Document:

EXCHANGE AGREEMENT
                              ------------------

    EXCHANGE AGREEMENT entered into and effective this 20th day of July,
2004, by and between Grupo Industrial NKS, S.A. de C.V. ("NKS") a Mexican
company, and North American Liability Group, Inc. ("NOAL"), a Florida
corporation.

                                  BACKGROUND
                                  ----------

    The directors and shareholders of NKS have elected to take the company
public on the US Exchange, which will allow the company to seek capital in
the public sector to restructure the corporate finance including the
liabilities to the Federal Treasury Department of Mexico.

    The Common Stock (par value $.001 per share) of NOAL is publicly traded
on the NASDAQ Bulletin Board.  NOAL was incorporated in the state of
Florida on November 13, 1992 and maintains its headquarters at 2929 E.
Commercial Blvd., Ft. Lauderdale, FL 33308.

    Subject to all of the terms and conditions set forth in this Agreement,
below is the agreement of the parties relative to the consummation of the
following transactions:

    a) at the closing of the transactions contemplated herein ("Closing"),
       the issuance by NOAL of an aggregate of 250,000,000 shares of NOAL
       common Stock to the shareholders of NKS;

    b) at Closing, the delivery of 30,000,000 shares of NOAL Preferred Stock
       Class B to Whitehall Trust for further distribution to the appropriate
       parties to be identified by the shareholders of NKS and NOAL as mutual
       agreed prior to closing;

    c) at Closing, the delivery to NOAL by the shareholders of NKS of 75% of
       the issued and outstanding shares of NKS, of whatever class;

    d) Prior to Closing, NOAL shall have effectuated a 1 for 30 reverse split
       of its common stock, and

    e) The filing by NOAL with the SEC under the 1934 Act of Form 8-K within
       15 days of the closing of the transaction, satisfying the requirements
       thereof and attaching this Agreement as an Exhibit thereto, and
       (within sixty days thereafter) the filing of an Form 8-K containing
       in compliance with Regulation S-X the required financial statements of
       NKS.

       NOW, THEREFORE, in consideration of the agreements, representations,
    warranties and mutual covenants hereinafter set forth, and intending to be
    legally bound hereby, the parties agree as follows:

1.  Representations and Warranties of NOAL:

    a) Representations of NOAL.  NOAL represents, warrants, covenants and
       agrees as follows, all of which are true and correct in all material
       respects as of the date hereof and will be true and correct in all
       material respects as of the Closing Date (as defined in herein) with
       the same force and effect as if then made:

NALG/NKS Stock Exchange Agreement

<PAGE>

    b) Corporate.  NOAL is a corporation duly organized and existing under
       Florida law and is in good standing in the State of Florida, NOAL has
       all requisite power and authority to conduct its business as it is
       now being conducted and to own or use the properties and assets it
       purports to own or use;

    c) Authority.  The execution and delivery by NOAL of this Agreement and
       each other agreement or instrument contemplated by this Agreement, the
       performance by NOAL of its covenants and obligations under this
       Agreement, and the consummation by NOAL of the transactions
       contemplated by this Agreement, have been authorized by all necessary
       corporate action.  Assuming due execution and delivery, this Agreement
       constitutes the valid and legally binding obligation of NOAL and is
       enforceable in accordance with its terms.

    d) No Violation.  Neither the execution and delivery of this Agreement,
       nor the consummation of the transactions contemplated by this
       Agreement violates any provisions of any of NOAL's organizational
       documents; violates any statute, ordinance, law, writ, injunction,
       ruling, regulation, order, judgment or decree of any court or
       governmental agency or board ("Laws") by which NOAL or any of its
       assets or properties is bound, which violation could reasonably be
       agreement ("Contracts") or other instrument or obligation to which
       NOAL is a party or by which NOAL's assets are encumbered and which,
       individually or in the aggregate, could reasonably be expected to
       have a material adverse effect on the financial position, results of
       operations or business of NOAL;

    e) Regarding Financial Statements.  All of NOAL's audited financial
       statements, including, but not limited to, NOAL's audited
       consolidated balance sheet (including the notes thereto), and the
       related audited consolidated statement of income, changes in
       stockholders' equity and cash flow for the two year fiscal period
       ended December 31, 2003 (the "NOAL Audited Financial Statements"),
       and all of NOAL's unaudited financial statement for the second
       quarter ended June 30, 2004 (the "NOAL Unaudited Financial
       Statements"),  fairly present, in all material respects, the financial
       condition and the results of operations, changed in stockholders'
       equity and cash flow of NOAL as of the respective dates thereof and
       for the accounting periods referenced therein, all in accordance with
       generally accepted accounting principles and practices applied on a
       consistent basis, and are collectively referred to herein as the "NOAL"
       Financial Statements.

    f) No Omissions.  This Agreement and the information furnished by NOAL,
       whether set forth in this Agreement or in any filing made by NOAL
       under the 1934 Act, contains no untrue statement of a material fact

NALG/NKS Stock Exchange Agreement                                         2

<PAGE>

       and does not omit to state a material fact necessary to make the
       statements made not misleading.

2.  Representations and Warranties of NKS:

    a) Representations of NKS.  NKS represents, warrants, covenants and
       agrees as follows, all of which are true and correct in all material
       respects as of the date hereof and will be true and correct in all
       material respects as of the Closing Date with the same force and
       effect as if then made:

    b) Corporate.  NKS is a corporation duly organized and existing under
       Mexico law and is in good standing in Mexico.  NKS has all requisite
       power and authority to conduct its business as it is now being
       conducted and to own or use the properties and assets it purports to
       own and use, NKS is registered to do business in all jurisdictions
       where the failure to obtain such registration could reasonably be
       expected to result in a material adverse effect on the financial
       position, results of operations or business of NKS.  NKS is in
       compliance with all federal and state regulations applicable to the
       business conducted by NKS;

    c) Authority.  The execution and delivery by NKS of this Agreement and
       each other agreement or instrument contemplated by this Agreement,
       the performance by NKS of its covenants and obligations under this
       Agreement, and the consummation by NKS of the transactions
       contemplated by this Agreement, have been authorized by all necessary
       corporate action.  Assuming due execution and delivery, the Agreement
       constitutes the valid and legally binding obligation of NKS and is
       enforceable in accordance with its terms;

    d) No Violation.  Neither the execution and delivery of this
       Agreement, nor the consummation of the transactions contemplated
       by this Agreement:  violates any provision of any of NKS's
       organizational documents; violates any statute, ordinance, law, writ,
       injunction, ruling, regulation, order, judgment or decree of any court
       or governmental agency or board ("Laws") by which NKS or any of its
       assets or properties is bound, which violation could reasonably be
       expected to have a material adverse effect on the financial position,
       results of operations or business of NKS; or, conflicts with, violates
       or will result in any breach of (or give rise to any right of
       termination, cancellation, modification, amendment, rescission,
       refusal to perform or acceleration of any of the terms of, or
       constitute a default under, or result in the creation of any lien
       pursuant to the terms of, any note, bond, lease, mortgage, deed of
       trust, franchise, guaranty, certificate of occupancy, indenture,
       license, permit, contract or agreement ("Contracts") or other
       instrument or obligation to which NKS is a party or by which NKS's
       assets are encumbered and which, individually or in the aggregate,
       could reasonably be expected to have a material adverse effect on the
       financial position, results of operations or business of NKS;

    e) Regarding Financial Statements.  All of NKS's audited financial
       statements, including NKS's opening audited balance sheet (including

NALG/NKS Stock Exchange Agreement                                         3

<PAGE>

       the notes thereto) (the "NKS Opening Audited Financial Statements"),
       fairly present, in all material respects, the financial condition of
       NKS as of the date thereof, in accordance with generally accepted
       accounting principles and practices, and is referred to herein as
       the "NKS Opening Financial Statements".

    f) Title to Assets.  NKS holds good and marketable title to the Assets,
       and with respect to the real property, free and clear of restrictions,
       with the exception of those liens and encumbrances listed in NKS's
       audited financial statements, said Assets are free and clear of
       liens, pledges, charges, or encumbrances.  The property on which NKS
       is located is held under an "Option to Purchase Agreement".

    g) No Omissions.  This Agreement and the information furnished by NKS,
       whether set forth in this Agreement or in any document, contains no
       untrue statement of a material fact and does not omit to state a
       material fact necessary to make the statements made not misleading.

    h) Conduct of the Business.  Other than as contemplated by this Agreement,
       each of NKS and NOAL covenants and agrees that, from and after the date
       hereof and until Closing, neither will conduct its business, or introduce
       any material change in its business practices or the accounting methods
       in respect of its business, except in a manner consistent with prior
       practices; provided, however, that nothing contained herein shall prevent
       NKS from acquiring additional businesses in any manner satisfying the
       business judgment of NKS.

    i) Books and Records.  Fail to maintain its books and records in accordance
       with sound business practices, on a basis consistent with prior practice;
       and make any announcement or submit any filing(s) to the SEC without
       having received the approval of the other party hereto.

3.  Closing Date.

    Provided all conditions precedent have been satisfied, closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
at the principal office of NOAL not more than sixty (60) days from the date
hereof (the "Closing Date"), or on such other date and at such other time and
place as is agreed to by the parties.  Absent written confirmation to the
contrary, this Agreement shall automatically terminate in the event that all
conditions precedent have not been satisfied prior to the Closing Date.

4.  Conditions Precedent to the Obligation of NKS to Close.

    The obligation of NKS and of each NKS member to close and consummate the
transactions contemplated by this Agreement, is subject to the satisfaction
of the following conditions precedent, any or all of which may be waived by
NKS and by each NKS member, and NOAL agrees to use commercially reasonable
efforts to satisfy each of the following conditions precedent at or prior
to Closing;

    a) Representations and Warranties.  The representations and warranties
       made by NOAL shall be true and correct as of the Closing Date with
       the same force and effect as if then made.  On the Closing Date,
       NOAL shall deliver to NKS a certificate dated the Closing Date to
       such effect;

NALG/NKS Stock Exchange Agreement                                         4

<PAGE>

    b) Compliance with Covenants.  All of the covenants and obligations
       required to be performed by NOAL or with which NOAL is to comply at or
       prior to Closing, must have been duly performed and complied with in
       all material respects;

    c) Other Certificates.  NKS shall have received such other certificates,
       instruments and other documents, in form and substance satisfactory to
       NKS and its counsel, as NKS shall have reasonably requested in
       connection with the consummation of the transactions contemplated
       hereby;

    d) NOAL Capitalization.  NOAL shall have approved a reverse split of its
       common stock at a ratio of 1 share for each 30 shares previously
       issued. The total number of issued and outstanding shares of Common
       Stock and Preferred Stock, of whatever Class, of NOAL shall not
       exceed 60,000,000; and

    e) Approval of NOAL Financial Statements.  Within ten (10) days of the
       receipt by NKS of the NOAL Financial Statements, NKS shall have
       approved the NOAL Financial Statements.  NKS shall have also, within
       the same time frame, approved all other documents or submissions
       delivered to NKS by NOAL pursuant to this Agreement.  Any Financial
       Statement, document or submission not disapproved within such ten
       (10) day period by NKS shall be deemed to have been approved.  Any
       basis for disapproval shall be explicitly stated by NKS.

5.  Conditions Precedent to the Obligation of NOAL to Close.

    The obligation of NOAL to close is subject to satisfaction of the
following conditions precedent, any one of which may be waived by NOAL in
its sole discretion, and, as to each of which, NOAL agrees to use commercially
reasonable efforts to satisfy at or prior to Closing:

    a) Approval of NKS Financial Statements.  Within ten (10) days of the
       receipt by NOAL of the NKS Financial Statements, NOAL shall have
       approved the NKS Financial Statements.  NOAL shall have also, within
       the same time frame, approved all other documents or submissions
       delivered to NOAL by NKS pursuant to this Agreement.  Any financial
       Statement, document or submission not disapproved within such ten (10)
       day period by NOAL shall be deemed to have been approved.  Any basis
       for disapproval shall be explicitly stated by NOAL;

    b) Approval by NKS Shareholders.  This Agreement and the obligations,
       representations and warranties of the NKS shareholders described herein
       shall have been duly adopted or ratified by the NKS shareholders
       pursuant to valid and legally binding member action; and NOAL shall be
       provided with a copy of action duly adopted by the NKS shareholders and
       certified by the Managing Member of NKS;

    c) Representations and Warranties.  The representations and warranties
       made by NKS herein shall be correct as of the Closing Date with the

NALG/NKS Stock Exchange Agreement                                         5

<PAGE>

       same force and effect as if then made, and NKS shall deliver to NOAL
       a certificate dated the Closing Date to such effect; and

    d) Opinion of Counsel of NKS.  At the closing, there will be delivered
       to NOAL a signed opinion from counsel for NKS, reasonably satisfactory
       to NOAL's counsel that:

      (1) NKS is a corporation validly existing in good standing under the
      laws of Mexico

      (2) This Agreement when executed and delivered by NKS will be a valid
      and binding obligation of NKS, enforceable against them in accordance
      with its terms, subject as to enforcement of remedies, to applicable
      bankruptcy, insolvency, reorganization, moratorium and other laws
      affecting the rights of creditors generally and the discretion of
      courts in granting equitable remedies.

      (3) The execution, delivery and performance of this Agreement by NKS, do
      not, and will not, with or without the giving of notice or the lapse of
      time, or both:  (A) result in a material beach of or conflict with any
      of the terms or provisions of, or constitute a material default under,
      or result in the modification or termination of, or result in the
      creation or imposition of any lien, security interest, charge or
      encumbrance upon any of the properties or assets of NOAL pursuant to any
      material note, contract, lease, commitment or other agreement or
      instrument to which he is a party or by which NKS or any of its
      properties or assets are or may be bound or affected, to the best of its
      knowledge;  (B)  violate in any material way any existing applicable
      law, rule, regulation, judgment, order or decree of any governmental
      agency or court, domestic or foreign, having jurisdiction over the
      Seller or any of its properties or business, to the best of counsel's
      knowledge; or (C)  violate any permit, certification, registration,
      approval, consent or license applicable to the business or properties
      of NKS, to the best of its knowledge.

      (4) That to counsel's knowledge:  (i) all written contracts with NKS's
          vendors and suppliers, are in full force and effect, in good
          standing and have not been breached by any party, and (ii) there
          are no pending or threatened lawsuits, enforcement proceedings or
          legal actions against NKS.

      (5) NOAL has good and valid title to all of its assets.

      (6) The performance of this Agreement by NKS does not violate any of
      the laws in the country of Mexico or any other state, municipality or
      other governmental law, rule or regulation.

6.  Procedures at Closing.

    Provided all conditions precedent to Closing have been satisfied or
waived, at Closing each party shall execute and deliver such other
instruments, certificates, authorizations, releases, resolutions and
documents as may be necessary to effect the

NALG/NKS Stock Exchange Agreement                                         8

<PAGE>

transactions described in or as is otherwise required by this Agreement and
the following shall occur:

    a) Issuance of NOAL Common Stock.  NOAL shall issue and deliver to the
       NKS shareholders an aggregate of 250,000,000 shares of unregistered
       NOAL common stock, fully paid and non-assessable, to be distributed
       among the NKS shareholders as the latter shall determine.  Such
       issuance shall constitute an exempt transaction pursuant to Section
       4(2) of the 1933 Act and such exemption shall be appropriately
       documented.  The shares shall be appropriately legended and stop
       transfer instructions shall be issued to the Transfer Agent for
       NOAL Common Stock.

    b) Transfer of NOAL Preferred Stock Class B.  NOAL shall deliver to
       Whitehall Trust the number of 30,000,000 shares of NOAL Preferred Stock
       Class B free and clear of all liens and encumbrances of any kind, to be
       distributed to the appropriate parties identified by shareholders of
       NKS and NOAL as mutual agreed prior to closing.

    c) Transfer of NKS Ownership to NOAL.  Simultaneously with the issuance
       and delivery of the NOAL Common Stock described in Paragraph 6(a)
       above, each NKS shareholders will assign and transfer to NOAL all
       of such NKS member's right, title and interest in and to all of the
       member's  interest in NKS owned by such member.  To do so, each NKS
       member will deliver to NOAL its certificate representing all of the
       NKS interest owned by such NKS member, such certificate to be duly
       endorsed in blank or accompanied by an irrevocable stock power and
       assignment separate from certificate and endorsed in blank.

7.  Procedures after Closing.

    Following closing, each of NKS and NOAL shall, from time-to-time, execute
and deliver such additional instruments, documents, conveyances or assurances
and take such other action as shall be necessary, or otherwise reasonably
requested by the other party, to confirm and assure the rights and obligations
provided for in this Agreement and render effective the consummation of the
transactions contemplated by this Agreement.

8.  Survival of Representations; Indemnification.

    a) The representations and warranties set forth in Paragraph 1(a) and (b)
       of this Agreement shall survive the Closing but shall terminate and
       be of no further force and effect on the first anniversary of the
       Closing Date.  Unless a specific period is set forth herein (in which
       event such specified period shall control), all other covenants and
       agreements contained in this Agreement shall survive the Closing and
       remain in effect until waived or otherwise fulfilled,

    b) Indemnifiable Losses.  The term "Indemnifiable Losses" shall mean any
       and all liabilities, obligations, claims, actions, damages, civil and
       criminal penalties and fines, out-of-pocket costs and expenses
       (including any reasonable attorneys' and other professional fees),
       relating to, resulting from or arising out of any breach of any
       representation, warranty,

NALG/NKS Stock Exchange Agreement                                         7

<PAGE>

       covenant, agreement or undertaking by the indemnifying party and
       contained in this Agreement.

    c) Indemnification by NOAL and NKS.  On the terms and subject to the
       limitations (if any) set forth in this Agreement, NOAL shall indemnify,
       defend and hold harmless NKS and its shareholders, and each of the
       past, present and future directors, officers and employees of NKS,
       and NKS and its shareholders shall indemnify, defend and hold harmless
       NOAL and its shareholders, and each of its past, present and future
       directors, officers and employees of NOAL, from and against any and
       all Indemnifiable Losses relating to, resulting from or arising out
       of any breach of any representation, warranty, covenant, agreement or
       undertaking by either such party set forth in this Agreement.

    d) Indemnification Procedure.  In the case of any claim asserted by a
       third  party against a party entitled to indemnification under this
       Agreement (the "Indemnified Party"), notice shall be given by the
       Indemnified Party to the party required to provide indemnification
       (the "Indemnifying Party") promptly after such Indemnified Party has
       actual knowledge of any claim as to which indemnity may be sought,
       and the Indemnified Party shall permit the Indemnifying Party (at
       the expense of such Indemnifying Party) to assume the defense of any
       claim or any litigation resulting there from provided that (i) counsel
       for the Indemnifying Party who shall conduct the defense of such claim
       or litigation shall be reasonably satisfactory to the Indemnified
       Party, (ii) the Indemnified Party may participate in such defense
       at such Indemnified Party's expense, and (iii) the omission by any
       Indemnified Party to give notice as provided herein shall not relieve
       the Indemnifying Party of its indemnification obligation under this
       Agreement except to the extent that such omission results in a failure
       of actual notice to the Indemnifying Party and such Indemnifying Party
       is materially damaged as a result of such failure to give notice.
       Except with the prior written consent of the Indemnified Party, no
       Indemnifying Party, in the defense of any such claim or litigation,
       shall consent to entry of any judgment or enter into any settlement
       that provides for injunctive or other non-monetary relief affecting
       the Indemnified Party or that does not include as an unconditional
       term thereof the giving by each claimant or plaintiff to such
       Indemnified Party of a release from all liability with respect to
       such claim or litigation.  In the event that the Indemnified Party
       shall in good faith determine that the conduct of the defense of any
       claim subject to indemnification hereunder or any proposed settlement
       of any such claim by the Indemnifying Party might be expected to affect
       adversely the Indemnified Party or its ability to conduct its business,
       or that the Indemnified Party may have available to it one or more
       defenses or counterclaims that are inconsistent with one or more of
       those that may be available to the Indemnifying Party in respect of
       such claim or litigation relating thereto, the Indemnified Party shall
       have the right at all times to take over and assume control over the
       defense, settlement negotiations or litigation relating to any such
       claim at the sole cost of the Indemnifying Party, provided that if
       the Indemnified Party does so take over and assume control, the
       Indemnified Party shall not settle such claim or litigation without
       the written consent of the Indemnifying Party, such consent not to
       be unreasonably withheld.  In the

NALG/NKS Stock Exchange Agreement                                         8

<PAGE>

       event that the Indemnifying Party does not accept the defense of any
       matter as above provided, the Indemnified Party shall have the full
       right to defend against any such claim or demand and shall be
       entitled to settle or arrange to pay in full such claim or demand.
       In any event, the Indemnifying Party and the Indemnified Party shall
       cooperate in the defense of any claim or litigation subject to this
       Section and the records of each shall be available to the other with
       respect to such defense.

    e) Legend.  All shares of NOAL Common Stock to be issued to the NKS
       shareholders, shall bear a legend in substantially the form set forth
       below:

           "The securities represented by this certificate have not
           been registered under the Securities Act of 1933, as amended
           (the "Act"), and may not be sold, transferred, assigned, made
           subject to a security interest, mortgaged, pledged, hypothecated
           or otherwise disposed of unless and until registered under the
           Act or an opinion of counsel for Company is received that
           registration is not required under such Act."

9.  Governing Law, Jurisdiction and Venue, Waiver of Right to Trial by Jury.

    This Agreement shall be governed by and construed in accordance with the
laws of the State of Florida.  If any action is brought among the parties
with respect to this Agreement or otherwise, by way of a claim or
counterclaim, the parties agree that in any such action, and on all issued
related to this Agreement, the parties irrevocably waive their right to a
trial by jury. Jurisdiction and venue for any such action shall be the State
Courts of Florida, USA.  In the event suit or action is brought by any party
under this Agreement to enforce any of its terms, or in any appeal there
from, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees at trial and all appellate levels.

10. Binding Effect; No Assignment.

    This Agreement shall be binding upon and shall inure to the benefit of
the parties to this Agreement and their respective successors and assigns.
This Agreement and the Exhibits attached hereto together constitute the
entire agreement of the parties with respect to the subject matter of this
Agreement and the Exhibits attached hereto and supersedes all prior
agreements and understandings relating hereto and thereto.  Notwithstanding
anything to the contrary, no party may transfer or assign any of its rights
or obligations under this Agreement without the prior written consent of
all other parties, which they may withhold in their sole discretion.

11. Notices.

    Any notice, communication, request, reply, or advice (hereinafter
severally and collectively called "notice") in this Agreement provided or
permitted to be given, made, or accepted by either party to the other must
be in writing and shall be given or be served by telex, telecopy, facsimile,
registered, certified or other form of mail requiring a return receipt,
addressed to the party to be notified, postage prepaid, or by reputable
overnight delivery service, or by delivering the same in person to such party
and obtaining a receipt for such delivery.  Notice deposited in the mail in
the manner herein above

NALG/NKS Stock Exchange Agreement                                         9

<PAGE>

described hall be deemed received on the earliest of the fifth day after day
after deposit in the mail or upon receipt, whichever is earlier.  Notice sent
by reputable overnight courier shall be deemed received on the next day after
sending.  Notices given by hand delivery shall be deemed received when
delivered.  Notices may also be sent by facsimile transmission with the
electronic confirmation, and shall be deemed received on the date sent or
the first business day thereafter, if sent after normal business hours or on
a non-business day, provided that the sender requests and the receiver send
a return confirmation by facsimile transmission or by mail.

    For purposes of notice, the address and facsimile numbers of the parties
shall, until notice of any change is provided, be as follows:

To NOAL				Bradley Wilson
                                2929 E. Commercial Blvd.
                                Ft. Lauderdale, FL  33308

With a copy to:			Eric P. Littman/Ben Grocock
                                7695 S.W. 104 Street
                                Suite 210
                                Miami, FL 33156
                                Fax:  (305)668-0003

As to NKS:                      David Gomez Arnau
                                Calle 7 No. 97
                                Col. San Pedro de los Pinos
                                C.P. 03800 Mexico D.F.
                                Fax: ++52 55 52737263

12. Further Assurances.

    Each of the parties to this Agreement shall use such party's commercially
reasonable efforts to take such actions as may be necessary or reasonably
requested by the other parties to this Agreement to carry out and consummate
the transactions contemplated by this Agreement.

13. Expenses.

    Each of the parties to this Agreement shall bear such party's own
expenses and attorneys' fees in connection with the negotiation and
preparation of this Agreement and the transactions contemplated by this
Agreement.  This provision shall not operate to limit any damages due to
breach by another party.

14. Counterparts.

    This Agreement may be executed in any number of counterparts, each of
which will be deemed an original but all of which shall constitute one and
the same instrument.

15. Taxation.

    All tax duties for the shareholders of NKS in connection with the
transactions contemplated by this Agreement shall be covered by the shares
under the same terms and conditions as received by NKS shareholders in
this exchange.

NALG/NKS Stock Exchange Agreement                                         10

<PAGE>

16. Headings.

    The headings preceding the test of the paragraphs of this Agreement are
inserted for convenience of reference only and shall not constitute a part
of this Agreement, nor shall they affect its meaning, construction or effect.

17. Amendments, Waivers.

    Any changes, amendments, waivers or additions to this Agreement, must
be made in writing by the parties to this Agreement in order to be
effective.  The failure of any party hereto to enforce at any time any
provision of this Agreement shall not be construed as a waiver of such
provision nor in any way to affect the validity of this Agreement or any
part hereof or the right of any party thereafter to enforce each and
every such provision strictly in accordance with its terms.  No waiver
of any breach of this Agreement shall be held to constitute a waiver of
any other or subsequent breach.

18. Invalidity.

    Should any provision of this Agreement be held by a court or arbitration
panel of competent jurisdiction to be enforceable only if modified, such
holding shall not affect the validity of the remainder of this Agreement,
the balance of which shall continue to be binding upon the parties to this
Agreement with any such modification to become a part hereof and treated
as though originally set forth in this Agreement.

19. Interpretation.

    No provision of this Agreement shall be construed against a party because
such party of its attorney may have been the draftsman thereof.

    This agreement shall be held confidential up to the execution and
deployment of final closing documents.

    IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement on the date first written above.

Grupo Industrial NKS, S.A. C.V.		North American Liability Group, INC.

By:/S/  Pedro Arizpe Carreon            By:/S/  Bradley Wilson
   -------------------------------         --------------------------
   Pedro Arizpe Carreon, President         Bradley Wilson, President

  /S/
  -------------------------------
	Witness

NALG/NKS Stock Exchange Agreement                                         11

<PAGE>Term Sheet

LEVEL
8 SYSTEMS, INC.

Corporate
Headquarters 

8000
Regency Parkway 

Cary, NC
27511

T
E R M S H E E T

 

October
6, 2004 

 

 

This
Term Sheet is an expression of intention only and, except as expressly set forth
below, is not to be construed as a binding agreement.

	
      Note
      & Warrant Offering 

	 	 
	
      Issuer:
	
      Level
      8 Systems, Inc., a Delaware corporation (the “Company”)

	
      Investors:
	
      Existing
      holders of outstanding warrants to purchase shares of the Company’s
      capital stock (the “Existing Warrants”)
      Exhibit A
      contains a list of Existing Warrants

	
      Investment
      Amount:
	
      Up
      to $1,706,575

	
      Securities
      Offered:
	
      $1,706,575
      million principal amount of Senior Secured Notes (the “Notes”) to be
      issued in integral amounts of $1,000. The first $1,000,000 principal
      amount of Notes purchased from the Company entitle the purchasers thereof
      to a proportionate number of the Re-load Warrants as described
      below.

       

      Each
      holder of Existing Warrants that purchases Notes will receive a warrant to
      acquire a number of shares of the Company’s common stock (the “Common
      Stock”) as set forth on Exhibit A (the “Additional Warrants”), having an
      exercise price, once exercisable, of $0.002 per share. The Additional
      Warrants will be subject to the Registration Rights described below and
      have a 7 year term. The Additional Warrants also will be subject to a
      forced cashless exercise upon consummation of the Restructuring, as
      described below. The Additional Warrants will not be exercisable unless
      and until the Restructuring is consummated.

	
      Coupon:
	
      10%
      per annum on the principal amount, payable in arrears in cash on the
      maturity date.

	
      Maturity
      Date:
	
      Consummation
      of the Merger (as defined below), but no later than December
      31, 2004.

       

      At
      maturity, the principal balance of the Notes, together with all accrued
      and unpaid interest, will become due and payable, subject to the Mandatory
      Exchange described below. 

	
      Events
      of Default:
	
      Standard
      events of default for debt instruments will be included in the
      Notes.

	
      Ranking:
	
      The
      Notes would constitute senior secured obligations of the Company. While
      the Notes are outstanding, the Company would not be permitted to incur
      indebtedness ranking senior or pari
      passu
      with the Notes, except for such senior indebtedness of the Company, if
      any, as is outstanding on the initial closing date of the sale of the
      Notes.

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October
6, 2004

 

	
      Collateral:
	
      The
      Notes would be secured by a first-priority security interest in all of the
      Company’s tangible and intangible assets (the “Collateral”), subordinate
      only to existing security interests at the closing date.
  

	
      Administrative
      Agent:
	
      The
      security interest in the Collateral will be held by, and the
      administration of the note provisions would be conducted by Brown Simpson
      Partners I (or one of its wholly-owned subsidiaries) as administrative
      agent (“BSP”), the lead investor in this financing transaction. The
      investors in the offering will appoint BSP to serve as administrative
      agent for this purpose.

	
      Protective
      Provisions:
	
      The
      Notes would contain customary affirmative and negative covenants of the
      Company.

	
      Allocation
      and Closings:
	
      The
      Notes would be offered to the Investors for purchase at one or more
      closings. Each Investor would be offered the right to purchase its
      allocated share of the Notes (the “Allocated Share”) based on the
      proportion of the aggregate outstanding Existing Warrants (on an
      as-exercised basis) that the Investor owns, with a right of
      over-subscription for any un-subscribed Notes.

       

      The
      initial closing of the sale of the Notes would occur not earlier than 10
      days after the commencement of the offering, and closings would continue
      on a rolling basis.

       

      Any
      Notes not purchased at a closing could be re-offered to the Investors from
      time to time by the Company until the Maturity Date. The over-subscription
      rights and allocation rules described herein are subject to change by the
      Company.

	
      Restructure
      of Existing Warrants:
	
      In
      the event that an Investor purchases its entire Allocated Share, the
      exercise price of its Existing Warrants will be reduced to $.10, if the
      exercise price is greater than that. All of an Investor’s Existing
      Warrants having an exercise price of $0.10 per share or less (whether
      before or after the repricing) are referred to herein as the “Eligible
      Warrants.”

	
      Mandatory
      Exchange:
	
      Upon
      consummation of the Merger and simultaneously therewith, all of the Notes
      held by each Investor would automatically be exchanged for and in
      consideration of (without the payment of additional consideration) the
      shares issuable upon exercise of each such Investor’s Existing Warrants to
      the extent of the principal and accrued but unpaid interest then due and
      owing on the Notes. 

	
      Use
      of Proceeds:
	
      The
      Company would use the proceeds from this offering to finance its
      operations. The proceeds would not be
      used to repay any short-term or long term debt
  instruments.

	
      Re-load
      Warrants:
	
      The
      Investors who subscribe to the first $1,000,000 principal amount of Notes,
      will receive warrants to purchase an aggregate of two times their
      respective Eligible Warrant shares at an exercise price of $0.10 per share
      (collectively, the “Re-load Warrants”). The Re-load Warrants will be
      subject to the Registration Rights described below, have the Anti-Dilution
      Protection described below, and have a 7 year term. The Re-load Warrants
      will be issued upon consummation of the Restructuring.

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6, 2004

 

	
      Merger
      Proposal

	 
	
      Company:
	
      Level
      8 Systems, Inc., a Delaware corporation (the “Company”)

	
      Overview
      of Merger:
	
      The
      Company will merge with a corporation owned by one or more of the
      Investors (in either event, “Newco”), with Newco being the surviving
      corporation (the “Merger”). 

       

      Each
      outstanding share of the Company’s common stock shall be converted into
      .05 shares of the surviving corporation’ common stock (the “Common Stock”)
      upon the closing of the Merger. The Company’s existing outstanding
      convertible notes and shares of convertible preferred stock
      (“collectively, the “Securities”) would be converted upon the closing of
      the Merger into shares of a newly created series of the surviving
      company’s preferred stock to be designated the Series A-1 Convertible
      Preferred Stock (the “Series A-1 Preferred”). Each of the Securities would
      be converted into the number of shares of Series A-1 Preferred that would
      convert into the same number of shares of Company common stock underlying
      the Securities being exchanged based on the Amended Conversion Price set
      forth below: 

      Security        Current
      Con. Price    Amended
      Con. Price

      
      

      

       ConvertibleNotes      $0.28                $0.02

                              $0.37                $0.026

                              $0.32                $0.023

                              $0.20                $0.014

                              $0.17                $0.012

                              $0.16                $0.011

                              $0.10                $0.0025

                              $0.08                $0.002

      
      

          Series D Convertible 

         
      Preferred               $0.32                $0.20

      
      

          Series C Convertible 

         
      Preferred Stock        $0.38                $0.25

      
      

         Series B3 Convertible 

        
      Preferred Stock        $12.50               $4.00

      
      

         Series A3 Convertible

        
      Preferred Stock        $8.33                 $3.50

	
       

      Upon
      consummation of the Merger, the Notes shall be exchanged for and in
      consideration of (without the payment of additional consideration) of the
      shares issuable upon exercise of the Existing Warrants to the extent of
      the principal and accrued but unpaid interest then due and owing on the
      Notes. 

	
      Special
      Shareholders Meeting:
	
      The
      Company shall convene a special shareholders meeting to approve the Merger
      at the earliest possible date, but in no event later than December
      31, 2004. 

	
      Fractional
      Shares
	
      The
      Company will issue cash in lieu of fractional
shares.

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October
6, 2004

 

	
      Terms
      of the Series A-1 Preferred:
	 
	
      Liquidation
      preference:
	
      In
      the event of any liquidation or winding up of the Company, the holders of
      the Series A-1 Preferred would be entitled to receive in preference to the
      holders of the Common Stock, an amount equal to $500 per share plus any
      accrued but unpaid dividends. After payment of such liquidation
      preference, holders of Common Stock would be entitled to receive, pro
      rata, the remaining assets of the Company available for distribution to
      its stockholders. A merger or consolidation to which the Company is a
      party, or a sale or exclusive license of all or substantially all of the
      assets or intellectual property of the Company, would be deemed to be a
      liquidation event unless the holders of a majority of the shares of Series
      A-1 Preferred then outstanding elect not to treat such event as a
      liquidation event. 

	
      Dividends:
	
      Holders
      of the Series A-1 Preferred would be entitled to receive an equivalent
      dividend (on an as-converted basis) whenever the Company declares a
      dividend on the Common Stock, other than dividends payable in shares of
      Common Stock.

	
      Anti-dilution
      Protection:
	
      The
      conversion price of the Series A-1 Preferred would be subject to customary
      adjustment in the event of any stock splits, stock dividends and the like
      undertaken by the Company.

	
      Optional
      Conversion:
	
      The
      holders of Series A-1 Preferred would have the right to convert the Series
      A-1 Preferred, at the option of the holder, at any time, into shares of
      Common Stock. Each share of Series A-1 Preferred will initially be
      convertible on a one for one thousand (1:1,000) basis .

	
      Mandatory
      Conversion:
	
      The
      Series A-1 Preferred shall automatically be converted into Common Stock at
      the then applicable conversion rate upon the occurrence of one of the
      following: 

      a)   The closing of an additional
      $5,000,000 equity financing from institutional or strategic investors;
      and/or

      b)    The
      Company having 4 consecutive quarters of positive cash flow as reflected
      on the Company’s financial statements prepared in accordance
      with generally accepted accounting principles ( “GAAP”) and filed
      with the Securities and Exchange Commission (the
      “SEC”).

	
      Redemption:
	
      The
      Series A-1 Preferred is not redeemable.

	
      Board
      of Directors:
	
      The
      holders of a majority of the outstanding shares of the Series A-1
      Preferred shall be entitled to appoint two board observers who shall be
      entitled to receive all information received by the Board of Directors and
      to attend and participate without vote at meetings of the Board of
      Directors and its committees. At the option of the holders of a majority
      of the outstanding shares of the Series A-1 Preferred, the holders of the
      Series A-1 Preferred may temporarily or permanently exchange their board
      observer rights for two seats on the Board of Directors, each having one
      vote.

	
      Company
      Milestone:
	
      If
      the Company does not have aggregate consolidated revenues of more than
      $1,500,000 as reflected on its financial statements for the six months
      ended December 31, 2004 prepared in accordance with GAAP and filed with
      the SEC, the holders of the Series A-1 Preferred shall have the right, but
      not the obligation, to elect a majority of the voting members of the Board
      of Directors. 

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October
6, 2004

 

	
      Voting
      Rights:
	
      Each
      share of Series A-1 Preferred shall represent that number of votes equal
      to the number of shares of Common Stock issuable upon conversion of a
      share of Series A-1 Preferred. The Series A-1 Preferred and the Common
      Stock shall vote together as a class except (i) regarding the election of
      the Board of Directors as set forth above, (ii) as required by law,
      and (iii) as set forth below under “Protective
  Provisions.”

	
      Protective
      Provisions:

       

       

       
	
      Until
      the closing by the Company of an additional $5,000,000 equity financing
      from institutional investors, approval of the holders of at least 2/3 of
      the outstanding shares of the Series A-1 Preferred voting together
      separately as a class will be required for:

       a)   a
      merger, sale of all, or substantially all of the assets or intellectual
      property, recapitalization, or reorganization  the
      Company;

       b)   the
      authorization or issuance of any equity security having any right,
      preference or priority superior to or on parity with the Series A-1
      Preferred (excluding debt not convertible into any such senior or
      pari
      passu
      equity security);

      
       c)   the
      redemption, repurchase or acquisition, directly or indirectly, through
      subsidiaries or otherwise, of any equity securities (other than the
      repurchase of equity securities of the Company at cost upon termination of
      employment or service pursuant to vesting agreements or stockholder
      agreements or a repurchase of the Series A-1 Preferred) or the payment of
      dividends or other distributions on equity securities by the Company
      (other than on the Series A-1 Preferred);

       d)   any
      amendment or repeal of any provision of the Company’s certificate of
      incorporation or by-laws that would adversely affect the rights,
      preferences, or privileges of the Series A-1
      Preferred;

       e)  
      a significant change in the principal business of the Company as conducted
      at the time of the   consummation of the closing of the Merger;
      

       
      f)  the making of any loan or advance to any entity other than in the
      ordinary course of business unless it is wholly owned by the
      Company;

       g)  
      the making of any loan or advance to any person, including, without
      limitation, any employee or director of the Company or any subsidiary,
      except advances and similar expenditures in the ordinary course of
      business or under the terms of an employee stock or option plan approved
      by the Board of Directors and Investor; or

       h)   
      the guarantee, directly or indirectly, of any indebtedness or obligations,
      except for trade accounts of any subsidiary arising in the ordinary course
      of business.

       

      Any
      liquidation, dissolution, recapitalization or reorganization of the
      Company would require a unanimous
      vote of the Board

	 	 
	
      Closing
      Condition- Series D:
	
      The
      Company further agrees to release approximately $780,000
      held in Escrow to SDS Merchant Fund upon closing. SDS shall in lieu ‘put’
      back the equivalent Series D stock as per the agreement laid out in the
      Series-D Securities Purchase Agreement dated March, 2003.
  

	
      Other
      Terms

	
      Transaction
      Costs:
	
      Legal
      fees associated with the Note offering and the Merger will be paid out of
      proceeds from the Note Offering.

       

      BSP
      will receive a fee of 50,000 shares of common stock issued by Newco upon
      consummation of the Merger.

5

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October
6, 2004

 

	
      Board
      Approval:
	
      This
      Term Sheet has been negotiated in good faith between the Investors and the
      Company's management but requires approval by the Company’s Board of
      Directors, whose approval is to be sought no later than
      October 31, 2004.

	
      Indemnification
	
      Whether
      or not the Note Offering or the Merger is consummated, the Company agrees
      to indemnify and hold harmless BSP, and its directors, partners, members,
      managers, officers, employees and agents (collectively, the “Indemnified
      Parties”) from and against any and all losses, claims, damages, expenses
      or liabilities to which any of them may become subject, insofar as such
      losses, claims, damages, expenses or liabilities (or actions, suits or
      proceedings, including any inquiry or investigation or claim in respect
      thereof) arise out of, in any way relate to, or result from any claim by a
      third party in respect of this Term Sheet or the transactions proposed
      herein (whether or not any Indemnified Party is a party to any action or
      proceeding out of which any such losses, claims, damages, expenses or
      liabilities arise), and to reimburse the Indemnified Parties, upon demand,
      for any reasonable expenses (legal or otherwise) incurred by any of them
      in connection therewith (including any costs incurred in investigating,
      preparing to defend, defending or otherwise participating in any such
      claim, action or proceeding related to any such loss, claim, damage or
      liability).

	
      Miscellaneous
	
      This
      Term Sheet may be signed in counterparts, each of which shall be deemed an
      original, but all such counterparts shall constitute one and the same
      agreement. Any party which is not in breach of the binding provisions of
      this Term Sheet, may terminate this Term Sheet by delivery of written
      notice to the other party, and in the event of such termination, the
      parties hereto shall be relieved of all liability hereunder, except for
      breaches of such provisions prior to their termination and except that the
      provisions captioned “Transaction Costs,” “Indemnification,”
      “Miscellaneous” and “Governing Law” shall survive any such
      termination.

	
      Governing
      Law:
	
      The
      binding provisions of this Term Sheet and all duties, obligations and
      rights arising herefrom shall be governed by, and construed in accordance
      with, the laws of the State of New York

	
      Memorandum
      of Terms:
	
      This
      Term Sheet does not set forth all of the terms and conditions of the
      transactions proposed hereby. Rather it is only an outline, in summary
      format, of the major points of understanding, which will form the basis of
      the final documentation. Except as provided in this paragraph and under
      “Transaction Costs,” “Indemnification” “Miscellaneous” and “Governing
      Law,” which are binding, this Term Sheet does not constitute a legally
      binding obligation of any of the parties hereto, BSP may terminate
      discussions with the Company at any time with respect to the matters
      proposed herein.

[Signatures
on Next Page]

6

T
E R M S H E E T

 

October
6, 2004

 

 

AGREED TO
AND ACCEPTED THIS _________ DAY OF OCTOBER 2004.

 

LEVEL
8 SYSTEMS, INC.

 

	
      By:
	
       

	
       
	
       Name:
      John Broderick

		 Title:
      Chief Financial
Officer

 

 

 

SDS
MERCHANT FUND, L.P.,

a
Delaware limited partnership

 

	
       By:
	 
	 	 Its
      Managing Member
	 	 SDS
      Capital Partners, L.L.C.

	 	 
	
       By:
	 
	 	Name:
      Steven Derbly
	 	 Title:
      Managing Member

 

 

 

BROWN
SIMPSON PARTNERS, LTD

 

	
       By:
	 
	 	 Name:
      James Simpson
	 	 Title:
      Managing Director

 

7

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