Document:

Retirement Benefits Agreement

EXHIBIT
10.1

 

Retirement
Benefits Agreement

 

    This
Retirement Benefits Agreement (the “Agreement”) is made and entered into by and
between G. Richard Gatton (“Gatton”) and First Savings Bank, A Federal Savings
Bank (the “Bank”), a federal savings bank with its headquarters in Three Rivers,
Michigan.

 

W i t
n e s s e t h:

 

    Whereas,
Gatton is
currently a director of the Bank and its holding company, Peoples Bancorp
(“PB”), and resigned from his position as President and Chief Executive Officer
of the Bank effective as of March 30, 2006 (the “Retirement Date”) at the age of
63 years;

 

Whereas,
pursuant
to Section 6(b) of the Employment Agreement dated February 29, 2000, by and
among Gatton, the Bank and PB (the “Employment Agreement”), the Bank has agreed
to pay to Gatton additional retirement benefits he would have received if he had
continued in the employment of the Bank until age 65 years, to the extent such
benefits are not otherwise paid to him under the Three Rivers Financial
Corporation’s Retirement Plan or under the First Savings Bank, FSB Salary
Continuation Agreement dated September 18, 1996, between the Bank and Gatton
(the “Salary Continuation Agreement”);

 

Whereas,
the Bank
has determined that present value of the benefit payable to Gatton under Section
6(b) of the Employment Agreement as a result of increased benefits he would have
received under the Three Rivers Financial Corporation’s Retirement Plan had he
worked until age 65 years, is $57,894, and has decided that such benefit shall
be paid to Gatton in a lump sum on January 5, 2007;

 

Whereas,
Gatton is
entitled to receive an additional $15,000 per year over a 15-year period under
the Salary Continuation Agreement as a result of the provisions in Section 6(b)
of the Employment Agreement;

 

Whereas,
this
Agreement is being signed to set forth the Bank’s obligation to make such
payment to Gatton and to clarify certain other matters pertaining to the
Employment Agreement and the Salary Continuation Agreement.

 

Now,
Therefore, in
consideration of the mutual promises and covenants contained herein, it is
hereby agreed by and between the parties hereto as follows:

 

1.  On
January 5, 2007, the Bank shall pay to Gatton the amount of $55,721.85, less
appropriate federal and state income tax withholdings, in satisfaction of its
obligations under Section 6(b) of the Employment Agreement, and Gatton agrees
that the payment of such amount will satisfy that obligation. To the extent
employment taxes are due with respect to this payment and with respect to the
payments described in Paragraph 2 of this Agreement, but have not previously
been paid, the Bank will pay those taxes in 2006 and withhold from the payment
to be provided on January 5, 2007 the appropriate FICA and FUTA portions payable
by Gatton with respect to these benefits.

 

2.  Pursuant
to Section 2.2 of the Salary Continuation Agreement and Section 6(b) of the
Employment Agreement, the Bank is required to pay Gatton annual payments of
$15,000 

over a
period of 15 years payable on a monthly basis commencing with the first day of
the month following Gatton’s Normal Retirement Date (the date he attains age 65)
and continuing thereafter for 179 additional months. Pursuant to that agreement,
the Bank shall pay to Gatton monthly payments of $1,250 (less appropriate
federal and state income tax withholdings) commencing on November 1, 2007, for a
period of 15 years. The monthly amount shall be increased by 3% annually in
November of each year, as shown on schedule “A” attached to this agreement. It
is the intention of the parties hereto that the Salary Continuation Agreement
shall comply in all respects with the requirements of § 409A of the Internal
Revenue Code of 1986, as amended.

 

3.  In
addition to the foregoing benefits, in consideration for his prior services as
an employee of the Bank, Gatton shall also continue to receive the health and
medical benefits that are provided by the Bank generally to Bank employees,
paying 75% of the premiums owed for such coverage, until Gatton attains age 65.
To the extent that the commencement date of Medicare benefits is extended beyond
age 65, the provisions of this Section 3 shall be extended to the commencement
date of such Medicare benefits.

 

4.  For
purposes of this Agreement, notices and all other communications provided for
herein shall be in writing and shall be deemed to have been given when delivered
or mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:

 

	 	
      If
      to Gatton:
	
      G.
      Richard Gatton

      3393
      Turnberry Lane

      Lakeland,
      FL 33803

       

	 	
      If
      to Bank:
	
      First
      Savings Bank, A Federal Savings Bank

      123
      Portage Avenue

      Three
      Rivers, MI 49093

 

or to
such address as either party hereto may have furnished to the other party in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

 

5.  The
validity, interpretation, and performance of this Agreement shall be governed by
the laws of the State of Indiana, except as otherwise required by mandatory
operation of federal law.

 

6.  No
provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed by Gatton and
the Bank. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
dissimilar provisions or conditions at the same or any prior subsequent time. No
agreements or representation, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.

 

2

 

7.  The
invalidity or unenforceability of any provisions of this Agreement shall not
affect the validity or enforceability of any other provisions of this Agreement
which shall remain in full force and effect.

 

8.  This
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
agreement.

 

9.  This
Agreement is personal in nature and neither party hereto shall, without consent
of the other, assign or transfer this Agreement or any rights or obligations
hereunder.

 

10.  This
Agreement may not be amended except in a writing executed by the parties
hereto.

 

11.  Gatton
acknowledges that the Employment Agreement has terminated and is without further
force and effect. The only other agreement relating to Gatton’s benefits from
the Bank that remains in effect, other than this Agreement, is the Salary
Continuation Agreement, as amended by this Agreement.

 

In
Witness Whereof, the
parties have caused the Agreement to be executed and delivered as of October 26,
2006.

 

	 	 	
      FIRST
      SAVINGS BANK, A FEDERAL

      SAVINGS
      BANK

	 	 	 
	 	 	 
	 	
      By:
	
      /s/
      Jeffrey H. Gatton

	 	 	
      Jeffrey
      H. Gatton, President and CEO

	 	 	 
	 	 	
      the
      “Bank”

	 	 	 
	 	 	
      /s/
      G. Richard Gatton

	 	 	
      G.
      Richard Gatton

	 	 	 
	 	 	
      “Gatton”

 

3

 

Payments
Begin 11-01-07

 

Schedule
A

Retired
Benefits Agreement

G.
Richard Gatton

G.
Richard Gatton

Salary
Continuation Agreement

3% Per
Year Increase - Change November 1st Each Year

 

	
      YEAR

       
	
      Effective

      11/1/2007

      Annual

       
	
      Monthly

       
	
      Per

      Pay

      (26)

       

	
      2007
	
      15000.00
	
      1250.00
	
      576.92

	
      2008
	
      15450.00
	
      1287.50
	
      594.23

	
      2009
	
      15914.00
	
      1326.17
	
      612.08

	
      2010
	
      16391.00
	
      1365.92
	
      630.42

	
      2011
	
      16883.00
	
      1406.92
	
      649.35

	
      2012
	
      17389.00
	
      1449.08
	
      668.81

	
      2013
	
      17911.00
	
      1492.58
	
      688.88

	
      2014
	
      18448.00
	
      1537.33
	
      709.54

	
      2015
	
      19002.00
	
      1583.50
	
      730.85

	
      2016
	
      19572.00
	
      1631.00
	
      752.77

	
      2017
	
      20159.00
	
      1679.92
	
      775.35

	
      2018
	
      20764.00
	
      1730.33
	
      798.62

	
      2019
	
      21386.00
	
      1782.17
	
      822.54

	
      2020
	
      22028.00
	
      1835.67
	
      847.23

	
      2021
	
      22689.00
	
      1890.75
	
      872.65EX-10.1

                                                                    FORM OF NOTE

THIS  SECURED  PROMISSORY  NOTE (THE "NOTE") HAS NOT BEEN  REGISTERED  UNDER THE
SECURITIES  ACT OF  1933,  AS  AMENDED  (THE  "SECURITIES  ACT"),  OR ANY  OTHER
APPLICABLE  FEDERAL OR STATE  SECURITIES  LAWS,  AND HAS BEEN ISSUED AND SOLD IN
RELIANCE  UPON  EXEMPTIONS  FROM THE  REGISTRATION  REQUIREMENTS  OF SUCH  LAWS,
INCLUDING,  WITHOUT  LIMITATION,  THE EXEMPTION CONTAINED IN SECTION 4(2) OF THE
SECURITIES  ACT.  THIS  NOTE  MAY  NOT  BE  SOLD  OR  TRANSFERRED  UNLESS  (1) A
REGISTRATION  STATEMENT  HAS BECOME AND IS THEN  EFFECTIVE  WITH RESPECT TO SUCH
SECURITIES,  (2) THIS NOTE IS TRANSFERRED PURSUANT TO RULE 144 PROMULGATED UNDER
THE  SECURITIES ACT (OR ANY SUCCESSOR  RULE) OR (3) THE COMPANY (AS  HEREINAFTER
DEFINED) HAS RECEIVED AN OPINION OF COUNSEL  REASONABLY  SATISFACTORY  TO IT, TO
THE EFFECT THAT THE PROPOSED SALE OR TRANSFER OF SUCH  SECURITIES IS EXEMPT FROM
REGISTRATION  UNDER THE SECURITIES ACT AND ALL OTHER APPLICABLE FEDERAL OR STATE
SECURITIES LAWS.

                             SECURED PROMISSORY NOTE
                                       OF
                         CHINA EDUCATION ALLIANCE, INC.

September 29, 2006

                                                       Newport Beach, California

         CHINA  EDUCATION  ALLIANCE,  INC., a North  Carolina  corporation  (the
"COMPANY"),  for value received,  hereby promises  unconditionally to pay to the
order of _________________________________________ or such person's assigns (the
"HOLDER"),  and SBI  ADVISORS,  LLC in its  capacity  as agent for  Lender  (the
"AGENT") at the address set forth in Section 12 hereof,  in lawful  money of the
United States of America ("DOLLARS" or "$") and in immediately  available funds,
the principal  amount set forth in Annex A hereto and initialed by an authorized
signatory of the Company (the  "PRINCIPAL"),  in full,  on the Maturity Date (as
defined below),  and unpaid Interest (as defined below) on each Interest Payment
Date.

         The  following  is a  statement  of the  rights of the  Holder  and the
conditions to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees:

         1.       DEFINITIONS. For the purposes of this Note:

                  "AFFILIATE(S)"  means,  with respect to any given Person other
than a partnership or limited  liability  company,  any other Person directly or
indirectly  controlling,  controlled by or under common control with such Person
and with respect to a  partnership,  the partners of such  partnership  and with
respect to a limited  liability  company,  the members of such limited liability
company.

                  "AUDITORS"  shall have the  meaning  assigned  to such term in
Section 3(g).

<PAGE>

                  "BUSINESS DAY" means any day that is not a Saturday, Sunday or
a legal holiday in the State of California.

                  "CHANGE IN CONTROL" means the occurrence of the following: any
person (as the term "person" is used in Section  13(d)(3) or Section 14(d)(2) of
the  Exchange  Act) other than the  Company,  any  Subsidiary,  or any  employee
benefit plan of the Company or any Subsidiary,  becomes the beneficial  owner of
greater  than 30% or more of the combined  voting power of the then  outstanding
securities of Company entitled to vote generally in the election of directors.

                  "COLLATERAL"  means all existing and future  assets of Company
and its  subsidiaries,  tangible and intangible,  including,  but not limited to
cash and cash  equivalents,  accounts  receivable,  inventories,  other  current
assets,  furniture,  fixtures and equipment,  trademarks,  trade names and other
assets, including, without limitation, the Collateral Shares.

                  "COMMON  STOCK" means the common  stock,  par value $0.001 per
share, of the Company.

                  "ENVIRONMENTAL  LAWS" shall have the meaning  assigned to such
term in Section 3(p).

                  "EVENT OF  DEFAULT"  shall have the  meaning  assigned to such
term in Section 5.

                  "EXCHANGE ACT" shall have the definition assigned to such term
in Section 3(a)(i).

                  "FAMILY MEMBER" means, with respect to any Person, any parent,
spouse,  child,  brother,  sister or any other relative with a relationship  (by
blood, marriage or adoption) not more remote than first cousin to such Person.

                  "GOVERNMENTAL  AUTHORITY"  means any  United  States  Federal,
state,  local,  foreign or other  court,  governmental  department,  commission,
board, bureau, agency or instrumentality.

                  "GUARANTEE  AGREEMENT"  means the  Guarantee,  dated as of the
date  hereof,  among the  Guarantors  named  therein and the Holders (as defined
therein).

                  "GUARANTEE PLEDGE AGREEMENT" means the Stock Pledge Agreement,
dated as of  September  29,  2006,  between  Xinqun Yu and the Agent (as defined
therein).

                  "GUARANTORS"  means  Harbin  Zhong  He Li Da Jiao Yu Ke Ji You
Xian Gong Si, Heilonghiang Zhonge Education Training Center,  Harbin Zhonghelida
Educational  Technology  Company Limited,  and Xinqun Yu,  collectively,  as the
guarantors of the Secured Obligations pursuant to the Guarantee Agreement.

                  "INDIVIDUAL GUARANTOR" means Xinqun Yu.

                  "INTEREST"  shall have the  meaning  assigned  to such term in
Section 2(b).

                  "INTEREST  PAYMENT  DATE"  means the  first day of each  month
commencing on November 1, 2006 and  terminating on March 1, 2007, as well as the
Maturity Date.

                                       -2-
<PAGE>

                  "ISSUE DATE" means September 29, 2006.

                  "LIEN" means any mortgage,  pledge, lien, security interest or
other charge or encumbrance of any kind.

                  "MATERIAL  ADVERSE EFFECT" shall have the meaning  assigned to
such term in Section 3(c).

                  "MATURITY DATE" means March 29, 2007.

                  "OTCBB"  shall  have  the  meaning  assigned  to such  term in
Section 3(b)(i).

                  "PERSON" means any individual,  corporation, limited liability
company,  partnership,  firm, joint venture,  association,  joint stock company,
trust or other  entity or  organization,  including a  government  or  political
subdivision or an agency or instrumentality thereof.

                  "PLEDGED  COLLATERAL"  shall have the meaning assigned to such
term in Section 9(a)(ii).

                  "PLEDGED  SHARES" shall have the meaning assigned to such term
in Section 9(a)(ii)(A).

                  "PROCEEDS"  means all  proceeds  of,  and all  other  profits,
products,  rents or receipts, in whatever form, arising from the sale, exchange,
assignment or other disposition of Collateral.

                  "RELATED PARTIES" shall have the meaning assigned to such term
in Section 9(f).

                  "SEC"  means  the  United  States   Securities   and  Exchange
Commission.

                  "SECURED  OBLIGATIONS"  means the  obligations  of the Company
under  this Note,  including,  without  limitation,  (i) all  Principal  of, and
Interest  (including,  without limitation,  any Interest which accrues after the
commencement  of  any  case,   proceeding  or  other  actions  relating  to  the
bankruptcy,  insolvency or  reorganization  of the Company and any other amounts
owing  hereunder)  on, the Note,  (ii) all other amounts  payable by the Company
under this Note (including  expenses incurred in connection with the enforcement
of this Note) and (iii) any renewals or extensions of any of the foregoing.

                  "SEC  DOCUMENTS"  shall have the  definition  assigned to such
term in Section 3(a)(i).

                  "SECURITIES ACT" means the Securities Act of 1933, as amended.

                  "SECURITY INTEREST" means the security interest of the lenders
(including  the  initial  Holder of this Note) in the  Collateral  securing  the
Secured Obligations.

                                       -3-
<PAGE>

                  "SUBSIDIARIES"  means,  with respect to any specified  Person,
any other Person (1) whose board of directors or similar  governing  body,  or a
majority thereof,  may presently by directly or indirectly  elected or appointed
by such specified Person,  (2) whose management  decisions and corporate actions
are  directly or  indirectly  subject to the present  control of such  specified
Person,  or (3) whose  voting  securities  are more than 50% owned,  directly or
indirectly, by such specified Person.

                  "SUBSIDIARY GUARANTORS" means Harbin Zhong He Li Da Jiao Yu Ke
Ji You Xian Gong Si,  Heilonghiang  Zhonge  Education  Training  Center,  Harbin
Zhonghelida Educational Technology Company Limited, collectively.

                  "TRANSACTION  AGREEMENTS"  shall mean this Note,  the Warrant,
the Guarantee Agreement, and the Guarantee Pledge Agreement.

                  "UCC"  means the Uniform  Commercial  Code as in effect on the
date hereof in the State of California; PROVIDED, THAT if by reason of mandatory
provisions of law, the perfection or the effect of perfection or  non-perfection
of the Security Interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a  jurisdiction  other  than  California,  "UCC"  means the
Uniform  Commercial Code as in effect in such other jurisdiction for purposes of
the  provisions  hereof  relating to such  perfection or effect of perfection or
non-perfection.

                  "WARRANT" shall mean the common stock purchase warrant,  dated
September 29, 2006, by the Company, registered in the name of SBI Advisors, LLC,
exercisable  for an  aggregate  of number of shares of Common Stock equal to the
highest  dollar  amount  of the  Principal  prior  to the  Maturity  Date at the
exercise  price  per  share of $0.50,  the form of which is  attached  hereto as
EXHIBIT 1.

         2.       PRINCIPAL; INTEREST; AND PREPAYMENT.

                  (a) PRINCIPAL; PRINCIPAL INCREASE. The entire unpaid Principal
shall be paid in Dollars on the Maturity Date.  Upon the payment in full of this
Note,  including,  without limitation,  the Principal and all accrued and unpaid
Interest and any other amounts owing hereunder,  the Holder shall surrender this
Note to the Company for cancellation.

                  (b) INTEREST.  Subject to Section 2(c) hereof, Interest on the
Note ("INTEREST"), during the period from the Issue Date (or with respect to any
increase in the Principal  during the term of this Note, from the date set forth
opposite such increase in Principal in Annex A) through the Maturity Date, shall
accrue on the  Principal of the Note set forth in Annex A hereto at a rate equal
to 6% per annum  ("INITIAL  INTEREST  RATE").  Interest shall be computed on the
basis of a 360-day  year  applied to actual days  elapsed.  Notwithstanding  the
foregoing any anything in this Note to the contrary,  upon the  occurrence,  and
during the continuation, of an Event of Default, the Initial Interest Rate shall
be  increased by 2% per annum to 8% per annum and shall be payable by the Holder
on demand. Interest accruing during any period commencing on the date commencing
immediately following any Interest Payment Date (or commencing on the Issue Date
in the case of the  period  ending on the  initial  Interest  Payment  Date) and
terminating on the next Interest  Payment Date (or the Maturity Date in the case
of the last such  period)  shall be paid in arrears by the  Company on the first
date of each such period. The rate of interest payable

                                       -4-
<PAGE>

under the Note from time to time shall in no event exceed the maximum  rate,  if
any, permissible under applicable law. If the rate of interest payable under the
Note is ever  reduced  as a result  of the  preceding  sentence  and at any time
thereafter the maximum rate permitted by applicable law shall exceed the rate of
interest  provided  hereunder,  then the rate  provided for  hereunder  shall be
increased to the maximum rate  permitted  by  applicable  law for such period as
required  so that the total  amount of  interest  received by the Holder is that
which  would  have been  received  by the Holder  but for the  operation  of the
preceding sentence.

                  (c) PREPAYMENT. The Principal may be prepaid by the Company at
any time without penalty,  with Interest  accrued  hereunder to the date of such
prepayment without the consent of the Holder.

         3.       REPRESENTATIONS,  WARRANTIES AND COVENANTS OF THE COMPANY. The
Company represents, warrants and covenants to the Holder that:

                  (a) (i) The Common  Stock has been  registered  under  Section
12(g) of the Securities  Exchange Act of 1934, as amended (the  "EXCHANGE  ACT")
and the Company is subject to the periodic reporting  requirements of Section 13
of the  Exchange  Act.  The Company has  heretofore  provided to the Agent true,
complete, and correct copies of all forms, reports,  schedules,  statements, and
other documents required to be filed by it under the Exchange Act since at least
December 31, 2003,  as such  documents  have been amended  since the time of the
filing  thereof   (collectively,   including  all  forms,  reports,   schedules,
statements,  and  other  documents  filed  by the  Company  therewith,  the "SEC
DOCUMENTS").  The SEC Documents,  including,  without limitation,  any financial
statements and schedules included therein, at the time filed or, if subsequently
amended,  as so amended,  (i) did not contain any untrue statement of a material
fact required to be stated  therein or necessary in order to make the statements
therein not  misleading  and (ii) complied in all respects  with the  applicable
requirements  of the  Exchange  Act and the  applicable  rules  and  regulations
thereunder.

                           (ii) The Company  maintains  disclosure  controls and
procedures  required  by Rule  13a-15 or 15d-15  under the  Exchange  Act;  such
controls and  procedures  are effective to ensure that all material  information
concerning the Company and its  subsidiaries  is made known on a timely basis to
the individuals  responsible  for the preparation of the Company's  filings with
the SEC and other public disclosure documents.  The Company has delivered to the
Agent  copies of, all written  descriptions  of, and all  policies,  manuals and
other documents  promulgating,  such disclosure controls and procedures.  To the
Company's knowledge,  each director and executive officer thereof has filed with
the SEC on a timely  basis  all  statements  required  by  Section  16(a) of the
Exchange Act and the rules and  regulations  thereunder  since at least December
31,  2003.  As used in this  Section  3(a),  the term  "file"  shall be  broadly
construed to include any manner in which a document or information is furnished,
supplied or otherwise made available to the SEC.

                           (iii)  The  Chief  Executive  Officer  and the  Chief
Financial  Officer of the Company have signed,  and the Company has furnished to
the  SEC,  all   certifications   required  by  Sections  302  and  906  of  the
Sarbanes-Oxley  Act of 2002; such  certifications  contain no  qualifications or
exceptions  to the  matters  certified  therein  and have not been  modified  or
withdrawn;  and neither the Company nor any of its officers has received  notice
from any

                                       -5-
<PAGE>

governmental entity questioning or challenging the accuracy,  completeness, form
or manner of filing or submission of such certifications.

                           (iv) The Company has  heretofore  has provided to the
Agent  complete  and  correct  copies of all  certifications  filed with the SEC
pursuant  to  Sections  302 and 906 of  Sarbanes-Oxley  Act of 2002  and  hereby
reaffirms, represents and warrants to the Holder the matters and statements made
in such certificates.

                  (b) At the date hereof:

                           (i) the  Common  Stock  is and  shall be  traded  and
quoted in the over-the-counter Bulletin Board market (the "OTCBB");

                           (ii) the  Company  has and shall  have  performed  or
satisfied all of its  undertakings  to, and of its obligations and  requirements
with, the SEC; and

                           (iii) the Company  has not,  and shall not have taken
any action that would preclude,  or otherwise  jeopardize,  the inclusion of the
Common Stock for quotation on the OTCBB.

                  (c) The Subsidiary Guarantors are the sole Subsidiaries of the
Company. Other than the Subsidiary  Guarantors,  the Company has no subsidiaries
or affiliated  corporation or owns any interest in any other enterprise (whether
or not such  enterprise  is a  corporation).  The  Company  and each  Subsidiary
thereof has been duly organized and is validly existing as a corporation in good
standing under the laws of the respective jurisdiction of its incorporation with
full power and  authority  (corporate  and other) to own,  lease and operate its
respective  properties and conduct its  respective  business as described in the
SEC Documents;  the Company and each Subsidiary  thereof is duly qualified to do
business as a foreign  corporation and is in good standing in each  jurisdiction
in which the ownership or leasing of its respective properties or the conduct of
its respective business requires such qualification, except where the failure to
be so qualified or be in good standing would not have a material  adverse effect
on the business,  prospects,  condition (financial or otherwise), and results of
operations  of the  Company  and  the  Subsidiaries  thereof  taken  as a  whole
("MATERIAL  ADVERSE  EFFECT");  no  proceeding  has been  instituted in any such
jurisdiction,  revoking,  limiting or curtailing, or seeking to revoke, limit or
curtail,  such  power and  authority  or  qualification;  the  Company  and each
Subsidiary  thereof is in possession  of, and operating in compliance  with, all
authorizations, licenses, certificates, consents, orders and permits from state,
federal,  foreign  and other  regulatory  authorities  that are  material to the
conduct of its  business,  all of which are valid and in full force and  effect;
neither the Company nor any Subsidiary thereof is in violation of its respective
charter  or  bylaws  or in  default  in the  performance  or  observance  of any
obligation,  agreement,  covenant or condition  contained in any material  bond,
debenture,  note or other evidence of  indebtedness,  or in any material  lease,
contract,  indenture,  mortgage, deed of trust, loan agreement, joint venture or
other  agreement  or  instrument  to  which  it is a party or by which it or its
respective  properties or assets may be bound,  which violation or default would
have a Material  Adverse  Effect;  and neither  the  Company nor any  Subsidiary
thereof is in violation of any law, order, rule,  regulation,  writ, injunction,
judgment  or decree of any court,  government  or  governmental  agency or body,
domestic  or foreign,  having  jurisdiction  over the Company or any  Subsidiary
thereof or over its

                                       -6-
<PAGE>

respective  properties or assets,  which violation would have a Material adverse
Effect. The SEC Documents  accurately  describe any corporation,  association or
other entity owned or controlled,  directly or indirectly, by the Company or any
Subsidiary Guarantor.

                  (d) (i) The Company has full legal right,  power and authority
to enter  into  this  Note  and the  Warrant  and to  perform  the  transactions
contemplated hereby and thereby. Each of this Note and the Warrant has been duly
authorized,  executed  and  delivered  by the Company and is a valid and binding
agreement  on the  part of the  Company,  enforceable  in  accordance  with  its
respective terms.

                           (ii) Each  Guarantor has full legal right,  power and
authority to enter into the Guarantee  Agreement and to perform the transactions
contemplated thereby. The Guarantee Agreement has been duly authorized, executed
and delivered by each Guarantor and is a valid and binding agreement on the part
of each  Guarantor,  enforceable in accordance  with its respective  terms.  The
Individual  Guarantor  has reached the age of  majority in the  jurisdiction  in
which he resides.  The  Individual  Guarantor  has full legal  right,  power and
authority  to enter into the  Guarantee  Pledge  Agreement  and to  perform  the
transactions  contemplated thereby. The Guarantee Pledge Agreement has been duly
authorized,  executed and delivered by the  Individual  Guarantor and is a valid
and binding  agreement on the part of the Individual  Guarantor,  enforceable in
accordance with its terms.

                           (iii)  The  performance  of each  of the  Transaction
Agreements  and  the  consummation  of  the   transactions   herein  or  therein
contemplated  will not result in a breach or  violation  of any of the terms and
provisions of, or constitute a default under, (i) any bond,  debenture,  note or
other  evidence  of  indebtedness,  or under  any  lease,  contract,  indenture,
mortgage,  deed of trust,  loan  agreement,  joint venture or other agreement or
instrument to which the Company or any Subsidiary thereof is a party or by which
its respective  properties or assets may be bound, (ii) the charter or bylaws of
the  Company  or  any  Subsidiary  thereof,  or  (iii)  any  law,  order,  rule,
regulation,  writ,  injunction,  judgment or decree of any court,  government or
governmental agency or body,  domestic or foreign,  having jurisdiction over the
Company or any Subsidiary  thereof or over its respective  properties or assets,
which  violation or default would have a Material  Adverse  Effect.  No consent,
approval,   authorization  or  order  of,  or  qualification  with,  any  court,
government  or  governmental  agency  or  body,  domestic  or  foreign,   having
jurisdiction  over the Company or any Subsidiary  thereof or over its respective
properties  or  assets  is  required  for  the  execution  and  delivery  of any
Transaction  Agreement and the  consummation by the Company of the  transactions
herein and therein contemplated.

                  (e) There is not any pending or, to the best of the  Company's
knowledge,  threatened, action, suit, claim or proceeding against the Company or
any  Subsidiary  thereof,  or  any  of  its  respective  officers  or any of its
properties,  assets or  rights,  before any court,  government  or  governmental
agency or body, domestic or foreign, having jurisdiction over the Company or any
Subsidiary  thereof or over its officers or properties or otherwise  that (i) is
reasonably  likely to result in any Material Adverse Effect,  (ii) might prevent
consummation of the  transactions  contemplated  by the Transaction  Agreements,
(iii) will be required to be disclosed in the SEC Documents to be filed,  except
to the  extent  heretofore  disclosed  in the SEC  Documents,  or (iv)  alleging
violation of any Federal or state securities laws.

                                       -7-
<PAGE>

                  (f) The  authorized  capital stock of the Company  consists of
150,000,000  shares  of  Common  Stock,  par value  $.001  per  share,  of which
57,915,000 shares of Common Stock are outstanding. All outstanding capital stock
of each Subsidiary  thereof is owned  beneficially and of record by the Company.
Each of such outstanding  shares of Common Stock and each  outstanding  share of
capital  stock  of each  Subsidiary  thereof,  is duly and  validly  authorized,
validly issued,  fully paid, and  nonassessable,  has not been issued and is not
owned or held in violation of any  preemptive or similar right of  stockholders.
Each share of Common  Stock  issuable  upon  exercise of the Warrant is duly and
validly authorized,  and when issued against payment therefor in accordance with
the terms of the Warrant, will be validly issued, fully paid, and nonassessable,
will  not  been  issued  and  will  not be  owned  or held in  violation  of any
preemptive  or similar  right of  stockholders.  Except as  disclosed in the SEC
Documents  and except for the  Warrant,  (i) there is no  commitment,  plan,  or
arrangement to issue, and no outstanding option, warrant, or other right calling
for the  issuance  of, any share of capital  stock of, or any  security or other
instrument  convertible into, exercisable for, or exchangeable for capital stock
of, the Company or any Subsidiary  thereof,  and (ii) except as described in the
SEC Documents,  there is outstanding no security or other instrument convertible
into or exchangeable for capital stock of the Company or any Subsidiary thereof.
The description of the Company's stock option, stock bonus and other stock plans
or  arrangements,  and  the  options  or  other  rights  granted  and  exercised
thereunder,  set forth in the SEC Documents  accurately and fairly  presents the
information  required  to be shown  with  respect to such  plans,  arrangements,
options and rights under the Securities Act, the Exchange Act, and the rules and
regulations promulgated thereunder.

                  (g) e-Fang  Accountancy  Corp., & CPA (the "AUDITORS"),  which
has examined the consolidated financial statements of the Company, together with
the related  schedules  and notes,  for the year ended and at December 31, 2005,
filed with the SEC as a part of the SEC Documents,  are independent  accountants
within the meaning of the  Securities  Act, the Exchange  Act, and the rules and
regulations   promulgated   thereunder;   the  audited  consolidated   financial
statements of the Company,  together with the related  schedules and notes,  and
the unaudited financial information,  forming part of the SEC Documents,  fairly
present the consolidated financial position and the results of operations of the
Company and its  Subsidiaries  at the  respective  dates and for the  respective
periods to which they apply; and all audited  consolidated  financial statements
of the Company, together with the related schedules and notes, and the unaudited
consolidated  financial  information,  filed  with  the  SEC as  part of the SEC
Documents,  complied  as to  form  in  all  material  respects  with  applicable
accounting  requirements  and with the  rules  and  regulations  of the SEC with
respect  hereto when filed,  have been  prepared in  accordance  with  generally
accepted  accounting  principles  consistently  applied  throughout  the periods
involved  except as may be otherwise  stated therein (except as may be indicated
in the  notes  thereto  or as  permitted  by the rules  and  regulations  of the
Commission)  and  fairly   present,   subject  in  the  case  of  the  unaudited
consolidated financial statements, to customary year end audit adjustments,  the
financial position of the Company as at the dates thereof and the results of its
operations and cash flows. The procedures  pursuant to which the  aforementioned
consolidated financial statements have been audited are compliant with generally
accepted auditing standards. The selected and summary consolidated financial and
statistical  data included in the SEC Documents  present fairly the  information
shown  therein  and have been  compiled on a basis  consistent  with the audited
consolidated financial statements presented therein. No other

                                       -8-
<PAGE>

financial  statements  or  schedules  are  required  to be  included  in the SEC
Documents. The financial statements referred to in this Section 3(g) contain all
certifications  and  statements  required the SEC's Order,  dated June 27, 2002,
pursuant to Section  21(a)(1) of the Exchange Act (File No. 4-460),  Rule 13a-14
or 15d-14 under the Exchange  Act, or 18 U.S.C.  Section 1350  (Sections 302 and
906 of the  Sarbanes-Oxley  Act of 2002) with  respect  to the  report  relating
thereto. Since December 31, 2005,

                           (i)  There  has at no time  been a  Material  Adverse
Effect;

                           (ii) The Company has not authorized,  declared, paid,
or effected any dividend or liquidating or other  distribution in respect of its
capital  stock  or  any  direct  or  indirect  redemption,  purchase,  or  other
acquisition of any stock of the Company or any of its Subsidiaries.

                           (iii) Except as set forth in the SEC  Documents,  the
operations and businesses of the Company and each  Subsidiary  thereof have been
conducted in all respects only in the ordinary course.

There is no fact known to the Company which in the future (as far as the Company
can  reasonably  foresee)  may  cause a  Material  Adversely  Effect;  provided,
however,  that the  Company  expresses  no opinion as to  political  or economic
matters of general  applicability.  The Company has made known,  or caused to be
made known,  to the  accountants  or auditors who have  prepared,  reviewed,  or
audited the aforementioned  consolidated financial statements all material facts
and circumstances which could affect the preparation, presentation, accuracy, or
completeness thereof.

                  (h) Subsequent to the respective dates as of which information
is given in the SEC  Documents,  there  has not  been (i) any  Material  Adverse
Effect, (ii) any transaction committed to or consummated that is material to the
Company and the  Subsidiaries  thereof taken as a whole,  (iii) any  obligation,
direct or  contingent,  that is material  to the  Company  and the  Subsidiaries
thereof  taken as a whole  incurred  by the Company or any  Subsidiary  thereof,
except  such  obligations  as have  been  incurred  in the  ordinary  course  of
business,  (iv) any change in the capital stock or outstanding  indebtedness  of
the Company or any  Subsidiary  thereof  that is material to the Company and the
Subsidiaries  thereof taken as whole,  (v) any dividend or  distribution  of any
kind  declared,  paid, or made on the capital stock of the Company,  or (vi) any
loss or damage  (whether or not  insured) to the  property of the Company or any
Subsidiary thereof which is causing or shall cause a Material Adverse Effect.

                  (i) Except as set forth in the SEC Documents,  (i) the Company
and each Subsidiary  thereof has good and marketable title to all properties and
assets  described  in the SEC  Documents  as owned by it,  free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest, other
than such as would not have a Material  Adverse  Effect,  (ii) the agreements to
which the  Company or any  Subsidiary  thereof is a party  described  in the SEC
Documents are legal, valid and binding agreements, enforceable by the Company or
such Subsidiary thereof, as applicable,  in accordance with their terms, and, to
the best of the  Company's  knowledge,  the other  contracting  party or parties
thereto are not in breach or default under any of such agreements, and (iii) the
Company and each Subsidiary thereof has valid and

                                       -9-
<PAGE>

enforceable  leases for all properties  described in the SEC Documents as leased
by it. Except as set forth in the SEC Documents, the Company and each Subsidiary
thereof owns or leases all such  properties as are  necessary to its  respective
operations as now conducted and as described in the SEC Documents.

                  (j) The Company and each  Subsidiary  thereof has timely filed
all  respective  United  States  federal,  state,  local and foreign tax returns
required to be filed by it and has paid all taxes shown thereon as due or as due
pursuant to valid  extensions,  and there is no tax deficiency that has been or,
to the best of the  Company's  knowledge,  is likely to be asserted  against the
Company  or any  Subsidiary  thereof  if  audited,  which  might have a Material
Adverse Effect, and all tax liabilities are adequately provided for on the books
of the Company and the Subsidiaries thereof.

                  (k)  The  Company  and  each  Subsidiary   thereof   maintains
insurance with insurers of recognized financial  responsibility of the types and
in the amounts  generally  deemed adequate for its business  including,  but not
limited to, insurance covering real and personal property owned or leased by the
Company or such  Subsidiary  thereof,  as  applicable,  against  theft,  damage,
destruction, acts of vandalism, and all other risks customarily insured against,
all of which insurance is in full force and effect;  neither the Company nor any
Subsidiary  thereof has been refused any  insurance  coverage  sought or applied
for;  and neither the Company nor any  Subsidiary  thereof has reason to believe
that it will not be able to renew its  existing  insurance  coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be  necessary to continue its business at a cost that would not cause a Material
Adversely Effect.

                  (l) No labor  disturbance  by the  employees of the Company or
any  Subsidiary  thereof exists or, to the best of the Company's  knowledge,  is
imminent. The Company is not aware of any existing or imminent labor disturbance
by the employees of any  principal  suppliers or customers of the Company or any
Subsidiary  thereof  that  might be  expected  to result in a  Material  Adverse
Effect.  Except as  disclosed in the SEC  Documents,  no  collective  bargaining
agreement exists with any of the Company's or any of its Subsidiary's  employees
and, to the best of the Company's knowledge, no such agreement is imminent.

                  (m) The Company and each Subsidiary  thereof owns or possesses
adequate rights to use all patents,  patent rights,  inventions,  trade secrets,
know-how,   trademarks,  service  marks,  trade  names,  logos,  and  copyrights
described or referred to in the SEC  Documents as owned by or used by it or that
are  necessary  to conduct its  respective  businesses  as  described in the SEC
Documents;  neither the  Company nor any  Subsidiary  thereof has  received  any
notice of, or has  knowledge of, any  infringement  of or conflict with asserted
rights of the Company or any  Subsidiary  thereof by others with  respect to any
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks,  trade names,  logos,  or copyrights  described or referred to in the SEC
Documents as owned by or used by it; and neither the Company nor any  Subsidiary
thereof has received any notice of, or has knowledge of, any infringement of, or
conflict  with,  asserted  rights of others with respect to any patents,  patent
rights, inventions,  trade secrets, know-how,  trademarks,  service marks, trade
names, logos, or copyrights described or referred to

                                      -10-
<PAGE>

in the SEC Documents as owned by or used by it or which,  individually or in the
aggregate,  in the event of an unfavorable  decision,  ruling or finding,  would
have a Material Adverse Effect.

                  (n) The Company has been  advised  concerning  the  Investment
Company Act of 1940, as amended (the  "INVESTMENT  COMPANY ACT"),  and the rules
and regulations  thereunder,  and has in the past conducted,  and intends in the
future,  to conduct its affairs in such a manner as to ensure that it is not and
will  not  become  an  "investment  company"  or a  company  "controlled"  by an
"investment  company" within the meaning of the Investment  Company Act and such
rules and regulations.

                  (o) Neither the Company nor any Subsidiary thereof has, and no
person or entity acting on behalf or at the request of the Company or Subsidiary
thereof  has,  at any time  during  the last five  years  (i) made any  unlawful
contribution to any candidate for foreign office or failed to disclose fully any
contribution  in  violation  of law,  or (ii) made any payment to any federal or
state  governmental  officer or official,  or other person  charged with similar
public or quasi-public  duties, other than payments required or permitted by the
laws of the United States or any other applicable jurisdiction.

                  (p) Except as set forth in the SEC Documents,  (i) the Company
and each Subsidiary  thereof is in compliance in all material  respects with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment  ("ENVIRONMENTAL
LAWS") that are  applicable  to its  business,  (ii) neither the Company nor any
Subsidiary thereof has received notice from any governmental  authority or third
party of an asserted claim under  Environmental Laws, which claim is required to
be disclosed in the SEC  Documents,  (iii) to the best knowledge of the Company,
neither the Company nor any Subsidiary  thereof is likely to be required to make
future material capital  expenditures to comply with  Environmental Laws (iv) no
property  which is owned,  leased or occupied  by the Company or any  Subsidiary
thereof has been  designated as a Superfund  site pursuant to the  Comprehensive
Response,  Compensation,  and Liability  Act of 1980, as amended (42 U.S.C.  ss.
9601, ET SEQ.), or otherwise  designated as a contaminated site under applicable
state or local law, and (v) neither the Company nor any Subsidiary thereof is in
violation  of any federal or state law or  regulation  relating to  occupational
safety or health.

                  (q) The books, records and accounts of each of the Company and
each Subsidiary thereof accurately and fairly reflect, in reasonable detail, the
transactions  in,  and  dispositions  of,  the  assets  of,  and the  results of
operations of, the Company and each Subsidiary  thereof,  as applicable,  all to
the extent required by generally  accepted  accounting  principles in the United
States.  The Company and each Subsidiary  thereof maintains a system of internal
accounting  controls  sufficient  to  provide  reasonable  assurances  that  (i)
transactions  are executed in accordance with  management's  general or specific
authorizations,   (ii)   transactions   are  recorded  as  necessary  to  permit
preparation  of financial  statements  in  accordance  with  generally  accepted
accounting  principles  and to maintain  asset  accountability,  (iii) access to
assets is permitted  only in accordance  with  management's  general or specific
authorization and (iv) the recorded  accountability  for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

                                      -11-
<PAGE>

                  (r) There are no outstanding  loans,  advances  (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company or any Subsidiary  thereof to, or for the benefit
of, any of the officers,  directors,  or director-nominees of the Company or any
Subsidiary  thereof or any of the members of the families of any of them, except
as disclosed in the SEC Documents.

                  (s)  Neither  the  Company  nor  any  Subsidiary  thereof  has
incurred  any  liability,  direct or  indirect,  for finders' or similar fees on
behalf  of or  payable  by the  Company  or any  Subsidiary  or  the  Holder  in
connection with the Transaction  Agreements or any other  transaction  involving
the Company and the Holder.

                  (t) Neither the Company or any Subsidiary thereof, nor, to the
best knowledge of the Company, any director,  officer, agent, employee, or other
person  associated  with, or acting on behalf of, the Company or any  Subsidiary
thereof,  has,  directly or  indirectly:  used any corporate  funds for unlawful
contributions,  gifts,  entertainment,  or other unlawful  expenses  relating to
political activity;  made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic  political parties or campaigns
from corporate  funds;  violated any provision of the Foreign Corrupt  Practices
Act of 1977, as amended; or made any bribe, rebate,  payoff,  influence payment,
kickback,  or other unlawful payment. The Company's internal accounting controls
and procedures are sufficient to cause the Company and the Subsidiaries  thereof
to comply in all respects  with the Foreign  Corrupt  Practices  Act of 1977, as
amended.

                  (u) Except as  disclosed  in the SEC  Documents,  no director,
officer,  shareholder or employee of the Company or any  Subsidiary  thereof has
any interest,  whether as an employee,  officer, director,  shareholder,  agent,
independent  contractor,  security holder,  creditor,  consultant,  or otherwise
(other than as less than 1% shareholder of a publicly  traded  company),  either
directly  or  indirectly,  in any person  (whether a  corporation,  partnership,
limited partnership,  limited liability company,  limited liability partnership,
business trust, sole  proprietorship,  or otherwise) that presently (i) provides
any services or designs, produces and/or sells any products or product lines, or
engages in any activity which is the same,  similar to or  competitive  with any
activity  or  business  in which the  Company or any  Subsidiary  thereof is now
engaged;  (ii) is a supplier of,  customer  of,  creditor of, or has an existing
contractual  relationship with the Company or any Subsidiary  thereof;  or (iii)
has any direct or indirect interest in any asset or property used by the Company
or any  Subsidiary  thereof  or any  property,  real or  personal,  tangible  or
intangible,  that is necessary  or desirable  for the conduct of the business of
the  Company  or the  Subsidiaries  thereof.  Except  as  disclosed  in the  SEC
Documents,  no current or former stockholder,  director,  officer or employee of
any member of the Company or any Subsidiary thereof or any affiliate thereof, is
at  present,  or since  the  inception  of the  Company  has been,  directly  or
indirectly  through  his  affiliation  with  any  other  person,  a party to any
transaction  (other  than as an  employee)  with the  Company or any  Subsidiary
thereof  providing  for the  furnishing  of  services  by,  or rental of real or
personal property from, or otherwise requiring cash payments to any such person.

                  (v)  (i)  The  Company  and  each  Subsidiary  thereof  is  in
compliance with, and is not in violation of, applicable federal, state, local or
foreign statutes, laws and regulations

                                      -12-
<PAGE>

(including without  limitation,  any applicable  building,  zoning or other law,
ordinance  or  regulation)  affecting  its  properties  or the  operation of its
business.  Neither  the  Company  nor any  Subsidiary  thereof is subject to any
order, decree, judgment or other sanction of any court, administrative agency or
other tribunal.

                           (ii)  Each  of the  Company,  its  directors  and its
senior financial officers has consulted with the Company's  independent auditors
and with the  Company's  outside  counsel  with  respect  to, and (to the extent
applicable to the Company) is familiar in all material  respects with all of the
requirements of,  Sarbanes-Oxley  Act of 2002. The Company is in compliance with
the  provisions  of such  act  applicable  to it as of the date  hereof  and has
implemented such programs and has taken reasonable steps, upon the advice of the
Company's independent auditors and outside counsel,  respectively, to ensure the
Company's  future  compliance  (not  later  than  the  relevant   statutory  and
regulatory  deadlines  therefore)  with all  provisions  of such act which shall
become applicable thereto after the date hereof.

                  (w) Neither this Note,  the  schedules  hereto,  and the other
Transaction  Documents nor any other document delivered by the Company to Holder
or their  attorneys  or agents in  connection  herewith or therewith or with the
transactions  contemplated hereby or thereby, contains any untrue statement of a
material fact or omits to state a material  fact  necessary in order to make the
statements contained herein or therein not misleading.

         4.       COVENANTS OF THE COMPANY.

                  (a) AFFIRMATIVE  COVENANTS.  The Company  covenants and agrees
with the Holder as follows:

                           (i)   Preserve  and  maintain   its  existence  as  a
corporation and in good standing in the jurisdiction of its  incorporation,  and
qualify and remain qualified as a corporation in each jurisdiction in which such
qualification is required.

                           (ii) Maintain, keep and preserve adequate records and
books of account,  in which  complete  entries will be made in  accordance  with
generally accepted accounting principles (with a reconciliation to United States
generally accepted accounting principles)  consistently applied,  reflecting all
financial transactions of the Company.

                           (iii)  Maintain  keep  and  preserve  all  Collateral
(tangible  and  intangible)  necessary  or useful in the  proper  conduct of its
business in good working order and condition, ordinary wear and tear excepted.

                           (iv)  Maintain, keep  and  preserve  with respect  to
the Collateral  accurate records that are as complete and comprehensive as those
customarily maintained by others engaged in the same business and make available
to the Holder or its representatives, including the Agent, at the Company's sole
cost and expense, on the Agent's reasonable advance request, all books, records,
contracts,  notes and all other  information  and data of every kind relating to
its business and the  collateral.  The Agent shall have the right to examine all
such books,  records,  contracts  and other  information  and to make  abstracts
therefrom  or copies  thereof at any time and from time to time upon  reasonable
advance notice to the Company. At any time or times

                                      -13-
<PAGE>

that the Agent may  reasonably  request in advance,  the Agent will, at its cost
and expense,  prepare a list or lists in such form as shall be  satisfactory  to
the Agent,  certified by duly authorized officers,  describing the Collateral in
such  detail as the Agent  shall  require and  specifying  the  location of such
Collateral and the records pertaining  thereto,  and permit the Agent to inspect
such  Collateral or any part thereof at the  Company's  cost and expense at such
place as the Collateral may be held or located or at such other reasonable place
chosen by the Agent.

                           (v)   Continue  to  conduct  in  an   efficient   and
economical  manner a  business  of the same  general  type as  conducted  by the
Company on the date of this Note.

                           (vi)  (A) At its  sole  cost  and  expense,  maintain
insurance  against  loss  or  damage  to the  Collateral  with  responsible  and
reputable insurance companies or associations  satisfactory to the Agent in such
amounts  and  covering  such  risks,   including,   without  limitation,   fire,
comprehensive and general and automobile  liability,  property damage,  workers'
compensation,  and miscellaneous  equipment floaters,  and for such terms as are
usually carried by corporations engaged in similar businesses.

                                    (B) Cause all insurance  policies  issued or
maintained  pursuant to this Section and name the Company  and/or any Subsidiary
thereof as insured and the Holder and the Agent, as agent to the Holder, as loss
payee  without the Holder or the Agent being  liable for premiums or other costs
or expenses; and

                                    (C)  At  least  thirty  days  prior  to  the
expiration of each such policy,  furnish the Agent with evidence satisfactory to
the Agent of the payment of premiums and the  reissuance of a policy  continuing
insurance  in  force  as  required  by this  Agreement.  All  such  policies  or
certificates shall contain a provision that such policies will not be subject to
cancellation or material amendment,  including without limitation, any amendment
reducing  the scope of limits of  coverage,  without at least  thirty days prior
written  notice by certified or registered  mail to the Agent.  In the event the
Company fails to provide,  maintain, keep in force or deliver and furnish to the
Agent the policies of  insurance  required by this  Section,  the Agent may, but
shall not be obligated to, procure such insurance or single  interest  insurance
for such risks  covering  the  Holder's  interest,  and the Company will pay all
premiums thereon promptly upon demand by the Holder or the Agent,  together with
interest  hereon from the date of  expenditure  by the Holder or the Agent until
reimbursement in full by the Company; and

                                    (D)  Attach or cause to be  attached  to all
insurance  policies  required to be furnished  by the Company or any  Subsidiary
pursuant to this Section, a lender's loss payable endorsement or its equivalent,
or a loss payable clause acceptable to the Agent, for the benefit of the Holder;
and

                                    (E) Observe and comply with the requirements
of all material  policies of insurance  required to be  maintained in accordance
with  this  Note and  perform  and  satisfy  the  material  requirements  of the
companies  writing such policies so that at all times companies of good standing
satisfactory  to the  Agent  shall be  willing  to write  and to  continue  such
insurance; and

                                      -14-
<PAGE>

                                    (F) Upon  request by the Agent,  furnish the
Agent with a  certificate  of an officer of the  Company,  containing a detailed
list of the insurance  policies of the Company or any Subsidiary  required by or
referred to in this Section, then outstanding and in force.

                           (vii)  Comply  in all  respects  with all  applicable
laws,  rules,  regulations and orders,  including,  without  limitation,  paying
before the same  become  delinquent  all taxes,  assessments,  and  governmental
charges imposed upon it or upon its property unless such taxes,  assessments and
governmental  charges are being  diligently  contested,  in good  faith,  by the
Company.

                           (viii) At its sole cost and expense,  upon request by
the Agent and in any event at least once in three  months,  permit the Holder or
any agent or representative thereof,  including,  without limitation, the Agent,
to examine, audit and make copies of and abstracts from the records and books of
account of, and  inspect the  Collateral  and  properties  of the Company and to
discuss the affairs,  finances and accounts of the Company and the  Subsidiaries
thereof with any of its officer, directors and independent accountants.  For the
purpose of this Section,  cost and expense include  reasonable  travel and hotel
expenses,  allowance paid to the inspecting  officer of the Agent and such other
expenses that are reasonably and customarily charged by Agent.

                           (ix) (A) As soon as available and in any event within
ninety (90) days after the close of each fiscal year of the Company,  the annual
report  of the  Company  under  the  Exchange  Act,  together  with the  audited
financial  statements required to be included therein,  all in reasonable detail
and stating in comparative form the respective consolidated and/or consolidating
figures for the  corresponding  date and period in the prior fiscal year and all
audited in accordance with generally accepted  accounting  principles  (together
with a reconciliation to generally accepted accounting  principles in the United
States) consistently applied by independent certified public accountant selected
by the Company and acceptable to the Agent; and

                                    (B) As soon as  available  and in any  event
within  forty-five  (45)  days  after the close of each  fiscal  quarter  of the
Company,  the quarterly  report of the Company under the Exchange Act,  together
with the unaudited financial  statements required to be included therein, all in
reasonable  detail and stating in comparative  form the respective  consolidated
and/or consolidating  figures for the corresponding date and period in the prior
fiscal year and in accordance  with  generally  accepted  accounting  principles
(together with a reconciliation to generally accepted  accounting  principles in
the  United  States)  consistently  applied  by  independent   certified  public
accountant selected by the Company and acceptable to the Agent

                           (x)  Promptly  upon  receipt  thereof,  copies of any
reports submitted to the Company by independent  certified public accountants in
connection with  examination of the financial  statements of the Company made by
such accountants.

                           (xi)  Simultaneously  with the delivery of the annual
financial  statements  referred  to  in  this  Section,  a  certificate  of  the
independent  public accountants that audited such statements to the effect that,
in making the examination necessary for the audit of such

                                      -15-
<PAGE>

statements,  they have  obtained no  knowledge  of any  condition  or event that
constitutes  an Event of Default,  or if such  accountants  shall have  obtained
knowledge of any such  condition  or event,  specifying  each such  condition or
event of which they have knowledge and the nature and status thereof.

                           (xii)  Promptly  after the  commencement  thereof  or
notice of all actions,  suits and proceedings  before any courts or governmental
department,  commission,  board, bureau, agency or instrumentality,  domestic or
foreign, affecting the Company or any Subsidiary,  could have a Material Adverse
Effect.

                           (xiii) As soon as  possible  and in any event  within
fifteen (15) days after the occurrence of each Event of Default a written notice
setting  forth the  details  of such Event of  Default  and the action  which is
proposed to be taken by the Company with respect thereto.

                           (xiv) Promptly after the furnishing  thereof,  copies
of any  statements or report  furnished to any other party pursuant to the terms
of any indenture, loan, credit or similar agreement not otherwise required to be
furnished to the agent pursuant to any other clause of this Section.

                           (xv) Promptly after sending or filing thereof, copies
of all proxy  statements,  financial  statements  and reports  that the Borrower
sends to its  stockholders  or members and copies of all  regular,  periodic and
special  reports and  registration  statements the Company filed with the SEC or
any governmental authority that may be substituted therefor or with any national
securities exchange.

                           (xvi)  (A)  Within  forty-five  (45)  from the end of
every fiscal quarter of the Company,  submit to the Agent a quarterly  statement
of accounts  receivable  for the quarter then ended duly  certified by the chief
financial  officer of Company  with  details  of aging.  Failure to provide  the
quarterly  statement as aforesaid  shall make the Company liable for interest at
the Default Rate in the sole discretion of the Agent.

                                    (B)  Within   fifteen  (15)  days  from  the
beginning of the month, submit a statement of accounts receivable as of the last
day of the preceding month.

                           (xvii)  Without  the  prior  written  consent  of the
Holder,  the proceeds of this Note shall be used solely for the  following:  (i)
capital expenditures;  (ii) working capital and general corporate purposes;  and
(iii) fees and expenses related to the loan evidenced by this Note.

                           (xviii)  Simultaneous  with the  funding  of the loan
evidenced by this Note,  the Company  shall issue and deliver the Warrant to SBI
Advisors, LLC.

                           (xix)  Simultaneous  with  the  funding  of the  loan
evidenced  by this Note,  the Company  shall pay to the Agent an amount equal to
5.0% of the  Principal as a fee for services in connection  herewith.  The Agent
shall be entitled to deduct such fee from the proceeds of such loan delivered to
the Company.

                                      -16-
<PAGE>

                           (xx) The Company shall be responsible for the payment
of pay for all of the Holder's reasonably incurred costs and expenses associated
with the negotiation and  preparation of the Transaction  Documents,  including,
but not limited to, costs and expenses  incurred by the Holder's  examiners  and
appraisers  (including  agents for the Holder),  the Holder's  reasonable  legal
expenses, and any filing and search fees.

                  (b)      NEGATIVE COVENANTS.  The Company covenants and agrees
with the Holder that it shall not:

                           (i) Create, incur, assume or suffer to exist any Lien
upon or with respect to any of its properties,  now owned or hereafter acquired,
except:

                                    (A) Liens in favor of the Holder or Agent;

                                    (B) Liens for taxes or  assessments or other

government  charges or levies not yet due and  payable  or, if due and  payable,
contested  in good faith by  appropriate  proceeding  and for which  appropriate
reserves are maintained;

                                    (C) Liens, deposits or pledges to secure the
performances of bids,  tenders,  contracts (other than contracts for the payment
of  money),  leases  (permitted  under  the  terms of this  Note) or  public  or
statutory  obligations;  surety, stay, appeal,  indemnity,  performance or other
similar bonds;  or other similar  obligations  arising in the ordinary course of
business;

                                    (D)  Purchase-money  liens  on any  property
hereafter  acquired or the  assumption  of any lien on property  existing at the
time of such acquisition,  or a lien incurred in connection with any conditional
sale or other title retention  agreement or a capital lease;  provided that: (1)
any property  subject to any of the  foregoing is acquired by the Company in the
ordinary  course  of  business  and the lien on any  such  property  is  created
contemporaneously  with,  or prior  to,  such  acquisition;  (2) the  obligation
secured by any Lien so  created,  assumed  or  existing  shall not exceed  fifty
percent  (50%)  of the  lesser  of cost or fair  market  value as of the time of
acquisition  of the property  covered  thereby to the Company,  except for liens
existing before the date of this Agreement; (3) each such lien shall attach only
to the property so acquired and fixed improvements thereon; (4) the debt secured
by all such liens  shall not exceed  US$50,000  at any time  outstanding  in the
aggregate  except  for debt  existing  prior to the date of this  Note and Liens
pursuant to this Note; and (5) the obligation  secured by such lien is permitted
by the provisions of the Section 4(b)(ii).

                           (ii)  Create,  incur,  assume  or suffer to exist any
debt, except: (A) debt of the Company under this Note;

                                    (B)  debt of the  Company  owed  to  lenders
other than the Holder and subordinated on terms satisfactory to the Agent to the
Company's obligations under this Note;

                                      -17-
<PAGE>

                                    (C) accounts  payable to trade creditors for
goods or services  that are not aged more than one hundred and eighty (180) days
from billing  date and current  operating  liabilities  (other than for borrowed
money)  which are not more than sixty (60) days past due, in each case  incurred
in the ordinary  course of business and paid within the specified  time,  unless
contested in good faith and by appropriate proceedings;

                                    (D) debt of the  Company  owed to lenders or
banks other than the Holder and secured by  purchase-money  liens  permitted  by
Section 3(b)(i)(D).

                           (iii) Merge or  consolidate  with,  or sell,  assign,
lease or  otherwise  dispose of  (whether in one  transaction  or in a series of
transactions),  all or  substantially  all of its assets  (whether  now owned or
hereafter  acquired)  to any Person or acquire all or  substantially  all of the
assets or the business of any Person.

                           (iv) Create,  incur, assume or suffer to exist, other
than in the ordinary course of business, any obligation as lessee for the rental
or hire of any real or personal  property,  except: (A) capital leases permitted
by Section  3(b)(i);  and (B) leases  existing  on the date of this Note and any
extensions or renewals thereof.

                           (v) Sell,  transfer or otherwise  dispose of any real
or personal  property to any person and thereafter  directly or indirectly lease
back the same or similar property.

                           (vi)  Declare or pay  dividends  or  profits  without
prior written consent of the Holder.

                           (vii) Without the Holder's prior  consent,  not to be
unreasonably withheld, sell, lease, assign, transfer or otherwise dispose of any
of its now owned or hereafter  acquired assets (including,  without  limitation,
receivables and leasehold  interest),  except:  (a) for inventory disposed of in
the ordinary course of business and (b) the sale or other  disposition of assets
no longer used or useful in the conduct of its business.

                           (viii) Without the Holder's prior consent,  not to be
unreasonably  withheld,  make any loan or advance to any Person or  purchase  or
otherwise acquire any capital stock, assets, obligations or other securities of,
make any capital  contribution to or otherwise invest in or acquire any interest
in any Person, except stock, obligations or securities received in settlement of
debts owing to the Company and created in the ordinary course of business.

                           (ix) Without the Holder's  prior  consent,  not to be
unreasonably  withheld,  assume,  guarantee,  endorse or  otherwise be or become
directly or contingently  responsible or liable (including,  but not limited to,
an agreement to purchase any  obligation,  stock,  assets,  goods or services to
supply or advance any funds, assets, goods or services to maintain or cause such
Person to maintain a minimum working capital or net worth or otherwise to assure
the creditors of any person against loss) for obligations of any Person,  except
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.

                                      -18-
<PAGE>

                   (x)  Without  the   Holder's   prior   consent,   not  to  be
unreasonably  withheld,  enter into any  transaction  with any  Affiliate of the
Company,  including,  without  limitation,  the  purchase,  sale or  exchange of
property or the rendering of any services,  except in the ordinary course of and
pursuant to the reasonable  requirements of the Company's business and upon fair
and  reasonable  terms no less  favorable  to the Company than would obtain in a
comparable  arm's-length  transaction  with a Person that is not an Affiliate of
the Company.

                           (xi) Permit or suffer to permit any Material  Adverse
Effect.

                           (xii)  Permit to effect any  change in the  corporate
structure  or  shareholding  of the Company  which  would  cause a cessation  or
diminution  of the priority of the security  interest of the Holder  pursuant to
the Transaction Documents.

                           (xiii)   Change  the  name  of  the  Company  or  any
Subsidiary or the nature of the respective business thereof.

                           (xiv)  Directly or indirectly  (i) purchase,  redeem,
retire  or  otherwise  acquire  for  value  any of its  capital  stock  or other
securities now or hereafter outstanding, return any capital to its stockholders,
or distribute any of its assets to its  stockholders or (ii) make any payment or
declare any dividend on any of its capital stock or other securities,  in either
case, without the prior written consent of the Holder.

                  (c)      FINANCIAL COVENANTS.

                           (i) The  Company  shall not  permit the excess of the
total  consolidated  current  assets of the Company over the total  consolidated
current  liabilities of the Company to be less than  US$500,000,  without giving
effect to the loans evidenced by this Note.

                           (ii) The Company shall not permit  aggregate  capital
expenditures  during the period commencing on the date hereof and terminating on
the Maturity Date to exceed $3 million.

         5.       REPRESENTATIONS,  WARRANTIES  AND COVENANTS OF HOLDER.  Holder
hereby represents and warrants to the Company as follows:

                  (a) ORGANIZATION, GOOD STANDING AND QUALIFICATION.  (a) Holder
is a limited  liability  company duly  organized,  validly  existing and in good
standing under the laws of its state of formation,  with all necessary power and
authority to execute and deliver this the Transaction Documents,  to perform its
obligations hereunder, and to consummate the transactions contemplated hereby.

                  (b)  AUTHORIZATION OF AGREEMENT.  The execution,  delivery and
performance of this Agreement has been duly and validly  authorized by the Board
of Directors and  stockholders of Holder,  as required;  and Holder has the full
legal  right,  power and  authority  to  execute  and  deliver  this Note and to
consummate  the  transactions   contemplated   hereby.   No  further   corporate
authorization  is necessary on the part of Holder to consummate the transactions
contemplated hereby.

                                      -19-
<PAGE>

                  (c) DUE  DILIGENCE  BY HOLDER.  Holder (i) has had  reasonable
access  to the  Company's  consolidated  financial  information,  the  books and
records  available  at the  Company's  offices or as  provided by the Company in
response to specific requests of Holder and (ii) the Company permitted Holder to
make such reasonable inspections thereof as requested.

                  (d)  RESTRICTED   SECURITIES.   Holder  understands  that  the
issuance of this Note will not be  registered  under the  Securities  Act or the
securities  laws of any State in  reliance  upon  exemptions  from  registration
contained in the Securities  Act and such laws, and the Company's  reliance upon
such  exemptions  is based  in part  upon the  representations,  warranties  and
agreements of Holder contained herein.

                  (e) INVESTMENT  INTENT.  Holder is acquiring this Note for its
owner account and not for  distribution or resale to others,  and agrees that it
will not sell or otherwise  transfer  this Note except  pursuant to an effective
registration  statement under the Securities Act and applicable state securities
laws, or exceptions available therefrom.

         6.       EVENTS  OF  DEFAULT.  If one or more of the  following  events
("EVENTS OF DEFAULT") shall have occurred and be continuing:

                  (a)  the  Company  shall  fail  to pay any  Principal  of,  or
Interest on, this Note, or any fees or any other amount payable hereunder within
five (5) days of the due date of such payment;

                  (b) the Company  shall fail to observe or perform any covenant
or agreement of this Note;

                  (c) any representation,  warranty,  certification or statement
made by the Company or any  Guarantor  in any  Transaction  Document,  or in any
document delivered pursuant to any Transaction Document shall prove to have been
incorrect in any material respect when made (or deemed made);

                  (d) a  judgment  or order for the  payment  of money  shall be
rendered  against the Company or any Subsidiary and such judgment or order shall
continue unsatisfied and unstayed for a period of ten (10) days;

                  (e) the Company or any  Guarantor  shall  commence a voluntary
case or other proceeding  seeking  liquidation,  reorganization  or other relief
with respect to itself or its debts under any  bankruptcy,  insolvency  or other
similar law now or hereafter in effect or seeking the  appointment of a trustee,
receiver,  liquidator,  custodian  or  other  similar  official  of  it  or  any
substantial part of its property,  or shall consent to any such relief or to the
appointment of or taking  possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the  benefit  of  creditors,  or shall fail  generally  to pay its debts as they
become  due,  or  shall  take  any  corporate  action  to  authorize  any of the
foregoing;

                  (f) an involuntary case or other proceeding shall be commenced
against the Company or any  Guarantor  seeking  liquidation,  reorganization  or
other relief with respect to it or

                                      -20-
<PAGE>

its debts under any bankruptcy, insolvency or other similar law now or hereafter
in effect  or  seeking  the  appointment  of a  trustee,  receiver,  liquidator,
custodian  or  other  similar  official  of it or any  substantial  part  of its
property, and such involuntary case or other proceeding shall remain undismissed
for a period of 60 days;  or an order for relief  shall be entered  against  the
Company or any Subsidiary,  as applicable,  under the federal bankruptcy laws as
now or hereafter in effect;

                  (g) the Security  Interest  shall,  for any reason (other than
the  Holder's  failure  to renew  the  filing  of any  Uniform  Commercial  Code
financing statement),  cease to be a first priority, perfected security interest
in and to any Collateral and such event is not remedied  within five (5) days of
such failure;

                  (h)  any  Guarantor  shall  fail to  observe  or  perform  any
covenant or agreement in the  Guarantee  Agreement or the  Individual  Guarantor
shall fail to observe or perform any  covenant  or  agreement  in the  Guarantee
Pledge Agreement;

                  (i) any representation,  warranty,  certification or statement
made  by any  Guarantor  in the  Guarantee  Agreement  or the  Guarantee  Pledge
Agreement,  or in any document  delivered pursuant to thereto or pursuant to any
Transaction  Document shall prove to have been incorrect in any material respect
when made (or deemed made);

                  (j) a  judgment  or order for the  payment  of money  shall be
rendered  against any the Company or any  Guarantor  and such  judgment or order
shall continue unsatisfied and unstayed for a period of ten (10) days;

                  (k) any  Guarantor  shall  commence a voluntary  case or other
proceeding seeking  liquidation,  reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter  in  effect  or  seeking  the  appointment  of  a  trustee,  receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property,  or shall consent to any such relief or to the  appointment  of or
taking  possession  by  any  such  official  in an  involuntary  case  or  other
proceeding  commenced  against  it, or shall make a general  assignment  for the
benefit of  creditors,  or shall fail  generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing; or

                  (l) an involuntary case or other proceeding shall be commenced
against any Guarantor seeking  liquidation,  reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the  appointment  of a trustee,  receiver,
liquidator, custodian or other similar official of it or any substantial part of
its  property,  and such  involuntary  case or  other  proceeding  shall  remain
undismissed  for a period of 60 days;  or an order for  relief  shall be entered
against any Guarantor,  as applicable,  under the federal bankruptcy laws as now
or hereafter in effect; or

                  (m) there shall have occurred any Change in Control;

then, and in every such event, the Holder may, by written notice to the Company,
declare the  Principal  (together  with accrued  Interest  thereon and all other
amounts  owing  hereunder)  to be,  and the  Principal  (together  with  accrued
Interest thereon and all other amounts owing hereunder)

                                      -21-
<PAGE>

shall thereupon become, immediately due and payable without presentment, demand,
protest  or other  notice of any kind,  all of which  are  hereby  waived by the
Company; PROVIDED, THAT in the case of any of the Events of Default specified in
clause (e),  (f),  (k),  or (l) above,  without any notice to the Company or any
other act by the Holder,  the Principal  (together with accrued Interest thereon
and all other amounts owing hereunder) shall become  immediately due and payable
without presentment,  demand,  protest or other notice of any kind, all of which
are hereby waived by the Company.

         7.       PAYMENTS; EXTENSION OF MATURITY. Unless otherwise converted in
accordance  with the terms of this Note,  all payments of Principal and Interest
(and all other amounts owing  hereunder) to be made by the Company in respect of
this Note shall be made in Dollars by wire transfer to an account  designated by
the Holder by written notice to the Company. All amounts payable under this Note
shall be paid  free and clear of,  and  without  reduction  by  reason  of,  any
deduction,  setoff,  or  counterclaim.  If the  Principal and accrued and unpaid
Interest  become  due and  payable on any day other  than a  Business  Day,  the
Maturity Date shall be extended to the next succeeding Business Day, and to such
payable amounts shall be added the Interest which shall have accrued during such
extension period at the rate per annum herein specified.

         8.       REPLACEMENT  OF NOTE.  Upon receipt by the Company of evidence
satisfactory to it of the loss,  theft,  destruction or mutilation of this Note,
and (in case of loss, theft or destruction) of indemnity reasonably satisfactory
to it,  and  upon  reimbursement  to the  Company  of  all  reasonable  expenses
incidental  thereto,  and (if mutilated) upon surrender and cancellation of this
Note,  the Company shall make and deliver to the Holder a new note of like tenor
in lieu of this Note. Any replacement note made and delivered in accordance with
this Section 7 shall be dated as of the date hereof.

         9.       SECURITY INTEREST;  PLEDGE;  GUARANTEE.

                  (a) GRANT OF SECURITY INTEREST; PLEDGE.

                           (i) In order to secure the full and punctual  payment
of the Secured  Obligations in accordance with the terms thereof,  and to secure
the  performance  of  the  obligations  of the  Company  hereunder,  subject  to
paragraph  9(g)  hereof,  the Company  hereby  grants to the Holder a continuing
first  priority  security  interest  in and to all  of the  Collateral  and  all
Proceeds of all or any of the Collateral.

                           (ii)  Without  limiting  the  generality  of  Section
9(a)(i),  in  order to  secure  the full and  punctual  payment  of the  Secured
Obligations in accordance  with the terms thereof the Company hereby pledges and
grants to the Holder a first priority  security interest in and to the following
(the "PLEDGED COLLATERAL"):

                                    (A) all  shares  of  capital  stock  of each
Subsidiary owned of record or beneficially by the Company as of the date hereof,
which number of shares are set forth  opposite the name of such  corporation  in
SCHEDULE 2.01(A) hereto (the "PLEDGED SHARES");

                                      -22-
<PAGE>

                                    (B) all  additional  shares of capital stock
in each  Subsidiary  owned of  record  or  beneficially  by the  Company  or any
successor  in  interest  thereto  or any other  securities,  options,  or rights
received  by  the  Company  pursuant  to any  reclassification,  reorganization,
increase or reduction of capital, or stock dividend, attributable to the Pledged
Collateral,  or in  substitution  of, or in  exchange  for,  any of the  Pledged
Collateral;

                                    (C)  all   certificates   representing   the
securities referred to in clauses (A) and (B) above; and

                                    (D) all dividends,  cash,  instruments,  and
other property or proceeds, from time to time received,  receivable or otherwise
distributed in respect of, or in exchange for, any or all of the shares referred
to in clauses (A) and (B) above.

                           (iii) All certificates or instruments representing or
evidencing the Pledged  Collateral shall be delivered to, and held by, Agent and
shall be in suitable  form for transfer by delivery or shall be  accompanied  by
duly executed  instruments of transfer or assignment  undated and in blank, with
medallion  signature  guarantee,  all in form and substance  satisfactory to the
Agent in its sole  discretion.  If the Company shall not satisfy its obligations
under this Note, the Holder shall have the right, where permitted by law, in its
sole  discretion  and  without  notice to the  Company,  to  transfer  to, or to
register  in its name or in the name of any of its  nominees,  any or all of the
Pledged Collateral.

                  (b)      COVENANTS, REPRESENTATIONS AND  WARRANTIES  REGARDING
SECURITY INTEREST.

                           (i) The Company  hereby  represents and warrants that
(A) the Security  Interest  constitutes a valid security  interest under the UCC
securing the Secured  Obligations;  and (B) when UCC financing  statements shall
have been  filed in the  appropriate  UCC filing  office for a debtor  that is a
registered  organization in the State of North Carolina,  the Security  Interest
shall constitute a perfected  security interest in the Collateral,  prior to all
other Liens and rights of others  therein  and (C) the Company has valid  rights
in, and good and marketable title to, the Collateral.

                           (ii) The Company  will not change its name,  identity
or corporate structure in any manner unless it shall have given the Holder prior
notice thereof and delivered an opinion of Company legal counsel with respect to
the  continued  perfected  Security  Interest.  The Company  will not change the
location  of (i) its  jurisdiction  of  organization,  (ii) its chief  executive
office or principal place of business,  PROVIDED,  HOWEVER, that the Company may
change its chief executive office and/or principal  placement of business to any
location within ten (10) miles of its current location within the State of North
Carolina,  or (iii) the locations  where it keeps or holds any Collateral or any
records  relating  thereto  unless it shall have given the Holder  prior  notice
thereof  and  delivered  an  opinion of counsel  with  respect to the  continued
perfected  Security  Interest.  The  Company  shall not in any event  change the
location of any Collateral, change the jurisdiction of incorporation or transfer
any assets  (to a  subsidiary  or  otherwise)  if such  change  would  cause the
Security Interest in such Collateral to lapse or cease to be perfected.

                                      -23-
<PAGE>

                           (iii) The  Company  will,  from time to time,  at its
expense,   execute,   deliver,  file  and  record  any  statement,   assignment,
instrument,  document,  agreement  or other  paper  and take  any  other  action
(including,  without  limitation,  any  filings of  financings  or  continuation
statements  under the UCC or otherwise)  that from time to time may be necessary
or desirable,  or that the Holder may  reasonably  request,  in order to create,
preserve,  perfect,  confirm or validate the Security  Interest,  whether in the
United States, People's Republic of China, or otherwise, or to enable the Holder
to exercise or enforce any of its rights,  powers and  remedies  hereunder  with
respect to any of the Collateral. To the extent permitted by applicable law, the
Company hereby authorizes the Holder to execute and file financing statements or
continuation  statements without the Company's signature appearing thereon.  The
Company agrees that a carbon, photographic, photostatic or other reproduction of
this Note or of a financing statement is sufficient as a financing statement.

                  (c)  REMEDIES.  In  case of the  occurrence  of any  Event  of
Default  and at any time  thereafter  during  the  continuance  of such Event of
Default,  the Holder may exercise all rights of a secured party under applicable
law  (including,  without  limitation,  the UCC (whether or not in effect in the
jurisdiction where such rights are exercised)).  The Holder may be the purchaser
of any or all of the  Collateral  so sold at any public  sale.  The Company will
execute  and deliver  such  documents  and take such other  action as the Holder
deems  necessary  or  advisable  in  order  that  any  such  sale may be made in
compliance  with law.  Upon any such  sale the  Collateral  shall be  delivered,
assigned and transferred to the Holder.  At any such sale, the Holder shall hold
the  Collateral  absolutely  and  free  and  clear  from  any  claim or right of
whatsoever  kind,  including  any equity or right of  redemption  of the Company
which may be waived,  and the Company,  to the extent  permitted by law,  hereby
specifically waives all rights of redemption,  stay or appraisal which it has or
may have under any law now existing or hereafter adopted.

                  (d) POWER OF ATTORNEY. The Company hereby irrevocably appoints
the Holder its true and lawful attorney, with full power of substitution, in the
name of the  Company  for the sole use and  benefit  of the  Holder,  but at the
Company's expense,  to the extent permitted by law to exercise,  at any time and
from time to time while an Event of Default has occurred and is continuing,  all
or any of the following powers with respect to all or any of the Collateral: (i)
to demand, sue for, collect, receive and give acquittance for any and all monies
due or to become due thereon or by virtue thereof;  (ii) to settle,  compromise,
compound,  prosecute or defend any action or  proceeding  with respect  thereto;
(iii) to sell,  transfer,  assign or  otherwise  deal in or with the same or the
Proceeds or avails  thereof,  as fully and effectually as if the Holder were the
absolute  owner  thereof,  and (iv) to extend  the time of payment of any or all
thereof and to make any allowance and other adjustments with reference  thereto;
PROVIDED  THAT the Holder  shall give the  Company  not less than ten (10) days'
prior  written  notice  of the  time and  place  of any  sale or other  intended
disposition of any of the Collateral,  except any Collateral which is perishable
or threatens to decline  speedily in value or is of a type customarily sold on a
recognized market.  The Company agrees that such notice constitutes  "reasonable
notification" within the meaning of Section 9-610(b) of the UCC.

                  (e)  TERMINATION OF SECURITY  INTEREST.  Upon the repayment in
full of all Secured Obligations and the termination of any obligations under the
Note, the Security Interest

                                      -24-
<PAGE>

shall  terminate and all rights to the  Collateral  shall revert to the Company.
The Holder agrees that it will take all actions,  including  filing  termination
statements, evidencing the same.

                  (f)   EXCULPATION.   The  Holder   shall  have  no  duties  or
responsibilities  except those expressly set forth in the Transaction Documents,
and the Holder shall not by reason of the Transaction Documents be a trustee for
the Company or have any fiduciary obligation to the Company.  Neither the Holder
nor any of its  directors,  officers,  employees  or agents  (collectively,  the
"RELATED  PARTIES")  shall be  liable to the  Company  for any  action  taken or
omitted to be taken by it under the  Transaction  Documents,  except for its own
willful misconduct or gross negligence.

                  (g) RANKING AND SUBORDINATION.  This Note is a secured general
obligation  of the Company.  The Note ranks senior in right of payment to all of
the  Company's  other  existing  and  future  indebtedness  whether  secured  or
unsecured and will be senior in right of payment any future  indebtedness of the
Company.  Further,  the  payment  of  this  Note  and  the  performance  of  the
obligations of the Company hereunder is guaranteed by the Guarantors pursuant to
the Guarantee Agreement.

         10.      REMEDIES.

                  (a) In addition  to, and not in  limitation  of, the  remedies
referenced  in  Section  9(c),  upon the  occurrence  of an  Event  of  Default,
Principal then outstanding of, and the accrued and unpaid Interest on, this Note
shall  automatically  become  immediately due and payable  without  presentment,
demand,  protest,  or other  formalities  of any kind,  all of which are  hereby
expressly waived by the Company.

                  (b) In addition  to, and not in  limitation  of, the  remedies
referenced in Section 9(c), The Holder may institute such actions or proceedings
in law or equity as it shall deem expedient for the protection of its rights and
may prosecute and enforce its claims  against all assets of the Company,  and in
connection with any such action or proceeding  shall be entitled to receive from
the Company payment of the principal  amount of this Note plus accrued  interest
to the date of  payment  plus  reasonable  expenses  of  collection,  including,
without limitation, attorneys' fees and expenses.

         11.      ATTORNEYS'  FEES.  In the  event  that any suit or  action  is
instituted to enforce any provision in this Note, the  prevailing  party in such
dispute  shall be entitled to recover from the losing party all fees,  costs and
expenses of enforcing any right of such  prevailing  party under or with respect
to this Note, including without limitation, such reasonable fees and expenses of
attorneys and accountants,  which shall include,  without limitation,  all fees,
costs and expenses of appeals.

         12.      NO  WAIVERS  BY DELAY  OR  PARTIAL  EXERCISE.  No delay by the
Holder in exercising any powers or rights hereunder shall operate as a waiver of
such power or right,  nor shall any single or partial  exercise  of any power or
right preclude other or further exercise  thereof,  or the exercise of any other
power or right hereunder or otherwise.

                                      -25-
<PAGE>

         13.      FURTHER  ASSURANCES.  Each party  agrees to execute such other
documents, instruments,  agreements and consents, and take such other actions as
may be  reasonably  requested  by the other  parties  hereto to  effectuate  the
purposes of this Note.

         14.      NOTICES.  All notices required or permitted hereunder shall be
in writing and shall be deemed  effectively given: (a) upon personal delivery to
the party to be notified,  (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next Business
Day, (c) five (5) days after having been sent by registered  or certified  mail,
return receipt requested, postage prepaid, or (d) one (1) day after deposit with
a nationally  recognized overnight courier,  specifying next day delivery,  with
written verification of receipt. All communications shall be sent as follows:

         IF TO THE COMPANY:        China Education Alliance, Inc.
                                   80 Heng Shan Road
                                   Kun Lun Shopping Mall
                                   Harbin, P.R. China 150090
                                   Attention: Xinqun Yu
                                   Telecopy: (01186) 451 8700 0662

         WITH A COPY TO:           Reitler Brown & Rosenblatt LLC
                                   800 Third Avenue, 21st Floor
                                   New York, NY 10022
                                   Attention: Robert Steven Brown
                                   Telecopy: (212) 371-5500

         IF TO THE HOLDER
         OR THE AGENT:             SBI Advisors LLC
                                   610 Newport Center Drive, Suite 1205
                                   Newport Beach, California 92660
                                   Attention: Shelly Singhal
                                   Telecopy: (949) 679-7280

or to such other address or telecopy number as the party to whom notice is to be
given may have furnished to the other party in writing in accordance herewith.

         15.      AMENDMENTS AND WAIVERS.  No modification,  amendment or waiver
of any provision of, or consent  required by, this Note,  nor any consent to any
departure  herefrom,  shall be  effective  unless it is in writing and signed by
each of the Company  and the Holder.  Such  modification,  amendment,  waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.

         16.      EXCLUSIVITY  AND WAIVER OF RIGHTS.  No failure to exercise and
no delay in exercising on the part of any party,  any right,  power or privilege
hereunder  shall  operate as a waiver  thereof,  nor shall any single or partial
exercise of any right,  power or privilege  preclude  any other right,  power or
privilege.  The rights and remedies  herein  provided are cumulative and are not
exclusive of any other rights or remedies provided by law.

                                      -26-
<PAGE>

         17.      INVALIDITY.  Any  term or  provision  of this  Note  shall  be
ineffective  to the  extent it is  declared  invalid or  unenforceable,  without
rendering  invalid or  enforceable  the remaining  terms and  provisions of this
Note.

         18.      HEADINGS.   Headings  used  in  this  Note  are  inserted  for
convenience  only and shall not affect the meaning of any term or  provision  of
this Note.

         19.      COUNTERPARTS.  This  Note  may be  executed  in  one  or  more
counterparts,  each of which shall be deemed an original instrument,  but all of
which collectively shall constitute one and the same agreement.

         20.      ASSIGNMENT. This Note and the rights and obligations hereunder
shall not be assignable or transferable by the Company without the prior written
consent  of the  Holder.  The  Holder  may  assign  this Note and the rights and
obligations  hereunder  without the prior  written  consent of the Company.  Any
instrument  purporting  to make an  assignment  in  violation of this Section 18
shall be void.

         21.      SURVIVAL.  Unless otherwise  expressly  provided  herein,  all
representations  warranties,  agreements  and  covenants  contained in this Note
shall  survive the  execution  hereof and shall  remain in full force and effect
until the payment in full of all Principal  and accrued and unpaid  Interest and
all other amounts owing under this Note.

         22.      MISCELLANEOUS.  This Note  shall  inure to the  benefit of the
Company  and the  Holder,  and all their  respective  successors  and  permitted
assigns.  Nothing in this Note is intended or shall be  construed to give to any
other person,  firm or corporation any legal or equitable right, remedy or claim
under or in respect of this Note or any provision herein contained.

         23.      GOVERNING  LAW.  THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE  WITH, THE LAWS OF THE STATE OF CALIFORNIA  (WITHOUT GIVING EFFECT
TO ANY CHOICE OR CONFLICT OF LAWS PROVISIONS).

         24.      CONSENT TO  JURISDICTION.  THE COMPANY HEREBY  IRREVOCABLY AND
UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE
OF CALIFORNIA AND OF THE FEDERAL COURTS SITTING IN THE STATE OF CALIFORNIA.  THE
COMPANY  AGREES  THAT ALL ACTIONS OR  PROCEEDINGS  ARISING OUT OF OR RELATING TO
THIS NOTE OR THE TRANSACTIONS  CONTEMPLATED HEREBY MUST BE LITIGATED EXCLUSIVELY
IN ANY SUCH  STATE OR  FEDERAL  COURT  THAT SITS IN THE  ORANGE  COUNTY,  OR LOS
ANGELES COUNTY, CALIFORNIA, AND ACCORDINGLY,  THE COMPANY IRREVOCABLY WAIVES ANY
OBJECTION  WHICH IT MAY NOW OR HEREAFTER  HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH LITIGATION IN ANY SUCH COURT.

         25.      WAIVER  OF JURY  TRIAL.  THE  COMPANY  HEREBY  WAIVES,  TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY

                                      -27-
<PAGE>

HAVE TO A TRIAL BY JURY IN  RESPECT OF ANY  LITIGATION  DIRECTLY  OR  INDIRECTLY
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE. THE COMPANY (A) CERTIFIES
THAT NO  REPRESENTATIVE,  AGENT  OR  ATTORNEY  OF THE  HOLDER  HAS  REPRESENTED,
EXPRESSLY OR OTHERWISE,  THAT THE HOLDER WOULD NOT, IN THE EVENT OF  LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE HOLDER
HAS BEEN  INDUCED TO ENTER INTO THIS NOTE,  BY, AMONG OTHER  THINGS,  THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 25.

         26.      EXPENSES.  The  Company  shall  pay the  reasonable  costs and
expenses of the Holder in connection with the negotiation,  execution,  delivery
and performance of this Note, the other Transaction Documents, and the Guarantee
Agreement.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                      -28-
<PAGE>

         IN WITNESS  WHEREOF,  the  undersigned has executed this Note as of the
date first above written.

                                  CHINA EDUCATION ALLIANCE, INC.

                                  BY:
                                      -----------------------------
                                      NAME:
                                      TITLE:

<PAGE>

                                     ANNEX A

                                                      INITIALS OF AUTHORIZED
   DATE     AMOUNT FUNDED     AGGREGATE PRINCIPAL    AMOUNT COMPANY SIGNATORY
   ----     -------------     -------------------    ------------------------
9/29/06     $_______ USD      $_______ USD

<PAGE>

                                SCHEDULE 2.01(A)

                                 PLEDGED SHARES

                             [INTENTIONALLY OMITTED]

                                      -31-
<PAGE>

                                    EXHIBIT 1

                                 FORM OF WARRANT

                             [INTENTIONALLY OMITTED]

                                      -32-

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