Document:

Energy and Engine Technology Corporation Exhibit 10 Sub Agr

 

SUBSCRIPTION
AGREEMENT

 

THIS
SUBSCRIPTION AGREEMENT (this
“Agreement”), dated
as of April ____, 2005, by and among Energy & Engine Technology Corporation,
a Nevada corporation (the “Company”), and
the subscribers identified on the signature page hereto (each a “Subscriber” and
collectively “Subscribers”).

WHEREAS, the
Company and the Subscribers are executing and delivering this Agreement in
reliance upon an exemption from securities registration afforded by the
provisions of Section 4(2), Section 4(6) and/or Regulation D (“Regulation
D”) as
promulgated by the United States Securities and Exchange Commission (the
“Commission”) under
the Securities Act of 1933, as amended (the “1933
Act”).

 

WHEREAS, the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Subscribers, as provided herein,
and the Subscribers, in the aggregate, shall purchase up to One Million Five
Hundred Thousand Dollars ($1,500,000) (the "Purchase
Price") of
principal amount of promissory notes of the Company (“Note” or
“Notes”)
convertible into shares of the Company's common stock, $.001 par value (the
"Common
Stock") at a
per share conversion price of $0.12, subject to adjustment as described in this
Agreement and the Note (“Conversion
Price”); and
share purchase warrants (the “Warrants”), in
the form attached hereto as Exhibits
A1 and A2, to
purchase shares of Common Stock (the “Warrant
Shares”). One
Million Dollars ($1,000,000) of the Purchase Price (“Initial
Closing Purchase Price”) shall
be payable on the Initial Closing Date. Five Hundred Thousand Dollars ($500,000)
of the Purchase Price (“Second
Closing Purchase Price”) will
be payable within five (5) days after the Actual Effective Date (as defined in
Section 11.1(iv) hereof). The Notes, shares of Common Stock issuable upon
conversion of the Notes (the “Shares”), the
Warrants and the Warrant Shares are collectively referred to herein as the
"Securities";
and

 

WHEREAS, the
aggregate proceeds of the sale of the Notes and the Warrants contemplated hereby
shall be held in escrow and disbursed pursuant to the terms of a Funds Escrow
Agreement to be executed by the parties substantially in the form attached
hereto as Exhibit
B (the
"Escrow
Agreement").

NOW,
THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement, the Company and the Subscribers hereby agree as follows:

	 	
      1.
	
      Closings.

	 	 	
      (a)
	
      Initial
      Closing.
      Subject to the satisfaction or waiver of the terms and conditions of this
      Agreement, on the Initial Closing Date, each Subscriber shall purchase and
      the Company shall sell to each Subscriber a Note in the principal amount
      designated on the signature page hereto (“Initial
      Closing Notes”).
      The aggregate amount of the Notes to be purchased by the Subscribers on
      the Initial Closing Date shall, in the aggregate, be equal to the Initial
      Closing Purchase Price. The “Initial
      Closing Date”
      shall be the date that subscriber funds representing the net amount due
      the Company from the Initial Closing Purchase Price of the Offering is
      transmitted by wire transfer or otherwise to or for the benefit of the
      Company. The consummation of the transactions contemplated herein for all
      closings shall take place at the offices of Grushko & Mittman, P.C.,
      551 Fifth Avenue, Suite 1601, New York, New York 10176, upon the
      satisfaction of all conditions to Closing set forth in this Agreement.
      Each of the Initial Closing Date and Second Closing Date is referred to as
      a “Closing
      Date”.

83

 

	 	 	
      (b)
	
      Second
      Closing.
      The closing date in relation to the Second Closing Purchase Price shall be
      the fifth (5th)
      day after the Actual Effective Date (the “Second
      Closing Date”).
      Subject to the satisfaction or waiver of the terms and conditions of this
      Agreement on the Second Closing Date, each Subscriber shall purchase and
      the Company shall sell to each Subscriber a Note in the principal amount
      designated on the signature page hereto (“Second
      Closing Notes”)
      and Warrants as described in Section 2 of this Agreement (“Second
      Closing Warrants”).
      The aggregate Purchase Price of the Second Closing Notes for all
      Subscribers shall be equal to the Second Closing Purchase Price. The
      Second Closing Note shall be identical to the Note issuable on the Initial
      Closing Date except that the maturity date of such Notes shall be
      twenty-four (24) months after the Second Closing Date. The Conversion
      Price (defined in Section 2.1 (b) of the Note) for the Second Closing
      Notes shall be equitably adjusted to offset the effect of stock splits,
      stock dividends, and pro rata distributions of property or equity
      interests to the Company’s shareholders after the Initial Closing
      Date.

	 	 	
      (c)
	
      Conditions
      to Second Closing.
      The occurrence of the Second Closing is expressly contingent on (i) the
      truth and accuracy, on the Effective Date and the Second Closing Date of
      the representations and warranties of the Company and Subscriber contained
      in this Agreement, (ii) continued compliance with the covenants of the
      Company set forth in this Agreement, (iii) the non-occurrence of any Event
      of Default (as defined in this Agreement and the Note) or other default by
      the Company of its obligations and undertakings contained in this
      Agreement, (iv) the delivery on the Second Closing Date of Second Closing
      Notes for which the Company Shares issuable upon conversion have been
      included in the Registration Statement, and (v) the delivery of the Second
      Closing Warrants for which the Warrant Shares issuable upon exercise have
      been included in the Registration Statement. The exercise prices of the
      Warrants issuable on the Second Closing Date shall be adjusted to offset
      the effect of stock splits, stock dividends, and pro rata distributions of
      property or equity interests to the Company’s shareholders after the
      Initial Closing Date. 

	 	 	
      (d)
	
      Second
      Closing Deliveries.
      On the Second Closing Date, the Company will deliver the Second Closing
      Notes and Second Closing Warrants to the Escrow Agent and each Subscriber
      will deliver his portion of the Purchase Price to the Escrow Agent. On the
      Second Closing Date, the Company will deliver a certificate (“Second
      Closing Certificate”)
      signed by its chief executive officer or chief financial officer (i)
      representing the truth and accuracy of all the representations and
      warranties made by the Company contained in this Agreement, as of the
      Initial Closing Date, and the Second Closing Date, as if such
      representations and warranties were made and given on all such dates, (ii)
      adopting and renewing the covenants and conditions set forth in Sections
      5, 7, 8, 9, 10, 11, and 12 of this Agreement in relation to the Second
      Closing Date, Second Closing Notes and Second Closing Warrants, (iii)
      representing the timely compliance by the Company with the Company’s
      registration requirements set forth in Section 11 of this Agreement, and
      (iv) certifying that an Event of Default has not occurred. A legal opinion
      nearly identical to the legal opinion referred to in Section 6 of this
      Agreement shall be delivered to each Subscriber at the Second Closing in
      relation to the Company, Second Closing Notes, and Second Closing Warrants
      (“Second
      Closing Legal Opinion”).
      The Second Closing Legal Opinion must also state that all of the
      Registrable Securities have been included for registration in the
      registration statement declared effective on the Actual Effective
      Date.

84

	 	
      2.
	
      Warrants.

	 	 	
      (a)
	
      Class
      A Warrants.
      On each Closing Date, the Company will issue and deliver Class A Warrants
      to the Subscribers. One Class A Warrant will be issued for each one Share
      which would be issued on the Closing Date assuming the complete conversion
      of the Notes issued on each Closing Date at the Conversion Price in effect
      on the Closing Date assuming the Closing Date were a Conversion Date. The
      per Warrant Share exercise price to acquire a Warrant Share upon exercise
      of a Class A Warrant shall be equal to $0.12. The Class A Warrants shall
      be exercisable until five (5) years after each Closing Date and subject to
      Call as described in the Class A Warrant.

	 	 	
      (b)
	
      Class
      B Warrants.
      On the Initial Closing Date, the Company will issue and deliver Class B
      Warrants to the Subscribers. Five (5) Class B Warrants will be issued for
      each one dollar of Purchase Price paid on the Initial Closing Date. The
      per Warrant Share exercise price to acquire a Warrant Share upon exercise
      of a Class B Warrant shall be $0.20. The Class B Warrants shall be
      exercisable until five (5) years after the Initial Closing Date. The Class
      B Warrants will be subject to Call as described in the Class B Warrant.
      

	 	 	
      (c)
	
      The
      Class A and Class B Warrants are collectively referred to herein as
      “Warrants”.

	 	
      3.
	
      Security
      Interest.
      The Subscribers will be granted a security interest in all the assets of
      the Company, including ownership of Subsidiaries as defined in Section
      5(x) of this Agreement and in the assets of the Subsidiaries, which will
      each be memorialized in a “Security
      Agreement”,
      forms of which are annexed hereto as Exhibits
      C1 and C2.
      The Company will execute such other agreements, documents and financing
      statements reasonably requested by Subscribers, which will be filed at the
      Company’s expense with such jurisdictions, states and counties designated
      by the Subscribers. The
      Company will also execute all such documents reasonably necessary in the
      opinion of Subscriber to memorialize and further protect the security
      interest described herein. The Subscribers will appoint a Collateral Agent
      to represent them collectively in connection with the security interest to
      be granted to the Subscribers. The appointment will be pursuant to a
      “Collateral
      Agent Agreement”,
      a form of which is annexed hereto as Exhibit
      D.

	 	
      4.
	
      Subscriber's
      Representations and Warranties.
      Each Subscriber hereby represents and warrants to and agrees with the
      Company only as to such Subscriber that:

	 	 	
      (a)
	
      Organization
      and Standing of the Subscribers.
      If the Subscriber is an entity, such Subscriber is a corporation,
      partnership or other entity duly incorporated or organized, validly
      existing and in good standing under the laws of the jurisdiction of its
      incorporation or organization.

	 	 	
      (b)
	
      Authorization
      and Power.
      Each Subscriber has the requisite power and authority to enter into and
      perform this Agreement and to purchase the Notes and Warrants being sold
      to it hereunder. The execution, delivery and performance of this Agreement
      by such Subscriber and the consummation by it of the transactions
      contemplated hereby and thereby have been duly authorized by all necessary
      corporate or partnership action, and no further consent or authorization
      of such Subscriber or its Board of Directors, stockholders, partners,
      members, as the case may be, is required. This Agreement has been duly
      authorized, executed and delivered by such Subscriber and constitutes, or
      shall constitute when executed and delivered, a valid and binding
      obligation of the Subscriber enforceable against the Subscriber in
      accordance with the terms thereof.

85

	 	 	
      (c)
	
      No
      Conflicts.
      The execution, delivery and performance of this Agreement and the
      consummation by such Subscriber of the transactions contemplated hereby or
      relating hereto do not and will not (i) result in a violation of such
      Subscriber’s charter documents or bylaws or other organizational documents
      or (ii) conflict with, or constitute a default (or an event which with
      notice or lapse of time or both would become a default) under, or give to
      others any rights of termination, amendment, acceleration or cancellation
      of any agreement, indenture or instrument or obligation to which such
      Subscriber is a party or by which its properties or assets are bound, or
      result in a violation of any law, rule, or regulation, or any order,
      judgment or decree of any court or governmental agency applicable to such
      Subscriber or its properties (except for such conflicts, defaults and
      violations as would not, individually or in the aggregate, have a material
      adverse effect on such Subscriber). Such Subscriber is not required to
      obtain any consent, authorization or order of, or make any filing or
      registration with, any court or governmental agency in order for it to
      execute, deliver or perform any of its obligations under this Agreement or
      to purchase the Notes or acquire the Warrants in accordance with the terms
      hereof, provided that for purposes of the representation made in this
      sentence, such Subscriber is assuming and relying upon the accuracy of the
      relevant representations and agreements of the Company
    herein.

	 	 	
      (d)
	
      Information
      on Company.
      The Subscriber has been furnished with or has had access at the EDGAR
      Website of the Commission to the Company's Form 10-KSB for the year ended
      December 31, 2004 and all periodic reports as filed with the Commission
      (hereinafter referred to as the "Reports"). In addition, the Subscriber
      has received in writing from the Company such other information concerning
      its operations, financial condition and other matters as the Subscriber
      has requested in writing (such other information is collectively, the
      "Other Written Information"), and considered all factors the Subscriber
      deems material in deciding on the advisability of investing in the
      Securities. 

	 	 	
      (e)
	
      Information
      on Subscriber.
      The Subscriber is, and will be at the time of the conversion of the Notes
      and exercise of the Warrants, an "accredited investor", as such term is
      defined in Regulation D promulgated by the Commission under the 1933 Act,
      is experienced in investments and business matters, has made investments
      of a speculative nature and has purchased securities of United States
      publicly-owned companies in private placements in the past and, with its
      representatives, has such knowledge and experience in financial, tax and
      other business matters as to enable the Subscriber to utilize the
      information made available by the Company to evaluate the merits and risks
      of and to make an informed investment decision with respect to the
      proposed purchase, which represents a speculative investment. The
      Subscriber has the authority and is duly and legally qualified to purchase
      and own the Securities. The Subscriber is able to bear the risk of such
      investment for an indefinite period and to afford a complete loss thereof.
      The information set forth on the signature page hereto regarding the
      Subscriber is accurate. 
      The Subscriber is not required to be registered as a broker-dealer under
      Section 15 of the Securities Exchange Act of 1934, as amended (the "1934
      Act") and the Subscriber is not a
broker-dealer.

	 	 	
      (f)
	
      Purchase
      of Notes and Warrants.
      On each Closing Date, the Subscriber will purchase the Notes and Warrants
      as principal for its own account for investment only and not with a view
      toward, or for resale in connection with, the public sale or any
      distribution thereof.

86

	 	 	
      (g)
	
      Compliance
      with Securities Act.
      The Subscriber understands and agrees that the Securities have not been
      registered under the 1933 Act or any applicable state securities laws, by
      reason of their issuance in a transaction that does not require
      registration under the 1933 Act (based in part on the accuracy of the
      representations and warranties of Subscriber contained herein), and that
      such Securities must be held indefinitely unless a subsequent disposition
      is registered under the 1933 Act or any applicable state securities laws
      or is exempt
      from such registration. The Subscriber will not use any of the Shares or
      the Warrant Shares acquired pursuant to this Agreement to cover any short
      position in the Common Stock of the
Company.

	 	 	
      (h)
	
      Shares
      Legend.
      The Shares and the Warrant Shares shall bear the following or similar
      legend:

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

	 	 	
      (i)
	
      Warrants
      Legend.
      The Warrants shall bear the following or
      similar 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. 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 UNDER SAID ACT OR
      ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
      SATISFACTORY TO ENERGY & ENGINE TECHNOLOGY CORPORATION THAT SUCH
      REGISTRATION IS NOT REQUIRED."

	 	 	
      (j)
	
      Note
      Legend.
      The Note shall bear the following legend:

	 	 	 	
      "THIS
      NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 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 OR AN
      OPINION OF COUNSEL REASONABLY SATISFACTORY TO ENERGY & ENGINE
      TECHNOLOGY CORPORATION THAT SUCH REGISTRATION IS NOT
      REQUIRED."

87

	 	 	
      (k)
	
      Communication
      of Offer.
      The offer to sell the Securities was directly communicated to the
      Subscriber by the Company. At no time was the Subscriber presented with or
      solicited by any leaflet, newspaper or magazine article, radio or
      television advertisement, or any other form of general advertising or
      solicited or invited to attend a promotional meeting otherwise than in
      connection and concurrently with such communicated
  offer.

	 	 	
      (l)
	
      Authority;
      Enforceability.
      This Agreement and other agreements delivered together with this Agreement
      or in connection herewith have been duly authorized, executed and
      delivered by the Subscriber and are valid and binding agreements
      enforceable in accordance with their terms, subject to bankruptcy,
      insolvency, fraudulent transfer, reorganization, moratorium and similar
      laws of general applicability relating to or affecting creditors’ rights
      generally and to general principles of equity; and Subscriber has full
      corporate power and authority necessary to enter into this Agreement and
      such other agreements and to perform its obligations hereunder and under
      all other agreements entered into by the Subscriber relating
      hereto.

	 	 	
      (m)
	
      Restricted
      Securities.
      Subscriber understands that the Securities have not been registered under
      the 1933 Act and such Subscriber will not sell, offer to sell, assign,
      pledge, hypothecate or otherwise transfer any of the Securities unless
      pursuant to an effective registration statement under the 1933 Act.
      Notwithstanding anything to the contrary contained in this Agreement, such
      Subscriber may transfer (without restriction and without the need for an
      opinion of counsel) the Securities to its Affiliates (as defined below)
      provided that each such Affiliate is an “accredited investor” under
      Regulation D and such Affiliate agrees to be bound by the terms and
      conditions of this Agreement. For the purposes of this Agreement, an
      “Affiliate”
      of any person or entity means any other person or entity directly or
      indirectly controlling, controlled by or under direct or indirect common
      control with such person or entity. Affiliate includes each subsidiary of
      the Company. For purposes of this definition, “control”
      means the power to direct the management and policies of such person or
      firm, directly or indirectly, whether through the ownership of voting
      securities, by contract or otherwise.

	 	 	
      (n)
	
      No
      Governmental Review.
      Each Subscriber understands that no United States federal or state agency
      or any other governmental or state agency has passed on or made
      recommendations or endorsement of the Securities or the suitability of the
      investment in the Securities nor have such authorities passed upon or
      endorsed the merits of the offering of the
Securities.

	 	 	
      (o)
	
      Correctness
      of Representations.
      Each Subscriber represents as to such Subscriber that the foregoing
      representations and warranties are true and correct as of the date hereof
      and, unless a Subscriber otherwise notifies the Company prior to each
      Closing Date shall be true and correct as of each Closing
      Date.

	 	 	
      (p)
	
      Survival.
      The foregoing representations and warranties shall survive each Closing
      Date until three years after the latest Closing
Date.

	 	
      5.
	
      Company
      Representations and Warranties.
      The Company represents and warrants to and agrees with each Subscriber
      that except as set forth in the Reports and as otherwise qualified in the
      Transaction Documents:

88

	 	 	
      (a)
	
      Due
      Incorporation.
      The Company is a corporation duly organized, validly existing and in good
      standing under the laws of the jurisdiction of its incorporation and has
      the requisite corporate power to own its properties and to carry on its
      business is disclosed in the Reports.
      The Company is duly qualified as a foreign corporation to do business and
      is in good standing in each jurisdiction where the nature of the business
      conducted or property owned by it makes such qualification necessary,
      other than those jurisdictions in which the failure to so qualify would
      not have a Material Adverse Effect. For purpose of this Agreement, a
      “Material
      Adverse Effect”
      shall mean a material adverse effect on the financial condition, results
      of operations, properties or business of the Company taken as a
      whole.

	 	 	
      (b)
	
      Outstanding
      Stock.
      All issued and outstanding shares of capital stock of the Company have
      been duly authorized and validly issued and are fully paid and
      nonassessable.

	 	 	
      (c)
	
      Authority;
      Enforceability.
      This Agreement, the Note, the Warrants, the Escrow Agreement, Security
      Agreements and Collateral Agent Agreement, and any other agreements
      delivered together with this Agreement or in connection herewith
      (collectively “Transaction
      Documents”)
      have been duly authorized, executed and delivered by the Company and are
      valid and binding agreements enforceable in accordance with their terms,
      subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
      moratorium and similar laws of general applicability relating to or
      affecting creditors' rights generally and to general principles of equity.
      The Company has full corporate power and authority necessary to enter into
      and deliver the Transaction Documents and to perform its obligations
      thereunder.

	 	 	
      (d)
	
      Additional
      Issuances.
      There are no outstanding agreements or preemptive or similar rights
      affecting the Company's common stock or equity and no outstanding rights,
      warrants or options to acquire, or instruments convertible into or
      exchangeable for, or agreements or understandings with respect to the sale
      or issuance of any shares of common stock or equity of the Company or
      other equity interest in any of the Subsidiaries of the Company except as
      described on Schedule
      5(d).

	 	 	
      (e)
	
      Consents.
      No consent, approval, authorization or order of any court, governmental
      agency or body or arbitrator having jurisdiction over the Company, or any
      of its Affiliates, the OTC Bulletin Board (“Bulletin
      Board”),
      any Principal Market (as defined in Section 9.1(b) of this Agreement), nor
      the Company's shareholders is required for the execution by the Company of
      the Transaction Documents and compliance and performance by the Company of
      its obligations under the Transaction Documents, including, without
      limitation, the issuance and sale of the
Securities.

	 	 	
      (f)
	
      No
      Violation or Conflict.
      Assuming the representations and warranties of the Subscribers in Section
      4 are true and correct, neither the issuance and sale of the Securities
      nor the performance of the Company’s obligations under this Agreement and
      all other agreements entered into by the Company relating thereto by the
      Company will:

89

	 	 	 	
      (i)
	
      violate,
      conflict with, result in a breach of, or constitute a default (or an event
      which with the giving of notice or the lapse of time or both would be
      reasonably likely to constitute a default in any material respect) of a
      material nature under (A) the articles or certificate of incorporation,
      charter or bylaws of the Company, (B) to the Company's knowledge, any
      decree, judgment, order, law, treaty, rule, regulation or determination
      applicable to the Company of any court, governmental agency or body, or
      arbitrator having jurisdiction over the Company or over the properties or
      assets of the Company or any of its Affiliates, (C) the terms of any bond,
      debenture, note or any other evidence of indebtedness, or any agreement,
      stock option or other similar plan, indenture, lease, mortgage, deed of
      trust or other instrument to which the Company or any of its Affiliates is
      a party, by which the Company or any of its Affiliates is bound, or to
      which any of the properties of the Company or any of its Affiliates is
      subject, or (D) the terms of any "lock-up" or similar provision of any
      underwriting or similar agreement to which the Company, or any of its
      Affiliates is a party except the violation, conflict, breach, or default
      of which would not have a Material Adverse Effect;
      or

	 	 	 	
      (ii)
	
      result
      in the creation or imposition of any lien, charge or encumbrance upon the
      Securities or any of the assets of the Company or any of its Affiliates;
      or

	 	 	 	
      (iii)
	
      except
      as described on Schedule 5(d), result in the activation of any
      anti-dilution rights or a reset or repricing of any debt or security
      instrument of any other creditor or equity holder of the Company, nor
      result in the acceleration of the due date of any obligation of the
      Company; or

	 	 	 	
      (iv)
	
      result
      in the activation of any piggy-back registration rights of any person or
      entity holding securities or debt of the Company or having the right to
      receive securities of the Company.

	 	 	
      (g)
	
      The
      Securities.
      The Securities upon issuance:

	 	 	 	
      (i)
	
      are,
      or will be, free and clear of any security interests, liens, claims or
      other encumbrances, subject to restrictions upon transfer under the 1933
      Act and any applicable state securities
laws;

	 	 	 	
      (ii)
	
      have
      been, or will be, duly and validly authorized and on the date of issuance
      of the Shares and upon exercise of the Warrants, the Shares and Warrant
      Shares will be duly and validly issued, fully paid and nonassessable or if
      registered pursuant to the 1933 Act, and resold pursuant to an effective
      registration statement will be free trading and
    unrestricted);

	 	 	 	
      (iii)
	
      will
      not have been issued or sold in violation of any preemptive or other
      similar rights of the holders of any securities of the
      Company;

	 	 	 	
      (iv)
	
      will
      not subject the holders thereof to personal liability by reason of being
      such holders provided Subscriber’s representations herein are true and
      accurate and Subscribers take no actions or fail to take any actions
      required for their purchase of the Securities to be in compliance with all
      applicable laws and regulations; and

	 	 	 	
      (v)
	
      will
      not result in a violation of Section 5 under the 1933
  Act.

90

	 	 	
      (h)
	
      Litigation.
      There is no pending or, to the best knowledge of the Company, threatened
      action, suit, proceeding or investigation before any court, governmental
      agency or body, or arbitrator having jurisdiction over the Company, or any
      of its Affiliates that would affect the execution by the Company or the
      performance by the Company of its obligations under the Transaction
      Documents. Except as disclosed on the Disclosure Schedule or
      in the Reports, there is no pending or, to the best knowledge of the
      Company, basis for or threatened action, suit, proceeding or investigation
      before any court, governmental agency or body, or arbitrator having
      jurisdiction over the Company, or any of its Affiliates which litigation
      if adversely determined would have a Material Adverse Effect.

	 	 	
      (i)
	
      Reporting
      Company.
      The Company is a publicly-held company subject to reporting obligations
      pursuant to Section 13 of the 1934
      Act
      and has a class of common shares registered pursuant to Section 12(g) of
      the 1934 Act. Pursuant to the provisions of the 1934 Act, the Company has
      timely filed all reports and other materials required to be filed
      thereunder with the Commission during the preceding twelve
      months.

	 	 	
      (j)
	
      No
      Market Manipulation.
      The Company and its Affiliates have not taken, and will not take, directly
      or indirectly, any action designed to, or that might reasonably be
      expected to, cause or result in stabilization or manipulation of the price
      of the Common Stock to
      facilitate the sale or resale of the Securities or affect the price at
      which the Securities may be issued or resold, provided, however, that this
      provision shall not prevent the Company from engaging in normal investor
      relations/public relations activities.

	 	 	
      (k)
	
      Information
      Concerning Company.
      The Reports contain all material information relating to the Company and
      its operations and financial condition as of their respective dates which
      information is required to be disclosed therein. Since the date of the
      financial statements included in the Reports, and except as modified in
      the Other Written Information or in the Schedules hereto, there has been
      no Material Adverse Event relating to the Company's business, financial
      condition or affairs not disclosed in the Reports. The Reports do not
      contain any untrue statement of a material fact or omit to state a
      material fact required to be stated therein or necessary to make the
      statements therein not misleading in light of the circumstances when
      made.

	 	 	
      (l)
	
      Stop
      Transfer.
      The Company will not issue any stop transfer order or other order impeding
      the sale, resale or delivery of any of the Securities, except as may be
      required by any applicable federal or state securities laws and unless
      contemporaneous notice of such instruction is given to the
      Subscriber.

	 	 	
      (m)
	
      Defaults.
      The Company is not in violation of its articles of incorporation or
      bylaws. The Company is (i) not in default under or in violation of any
      other material agreement or instrument to which it is a party or by which
      it or any of its properties are bound or affected, which default or
      violation would have a Material Adverse Effect,
      (ii) not in default with respect to any order of any court, arbitrator or
      governmental body or subject to or party to any order of any court or
      governmental authority arising out of any action, suit or proceeding under
      any statute or other law respecting antitrust, monopoly, restraint of
      trade, unfair competition or similar matters, or (iii) to the Company’s
      knowledge not in violation of any statute, rule or regulation of any
      governmental authority which violation would have a Material Adverse
      Effect.

91

	 	 	
      (n)
	
      No
      Integrated Offering.
      Neither the Company, 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 offer of the Securities pursuant to
      this Agreement to be integrated with prior offerings by the Company for
      purposes of the 1933 Act or any applicable stockholder approval
      provisions, including, without limitation, under the rules and regulations
      of the Bulletin Board or any Principal Market. Nor will the Company or any
      of its Affiliates take any action or steps that would cause the offer or
      issuance of the Securities to be integrated with other offerings. The
      Company will not conduct any offering other than the transactions
      contemplated hereby that will be integrated with the offer or issuance of
      the Securities.

	 	 	
      (o)
	
      No
      General Solicitation.
      Neither the Company, nor any of its Affiliates, nor to its knowledge, any
      person acting on its or their behalf, has engaged in any form of general
      solicitation or general advertising (within the meaning of Regulation D
      under the 1933 Act) in connection with the offer or sale of the
      Securities.

	 	 	
      (p)
	
      Listing.
      The Company's common stock is quoted on the Bulletin Board. The Company
      has not received any oral or written notice that its common stock is not
      eligible nor will become ineligible for quotation on the Bulletin Board
      nor that its common stock does not meet all requirements for the
      continuation of such quotation and the Company satisfies all the
      requirements for the continued quotation of its common stock on the
      Bulletin Board.

	 	 	
      (q)
	
      No
      Undisclosed Liabilities.
      The Company has no liabilities or obligations which are material,
      individually or in the aggregate, which are not disclosed in the Reports
      and Other Written Information, other than those incurred in the ordinary
      course of the Company’s businesses since December 31, 2004 and which,
      individually or in the aggregate, would reasonably be expected to have a
      Material Adverse Effect,
      except as disclosed on Schedule
      5(q).

	 	 	
      (r)
	
      No
      Undisclosed Events or Circumstances.
      Since December 31, 2004, no event or circumstance has occurred or exists
      with respect to the Company or its businesses, properties, operations or
      financial condition, that, under applicable law, rule or regulation,
      requires public disclosure or announcement prior to the date hereof by the
      Company but which has not been so publicly announced or disclosed in the
      Reports.

	 	 	
      (s)
	
      Capitalization.
      The authorized and outstanding capital stock of the Company as of the date
      of this Agreement and the Closing Date (not including the Securities) are
      set forth on Schedule
      5(d).
      Except as set forth on Schedule
      5(d),
      there are no options, warrants, or rights to subscribe to, securities,
      rights or obligations convertible into or exchangeable for or giving any
      right to subscribe for any shares of capital stock of the Company or any
      of its Subsidiaries. All of the outstanding shares of Common Stock of the
      Company have been duly and validly authorized and issued and are fully
      paid and nonassessable.

92

	 	 	
      (t)
	
      Dilution.
      The Company's executive officers and directors understand the nature of
      the Securities being sold hereby and recognize that the issuance of the
      Securities will have a potential dilutive effect on the equity holdings of
      other holders of the Company’s equity or rights to receive equity of the
      Company. The board of directors of the Company has concluded, in its good
      faith business judgment that the issuance of the Securities is in the best
      interests of the Company. The Company specifically acknowledges that its
      obligation to issue the Shares upon conversion of the Notes, and the
      Warrant Shares upon exercise of the Warrants is binding upon the Company
      and enforceable regardless of the dilution such issuance may have on the
      ownership interests of other shareholders of the Company or parties
      entitled to receive equity of the Company.

	 	 	
      (u)
	
      No
      Disagreements with Accountants and Lawyers.
      There are no disagreements of any kind presently existing, or reasonably
      anticipated by the Company to arise, between the Company and the
      accountants and lawyers formerly or presently employed by the Company,
      including but not limited to disputes or conflicts over payment owed to
      such accountants and lawyers.

	 	 	
      (v)
	
      DTC
      Status.
      The Company’s transfer agent is not a participant in and the Common Stock
      is not eligible for transfer pursuant to the Depository Trust Company
      Automated Securities Transfer Program.

	 	 	
      (w)
	
      Investment
      Company.
      Neither the Company nor any Affiliate is an “investment company” within
      the meaning of the Investment Company Act of 1940, as
    amended.

	 	 	
      (x)
	
      Subsidiary
      Representations.
      The Company makes each of the representations contained in Sections 5(a),
      (b), (d), (f), (h), (k), (m), (q) through (s), (u) and (w) of this
      Agreement, as same relate to each Subsidiary of the Company. For purposes
      of this Agreement, “Subsidiary”
      means, with respect to any entity at any date, any corporation, limited or
      general partnership, limited liability company, trust, estate,
      association, joint venture or other business entity) of which more
      than 50% of (i) the outstanding capital stock having (in the absence
      of contingencies) ordinary voting power to elect a majority of the board
      of directors or other managing body of such entity, (ii) in the case
      of a partnership or limited liability company, the interest in the capital
      or profits of such partnership or limited liability company or
      (iii) in the case of a trust, estate, association, joint venture or
      other entity, the beneficial interest in such trust, estate, association
      or other entity business is, at the time of determination, owned or
      controlled directly or indirectly through one or more intermediaries, by
      such entity. All the Company’s Subsidiaries as of the Initial Closing Date
      are set forth on Schedule
      5(x)
      hereto

	 	 	
      (y)
	
      Company
      Predecessor.
      All representations made by or relating to the Company of a historical or
      prospective nature and all undertaking described in Sections 9.1(g)
      through 9.1(l) shall relate and refer to the Company, its predecessors,
      and the Subsidiaries.

	 	 	
      (z)
	
      Correctness
      of Representations.
      The Company represents that the foregoing representations and warranties
      are true and correct as of the date hereof in all material respects, and,
      unless the Company otherwise notifies the Subscribers prior to each
      Closing Date, shall be true and correct in all material respects as of
      each Closing Date.

	 	 	
      (AA)
	
      Survival.
      The foregoing representations and warranties shall survive each Closing
      Date until three years after the latest Closing
Date.

93

	 	
      6.
	
      Regulation
      D Offering.
      The offer and issuance of the Securities to the Subscribers is being made
      pursuant to the exemption from the registration provisions of the 1933 Act
      afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506
      of Regulation D promulgated thereunder. On the Closing Date, the Company
      will provide an opinion reasonably acceptable to Subscriber from the
      Company's legal counsel opining on the availability of an exemption from
      registration under the 1933 Act as it relates to the offer and issuance of
      the Securities and other matters reasonably requested by Subscribers. A
      form of the legal opinion is annexed hereto as Exhibit
      E.
      The Company will provide, at the Company's expense, such other legal
      opinions in the future as are reasonably necessary for the issuance and
      resale of the Common Stock issuable upon conversion of the Notes and
      exercise of the Warrants pursuant to an effective registration statement.
      Subscriber agrees that any legal opinions required hereunder or under any
      other Transaction Documents may be supplied by the Company’s in house
      General Counsel.

	 	
      7.1.
	
      Conversion
      of Note.

	 	 	
      (a)
	
      Upon
      the conversion of a Note or part thereof, the Company shall, at its own
      cost and expense, take all necessary action, including obtaining and
      delivering, an opinion of counsel to assure that the Company's transfer
      agent shall issue stock certificates in the name of Subscriber (or its
      nominee) or such other persons as designated by Subscriber and in such
      denominations to be specified at conversion representing the number of
      shares of Common Stock issuable upon such conversion. The Company warrants
      that no instructions other than these instructions have been or will be
      given to the transfer agent of the Company's Common Stock and that, unless
      waived by the Subscriber, the Shares will be free-trading, and freely
      transferable, and will not contain a legend restricting the resale or
      transferability of the Shares provided the Shares are being sold pursuant
      to an effective registration statement covering the Shares or are
      otherwise exempt from registration. 

	 	 	
      (b)
	
      Subscriber
      will give notice of its decision to exercise its right to convert the
      Note, interest, any sum due to the Subscriber under the Transaction
      Documents including Liquidated Damages, or part thereof by telecopying an
      executed and completed Notice of Conversion (a form of which is annexed as
      Exhibit
      A to
      the Note) to the Company via confirmed telecopier transmission or
      otherwise pursuant to Section 14(a) of this Agreement. The Subscriber will
      not be
      required to surrender the Note
      until the Note has been fully converted or satisfied. Each date on which a
      Notice of Conversion is telecopied to the Company in accordance with the
      provisions hereof shall be deemed a Conversion
      Date.
      The Company will itself or cause the Company’s transfer agent to transmit
      the Company's Common Stock certificates representing the Shares issuable
      upon conversion of the Note to the Subscriber via express courier for
      receipt by such Subscriber within three (3) business days after receipt by
      the Company of the Notice of Conversion (such third day being the
      "Delivery
      Date").
      In the event the Shares are electronically transferable, then delivery of
      the Shares must be
      made by electronic transfer provided request for such electronic transfer
      has been made by the Subscriber
      and the Subscriber has complied with all applicable securities laws in
      connection with the sale of the Common Stock, including, without
      limitation, the prospectus delivery requirements. A Note representing the
      balance of the Note not so converted will be provided by the Company to
      the Subscriber if requested by Subscriber, provided the Subscriber
      delivers the
      original Note to the Company. In the event that a Subscriber elects not to
      surrender a Note for reissuance upon partial payment or conversion, the
      Subscriber hereby indemnifies the Company against any and all loss or
      damage attributable to a third-party claim in an amount in excess of the
      actual amount then due under the Note. The Company will obtain from the
      Company’s transfer agent a signed letter in the form annexed hereto as
      Exhibit
      F,
      and deliver such letter to the Subscribers on the Initial Closing Date.
      “Business
      Day”
      as employed in the Transaction Documents is a day that the New York Stock
      Exchange is open for trading for three or more
hours.

94

	 	 	
      (c)
	
      The
      Company understands that a delay in the delivery of the Shares in the form
      required pursuant to Section 7.1 hereof, or the Mandatory Redemption
      Amount described in Section 7.2 hereof, respectively after the Delivery
      Date or the Mandatory Redemption Payment Date (as hereinafter defined)
      could result in economic loss to the Subscriber. As compensation to the
      Subscriber for such loss, the Company agrees to pay (as liquidated damages
      and not as a penalty) to the Subscriber for late issuance of Shares in the
      form required pursuant to Section 7.1 hereof upon Conversion of the Note
      in the amount of $100 per business day after the Delivery Date for each
      $10,000 of Note principal amount being converted of the corresponding
      Shares which are not timely delivered. The Company shall pay any payments
      incurred under this Section in immediately available funds upon demand.
      Furthermore, in addition to any other remedies which may be available to
      the Subscriber, in the event that the Company fails for any reason to
      effect delivery of the Shares by the Delivery Date or make payment by the
      Mandatory Redemption Payment Date, the Subscriber will be entitled to
      revoke all or part of the relevant Notice of Conversion or rescind all or
      part of the notice of Mandatory Redemption by delivery of a notice to such
      effect to the Company whereupon the Company and the Subscriber shall each
      be restored to their respective positions immediately prior to the
      delivery of such notice, except that the liquidated damages described
      above shall be payable through the date notice of revocation or rescission
      is given to the Company.

	 	 	
      (d)
	
      Nothing
      contained herein 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 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
      permitted by such law, any payments in excess of such maximum shall be
      credited against amounts owed by the Company to the Subscriber and thus
      refunded to the Company.

	 	
      7.2.
	
      Mandatory
      Redemption at Subscriber’s Election.
      In the event (i) the Company is prohibited from issuing Shares, (ii) the
      Company fails to timely deliver Shares on a Delivery Date, (iii) upon the
      occurrence of any other Event of Default (as defined in the Note or in
      this Agreement), (iv) of the liquidation, dissolution or winding up of the
      Company, or (v) a Change of Control (as defined below) that continues for
      more than ten days, then at the Subscriber's election, the Company must
      pay to the Subscriber ten (10) business days after request by the
      Subscriber, at the Subscriber’s election, a sum of money determined by (y)
      multiplying up to the outstanding principal amount of the Note designated
      by the Subscriber by 120%, or (z) multiplying the number of Shares
      otherwise deliverable upon conversion of an amount of Note principal
      and/or interest designated by the Subscriber (with the date of giving of
      such designation being a “Deemed
      Conversion Date”)
      at the Conversion Price that would be in effect on the Deemed Conversion
      Date by the highest closing price of the Common Stock on the principal
      market for the period commencing on the Deemed Conversion Date until the
      day prior to the receipt by the Subscriber of the Mandatory Redemption
      Payment, whichever is greater, together with accrued but unpaid interest
      thereon ("Mandatory
      Redemption Payment").
      The Mandatory Redemption Payment must be received by the Subscriber on the
      same date as the Company Shares otherwise deliverable or within ten (10)
      business days after request, whichever is sooner ("Mandatory
      Redemption Payment Date").
      Upon receipt of the Mandatory Redemption Payment, the corresponding Note
      principal and interest will be deemed paid and no longer outstanding.
      Liquidated damages calculated pursuant to Section 7.1(c) hereof, that have
      been paid or accrued for the twenty day period prior to the actual receipt
      of the Mandatory Redemption Payment by the Subscriber shall be credited
      against the Mandatory Redemption Payment. For purposes of this Section
      7.2, “Change
      in Control”
      shall mean (i) the Company no longer having a class of shares publicly
      tradable and listed on a Principal Market, (ii) the Company becoming a
      Subsidiary of another entity, (iii) a majority of the board of directors
      of the Company as of the Closing Date no longer serving as directors of
      the Company, or (iv) if the holders of the Company’s Common Stock as of
      the Closing Date beneficially own at any time after the Closing Date less
      than fifty percent of the Common stock owned by them on the Closing
      Date.

95

	 	
      7.3.
	
      Maximum
      Conversion.
      The Subscriber shall not be entitled to convert on a Conversion Date that
      amount of the Note in connection with that number of shares of Common
      Stock which would be in excess of the sum of (i) the number of shares of
      common stock beneficially owned by the Subscriber and its Affiliates on a
      Conversion Date, and (ii) the number of shares of Common Stock issuable
      upon the conversion of the Note with respect to which the determination of
      this provision is being made on a Conversion Date, which would result in
      beneficial ownership by the Subscriber and its Affiliates of more than
      4.99% of the outstanding shares of common stock of the Company on such
      Conversion Date. For the purposes of the provision to the immediately
      preceding sentence, beneficial ownership shall be determined in accordance
      with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
      Regulation 13d-3 thereunder. Subject to the foregoing, the Subscriber
      shall not be limited to aggregate conversions of only 4.99% and aggregate
      conversions by the Subscriber may exceed 4.99%. The Subscriber may waive
      the conversion limitation described in this Section 7.3, in whole or in
      part, upon and effective after 61 days prior written notice to the
      Company. The Subscriber may allocate which of the equity of the Company
      deemed beneficially owned by the Subscriber shall be included in the 4.99%
      amount described above and which shall be allocated to the excess above
      4.99%.

	 	
      7.4.
	
      Injunction
      Posting of Bond.
      In the event a Subscriber shall elect to convert a Note or part thereof or
      exercise the Warrant in whole or in part, the Company may not refuse
      conversion or exercise based on any claim that such Subscriber or any one
      associated or affiliated with such Subscriber has been engaged in any
      violation of law, or for any other reason, unless, an injunction from a
      court, on notice, restraining and or enjoining conversion of all or part
      of such Note or exercise of all or part of such Warrant shall have been
      sought and obtained by the Company and
      the Company has posted a surety bond for the benefit of such Subscriber in
      the amount of 120% of the outstanding principal and interest of the Note,
      or aggregate purchase price of the Warrant Shares which are sought to be
      subject to the injunction, which bond shall remain in effect until the
      completion of arbitration/litigation of the dispute and the proceeds of
      which shall be payable to such Subscriber to the extent Subscriber obtains
      judgment. Notwithstanding the foregoing, if the Company receives an order
      restraining it from converting from a court or administration agency of
      competent jurisdiction, it shall comply without a bond
      requirement.

	 	
      7.5.
	
      Buy-In.
      In addition to any other rights available to the Subscriber, if the
      Company fails to deliver to the Subscriber such shares issuable upon
      conversion of a Note by the Delivery Date and if after seven (7) business
      days after the Delivery Date the Subscriber purchases (in an open market
      transaction or otherwise) shares of Common Stock to deliver in
      satisfaction of a sale by such Subscriber of the Common Stock which the
      Subscriber was entitled to receive upon such conversion (a "Buy-In"),
      then the Company shall pay in cash to the Subscriber (in addition to any
      remedies available to or elected by the Subscriber) the amount by which
      (A) the Subscriber's total purchase price (including brokerage
      commissions, if any) for the shares of Common Stock so purchased exceeds
      (B) the aggregate principal and/or interest amount of the Note for which
      such conversion was not timely honored,
      together with interest thereon at a rate of 15% per annum, accruing until
      such amount and any accrued interest thereon is paid in full (which amount
      shall be paid as liquidated damages and not as a penalty). For
      example, if the Subscriber purchases shares of Common Stock having a total
      purchase price of $11,000 to cover a Buy-In with respect to an attempted
      conversion of $10,000 of note principal and/or interest, the Company shall
      be required to pay the Subscriber $1,000,
      plus interest. The
      Subscriber shall provide the Company written notice indicating the amounts
      payable to the Subscriber in respect of the Buy-In.

	 	 	 

96

	 	
      7.6
	
      Adjustments.
      The Conversion Price, Warrant exercise price and amount of Shares issuable
      upon conversion of the Notes and exercise of the Warrants shall be
      adjusted as described in this Agreement, the Notes and
      Warrants.

	 	
      7.7.
	
      Redemption.
      The Note and Warrants shall not be redeemable or callable except as
      described in the Note and Warrants. 

	 	
      8.
	
      Due
      Diligence Fee/Legal Fees.

	 	 	
      (a)
	
      Broker’s
      Fee.
      The Company on the one hand, and each Subscriber (for itself only) on the
      other hand, agree to indemnify the other against and hold the other
      harmless from any and all liabilities to any persons claiming brokerage
      commissions or finder’s fees on account of services purported to have been
      rendered on behalf of the indemnifying party in connection with this
      Agreement or the transactions contemplated hereby and arising out of such
      party’s actions. The Company represents that there are no parties entitled
      to receive fees, commissions, or similar payments from the Company in
      connection with the transactions described in this Agreement except as
      described on Schedule 8 hereto.

	 	 	
      (b)
	
      Due
      Diligence Fee.
      The Company will pay an aggregate due diligence fee of $25,000 to the one
      or more entities designated on Schedule
      8
      hereto by the Lead Investor identified on Schedule
      8
      (“Lead
      Investor”)
      (“Due
      Diligence Fee”).
      The Due Diligence Fee will be payable out of funds held pursuant to the
      Escrow Agreement.

	 	 	
      (c)
	
      Legal
      Fees.
      The Company shall pay to Grushko & Mittman, P.C., a cash fee of
      $10,000 (“Legal
      Fees”)
      and 71,000 restricted shares of Common Stock (“Fee Shares”) having an
      agreed upon value of $5,000 as reimbursement for services rendered to the
      Subscribers in connection with this Agreement and the purchase and sale of
      the Notes and Warrants (the “Offering”).
      The Fee Shares will have been delivered prior to Closing. All
      the representations, covenants, warranties, undertakings, remedies,
      liquidated damages, indemnification, and other rights including but not
      limited to registration rights made or granted to or for the benefit of
      the Subscribers are hereby also made and granted to the holder of the Fee
      Shares.
      Ten Thousand Dollars ($10,000) of the Legal Fees will be payable on the
      Initial Closing Date out of funds held pursuant to the Escrow
      Agreement.

	 	 	
      9.
	
      Covenants
      of the Company.
      The Company covenants and agrees with the Subscribers as
      follows:

	 	 	
      (a)
	
      Stop
      Orders.
      The Company will advise the Subscribers, on the same day that the Company
      receives notice of issuance by the Commission, 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
      Company, or of the suspension of the qualification of the Common Stock of
      the Company for offering or sale in any jurisdiction, or the initiation of
      any proceeding for any such purpose.

97

	 	 	
      (b)
	
      Listing.
      The Company shall promptly secure the listing of the shares of Common
      Stock and the Warrant Shares upon each national securities exchange, or
      electronic or automated quotation system upon which they are or become
      eligible for listing and shall maintain such listing so long as any Notes
      or Warrants are outstanding. The Company will maintain the listing of its
      Common Stock on the American Stock Exchange, Nasdaq SmallCap Market,
      Nasdaq National Market System, Bulletin Board, or New York Stock Exchange
      (whichever of the foregoing is at the time the principal trading exchange
      or market for the Common Stock (the “Principal
      Market”)),
      and will comply in all respects with the Company's reporting, filing and
      other obligations under the bylaws or rules of the Principal Market, as
      applicable. The Company will provide the Subscribers copies of all notices
      it receives notifying the Company of the threatened and actual delisting
      of the Common Stock from any Principal Market. As of the date of this
      Agreement and the Initial Closing Date, the Bulletin Board is and will be
      the Principal Market.

	 	 	
      (c)
	
      Market
      Regulations.
      The Company shall notify the Commission, the Principal Market 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 the Subscribers and promptly provide copies thereof to
      Subscriber.

	 	 	
      (d)
	
      Filing
      Requirements.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitation, the Company will (A) cause its Common Stock
      to continue to be registered under Section 12(b) or 12(g) of the 1934 Act,
      (B) comply in all respects with its reporting and filing obligations under
      the 1934 Act, (C) comply with all reporting requirements that are
      applicable to an issuer with a class of shares registered pursuant to
      Section 12(b) or 12(g) of the 1934 Act, as applicable, and (D) comply with
      all requirements related to any registration statement filed pursuant to
      this Agreement. The Company will use its best efforts not to take any
      action or file any document (whether or not permitted by the 1933 Act or
      the 1934 Act or the rules thereunder) to terminate or suspend such
      registration or to terminate or suspend its reporting and filing
      obligations under said acts until three (3) years after the Second Closing
      Date. Until the earlier of the resale of the Common Stock and the Warrant
      Shares by each Subscriber or three (3) years after the Warrants have been
      exercised, the Company will use its best efforts to continue the listing
      or quotation of the Common Stock on a Principal Market and will comply in
      all respects with the Company's reporting, filing and other obligations
      under the bylaws or rules of the Principal Market. The Company agrees to
      timely file a Form D with respect to the Securities if required under
      Regulation D and to provide a copy thereof to each Subscriber promptly
      after such filing.

	 	 	
      (e)
	
      Use
      of Proceeds.
      The proceeds of the Offering will be employed by the Company for the
      purposes set forth on Schedule
      9(e)
      hereto. Except as set forth on Schedule
      9(e),
      the Purchase Price may not and will not be used for accrued and unpaid
      officer and director salaries, payment of financing related debt,
      redemption of outstanding notes or equity instruments of the Company,
      litigation related expenses or settlements, brokerage fees, nor non-trade
      obligations outstanding on a Closing Date. 

98

	 	 	
      (f)
	
      Reservation.
      Prior to the Initial Closing Date, the Company undertakes to reserve,
      pro rata,
      on behalf of the Subscribers from its authorized but unissued common
      stock, a number of common shares equal to 175%
      of the amount of Common Stock necessary to allow each Subscriber to be
      able to convert all Notes issuable pursuant to this Agreement and interest
      thereon and reserve 100% of the amount of Warrant Shares issuable upon
      exercise of the Warrants. Failure to have sufficient shares reserved
      pursuant to this Section 9.1(f) for five (5) consecutive business days or
      fifteen (15) days in the aggregate shall be a material default of the
      Company’s obligations under this Agreement and an Event of Default under
      the Note.

	 	 	
      (g)
	
      Taxes.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitations, the Company will 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 the
      income, profits, property or business of the Company; provided, however,
      that any such tax, assessment, charge or levy need not be paid if the
      validity thereof shall currently be contested in good faith by appropriate
      proceedings and if the Company shall have set aside on its books adequate
      reserves with respect thereto, and provided, further, that the Company
      will pay all such taxes, assessments, charges or levies forthwith upon the
      commencement of proceedings to foreclose any lien which may have attached
      as security therefore.

	 	 	
      (h)
	
      Insurance.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitations, the Company will 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 the Company’s line of
      business, in amounts sufficient to prevent the Company from becoming a
      co-insurer and not in any event less than one hundred percent (100%) of
      the insurable value of the property insured; and the Company will
      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 customary for companies in similar businesses
      similarly situated and to the extent available on commercially reasonable
      terms.

	 	 	
      (i)
	
      Books
      and Records.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitations, the Company will keep true records and books
      of account in which full, true and correct entries will be made of all
      dealings or transactions in relation to its business and affairs in
      accordance with generally accepted accounting principles applied on a
      consistent basis.

	 	 	
      (j)
	
      Governmental
      Authorities.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitations, the Company shall duly observe and conform
      in all material respects to all valid requirements of governmental
      authorities relating to the conduct of its business or to its properties
      or assets.

99

	 	 	
      (k)
	
      Intellectual
      Property.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement or pursuant to Rule 144, without
      regard to volume limitations, the Company shall 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, unless
      it is sold for value.

	 	 	
      (l)
	
      Properties.
      From the date of this Agreement and until the sooner of (i) three (3)
      years after the Second Closing Date, or (ii) until all the Shares and
      Warrant Shares have been resold or transferred by all the Subscribers
      pursuant to the Registration Statement (as defined in Section 11.1(iv)
      hereof) or pursuant to Rule 144, without regard to volume limitations, the
      Company will keep its properties in good repair, working order and
      condition, reasonable wear and tear excepted, and from time to time make
      all necessary and proper repairs, renewals, replacements, additions and
      improvements thereto; and the Company will 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.

	 	 	
      (m)
	
      Confidentiality/Public
      Announcement.
      From the date of this Agreement and until the sooner of (i) two (2) years
      after the Second Closing Date, or (ii) until all the Shares and Warrant
      Shares have been resold or transferred by all the Subscribers pursuant to
      the Registration Statement or pursuant to Rule 144, without regard to
      volume limitations, the Company agrees that except in connection with a
      Form 8-K or the Registration Statement or as otherwise required in any
      other Commission filing, it will not disclose publicly or privately the
      identity of the Subscribers unless expressly agreed to in writing by a
      Subscriber, only to the extent required by law and then only upon five
      days prior notice to Subscriber. In any event and subject to the
      foregoing, the Company shall file
      a Form 8-K or make a public announcement describing the Offering not later
      than the first business day after each Closing Date. In the Form 8-K or
      public announcement, the Company will specifically disclose the amount of
      common stock outstanding immediately after the Closing. A form of the
      proposed Form 8-K or public announcement to be employed in connection with
      the Initial Closing is annexed hereto as Exhibit
      G.

	 	 	
      (n)
	
      Further
      Registration Statements.
      Except for a registration statement filed on behalf of the Subscribers
      pursuant to Section 11 of this Agreement the Company will not file any
      registration statements or amend any already filed registration statement,
      including but not limited to Form S-8, with the Commission or with state
      regulatory authorities without the consent of the Subscriber until the
      sooner of (i) the Registration Statement shall have been current and
      available for use in connection with the resale of the Registrable
      Securities (as defined in Section 11.1(i) for a period of 365 days, or
      (ii) until all the Shares and Warrant Shares have been resold or
      transferred by the Subscribers pursuant to the Registration Statement or
      Rule 144, without regard to volume limitations (“Exclusion
      Period”).
      The Exclusion Period will be tolled during the pendency of an Event of
      Default as defined in the Note. The Exclusion Period shall be extended in
      connection with any Common Stock or rights to purchase Common Stock
      controlled or owned by directly, indirectly or beneficially by Kevin W.
      Smyth, for so long as Notes or Warrants are
outstanding.

100

	 	 	
      (o)
	
      Blackout.
      The Company undertakes and covenants that until the end of the Exclusion
      Period, the Company will not enter into any acquisition, merger, exchange
      or sale or other transaction that could have the effect of delaying the
      effectiveness of any pending registration statement or causing an already
      effective registration statement to no longer be effective or current for
      a period twenty
      (20) or more days.

	 	 	
      (p)
	
      Non-Public
      Information.
      The Company covenants and agrees that neither it nor any other person
      acting on its behalf will provide any Subscriber or its agents or counsel
      with any information that the Company believes constitutes material
      non-public information, unless prior thereto such Subscriber shall have
      agreed in writing to receive such information. The Company understands and
      confirms that each Subscriber shall be relying on the foregoing
      representations in effecting transactions in securities of the
      Company.

	 	 	
      (q)
	
      Board
      Representation or Attendance by Observer.
       The
      Company agrees until such time as 90% of the amount outstanding on the
      Notes shall have been fully paid or converted that the Lead Investor shall
      have the right,
      but
      not the obligation,
      from time to time to designate in writing a nominee to serve as a member
      of the Board of Directors of the Company. The Company will nominate and
      secure the election of such designee as
      Director of the Company. During such time as Lead Investor has
      not exercised such rights, the Lead Investor shall
      have the right to designate an observer, who shall be entitled to attend
      and participate (but not vote) in all meetings of the Board of Directors
      of the Company and to receive all notices, reports, information,
      correspondence and communications sent by the Company to members of the
      Board of Directors. All reasonable costs and expenses incurred in
      connection therewith by any such designated Director or observer, or by
      Lead Investor on behalf of such Director or observer, shall be reimbursed
      by the Company to the extent that the Company reimburses such expenses
      incurred by any directors of the Company. It
      is provided and agreed that the actions and advice of any person while
      serving pursuant to this section as a Director or an observer at meetings
      of the Board of Directors shall be construed to be the actions and advice
      of that person alone and not be construed as actions of any Subscriber as
      to any notice, requirements or rights of any Subscriber under the
      Transaction Documents, nor as action of any Subscriber to approve
      modifications, consents, amendments or waivers thereof; and all such
      actions or notices shall be deemed actions or notices to the Subscribers
      only when duly provided in writing and given in accordance with the
      provisions of the Transaction Documents. 
      The relationship between the Company and the Subscribers is, and shall at
      all times remain, solely that of the Company with a purchaser of its
      securities. The Subscribers neither undertake nor assume any
      responsibility or duty to the Company or Borrower to review, inspect,
      supervise, pass judgment upon, or inform the Company or Borrower of any
      matter in connection with any phase of the Company’s business, operations,
      or condition, financial or otherwise. The Company shall rely entirely upon
      its own judgment with respect to such matters, and any review, inspection,
      supervision, exercise of judgment, or information supplied to the Company
      by the Subscribers, or any representative or agent of the Subscribers, in
      connection with any such matter is for the protection of the Subscribers,
      and neither the Company, Borrower nor any third party is entitled to rely
      thereon. It shall be deemed a default of a material obligation under the
      Notes if Company or Borrower does not comply with the requirements of this
      section.

	 	 	
      (r)
	
      Limited
      Standstill.
      The Company will deliver to the Subscribers on or before the Closing Date
      and enforce the provisions of irrevocable standstill agreements
      (“Limited
      Standstill Agreements”)
      in the forms annexed hereto as Exhibit
      H1 and H2,
      with the parties identified on Schedule
      9(r)
      hereto.

101

	 	
      10.
	
      Covenants
      of the Company and Subscriber Regarding
Indemnification.

	 	 	
      (a)
	
      The
      Company agrees to indemnify, hold harmless, reimburse and defend the
      Subscribers, the Subscribers' officers, directors, agents, Affiliates,
      control persons, and principal shareholders, against any claim, cost,
      expense, liability, obligation, loss or damage (including reasonable legal
      fees) of any nature, incurred by or imposed upon the Subscriber or any
      such person which results, arises out of or is based upon (i) any material
      misrepresentation by Company or material breach of any warranty by Company
      in this Agreement or in any Exhibits or Schedules attached hereto, or
      other agreement delivered pursuant hereto; or (ii) after any applicable
      notice and/or cure periods, any material breach or default in performance
      by the Company of any covenant or undertaking to be performed by the
      Company hereunder, or any other agreement entered into by the Company and
      Subscriber relating hereto.

	 	 	
      (b)
	
      Each
      Subscriber agrees to indemnify, hold harmless, reimburse and defend the
      Company and each of the Company’s officers, directors, agents, Affiliates,
      control persons against any claim, cost, expense, liability, obligation,
      loss or damage (including reasonable legal fees) of any nature, incurred
      by or imposed upon the Company or any such person which results, arises
      out of or is based upon (i) any material misrepresentation by such
      Subscriber in this Agreement or in any Exhibits or Schedules attached
      hereto, or other agreement delivered pursuant hereto; or (ii) after any
      applicable notice and/or cure periods, any material breach or default in
      performance by such Subscriber of any covenant or undertaking to be
      performed by such Subscriber hereunder, or any other agreement entered
      into by the Company and Subscribers, relating
hereto.

	 	 	
      (c)
	
      In
      no event shall the liability of any Subscriber or permitted successor
      hereunder or under any Transaction Document or other agreement delivered
      in connection herewith be greater in amount than the dollar amount of the
      net proceeds actually received by such Subscriber upon the sale of
      Registrable Securities (as defined herein).

	 	 	
      (d)
	
      The
      procedures set forth in Section 11.6 shall apply to the indemnification
      set forth in Sections 10(a) and 10(b)
above.

	 	
      11.1.
	
      Registration
      Rights.
      The Company hereby grants the following registration rights to holders of
      the Securities.

	 	 	
      (i)
	
      On
      one occasion, for a period commencing one hundred and twenty-one (121)
      days after the Initial Closing Date, but not later than two (2) years
      after the Second Closing Date, upon a written request therefor from any
      record holder or holders of more than 50% of the Shares issued and
      issuable upon conversion of the outstanding Notes, Fee Shares, and
      outstanding Warrant Shares, the Company shall prepare and file with the
      Commission a registration statement under the 1933 Act registering the
      Registrable Securities, as defined in Section 11.1(iv) hereof, which are
      the subject of such request for unrestricted public resale by the holder
      thereof. For purposes of Sections 11.1(i) and 11.1(ii), Registrable
      Securities shall not include Securities which are (A) registered for
      resale in an effective registration statement, (B) included for
      registration in a pending registration statement, or (C) which have been
      issued without further transfer restrictions after a sale or transfer
      pursuant to Rule 144 under the 1933 Act. Upon the receipt of such request,
      the Company shall promptly give written notice to all other record holders
      of the Registrable Securities that such registration statement is to be
      filed and shall include in such registration statement Registrable
      Securities for which it has received written requests within ten (10) days
      after the Company gives such written notice. Such other requesting record
      holders shall be deemed to have exercised their demand registration right
      under this Section 11.1(i).

102

	 	 	
      (ii)
	
      If
      the Company at any time proposes to register any of its securities under
      the 1933 Act for sale to the public, whether for its own account or for
      the account of other security holders or both, except with respect to
      registration statements on Forms S-4, S-8 or another form not available
      for registering the Registrable Securities for sale to the public,
      provided the Registrable Securities are not otherwise registered for
      resale by the Subscribers or Holder pursuant to an effective registration
      statement, each such time it will give at least fifteen (15) days' prior
      written notice to the record holder of the Registrable Securities of its
      intention so to do. Upon the written request of the holder, received by
      the Company within ten (10) days after the giving of any such notice by
      the Company, to register any of the Registrable Securities not previously
      registered, the Company will cause such Registrable Securities as to which
      registration shall have been so requested to be included with the
      securities to be covered by the registration statement proposed to be
      filed by the Company, all to the extent required to permit the sale or
      other disposition of the Registrable Securities so registered by the
      holder of such Registrable Securities (the “Seller”
      or “Sellers”).
      In the event that any registration pursuant to this Section 11.1(ii) shall
      be, in whole or in part, an underwritten public offering of common stock
      of the Company, the number of shares of Registrable Securities to be
      included in such an underwriting may be reduced by the managing
      underwriter if and to the extent that the Company and the underwriter
      shall reasonably be of the opinion that such inclusion would adversely
      affect the marketing of the securities to be sold by the Company therein;
      provided, however, that the Company shall notify the Seller in writing of
      any such reduction. Notwithstanding the foregoing provisions, or Section
      11.4 hereof, the Company may withdraw or delay or suffer a delay of any
      registration statement referred to in this Section 11.1(ii) without
      thereby incurring any liability to the
Seller.

	 	 	
      (iii)
	
      If,
      at the time any written request for registration is received by the
      Company pursuant to Section 11.1(i), the Company has determined to proceed
      with the actual preparation and filing of a registration statement under
      the 1933 Act in connection with the proposed offer and sale for cash of
      any of its securities for the Company's own account and the Company
      actually does file such other registration statement, such written request
      shall be deemed to have been given pursuant to Section 11.1(ii) rather
      than Section 11.1(i), and the rights of the holders of Registrable
      Securities covered by such written request shall be governed by Section
      11.1(ii).

	 	 	
      (iv)
	
      The
      Company shall file with the Commission a Form SB-2 registration statement
      (the “Registration
      Statement”)
      (or such other form that it is eligible to use) in order to register the
      Registrable Securities for resale and distribution under the 1933 Act not
      later than
      thirty (30) business days after the Initial Closing Date (the
      “Filing
      Date”),
      and cause to be declared effective not
      later than one hundred and twenty (120) calendar days after the Closing
      Date (the
      “Effective
      Date”).
      The Company will register not less than a number of shares of common stock
      in the aforedescribed registration statement that is equal to 175%
      of the Shares issuable upon conversion of all of the Notes issuable to the
      Subscribers, 100% of the Warrant Shares issuable pursuant to this
      Agreement upon exercise of the Class A Warrants, Class B Warrants, and Fee
      Shares (collectively the “Registrable
      Securities”).
      The Registrable Securities shall be reserved and set aside exclusively for
      the benefit of each Subscriber and Warrant holder, pro rata,
      and not issued, employed or reserved for anyone other than each such
      Subscriber and Warrant holder. The Registration Statement will immediately
      be amended or additional registration statements will be immediately filed
      by the Company as necessary to register additional shares of Common Stock
      to allow the public resale of all Common Stock included in and issuable by
      virtue of the Registrable Securities. Except with the written consent of
      the Subscriber, or as described on Schedule 8 hereto, no securities of the
      Company other than the Registrable Securities will be included in the
      Registration Statement. It shall be deemed a Non-Registration Event if at
      any time after the date the Registration Statement is declared effective
      by the Commission (“Actual
      Effective Date”)
      the Company has registered for unrestricted resale on behalf of the
      Sellers fewer than 150%
      of the amount of Common Shares issuable upon full conversion of all sums
      due under the Notes and 100% of the Fee Shares and Warrant Shares issuable
      upon exercise of the Warrants.

103

	 	
      11.2.
	
      Registration
      Procedures.
      If and whenever the Company is required by the provisions of Section
      11.1(i), 11.1(ii), or (iv) to effect the registration of any Registrable
      Securities under the 1933 Act, the Company will, as expeditiously as
      possible: 

	 	 	
      (a)
	
      subject
      to the timelines provided in this Agreement, prepare and file with the
      Commission a registration statement required by Section 11, with respect
      to such securities and use its best efforts to cause such registration
      statement to become and remain effective for the period of the
      distribution contemplated thereby (determined as herein provided),
      promptly provide to the holders of the Registrable Securities copies of
      all filings and Commission letters of comment and notify Subscribers (by
      telecopier and by e-mail addresses provided by Subscribers) and Grushko
      & Mittman, P.C. (by telecopier and by email to Counslers@aol.com)
      on or before 6:00 PM EST on the first business day that the Company
      receives notice that (i) the Commission has no comments or no further
      comments on the Registration Statement, and (ii) the registration
      statement has been declared effective (failure to timely provide notice as
      required by this Section 11.2(a) shall be a material breach of the
      Company’s obligation and an Event of Default as defined in the
      Notes
      and a Non-Registration Event as defined in Section 10.4 of this
      Agreement); 

	 	 	
      (b)
	
      prepare
      and file with the Commission such amendments and supplements to such
      registration statement and the prospectus used in connection therewith as
      may be necessary to keep such registration statement effective until such
      registration statement has been effective for a period of two (2) years,
      and comply with the provisions of the 1933 Act with respect to the
      disposition of all of the Registrable Securities covered by such
      registration statement in accordance with the Sellers’ intended method of
      disposition set forth in such registration statement for such period;
      

	 	 	
      (c)
	
      furnish
      to the Sellers, at the Company’s expense, such number of copies of the
      registration statement and the prospectus included therein (including each
      preliminary prospectus) as such persons reasonably may request in order to
      facilitate the public sale or their disposition of the securities covered
      by such registration statement or make them electronically available;
      

	 	 	
      (d)
	
      use
      its commercially
      reasonable best
      efforts to register or qualify the Registrable Securities covered by such
      registration statement under the securities or “blue sky” laws of New York
      and such jurisdictions as the Sellers shall request in writing, provided,
      however, that the Company shall not for any such purpose be required to
      qualify generally to transact business as a foreign corporation in any
      jurisdiction where it is not so qualified or to consent to general service
      of process in any such jurisdiction; 

	 	 	
      (e)
	
      if
      applicable, list the Registrable Securities covered by such registration
      statement with any securities exchange on which the Common Stock of the
      Company is then listed; 

	 	 	
      (f)
	
      notify
      the Subscribers within two hours of the Company’s becoming aware that a
      prospectus relating thereto is required to be delivered under the 1933
      Act, of the happening of any event of which the Company has knowledge as a
      result of which the prospectus contained in such registration statement,
      as then in effect, includes an untrue statement of a material fact or
      omits to state a material fact required to be stated therein or necessary
      to make the statements therein not misleading in light of the
      circumstances then existing or which becomes subject to a Commission,
      state or other governmental order suspending the effectiveness of the
      registration statement covering any of the Shares;
and

104

	 	 	
      (g)
	
      provided
      same would not be in violation of the provision of Regulation FD under the
      1934 Act, make available for inspection by the Sellers, and any attorney,
      accountant or other agent retained by the Seller or underwriter, all
      publicly available, non-confidential financial and other records,
      pertinent corporate documents and properties of the Company, and cause the
      Company's officers, directors and employees to supply all publicly
      available, non-confidential information reasonably requested by the
      seller, attorney, accountant or agent in connection with such registration
      statement. 

	 	
      11.3.
	
      Provision
      of Documents.
      In connection with each registration described in this Section 11, each
      Seller will furnish to the Company in writing such information and
      representation letters with respect to itself and the proposed
      distribution by it as reasonably shall be necessary in order to assure
      compliance with federal and applicable state securities laws.
    

	 	
      11.4.
	
      Non-Registration
      Events.
      The Company and the Subscribers agree that the Sellers will suffer damages
      if the Registration Statement is not filed by the Filing Date and not
      declared effective by the Commission by the Effective Date, and any
      registration statement required under Section 11.1(i) or 11.1(ii) is not
      filed within 60 days after written request and declared effective by the
      Commission within 120 days after such request, and maintained in the
      manner and within the time periods contemplated by Section 11 hereof, and
      it would not be feasible to ascertain the extent of such damages with
      precision. Accordingly, if (A) the Registration Statement is not filed on
      or before the Filing Date, (B) is not declared effective on or before the
      Effective Date, (C) due to the action or inaction of the Company, the
      Registration Statement is not declared effective within five (5) business
      days after receipt by the Company or its attorneys of a written or oral
      communication from the Commission that the Registration Statement will not
      be reviewed or that the Commission has no further comments, (D) if the
      registration statement described in Sections 11.1(i) or 11.1(ii) is not
      filed within 60 days after such written request, or is not declared
      effective within 120 days after such written request, or (E) any
      registration statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv)
      is filed and declared effective but shall thereafter cease to be effective
      (without being succeeded within fifteen (15) business days by an effective
      replacement or amended registration statement) for a period of time which
      shall exceed 30 days in the aggregate per year (defined as a period of 365
      days commencing on the date the Registration Statement is declared
      effective) or more than 20 consecutive days (each such event referred to
      in clauses A through E of this Section 11.4 is referred to herein as a
      "Non-Registration Event"), then the Company shall deliver to the holder of
      Registrable Securities, as Liquidated Damages, an amount equal to two
      percent (2%) for each thirty (30) days or part thereof, thereafter of the
      Purchase Price of the Notes remaining unconverted and purchase price of
      Shares issued upon conversion of the Notes owned of record by such holder
      which are subject to such Non-Registration Event. The Company must pay the
      Liquidated Damages in cash or an amount equal to two hundred percent of
      such cash Liquidated Damages if paid in additional shares of registered
      unlegended free-trading shares of Common Stock. Such Common Stock shall be
      valued at the Conversion Price in effect on the first day of each thirty
      (30) day or shorter period for which Liquidated Damages are payable. The
      Liquidated Damages must be paid within ten (10) days after the end of each
      thirty (30) day period or shorter part thereof for which Liquidated
      Damages are payable. In the event a Registration Statement is filed by the
      Filing Date but is withdrawn prior to being declared effective by the
      Commission, then such Registration Statement will be deemed to have not
      been filed. All
      oral or written comments received from the Commission relating to the
      Registration Statement must be satisfactorily responded to within
      ten (10) business days after receipt of comments from the Commission.
      Failure to
      timely respond to Commission comments is a Non-Registration Event for
      which Liquidated Damages shall accrue and be payable by the Company to the
      holders of Registrable Securities at the same rate set forth above.
      Notwithstanding the foregoing, the Company shall not be liable to the
      Subscriber under this Section 11.4 for any events or delays occurring as a
      consequence of the acts or omissions of the Subscribers contrary to the
      obligations undertaken by Subscribers in this Agreement or if the federal
      government or the Commission is closed on any day which is otherwise a
      business day (i.e.: government shut down for budgetary reasons) or other
      acts of G-d. Liquidated Damages will not accrue nor be payable pursuant to
      this Section 11.4 nor will a Non-Registration Event be deemed to have
      occurred for times during which Registrable Securities are transferable by
      the holder of Registrable Securities pursuant to Rule 144(k) under the
      1933 Act.

105

	 	
      11.5.
	
      Expenses.
      All expenses incurred by the Company in complying with Section 11,
      including, without limitation, all registration and filing fees, printing
      expenses (if required), fees and disbursements of counsel and independent
      public accountants for the Company, fees and expenses (including
      reasonable counsel fees) incurred in connection with complying with state
      securities or “blue sky” laws, fees of the National Association of
      Securities Dealers, Inc., transfer taxes, and fees of transfer agents and
      registrars, are called “Registration
      Expenses.”
      All underwriting discounts and selling commissions applicable to the sale
      of Registrable Securities are called "Selling
      Expenses."
      The Company will pay all Registration Expenses in connection with the
      registration statement under Section 11. Selling Expenses in connection
      with each registration statement under Section 11 shall be borne by the
      Seller and may be apportioned among the Sellers in proportion to the
      number of shares sold by the Seller relative to the number of shares sold
      under such registration statement or as all Sellers thereunder may
      agree.

	 	
      11.6.
	
      Indemnification
      and Contribution.

	 	 	
      (a)
	
      In
      the event of a registration of any Registrable Securities under the 1933
      Act pursuant to Section 11, the Company will, to the extent permitted by
      law, indemnify and hold harmless the Seller, each officer of the Seller,
      each director of the Seller, each underwriter of such Registrable
      Securities thereunder and each other person, if any, who controls such
      Seller or underwriter within the meaning of the 1933 Act, against any
      losses, claims, damages or liabilities, joint or several, to which the
      Seller, or such underwriter or controlling person may become subject under
      the 1933 Act or otherwise, insofar as such losses, claims, damages or
      liabilities (or actions in respect thereof) arise out of or are based upon
      any untrue statement or alleged untrue statement of any material fact
      contained in any registration statement under which such Registrable
      Securities was registered under the 1933 Act pursuant to Section 11, any
      preliminary prospectus or final prospectus contained therein, or any
      amendment or supplement thereof, or arise out of or are based upon the
      omission or alleged omission to state therein a material fact required to
      be stated therein or necessary to make the statements therein not
      misleading in light of the circumstances when made, and will subject to
      the provisions of Section 11.6(c) reimburse the Seller, each such
      underwriter and each such controlling person for any legal or other
      expenses reasonably incurred by them in connection with investigating or
      defending any such loss, claim, damage, liability or action; provided,
      however, that the Company shall not be liable to the Seller to the extent
      that any such damages arise out of or are based upon an untrue statement
      or omission made in any preliminary prospectus if (i) the Seller failed to
      send or deliver a copy of the final prospectus delivered by the Company to
      the Seller with or prior to the delivery of written confirmation of the
      sale by the Seller to the person asserting the claim from which such
      damages arise, (ii) the final prospectus would have corrected such untrue
      statement or alleged untrue statement or such omission or alleged
      omission, or (iii) to the extent that any such loss, claim, damage or
      liability arises out of or is based upon an untrue statement or alleged
      untrue statement or omission or alleged omission so made in conformity
      with information furnished by any such Seller, or any such controlling
      person in writing specifically for use in such registration statement or
      prospectus. 

106

	 	 	
      (b)
	
      In
      the event of a registration of any of the Registrable Securities under the
      1933 Act pursuant to Section 11, each Seller severally but not jointly
      will, to the extent permitted by law, indemnify and hold harmless the
      Company, and each person, if any, who controls the Company within the
      meaning of the 1933 Act, each officer of the Company who signs the
      registration statement, each director of the Company, each underwriter and
      each person who controls any underwriter within the meaning of the 1933
      Act, against all losses, claims, damages or liabilities, joint or several,
      to which the Company or such officer, director, underwriter or controlling
      person may become subject under the 1933 Act or otherwise, insofar as such
      losses, claims, damages or liabilities (or actions in respect thereof)
      arise out of or are based upon any untrue statement or alleged untrue
      statement of any material fact contained in the registration statement
      under which such Registrable Securities were registered under the 1933 Act
      pursuant to Section 11, any preliminary prospectus or final prospectus
      contained therein, or any amendment or supplement thereof, or arise out of
      or are based upon the omission or alleged omission to state therein a
      material fact required to be stated therein or necessary to make the
      statements therein not misleading, and will reimburse the Company and each
      such officer, director, underwriter and controlling person for any legal
      or other expenses reasonably incurred by them in connection with
      investigating or defending any such loss, claim, damage, liability or
      action, provided, however, that the Seller will be liable hereunder in any
      such case if and only to the extent that any such loss, claim, damage or
      liability arises out of or is based upon an untrue statement or alleged
      untrue statement or omission or alleged omission made in reliance upon and
      in conformity with information pertaining to such Seller, as such,
      furnished in writing to the Company by such Seller specifically for use in
      such registration statement or prospectus, and provided, further, however,
      that the liability of the Seller hereunder shall be limited to the net
      proceeds actually received by the Seller from the sale of Registrable
      Securities covered by such registration
statement.

	 	 	
      (c)
	
      Promptly
      after receipt by an indemnified party hereunder of notice of the
      commencement of any action, such indemnified party shall, if a claim in
      respect thereof is to be made against the indemnifying party hereunder,
      notify the indemnifying party in writing thereof, but the omission so to
      notify the indemnifying party shall not relieve it from any liability
      which it may have to such indemnified party other than under this Section
      11.6(c) and shall only relieve it from any liability which it may have to
      such indemnified party under this Section 11.6(c), except and only if and
      to the extent the indemnifying party is prejudiced by such omission. In
      case any such action shall be brought against any indemnified party and it
      shall notify the indemnifying party of the commencement thereof, the
      indemnifying party shall be entitled to participate in and, to the extent
      it shall wish, to assume and undertake the defense thereof with counsel
      satisfactory to such indemnified party, and, after notice from the
      indemnifying party to such indemnified party of its election so to assume
      and undertake the defense thereof, the indemnifying party shall not be
      liable to such indemnified party under this Section 11.6(c) for any legal
      expenses subsequently incurred by such indemnified party in connection
      with the defense thereof other than reasonable costs of investigation and
      of liaison with counsel so selected, provided, however, that, if the
      defendants in any such action include both the indemnified party and the
      indemnifying party and the indemnified party shall have reasonably
      concluded that there may be reasonable defenses available to it which are
      different from or additional to those available to the indemnifying party
      or if the interests of the indemnified party reasonably may be deemed to
      conflict with the interests of the indemnifying party, the indemnified
      parties, as a group, shall have the right to select one separate counsel
      and to assume such legal defenses and otherwise to participate in the
      defense of such action, with the reasonable expenses and fees of such
      separate counsel and other expenses related to such participation to be
      reimbursed by the indemnifying party as
incurred.

107

	 	 	
      (d)
	
      In
      order to provide for just and equitable contribution in the event of joint
      liability under the 1933 Act in any case in which either (i) a Seller, or
      any controlling person of a Seller, makes a claim for indemnification
      pursuant to this Section 11.6 but it is judicially determined (by the
      entry of a final judgment or decree by a court of competent jurisdiction
      and the expiration of time to appeal or the denial of the last right of
      appeal) that such indemnification may not be enforced in such case
      notwithstanding the fact that this Section 11.6 provides for
      indemnification in such case, or (ii) contribution under the 1933 Act may
      be required on the part of the Seller or controlling person of the Seller
      in circumstances for which indemnification is not provided under this
      Section 11.6; then, and in each such case, the Company and the Seller will
      contribute to the aggregate losses, claims, damages or liabilities to
      which they may be subject (after contribution from others) in such
      proportion so that the Seller is responsible only for the portion
      represented by the percentage that the public offering price of its
      securities offered by the registration statement bears to the public
      offering price of all securities offered by such registration statement,
      provided, however, that, in any such case, (y) the Seller will not be
      required to contribute any amount in excess of the public offering price
      of all such securities sold by it pursuant to such registration statement;
      and (z) no person or entity guilty of fraudulent misrepresentation (within
      the meaning of Section 11(f) of the 1933 Act) will be entitled to
      contribution from any person or entity who was not guilty of such
      fraudulent misrepresentation.

	 	
      11.7.
	
      Delivery
      of Unlegended Shares.

	 	 	
      (a)
	
      Within
      three (3) business days (such third business day being the “Unlegended
      Shares Delivery Date”)
      after the business day on which the Company has received (i) a notice that
      Shares or Warrant Shares or any other Common Stock held by a Subscriber
      have been sold pursuant to the Registration Statement or Rule 144 under
      the 1933 Act, (ii) a representation that the prospectus delivery
      requirements, or the requirements of Rule 144, as applicable and if
      required, have been satisfied, and (iii) the original share certificates
      representing the shares of Common Stock that have been sold, and (iv) in
      the case of sales under Rule 144, customary representation letters of the
      Subscriber and/or Subscriber’s broker regarding compliance with the
      requirements of Rule 144, the Company at its expense, (y) shall deliver,
      and shall cause legal counsel selected by the Company to deliver to its
      transfer agent (with copies to Subscriber) an appropriate instruction and
      opinion of such counsel, directing the delivery of shares of Common Stock
      without any legends including the legend set forth in Section
      4(h)
      above, reissuable pursuant to any effective and current Registration
      Statement described in Section 11 of this Agreement or pursuant to Rule
      144 under the 1933 Act (the “Unlegended
      Shares”);
      and (z) cause the transmission of the certificates representing the
      Unlegended Shares together with a legended certificate representing the
      balance of the submitted Shares certificate, if any, to the Subscriber at
      the address specified in the notice of sale, via express courier, by
      electronic transfer or otherwise on or before the Unlegended Shares
      Delivery Date. Transfer fees shall be the responsibility of the
      Seller.

	 	 	
      (b)
	
      In
      lieu of delivering physical certificates representing the Unlegended
      Shares, if the Company’s transfer agent is participating in the Depository
      Trust Company (“DTC”)
      Fast Automated Securities Transfer program, upon request of a Subscriber,
      so long as the certificates therefor do not bear a legend and the
      Subscriber is not obligated to return such certificate for the placement
      of a legend thereon, the Company shall cause its transfer agent to
      electronically transmit the Unlegended Shares by crediting the account of
      Subscriber’s prime Broker with DTC through its Deposit Withdrawal Agent
      Commission system. Such delivery must be made on or before the Unlegended
      Shares Delivery Date.

108

	 	 	
      (c)
	
      The
      Company understands that a delay in the delivery of the Unlegended Shares
      pursuant to Section 11 hereof later than two business days after the
      Unlegended Shares Delivery Date could result in economic loss to a
      Subscriber. As compensation to a Subscriber for such loss, the Company
      agrees to pay late payment fees (as liquidated damages and not as a
      penalty) to the Subscriber for late delivery of Unlegended Shares in the
      amount of $100 per business day after the Delivery Date for each $10,000
      of purchase price of the Unlegended Shares subject to the delivery
      default. If during any 360 day period, the Company fails to deliver
      Unlegended Shares as required by this Section 11.7 for an aggregate of
      thirty (30) days, then each Subscriber or assignee holding Securities
      subject to such default may, at its option, require the Company to redeem
      all or any portion of the Shares and Warrant Shares subject to such
      default at a price per share equal to 120% of the Purchase Price of such
      Common Stock and Warrant Shares (“Unlegended
      Redemption Amount”).
      The amount of the aforedescribed liquidated damages that have accrued or
      been paid for the twenty day period prior to the receipt by the Subscriber
      of the Unlegended Redemption Amount shall be credited against the
      Unlegended Redemption Amount. The Company shall pay any payments incurred
      under this Section in immediately available funds upon
    demand.

	 	 	
      (d)
	
      In
      addition to any other rights available to a Subscriber, if the Company
      fails to deliver to a Subscriber Unlegended Shares as required pursuant to
      this Agreement, within seven (7) business days after the Unlegended Shares
      Delivery Date and the Subscriber purchases (in an open market transaction
      or otherwise) shares of common stock to deliver in satisfaction of a sale
      by such Subscriber of the shares of Common Stock which the Subscriber was
      entitled to receive from the Company (a "Buy-In"),
      then the Company shall pay in cash to the Subscriber (in addition to any
      remedies available to or elected by the Subscriber) the amount by which
      (A) the Subscriber's total purchase price (including brokerage
      commissions, if any) for the shares of common stock so purchased exceeds
      (B) the aggregate purchase price of the shares of Common Stock delivered
      to the Company for reissuance as Unlegended Shares  together
      with interest thereon at a rate of 15% per annum, accruing until such
      amount and any accrued interest thereon is paid in full (which amount
      shall be paid as liquidated damages and not as a penalty). For
      example, if a Subscriber purchases shares of Common Stock having a total
      purchase price of $11,000 to cover a Buy-In with respect to $10,000 of
      purchase price of shares of Common Stock delivered to the Company for
      reissuance as Unlegended Shares, the Company shall be required to pay the
      Subscriber $1,000,
      plus interest. The
      Subscriber shall provide the Company written notice indicating the amounts
      payable to the Subscriber in respect of the
Buy-In.

	 	 	
      (e)
	
      In
      the event a Subscriber shall request delivery of Unlegended Shares as
      described in Section 11.7 and the Company is required to deliver such
      Unlegended Shares pursuant to Section 11.7, the Company may not refuse to
      deliver Unlegended Shares based on any claim that such Subscriber or any
      one associated or affiliated with such Subscriber has been engaged in any
      violation of law, or for any other reason, unless, an injunction or
      temporary restraining order from a court, on notice, restraining and or
      enjoining delivery of such Unlegended Shares or exercise of all or part of
      said Warrant shall have been sought and obtained
      and the Company has posted a surety bond for the benefit of such
      Subscriber in the amount of 120% of the amount of the aggregate purchase
      price of the Common Stock and Warrant Shares which are subject to the
      injunction or temporary restraining order, which bond shall remain in
      effect until the completion of arbitration/litigation of the dispute and
      the proceeds of which shall be payable to such Subscriber to the extent
      Subscriber obtains judgment in Subscriber’s
favor.

109

	 	
      12.
	
      (a)
	
      Right
      of First Refusal.
      Unti0l the expiration of the 364th day after the Effective Date, the
      Subscribers shall be given not less than seven (7) business days prior
      written notice of any proposed sale by the Company of its common stock or
      other securities or debt obligations, except in connection with (i) full
      or partial consideration in connection with a strategic merger,
      acquisition, consolidation or purchase of substantially all of the
      securities or assets of corporation or other entity, (ii)
      the
      Company’s issuance of securities in connection with strategic license
      agreements and other partnering arrangements so long as such issuances are
      not for the purpose of raising capital, (iii) the Company’s issuance of
      Common Stock or the issuances or grants of options to purchase Common
      Stock pursuant to stock option plans and employee stock purchase plans,
      (iv) as a result of the exercise of Warrants or conversion of Notes which
      are granted or issued pursuant to this Agreement, (v) the payment of any
      interest on the Notes and Liquidated Damages, (vi) as
      has been described in the Reports or Other Written Information filed with
      the Commission or delivered to the Subscribers prior to the Initial
      Closing Date, (vii) strategic investors, subject to the reasonable
      approval of the Lead Investor, and (viii) up to $500,000 of additional
      Note principal and Warrants to a single Subscriber on the same terms and
      conditions as the Offering, subject to the reasonable approval of the Lead
      Investor, which subscription must be completed prior to the Filing Date
      (collectively the foregoing are “Excepted
      Issuances”).
      The aggregate issuances of Common Stock and rights to purchase Common
      Stock shall not exceed 5,000,000 shares of Common Stock per year in the
      aggregate for all issuances described in Sections (i), (ii), (iii), and
      (vii) above, which issuances may not include any registration rights at
      all and which the Company agrees it will not register for resale.
      The
      Subscribers who exercise their rights pursuant to this Section 12(a) shall
      have the right during the seven (7) business days following receipt of the
      notice to purchase such offered common stock, debt or other securities in
      accordance with the terms and conditions set forth in the notice of sale
      in the same proportion to each other as their purchase of Notes in the
      Offering. In the event such terms and conditions are modified during the
      notice period, the Subscribers shall be given prompt notice of such
      modification and shall have the right during the seven (7) business days
      following the notice of modification, whichever is longer, to exercise
      such right. 

	 	 	
      (b)
	
      Offering
      Restrictions.
      Until the expiration of the Exclusion Period and during the pendency of an
      Event of Default, except for the Excepted Issuances, the Company will not
      enter into an agreement to nor issue any equity, convertible debt or other
      securities convertible into common stock or equity of the Company nor
      modify any of the foregoing which may be outstanding at anytime, without
      the prior written consent of the Subscriber, which consent may be withheld
      for any reason. For so long as the Notes are outstanding, the Company will
      not enter into any equity line of credit or similar agreement, nor issue
      or agree to issue any floating or variable priced equity linked
      instruments nor any of the foregoing or equity with price reset rights.
      

110

	 	 	
      (c)
	
      Favored
      Nations Provision.
      Other than the Excepted Issuances, if at any time Notes or Warrants are
      outstanding the Company shall offer, issue or agree to issue any common
      stock or securities convertible into or exercisable for shares of common
      stock (or modify any of the foregoing which may be outstanding) to any
      person or entity at a price per share or conversion or exercise price per
      share which shall be less than the Conversion Price in respect of the
      Shares, or if less than the Warrant exercise price in respect of the
      Warrant Shares, without the consent of each Subscriber holding Notes,
      Shares, Warrants, or Warrant Shares, then the Company shall issue, for
      each such occasion, additional shares of Common Stock to each Subscriber
      so that the average per share purchase price of the shares of Common Stock
      issued to the Subscriber (of only the Common Stock or Warrant Shares still
      owned by the Subscriber) is equal to such other lower price per share and
      the Conversion Price and Warrant exercise price shall automatically be
      adjusted as provided in the Notes and the Warrants. The average Purchase
      Price of the Shares and average exercise price in relation to the Warrant
      Shares shall be calculated separately for the Shares and Warrant Shares.
      The foregoing calculation and issuance shall be made separately for Shares
      received upon conversion and separately for Warrant Shares. The delivery
      to the Subscriber of the additional shares of Common Stock shall be not
      later than the closing date of the transaction giving rise to the
      requirement to issue additional shares of Common Stock. The Subscriber is
      granted the registration rights described in Section 11 hereof in relation
      to such additional shares of Common Stock except that the Filing Date and
      Effective Date vis-à-vis such additional common shares shall be,
      respectively, the thirtieth (30th)
      and sixtieth (60th)
      date after the closing date giving rise to the requirement to issue the
      additional shares of Common Stock. For purposes of the issuance and
      adjustment described in this paragraph, the issuance of any security of
      the Company carrying the right to convert such security into shares of
      Common Stock or of any warrant, right or option to purchase Common Stock
      shall result in the issuance of the additional shares of Common Stock upon
      the sooner of the agreement to or actual issuance of such convertible
      security, warrant, right or option and again at any time upon any
      subsequent issuances of shares of Common Stock upon exercise of such
      conversion or purchase rights if such issuance is at a price lower than
      the Conversion Price or Warrant exercise price in effect upon such
      issuance. The rights of the Subscriber set forth in this Section 12 are in
      addition to any other rights the Subscriber has pursuant to this
      Agreement, the Note, any Transaction Document, and any other agreement
      referred to or entered into in connection herewith.

	 	 	
      (d)
	
      Paid
      In Kind.
      The Subscriber may demand that some or all of the sums payable to the
      Subscriber pursuant to Sections 7.1(c), 7.2, 7.5, 11.7(c), 11.7(d) and
      11.7(e) that are not paid within ten business days of the required payment
      date be paid in shares of Common Stock valued at the Conversion Price in
      effect at the time Subscriber makes such demand or, at the Subscriber’s
      election, at such other valuation described in the Transaction Documents.
      In addition to any other rights granted to the Subscriber herein, the
      Subscriber is also granted the registration rights set forth in Section
      11.1(ii) hereof in relation to such shares of Common Stock and the Common
      Stock issuable as Liquidated Damages pursuant to Section 11.4
      hereof.

111

	 	 	
      (e)
	
      Maximum
      Exercise of Rights.
      In the event the exercise of the rights described in Sections 12(a), 12(c)
      and 12(d) would
      result in the issuance of an amount of common stock of the Company that
      would exceed the maximum amount that may be issued to a Subscriber
      calculated in the manner described in Section 7.3 of this Agreement, then
      the issuance of such additional shares of common stock of the Company to
      such Subscriber will be deferred in whole or in part until such time as
      such Subscriber is able to beneficially own such common stock without
      exceeding the maximum amount set forth calculated in the manner described
      in Section 7.3 of this Agreement. The determination of when such common
      stock may be issued shall be made by each Subscriber as to only such
      Subscriber.

	 	
      13.
	
      Miscellaneous.

	 	 	
      (a)
	
      Notices.
      All notices, demands, requests, consents, approvals, and other
      communications required or permitted hereunder shall be in writing and,
      unless otherwise specified herein, shall be (i) personally served, (ii)
      deposited in the mail, registered or certified, return receipt requested,
      postage prepaid, (iii) delivered by reputable air courier service with
      charges prepaid, or (iv) transmitted by hand delivery, telegram, or
      facsimile, addressed as set forth below or to such other address as such
      party shall have specified most recently by written notice. Any notice or
      other communication required or permitted to be given hereunder shall be
      deemed effective (a) upon hand delivery or delivery by facsimile, with
      accurate confirmation generated by the transmitting facsimile machine, at
      the address or number designated below (if delivered on a business day
      during normal business hours where such notice is to be received), or the
      first business day following such delivery (if delivered other than on a
      business day during normal business hours where such notice is to be
      received) or (b) on the second business day following the date of mailing
      by express courier service, fully prepaid, addressed to such address, or
      upon actual receipt of such mailing, whichever shall first occur. The
      addresses for such communications shall be: (i) if to the Company, to:
      Energy
      & Engine Technology Corporation, 5308 West Plano Parkway, Plano, TX
      75093, Attn: Jolie G. Kahn, Esq., telecopier number: (972) 732-6440, and
      (ii) if to the Subscribers, to: the
      one or more addresses and telecopier numbers indicated on the signature
      pages hereto, with an additional copy by telecopier only to: Grushko &
      Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176,
      telecopier number: (212) 697-3575.

	 	 	
      (b)
	
      Entire
      Agreement; Assignment.
      This Agreement and other documents delivered in connection herewith
      represent the entire agreement between the parties hereto with respect to
      the subject matter hereof and may be amended only by a writing executed by
      both parties. Neither the Company nor the Subscribers have relied on any
      representations not contained or referred to in this Agreement and the
      documents delivered herewith. No right or obligation of the Company shall
      be assigned without prior notice to and the written consent of the
      Subscribers. 

	 	 	
      (c)
	
      Counterparts/Execution.
      This Agreement may be executed in any number of counterparts and by the
      different signatories hereto on separate counterparts, each of which, when
      so executed, shall be deemed an original, but all such counterparts shall
      constitute but one and the same instrument. This Agreement may be executed
      by facsimile signature and delivered by facsimile
      transmission.

112

	 	 	
      (d)
	
      Law
      Governing this Agreement.
      This Agreement shall be governed by and construed in accordance with the
      laws of the State of New York without regard to conflicts
      of laws principles
      that would result in the application of the substantive laws of another
      jurisdiction. Any action brought by either party against the other
      concerning the transactions contemplated by this Agreement shall be
      brought only in the civil or state courts of New York or in the federal
      courts located in New York County. The
      parties and the individuals executing this Agreement and other agreements
      referred to herein or delivered in connection herewith on behalf of the
      Company agree to submit to the jurisdiction of such courts and waive trial
      by jury.
      The prevailing party shall be entitled to recover from the other party its
      reasonable attorney's fees and costs. In the event that any provision of
      this Agreement or any other agreement delivered in connection herewith 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 any
agreement.

	 	 	
      (e)
	
      Specific
      Enforcement, Consent to Jurisdiction.
      The Company and Subscriber acknowledge and agree that irreparable damage
      would occur in the event that any of the provisions of this Agreement were
      not performed in accordance with their specific terms or were otherwise
      breached. It is accordingly agreed that the parties shall be entitled to
      one or more preliminary and final injunctions to prevent or cure breaches
      of the provisions of this Agreement and to enforce specifically the terms
      and provisions hereof, this being in addition to any other remedy to which
      any of them may be entitled by law or equity. Subject to Section 13(d)
      hereof, each of the Company, Subscriber and any signator hereto in his
      personal capacity hereby waives, and agrees not to assert in any such
      suit, action or proceeding, any claim that it is not personally subject to
      the jurisdiction in New York of such court, that the suit, action or
      proceeding is brought in an inconvenient forum or that the venue of the
      suit, action or proceeding is improper. Nothing in this Section shall
      affect or limit any right to serve process in any other manner permitted
      by law.

113

	 	 	
      (f)
	
      Independent
      Nature of Subscribers.  
        The
      Company acknowledges that the obligations of each Subscriber under the
      Transaction Documents are several and not joint with the obligations of
      any other Subscriber, and no Subscriber shall be responsible in any way
      for the performance of the obligations of any other Subscriber under the
      Transaction Documents. The
      Company acknowledges that each Subscriber has represented that the
      decision of each Subscriber to purchase Securities has been made by such
      Subscriber independently of any other Subscriber and independently of any
      information, materials, statements or opinions as to the business,
      affairs, operations, assets, properties, liabilities, results of
      operations, condition (financial or otherwise) or prospects of the Company
      which may have been made or given by any other Subscriber or by any agent
      or employee of any other Subscriber, and no Subscriber or any of its
      agents or employees shall have any liability to any Subscriber (or any
      other person) relating to or arising from any such information, materials,
      statements or opinions.  The
      Company acknowledges that nothing contained in any Transaction Document,
      and no action taken by any Subscriber pursuant hereto or thereto
      (including, but not limited to, the (i) inclusion of a Subscriber in the
      Registration Statement and (ii) review by, and consent to, such
      Registration Statement by a Subscriber) shall be deemed to constitute the
      Subscribers as a partnership, an association, a joint venture or any other
      kind of entity, or create a presumption that the Subscribers are in any
      way acting in concert or as a group with respect to such obligations or
      the transactions contemplated by the Transaction Documents.  The
      Company acknowledges that each Subscriber shall be entitled to
      independently protect and enforce its rights, including without
      limitation, the rights arising out of the Transaction Documents,
      and it shall not be necessary for any other Subscriber to be joined as an
      additional party in any proceeding for such purpose.  The Company
      acknowledges that it has elected to provide all Subscribers with the same
      terms and Transaction Documents for the convenience of the Company and not
      because Company was required or requested to do so by the
      Subscribers.  The Company acknowledges that such procedure with
      respect to the Transaction Documents in no way creates a presumption that
      the Subscribers are in any way acting in concert or as a group with
      respect to the Transaction Documents or the transactions
      contemplated thereby.

114

SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (A) (MULTIPLE)

Please
acknowledge your acceptance of the foregoing Subscription Agreement by signing
and returning a copy to the undersigned whereupon it shall become a binding
agreement between us.

	 	
      ENERGY
      & ENGINE TECHNOLOGY CORPORATION

	 	
      a
      Nevada corporation

	 	 
	 	 
	 	
      By:
	 
	 	
      Name:
      
	 
	 	
      Title:
      
	 
	 	 	 
	 	
      Dated:
      April _____, 2005

	
      SUBSCRIBER
	
      INITIAL
      CLOSING PURCHASE PRICE
	
      SECOND
      CLOSING PURCHASE PRICE
	
      CLASS
      A WARRANTS (Initial Closing Date)
	
      CLASS
      B WARRANTS (Initial Closing Date)

	
      LONGVIEW
      FUND, LP
	
      $400,000.00
	
      $200,000.00
	 	 
	
      600
      Montgomery Street, 44th Floor
	 	 	 	 
	
      San
      Francisco, CA 94111
	 	 	 	 
	
      Fax:
      (415) 981-5300
	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	
      (Signature)
	 	 	 	 
	
      By:
	 	 	 	 

115

LIST
OF EXHIBITS AND SCHEDULES

	
      Exhibit
      A1
	
      Form
      of Class A Warrant

	
      Exhibit
      A2
	
      Form
      of Class B Warrant

	
      Exhibit
      B
	
      Escrow
      Agreement

	
      Exhibit
      C1
	
      Form
      of Security Agreement (Company)

	
      Exhibit
      C2
	
      Form
      of Security Agreement (Subsidiary)

	
      Exhibit
      D
	
      Form
      of Collateral Agent Agreement

	
      Exhibit
      E
	
      Form
      of Legal Opinion

	
      Exhibit
      F
	
      Transfer
      Agent Instructions

	
      Exhibit
      G
	
      Form
      of Public Announcement or Form 8-K

	
      Exhibits
      H1 and H2
	
      Form
      of Limited Standstill Agreement

	
      Schedule
      5(d)
	
      Additional
      Issuances / Capitalization

	
      Schedule
      5(q)
	
      Undisclosed
      Liabilities

	
      Schedule
      5(u)
	
      Disagreements
      with Accountants and Lawyers

	
      Schedule
      5(x)
	
      Subsidiaries

	
      Schedule
      8
	
      Due
      Diligence Fee Recipients

	
      Schedule
      9(e)
	
      Use
      of Proceeds

	
      Schedule
      9(r)
	
      Providers
      of Limited Standstill Agreements

116

SCHEDULE
8

LEAD
INVESTOR

LONGVIEW
FUND, LP

600
Montgomery Street, 44th Floor

San
Francisco, CA 94111

Fax:
(415) 981-5300

RECIPIENTS
OF DUE DILIGENCE FEE

GHILLIE
FINANZ, S.A.

BROKER

Security
Research Associates

80 East
Sir Francis Drake Blvd., Suite 3F

Larkspur,
CA 94939

(415)
925-0346

6% cash
and an amount of warrants equal to 10% of the type and amount of warrants issued
in the Offering.

117Energy and Engine Technology Corporation Exhibit 10 Sec Agr Co

 

SECURITY
AGREEMENT

	
      1.
	
      Identification.

	 	
      This
      Security Agreement (the "Agreement"), dated as of April ___, 2005, is
      entered into by and between Energy & Engine Technology Corporation, a
      Nevada corporation (“Debtor”), and Barbara Mittman, as collateral agent
      acting in the manner and to the extent described in the Collateral Agent
      Agreement defined below (the "Collateral Agent"), for the benefit of the
      parties identified on Schedule A hereto (collectively, the
      "Lenders").

	
      2.
	
      Recitals.

	 	
      2.1
	
      The
      Lenders have made or are making loans to Debtor (the "Loans"). It is
      beneficial to Debtor that the Loans were made and are being
      made.

	 	
      2.2
	
      The
      Loans are evidenced by certain convertible promissory notes (each a
      “Convertible Note”) issued by Debtor on or about the date of this
      Agreement pursuant to subscription agreements (each a “Subscription
      Agreement”) to which Debtor and Lenders are parties. The Notes are further
      identified on Schedule A hereto and were and will be executed by Debtor as
      “Borrower” or “Debtor” for the benefit of each Lender as the “Holder” or
      “Lender” thereof. Schedule A hereto may be amended to include such other
      Lenders who become parties hereto and sign this Agreement, the Collateral
      Agent Agreement and any other agreement reasonably requested by the
      Collateral Agent, who will have purchased Notes pursuant to the
      Subscription Agreement, in the aggregate principal amount of
      $500,000.

	 	
      2.3
	
      In
      consideration of the Loans made by Lenders to Debtor and for other good
      and valuable consideration, and as security for the performance by Debtor
      of its obligations under the Notes and as security for the repayment of
      the Loans and all other sums due from Debtor to Lenders arising under the
      Notes presently outstanding or to be outstanding in the future,
      Subscription Agreements, and any other agreement between or among them
      (collectively, the "Obligations"), Debtor, for good and valuable
      consideration, receipt of which is acknowledged, has agreed to grant to
      the Collateral Agent, for the benefit of the Lenders, a security interest
      in the Collateral (as such term is hereinafter defined), on the terms and
      conditions hereinafter set forth. Obligations include all future advances
      by Lenders to Debtor advanced on a pro rata basis by all Lenders on
      substantially the same terms.

	 	
      2.4
	
      The
      Lenders have appointed Barbara Mittman as Collateral Agent pursuant to
      that certain Collateral Agent Agreement dated at or about April ____, 2005
      (“Collateral Agent Agreement”), among the Lenders and Collateral
      Agent.

	 	
      2.5
	
      The
      following defined terms which are defined in the Uniform Commercial Code
      in effect in the State of New York on the date hereof are used herein as
      so defined: Accounts, Chattel Paper, Documents, Equipment, General
      Intangibles, Instruments, Inventory and
Proceeds.

	
      3.
	
      Grant
      of General Security Interest in Collateral.

	 	
      3.1
	
      As
      security for the Obligations of Debtor, Debtor hereby grants the
      Collateral Agent, for the benefit of the Lenders, a security interest in
      the Collateral.

118

	 	
      3.2
	
      “Collateral”
      shall mean all of the following property of
Debtor:

	 	 	
      (A)
	
      All
      now owned and hereafter acquired right, title and interest of Debtor in,
      to and in respect of all Accounts, Goods, real or personal property, all
      present and future books and records relating to the foregoing and all
      products and Proceeds of the foregoing, and as set forth
      below:

	 	 	 	
      (i)
	
      Accounts:
      All now owned and hereafter acquired right, title and interest of Debtor
      in, to and in respect of all: Accounts, interests in goods represented by
      Accounts, returned, reclaimed or repossessed goods with respect thereto
      and rights as an unpaid vendor; contract rights; Chattel Paper; investment
      property; General Intangibles (including but not limited to, tax and duty
      claims and refunds, registered and unregistered patents, trademarks,
      service marks, certificates, copyrights trade names, applications for the
      foregoing, trade secrets, goodwill, processes, drawings, blueprints,
      customer lists, licenses, whether as licensor or licensee, chooses in
      action and other claims, and existing and future leasehold interests in
      equipment, real estate and fixtures); Documents; Instruments; letters of
      credit, bankers’ acceptances or guaranties; cash moneys, deposits;
      securities, bank accounts, deposit accounts, credits and other property
      now or hereafter owned or held in any capacity by Debtor, as well as its
      affiliates, agreements or property securing or relating to any of the
      items referred to above;

	 	 	 	
      (ii)
	
      Goods:
      All now owned and hereafter acquired right, title and interest of Debtor
      in, to and in respect of goods, including, but not limited
    to:

	 	 	 	 	
      (a)
	
      All
      Inventory, wherever located, whether now owned or hereafter acquired, of
      whatever kind, nature or description, including all raw materials,
      work-in-process, finished goods, and materials to be used or consumed in
      Debtor’ business; finished goods, timber cut or to be cut, oil, gas,
      hydrocarbons, and minerals extracted or to be extracted, and all names or
      marks affixed to or to be affixed thereto for purposes of selling same by
      the seller, manufacturer, lessor or licensor thereof and all Inventory
      which may be returned to Debtor by its customers or repossessed by Debtor
      and all of Debtor’ right, title and interest in and to the foregoing
      (including all of Debtor’ rights as a seller of
goods);

	 	 	 	 	
      (b)
	
      All
      Equipment and fixtures, wherever located, whether now owned or hereafter
      acquired, including, without limitation, all machinery, motor vehicles,
      furniture and fixtures, and any and all additions, substitutions,
      replacements (including spare parts), and accessions thereof and thereto
      (including, but not limited to Debtor’ rights to acquire any of the
      foregoing, whether by exercise of a purchase option or
      otherwise);

	 	 	 	
      (iii)
	
      Property:
      All now owned and hereafter acquired right, title and interests of Debtor
      in, to and in respect of any real or other personal property in or upon
      which Debtor has or may hereafter have a security interest, lien or right
      of setoff;

	 	 	 	
      (iv)
	
      Books
      and Records:
      All present and future books and records relating to any of the above
      including, without limitation, all computer programs, printed output and
      computer readable data in the possession or control of the Debtor, any
      computer service bureau or other third party;
and

	 	 	 	
      (v)
	
      Products
      and Proceeds:
      All products and Proceeds of the foregoing in whatever form and wherever
      located, including, without limitation, all insurance proceeds and all
      claims against third parties for loss or destruction of or damage to any
      of the foregoing.

119

	 	 	
      (B)
	
      All
      now owned and hereafter acquired right, title and interest of Debtor in,
      to and in respect of the following:

	 	 	 	
      (i)
	
      the
      shares of stock, partnership interests, member interests or other equity
      interests at any time and from time to time acquired by Debtor of any and
      all entities now or hereafter existing, all or a portion of such stock or
      other equity interests which are acquired by such entities at any time
      (such entities, together with the existing issuers, being hereinafter
      referred to collectively as the "Pledged Issuers" and individually as a
      "Pledged Issuer"), the certificates representing such shares, partnership
      interests, member interests or other interests all options and other
      rights, contractual or otherwise, in respect thereof and all dividends,
      distributions, cash, instruments, investment property and other property
      from time to time received, receivable or otherwise distributed in respect
      of or in exchange for any or all of such shares, partnership interests,
      member interests or other interests;

	 	 	 	
      (ii)
	
      all
      additional shares of stock, partnership interests, member interests or
      other equity interests from time to time acquired by Debtor, of any
      Pledged Issuer, the certificates representing such additional shares, all
      options and other rights, contractual or otherwise, in respect thereof and
      all dividends, distributions, cash, instruments, investment property and
      other property from time to time received, receivable or otherwise
      distributed in respect of or in exchange for any or all of such additional
      shares, interests or equity; and 

	 	 	 	
      (iii)
	
      all
      security entitlements of Debtor in, and all Proceeds of any and all of the
      foregoing in each case, whether now owned or hereafter acquired by Debtor
      and howsoever its interest therein may arise or appear (whether by
      ownership, security interest, lien, claim or
otherwise).

	 	
      3.3
	
      The
      Collateral Agent is hereby specifically authorized, after the Maturity
      Date (defined in the Notes) accelerated or otherwise, or after an Event of
      Default (as defined herein) and the expiration of any applicable cure
      period, to transfer any Collateral into the name of the Collateral Agent
      and to take any and all action deemed advisable to the Collateral Agent to
      remove any transfer restrictions affecting the
  Collateral.

	
      4.
	
      Perfection
      of Security Interest.

	 	
      4.1
	
      Debtor
      shall prepare, execute and deliver to the Collateral Agent UCC-1 Financing
      Statements. The Collateral Agent is instructed to prepare and file at
      Debtor’s cost and expense, financing statements in such jurisdictions
      deemed advisable to the Collateral Agent, including but not limited to
      Nevada. The Financing Statements are deemed to have been filed for the
      benefit of the Collateral Agent and Lenders identified on Schedule A
      hereto.

	 	
      4.2
	
      All
      other certificates and instruments constituting Collateral from time to
      time required to be pledged to Collateral Agent pursuant to the terms
      hereof (the "Additional Collateral") shall be delivered to Collateral
      Agent promptly upon receipt thereof by or on behalf of Debtor. All such
      certificates and instruments shall be held by or on behalf of Collateral
      Agent pursuant hereto and shall be delivered in suitable form for transfer
      by delivery, or shall be accompanied by duly executed instruments of
      transfer or assignment or undated stock powers executed in blank, all in
      form and substance satisfactory to Collateral Agent. If any Collateral
      consists of uncertificated securities, unless the immediately following
      sentence is applicable thereto, Debtor shall cause Collateral Agent (or
      its custodian, nominee or other designee) to become the registered holder
      thereof, or cause each issuer of such securities to agree that it will
      comply with instructions originated by Collateral Agent with respect to
      such securities without further consent by Debtor. If any Collateral
      consists of security entitlements, Debtor shall transfer such security
      entitlements to Collateral Agent (or its custodian, nominee or other
      designee) or cause the applicable securities intermediary to agree that it
      will comply with entitlement orders by Collateral Agent without further
      consent by Debtor. 

120

	 	
      4.3
	
      Within
      five (5) days after the receipt by Debtor of any Additional Collateral, a
      Pledge Amendment, duly executed by Debtor, in substantially the form of
      Annex I hereto (a "Pledge Amendment"), shall be delivered to Collateral
      Agent in respect of the Additional Collateral to be pledged pursuant to
      this Agreement. Debtor hereby authorizes Collateral Agent to attach each
      Pledge Amendment to this Agreement and agrees that all certificates or
      instruments listed on any Pledge Amendment delivered to Collateral Agent
      shall for all purposes hereunder constitute
Collateral.

	 	
      4.4
	
      If
      Debtor shall receive, by virtue of Debtor being or having been an owner of
      any Collateral, any (i) stock certificate (including, without limitation,
      any certificate representing a stock dividend or distribution in
      connection with any increase or reduction of capital, reclassification,
      merger, consolidation, sale of assets, combination of shares, stock split,
      spin-off or split-off), promissory note or other instrument,
      (ii) option or right, whether as an addition to, substitution for, or
      in exchange for, any Collateral, or otherwise, (iii) dividends payable in
      cash (except such dividends permitted to be retained by Debtor pursuant to
      Section 5.2 hereof) or in securities or other property or
      (iv) dividends or other distributions in connection with a partial or
      total liquidation or dissolution or in connection with a reduction of
      capital, capital surplus or paid-in surplus, Debtor shall receive such
      stock certificate, promissory note, instrument, option, right, payment or
      distribution in trust for the benefit of Collateral Agent, shall segregate
      it from Debtor's other property and shall deliver it forthwith to
      Collateral Agent, in the exact form received, with any necessary
      endorsement and/or appropriate stock powers duly executed in blank, to be
      held by Collateral Agent as Collateral and as further collateral security
      for the Obligations.

	
      5.
	
      Distribution
      on Liquidation.

	 	
      5.1
	
      If
      any sum is paid as a liquidating distribution on or with respect to the
      Collateral, Debtor shall deliver same to the Collateral Agent to be
      applied to the Obligations, then due, in accordance with the terms of the
      Convertible Notes.

	 	
      5.2
	
      So
      long as no Event of Default exists, Debtor shall be entitled (i) to
      exercise all voting power pertaining to any of the Collateral, provided
      such exercise is not contrary to the interests of the Lenders and does not
      impair the Collateral and (ii) may receive and retain any and all
      dividends, interest payments or other distributions paid in respect of the
      Collateral.

	 	
      5.3.
	
      Upon
      the occurrence and during the continuation of an Event of Default, all
      rights of Debtor, upon notice given by Collateral Agent, to exercise the
      voting power and receive payments, which it would otherwise be entitled to
      pursuant to Section 5.2, shall cease and all such rights shall thereupon
      become vested in Collateral Agent, which shall thereupon have the sole
      right to exercise such voting power and receive such
    payments.

	 	
      5.4
	
      All
      dividends, distributions, interest and other payments which are received
      by Debtor contrary to the provisions of Section 5.3 shall be received in
      trust for the benefit of Collateral Agent, shall be segregated from other
      funds of Debtor, and shall be forthwith paid over to Collateral Agent as
      Collateral in the exact form received with any necessary endorsement
      and/or appropriate stock powers duly executed in blank, to be held by
      Collateral Agent as Collateral and as further collateral security for the
      Obligations.

121

	
      6.
	
      Further
      Action By Debtor; Covenants and Warranties.

	 	
      6.1
	
      Collateral
      Agent at all times shall have a perfected security interest in the
      Collateral. Subject to the security interests described herein, Debtor has
      and will continue to have full title to the Collateral free from any
      liens, leases, encumbrances, judgments or other claims. Collateral Agent's
      security interest in the Collateral constitutes and will continue to
      constitute a first, prior and indefeasible security interest in favor of
      Collateral Agent. Debtor will do all acts and things, and will execute and
      file all instruments (including, but not limited to, security agreements,
      financing statements, continuation statements, etc.) reasonably requested
      by Collateral Agent to establish, maintain and continue the perfected
      security interest of Collateral Agent in the Collateral, and will promptly
      on demand, pay all costs and expenses of filing and recording, including
      the costs of any searches reasonably deemed necessary by Collateral Agent
      from time to time to establish and determine the validity and the
      continuing priority of the security interest of Collateral Agent, and also
      pay all other claims and charges that, in the opinion of Collateral Agent,
      exercised in good faith, are reasonably likely to materially prejudice,
      imperil or otherwise affect the Collateral or Collateral Agent’s or
      Lenders’ security interests therein. Notwithstanding
      anything to the foregoing in this Section 6.1, the Debtor may grant a
      purchase money security interest in the assets to be purchased from Anchor
      Tampa, Inc. to secure its obligations under that certain purchase money
      note to be issued in connection with such acquisition in an amount not to
      exceed $137,500 for a term not longer than one (1) year, and shall
      constitute an exception to Collateral Agent’s first priority perfected
      lien on the Assets.

	 	
      6.2
	
      Other
      than in the ordinary course of business, and except for Collateral which
      is substituted by assets of identical or greater value or which has become
      obsolete or is of inconsequential in value, Debtor will not sell,
      transfer, assign or pledge those items of Collateral (or allow any such
      items to be sold, transferred, assigned or pledged), without the prior
      written consent of Collateral Agent other than a transfer of the
      Collateral to a wholly-owned subsidiary on prior notice to Collateral
      Agent, and provided the Collateral remains subject to the security
      interest herein described. Although Proceeds of Collateral are covered by
      this Agreement, this shall not be construed to mean that Collateral Agent
      consents to any sale of the Collateral, except as provided herein. Sales
      of Collateral in the ordinary course of business shall be free of the
      security interest of Lenders and Collateral Agent and Lenders and
      Collateral Agent shall promptly execute such documents (including without
      limitation releases and termination statements) as may be required by
      Debtor to evidence or effectuate the same.

	 	
      6.3
	
      Debtor
      will, at all reasonable times and upon reasonable notice, allow Collateral
      Agent or its representatives free and complete access to the Collateral
      and all of Debtor's records which in any way relate to the Collateral, for
      such inspection and examination as Collateral Agent reasonably deems
      necessary.

	 	
      6.4
	
      Debtor,
      at its sole cost and expense, will protect and defend this Security
      Agreement, all of the rights of Collateral Agent and Lenders hereunder,
      and the Collateral against the claims and demands of all other
      persons.

	 	
      6.5
	
      Debtor
      will promptly notify Collateral Agent of any levy, distraint or other
      seizure by legal process or otherwise of any part of the Collateral, and
      of any threatened or filed claims or proceedings that are reasonably
      likely to affect or impair any of the rights of Collateral Agent under
      this Security Agreement in any material
respect.

122

	 	
      6.6
	
      Debtor,
      at its own expense, will obtain and maintain in force insurance policies
      covering losses or damage to those items of Collateral which constitute
      physical personal property. The insurance policies to be obtained by
      Debtor shall be in form and amounts reasonably acceptable to Collateral
      Agent. Debtor shall make the Collateral Agent first a loss payee thereon
      to the extent of its interest in the Collateral. Collateral Agent is
      hereby irrevocably (until the Obligations are paid in full) appointed
      Debtor’ attorney-in-fact to endorse any check or draft that may be payable
      to Debtor so that Collateral Agent may collect the proceeds payable for
      any loss under such insurance. The proceeds of such insurance (subject to
      the rights of senior secured parties), less any costs and expenses
      incurred or paid by Collateral Agent in the collection thereof, shall be
      applied either toward the cost of the repair or replacement of the items
      damaged or destroyed, or on account of any sums secured hereby, whether or
      not then due or payable.

	 	
      6.7
	
      Collateral
      Agent may, at its option, and without any obligation to do so, pay,
      perform and discharge any and all amounts, costs, expenses and liabilities
      herein agreed to be paid or performed by Debtor.  Upon
      Debtor’s
      failure to
      do so,
      all amounts expended by Collateral Agent in so doing shall become part of
      the Obligations secured hereby, and shall be immediately due and payable
      by Debtor to Collateral Agent upon demand and
      shall bear interest at the lesser of 15% per annum or the highest legal
      amount from the dates of such expenditures until paid.

	 	
      6.8
	
      Upon
      the request of Collateral Agent, Debtor will furnish to Collateral Agent
      within five (5) business days thereafter, or to any proposed assignee of
      this Security Agreement, a written statement in form reasonably
      satisfactory to Collateral Agent, duly acknowledged, certifying the amount
      of the principal and interest and any other sum then owing under the
      Obligations, whether to its knowledge any claims, offsets or defenses
      exist against the Obligations or against this Security Agreement, or any
      of the terms and provisions of any other agreement of Debtor securing the
      Obligations. In connection with any assignment by Collateral Agent of this
      Security Agreement, Debtor hereby agrees to cause the insurance policies
      required hereby to be carried by Debtor, if any, to be endorsed in form
      satisfactory to Collateral Agent or to such assignee, with loss payable
      clauses in favor of such assignee, and to cause such endorsements to be
      delivered to Collateral Agent within ten (10) calendar days after request
      therefor by Collateral Agent.

	 	
      6.9
	
      Debtor
      will, at its own expense, make, execute, endorse, acknowledge, file and/or
      deliver to the Collateral Agent from time to time such vouchers, invoices,
      schedules, confirmatory assignments, conveyances, financing statements,
      transfer endorsements, powers of attorney, certificates, reports and other
      reasonable assurances or instruments and take further steps relating to
      the Collateral and other property or rights covered by the security
      interest hereby granted, as the Collateral Agent may reasonably require to
      perfect its security interest hereunder.

	 	
      6.10
	
      Debtor
      represents and warrants that it is the true and lawful exclusive owner of
      the Collateral, free and clear of any liens and
    encumbrances.

	 	
      6.11
	
      Debtor
      hereby agrees not to divest itself of any right under the Collateral
      except as permitted herein absent prior written approval of the Collateral
      Agent, except to a subsidiary organized and located in the United States
      on prior notice to Collateral Agent provided the Collateral remains
      subject to the security interest herein
described.

123

	 	
      6.12
	
      Debtor
      shall cause each Subsidiary of Debtor not in existence on the date hereof
      to execute and deliver to Collateral Agent promptly and in any event
      within 10 days after the formation, acquisition or change in status
      thereof (A) a guaranty guaranteeing the Obligations and (B) a security and
      pledge agreement substantially in the form of this Agreement together with
      (x) certificates evidencing all of the capital stock of any entity owned
      by such Subsidiary, (y) undated stock powers executed in blank with
      signature guaranteed, and (z) such opinion of counsel and such approving
      certificate of such Subsidiary as Collateral Agent may reasonably request
      in respect of complying with any legend on any such certificate or any
      other matter relating to such shares and (E) such other agreements,
      instruments, approvals, legal opinions or other documents reasonably
      requested by Collateral Agent in order to create, perfect, establish the
      first priority of or otherwise protect any lien purported to be covered by
      any such pledge and security agreement or otherwise to effect the intent
      that all property and assets of such Subsidiary shall become Collateral
      for the Obligations. For purposes of this Agreement, “Subsidiary”
      means, with respect to any entity at any date, any corporation, limited or
      general partnership, limited liability company, trust, estate,
      association, joint venture or other business entity) of which more
      than 50% of (A) the outstanding capital stock having (in the absence
      of contingencies) ordinary voting power to elect a majority of the board
      of directors or other managing body of such entity, (B) in the case
      of a partnership or limited liability company, the interest in the capital
      or profits of such partnership or limited liability company or (C) in
      the case of a trust, estate, association, joint venture or other entity,
      the beneficial interest in such trust, estate, association or other entity
      business is, at the time of determination, owned or controlled directly or
      indirectly through one or more intermediaries, by such
    entity.

	
      7.
	
      Power
      of Attorney.

	 	
      After
      the occurrence and during the uncured continuation of an Event of Default
      as defined in Section 9 below, Debtor hereby irrevocably constitutes and
      appoints the Collateral Agent as the true and lawful attorney of Debtor,
      with full power of substitution, in the place and stead of Debtor and in
      the name of Debtor or otherwise, at any time or times, in the discretion
      of the Collateral Agent, to take any action and to execute any instrument
      or document which the Collateral Agent may deem necessary or advisable to
      accomplish the purposes of this Agreement. This power of attorney is
      coupled with an interest and is irrevocable until the Obligations are
      satisfied.

	
      8.
	
      Performance
      By The Collateral Agent.

	 	
      If
      Debtor fails to perform any material covenant, agreement, duty or
      obligation of Debtor under this Agreement, the Collateral Agent may, after
      any applicable cure period, at any time or times in its discretion, take
      action to effect performance of such obligation. All reasonable expenses
      of the Collateral Agent incurred in connection with the foregoing
      authorization shall be payable by Debtor as provided in Paragraph 12.1
      hereof. No discretionary right, remedy or power granted to the Collateral
      Agent under any part of this Agreement shall be deemed to impose any
      obligation whatsoever on the Collateral Agent with respect thereto, such
      rights, remedies and powers being solely for the protection of the
      Collateral Agent.

	
      9.
	
      Event
      of Default.

	 	
      An
      event of default ("Event of Default") shall be deemed to have occurred
      hereunder upon the occurrence of any event of default as defined and
      described in this Agreement, in the Notes, Subscription Agreement, and any
      other agreement to which Debtor and a Lender are parties. Upon and after
      any Event of Default, after the applicable cure period, if any, any or all
      of the Obligations shall become immediately due and payable at the option
      of the Collateral Agent, for the benefit of the Lenders, and the
      Collateral Agent may dispose of Collateral as provided below. A default by
      Debtor of any of its material obligations pursuant to this Agreement shall
      be an Event of Default hereunder and an event of default as defined in the
      Notes, and Subscription Agreement.

 

 

124

 

 

	
      10.
	
      Disposition
      of Collateral.

	 	
      Upon
      and after any Event of Default which is then
continuing,

	 	
      10.1
	
      The
      Collateral Agent may exercise its rights with respect to each and every
      component of the Collateral, without regard to the existence of any other
      security or source of payment for the Obligations. In addition to other
      rights and remedies provided for herein or otherwise available to it, the
      Collateral Agent shall have all of the rights and remedies of a lender on
      default under the Uniform Commercial Code then in effect in the State of
      New York.

	 	
      10.2
	
      If
      any notice to Debtor of the sale or other disposition of Collateral is
      required by then applicable law, five business (5) days prior written
      notice (which Debtor agrees is reasonable notice within the meaning of
      Section 9.612(a) of the Uniform Commercial Code) shall be given to Debtor
      of the time and place of any sale of Collateral which Debtor hereby agrees
      may be by private sale. The rights granted in this Section are in addition
      to any and all rights available to Collateral Agent under the Uniform
      Commercial Code.

	 	
      10.3
	
      The
      Collateral Agent is authorized, at any such sale, if the Collateral Agent
      deems it advisable to do so, in order to comply with any applicable
      securities laws, to restrict the prospective bidders or purchasers to
      persons who will represent and agree, among other things, that they are
      purchasing the Collateral for their own account for investment, and not
      with a view to the distribution or resale thereof, or otherwise to
      restrict such sale in such other manner as the Collateral Agent deems
      advisable to ensure such compliance. Sales made subject to such
      restrictions shall be deemed to have been made in a commercially
      reasonable manner.

	 	
      10.4
	
      All
      proceeds received by the Collateral Agent for the benefit of the Lenders
      in respect of any sale, collection or other enforcement or disposition of
      Collateral, shall be applied (after deduction of any amounts payable to
      the Collateral Agent pursuant to Paragraph 12.1 hereof) against the
      Obligations pro rata among the Lenders in proportion to their interests in
      the Obligations. Upon payment in full of all Obligations, Debtor shall be
      entitled to the return of all Collateral, including cash, which has not
      been used or applied toward the payment of Obligations or used or applied
      to any and all costs or expenses of the Collateral Agent incurred in
      connection with the liquidation of the Collateral (unless another person
      is legally entitled thereto). Any assignment of Collateral by the
      Collateral Agent to Debtor shall be without representation or warranty of
      any nature whatsoever and wholly without recourse. To the extent allowed
      by law, each Lender may purchase the Collateral and pay for such purchase
      by offsetting up to such Lender’s pro rata portion of the purchase price
      with sums owed to such Lender by Debtor arising under the Obligations or
      any other source.

125

	
      11.
	
      Waiver
      of Automatic Stay.
      Debtor acknowledges and agrees that should a proceeding under any
      bankruptcy or insolvency law be commenced by or against Debtor, or if any
      of the Collateral should become the subject of any bankruptcy or
      insolvency proceeding, then the Collateral Agent should be entitled to,
      among other relief to which the Collateral Agent or Lenders may be
      entitled under the Note, Subscription Agreement and any other agreement to
      which the Debtor, Lenders or Collateral Agent are parties, (collectively
      "Loan Documents") and/or applicable law, an order from the court granting
      immediate relief from the automatic stay pursuant to 11 U.S.C. Section 362
      to permit the Collateral Agent to exercise all of its rights and remedies
      pursuant to the Loan Documents and/or applicable law. Debtor EXPRESSLY
      WAIVES THE BENEFIT OF THE AUTOMATIC STAY IMPOSED BY 11 U.S.C. SECTION 362.
      FURTHERMORE, Debtor EXPRESSLY ACKNOWLEDGES AND AGREES THAT NEITHER 11
      U.S.C. SECTION 362 NOR ANY OTHER SECTION OF THE BANKRUPTCY CODE OR OTHER
      STATUTE OR RULE (INCLUDING, WITHOUT LIMITATION, 11 U.S.C. SECTION 105)
      SHALL STAY, INTERDICT, CONDITION, REDUCE OR INHIBIT IN ANY WAY THE ABILITY
      OF THE COLLATERAL AGENT TO ENFORCE ANY OF ITS RIGHTS AND REMEDIES UNDER
      THE LOAN DOCUMENTS AND/OR APPLICABLE LAW. Debtor hereby consents to any
      motion for relief from stay which may be filed by the Collateral Agent in
      any bankruptcy or insolvency proceeding initiated by or against Debtor,
      and further agrees not to file any opposition to any motion for relief
      from stay filed by the Collateral Agent. Debtor represents, acknowledges
      and agrees that this provision is a specific and material aspect of this
      Agreement, and that the Collateral Agent would not agree to the terms of
      this Agreement if this waiver were not a part of this Agreement. Debtor
      further represents, acknowledges and agrees that this waiver is knowingly,
      intelligently and voluntarily made, that neither the Collateral Agent nor
      any person acting on behalf of the Collateral Agent has made any
      representations to induce this waiver, that Debtor has been represented
      (or has had the opportunity to be represented) in the signing of this
      Agreement and in the making of this waiver by independent legal counsel
      selected by Debtor and that Debtor has had the opportunity to discuss this
      waiver with counsel. Debtor further agrees that any bankruptcy or
      insolvency proceeding initiated by Debtor will only be brought in the
      Federal Court within the Southern District of New
York.

	
      12.
	
      Miscellaneous.

	 	
      12.1
	
      Expenses.
      Debtor shall pay to the Collateral Agent, on demand, the amount of any and
      all reasonable expenses, including, without limitation, attorneys' fees,
      legal expenses and brokers' fees, which the Collateral Agent may incur in
      connection with (a) sale, collection or other enforcement or disposition
      of Collateral; (b) exercise or enforcement of any the rights, remedies or
      powers of the Collateral Agent hereunder or with respect to any or all of
      the Obligations upon breach or threatened breach; or (c) failure by Debtor
      to perform and observe any agreements of Debtor contained herein which are
      performed by the Collateral Agent.

	 	
      12.2
	
      Waivers,
      Amendment and Remedies.
      No course of dealing by the Collateral Agent and no failure by the
      Collateral Agent to exercise, or delay by the Collateral Agent in
      exercising, any right, remedy or power hereunder shall operate as a waiver
      thereof, and no single or partial exercise thereof shall preclude any
      other or further exercise thereof or the exercise of any other right,
      remedy or power of the Collateral Agent. No amendment, modification or
      waiver of any provision of this Agreement and no consent to any departure
      by Debtor therefrom, shall, in any event, be effective unless contained in
      a writing signed by the Collateral Agent, and then such waiver or consent
      shall be effective only in the specific instance and for the specific
      purpose for which given. The rights, remedies and powers of the Collateral
      Agent, not only hereunder, but also under any instruments and agreements
      evidencing or securing the Obligations and under applicable law are
      cumulative, and may be exercised by the Collateral Agent from time to time
      in such order as the Collateral Agent may
elect.

126

	 	
      12.3
	
      Notices.
      All notices or other communications given or made hereunder shall be in
      writing and shall be personally delivered or deemed delivered the first
      business day after being faxed (provided that a copy is delivered by first
      class mail) to the party to receive the same at its address set forth
      below or to such other address as either party shall hereafter give to the
      other by notice duly made under this
Section:

	 	
      To
      Debtor:
	
      Energy
      & Engine Technology Corporation

      5308
      West Plano Parkway

      Plano,
      TX 75093

      Attn:
      Jolie G. Kahn,

      Esq.
      Fax: (972) 732-6440

	 	
      To
      Lenders:
	
      To
      the addresses and telecopier numbers set forth on
      Schedule A 

	 	
      To
      the Collateral Agent:
	
      Barbara
      R. Mittman Grushko
      & Mittman, P.C. 551
      Fifth Avenue, Suite 1601 New
      York, New York 10176 Fax:
      (212) 697-3575

	 	
      Any
      party may change its address by written notice in accordance with this
      paragraph.

	 	
      12.4
	
      Term;
      Binding Effect.
      This Agreement shall (a) remain in full force and effect until payment and
      satisfaction in full of all of the Obligations; (b) be binding upon
      Debtor, and its successors and permitted assigns; and (c) inure to the
      benefit of the Collateral Agent, for the benefit of the Lenders and their
      respective successors and assigns. All the rights and benefits granted by
      Debtor to the Collateral Agent and Lenders in the Loan Documents and other
      agreements and documents delivered in connection therewith are deemed
      granted to both the Collateral Agent and
Lenders.

	 	
      12.5
	
      Captions.
      The captions of Paragraphs, Articles and Sections in this Agreement have
      been included for convenience of reference only, and shall not define or
      limit the provisions hereof and have no legal or other significance
      whatsoever.

	 	
      12.6
	
      Governing
      Law; Venue; Severability.
      This Agreement shall be governed by and construed in accordance with the
      laws of the State of New York without
      regard to conflicts
      of laws principles
      that
      would result in the application of the substantive laws of another
      jurisdiction,
      except to the extent that the perfection of the security interest granted
      hereby in respect of any item of Collateral may be governed by the law of
      another jurisdiction. Any legal action or proceeding against Debtor with
      respect to this Agreement may be brought in the courts in the State of New
      York or of the
      United States for the Southern District of New York, and, by execution and
      delivery of this Agreement, Debtor hereby irrevocably accepts for itself
      and in respect of its property, generally and unconditionally, the
      jurisdiction of the aforesaid courts. Debtor hereby irrevocably waives any
      objection which they may now or hereafter have to the laying of venue of
      any of the aforesaid actions or proceedings arising out of or in
      connection with this Agreement brought in the aforesaid courts and hereby
      further irrevocably waives and agrees not to plead or claim in any such
      court that any such action or proceeding brought in any such court has
      been brought in an inconvenient forum. If any provision of this Agreement,
      or the application thereof to any person or circumstance, is held invalid,
      such invalidity shall not affect any other provisions which can be given
      effect without the invalid provision or application, and to this end the
      provisions hereof shall be severable and the remaining, valid provisions
      shall remain of full force and effect.

	 	
      12.7
	
      Entire
      Agreement.
      This Agreement contains the entire agreement of the parties and supersedes
      all other agreements and understandings, oral or written, with respect to
      the matters contained herein.

127

	 	
      12.8
	
      Counterparts/Execution.
      This Agreement may be executed in any number of counterparts and by the
      different signatories hereto on separate counterparts, each of which, when
      so executed, shall be deemed an original, but all such counterparts shall
      constitute but one and the same instrument. This Agreement may be executed
      by facsimile signature and delivered by facsimile
      transmission.

	 	
      13.
	
      Intercreditor
      Terms.
      As between the Lenders, any distribution under paragraph 5 shall be made
      proportionately based upon the remaining principal amount (plus accrued
      and unpaid interest) to each as to the total amount then owed to the
      Lenders as a whole. The rights of each Lender hereunder are pari
      passu to
      the rights of the other Lenders hereunder. Any recovery hereunder shall be
      shared ratably among the Lenders according to the then remaining principal
      amount owed to each (plus accrued and unpaid interest) as to the total
      amount then owed to the Lenders as a whole. Kevin W. Smyth is deemed a
      Lender hereunder in connection with the Obligations described on Schedule
      A hereto. 

[THIS
SPACE INTENTIONALLY LEFT BLANK]

 

128

 

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

	
      "DEBTOR"
	
      "THE
      COLLATERAL AGENT"

	
      ENERGY
      & ENGINE TECHNOLOGY CORPORATION
	
      BARBARA
      R. MITTMAN

	
      a
      Nevada corporation
	 

	
      By:
	 	 	 
	 	 	 	 
	
      Its:
	 	 	 

APPROVED
BY “LENDERS”:

	 	 	 
	
      LONGVIEW
      FUND, LP
	 	
      LONGVIEW
      EQUITY FUND, LP

	 	 	 
	 	 	 
	 	 	 
	 	 	 
	
      LONGVIEW
      INTERNATIONAL EQUITY FUND, LP
	 	 
	 	 	 
	 	 	 
	 	 	 
	 	 	 
	
      KEVIN
      W. SMYTH
	 	 

This
Security Agreement may be signed by facsimile signature
and

delivered
by confirmed facsimile transmission.

129

SCHEDULE
A TO SECURITY AGREEMENT

	
      LENDER
	
      INITIAL
      CLOSING PURCHASE PRICE
	
      SECOND
      CLOSING PURCHASE PRICE

	
      LONGVIEW
      FUND, LP

      600
      Montgomery Street, 44th Floor

      San
      Francisco, CA 94111

      Fax:
      (415) 981-5300
	
      $400,000.00
	
      $200,000.00

	
      LONGVIEW
      EQUITY FUND, LP

      600
      Montgomery Street, 44th Floor

      San
      Francisco, CA 94111

      Fax:
      (415) 981-5300
	
      $420,000.00
	
      $210,000.00

	
      LONGVIEW
      INTERNATIONAL EQUITY FUND, LP

      600
      Montgomery Street, 44th Floor

      San
      Francisco, CA 94111

      Fax:
      (415) 981-5300
	
      $180,000.00
	
      $90,000.00

	
      TOTALS
	
      $1,000,000.00
	
      $500,000.00

	
      KEVIN
      W. SMYTH

      8816
      Lake Sheen Court

      Orlando,
      FL 33826

      Fax:
      (407) 876-6391
	
      $800,000.00
      of Obligations

      (for
      purposes of determining pro rata

      apportionment
      of collateral only)

130

ANNEX
I

 

TO

 

SECURITY
AGREEMENT

 

PLEDGE
AMENDMENT

 

This
Pledge Amendment, dated _________ __ 200_, is delivered pursuant to Section 4.3
of the Security Agreement referred to below. The undersigned hereby agrees that
this Pledge Amendment may be attached to the Security Agreement, dated April
___, 2005, as it may heretofore have been or hereafter may be amended, restated,
supplemented or otherwise modified from time to time and that the shares listed
on this Pledge Amendment shall be hereby pledged and assigned to Collateral
Agent and become part of the Collateral referred to in such Security Agreement
and shall secure all of the Obligations referred to in such Security
Agreement.

 

	
       

      Name
      of Issuer

       
	
       

      Number
      of Shares

       
	
       

      Class

       
	
       

      Certificate
      Number(s)

       

	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

	 	
      ENERGY
      & ENGINE TECHNOLOGY CORPORATION

	 	
      By:
	 

131

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