(v).

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

      "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,  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.


                                       4
<PAGE>

      "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.

      "Guarantors"  means  the  Term  Loan B  Guarantors  and any and all  other
Persons who may from time to time guaranty all or a portion of the Obligations.

      "Guaranty Agreements" means any and all guaranty agreements made from time
to  time  by  Guarantors  in  favor  of  GSSF,  as  the  same  may  be  amended,
supplemented, restates and/or otherwise modified from time to time.

      "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.

      "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 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.


                                       5
<PAGE>

      "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 Note and shall  include all other  extensions of credit
hereunder and under any Ancillary Agreement.

      "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 GSSF's  rights  and  remedies  under  this  Agreement  and the
Ancillary Agreements.

      "Mortgage  Documentation"  means (a) the second  Deed of Trust dated as of
the date hereof made by NTSCO in favor of GSSF with respect to the real property
located at 412 West Bolt Street, Fort Worth, Texas 76110, (b) the second Deed of
Trust dated as of the date hereof made by NTSCO in favor of GSSF with respect to
the real property located at 4410 Marsalis Street,  Fort Worth, Texas 76117, (c)
the second Mortgage dated as of the date hereof made by certain Persons in favor
of GSSF  with  respect  to the real  property  located  at 160 Rose  Hill  Road,
Southport,  Connecticut 06890, (d) the Mortgage dated as of the date hereof made
by the Term Note B Guarantors in favor of GSSF with respect to the real property
located at 69 Ellsworth,  Unit 105,  Bridgeport,  Connecticut  and (e) all other
documents,  instruments and agreements  which are executed by any Company or any
of its Subsidiaries and/or in favor of GSSF in connection therewith

      "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).

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

      "Note"  means the Note as that term is defined in Section  2(a) hereof and
any  other  notes  made by  Companies  in favor of GSSF 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.


                                       6
<PAGE>

      "NTSCO" means North Texas Steel Company, Inc., a Texas corporation.

      "Obligations"   means  all  Loans,  all  advances,   debts,   liabilities,
obligations,  covenants  and  duties  owing  by  each  Company  and  each of its
Subsidiaries to GSSF (or any corporation that directly or indirectly controls or
is  controlled  by or is under  common  control  with  GSSF)  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 GSSF 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 GSSF in connection therewith.

      "Option Shares" shall have the meaning given such term in Section 12(a).

      "Options"  means those  certain  Option each dated as of the Closing  Date
made by the Parent in favor of GSSF and each other  option made by the Parent in
favor of GSSF,  as each of the same may be amended,  restated,  modified  and/or
supplemented from time to time.

      "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 GSSF;  (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 GSSF or the value of
the assets in which GSSF has a Lien; (e) Purchase Money Liens securing  Purchase
Money  Indebtedness  to the extent  permitted  in this  Agreement  and (f) Liens
granted  to Laurus  Master  Fund,  L.P.  and (g) Liens set forth on  Schedule  2
hereto.


                                       7
<PAGE>

      "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.

      "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.


                                       8
<PAGE>

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

      "SEC" means the Securities and Exchange Commission.

      "SEC Reports" has the meaning given such term in Section 12(u).

      "Securities"  means the Note,  the Options and the Warrants and the shares
of Common Stock which may be issued pursuant to conversion of such Note 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  the  Mortgage  Documentation  and all  other
security  agreements,  mortgages,  cash collateral deposit letters,  pledges and
other  agreements  which  are  executed  by any  Company,  any of its and or any
Guarantor favor of GSSF.

      "Sellers" means, collectively,  Janet Judd, Robert Judd, Robert Judd, Jr.,
North  Texas  Steel  Company,  Inc.  Pension  Plan and the other  Persons  named
therein.

      "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  Securities  Exchange Act of
1934).

      "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.

      "Term"  means the  Closing  Date  through the close of business on the day
immediately  proceeding  the Maturity Date (as defined in the Note),  subject to
acceleration  at the option of GSSF upon the  occurrence  of an Event of Default
hereunder or other termination hereunder.


                                       9
<PAGE>

      "Term Note B" means that certain Secured  Convertible Term Note B dated as
of the Closing Date made by Companies  in favor of Laurus  Master Fund,  L.P. in
the  original  principal  amount  of  $2,000,000  as the  same  may be  amended,
supplemented, restated and/or otherwise modified from time to time.

      "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,  GSSF's 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 GSSF and each other warrant made
by the Parent in favor of GSSF,  as each of the same may be  amended,  restated,
modified and/or supplemented from time to time.


                                       10
<PAGE>

                                    Exhibit A

                              Eligible Subsidiaries

              North Texas Steel Company, Inc., a Texas corporation

                  Omaha Holdings Corp., a Delaware corporation
<PAGE>

                               SECURITY AGREEMENT

                             GSSF MASTER FUND, L.P.

                        AMERICAN TECHNOLOGIES GROUP, INC.

                                       and

                     EACH ELIGIBLE SUBSIDIARY NAMED THEREIN


                            Dated: ___________, 2005
<PAGE>

1.  General Definitions and Terms; Rules of Construction......................1

2.  Loan Facility.............................................................2

3.  Repayment of the Loans....................................................5

4.  Omitted...................................................................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.................................11

10. Inspections and Appraisals...............................................11

11. Financial Reporting......................................................11

12. Additional Representations and Warranties................................12

13. Covenants................................................................23

14. Further Assurances.......................................................29

15. Representations, Warranties and Covenants of GSSF........................30

16. Power of Attorney........................................................31

17. Term of Agreement........................................................32

18. Termination of Lien......................................................32

19. Events of Default........................................................33

20. Remedies.................................................................35

21. Waivers..................................................................36

22. Expenses.................................................................36

23. Assignment By GSSF.......................................................37

24. No Waiver; Cumulative Remedies...........................................37

25. Application of Payments..................................................37
<PAGE>

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; Maximum Interest...................................41

33. Severability.............................................................42

34. Survival.................................................................42

35. Captions.................................................................42

36. Counterparts; Telecopier Signatures......................................42

37. Construction.............................................................42

38. Publicity................................................................42

39. Joinder..................................................................42

40. Legends..................................................................43