Document:

EXHIBIT 4.14

               CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS

                                       OF

                      SERIES D CONVERTIBLE PREFERRED STOCK

                                       OF

                        AMERICAN TECHNOLOGIES GROUP, INC.

                    (Pursuant to the Nevada Revised Statutes)

      American  Technologies  Group, Inc., a corporation  organized and existing
under the laws of the State of Nevada (the  "Company"),  hereby  certifies that,
pursuant to authority vested in the Board of Directors of the Company by Article
IV of the Articles of Incorporation of the Company, the following resolution was
adopted  as of  September  6,  2005 by the  Board of  Directors  of the  Company
pursuant to the Nevada Revised Statutes:

      "RESOLVED that,  pursuant to authority vested in the Board of Directors of
the Company by Article IV of the Company's Articles of Incorporation, out of the
total authorized  number of 50,000,000  shares of its preferred stock, par value
$0.001 per share  ("Preferred  Stock"),  there shall be  designated  a Series of
900,000  shares which shall be issued in and  constitute  a single  series to be
known as "Series D Convertible  Preferred Stock" (hereinafter called the "Series
D  Preferred  Stock").  The shares of Series D  Preferred  Stock have the voting
powers, designations,  preferences and other special rights, and qualifications,
limitations and restrictions thereof set forth below:

      1. Certain Definitions.

      As used in this Articles of Designations, Preferences and Rights of Series
D  Convertible  Preferred  Stock  of  American  Technologies  Group,  Inc.,  the
following terms shall have the respective meanings set forth below:

      "Affiliate",  as applied to any Person, means any other Person directly or
indirectly  controlling,  controlled  by, or under  common  control  with,  that
Person.  For  the  purposes  of  this  definition,  "control"  (including,  with
correlative meanings, the terms "controlling", "controlled by" and "under common
control  with"),  as applied to any Person,  means the  possession,  directly or
indirectly,  of the power to direct or cause the direction of the management and
policies of that Person,  whether through the ownership of voting  securities or
by contract or otherwise.

      "Common Stock" means the common stock,  $0.001 par value per share, of the
Company,  including  the  stock  into  which  the  Series D  Preferred  Stock is
convertible, and any securities into which the Common Stock may be reclassified.

<PAGE>

"Excluded Stock" means (A) capital stock,  Options (as defined in Section 4E(1))
or  Convertible  Securities  (as defined in Section  4E(1)) issued to employees,
consultants,  officers  or  directors  of the  Company  pursuant to any stock or
option plan duly adopted by a majority of the non-employee  members of the Board
of  Directors  of the Company or a majority  of the  members of a  committee  of
non-employee  directors established for such purpose, (B) shares of Common Stock
issued upon the  conversion  or exercise  of Options or  Convertible  Securities
issued prior to the date the Series D Preferred  Stock is issued,  provided that
such securities  have not been amended since the date hereof,  (C) capital stock
or Convertible Securities issued to a lender in connection with the provision of
credit to the  Company  and (D) shares of Common  Stock  issued or  issuable  by
reason of a  dividend,  stock  split or other  distribution  on shares of Common
Stock  (but only to the  extent  that  such a  dividend,  split or  distribution
results  in an  adjustment  in  the  Conversion  Price  pursuant  to  the  other
provisions of this Series D Preferred Stock).

      "Person"  shall be construed in the broadest  sense and means and includes
any natural person, a partnership, a corporation,  an association, a joint stock
company,   a  limited  liability   company,   a  trust,  a  joint  venture,   an
unincorporated    organization    and   other   entity   or    governmental   or
quasi-governmental entity.

      "Series D Stated  Value" means  $11.1111  (appropriately  adjusted for any
stock split,  reverse stock split, stock dividend or other  reclassification  or
combination of the Series D Preferred Stock occurring after the date hereof).

      "Subsidiary"  means any corporation,  association or other business entity
(i) at least 50% of the outstanding  voting  securities of which are at the time
owned or  controlled,  directly  or  indirectly,  by the  Company;  or (ii) with
respect to which the Company  possesses,  directly or  indirectly,  the power to
direct or cause the direction of the affairs or management of such Person.

      2. Dividends.

      (a) In the event that the Company  shall at any time pay a dividend on the
Common Stock (other than a dividend payable solely in shares of Common Stock) or
any other class or series of capital stock of the Company the Company shall,  at
the same time,  pay to each holder of Series D Preferred  Stock a dividend equal
to the  dividend  that would have been  payable to such  holder if the shares of
Series D  Preferred  Stock held by such  holder had been  converted  into Common
Stock on the date of  determination  of  holders  of Common  Stock  entitled  to
receive such dividends.

      3. Liquidation;  Redemption. Upon any liquidation,  dissolution or winding
up of the Company,  whether voluntary or involuntary,  the holders of the shares
of Series D  Preferred  Stock shall rank (i) senior to the holders of the Common
Stock and shall be entitled to be paid an amount per share equal to the Series D
Stated  Value  plus  any  accrued  and  unpaid   dividends   (the   "Liquidation
Preference").  If  upon  such  liquidation,  dissolution  or  winding  up of the
Company,  whether  voluntary or involuntary,  the assets to be distributed among
the holders of the Series D  Preferred  Stock and any class or series of capital
stock  ranking  on a  parity  with  the  Series  D  Preferred  Stock  as to such
distributions  shall be  insufficient  to permit  payment to the  holders of the
Series D Preferred  Stock and any such class or series of capital stock of their
respective  liquidation  amount,  then the  entire  assets of the  Company to be
distributed  shall be distributed  pro rata to the holders of Series D Preferred
Stock and the  holders  of such class or series of  capital  stock  ranking on a
parity with the Series D Preferred Stock as to such  distributions  according to
the preferential amounts due thereon.

                                      -2-
<PAGE>

      4. Conversion.

            4A.  Optional Right to Convert.  Subject to the terms and conditions
      of this  paragraph  4A,  the  holder  of any  share or  shares of Series D
      Preferred  Stock  shall  have the  right,  at its  option at any time,  to
      convert any such  shares of Series D  Preferred  Stock into such number of
      fully paid and  nonassessable  whole shares of Common Stock as is obtained
      by multiplying  the number of shares of Series D Preferred  Stock so to be
      converted by the Liquidation  Preference per share and dividing the result
      by the  conversion  price of  $.0033  per  share  or, if there has been an
      adjustment  of the  conversion  price,  by the  conversion  price  as last
      adjusted  and in  effect  at the date  any  share or  shares  of  Series D
      Preferred Stock are surrendered for conversion  (such price, or such price
      as last  adjusted,  being referred to herein as the  "Conversion  Price").
      Holders shall effect conversions by providing the Company with the form of
      conversion  notice attached hereto as Annex A (a "Notice of  Conversion");
      provided,  however, in the event that the Company does not have authorized
      shares  available for issuance,  then the holder of any share or shares of
      Series D Preferred  Stock shall only be entitled to convert into shares of
      common  stock  pursuant  to this  Section 4A to the extent  that there are
      authorized  shares of common stock available for issuance.  Each Notice of
      Conversion  shall specify the number of shares of Series D Preferred Stock
      to be  converted,  the number of shares of Preferred  Stock owned prior to
      the conversion at issue,  the number of shares of Series D Preferred Stock
      owned  subsequent  to the  conversion  at issue and the date on which such
      conversion is to be effected,  which date may not be prior to the date the
      Holder delivers such Notice of Conversion to the Company by facsimile (the
      "Conversion  Date").  If no  Conversion  Date is  specified in a Notice of
      Conversion,  the  Conversion  Date  shall be the date that such  Notice of
      Conversion to the Company is deemed delivered hereunder. .

            4B. Intentionally Left Blank.

            4C. Issuance of Certificates;  Time Conversion Effected. Within five
      business  days after the  optional  conversion  of the Series D  Preferred
      Stock  pursuant  to  Section  4A  and  surrender  of  the  certificate  or
      certificates for the share or shares of the Series D Preferred Stock being
      converted,  the Company shall issue and deliver, or cause to be issued and
      delivered, to the holder,  registered in such name or names as such holder
      may direct,  subject to compliance with applicable laws to the extent such
      designation  shall involve a transfer,  a certificate or certificates  for
      the number of whole shares of Common Stock issuable upon the conversion of
      such share or shares of Series D Preferred Stock.  Upon the effective date
      of any such conversion, the rights of the holder of the shares of Series D
      Preferred Stock being converted shall cease,  and the person or persons in
      whose name or names any certificate or  certificates  for shares of Common
      Stock  shall be  issuable  upon  such  conversion  shall be deemed to have
      become the holder or holders of record of the shares represented thereby.

                                      -3-
<PAGE>

            4D. Fractional Shares; Dividends;  Partial Conversion. No fractional
      shares shall be issued upon any conversion of the Series D Preferred Stock
      into Common  Stock,  and the number of shares of Common Stock to be issued
      shall be rounded down to the nearest  whole  share.  In case the number of
      shares of Series D  Preferred  Stock  represented  by the  certificate  or
      certificates  surrendered  pursuant to subsection 4A exceeds the number of
      shares  converted,  the Company  shall upon such  conversion,  execute and
      deliver  to the  holder  thereof  at the  expense  of the  Company,  a new
      certificate  for  the  number  of  shares  of  Series  D  Preferred  Stock
      represented by the certificate or certificates  surrendered  which are not
      to be converted.

            4E.  Adjustment of Conversion  Price.  If the Company shall issue or
      sell, or is, in  accordance  with  subsections  4E(1) through 4E(8) below,
      deemed  to have  issued or sold,  any  Additional  Shares of Common  Stock
      without  consideration  or for a  consideration  per  share  less than the
      Conversion Price in effect  immediately prior to the time of such issue or
      sale, then and in each such case (a "Trigger  Issuance") the then-existing
      Conversion  Price,  shall be  reduced,  as of the close of business on the
      effective date of the Trigger Issuance, to a price determined as follows:

                  Adjusted Conversion Price = (A x B) + D
                                              -----------
                                               A + C

                                      where

                  "A" equals the number of shares of Common  Stock  outstanding,
including  Additional  Shares of Common  Stock (as defined  below)  deemed to be
issued hereunder, immediately preceding such Trigger Issuance;

                  "B"  equals  the  Conversion   Price  in  effect   immediately
preceding such Trigger Issuance;

                  "C"  equals the number of  Additional  Shares of Common  Stock
issued or deemed issued hereunder as a result of the Trigger Issuance; and

                  "D" equals the aggregate  consideration,  if any,  received or
deemed to be received by the Company upon such Trigger Issuance;

provided,  however,  that in no event shall the  Conversion  Price after  giving
effect to such Trigger  Issuance be greater than the Conversion  Price in effect
prior to such Trigger Issuance.

      For purposes of this  subsection 4E,  "Additional  Shares of Common Stock"
shall  mean all  shares of Common  Stock  issued by the  Company or deemed to be
issued pursuant to this subsection 4E, other than Excluded Stock.

                                      -4-
<PAGE>

      For purposes of this  subsection  4E, the  following  paragraphs  4E(1) to
4E(8) shall also be applicable:

            4E(1) Issuance of Rights or Options. In case at any time the Company
      shall in any manner grant  (directly  and not by assumption in a merger or
      otherwise)  any warrants or other rights to subscribe  for or to purchase,
      or any options for the purchase of,  Common Stock or any stock or security
      convertible into or exchangeable  for Common Stock (such warrants,  rights
      or options being called  "Options" and such  convertible  or  exchangeable
      stock or securities being called "Convertible  Securities") whether or not
      such  Options  or the right to convert or  exchange  any such  Convertible
      Securities are immediately exercisable,  and the price per share for which
      Common  Stock is issuable  upon the  exercise of such  Options or upon the
      conversion  or  exchange of such  Convertible  Securities  (determined  by
      dividing  (i)  the  sum  (which  sum  shall   constitute   the  applicable
      consideration)  of (x) the total amount, if any, received or receivable by
      the Company as  consideration  for the granting of such Options,  plus (y)
      the aggregate  amount of additional  consideration  payable to the Company
      upon the  exercise  of all such  Options,  plus  (z),  in the case of such
      Options which relate to Convertible  Securities,  the aggregate  amount of
      additional  consideration,  if any, payable upon the issue or sale of such
      Convertible  Securities  and upon the conversion or exchange  thereof,  by
      (ii) the total maximum  number of shares of Common Stock issuable upon the
      exercise of such  Options or upon the  conversion  or exchange of all such
      Convertible  Securities  issuable upon the exercise of such Options) shall
      be less than the Conversion Price in effect  immediately prior to the time
      of the granting of such Options, then the total number of shares of Common
      Stock  issuable  upon the exercise of such Options or upon  conversion  or
      exchange of the total amount of such Convertible  Securities issuable upon
      the exercise of such Options  shall be deemed to have been issued for such
      price per share as of the date of granting of such Options or the issuance
      of such  Convertible  Securities  and  thereafter  shall be  deemed  to be
      outstanding  for purposes of adjusting  the  Conversion  Price.  Except as
      otherwise  provided in subsection  4E(3),  no adjustment of the Conversion
      Price shall be made upon the actual  issue of such Common Stock or of such
      Convertible  Securities  upon  exercise of such Options or upon the actual
      issue of such Common Stock upon conversion or exchange of such Convertible
      Securities.

            4E(2) Issuance of Convertible Securities.  In case the Company shall
      in any  manner  issue  (directly  and not by  assumption  in a  merger  or
      otherwise) or sell any Convertible  Securities,  whether or not the rights
      to exchange or convert any such  Convertible  Securities  are  immediately
      exercisable,  and the price per share for which  Common  Stock is issuable
      upon such  conversion  or exchange  (determined  by  dividing  (i) the sum
      (which sum shall constitute the applicable consideration) of (x) the total
      amount  received or  receivable  by the Company as  consideration  for the
      issue  or sale of such  Convertible  Securities,  plus  (y) the  aggregate
      amount of additional  consideration,  if any,  payable to the Company upon
      the conversion or exchange thereof,  by (ii) the total number of shares of
      Common  Stock  issuable  upon  the  conversion  or  exchange  of all  such
      Convertible  Securities) shall be less than the Conversion Price in effect
      immediately  prior to the  time of such  issue  or  sale,  then the  total
      maximum  number of shares of Common  Stock  issuable  upon  conversion  or
      exchange of all such  Convertible  Securities shall be deemed to have been
      issued  for such  price  per  share as of the date of the issue or sale of
      such  Convertible   Securities  and  thereafter  shall  be  deemed  to  be
      outstanding for purposes of adjusting the Conversion Price,  provided that
      (a) except as otherwise provided in subsection 4E(3), no adjustment of the
      Conversion  Price  shall be made upon the actual  issuance  of such Common
      Stock upon conversion or exchange of such  Convertible  Securities and (b)
      no further  adjustment of the Conversion  Price shall be made by reason of
      the issue or sale of Convertible  Securities  upon exercise of any Options
      to purchase any such Convertible  Securities for which  adjustments of the
      Conversion  Price  have been made  pursuant  to the  other  provisions  of
      subsection 4E.

                                      -5-
<PAGE>

            4E(3) Change in Option Price or Conversion  Rate. Upon the happening
      of any of the following events, namely, if the purchase price provided for
      in any Option  referred to in  subsection  4E(l)  hereof,  the  additional
      consideration,  if any,  payable  upon the  conversion  or exchange of any
      Convertible  Securities  referred to in subsections 4E(l) or 4E(2), or the
      rate at which Convertible  Securities  referred to in subsections 4E(l) or
      4E(2) are convertible  into or exchangeable  for Common Stock shall change
      at any time (including,  but not limited to, changes under or by reason of
      provisions designed to protect against dilution),  the Conversion Price in
      effect at the time of such event  shall  forthwith  be  readjusted  to the
      Conversion  Price  which  would  have been in effect at such time had such
      Options or  Convertible  Securities  still  outstanding  provided for such
      changed  purchase price,  additional  consideration or conversion rate, as
      the case may be, at the time  initially  granted,  issued or sold.  On the
      termination  of any Option for which any  adjustment  was made pursuant to
      this  subsection  4(D) or any right to  convert  or  exchange  Convertible
      Securities for which any  adjustment was made pursuant to this  subsection
      4(D)  (including  without  limitation  upon the redemption or purchase for
      consideration  of  such  Convertible   Securities  by  the  Company),  the
      Conversion  Price then in effect  hereunder  shall forthwith be changed to
      the  Conversion  Price which would have been in effect at the time of such
      termination  had such  Option or  Convertible  Securities,  to the  extent
      outstanding immediately prior to such termination, never been issued.

            4E(4) Stock Dividends.  Subject to the provisions of this subsection
      4E,  in case the  Company  shall  declare  a  dividend  or make any  other
      distribution  upon any stock of the Company  (other than the Common Stock)
      payable in Common  Stock,  Options  or  Convertible  Securities,  then any
      Common  Stock,  Options  or  Convertible  Securities,  as the case may be,
      issuable in payment of such  dividend or  distribution  shall be deemed to
      have been issued or sold without consideration.

                                      -6-
<PAGE>

            4E(5)  Consideration  for Stock. In case any shares of Common Stock,
      Options or  Convertible  Securities  shall be issued or sold for cash, the
      consideration  received  therefor  shall be  deemed  to be the net  amount
      received  by  the  Company  therefor,  after  deduction  therefrom  of any
      expenses  incurred or any underwriting  commissions or concessions paid or
      allowed by the  Company  in  connection  therewith.  In case any shares of
      Common Stock,  Options or Convertible  Securities  shall be issued or sold
      for a consideration other than cash, the amount of the consideration other
      than cash  received by the Company shall be deemed to be the fair value of
      such  consideration  as determined in good faith by the Board of Directors
      of  the  Company,   after  deduction  of  any  expenses  incurred  or  any
      underwriting  commissions or concessions paid or allowed by the Company in
      connection  therewith.  In case any Options  shall be issued in connection
      with the  issue  and sale of other  securities  of the  Company,  together
      comprising one integral transaction in which no specific  consideration is
      allocated to such Options by the parties  thereto,  such Options  shall be
      deemed to have been issued for such  consideration  as  determined in good
      faith by the Board of Directors of the Company.  If Common Stock,  Options
      or Convertible  Securities  shall be issued or sold by the Company and, in
      connection  therewith,   other  Options  or  Convertible  Securities  (the
      "Additional Rights") are issued, then the consideration received or deemed
      to be received by the Company shall be reduced by the fair market value of
      the  Additional  Rights  (as  determined  using the  Black-Scholes  option
      pricing model or another method  mutually agreed to by the Company and the
      holder). The Board of Directors of the Company shall respond promptly,  in
      writing,  to an inquiry by the holder as to the fair  market  value of the
      Additional Rights. In the event that the Board of Directors of the Company
      and the  holder  are  unable to agree  upon the fair  market  value of the
      Additional  Rights,  the Company and the holder  shall  jointly  select an
      appraiser,  who is  experienced  in such  matters.  The  decision  of such
      appraiser  shall be final and  conclusive,  and the cost of such appraiser
      shall be borne evenly by the Company and the holder.

            4E(6)  Record Date.  In case the Company  shall take a record of the
      holders  of its Common  Stock for the  purpose  of  entitling  them (i) to
      receive a dividend or other distribution  payable in Common Stock, Options
      or  Convertible  Securities  or (ii) to subscribe  for or purchase  Common
      Stock, Options or Convertible  Securities,  then such record date shall be
      deemed to be the date of the issue or sale of the  shares of Common  Stock
      deemed to have been issued or sold upon the  declaration  of such dividend
      or the making of such other  distribution  or the date of the  granting of
      such right of subscription or purchase, as the case may be.

            4E(7)  Treasury  Shares.  The  number  of  shares  of  Common  Stock
      outstanding at any given time shall not include shares owned or held by or
      for the  account of the Company or any of its  wholly-owned  subsidiaries,
      and the  disposition  of any such shares (other than the  cancellation  or
      retirement  thereof)  shall be considered an issue or sale of Common Stock
      for the purpose of this Section 4E.

                                      -7-
<PAGE>

            4F Stock Splits and Dividends.  If the Company shall, at any time or
      from time to time while the Series D Preferred Stock is outstanding, pay a
      dividend or make a  distribution  on its Common  Stock in shares of Common
      Stock,  subdivide  its  outstanding  shares of Common Stock into a greater
      number of shares or combine its outstanding  shares of Common Stock into a
      smaller number of shares or issue by  reclassification  of its outstanding
      shares of Common Stock any shares of its capital stock (including any such
      reclassification in connection with a consolidation or merger in which the
      Company  is the  continuing  corporation),  then the  Conversion  Price in
      effect  immediately  prior to the date upon which such change shall become
      effective  shall be adjusted by the Company so that the holder  thereafter
      converting  its shares of Series D  Preferred  Stock  shall be entitled to
      receive the number of shares of Common Stock or other  capital stock which
      such holder would have received if the shares of Series D Preferred  Stock
      had been converted immediately prior to such event. Such adjustments shall
      be made successively whenever any event listed above shall occur.

            4G.    Reorganization   or   Reclassification.    If   any   capital
      reorganization  or  reclassification  of the capital  stock of the Company
      shall be effected in such a way (including,  without limitation, by way of
      consolidation  or merger)  that holders of Common Stock but not holders of
      Series D Preferred Stock shall be entitled to receive stock, securities or
      assets  with  respect  to or in  exchange  for  Common  Stock  then,  as a
      condition of such reorganization or reclassification,  lawful and adequate
      provision shall be made whereby each holder of a share or shares of Series
      D Preferred  Stock shall  thereafter  have the right to receive,  upon the
      basis and upon the terms and  conditions  specified  herein and in lieu of
      the  shares  of  Common  Stock  of  the  Company  immediately  theretofore
      receivable  upon the  conversion  of such  share or shares of the Series D
      Preferred  Stock,  such  shares of stock,  securities  or assets as may be
      issued  or  payable  with  respect  to or in  exchange  for  a  number  of
      outstanding  shares of Common  Stock equal to the number of shares of such
      stock  immediately  theretofore so receivable had such  reorganization  or
      reclassification  not  taken  place  and  in  any  such  case  appropriate
      provision  shall be made with respect to the rights and  interests of such
      holder to the end that the provisions hereof (including without limitation
      provisions for  adjustments of the Conversion  Price) shall  thereafter be
      applicable,  as  nearly  as may be, in  relation  to any  shares of stock,
      securities  or assets  thereafter  deliverable  upon the  exercise of such
      conversion  rights (including an immediate  adjustment,  by reason of such
      reorganization or  reclassification,  of the Conversion Price to the value
      for the Common  Stock  reflected  by the terms of such  reorganization  or
      reclassification  if the value so  reflected  is less than the  Conversion
      Price   in   effect   immediately   prior   to  such   reorganization   or
      reclassification).  In the  event  of a  merger  or  consolidation  of the
      Company  as a result  of which a  greater  or  lesser  number of shares of
      common stock of the surviving  corporation  are issuable to holders of the
      Common Stock of the Company  outstanding  immediately prior to such merger
      or consolidation, the Conversion Price in effect immediately prior to such
      merger or  consolidation  shall be  adjusted  in the same manner as though
      there were a  subdivision  or  combination  of the  outstanding  shares of
      Common Stock of the Company.

                                      -8-
<PAGE>

            4H. Distributions.  In case the Company shall fix a payment date for
      the making of a distribution to all holders of Common Stock (including any
      such  distribution  made in connection with a  consolidation  or merger in
      which  the  Company  is  the  continuing   corporation)  of  evidences  of
      indebtedness  or assets (other than cash  dividends or cash  distributions
      payable out of  consolidated  earnings or earned  surplus or  dividends or
      distributions  referred to in Section 4E or F), or subscription  rights or
      warrants,  the  Conversion  Price to be in effect  after such payment date
      shall  be  determined  by  multiplying  the  Conversion  Price  in  effect
      immediately  prior to such  payment date by a fraction,  the  numerator of
      which  shall be the total  number of  shares of Common  Stock  outstanding
      multiplied  by the  Market  Price (as  defined  below) per share of Common
      Stock  immediately  prior to such payment date, less the fair market value
      (as determined by the Company's  Board of Directors in good faith) of said
      assets  or  evidences  of  indebtedness   so   distributed,   or  of  such
      subscription rights or warrants, and the denominator of which shall be the
      total  number of shares of Common  Stock  outstanding  multiplied  by such
      Market Price per share of Common Stock  immediately  prior to such payment
      date.  "Market Price" as of a particular date (the "Valuation Date") shall
      mean the  following:  (a) if the Common Stock is then listed on a national
      stock  exchange,  the closing  sale price of one share of Common  Stock on
      such exchange on the last trading day prior to the Valuation  Date; (b) if
      the  Common  Stock  is  then  quoted  on The  Nasdaq  Stock  Market,  Inc.
      ("Nasdaq"),  the National  Association  of  Securities  Dealers,  Inc. OTC
      Bulletin  Board  (the  "Bulletin  Board")  or  such  similar  exchange  or
      association,  the  closing  sale  price of one  share of  Common  Stock on
      Nasdaq,  the Bulletin  Board or such other  exchange or association on the
      last trading day prior to the  Valuation  Date or, if no such closing sale
      price is  available,  the  average of the high bid and the low asked price
      quoted thereon on the last trading day prior to the Valuation Date; or (c)
      if the Common  Stock is not then  listed on a national  stock  exchange or
      quoted  on  Nasdaq,   the  Bulletin   Board  or  such  other  exchange  or
      association,  the fair market value of one share of Common Stock as of the
      Valuation  Date,  shall  be  determined  in good  faith  by the  Board  of
      Directors of the Company and the holders of a majority of the  outstanding
      Series D  Preferred  Stock.  If the Common  Stock is not then  listed on a
      national securities exchange, the Bulletin Board or such other exchange or
      association, the Board of Directors of the Company shall respond promptly,
      in writing, to an inquiry by a holder of Series D Preferred Stock prior to
      the  exercise  hereunder  as to the fair market value of a share of Common
      Stock as determined by the Board of Directors of the Company. In the event
      that the Board of  Directors  of the  Company  and the holders of at least
      62.5% of the outstanding Series D Preferred Stock are unable to agree upon
      the fair market  value in respect of subpart  (c) hereof,  the Company and
      the holders of a majority  of the  outstanding  Series D  Preferred  Stock
      shall jointly select an appraiser, who is experienced in such matters. The
      decision of such appraiser shall be final and conclusive,  and the cost of
      such  appraiser  shall be borne  equally by the Company and such  holders.
      Such adjustment shall be made successively whenever such a payment date is
      fixed.

            4I.  Effective Date of  Adjustment.  An adjustment to the Conversion
      Price shall  become  effective  immediately  after the payment date in the
      case of each dividend or distribution and immediately  after the effective
      date of each other event which requires an adjustment.

            4J.  Subsequent  Adjustments.  In the event that,  as a result of an
      adjustment  made pursuant to this Section 4, holders of Series D Preferred
      Stock shall become  entitled to receive any shares of capital stock of the
      Company other than shares of Common Stock, the number of such other shares
      so receivable upon the conversion of the Series D Preferred Stock shall be
      subject  thereafter  to  adjustment  from time to time in a manner  and on
      terms as nearly  equivalent as practicable to the provisions  with respect
      to the Conversion Shares contained herein.

                                      -9-
<PAGE>

            4K. Notice of  Adjustment.  Upon any  adjustment  of the  Conversion
      Price,  then,  and in each such case the Company shall give written notice
      thereof by first class mail, postage prepaid,  addressed to each holder of
      shares of Series D Preferred  Stock at the address of such holder as shown
      on the books of the Company, which notice shall state the Conversion Price
      resulting  from such  adjustment,  setting forth in reasonable  detail the
      method of calculation and the facts upon which such calculation is based.

            4L. Other Notices. In case at any time:

                  (1) the Company  shall  declare any  dividend  upon its Common
            Stock payable in cash or stock or make any other distribution to the
            holders of its Common Stock;

                  (2) the Company shall offer for  subscription  pro rata to the
            holders of its Common Stock any  additional  shares of such stock of
            any class or other rights;

                  (3)   there   shall   be   any   capital   reorganization   or
            reclassification   of  the  capital  stock  of  the  Company,  or  a
            consolidation  or merger of the  Company  with,  or a sale of all or
            substantially all its assets to, another corporation; or

                  (4) there shall be a  voluntary  or  involuntary  dissolution,
            liquidation or winding up of the Company;

      then,  in any one or more of said cases,  the Company shall give, by first
      class mail,  postage  prepaid,  addressed  to each holder of any shares of
      Series D  Preferred  Stock at the  address of such  holder as shown on the
      books of the  Company,  (a) at least 15 days prior  written  notice of the
      date on which the books of the Company  shall  close or a record  shall be
      taken  for such  dividend,  distribution  or  subscription  rights  or for
      determining  rights  to  vote  in  respect  of  any  such  reorganization,
      reclassification, consolidation, merger, sale, dissolution, liquidation or
      winding   up,   and  (b)  in  the   case  of  any   such   reorganization,
      reclassification, consolidation, merger, sale, dissolution, liquidation or
      winding  up, at least 15 days  prior  written  notice of the date when the
      same shall take place. Such notice in accordance with the foregoing clause
      (a) shall also specify, in the case of any such dividend,  distribution or
      subscription  rights,  the date on which the holders of Common Stock shall
      be entitled  thereto,  and such notice in  accordance  with the  foregoing
      clause  (b) shall  also  specify  the date on which the  holders of Common
      Stock shall be entitled to exchange  their Common Stock for  securities or
      other property  deliverable  upon such  reorganization,  reclassification,
      consolidation,  merger, sale,  dissolution,  liquidation or winding up, as
      the case may be.

            4L. Automatic Conversion; Reservation of Shares.

                  The Series D Preferred Stock shall automatically  convert into
            Common Stock, upon the Company's  authorizing a sufficient number of
            shares of Common Stock and effecting a reverse stock split  pursuant
            to which each 10,000  shares of Common Stock shall be  reconstituted
            as one share.

                                      -10-
<PAGE>

                  (2) The Company will at all times  reserve and keep  available
            out of its authorized Series D Preferred Stock such number of shares
            of Series D  Preferred  Stock as is equal to the number of shares of
            Series D Preferred Stock then outstanding,  but in any case not less
            than the  number of shares  stated in the second  paragraph  of this
            certificate,  except as otherwise provided in Section 4M. All shares
            of Series D Preferred Stock,  which shall be so issued shall be duly
            and validly  issued and fully paid and  nonassessable  and free from
            all liens,  duties and  charges  arising  out of or by reason of the
            issue thereof (including, without limitation, in respect of taxes).

            4M. No  Reissuance of Series D Preferred  Stock.  Shares of Series D
      Preferred Stock that are converted into shares of Common Stock as provided
      herein  shall be retired  and may not be  reissued  as Series D  Preferred
      Stock but may be  reissued  as all or part of another  Series D  Preferred
      Stock.

            4N.  Issue Tax. The  issuance of  certificates  for shares of Common
      Stock  upon  conversion  of the  Series D  Preferred  Stock  shall be made
      without  charge to the holders  thereof for any issuance  tax,  stamp tax,
      transfer tax, duty or charge in respect thereof, provided that the Company
      shall not be required to pay any tax,  duty or charge which may be payable
      in respect of any  transfer  involved in the  issuance and delivery of any
      certificate  in a name  other  than  that of the  holder  of the  Series D
      Preferred Stock which is being converted.

            4O. Closing of Books. The Company will at no time close its transfer
      books  against  the  transfer  of any Series D  Preferred  Stock or of any
      shares of Common  Stock  issued or  issuable  upon the  conversion  of any
      shares of Series D Preferred Stock in any manner which interferes with the
      timely  conversion of such Series D Preferred  Stock;  provided,  however,
      nothing  herein  shall be  construed  to prevent the Company  from setting
      record dates for the holders of its securities.

      5. Voting - Series D  Preferred  Stock.  In  addition to any class  voting
rights  provided by law and this  Certificate  of  Designations,  the holders of
Series D Preferred  Stock shall have the right to vote together with the holders
of Common  Stock as a single  class on any matter on which the holders of Common
Stock are entitled to vote.  With respect to the voting rights of the holders of
the Series D Preferred Stock pursuant to the preceding sentence,  each holder of
Series D  Preferred  Stock  shall be entitled to vote a number of votes equal to
the number of shares of Common Stock into which their  Series D Preferred  Stock
may then be converted at the Conversion Price then in effect.

      6. Certain  Restrictions.  In addition to any other vote of the holders of
Series D Preferred  Stock  required by law or by the Articles of  Incorporation,
without the prior consent of the holders of a majority of the outstanding Series
D  Preferred  Stock,  given in  person or by proxy,  either in  writing  or at a
special  meeting  called for that  purpose,  at which meeting the holders of the
shares of such Series D  Preferred  Stock  shall vote  together as a class,  the
Company will not:

            (a)  authorize,  create,  designate,  establish or issue (whether by
      merger  or  otherwise)  (i) an  increased  number  of  shares  of Series D
      Preferred  Stock (other than shares of Series D Preferred Stock payable as
      payment-in-kind  dividends  on  outstanding  shares of Series D  Preferred
      Stock),  or (ii) any other class or series of capital stock ranking senior
      to or on parity with the Series D Preferred  Stock as to dividends or upon
      liquidation  or  reclassify  any shares of Common Stock into shares having
      any preference or priority as to dividends or upon liquidation superior to
      or on parity  with any such  preference  or priority of Series D Preferred
      Stock;

                                      -11-
<PAGE>

            (b) adopt a plan for the  liquidation,  dissolution or winding up of
      the affairs of the Company or any recapitalization plan (whether occurring
      by  merger,   consolidation  or  otherwise),  file  any  petition  seeking
      protection under any federal or state bankruptcy or insolvency law or make
      a general  assignment  for the benefit of creditors  unless the holders of
      the Series D Preferred Stock will receive an amount in cash at least equal
      to the Liquidation Preference in such transaction;

            (c) amend,  alter or repeal,  whether  by merger,  consolidation  or
      otherwise,  the Articles of Incorporation or By-laws of the Company or the
      Resolutions  contained in this Certificate of Designations of the Series D
      Preferred  Stock  and  the  powers,  preferences,   privileges,  relative,
      participating,  optional  and other  special  rights  and  qualifications,
      limitations and  restrictions  thereof,  which would adversely  affect any
      right,  preference,  privilege  or voting  power of the Series D Preferred
      Stock, or which would increase or decrease the amount of authorized shares
      of the Series D Preferred  Stock or of any other series of preferred stock
      ranking  senior to the  Series D  Preferred  Stock,  with  respect  to the
      payment of  dividends  (whether or not such series of  preferred  stock is
      cumulative  or   non-cumulative  as  to  payment  of  dividends)  or  upon
      liquidation;

            (d) agree to do any of the foregoing.

      7. No Waiver.  Except as otherwise  modified or provided  for herein,  the
holders of Series D Preferred  Stock shall also be entitled to, and shall not be
deemed to have waived, any other applicable rights granted to such holders under
the Nevada Revised Statutes.

      8. No  Impairment.  The  Company  will not,  through  any  reorganization,
transfer of assets,  merger,  dissolution,  issue or sale of  securities  or any
other voluntary action,  avoid or seek to avoid the observance or performance of
any of the terms to be observed or  performed  hereunder by the Company but will
at all times in good  faith  assist in the  carrying  out of all the  provisions
hereunder  and in the  taking  of  all  such  action  as  may  be  necessary  or
appropriate  in  order  to  protect  the  conversion   rights  and   liquidation
preferences  granted  hereunder  of the holders of the Series D Preferred  Stock
against impairment.

      9.  Amendment;  Waiver.  Any term of the Series D  Preferred  Stock may be
amended or waived (including the adjustment  provisions included in Section 4(D)
hereof) upon the written consent of the Company and the holders of a majority of
the Series D Preferred Stock then outstanding; provided, however that the number
of Conversion  Shares  issuable  hereunder and the  Conversion  Price may not be
amended,  and the  right to  convert  the  Series D  Preferred  Stock may not be
altered or waived,  without  the  written  consent of the  holders of all of the
Series D Preferred Stock then outstanding.

                                      -12-
<PAGE>

      10.  Action By Holders.  Any action or consent to be taken or given by the
holders of the Series D Preferred  Stock may be given either at a meeting of the
holders of the Series D Preferred  Stock  called and held for such purpose or by
written consent.

                            [Execution Page Follows]

                                      -13-
<PAGE>

      IN WITNESS  WHEREOF,  the  undersigned  has executed this  Certificate  of
Designations, Preferences and Rights this 6th day of September, 2005.

                                        AMERICAN TECHNOLOGIES GROUP, INC.

                                        By: Dr. Gary Fromm
                                            Name: Dr. Gary Fromm
                                            Title: CEO

                                      -14-
<PAGE>

                                     ANNEX A

                              NOTICE OF CONVERSION

(To be Executed by the Registered  Holder in order to convert shares of Series D
Convertible Preferred Stock)

The  undersigned  hereby  elects  to  convert  the  number of shares of Series D
Convertible  Preferred Stock indicated  below,  into shares of common stock, par
value $0.001 per share (the "Common  Stock"),  of American  Technologies  Group,
Inc., a Nevada corporation (the "Company"),  according to the conditions hereof,
as of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect  thereto and is delivering  herewith such  certificates  and opinions as
reasonably  requested  by the Company in  accordance  therewith.  No fee will be
charged to the holder for any  conversion,  except for such transfer  taxes,  if
any.

Conversion calculations:

      Date to Effect Conversion

      -----------------------------------------

      Number of shares of Series D Preferred Stock owned prior to Conversion

      -----------------------------------------

      Number of shares of Series D Preferred Stock to be Converted

      -----------------------------------------

      Series D  Stated  Value  of  shares  of  Series  D  Preferred  Stock to be
      Converted

      -----------------------------------------

      Number of shares of Common Stock to be Issued

      -----------------------------------------

      Applicable Set Price

      -----------------------------------------

      Number of shares of Series D Preferred Stock subsequent to Conversion

      -----------------------------------------

                                            [HOLDER]

                                            By:_______________________
                                               Name:
                                               Title:

                                      -15-EXHIBIT 4.15

                               SECURITY AGREEMENT

                            GRYPHON MASTER FUND, L.P.

                        AMERICAN TECHNOLOGIES GROUP, INC.

                                       and

                     EACH ELIGIBLE SUBSIDIARY NAMED THEREIN

                            Dated: ___________, 2005

<PAGE>

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

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

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

4.  Omitted..................................................................5

5.  Interest and Payments....................................................5

6.  Security Interest........................................................7

7.  Representations, Warranties and Covenants Concerning the Collateral......7

8.  Payment of Accounts.....................................................10

9.  Collection and Maintenance of Collateral................................11

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

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

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

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

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

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

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

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

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

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

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

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

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

23. Assignment By Gryphon...................................................37

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

25. Application of Payments.................................................37

<PAGE>

26. Indemnity...............................................................37

27. Revival.................................................................38

28. Borrowing Agency Provisions.............................................38

29. Notices.................................................................39

30. Governing Law, Jurisdiction and Waiver of Jury Trial....................40

31. Limitation of Liability.................................................41

32. Entire Understanding; Maximum Interest..................................41

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

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

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

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

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

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

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

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

<PAGE>

                               SECURITY AGREEMENT

                  This Security Agreement is made as of ____________, 2005 (this
"Agreement")  by and  among  GRYPHON  MASTER  FUND  L.P.  ("Gryphon"),  AMERICAN
TECHNOLOGIES  GROUP, INC., a Nevada  corporation (the "Parent"),  and each party
listed  on  Exhibit  A  attached  hereto  (each  an  "Eligible  Subsidiary"  and
collectively,  the  "Eligible  Subsidiaries")  (the  Parent  and  each  Eligible
Subsidiary, each a "Company" and collectively, the "Companies").

                                   BACKGROUND

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

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

                                    AGREEMENT

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

                  1. General Definitions and Terms; Rules of Construction.

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

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

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

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

                                       1
<PAGE>

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

                  2. Note.

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

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

                  4. [Omitted]

                  5. Interest and Payments.

                  (a) Interest.

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

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

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

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

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

                                       2
<PAGE>

                  (b) Payments; Certain Closing Conditions.

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

                             (ii) [Omitted]

                             (iii) [Omitted]

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

                           (v)  Expenses.   The  Companies   shall  jointly  and
severally reimburse Gryphon for its reasonable  expenses  (including  reasonable
legal  fees and  expenses)  incurred  in  connection  with the  preparation  and
negotiation  of  this  Agreement  and the  Ancillary  Agreements,  and  expenses
incurred in connection  with Gryphon's due diligence  review of each Company and
its Subsidiaries and all related matters. Amounts required to be paid under this
Section 5(b)(v) will be paid on the Closing Date.

                  6. Security Interest.

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

                  (b) Each  Company  hereby (i)  authorizes  Gryphon to file any
financing  statements,  continuation  statements or amendments  thereto that (x)
indicate the Collateral (1) as all assets and personal  property of such Company
or words of similar effect, regardless of whether any particular asset comprised
in the  Collateral  falls  within  the  scope  of  Article  9 of the UCC of such
jurisdiction,  or (2) as  being  of an equal  or  lesser  scope or with  greater
detail, and (y) contain any other information required by Part 5 of Article 9 of
the UCC  for the  sufficiency  or  filing  office  acceptance  of any  financing
statement,   continuation   statement  or  amendment   and  (ii)   ratifies  its
authorization  for Gryphon to have filed any initial  financial  statements,  or
amendments thereto if filed prior to the date hereof. Each Company  acknowledges
that it is not  authorized  to file any  financing  statement  or  amendment  or

                                       3
<PAGE>

termination  statement with respect to any financing statement without the prior
written  consent of Gryphon  and agrees that it will not do so without the prior
written  consent of Gryphon,  subject to such  Company's  rights  under  Section
9-509(d)(2) of the UCC.

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

                  7.  Representations,  Warranties and Covenants  Concerning the
Collateral. Each Company represents, warrants and covenants as follows:

                  (a) all of the Collateral (i) is owned by it free and clear of
all Liens (including any claims of infringement) except those in Gryphon's favor
and  Permitted  Liens and (ii) is not subject to any agreement  prohibiting  the
granting of a Lien or requiring notice of or consent to the granting of a Lien.

                  (b) it shall not  encumber,  mortgage,  pledge,  assign (other
than as  expressly  permitted  under  this  Agreement)  or grant any Lien in any
Collateral  or any other  assets to anyone  other  than  Gryphon  and except for
Permitted Liens.

                  (c)  the  Liens  granted  pursuant  to  this  Agreement,  upon
completion of the filings and other actions  listed on Schedule 7(c) (which,  in
the case of all filings and other documents  referred to in said Schedule,  have
been  delivered to Gryphon in duly executed  form)  constitute  valid  perfected
security  interests in all of the Collateral in favor of Gryphon as security for
the prompt and complete payment and performance of the Obligations,  enforceable
in  accordance  with the terms hereof  against any and all of its  creditors and
purchasers  and such security  interest is prior to all other Liens in existence
on the date hereof other than Premitted Liens.

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

                  (e) it shall not dispose of any of the  Collateral  whether by
sale, lease or otherwise except for the sale of Inventory in the ordinary course
of  business  and for the  disposition  or transfer  in the  ordinary  course of
business  during any fiscal year of obsolete  and worn-out  Equipment  having an
aggregate  fair market  value of not more than  $100,000  and only to the extent
that (i) the proceeds of any such  disposition  are used to acquire  replacement

                                       4
<PAGE>

Equipment which is subject to Gryphon's  security  interest or are used to repay
Loans or to pay general corporate expenses,  or (ii) following the occurrence of
an Event of Default which  continues to exist the proceeds of which are remitted
to Gryphon to be held as cash collateral for the Obligations.

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

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

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

                  (i)  if  it  retains   possession  of  any  Chattel  Paper  or
Instrument with Gryphon's consent, upon Gryphon's request such Chattel Paper and
Instruments  shall be  marked  with the  following  legend:  "This  writing  and
obligations  evidenced or secured hereby are subject to the security interest of
Gryphon  Master  Fund,  L.P."  Notwithstanding  the  foregoing,   following  the
indefeasible  payment in full of all obligations  and  liabilities  owing by the
Companies to Laurus Master Fund, Ltd. (the "Laurus  Debt"),  upon the reasonable
request of Gryphon,  such Chattel  Paper and  Instruments  shall be delivered to
Gryphon.

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

                  (k) it shall notify  Gryphon  promptly and in any event within
three (3) Business Days after  obtaining  knowledge  thereof (i) of any event or
circumstance  that, to its  knowledge,  would cause Gryphon to consider any then
existing Account and/or Inventory as no longer  constituting an Eligible Account
or Eligible  Inventory,  as the case may be; (ii) of any  material  delay in its
performance  of any of its  obligations  to any  Account  Debtor;  (iii)  of any
assertion   by  any  Account   Debtor  of  any  material   claims,   offsets  or
counterclaims;  (iv) of any  allowances,  credits and/or monies granted by it to
any Account  Debtor;  (v) of all material  adverse  information  relating to the
financial  condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.

                                       5
<PAGE>

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

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

                  (n) it shall maintain and keep the tangible  Collateral at the
addresses listed in Schedule 12(bb), provided, that it may change such locations
or open a new location,  provided that it provides  Gryphon at least thirty (30)
days prior written notice of such changes or new location and (ii) prior to such
change or opening of a new location where Collateral having a value of more than
$50,000 will be located,  it executes  and  delivers to Gryphon such  agreements
deemed  reasonably   necessary  or  prudent  by  Gryphon,   including   landlord
agreements,  mortgagee  agreements  and warehouse  agreements,  each in form and
substance  satisfactory to Gryphon, to adequately protect and maintain Gryphon's
security interest in such Collateral.

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

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

                  8. Payment of Accounts.

                  (a) Following the  indefeasible  payment in full of the Laurus
Debt, each Company will irrevocably direct all of its present and future Account
Debtors and other Persons obligated to make payments constituting  Collateral to
make such  payments  directly to the  lockboxes  maintained by such Company (the
"Lockboxes")  with  Frost  National  Bank or such  other  financial  institution
accepted by Gryphon in writing as may be selected by such Company (the  "Lockbox
Bank")  pursuant  to the  terms  of the  certain  agreements  among  one or more
Companies,  Gryphon  and/or the Lockbox  Bank.  On or prior to the Closing Date,
each  Company  shall and shall  cause the  Lockbox  Bank to enter  into all such
documentation  acceptable to Gryphon pursuant to which,  among other things, the
Lockbox  Bank  agrees to: (a) sweep the Lockbox on a daily basis and deposit all
checks received  therein to an account  designated by Gryphon in writing and (b)
comply only with the instructions or other directions of Gryphon  concerning the
Lockbox. All of each Company's invoices, account statements and other written or
oral communications directing,  instructing,  demanding or requesting payment of
any Account of any Company or any other  amount  constituting  Collateral  shall
conspicuously  direct  that all  payments  be made to the  Lockbox or such other
address as Gryphon may direct in writing.  If,  notwithstanding the instructions

                                       6
<PAGE>

to Account  Debtors,  any Company  receives any  payments,  such  Company  shall
immediately  remit such  payments  to Gryphon  in their  original  form with all
necessary  endorsements.  Until so remitted,  such  Company  shall hold all such
payments in trust for and as the  property  of Gryphon  and shall not  commingle
such payments with any of its other funds or property.

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

                  9. Collection and Maintenance of Collateral.

                  (a) Gryphon may verify each  Company's  Accounts  from time to
time,  but not more often than once every three (3)  months,  unless an Event of
Default  has  occurred  and  is  continuing   or  Gryphon   believes  that  such
verification  is necessary to preserve or protect the  Collateral,  utilizing an
audit control company or any other agent of Gryphon.

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

                  (c) As  Gryphon  receives  the  proceeds  of  Accounts  of any
Company, it shall (i) apply such proceeds,  as required,  to amounts outstanding
under the Note,  and (ii) remit all such  remaining  proceeds  (net of interest,
fees and other amounts then due and owing to Gryphon hereunder) to Company Agent
(for the benefit of the  applicable  Companies)  upon request (but no more often
than twice a week). Notwithstanding the foregoing,  following the occurrence and
during the continuance of an Event of Default,  Gryphon,  at its option, may (a)
apply such proceeds to the Obligations in such order as Gryphon shall elect, (b)
hold all such proceeds as cash  collateral for the  Obligations and each Company
hereby grants to Gryphon a security interest in such cash collateral  amounts as
security for the Obligations and/or (c) do any combination of the foregoing.

                  10.  Inspections  and  Appraisals.  At all times during normal
business hours,  and upon reasonable  notice (provided that no such prior notice
shall be  required  to be given in the event  Gryphon  believes  such  access is
necessary to preserve or protect the  Collateral or following the occurrence and
during the  continuance  of an Event of  Default)  Gryphon,  and/or any agent of
Gryphon  shall have the right to (a) have  access to,  visit,  inspect,  review,
evaluate  and  make  physical  verification  and  appraisals  of each  Company's
properties and the Collateral, (b) inspect, audit and copy (or take originals if
necessary)  and make extracts from each Company's  Books and Records,  including
management  letters  prepared  by the  Accountants,  and (c)  discuss  with each
Company's  directors,  principal  officers,  and independent  accountants,  each
Company's  business,  assets,  liabilities,   financial  condition,  results  of
operations  and  business  prospects.  Each  Company will deliver to Gryphon any
instrument  necessary  for Gryphon to obtain  records  from any  service  bureau
maintaining  records for such  Company.  If any  internally  prepared  financial
information, including that required under this Section is unsatisfactory in any
manner to Gryphon, Gryphon may request that the Accountants review the same.

                                       7
<PAGE>

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

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

                  (b) As soon as  available  and in any event  within forty five
(45) days after the end of each quarter, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of each Company as at the
end of and for  such  quarter  and for the  year  to  date  period  then  ended,
prepared,  if Gryphon so requests,  on a consolidating and consolidated basis to
include all  Subsidiaries and Affiliates of each Company,  in reasonable  detail
and  stating in  comparative  form the figures  for the  corresponding  date and
periods in the previous year, all prepared in accordance  with GAAP,  subject to
year-end adjustments and accompanied by a certificate of the Parent's President,
Chief  Executive  Officer  or Chief  Financial  Officer,  stating  (i) that such
financial  statements  have been  prepared in accordance  with GAAP,  subject to
year-end audit  adjustments,  and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default  hereunder not  theretofore
reported and remedied and, if so,  stating in  reasonable  detail the facts with
respect thereto;

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

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

                                       8
<PAGE>

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

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

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

                  (c) Capitalization; Voting Rights.

                             (i) The authorized  capital stock of the Parent, as
of the date hereof consists  1,010,502,000 of which  1,000,000,000 are shares of
Common Stock,  par value $0.001 per share,  99,776,704  shares of which of which
are issued and  outstanding  and 10,502,000 are shares of preferred  stock,  par
value $0.001 per share of which 378,061  shares of Series A preferred  stock are
issued and outstanding. The authorized,  issued and outstanding capital stock of
each Subsidiary of each Company is set forth on Schedule 12(c).

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

                                       9
<PAGE>

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

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

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

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

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

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

                  (e)  Liabilities.  Neither it nor any of its  Subsidiaries has
any liabilities,  except current liabilities  incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.

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

                             (i)  There  are  no   agreements,   understandings,
instruments,  contracts,  proposed  transactions,  judgments,  orders,  writs or
decrees to which it or any of its Subsidiaries is a party or to its knowledge by
which it is bound which may involve:  (i) obligations  (contingent or otherwise)
of, or payments to, it or any of its  Subsidiaries  in excess of $75,000  (other
than obligations of, or payments to, it or any of its Subsidiaries  arising from
purchase or sale agreements entered into in the ordinary course of business); or

                                       10
<PAGE>

(ii) the  transfer or license of any patent,  copyright,  trade  secret or other
proprietary  right to or from it (other than licenses  arising from the purchase
of "off the shelf" or other standard products);  or (iii) provisions restricting
the development,  manufacture or distribution of its or any of its Subsidiaries'
products or services;  or (iv)  indemnification by it or any of its Subsidiaries
with respect to infringements of proprietary rights.

                             (ii) Since June 30, 2005 (the "Balance Sheet Date")
neither it nor any of its Subsidiaries  has: (i) declared or paid any dividends,
or  authorized  or made any  distribution  upon or with  respect to any class or
series of its capital stock;  (ii) incurred any  indebtedness for money borrowed
or any other liabilities (other than ordinary course  obligations)  individually
in  excess  of  $50,000  or,  in the  case of  indebtedness  and/or  liabilities
individually  less than $50,000,  in excess of $100,000 in the aggregate;  (iii)
made any loans or advances to any Person not in excess,  individually  or in the
aggregate,  of $100,000,  other than ordinary  advances for travel expenses;  or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its Inventory in the ordinary course of business.

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

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

                             (v) The Parent makes and keeps books,  records, and
accounts,  that,  in  reasonable  detail,  accurately  and  fairly  reflect  the
transactions and dispositions of its assets. It maintains  internal control over
financial reporting  ("Financial  Reporting Controls") designed by, or under the
supervision of, its principal executive and principal  financial  officers,  and
effected by its board of directors,  management, and other personnel, to provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
GAAP, including that:

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

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

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

                                       11
<PAGE>

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

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

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

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

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

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

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

                             (iv)  obligations  listed  in its  and  each of its
Subsidiary's  financial  statements or disclosed in any of the Parent's Exchange
Act Filings.

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

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

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

                                       12
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       13
<PAGE>

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

All facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or used by it or any of its  Subsidiaries  are in good  operating  condition and
repair and are  reasonably  fit and usable for the  purposes  for which they are
being  used.  Except  as  set  forth  on  Schedule  12(i),  it and  each  of its
Subsidiaries  is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.

                  (j)      Intellectual Property.

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

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

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

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

                                       14
<PAGE>

                  (l) Litigation.  Except as set forth on Schedule 12(l),  there
is no action,  suit,  proceeding or investigation  pending or, to its knowledge,
currently  threatened  against it or any of its Subsidiaries that prevents it or
any of its  Subsidiaries  from  entering  into this  Agreement or the  Ancillary
Agreements,  or  from  consummating  the  transactions  contemplated  hereby  or
thereby,  or which has had, or could  reasonably  be  expected  to have,  either
individually or in the aggregate,  a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries'  current equity ownership,  nor is
it aware that there is any basis to assert any of the foregoing.  Neither it nor
any of its Subsidiaries is a party to or subject to the provisions of any order,
writ,  injunction,  judgment  or  decree of any  court or  government  agency or
instrumentality.  There is no action, suit, proceeding or investigation by it or
any of its Subsidiaries currently pending or which it or any of its Subsidiaries
intends to initiate.

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

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

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

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

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

                                       15
<PAGE>

of its Subsidiaries has received any notice alleging that any such violation has
occurred. Except for employees who have a current effective employment agreement
with  it or any of its  Subsidiaries,  none  of its or any of its  Subsidiaries'
employees has been granted the right to continued employment by it or any of its
Subsidiaries or to any material compensation following termination of employment
with it or any of its  Subsidiaries.  Except  as set  forth on  Schedule  12(n),
neither it nor any of its  Subsidiaries is aware that any officer,  key employee
or group of employees  intends to terminate his, her or their employment with it
or  any  of  its  Subsidiaries,  as  applicable,  nor  does  it or  any  of  its
Subsidiaries  have a  present  intention  to  terminate  the  employment  of any
officer, key employee or group of employees.

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

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

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

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

                                       16
<PAGE>

                             (ii) any petroleum products or nuclear materials.

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

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

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

                  (u) SEC Reports and Financial Statements.  Except as set forth
on  Schedule  12(u),  it and  each  of its  Subsidiaries  has  filed  all  proxy
statements,  reports  and other  documents  required to be filed by it under the
Exchange  Act. The Parent has  furnished  Gryphon with copies of: (i) its Annual
Report on Form 10-KSB for its fiscal years ended December 31, 2004; and (ii) its
Quarterly  Reports on Form 10-QSB for its fiscal  quarters  ended March 31, 2005
and June 30, 2005,  and the Form 8-K filings which it has made during its fiscal
year  2005 to date  (collectively,  the "SEC  Reports").  Except as set forth on
Schedule 12(u),  each SEC Report was, at the time of its filing,  in substantial
compliance  with the  requirements  of its  respective  form and none of the SEC
Reports,  nor the financial  statements (and the notes thereto)  included in the
SEC Reports, as of their respective filing dates, contained any untrue statement
of a material  fact or omitted to state a material  fact  required  to be stated
therein  or  necessary  to  make  the  statements   therein,  in  light  of  the
circumstances  under  which  they were  made,  not  misleading.  Such  financial
statements  have been prepared in  accordance  with GAAP applied on a consistent
basis during the periods involved  (except (i) as may be otherwise  indicated in
such financial  statements or the notes thereto or (ii) in the case of unaudited
interim  statements,  to the extent  they may not  include  footnotes  or may be
condensed) and fairly present in all material respects the financial  condition,
the results of operations and cash flows of the Parent and its Subsidiaries,  on
a  consolidated  basis,  as of, and for, the periods  presented in each such SEC
Report.

                                       17
<PAGE>

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

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

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

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

                  (z)  Patriot  Act.  It  certifies  that,  to the  best  of its
knowledge, neither it nor any of its Subsidiaries has been designated, nor is or
shall be owned or controlled, by a "suspected terrorist" as defined in Executive
Order  13224.  It hereby  acknowledges  that  Gryphon  seeks to comply  with all
applicable  laws  concerning  money  laundering  and  related   activities.   In
furtherance of those efforts, it hereby represents, warrants and covenants that:
(i) none of the cash or property that it or any of its Subsidiaries  will pay or
will contribute to Gryphon has been or shall be derived from, or related to, any
activity  that  is  deemed  criminal  under  United  States  law;  and  (ii)  no
contribution  or payment by it or any of its  Subsidiaries  to  Gryphon,  to the
extent  that they are within its or any such  Subsidiary's  control  shall cause
Gryphon to be in  violation  of the United  States Bank  Secrecy Act, the United
States  International  Money Laundering Control Act of 1986 or the United States
International  Money Laundering  Abatement and  Anti-Terrorist  Financing Act of
2001.  It  shall  promptly  notify  Gryphon  if  any of  these  representations,
warranties and covenants  ceases to be true and accurate  regarding it or any of
its  Subsidiaries.  It shall  provide  Gryphon with any  additional  information
regarding  it and each  Subsidiary  thereof  that  Gryphon  deems  necessary  or
convenient  to ensure  compliance  with all  applicable  laws  concerning  money

                                       18
<PAGE>

laundering and similar activities. It understands and agrees that if at any time
it is  discovered  that any of the  foregoing  representations,  warranties  and
covenants  are  incorrect,  or  if  otherwise  required  by  applicable  law  or
regulation  related to money  laundering  or  similar  activities,  Gryphon  may
undertake  appropriate  actions  to ensure  compliance  with  applicable  law or
regulation,  including  but not  limited to  segregation  and/or  redemption  of
Gryphon's  investment  in it. It further  understands  that  Gryphon may release
confidential  information about it and its Subsidiaries and, if applicable,  any
underlying  beneficial  owners,  to proper  authorities if Gryphon,  in its sole
discretion,  determines  that it is in the best interests of Gryphon in light of
relevant  rules and  regulations  under the laws set  forth in  subsection  (ii)
above.

                  (aa)  Company   Name;   Locations  of  Offices,   Records  and
Collateral.  Schedule  12(aa)  sets forth each  Company's  name as it appears in
official  filings in the state of its  organization,  the type of entity of each
Company, the organizational identification number issued by each Company's state
of  organization  or a  statement  that no such  number  has been  issued,  each
Company's  state of  organization,  and the  location  of each  Company's  chief
executive office, corporate offices,  warehouses,  other locations of Collateral
and locations  where records with respect to Collateral  are kept  (including in
each  case the  county  of such  locations)  and,  except  as set  forth in such
Schedule  12(aa),  such locations  have not changed during the preceding  twelve
months. As of the Closing Date, during the prior five years, except as set forth
in Schedule  12(aa),  no Company has been known as or conducted  business in any
other  name  (including  trade  names).  Each  Company  has  only  one  state of
organization.

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

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

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

                  (b)  Listing.   It  shall  promptly   secure  the  listing  or
quotation, as applicable, of the shares of Common Stock issuable upon conversion
of the Note and exercise of the Options and the Warrants on the Principal Market
upon which shares of Common Stock are listed or quoted, as applicable,  (subject
to official notice of issuance) and shall maintain such listing or quotation, as

                                       19
<PAGE>

applicable,  so long as any other  shares of Common  Stock shall be so listed or
quoted,  as applicable.  The Parent shall maintain the listing or quotation,  as
applicable,  of its Common Stock on the Principal Market, and will comply in all
material  respects  with the Parent's  reporting,  filing and other  obligations
under the bylaws or rules of the  National  Association  of  Securities  Dealers
("NASD") and such exchanges, as applicable.

                  (c) Market  Regulations.  It shall  notify  the SEC,  NASD and
applicable  state  authorities,  in accordance with their  requirements,  of the
transactions  contemplated by this Agreement, and shall take all other necessary
action and  proceedings as may be required and permitted by applicable law, rule
and  regulation,  for the legal and valid  issuance of the Securities to Gryphon
and promptly provide copies thereof to Gryphon.

                  (d) Reporting Requirements.  It shall timely file with the SEC
all reports  required to be filed  pursuant to the Exchange Act and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.

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

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

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

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

                             (iii) discuss its or any such Subsidiary's affairs,
finances and accounts with its or any such Subsidiary's directors,  officers and
Accountants.

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

                  (g) Taxes. It shall,  and shall cause each of its Subsidiaries
to, promptly pay and discharge, or cause to be paid and discharged, when due and
payable,  all  lawful  taxes,  assessments  and  governmental  charges or levies
imposed upon it and its Subsidiaries' income, profits,  property or business, as
the case may be; provided,  however,  that any such tax,  assessment,  charge or

                                       20
<PAGE>

levy need not be paid currently if (i) the validity  thereof shall currently and
diligently be contested in good faith by appropriate proceedings, (ii) such tax,
assessment,  charge or levy shall have no effect on the Lien priority of Gryphon
in the Collateral, and (iii) if it and/or such Subsidiary, as applicable,  shall
have set aside on its and/or such  Subsidiary's  books  adequate  reserves  with
respect thereto in accordance with GAAP; and provided,  further,  that it shall,
and shall cause each of its  Subsidiaries  to, pay all such taxes,  assessments,
charges or levies  forthwith upon the  commencement  of proceedings to foreclose
any lien which may have attached as security therefor.

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

                                       21
<PAGE>

advisable to reduce the same to cash. Gryphon is hereby authorized to adjust and
compromise  claims.  All  loss  recoveries  received  by  Gryphon  upon any such
insurance  may be  applied to the  Obligations,  in such order as Gryphon in its
sole discretion shall determine or shall otherwise be delivered to Company Agent
for the benefit of the  applicable  Company and/or its  Subsidiaries;  provided;
however,  any loss  recoveries  received by Gryphon  arising  from the damage or
destruction  of Collateral  may be used by the  Companies to repair,  restore or
replace such Collateral, as the case may be, so long as the fair market value of
any such  Collateral  damaged or destroyed  in any single  incident is less than
$25,000 and the fair market  value,  in the  aggregate,  of all such  Collateral
owned by Borrower and damaged,  destroyed or condemned  during any  twelve-month
period is less than  $50,000.  Any  surplus  shall be paid by Gryphon to Company
Agent for the benefit of the  applicable  Company  and/or its  Subsidiaries,  or
applied as may be otherwise  required by law. Any  deficiency  thereon  shall be
paid, as applicable, by Companies and their Subsidiaries to Gryphon, on demand.

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

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

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

                  (l) Required Approvals. It shall not, and shall not permit any
of its  Subsidiaries  to,  without the prior  written  consent of  Gryphon,  (i)
create,  incur,  assume or suffer to exist any indebtedness  (exclusive of trade
debt) whether  secured or unsecured  other than each Company's  indebtedness  to
Gryphon and as set forth on Schedule  13(l)(i)  attached  hereto and made a part
hereof;  (ii) cancel any debt owing to it in excess of $100,000 in the aggregate
during any 12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently  liable in connection with any obligations of any other
Person,  except  the  endorsement  of  negotiable   instruments  by  it  or  its
Subsidiaries  for deposit or collection or similar  transactions in the ordinary
course  of  business;  (iv)  directly  or  indirectly  declare,  pay or make any
dividend  or  distribution  on any class of its Stock or apply any of its funds,
property or assets to the purchase, redemption or other retirement of any of its
or its  Subsidiaries'  Stock  outstanding  on the  date  hereof,  or  issue  any
preferred stock; (v) purchase or hold beneficially any Stock or other securities
or evidences of  indebtedness  of, make or permit to exist any loans or advances
to, or make any  investment  or acquire any  interest  whatsoever  in, any other
Person,  including any partnership or joint venture, except (x) travel advances,

                                       22
<PAGE>

(y) loans to its and its  Subsidiaries'  officers and employees not exceeding at
any one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries
so long as such Subsidiaries are designated as either a co-borrower hereunder or
has entered into such guaranty and security  documentation  required by Gryphon,
including,  without  limitation,  to grant to Gryphon a first priority perfected
security interest in substantially all of such Subsidiary's assets to secure the
Obligations;  (vi)  create or permit to exist  any  Subsidiary,  other  than any
Subsidiary  in existence on the date hereof and listed in Schedule  12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Gryphon as
either a  co-borrower  or guarantor  hereunder  and such  Subsidiary  shall have
entered  into all such  documentation  required by Gryphon,  including,  without
limitation,  to grant to Gryphon a first priority perfected security interest in
substantially all of such Subsidiary's  assets to secure the Obligations;  (vii)
directly or indirectly,  prepay any  indebtedness  (other than to Gryphon and in
the ordinary  course of business),  or repurchase,  redeem,  retire or otherwise
acquire any  indebtedness  (other than to Gryphon and in the ordinary  course of
business) except to make scheduled  payments of principal and interest  thereof;
(viii) enter into any merger, consolidation or other reorganization with or into
any other  Person or  acquire  all or a  portion  of the  assets or Stock of any
Person or permit any other Person to  consolidate  with or merge with it, unless
(A) (1) such Company is the  surviving  entity of such merger or  consolidation,
(2) no Event of Default shall exist immediately prior to and after giving effect
to such merger or  consolidation,  (3) such Company shall have provided  Gryphon
copies of all  documentation  relating to such merger or  consolidation  and (4)
such Company shall have  provided  Gryphon with at least thirty (30) days' prior
written  notice  of such  merger  or  consolidation  or (B) (1) such  merger  or
consolidation  results in the  indefeasible  payment in full of all  Obligations
(including,  without  limitation,  all early  termination  and  prepayment  fees
required to be paid hereunder and under the terms of the Ancillary  Agreements),
(2) such  Company  shall  have  provided  Gryphon  copies  of all  documentation
relating  to such  merger  or  consolidation  and (3) such  Company  shall  have
provided  Gryphon at least thirty (30) days' prior written  notice of such early
prepayment of the Obligations; (ix) materially change the nature of the business
in which it is presently  engaged;  (x) become  subject to  (including,  without
limitation,  by way  of  amendment  to or  modification  of)  any  agreement  or
instrument  which by its terms would (under any  circumstances)  restrict its or
any of its  Subsidiaries'  right to perform the  provisions of this Agreement or
any of the Ancillary Agreements; (xi) change its fiscal year or make any changes
in accounting  treatment and reporting practices without prior written notice to
Gryphon  except as required by GAAP or in the tax reporting  treatment or except
as required by law; (xii) enter into any transaction with any employee, director
or Affiliate,  except in the ordinary course on arms-length  terms;  (xiii) bill
Accounts under any name except the present name of such Company;  or (xiv) sell,
lease,  transfer or otherwise dispose of any of its properties or assets, or any
of the  properties  or assets of its  Subsidiaries,  except  for (1) the sale of
Inventory in the ordinary course of business, (2) the disposition or transfer in
the ordinary  course of business during any fiscal year of obsolete and worn-out
Equipment  and only to the extent that (x) the proceeds of any such  disposition
are used to acquire  replacement  Equipment  which is subject to Gryphon's first
priority  security  interest  or are  used  to  repay  Loans  or to pay  general
corporate expenses, or (y) following the occurrence of an Event of Default which
continues to exist,  the proceeds of which are remitted to Gryphon to be held as
cash collateral for the  Obligations;  and (3) the sale of real property so long
as the Company  Agent has  received  the prior  written  consent of Gryphon with
respect to such sale, which consent shall not be unreasonably withheld, provided
that,  (x) the  Company  Agent  provided  Gryphon not less than thirty (30) days

                                       23
<PAGE>

prior written notice of such sale, (y) such sale is on  commercially  reasonable
terms  in an  arms-length  transaction  and (z) all  proceeds  of such  sale are
remitted  directly to Gryphon to repay the  Obligations in such order as Gryphon
shall elect.

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

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

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

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

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

                  (o) Legal Name, etc. It shall not, without  providing  Gryphon
with 30 days  prior  written  notice,  change  (i) its name as it appears in the
official filings in the state of its organization, (ii) the type of legal entity
it is, (iii) its organization identification number, if any, issued by its state
of organization,  (iv) its state of organization or (v) amend its certificate of
incorporation, by-laws or other organizational document.

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

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

                                       24
<PAGE>

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

                  (s) Offering  Restrictions.  Except as previously disclosed in
the SEC  Reports  or in the  Exchange  Act  Filings,  or stock or stock  options
granted to its  employees or directors,  neither it nor any of its  Subsidiaries
shall,  prior to the full repayment or conversion of the Note (together with all
accrued and unpaid interest and fees related thereto), (x) enter into any equity
line of credit  agreement or similar  agreement or (y) issue,  or enter into any
agreement to issue, any securities with a  variable/floating  conversion  and/or
pricing  feature  which  are  or  could  be  (by  conversion  or   registration)
free-trading securities (i.e. common stock subject to a registration statement).

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

                  (u) [Omitted]

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

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

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

                  (b) Investment  Representations.  Gryphon understands that the
Securities  are  being  offered  pursuant  to  an  exemption  from  registration
contained in the  Securities  Act based in part upon  Gryphon's  representations
contained in this Agreement,  including,  without limitation, that Gryphon is an

                                       25
<PAGE>

"accredited  investor"  within the meaning of Regulation D under the  Securities
Act.  Gryphon  has  received or has had full  access to all the  information  it
considers  necessary or appropriate to make an informed investment decision with
respect to the Note to be issued to it under this  Agreement and the  Securities
acquired by it upon the conversion of the Note.

                  (c) Gryphon  Bears  Economic  Risk.  Gryphon  has  substantial
experience in  evaluating  and investing in private  placement  transactions  of
securities  in  companies  similar  to the  Parent  so  that  it is  capable  of
evaluating  the  merits  and risks of its  investment  in the Parent and has the
capacity to protect its own  interests.  Gryphon must bear the economic  risk of
this  investment  until the  Securities  are sold  pursuant to (i) an  effective
registration  statement  under the  Securities  Act, or (ii) an  exemption  from
registration is available.

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

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

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

                  (g)  Shorting.  Neither  Gryphon nor any of its  Affiliates or
investment  partners has, will, or will cause any Person,  to directly engage in
"short  sales"  of the  Parent's  Common  Stock  as long as any  Note  shall  be
outstanding.

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

                                       26
<PAGE>

Gryphon's investment in the Parent.  Gryphon further understands that the Parent
may release  information  about  Gryphon  and,  if  applicable,  any  underlying
beneficial  owners, to proper authorities if the Parent, in its sole discretion,
determines  that it is in the best  interests of the Parent in light of relevant
rules and regulations under the laws set forth in subsection (ii) above.

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

                  16. Power of Attorney.  Each Company hereby appoints  Gryphon,
or any other Person whom Gryphon may designate as such Company's attorney,  with
power to: (i) endorse such  Company's  name on any checks,  notes,  acceptances,
money  orders,  drafts or other forms of payment or security  that may come into
Gryphon's  possession;  (ii) sign such  Company's name on any invoice or bill of
lading relating to any Accounts,  drafts against Account Debtors,  schedules and
assignments of Accounts,  notices of assignment,  financing statements and other
public records, verifications of Account and notices to or from Account Debtors;
(iii) verify the validity, amount or any other matter relating to any Account by
mail, telephone, telegraph or otherwise with Account Debtors; (iv) do all things
necessary to carry out this Agreement,  any Ancillary  Agreement and all related
documents;  and (v) on or after the occurrence and during the continuation of an
Event of Default,  notify the post office  authorities to change the address for
delivery of such  Company's  mail to an address  designated  by Gryphon,  and to
receive,  open and dispose of all mail  addressed to such Company.  Each Company
hereby ratifies and approves all acts of the attorney.  Neither Gryphon, nor the
attorney  will be liable for any acts or  omissions or for any error of judgment
or mistake of fact or law,  except for gross  negligence or willful  misconduct.
This power,  being coupled with an interest,  is  irrevocable so long as Gryphon
has a security interest and until the Obligations have been fully satisfied.

                  17. Term of Agreement.  Gryphon's  agreement to make Loans and
extend financial  accommodations  under and in accordance with the terms of this

                                       27
<PAGE>

Agreement or any  Ancillary  Agreement  shall  continue in full force and effect
until the expiration of the Term. At Gryphon's election following the occurrence
of an Event of Default, Gryphon may terminate this Agreement. The termination of
the  Agreement  shall  not  affect  any of  Gryphon's  rights  hereunder  or any
Ancillary  Agreement and the provisions  hereof and thereof shall continue to be
fully operative until all transactions entered into, rights or interests created
and the Obligations have been irrevocably  disposed of, concluded or liquidated.
Notwithstanding  the foregoing,  Gryphon shall release its security interests at
any time after  thirty (30) days notice  upon  irrevocable  payment to it of all
Obligations  if each Company  shall have (i)  provided  Gryphon with an executed
release of any and all claims  which such  Company may have or  thereafter  have
under this  Agreement and all Ancillary  Agreements  and (ii) paid to Gryphon an
early  payment  fee in an  amount  equal to (1) five  percent  (5%) of the Total
Investment  Amount if such payment occurs prior to the first  anniversary of the
Closing  Date,  (2) four  percent  (4%) of the Total  Investment  Amount if such
payment  occurs on or after the first  anniversary of the Closing Date and prior
to the second  anniversary of the Closing Date and (3) three percent (3%) of the
Total Investment  Amount if such termination  occurs thereafter during the Term;
such fee being  intended  to  compensate  Gryphon  for its  costs  and  expenses
incurred in initially  approving  this Agreement or extending  same.  Such early
payment fee shall be due and payable  jointly and  severally by the Companies to
Gryphon upon termination by acceleration of this Agreement by Gryphon due to the
occurrence and continuance of an Event of Default.

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

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

                  (a)  failure to make  payment of any of the  Obligations  when
required  hereunder,  and, in any such case,  such failure shall  continue for a
period of three (3) days following the date upon which any such payment was due;

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

                  (c) failure to perform under, and/or committing any breach of,
in any material respect,  this Agreement or any covenant contained herein, which
failure or breach  shall  continue  without  remedy for a period of fifteen (15)
days after the occurrence thereof;

                                       28
<PAGE>

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

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

                  (f)  attachments  or  levies  in  excess  of  $100,000  in the
aggregate are made upon any Company's  assets or a judgment is rendered  against
any Company's  property  involving a liability of more than $100,000 which shall
not have been vacated, discharged, stayed or bonded within thirty (30) days from
the entry thereof;

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

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

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

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

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

                  (l) any  "Person"  or "group"  (as such  terms are  defined in
Sections  13(d) and 14(d) of the Exchange  Act, as in effect on the date hereof)
is or becomes the  "beneficial  owner" (as defined in Rules  13(d)-3 and 13(d)-5
under the  Exchange  Act),  directly  or  indirectly,  of 35% or more on a fully
diluted  basis of the then  outstanding  voting  equity  interest of any Company
(other than a "Person"  or "group"  that  beneficially  owns 35% or more of such
outstanding  voting  equity  interests  of the  respective  Company  on the date

                                       29
<PAGE>

hereof) or (ii) the Board of Directors of the Parent shall cease to consist of a
majority of the Parent's  board of  directors  on the date hereof (or  directors
appointed by a majority of the board of directors in effect immediately prior to
such appointment);

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

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

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

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

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

                  (r) the  Parent's  failure to deliver  Common Stock to Gryphon
pursuant to and in the form required by the Convertible Note and this Agreement,
if such  failure  to  deliver  Common  Stock  shall not be cured  within two (2)
Business Days or any Company is required to issue a replacement  Note to Gryphon
and such Company  shall fail to deliver such  replacement  Note within seven (7)
Business Days;

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

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

                  20. Remedies. Following the occurrence of an Event of Default,
Gryphon  shall have the right to demand  repayment  in full of all  Obligations,

                                       30
<PAGE>

whether  or not  otherwise  due.  Until  all  Obligations  have  been  fully and
indefeasibly satisfied, Gryphon shall retain its Lien in all Collateral. Gryphon
shall  have,  in  addition  to all  other  rights  provided  herein  and in each
Ancillary  Agreement,  the rights and remedies of a secured party under the UCC,
and under other  applicable  law, all other legal and equitable  rights to which
Gryphon may be entitled, including the right to take immediate possession of the
Collateral,  to require each Company to assemble the  Collateral,  at Companies'
joint and  several  expense,  and to make it  available  to  Gryphon  at a place
designated  by Gryphon  which is  reasonably  convenient  to both parties and to
enter any of the  premises of any Company or wherever  the  Collateral  shall be
located, with or without force or process of law, and to keep and store the same
on said  premises  until  sold  (and if said  premises  be the  property  of any
Company, such Company agrees not to charge Gryphon for storage thereof), and the
right to apply for the  appointment of a receiver for such  Company's  property.
Further,  Gryphon may, at any time or times after the  occurrence of an Event of
Default,  sell and  deliver all  Collateral  held by or for Gryphon at public or
private sale for cash,  upon credit or  otherwise,  at such prices and upon such
terms as Gryphon,  in Gryphon's sole discretion,  deems advisable or Gryphon may
otherwise  recover upon the Collateral in any commercially  reasonable manner as
Gryphon, in its sole discretion,  deems advisable. The requirement of reasonable
notice shall be met if such notice is mailed postage prepaid to Company Agent at
Company  Agent's address as shown in Gryphon's  records,  at least ten (10) days
before the time of the event of which notice is being given.  Gryphon may be the
purchaser at any sale, if it is public.  In connection  with the exercise of the
foregoing  remedies,  Gryphon is granted permission to use all of each Company's
Intellectual  Property. The proceeds of sale shall be applied first to all costs
and expenses of sale,  including  attorneys' fees, and second to the payment (in
whatever  order  Gryphon  elects)  of all  Obligations.  After the  indefeasible
payment  and  satisfaction  in full of all of the  Obligations,  and  after  the
payment  by  Gryphon  of any other  amount  required  by any  provision  of law,
including  Section  9-608(a)(1)  of the UCC (but only after Gryphon has received
what  Gryphon  considers  reasonable  proof of a  subordinate  party's  security
interest),  the surplus, if any, shall be paid to Company Agent (for the benefit
of the  applicable  Companies)  or its  representatives  or to whosoever  may be
lawfully  entitled to receive the same, or as a court of competent  jurisdiction
may direct.  The Companies shall remain jointly and severally  liable to Gryphon
for any deficiency.  In addition,  the Companies shall jointly and severally pay
Gryphon a liquidation fee ("Liquidation Fee") in the amount of five percent (5%)
of the actual  amount  collected in respect of each Account  outstanding  at any
time during a Liquidation  Period".  For purposes hereof,  "Liquidation  Period"
means a period:  (i) beginning on the earliest date of (x) an event  referred to
in Section 19(i) or 19(j), or (y) the cessation of any Company's  business;  and
(ii) ending on the date on which Gryphon has actually  received all  Obligations
due and  owing  it  under  this  Agreement  and the  Ancillary  Agreements.  The
Liquidation  Fee  shall  be  paid on the  date on  which  Gryphon  collects  the
applicable  Account by  deduction  from the proceeds  thereof.  Each Company and
Gryphon  acknowledge  that the actual  damages that would be incurred by Gryphon
after the  occurrence  of an Event of Default would be difficult to quantify and
that such  Company and Gryphon  have  agreed that the fees and  obligations  set
forth  in  this  Section  and  in  this  Agreement  would  constitute  fair  and
appropriate liquidated damages in the event of any such termination.

                  21. Waivers.  To the full extent  permitted by applicable law,
each Company hereby waives (a)  presentment,  demand and protest,  and notice of
presentment,  dishonor,  intent to accelerate,  acceleration,  protest, default,
nonpayment,  maturity, release, compromise,  settlement, extension or renewal of

                                       31
<PAGE>

any or all of this  Agreement and the  Ancillary  Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and
guaranties  at any time held by Gryphon on which such  Company may in any way be
liable, and hereby ratifies and confirms whatever Gryphon may do in this regard;
(b) all rights to notice and a hearing prior to Gryphon's  taking  possession or
control of, or to Gryphon's replevin, attachment or levy upon, any Collateral or
any bond or  security  that might be  required  by any court  prior to  allowing
Gryphon to exercise any of its remedies;  and (c) the benefit of all  valuation,
appraisal and exemption laws. Each Company acknowledges that it has been advised
by counsel of its choices and  decisions  with  respect to this  Agreement,  the
Ancillary Agreements and the transactions evidenced hereby and thereby.

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

                  23.  Assignment  By Gryphon.  Gryphon may assign any or all of
the Obligations  together with any or all of the security therefor to any Person
and any such  assignee  shall  succeed to all of  Gryphon's  rights with respect
thereto;  provided  that  Gryphon  shall not be  permitted  to  effect  any such

                                       32
<PAGE>

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

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

                  25.  Application of Payments.  Each Company  irrevocably waive
the right to direct the application of any and all payments at any time or times
hereafter  received by Gryphon from or on such Company's behalf and each Company
hereby irrevocably agrees that Gryphon shall have the continuing exclusive right
to  apply  and  reapply  any and all  payments  received  at any  time or  times
hereafter  against the Obligations  hereunder in such manner as Gryphon may deem
advisable  notwithstanding  any entry by Gryphon upon any of Gryphon's books and
records.

                  26.  Indemnity.  Each  Company  hereby  jointly and  severally
indemnify and hold Gryphon, and its respective affiliates,  employees, attorneys
and agents (each,  an "Indemnified  Person"),  harmless from and against any and
all suits,  actions,  proceedings,  claims,  damages,  losses,  liabilities  and
expenses  of any  kind or  nature  whatsoever  (including  attorneys'  fees  and
disbursements  and other  costs of  investigation  or defense,  including  those
incurred  upon any  appeal)  which may be  instituted  or  asserted  against  or
incurred  by any such  Indemnified  Person as the result of credit  having  been
extended,  suspended or terminated  under this Agreement or any of the Ancillary
Agreements or with respect to the execution, delivery, enforcement,  performance
and  administration  of, or in any other way arising out of or relating to, this
Agreement,  the  Ancillary  Agreements  or any other  documents or  transactions
contemplated  by or referred to herein or therein and any actions or failures to
act with  respect to any of the  foregoing,  except to the extent  that any such
indemnified liability is finally determined by a court of competent jurisdiction
to have  resulted  solely from such  Indemnified  Person's  gross  negligence or
willful misconduct.  NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY
COMPANY  OR TO ANY OTHER  PARTY OR TO ANY  SUCCESSOR,  ASSIGNEE  OR THIRD  PARTY
BENEFICIARY  OR ANY OTHER  PERSON  ASSERTING  CLAIMS  DERIVATIVELY  THROUGH SUCH
PARTY, FOR INDIRECT,  PUNITIVE,  EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE
ALLEGED AS A RESULT OF CREDIT  HAVING BEEN  EXTENDED,  SUSPENDED  OR  TERMINATED

                                       33
<PAGE>

UNDER THIS  AGREEMENT  OR ANY  ANCILLARY  AGREEMENT  OR AS A RESULT OF ANY OTHER
TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

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

                  28. Borrowing Agency Provisions.

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

                  (b) The  handling  of this credit  facility as a  co-borrowing
facility  with a borrowing  agent in the manner set forth in this  Agreement  is
solely as an accommodation to the Companies and at their request.  Gryphon shall
not incur any liability to any Company as a result thereof. To induce Gryphon to
do so and in consideration  thereof, each Company hereby indemnifies Gryphon and
holds  Gryphon  harmless  from and  against any and all  liabilities,  expenses,
losses,  damages and claims of damage or injury asserted  against Gryphon by any
Person  arising  from or  incurred by reason of the  handling  of the  financing
arrangements  of the  Companies as provided  herein,  reliance by Gryphon on any
request or  instruction  from Company Agent or any other action taken by Gryphon
with respect to this Paragraph 28.

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

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

                                       34
<PAGE>

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

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

Notices shall be provided as follows:

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

                  With a copy to:       _________________________
                                        _________________________
                                        _________________________
                                        Attention:  ________________
                                        Telephone:  ________________
                                        Facsimile:  ________________

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

                                       35
<PAGE>

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

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

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

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

                  (b) EACH COMPANY HEREBY  CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS  LOCATED IN THE COUNTY OF NEW YORK,  STATE OF NEW YORK SHALL HAVE
EXCLUSIVE  JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY
COMPANY,  ON THE ONE HAND,  AND GRYPHON,  ON THE OTHER HAND,  PERTAINING TO THIS
AGREEMENT OR ANY OF THE ANCILLARY  AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS  AGREEMENT OR ANY OF THE ANCILLARY  AGREEMENTS;  PROVIDED,  THAT
GRYPHON AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE
TO BE HEARD BY A COURT LOCATED  OUTSIDE OF THE COUNTY OF NEW YORK,  STATE OF NEW
YORK; AND FURTHER  PROVIDED,  THAT NOTHING IN THIS AGREEMENT  SHALL BE DEEMED OR
OPERATE TO PRECLUDE  GRYPHON FROM  BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN
ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,  TO REALIZE ON THE COLLATERAL
OR ANY OTHER  SECURITY  FOR THE  OBLIGATIONS,  OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF GRYPHON.  EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO SUCH  JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND EACH COMPANY  HEREBY WAIVES ANY OBJECTION  WHICH IT MAY HAVE BASED UPON LACK
OF PERSONAL JURISDICTION,  IMPROPER VENUE OR FORUM NON CONVENIENS.  EACH COMPANY
HEREBY  WAIVES  PERSONAL  SERVICE OF THE SUMMONS,  COMPLAINT  AND OTHER  PROCESS
ISSUED IN ANY SUCH  ACTION OR SUIT AND  AGREES  THAT  SERVICE  OF SUCH  SUMMONS,
COMPLAINT  AND  OTHER  PROCESS  MAY BE  MADE BY  REGISTERED  OR  CERTIFIED  MAIL
ADDRESSED  TO  COMPANY  AGENT AT THE  ADDRESS  SET FORTH IN  SECTION 29 AND THAT
SERVICE SO MADE SHALL BE DEEMED  COMPLETED  UPON THE EARLIER OF COMPANY  AGENT'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

                                       36
<PAGE>

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

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

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

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

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

                                       37
<PAGE>

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

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

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

                  38. Publicity.  Each Company hereby authorizes Gryphon to make
appropriate announcements of the financial arrangement entered into by and among
each Company and Gryphon, including, without limitation, announcements which are
commonly known as tombstones,  in such publications and to such selected parties
as Gryphon shall in its sole and absolute  discretion  deem  appropriate,  or as
required by applicable law.

                  39. Joinder.  It is understood and agreed that any Person that
desires to become a Company  hereunder,  or is required to execute a counterpart
of this Agreement  after the date hereof  pursuant to the  requirements  of this
Agreement or any Ancillary  Agreement,  shall become a Company  hereunder by (a)
executing a Joinder Agreement in form and substance satisfactory to Gryphon, (b)
delivering  supplements  to such exhibits and annexes to this  Agreement and the
Ancillary  Agreements  as Gryphon  shall  reasonably  request and (c) taking all
actions as specified in this  Agreement as would have been taken by such Company
had it been an original party to this Agreement, in each case with all documents
required  above to be  delivered to Gryphon and with all  documents  and actions
required above to be taken to the reasonable satisfaction of Gryphon.

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

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

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

                                       38
<PAGE>

                  (b) Any shares of Common Stock issued  pursuant to  conversion
of the Note or  exercise  of the  Options or the  Warrants,  shall bear a legend
which shall be in substantially the following form until such shares are covered
by an effective registration statement filed with the SEC:

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

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

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

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

                  "THIS WARRANT AND THE COMMON SHARES  ISSUABLE UPON EXERCISE OF
                  THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
                  OF 1933, AS AMENDED,  OR ANY APPLICABLE STATE SECURITIES LAWS.
                  THIS WARRANT AND THE COMMON  SHARES  ISSUABLE UPON EXERCISE OF
                  THIS  WARRANT MAY NOT BE SOLD,  OFFERED  FOR SALE,  PLEDGED OR
                  HYPOTHECATED  IN  THE  ABSENCE  OF AN  EFFECTIVE  REGISTRATION

                                       39
<PAGE>

                  STATEMENT  AS TO THIS  WARRANT  OR THE  UNDERLYING  SHARES  OF
                  COMMON STOCK UNDER SAID ACT AND  APPLICABLE  STATE  SECURITIES
                  LAWS OR AN  OPINION  OF  COUNSEL  REASONABLY  SATISFACTORY  TO
                  AMERICAN  TECHNOLOGIES  GROUP,  INC. THAT SUCH REGISTRATION IS
                  NOT REQUIRED."

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

                                       40
<PAGE>

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

                                        AMERICAN TECHNOLOGIES GROUP, INC.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        NORTH TEXAS STEEL COMPANY, INC.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        OMAHA HOLDINGS CORP.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        GRYPHON MASTER FUND, L.P.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                       41
<PAGE>

                              Annex A - Definitions

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

                  (a) all Inventory;

                  (b) all Equipment;

                  (c) all Fixtures;

                  (d) all General Intangibles;

                  (e) all Accounts;

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

                  (g) all Investment Property;

                  (h) all Stock;

                  (i) all Chattel Paper;

                  (j) all Letter-of-Credit Rights;

                  (k) all Instruments;

                                       2
<PAGE>

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

                  (m) all Books and Records;

                  (n) all Intellectual Property;

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

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

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

                  "Common  Stock"  means the  shares of stock  representing  the
Parent's common equity interests.

                  "Company Agent" means the Parent.

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

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

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

                  "Disclosure  Controls"  has the  meaning  given  such  term in
Section 12(f)(iv).

                  "Documents" means all "documents",  as such term is defined in
the UCC,  now owned or  hereafter  acquired  by any  Person,  wherever  located,
including all bills of lading, dock warrants, dock receipts, warehouse receipts,
and other documents of title, whether negotiable or non-negotiable.

                  "Eligible  Subsidiary" means each Subsidiary of the Parent set
forth on  Exhibit A hereto,  as the same may be  updated  from time to time with
Gryphon's written consent.

                                       3
<PAGE>

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

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

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

                  "Exchange Act" means the  Securities  Exchange Act of 1934, as
amended.

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

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

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

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

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

                  "Letter-of-Credit  Rights" means "letter-of-credit  rights" as
such term is defined in the UCC, now owned or hereafter  acquired by any Person,
including rights to payment or performance under a letter of credit,  whether or
not such Person,  as beneficiary,  has demanded or is entitled to demand payment
or performance.

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

                                       5
<PAGE>

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

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

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

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

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

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

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

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

                  "Note"  means the Note as that term is defined in Section 2(a)
hereof and any other notes made by Companies  in favor of Gryphon in  connection
with the transactions  contemplated  hereby, as each of the same may be amended,
supplemented, restated and/or otherwise modified from time to time.

                                       6
<PAGE>

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

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

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

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

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

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

                                       7
<PAGE>

Purchase Money  Indebtedness  to the extent  permitted in this Agreement and (f)
Liens granted to Laurus Master Fund,  L.P. and (g) Liens set forth on Schedule 2
hereto.

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

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

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

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

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

                                       8
<PAGE>

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

                  "SEC" means the Securities and Exchange Commission.

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

                  "Securities"  means the Note, the Options and the Warrants and
the shares of Common Stock which may be issued  pursuant to  conversion  of such
Note in whole or in part or exercise of such Warrants.

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

                  "Security Documents" means the Mortgage  Documentation and all
other security agreements,  mortgages,  cash collateral deposit letters, pledges
and other  agreements  which are executed by any Company,  any of its and or any
Guarantor favor of Gryphon.

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

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

                  "Stock"  means all  certificated  and  uncertificated  shares,
options,  warrants,   membership  interests,   general  or  limited  partnership
interests,  participation or other equivalents (regardless of how designated) of
or in a corporation, partnership, limited liability company or equivalent entity
whether voting or nonvoting,  including  common stock,  preferred  stock, or any
other  "equity  security" (as such term is defined in Rule 3a11-1 of the General
Rules and Regulations  promulgated by the SEC under the Securities  Exchange Act
of 1934).

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

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

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

                                        9
<PAGE>

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

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

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

                  "Warrants"  means that certain Common Stock  Purchase  Warrant
dated as of the  Closing  Date made by the Parent in favor of  Gryphon  and each
other warrant made by the Parent in favor of Gryphon, as each of the same may be
amended, restated, modified and/or supplemented from time to time.

                                       10
<PAGE>

                                    Exhibit A

                              Eligible Subsidiaries

              North Texas Steel Company, Inc., a Texas corporation

                  Omaha Holdings Corp., a Delaware corporation

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