Document:

SECURITY AGREEMENT

                            LAURUS MASTER FUND, LTD.

                        AMERICAN TECHNOLOGIES GROUP, INC.

                                       and

                     EACH ELIGIBLE SUBSIDIARY NAMED THEREIN

                            Dated: September 7, 2005

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                                TABLE OF CONTENTS

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

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

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

4. Procedure for Revolving Loans............................................5

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

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

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

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

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

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

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

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

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

14.Further Assurances......................................................30

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

16.Power of Attorney.......................................................32

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

18.Termination of Lien.....................................................33

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

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

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

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

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                                                                         PAGE(S)
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23.Assignment By Laurus....................................................37

24.No Waiver; Cumulative Remedies..........................................38

25.Application of Payments.................................................38

26.Indemnity...............................................................38

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

28.Borrowing Agency Provisions.............................................39

29.Notices.................................................................40

30.Governing Law, Jurisdiction and Waiver of Jury Trial....................41

31.Limitation of Liability.................................................42

32.Entire Understanding; Maximum Interest..................................42

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

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

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

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

37.Construction............................................................43

38.Publicity...............................................................43

39.Joinder.................................................................43

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

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                               SECURITY AGREEMENT

                  This Security Agreement is made as of September 7, 2005 (this
"AGREEMENT") by and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation
("LAURUS"), AMERICAN TECHNOLOGIES GROUP, INC., a Nevada corporation (the
"PARENT"), and each party listed on EXHIBIT A attached hereto (each an "ELIGIBLE
SUBSIDIARY" and collectively, the "ELIGIBLE SUBSIDIARIES") (the Parent and each
Eligible Subsidiary, each a "COMPANY" and collectively, the "COMPANIES").

                                   BACKGROUND

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

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

                                    AGREEMENT

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

      1. GENERAL DEFINITIONS AND TERMS; RULES OF CONSTRUCTION.

      (a) GENERAL  DEFINITIONS.  Capitalized  terms used in this Agreement shall
have the meanings assigned to them in ANNEX A.

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

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

      (d) RULES OF CONSTRUCTION.  All Schedules,  Addenda,  Annexes and Exhibits
hereto or expressly  identified  to this  Agreement are  incorporated  herein by
reference  and  taken  together  with  this  Agreement  constitute  but a single
agreement.  The words  "herein",  "hereof"  and  "hereunder"  or other  words of
similar  import refer to this  Agreement  as a whole,  including  the  Exhibits,
Addenda,  Annexes and  Schedules  thereto,  as the same may be from time to time
amended, modified, restated or supplemented,  and not to any particular section,
subsection or clause  contained in this Agreement.  Wherever from the context it
appears  appropriate,  each term stated in either the  singular or plural  shall
include the  singular  and the plural,  and  pronouns  stated in the  masculine,
feminine or neuter  gender  shall  include the  masculine,  the feminine and the
neuter.  The  term  "or" is not  exclusive.  The term  "including"  (or any form
thereof)  shall not be limiting or  exclusive.  All  references  to statutes and
related  regulations  shall  include any  amendments  of same and any  successor
statutes and regulations.  All references in this Agreement or in the Schedules,
Addenda,  Annexes  and  Exhibits  to  this  Agreement  to  sections,  schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections,  schedules,  disclosure schedules,  exhibits, and attachments of or to
this  Agreement.  All references to any  instruments  or  agreements,  including
references to any of this  Agreement or the Ancillary  Agreements  shall include
any and all  modifications  or amendments  thereto and any and all extensions or
renewals thereof.

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      2. LOAN FACILITY.

      (a) REVOLVING LOANS.

            (i) Subject to the terms and  conditions set forth herein and in the
Ancillary

            Agreements,  Laurus may make revolving loans (the "REVOLVING LOANS")
to Companies  from time to time during the Term which,  in the  aggregate at any
time outstanding, will not exceed the lesser of (x) (I) the Capital Availability
Amount,  minus (II) such  reserves  as Laurus may  reasonably  in its good faith
judgment deem proper and necessary from time to time (the "RESERVES") and (y) an
amount  equal  to  (I)  the  Accounts  Availability,  plus  (II)  the  Inventory
Availability,  minus  (III) the  Reserves.  The amount  derived at any time from
Section  2(a)(i)(y)(I),  plus Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall
be referred to as the "FORMULA AMOUNT." Companies shall,  jointly and severally,
execute  and  deliver to Laurus on the  Closing  Date the  Revolving  Note and a
Minimum  Borrowing  Note  evidencing  the Revolving  Loans funded on the Closing
Date.  From time to time  thereafter,  the Companies shall jointly and severally
execute and  deliver to Laurus  immediately  prior to the final  funding of each
additional  $3,000,000  tranche of  Revolving  Loans  allocated  to any  Minimum
Borrowing Note issued after the date hereof  (calculated  on a cumulative  basis
for each such tranche) an additional  Minimum  Borrowing  Note  evidencing  such
tranche,  substantially  in the form of the Minimum  Borrowing Note delivered by
the Companies to Laurus on the Closing Date.  Notwithstanding anything herein to
the contrary,  whenever during the Term the  outstanding  balance on the Minimum
Borrowing  Note shall be less than the Minimum  Borrowing  Amount  (such  amount
being  referred to herein as the  "Transferable  Amount") to the extent that the
outstanding  balance on the  Revolving  Note should equal or exceed  $1,000,000,
that portion of the balance of the Revolving Note that exceeds  $3,000,000,  but
does  not  exceed  the  Transferable   Amount,  shall  be  segregated  from  the
outstanding  balance  under the Revolving  Note and allocated to and  aggregated
with the then existing balance of the next unissued serialized Minimum Borrowing
Note (the "Next Unissued Serialized Note"); provided that such segregated amount
shall remain  subject to the terms and conditions of such Revolving Note until a
new serialized  Minimum  Borrowing  Note is issued as set forth below.  The Next
Unissued  Serialized  Note shall  remain in book  entry  form until the  balance
thereunder  shall  equal  the  Minimum  Borrowing  Amount,  at which  time a new
serialized  Minimum  Borrowing  Note in the face  amount  equal  to the  Minimum
Borrowing  Amount will be issued and registered as set forth in the Registration
Rights Agreement (and the outstanding  balance under the Revolving Note shall at
such  time  be  correspondingly  reduced  in the  amount  equal  to the  Minimum
Borrowing  Amount as a result of the  issuance  of such new  serialized  Minimum
Borrowing Note).

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            (ii)  Notwithstanding  the limitations set forth above, if requested
by any Company,  Laurus  retains the right (but not the  obligation)  to lend to
such  Company from time to time such  amounts in excess of such  limitations  as
Laurus may determine in its sole discretion.

            (iii)  The  Companies  acknowledge  that  the  exercise  of  Laurus'
discretionary  rights  hereunder  may  result  during  the  Term  in one or more
increases or decreases in the advance  percentages used in determining  Accounts
Availability  and/or  Inventory  Availability  and each of the Companies  hereby
consent to any such increases or decreases which may limit or restrict  advances
requested by the Companies.

            (iv) If any  interest,  fees,  costs or  charges  payable  to Laurus
hereunder are not paid when due,  each of the Companies  shall thereby be deemed
to have requested, and Laurus is hereby authorized at its discretion to make and
charge to the Companies'  account,  a Loan as of such date in an amount equal to
such unpaid interest, fees, costs or charges.

            (v) If any  Company at any time  fails to perform or observe  any of
the covenants  contained in this  Agreement or any Ancillary  Agreement,  Laurus
may, but need not,  perform or observe such  covenant on behalf and in the name,
place and stead of such Company  (or, at Laurus'  option,  in Laurus'  name) and
may,  but need  not,  take  any and all  other  actions  which  Laurus  may deem
necessary to cure or correct such failure  (including the payment of taxes,  the
satisfaction of Liens,  the performance of obligations  owed to Account Debtors,
lessors or other obligors,  the  procurement  and maintenance of insurance,  the
execution of assignments,  security agreements and financing statements, and the
endorsement of instruments). The amount of all monies expended and all costs and
expenses  (including  attorneys' fees and legal expenses)  incurred by Laurus in
connection  with  or as a  result  of the  performance  or  observance  of  such
agreements  or the  taking  of such  action by Laurus  shall be  charged  to the
Companies'  account  as a  Revolving  Loan  and  added  to the  Obligations.  To
facilitate Laurus'  performance or observance of such covenants by each Company,
each Company hereby  irrevocably  appoints Laurus, or Laurus'  delegate,  acting
alone, as such Company's  attorney in fact (which appointment is coupled with an
interest)  with  the  right  (but not the  duty)  from  time to time to  create,
prepare,  complete,  execute, deliver, endorse or file in the name and on behalf
of such  Company  any  and all  instruments,  documents,  assignments,  security
agreements,   financing   statements,   applications  for  insurance  and  other
agreements and writings required to be obtained, executed, delivered or endorsed
by such Company.

            (vi) Laurus will account to Company  Agent  monthly with a statement
of all Loans and other  advances,  charges and  payments  made  pursuant to this
Agreement,  and such account  rendered by Laurus shall be deemed final,  binding
and  conclusive  unless  Laurus is notified  by Company  Agent in writing to the
contrary  within  thirty  (30)  days  of the  date  each  account  was  rendered
specifying the item or items to which objection is made.

            (vii) During the Term,  the Companies may borrow and prepay Loans in
accordance with the terms and conditions of this Agreement and the Notes.

            (viii) If any  Eligible  Account is not paid by the  Account  Debtor
within ninety (90) days after the date that such  Eligible  Account was invoiced
or if any Account Debtor asserts a deduction, dispute, contingency,  set-off, or
counterclaim with respect to any Eligible Account, (a "DELINQUENT ACCOUNT"), the
Companies shall jointly and severally (i) reimburse Laurus for the amount of the
Revolving Loans made with respect to such Delinquent  Account plus an adjustment
fee in an amount  equal to  one-half  of one  percent  (0.50%) of the gross face
amount of such Eligible  Account,  provided that no such adjustment fee shall be
payable  in the event  Laurus is so  reimbursed  within ten (10)  Business  Days
following  the date such  applicable  Eligible  Account  is deemed a  Delinquent
Account or (ii)  immediately  replace such Delinquent  Account with an otherwise
Eligible Account.

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      (b)  RECEIVABLES  PURCHASE.   Following  the  occurrence  and  during  the
continuance of an Event of Default,  Laurus may, at its option, elect to convert
the credit  facility  contemplated  hereby to an  accounts  receivable  purchase
facility.  Upon such election by Laurus (subsequent notice of which Laurus shall
provide  to  Company  Agent),  Companies  shall be deemed to hereby  have  sold,
assigned,  transferred,  conveyed and  delivered to Laurus,  and Laurus shall be
deemed to have purchased and received from the Companies,  all right,  title and
interest of Companies in and to all Accounts which shall at any time  constitute
Eligible Accounts (the "RECEIVABLES PURCHASE").  All outstanding Loans hereunder
shall be deemed  obligations under such accounts  receivable  purchase facility.
The conversion to an accounts  receivable  purchase  facility in accordance with
the  terms  hereof  shall not be deemed  an  exercise  by Laurus of its  secured
creditor  rights  under  Article  9 of the UCC.  Immediately  following  Laurus'
request,  Companies  shall  execute  all such  further  documentation  as may be
required  by Laurus to more  fully set forth the  accounts  receivable  purchase
facility herein contemplated,  including,  without limitation,  Laurus' standard
form of accounts  receivable  purchase agreement and account debtor notification
letters,  but any Company's failure to enter into any such  documentation  shall
not impair or affect the Receivables Purchase in any manner whatsoever.

      (c) MINIMUM BORROWING AMOUNT. After a registration  statement  registering
the Registrable  Securities has been declared effective by the SEC,  conversions
of the Minimum  Borrowing  Amount into the Common  Stock may be initiated as set
forth in the respective  Minimum  Borrowing  Note.  From and after the date upon
which any outstanding principal of the Minimum Borrowing Amount (as evidenced by
the first  Minimum  Borrowing  Note) is converted  into Common Stock (the "FIRST
CONVERSION DATE"), (i) corresponding  amounts of all outstanding Revolving Loans
(not attributable to the then outstanding  Minimum Borrowing Amount) existing on
or made after the First  Conversion  Date will be aggregated in accordance  with
Section  2(a)(i),  (ii) the  Companies  will  issue a new  (serialized)  Minimum
Borrowing  Note to Laurus in  accordance  with  Section  2(a)(i),  and (iii) the
Parent shall prepare and file a subsequent  registration  statement with the SEC
to  register  such  subsequent  Minimum  Borrowing  Note  as  set  forth  in the
Registration Rights Agreement.

      (d) TERM LOANS.  Subject to the terms and  conditions set forth herein and
in the Ancillary  Agreements,  Laurus shall make (i) a term loan ("TERM LOAN A")
to the Companies in an aggregate  amount equal to $3,000,000.  Term Loan A shall
be advanced on the Closing Date and shall be, with respect to principal, payable
in consecutive monthly  installments of principal commencing on December 1, 2005
and on the first day of each month thereafter,  subject to acceleration upon the
occurrence of an Event of Default or  termination of this  Agreement.  The first
three (3)  principal  installments  shall each be in the amount of $50,000,  the
following twenty nine (29) principal installments shall each be in the amount of
$98,275 and the thirty third and final installment  payable on September 6, 2008
shall be in an amount equal to the unpaid principal  balance of Term Loan A plus
all accrued and unpaid interest thereon.  Term Loan A shall be evidenced by Term
Note A and (ii) a term note ("Term Loan B" and together with Term Note A, each a
"Term Note" and  collectively the "Term Notes") to the Companies in an aggregate
amount  equal to  $2,000,000.  Term Loan B shall be advanced on the Closing Date
and shall be, with respect to  principal,  payable on March 6, 2007,  subject to
acceleration  upon the  occurrence of an Event of Default or termination of this
Agreement. Term Loan B shall be evidenced by Term Note B.

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      3.  REPAYMENT OF THE LOANS.  The Companies (a) may prepay the  Obligations
from time to time in accordance  with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this Agreement);
(b) shall repay on the expiration of the Term (i) the then aggregate outstanding
principal  balance of the Loans together with accrued and unpaid interest,  fees
and charges and; (ii) all other amounts owed Laurus under this Agreement and the
Ancillary  Agreements;  and (c) subject to Section 2(a)(ii),  shall repay on any
day on which the then aggregate  outstanding  principal balance of the Revolving
Loans are in excess of the Formula  Amount at such time,  Revolving  Loans in an
amount equal to such excess.  Any payments of principal,  interest,  fees or any
other amounts payable  hereunder or under any Ancillary  Agreement shall be made
prior to 12:00  noon  (New York  time) on the due date  thereof  in  immediately
available funds.

      4.  PROCEDURE FOR  REVOLVING  LOANS.  Company Agent may by written  notice
request a borrowing  of  Revolving  Loans prior to 12:00 noon (New York time) on
the Business Day of its request to incur,  on the next Business Day, a Revolving
Loan.  Together  with  each  request  for a  Revolving  Loan  (or at such  other
intervals  as Laurus  may  request),  Company  Agent  shall  deliver to Laurus a
Borrowing Base Certificate in the form of EXHIBIT B attached hereto, which shall
be  certified  as true and  correct  by the  Chief  Executive  Officer  or Chief
Financial  Officer of Company Agent together with all  supporting  documentation
relating  thereto.  All Revolving Loans shall be disbursed from whichever office
or other place  Laurus may  designate  from time to time and shall be charged to
the  Companies'  account on Laurus'  books.  The proceeds of each Revolving Loan
made by Laurus  shall be made  available  to Company  Agent on the  Business Day
following  the Business Day so  requested in  accordance  with the terms of this
Section  4 by way  of  credit  to the  applicable  Company's  operating  account
maintained  with such bank as Company Agent  designated  to Laurus.  Any and all
Obligations due and owing hereunder may be charged to the Companies' account and
shall constitute Revolving Loans.

      5. INTEREST AND PAYMENTS.

      (a) INTEREST.

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

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

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

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

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

      (b) PAYMENTS; CERTAIN CLOSING CONDITIONS.

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

            (ii) UNUSED LINE PAYMENT.  If, during any month,  the average of the
aggregate Loans  outstanding  during such month (the "AVERAGE LOAN AMOUNT") does
not equal the Total Investment Amount, the Companies shall jointly and severally
pay to Laurus  at the end of such  month a  payment  (calculated  on a per annum
basis) in an amount equal to one-half percent (0.50%) of the amount by which the
Total  Investment  Amount exceeds the Average Loan Amount.  Notwithstanding  the
foregoing,  any such due and unpaid fee shall come  immediately  due and payable
upon termination of this Agreement.

            (iii)   OVERADVANCE   PAYMENT.   Without  affecting  Laurus'  rights
hereunder in the event the Revolving  Loans exceed the Formula Amount (each such
event, an "OVERADVANCE"),  all such Overadvances shall bear additional  interest
at a rate equal to two percent (2%) per month of the amount of such Overadvances
for all times such amounts shall be in excess of the Formula Amount. All amounts
that are incurred pursuant to this Section 5(b)(iii) shall be due and payable by
the Companies  monthly,  in arrears,  on the first business day of each calendar
month and upon expiration of the Term.

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

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

      6. SECURITY INTEREST.

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

      (b) Each  Company  hereby  (i)  authorizes  Laurus  to file any  financing
statements,  continuation statements or amendments thereto that (x) indicate the
Collateral  (1) as all assets and personal  property of such Company or words of
similar  effect,  regardless of whether any  particular  asset  comprised in the
Collateral falls within the scope of Article 9 of the UCC of such  jurisdiction,
or (2) as being of an equal or  lesser  scope or with  greater  detail,  and (y)
contain any other information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement, continuation
statement or amendment  and (ii) ratifies its  authorization  for Laurus to have
filed any initial financial statements,  or amendments thereto if filed prior to
the date hereof. Each Company acknowledges that it is not authorized to file any
financing  statement or amendment or  termination  statement with respect to any
financing  statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written  consent of Laurus,  subject to such
Company's rights under Section 9-509(d)(2) of the UCC.

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

      7.  REPRESENTATIONS,  WARRANTIES AND COVENANTS  CONCERNING THE COLLATERAL.
Each  Company  represents,  warrants  (each of which  such  representations  and
warranties  shall be  deemed  repeated  upon the  making of each  request  for a
Revolving  Loan  and  made as of the  time  of each  and  every  Revolving  Loan
hereunder) and covenants as follows:

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

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

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

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

      (e) it shall not dispose of any of the Collateral  whether by sale,  lease
or otherwise except for the sale of Inventory in the ordinary course of business
and for the  disposition or transfer in the ordinary  course of business  during
any fiscal year of obsolete and  worn-out  Equipment  having an  aggregate  fair
market  value of not more  than  $100,000  and only to the  extent  that (i) the
proceeds of any such disposition are used to acquire replacement Equipment which
is subject to Laurus'  first  priority  security  interest  or are used to repay
Loans or to pay general corporate expenses,  or (ii) following the occurrence of
an Event of Default which  continues to exist the proceeds of which are remitted
to Laurus to be held as cash collateral for the Obligations.

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

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

                                       8
<PAGE>

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

      (i) if it retains  possession  of any  Chattel  Paper or  Instrument  with
Laurus' consent,  upon Laurus' request such Chattel Paper and Instruments  shall
be marked with the following legend: "This writing and obligations  evidenced or
secured hereby are subject to the security interest of Laurus Master Fund, Ltd."
Notwithstanding  the  foregoing,  upon the  reasonable  request of Laurus,  such
Chattel Paper and Instruments shall be delivered to Laurus.

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

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

      (l) all Eligible  Accounts (i) represent  complete bona fide  transactions
which  require no further act under any  circumstances  on its part to make such
Accounts  payable by the Account  Debtors,  (ii) are not subject to any present,
future contingent offsets or counterclaims,  and (iii) do not represent bill and
hold sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of such Company. It
has not made,  nor will it make,  any agreement  with any Account Debtor for any
extension of time for the payment of any Account,  any  compromise or settlement
for less than the full amount  thereof,  any release of any Account  Debtor from
liability  therefor,  or any deduction  therefrom except a discount or allowance
for prompt or early payment allowed by it in the ordinary course of its business
consistent  with  historical  practice and as previously  disclosed to Laurus in
writing.

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

      (n) it shall maintain and keep all of its Books and Records concerning the
Collateral at its executive offices listed in SCHEDULE 12(AA).

                                       9
<PAGE>

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

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

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

      8. PAYMENT OF ACCOUNTS.

      (a) Each  Company  will  irrevocably  direct all of its present and future
Account  Debtors  and other  Persons  obligated  to make  payments  constituting
Collateral  to make such payments  directly to the lockboxes  maintained by such
Company  (the  "LOCKBOXES")  with Frost  National  Bank or such other  financial
institution  accepted by Laurus in writing as may be  selected  by such  Company
(the "Lockbox Bank") pursuant to the terms of the certain  agreements  among one
or more  Companies,  Laurus  and/or the Lockbox Bank. On or prior to the Closing
Date, each Company shall and shall cause the Lockbox Bank to enter into all such
documentation  acceptable to Laurus pursuant to which,  among other things,  the
Lockbox  Bank  agrees to: (a) sweep the Lockbox on a daily basis and deposit all
checks  received  therein to an account  designated by Laurus in writing and (b)
comply only with the instructions or other  directions of Laurus  concerning the
Lockbox. All of each Company's invoices, account statements and other written or
oral communications directing,  instructing,  demanding or requesting payment of
any Account of any Company or any other  amount  constituting  Collateral  shall
conspicuously  direct  that all  payments  be made to the  Lockbox or such other
address as Laurus may direct in writing. If, notwithstanding the instructions to
Account  Debtors,  any  Company  receives  any  payments,   such  Company  shall
immediately  remit  such  payments  to  Laurus in their  original  form with all
necessary  endorsements.  Until so remitted,  such  Company  shall hold all such
payments in trust for and as the property of Laurus and shall not commingle such
payments with any of its other funds or property.

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

                                       10
<PAGE>

      9. COLLECTION AND MAINTENANCE OF COLLATERAL.

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

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

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

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

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

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

                                       11
<PAGE>

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

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

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

      12.  ADDITIONAL  REPRESENTATIONS  AND  WARRANTIES.   Each  Company  hereby
represents and warrants to Laurus as follows:

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

                                       12
<PAGE>

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

      (c) CAPITALIZATION; VOTING RIGHTS.

            (i) The  authorized  capital  stock  of the  Parent,  as of the date
hereof consists of 1,050,000,000  shares,  of which  1,000,000,000 are shares of
Common Stock, par value $0.001 per share,  99,776,704 shares of which are issued
and  outstanding,  and 50,000,000 are shares of preferred stock, par value $0.01
per share of which  10,000,000  shares of Series A, 500,000  shares of Series B,
2,000 shares of Series C, 900,000  shares of Series D, 25,000 shares of Series E
and 900,000  shares of Series F are  authorized,  and of which 378,061 shares of
Series  A  and  1,500  shares  of  Series  E  preferred  stock  are  issued  and
outstanding.  The  authorized,  issued  and  outstanding  capital  stock of each
Subsidiary of each Company is set forth on SCHEDULE 12(C).

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

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

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

                                       13
<PAGE>

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

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

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

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

      (f)  AGREEMENTS;  ACTION.  Except  as set  forth on  SCHEDULE  12(F) or as
disclosed in any Exchange Act Filings:

            (i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which it or any of
its  Subsidiaries  is a party or to its knowledge by which it is bound which may
involve: (i) obligations (contingent or otherwise) of, or payments to, it or any
of its Subsidiaries in excess of $75,000 (other than obligations of, or payments
to, it or any of its  Subsidiaries  arising  from  purchase  or sale  agreements
entered  into in the  ordinary  course of  business);  or (ii) the  transfer  or
license of any patent, copyright,  trade secret or other proprietary right to or
from it (other than  licenses  arising  from the  purchase of "off the shelf" or
other standard  products);  or (iii)  provisions  restricting  the  development,
manufacture  or  distribution  of its or any of its  Subsidiaries'  products  or
services;  or (iv) indemnification by it or any of its Subsidiaries with respect
to infringements of proprietary rights.

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

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

                                       14
<PAGE>

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

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

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

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

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

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

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

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

      (g) OBLIGATIONS TO RELATED PARTIES. Except as set forth on SCHEDULE 12(G),
neither it nor any of its  Subsidiaries  has any obligations to their respective
officers, directors, stockholders or employees other than:

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

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

                                       15
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

      (i) TITLE TO PROPERTIES  AND ASSETS;  LIENS,  ETC.  Except as set forth on
SCHEDULE 12(I), it and each of its Subsidiaries has good and marketable title to
their  respective  properties  and  assets,  and  good  title  to its  leasehold
interests, in each case subject to no Lien, other than Permitted Liens.

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

      (j) INTELLECTUAL PROPERTY.

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

                                       17
<PAGE>

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

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

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

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

                                       18
<PAGE>

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

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

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

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

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

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

                                       19
<PAGE>

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

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

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

            (ii) any petroleum products or nuclear materials.

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

                                       20
<PAGE>

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

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

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

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

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

                                       21
<PAGE>

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

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

      (z) PATRIOT ACT. It certifies that, to the best of its knowledge,  neither
it nor any of its Subsidiaries has been designated,  nor is or shall be owned or
controlled,  by a "suspected  terrorist" as defined in Executive Order 13224. It
hereby  acknowledges  that  Laurus  seeks to  comply  with all  applicable  laws
concerning  money  laundering  and related  activities.  In furtherance of those
efforts, it hereby represents, warrants and covenants that: (i) none of the cash
or property that it or any of its  Subsidiaries  will pay or will  contribute to
Laurus has been or shall be derived  from,  or related to, any activity  that is
deemed  criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus,  to the extent that they are within its
or any such  Subsidiary's  control  shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money Laundering
Control  Act of  1986  or  the  United  States  International  Money  Laundering
Abatement and  Anti-Terrorist  Financing Act of 2001. It shall  promptly  notify
Laurus if any of these  representations,  warranties and covenants  ceases to be
true and accurate  regarding  it or any of its  Subsidiaries.  It shall  provide
Laurus with any additional  information regarding it and each Subsidiary thereof
that  Laurus  deems  necessary  or  convenient  to  ensure  compliance  with all
applicable  laws  concerning  money  laundering  and  similar   activities.   It
understands  and  agrees  that if at any time it is  discovered  that any of the
foregoing  representations,  warranties  and  covenants  are  incorrect,  or  if
otherwise  required by applicable law or regulation  related to money laundering
or  similar  activities,  Laurus  may  undertake  appropriate  actions to ensure
compliance  with  applicable  law or  regulation,  including  but not limited to
segregation   and/or  redemption  of  Laurus'   investment  in  it.  It  further
understands that Laurus may release  confidential  information  about it and its
Subsidiaries  and, if applicable,  any underlying  beneficial  owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the best
interests of Laurus in light of relevant  rules and  regulations  under the laws
set forth in subsection (ii) above.

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

                                       22
<PAGE>

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

      13.  COVENANTS.  Each Company,  as  applicable,  covenants and agrees with
Laurus as follows:

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

      (b)  LISTING.  It shall  promptly  secure  the  listing or  quotation,  as
applicable,  of the shares of Common Stock issuable upon conversion of the Notes
and exercise of the Options and the Warrants on the Principal  Market upon which
shares of Common Stock are listed or quoted, as applicable, (subject to official
notice of issuance) and shall maintain such listing or quotation, as applicable,
so long as any other  shares of Common  Stock  shall be so listed or quoted,  as
applicable.  The Parent shall maintain the listing or quotation,  as applicable,
of its Common  Stock on the  Principal  Market,  and will comply in all material
respects with the Parent's  reporting,  filing and other  obligations  under the
bylaws or rules of the National  Association of Securities  Dealers ("NASD") and
such exchanges, as applicable.

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

                                       23
<PAGE>

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

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

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

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

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

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

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

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

      (h)  INSURANCE.  It shall  bear the full risk of loss from any loss of any
nature  whatsoever  with  respect  to  the  Collateral.   It  and  each  of  its
Subsidiaries  shall keep its assets which are of an insurable  character insured
by  financially  sound and  reputable  insurers  against loss or damage by fire,
explosion and other risks  customarily  insured  against by companies in similar
business  similarly  situated  as it  and  its  Subsidiaries;  and  it  and  its
Subsidiaries  shall maintain,  with  financially  sound and reputable  insurers,
insurance  against other hazards and risks and liability to persons and property
to the  extent  and in the  manner  which  it  and/or  such  Subsidiary  thereof
reasonably  believes is customary  for companies in similar  business  similarly
situated as it and its  Subsidiaries and to the extent available on commercially
reasonable  terms.  It and each of its  Subsidiaries  will jointly and severally
bear the full risk of loss from any loss of any nature  whatsoever  with respect
to the assets  pledged to Laurus as security for its  obligations  hereunder and
under the Ancillary Agreements.  At its own cost and expense in amounts and with
carriers reasonably  acceptable to Laurus, it and each of its Subsidiaries shall
(i) keep all their  insurable  properties  and  properties in which they have an
interest insured against the hazards of fire, flood,  sprinkler  leakage,  those
hazards covered by extended coverage  insurance and such other hazards,  and for
such  amounts,  as is customary in the case of companies  engaged in  businesses
similar to it or the respective  Subsidiary's  including  business  interruption
insurance;

                                       24
<PAGE>

(ii)  maintain a bond in such  amounts as is  customary in the case of companies
engaged in  businesses  similar  to it and its  Subsidiaries'  insuring  against
larceny,  embezzlement or other criminal  misappropriation of insured's officers
and  employees  who may either  singly or jointly  with  others at any time have
access to its or any of its  Subsidiaries  assets or funds  either  directly  or
through  governmental  authority to draw upon such funds or to direct  generally
the  disposition  of such assets;  (iii) maintain  public and product  liability
insurance against claims for personal injury,  death or property damage suffered
by others; (iv) maintain all such worker's  compensation or similar insurance as
may be required under the laws of any state or  jurisdiction  in which it or any
of its  Subsidiaries  is engaged in business;  and (v) furnish Laurus with (x) a
copy of all policies and evidence of the  maintenance  of such policies at least
thirty  (30)  days  before  any  expiration  date,  (y)  excepting  its  and its
Subsidiaries' workers' compensation policy, endorsements to such policies naming
Laurus as  "co-insured"  or "additional  insured" and  appropriate  loss payable
endorsements  in form and  substance  satisfactory  to Laurus,  naming Laurus as
lenders loss payee,  and (z) evidence that as to Laurus the  insurance  coverage
shall not be impaired or invalidated by any act or neglect of any Company or any
of its  Subsidiaries  and the insurer will  provide  Laurus with at least thirty
(30) days notice prior to cancellation. It shall instruct the insurance carriers
that in the event of any loss  thereunder,  the carriers  shall make payment for
such loss to Laurus and not to any Company or any of its Subsidiaries and Laurus
jointly.  If any insurance  losses are paid by check,  draft or other instrument
payable to any Company and/or any of its Subsidiaries and Laurus jointly, Laurus
may endorse, as applicable,  such Company's and/or any of its Subsidiaries' name
thereon and do such other things as Laurus may deem advisable to reduce the same
to cash. Laurus is hereby authorized to adjust and compromise  claims.  All loss
recoveries  received  by Laurus  upon any such  insurance  may be applied to the
Obligations,  in such order as Laurus in its sole discretion  shall determine or
shall  otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries; provided; however, any loss recoveries received
by Laurus  arising from the damage or  destruction  of Collateral may be used by
the Companies to repair, restore or replace such Collateral, as the case may be,
so long as the fair market value of any such Collateral  damaged or destroyed in
any single  incident  is less than  $25,000 and the fair  market  value,  in the
aggregate,  of all such Collateral  owned by Borrower and damaged,  destroyed or
condemned during any twelve-month period is less than $50,000. Any surplus shall
be paid by Laurus to Company  Agent for the  benefit of the  applicable  Company
and/or its  Subsidiaries,  or applied as may be  otherwise  required by law. Any
deficiency  thereon  shall  be paid,  as  applicable,  by  Companies  and  their
Subsidiaries to Laurus, on demand.

                                       25
<PAGE>

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

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

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

      (l)  REQUIRED  APPROVALS.  It shall  not,  and shall not permit any of its
Subsidiaries to, without the prior written consent of Laurus, (i) create, incur,
assume or suffer to exist any  indebtedness  (exclusive  of trade debt)  whether
secured or unsecured other than each Company's indebtedness to Laurus and as set
forth on SCHEDULE 13(L)(I)  attached hereto and made a part hereof;  (ii) cancel
any debt owing to it in excess of $100,000 in the aggregate  during any 12 month
period;  (iii)  assume,  guarantee,  endorse or  otherwise  become  directly  or
contingently  liable in  connection  with any  obligations  of any other Person,
except the endorsement of negotiable  instruments by it or its  Subsidiaries for
deposit  or  collection  or  similar  transactions  in the  ordinary  course  of
business;  (iv)  directly or  indirectly  declare,  pay or make any  dividend or
distribution  on any class of its Stock or apply any of its funds,  property  or
assets to the  purchase,  redemption  or other  retirement  of any of its or its
Subsidiaries'  Stock  outstanding  on the date  hereof,  or issue any  preferred
stock;  (v)  purchase  or hold  beneficially  any Stock or other  securities  or
evidences of indebtedness  of, make or permit to exist any loans or advances to,
or make any investment or acquire any interest  whatsoever in, any other Person,
including any  partnership or joint  venture,  except (x) travel  advances,  (y)
loans to its and its  Subsidiaries'  officers and employees not exceeding at any
one time an aggregate of $10,000, and (z) loans to its existing  Subsidiaries so
long as such  Subsidiaries  are designated as either a co-borrower  hereunder or
has entered into such  guaranty and security  documentation  required by Laurus,
including,  without  limitation,  to grant to Laurus a first priority  perfected
security interest in substantially all of such Subsidiary's assets to secure the
Obligations;  (vi)  create or permit to exist  any  Subsidiary,  other  than any
Subsidiary  in existence on the date hereof and listed in SCHEDULE  12(B) unless
such new Subsidiary is a wholly-owned  Subsidiary and is designated by Laurus as
either a  co-borrower  or guarantor  hereunder  and such  Subsidiary  shall have
entered  into all such  documentation  required  by Laurus,  including,  without
limitation,  to grant to Laurus a first priority  perfected security interest in
substantially all of such Subsidiary's  assets to secure the Obligations;  (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any  indebtedness  (other than to Laurus and in the ordinary course of business)
except to make  scheduled  payments of principal  and interest  thereof;  (viii)
enter into any merger,  consolidation or other  reorganization  with or into any
other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other  Person to  consolidate  with or merge with it,  unless (A) (1)
such Company is the  surviving  entity of such merger or  consolidation,  (2) no
Event of Default  shall exist  immediately  prior to and after giving  effect to
such merger or consolidation, (3) such Company shall have provided Laurus copies
of all  documentation  relating  to such  merger or  consolidation  and (4) such
Company shall have provided Laurus with at least thirty (30) days' prior written
notice of such merger or  consolidation  or (B) (1) such merger or consolidation
results  in the  indefeasible  payment  in full of all  Obligations  (including,
without  limitation,  all early  termination  and prepayment fees required to be
paid  hereunder  and  under  the terms of the  Ancillary  Agreements),  (2) such
Company shall have provided Laurus copies of all documentation  relating to such
merger or consolidation and (3) such Company shall have provided Laurus at least
thirty  (30)  days'  prior  written  notice  of  such  early  prepayment  of the
Obligations;  (ix)  materially  change the nature of the business in which it is
presently engaged;

                                       26
<PAGE>

(x) become subject to (including,  without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances)  restrict  its or any of its  Subsidiaries'  right to perform the
provisions of this Agreement or any of the Ancillary Agreements; (xi) change its
fiscal year or make any changes in accounting  treatment and reporting practices
without prior written  notice to Laurus except as required by GAAP or in the tax
reporting  treatment  or  except  as  required  by law;  (xii)  enter  into  any
transaction  with any employee,  director or  Affiliate,  except in the ordinary
course on  arms-length  terms;  (xiii) bill  Accounts  under any name except the
present name of such Company;  (xiv) sell, lease,  transfer or otherwise dispose
of any of its  properties or assets,  or any of the  properties or assets of its
Subsidiaries,  except for (1) the sale of Inventory  in the  ordinary  course of
business,  (2) the  disposition  or transfer in the ordinary  course of business
during any fiscal year of obsolete and worn-out Equipment and only to the extent
that (x) the proceeds of any such  disposition  are used to acquire  replacement
Equipment  which is subject to Laurus' first priority  security  interest or are
used to repay Loans or to pay general corporate  expenses,  or (y) following the
occurrence  of an Event of Default  which  continues  to exist,  the proceeds of
which are remitted to Laurus to be held as cash collateral for the  Obligations;
and (3) the sale of real  property so long as the Company Agent has received the
prior written  consent of Laurus with respect to such sale,  which consent shall
not be  unreasonably  withheld,  provided  that,  (x) the Company Agent provided
Laurus not less than thirty  (30) days prior  written  notice of such sale,  (y)
such sale is on commercially  reasonable terms in an arms-length transaction and
(z) all  proceeds  of such  sale are  remitted  directly  to Laurus to repay the
Obligations  in such order as Laurus shall elect;  (xv) directly or  indirectly,
redeem,  repurchase,  retire  or  otherwise  acquire  or  make  any  payment  or
distribution  with  respect  to the  Subordinated  Debt  except  to  the  extent
permitted pursuant to the applicable Subordination Agreement; or (xvi) change or
modify the terms of any Subordinated Debt Documentation.

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

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

                                       27
<PAGE>

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

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

      (n) OPINION.  On the Closing  Date,  it shall deliver to Laurus an opinion
acceptable to Laurus from each Company's and each Term Loan B Guarantor's  legal
counsel. Each Company will provide, at the Companies' joint and several expense,
such other legal  opinions  in the future as are  reasonably  necessary  for the
conversion of the Notes and the exercise of the Warrants.

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

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

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

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

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

                                       28
<PAGE>

      (t) AUTHORIZATION AND RESERVATION OF SHARES. The Parent shall at all times
have  authorized  and reserved a sufficient  number of shares of Common Stock to
provide  for the  conversion  of the Notes and  exercise  of the Options and the
Warrants.

      (u) FINANCING RIGHT OF FIRST REFUSAL.

            (i) It hereby  grants to Laurus a right of first  refusal to provide
any  Additional  Financing (as defined below) to be issued by any Company and/or
any of its Subsidiaries  (the "ADDITIONAL  FINANCING  PARTIES"),  subject to the
following  terms and  conditions.  From and after the date hereof,  prior to the
incurrence  of any  additional  indebtedness  and/or the sale or issuance of any
equity   interests  of  the  Additional   Financing   Parties  (an   "ADDITIONAL
FINANCING"),  Company Agent shall notify Laurus of such Additional Financing. In
connection therewith,  Company Agent shall submit a fully executed term sheet (a
"PROPOSED TERM SHEET") to Laurus setting forth the terms, conditions and pricing
of any such  Additional  Financing  (such  financing to be  negotiated on "arm's
length" terms and the terms thereof to be negotiated in good faith)  proposed to
be entered  into by the  Additional  Financing  Parties.  Laurus  shall have the
right, but not the obligation, to deliver to Company Agent its own proposed term
sheet (the "LAURUS  TERM SHEET")  setting  forth the terms and  conditions  upon
which  Laurus  would be willing  to provide  such  Additional  Financing  to the
Additional  Financing Parties. The Laurus Term Sheet shall contain terms no less
favorable to the  Additional  Financing  Parties than those outlined in Proposed
Term Sheet.  Laurus shall  deliver to Company Agent the Laurus Term Sheet within
ten Business Days of receipt of each such Proposed Term Sheet. If the provisions
of the Laurus Term Sheet are at least as favorable to the  Additional  Financing
Parties as the provisions of the Proposed Term Sheet,  the Additional  Financing
Parties shall enter into and  consummate the  Additional  Financing  transaction
outlined in the Laurus Term Sheet.

            (ii) It shall not, and shall not permit its  Subsidiaries to, agree,
directly or  indirectly,  to any  restriction  with any Person  which limits the
ability of Laurus to consummate an  Additional  Financing  with it or any of its
Subsidiaries.

      (v) PROHIBITION OF AMENDMENTS TO SUBORDINATED DEBT DOCUMENTATION. It shall
not,  without the prior written consent of Laurus,  amend,  modify or in any way
alter the terms of any of the Subordinated Debt Documentation.

      (w)   PROHIBITION   OF  GRANT  OF   COLLATERAL   FOR   SUBORDINATED   DEBT
DOCUMENTATION.  It shall not, without the prior written consent of Laurus, grant
or permit any of its  Subsidiaries to grant to any Person any Collateral of such
Company  or any  collateral  of any of its  Subsidiaries  as  security  for  any
obligation arising under the Subordinated Debt Documentation.

                                       29
<PAGE>

      (x) PROHIBITIONS OF PAYMENT UNDER SUBORDINATED DEBT DOCUMENTATION. Neither
it nor any of its  Subsidiaries  shall,  without  the prior  written  consent of
Laurus,  make any  payments  in respect  of the  indebtedness  evidenced  by the
Subordinated Debt Documentation,  other than as expressly permitted by the terms
thereof.

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

      15.  REPRESENTATIONS,  WARRANTIES  AND COVENANTS OF LAURUS.  Laurus hereby
represents, warrants and covenants to each Company as follows:

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

      (b) INVESTMENT REPRESENTATIONS. Laurus understands that the Securities are
being  offered  pursuant to an  exemption  from  registration  contained  in the
Securities  Act based in part upon  Laurus'  representations  contained  in this
Agreement,   including,  without  limitation,  that  Laurus  is  an  "accredited
investor"  within the meaning of Regulation D under the Securities  Act.  Laurus
has  received  or has had  full  access  to all  the  information  it  considers
necessary or appropriate to make an informed investment decision with respect to
the Notes to be issued to it under this Agreement and the Securities acquired by
it upon the conversion of the Notes.

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

      (d) INVESTMENT FOR OWN ACCOUNT.  The Securities are being issued to Laurus
for its own account for  investment  only, and not as a nominee or agent and not
with a view towards or for resale in connection with their distribution.

                                       30
<PAGE>

      (e) LAURUS CAN PROTECT ITS INTEREST.  Laurus  represents that by reason of
its, or of its management's,  business and financial experience,  Laurus has the
capacity to evaluate the merits and risks of its  investment  in the Notes,  and
the  Securities  and to  protect  its  own  interests  in  connection  with  the
transactions  contemplated  in this  Agreement,  and the  Ancillary  Agreements.
Further,  Laurus is aware of no publication of any  advertisement  in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.

      (f)  ACCREDITED  INVESTOR.  Laurus  represents  that  it is an  accredited
investor within the meaning of Regulation D under the Securities Act.

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

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

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

                                       31
<PAGE>

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

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

                                       32
<PAGE>

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

      19.  EVENTS OF  DEFAULT.  The  occurrence  of any of the  following  shall
constitute an "EVENT OF DEFAULT":

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

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

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

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

      (e) the  occurrence of any default (or similar term) in the  observance or
performance of any other agreement or condition  relating to any indebtedness or
contingent  obligation  of any  Company or any of its  Subsidiaries  (including,
without  limitation,   the  indebtedness  evidenced  by  the  Subordinated  Debt
Documentation)  beyond the period of grace (if any), the effect of which default
is to cause, or permit the holder or holders of such indebtedness or beneficiary
or beneficiaries of such contingent  obligation to cause,  such  indebtedness to
become due prior to its stated maturity or such contingent  obligation to become
payable;

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

                                       33
<PAGE>

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

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

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

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

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

      (l) any  "Person" or "group" (as such terms are defined in Sections  13(d)
and 14(d) of the  Exchange  Act, as in effect on the date  hereof) is or becomes
the  "beneficial  owner" (as  defined in Rules  13(d)-3  and  13(d)-5  under the
Exchange Act),  directly or indirectly,  of 35% or more on a fully diluted basis
of the then  outstanding  voting  equity  interest of any Company  (other than a
"Person"  or  "group"  that  beneficially  owns 35% or more of such  outstanding
voting equity  interests of the  respective  Company on the date hereof) or (ii)
the Board of Directors of the Parent shall cease to consist of a majority of the
Parent's  board of  directors  on the date hereof (or  directors  appointed by a
majority  of the  board  of  directors  in  effect  immediately  prior  to  such
appointment);

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

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

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

                                       34
<PAGE>

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

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

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

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

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

      (u) any Company,  or any of its Subsidiaries  shall take or participate in
any action which would be prohibited  under the provisions of any  Subordination
Agreement or make any payment on the indebtedness  evidenced by the Subordinated
Debt  Documentation  to a Person that was not entitled to receive such  payments
under the provisions of the applicable Subordination Agreement.

      20.  REMEDIES.  Following the  occurrence  of an Event of Default,  Laurus
shall have the right to demand repayment in full of all Obligations,  whether or
not  otherwise  due.  Until all  Obligations  have been  fully and  indefeasibly
satisfied, Laurus shall retain its Lien in all Collateral. Laurus shall have, in
addition to all other rights  provided  herein and in each Ancillary  Agreement,
the  rights and  remedies  of a secured  party  under the UCC,  and under  other
applicable  law,  all other legal and  equitable  rights to which  Laurus may be
entitled, including the right to take immediate possession of the Collateral, to
require each Company to assemble the Collateral, at Companies' joint and several
expense,  and to make it  available  to Laurus at a place  designated  by Laurus
which is reasonably  convenient to both parties and to enter any of the premises
of any  Company or wherever  the  Collateral  shall be located,  with or without
force or process of law, and to keep and store the same on said  premises  until
sold (and if said premises be the property of any Company,  such Company  agrees
not to  charge  Laurus  for  storage  thereof),  and the  right to apply for the
appointment of a receiver for such Company's property.  Further,  Laurus may, at
any time or times after the occurrence of an Event of Default,  sell and deliver
all  Collateral  held by or for Laurus at public or private sale for cash,  upon
credit or  otherwise,  at such prices and upon such terms as Laurus,  in Laurus'
sole  discretion,  deems  advisable  or Laurus may  otherwise  recover  upon the
Collateral  in any  commercially  reasonable  manner  as  Laurus,  in  its  sole
discretion,  deems advisable.

                                       35
<PAGE>

The  requirement  of  reasonable  notice  shall be met if such  notice is mailed
postage  prepaid to Company Agent at Company Agent's address as shown in Laurus'
records,  at least ten (10) days before the time of the event of which notice is
being  given.  Laurus may be the  purchaser  at any sale,  if it is  public.  In
connection  with the  exercise  of the  foregoing  remedies,  Laurus is  granted
permission to use all of each Company's  Intellectual  Property. The proceeds of
sale  shall be  applied  first to all  costs  and  expenses  of sale,  including
attorneys'  fees, and second to the payment (in whatever order Laurus elects) of
all Obligations.  After the indefeasible payment and satisfaction in full of all
of the Obligations, and after the payment by Laurus of any other amount required
by any  provision of law,  including  Section  9-608(a)(1)  of the UCC (but only
after  Laurus  has  received  what  Laurus  considers   reasonable  proof  of  a
subordinate  party's security  interest),  the surplus, if any, shall be paid to
Company   Agent  (for  the  benefit  of  the   applicable   Companies)   or  its
representatives or to whosoever may be lawfully entitled to receive the same, or
as a court of competent  jurisdiction  may direct.  The  Companies  shall remain
jointly and  severally  liable to Laurus for any  deficiency.  In addition,  the
Companies shall jointly and severally pay Laurus a liquidation fee ("LIQUIDATION
FEE") in the amount of five  percent  (5%) of the  actual  amount  collected  in
respect of each Account  outstanding  at any time during a Liquidation  Period".
For purposes hereof,  "LIQUIDATION  PERIOD" means a period: (i) beginning on the
earliest date of (x) an event referred to in Section 19(i) or 19(j),  or (y) the
cessation of any Company's business; and (ii) ending on the date on which Laurus
has actually  received all Obligations due and owing it under this Agreement and
the Ancillary Agreements. The Liquidation Fee shall be paid on the date on which
Laurus collects the applicable  Account by deduction from the proceeds  thereof.
Each  Company  and  Laurus  acknowledge  that the actual  damages  that would be
incurred  by  Laurus  after  the  occurrence  of an  Event of  Default  would be
difficult to quantify and that such Company and Laurus have agreed that the fees
and obligations set forth in this Section and in this Agreement would constitute
fair and appropriate liquidated damages in the event of any such termination.

      21. WAIVERS.  To the full extent permitted by applicable law, each Company
hereby waives (a)  presentment,  demand and protest,  and notice of presentment,
dishonor,  intent to accelerate,  acceleration,  protest,  default,  nonpayment,
maturity, release, compromise, settlement, extension or renewal of any or all of
this  Agreement  and the  Ancillary  Agreements  or any other notes,  commercial
paper, Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties
at any time held by Laurus on which such  Company may in any way be liable,  and
hereby  ratifies and  confirms  whatever  Laurus may do in this regard;  (b) all
rights to notice and a hearing prior to Laurus' taking possession or control of,
or to Laurus'  replevy,  attachment or levy upon,  any Collateral or any bond or
security  that  might be  required  by any  court  prior to  allowing  Laurus to
exercise any of its remedies;  and (c) the benefit of all  valuation,  appraisal
and  exemption  laws.  Each  Company  acknowledges  that it has been  advised by
counsel  of its  choices  and  decisions  with  respect to this  Agreement,  the
Ancillary Agreements and the transactions evidenced hereby and thereby.

      22. EXPENSES. The Companies shall jointly and severally pay all of Laurus'
reasonable  out-of-pocket  costs and  expenses,  including  reasonable  fees and
disbursements of in-house or outside counsel and appraisers,  in connection with
the  preparation,  execution  and delivery of this  Agreement  and the Ancillary
Agreements,  and in connection  with the  prosecution  or defense of any action,
contest,  dispute,  suit or proceeding  concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary  Agreement.
The Companies  shall also jointly and  severally  pay all of Laurus'  reasonable
fees,   charges,   out-of-pocket   costs  and  expenses,   including   fees  and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver,  any amendment thereto or consent proposed
or executed in connection with the  transactions  contemplated by this Agreement
or  the  Ancillary   Agreements,

                                       36
<PAGE>

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

      23. ASSIGNMENT BY LAURUS.  Laurus may assign any or all of the Obligations
together  with any or all of the  security  therefor  to any Person and any such
assignee shall succeed to all of Laurus' rights with respect  thereto;  provided
that Laurus shall not be permitted to effect any such assignment to a competitor
of any Company unless an Event of Default has occurred and is  continuing.  Upon
such  assignment,  Laurus  shall be  released  from all  responsibility  for the
Collateral  to the extent same is assigned  to any  transferee.  Laurus may from
time to time sell or otherwise  grant  participations  in any of the Obligations
and the  holder of any such  participation  shall,  subject  to the terms of any
agreement  between  Laurus and such holder,  be entitled to the same benefits as
Laurus with respect to any security for the  Obligations in which such holder is
a  participant.  Each Company  agrees that each such holder may exercise any and
all rights of  banker's  lien,  set-off  and  counterclaim  with  respect to its
participation  in the  Obligations as fully as though such Company were directly
indebted to such holder in the amount of such participation.

                                       37
<PAGE>

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

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

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

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

                                       38
<PAGE>

      28. BORROWING AGENCY PROVISIONS.

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

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

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

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

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

                                       39
<PAGE>

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

Notices shall be provided as follows:

         If to Laurus:                 Laurus Master Fund, Ltd.
                                       c/o Laurus Capital Management, LLC
                                       825 Third Avenue 14th Fl.
                                       New York, New York 10022
                                       Attention:     John E. Tucker, Esq.
                                       Telephone:     (212) 541-4434
                                       Facsimile:     (212) 541-5800

         With a copy to:               Loeb & Loeb LLP
                                       345 Park Avenue
                                       New York, New York 10154
                                       Attention:     Scott J. Giordano, Esq.
                                       Telephone:     (212) 407-4000
                                       Facsimile:     (212) 504-2669

         If to any Company,
         or Company Agent:             American Technologies Group, Inc.
                                       PO Box 90
                                       Monrovia, California 91016
                                       Attention: Dr. Gary Fromm, CEO
                                       Telephone: (626) 357-5000
                                       Facsimile: (626) 357-4464

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

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

                                       40
<PAGE>

      30. GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.

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

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

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

                                       41
<PAGE>

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

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

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

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

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

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

                                       42
<PAGE>

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

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

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

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

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

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

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

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

                                       43
<PAGE>

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

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

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

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

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

                                       44
<PAGE>

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

                                        AMERICAN TECHNOLOGIES GROUP, INC.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        NORTH TEXAS STEEL COMPANY, INC.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        OMAHA HOLDINGS CORP.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                        LAURUS MASTER FUND, LTD.

                                        By:____________________________________
                                        Name:__________________________________
                                        Title:_________________________________

                                       45
<PAGE>

                              ANNEX A - DEFINITIONS

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

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

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

      "ACCOUNTS  AVAILABILITY"  means up to ninety percent (90%) of the net face
amount of Eligible Accounts.

      "ACQUISITION  DOCUMENTATION"  means the Share  Purchase  Agreement  by and
among the Parent and Sellers  dated as of September  7, 2005 and all  documents,
instruments and agreements entered into in connection therewith.

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

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

<PAGE>

      "AVAILABLE  MINIMUM  BORROWING" has the meaning given such term in Section
2(a)(i).

      "BALANCE SHEET DATE" has the meaning given such term in Section 12(f)(ii).

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

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

      "CAPITAL AVAILABILITY AMOUNT" means $7,000,000.

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

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

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

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

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

      (a)   all Inventory;

      (b)   all Equipment;

      (c)   all Fixtures;

      (d)   all General Intangibles;

      (e)   all Accounts;

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

                                       2
<PAGE>

      (g)   all Investment Property;

      (h)   all Stock;

      (i)   all Chattel Paper;

      (j)   all Letter-of-Credit Rights;

      (k)   all Instruments;

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

      (m)   all Books and Records;

      (n)   all Intellectual Property;

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

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

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

      "COMMON STOCK" means the shares of stock  representing the Parent's common
equity interests.

      "COMPANY AGENT" means the Parent.

      "CONTRACT RATE" has the meaning given such term in the respective Note.

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

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

      "DISCLOSURE   CONTROLS"  has  the  meaning  given  such  term  in  Section
12(f)(iv).

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

                                       3
<PAGE>

      "ELIGIBLE  ACCOUNTS"  means each Account of each Company which conforms to
the  following  criteria:  (a) shipment of the  merchandise  or the rendition of
services has been  completed;  (b) no return,  rejection or  repossession of the
merchandise  has  occurred;  (c)  merchandise  or  services  shall not have been
rejected  or  disputed  by the  Account  Debtor  and  there  shall not have been
asserted  any  offset,  defense or  counterclaim;  (d)  continues  to be in full
conformity  with the  representations  and  warranties  made by such  Company to
Laurus with respect thereto;  (e) Laurus is, and continues to be, satisfied with
the credit  standing of the  Account  Debtor in relation to the amount of credit
extended;  (f) there are no facts  existing  or  threatened  which are likely to
result in any adverse change in an Account Debtor's financial condition;  (g) is
documented  by an invoice in a form  approved  by Laurus and shall not be unpaid
more than  ninety (90) days from  invoice  date;  (h) not more than  twenty-five
percent  (25%) of the unpaid  amount of invoices  due from such  Account  Debtor
remains  unpaid  more  than  ninety  (90)  days from  invoice  date;  (i) is not
evidenced by chattel  paper or an  instrument  of any kind with respect to or in
payment  of the  Account  unless  such  instrument  is duly  endorsed  to and in
possession  of Laurus or  represents  a check in payment of an Account;  (j) the
Account Debtor is located in the United States;  PROVIDED,  HOWEVER, Laurus may,
from  time to time,  in the  exercise  of its sole  discretion  and  based  upon
satisfaction of certain conditions to be determined at such time by Laurus, deem
certain Accounts as Eligible Accounts  notwithstanding  that such Account is due
from an Account  Debtor located  outside of the United States;  (k) Laurus has a
first priority perfected Lien in such Account and such Account is not subject to
any Lien other than Permitted Liens; (l) does not arise out of transactions with
any employee, officer, director, stockholder or Affiliate of any Company; (m) is
payable to such Company; (n) does not arise out of a bill and hold sale prior to
shipment and does not arise out of a sale to any Person to which such Company is
indebted; (o) is net of any returns, discounts,  claims, credits and allowances;
(p) if the Account  arises out of  contracts  between such  Company,  on the one
hand, and the United States,  on the other hand, any state,  or any  department,
agency or  instrumentality  of any of them, such Company has so notified Laurus,
in writing, prior to the creation of such Account, and there has been compliance
with any governmental notice or approval requirements, including compliance with
the  Federal  Assignment  of  Claims  Act;  (q)  is a  good  and  valid  account
representing an undisputed bona fide indebtedness incurred by the Account Debtor
therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an  unconditional  sale and  delivery  upon the stated terms of goods
sold by such Company or work,  labor and/or  services  rendered by such Company;
(r) does not arise out of progress  billings  prior to  completion of the order;
(s) the  total  unpaid  Accounts  from  such  Account  Debtor  does  not  exceed
twenty-five percent (25%) of all Eligible Accounts;  (t) such Company's right to
payment is absolute and not  contingent  upon the  fulfillment  of any condition
whatsoever;  (u) such  Company is able to bring suit and  enforce  its  remedies
against the Account  Debtor  through  judicial  process;  (v) does not represent
interest  payments,  late or finance  charges owing to such Company,  and (w) is
otherwise  satisfactory to Laurus as determined by Laurus in the exercise of its
reasonable  discretion.  In the event any Company  requests that Laurus  include
within  Eligible  Accounts  certain  Accounts  of one or more of such  Company's
acquisition  targets,  Laurus  shall at the time of such request  consider  such
inclusion,  but any such  inclusion  shall be at the sole  option of Laurus  and
shall at all times be subject to the  execution  and  delivery  to Laurus of all
such  documentation  (including,  without  limitation,   guaranty  and  security
documentation) as Laurus may require in its sole discretion.

                                       4
<PAGE>

      "ELIGIBLE  INVENTORY" means Inventory owned by a Company which Laurus,  in
its sole and absolute discretion, determines: (a) is subject to a first priority
perfected  Lien in favor of Laurus and is subject to no other  Liens  whatsoever
(other than Permitted Liens); (b) is located on a premises owned by such Company
or a premises leased by such Company with respect to which Laurus has received a
landlord or mortgagee waiver acceptable in form and substance to Laurus;  (c) is
not in transit;  (d) is in good condition and meets all standards imposed by any
governmental  agency,  or  department  or  division  thereof  having  regulatory
Governmental  Authority  over  such  Inventory,  its use or sale  including  the
Federal Fair Labor Standards Act of 1938 as amended, and all rules,  regulations
and orders  thereunder;  (e) is currently either usable or salable in the normal
course  of  such  Company's  business;  (f) is not  placed  by such  Company  on
consignment or held by such Company on consignment  from another Person;  (g) is
in conformity  with the  representations  and warranties made by such Company to
Laurus  with  respect  thereto;  (h) is not  subject to any  licensing,  patent,
royalty,  trademark,  trade name or copyright  agreement with any third parties;
(i)  does  not  require  the  consent  of  any  Person  for  the  completion  of
manufacture,  sale or other  disposition of such Inventory and such  completion,
manufacture  or sale does not  constitute a breach or default under any contract
or agreement  to which such Company is a party or to which such  Inventory is or
may be subject; (j) is not work-in-process; (k) is covered by casualty insurance
acceptable  to Laurus and under which  Laurus has been named as a lender's  loss
payee and additional insured; and (l) not to be ineligible for any other reason.

      "ELIGIBLE  SUBSIDIARY"  means each  Subsidiary  of the Parent set forth on
EXHIBIT  A hereto,  as the same may be  updated  from time to time with  Laurus'
written consent.

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

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

      "EVENT OF DEFAULT"  means the occurrence of any of the events set forth in
Section 19.

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

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

      "FINANCIAL  REPORTING CONTROLS" has the meaning given such term in Section
12(f)(v).

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

                                       5
<PAGE>

      "FORMULA AMOUNT" has the meaning given such term in Section 2(a)(i).

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

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

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

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

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

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

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

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

                                       6
<PAGE>

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

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

      "INVENTORY AVAILABILITY" means up to the lesser of (a) fifty percent (50%)
of the value of Companies'  Eligible  Inventory  (calculated on the basis of the
lower of cost or market, on a first-in first-out basis) and (b) $1,000,000.

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

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

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

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

      "LOANS"  means the Revolving  Loans,  the Term Loans and shall include all
other extensions of credit hereunder and under any Ancillary Agreement.

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

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

                                       7
<PAGE>

      "MINIMUM BORROWING AMOUNT" means $3,000,000.

      "MINIMUM BORROWING NOTES" means that certain Secured  Convertible  Minimum
Borrowing  Note dated as of the Closing  Date made by the  Companies in favor of
Laurus   evidencing  the  Minimum   Borrowing  Amount  and  each  other  Secured
Convertible  Minimum  Borrowing  Note made by the  Companies  in favor of Laurus
which  evidences  the  Minimum  Borrowing  Amount,  as each of the  same  may be
amended, supplemented, restated and/or otherwise modified from time to time.

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

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

      "NEXT UNISSUED SERIALIZED NOTE" has the meaning given such term in Section
2(a)(i).

      "NOTE SHARES" has the meaning given such term in Section 12(a).

      "NOTES" means the Minimum Borrowing Notes, the Revolving Note and the Term
Notes made by Companies in favor of Laurus in connection  with the  transactions
contemplated hereby, as each of the same may be amended, supplemented,  restated
and/or otherwise modified from time to time.

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

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

                                       8
<PAGE>

      "OPTION SHARES" shall have the meaning given such term in Section 12(a).

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

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

      "PERMITTED  LIENS"  means (a) Liens of carriers,  warehousemen,  artisans,
bailees,  mechanics and materialmen  incurred in the ordinary course of business
securing sums not overdue; (b) Liens incurred in the ordinary course of business
in connection with worker's compensation,  unemployment insurance or other forms
of governmental insurance or benefits, relating to employees,  securing sums (i)
not  overdue or (ii) being  diligently  contested  in good faith  provided  that
adequate  reserves  with  respect  thereto  are  maintained  on the books of the
Companies and their  Subsidiaries,  as applicable,  in conformity with GAAP; (c)
Liens in favor of  Laurus;  (d) Liens  for  taxes (i) not yet due or (ii)  being
diligently  contested in good faith by  appropriate  proceedings,  provided that
adequate  reserves  with  respect  thereto  are  maintained  on the books of the
Companies and their  Subsidiaries,  as applicable,  in conformity with GAAP; and
which have no effect on the priority of Liens in favor of Laurus or the value of
the  assets in which  Laurus  has a Lien;  (e)  Purchase  Money  Liens  securing
Purchase Money  Indebtedness  to the extent  permitted in this Agreement and (f)
Liens specified on SCHEDULE 2 hereto.

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

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

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

                                       9
<PAGE>

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

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

      "REGISTRATION RIGHTS AGREEMENTS" means that certain Minimum Borrowing Note
Registration  Rights  Agreement  dated as of the Closing Date by and between the
Parent and Laurus and each other  registration  rights  agreement by and between
the  Parent  and  Laurus,  as each of the  same  may be  amended,  modified  and
supplemented from time to time.

      "REVOLVING LOANS" has the meaning given such term in Section 2(a)(i).

      "REVOLVING NOTE" means that certain Secured Revolving Note dated as of the
Closing Date made by the Companies in favor of Laurus in the original  principal
amount of $7,000,000, as the same may be amended, supplemented,  restated and/or
otherwise modified from time to time.

      "SEC" means the Securities and Exchange Commission.

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

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

                                       10
<PAGE>

      "SECURITIES ACT" has the meaning given such term in Section 12(r).

      "SECURITY  DOCUMENTS"  means  the  Mortgage  Documentation  and all  other
security  agreements,  mortgages,  cash collateral deposit letters,  pledges and
other  agreements  which are  executed by any Company,  any of its  Subsidiaries
and/or any Guarantor in favor of Laurus.

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

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

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

      "SUBORDINATED DEBT  DOCUMENTATION"  means  collectively,  (a) the Security
Agreement by and among the Companies and Gryphon Master Fund, L.P. and any other
note,  document,  instrument  or agreement  now or any time  hereafter  executed
and/or  delivered in  connection  therewith,  (b) the Security  Agreement by and
among the  Companies  and GSSF Master  Fund,  LP and any other  note,  document,
instrument or agreement now or any time hereafter  executed and/or  delivered in
connection  therewith  and  (c)  all  other  notes,  documents,  instruments  or
agreements now or any time hereafter  executed  and/or  delivered by any Company
with or in favor of any  Subordinated  Lender  which  evidences  the  principal,
interest and other amounts owed by such Company to such Subordinated Lender.

      "SUBORDINATED LENDER" means collectively,  Gryphon Master Fund, L.P., GSSF
Master Fund, LP and any other Person who enters into a  Subordination  Agreement
with Laurus  with  respect to amounts  owed by any Company to such  Subordinated
Lender.

      "SUBORDINATION AGREEMENT" means collectively,  the Subordination Agreement
executed by Gryphon  Master  Fund,  L.P.  and GSSF Master  Fund,  LP in favor of
Laurus and  acknowledged  by each Company,  and any and all other  subordination
agreements  accepted by Laurus from time to time with respect to indebtedness of
any Company.

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

      "SUPPORTING  OBLIGATIONS" means all "supporting  obligations" as such term
is defined in the UCC.

                                       11
<PAGE>

      "TERM"  means the  Closing  Date  through the close of business on the day
immediately  preceding the third  anniversary  of the Closing  Date,  subject to
acceleration  at the option of Laurus upon the occurrence of an Event of Default
hereunder or other termination hereunder.

      "TERM LOANS" has the meaning given such term in Section 2(d).

      "TERM LOAN B GUARANTORS" means Patricia E. Matteson and Charles Matteson.

      "TERM NOTE A" means that certain Secured  Convertible Term Note A dated as
of the  Closing  Date  made by  Companies  in favor of  Laurus  in the  original
principal  amount  of  $3,000,000,  as the  same may be  amended,  supplemented,
restated and/or otherwise modified from time to time.

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

      "TOTAL INVESTMENT AMOUNT" means $12,000,000.

      "TRANSFERABLE AMOUNT" has the meaning given such term in Section 2(a)(i).

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

      "WARRANT SHARES" has the meaning given such term in Section 12(a).

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

                                       12
<PAGE>

                                    EXHIBIT A

                              ELIGIBLE SUBSIDIARIES

              North Texas Steel Company, Inc., a Texas corporation

                  Omaha Holdings Corp., a Delaware corporation

<PAGE>

                                    EXHIBIT B

                           BORROWING BASE CERTIFICATE

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

                             SECURED REVOLVING NOTE

      FOR VALUE RECEIVED,  each of AMERICAN  TECHNOLOGIES  GROUP, INC., a Nevada
corporation (the "Parent"), and the other companies listed on EXHIBIT A attached
hereto (such other  companies  together  with the Parent,  each a "COMPANY"  and
collectively, the "COMPANIES"), jointly and severally, promises to pay to LAURUS
MASTER FUND, LTD., c/o M&C Corporate  Services Limited,  P.O. Box 309 GT, Ugland
House,  South Church Street,  George Town,  Grand Cayman,  Cayman Islands,  Fax:
345-949-8080 (the "HOLDER") or its registered assigns or successors in interest,
the sum of  Seven  Million  Dollars  ($7,000,000),  without  duplication  of any
amounts owing by the Companies to the Holder under the Minimum  Borrowing  Notes
(as defined in the Security Agreement referred to below), or, if different,  the
aggregate  principal  amount of all Loans (as defined in the Security  Agreement
referred to below),  together with any accrued and unpaid  interest  hereon,  on
September 6, 2008 (the "MATURITY Date") if not sooner indefeasibly paid in full.

      This Secured  Revolving  Note (this "NOTE") is intended to be a registered
obligation within the meaning of Treasury  Regulation Section  1.871-14(c)(1)(i)
and each Company (or its agent) shall register this Note (and  thereafter  shall
maintain  such  registration)  as to both  principal  and any  stated  interest.
Notwithstanding  any document,  instrument or agreement relating to this Note to
the  contrary,  transfer of this Note (or the right to any payments of principal
or stated  interest  thereunder)  may only be effected by (i)  surrender of this
Note and either the  reissuance by the Company of this Note to the new holder or
the  issuance by the  Company of a new  instrument  to the new  holder,  or (ii)
transfer  through a book entry system  maintained by the Company (or its agent),
within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

      Capitalized  terms used herein without  definition shall have the meanings
ascribed to such terms in that certain  Security  Agreement dated as of the date
hereof by and among the  Companies and the Holder (as amended,  modified  and/or
supplemented from time to time, the "SECURITY AGREEMENT").

      The following terms shall apply to this Note:

<PAGE>

                                    ARTICLE I
                    CONTRACT RATE AND MINIMUM BORROWING NOTE

      1.1 CONTRACT RATE.  Subject to Sections 3.2 and 4.10,  interest payable on
the outstanding  principal  amount of this Note (the  "PRINCIPAL  AMOUNT") shall
accrue at a rate per  annum  equal to the  "prime  rate"  published  in THE WALL
STREET JOURNAL from time to time (the "PRIME RATE"),  plus two percent (2%) (the
"CONTRACT RATE").  The Contract Rate shall be increased or decreased as the case
may be for each  increase or  decrease  in the Prime Rate in an amount  equal to
such  increase or decrease in the Prime Rate;  each change to be effective as of
the day of the change in the Prime Rate.  Subject to Section  1.2,  the Contract
Rate shall not at any time be less than  eight and  one-quarter  of one  percent
(8.25%).  Interest  shall be (i)  calculated on the basis of a 360 day year, and
(ii) payable  monthly,  in arrears,  commencing  on October 1, 2005 on the first
business day of each consecutive calendar month thereafter through and including
the  Maturity  Date,  and on the  Maturity  Date,  whether  by  acceleration  or
otherwise.

      1.2 CONTRACT RATE  ADJUSTMENTS  AND  PAYMENTS.  The Contract Rate shall be
calculated on the last business day of each calendar month hereafter (other than
for  increases  or  decreases  in the Prime Rate which shall be  calculated  and
become effective in accordance with the terms of Section 1.1) until the Maturity
Date (each a  "DETERMINATION  DATE") and shall be subject to  adjustment  as set
forth herein.  If (i) the Parent shall have  registered the shares of its Common
Stock underlying the conversion of each Minimum Borrowing Note, each Warrant and
each Option on a registration statement declared effective by the Securities and
Exchange  Commission (the "SEC"), and (ii) the market price (the "MARKET PRICE")
of the Common Stock as reported by Bloomberg,  L.P. on the Principal  Market for
the five (5) trading days immediately preceding a Determination Date exceeds the
then applicable Fixed Conversion  Price by at least  twenty-five  percent (25%),
the Contract  Rate for the  succeeding  calendar  month shall  automatically  be
reduced by 200 basis  points  (200 b.p.) (2%) for each  incremental  twenty-five
percent  (25%)  increase in the Market  Price of the Common Stock above the then
applicable Fixed Conversion Price.  Notwithstanding  the foregoing (and anything
to the contrary  contained  herein),  in no event shall the Contract Rate at any
time be less than zero percent (0%).

      1.3  ALLOCATION OF PRINCIPAL TO MINIMUM  BORROWING  NOTE.  Notwithstanding
anything  herein  to the  contrary,  whenever  during  the Term the  outstanding
balance on the Minimum  Borrowing Note shall be less than the Minimum  Borrowing
Amount (such amount being  referred to herein as the  "TRANSFERABLE  AMOUNT") to
the extent that the  outstanding  balance on the Revolving  Note should equal or
exceed  $3,000,000,  that  portion  of the  balance of the  Revolving  Note that
exceeds  $3,000,000,  but does not  exceed  the  Transferable  Amount,  shall be
segregated from the  outstanding  balance under the Revolving Note and allocated
to and aggregated with the then existing balance of the next unissued serialized
Minimum Borrowing Note (the "NEXT UNISSUED SERIALIZED NOTE"); provided that such
segregated  balance  shall remain  subject to the terms and  conditions  of such
Revolving  Note until a new serialized  Minimum  Borrowing Note is issued as set
forth below.  The Next Unissued  Serialized Note shall remain in book entry form
until the balance  thereunder shall equal the Minimum Borrowing Amount, at which
time a new  serialized  Minimum  Borrowing  Note in the face amount equal to the
Minimum  Borrowing  Amount  will be issued  and  registered  as set forth in the
Registration  Rights Agreement (and the outstanding  balance under the Revolving
Note shall at such time be  correspondingly  reduced in the amount  equal to the
Minimum  Borrowing  Amount as a result of the  issuance  of such new  serialized
Minimum Borrowing Note).

                                       2
<PAGE>

                                   ARTICLE II
                  CONVERSION RIGHTS AND FIXED CONVERSION PRICE

      2.1  OPTIONAL  CONVERSION.  Subject to the terms of this  Article  II, the
Holder  shall  have the  right,  but not the  obligation,  at any time until the
Maturity  Date, or during an Event of Default (as defined in Article III),  and,
subject to the  limitations  set forth in Section 2.2 hereof,  to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and fees
due and  payable  into fully  paid and  nonassessable  restricted  shares of the
Common Stock at the Fixed Conversion Price (defined below). For purposes hereof,
subject to Section  2.6 hereof,  the  initial  "FIXED  CONVERSION  PRICE"  means
$0.0033. The shares of Common Stock to be issued upon such conversion are herein
referred to as the "CONVERSION SHARES."

      2.2 CONVERSION  LIMITATION.  Notwithstanding  anything contained herein to
the contrary,  the Holder shall not be entitled to convert pursuant to the terms
of this Note an amount that would be convertible  into that number of Conversion
Shares  which would  exceed the  difference  between (i) 4.99% of the issued and
outstanding shares of Common Stock and (ii) the number of shares of Common Stock
beneficially owned by the Holder and issuable to the Holder upon exercise of the
Warrants and the Options.  For purposes of the immediately  preceding  sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13d-3  thereunder.  The Conversion Shares limitation
described in this Section 2.2 shall automatically become null and void following
notice to any Company upon the occurrence and during the continuance of an Event
of Default, or upon 75 days prior notice to the Parent. Notwithstanding anything
contained  herein  to the  contrary,  the  provisions  of this  Section  2.2 are
irrevocable and may not be waived by the Holder or any Company.

      2.3 MECHANICS OF HOLDER'S CONVERSION.  In the event that the Holder elects
to convert  this Note into Common  Stock,  the Holder  shall give notice of such
election by  delivering  an  executed  and  completed  notice of  conversion  in
substantially the form of Exhibit B hereto (appropriately completed) ("NOTICE OF
CONVERSION")  to the  Parent  and such  Notice  of  Conversion  shall  provide a
breakdown in reasonable  detail of the Principal  Amount,  accrued  interest and
fees that are being converted.  On each Conversion Date (as hereinafter defined)
and in  accordance  with its Notice of  Conversion,  the  Holder  shall make the
appropriate  reduction to the  Principal  Amount,  accrued  interest and fees as
entered in its records and shall provide  written  notice  thereof to the Parent
within two (2) Business  Days after the  Conversion  Date.  Each date on which a
Notice of Conversion is delivered or telecopied to the Parent in accordance with
the  provisions  hereof  shall be  deemed a  Conversion  Date  (the  "CONVERSION
DATE")..  Pursuant  to the terms of the Notice of  Conversion,  the Parent  will
issue  instructions  to the transfer agent  accompanied by an opinion of counsel
within one (1)  Business  Day of the date of the  delivery  to the Parent of the
Notice  of  Conversion  and shall  cause  the  transfer  agent to  transmit  the
certificates  representing the Conversion  Shares to the Holder by crediting the
account of the Holder's  designated broker with the Depository Trust Corporation
("DTC") through its Deposit  Withdrawal Agent Commission  ("DWAC") system within
three (3) Business  Days after receipt by the Parent of the Notice of Conversion
(the "DELIVERY  Date"). In the case of the exercise of the conversion rights set
forth herein the conversion privilege shall be deemed to have been exercised and
the Conversion Shares issuable upon such conversion shall be deemed to have been
issued upon the date of receipt by the Parent of the Notice of  Conversion.  The
Holder shall be treated for all purposes as the record holder of the  Conversion
Shares,  unless  the Holder  provides  the Parent  written  instructions  to the
contrary.

                                       3
<PAGE>

      2.4 LATE PAYMENTS.  Each Company  understands that a delay in the delivery
of the  Conversion  Shares in the form required  pursuant to this Article beyond
the Delivery Date could result in economic loss to the Holder.  As  compensation
to the Holder for such loss, in addition to all other rights and remedies  which
the Holder may have under this Note, applicable law or otherwise,  the Companies
shall,  jointly  and  severally,  pay late  payments  to the Holder for any late
issuance of Conversion  Shares in the form required  pursuant to this Article II
upon conversion of this Note, in the amount equal to $500 per Business Day after
the Delivery Date. The Companies shall, jointly and severally, make any payments
incurred under this Section in immediately available funds upon demand.

      2.5  CONVERSION  MECHANICS.  The  number of  shares of Common  Stock to be
issued upon each  conversion  of this Note shall be  determined by dividing that
portion of the principal  and interest and fees to be converted,  if any, by the
then applicable Fixed Conversion Price.

      2.6 ADJUSTMENT PROVISIONS.  The Fixed Conversion Price and number and kind
of shares or other securities to be issued upon conversion  determined  pursuant
to  Section  2.1  shall be  subject  to  adjustment  from  time to time upon the
occurrence  of  certain  events  during the period  that this  conversion  right
remains outstanding, as follows:

            (a)   RECLASSIFICATION.   If  the  Parent  at  any  time  shall,  by
reclassification  or  otherwise,  change  the  Common  Stock  into the same or a
different  number of  securities  of any class or classes,  this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed
to evidence the right to purchase an adjusted number of such securities and kind
of  securities  as would have been  issuable  as the result of such  change with
respect to the Common Stock (i) immediately prior to or (ii) immediately  after,
such reclassification or other change at the sole election of the Holder.

            (b) STOCK  SPLITS,  COMBINATIONS  AND  DIVIDENDS.  If the  shares of
Common  Stock are  subdivided  or combined  into a greater or smaller  number of
shares of Common  Stock,  or if a dividend  is paid on the  Common  Stock or any
preferred  stock  issued by the  Parent in  shares  of Common  Stock,  the Fixed
Conversion  Price shall be  proportionately  reduced in case of  subdivision  of
shares or stock dividend or proportionately increased in the case of combination
of shares,  in each such case by the ratio  which the total  number of shares of
Common Stock outstanding  immediately after such event bears to the total number
of shares of Common Stock outstanding immediately prior to such event.

            (c) SHARE ISSUANCES.  Subject to the provisions of this Section 2.6,
if the Parent shall at any time prior to the  conversion or repayment in full of
the Principal Amount issue any shares of Common Stock or securities  convertible
into Common  Stock to a Person  other than the Holder  (except  (i)  pursuant to
Sections  2.6(a) or (b) above;  (ii)  pursuant  to options,  warrants,  or other
obligations  to issue shares  outstanding on the date hereof as disclosed to the
Holder in writing;  or (iii)  pursuant to options  that may be issued  under any
employee  incentive  stock option and/or any qualified stock option plan adopted
by the Parent) for a  consideration  per share (the "OFFER PRICE") less than the
Fixed  Conversion  Price in effect at the time of such issuance,  then the Fixed
Conversion  Price  shall be  immediately  reset to such lower Offer  Price.  For
purposes hereof,  the issuance of any security of the Parent convertible into or
exercisable  or  exchangeable  for Common Stock shall result in an adjustment to
the Fixed Conversion Price upon the issuance of such securities.

                                       4
<PAGE>

            (d)  COMPUTATION OF  CONSIDERATION.  For purposes of any computation
respecting   consideration  received  pursuant  to  Section  2.6(c)  above,  the
following shall apply:

                  (i) in the case of the  issuance of shares of Common Stock for
            cash, the consideration  shall be the amount of such cash,  provided
            that in no case  shall any  deduction  be made for any  commissions,
            discounts  or  other  expenses   incurred  by  the  Parent  for  any
            underwriting of the issue or otherwise in connection therewith;

                  (ii) in the case of the issuance of shares of Common Stock for
            a   consideration   in  whole  or  in  part  other  than  cash,  the
            consideration  other than cash shall be deemed to be the fair market
            value  thereof as determined in good faith by the Board of Directors
            of the Parent  (irrespective of the accounting  treatment  thereof);
            and

                  (iii)  upon any such  exercise,  the  aggregate  consideration
            received for such securities shall be deemed to be the consideration
            received by the Parent for the issuance of such  securities plus the
            additional  minimum  consideration,  if any,  to be  received by the
            Parent upon the conversion or exchange thereof (the consideration in
            each  case to be  determined  in the  same  manner  as  provided  in
            subsections (i) and (ii) of this Section 2.6(d)).

            2.7  RESERVATION OF SHARES.  During the period the conversion  right
exists,  the Parent will reserve from its authorized and unissued Common Stock a
sufficient  number of shares to provide for the  issuance of  Conversion  Shares
upon the full conversion of this Note, the Warrants and the Options.  The Parent
represents  that upon issuance,  the Conversion  Shares will be duly and validly
issued,  fully paid and  non-assessable.  The Parent agrees that its issuance of
this Note shall constitute full authority to its officers,  agents, and transfer
agents who are charged with the duty of executing and issuing stock certificates
to execute and issue the necessary  certificates for the Conversion  Shares upon
the conversion of this Note.

                                   ARTICLE III
                EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

      3.1 EVENTS OF DEFAULT.  The  occurrence  of an Event of Default  under the
Security  Agreement  shall  constitute an event of default  ("EVENT OF DEFAULT")
hereunder.

      3.2 DEFAULT INTEREST.  Following the occurrence and during the continuance
of an  Event of  Default,  the  Companies  shall,  jointly  and  severally,  pay
additional  interest  on the  outstanding  principal  balance of this Note in an
amount  equal to the  Contract  Rate plus ten percent  (10%) per annum,  and all
outstanding  Obligations,  including unpaid  interest,  shall continue to accrue
interest at such additional interest rate from the date of such Event of Default
until the date such Event of Default is cured or waived.

                                       5
<PAGE>

      3.3 DEFAULT  PAYMENT.  Following the occurrence and during the continuance
of an Event of Default, the Holder, at its option, may elect, in addition to all
rights and  remedies of the Holder under the  Security  Agreement  and the other
Ancillary  Agreements and all  obligations and liabilities of each Company under
the  Security  Agreement  and the other  Ancillary  Agreements,  to require  the
Companies, jointly and severally, to make a Default Payment ("DEFAULT PAYMENT").
The Default  Payment shall be 130% of the  outstanding  principal  amount of the
Note, plus accrued but unpaid  interest,  all other fees then remaining  unpaid,
and all other amounts  payable  hereunder.  The Default Payment shall be applied
first to any fees due and  payable to the  Holder  pursuant  to the  Notes,  the
Security Agreement and/or the Ancillary  Agreements,  then to accrued and unpaid
interest due on the Notes and then to the outstanding  principal  balance of the
Notes. The Default Payment shall be due and payable immediately on the date that
the Holder has exercised its rights pursuant to this Section 3.3.

                                   ARTICLE IV
                                  MISCELLANEOUS

      4.1 CONVERSION PRIVILEGES.  The conversion privileges set forth in Article
II shall remain in full force and effect  immediately from the date hereof until
the date this Note is indefeasibly paid in full and irrevocably terminated.

      4.2 CUMULATIVE REMEDIES. The remedies under this Note shall be cumulative.

      4.3 FAILURE OR INDULGENCE  NOT WAIVER.  No failure or delay on the part of
the Holder  hereof in the exercise of any power,  right or  privilege  hereunder
shall operate as a waiver thereof,  nor shall any single or partial  exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other  right,  power or  privilege.  All  rights  and  remedies  existing
hereunder  are  cumulative  to, and not  exclusive  of,  any rights or  remedies
otherwise available.

      4.4 NOTICES.  Any notice herein required or permitted to be given shall be
in writing and provided in accordance with the terms of the Security Agreement.

      4.5 AMENDMENT  PROVISION.  The term "Note" and all references  thereto, as
used  throughout  this  instrument,  shall mean this  instrument  as  originally
executed,  or  if  later  amended  or  supplemented,   then  as  so  amended  or
supplemented,  and any successor  instrument as such successor instrument may be
amended or supplemented.

      4.6  ASSIGNABILITY.  This Note shall be binding  upon each Company and its
successors  and  assigns,  and shall  inure to the benefit of the Holder and its
successors and assigns, and may be assigned by the Holder in accordance with the
requirements  of the  Security  Agreement.  No Company may not assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.

                                       6
<PAGE>

      4.7 COST OF  COLLECTION.  In case of any Event of Default under this Note,
the  Companies  shall,  jointly  and  severally,  pay the  Holder  the  Holder's
reasonable costs of collection, including reasonable attorneys' fees.

      4.8 GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.

            (a) THIS NOTE SHALL BE GOVERNED  BY AND  CONSTRUED  AND  ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,  WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.

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

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

                                       7
<PAGE>

      4.9 SEVERABILITY.  In the event that any provision of this Note is invalid
or  unenforceable  under  any  applicable  statute  or rule of  law,  then  such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any such provision which may prove invalid or  unenforceable  under any law
shall not affect the validity or  enforceability  of any other provision of this
Note.

      4.10  MAXIMUM  PAYMENTS.  Nothing  contained  herein  shall be  deemed  to
establish  or require  the  payment of a rate of  interest  or other  charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest  required to be paid or other charges hereunder exceed the maximum rate
permitted  by such law,  any  payments in excess of such  maximum  rate shall be
credited  against  amounts owed by the Companies to the Holder and thus refunded
to the Companies.

      4.11 SECURITY  INTEREST.  The Holder has been granted a security  interest
(i) in certain  assets of the Companies as more fully  described in the Security
Agreement and (ii) pursuant to the Stock Pledge  Agreement  dated as of the date
hereof.

      4.12  CONSTRUCTION.   Each  party  acknowledges  that  its  legal  counsel
participated in the preparation of this Note and, therefore, stipulates that the
rule of construction  that  ambiguities are to be resolved  against the drafting
party shall not be applied in the interpretation of this Note to favor any party
against the other.

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

                                       8
<PAGE>

      IN WITNESS WHEREOF, each Company has caused this Secured Revolving Note to
be signed in its name effective as of this 7th day of September, 2005.

                                        AMERICAN TECHNOLOGIES GROUP, INC.

                                        By:__________________________________
                                             Name:
                                             Title:

WITNESS:

__________________________________

                                        NORTH TEXAS STEEL COMPANY, INC.

                                        By:__________________________________
                                             Name:
                                             Title:

WITNESS:

__________________________________

                                        OMAHA HOLDINGS CORP.

                                        By:__________________________________
                                             Name:
                                             Title:

WITNESS:

__________________________________

                                       9
<PAGE>

                                    EXHIBIT A

                                 OTHER COMPANIES

              North Texas Steel Company, Inc., a Texas corporation

                  Omaha Holdings Corp., a Delaware corporation

<PAGE>

                                    EXHIBIT B

                              NOTICE OF CONVERSION

  (To be executed by the Holder in order to convert the Secured Revolving Note)

      The undersigned  hereby elects to convert  $_________ of the principal and
$_________  of the  interest  due on the  Secured  Revolving  Note  dated  as of
September 7, 2005 (the "NOTE") issued by American  Technologies Group, Inc. (the
"PARENT") and the other  Companies  named and as defined  therein into shares of
Common  Stock  of the  Parent  ("SHARES")  in  accordance  with  the  terms  and
conditions set forth in the Note, as of the date written below.

Date of Conversion:          ___________________________________________________

Conversion Price:            ___________________________________________________

Shares To Be Delivered:      ___________________________________________________

Signature:                   ___________________________________________________

Print Name:                  ___________________________________________________

Address:                     ___________________________________________________

Holder DWAC instructions     ___________________________________________________

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