The Zanett Securities Corporation
                                    Tower 49
                                   31st Floor
                               12 East 49th Street
                               New York, NY 10017


                                                               March 27, 2000

American Quantum Cycles, Inc.
731 Washburn Road
Melbourne, FL 32934

Attention: Richard K. Hagen, Chief Executive Officer

Ladies and Gentlemen:

         Pursuant to the terms and subject to the conditions set forth in this
letter agreement (this "Agreement"), The Zanett Securities Corporation, for
itself and as agent (in such capacity, "Agent") for the lenders set forth on the
signature pages hereof (each a "Lender" and collectively, "Lenders") hereby
agrees to make a secured subordinated term loan to American Quantum Cycles,
Inc., a Florida corporation ("Borrower"), in the principal amount of One Million
Five Hundred Thousand ($1,500,000.00) Dollars (the "Loan"). All references to $
or Dollars herein shall mean United States dollars. The terms and conditions of
the Loan shall be as follows:

      1.    Advance of Loan Proceeds. Subject to Borrower's fulfillment of each
            of the conditions precedent set forth in paragraph 5 hereof, each
            Lender shall advance the amount set forth opposite to such Lender's
            name on Schedule 1 attached hereto (such Lender's "Commitment") to
            Agent prior to the Closing Date (as hereinafter defined). The Loan
            shall be advanced by Agent to Borrower in one or more disbursements
            beginning March 20, 2000 (the "Closing Date").

      2.    Financing Documents. The Loan shall be evidenced by convertible
            promissory notes payable to the Lenders in an aggregate principal
            sum of One Million Five Hundred Thousand ($1,500,000.00) Dollars
            (each a "Note" and collectively, the "Notes") and in the form
            attached as Exhibit "A" hereto. Each Lender shall receive a Note
            executed by Borrower and payable to the order of such Lender in an
            amount equal to the product of (a) the proportion that such Lender's
            Commitment bears to the original principal amount of the Loan (such
            Lender's "pro rata share") multiplied by (b) One Million Five
            Hundred Thousand ($1,500,000.00) Dollars. The principal amount of
            the Loan and interest thereon, calculated as provided in the Notes,
            shall be payable as set forth more particularly therein. The Notes
            shall be convertible, at Lenders' election upon the occurrence of an



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March 27, 2000
Page 2


            Event of Default (as hereinafter defined), into shares of Borrower's
            senior convertible preferred stock (the "Conversion Shares"), as
            more fully described in the Notes and in accordance with a certain
            Certificate of Designations, Rights and Preferences of Series A
            Convertible Preferred Stock of Borrower (the "Certificate of
            Designation") in the form of Exhibit "B" attached hereto. The Loan
            shall be secured pursuant to the provisions of paragraph 3 hereof.
            As an inducement to Lenders to make the Loan, Borrower shall grant
            Lenders warrants to purchase up to 375,000 shares of Borrower's
            capital stock (such capital stock, together with the shares of
            capital stock issuable upon the exercise of the Consulting Warrants
            (as hereinafter defined), the "Warrant Shares") pursuant to the
            terms and subject to the conditions set forth in the Warrant
            Agreements (the "Warrants") attached hereto as Exhibits "C", "D",
            "F" and "G". Borrower and Lenders shall enter into Registration
            Rights Agreements in the form of Exhibit "F" attached hereto (the
            "Registration Rights Agreements"). This Agreement, the Notes, the
            Warrants, the Registration Rights Agreement, the Consulting Warrants
            and each other document executed in connection with the Loan and/or
            contemplated hereby are hereinafter collectively referred to as the
            "Financing Documents."

      3.    Collateral. As security for the performance of Borrower's
            obligations under this Agreement and/or any of the other Financing
            Documents, the payment of principal and interest under the Loan and
            the payment of all other liabilities of Borrower to Lenders arising
            hereunder, under any of the other Financing Documents, or in
            connection with any of the transactions described herein or therein
            (collectively, the "Obligations"), whether absolute or contingent,
            matured or unmatured, direct or indirect, similar or dissimilar, due
            or to become due or heretofore or hereafter, contracted or acquired,
            Borrower hereby grants, pledges and assigns to Agent (for the
            benefit of Lenders) a security interest in all of its right, title
            and interest in and to all of Borrower's equipment, inventory,
            accounts and general intangibles, now owned or hereafter acquired,
            and all proceeds and products of the foregoing including proceeds of
            proceeds (collectively, the "Collateral"); provided, however, such
            security interests shall not encumber any assets of Borrower which
            are encumbered by security interests in favor of third
            parties as of the date hereof and which have been disclosed to Agent
            by Borrower in writing. Borrower will also take such commercially
            reasonable steps Agent determines are necessary to perfect and
            protect Lender's rights in and to the Collateral including, without
            limitation, executing and delivering to Agent UCC-1 Financing
            Statements for filing with such filing offices deemed appropriate by
            Agent and Borrower shall reimburse Agent for the reasonable cost
            thereof. Agent agrees to subordinate the lien priority of any and
            all security interests held by Agent hereunder to any security
            interests granted to by Borrower to third parties who provide
            Borrower with debt financing to meet Borrower's working capital
            requirements.



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March 27, 2000
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      4.    Fees and Other Compensation. (a) In consideration of the brokerage
            services rendered by The Zanett Securities Corporation ("Zanett") in
            connection with the Loan, contemporaneous with the advance of the
            Loan, Borrower shall pay to Zanett a fee equal to six (6%) percent
            of the aggregate face amount advanced by Lenders to Borrower (the
            "Origination Fee"), which fee shall be deemed fully earned and
            nonrefundable when paid.

            (b)   In consideration for certain consulting services to be
                  rendered by Zanett on behalf of Borrower, Borrower shall grant
                  to Zanett, contemporaneous with the advance of the Loan,
                  warrants to purchase 90,000 shares of Borrower's capital stock
                  pursuant to the terms and subject to the conditions set forth
                  in the Warrant Agreement (the "Consulting Warrants") attached
                  hereto as Exhibit "H."

            (c)   Borrower represents that other than the fees expressly payable
                  pursuant to this Agreement, no party is entitled to any
                  finders, brokers or similar fees or commissions as a result of
                  the transactions contemplated hereby.

      5.    Conditions Precedent. The obligation of Lenders to make the Loan is
            subject to Borrower duly executing and/or delivering (or causing to
            be executed and/or delivered) each of the following (all documents
            to be in form and substance satisfactory to Agent and its counsel):

            (a)   This Agreement, each of the Notes, the Warrants, the
                  Consulting Warrants the Registration Rights Agreement, the
                  Certificate of Designation and each other instrument,
                  agreement and document to be executed and/or delivered
                  pursuant to this Agreement;

            (b)   Payment to Zanett of the Origination Fee;

            (c)   The Consulting Warrants delivered to Zanett;

            (d)   A certified copy of the resolutions of the board of directors
                  of Borrower dated as of the Closing Date, authorizing the
                  execution, delivery and performance of this Agreement and the
                  other Financing Documents;

            (e)   Certified copies of the Articles or Certificate of
                  Incorporation and Bylaws of Borrower, in each case with all
                  amendments thereto;

            (f)   The Certificate of the corporate secretary of Borrower as to
                  the incumbency and specimen signatures of the officers of
                  Borrower executing this Agreement and the other Financing
                  Documents;


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March 27, 2000
Page 4

            (g)   Certificates of status, as of the most recent dates
                  practicable, of the Secretary of State of Borrower's state of
                  incorporation and each other state in which Borrower conducts
                  business;

            (h)   A certificate, dated as of the Closing Date, signed by the
                  President of Borrower to the effect that: (i) the
                  representations and warranties set forth in Paragraph 6 of
                  this Agreement are true and correct as of the Closing Date;
                  and (ii) no Event of Default hereunder, and no event which,
                  with the giving of notice or the passage of time, or both,
                  would constitute an Event of Default, has occurred as of the
                  Closing Date;

            (i)   No material adverse event affecting Borrower shall have
                  occurred since the date of the most recent financial
                  statements of Borrower submitted to the Agent; and

            (j)   The written opinion of Borrower's counsel dated as of the
                  Closing Date in the form of Exhibit "I" attached hereto.

      6.    Representations. To induce Lenders to make the Loan, Borrower hereby
            warrants and represents to Lenders that at and as of the date
            hereof:

            (a)   Organization and Qualification. Borrower and each of its
                  subsidiaries is a corporation duly organized and existing in
                  good standing under the laws of the jurisdiction in which it
                  is incorporated, and has the requisite corporate power to own
                  its properties and to carry on its business as now being
                  conducted. Borrower and each of its subsidiaries is duly
                  qualified as a foreign corporation to do business and is in
                  good standing in every jurisdiction in which its ownership of
                  property or the nature of the business conducted by it makes
                  such qualification necessary and where the failure so to
                  qualify would have a Material Adverse Effect. "Material
                  Adverse Effect" means any material adverse effect on (i) the
                  Securities, (ii) the ability of Borrower to perform its
                  obligations hereunder or any of the other Financing Documents
                  or (iii) the business, operations, properties, prospects or
                  financial condition of Borrower and its subsidiaries, taken as
                  a whole.

            (b)   Authorization; Enforcement. (i) Borrower has the requisite
                  corporate power and authority to enter into and perform its
                  obligations under this Agreement or the other Financing
                  Documents, to issue the Warrant Shares upon the exercise of
                  the Warrants and the Consulting Warrants to issue the
                  Conversion Shares upon conversion of the Notes in accordance
                  with the terms of the Certificate of Designation and to issue
                  the Warrant Shares upon exercise of the Warrants and the
                  Consulting Warrants in accordance with the terms of such


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March 27, 2000
Page 5


                  warrant agreements; (ii) the execution, delivery and
                  performance of this Agreement and the other Financing
                  Documents by Borrower and the consummation by it of the
                  transactions contemplated hereby and thereby have been duly
                  authorized by Borrower's Board of Directors and no further
                  consent or authorization of Borrower, its Board of Directors,
                  any committee of the Board of Directors or Borrower's
                  shareholders is required, and (iii) this Agreement
                  constitutes, and, upon execution and delivery by Borrower of
                  the other Financing Documents such agreements will constitute,
                  valid and binding obligations of Borrower enforceable against
                  Borrower in accordance with their terms.

            (c)   Stockholder Authorization. Neither the execution, delivery or
                  performance of this Agreement or other Financing Documents by
                  Borrower nor the consummation by it of the transactions
                  contemplated hereby or thereby requires any consent, approval
                  or authorization of Borrower's stockholders.


            (d)   Capitalization. The capitalization of Borrower as of the date
                  hereof, including the authorized capital stock, the number of
                  shares issued and outstanding, the number of shares issuable
                  and reserved for issuance pursuant to Borrower's stock option
                  plans, the number of shares issuable and reserved for issuance
                  pursuant to securities (other than the Notes, the Warrants and
                  the Consulting Warrants) exercisable or exchangeable for, or
                  convertible into, any shares of capital stock and the number
                  of shares to be reserved for issuance upon conversion of the
                  Note and the Conversion Shares and exercise of the Warrants
                  and the Consulting Warrants is set forth on Schedule 6(d). All
                  of such outstanding shares of capital stock have been, or upon
                  issuance in accordance with the terms of any such warrants,
                  options or preferred stock, will be, validly issued, fully
                  paid and non-assessable. No shares of capital stock of
                  Borrower (including the Conversion Shares and the Warrant
                  Shares) are subject to preemptive rights or any other similar
                  rights of the stockholders of Borrower or any liens or
                  encumbrances. Except for the Securities and as set forth on
                  Schedule 6(d), as of the date of this Agreement, (i) there are
                  no outstanding options, warrants, scrip, rights to subscribe
                  to, calls or commitments of any character whatsoever relating
                  to, or securities or rights convertible into or exercisable or
                  exchangeable for, any shares of capital stock of Borrower or
                  any of its subsidiaries, or arrangements by which Borrower or
                  any of its subsidiaries is or may become bound to issue
                  additional shares of capital stock of Borrower or any of its
                  subsidiaries, and (ii) there are no agreements or arrangements
                  under which Borrower or any of its subsidiaries is obligated
                  to register the sale of any of its or their securities under
                  the Securities Act (except the Registration Rights Agreement).
                  Except as set forth on Schedule 6(d), (i) there are no

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March 27, 2000
Page 6


                  securities or instruments containing antidilution or similar
                  provisions that will be triggered by the issuance of the
                  Conversion Shares, the common stock of Borrower upon
                  conversion of the Conversion Shares (the "Converted Shares")
                  or the Warrant Shares (collectively, the "Securities") in
                  accordance with the terms of this Agreement or the other
                  Financing Documents, (ii) there are no outstanding securities
                  or instruments of Borrower or any of its subsidiaries which
                  contain any redemption or similar provisions, and there are no
                  contracts, commitments, understandings or arrangements by
                  which Borrower or any of its subsidiaries is or may become
                  bound to redeem a security of Borrower or any of its
                  subsidiaries, and (iii) Borrower does not have any stock
                  appreciation rights or "phantom stock" plans or agreements or
                  any similar plan or agreement. Borrower has furnished to Agent
                  and Lenders true and correct copies of Borrower's Articles of
                  Incorporation as in effect on the date hereof ("Articles of
                  Incorporation"), Borrower's By-laws as in effect on the date
                  hereof (the "By-laws"), and all other instruments and
                  agreements governing securities convertible into or
                  exercisable or exchangeable for capital stock of Borrower. The
                  Certificate of Designation, in the form attached hereto, will
                  be duly filed prior to Closing with the Secretary of State of
                  the State of Florida and, upon the issuance of the Warrant
                  Shares in accordance with the terms hereof, each Lender shall
                  be entitled to the rights set forth therein.

            (e)   Issuance of Shares. The Conversion Shares, the Converted
                  Shares and Warrant Shares are duly authorized and, in
                  accordance with the Certificate of Designation, reserved for
                  issuance, and, upon conversion of the Note and the Conversion
                  Shares and exercise of the Warrants and the Consulting
                  Warrants in accordance with the terms thereof, will be validly
                  issued, fully paid and non-assessable, and free from all
                  taxes, liens, claims and encumbrances and will not be subject
                  to preemptive rights or other similar rights of stockholders
                  of Borrower and will not impose personal liability upon the
                  holder thereof.


            (f)   No Conflicts. The execution, delivery and performance of this
                  Agreement and the other Financing Documents by Borrower, the
                  performance by Borrower of its obligations under the
                  Certificate of Designation, and the consummation by Borrower
                  of the transactions contemplated hereby and thereby
                  (including, without limitation, the issuance and reservation
                  for issuance, as applicable, of the Warrants, Consulting
                  Warrants, Conversion Shares and Warrant Shares and Converted
                  Shares) will not (i) result in a violation of the Articles of
                  Incorporation or By-laws or (ii) conflict with, or constitute
                  a default (or an event which, with notice or lapse of time or
                  both, would become a default) under, or give to others any
                  rights of termination, amendment (including, without
                  limitation, the triggering of any anti-dilution provisions),


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March 27, 2000
Page 7

                  acceleration or cancellation of, any agreement, indenture or
                  instrument to which Borrower or any of its subsidiaries is a
                  party, or result in a violation of any law, rule, regulation,
                  order, judgment or decree (including federal and state
                  securities laws and regulations and rules or regulations of
                  any self-regulatory organizations to which either Borrower or
                  its securities are subject) applicable to Borrower or any of
                  its subsidiaries or by which any property or asset of Borrower
                  or any of its subsidiaries is bound or affected (except, with
                  respect to clause (ii), for such conflicts, defaults,
                  terminations, amendments, accelerations, cancellations and
                  violations that would not, individually or in the aggregate,
                  have a Material Adverse Effect); provided, however, the
                  consent of the American Stock Exchange will be required for
                  Borrower to issue Warrant Shares and Converted Shares. Neither
                  Borrower nor any of its subsidiaries is in violation of its
                  Articles of Incorporation, By-laws or other organizational
                  documents and neither Borrower nor any of its subsidiaries is
                  in default (and no event has occurred which, with notice or
                  lapse of time or both, would put Borrower or any of its
                  subsidiaries in default) under, nor has there occurred any
                  event giving others (with notice or lapse of time or both) any
                  rights of termination, amendment, acceleration or cancellation
                  of, any agreement, indenture or instrument to which Borrower
                  or any of its subsidiaries is a party, except for actual or
                  possible violations, defaults or rights that would not,
                  individually or in the aggregate, have a Material Adverse
                  Effect. The businesses of Borrower and its subsidiaries are
                  not being conducted, and shall not be conducted so long as a
                  Lender owns any of the Securities, in violation of any law,
                  ordinance or regulation of any governmental entity, except for
                  possible violations the sanctions for which either singly or
                  in the aggregate would not have a Material Adverse Effect.
                  Except as specifically contemplated by this Agreement and
                  Schedule 6(f) and the Registration Rights Agreement, Borrower
                  is not required to obtain any consent, approval, authorization
                  or order of, or make any filing or registration with, any
                  court or governmental agency or any regulatory or self
                  regulatory agency in order for it to execute, deliver or
                  perform any of its obligations under this Agreement or the
                  other Financing Documents, in each case in accordance with the
                  terms hereof or thereof.

            (g)   SEC Documents, Financial Statements. Except as set forth on
                  Schedule 6(g) hereto, since December 31, 1998, Borrower has
                  timely filed (within applicable extension periods) all
                  reports, schedules, forms, statements and other documents
                  required to be filed by it with the Securities Exchange
                  Commission (the "SEC") pursuant to the reporting requirements
                  of the Securities Exchange Act of 1934, as amended (the
                  "Exchange Act") (all of the foregoing and all exhibits
                  included therein and financial statements and schedules
                  thereto and documents incorporated by reference therein being
                  hereinafter referred to herein as the "SEC Documents").
                  Borrower has delivered to Lenders true and complete copies of


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March 27, 2000
Page 8



                  the SEC Documents. As of their respective dates, the SEC
                  Documents complied in all material respects with the
                  requirements of the Exchange Act or the Securities Act, as the
                  case may be, and the rules and regulations of the SEC
                  promulgated thereunder applicable to the SEC Documents, and
                  none of the SEC Documents, at the time they were filed with
                  the SEC, contained any untrue statement of a material fact or
                  omitted to state a material fact required to be stated therein
                  or necessary in order to make the statements therein, in light
                  of the circumstances under which they were made, not
                  misleading. None of the statements made in any such SEC
                  Documents is, or has been, required to be amended or updated
                  under applicable law (except for such statements as have been
                  amended or updated in subsequent filings made prior to the
                  date hereof). As of their respective dates, the financial
                  statements of Borrower included in the SEC Documents complied
                  as to form in all material respects with applicable accounting
                  requirements and the published rules and regulations of the
                  SEC applicable with respect thereto. Such financial statements
                  have been prepared in accordance with U.S. generally accepted
                  accounting principles ("GAAP"), consistently applied, during
                  the periods involved (except (i) as may be otherwise indicated
                  in such financial statements or the notes thereto, or (ii) in
                  the case of unaudited interim statements, to the extent they
                  may not include footnotes or may be condensed or summary
                  statements), and fairly present in all material respects the
                  consolidated financial position of Borrower and its
                  consolidated subsidiaries as of the dates thereof and the
                  consolidated results of their operations and cash flows for
                  the periods then ended (subject, in the case of unaudited
                  statements, to immaterial year-end audit adjustments). Except
                  as set forth in the financial statements of Borrower included
                  in the SEC Documents filed prior to the date hereof and any of
                  the liabilities described on Schedule 6(g) hereto, Borrower
                  has no liabilities, contingent or otherwise, other than (i)
                  liabilities incurred in the ordinary course of business
                  subsequent to the date of such financial statements, (ii)
                  liabilities not required by GAAP to be disclosed on a balance
                  sheet prepared in accordance with GAAP, and (iii) obligations
                  under contracts and commitments incurred in the ordinary
                  course of business and not required under GAAP to be reflected
                  in such financial statements, which liabilities and
                  obligations referred to in clauses (i), (ii) and (iii),
                  individually or in the aggregate, are not material to the
                  financial condition or operating results of Borrower. Neither
                  Borrower nor any of its subsidiaries or any of their officers,
                  directors, employees or agents have provided the Lenders with
                  any material, nonpublic information.

            (h)   Absence of Certain Changes. Since April 30, 1999, there has
                  been no material adverse change and no material adverse
                  development in the business, properties, operations, financial
                  condition or results of operations

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March 27, 2000
Page 9

                  of Borrower and its subsidiaries, taken as a whole, except as
                  disclosed in Schedule 6(h) or in the SEC Documents filed prior
                  to the date hereof.

            (i)   Absence of Litigation. Except as expressly disclosed in the
                  SEC Documents filed prior to the date hereof or on Schedule
                  6(i), there is no action, suit, proceeding, inquiry or
                  investigation before or by any court, public board, government
                  agency, self-regulatory organization or body pending or, to
                  the knowledge of Borrower or any of its subsidiaries,
                  threatened against or affecting Borrower, any of its
                  subsidiaries, or any of their respective directors or officers
                  in their capacities as such. There are no facts which, if
                  known by a potential claimant or governmental authority, could
                  give rise to a claim or proceeding which, if asserted or
                  conducted with results unfavorable to Borrower or any of its
                  subsidiaries, could reasonably be expected to have a Material
                  Adverse Effect.

            (j)   Intellectual Property. Each of Borrower and its subsidiaries
                  owns or is licensed to use all patents, patent applications,
                  trademarks, trademark applications, trade names, service
                  marks, copyrights, copyright applications, licenses, permits,
                  know-how (including trade secrets and other unpatented and/or
                  unpatentable proprietary or confidential information, systems
                  or procedures) and other similar rights and proprietary
                  knowledge (collectively, "Intangibles") which are material to
                  the conduct of its business as now being conducted and as
                  described in Borrower's Annual Report on Form 10-K or 10-KSB
                  for the fiscal year ended April 30, 1999. To the best
                  knowledge of Borrower, neither Borrower nor any subsidiary of
                  Borrower infringes or is in conflict with any right of any
                  other person with respect to any Intangibles which,
                  individually or in the aggregate, if the subject of an
                  unfavorable decision, ruling or finding, would have a Material
                  Adverse Effect. Neither Borrower nor any of its subsidiaries
                  has received written notice of any pending conflict with or
                  infringement upon such third party Intangibles, which alleged
                  pending conflict or alleged infringement, if adversely
                  determined, would result in a Material Adverse Effect. Except
                  as disclosed in the SEC Documents filed prior to the date
                  hereof hereto, the termination of Borrower's ownership of, or
                  right to use, any single Intangible would not result in a
                  Material Adverse Effect on Borrower. Neither Borrower nor any
                  of its subsidiaries has entered into any consent agreement,
                  indemnification agreement, forbearance to sue or settlement
                  agreement with respect to the validity of Borrower's or its
                  subsidiaries' ownership or right to use its Intangibles and,
                  to the best knowledge of Borrower, there is no reasonable

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March 27, 2000
Page 10


                  basis for any such claim to be successful. The Intangibles
                  which are material to the conduct of Borrower's business are
                  valid and enforceable and no registration relating thereto has
                  lapsed, expired or been abandoned or canceled or is the
                  subject of cancellation or other adversarial proceedings, and
                  all applications therefor are pending and in good standing.
                  Borrower and its subsidiaries have complied, in all material
                  respects, with their respective contractual obligations
                  relating to the protection of the Intangibles used pursuant to
                  licenses. To the best knowledge of Borrower, no person is
                  infringing on or violating the Intangibles owned or used by
                  Borrower or its subsidiaries.

            (k)   Foreign Corrupt Practices. Neither Borrower, nor any of its
                  subsidiaries, nor any director, officer, agent, employee or
                  other person acting on behalf of Borrower or any subsidiary
                  has, in the course of his actions for, or on behalf of,
                  Borrower, used any corporate funds for any unlawful
                  contribution, gift, entertainment or other unlawful expenses
                  relating to political activity; made any direct or indirect
                  unlawful payment to any foreign or domestic government
                  official or employee from corporate funds; violated or is in
                  violation of any provision of the U.S. Foreign Corrupt
                  Practices Act of 1977; or made any bribe, rebate, payoff,
                  influence payment, kickback or other unlawful payment to any
                  foreign or domestic government official or employee.

            (l)   Disclosure. All information relating to or concerning Borrower
                  set forth in this Agreement or provided to the Lenders
                  pursuant to Paragraphs 5 and 6 hereof or otherwise in
                  connection with the transactions contemplated hereby is true
                  and correct in all material respects and Borrower has not
                  omitted to state any material fact necessary in order to make
                  the statements made herein or therein, in light of the
                  circumstances under which they were made, not misleading. No
                  event or circumstance has occurred or exists with respect to
                  Borrower or its subsidiaries or their respective businesses,
                  properties, operations or financial conditions, which has not
                  been publicly disclosed but, under applicable law, rule or
                  regulation, would be required to be disclosed by Borrower in a
                  registration statement filed on the date hereof by Borrower
                  under the Securities Act with respect to the primary issuance
                  of Borrower's securities.

            (m)   Acknowledgment Regarding Lender's Acquisition of Securities.
                  Borrower acknowledges and agrees that none of the Lenders or
                  the Agent is acting as a financial advisor or fiduciary of
                  Borrower (or in any similar capacity) with respect to this
                  Agreement or the transactions contemplated hereby, the
                  relationship between Borrower and the Lenders and the Agent is
                  "arms-length" and any statement made by any Lender or the
                  Agent or any of their respective representatives or agents in


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March 27, 2000
Page 11


                  connection with this Agreement and the transactions
                  contemplated hereby is not advice or a recommendation and is
                  merely incidental to such Lender's purchase of Securities or
                  such Agent's role as an agent and has not been relied upon by
                  Borrower, its officers or its directors in any way. Borrower
                  further acknowledges that Borrower's decision to enter into
                  this Agreement has been based solely on an independent
                  evaluation by Borrower and its representatives.

            (n)   No General Solicitation. Neither Borrower nor any distributor
                  participating on Borrower's behalf in the transactions
                  contemplated hereby (if any) nor any person acting for
                  Borrower, or any such distributor, has conducted any "general
                  solicitation," as such term is defined in Regulation D, with
                  respect to any of the Securities being offered hereby.

            (o)   No Integrated Offering. Neither Borrower, nor any of its
                  affiliates, nor any person acting on its or their behalf, has
                  directly or indirectly made any offers or sales of any
                  security or solicited any offers to buy any security under
                  circumstances that would require registration of the
                  Securities being offered hereby under the Securities Act or
                  cause this offering of Securities to be integrated with any
                  prior offering of securities of Borrower for purposes of the
                  Securities Act or any applicable stockholder approval
                  provisions.

            (p)   No Brokers. Borrower has taken no action which would give rise
                  to any claim by any person for brokerage commissions, finder's
                  fees or similar payments by any Purchaser relating to this
                  Agreement or the transactions contemplated hereby, except for
                  Zanett.

            (q)   Acknowledgment of Dilution. The number of shares of Borrower's
                  common stock (the "Common Stock") issuable upon conversion of
                  the Conversion Shares may increase in certain circumstances,
                  including if the trading price of the Common Stock declines.
                  Borrower's executive officers have studied and fully
                  understand the nature of the Securities being sold hereunder.
                  Borrower acknowledges that its obligation to issue Common
                  Stock upon conversion of the Conversion Shares in accordance
                  with the Certificate of Designation is absolute and
                  unconditional, regardless of the dilution that such issuance
                  may have on the ownership interests of other shareholders.
                  Taking the foregoing into account, Borrower's Board of
                  Directors has determined in its good faith business judgment
                  that the issuance of the Securities under the Financing
                  Documents and the consummation of the other transactions
                  contemplated hereby and thereby are in the best interests of
                  Borrower and its shareholders.

            (r)   Title. Borrower and its subsidiaries have good and marketable
                  title in fee simple to all real property and good and
                  merchantable title to all personal property owned by them that



<PAGE>

March 27, 2000
Page 12
                  is material to the business of Borrower and its subsidiaries,
                  in each case free and clear of all liens, encumbrances and
                  defects except such as are described in the SEC Documents or
                  such as do not materially affect the value of such property
                  and do not materially interfere with the use made and proposed
                  to be made of such property by Borrower and its subsidiaries.
                  Any real property and facilities held under lease by Borrower
                  and its subsidiaries are held by them under valid, subsisting
                  and enforceable leases with such exceptions as are not
                  material and do not materially interfere with the use made and
                  proposed to be made of such property and buildings by Borrower
                  and its subsidiaries.

            (s)   Tax Status. Borrower and each of its subsidiaries has made or
                  filed all foreign, federal, state and local income and all
                  other tax returns, reports and declarations required by any
                  jurisdiction to which it is subject (unless and only to the
                  extent that Borrower and each of its subsidiaries has set
                  aside on its books provisions reasonably adequate for the
                  payment of all unpaid and unreported taxes) and has paid all
                  taxes and other governmental assessments and charges that are
                  material in amount, shown or determined to be due on such
                  returns, reports and declarations, except those being
                  contested in good faith and has set aside on its books
                  provisions reasonably adequate for the payment of all taxes
                  for periods subsequent to the periods to which such returns,
                  reports or declarations apply. There are no unpaid taxes in
                  any material amount claimed to be due by the taxing authority
                  of any jurisdiction, and the officers of Borrower know of no
                  basis for any such claim. Borrower has not executed a waiver
                  with respect to any statute of limitations relating to the
                  assessment or collection of any federal, state or local tax.
                  None of Borrower's tax returns is presently being audited by
                  any taxing authority.

            (t)   Environmental Laws. Borrower and each of its subsidiaries (i)
                  are in compliance with any and all applicable foreign,
                  federal, state and local laws and regulations relating to the
                  protection of human health and safety, the environment or
                  hazardous or toxic substances or wastes, pollutants or
                  contaminants ("Environmental Laws"), except where
                  noncompliance with such Environmental Laws would not
                  constitute a Material Adverse Effect, (ii) have received all
                  permits, licenses or other approvals required of them under
                  applicable Environmental Laws which are material to the
                  conduct their respective businesses and (iii) are in
                  compliance with all terms and conditions of any such permit,
                  license or approval. No contaminant, pollutant or toxic or
                  hazardous waste has been generated, used, treated, stored or
                  disposed of at, or transported to or from, or released into
                  the air, soil, surface or ground waters at, on or under any

<PAGE>

March 27, 2000
Page 13

                  real property while such real property has been owned, leased,
                  operated or used by Borrower which would constitute or give
                  rise to a Material Adverse Effect. Borrower is not currently
                  involved in and no person or entity has taken any action or
                  threatened or proposed to involve Borrower in any
                  environmental clean-up or remediation or sought to expose
                  Borrower to contribution or liability for such remediation.

            (u)   Regulatory Permits. Borrower and each of its subsidiaries
                  possess all certificates, authorizations and permits issued by
                  the appropriate federal, state or foreign regulatory
                  authorities which are material to the conduct of their
                  respective businesses, and neither Borrower nor any such
                  subsidiary has received any notice of proceedings relating to
                  the revocation or modification of any such certificate,
                  authorization or permit.

            (v)   No Other Agreements. Borrower has not, directly or indirectly,
                  made any agreements with any Lenders relating to the terms or
                  conditions of the transactions contemplated by this Agreement
                  or the other except as set forth in such documents.

            (w)   Use of Proceeds. Schedule "6(w)" attached hereto is a complete
                  and accurate list of all entities in which Borrower holds a
                  majority or controlling interest. The proceeds of the Loan
                  shall be used by Borrower solely for the purpose of funding
                  Borrower's working capital requirements.

      7.    Affirmative Covenants. So long as any part of the indebtedness
            contemplated hereby shall remain unpaid, Borrower will:

              (a)     Insurance. Maintain in form, with companies reasonably
                      acceptable to Agent and with Agent named lender loss
                      payee, adequate fire with extended coverage and public
                      liability insurance in amounts customarily carried by
                      others engaged in a like or similar business and operating
                      in similar markets and similar geographic locations and
                      such additional insurance as Agent from time to time may
                      reasonably require, and upon demand, within a commercially
                      reasonable time deliver to Agent the policies concerned or
                      a schedule of all insurance in force.

              (b)     Taxes. Discharge all tax liens and pay all taxes,
                      assessments, and other governmental charges imposed on the
                      assets of or assessed against Borrower; provided, however,
                      that nothing herein contained shall require Borrower to
                      pay any tax or discharge any lien so long as its validity
                      is being contested in good faith and adequate reserves,
                      acceptable to Agent, have been made therefor.

<PAGE>

March 27, 2000
Page 14

            (c)   Notice of Default. Promptly notify Agent of the occurrence of
                  an Event of Default or of any event which, with the giving of
                  notice and/or the passage of time would constitute an Event of
                  Default.

            (d)   Form D: Blue Sky Laws. Borrower shall file with the SEC a Form
                  D with respect to the Securities as required under Regulation
                  D and to provide a copy thereof to each Purchaser promptly
                  after such filing. Borrower shall, on or before the Closing
                  Date, take such action as Borrower shall reasonably determine
                  is necessary to qualify the Securities for sale to the
                  Purchasers pursuant to this Agreement under applicable
                  securities or "blue sky" laws of the states of the United
                  States or obtain exemption therefrom, and shall provide
                  evidence of any such action so taken to the Purchasers on or
                  prior to the Closing Date.

            (e)   Reporting Status. So long as any Purchaser beneficially owns
                  any of the Securities, Borrower shall timely file all reports
                  required to be filed with the SEC pursuant to the Exchange
                  Act, and Borrower shall not terminate its status as an issuer
                  required to file reports under the Exchange Act even if the
                  Exchange Act or the rules and regulations thereunder would
                  permit such termination.

            (f)   Financial Information. Borrower shall send the following
                  reports to each Lender until such Lender transfers, assigns or
                  sells all of its Securities: (i) within 10 days after the
                  filing with the SEC, a copy of its Annual Report on Form 10-K
                  or 10-KSB, its Quarterly Reports on Form 10-Q or 10-QSB, its
                  proxy statements and any Current Reports on Form 8-K; (ii)
                  within one day after release, copies of all press releases
                  issued by Borrower or any of its subsidiaries; and (iii)
                  copies of any notices and other information made available or
                  given to shareholders of Borrower generally, contemporaneously
                  with making available or giving thereof to such shareholders.

            (g)   Reservation of Shares. Borrower shall at all times have
                  authorized and reserved for the purpose of issuance a
                  sufficient number of shares of Common Stock to provide for the
                  full conversion of the outstanding Conversion Shares in
                  connection therewith and the full exercise of the Warrants and
                  the Consulting Warrants and the issuance of the Warrant Shares
                  in connection therewith, subject to and as otherwise required
                  by the Note, Certificate of Designation, the Warrants and the
                  Consulting Warrants.

            (h)   Listing. Borrower will use its commercially reasonable best
                  efforts to continue the listing and trading of its Common
                  Stock on the Bulletin Board, the Nasdaq SmallCap Market




<PAGE>

March 27, 2000
Page 15

                  ("NSCM"), The Nasdaq National Market ("NNM"), the New York
                  Stock Exchange ("NYSE") or the American Stock Exchange
                  ("AMEX") and will comply in all respects with the reporting,
                  filing and other obligations under the bylaws or rules of the
                  Bulletin Board, NSCM, NNM, NYSE or AMEX as applicable.

            (i)   Corporate Existence. So long as a Lender beneficially owns any
                  Securities, Borrower shall maintain its corporate existence,
                  and in the event of a merger or consolidation where Borrower
                  is not the surviving entity or where shareholders of Borrower
                  immediately prior to such merger or consolidation own less
                  than fifty percent (50%) of the issued and outstanding shares
                  of Common Stock, on a fully-diluted basis, immediately
                  following such merger or consolidation or sale of all or
                  substantially all of Borrower's assets, Borrower shall ensure
                  that the surviving or successor entity in such transaction (i)
                  assumes Borrower's obligations hereunder and under the other
                  Financing Documents and (ii) is a publicly traded corporation
                  whose common stock is listed for trading on the Bulletin
                  Board, NSCM, NNM, NYSE or AMEX.

            (j)   Reimbursement of Expenses. Promptly reimburse Agent for all
                  reasonable expenses, including the fees and expenses of legal
                  counsel for Agent, incurred in connection with the
                  preparation, negotiation, amendment, modification or
                  enforcement of this Agreement, the other Financing Documents
                  and the Notes.

      8.    Negative Covenants. So long as any part of the indebtedness
            contemplated hereby shall remain unpaid Borrower will not, directly
            or indirectly, without the prior written consent of Agent:

            (a)   Create or acquire any subsidiaries unless such subsidiaries
                  join in and become obligors under the Financing Documents by
                  executing and delivering to Agent a joinder agreement in form
                  acceptable to Agent and such other documents, instruments and
                  agreements as Agent may reasonably require.

            (b)   Merge or consolidate, with or into any other person or entity,
                  or convey, lease, or sell all or substantially all of its
                  assets to any person or entity, whether in one transaction or
                  a series of transactions.

            (c)   Make loans to others.

            (d)   Become liable in any manner for the debts or obligations of
                  others.

            (e)   Borrower shall not make any offers or sales of any security
                  (other than pursuant to this Agreement and the Registration
                  Rights Agreement) under circumstances that would require

<PAGE>

March 27, 2000
Page 16

                  registration of the Securities under the Securities Act or
                  cause the offering of the Securities to be integrated with any
                  other offering of securities by Borrower for purposes of any
                  stockholder approval provision applicable to Borrower or its
                  securities.

            (f)   Engage in any business other than that in which it is
                  currently engaged and businesses related thereto.

            (g)   So long as any part o the Loan remains outstanding, make any
                  payments to Richard K. Hagen ("Hagen") on account of deferred
                  compensation or any other indebtedness of Borrower to Hagen
                  outstanding as of the Closing Date.

      9.    Events of Default; Remedies. Each of the following shall constitute
            an "Event of Default" hereunder:

            (a)   Failure by Borrower to make any payment of principal or
                  interest on the Notes when due after two (2) days' notice from
                  Agent to Borrower of such default, provided, however, after
                  the first occurrence of a default by Borrower in the payment
                  of interest when due under the Notes, Borrower shall have an
                  additional thirty (30) days to make such payment; provided
                  further that if Borrower exercises such right, Borrower shall
                  pay to Lenders a late fee equal to three (3%) percent of the
                  principal then outstanding as liquidated damages;

            (b)   Failure by Borrower to observe or perform any covenant, other
                  term or provision of this Agreement, the Notes or any other
                  Financing Document within five (5) business days of the
                  earlier of Borrower's knowledge of such failure and receipt by
                  Borrower of written notice from the Agent of such failure;

            (c)   Upon two (2) days' notice from Agent to Borrower, if any
                  representation made by or on behalf of Borrower in this
                  Agreement, the Notes or any Financing Document shall be
                  inaccurate in any material respect;

            (d)   A change in control or ownership of Borrower;

            (e)   Failure of Borrower to issue Warrant Shares upon the exercise
                  of Lender or Zanett of the Warrants or the Consulting
                  Warrants, respectively;

            (f)   Borrower shall admit in writing its inability to pay its debts
                  as they become due or shall become insolvent (however
                  evidenced) or there shall be commenced any bankruptcy,
                  insolvency, arrangement, reorganization, or other
                  debtor-relief proceedings by or against Borrower and, if such




<PAGE>
March 27, 2000
Page 17


                  case or proceeding is not commenced by Borrower as the case
                  may be, or converted to a voluntary case, such case or
                  proceeding shall be consented to or acquiesced in by Borrower
                  as the case may be, or shall result in the entry of an order
                  for relief or shall remain for sixty (60) days undismissed, or
                  Borrower shall dissolve or terminate its existence;

            (g)   The making of demand by any lender or other creditor of
                  Borrower for payment of any indebtedness of Borrower for
                  borrowed money, which is payable upon demand, or the
                  acceleration of the maturity of any indebtedness of Borrower
                  for borrowed money upon default by Borrower; or

            (h)   Entry of any judgment against Borrower which, to the extent
                  not covered by insurance, equals or exceeds Fifty Thousand
                  ($50,000.00) Dollars and within thirty (30) days from the date
                  of entry, such judgment shall not have been discharged or
                  execution thereof stayed pending appeal, or, within thirty 30
                  days after the expiration of any such stay, such judgment
                  shall not have been discharged;

            Upon the occurrence of an Event of Default Agent may:

                           (i) Increase the interest rate on the unpaid
                  principal amount of the Notes to a fixed per annum rate equal
                  to eighteen (18%) percent; and

                           (ii) At its election and without demand or notice of
                  any kind, which are hereby waived, declare the unpaid balance
                  of the Notes, and accrued interest thereon, immediately due
                  and payable, proceed to collect same, and exercise any and all
                  other rights, powers and remedies given it by this Agreement,
                  the Notes, and the other Financing Document or otherwise at
                  law or in equity.

              In lieu of the foregoing remedies, Lenders may elect to exercise
              the conversion rights set forth in the Notes.

<PAGE>
March 27, 2000
Page 18



      10.   Agency Provisions.

            (a)   Each Lender hereby irrevocably appoints and authorizes Agent
                  to take such action as Agent on its behalf and to exercise
                  such powers under this Agreement and the other Financing
                  Documents as are delegated to the Agent by the terms hereof,
                  together with such powers as are reasonably incidental
                  thereto. The duties of the Agent shall be mechanical and
                  administrative in nature and the Agent shall not by reason of
                  this Agreement be a trustee or fiduciary for any Lender. The
                  Agent shall have no duties or responsibilities except as
                  expressly set forth in the Financing Documents.

            (b)   Neither the Agent nor any of its directors, officers, agents
                  or employees shall be liable to the Lenders for any action
                  taken or omitted to be taken by it or them under or in
                  connection with any Financing Documents in the absence of its
                  or their own gross negligence or willful misconduct.

            (c)   With respect to its obligation to advance its Commitment, the
                  Agent shall have the same rights and powers under the
                  Financing Documents as any other Lender and may exercise the
                  same as though it were not the Agent; and the term "Lender" or
                  "Lenders" shall, unless otherwise expressly indicated, include
                  the Agent in its individual capacity.

            (d)   Each Lender acknowledges that it has, independently and
                  without reliance upon the Agent or any other Lender and based
                  on such documents and information as it has deemed appropriate
                  made its own credit analysis and decision to enter into this
                  Agreement.

            (e)   The Lenders agree to indemnify the Agent (to the extent not
                  reimbursed by Borrower), pro rata according to their
                  respective pro rata shares of the Loan, from and against any
                  and all liabilities, obligations, losses, damages, penalties,
                  actions, judgments, suits, costs, expenses or disbursements of
                  any kind or nature whatsoever which may be imposed on,
                  incurred by, or asserted against the Agent in any way relating
                  to or arising out of any of the Financing Documents or any
                  action taken or omitted by the Agent under the Financing
                  Documents, provided that no Lender shall be liable for any
                  portion of any of the foregoing resulting from the Agent's
                  gross negligence or willful misconduct. Without limiting the
                  foregoing, each Lender agrees to reimburse the Agent (to the
                  extent not reimbursed by Borrower) promptly upon demand for
                  its pro rata share for out-of-pocket expenses (including
                  counsel fees) incurred by Agent in connection with the
                  administration, or enforcement of, or legal advice in respect
                  of rights or responsibilities under, any of the Financing
                  Documents.


<PAGE>

March 27, 2000
Page 19

            (f)   Upon receipt of funds on account of the Obligations, the Agent
                  will promptly thereafter caused to be distributed such
                  payments of principal, interest and other fees payable to
                  Lenders hereunder and under the other Financing Documents to
                  each Lender, in like funds, an amount equal to such Lender's
                  pro rata share of the amount collected by Agent.

            (g)   Lenders acknowledge that Zanett's right to receive the
                  Organization Fee and the Consulting Warrants inures to Zanett
                  in its individual capacity and not in its capacity as Agent.

      11.   Representations of Lenders. Each Lender severally and not jointly
            represents and warrants to Borrower as follows:

            (a)   Purchase for Own Account, Etc. Lender is purchasing the Notes,
                  Warrants, Warrant Shares, Conversion Shares and Converted
                  Shares issuable hereunder or under the Notes or Warrants for
                  Lender's own account and not with a present view towards the
                  public sale or distribution thereof, except pursuant to sales
                  that are exempt from the registration requirements of the
                  Securities Act of 1933, as amended (the "Securities Act") or
                  sales registered under the Securities Act. Lender understands
                  that Lender must bear the economic risk of this investment
                  indefinitely, unless the Securities are registered pursuant to
                  the Securities Act and any applicable state securities or blue
                  sky laws or an exemption from such registration is available,
                  and that Borrower has no present intention of registering the
                  resale of any such Securities other than as contemplated by
                  the Registration Rights Agreement. Notwithstanding anything in
                  this Paragraph 11(a) to the contrary, by making the
                  representations herein, the Lender does not agree to hold the
                  Securities for any minimum or other specific term and reserves
                  the right to dispose of the Securities at any time in
                  accordance with or pursuant to a registration statement or an
                  exemption from the registration requirements under the
                  Securities Act.

            (b)   Accredited Investor Status. Lender is an "Accredited Investor"
                  as that term is defined in Rule 501(a) of Regulation D.

            (c)   Reliance on Exemptions. Lender understands that the Securities
                  are being offered and sold to Lender in reliance upon specific
                  exemptions from the requirements to provide Lenders with a
                  prospectus, to sell the Securities through a person or
                  Borrower registered to sell the Securities and from the
                  registration requirements of United States' federal and state
                  securities laws and that Borrower is relying upon the truth
                  and accuracy of, and Lender's compliance with, the
                  representations, warranties, agreements, acknowledgments and
                  understandings of Lender set forth herein in order to
                  determine the availability of such exemptions and the
                  eligibility of Lender to acquire the Securities.


<PAGE>

March 27, 2000
Page 20

            (d)   Information. Lender understands that Lender's investment in
                  the Securities involves a high degree of risk.

            (e)   Governmental Review. Lender understands that no federal or
                  state agency or any other government or governmental agency
                  has passed upon or made any recommendation or endorsement or
                  provides any insurance with respect to the Securities.

            (f)   Transfer or Resale. Lender understands that (i) except as
                  provided in the Registration Rights Agreement, the sale or
                  resale of the Securities have not been and are not being
                  registered under the Securities Act or any state securities
                  laws, and the Securities may not be transferred unless (a) the
                  resale of the Securities has been registered thereunder; or
                  (b) Lender shall have delivered to Borrower an opinion of
                  counsel (which opinion shall be in form, substance and scope
                  customary for opinions of counsel in comparable transactions)
                  to the effect that the Securities to be sold or transferred
                  may be sold or transferred pursuant to an exemption from such
                  registration; or (c) the Securities are sold under Rule 144
                  promulgated under the Securities Act (or a successor rule)
                  ("Rule 144"); or (d) the Securities are sold or transferred to
                  an affiliate of Lender who agrees to sell or otherwise
                  transfer the Securities only in accordance with the provisions
                  of this Paragraph 12(f) and who is an Accredited Investor; and
                  (ii) neither Borrower nor any other person is under any
                  obligation to register such Securities under the Securities
                  Act or any state securities laws (other than pursuant to the
                  Registration Rights Agreement). Notwithstanding the foregoing
                  or anything else contained herein to the contrary, the
                  Securities may be pledged as collateral in connection with a
                  bona fide margin account or other lending arrangement. Lender
                  understands that it is its responsibility to comply with all
                  transfer restrictions.

            (g)   Restrictions on Resale. There are restrictions on the Lenders'
                  ability to resell the Securities and it is the responsibility
                  of each Lender to determine the nature and extent of such
                  restrictions and to comply with such restrictions prior to
                  selling the Securities.



<PAGE>

March 27, 2000
Page 21


      12.   Miscellaneous.

            (a)   The representations and warranties of Borrower contained
                  herein shall survive the making of the Loan and shall remain
                  effective until all indebtedness contemplated hereby shall
                  have been paid by Borrower in full.

            (b)   This Agreement shall be governed and construed in accordance
                  with the laws of the State of New York applicable to contracts
                  made and to be performed in the State of New York. Borrower
                  irrevocably consents to the jurisdiction of the United States
                  federal courts located in the Southern District of New York,
                  in any suit or proceeding based on or arising under this
                  Agreement and irrevocably agrees that all claims in respect of
                  such suit or proceeding may be determined in such courts.
                  Borrower irrevocably waives the defense of an inconvenient
                  forum to the maintenance of such suit or proceeding. Borrower
                  agrees that service of process upon Borrower mailed by first
                  class mail shall be deemed in every respect effective service
                  of process upon Borrower in any such suit or proceeding.
                  Nothing herein shall affect the Agent's right to serve process
                  in any other manner permitted by law. Borrower agrees that a
                  final non-appealable judgment in any such suit or proceeding
                  shall be conclusive and may be enforced in other jurisdictions
                  by suit on such judgment or in any other lawful manner.

            (c)   Any forbearance, failure, or delay by Agent in exercising any
                  right, power, or remedy on behalf of Lenders shall not
                  preclude the further exercise thereof, and all of Agent's
                  rights, powers, and remedies shall continue in full force and
                  effect until specifically waived by Agent.

            (d)   This Agreement may be executed in two or more counterparts,
                  all of which shall be considered one and the same agreement
                  and shall become effective when counterparts have been signed
                  by each party and delivered to the other party.

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

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



<PAGE>

March 27, 2000
Page 22


            (g)   This Agreement and the instruments referenced herein contain
                  the entire understanding of the parties with respect to the
                  matters covered herein and therein. No provision of this
                  Agreement may be waived or amended other than by an instrument
                  in writing signed by the party to be charged with enforcement.

            (h)   Any notices, demands or waivers required or permitted to be
                  given under the terms of this Agreement shall be in writing
                  and sent by mail or delivered personally or by courier and
                  shall be effective five business days after being placed in
                  the mail, if mailed, or upon receipt, if delivered personally
                  or by courier, in each case addressed to a party. The
                  addresses for such communications shall be:

                      If to Borrower:

                      American Quantum Cycles, Inc.
                      731 Washburn Road
                      Melbourne, FL 32934
                      Attention:  Richard K. Hagen,
                                    Chief Executive Officer

                      With a copy to:

                      Atlas, Pearlman, Trop & Borkson P.A.
                      New River Center, Suite 1900
                      200 E. Las Olas Boulevard
                      Fort Lauderdale, FL 33302-4610
                      Attention: James M. Schneider, Esquire

                      If to Lenders or Agent, addressed to Agent at:

                      The Zanett Securities Corporation
                      Tower 49
                      31st Floor
                      12 East 49th Street
                      New York, NY  10017
                      Attention: David M. McCarthy, Managing Director

                      With a copy to:

                      Klehr, Harrison, Harvey, Branzburg & Ellers LLP
                      260 South Broad Street
                      Philadelphia, PA 19102
                      Attention: Barry J. Siegel, Esquire


<PAGE>

March 27, 2000
Page 23



      Each party shall provide notice to the other party of any change in
address, such notice to become effective upon receipt.

            (i)   This Agreement shall be binding upon and inure to the benefit
                  of the parties and their successors and assigns. Borrower
                  shall not assign this Agreement or any rights or obligations
                  hereunder without the prior written consent of Agent.
                  Notwithstanding the foregoing, Agent and Lenders may assign
                  their respective rights hereunder to any other Lender, without
                  the consent of Borrower, provided, however, nothing herein
                  shall be construed to limit Agent's right to dispose of the
                  Collateral upon the occurrence and during the continuance of
                  an Event of Default by way of assignment, sale or other means
                  of conveyance to a third party including, without limitation,
                  a competitor of Borrower.

            (j)   This Agreement is intended for the benefit of the parties
                  hereto and their respective permitted successors and assigns,
                  and is not for the benefit of, nor may any provision hereof be
                  enforced by, any other person.

            (k)   Notwithstanding anything to the contrary contained in this
                  Agreement or the Notes, if Borrower is prohibited by the rules
                  or regulations of any securities exchange or quotation system
                  on which the Warrant Shares are then listed or traded or by
                  the rules of any commission or other regulatory body having
                  jurisdiction over Borrower (each, a "Governmental Body"), from
                  listing or issuing a number of shares of capital stock in
                  excess of an amount prescribed by a Governmental Body to
                  holders of Notes (the "Cap Amount") without first obtaining
                  the approval of Borrower's stockholders, then Borrower shall
                  not be required to list or issue, as applicable, shares in
                  excess of the Cap Amount unless Borrower has obtained the
                  required approvals. The Cap Amount, as of the date hereof,
                  equals 19.99% of the number of shares of Common Stock
                  outstanding as of the date hereof, as set forth on Schedule
                  6(d) hereof.



<PAGE>

March 27, 2000
Page 24




            (l)   Each Lender shall have the right to review and approve any
                  disclosure in any press release, Securities and Exchange
                  Commission, National Association of Securities Dealers or
                  similar filing or public announcement (each a "Public
                  Disclosure") which specifically names such Lender; provided,
                  however, if such Public Disclosure, including the names of
                  such Lender, is required by applicable law or regulation such
                  approval shall be deemed to have been received if Borrower
                  uses all commercially reasonable efforts to provide Lenders
                  with copies of such Public Disclosure not less than three
                  business days (or such other period as is practicable) prior
                  to the disclosure thereof. Borrower shall use all commercially
                  reasonable efforts to provide Lenders with copies of all other
                  Public Disclosure relating to the transactions contemplated
                  hereby not less than one business day prior to the disclosure
                  thereof (or such other period as is practicable).

                                       Very truly yours,

                                   THE ZANETT SECURITIES CORPORATION,
                                               as Agent


                                   By:   /s/ David McCarthy
                                         --------------------------------
                                         David McCarthy, Managing Director


By executing the appropriate signature lines below, each party, intending to be
legally bound hereby, agrees to the terms and conditions of this Agreement as of
the date appearing opposite such party's signature.

                                   BORROWER:

                                   AMERICAN UANTUM CYCLES, INC.


Date: March 27, 2000               By: /s/ Richard K. Hagen
      --------------                   ----------------------------
                                           Name:  Richard K. Hagen
                                           Title: Chairman and C.E.O.