DiaSys Corporation - Exhibit 10.7


 Exhibit 10.7

INDEMNIFICATION AND MUTUAL CONTRIBUTION AGREEMENT 





                
INDEMNIFICATION AND MUTUAL CONTRIBUTION AGREEMENT, dated as of the 13th day of
August, 2004, by and among MORRIS SILVERMAN (the "Lender"), GREGORY WITCHEL, ROBERT
M. WIGODA, HOWARD M. BLOOM , SHERWIN GILBERT, KENNETH GROSSMAN and JEFFREY B.
AARONSON (all of whom are hereinafter sometimes collectively referred to as the
"Guarantors") and DIASYS CORPORATION , a Delaware corporation (the "Company").




RECITALS



                
The Lender is the Chairman of the Board of Directors of the Company and the Guarantors
are officers directors of the Company. 



                
The Company has entered into a Settlement and General Release Agreement with Todd
M. DeMatteo pursuant to which the Company is obliged to make certain payments
on or before August 16, 2004 and certain additional payments on or before September
16, 2004 (the "Settlement Payments"). The Company will suffer severe adverse effects
if it does not make the Settlement Payments at the times required. 



                
The Company does not have funds to make such Settlement Payments and is in urgent
need of additional working capital. 



                
The Company has used its best efforts to borrow necessary funds from a commercial
lending institution but has been unable to do so because it lacks the cash flow
and tangible assets necessary to support such borrowing. 



                
As an accommodation to the Company and to enable it to avoid default under the
terms of the DeMatteo settlement, the Lender is willing to make a personal loan
or loans to the Company in the amount of up to $600,000 (collectively, the "Loan"),
but only on the terms and conditions set forth herein and in the Loan and Security
Agreement between the Lender and the Company being executed and delivered concurrently
herewith (the "Loan Agreement"). 



                


AGREEMENT



                
In consideration of the premises and the mutual covenants contained herein,
the parties do hereby agree as follows:



                
1. The Loan. Concurrently herewith, the Lender is making the Loan to the
Company in the amount of $475,000 upon the terms and conditions set forth herein.
The Lender, in his 






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 discretion, may make advance additional sums up to an aggregate
of $600,000 principal amount of the Loan. The Loan is evidenced by two or more
Convertible Promissory Notes (the "Notes"), which are convertible into shares
of Common Stock of the Company, as provided in the Loan Agreement and the Notes.




                
2. Guarantors. Each of the Guarantors will execute a Personal Guaranty
Agreement in the form delivered herewith (each a "Guaranty Agreement") pursuant
to which such Guarantor will personally guaranty repayment of a portion of the
Loan and related costs as set forth on Schedule I attached hereto. 



                
3. Company Indemnity. The Company hereby agrees to indemnify the Lender
and each of the Guarantors and hold them harmless from and against any and all
loss, cost or expense of any and every nature arising out of this Agreement, the
Loan Agreement and/or the individual Guaranty Agreements, as the case may be.
Such indemnity shall include any and all direct or indirect loss, cost, expense
or damages of any and every nature, including without limitation any and all legal
fees and expenses incurred in enforcing the Lender's or the Guarantor's rights
hereunder and all amounts constituting "Indemnified Amounts" as hereinafter defined.




                
4. Compensation of Lender and Guarantors. In consideration of agreements
of the Lender to make the Loan and the Guarantors to execute and deliver the Guaranty
Agreements and this Agreement, the Company agrees to compensate the Lender and
the Guarantors through the issuance of shares of its Common Stock, $.001 par value
("Common Stock"), which shares shall be deemed fully paid and nonassessable, as
follows:



                
(a) With respect to the Lender, as additional compensation for the making of the
Loan, as provided in the Loan Agreement, the Company shall issue to the Lender,
without further payment or consideration, One (1) share of Common Stock for each
Four (4) Dollars principal amount of the Loan. Accordingly, based on the $475,000
initial principal amount of the Loan, 118,750 shares of Common Stock are being
issued concurrently herewith and up to an additional 31,250 shares may be issued
as additional amounts are advanced in respect of the Loan. 



                
(b) With respect to each Guarantor, as compensation for the execution and delivery
of such Guarantor's Guaranty Agreement, the Company shall issue to such Guarantor,
without further payment or consideration, One (1) share of Common Stock for each
Six (6) Initial Exposure Dollars, as hereinafter defined, which shares shall be
deemed fully paid and nonassessable. Accordingly, shares are being issued to the
Guarantors as set forth on Schedule I attached hereto. 



                
(c) As used herein, the term "Exposure Dollars" shall mean with respect to each
Guarantor an amount equal to the portion of the Loan for which each Guarantor
is responsible as provided in the several Guaranty Agreements and as set forth
on Schedule I attached hereto (collectively, the "Guaranty Percentages"). 



                
6. Mutual Indemnity. (a) The Lender and each of the Guarantors agree that
all 




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Indemnified Amounts (as hereinafter defined) shall be borne by
the Lender and the Guarantors in accordance with the Guaranty Percentages. 



                
(b) As used herein, the term "Indemnified Amounts" shall mean the unpaid amount
of any sums due to the Lender under the Loan Agreement following a Loss Event
(as hereinafter defined), including without limitation the amount of any costs
or expense incurred by the Lender in collecting or managing the Loan or as a result
of any foreclosure against, or taking possession of, any assets of the Company




                
(c) As used herein the term "Loss Event" shall mean the occurrence of any event
of default under the Loan Agreement, including without limitation, the failure
of the Company to repay any indebtedness owed to the Lender when due or honor
any other obligation to the Lender in respect of the Loan when due. 



                
(d) Following any Loss Event, the Lender may make written demand upon each of
the Guarantors for payment of their respective Guaranty Percentages of the Indemnified
Amount arising from the Loss Event. Within five business days of the making of
such written demand, all Guarantors shall pay their respective Indemnification
Percentages of the Indemnified Amount directly to the Lender. 



                7.
Expenses of Lender. In the event the Lender shall be required to take legal
action to enforce the terms of any Guaranty Agreement or this Agreement against
any Guarantor (a "Delinquent Guarantor"), such Delinquent Guarantor shall pay
to the Lender, in addition to such Delinquent Guarantor's Percentage Indemnification,
all legal fees and expenses reasonably incurred by the Lender in enforcing the
Lender's rights hereunder against such Delinquent Guarantor. 



                8.
Representations of Lender and Guarantors. Each of the Lender and Guarantors
acknowledges that the transactions contemplated by the Loan Agreement, the Notes,
the Guaranty Agreements and this Agreement constitute an investments in the Common
Stock (the "Shares") issuable pursuant to this Agreement and the Loan Agreement
and upon conversion of the Notes and that such investments are suitable only for
sophisticated investors and are being offered and sold under the exemption provided
under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended (the "Securities
Act"), and Rule 506 promulgated thereunder and similar state securities law exemptions
for private offerings, and makes the following representations, declarations and
warranties with the intent that the same be relied upon in determining the suitability
as a shareholder in the Company. Each Lender represents and warrants to the Company
as follows: 



                
(a) He is an accredited investor, as that term is defined in Rule 501(a) under
the Securities Act, in that he is a natural person and either (i) his individual
net worth and that of his spouse on the date hereof exceeds $1,000,000 or (ii)
he had an individual income in excess of $200,000 in each of the two most recent
years or joint income with his spouse in excess of $300,000 in each of those years
and he 




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 has a reasonable expectation of reaching the same income level
in the current year. 



                (b)
He understands: (i) that the Shares have not been registered under the Securities
Act, nor pursuant to the provisions of the securities or other laws of any other
applicable jurisdictions in reliance on exemptions for private offerings contained
in Section 4(2) and 4(6) of the Securities Act, Rule 506 promulgated thereunder
and in the laws of such jurisdictions; and (ii) that the Shares are to be issued
in reliance upon such exemptions based upon his representations, warranties and
agreements set forth herein. 



                
(c) He agrees that the Shares may not be resold pledged or otherwise transferred
unless they are registered under such securities laws or unless exemptions from
applicable registration requirements are available and that the certificate evidencing
his Shares will bear a legend to such effect. 



                
9. Construction of Agreement. This Agreement shall be construed so as to
give maximum effect to the provisions of Section 6 hereof that all burden of all
Guaranty amounts be shared in the manner provided in such Section 6 and Schedule
I hereto. 



                
10. Exclusive Jurisdiction. Each of the Lender, the Guarantors and the
Company hereby irrevocably submits to the exclusive jurisdiction of any Illinois
court or United States federal court located in the State of Illinois and irrevocably
agrees that any and all actions or proceedings relating to this Agreement or any
agreement or instrument executed hereunder shall be litigated in such courts,
and each of the parties waives any objection which it may have based on improper
venue or forum non conveniens to the conduct of any such action or proceeding
in any such court and waives personal service and any and all process upon it,
and consents to all such service of process made in the manner set forth in Section
11 hereof with respect to notices. Nothing contained on this Section10 shall affect
the right of any Lender to serve legal process on any other Lender in any other
manner permitted by law. 



                
11. Notices. All notices, requests, demands and other communications called
for or complaint contemplated hereunder shall be in writing and it shall be deemed
to have been duly given when delivered to the party to whom addressed or when
sent by telecopy, telegram, telex or wire (if promptly confirmed by registered
or certified mail, return receipt requested, prepaid and addressed) to the parties,
their successors in interest or their assignees at their respective addresses
set forth on Schedule I attached hereto, or at such other addresses as the parties
may designate by written notice in the address of such party set forth on Schedule
I attached hereto. 



                
12. Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter hereof. There are no oral understandings,
terms or conditions, and no Lender has relied upon any representation, express
or implied, not contained in this Agreement. 




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13. Counterparts; Parties. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original. This Agreement shall
be binding upon and enforceable by the Lender, the Company and each Guarantor
executing the same, regardless of whether executed or not executed by any other
Guarantor named as a party hereto. 



                
14. Applicable Law. This Agreement shall be governed by, construed,
and enforced in accordance with the laws of the State of Illinois. 



                
IN WITNESS WHEREOF, the undersigned have hereunto set their hands or cause this
instrument to be duly executed as of the date first above indicated. 




	 	S/ MORRIS SILVERMAN 

      Morris Silverman 
	 	
	
       

    	S/ GREGORY WITCHEL 

      Gregory Witchel 
	
       

    	
	
       

    	S/ ROBERT M. WIGODA 

      Robert M. Wigoda 
	 	
	 	S/ HOWARD M. BLOOM 

      Howard M. Bloom 
	 	
	 	NOT SIGNED 

      Sherwin Gilbert 
	 	
	 	NOT SIGNED 

      Kenneth Grossman 
	 	
	 	S/ JEFFREY B. AARONSON 

      Jeffrey B. Aaronson 
	 	
	 	
	 	DIASYS CORPORATION 
	 	
	 	By: S/ JEFFREY B. AARONSON 

             Jeffrey B. Aaronson, President


 






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SCHEDULE I 

  Responsibility for Loan



	
      Name

    	
      

    	
      Guaranty Percentage

    	
      

    	
      Initial Principal 

        Amount Responsible

        (Exposure Dollars) 

    	
      

    	
      Shares To

        Be issued 

    	
      

    
	Morris W. Silverman 

      M.S. Management Corp. 

      790 Estate Drive 

      Suite 100 

      Deerfield, IL 60015 	 	
      51.67%

    	
      

    	
      $310,000

    	
      

    	
      118,750(1)

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Gregory Witchel

      DiaSys Corporation 

      81 W. Main Street 

      Waterbury, CT 06702 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Robert M. Wigoda

      Wigoda & Wigoda 

      444 N. Michigan Avenue 

      26th Floor, Suite 2600 

      Chicago, IL 60611 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	 	 	 	 	 	 
	Sherwin Gilbert 

      Indeck Energy Services 

      600 Buffalo Grove Road, #300 

      Buffalo Grove, IL 60089  	 	
      6.67%

    	
      

    	
      40,000

    	
      

    	
      6,667

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Kenneth Grossman

      S.G. Capital 225 

      W. Hubbard Street 

      Suite 600 

      Chicago, IL 60610 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Howard M. Bloom

      Kipnis Rosen & Bloom, Ltd. 

      550 W. Touhy Avenue, Suite 300 

      Skokie, IL 60077 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Jeffrey B. Aaronson

      DiaSys Corporation 

      81 W. Main Street 

      Waterbury, CT 06702	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 




 1. Based on initial advance of $475,000. 



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