Document:

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                                                                    EXHIBIT 10.6

        PHASE II DEVELOPMENT AND PHASE III FEASIBILITY STUDY AGREEMENT

          This DEVELOPMENT AGREEMENT ("Agreement") is effective as of
January 22, 1999, ("Effective Date") by and between Active Power, 11525
Stonehollow Drive, Suite 135, Austin, Texas 78758  ("ACTIVE POWER") and
Caterpillar Inc., 100 N.E. Adams Street, Peoria, Illinois  61629-6490
("CATERPILLAR").

          1.   DEFINITIONS
               -----------

          For purposes of this AGREEMENT, the following definitions shall apply:

               a)   "AFFILIATE" means any company, corporation, partnership or
other business entity which is more than fifty percent (50%) or more owned,
directly or indirectly, by a party to this AGREEMENT.

               b)   "BACKGROUND INTELLECTUAL PROPERTY" shall be all INTELLECTUAL
PROPERTY incorporated into the PHASE II PRODUCT other than that which is defined
as PROGRAM INTELLECTUAL PROPERTY.

               c)   "FIELD OF USE" shall mean earth-moving equipment,
construction equipment, mining equipment, forestry equipment, engines, engine
generator sets, agricultural equipment, paving equipment, components for all
such equipment and all reasonable extensions thereof which are mutually agreed
in writing by the parties hereto.

               d)   "INTELLECTUAL PROPERTY" includes, without limitation,
inventions, whether or not patentable, copyrights, computer software and
accompanying documentation, specifications, know how and original works of
authorship. INTELLECTUAL PROPERTY includes PROPRIETARY INFORMATION.

               e)   "PROGRAM INTELLECTUAL PROPERTY" means INTELLECTUAL PROPERTY
that is  created, made, conceived or reduced to practice in performance of work
under the PROGRAM with respect to UPS electronics (identified as such in Exhibit
E) or UPS packaging.

               f)   "PROGRAM" shall mean the efforts of CATERPILLAR or ACTIVE
POWER to develop PHASE II PRODUCTS.

          2.   PROGRAM
               -------

          CATERPILLAR and ACTIVE POWER have agreed to a PHASE I program under a
separate agreement governing the purchase of certain PHASE I products.  This
Agreement governs Phase II development and preliminary Phase III discussions.
Notwithstanding anything contained in this Agreement and subject to the
restrictions in the PHASE I Purchase Agreement, nothing contained herein shall
preclude ACTIVE POWER from selling or otherwise disposing of ACTIVE POWER'S
CleanSource flywheel energy storage system.

               a)   PHASE II

                    (i)  The parties shall cooperate to develop a PHASE II
PRODUCT which shall include an industrial duty uninterruptible power supply
("UPS") and a CleanSource flywheel. The PHASE II PRODUCT specification and
requirements are detailed in Exhibit A ("Specifications").

                                       1
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                    (ii)   The parties will cooperate with one another to
design, develop and test the PHASE II PRODUCT for possible use with CATERPILLAR
generator sets. ACTIVE POWER will make one prototype that conforms with the
Specifications. If the parties mutually agree on any changes to the
Specifications during the development process, such changes shall be
incorporated into the Specifications and be attached to,and become part of, this
Agreement. The parties will test this prototype, at a mutually, reasonably
agreed upon site, for compliance with the Specifications (except for the
Specification relating to reliability target) stated in Exhibit A. Each party
will document and report to the other party the results of such tests performed
on such prototype together with any comments concerning design changes, further
development, and the like. CATERPILLAR will accept or reject the PHASE II
PRODUCT prototype within thirty (30) calendar days after testing begins at the
site selected by CATERPILLAR (however, if CATERPILLAR fails to indicate a
testing location within sixty (60) days after ACTIVE POWER has completed
Milestone 2 (as set forth in Exhibit C), the testing site shall be ACTIVE
POWER's site in Austin Texas); failure to give notice of acceptance or rejection
will constitute acceptance. CATERPILLAR may reject the PHASE II PRODUCT only if
it fails in some respect to meet the Specifications (except for the
Specification relating to reliability target) stated in Exhibit A. If
CATERPILLAR properly rejects the PHASE II PRODUCT, ACTIVE POWER may correct the
failures and when it believes that it has made the necessary corrections and has
notified CATERPILLAR, the parties will again test the PHASE II prototype and the
acceptance/rejection/correction provisions above shall be reapplied until the
PHASE II PRODUCT is accepted; provided, however, if a correction to a
deliverable that is rejected by CATERPILLAR for failure to meet a Specification
(except for the Specification relating to reliability target) set forth in
Exhibit A is not accepted, Caterpillar may terminate this Agreement. The day on
which CATERPILLAR accepts the PHASE II PRODUCT shall be deemed the "Acceptance
Date". After the Acceptance Date, CATERPILLAR may purchase additional prototypes
at a price per prototype defined by the pricing for Phase II Product in Exhibit
B. Any prototypes shall be provided to CATERPILLAR on an "AS IS" basis.

                    (iii)  Within ninety (90) days following the Acceptance
Date, CATERPILLAR shall have the option of purchasing such PHASE II PRODUCTS
pursuant to the provisions of the Phase II Purchase Agreement Terms and
Conditions ("Phase II Purchase Option") as specified in Exhibit B hereto. In the
event of conflict between this Agreement and the Phase II Purchase Agreement
Terms and Conditions, this Agreement shall control. Caterpillar may exercise
such Phase II Purchase Option by providing written notice to Active Power of
such exercise within the aforesaid 90 day period. ACTIVE POWER will cooperate
with CATERPILLAR during reliability testing to meet the reliability targets.

               b)   PHASE III

                    (i)    CATERPILLAR and ACTIVE POWER will negotiate
reasonably and in good faith towards a PHASE III development program ("PHASE III
PROGRAM"), which presently contemplates the activities specified below in
paragraph 2(b)(iii).

                    (ii)   CATERPILLAR and ACTIVE POWER may agree to jointly
fund any PHASE III PROGRAM.

                    (iii)  The PHASE III PROGRAM development will include a
jointly completed feasibility study [****] that is based on the PHASE II PROGRAM
developments, ACTIVE POWER's flywheel technology, and CATERPILLAR's knowledge of
the generator set market. The parties will also explore other opportunities for
application of the PHASE II PRODUCT and opportunities for further joint
development efforts to expand the PHASE II PRODUCT's capabilities. The study
will identify the scope

                                       2

**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>

of the market opportunity, required resources, technical risk, and an initial
application. [****] It is envisioned that the feasibility study will provide
ACTIVE POWER and CATERPILLAR with necessary information to complete a long-term
[****] alliance agreement.

          3.   PHASE II COSTS
               --------------

               a)   Unless otherwise stated in this Agreement or later mutually
agreed to in writing specifically referencing this Agreement, each party will
bear its own costs incurred in the PROGRAM.

               b)   Caterpillar agrees to pay Active Power for co-ownership of
PROGRAM INTELLECTUAL PROPERTY the sum of $5,000,000 (five million dollars). The
payments shall be made in installments, each installment being due and payable
upon the objective satisfaction of each of the five milestones in the payment
schedule listed in Exhibit C ("Payment Milestones"). Other than the payments
specified above, Caterpillar shall not be responsible for any other payments or
funding, and Active Power shall bear all its costs for participating in this
Program, or any part thereof. Caterpillar shall bear its own costs for
participating in this program, or any part thereof.

               c)   Upon receipt of ACTIVE POWER'S correct itemized invoice(s)
and after objective satisfaction of each Milestone, CATERPILLAR will pay ACTIVE
POWER in accordance with such invoice.

          4.   CONFIDENTIALITY
               ---------------

               a)   In connection with work under this Agreement, a party
("TRANSMITTING PARTY") may deliver PROPRIETARY INFORMATION relating directly to
the PHASE II or PHASE III development to the other party ("RECEIVING PARTY").
The RECEIVING PARTY may not use the PROPRIETARY INFORMATION except for work
performed according to this Agreement, will protect the confidentiality of the
PROPRIETARY INFORMATION with at least the same degree of care as it protects its
own confidential information and will not disclose any such PROPRIETARY
INFORMATION, without the express written consent of the TRANSMITTING PARTY.
"PROPRIETARY INFORMATION" includes any process, system, formula, pattern, model,
device compilation, or other information:  (i) not known by the RECEIVING PARTY
prior to this Agreement or known by the RECEIVING PARTY prior to this Agreement
but having restriction on its use or disclosure; and (ii) not generally known by
others (unless so know through some fault of the RECEIVING PARTY).  PROPRIETARY
INFORMATION does not include knowledge, skills or information which is generally
known in ACTIVE POWER's or CATERPILLAR's trade or profession.

               b)   Each party agrees that it will neither (i) disclose to the
other party or any of its employees information in confidence belonging to a
third party; nor (ii) knowingly in the performance of the work hereunder produce
anything that embodies information under confidential restriction, or is covered
by a patent, patent application, copyright, trade secret, or other intellectual
property right owned by a third party.

               c)   Nothing in this Agreement shall be construed as preventing
either party from independent development, provided that PROPRIETARY INFORMATION
is handled in accordance with paragraph 4(a).

               d)   Should the RECEIVING PARTY be required to disclose
PROPRIETARY INFORMATION by governmental or judicial order, the RECEIVING PARTY
will give the TRANSMITTING PARTY prompt notice of any such order and will comply
with any protective order imposed on such disclosure.

                                       3

**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**
<PAGE>

          5.   INTELLECTUAL PROPERTY
               ---------------------

               a)   BACKGROUND INTELLECTUAL PROPERTY shall remain the property
of the party who created, made, conceived and reduced it to practice.

               b)   All PROGRAM INTELLECTUAL PROPERTY shall be jointly owned by
the parties and may be exploited and/or nonexclusively licensed by either party
without further consent or accounting to the other party.  With respect to all
rights and ownership in such PROGRAM INTELLECTUAL PROPERTY, the parties will
mutually discuss whether to obtain or maintain such rights, including without
limitation, any patents, trademarks, copyrights, trade secrets, CONFIDENTIAL
INFORMATION, and any other proprietary rights therein, and if one refuses to
take any such joint action requested by the other, the other may proceed at its
own expense; no such action will change the foregoing ownership provision.  A
party will execute all documents the other may request for such purposes and to
otherwise assist the other (at the other's expense) for such purposes.

               c)   Each of CATERPILLAR and ACTIVE POWER grant to the other
party an irrevocable, perpetual, nonexclusive, worldwide, royalty free license
(including the right to sublicense to such other party's Affiliates) to make,
have made, use, sell and otherwise exploit during and/or after the term of this
Agreement any modifications, improvements, inventions, know how, ideas or
suggestions made with respect to the other party's Proprietary Information by
such party's employees who have had access to such Proprietary Information.  If
something ceases to be considered Proprietary Information, licenses granted with
respect thereto while such information was deemed Proprietary Information, will
be unaffected.

               d)   Except as provided in this Agreement or the Exhibits,
nothing in this Agreement shall be construed as a grant of, or agreement to
grant, to either party any licenses under intellectual property rights of the
other party, regardless of whether they are dominant of or subordinate to those
provided herein.

          6.   LICENSING JOINTLY OWNED INTELLECTUAL PROPERTY
               ---------------------------------------------

               a)   Unless otherwise agreed to by the parties, all licensing
revenues generated by licensing PROGRAM INTELLECTUAL PROPERTY to third parties
shall be retained by the licensor of such PROGRAM INTELLECTUAL PROPERTY.

               b)   In the event that one party chooses to enforce PROGRAM
INTELLECTUAL PROPERTY rights against a third party, the other party shall be
given the opportunity to join in such enforcement prior to its commencement and
in the event the other party chooses to join, both parties shall equally share
all costs, including attorneys' fees and share equally all revenues generated by
the enforcement, including licensing fees, if any.  If the other party chooses
not to join such enforcement, such party shall nevertheless reasonably cooperate
with the one party in such enforcement (at the other party's expense), including
joining as a nominal party subject to indemnification by such party , but will
not be entitled to any proceeds of such enforcement activity.

          7.   NOTICES
               -------

          All notices and invoices pursuant to this Agreement shall reference
this Agreement and be given in writing to the respective party at its address
designated below or to such other address as may be substituted in writing by
that party to the other.  All notices shall be deemed to be fully given and
received if sent by registered or certified mail, postage prepaid, return
receipt requested.

                                       4

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     Notice to ACTIVE POWER:
     Active Power
     11525 Stonehollow Drive, Suite 135
     Austin, Texas 78758

     Notices to CATERPILLAR:                Invoices to CATERPILLAR:
     Caterpillar Inc.                       Attn:  Disbursements Div.
     Intellectual Property Department           LD235 Mailroom
     Attn:  Licensing Division              600 W. Washington Street
     100 N.E. Adams Street                  East Peoria, Illinois 61630
     Peoria, Illinois 61629-6490            Pontiac, Illinois 61764

          8.  INDEMNIFICATION
              ---------------

          Each party shall indemnify, defend and hold harmless the other party,
its directors, officers, employees and agents, from all third party (including a
party's employees) claims, demands, liabilities, loss, damage, and expense,
including costs, and reasonable litigation expenses and counsel fees incurred in
connection therewith, arising out of injury to or death of any person or damage
to property proximately caused by the indemnifying party's gross negligence or
willful acts or omissions which arise in connection with the performance of work
hereunder while the indemnifying party is on premises of the other party. Such
indemnity shall be provided subject to (a) prompt written notifications of any
and all such threats, claims, or proceedings related thereto and the other party
giving reasonable assistance to the indemnifying party in the defense thereof,
(b) the indemnifying party having sole control of the defense and all related
settlement negotiations, and (c) such indemnifications shall be limited in the
case of real or tangible property to the reduction in value or replacement cost
of such property.

          9.  WARRANTY
              --------

          Each party warrants its right to enter into this AGREEMENT.
Warranties for production units of PHASE II PRODUCTS shall be as set forth in
Exhibit B.  In addition, any hardware, software or firmware provided by ACTIVE
POWER to CATERPILLAR is warranted to accurately process properly formatted
date/time data (including, but not limited to, calculating, comparing, and
sequencing) from, into, and between the twentieth and twenty-first centuries,
and the years 1999 and 2000 and leap year calculations to the extent that other
hardware, software or firmware used in combination with the hardware, software
or firmware being provided by ACTIVE POWER, properly exchanges properly
formatted date/time data with it.

          10. TERM AND TERMINATION
              --------------------

              a)   This PROGRAM shall become effective on the Effective Date of
this Agreement and shall remain in effect unless terminated in writing by both
parties.

              b)   CATERPILLAR may terminate ACTIVE POWER's work under this
Agreement  by giving ACTIVE POWER ninety (90) days written notice in which event
ACTIVE POWER shall be (i) reimbursed only for work performed and expenses
reasonably incurred prior to receipt of such notice and (ii) entitled to
immediate payment of the amount associated with the next milestone. In no event
shall the total amount paid to ACTIVE POWER exceed the price agreed to herein.

               c)   Upon termination of this Agreement, Paragraphs 4, 5,6,7, 8,
9, 10, 11, 12, 13, and 14, of this Agreement shall survive.

               d)   If the Agreement is terminated and upon and in accordance
with the written reasonable request of either party (provided such written
request is given within a reasonable

                                       5

<PAGE>

period of time after such termination), but except for information covered by
the rights granted in Paragraph 5, the other party shall promptly return or
destroy any tangible information (including all copies thereof except as noted
below) provided under the PROGRAM by the requesting party. However the other
party's counsel may retain in a secure location one copy each of such tangible
information and use them only for ensuring compliance with the obligations of
Paragraph 5.

          11.  RELATIONSHIP
               ------------

          Nothing herein is to imply an agency, joint venture or partner
relationship between the parties.

          12.  ASSIGNMENT AND GOVERNING LAW
               ----------------------------

          Except to an entity that acquires all or substantially all the
business or assets of a party, this Agreement is not assignable by either party
without the written consent of the other party, which shall not be unreasonably
withheld, and will be governed by and construed in accordance with the laws of
the State of New York, without regard to the conflict of laws provisions
thereof.

          13.  ENTIRE UNDERSTANDING
               --------------------

          This Agreement and the Exhibits hereto constitute the entire agreement
and understanding between the parties with respect to the subject matters herein
and therein, and shall supersede and replace any conflicting terms and
conditions set forth in any purchase order, prior agreement, quotation,
proposal, correspondence, or oral discussion relating to the subject matter
hereof.  This Agreement may only be amended by a writing signed by both parties
which makes specific reference to the provision(s) of this Agreement being
modified.  Should any provision of this Agreement be held invalid, illegal, or
unenforceable, the validity of the remaining provisions shall not be affected by
such holding. This AGREEMENT shall be binding upon the heirs, successors, and/or
legal representatives of the parties.

          14.  Limitation of Liability
               -----------------------

          NEITHER PARTY SHALL BE LIABLE FOR (I) ANY SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE SUBJECT MATTER OF THIS
AGREEMENT OR (II) CATERPILLAR'S COST OF PROCUREMENT OF SUBSTITUTE GOODS OR
SERVICES.

          The parties have caused this Agreement to be signed in duplicate by
their duly authorized representatives on the Effective Date.

ACTIVE POWER, Inc.                       CATERPILLAR INC

By:      /s/                             By:       /s/
   ------------------------                 -----------------------------

Name:______________________              Name:___________________________

Title:_____________________              Title:__________________________

Date:______________________              Date:___________________________

                                       6

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EXHIBIT "A"

                      SPECIFICATIONS FOR PHASE II PRODUCT

     In the event that ACTIVE POWER has developed and includes a CS2 flywheel
  and associated components in the Prototype, then the Phase II Product shall
  comply with the following specification entitled CS2-UPS Specification,
  otherwise the Phase II Product shall comply with the following specification
  entitled CS1-UPS Specification.

                             CS1-UPS Specification
                                   12/14/98

                                  Definition

CS1-UPS is a line-interactive UPS that employs Active Power's first generation
DC to DC flywheel energy storage system (flywheel system described in US patent
5,731,645).

                    (i)   Ratings

  .  Maximum discharge time - 300 seconds
  .  Delivered energy - 3.0 MJ
  .  Maximum delivered power - 250KW for 12.5 seconds

                    (ii)  Input

  .  Input voltage - 480Vrms +10%/-20%
  .  Interface - 3 phase, 4 wire (3 phase plus neutral and ground)
  .  Input frequency - 45Hz - 66Hz
  .  Walk-in time - 1 second minimum, variable to up to 15 seconds

                    (iii) Output

  .  Nominal output voltage: 480Vrms, matched to utility input  +/- 5%
  .  Interface - 3 phase, 4 wire (3 phase plus neutral and ground)
  .  Output voltage regulation in Flywheel Mode:
       . +/- 5 % of input nominal, static balanced
       . +/- 5 % of input nominal, static asymmetrical
       . +/- 5 % of input nominal, within 80 ms following 100% step load
  .  Output voltage harmonic distortion:
       . 5% THD maximum and 3% any single harmonic with 100% linear load
       . 10% THD maximum with 100% non-linear load

                    (iv)  Recharge Time

  .  Recharge time - 2.5 minutes maximum
  .  Charge time from 0 RPM - 7.5 minutes maximum
  .  Adjustable to avoid overloading source
  .  Duty Cycle: 10% for 5 discharges

                    (v)    Standby Losses

         .  3% of rated power

                    (vi)   Temperature rating

     .   Start-up - 0 to +40C
     .   Operating - -20 to 40C
     .   Storage - -25 to +70C

                    (vii)  Humidity

                                       7

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     .   Relative humidity -  95%, non-condensing

                    (viii) Barometric Pressure

         .  Full rating to 3000  feet; reduced by 5% /1000ft above 4000ft

                    (ix)   Vibration

         .  5g  peak, 30ms pulse duration

                    (x)    Acoustical Noise

         .  70 dB, "A" weighting, at 3 feet from system

                    (xi)   Dimensions

         .  Height 79" maximum
         .  Width 43" maximum
         .  Depth 36" maximum

                    (xii)  Floor Loading

         .  325 lbs./sq. ft. maximum

                    (xiii) System Features

         .  Bi-directional Inverters
         .  Flywheel energy storage for standby power
         .  Adjustable load walk-in
         .  Internal self-diagnostics
         .  Fault event logging
         .  Preheat capability

                    (xiv)  Monitoring and Control

         .  Key switch for system control
         .  Local EPO (Emergency Power Off)
         .  LCD display - reports alarms & system state
         .  Monitor & alarms on critical components
         .  Programmable setup parameters
         .  External customer contacts (A-Type) dry contacts {six (6) input and
            six (6) output
         .  RS232 or RS485 Serial Connection
         .  Ethernet Interface

                    (xv)   System Options

         .  Automatic bypass
         .  Automatic restart following depletion of stored-energy and
            restoration of AC source
         .  Remote monitoring capability
         .  Internal modem
         .  Remote EPO (Emergency Power Off)
         .  Input voltage other than 480VAC using optional external transformer
            cabinet
         .  Output voltage other than 480VAC using optional external transformer
            cabinet

                    (xvi)  System Reliability

         The reliability target of .039 failures per 100 hours is to be met with
         a 75% confidence.

                                      8

<PAGE>

                                    [****]

                                       9

**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**

<PAGE>

                                    [****]

                                      10

**Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.**

<PAGE>

                                  EXHIBIT "B"

               PURCHASE OF PHASE II PRODUCT TERMS AND CONDITIONS

          The terms and conditions of the Phase II Purchase Agreement are
attached hereto and shall be incorporated herein by reference.

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                          PHASE II PURCHASE AGREEMENT
                          ---------------------------

     1.  Products Covered by Agreement.  This Agreement concerns the purchase
and sale of the PHASE II PRODUCT  (hereinafter called "Product"), manufactured
to the Specifications.

     2.  Purchase and Sale of Product.  Subject to the terms and conditions of
this Agreement, Seller will, to the extent properly and accurately forecasted
and ordered by Buyer as provided in the next paragraph, use commercially
reasonable efforts to supply the Products to Buyer and Buyer agrees to purchase
ninety percent (90%) of Buyer's and its Affiliates ("Affiliate" means any
company of which Buyer holds a greater than fifty percent (50%) ownership
interest) requirements for an AC to AC flywheel-based UPS product for generator
set applications. Seller understands that Buyer makes no guarantee as to the
quantity of Product it will require, however, Buyer agrees that it will
undertake the Phase II activities set forth on Exhibit A ("Phase II
Activities").

     Buyer's initial forecasted annual requirements will be attached hereto as
Exhibit B as of the Effective Date of this Phase II Purchase Agreement. Buyer
agrees to update the annual forecast on a (Four (4) quarters) quarterly basis.
Such forecast of such requirements provided to Seller by Buyer shall be non-
binding and Seller acknowledges that it shall not be entitled to and shall not
rely on such forecasts/estimates as binding commitments unless they are
expressly stated as such by Buyer in writing.  Seller shall not be obligated to
supply Buyer with more than one hundred fifty percent (150%) of the initial
projection for a particular quarter, unless agreed to in writing.  Buyer's
forecasts and orders shall reflect its good-faith expectations of customer
demand and Buyer shall act in a commercially reasonable manner to schedule
orders to avoid creating production capacity problems for Seller.

     3.  Exclusive Caterpillar Rights.  For a period of five years from the
Effective Date of this Phase II Purchase Agreement, and provided this Phase II
Purchase Agreement has not been terminated, ACTIVE POWER agrees not to license
any PROGRAM INTELLECTUAL PROPERTY nor ACTIVE POWER's BACKGROUND INTELLECTUAL
PROPERTY that is solely developed for a PHASE II PRODUCT, to any entity set
forth in Exhibit C ("CATERPILLAR's Competitor List") that is manufacturing,
selling, using, or distributing equipment or components therefor within
CATERPILLAR's FIELD OF USE for the purposes of creating a product that is an AC
to AC flywheel-based UPS system.  Before the end of such five-year period,
ACTIVE POWER will, at CATERPILLAR's option, discuss the possibility of a
mutually agreeable extension of such FIELD OF USE exclusivity.  During such five
year period, if any, and provided this Agreement has not been terminated, ACTIVE
POWER shall, at CATERPILLAR's option and provided that CATERPILLAR meets the
Minimum Purchase Commitment as defined in Exhibit D, not sell PHASE II PRODUCTS,
to any entity on CATERPILLAR's Competitor List that is within CATERPILLAR's
FIELD OF USE.  However, nothing contained in this Agreement, shall restrict
ACTIVE POWER with respect to making, using, selling, marketing, licensing or
exploiting its flywheel energy storage systems or technologies.

     If, during any six (6) month period (as measured from the Effective Date of
this Agreement and every six (6) months thereafter), CATERPILLAR fails to meet
the agreed to Minimum Purchase Commitment, and does not, within the immediately
following six (6) month period or twelve (12) month period, make up the
difference and also meet the Minimum Purchase Commitments for that 6 or 12 month
period, then CATERPILLAR's exclusive rights shall be subject to renegotiation.
If Buyer exceeds the Minimum Purchase Commitment during any six (6) month
period, Buyer may carry such excess purchase(s) backwards and /or forward and
may apply such excess purchase(s) to Minimum Purchase Commitment(s) during the
immediately previous and/or subsequent six (6) month period(s).  If ACTIVE POWER
or CATERPILLAR is not satisfied with the results of such negotiation within
thirty (30) days,

                                      B-1
<PAGE>

then the exclusive rights set forth in this Agreement shall become non-exclusive
and the restrictions set forth in the above paragraph shall terminate.

     4.  Price Containment.  Both Seller and Buyer are committed to controlling
and reducing costs, and both recognize that effective cost control is of the
essence to this Agreement, While this Agreement is in effect, Seller will
maintain a cost control and reduction program with respect to Product, and will
review costs on a regular basis for progress toward the objective of maintaining
or reducing Seller's prices to Buyer.  A constant interaction between Buyer's
and Seller's engineering personnel is essential.  All documented mutually agreed
cost savings, through the efforts of Buyer or Seller, will be shared on a 50-50
basis.  Any cost savings gained without the efforts of Buyer and not mutually
agreed to in writing will be owned by Seller.  Any cost increases must be
documented and approved by Buyer.

     5.  Product Prices. The OEM Prices and volume earned discounts are as shown
in Exhibit E. [****]  Seller and Buyer agree  to renegotiate prices and
discounts as necessary or appropriate to respond to market conditions.  After
eighteen months from the Effective date of this Agreement, Exhibit E may be
modified from time to time upon sixty (60) days written notice from the Seller;
provided, however, that Buyer may terminate this Agreement within thirty (30)
days after receipt of notice of such price increase if such increase is
unacceptable to Buyer.  Seller agrees and acknowledges that should such prices
exceed the lowest Product prices provided to any other customer of Seller
purchasing Product at similar (or reduced) volume levels and making only similar
or reduced commitments (including, but not limited to time commitments), such
prices to Buyer shall be automatically adjusted to reflect any lower pricing
provided to such other customers.

     6.  Product Training and Support.

         a. In order to provide sufficient warranty support for the Product,
Buyer's service training personnel will successfully complete Seller's certified
training course in order to become competent to a level equivalent to Seller's
certified service technicians. Seller shall provide such training for up to five
(5) scheduled classes and for a maximum of ten (10) students per class. Such
training shall be given at Seller's facilities free of charge for the first five
scheduled classes of the term of this Agreement and at Seller's published prices
for any remaining training. Buyer shall be responsible for its own travel
expenses as incurred for such training at Seller's facilities.

         b. Seller will provide sales and marketing support to Buyer's key
dealers, as requested and identified by Buyer and agreed to by the Seller.

     7.  Term.  The initial term of this Agreement shall be Five (5) years,
commencing as of January 1, 2000 (the "Effective Date").  This Agreement shall
automatically be extended for additional terms of six (6) months each unless
either party gives written notice to terminate at least three (3) months prior
to the end of the initial term or any additional term, or unless otherwise
terminated pursuant to the provisions hereof.

     8.  Warranty.

         a. Seller warrants that each Product shall be in conformity with
the Specifications and shall be free from defects in material and workmanship.
In addition, any hardware, software or firmware provided by Seller to Buyer is
warranted to accurately process properly formatted date/time data (including,
but not limited to, calculating, comparing, and sequencing) from, into, and
between the twentieth and twenty-first centuries, and the years 1999 and 2000
and leap year calculations to the extent

                                      B-2

***Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.***

<PAGE>

that other hardware, software or firmware used in combination with the hardware,
software or firmware being provided by Seller, properly exchanges properly
formatted date/time data with it.

         b. Except as provided below, Seller will provide Buyer with the same
warranty, under the same terms and conditions (including without limitation,
disclaimers), as Buyer provides to its customers procuring electric power
generation products (as attached as Exhibit G); provided, however, that Seller's
warranty to Buyer shall be for a one year period from the date of delivery to
the end-user, notwithstanding any longer warranty period in Buyer's warranty. If
Buyer performs travel labor (up to four hours), Seller shall reimburse such
documented, customary and reasonable expenses incurred by Buyer on behalf of the
Product provided such labor is performed by an employee of Buyer or one of its
dealers that has been competently trained with respect to the Product. A
quarterly written statement of Buyer's actual costs for providing warranty
services to its customers, including notice of specific Product failures, and
summary information on the causes of such failure, will be sent by Buyer to
Seller.

         c. Within twelve (12) months from the Effective Date of this Agreement,
Buyer shall inventory and maintain appropriate spares to provide its standard
level of service.

         d. Claims for Buyer's "Product Improvement Programs" (PIP), "Product
Support Programs" (PSP), "Extended Warranty" and other policy actions are to be
negotiated on a case-by-case basis by both parties and documented in writing as
signed by both parties. Participation in these programs will be based on an
amount mutually agreed to by Seller and Buyer.

     THE FOREGOING WARRANTIES SHALL BE SELLER'S SOLE LIABILITY WITH REGARD TO
THE PRODUCTS.

     9.  Indemnification.  Except to the extent covered by the indemnity from
Buyer below, Seller agrees to indemnify, defend, and hold Buyer harmless against
and from all claims, demands, liabilities, loss, damage, cost, and expense, of
whatsoever nature paid to a third party or incurred in the defense (i) arising
from a claim that the Product infringes an intellectual property right of a
third party or (ii) arising from the injury or death of any person or loss or
damage to property directly due to, any defect of design, material, or
workmanship of Product  or failure of Product  to conform with the
Specifications, provided Seller is promptly notified of any and all such
threats, claims or proceedings related thereto and given reasonable assistance
and the opportunity to assume sole control over defense and settlement; Seller
shall not be responsible for any settlement it does not approve of in writing.
The indemnity provided in this Section shall be Buyer's sole and exclusive
remedy for any claim of infringement related to the Product.  Buyer agrees to
indemnify, defend, and hold Seller harmless against and from all claims,
demands, liabilities, loss, damage, cost, and expense, of whatsoever nature paid
to a third party or incurred in the defense of a claim arising on account of
Buyer's (i) misrepresentation of the Product or providing unauthorized
representations or warranties to its customers, (ii) modifications to the
Product or (iii) negligence or other fault of products or services of Buyer.

     10.  Indemnity Restrictions.  SELLER MAKES NO WARRANTY OR REPRESENTATION
WITH RESPECT TO, (a) determining whether the Product will achieve the results
desired by Buyer or any third person, (b) selecting, procuring, installing,
operating and maintaining complementary equipment to insure correct operation of
the Product, and (c) ensuring the accuracy of any configuration design or
implementation that utilizes the Product.  In the event of any alteration or
attachment to the Product not authorized by Seller, Seller shall have no
liability or responsibility to Buyer for:  (a) any hardware, software,
equipment, or services provided by any persons other than Seller; (b) the proper
functioning of the Product if the alteration or attachment is the cause of the
malfunction; or (c) damage caused by any alteration or attachment to the
Product.

                                      B-3
<PAGE>

     11.  Insurance.  Seller agrees to keep in full force and effect, at its
sole expense, during the term of this Agreement and for a period of ten (10)
years thereafter, at least the insurance coverage described below with insurance
companies acceptable to Buyer.  The limits set forth are minimum limits and
shall not be construed to limit Seller's liability.  All cost and deductible
amounts shall be for the sole account of Seller.  All policies required by Buyer
pursuant to this Agreement shall name Buyer as an additional insured (per ISO
Endorsement #CG 2026 or its equivalent) and waive subrogation rights in favor of
Caterpillar.  All policies required shall also be designated as primary coverage
to any similar coverage carried by Caterpillar.

     Seller shall not provide Product hereunder until all insurance as required
hereunder has been obtained, and certificates have been submitted to and
accepted by Buyer.

     The required coverage shall be:  Commercial General Liability Insurance
(Occurrence Coverage) including products, completed operations, contractual
liability coverage of indemnities contained in this contract, with a minimum
combined single limit of liability of $5,000,000 for each occurrence for bodily
injury and property damage.  Such policy shall contain provisions that provide
at least thirty (30) days prior written notice of any cancellation, non-renewal,
or reduction in coverage to Buyer.  Seller shall deliver Certificates of
Insurance in a form satisfactory to Buyer evidencing the existence of such
policy.

     12.  Termination by Buyer.  Buyer may terminate this Agreement at any time,
in the event:

         a. Quality - Products consistently and materially fail to meet the
Specifications as defined herein or as hereafter agreed to by Buyer and Seller,
or fails to achieve status as a Caterpillar certified supplier within twenty-
four (24) months of the Effective Date of this Agreement.

         b. Delivery - Seller is substantially and continuously failing to meet
Buyer's Firm Orders with respect to mutually agreed shipment dates. Seller shall
provide to Buyer a written schedule of Seller's standard lead times for delivery
of Products from the date Orders are accepted by Seller. Such schedule for lead
times shall be updated by Seller on a regular basis to reflect any modifications
thereto.

         c. Competitiveness - Seller fails to be responsive to the market place
or fails to remain competitive on a world-wide basis with other manufacturers of
comparable parts in terms of price.

         d. Default Generally - Material default by Seller in any material
obligation hereunder owed by Seller to Buyer.

     Notwithstanding the above, Buyer may terminate pursuant to Subsections (a),
(b), (c) or (d) above only if Seller has failed to cure such default within
sixty (60) days after written notice thereof has been received by Seller.

     13.  Termination by Seller.  Seller may terminate this Agreement at any
time in the event Buyer breaches the Agreement and fails to cure such breach
within sixty (60) (or ten days in the case of non-payment) after written notice
thereof has been received by Buyer.

     14.  Licenses.  As between the parties, Seller shall own all right, title
and interest in and to the Product except as otherwise provided in the "Phase II
Development and Phase III Feasibility Study Agreement.".  In the event that this
Agreement is terminated by Buyer pursuant to Section 12(b) and only while Buyer
remains in full compliance with the provisions of this Agreement prior to
termination and

                                      B-4
<PAGE>

 following termination as such surviving provisions shall apply, Seller hereby
grants to Buyer, effective as of such termination date, a nonexclusive,
worldwide, royalty bearing license (including the right to sublicense to Buyer's
Affiliates) to make, have made, use and/or sell Product. The foregoing license
shall only be effective for the 18 months beginning with the date of termination
and Buyer shall pay a royalty of one thousand two hundred fifty dollars ($1,250)
per delivered megajoule per published rating by Seller for each Product.

     Each of Buyer and Seller grant to the other party an irrevocable,
perpetual, nonexclusive, worldwide, royalty free license (including the right to
sublicense to such other party's Affiliates) to make, have made, use, sell and
otherwise exploit during the term of this Agreement any modifications,
improvements, inventions, know how, ideas or suggestions made with respect to
the other party's Confidential Information by such party's employees who have
had access to such Confidential Information.  If something ceases to be
considered Confidential Information, licenses granted with respect thereto while
such information was deemed Confidential Information will be unaffected.

     15.  Parts Support.  During the term of this Agreement or following any
termination hereof, other than termination by Seller due to a breach by Buyer,
Seller shall provide, or at its option cause to be provided, such quantities of
parts to Buyer as Buyer may request from time to time for a period of five (5)
years from the date of the last customer shipment made by Seller under this
Agreement of the applicable Product release, at a price not to exceed Seller's
then-current prices provided to other customers under similar terms and
conditions, provided such parts are reasonably and commercially available to
Seller.  If for any reason Seller is unable to provide parts to Buyer pursuant
to its obligations under this section 14, Seller grants to Buyer a nonexclusive,
perpetual, worldwide royalty bearing license to make, have made, use and/or sell
such parts utilizing Seller's proprietary designs.  The foregoing license is
subject to a royalty of 6% of the applicable price set forth in Seller's most
current Catalog Spares Pricing list.

     16.  Use of Other Supply Sources.  Nothing in this Agreement shall prevent
Buyer from seeking other sources for alternatives to the Product to the extent
Seller's production capacity continuously and substantially fails to meet
Buyer's Firm Orders.

     17.  Change in Ownership and Control.  During the life of this Agreement,
if there is a change in the ownership and control of either party, the other
party shall have the option of terminating this Agreement immediately by giving
written notice thereof within ten days of being notified of the occurrence of
such change of control; provided that if a party provides advance notice of a
bona fide proposed change of control (including the identity of the principal
owners after such change of control occurs) the other party will within ten days
provide written notification to the first party as to whether it will exercise
such termination right if the change of control occurs.  For purposes of this
Section 17, a change in the ownership and control of either Buyer or Seller or a
parent company of either party shall be deemed to have occurred if and only if
and when any one or more persons (excluding existing investors) acting in
concert individually or jointly is or becomes a beneficial owner, directly or
indirectly, of securities representing more than fifty percent (50%) of the
combined voting power of all then outstanding securities of Seller or Buyer or
the parent company of either party.

     18.  Shipping Instructions/Terms and Conditions.  Orders will be placed
under Buyer's blanket purchase order(s).  This agreement shall supersede Buyers
standard purchase order terms (other than the terms under the following
sections:  "Work on Buyer's Premises" and "Property Furnished to Seller by
Buyer", which terms shall be deemed to be incorporated herein by reference and
made a part hereof) or any terms stated in any acknowledgment forms or other
forms utilized by Seller or Buyer.  Such orders shall specify the quantity, part
number and description, unit price, requested ship date, destination, and
Buyer's freight carrier and account number with the carrier.  Orders shall be
subject to acceptance by Seller ("Firm Orders").  No modification to this
Agreement will be stated on an order.  All

                                      B-5
<PAGE>

Products shall be shipped F.O.B. Seller's facility in Austin, Texas. Title and
risk of loss to Product shall pass to Buyer upon delivery to the carrier at the
F.O.B. point. Buyer shall designate a carrier. Any special freight charges shall
be Seller's responsibility if necessary to meet not more than 115% of Buyer's
projected quarterly requirements.

     19.  Inspection.  Product is subject to Buyer's inspection, testing and
approval.  Buyer, at its option, may reject or refuse to accept any Product
which does not meet the requirements of the warranty set forth herein.  Buyer's
right to reject shall expire one (1) year after the date of shipment.  Prior to
returning any Product, Buyer shall notify Seller of its intent to reject, and
Seller may within thirty (30) days correct any such defect.  Items rejected by
Buyer will be returned to Seller at Seller's expense, and Seller agrees to
refund to Buyer any payments (including but not limited to shipment expense)
made by Buyer for such Product.  Payment by Buyer for any Product shall not be
deemed an acceptance thereof.  Acceptance of any Product shall not relieve
Seller from any of its obligations, representations or warranties hereunder or
with respect thereto.

     20.  Prices and Payments.  Prices set forth in Exhibit E do not include
installation, freight and handling charges, or applicable taxes, and Buyer shall
be responsible for all such charges and taxes with respect to the Products and
the shipment thereof.  All payments shall be made by Buyer  in accordance with
the terms of Buyer's then-current standard settlement schedule.  All payments
due hereunder shall be paid to Seller in United States dollars in the United
States.  Unless Buyer furnishes a proper exemption certificate, Buyer shall be
charged for all taxes, however, designated, levied or based on this Agreement or
the Product.

     21.  Force Majeure.  Neither Buyer nor Seller shall be liable for any delay
in or failure of performance of their respective obligations hereunder if such
performance is rendered impossible or impracticable by reason of fire,
explosion, earthquake, accident, breakdown, strike, drought, embargo, war, riot,
act of God or public enemy, an act of governmental authority, agency or entity,
shortage of raw materials, or other contingency, delay, failure or cause, beyond
the reasonable control of the party whose performance is affected, irrespective
of whether such contingency is specified herein or is presently occurring or
anticipated by either party.  Upon the occurrence of any event covered by this
provision, Seller and Buyer shall make every effort to continue to maintain as
much as possible the supplier-customer relationship established under this
Agreement.  However, in the event Buyer or Seller is unable to meet its
obligations hereunder because of the conditions described above and such
inability continued for a period of two (2) months, the other party shall have
the right to terminate this Agreement upon thirty (30) days prior written
notice.

     22.  Assignment/Applicable Law.  Except to an entity that acquires all or
substantially all the business or assets of a party, this Agreement is not
assignable by either party without the written consent of the other party and
will be governed by and construed in accordance with the laws of the State of
New York without regard to the conflict of laws provisions thereof.

     23.  Entire Agreement.  This Agreement and the Exhibits hereto constitute
the entire agreement and understanding between the parties with respect to the
subject matters herein and therein, and supersede and replace any prior
agreements and understandings whether oral or written, between them with respect
to such matters.  Without limiting the generality of the foregoing, it is
understood that this Agreement supersedes and replaces the Phase II Purchase
Agreement Terms and Conditions attached as Exhibit B to the Phase II Development
and Phase III Feasibility Study Agreement dated as of January 22, 1999.  Any
additional or different terms of any related purchase order, confirmation,
acknowledgment, shipping instruction form or similar form of Buyer or Seller
even if signed by the parties after the date hereof, shall have no force or
effect.

                                      B-6
<PAGE>

     24.  Waiver.  The provisions of this Agreement may waived, altered,
amended, or repealed in whole or in part upon the written consent of all parties
to this Agreement The waiver by party of any breach of this Agreement shall not
be deemed or construed as a waiver of any other breach, whether prior,
subsequent or contemporaneous, of this Agreement.

     25.  Severability.  Invalidation of any of the provisions contained herein,
or the application of such invalidation of thereof to any person, by
legislation, judgment or court order shall in no way affect any of the other
provisions hereof or the application thereof to any other person, and the same
shall remain in full force and effect, unless enforcement as so modified would
be unreasonable or grossly inequitable under all the circumstances or would
frustrate the purposes hereof.

     26.  Counterparts.  Section headings contained herein are for ease of
reference only and shall not be given substantive effect.  This Agreement may be
signed in one or more counterparts, each to be effective as an original.

     27.  Limitation of Liability.  NEITHER PARTY SHALL BE LIABLE FOR ANY
SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE
SUBJECT MATTER OF THIS AGREEMENT, OR BUYER'S COST OF PROCUREMENT OF SUBSTITUTE
GOODS OR SERVICES.

     28.  Confidential Information.

          a.  In connection with work under this Agreement, a party
("TRANSMITTING PARTY") may deliver PROPRIETARY INFORMATION relating directly to
the business or technology of the other party ("RECEIVING PARTY").  The
RECEIVING PARTY may not use PROPRIETARY INFORMATION except as necessary to
perform its obligations under this Agreement, will protect the confidentiality
of the PROPRIETARY INFORMATION with at least the same degree of care as it
protects its own confidential information and will not disclose any such
PROPRIETARY INFORMATION, without the express written consent of the TRANSMITTING
PARTY.  "PROPRIETARY INFORMATION" includes any process, system, formula,
pattern, model, device compilation, or information:  (i) not known by the
RECEIVING PARTY prior to this Agreement or known by the RECEIVING PARTY prior to
this Agreement but having restriction on its use or disclosure; and (ii) not
generally known by others (unless so know through some fault of the RECEIVING
PARTY).  PROPRIETARY INFORMATION does not include knowledge, skills or
information which is generally known in Seller's or Buyer's trade or profession.

          b.  Each party agrees that it will neither (i) disclose to the other
party or any of its employees information in confidence belonging to a third
party; nor (ii) knowingly in the performance of the work hereunder produce
anything that embodies information under confidential restriction, or is covered
by a patent, patent application, copyright, trade secret, or other intellectual
property right owned by a third party.

          c.  Nothing in this Agreement shall be construed as preventing either
party from independent development, provided that the PROPRIETARY INFORMATION is
handled in accordance with paragraph 28(a).

          d.  Should the RECEIVING PARTY be required to disclose PROPRIETARY
INFORMATION by governmental or judicial order, the RECEIVING PARTY will give the
TRANSMITTING PARTY prompt notice of any such order and will comply with any
protective order imposed on such disclosure.

                                      B-7
<PAGE>

     29.  Compliance with Laws.  Both parties represent that they have complied,
and during the performance of this Agreement will continue to comply, with the
provisions of all applicable laws and regulations from which liability may
accrue to the other party for any violation thereof.

     30.  Confidentiality.  Except with respect to potential investors and/or
acquirers, the terms of this Agreement as well as its existence shall be kept
confidential and not disclosed by either party without the express written
consent of the other party.

Caterpillar, Inc.                       Active Power, Inc.

By:  /s/                                By::      /s/
   ----------------------                   -----------------------
 Name:                                   Name:
 Title:                                  Title:

                                      B-8
<PAGE>

                                  EXHIBIT "A"

                         PHASE II MARKETING ACTIVITIES

 .  Buyer will conduct a product launch with appropriate marketing subsidiaries
   and dealers.
 .  Buyer will create appropriate sales binder for above training or launch.
 .  Buyer will effect pricing and price list literature for the program for all
   appropriate worldwide marketing subsidiaries and dealers.
 .  Buyer will announce product to dealers.
 .  Buyer will effect a Caterpillar Product News announcement.
 .  Buyer will create product brochures for product promotion.
 .  Buyer will create product specification sheets.
 .  Buyer will enter appropriate performance and specifications into its online
   Technical Marketing Information (TMI) systems.
 .  Buyer will make adequate technical drawings available to its dealers.
 .  Buyer will effect a public product announcement of the phase II product that
   will include reference to the new Caterpillar UPS product and its use of the
   Active Power flywheel energy storage system.
 .  Buyer will create a product promotional video.
 .  Buyer will include the product where appropriate in its
   marketing/specification software.
 .  Buyer will promote the product internally to its worldwide marketing
   subsidiaries.
 .  Buyer will effect the above in all languages deemed appropriate by Buyer.

   Implementation of the foregoing Marketing Activities is dependent upon Buyer
   receiving adequate product and technical information from Seller

                                      B-9
<PAGE>

                                  EXHIBIT "B"

                                   FORECAST

                   (to be provided as of the Effective Date)

                                     B-10

<PAGE>

                                  EXHIBIT "C"

                            BUYER'S COMPETITOR LIST

                                    [****]

                                     B-11

***Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.***
<PAGE>

                                  EXHIBIT "D"

                  MINIMUM PURCHASE COMMITMENT OVER FIVE YEARS

                                    [****]

                                     B-12

***Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.***
<PAGE>

                                  EXHIBIT "E"

                                    [****]

                                     B-13

***Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.***
<PAGE>

                                   EXHIBIT G

      Effective with sales to the first user on or after January 1, 2000

                         CATERPILLAR LIMITED WARRANTY
                        INDUSTRIAL ENGINE PRODUCTS AND
                      ELECTRIC POWER GENERATION PRODUCTS
                                  WORLDWIDE*

              (*excluding the Commonwealth of Independent States)

Caterpillar Inc. or any of its subsidiaries ("Caterpillar") warrants new and
Remanufactured engines and electric power generation products sold by it
(including any products of other manufacturers packaged and sold by Caterpillar)
and operating outside the Commonwealth of Independent States (formerly USSR), to
be free from defects in material and workmanship.

A different warranty statement applies to product operating in the Commonwealth
of Independent States. Copies of this warranty may be obtained by writing
Caterpillar Inc., 100 N.E. Adams St., Peoria, IL USA 61629-9260.

This warranty does not apply to CM product, engines sold for use in on-highway
vehicle or marine applications, engines in machines manufactured by or for
Caterpillar, 3500 and 3600 Family engines used in locomotive applications, 3000
Family engines, or Caterpillar brand batteries. These products are covered by
other Caterpillar warranties.

This warranty is subject to the following:

WARRANTY PERIOD

The warranty period for new engines, Uninterruptible Power Systems (UPS
systems), and electric power generation products is 12 months (24 months for
mobile agricultural and standby electric power generation applications) after
date of delivery to the first user.

The warranty period for all Remanufactured engines is 6 months (12 months for
mobile agricultural and standby electric power generation applications) after
date of delivery to the first user.

CATERPILLAR RESPONSIBILITIES

If a defect in material or workmanship is found during the warranty period,
Caterpillar will, during normal working hours and through a place of business of
a Caterpillar dealer or other source approved by Caterpillar:

 . Provide (at Caterpillar's choice) new, Remanufactured or Caterpillar-approved
  repaired parts or assembled components needed to correct the defect.

Note:  Items replaced under this warranty become the property of Caterpillar.

 . Replace lubricating oil, filters, coolant and other service items made
  unusable by the defect.

 . Provide reasonable or customary labor needed to correct the defect, including
  labor to disconnect the product from and reconnect the product to its attached
  equipment, mounting, and support systems, if required.

For new 3114, 3116 and 3126 engines and electric power generation products
(including any new products of other manufacturers packaged and sold by
Caterpillar):

 . Provide travel labor, up to four hours round trip if, in the opinion of
  Caterpillar, the product cannot reasonably be transported to a place of
  business of a Caterpillar dealer or other source approved by Caterpillar
  (travel labor in excess of four hours round trip, and any meals, mileage,
  lodging, etc. is the user's responsibility).

For all other products:

 . Provide reasonable travel expenses for authorized mechanics, including meals,
  mileage, and lodging, when Caterpillar chooses to make the repair on-site.

USER RESPONSIBILITIES

The user is responsible for:

 . Providing proof of the delivery date to the first user.

 . Labor costs, except as stated under "Caterpillar Responsibilities", including
  costs beyond those required to disconnect the product from and reconnect the
  product to its attached equipment, mounting and support systems.

 . Travel expenses not covered under "Caterpillar Responsibilities".

 . All costs associated with transporting the product to and from the place of
  business of a Caterpillar dealer or other source approved by Caterpillar.

 . Premium or overtime labor costs.

 . Parts shipping charges in excess of those which are usual and customary.

 . Local taxes, if applicable.

 . Costs to investigate complaints, unless the problem is caused by a defect in
  Caterpillar material or workmanship.

 . Giving timely notice of a warrantable failure and promptly making the product
  available for repair.

 . Performance of the required maintenance (including use of proper fuel, oil,
  lubricants and coolant) and items replaced due to normal wear and tear.

 . Allowing Caterpillar access to all electronically stored data.

                                        (continued on reverse side...)

<PAGE>

                                   EXHIBIT G

LIMITATIONS

Caterpillar is not responsible for:

 . Failures resulting from any use or installation which Caterpillar judges
  improper.

 . Failures resulting from attachments, accessory items and parts not sold or
  approved by Caterpillar.

 . Failures resulting from abuse, neglect and/or improper repair.

 . Failures resulting from user's delay in making the product available after
  being notified of a potential product problem.

 . Failures resulting from unauthorized repair or adjustments, and unauthorized
  fuel setting changes.

 . Damage to parts, fixtures, housings, attachments, and accessory items which
  are not part of the engine or electric power generation product (including any
  products of other manufacturers packaged and sold by Caterpillar).

 . Repair of components sold by Caterpillar that are warranted directly to the
  user by their respective manufacturer. Depending on type of application,
  certain exclusions may apply. Consult your Caterpillar dealer for more
  information.

For products operating outside of Australia, Fiji, Nauru, New Caledonia, New
Zealand, Papua New Guinea, the Solomon Islands and Tahiti, the following is
applicable:

NEITHER THE FOREGOING EXPRESS WARRANTY NOR ANY OTHER WARRANTY BY CATERPILLAR,
EXPRESS OR IMPLIED, IS APPLICABLE TO ANY ITEM CATERPILLAR SELLS WHICH IS
WARRANTED DIRECTLY TO THE USER BY ITS MANUFACTURER.

THIS WARRANTY IS EXPRESSLY IN LIEU OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
EXCEPT CATERPILLAR EMISSION-RELATED COMPONENTS WARRANTIES FOR NEW ENGINES, WHERE
APPLICABLE. REMEDIES UNDER THIS WARRANTY ARE LIMITED TO THE PROVISION OF
MATERIAL AND SERVICES, AS SPECIFIED HEREIN. CATERPILLAR IS NOT RESPONSIBLE FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES.

CATERPILLAR EXCLUDES ALL LIABILITY FOR OR ARISING FROM ANY NEGLIGENCE ON ITS
PART OR ON THE PART OF ANY OF ITS EMPLOYEES, AGENTS OR REPRESENTATIVES IN
RESPECT OF THE MANUFACTURE OR SUPPLY OF GOODS OR THE PROVISION OF SERVICES
RELATING TO THE GOODS.

IF OTHERWISE APPLICABLE, THE VIENNA CONVENTION (CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS) IS EXCLUDED IN ITS ENTIRETY.

For electric power generation products sold for personal or family use,
operating in the USA, its territories and possessions, some states do not allow
limitations on how long an implied warranty may last nor allow the exclusion or
limitation of incidental or consequential damages. Therefore, the previously
expressed exclusion may not apply to you. This warranty gives you specific legal
rights and you may also have other rights which vary by jurisdiction. To find
the location of the nearest Caterpillar dealer or other authorized repair
facility, call (800) 447-4986. If you have questions concerning this warranty or
its applications, call or write:

In USA and Canada:  Caterpillar Inc., Engine Division, P.O. Box 610, Mossville,
IL 61552-0610, Attention:  Customer Service Manager, Telephone (800) 447-4986.
Outside the USA and Canada:  Contact your Caterpillar dealer.

For products operating in Australia, Fiji, Nauru, New Caledonia, New Zealand,
Papua New Guinea, the Solomon Islands and Tahiti, the following is applicable:

THIS WARRANTY IS IN ADDITION TO WARRANTIES AND CONDITIONS IMPLIED BY STATUTE AND
OTHER STATUTORY RIGHTS AND OBLIGATIONS THAT BY ANY APPLICABLE LAW CANNOT BE
EXCLUDED, RESTRICTED OR MODIFIED ("MANDATORY RIGHTS"). ALL OTHER WARRANTIES OR
CONDITIONS, EXPRESS OR IMPLIED (BY STATUTE OR OTHERWISE), ARE EXCLUDED.

NEITHER THIS WARRANTY NOR ANY OTHER CONDITION OR WARRANTY BY CATERPILLAR,
EXPRESS OR IMPLIED (SUBJECT ONLY TO THE MANDATORY RIGHTS), IS APPLICABLE TO ANY
ITEM CATERPILLAR SELLS WHICH IS WARRANTED DIRECTLY TO THE USER BY ITS
MANUFACTURER.

TO THE EXTENT PERMITTED UNDER THE MANDATORY RIGHTS, IF CATERPILLAR IS THE
SUPPLIER TO THE USER, CATERPILLAR'S LIABILITY SHALL BE LIMITED AT ITS OPTION TO
(a) IN THE CASE OF SERVICES, THE SUPPLY OF THE SERVICES AGAIN OR THE PAYMENT OF
THE COST OF HAVING THE SERVICES SUPPLIED AGAIN, AND (b) IN THE CASE OF GOODS,
THE REPAIR OR REPLACEMENT OF THE GOODS, THE SUPPLY OF EQUIVALENT GOODS, THE
PAYMENT OF THE COST OF SUCH REPAIR OR REPLACEMENT OR THE ACQUISITION OF
EQUIVALENT GOODS.

CATERPILLAR EXCLUDES ALL LIABILITY FOR OR ARISING FROM ANY NEGLIGENCE ON ITS
PART OR ON THE PART OF ANY OF ITS EMPLOYEES, AGENTS OR REPRESENTATIVES IN
RESPECT OF THE MANUFACTURE OR SUPPLY OF GOODS OR THE PROVISION OF SERVICES
RELATING TO THE GOODS.

CATERPILLAR IS NOT LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES UNLESS IMPOSED
UNDER MANDATORY RIGHTS.

IF OTHERWISE APPLICABLE, THE VIENNA CONVENTION (CONTRACTS FOR THE INTERNATIONAL
SALE OF GOODS) IS EXCLUDED IN ITS ENTIRETY.

This warranty covers every major component of the products. Claims under this
warranty should be submitted to a place of business of a Caterpillar dealer or
other source approved by Caterpillar. For further information concerning either
the location to submit claims or Caterpillar as the issuer of this warranty,
write Caterpillar Inc., 100 N. E. Adams St., Peoria, IL USA 61629-9260, or its
subsidiary, Caterpillar of Australia Ltd., 1 Caterpillar Drive, Private Mail Bag
4, Tullamarine, Victoria 3043, Australia.
<PAGE>

                                  EXHIBIT "C"

                              PAYMENT MILESTONES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
               MILESTONE                                     PAYMENT                     ESTIMATED
               ---------                                     -------                     ---------
                                                                                         COMPLETION
                                                                                         ----------
                                                                                            DATE
                                                                                            ----
---------------------------------------------------------------------------------------------------------
<S>                                                      <C>                        <C>
1.  Phase II agreement signed                                  $ .5 million                  4Q98

---------------------------------------------------------------------------------------------------------
1.  CS-UPS bench demo at Active Power's
    Austin facility that meets following                       $1.0 million                  1Q99
    performance objectives:

 . 30 second discharge at 50 kW
 . flywheel recharges in less than 20 minutes
 . less than 15% THD on input & output
 . output voltage regulation plus or minus 10%
---------------------------------------------------------------------------------------------------------
3.  CS-UPS bench demo at Active Power's                        $1.5 million                  1Q99
    Austin facility that meets following
    performance objectives:

 . 20 second discharge at 100 kW
 . flywheel recharges in less than 10 minutes
 . less than 10% THD on input & output
 . output voltage regulation plus or minus 5%
---------------------------------------------------------------------------------------------------------
4.  CS-UPS bench demo at Active Power's                        $1   million                  2Q99
    Austin facility that meets following
    performance objectives:

 . will use production components
 . single board controller for flywheel & UPS
 . static switch & contactors operational
 . 12.5 second discharge at 250 kW
 . flywheel recharges in less than 5 minutes
 . less than 5% THD on input & output
 . output voltage regulation plus or minus 2%
---------------------------------------------------------------------------------------------------------
5.  Phase II product meets Exhibit A                            $1  million                  3Q99
    specifications and first Phase II unit
    shipped, along with associated production
    drawings, to Caterpillar.
---------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

                                  EXHIBIT "D"

                         CATERPILLAR'S COMPETITOR LIST

                                    [****]

***Confidential treatment has been requested for the portions of this agreement
marked by asterisks. Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and Exchange
Commission.***

<PAGE>

                                  EXHIBIT "E"

            PICTORIAL DESCRIPTION OF PROGRAM INTELLECTUAL PROPERTY

                              PHASE II SCHEMATIC

                            [Graphic of Schematic]

[Description of graphic: The schematic depicts the elements of each party's
intellectual property divided between "flywheel and flywheel electronics" and
"UPS electronics."]

For the avoidance of doubt, PROGRAM INTELLECTUAL PROPERTY does not include
INTELLECTUAL PROPERTY with respect to the fly wheel, fly wheel electronics or
flywheel packaging.ACQUISITION AGREEMENT
                              ---------------------

         THIS ACQUISITION AGREEMENT (the Agreement"), dated as of June 30, 2000
by and among China Resources Development, Inc., a Nevada corporation
(hereinafter called the "Purchaser"); Silver Moon Technologies Limited, a
British Virgin Islands corporation (hereinafter called the "Company ") and
E-link Investment Limited, a British Virgin Islands corporation and the existing
sole-shareholder of the Company (hereafter called the "Seller").

                                    RECITALS
                                    --------

         WHEREAS, the Seller is the owner of 100 shares of U.S.$1.00 par value
each, representing 100% of the issued share capital of the Company;

         WHEREAS, the Company is indebted to the Seller in the sum of
HK$8,023,995 as an interest-free, unsecured loan by the Seller (the
Shareholder's Loan);

         WHEREAS, the Purchaser wishes to acquire Eighty (80) shares of the
Company, representing 80% of the issued shares of U.S.$1.00 each of the share
capital of the Company (hereinafter collectively referred to as the "Company
Stock"), together with the Shareholder's Loan, and the Seller wishes to sell to
the Purchaser the Company Stock and the Shareholder's Loan on the terms and
conditions set forth herein;

         NOW, THEREFORE, in consideration of the premises herein contained, the
mutual covenants hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto covenant and agree as follows:

                                      TERMS
                                      -----

         1. PURCHASE AND SALE. Subject to the terms and conditions hereinafter
set forth, at the time of the closing referred to in Section 2 hereof
(hereinafter called the "Closing Date"), the Purchaser shall purchase from the
Seller 80 shares of U.S.$1.00 each of the share capital of the Company and the
Shareholder's Loan, and the Seller shall sell to the Purchaser the 80 shares and
the Shareholder's Loan, for the consideration set forth in Section 2 thereof.

         2. PURCHASE CONSIDERATION. The aggregate purchase consideration for the
Company Stock and the Shareholder's Loan shall be the sum of U.S.$1,500,000 (the
"Purchase Consideration"). At the time of the closing, the Purchaser shall
satisfy the Purchase Consideration by issuing and delivering to the Seller Two
Hundred and Fifty Thousand (244,897) shares of common stock of the Purchaser,
with a par value of $.001 per share (hereinafter the "Purchaser Common Stock"),
which will be issued at U.S.$6.125 per share of Purchaser Common Stock,
representing the closing bid price of the common stock of the Purchaser as
quoted on the Nasdaq Small Cap Market on June 29, 2000, being the immediate
trading day prior to the date of the Agreement.

<PAGE>

         3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents, warrants and covenants to the Purchaser, all of which representation
and warranties shall be true at the time of the Closing Date and shall survive
the Closing Date for a period of two (2) years therefrom, that:

         a. The Company is duly organized, validly existing and in good standing
under the laws of the British Virgin Islands. Certified copies of the Memorandum
and Articles of Association for the Company have heretofore been furnished by
the directors of the Company to the Purchaser and such documents are true and
correct copies of the Memorandum and Articles of Association of the Company and
include all amendments thereto through the date hereof. The Company's authorized
capital consists of 50,000 shares of U.S.$1.00 each and it has 100 shares issued
and outstanding, all of which are owned by the Seller, free and clear of any
lien or encumbrance;

         b. The Company is the beneficial owner of the entire equity interest in
Sky Creation Technology Limited ("Sky Creation"), a company established under
the laws of the Hong Kong Special Administrative Region ("Hong Kong"). Sky
Creation is an online healthcare content provider, through its website
medi-china.com, offers a healthcare content in both English and Chinese with a
focus on Chinese herbal medicine and therapies;

         c. The financial information, consisting of consolidated unaudited
financial statements of the Company and its subsidiary (hereinafter collectively
called the "Group") for the period from the date of incorporation of the Company
to May 31, 2000, attached hereto as Exhibit 1 prepared by the Company,
constitute true and correct statements of all material facts, as of such date,
of the consolidated financial condition of the Group and of its assets,
liabilities and income, and from such date and until the Closing Date, no
dividends or distributions of capital, surplus, or profits has been paid or
declared by the Company (in redemption of its outstanding shares or otherwise),
other than those disclosed in writing to the Purchaser. The consolidated
unaudited financial statements of the Group have been prepared in accordance
with generally accepted accounting principles in the United States (hereinafter
referred to as U.S. GAAP).

         d. Since May 31, 2000, the Group has not experienced any material
adverse changes with respect to their business condition (financial or
otherwise), results of operations, assets, contracts, liabilities or property.

         e. The Group has complied, in all material respects, with the terms and
provisions of all agreements to which they are a party and all laws, rules,
regulations and orders to which they or their assets are subject.

         f. The Group has not violated any law, rule, regulation or order, and
is not involved in any pending or threatened litigation, which would materially
adversely affect its financial condition as shown in its financial information
referenced in Section3.c above, which have not been provided for or referred to
in such financial information or otherwise disclosed to the Purchaser.

                                       2
<PAGE>

         g. The Group shall not, from the date hereof through the Closing Date,
engage in any transaction other than transactions in the normal course of the
operation of its business, except as specifically authorized by the Purchaser in
writing.

         4. REPRESENTATIONS AND WARRANTIES BY THE SELLER. The Seller represents
and warrants to the Purchaser, all of which representation and warranties shall
be true at the time of the Closing Date and shall survive the Closing Date for a
period of two (2) years therefrom, that:

         a. The Seller has, and will have at the Closing Date, good and
marketable title to all of the shares of the Company that it is selling pursuant
to this Agreement, free and clear of any and all liens or encumbrances.

         b. The Seller has the full power to sell and transfer his or her shares
in the capital of the Company upon the terms provided for in this Agreement.

         c. The Seller has been duly organized and is validly existing under the
laws of the British Virgin Islands, with full power and authority to own its
properties and carry on its business as currently conducted.

         d. Intellectual Property

                  (1) The Company possesses all Intellectual Property necessary
to conduct its business as it currently operates or proposes to operate as of
the Closing Date and the Company owns or has the unrestricted right to use such
Intellectual Property.

                  (2) The Intellectual Property of the Company (i) does not
infringe Intellectual Property of any Person; (ii) is free and clear of any and
all Liens, escrows or other clouds on title; and (iii) is not the subject of any
assignment, exclusive or non-exclusive license, or other agreements or contracts
for purchase and sale; and there are no actual, pending or threatened third-
party claims, whether written or oral; cause of action; complaints;
cross-complaints, counterclaim; temporary restraining orders; injunctions of any
kind; court orders; judgments of any kind; settlement agreements; damages
awards; or other like adverse matters, which in any way relate to any or all of
any such Intellectual Property.

                  (3) None of the Intellectual Property of the Company, the
value of which to the Company is contingent upon maintenance of the
confidentiality thereof, has been disclosed by the Company to any Person other
than employees, representatives and agents of the Company.

                  (4) Since the Company's creation, (i) neither the Company nor
any the Company Software has infringed any third party Intellectual Property or
has at any time been sued or been the subject of a claim, or been a defendant in
any claim, suit, action or proceeding relating to its business which involves a
claim of infringement of any Intellectual Property. None of the Company's
Intellectual Property is subject to any outstanding order, judgment, decree,
stipulation or agreement restricting the use thereof by the Company or
restricting the licensing thereof by the Company to any Person.

                                       3
<PAGE>

                  (5) The Company Business has not, and is not, conducted in
contravention of any Intellectual Property or other proprietary right of any
third party.

         e. Licensed Software

         In respect of the software (including embedded products and other
components) used by the Company in its business (including, without limitation,
software and embedded components used by the Company in its products, business
information systems and facilities) but which is not owned by the Company (the
"Licensed Software"), the Company has a valid, existing and enforceable right to
use the Licensed Software. The Company has complied with the terms of all
agreements under which it has the use of any Licensed Software.

         The following terms, as used in Sections 4(d) and 4(e) above, have the
following meanings:

         "Copyrights" means copyrighted and copyrightable materials, whether or
not registered, published, or containing a copyright notice, in any and all
media, and further including but not limited to , any and all corresponding
rights under international agreements and conventions, adaptations,
modifications, moral rights, revisions, translations, or other derivative work
thereof, and any and all applications for registrations, registrations, and
or/or renewals of any of the foregoing.

         "Intellectual Property" used herein means any and all intellectual
property or proprietary rights of a Party or Person in and to Copyrights,
Patents, Software, Technical Information, Technology, and/or Trademarks and
Trade Names.

         "Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.

         "Software" means any and all mask works and computer software programs,
including but not limited to source code and object code, micros, macros,
programming languages, applications, tools, utilities, and the like, and further
including any and all alpha, beta, development, commercial, or master versions
thereof.

         "Technical Information" means know-how, show-how, data and other
technical information including, but not limited to: (i) engineering
documentation, such as development records, production software information,
algorithms, flow charts, design information, drawings, specifications and data
sheets; (ii) manufacturing documentation such as manufacturing drawings,
instructions, specifications, procedures, methods, standards documentations,
tooling and fixture drawings, process specifications and instructions; and (iii)
quality and reliability documentation such as quality plans, specifications,
instructions, procedures, test plans, test records and regulatory documentation,
and which may be disclosed by the party in possession thereof without violating
obligations to a third party.

                                       4
<PAGE>

         "Technology" means know-how, show-how, procedures, systems, processes,
trade secrets, inventions (whether or not patentable and whether or not reduced
to practice), algorithms, formulae, research and development data,
manufacturing, development and production techniques; and all other proprietary
information relating thereto.

         "Trademarks and Trade Names" means any and all trademarks, service
marks, logos, design marks, trade names, and corporate names, alone or in
connection, whether or not registered, along with the goodwill of the business
appurtenant thereto, and any and all applications for registration thereof and/
or registrations therefor.

         f. The Seller understands that (i) the Purchaser is relying upon an
exemption from registration under the Securities Act of 1933, as amended (the
"Securities Act"), as set forth in Section 5 thereof, which relate to
"transactions by an issuer not involving any public offering," and applicable
regulations promulgated by the U.S. Securities and Exchange Commission ("SEC")
thereunder or other exemption under such act; and (ii) the Purchaser is also
relying upon the securities laws of any state on the basis that the transactions
contemplated herein are exempt from the registration requirements of such laws.

         g. The Seller has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of , and to receive answers from,
representatives of the Purchaser concerning the merits and risks of investing in
the Purchaser Common Stock, (ii) access to public information about the
Purchaser and the Purchaser's financial condition, results of operations,
business, properties, management and prospects sufficient to enable it to
evaluate its investment in the Purchaser Common Stock, and (iii) the opportunity
to obtain such additional public information that is necessary to make an
informed decision with respect to the Purchaser Common Stock.

         h. The Seller is able to bear the economic risk of an investment in the
Purchaser Common Stock and, at the present time, is able to afford a complete
loss of such investment.

         i. The Seller has such knowledge, sophistication and experience in
business and financial matters so as to be able of evaluating the merits and
risks of the prospective investment in the Purchaser Common Stock , and has so
evaluated the merits and risks of such investment.

         j. The Seller is not a "U.S. person" as such term is defined in
Regulation S promulgated under the Securities Act.

         k. The Seller is acquiring the Purchaser Common Stock for its own
account for investment and not with a view to distribution.

         l. The Seller understands and acknowledges that (i) the Purchaser
Common Stock are being sold to it without registration under the Securities Act
by reason of reliance upon certain exemptions therefrom and (ii) the
availability of such exemptions depends in part on, and the Purchaser will rely
upon the accuracy and truthfulness of, the foregoing representations, and the
Seller hereby consents to such reliance.

                                       5
<PAGE>

         m. The Seller understands that resale or transfer of the Purchaser
Common Stock may only be undertaken pursuant to an effective registration
statement under the Securities Act or pursuant to an available exemption from
the registration requirements of the Securities Act. In connection with any
transfer of any Purchaser Common Stock other than pursuant to an effective
registration statement under the Securities Act, the Purchaser may require that
the transferor provide to the Purchaser an opinion of counsel, reasonably
satisfactory to the Purchaser, to the effect that such transfer does not require
registration of such Purchaser Common Stock under the Securities Act.

         n. The Seller acknowledges and agrees that the Purchaser Common Stock
are subject to certain restrictions on public trading as set forth above and
that the Purchaser is under no obligation to register, or assist in the
registration of, the Purchaser Common Stock under the Securities Act or to make
any exemption from registration under the Securities Act available.

         o. Notwithstanding anything set forth in this Agreement to the
contrary, the Seller acknowledges that after the acquisition of the Company, it
is the intention of the Purchaser to negotiate with third parties for the
possible issuance of additional shares of common stock of the Purchaser to
acquire other corporations by the exchange of common stock or for the sale of
additional shares of common stock to increase the operating capital of the
Purchaser. Therefore, the Seller acknowledges and consents that the number of
shares outstanding and number of shareholders of the Purchaser may change after
the date hereof and the financial condition of Purchaser may change to reflect
the results of any such issuances for assets of another corporation or may
change to reflect the proceeds from a future sale of common stock.

         5. REPRESENTATION AND WARRANTIES BY THE PURCHASER. The Purchaser
represents, warrants and covenants to the Seller, all of which representations
and warranties shall be true at the time of the Closing Date and shall survive
the Closing Date for a period of two (2) years therefrom, that:

         a. The Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of the State of Nevada and has the corporate
power to own its properties and carry on its business as now being conducted.

         b. The Purchaser has all of the necessary corporate power and authority
to execute, deliver and perform this Agreement and to issue and deliver the
Purchaser Common Stock and any other shares of the Purchaser's common stock
required to be delivered hereunder.

         c. The execution, delivery and performance of this Agreement have been
duly authorized by the Purchaser. This Agreement constitutes a valid binding
obligation of the Purchaser enforceable in accordance with its terms, except as
the enforceability thereof may be limited by applicable bankruptcy, insolvency
or similar laws affecting creditors' rights and by general principles of equity.
The execution, delivery and performance by the Purchaser of this Agreement, the
consummation of the Exchange, the issuance and sale of the Purchaser Common

                                       6
<PAGE>

Stock to the Seller, and the consummation of the other transactions contemplated
by this Agreement to be performed by the Purchaser do not and will not require
the authorization, consent, permit or approval of, or declaration to or filing
with, any court, regulatory or public body or governmental authority not already
obtained or made, or result in the creation of any lien, security interest,
charge or encumbrance upon the capital stock or assets of the Purchaser.

         d. The Purchaser has complied, in all material respects, with the terms
and provisions of all agreements to which it is a party and all laws, rules,
regulations and orders or to which it or its assets are subject.

         e. Neither the execution or delivery of this Agreement, nor the
issuance of the Purchaser Common Stock or other shares to be issued hereunder,
nor the performance, observance or compliance with the terms and provisions of
this Agreement, will violate any provision of law, any order of any court or
other governmental agency, the Articles of Incorporation or By-laws of the
Purchaser or any indenture, agreement or other instrument to which the Purchaser
is a party, or which the Purchaser is bound or by which any of its property is
bound.

         f. The Purchaser Common Stock deliverable hereunder will, upon their
delivery in accordance with the terms hereof, be duly authorized, validly
issued, fully paid and non-assessable.

         g. All of the issued and outstanding shares of common stock of the
Purchaser are and the Purchaser Common Stock shall be when issued, (i) duly
authorized, validly issued, fully paid and non-assessable. (ii) listed for
trading on the NASDAQ Small Cap Market (Nasdaq: CHRB) (except that the Purchaser
Common Stock will be restricted stock and not freely tradable thereon), and the
Purchaser has received no notice that its Common Stock is subject to being
delisted therefrom.

         h. The Purchaser and its subsidiaries, if any, have complied with all
applicable foreign, federal and state laws, rules and regulations, including,
without limitation, the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and the Securities Act.

         i. The Purchaser is required to file reports under Section 12(g) of the
Exchange Act, and is current in its filing thereunder. All of the filings made
by the Purchaser under the Securities Act or the Exchange Act ("Filings") comply
with the requirements thereof and the rules and regulations of the Securities
and Exchange Commission thereunder. None of the Filings made by the Purchaser
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.

         j. The Purchaser hereby acknowledges that the Company Stock are not
registered under the Securities Act or the laws of any other jurisdiction and
are subject to restrictions on their transfer and resale under applicable
federal and state law.

         The Purchaser understands that (i) in agreeing to sell and transfer its
Company Stock to the Purchaser in accordance with this Agreement, the Seller is
relying upon an exemption from registration under the Securities Act, as set
forth in Section 4 thereof, which relate to private resales of restricted

                                       7
<PAGE>

securities; and (ii) the Seller is also relying upon the securities laws of any
state on the basis that the transactions contemplated herein are exempt from the
registration requirements of such laws.

         k. The Company and the Seller have made available to the Purchaser the
opportunity to ask questions of and receive answers from the Company concerning
the terms and conditions of the Exchange and to obtain any additional
information from the Company or the Seller desired by the Purchaser concerning
the Company or the Seller.

         l. That the investment by the Purchaser in the Company Stock is a
suitable investment for the Purchaser, given the investment goals and objectives
of the Company.

         m. The Purchaser has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in the Company Stock. The Purchaser understands the effect of
acquiring the Company Stock and the differing rights, restrictions and
obligations of a holder of the Company Stock.

         n. The Purchaser has had access to and has thoroughly reviewed all
documents and instruments, including but not limited to the Memorandum and
Articles of Association of the Company, and have been able to obtain such
information, and has had the opportunity to ask all questions of, and receive
answers from the Company and the Seller, which it deems necessary or relevant to
an investment in the Company Stock and has utilized such opportunity to the
extent deemed necessary by the Purchaser to allow it to make a fully informed
decision to purchase the Company Stock described herein.

         o. The Purchaser is purchasing the Company Stock for its own account,
for investment purposes only, and not with a view to the sale, pledge,
hypothecation, or other distribution or disposition thereof or of any interest
therein.

         p. The Purchaser understands that resale or transfer of the Company
Stock will be prohibited indefinitely unless the Company Stock is registered
under the Act or an exemption from such registration is available and such
resale or transfer will not otherwise violate federal or state securities laws.

         6. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. The obligations of
the Purchaser to consummate the transactions pursuant to Sections 1 and 2 is
subject to the following conditions as of the Closing Date.

         a. The Purchaser shall not have discovered any material error or
misstatement in any of the representations and warranties made by the Seller or
the Company and all of the terms and conditions of this Agreement to be
performed and complied with prior to the Closing Date have been performed and
complied with on or prior to the Closing Date.

                                       8
<PAGE>

         b. The Company and the Seller are in compliance with all covenants set
forth herein.

         c. There have been no material adverse change in the condition
(financial, business or otherwise)
of the Group from May 31, 2000 to the Closing Date;

         d. The Company and the Seller have received all corporate, regulatory
and other third party approvals and authorizations necessary to consummate the
transactions contemplated herein.

         e. The Seller shall have transferred and assigned all its interest and
benefit in the Shareholder's Loan to the Purchaser and the Seller shall have
executed a loan assignment agreement in form and substance satisfactory to the
Purchaser prior to the Closing Date .

         7. CONDITIONS TO THE OBLIGATIONS OF THE SELLER AND THE COMPANY. The
obligations of the Seller and the Company hereunder are subject to the following
conditions:

         a. The Seller or the Company shall not have discovered any material
error or misstatement in any of the representations or warranties made by the
Purchaser herein and all the terms and conditions of the Agreement to be
performed and complied with by the Purchaser herein to the Closing Date have
been performed and complied with on or prior to the Closing Date.

         b. The Purchaser is in compliance with all covenants set forth herein.

         c. As of the Closing date, the Purchaser shall have received all
corporate, regulatory and other third party approvals and authorizations
necessary to consummate the transactions contemplated herein.

         8. CLOSING DATE. The Closing Date shall take place on July 12, 2000 at
the offices of the Purchaser, Room 2005, 20/F., Universal Trade Center, 3
Arbuthnot Road, Hong Kong, or at such other time and place as the parties hereto
shall mutually agree. Otherwise, this Agreement shall terminate on July 12,
2000.

         9. ACTIONS AT CLOSING. At closing, the Purchaser and the Seller will
each deliver, or cause to be delivered to the other, the securities to be
exchanged in accordance with Section 1 and 2 of this Agreement, and each party
shall pay any and all taxes required to be paid in connection with the issuance
and delivery of its own securities. All share certificates shall be in the name
of the party to which the same are deliverable except the Seller's shares, which
will be accompanied by an instrument of transfer executed in favor of the
Purchaser.

                                       9
<PAGE>

         In addition, the following shall occur at Closing:

         a. The Purchaser will deliver to the Seller certified copies of all
corporate resolutions and other corporate proceedings taken by the Company to
authorize the execution, delivery and performance of this Agreement.

         b. The Seller will deliver to the Purchaser:

                  (1) certified copies of all corporate resolutions and other
corporate proceedings taken by the Seller to authorize the execution, delivery
and performance of this Agreement.

                  (2) the loan assignment agreement duly executed by the Seller.

         c. The Company will deliver to the Purchaser:

                  (1) all registration certificates, statutory books, minute
books and common seal of the Company, all accounts books and all documents and
papers in connection with the affairs of the Company and all documents of title
relating to the Company's assets (unless already in the possession of the
Purchaser) as are required by the Purchaser.

                  (2) certified copies of resolutions of the directors and
shareholders of the Company electing or appointing (as the case may be) such
number of new directors and officers of the Company as may be designated by the
Purchaser.

         10. CONFIDENTIAL INFORMATION: DELIVERY; RETURN: NON-DISCLOSURE.

         a. Delivery of Information. Until the earlier of the Closing Date or
the termination of this Agreement (such date hereinafter the "Termination
Date"), pursuant to the terms of this Agreement:

                  (1) The Company has provided and will provide the Purchaser
and its officers, directors, employees, agents, counsel, accountants, financial
advisors, consultants and other representatives (together "Purchaser
Representatives") with full access, upon reasonable prior notice, to all
officers, employees and accountants of the Company and Sky Creation and to their
assets, properties, contracts, books, records and all such other information and
data concerning the business and operations of the Company or Sky Creation as
the Purchaser Representatives reasonably may request in connection with such
investigation, but only to the extent that such access does not unreasonably
interfere with the business and operations of the Company or Sky Creation.

                  (2) The Purchaser has provided and will provide the Seller and
the Company and its officers, directors, employees, agents, counsel,
accountants, financial advisors, consultants and other representatives (together
"Seller Representatives") with full access, upon reasonable prior notice, to all
officers, employees and accountants of the Company and to their assets,
properties, contracts, books, records and all such other information and data
concerning the business and operations of the Purchaser as the Seller
Representatives reasonably may request in connection with such investigation.

                                       10
<PAGE>

         b. Acknowledgments: definitions:

                  (1) The Purchaser has been and, pursuant to the terms of this
Section, shall continue to be privy to certain proprietary and confidential
information of the Company and/or the Seller (the "Company Confidential
Information"). As used herein, the term "Company Confidential Information" shall
include, but not be limited to, any and all information or documentation
whatsoever which has been disclosed or made available to the Purchaser by the
Company, the Seller or Sky Creation, regarding their products, services,
techniques, manufacturing or other processes, activities, businesses,
properties, operations, clients, customers, prospective clients, price lists,
suppliers, business associates, equipment, Trade Secrets (as defined herein),
computer software, scientific discoveries, experiments, data, equipment designs,
training, devices, charts, manuals, payroll, financial statements and
improvements thereto and any other information or materials disclosed or
delivered to the Purchaser which the disclosing party may from time to time
designate and treat as confidential, proprietary or as a trade secret, including
all information relating (directly or indirectly) to the material set forth in
the Company business plan delivered or to be delivered to the Purchaser.

                  (2) The Company and/or the Seller have been and, pursuant to
the terms of this Section, shall continue to be privy to certain proprietary and
confidential information of the Purchaser (the "Purchaser Confidential
Information"). As used herein, the term "Purchaser Confidential Information"
shall include, but not be limited to, any and all information or documentation
whatsoever which has been disclosed or made available to the Company and/or the
Seller regarding its products, services, techniques, manufacturing or other
processes, activities, businesses, properties, operations, clients, customers,
prospective clients, price lists, suppliers, business associates, equipment,
Trade Secrets (as defined herein), computer software, scientific discoveries,
experiments, data, equipment designs, training devices, charts, manuals,
payroll, financial statements and improvements thereto and any other information
or materials disclosed or delivered to the Company and/or the Seller which the
disclosing party may from time to time designate and treat as confidential,
proprietary or as a trade secret.

                  (3) Reference to "Confidential Information" herein shall
include and relate to both the Company Confidential Information and the
Purchaser Confidential Information.

                  (4) As used herein, the term "Trade Secret" shall mean the
whole or any portion of any formula, pattern, device, combination of devices, or
compilation of information which is for use, or is used in the operation of the
other party's businesses and which provides such party's business an advantage,
or an opportunity to obtain an advantage, over those who do not know or use it.
For purposes of interpretation hereunder the following shall apply:

                  Irrespective of novelty, invention, patentability, the state
of the prior art, and the level of skill in the business, art or field to which
the subject matter pertains, when the owner thereof takes measures to prevent it
from becoming available to persons other than those selected by the owner to
have access thereto for limited purposes, a trade secret is considered to be
secret, of value, for use or in use by the business, and of advantage to the
business, or providing an opportunity to obtain an advantage, over those who do
not know or use it.

                                       11
<PAGE>

                  In addition, a "Trade Secret" shall include information (not
readily compiled from publicly available sources) which has been made available
by the Company and/or the Seller to the Purchaser by the Purchaser to the
Company and/or the Seller, as the case may be, during the course of their
involvement with each other, including but not limited to the names, addresses,
telephone numbers, qualifications, education, accomplishments, experience and
resumes of all persons who have applied or been recruited for employment, for
either or both permanent and temporary jobs, job order specifications and the
particular characteristics and requirements of persons generally hired by the
disclosing party, as well as specific job listings from companies with whom the
disclosing party does, or attempts to do, business, as well as mailing lists,
computer runoffs, financial or other information not generally available to
others.

         c. Non-Disclosure: the Purchaser:

                  (1) The Purchaser, for itself, its officers, employees,
directors, agents, affiliates, subsidiaries, independent contractors, and
related parties (all of whom are to be deemed included in any reference herein
to the Purchaser) agrees that it will not at any time during or after the
termination or expiration of this Agreement, except as authorized or directed
herein or in writing by the Company and/or the Seller, use for the Purchaser's
own benefit, copy, reveal, sell, exchange or give away, disclose, divulge or
make known or available in any manner to any person, firm, corporation or other
entity (whether or not the Purchaser receives any benefit therefrom), any the
Company Confidential Information.

                  (2) The Purchaser will take all actions necessary to ensure
that the Company Confidential Information is maintained as secret and
confidential and its disclosure shall only be made, to the extent necessary, to
a limited group of the Purchaser's employees, officers and/or directors who are
actually engaged in the evaluation of the Company Confidential Information;
provided, however, the Purchaser acknowledges and agrees that it shall be
responsible and held liable for the actions or inactions of such employees,
officers and directors (regardless whether or not such actions or inactions are
within their scope of employment) with respect to the maintenance of the secrecy
and confidentiality of the Company Confidential Information.

                  (3) The Purchaser understands that if it discloses to others,
use for its own benefit (other than as part of an agreement with the Company and
the Seller, which contemplates such use) or for the benefit of any person or
entity other than the Company and/or the Seller, copies or makes notes of any
such the Company Confidential Information, such conduct will constitute a breach
of the confidence and trust bestowed upon the Purchaser by the Company and the
Seller and will constitute a breach of this Agreement and render the Purchaser
responsible for any and all damages suffered by the Company and/or the Seller as
a result thereof.

                  (4) Provided, however, notwithstanding the foregoing, the
terms of this subsection (c) shall not be applicable to any information which
the Purchaser is compelled to disclose by judicial or administrative process or
by other requirements of law (including, without limitation, in connection with
obtaining the necessary approvals of the Exchange of governmental or regulatory
authorities).

                                       12
<PAGE>

         d. Non-Disclosure: the Company and the Seller:

                  (1) The Company and the Seller, for themselves, their
officers, employees, directors, agents, affiliates, subsidiaries, independent
contractors, and related parties (all of whom are to be deemed included in any
reference herein to the Company and the Seller) agree that they will not at any
time during or after the termination or expiration of any agreement or
negotiations for an agreement with the Purchaser, except as authorized or
directed herein or in writing by the Purchaser, use for the Company and the
Seller's own benefit, copy, reveal, sell, exchange or give away, disclose,
divulge or make known or available in any manner to any person, firm,
corporation or other entity (whether or not the Company and the Seller receive
any benefit therefrom), any Purchaser Confidential Information.

                  (2) The Company and the Seller will take all actions necessary
to ensure that the Purchaser Confidential Information is maintained as secret
and confidential and its disclosure shall only be made, to the extent necessary,
to a limited group of the Company and/or the Seller's own employees, officers,
directors and/or professional advisors who are actually engaged in the
evaluation of the Purchaser Confidential Information; provided, however, the
Company and the Seller acknowledge and agree that they shall be responsible and
held liable for the actions or inactions of such employees, officers, directors
and/or professional advisors (regardless whether or not such actions or
inactions are within their scope of employment) with respect to the maintenance
of the secrecy and confidentiality of the Purchaser Confidential Information.

                  (3) The Company and the Seller understand that if they
disclose to others, uses for their own benefit (other than as part of an
agreement with the Purchaser, which contemplates such use) or for the benefit of
any person or entity other than the Purchaser, copies or makes notes of any such
Purchaser Confidential Information, such conduct will constitute a breach of the
confidence and trust bestowed upon the Company and the Seller by the Purchaser
and will constitute a breach of this Agreement and render the Company and the
Seller severally responsible for any and all damages suffered by the Purchaser
as a result thereof.

                  (4) Provided, however, notwithstanding the foregoing, the
terms of this subsection (d) shall not be applicable to any information which
the Company and/or the Seller are compelled to disclose by judicial or
administrative process or by other requirements of law (including, without
limitation, in connection with obtaining the necessary approvals of the Exchange
of governmental or regulatory authorities).

         e. Return of Information:

                  (1) At any time after the Termination Date, upon request of
the Company or the Seller, the Purchaser will, and will cause the Purchaser
Representatives to, promptly (and in no event later than five days after such
request) redeliver or cause to be redelivered to the Company all the Company
Confidential Information and destroy or cause to be destroyed all notes,
memoranda, summaries, analyses, compilations and other writings relating thereto
or based thereon prepared by the Purchaser or any Purchaser Representative. Such
destruction shall be certified in writing to the Company by an authorized
officer supervising such destruction.

                                       13
<PAGE>

                  (2) At any time after the Termination Date, upon request of
the Purchaser, the Seller and/or the Company will, and will cause the Company
Representatives to, promptly (and in no event later than five days after such
request) redeliver or cause to be redelivered to the Purchaser all Purchaser
Confidential Information and destroy or cause to be destroyed all notes,
memoranda, summaries, analyses, compilations and other writings relating thereto
or based thereon prepared by the Seller, the Company or the Company
Representatives. Such destruction shall be certified in writing to the Purchaser
by an authorized officer supervising such destruction.

         11. EQUITABLE RELIEF. The Purchaser and the Seller agree that money
damages would not be a sufficient remedy for any breach of any provision set
forth in Sections 9, 11 or 12 by the other, and that, in addition to all other
remedies which any party hereto may have, each party will be entitled to
specific performance and injunctive or other equitable relief as a remedy for
any such breach. No failure or delay by any party hereto in exercising any
right, power or privilege hereunder will operate as a waiver thereof, nor will
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any right, power or privilege hereunder.

         12. CONDUCT AND BUSINESS.

         a. Between the date hereof and the Closing Date, the Company shall
conduct its business in the same manner in which it has heretofore been
conducted, and the Seller will not permit the Company to; (l) enter into any
contracts, agreements, arrangements, etc., other than in the ordinary course of
business, or (2) declare or make any distribution of any kind to the
shareholders of the Company without first obtaining the written consent of the
Purchaser.

         b. Between the date hereof and the Closing Date, the Purchaser shall
conduct its business in the same manner in which it has heretofore been
conducted, and the Purchaser will not; (1) enter into any contracts, agreements,
arrangements, etc., other than in the ordinary course of business, or (2)
declare or make any distribution of any kind to the shareholders of the
Purchaser without first obtaining the written consent of the Company.

         13. NO PUBLIC DISCLOSURE.

         a. The Company and the Seller hereby acknowledge that they are aware
(and that the Company Representatives who have been apprised of this Agreement
and the Seller's consideration of the transactions contemplated herein have
been, or upon becoming so apprised will be advised) of the restrictions imposed
by federal and state securities laws on a person possessing material
"non-public" information about a company with a class of securities registered
under the Exchange Act. In this regard, the Seller agrees that while it is in
possession of material non-public information with respect to the Purchaser and
its subsidiaries, the Seller will not purchase or sell any securities of the
Purchaser, or communicate such information to any third party, in violation of
any such laws.

                                       14
<PAGE>

         b. Without the prior written consent of the other, neither the Seller
or the Company, on the one hand, nor the Purchaser, on the other, will, and will
each cause their respective representatives not to, make any release to the
press or other public disclosure with respect to either the fact that
discussions or negotiations are taking place concerning the transactions
contemplated herein , the existence or contents of this Agreement or any prior
correspondence relating to this transaction, except for such public disclosure
as may be necessary, in the written opinion of outside counsel (reasonably
satisfactory to the other party) for the party proposing to make the disclosure
not to be in violation of or default under any applicable law, regulation or
governmental order. If either party proposes to make any disclosure based upon
such an opinion, that party will deliver a copy of such opinion to the other
party, together with the text of the proposed disclosure, as far in advance of
its disclosure as is practicable, and will in good faith consult with and
consider the suggestions of the other party concerning the nature and scope of
the information it proposes to disclose.

         14. BROKERAGE FEE. Each party hereto represents that no brokers have
been employed in this transaction for which the other party could or will become
liable.

         15. AGREEMENT TO INDEMNIFY. Subject to the terms and conditions of this
Section, the Purchaser hereby agrees for a period of two (2) years to indemnify,
defend and hold the Company and the Seller harmless from and against all
demands, claims, actions or causes of action, assessments, losses, damages,
liabilities, costs and expenses, including without limitation, interest,
penalties, court costs and reasonable attorneys fees (including paralegal and
law clerk fees and other legal expenses and costs) and expenses, asserted
against, relating to, imposed upon or incurred by the Company or the Seller by
reason of or resulting from a breach of (i) any representation or warranty given
by the Purchaser contained in or made pursuant to this Agreement, or (ii) any
provision set forth in this Agreement to be performed by the Purchaser or the
Purchaser Representatives.

         Subject to the terms and conditions of this Section, the Company and
the Seller hereby agree to indemnify, defend and hold the Purchaser harmless
from and against all demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, costs and expenses, including without limitation,
interest, penalties, court costs and reasonable attorneys' fees (including
paralegal and law clerk fees and other legal expenses and costs) and expenses,
asserted against, relating to, imposed upon or incurred by the Purchaser by
reason of or resulting from a breach of (i) any representation or warranty given
by the Company or the Seller contained in or made pursuant to this Agreement, or
(ii) any provision set forth in this Agreement to be performed by the Seller,
the Company or the Company Representatives.

         All of the foregoing are hereinafter collectively referred to as
"Claims" and singularly as a "Claim."

         a. Conditions of Indemnification. The obligations and liabilities of
the Seller, the Company and the Purchaser, with respect to Claims resulting from
the assertion of liability by third parties, shall be subject to the following
terms and conditions:

                                       15
<PAGE>

                  (1) The party hereto seeking indemnification (the
"Indemnitee") will give the other party hereto (the "Indemnitor") notice of any
such Claim reasonably promptly after the Indemnitee receives notice thereof, and
the Indemnitor will undertake the defense thereof by representatives of its own
choosing.

                  (2) In the event that the Indemnitor, within ten (10) business
days after notice of any such Claim, fails to defend such Claim, the Indemnitee
will (upon giving written notice to the Indemnitor) have the right, but not the
obligation, to undertake the defense, compromise or settlement of such Claim on
behalf of and for the account and risk of the Indemnitor, subject to the right
of the Indemnitor to assume the defense of such Claim at any time prior to
settlement, compromise or final determination thereof.

                  (3) Anything in this Section to the contrary notwithstanding,
if there is a reasonable probability that a Claim may materially and adversely
affect the Indemnitee other than as a result of money damages or other money
payments, the Indemnitee shall have the right to defend, compromise or settle
such Claim, in good faith, on behalf of and for the account and risk of the
Indemnitor. However, the Indemnitee shall not, without the Indemnitor's written
consent, settle or compromise any Claim or consent to entry of any judgment
which does not include an unconditional release from all liability in respect of
such Claim, other than liability specified in the settlement, from the claimant
or plaintiff to the Indemnitor and the Indemnitee. To the greatest extent
reasonably possible, the parties shall attempt to obtain general releases from
such plaintiff or claimant.

         16. COST AND EXPENSES. Each party hereto shall pay its own costs and
expenses incident to the negotiation and preparation of this Agreement and to
the consummation of the transaction contemplated herein.

         17. MISCELLANEOUS.

         a. Waiver: Strict Construction. No change or modification of this
Agreement shall be valid unless the same is in writing and signed by all the
parties hereto. No wavier of any provision of this Agreement shall be valid
unless in writing and signed by the person against whom sought to be enforced.
The failure of any party at any time to insist upon strict performance of any
condition, promise, agreement or understanding set forth and shall not be
construed as a waiver of relinquishment of the right to insist upon strict
performance of the same condition, promise, agreement or understanding at a
future time.

         b. Entire Agreement. This Agreement, together with all schedules and
exhibits, sets forth all of the promises, agreements, conditions,
understandings, warranties and representations among the parties hereto, and
there are no promises, agreements, conditions, understandings, warranties or
representations, oral or written, express or implied, among them other than as
set forth herein. This Agreement is, and is intended by the parties to be, an
integration of any and all prior agreements or understandings, oral or written.

                                       16
<PAGE>

         c. Headings. The headings in this Agreement are inserted for
convenience of reference only and are not to be used in construing or
interpreting the provisions of this Agreement.

         d. Counterparts. This Agreement may be executed in two or more
identical counterparts, each of which will be deemed an original and all of
which will constitute one instrument.

         e. Construction. Unless the context clearly otherwise requires the use
of the singular will include the plural and the use of the plural will include
the singular, and the use of any gender will include the other two genders.

         f. Severability. If a covenant or provision provided in this Agreement
is deemed to be contrary to law, that covenant or provision will be deemed
separable from the remaining covenants and provisions of this Agreement, and
will not affect the validity, interpretation, or effect of the other provisions
of either this Agreement or any agreement executed pursuant to it or the
application of that covenant or provision to other circumstances not contrary to
law.

         g. Computation of Time. Whenever the last day for the exercise of any
privilege or the discharge of any duty hereunder falls upon Saturday, Sunday, or
any public or legal holiday, whether Nevada or federal, the party having the
privilege or duty will have until 5:00 p.m. Pacific Standard Time on the next
succeeding regular business day to exercise the privilege or discharge the duty.

         h. Interpretation. No provision of this Agreement will be construed
against or interpreted to the disadvantage of any party by any court or other
governmental or judicial authority by reason of such party having or being
deemed to have structured or dictated such provision.

         i. Governing Law. This Agreement and the obligations of the parties
hereunder will be interpreted, construed, and enforced in accordance with the
Laws of the State of Florida.

         j. Attorneys' Fees. In the event a lawsuit is brought by either party
to enforce or interpret the terms hereof, or for any dispute arising out of this
transaction, the party prevailing in any such lawsuit shall be entitled to
recover from the non-prevailing party its costs and expenses thereof, including
its legal fees in reasonable amount and prejudgment and post-judgment interest
at the highest rate allowable under Florida law.

         k. Assignment. This Agreement shall not be assignable by either party
without the prior written consent of the other.

         1. Notices. All notices, requests, instructions or other documents to
be given hereunder shall be in writing and sent by registered mail:

                                       17
<PAGE>

If to the Purchaser, then:

China Resources Development, Inc.
Room 2005, 20/F., Universal Trade Center,
3 Arbuthnot Road, Central,
Hong Kong
Attn: Mr. Bell Tam

with copies to:

Baker & Hostetler LLP
2300 Sun Bank Center
200 South Orange Avenue,
Post Office Box 112,
Orlando, Florida 32802,
Attn:  Kenneth C. Wright, Esq.

If to the Company, then:

Silver Moon Technologies Limited
17/F., Kwanchart Tower,
6 Tonnochy Road,
Wanchai,
Hong Kong
Attn: Mr. Cheung Yu Shum

If to the Seller then:

E-link Investment Limited
17/F., Kwanchart Tower,
6 Tonnochy Road,
Wanchai,
Hong Kong
Attn: Mr. Cheung Yu Shum

         m. Benefit and Burden. This Agreement shall inure to the benefit of,
and shall be binding upon, the parties hereto and their legatees, distributees,
estates, executors or administrators, successors and assigns, and personal and
legal representatives.

                                       18
<PAGE>

         IN WITNESS WHEREOF, on the date first written above, the parties hereto
have duly executed this Agreement and the Company and the Seller have caused
their corporate seal to be affixed hereto as of the date and year first above
written.

The Purchaser:

China Resources Development, Inc., a Nevada corporation

By:               /s/ Ching Lung Po
                  -----------------
                  Ching Lung Po
Its:              President

ATTEST:           /s/ WongWah On
                  --------------
                  Wong Wah On
Its:              Secretary

The Seller:

E-link Investment Limited, a British Virgin Islands corporation

By:               /s/ Cheung Yu Shum
                  ------------------
                  Cheung Yu Shum
Its:              Sole-shareholder and director

The Company:

Silver Moon Technologies Limited, a British Virgin Islands corporation

By:               /s/ Cheung Yu Shum
                  ------------------
                  Cheung Yu Shum
Its:              Chairman

ATTEST:           /s/ Ng Wai Ip
                  -------------
                  Ng Wai Ip
Its:              Secretary

                                       19
<PAGE>

                                LIST OF EXHIBITS

EXHIBIT 1

         Consolidated unaudited financial statements of Silver Moon Technologies
Limited and its subsidiary for the period from the date of incorporation to May
31, 2000.

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