Document:

Exhibit 4.1

                             SUBSCRIPTION AGREEMENT

     THIS  SUBSCRIPTION  AGREEMENT (this  "Agreement"),  dated as of January __,
2006, by and among HQ Sustainable  Maritime  Industries,  Inc. (formerly Process
Equipment,  Inc.), a Delaware  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 Ten  Million  Dollars  ($10,000,000)  (the  "Purchase  Price") of
principal amount of promissory notes of the Company ("Note" or "Notes"),  a form
of which is  annexed  hereto  as  Exhibit  A,  convertible  into  shares  of the
Company's  common  stock,  $0.001 par value (the "Common  Stock") at a per share
conversion price set forth in the Note ("Conversion  Price"); and share purchase
warrants (the "Warrants"),  in the form annexed hereto as Exhibit B, to purchase
shares of Common Stock (the "Warrant Shares"). 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  pursuant  to the terms of a Funds
Escrow  Agreement  to be  executed  by the  parties  substantially  in the  form
attached hereto as Exhibit C (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.  Closing.  Subject  to the  satisfaction  or waiver of the terms and
conditions  of this  Agreement,  on the  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.  The aggregate  amount of the
Notes to be  purchased  by the  Subscribers  on the Closing  Date shall,  in the
aggregate,  be equal to the Closing  Purchase Price. The "Closing Date" shall be
the date that subscriber funds  representing the net amount due the Company from
the Closing  Purchase  Price of the  Offering  [as  defined in Section  8(b)] 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.

         2.  Warrants.  On the Closing Date,  the Company will issue and deliver
Warrants to the Subscribers. One Class A Warrant and one Class B Warrant will be
issued for each two Shares  which would be issued on the Closing  Date  assuming
the complete conversion of the Note issued on the Closing Date at the Conversion
Price in effect on the Closing  Date.  The per Warrant Share  exercise  price to
acquire a Warrant Share upon  exercise of a Class A Warrant shall be $0.35.  The
per Warrant Share  exercise  price to acquire a Warrant Share upon exercise of a
Class B Warrant shall be $0.40. The Class A Warrants shall be exercisable  until
three (3) years after the  Closing  Date of the  Warrants.  The Class B Warrants
shall be  exercisable  until  five  (5)  years  after  the  Closing  Date of the
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(a)  of  this  Agreement,  and in the  assets  of the
Subsidiaries to be memorialized  in a "Security  Agreement",  a form of which is
annexed  hereto as Exhibit D. Each  Subsidiary  will  execute and deliver to the
Subscribers a form of "Guaranty"  annexed  hereto as Exhibit E. 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 the
jurisdictions,  states and counties  designated by the Subscribers.  The Company
will also  execute all such  documents  reasonably  necessary  in the opinion of

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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 F.

         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.

                  (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 filed
with the Commission  thereafter not later than five days before the Closing Date
(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.

                  (f) Purchase of Notes and Warrants.  On the 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, but Subscriber does not agree
to hold the Notes and Warrants for any minimum amount of time.

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                  (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.

                  (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 HQ SUSTAINABLE MARITIME INDUSTRIES, INC. 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 HQ SUSTAINABLE  MARITIME
         INDUSTRIES, INC. 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 HQ SUSTAINABLE
          MARITIME  INDUSTRIES,  INC.  THAT  SUCH  REGISTRATION  IS  NOT
          REQUIRED."

                  (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

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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  when  employed  in  connection  with the  Company
includes  each  Subsidiary  [as  defined in Section  5(a)] 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 the  Closing  Date  shall be true and  correct  as of the
Closing Date.

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

                  (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 individually, or in the
aggregate, as a whole. 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 Closing Date are set forth on Schedule 5(a)
hereto.

                  (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 Agreement,  Guaranty,  and Collateral
Agent Agreement, and any other agreements delivered together with this Agreement
or in connection herewith (collectively  "Transaction Documents") have been duly

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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). The Common stock of the Company on a fully
diluted basis  outstanding as of the last trading day preceding the Closing Date
is set forth 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,  any  Principal  Market (as defined in
Section 9(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:

                                    (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) 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)  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  and 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;

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                                    (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 have been issued in  reliance  upon
an  exemption  from the  registration  requirements  of and will not result in a
violation of Section 5 under the 1933 Act.

                  (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  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  Securities
Exchange  Act of  1934  (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 investor relations/public  relations activities consistent with
past practices.

                  (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 and all the information  required to be
disclosed  therein.  Since the last day of the  fiscal  year of the most  recent
audited financial  statements included in the Reports ("Latest Financial Date"),
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. The
Company has not provided to the Subscribers any material non-public information.

                  (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.

                  (n) Not an 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 OTC Bulletin  Board  ("Bulletin  Board")  which would impair the  exemptions
relied upon in this Offering or the Company's  ability to timely comply with its
obligations  hereunder.  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

                                       6
<PAGE>

integrated with other offerings which would impair the exemptions relied upon in
this  Offering or the Company's  ability to timely  comply with its  obligations
hereunder. 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,  which would impair the  exemptions  relied upon in this Offering or
the Company's ability to timely comply with its obligations hereunder.

                  (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.  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 the Latest
Financial Date 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 the Latest
Financial Date, 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 and  Subsidiaries  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.

                  (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 a participant
in and the Common  Stock is eligible  for  transfer  pursuant to the  Depository
Trust  Company  Automated   Securities  Transfer  Program.  The  name,  address,
telephone  number,  fax number,  contact person and email address of the Company
transfer agent is set forth on Schedule 5(v) hereto.

                  (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), (e), (f), (h), (k), (m),
(q), (r), (s), (u) and (w) of this Agreement,  as same relate to each Subsidiary
of the Company.

                                       7
<PAGE>

                  (y)  Company  Predecessor.  All  representations  made  by  or
relating  to  the  Company  of  a  historical  or  prospective  nature  and  all
undertakings  described in Sections  9(g) through 9(l) shall  relate,  apply 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 the  Closing  Date,  shall be true and correct in all
material respects as of the Closing Date.

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

         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 G. 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  13(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. "Business day" and "trading
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.

                                       8
<PAGE>

                  (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
may 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) any of which 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, a sum of money determined by
multiplying up to the outstanding principal amount of the Note designated by the
Subscriber  by  120%,   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 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  traded or  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  except  due to  natural  causes,  (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 forty  percent of the Common  stock owned by them on
the Closing Date, or (v) if the Chief Executive Officer of the Company as of the
Closing Date no longer serves as Chief Executive Officer of the Company.

         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.
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 decide whether to convert a Note or
exercise Warrants to achieve an actual 4.99% ownership position.

         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

                                       9
<PAGE>

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.

         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
mandatorily convertible except as described in the Note and Warrants.

         8. Finder/Legal Fees.

                  (a) Finder's Commission. The Company on the one hand, and each
Subscriber  (for himself only) on the other hand,  agrees to indemnify the other
against and hold the other harmless from any and all  liabilities to any persons
claiming  brokerage  commissions  or  similar  fees  other  than the one or more
entities  identified  on  Schedule  8 hereto,  (each a  "Finder")  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.  Anything in this Agreement to the contrary
notwithstanding,  each  Subscriber  is providing  indemnification  only for such
Subscriber's  own actions and not for any action of any other  Subscriber.  Each
Subscriber's  liability  hereunder is several and not joint.  The Company agrees
that it will pay the Finder an  aggregate  cash fee equal to 10% of the Purchase
Price on the Closing Date  directly out of the funds held pursuant to the Escrow
Agreement ("Finder's Fees"). The Finders will also be paid by the Company in the
aggregate,  ten percent (10%) of the cash proceeds  received by the Company from
Warrant  exercise  ("Warrant  Exercise  Compensation").   The  Warrant  Exercise
Compensation  must be paid by the  Company  to the Finder  within  five (5) days
after each receipt by the Company of Warrant Exercise cash proceeds. The Company
represents   that  there  are  no  other  parties   entitled  to  receive  fees,
commissions,  or similar  payments in connection with the offering  described in
this Agreement except the Broker.

                  (b) Finder's  Warrants.  On the Closing Date, the Company will
issue to the  Finders,  Warrants  similar to and carrying the same rights as the
Class B Warrants issuable to the Subscribers  ("Finder's  Warrants") except that
the exercise price shall be $0.35 per Warrant Share. The Finder will receive, in
the  aggregate,  ten (10) Finder's  Warrants for each one hundred (100) Warrants
issuable  on the  Closing  Date to the  Subscribers.  All  the  representations,
covenants,    warranties,    undertakings,    remedies,    liquidated   damages,
indemnification,  and other rights  including but not limited to reservation and
registration rights made or granted to or for the benefit of the Subscribers are
hereby  also made by the  Company  and  granted to the  holders of the  Finder's
Warrants.  Warrant Exercise  Compensation will not be payable in connection with
the Finder's Warrants.

                                       10
<PAGE>

                  (c) Legal Fees.  The  Company  shall pay to Grushko & Mittman,
P.C.,  a cash fee of $25,000  ("Legal  Fees") (of which $5,000 has been paid) 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 Legal Fees and  reimbursement  for  estimated  UCC  searches and filing fees
(less any amounts  paid prior to a Closing  Date) will be payable on the 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,
within  two  hours  after  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.

                  (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, the Bulletin Board is 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) two (2) years after the 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 (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)  voluntarily  comply  with all  reporting  requirements  that are
applicable  to an issuer with a class of shares  registered  pursuant to Section
12(g) of the 1934 Act, if Company is not subject to such reporting requirements,
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 two (2) years after the Closing  Date.  Until the earlier of the resale of
the Common  Stock and the  Warrant  Shares by each  Subscriber  or two (2) 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. For so long as any Notes
are  outstanding,  the  Company  will not  prepay  any  financing  related  debt
obligations nor redeem any equity instruments of the Company.

                                       11
<PAGE>

                  (f)  Reservation.  Prior  to the  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(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) two (2) years after the 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) two (2) years after the 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 less
reasonable  deductible amounts; 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) two (2) years after the 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) two (2) years after the 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.

                  (k) Intellectual Property. From the date of this Agreement and
until the sooner of (i) two (2) years after the 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) two (2) years after the 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.

                                       12
<PAGE>

                  (m) Confidentiality/Public Announcement. From the date of this
Agreement  and until the sooner of (i) two (2) years after the 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
Closing is annexed hereto as Exhibit H.

                  (n) Further Registration Statements. Except for a registration
statement  filed on behalf of the  Subscribers  pursuant  to  Section 11 of this
Agreement,  and as set forth on Schedule 11.1 hereto,  the Company will not file
any registration  statements or amend any already filed registration  statement,
including  but not  limited  to Forms  S-8,  with the  Commission  or with state
regulatory   authorities  without  the  consent  of  the  Subscriber  until  the
expiration of the  "Exclusion  Period",  which shall be defined as 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 180 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.  The
Exclusion  Period will be tolled  during the  pendency of an Event of Default as
defined in the Note.

                  (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.

                  (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)  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 form
annexed  hereto as Exhibit  I, with the  parties  identified  on  Schedule  9(q)
hereto.

                  (r)  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 any  principal
amount of the Notes is  outstanding,  the Company will not enter into any equity
line of credit or similar  agreement,  nor issue nor agree to issue any floating
or variable priced equity linked  instruments nor any of the foregoing or equity
with price reset rights.

                  (s) Negative Covenants. So long as any portion of this Note is
outstanding, the Company will not and will not permit any of its Subsidiaries to
directly or indirectly:

                                    (i) enter  into,  create,  incur,  assume or
suffer to exist any indebtedness or liens of any kind, on or with respect to any
of its  property  or assets  now owned or  hereafter  acquired  or any  interest
therein or any income or profits therefrom that is senior to or pari passu with,
in any respect, the Company's  obligations under the Notes except for debt under
the GSO  facility  of up to  seventy  million  dollars  or if such  facility  is
unavailable,  then a traditional  (non-equity) debt only accounts receivable and
inventory  financing  facility from a conventional  institutional  United States
based financing source;

                                       13
<PAGE>

                                    (ii) amend its certificate of incorporation,
bylaws or its  charter  documents  so as to  adversely  affect any rights of the
Subscriber;

                                    (iii) repay,  repurchase  or offer to repay,
repurchase or otherwise  acquire or make any dividend or distribution in respect
of any of its Common Stock,  Preferred  Stock, or other equity  securities other
than to the extent permitted or required under the Transaction Documents;

                                    (iv)  engage  in any  transactions  with any
officer,  director,  employee or any  Affiliate  of the Company,  including  any
contract,  agreement  or  other  arrangement  providing  for the  furnishing  of
services to or by, providing for rental of real or personal property to or from,
or  otherwise  requiring  payments  to or from  any  officer,  director  or such
employee or, to the  knowledge of the Company,  any entity in which any officer,
director,  or any such  employee  has a  substantial  interest or is an officer,
director,  trustee or partner,  in each case in excess of $10,000 other than (i)
for  payment  of  salary  or  consulting  fees  for  services   rendered,   (ii)
reimbursement for expenses incurred on behalf of the Company and (iii) for other
employee benefits, including stock option agreements under any stock option plan
of the Company.

                  (t) The Company is not required to obtain any consent, waiver,
authorization  or  order  of,  give  any  notice  to,  or  make  any  filing  or
registration with, any court or other governmental  authority or other person or
entity  to  transfer  currency  or  funds  out  of  China  or  repay  any of its
obligations  under the  Transaction  Documents.  The  Company  is unaware of any
impediment  to  its  compliance  with  its  obligations  under  the  Transaction
Documents which impediment derives from the Company's operations in the People's
Republic of China.

         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 Closing Date,  but not later than two (2) years
after the 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

                                       14
<PAGE>

the outstanding Notes 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).

                  (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 within  thirty (30)  calendar  days
after the 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, and 100% of the Warrant Shares issuable pursuant to
this Agreement upon exercise of the Warrants and Finder's Warrants (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  11.1 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  Subscribers  fewer than 125% of the amount of Common  Shares  issuable upon
full  conversion of all sums due under the Notes and 100% of the Warrant  Shares
issuable upon exercise of the Warrants.

                                       15
<PAGE>

         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
same 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 11.4 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

                  (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)

                                       16
<PAGE>

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 three (3) 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  or 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 Actual Effective Date (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 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 at the Company's  election  with  registered
shares of Common  stock  valued at the  Conversion  Price in effect on the first
trading day of each thirty 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.  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. The Company
acknowledges  that it is a  Non-Registration  Event if the Company does not have
sufficient  shares as required  by this  Agreement  included  in a  Registration
Statement prior to or after effectiveness of the Registration Statement.

         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

                                       17
<PAGE>

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.

                  (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.

                                       18
<PAGE>

                  (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.

                  (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.

                  (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

                                       19
<PAGE>

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.

         12. (a) Right of First Refusal.  Until the  Registration  Statement has
been  effective  for 365  days,  the  Subscribers  shall be given  not less than
fourteen (14)  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  which  holders  of such
securities  or debt are not at any time granted  registration  rights,  (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 which holders of such  securities or debt are not at
any time granted  registration  rights,  (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  described on Schedule 5(d)
hereto,  (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 or other damages  pursuant to the
Transaction  Documents,  and (vi) as has been  described in the Reports or Other
Written Information filed with the Commission not later than three Business Days
before the Closing Date  (collectively the foregoing are "Excepted  Issuances").
The  Subscribers  who exercise their rights pursuant to this Section 12(a) shall
have the right during the fourteen (14) 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  fourteen  (14)   business  days   following  the  notice  of
modification to exercise such right.

                  (b) Favored Nations  Provision.  Other than in connection with
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

                                       20
<PAGE>

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-a-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.

                  (c) 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,
11.4, 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 the aforedescribed shares of Common Stock.

                  (d) Maximum  Exercise of Rights.  In the event the exercise of
the rights  described  in Sections  12(a),  12(b) and 12(c) 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: HQ Sustainable Maritime
Industries, Inc., 1511 Third Avenue, Suite 788, Seattle, Washington 98101, Attn:
Norbert Sporns, CEO, telecopier:  (450) 465-7348, with a copy by telecopier only
to:  Joseph  Emas,  Esq.,  1224  Washington  Avenue,   Miami  Beach,  FL  33139,
telecopier:  (305) 531-1274, and (ii) if to the Subscriber,  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,
and (iii) if to the Finder,  to: the address and telecopier  number set forth on
Schedule 8 hereto.

                  (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

                                       21
<PAGE>

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.

                  (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.  To the
extent  permitted by law, 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.

                  (f)  Damages.  In the  event the  Subscriber  is  entitled  to
receive any liquidated damages pursuant to the Transactions,  the Subscriber may
elect to receive the greater of actual damages or such liquidated damages.

                  (g)   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

                                       22
<PAGE>

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.

                  (h) As used in the Agreement,  "consent of the Subscribers" or
similar  language means the consent of holders of not less than 75% of the total
of the Shares issued and issuable upon conversion of outstanding  Notes owned by
Subscribers on the date consent is requested.

                  (i) No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of the Transaction
Documents  unless the same  consideration  is also  offered  and paid to all the
parties to the Transaction Documents.

                      [THIS SPACE INTENTIONALLY LEFT BLANK]

                                       23
<PAGE>

                    SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT

         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.

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
                                        a Delaware corporation

                                        By:_____________________________________
                                           Name:  Norbert Sporns
                                           Title: CEO

                                        Dated: January __, 2006

--------------------------------------------------------------------------------
SUBSCRIBER                 NOTE               CLASS A           CLASS B
                           PRINCIPAL          WARRANTS          WARRANTS
-------------------------  -----------------  ----------------  ----------------

____________________________
(Signature)
By:

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

                                       24
<PAGE>

                         LIST OF EXHIBITS AND SCHEDULES

Exhibit A                  Form of Note

Exhibit B                  Form of Warrant

Exhibit C                  Escrow Agreement

Exhibit D                  Form of Security Agreement

Exhibit E                  Form of Guaranty Agreement

Exhibit F                  Form of Collateral Agent Agreement

Exhibit G                  Form of Legal Opinion

Exhibit H                  Form of Form 8-K or Public Announcement

Exhibit I                  Limit Standstill Agreement

Schedule 5(a)              Subsidiaries

Schedule 5(d)     Additional Issuances / Capitalization

Schedule 5(q)     Undisclosed Liabilities

Schedule 5(v)              Transfer Agent

Schedule 8                 Finder

Schedule 9(e)              Use of Proceeds

Schedule 9(q)     Limited Standstill Agreement Providers

Schedule 11.1     Other Registrable Securities

<PAGE>

                                    EXHIBIT A

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 HQ SUSTAINABLE MARITIME INDUSTRIES,  INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.

Principal $_______________                          Issue Date: January __, 2006

SECURED CONVERTIBLE PROMISSORY NOTE

         FOR  VALUE  RECEIVED,  HQ  SUSTAINABLE  MARITIME  INDUSTRIES,  INC.,  a
Delaware corporation (hereinafter called "Borrower"),  hereby promises to pay to
_____________,  _____________________________,  (the "Holder") or its registered
assigns  or  successors  in  interest  or  order,  without  demand,  the  sum of
[_______________]  Dollars ($___________)  ("Principal Amount"), with simple and
unpaid interest  thereon,  on January ____, 2008 (the "Maturity  Date"),  if not
sooner paid.

         This Note has been entered into pursuant to the terms of a subscription
agreement between the Borrower, the Holder and certain other holders (the "Other
Holders") of secured convertible  promissory notes (the "Other Notes"), dated of
even date herewith (the "Subscription Agreement"),  and shall be governed by the
terms  of such  Subscription  Agreement.  Unless  otherwise  separately  defined
herein,  all capitalized  terms used in this Note shall have the same meaning as
is set forth in the Subscription  Agreement.  The following terms shall apply to
this Note:

                                    ARTICLE I

                   INTEREST; AMORTIZATION; SECURITY AGREEMENT

         1.1. Interest Rate. Subject to Section 6.7 hereof,  interest payable on
this  Note  shall  accrue  at a rate per annum  (the  "Interest  Rate") of eight
percent  (8%).  Interest on the  Principal  Amount shall accrue from the date of
this Note and shall be  payable,  in arrears,  together  with  Principal  Amount
payments as described below and on the Maturity Date, whether by acceleration or
otherwise.

         1.2. Minimum Monthly  Principal  Payments.  Amortizing  payments of the
outstanding  Principal  Amount and  interest of this Note shall  commence on the
third  month  anniversary  date of this  Note and on the same day of each  month
thereafter  (each a "Repayment  Date") until the  Principal  Amount and interest
have been repaid in full, whether by the payment of cash or by the conversion of
such  Principal  amount and  interest  into Common  Stock  pursuant to the terms
hereof.  Subject to Section 2.1 and Article 3 below,  on each Repayment Date the
Borrower shall make payments to the Holder in the amount of 4.545 percent of the
initial Principal  Amount,  all interest accrued on the Note as of the Repayment
Date and any other  amounts  which are then owing  under this Note that have not
been paid  (collectively,  the  "Monthly  Amount").  Amounts of  conversions  of
Principal Amount and interest made by the Holder or Borrower pursuant to Section
2.1 or Article III, and amounts  converted  pursuant to Section 2.3 of this Note
shall be applied  first  against  outstanding  fees and  damages,  then  against
accrued interest on the Principal Amount and then to Monthly Amounts  commencing
with the Monthly  Amount first  payable and then Monthly  Amounts  thereafter in
chronological  order. Any Principal  Amount,  interest and any other sum arising
under the Subscription  Agreement that remains  outstanding on the Maturity Date
shall be due and payable on the Maturity Date.

<PAGE>

         1.3.  Default  Interest  Rate.  Following the occurrence and during the
continuance of an Event of Default,  which,  if susceptible to cure is not cured
within ten (10) days, otherwise then from the first date of such occurrence, the
annual  interest rate on this Note shall (subject to Section 6.7)  automatically
be increased to fifteen percent (15%).

                                   ARTICLE II

                              CONVERSION REPAYMENT

         2.1.  Payment of  Monthly  Amount in Cash or Common  Stock.  Subject to
Section 3.2 hereof,  the Borrower,  at the  Borrower's  election,  shall pay the
Monthly  Amount (i) in cash in an amount equal to 110% of the  Principal  Amount
component of the Monthly Amount and 100% of all other  components of the Monthly
Amount,  within three (3) business days after the applicable  Repayment Date, or
(ii) in  registered  Common  Stock at an  applied  conversion  rate equal to the
lesser of (A) the Fixed Conversion Price (as defined in section 3.1 hereof),  or
(B)  seventy-five  percent  (75%) of the volume  weighted  average  price of the
common  stock as reported  by  Bloomberg  L.P.  using the AQR  function  for the
Principal  Market ("VWAP") for the five trading days preceding the date a Notice
of  Conversion,  if any, [as described in Section 3(a)] is given to the Borrower
by Holder  after  Borrower  notifies  Holder of its  election to pay the Monthly
Amount  with shares of Common  Stock  pursuant to the  following  sentence.  The
Borrower must send notice to the Holder by confirmed  telecopier  not later than
6:00 P.M.,  New York City time on the  twenty-second  trading  day  preceding  a
Repayment  Date  notifying  Holder of  Borrower's  election  to pay the  Monthly
Redemption  Amount in cash or Common Stock.  The Notice must state the amount of
cash to be paid and include supporting  calculations.  If the Borrower elects to
pay the Monthly  Amount with Common Stock and if the Holder does not give Notice
of Conversion  then the Repayment Date shall be deemed the  Conversion  Date and
the  Conversion  Price  shall  be 75% of the  VWAP  for the  five  trading  days
preceding the Repayment  Date.  Amounts paid with shares of Common Stock must be
delivered  to the  Holder as  described  in  Section  3.3(b).  Elections  by the
Borrower  must be made to all Other  Holders in  proportion to the relative Note
principal held by the Holder and the Other Holders. If such notice is not timely
sent or if the Monthly  Redemption Amount is not timely  delivered,  then Holder
shall have the right,  instead  of the  Company,  to elect at any time from when
such notice was required to be given until the applicable Repayment Date whether
to be  paid in cash  or  Common  Stock.  Such  Holder's  election  shall  not be
construed  to be a waiver of any  default by  Borrower  relating  to  non-timely
compliance by Borrower with any of its obligations under this Note.

         2.2.  No  Effective  Registration.   Notwithstanding  anything  to  the
contrary  herein,  no amount  payable  hereunder may be paid in shares of Common
Stock by the  Borrower  without the  Holder's  consent  unless (a) either (i) an
effective current Registration  Statement covering the shares of Common Stock to
be issued in satisfaction of such obligations  exists, or (ii) an exemption from
registration  of the Common  Stock is  available  pursuant to Rule 144(k) of the
1933  Act,  and (b) no Event of  Default  hereunder  (or an event  that with the
passage  of time or the  giving of  notice  could  become an Event of  Default),
exists and is continuing,  unless such event or Event of Default is cured within
any  applicable  cure period or is otherwise  waived in writing by the Holder in
whole or in part at the Holder's option.

         2.3.  Optional  Redemption  of Principal  Amount.  Provided an Event of
Default or an event which with the passage of time or the giving of notice could
become  an Event of  Default  has not  occurred,  whether  or not such  Event of
Default has been  cured,  the  Borrower  will have the option of  prepaying  the
outstanding Principal amount of this Note ("Optional  Redemption"),  in whole or
in part,  by paying to the Holder a sum of money equal to one hundred and twenty
percent (120%) of the Principal amount to be redeemed, together with accrued but
unpaid  interest  thereon and any and all other sums due,  accrued or payable to
the Holder  arising  under this Note or any  Transaction  Document  through  the
Redemption Payment Date as defined below (the "Redemption  Amount").  Borrower's
election to exercise  its right to prepay must be by notice in writing  ("Notice
of  Redemption").  The  Notice of  Redemption  shall  specify  the date for such
Optional Redemption (the "Redemption Payment Date"),  which date shall be thirty
(30) business days after the date of the Notice of Redemption  (the  "Redemption
Period").  A Notice of  Redemption  shall not be  effective  with respect to any
portion of the Principal  Amount for which the Holder has a pending  election to
convert,  or for  conversions  initiated  or  made  by  the  Holder  during  the
Redemption Period. On the Redemption  Payment Date, the Redemption Amount,  less
any portion of the Redemption  Amount against which the Holder has exercised its
conversion  rights,  shall be paid in good funds to the Holder. In the event the
Borrower  fails to pay the Redemption  Amount on the Redemption  Payment Date as
set forth herein, then (i) such Notice of Redemption will be null and void, (ii)
Borrower will have no right to deliver  another Notice of Redemption,  and (iii)
Borrower's failure may be deemed by Holder to be a non-curable Event of Default.

<PAGE>

A  Redemption  Notice may be given only at a time a  Registration  Statement  is
effective.  A  Notice  of  Redemption  may not be  given  nor  may the  Borrower
effectuate a Redemption without the consent of the Holder, if at any time during
the Redemption  Period an Event of Default or an Event which with the passage of
time or giving of notice could  become an Event of Default  (whether or not such
Event of Default has been  cured),  has occurred or the  Registration  Statement
registering  the  Registrable  Securities is not  effective  each day during the
Redemption Period.

                                   ARTICLE III

                                CONVERSION RIGHTS

         3.1.  Holder's  Conversion  Rights.  Subject to Section 3.2, the Holder
shall have the right, but not the obligation at all times, to convert all or any
portion of the then aggregate  outstanding  Principal  Amount of this Note, into
shares of Common Stock,  subject to the terms and  conditions  set forth in this
Article III at the rate of $0.30 per share of Common  Stock  ("Fixed  Conversion
Price")  as same may be  adjusted  pursuant  to this  Note and the  Subscription
Agreement.  The Holder may exercise  such right by delivery to the Borrower of a
written Notice of Conversion pursuant to Section 3.3. After the occurrence of an
Event of Default,  the Fixed  Conversion  Price shall be the lesser of the Fixed
Conversion  Price  or 75% of the  VWAP  for the  five  trading  days  prior to a
Conversion Date.

         3.2. Conversion Limitation. The Holder 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 Holder and its affiliates on a
Conversion  Date,  (ii)  any  Common  Stock  issuable  in  connection  with  the
unconverted  portion of the Note, and (iii) 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 Holder and its affiliates of more than 4.99% of the
outstanding  shares of Common Stock of the Borrower 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 Holder shall not be limited to aggregate conversions of only
4.99% and aggregate  conversion by the Holder may exceed 4.99%. The Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section 3.2 will limit any  conversion  hereunder and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination  of  which  portion  of the  Notes  are  convertible  shall be the
responsibility and obligation of the Holder. The Holder may waive the conversion
limitation  described  in this  Section  3.2,  in  whole  or in  part,  upon and
effective  after 61 days prior written  notice to the  Borrower.  The Holder may
allocate  decide  whether to convert a Note or  exercise  Warrants to achieve an
actual 4.99% ownership position.

         3.3. Mechanics of Holder's Conversion.

                  (a) In the event that the Holder elects to convert any amounts
outstanding  under this Note into Common Stock,  the Holder shall give notice of
such election by  delivering  an executed and completed  notice of conversion (a
"Notice of  Conversion")  to the  Borrower,  which  Notice of  Conversion  shall
provide a  breakdown  in  reasonable  detail of the  Principal  Amount,  accrued
interest and amounts  being  converted.  The original Note is not required to be
surrendered to the Borrower until all sums due under the Note have been paid. On
each Conversion Date (as hereinafter  defined) and in accordance with its Notice
of Conversion,  the Holder shall make the appropriate reduction to the Principal
Amount,  accrued interest and fees as entered in its records. Each date on which
a Notice of  Conversion is delivered or telecopied to the Borrower in accordance
with the provisions hereof shall be deemed a "Conversion Date." A form of Notice
of Conversion to be employed by the Holder is annexed hereto as Exhibit A.

                  (b)  Pursuant  to the  terms of a Notice  of  Conversion,  the
Borrower will issue instructions to the transfer agent accompanied by an opinion
of counsel,  if so required by the Borrower's transfer agent and shall cause the
transfer agent to transmit the certificates  representing the Conversion  Shares
to the Holder by crediting  the account of the Holder's  designated  broker with
the Depository Trust  Corporation  ("DTC") through its Deposit  Withdrawal Agent
Commission  ("DWAC")  system within three (3) business days after receipt by the
Borrower of the Notice of Conversion (the "Delivery  Date").  In the case of the
exercise of the  conversion  rights set forth  herein the  conversion  privilege
shall be deemed to have been exercised and the Conversion  Shares  issuable upon
such conversion  shall be deemed to have been issued upon the date of receipt by
the  Borrower of the Notice of  Conversion.  The Holder shall be treated for all
purposes as the record holder of such shares of Common Stock,  unless the Holder

<PAGE>

provides the Borrower written instructions to the contrary.  Notwithstanding the
foregoing to the  contrary,  the  Borrower or its  transfer  agent shall only be
obligated to issue and deliver the shares to the DTC on the Holder's  behalf via
DWAC (or certificates free of restrictive legends) if the registration statement
providing  for the  resale  of the  shares  of Common  Stock  issuable  upon the
conversion  of this Note is  effective  and the  Holder  has  complied  with all
applicable  securities  laws in  connection  with the sale of the Common  Stock,
including,  without  limitation,  the prospectus delivery  requirements.  In the
event that  Conversion  Shares  cannot be delivered to the Holder via DWAC,  the
Borrower shall deliver physical certificates  representing the Conversion Shares
by the Delivery Date.

         3.4. Conversion Mechanics.

                  (a) The  number of shares  of Common  Stock to be issued  upon
each conversion of this Note pursuant to this Article III shall be determined by
dividing  that  portion  of the  Principal  Amount and  interest  and fees to be
converted, if any, by the then applicable Fixed Conversion Price.

                  (b) The Fixed  Conversion  Price and number and kind of shares
or other  securities to be issued upon conversion shall be subject to adjustment
from time to time upon the  happening of certain  events  while this  conversion
right remains outstanding, as follows:

                                    A.  Merger,  Sale  of  Assets,  etc.  If the
Borrower at any time shall  consolidate with or merge into or sell or convey all
or substantially all its assets to any other  corporation,  this Note, as to the
unpaid principal portion thereof and accrued interest thereon,  shall thereafter
be deemed to evidence  the right to  purchase  such number and kind of shares or
other  securities and property as would have been issuable or  distributable  on
account of such consolidation,  merger, sale or conveyance, upon or with respect
to the securities  subject to the conversion or purchase right immediately prior
to such consolidation, merger, sale or conveyance. The foregoing provision shall
similarly  apply to  successive  transactions  of a  similar  nature by any such
successor or purchaser.  Without  limiting the generality of the foregoing,  the
anti-dilution  provisions of this Section shall apply to such securities of such
successor or purchaser after any such consolidation, merger, sale or conveyance.

                                    B. Reclassification, etc. If the Borrower at
any time shall, by reclassification  or otherwise,  change the Common Stock into
the same or a different number of securities of any class or classes, this Note,
as to the unpaid principal portion thereof and accrued interest  thereon,  shall
thereafter  be deemed to evidence  the right to  purchase an adjusted  number of
such securities and kind of securities as would have been issuable as the result
of such  change  with  respect to the  Common  Stock  immediately  prior to such
reclassification or other change.

                                    C. Stock Splits, Combinations and Dividends.
If the  shares of Common  Stock are  subdivided  or  combined  into a greater or
smaller number of shares of Common Stock, or if a dividend is paid on the Common
Stock in shares of Common Stock, the Conversion  Price shall be  proportionately
reduced in case of subdivision  of shares or stock  dividend or  proportionately
increased in the case of combination  of shares,  in each such case by the ratio
which the total number of shares of Common Stock  outstanding  immediately after
such  event  bears to the total  number of  shares of Common  Stock  outstanding
immediately prior to such event.

                                    D. Share  Issuance.  So long as this Note is
outstanding,  if the  Borrower  shall  issue any  Common  Stock  except  for the
Excepted  Issuances  (as defined in the  Subscription  Agreement),  prior to the
complete  conversion or payment of this Note, for a consideration  less than the
Fixed Conversion Price that would be in effect at the time of such issue,  then,
and thereafter  successively upon each such issuance, the Fixed Conversion Price
shall  be  reduced  to such  other  lower  issue  price.  For  purposes  of this
adjustment,  the  issuance of any  security or debt  instrument  of the Borrower
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant,  right or option to purchase  Common Stock shall result in an
adjustment   to  the  Fixed   Conversion   Price  upon  the   issuance   of  the
above-described  security, debt instrument,  warrant, right, or option and again
upon the issuance of shares of Common Stock upon exercise of such  conversion or
purchase  rights if such  issuance is at a price lower than the then  applicable
Conversion  Price. The reduction of the Fixed Conversion Price described in this
paragraph  is in addition  to the other  rights of the Holder  described  in the
Subscription Agreement.

                  (c)  Whenever  the  Conversion  Price is adjusted  pursuant to
Section  3.4(b) above,  the Borrower  shall promptly mail to the Holder a notice
setting forth the  Conversion  Price after such  adjustment  and setting forth a
statement of the facts requiring such adjustment.

<PAGE>

         3.5.  Reservation.  During  the  period the  conversion  right  exists,
Borrower  will reserve from its  authorized  and unissued  Common Stock not less
than one hundred  seventy-five percent (175%) of the number of shares to provide
for the issuance of Common Stock upon the full conversion of this Note. Borrower
represents  that upon  issuance,  such shares  will be duly and validly  issued,
fully paid and  non-assessable.  Borrower  agrees that its issuance of this Note
shall constitute full authority to its officers, agents, and transfer agents who
are charged with the duty of executing and issuing stock certificates to execute
and issue the  necessary  certificates  for  shares  of  Common  Stock  upon the
conversion of this Note.

         3.6 Issuance of Replacement  Note. Upon any partial  conversion of this
Note, a replacement  Note  containing  the same date and provisions of this Note
shall,  at the written  request of the Holder,  be issued by the Borrower to the
Holder for the outstanding  Principal  Amount of this Note and accrued  interest
which shall not have been converted or paid,  provided Holder has surrendered an
original  Note to the  Company.  In the  event  that the  Holder  elects  not to
surrender a Note for reissuance upon partial  payment or conversion,  the Holder
hereby indemnifies the Borrower 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.

                                   ARTICLE IV

                                SECURITY INTEREST

         4. Security  Interest/Waiver of Automatic Stay. This Note is secured by
a security  interest  granted  to the  Collateral  Agent for the  benefit of the
Holder pursuant to a Security Agreement, as delivered by Borrower to Holder. The
Borrower  acknowledges  and agrees that should a proceeding under any bankruptcy
or  insolvency  law be  commenced by or against the  Borrower,  or if any of the
Collateral (as defined in the Security  Agreement)  should become the subject of
any bankruptcy or insolvency proceeding,  then the Holder should be entitled to,
among  other  relief to which the Holder may be entitled  under the  Transaction
Documents  and any other  agreement to which the Borrower and Holder 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 Holder to exercise all of its rights and remedies  pursuant to
the Loan Documents  and/or  applicable law. TO THE EXTENT  PERMITTED BY LAW, THE
BORROWER EXPRESSLY WAIVES THE BENEFIT OF THE AUTOMATIC STAY IMPOSED BY 11 U.S.C.
SECTION 362.  FURTHERMORE,  THE BORROWER 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 HOLDER TO ENFORCE ANY OF ITS RIGHTS AND  REMEDIES  UNDER THE LOAN  DOCUMENTS
AND/OR  APPLICABLE  LAW. The Borrower  hereby  consents to any motion for relief
from  stay  that may be filed by the  Holder  in any  bankruptcy  or  insolvency
proceeding initiated by or against the Borrower and, further, agrees not to file
any  opposition  to any  motion for relief  from stay filed by the  Holder.  The
Borrower  represents,  acknowledges and agrees that this provision is a specific
and material aspect of the Loan  Documents,  and that the Holder would not agree
to the terms of the Loan  Documents if this waiver were not a part of this Note.
The Borrower  further  represents,  acknowledges  and agrees that this waiver is
knowingly,  intelligently  and voluntarily made, that neither the Holder nor any
person  acting on behalf of the  Holder has made any  representations  to induce
this waiver,  that the Borrower has been represented (or has had the opportunity
to he represented) in the signing of this Note and the Loan Documents and in the
making of this waiver by independent  legal counsel selected by the Borrower and
that the Borrower has discussed this waiver with counsel.

                                    ARTICLE V

                                EVENTS OF DEFAULT

         The  occurrence  of any of the following  events of default  ("Event of
Default") shall, at the option of the Holder hereof,  make all sums of principal
and  interest  then  remaining  unpaid  hereon  and all  other  amounts  payable
hereunder  immediately due and payable,  upon demand,  without  presentment,  or
grace  period,  all of which hereby are  expressly  waived,  except as set forth
below:

<PAGE>

         5.1 Failure to Pay Principal or Interest. The Borrower fails to pay any
installment  of Principal  Amount,  interest or other sum due under this Note or
any  Transaction  Document  when due and such failure  continues for a period of
five (5) business days after the due date.

         5.2 Breach of Covenant.  The Borrower breaches any material covenant or
other  term or  condition  of the  Subscription  Agreement,  this  Note or other
Transaction  Document in any  material  respect and such  breach,  if subject to
cure,  continues for a period of ten (10) business days after written  notice to
the Borrower from the Holder.

         5.3   Breach  of   Representations   and   Warranties.   Any   material
representation  or warranty of the  Borrower  made herein,  in the  Subscription
Agreement,  Transaction  Document or in any agreement,  statement or certificate
given in writing pursuant hereto or in connection herewith or therewith shall be
false or misleading in any material  respect as of the date made and the Closing
Date.

         5.4  Receiver or Trustee.  The Borrower or any  Subsidiary  of Borrower
shall make an assignment  for the benefit of creditors,  or apply for or consent
to the  appointment of a receiver or trustee for them or for a substantial  part
of their property or business;  or such a receiver or trustee shall otherwise be
appointed.

         5.5 Judgments.  Any money judgment, writ or similar final process shall
be entered or filed  against  Borrower or any  subsidiary  of Borrower or any of
their  property  or other  assets  for more  than  $100,000,  and  shall  remain
unvacated, unbonded or unstayed for a period of forty-five (45) days.

         5.6 Non-Payment.  The Borrower shall have received a notice of default,
which remains  uncured for a period of more than thirty (30)  business  days, on
the payment of any one or more debts or obligations aggregating in excess of Two
Hundred Thousand Dollars (US $200,000.00) beyond any applicable grace period;

         5.7 Bankruptcy. Bankruptcy,  insolvency,  reorganization or liquidation
proceedings or other  proceedings or relief under any bankruptcy law or any law,
or the  issuance  of any notice in  relation  to such  event,  for the relief of
debtors  shall be  instituted  by or against the Borrower or any  Subsidiary  of
Borrower and if instituted against them are not dismissed within sixty (60) days
of initiation.

         5.8  Delisting.  Failure of the Common  Stock to be quoted or listed on
the OTC Bulletin Board ("Bulletin Board") or other Principal Market;  failure to
comply with the requirements  for continued  listing on the Bulletin Board for a
period of seven  consecutive  trading  days; or  notification  from the Bulletin
Board or any Principal  Market that the Borrower is not in  compliance  with the
conditions for such continued  listing on the Bulletin Board or other  Principal
Market.

         5.9 Stop Trade. An SEC or judicial stop trade order or Principal Market
trading  suspension with respect to Borrower's  Common Stock that lasts for five
or more consecutive trading days.

         5.10 Failure to Deliver  Common Stock or Replacement  Note.  Borrower's
failure to timely deliver Common Stock to the Holder pursuant to and in the form
required  by this Note or the  Subscription  Agreement,  and,  if  requested  by
Borrower,  a replacement  Note, and such failure continues for a period of three
(3) business days after the due date.

         5.11 Non-Registration Event. The occurrence of a Non-Registration Event
as described in the Subscription Agreement.

         5.12 Reverse  Splits.  The Borrower  effectuates a reverse split of its
Common Stock without twenty days prior written notice to the Holder.

         5.13 Cross  Default.  A default  by the  Borrower  of a material  term,
covenant, warranty or undertaking of any Transaction Document or other agreement
to which the Borrower and Holder are parties,  or the  occurrence  of a material
event of default  under any such other  agreement  which is not cured  after any
required notice and/or cure period.

                                   ARTICLE VI

                                  MISCELLANEOUS

<PAGE>

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

         6.2 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 Borrower to: HQ Sustainable Maritime
Industries, Inc., 1511 Third Avenue, Suite 788, Seattle, Washington 98101, Attn:
Norbert Sporns, CEO, telecopier:  (450) 465-7348, with a copy by telecopier only
to:  Joseph  Emas,  Esq.,  1224  Washington  Avenue,   Miami  Beach,  FL  33139,
telecopier:  (305) 531-1274, and (ii) if to the Holder, to the name, address and
telecopy  number  set  forth  on the  front  page of this  Note,  with a copy by
telecopier  only to Grushko & Mittman,  P.C., 551 Fifth Avenue,  Suite 1601, New
York, New York 10176, telecopier number: (212) 697-3575.

         6.3 Amendment Provision.  The term "Note" and all reference thereto, as
used  throughout  this  instrument,  shall mean this  instrument  as  originally
executed,  or  if  later  amended  or  supplemented,   then  as  so  amended  or
supplemented.

         6.4 Assignability. This Note shall be binding upon the Borrower and its
successors  and  assigns,  and shall  inure to the benefit of the Holder and its
successors and assigns.

         6.5 Cost of Collection. If default is made in the payment of this Note,
Borrower shall pay the Holder hereof  reasonable costs of collection,  including
reasonable attorneys' fees.

         6.6  Governing  Law.  This Note 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 state courts of New York or in the federal courts located in the state of
New York.  Both  parties and the  individual  signing this Note on behalf of the
Borrower  agree to submit to the  jurisdiction  of such courts.  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 Note is
invalid or unenforceable  under any applicable statute or rule of law, then such
provision  shall  be  deemed  inoperative  to the  extent  that it may  conflict
therewith  and shall be deemed  modified to conform with such statute or rule of
law. Any such provision which may prove invalid or  unenforceable  under any law
shall not affect the validity or unenforceability of any other provision of this
Note. Nothing contained herein shall be deemed or operate to preclude the Holder
from  bringing  suit or taking  other legal  action  against the Borrower in any
other  jurisdiction  to  collect on the  Borrower's  obligations  to Holder,  to
realize on any  collateral  or any other  security for such  obligations,  or to
enforce a judgment or other court in favor of the Holder.

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

<PAGE>

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

         6.9  Redemption.  This Note may not be redeemed  or called  without the
consent of the Holder except as described in this Note.

         6.10  Shareholder  Status.  The  Holder  shall  not  have  rights  as a
shareholder of the Borrower with respect to  unconverted  portions of this Note.
However,  the Holder will have the rights of a shareholder  of the Borrower with
respect to the  Shares of Common  Stock to be  received  after  delivery  by the
Holder of a Conversion Notice to the Borrower.

         IN WITNESS  WHEREOF,  Borrower has caused this Note to be signed in its
name by an authorized officer as of the ____ day of January, 2006.

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

                                        By:________________________________
                                           Name:
                                           Title:

WITNESS:

____________________________

<PAGE>

                              NOTICE OF CONVERSION

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

         The  undersigned  hereby elects to convert  $_________ of the principal
and $_________ of the interest due on the Note issued by HQ Sustainable Maritime
Industries,  Inc.  on  January  ____,  2006 into  Shares  of Common  Stock of HQ
Sustainable  Maritime  Industries,   Inc.  (the  "Borrower")  according  to  the
conditions set forth in such Note, as of the date written below.

Date of Conversion:_____________________________________________________________

Conversion Price:_______________________________________________________________

Number of Shares of Common Stock Beneficially Owned on the Conversion Date: Less
than 5% of the outstanding Common Stock of HQ Sustainable  Maritime  Industries,
Inc.

Shares To Be Delivered:_________________________________________________________

Signature:______________________________________________________________________

Print Name:_____________________________________________________________________

Address:________________________________________________________________________

        ________________________________________________________________________

<PAGE>

                                    EXHIBIT B

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  UNDER  SAID ACT OR AN  OPINION  OF  COUNSEL  REASONABLY
SATISFACTORY TO HQ SUSTAINABLE MARITIME INDUSTRIES,  INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.

                                    Right to Purchase  ________ shares of Common
                                    Stock of HQ Sustainable Maritime Industries,
                                    Inc.  (subject  to  adjustment  as  provided
                                    herein)

                      CLASS A COMMON STOCK PURCHASE WARRANT

No. 2006-A-001                                      Issue Date: January __, 2006

         HQ SUSTAINABLE MARITIME INDUSTRIES, INC., a corporation organized under
the laws of the State of Delaware (the  "Company"),  hereby  certifies that, for
value  _______________________  or its  assigns  (the  "Holder"),  is  entitled,
subject to the terms set forth below,  to purchase  from the Company at any time
after the Issue Date until 5:00 p.m.,  E.S.T on the third (3rd)  anniversary  of
the Issue Date (the "Expiration  Date"),  ________ fully paid and  nonassessable
shares  of  Common  Stock  at  a  per  share  purchase   price  of  $0.35.   The
aforedescribed purchase price per share, as adjusted from time to time as herein
provided,  is  referred  to herein  as the  "Purchase  Price."  The  number  and
character of such shares of Common  Stock and the Purchase  Price are subject to
adjustment as provided herein. The Company may reduce the Purchase Price without
the  consent of the Holder.  Capitalized  terms used and not  otherwise  defined
herein shall have the meanings set forth in that certain Subscription  Agreement
(the  "Subscription  Agreement"),  dated January ___, 2006,  entered into by the
Company and Holders of the Warrants.

         As used  herein  the  following  terms,  unless the  context  otherwise
requires, have the following respective meanings:

         (a)  The  term  "Company"   shall  include  HQ   Sustainable   Maritime
Industries,  Inc.  and  any  corporation  which  shall  succeed  or  assume  the
obligations of HQ Sustainable Maritime Industries, Inc. hereunder.

         (b) The term "Common  Stock"  includes (a) the Company's  Common Stock,
$0.001  par value  per  share,  as  authorized  on the date of the  Subscription
Agreement,  and (b) any  other  securities  into  which or for  which any of the
securities  described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.

         (c) The term "Other  Securities" refers to any stock (other than Common
Stock) and other  securities  of the Company or any other person  (corporate  or
otherwise)  which the holder of the  Warrant at any time  shall be  entitled  to
receive,  or shall have received,  on the exercise of the Warrant, in lieu of or
in  addition  to Common  Stock,  or which at any time shall be issuable or shall
have been  issued in exchange  for or in  replacement  of Common  Stock or Other
Securities pursuant to Section 5 or otherwise.

         (d) The term "Warrant Shares" shall mean the Common Stock issuable upon
exercise of this Warrant.

<PAGE>

         1. Exercise of Warrant.

                  1.1. Number of Shares  Issuable upon Exercise.  From and after
the Issue Date through and  including  the  Expiration  Date,  the Holder hereof
shall  be  entitled  to  receive,  upon  exercise  of this  Warrant  in whole in
accordance  with the terms of subsection 1.2 or upon exercise of this Warrant in
part in accordance  with  subsection 1.3, shares of Common Stock of the Company,
subject to adjustment pursuant to Section 4.

                  1.2. Full  Exercise.  This Warrant may be exercised in full by
the Holder  hereof by delivery of an original or  facsimile  copy of the form of
subscription  attached  as  Exhibit  A hereto  (the  "Subscription  Form")  duly
executed by such Holder and  surrender of the original  Warrant  within four (4)
days of exercise, to the Company at its principal office or at the office of its
Warrant Agent (as provided  hereinafter),  accompanied by payment, in cash, wire
transfer  or by  certified  or official  bank check  payable to the order of the
Company,  in the amount  obtained by multiplying  the number of shares of Common
Stock for which this Warrant is then  exercisable  by the Purchase Price then in
effect.

                  1.3. Partial  Exercise.  This Warrant may be exercised in part
(but not for a fractional  share) by surrender of this Warrant in the manner and
at the place  provided in subsection  1.2 except that the amount  payable by the
Holder on such partial  exercise shall be the amount obtained by multiplying (a)
the  number of whole  shares of Common  Stock  designated  by the  Holder in the
Subscription  Form by (b) the Purchase Price then in effect. On any such partial
exercise,  the Company,  at its expense,  will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor,  in the name of
the  Holder  hereof  or as such  Holder  (upon  payment  by such  Holder  of any
applicable  transfer  taxes) may  request,  the whole number of shares of Common
Stock for which such Warrant may still be exercised.

                  1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean:

                                    (a) If the Company's  Common Stock is traded
on an exchange or is quoted on the National  Association of Securities  Dealers,
Inc. Automated Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap
Market or the American Stock Exchange, LLC, then the closing or last sale price,
respectively,  reported for the last  business  day  immediately  preceding  the
Determination Date;

                                    (b) If the  Company's  Common  Stock  is not
traded on an  exchange  or on the  NASDAQ  National  Market  System,  the NASDAQ
SmallCap  Market or the  American  Stock  Exchange,  Inc.,  but is traded in the
over-the-counter  market,  then the  average of the  closing  bid and ask prices
reported for the last business day immediately preceding the Determination Date;

                                    (c) Except as  provided in clause (d) below,
if the Company's Common Stock is not publicly traded, then as the Holder and the
Company  agree,  or in the  absence  of such an  agreement,  by  arbitration  in
accordance with the rules then standing of the American Arbitration Association,
before a single  arbitrator  to be chosen from a panel of persons  qualified  by
education and training to pass on the matter to be decided; or

                                    (d) If the Determination Date is the date of
a  liquidation,  dissolution  or  winding  up,  or  any  event  deemed  to  be a
liquidation,  dissolution or winding up pursuant to the Company's charter,  then
all amounts to be payable per share to holders of the Common  Stock  pursuant to
the charter in the event of such  liquidation,  dissolution  or winding up, plus
all other  amounts  to be payable  per share in  respect of the Common  Stock in
liquidation under the charter, assuming for the purposes of this clause (d) that
all of the shares of Common  Stock then  issuable  upon  exercise  of all of the
Warrants are outstanding at the Determination Date.

                  1.5. Company Acknowledgment.  The Company will, at the time of
the exercise of the Warrant,  upon the request of the Holder hereof  acknowledge
in writing  its  continuing  obligation  to afford to such  Holder any rights to
which  such  Holder  shall  continue  to be  entitled  after  such  exercise  in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.

                  1.6.  Trustee  for  Warrant  Holders.  In  the  event  that  a
qualified  bank or trust  company  shall have been  appointed as trustee for the
Holder of the Warrants  pursuant to  Subsection  3.2, such bank or trust company

<PAGE>

shall  have all the  powers  and  duties  of a  warrant  agent  (as  hereinafter
described)  and shall accept,  in its own name for the account of the Company or
such successor person as may be entitled thereto,  all amounts otherwise payable
to the  Company  or such  successor,  as the case may be,  on  exercise  of this
Warrant pursuant to this Section 1.

                  1.7  Delivery of Stock  Certificates,  etc. on  Exercise.  The
Company  agrees that the shares of Common Stock  purchased upon exercise of this
Warrant shall be deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this Warrant  shall
have been surrendered and payment made for such shares as aforesaid.  As soon as
practicable  after the exercise of this  Warrant in full or in part,  and in any
event  within  three (3) business  days  thereafter,  the Company at its expense
(including  the payment by it of any  applicable  issue  taxes) will cause to be
issued in the name of and  delivered  to the Holder  hereof,  or as such  Holder
(upon  payment by such Holder of any  applicable  transfer  taxes) may direct in
compliance with applicable  securities  laws, a certificate or certificates  for
the number of duly and validly issued,  fully paid and  nonassessable  shares of
Common  Stock (or Other  Securities)  to which such Holder  shall be entitled on
such exercise,  plus, in lieu of any fractional share to which such Holder would
otherwise be entitled,  cash equal to such fraction  multiplied by the then Fair
Market Value of one full share of Common Stock, together with any other stock or
other securities and property  (including cash, where  applicable) to which such
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

        2. Cashless Exercise.

                  (a) Except as described below, if a Registration Statement (as
defined in the Subscription Agreement)  ("Registration  Statement") is effective
and the Holder may sell its shares of Common Stock upon exercise hereof pursuant
to the  Registration  Statement,  this Warrant may be exercisable in whole or in
part for cash only as set  forth in  Section  1 above.  If no such  Registration
Statement  is  available  during the time that such  Registration  Statement  is
required to be effective  pursuant to the terms of the  Subscription  Agreement,
then commencing one year after the Issue Date, payment upon exercise may be made
at the option of the Holder either in (i) cash, wire transfer or by certified or
official bank check payable to the order of the Company equal to the  applicable
aggregate  Purchase Price,  (ii) by cashless exercise in accordance with Section
(b) below or (iii) by a  combination  of any of the foregoing  methods,  for the
number of Common Stock  specified in such form (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common Stock
issuable  to the holder  per the terms of this  Warrant)  and the  holder  shall
thereupon be entitled to receive the number of duly authorized,  validly issued,
fully-paid  and  non-assessable  shares  of Common  Stock (or Other  Securities)
determined as provided herein.

                  (b) If the Fair Market  Value of one share of Common  Stock is
greater than the Purchase Price (at the date of calculation as set forth below),
in lieu of  exercising  this  Warrant for cash,  the holder may elect to receive
shares equal to the value (as determined  below) of this Warrant (or the portion
thereof being cancelled) by surrender of this Warrant at the principal office of
the Company together with the properly endorsed Subscription Form in which event
the  Company  shall  issue to the  holder a number of  shares  of  Common  Stock
computed using the following formula:

                            X=Y (A-B)
                            A

                  Where    X=       the  number of shares of Common  Stock to be
                                    issued to the holder

                           Y=       the   number  of  shares  of  Common   Stock
                                    purchasable  under the Warrant or, if only a
                                    portion of the  Warrant is being  exercised,
                                    the portion of the Warrant  being  exercised
                                    (at the date of such calculation)

                           A=       the Fair  Market  Value of one  share of the
                                    Company's  Common Stock (at the date of such
                                    calculation)

                           B=       Purchase  Price (as  adjusted to the date of
                                    such calculation)

                  (c) The  Holder  may  employ  the  cashless  exercise  feature
described in Section (b) above commencing one year after the Issue Date and only
during the  pendency of a  Non-Registration  Event as described in Section 11 of
the Subscription Agreement.  For purposes of Rule 144 promulgated under the 1933

<PAGE>

Act, it is intended,  understood and acknowledged that the Warrant Shares issued
in a cashless exercise  transaction shall be deemed to have been acquired by the
Holder,  and the holding  period for the Warrant  Shares shall be deemed to have
commenced,  on the date this  Warrant  was  originally  issued  pursuant  to the
Subscription Agreement.

         3. Adjustment for Reorganization, Consolidation, Merger, etc.

                  3.1.  Reorganization,  Consolidation,  Merger, etc. In case at
any time or from time to time,  the Company  shall (a) effect a  reorganization,
(b)  consolidate  with or merge  into any other  person or (c)  transfer  all or
substantially all of its properties or assets to any other person under any plan
or arrangement  contemplating the dissolution of the Company, then, in each such
case,  as a condition  to the  consummation  of such a  transaction,  proper and
adequate  provision  shall be made by the  Company  whereby  the  Holder of this
Warrant,  on the exercise hereof as provided in Section 1, at any time after the
consummation of such  reorganization,  consolidation  or merger or the effective
date of such  dissolution,  as the case may be,  shall  receive,  in lieu of the
Common  Stock (or Other  Securities)  issuable  on such  exercise  prior to such
consummation or such effective date, the stock and other securities and property
(including  cash) to which  such  Holder  would  have  been  entitled  upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant,  immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.

                  3.2.  Dissolution.  In the  event  of any  dissolution  of the
Company  following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution,  shall at its expense deliver or
cause to be delivered  the stock and other  securities  and property  (including
cash, where applicable)  receivable in accordance with Section 3.1 by the Holder
of the Warrants upon their exercise after the effective date of such dissolution
pursuant to this Section 3 to a bank or trust company (a  "Trustee")  having its
principal office in New York, NY, as trustee for the Holder of the Warrants.

                  3.3.   Continuation   of  Terms.   Upon  any   reorganization,
consolidation,  merger or transfer (and any dissolution  following any transfer)
referred to in this  Section 3, this  Warrant  shall  continue in full force and
effect and the terms  hereof shall be  applicable  to the Other  Securities  and
property  receivable on the exercise of this Warrant after the  consummation  of
such   reorganization,   consolidation  or  merger  or  the  effective  date  of
dissolution  following  any such  transfer,  as the case  may be,  and  shall be
binding upon the issuer of any Other Securities,  including,  in the case of any
such transfer,  the person acquiring all or substantially  all of the properties
or assets of the  Company,  whether  or not such  person  shall  have  expressly
assumed  the terms of this  Warrant as  provided in Section 4. In the event this
Warrant does not continue in full force and effect after the consummation of the
transaction  described  in this  Section  3,  then only in such  event  will the
Company's securities and property (including cash, where applicable)  receivable
by the Holder of the  Warrants be delivered  to the Trustee as  contemplated  by
Section 3.2.

                  3.4 Share Issuance.  Until the Expiration Date, if the Company
shall issue any Common Stock except for the  Excepted  Issuances  (as defined in
the Subscription Agreement),  prior to the complete exercise of this Warrant for
a consideration less than the Purchase Price that would be in effect at the time
of such issue,  then,  and  thereafter  successively  upon each such issue,  the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment,  the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant,  right or option to purchase  Common Stock shall result in an
adjustment  to the  Purchase  Price  upon the  issuance  of the  above-described
security,  debt instrument,  warrant,  right, or option if such issuance is at a
price lower than the Purchase Price in effect upon such issuance.  The reduction
of the Purchase Price  described in this Section 3.4 is in addition to the other
rights of the Holder described in the Subscription Agreement.

         4.  Extraordinary  Events Regarding Common Stock. In the event that the
Company shall (a) issue  additional  shares of the Common Stock as a dividend or
other  distribution on outstanding  Common Stock,  (b) subdivide its outstanding
shares of Common  Stock,  or (c)  combine its  outstanding  shares of the Common
Stock into a smaller  number of shares of the Common  Stock,  then, in each such
event,  the Purchase  Price  shall,  simultaneously  with the  happening of such
event,  be adjusted by multiplying  the then Purchase  Price by a fraction,  the
numerator  of which  shall be the number of shares of Common  Stock  outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common  Stock  outstanding  immediately  after such event,  and the
product so obtained shall  thereafter be the Purchase Price then in effect.  The
Purchase Price, as so adjusted,  shall be readjusted in the same manner upon the
happening of any successive  event or events described herein in this Section 4.
The  number of shares of Common  Stock  that the  Holder of this  Warrant  shall

<PAGE>

thereafter,  on the  exercise  hereof as  provided  in Section 1, be entitled to
receive shall be adjusted to a number  determined by  multiplying  the number of
shares of Common  Stock that would  otherwise  (but for the  provisions  of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the  Purchase  Price that would  otherwise  (but for the  provisions  of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.

         5.  Certificate  as to  Adjustments.  In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the  Warrants,  the Company at its expense will  promptly  cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or  readjustment  in  accordance  with the terms of the  Warrant  and  prepare a
certificate  setting forth such adjustment or readjustment and showing in detail
the facts upon which such  adjustment  or  readjustment  is based,  including  a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold,  (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding,  and (c) the Purchase Price
and the number of shares of Common  Stock to be received  upon  exercise of this
Warrant,  in effect  immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant.  The Company will  forthwith
mail a copy of each  such  certificate  to the  Holder  of the  Warrant  and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).

         6.  Reservation  of  Stock,  etc.  Issuable  on  Exercise  of  Warrant;
Financial Statements.  The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants,  all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant.  This Warrant  entitles the Holder hereof to receive  copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.

         7.  Assignment;   Exchange  of  Warrant.  Subject  to  compliance  with
applicable  securities laws, this Warrant,  and the rights evidenced hereby, may
be  transferred  by  any  registered  holder  hereof  (a  "Transferor").  On the
surrender for exchange of this Warrant, with the Transferor's endorsement in the
form of  Exhibit B  attached  hereto  (the  "Transferor  Endorsement  Form") and
together with an opinion of counsel reasonably  satisfactory to the Company that
the transfer of this Warrant will be in compliance  with  applicable  securities
laws,  the  Company  at its  expense,  twice,  only,  but  with  payment  by the
Transferor of any applicable transfer taxes, will issue and deliver to or on the
order of the Transferor  thereof a new Warrant or Warrants of like tenor, in the
name of the Transferor  and/or the  transferee(s)  specified in such  Transferor
Endorsement Form (each a "Transferee"),  calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock called for on the face or
faces of the Warrant so surrendered by the  Transferor.  No such transfers shall
result in a public distribution of the Warrant.

         8.   Replacement  of  Warrant.   On  receipt  of  evidence   reasonably
satisfactory  to the Company of the loss,  theft,  destruction  or mutilation of
this Warrant  and, in the case of any such loss,  theft or  destruction  of this
Warrant,   on  delivery  of  an  indemnity   agreement  or  security  reasonably
satisfactory  in form and  amount  to the  Company  or,  in the case of any such
mutilation,  on surrender and  cancellation of this Warrant,  the Company at its
expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of
like tenor.

         9.  Registration  Rights.  The Holder of this  Warrant has been granted
certain  registration  rights by the Company.  These registration rights are set
forth in the Subscription Agreement. The terms of the Subscription Agreement are
incorporated herein by this reference.

         10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date, 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 Holder and its affiliates on an exercise date,
and (ii) the number of shares of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
on an exercise  date,  which would result in beneficial  ownership by the Holder
and its affiliates of more than 4.99% of the outstanding  shares of Common Stock
on such date. For the purposes of 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 Holder  shall not be limited to aggregate  exercises  which
would result in the issuance of more than 4.99%.  The  restriction  described in
this  paragraph may be waived,  in whole or in part,  upon  sixty-one  (61) days
prior  notice from the Holder to the Company.  The Holder may decide  whether to
convert a Series A Preferred Stock or exercise this Warrant to achieve an actual
4.99% ownership position.

<PAGE>

         11. Warrant Agent.  The Company may, by written notice to the Holder of
the  Warrant,  appoint an agent (a  "Warrant  Agent") for the purpose of issuing
Common Stock (or Other  Securities) on the exercise of this Warrant  pursuant to
Section 1,  exchanging  this Warrant  pursuant to Section 7, and replacing  this
Warrant pursuant to Section 8, or any of the foregoing,  and thereafter any such
issuance,  exchange or  replacement,  as the case may be,  shall be made at such
office by such Warrant Agent.

         12. Transfer on the Company's Books.  Until this Warrant is transferred
on the books of the Company,  the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

         13. Warrant Exercise Compensation. The Company has agreed to pay to the
Finder identified on Schedule 8 to the Subscription Agreement ("Finder") Warrant
Exercise  Compensation as described in the  Subscription  Agreement equal to ten
percent (10%) of the cash  proceeds  payable to the Company upon exercise of the
Warrant.  The Warrant Exercise  Compensation  will be paid by the Company to the
Finder not later than the fifth (5th)  business  day after the Company  receives
cash proceeds  from the exercise of this Warrant.  The Holder of the Warrant has
no obligation or responsibility to pay Warrant Exercise Compensation

         14. 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 or (c)  three
business  days after  deposited in the mail if delivered  pursuant to subsection
(ii)  above.  The  addresses  for such  communications  shall be:  (i) if to the
Company to: HQ Sustainable Maritime  Industries,  Inc., 1511 Third Avenue, Suite
788, Seattle,  Washington 98101, Attn: Norbert Sporns,  CEO,  telecopier:  (450)
465-7348,  with a copy by telecopier only to: Joseph Emas, Esq., 1224 Washington
Avenue,  Miami  Beach,  FL 33139,  telecopier:  (305)  531-1274,  (ii) if to the
Holder,  to the addresses and telecopier number set forth in the first paragraph
of this  Warrant,  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,  and (iii) if to the Finder, to: the address
and telecopier number set forth on Schedule 8 to the Subscription Agreement.

         15.  Miscellaneous.  This  Warrant  and any term hereof may be changed,
waived,  discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.  This Warrant shall be construed and enforced in accordance  with and
governed by the laws of New York. Any dispute  relating to this Warrant shall be
adjudicated  in New York County in the State of New York.  The  headings in this
Warrant are for  purposes of  reference  only,  and shall not limit or otherwise
affect  any of the terms  hereof.  The  invalidity  or  unenforceability  of any
provision  hereof shall in no way affect the validity or  enforceability  of any
other provision.

<PAGE>

         IN WITNESS  WHEREOF,  the Company has  executed  this Warrant as of the
date first written above.

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

                                        By:
                                           Name:
                                           Title:

Witness:

<PAGE>

                                    Exhibit A
                              FORM OF SUBSCRIPTION
                   (to be signed only on exercise of Warrant)

TO:  HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

The  undersigned,  pursuant to the provisions set forth in the attached  Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):

___ ________  shares of the Common  Stock  covered by such  Warrant;  or ___ the
maximum number of shares of Common Stock covered by such Warrant pursuant to the
cashless exercise procedure set forth in Section 2.

The  undersigned  herewith  makes  payment of the full  purchase  price for such
shares  at  the  price  per  share  provided  for  in  such  Warrant,  which  is
$___________.  Such payment takes the form of (check  applicable  box or boxes):
___  $__________  in  lawful  money  of  the  United  States;   and/or  ___  the
cancellation  of the Warrant to the extent  necessary,  in  accordance  with the
formula set forth in Section 2, to exercise  this  Warrant  with  respect to the
maximum  number of shares of Common Stock  purchasable  pursuant to the cashless
exercise procedure set forth in Section 2.

The undersigned  requests that the certificates for such shares be issued in the
name of, and  delivered to  __________________________________  whose address is
________________________________________________________________________________
________________________________________________________________________________
Number of Shares of Common  Stock  Beneficially  Owned on the date of  exercise:
Less than five percent (5%) of the  outstanding  Common Stock of HQ  Sustainable
Maritime Industries, Inc.

The undersigned  represents and warrants that the representations and warranties
in Section 4 of the Subscription Agreement (as defined in this Warrant) are true
and accurate with respect to the undersigned on the date hereof.

The  undersigned  represents  and  warrants  that all  offers  and  sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933,  as amended  (the  "Securities  Act"),  or pursuant to an  exemption  from
registration under the Securities Act.

Dated:___________________           (Signature must conform to name of holder as
                                    specified on the face of the Warrant)

                                    (Address)

<PAGE>

                                    Exhibit B

                         FORM OF TRANSFEROR ENDORSEMENT

                   (To be signed only on transfer of Warrant)

         For  value  received,   the  undersigned  hereby  sells,  assigns,  and
transfers  unto the person(s)  named below under the heading  "Transferees"  the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of HQ SUSTAINABLE MARITIME INDUSTRIES,  INC. to which the
within Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred,"  respectively,  opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of HQ SUSTAINABLE MARITIME  INDUSTRIES,  INC. with full power of substitution in
the premises.

--------------------- ------------------------------- --------------------------
Transferees           Percentage Transferred          Number Transferred
--------------------- ------------------------------- --------------------------

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

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

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

Dated:  ______________, ___________ (Signature must conform to name of holder as
                                    specified on the face of the warrant)

Signed in the presence of:

         (Name)
                                    (address)

ACCEPTED AND AGREED:
[TRANSFEREE]
                                    (address)

         (Name)

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  UNDER  SAID ACT OR AN  OPINION  OF  COUNSEL  REASONABLY
SATISFACTORY TO HQ SUSTAINABLE MARITIME INDUSTRIES,  INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.

<PAGE>

                                    Right to Purchase  ________ shares of Common
                                    Stock of HQ Sustainable Maritime Industries,
                                    Inc.  (subject  to  adjustment  as  provided
                                    herein)

                      CLASS B COMMON STOCK PURCHASE WARRANT

No. 2006-B-001                                      Issue Date: January __, 2006

         HQ SUSTAINABLE MARITIME INDUSTRIES, INC., a corporation organized under
the laws of the State of Delaware (the  "Company"),  hereby  certifies that, for
value received, _________________, ______________________________________ or its
assigns (the  "Holder"),  is entitled,  subject to the terms set forth below, to
purchase  from the  Company  at any time  after the Issue  Date until 5:00 p.m.,
E.S.T on the fifth (5th) anniversary of the Issue Date (the "Expiration  Date"),
________  fully  paid and  nonassessable  shares of Common  Stock at a per share
purchase  price of  $0.40.  The  aforedescribed  purchase  price per  share,  as
adjusted  from time to time as herein  provided,  is  referred  to herein as the
"Purchase  Price." The number and  character  of such shares of Common Stock and
the Purchase Price are subject to adjustment as provided herein. The Company may
reduce the Purchase Price without the consent of the Holder.  Capitalized  terms
used and not otherwise  defined herein shall have the meanings set forth in that
certain  Subscription  Agreement (the "Subscription  Agreement"),  dated January
___, 2006, entered into by the Company and Holders of the Warrants.

         As used  herein  the  following  terms,  unless the  context  otherwise
requires, have the following respective meanings:

         (a) The term "Company" shall include HQ Sustainable Maritime
Industries, Inc. and any corporation which shall succeed or assume the
obligations of HQ Sustainable Maritime Industries, Inc. hereunder.

         (b) The term "Common  Stock"  includes (a) the Company's  Common Stock,
$0.001  par value  per  share,  as  authorized  on the date of the  Subscription
Agreement,  and (b) any  other  securities  into  which or for  which any of the
securities  described in (a) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.

         (c) The term "Other  Securities" refers to any stock (other than Common
Stock) and other  securities  of the Company or any other person  (corporate  or
otherwise)  which the holder of the  Warrant at any time  shall be  entitled  to
receive,  or shall have received,  on the exercise of the Warrant, in lieu of or
in  addition  to Common  Stock,  or which at any time shall be issuable or shall
have been  issued in exchange  for or in  replacement  of Common  Stock or Other
Securities pursuant to Section 5 or otherwise.

         (d) The term "Warrant Shares" shall mean the Common Stock issuable upon
exercise of this Warrant.

<PAGE>

         1. Exercise of Warrant.

                  1.1. Number of Shares  Issuable upon Exercise.  From and after
the Issue Date through and  including  the  Expiration  Date,  the Holder hereof
shall  be  entitled  to  receive,  upon  exercise  of this  Warrant  in whole in
accordance  with the terms of subsection 1.2 or upon exercise of this Warrant in
part in accordance  with  subsection 1.3, shares of Common Stock of the Company,
subject to adjustment pursuant to Section 4.

                  1.2. Full  Exercise.  This Warrant may be exercised in full by
the Holder  hereof by delivery of an original or  facsimile  copy of the form of
subscription  attached  as  Exhibit  A hereto  (the  "Subscription  Form")  duly
executed by such Holder and  surrender of the original  Warrant  within four (4)
days of exercise, to the Company at its principal office or at the office of its
Warrant Agent (as provided  hereinafter),  accompanied by payment, in cash, wire
transfer  or by  certified  or official  bank check  payable to the order of the
Company,  in the amount  obtained by multiplying  the number of shares of Common
Stock for which this Warrant is then  exercisable  by the Purchase Price then in
effect.

                  1.3. Partial  Exercise.  This Warrant may be exercised in part
(but not for a fractional  share) by surrender of this Warrant in the manner and
at the place  provided in subsection  1.2 except that the amount  payable by the
Holder on such partial  exercise shall be the amount obtained by multiplying (a)
the  number of whole  shares of Common  Stock  designated  by the  Holder in the
Subscription  Form by (b) the Purchase Price then in effect. On any such partial
exercise,  the Company,  at its expense,  will forthwith issue and deliver to or
upon the order of the Holder hereof a new Warrant of like tenor,  in the name of
the  Holder  hereof  or as such  Holder  (upon  payment  by such  Holder  of any
applicable  transfer  taxes) may  request,  the whole number of shares of Common
Stock for which such Warrant may still be exercised.

                  1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean:

                                    (a) If the Company's  Common Stock is traded
on an exchange or is quoted on the National  Association of Securities  Dealers,
Inc. Automated Quotation ("NASDAQ"), National Market System, the NASDAQ SmallCap
Market or the American Stock Exchange, LLC, then the closing or last sale price,
respectively,  reported for the last  business  day  immediately  preceding  the
Determination Date;

                                    (b) If the  Company's  Common  Stock  is not
traded on an  exchange  or on the  NASDAQ  National  Market  System,  the NASDAQ
SmallCap  Market or the  American  Stock  Exchange,  Inc.,  but is traded in the
over-the-counter  market,  then the  average of the  closing  bid and ask prices
reported for the last business day immediately preceding the Determination Date;

                                    (c) Except as  provided in clause (d) below,
if the Company's Common Stock is not publicly traded, then as the Holder and the
Company  agree,  or in the  absence  of such an  agreement,  by  arbitration  in
accordance with the rules then standing of the American Arbitration Association,
before a single  arbitrator  to be chosen from a panel of persons  qualified  by
education and training to pass on the matter to be decided; or

                                    (d) If the Determination Date is the date of
a  liquidation,  dissolution  or  winding  up,  or  any  event  deemed  to  be a
liquidation,  dissolution or winding up pursuant to the Company's charter,  then
all amounts to be payable per share to holders of the Common  Stock  pursuant to
the charter in the event of such  liquidation,  dissolution  or winding up, plus
all other  amounts  to be payable  per share in  respect of the Common  Stock in
liquidation under the charter, assuming for the purposes of this clause (d) that
all of the shares of Common  Stock then  issuable  upon  exercise  of all of the
Warrants are outstanding at the Determination Date.

                  1.5. Company Acknowledgment.  The Company will, at the time of
the exercise of the Warrant,  upon the request of the Holder hereof  acknowledge
in writing  its  continuing  obligation  to afford to such  Holder any rights to
which  such  Holder  shall  continue  to be  entitled  after  such  exercise  in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.

                  1.6.  Trustee  for  Warrant  Holders.  In  the  event  that  a
qualified  bank or trust  company  shall have been  appointed as trustee for the
Holder of the Warrants  pursuant to  Subsection  3.2, such bank or trust company

<PAGE>

shall  have all the  powers  and  duties  of a  warrant  agent  (as  hereinafter
described)  and shall accept,  in its own name for the account of the Company or
such successor person as may be entitled thereto,  all amounts otherwise payable
to the  Company  or such  successor,  as the case may be,  on  exercise  of this
Warrant pursuant to this Section 1.

                  1.7  Delivery of Stock  Certificates,  etc. on  Exercise.  The
Company  agrees that the shares of Common Stock  purchased upon exercise of this
Warrant shall be deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this Warrant  shall
have been surrendered and payment made for such shares as aforesaid.  As soon as
practicable  after the exercise of this  Warrant in full or in part,  and in any
event  within  three (3) business  days  thereafter,  the Company at its expense
(including  the payment by it of any  applicable  issue  taxes) will cause to be
issued in the name of and  delivered  to the Holder  hereof,  or as such  Holder
(upon  payment by such Holder of any  applicable  transfer  taxes) may direct in
compliance with applicable  securities  laws, a certificate or certificates  for
the number of duly and validly issued,  fully paid and  nonassessable  shares of
Common  Stock (or Other  Securities)  to which such Holder  shall be entitled on
such exercise,  plus, in lieu of any fractional share to which such Holder would
otherwise be entitled,  cash equal to such fraction  multiplied by the then Fair
Market Value of one full share of Common Stock, together with any other stock or
other securities and property  (including cash, where  applicable) to which such
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

         2. Cashless Exercise.

                  (a) Except as described below, if a Registration Statement (as
defined in the Subscription Agreement)  ("Registration  Statement") is effective
and the Holder may sell its shares of Common Stock upon exercise hereof pursuant
to the  Registration  Statement,  this Warrant may be exercisable in whole or in
part for cash only as set  forth in  Section  1 above.  If no such  Registration
Statement  is  available  during the time that such  Registration  Statement  is
required to be effective  pursuant to the terms of the  Subscription  Agreement,
then commencing one year after the Issue Date, payment upon exercise may be made
at the option of the Holder either in (i) cash, wire transfer or by certified or
official bank check payable to the order of the Company equal to the  applicable
aggregate  Purchase Price,  (ii) by cashless exercise in accordance with Section
(b) below or (iii) by a  combination  of any of the foregoing  methods,  for the
number of Common Stock  specified in such form (as such exercise number shall be
adjusted to reflect any adjustment in the total number of shares of Common Stock
issuable  to the holder  per the terms of this  Warrant)  and the  holder  shall
thereupon be entitled to receive the number of duly authorized,  validly issued,
fully-paid  and  non-assessable  shares  of Common  Stock (or Other  Securities)
determined as provided herein.

                  (b) If the Fair Market  Value of one share of Common  Stock is
greater than the Purchase Price (at the date of calculation as set forth below),
in lieu of  exercising  this  Warrant for cash,  the holder may elect to receive
shares equal to the value (as determined  below) of this Warrant (or the portion
thereof being cancelled) by surrender of this Warrant at the principal office of
the Company together with the properly endorsed Subscription Form in which event
the  Company  shall  issue to the  holder a number of  shares  of  Common  Stock
computed using the following formula:

                            X=Y (A-B)
                            A

                  Where    X=       the  number of shares of Common  Stock to be
                                    issued to the holder

                           Y=       the   number  of  shares  of  Common   Stock
                                    purchasable  under the Warrant or, if only a
                                    portion of the  Warrant is being  exercised,
                                    the portion of the Warrant  being  exercised
                                    (at the date of such calculation)

                           A=       the Fair  Market  Value of one  share of the
                                    Company's  Common Stock (at the date of such
                                    calculation)

                           B=       Purchase  Price (as  adjusted to the date of
                                    such calculation)

                  (d) The  Holder  may  employ  the  cashless  exercise  feature
described in Section (b) above commencing one year after the Issue Date and only
during the  pendency of a  Non-Registration  Event as described in Section 11 of

<PAGE>

the Subscription Agreement.  For purposes of Rule 144 promulgated under the 1933
Act, it is intended,  understood and acknowledged that the Warrant Shares issued
in a cashless exercise  transaction shall be deemed to have been acquired by the
Holder,  and the holding  period for the Warrant  Shares shall be deemed to have
commenced,  on the date this  Warrant  was  originally  issued  pursuant  to the
Subscription Agreement.

         3. Adjustment for Reorganization, Consolidation, Merger, etc.

                  3.1.  Reorganization,  Consolidation,  Merger, etc. In case at
any time or from time to time,  the Company  shall (a) effect a  reorganization,
(b)  consolidate  with or merge  into any other  person or (c)  transfer  all or
substantially all of its properties or assets to any other person under any plan
or arrangement  contemplating the dissolution of the Company, then, in each such
case,  as a condition  to the  consummation  of such a  transaction,  proper and
adequate  provision  shall be made by the  Company  whereby  the  Holder of this
Warrant,  on the exercise hereof as provided in Section 1, at any time after the
consummation of such  reorganization,  consolidation  or merger or the effective
date of such  dissolution,  as the case may be,  shall  receive,  in lieu of the
Common  Stock (or Other  Securities)  issuable  on such  exercise  prior to such
consummation or such effective date, the stock and other securities and property
(including  cash) to which  such  Holder  would  have  been  entitled  upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant,  immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.

                  3.2.  Dissolution.  In the  event  of any  dissolution  of the
Company  following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution,  shall at its expense deliver or
cause to be delivered  the stock and other  securities  and property  (including
cash, where applicable)  receivable in accordance with Section 3.1 by the Holder
of the Warrants upon their exercise after the effective date of such dissolution
pursuant to this Section 3 to a bank or trust company (a  "Trustee")  having its
principal office in New York, NY, as trustee for the Holder of the Warrants.

                  3.3.   Continuation   of  Terms.   Upon  any   reorganization,
consolidation,  merger or transfer (and any dissolution  following any transfer)
referred to in this  Section 3, this  Warrant  shall  continue in full force and
effect and the terms  hereof shall be  applicable  to the Other  Securities  and
property  receivable on the exercise of this Warrant after the  consummation  of
such   reorganization,   consolidation  or  merger  or  the  effective  date  of
dissolution  following  any such  transfer,  as the case  may be,  and  shall be
binding upon the issuer of any Other Securities,  including,  in the case of any
such transfer,  the person acquiring all or substantially  all of the properties
or assets of the  Company,  whether  or not such  person  shall  have  expressly
assumed  the terms of this  Warrant as  provided in Section 4. In the event this
Warrant does not continue in full force and effect after the consummation of the
transaction  described  in this  Section  3,  then only in such  event  will the
Company's securities and property (including cash, where applicable)  receivable
by the Holder of the  Warrants be delivered  to the Trustee as  contemplated  by
Section 3.2.

                  3.4 Share Issuance.  Until the Expiration Date, if the Company
shall issue any Common Stock except for the  Excepted  Issuances  (as defined in
the Subscription Agreement),  prior to the complete exercise of this Warrant for
a consideration less than the Purchase Price that would be in effect at the time
of such issue,  then,  and  thereafter  successively  upon each such issue,  the
Purchase Price shall be reduced to such other lower issue price. For purposes of
this adjustment,  the issuance of any security or debt instrument of the Company
carrying the right to convert such security or debt instrument into Common Stock
or of any warrant,  right or option to purchase  Common Stock shall result in an
adjustment  to the  Purchase  Price  upon the  issuance  of the  above-described
security,  debt instrument,  warrant,  right, or option if such issuance is at a
price lower than the Purchase Price in effect upon such issuance.  The reduction
of the Purchase Price  described in this Section 3.4 is in addition to the other
rights of the Holder described in the Subscription Agreement.

         4.  Extraordinary  Events Regarding Common Stock. In the event that the
Company shall (a) issue  additional  shares of the Common Stock as a dividend or
other  distribution on outstanding  Common Stock,  (b) subdivide its outstanding
shares of Common  Stock,  or (c)  combine its  outstanding  shares of the Common
Stock into a smaller  number of shares of the Common  Stock,  then, in each such
event,  the Purchase  Price  shall,  simultaneously  with the  happening of such
event,  be adjusted by multiplying  the then Purchase  Price by a fraction,  the
numerator  of which  shall be the number of shares of Common  Stock  outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common  Stock  outstanding  immediately  after such event,  and the

<PAGE>

product so obtained shall  thereafter be the Purchase Price then in effect.  The
Purchase Price, as so adjusted,  shall be readjusted in the same manner upon the
happening of any successive  event or events described herein in this Section 4.
The  number of shares of Common  Stock  that the  Holder of this  Warrant  shall
thereafter,  on the  exercise  hereof as  provided  in Section 1, be entitled to
receive shall be adjusted to a number  determined by  multiplying  the number of
shares of Common  Stock that would  otherwise  (but for the  provisions  of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the  Purchase  Price that would  otherwise  (but for the  provisions  of this
Section 4) be in effect, and (b) the denominator is the Purchase Price in effect
on the date of such exercise.

         5.  Certificate  as to  Adjustments.  In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of the  Warrants,  the Company at its expense will  promptly  cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or  readjustment  in  accordance  with the terms of the  Warrant  and  prepare a
certificate  setting forth such adjustment or readjustment and showing in detail
the facts upon which such  adjustment  or  readjustment  is based,  including  a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold,  (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding,  and (c) the Purchase Price
and the number of shares of Common  Stock to be received  upon  exercise of this
Warrant,  in effect  immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant.  The Company will  forthwith
mail a copy of each  such  certificate  to the  Holder  of the  Warrant  and any
Warrant Agent of the Company (appointed pursuant to Section 11 hereof).

         6.  Reservation  of  Stock,  etc.  Issuable  on  Exercise  of  Warrant;
Financial Statements.  The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants,  all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant.  This Warrant  entitles the Holder hereof to receive  copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.

         7.  Assignment;   Exchange  of  Warrant.  Subject  to  compliance  with
applicable  securities laws, this Warrant,  and the rights evidenced hereby, may
be  transferred  by  any  registered  holder  hereof  (a  "Transferor").  On the
surrender for exchange of this Warrant, with the Transferor's endorsement in the
form of  Exhibit B  attached  hereto  (the  "Transferor  Endorsement  Form") and
together with an opinion of counsel reasonably  satisfactory to the Company that
the transfer of this Warrant will be in compliance  with  applicable  securities
laws,  the  Company  at its  expense,  twice,  only,  but  with  payment  by the
Transferor of any applicable transfer taxes, will issue and deliver to or on the
order of the Transferor  thereof a new Warrant or Warrants of like tenor, in the
name of the Transferor  and/or the  transferee(s)  specified in such  Transferor
Endorsement Form (each a "Transferee"),  calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock called for on the face or
faces of the Warrant so surrendered by the  Transferor.  No such transfers shall
result in a public distribution of the Warrant.

         8.   Replacement  of  Warrant.   On  receipt  of  evidence   reasonably
satisfactory  to the Company of the loss,  theft,  destruction  or mutilation of
this Warrant  and, in the case of any such loss,  theft or  destruction  of this
Warrant,   on  delivery  of  an  indemnity   agreement  or  security  reasonably
satisfactory  in form and  amount  to the  Company  or,  in the case of any such
mutilation,  on surrender and  cancellation of this Warrant,  the Company at its
expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of
like tenor.

         9.  Registration  Rights.  The Holder of this  Warrant has been granted
certain  registration  rights by the Company.  These registration rights are set
forth in the Subscription Agreement. The terms of the Subscription Agreement are
incorporated herein by this reference.

         10. Maximum Exercise. The Holder shall not be entitled to exercise this
Warrant on an exercise date, 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 Holder and its affiliates on an exercise date,
and (ii) the number of shares of Common Stock issuable upon the exercise of this
Warrant with respect to which the determination of this limitation is being made
on an exercise  date,  which would result in beneficial  ownership by the Holder
and its affiliates of more than 4.99% of the outstanding  shares of Common Stock
on such date. For the purposes of 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 Holder  shall not be limited to aggregate  exercises  which
would result in the issuance of more than 4.99%.  The  restriction  described in
this  paragraph may be waived,  in whole or in part,  upon  sixty-one  (61) days
prior  notice from the Holder to the Company.  The Holder may decide  whether to
convert a Series A Preferred Stock or exercise this Warrant to achieve an actual
4.99% ownership position.

<PAGE>

         11. Warrant Agent.  The Company may, by written notice to the Holder of
the  Warrant,  appoint an agent (a  "Warrant  Agent") for the purpose of issuing
Common Stock (or Other  Securities) on the exercise of this Warrant  pursuant to
Section 1,  exchanging  this Warrant  pursuant to Section 7, and replacing  this
Warrant pursuant to Section 8, or any of the foregoing,  and thereafter any such
issuance,  exchange or  replacement,  as the case may be,  shall be made at such
office by such Warrant Agent.

         12. Transfer on the Company's Books.  Until this Warrant is transferred
on the books of the Company,  the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

         13. Warrant Exercise Compensation. The Company has agreed to pay to the
Finder identified on Schedule 8 to the Subscription Agreement ("Finder") Warrant
Exercise  Compensation as described in the  Subscription  Agreement equal to ten
percent (10%) of the cash  proceeds  payable to the Company upon exercise of the
Warrant.  The Warrant Exercise  Compensation  will be paid by the Company to the
Finder not later than the fifth (5th)  business  day after the Company  receives
cash proceeds  from the exercise of this Warrant.  The Holder of the Warrant has
no obligation or responsibility to pay Warrant Exercise Compensation

         14. 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 or (c)  three
business  days after  deposited in the mail if delivered  pursuant to subsection
(ii)  above.  The  addresses  for such  communications  shall be:  (i) if to the
Company to: HQ Sustainable Maritime  Industries,  Inc., 1511 Third Avenue, Suite
788, Seattle,  Washington 98101, Attn: Norbert Sporns,  CEO,  telecopier:  (450)
465-7348,  with a copy by telecopier only to: Joseph Emas, Esq., 1224 Washington
Avenue,  Miami  Beach,  FL 33139,  telecopier:  (305)  531-1274,  (ii) if to the
Holder,  to the addresses and telecopier number set forth in the first paragraph
of this  Warrant,  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,  and (iii) if to the Finder, to: the address
and telecopier number set forth on Schedule 8 to the Subscription Agreement.

         15.  Miscellaneous.  This  Warrant  and any term hereof may be changed,
waived,  discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.  This Warrant shall be construed and enforced in accordance  with and
governed by the laws of New York. Any dispute  relating to this Warrant shall be
adjudicated  in New York County in the State of New York.  The  headings in this
Warrant are for  purposes of  reference  only,  and shall not limit or otherwise
affect  any of the terms  hereof.  The  invalidity  or  unenforceability  of any
provision  hereof shall in no way affect the validity or  enforceability  of any
other provision.

<PAGE>

         IN WITNESS  WHEREOF,  the Company has  executed  this Warrant as of the
date first written above.

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

                                        By:
                                           Name:
                                           Title:

Witness:

<PAGE>

                                    Exhibit A
                              FORM OF SUBSCRIPTION
                   (to be signed only on exercise of Warrant)

TO:  HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

The  undersigned,  pursuant to the provisions set forth in the attached  Warrant
(No.____), hereby irrevocably elects to purchase (check applicable box):

___       ________ shares of the Common Stock covered by such Warrant; or

___      the maximum  number of shares of Common  Stock  covered by such Warrant
         pursuant to the cashless exercise procedure set forth in Section 2.

The  undersigned  herewith  makes  payment of the full  purchase  price for such
shares  at  the  price  per  share  provided  for  in  such  Warrant,  which  is
$___________.  Such payment takes the form of (check  applicable  box or boxes):
___  $__________  in  lawful  money  of  the  United  States;   and/or  ___  the
cancellation  of the Warrant to the extent  necessary,  in  accordance  with the
formula set forth in Section 2, to exercise  this  Warrant  with  respect to the
maximum  number of shares of Common Stock  purchasable  pursuant to the cashless
exercise procedure set forth in Section 2.

The undersigned  requests that the certificates for such shares be issued in the
name of, and delivered to _____________________________________ whose address is
________________________________________________________________________________
________________________________________________________________________________
Number of Shares of Common  Stock  Beneficially  Owned on the date of  exercise:
Less than five percent (5%) of the  outstanding  Common Stock of HQ  Sustainable
Maritime Industries, Inc.

The undersigned  represents and warrants that the representations and warranties
in Section 4 of the Subscription Agreement (as defined in this Warrant) are true
and accurate with respect to the undersigned on the date hereof.

The  undersigned  represents  and  warrants  that all  offers  and  sales by the
undersigned of the securities issuable upon exercise of the within Warrant shall
be made pursuant to registration of the Common Stock under the Securities Act of
1933,  as amended  (the  "Securities  Act"),  or pursuant to an  exemption  from
registration under the Securities Act.

Dated:___________________           (Signature must conform to name of holder as
                                    specified on the face of the Warrant)

                                    (Address)

<PAGE>

                                    Exhibit B

                         FORM OF TRANSFEROR ENDORSEMENT
                   (To be signed only on transfer of Warrant)

         For  value  received,   the  undersigned  hereby  sells,  assigns,  and
transfers  unto the person(s)  named below under the heading  "Transferees"  the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of HQ SUSTAINABLE MARITIME INDUSTRIES,  INC. to which the
within Warrant relates specified under the headings "Percentage Transferred" and
"Number Transferred,"  respectively,  opposite the name(s) of such person(s) and
appoints each such person Attorney to transfer its respective right on the books
of HQ SUSTAINABLE MARITIME  INDUSTRIES,  INC. with full power of substitution in
the premises.

--------------------- ------------------------------- --------------------------
Transferees           Percentage Transferred          Number Transferred
--------------------- ------------------------------- --------------------------

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

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

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

Dated:  ______________, ___________ (Signature must conform to name of holder as
                                    specified on the face of the warrant)

Signed in the presence of:

         (Name)
                                    (address)

ACCEPTED AND AGREED:
[TRANSFEREE]
                                    (address)

         (Name)

<PAGE>

                                    EXHIBIT C

                             FUNDS ESCROW AGREEMENT

         This  Agreement  is dated as of the ____ day of January,  2006 among HQ
Sustainable Maritime  Industries,  Inc., a Delaware corporation (the "Company"),
the  Subscribers  identified  on  Schedule  A hereto  (each a  "Subscriber"  and
collectively "Subscribers"), and Grushko & Mittman, P.C. (the "Escrow Agent"):

                              W I T N E S S E T H:

         WHEREAS,  the Company and Subscribers  have entered into a Subscription
Agreement  calling  for the sale by the  Company  to the  Subscriber  of secured
promissory notes ("Notes") and Warrants for an aggregate purchase price of up to
$10,000,000 in the amounts set forth on Schedule A hereto; and

         WHEREAS,  the parties  hereto  require the Company to deliver the Notes
and  Warrants  against  payment  therefor,  with such  Notes,  Warrants  and the
Escrowed  Payment to be  delivered  to the Escrow Agent to be held in escrow and
released by the Escrow Agent in accordance with the terms and conditions of this
Agreement; and

         WHEREAS,  the Escrow Agent is willing to serve as escrow agent pursuant
to the terms and conditions of this Agreement;

         NOW THEREFORE, the parties agree as follows:

                                    ARTICLE I

                                 INTERPRETATION

         1.1.  Definitions.  Capitalized  terms used and not  otherwise  defined
herein that are defined in the  Subscription  Agreement  shall have the meanings
given  to  such  terms  in the  Subscription  Agreement.  Whenever  used in this
Agreement, the following terms shall have the following respective meanings:

                  (a)  "Agreement"  means this Agreement and all amendments made
hereto and thereto by written agreement between the parties;

                  (b) "Closing Date" shall have the meaning set forth in Section
1 of the Subscription Agreement;

                  (c) "Collateral  Agent  Agreement"  shall have the meaning set
forth in Section 3 of the Subscription Agreement;

                  (d)  "Escrowed  Payment"  means an aggregate  payment of up to
$10,000,000 of Purchase Price;

                  (e) "Finder" shall mean the entity identified on Schedule 8 to
the Subscription Agreement;

                  (f) "Finder's Fee" shall have the meaning set forth in Section
8(a) of the Subscription Agreement;

                  (g)  "Finder's  Warrants"  shall have the meaning set forth in
Section 8(b) of the Subscription Agreement;

                  (h)  "Guaranty"  shall have the meaning set forth in Section 3
of the Subscription Agreement;

                  (i) "Legal  Fees"  shall have the meaning set forth in Section
8(c) of the Subscription Agreement;

<PAGE>

                  (j) "Legal  Opinion"  means the original  signed legal opinion
referred to in Section 6 of the Subscription Agreement;

                  (k)  "Notes"  shall have the meaning set forth in Section 1 of
the Subscription Agreement;

                  (l) "Purchase Price" shall mean up to $10,000,000;

                  (m) "Security  Agreement"  shall have the meaning set forth in
Section 3 of the Subscription Agreement;

                  (n) "Subscription  Agreement" means the Subscription Agreement
(and the exhibits thereto) entered into or to be entered into by the Company and
Subscribers in reference to the sale and purchase of the Notes and Warrants;

                  (o)  "Warrants"  shall have the meaning set forth in Section 2
of the Subscription Agreement;

                  (p) Collectively,  the executed Subscription Agreement, Notes,
Legal Opinion,  Warrants,  Finder's  Warrants,  Finder's Fee,  Collateral  Agent
Agreement,   Guaranty  and  Security  Agreement  are  referred  to  as  "Company
Documents"; and

                  (q)  Collectively,  the  Escrowed  Payment  and  the  executed
Subscription Agreement are referred to as "Subscriber Documents".

         1.2. Entire Agreement.  This Agreement along with the Company Documents
and the Subscriber Documents constitute the entire agreement between the parties
hereto  pertaining  to  the  Company  Documents  and  Subscriber  Documents  and
supersedes all prior agreements,  understandings,  negotiations and discussions,
whether   oral  or  written,   of  the   parties.   There  are  no   warranties,
representations  and other agreements made by the parties in connection with the
subject matter hereof except as specifically  set forth in this  Agreement,  the
Company Documents and the Subscriber Documents.

         1.3. Extended Meanings.  In this Agreement words importing the singular
number include the plural and vice versa;  words importing the masculine  gender
include  the  feminine  and  neuter  genders.  The  word  "person"  includes  an
individual,  body  corporate,  partnership,  trustee or trust or  unincorporated
association, executor, administrator or legal representative.

         1.4. Waivers and Amendments.  This Agreement may be amended,  modified,
superseded,  cancelled, renewed or extended, and the terms and conditions hereof
may be waived,  only by a written  instrument signed by all parties,  or, in the
case of a waiver,  by the party waiving  compliance.  Except as expressly stated
herein,  no delay on the part of any party in  exercising  any  right,  power or
privilege  hereunder shall operate as a waiver thereof,  nor shall any waiver on
the part of any party of any right,  power or privilege  hereunder  preclude any
other or future exercise of any other right, power or privilege hereunder.

         1.5. Headings. The division of this Agreement into articles,  sections,
subsections  and paragraphs and the insertion of headings are for convenience of
reference only and shall not affect the construction or  interpretation  of this
Agreement.

         1.6. 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 state  courts of New York or in the federal  courts
located in the state of New York.  Both  parties and the  individuals  executing
this Agreement and other  agreements on behalf of the Company agree to submit to
the  jurisdiction  of such courts and waive trial by jury. The prevailing  party
(which shall be the party which  receives an award most closely  resembling  the
remedy or action  sought)  shall be entitled to recover from the other party its

<PAGE>

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.

         1.7.  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 an  injuction  or
injunctions  to prevent or cure breaches of the provisions of this Agreement and
to enforce  specifically the terms and provisions hereof or thereof,  this being
in addition  to any other  remedy to which any of them may be entitled by law or
equity. Subject to Section 1.6 hereof, each of the Company and Subscriber 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 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.

                                   ARTICLE II

                         DELIVERIES TO THE ESCROW AGENT

         2.1.  Company  Deliveries.  On or before the Closing Date,  the Company
shall deliver the Company Documents to the Escrow Agent.

         2.2.  Subscriber  Deliveries.  On or  before  the  Closing  Date,  each
Subscriber  shall deliver to the Escrow Agent such  Subscriber's  portion of the
Purchase Price and the executed  Subscription  Agreement.  The Escrowed  Payment
will be delivered pursuant to the following wire transfer instructions:

                                 Citibank, N.A.
                                 1155 6th Avenue
                             New York, NY 10036, USA
                             ABA Number: 0210-00089
              For Credit to: Grushko & Mittman, IOLA Trust Account
                            Account Number: 45208884

         2.3.  Intention to Create Escrow Over Company  Documents and Subscriber
Documents.  The  Subscriber  and Company  intend that the Company  Documents and
Subscriber  Documents  shall be held in escrow by the Escrow  Agent  pursuant to
this Agreement for their benefit as set forth herein.

         2.4.  Escrow  Agent  to  Deliver   Company   Documents  and  Subscriber
Documents.  The Escrow  Agent shall hold and release the Company  Documents  and
Subscriber  Documents  only in accordance  with the terms and conditions of this
Agreement.

                                   ARTICLE III

              RELEASE OF COMPANY DOCUMENTS AND SUBSCRIBER DOCUMENTS

         3.1.  Release of Escrow.  Subject to the provisions of Section 4.2, the
Escrow Agent shall  release the Company  Documents and  Subscriber  Documents as
follows:

                  (a) On the Closing Date, the Escrow Agent will  simultaneously
release the  Company  Documents  to the  Subscriber  and release the  Subscriber
Documents to the Company except that: (i) the Finder's Fee and Finder's Warrants
will be  released  to the  Finder;  (ii) the Legal Fees will be  released to the
Subscriber's  attorneys;   and  (iii)  the  Security  Agreement,   Guaranty  and
Collateral Agent Agreement will also be released to the Collateral Agent.

<PAGE>

                  (b)  All  funds  to be  delivered  to  the  Company  shall  be
delivered  pursuant  to the wire  instructions  to be provided in writing by the
Company to the Escrow Agent.

                  (c)  Notwithstanding  the  above,  upon  receipt by the Escrow
Agent of joint written instructions ("Joint Instructions") signed by the Company
and the  Subscriber,  it shall  deliver the  Company  Documents  and  Subscriber
Documents in accordance with the terms of the Joint Instructions.

                  (d)  Notwithstanding  the  above,  upon  receipt by the Escrow
Agent of a final and non-appealable judgment,  order, decree or award of a court
of competent  jurisdiction (a "Court Order"), the Escrow Agent shall deliver the
Company  Documents and Subscriber  Documents in accordance with the Court Order.
Any Court  Order  shall be  accompanied  by an opinion of counsel  for the party
presenting  the  Court  Order  to the  Escrow  Agent  (which  opinion  shall  be
satisfactory to the Escrow Agent) to the effect that the court issuing the Court
Order  has  competent  jurisdiction  and that  the  Court  Order  is  final  and
non-appealable.

         3.2.  Acknowledgement of Company and Subscriber;  Disputes. The Company
and the Subscriber acknowledge that the only terms and conditions upon which the
Company  Documents and Subscriber  Documents are to be released are set forth in
Sections 3 and 4 of this  Agreement.  The  Company and the  Subscriber  reaffirm
their  agreement to abide by the terms and  conditions  of this  Agreement  with
respect to the release of the Company  Documents and Subscriber  Documents.  Any
dispute  with  respect to the release of the Company  Documents  and  Subscriber
Documents shall be resolved  pursuant to Section 4.2 or by agreement between the
Company and Subscriber.

                                   ARTICLE IV

                           CONCERNING THE ESCROW AGENT

         4.1.  Duties  and  Responsibilities  of the  Escrow  Agent.  The Escrow
Agent's duties and responsibilities  shall be subject to the following terms and
conditions:

                  (a) The Subscriber and Company  acknowledge and agree that the
Escrow  Agent  (i) shall not be  responsible  for or bound by,  and shall not be
required to inquire into whether either the Subscriber or Company is entitled to
receipt of the Company Documents and Subscriber Documents pursuant to, any other
agreement or otherwise; (ii) shall be obligated only for the performance of such
duties  as are  specifically  assumed  by the  Escrow  Agent  pursuant  to  this
Agreement; (iii) may rely on and shall be protected in acting or refraining from
acting upon any written notice, instruction,  instrument,  statement, request or
document  furnished  to it  hereunder  and  believed by the Escrow Agent in good
faith to be genuine and to have been signed or presented by the proper person or
party,  without being required to determine the  authenticity  or correctness of
any fact stated  therein or the  propriety  or validity or the service  thereof;
(iv) may assume that any person believed by the Escrow Agent in good faith to be
authorized  to give  notice or make any  statement  or execute  any  document in
connection with the provisions  hereof is so authorized;  (v) shall not be under
any duty to give the property held by Escrow Agent  hereunder any greater degree
of care than Escrow Agent gives its own similar  property;  and (vi) may consult
counsel satisfactory to Escrow Agent, the opinion of such counsel to be full and
complete  authorization and protection in respect of any action taken,  suffered
or omitted by Escrow Agent  hereunder in good faith and in  accordance  with the
opinion of such counsel.

                  (b) The  Subscriber  and Company  acknowledge  that the Escrow
Agent is acting  solely as a  stakeholder  at their  request and that the Escrow
Agent shall not be liable for any action taken by Escrow Agent in good faith and
believed  by  Escrow  Agent to be  authorized  or  within  the  rights or powers
conferred  upon Escrow  Agent by this  Agreement.  The  Subscriber  and Company,

<PAGE>

jointly and severally, agree to indemnify and hold harmless the Escrow Agent and
any of Escrow Agent's partners,  employees,  agents and  representatives for any
action  taken or omitted to be taken by Escrow  Agent or any of them  hereunder,
including the fees of outside  counsel and other costs and expenses of defending
itself against any claim or liability under this  Agreement,  except in the case
of gross  negligence or willful  misconduct on Escrow  Agent's part committed in
its capacity as Escrow Agent under this Agreement.  The Escrow Agent shall owe a
duty only to the  Subscriber  and Company  under this  Agreement and to no other
person.

                  (c) The Subscriber and Company  jointly and severally agree to
reimburse the Escrow Agent for outside  counsel  fees, to the extent  authorized
hereunder  and incurred in  connection  with the  performance  of its duties and
responsibilities hereunder.

                  (d) The Escrow  Agent may at any time  resign as Escrow  Agent
hereunder by giving five (5) days prior  written  notice of  resignation  to the
Subscriber and the Company.  Prior to the effective  date of the  resignation as
specified in such notice,  the  Subscriber  and Company will issue to the Escrow
Agent a Joint  Instruction  authorizing  delivery of the Company  Documents  and
Subscriber Documents to a substitute Escrow Agent selected by the Subscriber and
Company.  If no successor  Escrow Agent is named by the  Subscriber and Company,
the Escrow Agent may apply to a court of competent  jurisdiction in the State of
New York for appointment of a successor Escrow Agent, and to deposit the Company
Documents and Subscriber Documents with the clerk of any such court.

                  (e) The  Escrow  Agent  does  not  have  and will not have any
interest in the Company Documents and Subscriber Documents,  but is serving only
as escrow agent, having only possession  thereof.  The Escrow Agent shall not be
liable for any loss  resulting from the making or retention of any investment in
accordance with this Escrow Agreement.

                  (f) This  Agreement sets forth  exclusively  the duties of the
Escrow  Agent  with  respect to any and all  matters  pertinent  thereto  and no
implied duties or obligations shall be read into this Agreement.

                  (g) The Escrow  Agent shall be permitted to act as counsel for
the Subscriber in any dispute as to the disposition of the Company Documents and
Subscriber  Documents,  in any other dispute between the Subscriber and Company,
whether  or not the Escrow  Agent is then  holding  the  Company  Documents  and
Subscriber Documents and continues to act as the Escrow Agent hereunder.

                  (h) The  provisions  of this  Section  4.1 shall  survive  the
resignation of the Escrow Agent or the termination of this Agreement.

         4.2.  Dispute  Resolution:  Judgments.  Resolution of disputes  arising
under this Agreement shall be subject to the following terms and conditions:

                  (a) If any dispute  shall arise with respect to the  delivery,
ownership,  right of  possession  or  disposition  of the Company  Documents and
Subscriber Documents, or if the Escrow Agent shall in good faith be uncertain as
to its duties or rights hereunder, the Escrow Agent shall be authorized, without
liability  to anyone,  to (i)  refrain  from  taking  any  action  other than to
continue to hold the Company Documents and Subscriber  Documents pending receipt
of a Joint  Instruction  from the  Subscriber  and Company,  or (ii) deposit the
Company  Documents  and  Subscriber   Documents  with  any  court  of  competent
jurisdiction  in the State of New York,  in which  event the Escrow  Agent shall
give  written  notice  thereof  to the  Subscriber  and the  Company  and  shall
thereupon be relieved and discharged  from all further  obligations  pursuant to
this Agreement.  The Escrow Agent may, but shall be under no duty to,  institute
or defend  any legal  proceedings  which  relate to the  Company  Documents  and
Subscriber Documents. The Escrow Agent shall have the right to retain counsel if

<PAGE>

it becomes  involved in any  disagreement,  dispute or  litigation on account of
this Agreement or otherwise determines that it is necessary to consult counsel.

                  (b) The Escrow Agent is hereby expressly  authorized to comply
with and obey any Court Order. In case the Escrow Agent obeys or complies with a
Court Order,  the Escrow Agent shall not be liable to the Subscriber and Company
or to  any  other  person,  firm,  corporation  or  entity  by  reason  of  such
compliance.

                                    ARTICLE V

                                 GENERAL MATTERS

         5.1.  Termination.  This escrow shall terminate upon the release of all
of the  Company  Documents  and  Subscriber  Documents  or at any time  upon the
agreement in writing of the Subscriber and Company.

         5.2. 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:

(a)      If to the Company, to:

                           HQ Sustainable Maritime Industries, Inc.
                           1511 Third Avenue, Suite 788
                           Seattle, Washington 98101
                           Attn: Norbert Sporns, CEO
                           Fax: (450) 465-7348

         With a copy by telecopier only to:

                           Joseph Emas, Esq.
                           1224 Washington Avenue
                           Miami Beach, FL 33139
                           Fax: (305) 531-1274

(b)      If to the  Subscribers,  to: the  addresses  and fax numbers  listed on
         Schedule A hereto

(c)      If to the Escrow Agent, to:

                           Grushko & Mittman, P.C.
                           551 Fifth Avenue, Suite 1601
                           New York, New York 10176
                           Fax: 212-697-3575

or to such other address as any of them shall give to the others by notice made
pursuant to this Section 5.2.

<PAGE>

         5.3.  Interest.  The Escrowed  Payment shall not be held in an interest
bearing  account nor will  interest be payable in connection  therewith.  In the
event the Escrowed  Payment is deposited in an interest  bearing  account,  each
Subscriber  shall be  entitled  to receive  its pro rata  portion of any accrued
interest thereon, but only if the Escrow Agent receives from such Subscriber the
Subscriber's  United States taxpayer  identification  number and other requested
information and forms.

         5.4.  Assignment;  Binding  Agreement.  Neither this  Agreement nor any
right or obligation hereunder shall be assignable by any party without the prior
written consent of the other parties  hereto.  This Agreement shall enure to the
benefit of and be binding  upon the parties  hereto and their  respective  legal
representatives, successors and assigns.

         5.5.  Invalidity.  In the event that any one or more of the  provisions
contained  herein,  or the  application  thereof  in any  circumstance,  is held
invalid,  illegal, or unenforceable in any respect for any reason, the validity,
legality and  enforceability of any such provision in every other respect and of
the  remaining  provisions  contained  herein  shall not be in any way  impaired
thereby,  it being intended that all of the rights and privileges of the parties
hereto shall be enforceable to the fullest extent permitted by law.

<PAGE>

         5.6.  Counterparts/Execution.  This  Agreement  may be  executed in any
number  of  counterparts  and  by  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  transmission  and delivered by facsimile
transmission.

         5.7.  Agreement.  Each of the  undersigned  states that he has read the
foregoing Funds Escrow Agreement and understands and agrees to it.

                                                         HQ SUSTAINABLE MARITIME
                                                         INDUSTRIES, INC.
                                                         the "Company"

By:___________________________

___________________________                          ___________________________
DOUBLE U MASTER FUND, L.P.                           "Subscriber"
"Subscriber"

___________________________                          ___________________________
"Subscriber"                                         "Subscriber"

___________________________                          ___________________________
"Subscriber"                                         "Subscriber"

                                  ESCROW AGENT:

                                                     ___________________________
                                                     GRUSHKO & MITTMAN, P.C.

<PAGE>

                      SCHEDULE A TO FUNDS ESCROW AGREEMENT

------------------------------------ -------------------------------------------
SUBSCRIBER                           PURCHASE PRICE
------------------------------------ -------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

------------------------------------ -------------------------------------------
TOTAL
------------------------------------ -------------------------------------------

<PAGE>

                                    EXHIBIT D
                               SECURITY AGREEMENT

1.       Identification.

         This Security  Agreement (the  "Agreement"),  dated as of January ____,
2006, is entered into by and between HQ Sustainable Maritime Industries, Inc., a
Delaware  corporation  ("Parent"),  Jade Profit  Investment  Limited,  a British
Virgin Islands limited liability  corporation,  Hainan Quebec Ocean Fishing Co.,
Ltd., a People's Republic of China limited liability corporation, Sealink Wealth
Limited, a British Virgin Island corporation,  Hainan Jiahua Marine Bio-Products
Co., Ltd., a limited liability company existing in China (each a "Guarantor" and
together  with Parent,  each a "Debtor" and  collectively  the  "Debtors"),  and
Barbara R. 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,  are  making  and will be making  loans to
Parent (the  "Loans").  It is beneficial to each Debtor that the Loans were made
and are being made.

         2.2  The  Loans  are and  will  be  evidenced  by  certain  convertible
promissory  notes (each a  "Convertible  Note") issued by Parent on or about the
date of and after the date of this Agreement pursuant to subscription agreements
(each a "Subscription  Agreement") to which Parent and Lenders are parties.  The
Notes are further  identified on Schedule A hereto and were and will be executed
by Parent 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.

         2.3 In  consideration  of the Loans  made and to be made by  Lenders to
Parent and for other good and  valuable  consideration,  and as security for the
performance by Parent of its obligations under the Notes and as security for the
repayment  of the Loans and all other sums due from  Debtors to Lenders  arising
under the Transaction Documents (as defined in the Subscription Agreement),  and
any other agreement  between or among them  (collectively,  the  "Obligations"),
each  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  made  pursuant  to the  Subscription
Agreement.

         2.4 The Lenders have appointed  Barbara R. Mittman as Collateral  Agent
pursuant to that certain  Collateral  Agent  Agreement dated at or about January
____,  2006  ("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 Debtors,  each Debtor  hereby
grants the Collateral Agent, for the benefit of the Lenders, a security interest
in the Collateral.

         3.2 "Collateral" shall mean all of the following property of Debtors:

<PAGE>

(A) All now owned and hereafter  acquired  right,  title and interest of Debtors
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) All now  owned and  hereafter  acquired  right,  title and
interest of Debtors 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 Debtors,  as well as 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 Debtors  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 Debtors'  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 any Debtor by its customers or  repossessed by any Debtor and all of
Debtors' right,  title and interest in and to the foregoing  (including all of a
Debtor's rights as a seller of goods);

                           (b) All  Equipment and  fixtures,  wherever  located,
whether now owned or hereafter  acquired,  including,  without  limitation,  all
machinery,  furniture and fixtures,  and any and all  additions,  substitutions,
replacements  (including  spare  parts),  and  accessions  thereof  and  thereto
(including,  but not limited to Debtors' 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 Debtors  in, to and in  respect  of any other  personal
property  in or  upon  which  a  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 Debtors, any computer service bureau or other third party; and

<PAGE>

                  (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.

         (B) All now owned and hereafter  acquired right,  title and interest of
Debtors 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 Debtors of any and all entities now or hereafter  existing,  (such  entities,
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
Debtors,  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  Debtors  in,  and  all
Proceeds  of any and all of the  foregoing  in each case,  whether  now owned or
hereafter  acquired by a Debtor and howsoever its interest  therein may arise or
appear (whether by ownership, security interest, lien, claim or otherwise).

Notwithstanding  anything to the contrary  contained  herein or any  Transaction
Document, Collateral shall not include any personal property which is, or at the
time of a Debtor's  acquisition  thereof  shall be  subject to a purchase  money
mortgage or other purchase money lien or security  interest  (including  capital
leases).

<PAGE>

         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 Each Debtor shall  prepare,  execute and deliver to the  Collateral
Agent UCC-1 Financing Statements.  The Collateral Agent is instructed to prepare
and  file at each  Debtor's  cost  and  expense,  financing  statements  in such
jurisdictions  deemed  advisable  to the  Collateral  Agent,  including  but not
limited to the State of Delaware.  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 The  Parent  shall  deliver  to  Collateral  Agent  promptly  stock
certificates  representing all of the shares of outstanding capital stock of the
Guarantor  (the  "Securities").  All  such  certificates  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.

         4.3 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 Debtors.  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,  Debtors 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 Debtors. If any Collateral
consists  of  security  entitlements,   Debtors  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 Debtors.

         4.4  Within  five  (5)  days  after  the  receipt  by a  Debtor  of any
Additional  Collateral,  a Pledge  Amendment,  duly executed by such 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.  Each 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.

         4.5 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.

<PAGE>

5.       Distribution.

         5.1 So long as no Event of Default exists, Debtors shall be entitled 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.

         5.2. At any time an Event of Default exists or has occurred, all rights
of Debtors,  upon notice given by Collateral Agent, to exercise the voting power
and  receive  payments,  which it would  otherwise  be  entitled  to pursuant to
Section 5.1,  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.

         5.3 All dividends, distributions, interest and other payments which are
received by Debtors  contrary to the provisions of Section 5.2 shall be received
in trust for the benefit of  Collateral  Agent as security  and  Collateral  for
payment of the Obligations shall be segregated from other funds of Debtors,  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.

6.       Further Action By Debtors; Covenants and Warranties.

         6.1  Collateral  Agent at all times  shall  have a  perfected  security
interest  in  the  Collateral,   the  Securities,   Additional  Collateral  (the
"Perfected Collateral"). Each 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.  Each 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 Perfected  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.

         6.2 Other than in the ordinary  course of business,  for fair value and
in cash, and except for  Collateral  which is substituted by assets of identical
or greater value (with the consent of the Collateral  Agent) or which has become
obsolete or is of inconsequential in value, each 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  or to  another  Debtor 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 Debtors to evidence or effectuate the same.

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

         6.4 Each 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.

<PAGE>

         6.5  Debtors  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.

         6.6 Each 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,  which insurance shall be of the types
customarily  insured  against  by  companies  in the same or  similar  business,
similarly  situated,  in such  amounts  (with  such  deductible  amounts)  as is
customary for such companies under the same or similar circumstances,  similarly
situated.  Debtors shall make the  Collateral  Agent 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   each   Debtor's
attorney-in-fact  to  endorse  any check or draft  that may be  payable  to such
Debtor so that  Collateral  Agent may collect the proceeds  payable for any loss
under  such  insurance.  The  proceeds  of such  insurance,  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,  Debtors  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 Debtors  securing  the  Obligations.  In
connection with any assignment by Collateral  Agent of this Security  Agreement,
each Debtor hereby agrees to cause the insurance  policies required hereby to be
carried  by such  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 Each 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  Debtors  represent  and warrant that they are the true and lawful
exclusive   owners  of  the  Collateral,   free  and  clear  of  any  liens  and
encumbrances.

         6.11 Each 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.

         6.12  Each  Debtor  shall  cause  each  Subsidiary  of such  Debtor  in
existence  on the date hereof and each  Subsidiary  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) if requested  by  Collateral

<PAGE>

Agent,  a  security  and  pledge  agreement  substantially  in the  form of this
Agreement together with (x) certificates  evidencing all of the capital stock of
each  Subsidiary of and any entity owned by such  Subsidiary,  (y) undated stock
powers  executed in blank with  signatures  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 (C) 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.  Annex I annexed hereto  contains a list of all
Subsidiaries of the Debtors as of the date of this Agreement.

7.       Power of Attorney.

         At any time an Event of Default  exists or has  occurred,  each  Debtor
hereby irrevocably constitutes and appoints the Collateral Agent as the true and
lawful attorney of such Debtor,  with full power of  substitution,  in the place
and stead of such  Debtor and in the name of such  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 a Debtor fails to perform any material covenant,  agreement, duty or
obligation of such 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 Debtors 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, the 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  and any of the  Transaction
Documents  (as  defined  in the  Subscription  Agreement)  shall  be an Event of
Default  hereunder  and an "Event of  Default"  as  defined  in the  Notes,  and
Subscription Agreement.

10.      Disposition of Collateral.

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

<PAGE>

         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  Debtors  of the sale or other  disposition  of
Collateral  is required by then  applicable  law,  five  business (5) days prior
written notice (which  Debtors agree is reasonable  notice within the meaning of
Section  9.612(a) of the Uniform  Commercial  Code) shall be given to Debtors of
the time and place of any sale of Collateral  which Debtors  hereby agree 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,  Debtors 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 Debtors 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 Debtors  arising
under the Obligations or any other source.

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

<PAGE>

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.  Debtors 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
Debtors to perform and observe any agreements of Debtors  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
Debtors  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.

         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 Debtors:                    HQ Sustainable Maritime Industries, Inc.
                                        1511 Third Avenue, Suite 788
                                        Seattle, Washington 98101
                                        Attn: Norbert Sporns, CEO
                                        Fax: (450) 465-7348

         With a copy by telecopier only to:

                                         Joseph Emas, Esq.
                                         1224 Washington Avenue
                                         Miami Beach, FL 33139
                                         Fax: (305) 531-1274

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

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

<PAGE>

         With a copy by telecopier only to:

                                        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 each 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.

         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 a 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,  each Debtor hereby irrevocably  accepts for itself and in respect of
its property,  generally and unconditionally,  the jurisdiction of the aforesaid
courts.  Each 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.

         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 10.4 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.

14.      Termination;  Release. When the Obligations have been indefeasibly paid
and performed in full or all outstanding  Convertible  Notes have been converted
to  common  stock  pursuant  to the  terms  of the  Convertible  Notes  and  the
Subscription  Agreements,  this Agreement shall  terminated,  and the Collateral

<PAGE>

Agent, at the request and sole expense of the Debtors,  will execute and deliver
to the Debtors the proper  instruments  (including UCC  termination  statements)
acknowledging  the  termination  of the  Security  Agreement,  and duly  assign,
transfer  and  deliver  to the  Debtors,  without  recourse,  representation  or
warranty of any kind  whatsoever,  such of the  Collateral,  including,  without
limitation,  Securities  and  any  Additional  Collateral,  as  may  be  in  the
possession of the Collateral Agent.

15.      Collateral Agent.

         15.1 Collateral  Agent Powers.  The powers  conferred on the Collateral
Agent hereunder are solely to protect its interest (on behalf of the Lenders) in
the Collateral and shall not impose any duty on it to exercise any such powers.

         15.2  Reasonable  Care.  The  Collateral  Agent is required to exercise
reasonable  care  in the  custody  and  preservation  of any  Collateral  in its
possession; provided, however, that the Collateral Agent shall be deemed to have
exercised  reasonable  care  in  the  custody  and  preservation  of  any of the
Collateral  if it takes  such  action  for that  purposes  as any owner  thereof
reasonably  requests  in writing at times  other  than upon the  occurrence  and
during the  continuance  of any Event of Default,  but failure of the Collateral
Agent, to comply with any such request at any time shall not in itself be deemed
a failure to exercise reasonable care.

                      [THIS SPACE INTENTIONALLY LEFT BLANK]

<PAGE>

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

"DEBTOR"                                    "THE COLLATERAL AGENT"
HQ SUSTAINABLE MARITIME INDUSTRIES, INC.    BARBARA R. MITTMAN
a Delaware corporation

By: _____________________________________   ____________________________________

Its: ____________________________________

"SUBSIDIARY"                                "SUBSIDIARY"
JADE PROFIT INVESTMENT LIMITED              HAINAN QUEBEC OCEAN FISHING CO. LTD.
a British Virgin Islands limited            A People's Republic of China limited
liability corporation                       liability corporation

By: _____________________________________   By:_________________________________

Its: ____________________________________   Its: _______________________________

"SUBSIDIARY"                                "SUBSIDIARY"
SEALINK WEALTH LIMITED                      HAINAN JIAHUA MARINE BIO-PRODUCTS
a British Virgin Islands corporation        CO., LTD.
                                            A People's Republic of China limited
                                            liability corporation

By: _____________________________________   By:_________________________________

Its: ____________________________________   Its: _______________________________

                             APPROVED BY "LENDERS":

_________________________________________   ____________________________________

_________________________________________   ____________________________________

        This Security Agreement may be signed by facsimile signature and
                 delivered by confirmed facsimile transmission.

<PAGE>

                        SCHEDULE A TO SECURITY AGREEMENT

---------------------------------------------- ---------------------------------
LENDER                                         PURCHASE PRICE
---------------------------------------------- ---------------------------------

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

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

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

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

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

<PAGE>

                                     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 January ____, 2006, 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.

----------------------- -------------------- ------------------- ---------------
                               Number                              Certificate
Name of Issuer                of Shares             Class           Number(s)
----------------------- -------------------- ------------------- ---------------

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

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

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

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

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

                                        By:_____________________________________

<PAGE>

                                    EXHIBIT E
                                FORM OF GUARANTY

1.       Identification.

         This Guaranty  (the  "Guaranty"),  dated as of January  ____,  2006, is
entered into by Jade Profit Investment Limited, a British Virgin Islands limited
liability  corporation,  Hainan  Quebec  Ocean  Fishing  Co.,  Ltd.,  a People's
Republic of China limited  liability  corporation,  Sealink  Wealth  Limited,  a
British Virgin Island corporation,  Hainan Jiahua Marine Bio-Products Co., Ltd.,
a limited  liability  company  existing in China (each a  "Guarantor"),  for the
benefit of the  parties  identified  on Schedule A hereto  (each a "Lender"  and
collectively, the "Lenders").

2.       Recitals.

         2.1  Guarantor  is a direct or indirect  subsidiary  of HQ  Sustainable
Maritime Industries,  Inc., a Delaware corporation ("Parent").  The Lenders have
made,  are making and will be making  loans to Parent (the  "Loans").  Guarantor
will obtain substantial benefit from the proceeds of the Loans.

         2.2  The  Loans  are and  will  be  evidenced  by  certain  convertible
promissory notes (each a "Convertible  Note" and collectively,  the "Convertible
Notes")  issued by Parent on, about or after the date of this Guaranty  pursuant
to  subscription  agreements  dated at or about the date  hereof  ("Subscription
Agreements").  The Convertible Notes are further identified on Schedule A hereto
and were and will be  executed  by  Parent as  "Borrower"  or  "Debtor"  for the
benefit of each Lender as the "Holder" or "Lender" thereof.

         2.3 In  consideration  of the Loans  made and to be made by  Lenders to
Parent and for other good and  valuable  consideration,  and as security for the
performance  by Parent of its  obligations  under the  Convertible  Notes and as
security  for the  repayment  of the Loans and all other sums due from Debtor to
Lenders arising under the  Convertible  Notes,  Subscription  Agreements and any
other agreement  between or among them relating to the foregoing  (collectively,
the "Obligations"),  Guarantor, for good and valuable consideration,  receipt of
which is  acknowledged,  has  agreed to enter  into this  Guaranty.  Obligations
include all future advances by Lenders to Parent made by Lenders pursuant to the
Subscription Agreement.

         2.4 The Lenders have appointed  Barbara R. Mittman as Collateral  Agent
pursuant to that certain  Collateral  Agent  Agreement dated at or about January
____,  2006  ("Collateral  Agent  Agreement"),  among the Lenders and Collateral
Agent.

3.       Guaranty.

         3.1  Guaranty.   Guarantor  hereby   unconditionally   and  irrevocably
guarantees,  jointly  and  severally  with any  other  Guarantor,  the  punctual
payment,  performance and observance when due,  whether at stated  maturity,  by
acceleration or otherwise,  of all of the Obligations now or hereafter existing,
whether for principal,  interest  (including,  without limitation,  all interest
that  accrues  after  the   commencement  of  any   insolvency,   bankruptcy  or
reorganization  of Parent,  whether or not constituting an allowed claim in such
proceeding),  fees,  commissions,  expense  reimbursements,  liquidated damages,
indemnifications  or  otherwise  (such  obligations,  to the  extent not paid by
Parent being the "Guaranteed Obligations"), and agrees to pay any and all costs,
fees and expenses  (including  reasonable counsel fees and expenses) incurred by
Collateral  Agent and the Lenders in enforcing any rights under the guaranty set
forth herein.  Without  limiting the  generality of the  foregoing,  Guarantor's
liability  shall extend to all amounts that  constitute  part of the  Guaranteed
Obligations and would be owed by Parent to Collateral Agent and the Lenders, but
for the fact that they are  unenforceable  or not allowable due to the existence
of an insolvency, bankruptcy or reorganization involving Parent.

         3.2  Guaranty  Absolute.   Guarantor  guarantees  that  the  Guaranteed
Obligations  will  be  paid  strictly  in  accordance  with  the  terms  of  the
Convertible Notes,  regardless of any law,  regulation or order now or hereafter
in effect  in any  jurisdiction  affecting  any of such  terms or the  rights of
Collateral  Agent or the  Lenders  with  respect  thereto.  The  obligations  of

<PAGE>

Guarantor under this Guaranty are independent of the Guaranteed Obligations, and
a separate action or actions may be brought and prosecuted  against Guarantor to
enforce such obligations,  irrespective of whether any action is brought against
Parent or any other Guarantor or whether Parent or any other Guarantor is joined
in any such action or actions.  The  liability of Guarantor  under this Guaranty
constitutes  a primary  obligation,  and not a contract  of  surety,  and to the
extent  permitted  by law,  shall be  irrevocable,  absolute  and  unconditional
irrespective of, and Guarantor hereby irrevocably waives any defenses it may now
or hereafter have in any way relating to, any or all of the following:  any lack
of validity or  enforceability  of the  Convertible  Notes or any  agreement  or
instrument relating thereto;  any change in the time, manner or place of payment
of, or in any other term of, all or any of the  Guaranteed  Obligations,  or any
other  amendment or waiver of or any consent to departure  from the  Convertible
Notes, including, without limitation, any increase in the Guaranteed Obligations
resulting  from the extension of additional  credit to Parent or otherwise;  any
taking, exchange, release, subordination or non-perfection of any Collateral, or
any taking,  release or amendment or waiver of or consent to departure  from any
other  guaranty,  for  all or any of the  Guaranteed  Obligations;  any  change,
restructuring  or  termination of the corporate,  limited  liability  company or
partnership  structure  or  existence  of  Parent;  or  any  other  circumstance
(including,  without limitation, any statute of limitations) or any existence of
or reliance on any  representation by Collateral Agent or the Lenders that might
otherwise  constitute a defense  available  to, or a discharge of, Parent or any
other  guarantor or surety.  This Guaranty  shall continue to be effective or be
reinstated,  as the  case  may be,  if at any  time  any  payment  of any of the
Guaranteed  Obligations is rescinded or must otherwise be returned by Collateral
Agent,  the  Lenders or any other  entity  upon the  insolvency,  bankruptcy  or
reorganization  of the  Parent  or  otherwise  (and  whether  as a result of any
demand, settlement, litigation or otherwise), all as though such payment had not
been made.

         3.3 Waiver.  Guarantor hereby waives promptness,  diligence,  notice of
acceptance  and  any  other  notice  with  respect  to  any  of  the  Guaranteed
Obligations and this Guaranty and any requirement  that Collateral  Agent or the
Lenders or exhaust  any right or take any action  against  any  Borrower  or any
other person or entity or any Collateral.  Guarantor  acknowledges  that it will
receive   direct  and  indirect   benefits  from  the   financing   arrangements
contemplated  herein  and that the  waiver  set  forth  in this  Section  3.3 is
knowingly made in  contemplation  of such benefits.  Guarantor hereby waives any
right to revoke this Guaranty, and acknowledges that this Guaranty is continuing
in nature and applies to all Guaranteed Obligations,  whether existing now or in
the future.

         3.4  Continuing  Guaranty;  Assignments.  This Guaranty is a continuing
guaranty  and shall (a) remain in full  force and effect  until the later of the
indefeasible  cash payment in full of the Guaranteed  Obligations  and all other
amounts payable under this Guaranty, the Subscription Agreements and Convertible
Notes,  (b) be binding upon Guarantor,  its successors and assigns and (c) inure
to the  benefit  of and be  enforceable  by the  Lenders  and their  successors,
pledgees,  transferees  and  assigns.  Without  limiting the  generality  of the
foregoing clause (c), any Lender may pledge, assign or otherwise transfer all or
any  portion of its  rights and  obligations  under  this  Guaranty  (including,
without limitation,  all or any portion of its Convertible Notes owing to it) to
any other Person,  and such other Person shall thereupon  become vested with all
the benefits in respect thereof  granted such Collateral  Agent or Lender herein
or otherwise.

         3.5 Subrogation.  No Guarantor will exercise any rights that it may now
or  hereafter  acquire  against  the  Collateral  Agent or any  Lender  or other
Guarantor  (if any) that  arise  from the  existence,  payment,  performance  or
enforcement of such  Guarantor's  obligations  under this  Guaranty,  including,
without  limitation,  any  right  of  subrogation,  reimbursement,  exoneration,
contribution  or  indemnification,  whether or not such  claim,  remedy or right
arises in equity or under contract,  statute or common law,  including,  without
limitation, the right to take or receive from the Collateral Agent or any Lender
or other Guarantor (if any),  directly or indirectly,  in cash or other property
or by set-off or in any other manner,  payment or security  solely on account of
such claim, remedy or right, unless and until all of the Guaranteed  Obligations
and all other amounts  payable under this Guaranty shall have been  indefeasibly
paid in full in cash.

<PAGE>

         3.6 Maximum Obligations. Notwithstanding any provision herein contained
to the contrary,  Guarantor's liability with respect to the Obligations shall be
limited to an amount not to exceed, as of any date of determination,  the amount
that could be claimed by Lenders from  Guarantor  without  rendering  such claim
voidable or  avoidable  under  Section 548 of the  Bankruptcy  Code or under any
applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent  Conveyance
Act or similar statute or common law.

4.       Miscellaneous.

         4.1 Expenses. Guarantor shall pay to the Lenders, on demand, the amount
of any and all reasonable expenses,  including,  without limitation,  attorneys'
fees,  legal  expenses  and  brokers'  fees,  which  the  Lenders  may  incur in
connection with exercise or enforcement of any the rights, remedies or powers of
the Lenders hereunder or with respect to any or all of the Obligations.

         4.2  Waivers,  Amendment  and  Remedies.  No course of  dealing  by the
Lenders  and no failure by the  Lenders to  exercise,  or delay by the Lender 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  Lenders.  No  amendment,  modification  or waiver of any  provision of this
Guaranty and no consent to any departure by Guarantor  therefrom,  shall, in any
event,  be effective  unless  contained  in a writing  signed by the Majority in
Interest  (as such term is defined in the  Collateral  Agent  Agreement)  or the
Lender or Lenders against whom such amendment, modification or waiver is sought,
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 Lenders,  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  Lenders  from  time to time in such  order as the
Lenders may elect.

         4.3  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 Parent and
         Guarantor, to:                 HQ Sustainable Maritime Industries, Inc.
                                        1511 Third Avenue, Suite 788
                                        Seattle, Washington 98101
                                        Attn: Norbert Sporns, CEO
                                        Fax: (450) 465-7348

         With a copy by telecopier only to:

                                        Joseph Emas, Esq.
                                        1224 Washington Avenue
                                        Miami Beach, FL 33139
                                        Fax: (305) 531-1274

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

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

<PAGE>

         With a copy to:                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.

         4.4 Term; Binding Effect.  This Guaranty shall (a) remain in full force
and effect until payment and satisfaction in full of all of the Obligations; (b)
be binding upon  Guarantor and its  successors  and permitted  assigns;  and (c)
inure to the benefit of the Lenders and their respective successors and assigns.
All the rights and benefits  granted by Guarantor  to the  Collateral  Agent and
Lenders  hereunder and other  agreements  and documents  delivered in connection
therewith are deemed granted to both the Collateral Agent and Lenders.  Upon the
payment in full of the  Obligations,  (i) this Guaranty shall terminate and (ii)
the Lenders will, upon Guarantor's request and at Guarantor's  expense,  execute
and deliver to Guarantor such documents as Guarantor shall reasonably request to
evidence such termination, all without any representation,  warranty or recourse
whatsoever.

         4.5 Captions. The captions of Paragraphs, Articles and Sections in this
Guaranty 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.

         4.6 Governing Law; Venue; Severability. This Guaranty shall be governed
by and  construed in  accordance  with the laws of the State of New York without
regard  to  principles  of  conflicts  or choice  of law.  Any  legal  action or
proceeding against Guarantor with respect to this Guaranty may be brought in the
courts  of the  State  of New  York or of the  United  States  for the  Southern
District of New York, and, by execution and delivery of this Guaranty, Guarantor
hereby irrevocably accepts for itself and in respect of its property,  generally
and unconditionally,  the jurisdiction of the aforesaid courts. Guarantor 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 Guaranty  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 Guaranty,  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.

         4.7 Satisfaction of Obligations. For all purposes of this Guaranty, the
payment in full of the Obligations shall be conclusively deemed to have occurred
when  either  the  Obligations  have  been  indefeasibly  paid  in  cash  or all
outstanding  Convertible  Notes have been  converted to common stock pursuant to
the terms of the Convertible Notes and the Subscription Agreements.

         4.8  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.

<PAGE>

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

"GUARANTOR"                                 "GUARANTOR"
JADE PROFIT INVESTMENT LIMITED              HAINAN QUEBEC OCEAN FISHING CO. LTD.
a British Virgin Islands limited            A People's Republic of China limited
liability corporation                       liability corporation

By: _____________________________________   By:_________________________________

Its: ____________________________________   Its: _______________________________

"GUARANTOR"                                 "GUARANTOR"
SEALINK WEALTH LIMITED                      HAINAN JIAHUA MARINE BIO-PRODUCTS
a British Virgin Islands corporation        CO., LTD.
                                            A People's Republic of China limited
                                            liability corporation

By: _____________________________________   By:_________________________________

Its: ____________________________________   Its: _______________________________

                             APPROVED BY "LENDERS":

________________________________________    ____________________________________

________________________________________    ____________________________________

        This Guaranty Agreement may be signed by facsimile signature and
                 delivered by confirmed facsimile transmission.

<PAGE>

                             SCHEDULE A TO GUARANTY

------------------------------------------ -------------------------------------
LENDER                                     PURCHASE PRICE
------------------------------------------ -------------------------------------

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

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

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

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

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

<PAGE>

                                    EXHIBIT F
                           COLLATERAL AGENT AGREEMENT

         COLLATERAL AGENT AGREEMENT (this "Agreement") dated as of January ____,
2006,  among  Barbara R.  Mittman  (the  "Collateral  Agent"),  and the  parties
identified   on  Schedule  A  hereto   (each,   individually,   a  "Lender"  and
collectively,  the "Lenders"),  who hold or will acquire convertible  promissory
notes  issued  or to be  issued  by HQ  Sustainable  Maritime  Industries,  Inc.
("Parent"),  a Delaware  corporation,  at or about the date of this Agreement as
described  in  the  Security   Agreement  referred  to  in  Section  1(a)  below
(collectively herein the "Notes").

         WHEREAS,  the Lenders have made, are making and will be making loans to
Parent to be secured by certain collateral; and

         WHEREAS,  it is desirable to provide for the orderly  administration of
such  collateral by requiring each Lender to appoint the Collateral  Agent,  and
the Collateral Agent has agreed to accept such appointment and to receive,  hold
and deliver such  collateral,  all upon the terms and subject to the  conditions
hereinafter set forth; and

         WHEREAS,  it is desirable to allocate the enforcement of certain rights
of the Lenders under the Notes for the orderly administration thereof.

         NOW,  THEREFORE,  in consideration of the premises set forth herein and
for other good and valuable consideration, the parties hereto agree as follows:

1.       Collateral.

         (a) Contemporaneously with the execution and delivery of this Agreement
by the Collateral  Agent and the Lenders,  (i) the Collateral  Agent has or will
have entered into a Security  Agreement among the Collateral  Agent,  Parent and
Jade Profit  Investment  Limited,  a British  Virgin Islands  limited  liability
corporation, Hainan Quebec Ocean Fishing Co., Ltd., a People's Republic of China
limited liability  corporation,  Sealink Wealth Limited, a British Virgin Island
corporation,  Hainan Jiahua Marine  Bio-Products  Co., Ltd., a limited liability
company  existing  in  China  (each a  "Guarantor"  and  together  with  Parent,
"Debtors") ("Security Agreement"), regarding the grant of a security interest in
assets owned by Debtors  (such assets are referred to herein and in the Security
Agreement as the  "Collateral") to the Collateral  Agent, for the benefit of the
Lenders,  (ii)  Parent  is  issuing  the  Notes  to the  Lenders  pursuant  to a
"Subscription  Agreement"  dated  at  or  about  the  date  of  this  Agreement.
Collectively,  the Security Agreement and may issue additional Notes pursuant to
the  Subscription  Agreement,  the Notes and  Subscription  Agreement  and other
agreements referred to therein are referred to herein as "Borrower Documents".

         (b) The Collateral Agent hereby  acknowledges  that any Collateral held
by the  Collateral  Agent is held for the benefit of the  Lenders in  accordance
with this  Agreement  and the Borrower  Documents.  No reference to the Borrower
Documents or any other instrument or document shall be deemed to incorporate any
term or provision thereof into this Agreement unless expressly so provided.

         (c) The  Collateral  Agent  is to  distribute  in  accordance  with the
Borrower   Documents  any  proceeds  received  from  the  Collateral  which  are
distributable to the Lenders in proportion to their respective  interests in the
Obligations as defined in the Security Agreement.

2.       Appointment of the Collateral Agent.

         The Lenders  hereby  appoint the  Collateral  Agent (and the Collateral
Agent hereby accepts such  appointment)  to take any action  including,  without
limitation,  the  registration  of any  Collateral in the name of the Collateral
Agent or its nominees prior to or during the  continuance of an Event of Default
(as defined in the Borrower  Documents),  the exercise of voting rights upon the
occurrence and during the continuance of an Event of Default, the application of

<PAGE>

any cash  collateral  received  by the  Collateral  Agent to the  payment of the
Obligations, the making of any demand under the Borrower Documents, the exercise
of any remedies given to the Collateral Agent pursuant to the Borrower Documents
and the exercise of any authority  pursuant to the appointment of the Collateral
Agent  as an  attorney-in-fact  pursuant  to the  Security  Agreement  that  the
Collateral  Agent  deems  necessary  or  proper  for the  administration  of the
Collateral  pursuant  to  the  Security  Agreements.  Upon  disposition  of  the
Collateral in accordance with the Borrower Documents, the Collateral Agent shall
promptly  distribute  any cash or Collateral in accordance  with Section 10.4 of
the Security  Agreement.  Lenders must notify Collateral Agent in writing of the
issuance  of Notes to  Lenders  by  Debtor.  The  Collateral  Agent  will not be
required to act hereunder in connection with Notes the issuance of which was not
disclosed in writing to the Collateral  Agent nor will the  Collateral  Agent be
required to act on behalf of any assignee of Notes  without the written  consent
of Collateral Agent.

3.       Action by the Majority in Interest.

         (a) Certain Actions. Each of the Lenders covenants and agrees that only
a  Majority  in  Interest  shall  have the  right,  but not the  obligation,  to
undertake the following actions (it being expressly  understood that less than a
Majority in Interest hereby  expressly waive the following  rights that they may
otherwise have under the Borrower Documents):

                  (i)  Acceleration.  If an Event of Default  occurs,  after the
applicable cure period, if any, a Majority in Interest may, on behalf of all the
Lenders, instruct the Collateral Agent to provide to Debtors notice to cure such
default  and/or declare the unpaid  principal  amount of the Notes to be due and
payable,  together  with any and all  accrued  interest  thereon  and all  costs
payable pursuant to such Notes;

                  (ii) Enforcement.  Upon the occurrence of any Event of Default
after the  applicable  cure period,  if any, a Majority in Interest may instruct
the Collateral Agent to proceed to protect,  exercise and enforce,  on behalf of
all the Lenders,  their rights and remedies under the Borrower Documents against
Debtors,  and such other  rights and  remedies as are provided by law or equity;
and

                  (iii)  Waiver of Past  Defaults.  A Majority in  Interest  may
instruct the Collateral Agent to waive any Event of Default by written notice to
Debtors, and the other Lenders.

         (b)  Permitted  Subordination.  A Majority in Interest may instruct the
Collateral  Agent to agree to  subordinate  any  Collateral to any claim and may
enter into any agreement with Debtors to evidence such subordination;  provided,
however, that subsequent to any such subordination,  each Note shall remain pari
passu with the other Notes held by the Lenders.

         (c) Further Actions. A Majority in Interest may instruct the Collateral
Agent to take any action that it may take under this  Agreement  by  instructing
the  Collateral  Agent in  writing  to take  such  action  on  behalf of all the
Lenders.

         (d)  Majority  in  Interest.  For so  long  as any  obligations  remain
outstanding  on the  Notes,  Majority  in  Interest  for  the  purposes  of this
Agreement and the Security  Agreement  shall mean Lenders who hold not less than
seventy-five  percent  (75%) of the  outstanding  principal  amount of the Notes
except in relation to Sections  3(a)(i) and 3(a)(ii) when a Majority in Interest
shall mean 33% of the outstanding principal amount of the Notes.

4.       Power of Attorney.

         (a) To effectuate the terms and provisions  hereof,  the Lenders hereby
appoint the Collateral Agent as their attorney-in-fact (and the Collateral Agent
hereby accepts such  appointment) for the purpose of carrying out the provisions
of this Agreement including, without limitation, taking any action on behalf of,
or at the instruction  of, the Majority in Interest at the written  direction of

<PAGE>

the Majority in Interest and executing any consent  authorized  pursuant to this
Agreement and taking any action and executing any instrument that the Collateral
Agent may deem  necessary or advisable  (and lawful) to accomplish  the purposes
hereof.

         (b) All acts done under the foregoing authorization are hereby ratified
and approved and neither the Collateral Agent nor any designee nor agent thereof
shall be  liable  for any  acts of  commission  or  omission,  for any  error of
judgment,  for any mistake of fact or law except for acts of gross negligence or
willful misconduct.

         (c)  This  power  of  attorney,  being  coupled  with an  interest,  is
irrevocable while this Agreement remains in effect.

5.       Expenses of the  Collateral  Agent.  The Lenders  shall pay any and all
reasonable  costs and  expenses  incurred by the  Collateral  Agent,  including,
without  limitation,  reasonable  costs and  expenses  relating to all  waivers,
releases,  discharges,  satisfactions,  modifications  and  amendments  of  this
Agreement, the administration and holding of the Collateral, insurance expenses,
and  the  enforcement,  protection  and  adjudication  of  the  parties'  rights
hereunder by the Collateral Agent, including, without limitation, the reasonable
disbursements,  expenses  and fees of the  attorneys  the  Collateral  Agent may
retain,  if any, each of the  foregoing in  proportion to their  holdings of the
Notes.

6.       Reliance  on  Documents  and  Experts.  The  Collateral  Agent shall be
entitled to rely upon any notice, consent,  certificate,  affidavit,  statement,
paper,  document,  writing or  communication  (which may be by telegram,  cable,
telex, telecopier,  or telephone) reasonably believed by it to be genuine and to
have  been  signed,  sent or made by the  proper  person  or  persons,  and upon
opinions and advice of its own legal counsel, independent public accountants and
other experts selected by the Collateral Agent.

7.       Duties of the Collateral Agent; Standard of Care.

                  (a) The Collateral Agent's only duties are those expressly set
forth in this Agreement, and the Collateral Agent hereby is authorized to
perform those duties in accordance with commercially reasonable practices. The
Collateral Agent may exercise or otherwise enforce any of its rights, powers,
privileges, remedies and interests under this Agreement and applicable law or
perform any of its duties under this Agreement by or through its officers,
employees, attorneys, or agents.

         (b) The  Collateral  Agent shall act in good faith and with that degree
of care that an ordinarily  prudent  person in a like  position  would use under
similar circumstances.

         (c) Any  funds  held by the  Collateral  Agent  hereunder  need  not be
segregated from other funds except to the extent required by law. The Collateral
Agent  shall be under no  liability  for  interest  on any funds  received by it
hereunder.

8.       Resignation.  The Collateral  Agent may resign and be discharged of its
duties hereunder at any time by giving written notice of such resignation to the
other  parties  hereto,  stating the date such  resignation  is to take  effect.
Within five (5) days of the giving of such notice, a successor  collateral agent
shall be appointed by the Majority in Interest;  provided,  however, that if the
Lenders are unable so to agree upon a successor  within  such time  period,  and
notify the Collateral  Agent during such period of the identity of the successor
collateral  agent, the successor  collateral agent may be a person designated by
the Collateral  Agent,  and any and all fees of such successor  collateral agent
shall be the joint and several  obligation of the Lenders.  The Collateral Agent
shall continue to serve until the effective date of the resignation or until its
successor  accepts the  appointment  and  receives  the  Collateral  held by the
Collateral  Agent but shall not be obligated to take any action  hereunder.  The
Collateral  Agent may deposit any Collateral with the Supreme Court of the State
of New York for New York  County or any such other  court in New York State that
accepts such Collateral.

9.       Exculpation.   The  Collateral  Agent  and  its  officers,   employees,
attorneys and agents,  shall not incur any liability  whatsoever for the holding
or delivery of documents or the taking of any other  action in  accordance  with
the  terms  and  provisions  of this  Agreement,  for any  mistake  or  error in
judgment,  for compliance  with any applicable law or any  attachment,  order or

<PAGE>

other directive of any court or other authority (irrespective of any conflicting
term or  provision of this  Agreement),  or for any act or omission of any other
person engaged by the Collateral Agent in connection with this Agreement, unless
occasioned  by  the  exculpated   person's  own  gross   negligence  or  willful
misconduct;  and each party hereto  hereby waives any and all claims and actions
whatsoever against the Collateral Agent and its officers,  employees,  attorneys
and agents,  arising out of or related  directly or  indirectly to any or all of
the foregoing acts, omissions and circumstances.

10.      Indemnification.  The Lenders hereby agree to indemnify,  reimburse and
hold  harmless the  Collateral  Agent and its  directors,  officers,  employees,
attorneys  and  agents,  jointly  and  severally,  from and  against any and all
claims, liabilities,  losses and expenses that may be imposed upon, incurred by,
or  asserted  against  any of  them,  arising  out  of or  related  directly  or
indirectly to this Agreement or the Collateral, except such as are occasioned by
the indemnified person's own gross negligence or willful misconduct.

11.      Miscellaneous.

         (a) Rights and  Remedies Not Waived.  No act,  omission or delay by the
Collateral Agent shall constitute a waiver of the Collateral  Agent's rights and
remedies  hereunder or otherwise.  No single or partial waiver by the Collateral
Agent of any default hereunder or right or remedy that it may have shall operate
as a waiver of any other default,  right or remedy or of the same default, right
or remedy on a future occasion.

         (b) Governing Law. 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 that would result in the application of the  substantive  laws
of another jurisdiction.

         (c) Waiver of Jury Trial and Setoff; Consent to Jurisdiction; Etc.

                  (i) In any  litigation  in  any  court  with  respect  to,  in
connection  with, or arising out of this Agreement or any instrument or document
delivered   pursuant   to  this   Agreement,   or  the   validity,   protection,
interpretation,  collection or enforcement hereof or thereof, or any other claim
or dispute  howsoever  arising,  between the Collateral Agent and the Lenders or
any Lender,  then each Lender,  to the fullest  extent it may legally do so, (A)
waives  the  right  to  interpose  any  setoff,   recoupment,   counterclaim  or
cross-claim in connection with any such  litigation,  irrespective of the nature
of such setoff,  recoupment,  counterclaim or  cross-claim,  unless such setoff,
recoupment,  counterclaim or cross-claim  could not, by reason of any applicable
federal or state procedural laws, be interposed, pleaded or alleged in any other
action;  and (B) WAIVES TRIAL BY JURY IN CONNECTION WITH ANY SUCH LITIGATION AND
ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH  LITIGATION  ANY  SPECIAL,
EXEMPLARY,  PUNITIVE OR  CONSEQUENTIAL  DAMAGES OR ANY DAMAGES OTHER THAN, OR IN
ADDITION TO,  ACTUAL  DAMAGES.  EACH LENDER  AGREES THAT THIS SECTION 11(c) IS A
SPECIFIC  AND  MATERIAL  ASPECT  OF THIS  AGREEMENT  AND  ACKNOWLEDGE  THAT  THE
COLLATERAL  AGENT WOULD NOT ENTER THIS  AGREEMENT IF THIS SECTION 11(c) WERE NOT
PART OF THIS AGREEMENT.

                  (ii)  Each  Lender  irrevocably   consents  to  the  exclusive
jurisdiction  of any State or  Federal  Court  located  within the County of New
York, State of New York, in connection with any action or proceeding arising out
of or  relating  to this  Agreement  or any  document  or  instrument  delivered
pursuant to this  Agreement or otherwise.  In any such  litigation,  each Lender
waives,  to the fullest extent it may effectively do so, personal service of any
summons,  complaint or other  process and agree that the service  thereof may be
made by certified or registered  mail directed to such Lender at its address for
notice  determined in accordance  with Section 11(e) hereof.  Each Lender hereby
waives,  to the fullest  extent it may  effectively do so, the defenses of forum
non conveniens and improper venue.

<PAGE>

         (d)  Admissibility  of this Agreement.  Each of the Lenders agrees that
any copy of this  Agreement  signed  by it and  transmitted  by  telecopier  for
delivery to the Collateral Agent shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original
is in existence.

         (e) Address for Notices.  Any notice or other  communication  under the
provisions of this Agreement  shall be given in writing and delivered in person,
by  reputable  overnight  courier or  delivery  service,  by  facsimile  machine
(receipt  confirmed)  with a copy  sent  by  first  class  mail  on the  date of
transmissions,  or by registered or certified  mail,  return receipt  requested,
directed  to such  party's  addresses  set forth below (or to any new address of
which any party hereto shall have informed the others by the giving of notice in
the manner provided herein):

         In the case of the Collateral Agent, to her at:

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

         With a copy to:

         Grushko & Mittman, P.C.
         551 Fifth Avenue, Suite 1601
         New York, New York 10176
         Fax: (212) 697-3575

         In the case of the Lenders, to:

         To the address and telecopier number set forth on Schedule A
         hereto.

         In the case of Debtors, to:

         HQ Sustainable Maritime Industries, Inc.
         1511 Third Avenue, Suite 788
         Seattle, Washington 98101
         Attn: Norbert Sporns, CEO
         Fax: (450) 465-7348

         With a copy by telecopier only to:

         Joseph Emas, Esq.
         1224 Washington Avenue
         Miami Beach, FL 33139
         Fax: (305) 531-1274

         (f) Amendments and Modification; Additional Lender. No provision hereof
shall be  modified,  altered,  waived or limited  except by  written  instrument
expressly referring to this Agreement and to such provision, and executed by the
parties  hereto.  Any  transferee  of a Note who  acquires a Note after the date
hereof will become a party hereto by signing the  signature  page and sending an
executed copy of this Agreement to the  Collateral  Agent and receiving a signed
acknowledgement from the Collateral Agent.

         (g) Fee.  Upon the  occurrence  of an Event  of  Default,  the  Lenders
collectively  shall pay the Collateral  Agent the sum of $10,000 on account,  to
apply  against an hourly fee of $350 to be paid to the  Collateral  Agent by the
Lenders for services  rendered  pursuant to this Agreement.  All payments due to

<PAGE>

the Collateral Agent under this Agreement including  reimbursements must be paid
when  billed.  The  Collateral  Agent  may  refuse to act on behalf of or make a
distribution  to any Lender who is not  current in  payments  to the  Collateral
Agent.  Payments  required pursuant to this Agreement shall be pari passu to the
Lenders'  interests in the Notes. The Collateral  Agent is hereby  authorized to
deduct any sums due the  Collateral  Agent  from  Collateral  in the  Collateral
Agent's possession.

         (h)  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.

         (i)  Successors and Assigns.  Whenever in this  Agreement  reference is
made to any party,  such  reference  shall be deemed to include the  successors,
assigns,  heirs and legal  representatives  of such party.  No party  hereto may
transfer any rights under this  Agreement,  unless the  transferee  agrees to be
bound by, and comply with all of the terms and provisions of this Agreement,  as
if an original signatory hereto on the date hereof.

         (j) Captions: Certain Definitions. The captions of the various sections
and  paragraphs  of this  Agreement  have been inserted only for the purposes of
convenience;  such  captions are not a part of this  Agreement  and shall not be
deemed  in any  manner  to  modify,  explain,  enlarge  or  restrict  any of the
provisions of this Agreement.  As used in this Agreement the term "person" shall
mean and include an individual, a partnership, a joint venture, a corporation, a
limited  liability  company,  a  trust,  an  unincorporated  organization  and a
government or any department or agency thereof.

         (k)  Severability.  In the  event  that any term or  provision  of this
Agreement  shall be finally  determined to be  superseded,  invalid,  illegal or
otherwise  unenforceable  pursuant  to  applicable  law by an  authority  having
jurisdiction and venue, that determination  shall not impair or otherwise affect
the validity,  legality or enforceability (i) by or before that authority of the
remaining terms and provisions of this Agreement,  which shall be enforced as if
the unenforceable term or provision were deleted, or (ii) by or before any other
authority of any of the terms and provisions of this Agreement.

         (l) 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.

         (m) Schedules.  The Collateral  Agent is authorized to annex hereto any
schedules referred to herein.

                      [THIS SPACE INTENTIONALLY LEFT BLANK]

<PAGE>

IN WITNESS  WHEREOF,  the  parties  hereto have  caused  this  Collateral  Agent
Agreement  to be  signed,  by  their  respective  duly  authorized  officers  or
directly, as of the date first written above.

"LENDERS"

___________________________________        _____________________________________

___________________________________        _____________________________________

                                           _____________________________________
                                           BARBARA R. MITTMAN - Collateral Agent

Acknowledged:

HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

By:__________________________________
   Name:
   Title:

    This Collateral Agent Agreement may be signed by facsimile signature and
                 delivered by confirmed facsimile transmission.

<PAGE>

                    SCHEDULE A TO COLLATERAL AGENT AGREEMENT

------------------------------------------ -------------------------------------
LENDER                                     PURCHASE PRICE
------------------------------------------ -------------------------------------

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

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

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

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

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

<PAGE>

                                    EXHIBIT G

December ___, 2005

TO:      The Subscribers identified on Schedule A hereto:

         We have acted as counsel to HQ Sustainable Maritime Industries, Inc., a
         Delaware corporation (the "Company") and its wholly-owned subsidiaries
identified on Schedule B hereto (each a "Subsidiary" and collectively
"Subsidiaries") in connection with the offer and sale by the Company of up to
$10,000,000 principal amount of Convertible Notes (the "Notes") and issuance of
Class A Warrants (collectively "Warrants") to the Subscribers identified on
Schedule A hereto, pursuant to the exemption from registration under the
Securities Act of 1933, as amended (the "Act) as set forth in Regulation D
("Regulation D") promulgated thereunder. Capitalized terms used herein and not
otherwise defined shall have the meaning assigned to them in the Subscription
Agreement (the "Agreement") by and between the Company and Subscribers entered
into at or about the date hereof. The Agreement, and the agreements described
below are sometimes hereinafter referred to collectively as the "Documents".

         In  connection  with the opinions  expressed  herein,  I have made such
examination of law as I considered appropriate or advisable for purposes hereof.
As to matters of fact material to the opinions  expressed herein, I have relied,
with your  permission,  upon the  representations  and  warranties as to factual
matters  contained  in and made by the Company and  Subscribers  pursuant to the
Documents and upon certificates and statements of certain  government  officials
and of  officers  of the  Company  as  described  below.  I have  also  examined
originals or copies of certain corporate  documents or records of the Company as
described below:

         (a)      Form of Agreement
         (b)      Form of Note
         (c)      Form of Common Stock Purchase Warrants (the "Warrants")
         (d)      Funds Escrow Agreement
         (e)      Form of Security Agreement
         (f)      Form of Guaranty Agreement
         (g)      Form of Collateral Agent Agreement
         (h)      Certificate of Incorporation of the Company as amended
         (i)      Bylaws of the Company
         (j)      Minutes of the  action of the  Company's  Board of  Directors,
                  including   unanimous  Board  of  Directors  approval  of  the
                  Documents, a copy of which is annexed hereto.

In rendering  this  opinion,  I have,  with your  permission,  assumed:  (a) the
authenticity of all documents  submitted to us as originals;  (b) the conformity
to the originals of all documents  submitted to us as copies;  (c) the genuiness
of all  signatures;  (d) the legal capacity of natural  persons;  (e) the truth,
accuracy and completeness of the information,  factual matters,  representations
and warranties  contained in all of such documents;  (f) the due  authorization,
execution  and  delivery of all such  documents by  Subscribers,  and the legal,
valid and binding  effect thereof on  Subscribers;  and (g) that the Company and
the Purchasers will act in accordance with their respective  representations and
warranties as set forth in the Documents.

         I am a member  of the bar of the  State of  __________.  I  express  no
opinion  as to the laws of any  jurisdiction  other than  corporate  laws of the
State of  Delaware,  New York,  and the  federal  laws of the  United  States of

<PAGE>

America.  I express no opinion with respect to the effect or  application of any
other laws.  Special  rulings of authorities  administering  any of such laws or
opinions of other  counsel have not been sought or obtained by us in  connection
with rendering the opinions expressed herein.

         1. The  Company  and each  Subsidiary  are duly  incorporated,  validly
existing  and in  good  standing  in  the  states  and  jurisdictions  of  their
incorporation; have qualified to do business in each state where required unless
the failure to do so would not have a material impact on their  operations;  and
have the requisite corporate power and authority to conduct their business,  and
to own,  lease and  operate  their  properties  as  presently  conducted  and as
described in the Reports.

         2. The Company and each Subsidiary  have the requisite  corporate power
and  authority  to  execute,  deliver and perform  their  obligations  under the
Documents.  The Documents,  and the issuance of the Notes,  and Warrants and the
reservation  and issuance of Common Stock issuable upon  conversion of the Notes
and  exercise  of the  Warrants  have  been (a) duly  approved  by the  Board of
Directors of the Company,  and (b) all such Securities,  when issued pursuant to
the Agreement and upon delivery, shall be validly issued and outstanding,  fully
paid and non assessable.

         3. The  execution,  delivery and  performance  of the  Documents by the
Company  and  each  Subsidiary  and  the   consummation   of  the   transactions
contemplated  thereby,  will not,  with or  without  the giving of notice or the
passage of time or both:

                  (a)  violate  a  material  provision  of  the  Certificate  of
Incorporation or bylaws of the Company or each Subsidiary; or

                  (b) To  counsel's  knowledge,  violate any  judgment,  decree,
order or award of any court binding upon the Company or each Subsidiary.

         4. The Documents  constitute the valid and legally binding  obligations
of the Company and each Subsidiary and are  enforceable  against the Company and
each Subsidiary in accordance with their respective terms.

         5. The Notes, Warrants and the Common Stock issuable upon conversion of
the Notes,  and exercise of the  Warrants,  have not been  registered  under the
Securities Act of 1933, as amended (the "Act") or under the laws of any state or
other jurisdiction, and are or will be issued pursuant to a valid exemption from
registration.

         6. The holders of the Common  Stock  issuable  upon  conversion  of the
Notes and exercise of the Warrants will not be subject to the  provisions of the
anti-takeover statutes of the State of Delaware.

         7. The  Subscribers  have been granted valid security  interests in the
Collateral  (as defined in each Security  Agreement)  pursuant to the Documents,
enforceable  against the Company and each  Subsidiary in  accordance  with their
respective  terms and  provisions,  and to the  extent  such  Collateral  may be
perfected under the NYUCC by the filing of financing  statements,  then upon the
due and timely filing of Uniform Commercial Code financing statements respecting
the  Company  and  Subsidiary,  with the  Secretary  of  State  of the  State of
Delaware,  those security  interests will be perfected in such Collateral to the
extent described in those statements.

         8. The Company,  each  Subsidiary  and their  Boards of Directors  have
taken all necessary action, if any, in order to render  inapplicable any control
share acquisition, business combination, poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under the
Company's  Certificate of  Incorporation  (or similar charter  documents) or the
laws of their state of incorporation  that is or could become  applicable to the
Subscribers  as a result of the  Subscribers,  the Company  and each  Subsidiary

<PAGE>

fulfilling  their  obligations  or exercising  their rights under the Documents,
including without limitation as a result of the Company's issuance of the Notes,
Warrants and Common Stock issuable upon  conversion of the Notes and exercise of
the Warrants and the  Subscribers'  ownership of the Notes,  Warrants and Common
Stock issuable upon conversion of the Notes and exercise of the Warrants.

         9. The Company has either  obtained  the  approval of the  transactions
described  in the  Documents  from  its  shareholders  or no  such  approval  is
required.

         Our opinions expressed above are specifically  subject to the following
limitations, exceptions, qualifications and assumptions:

         A. The effect of bankruptcy, insolvency, reorganization, moratorium and
other  similar laws relating to or affecting the relief of debtors or the rights
and remedies of creditors generally,  including without limitation the effect of
statutory  or  other  law  regarding  fraudulent  conveyances  and  preferential
transfers.

         B. Limitations  imposed by state law, federal law or general  equitable
principles upon the specific enforceability of any of the remedies, covenants or
other  provisions  of any  applicable  agreement  and upon the  availability  of
injunctive relief or other equitable remedies, regardless of whether enforcement
of any such agreement is considered in a proceeding in equity or at law.

         C. This  opinion  letter is governed  by, and shall be  interpreted  in
accordance  with,  the Legal Opinion Accord (the "Accord") of the ABA Section of
Business  Law  (1991).  As  a  consequence,   it  is  subject  to  a  number  of
qualifications,  exceptions,  definitions,  limitations  on  coverage  and other
limitations,  all as more  particularly  described in the Accord,  including the
General Qualifications and the Equitable Principles Limitation, and this opinion
letter should be read in conjunction therewith.

         This opinion is rendered as of the date first written above,  is solely
for your benefit in connection  with the Agreement and may not be relief upon or
used by,  circulated,  quoted,  or  referred  to nor may any  copies  hereof  by
delivered to any other person without our prior written consent.  I disclaim any
obligation   to  update  this  opinion   letter  or  to  advise  you  of  facts,
circumstances,  events or  developments  which  hereafter  may be brought to our
attention and which may alter, affect or modify the opinions expressed herein.

                                                     Very truly yours,

<PAGE>

                           SCHEDULE A TO LEGAL OPINION

-------------------------------------------------- -----------------------------
SUBSCRIBERS                                        PURCHASE PRICE
-------------------------------------------------- -----------------------------

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

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

-------------------------------------------------- -----------------------------
TOTAL
-------------------------------------------------- -----------------------------

<PAGE>

                                    EXHIBIT H

HQ Sustainable Maritime Industries Closes on Private Placement of $5.225 Million
Thursday January 26, 8:18 am ET

HQSM Positions Itself for Strong Growth in 2006

SEATTLE,  WA--(MARKET WIRE)--Jan 26, 2006 -- HQ Sustainable Maritime Industries,
Inc. (HQ) (OTC BB:HQSM.OB - News), a leader in zero-toxin integrated aquaculture
and aquatic product processing,  announced today that it has closed on a private
placement  offering of $5.225 million,  provided by a small group of experienced
accredited investors.

Terms and  conditions  of the  financing  are  included in a Form 8K,  which the
Company will file forthwith.

The net  proceeds  will  allow the  company  to  directly  market  and brand its
zero-toxin  products to U.S.  consumers and targeted retail  outlets.  This is a
landmark event in the growth of HQ Sustainable Maritime Industries as it centers
in the United  States the  marketing  and sales of its  products  as well as its
corporate  offices.  The  company  intends  to expand the range of  products  it
markets as it executes the "roadmap"  outlined in December 2005 by the Company's
Chairman.  The Company  expects this will have a strong  positive impact on both
sales and profitability.

Norbert  Sporns,  CEO of HQSM,  said, "We are extremely  pleased to receive this
financing  from such an important  group of accredited  investors who understand
the huge growth  potential of the  aquaculture  markets and HQ's  capability  of
becoming the world market  leader in zero-toxin  production  in this field.  Our
strong branding, marketing and distribution initiatives in the United States are
in  place to  capitalize  on the  U.S.  market  growth  and  increased  consumer
awareness of quality toxin free food products."

About HQ Sustainable Maritime Industries Inc.

HQ Sustainable Maritime Industries Inc. is an integrated aquaculture and aquatic
product  processing  company,  with  operations  based  in  the  environmentally
pristine  island  province  of  Hainan,  in the South  China Sea.  HQ  practices
cooperative sustainable  aquaculture,  using nutraceutically  enriched feeds and
conducting  fish  processing and sales.  The company is dedicated to sustainable
zero-toxin  methods  giving its  customers  the purest  products  possible.  The
Company holds HACCP  certification  from the U.S. FDA and the EU Code assignment
of quality,  permitting its products to be sold in these international  markets.
It has recently acquired a nutraceuticals and health products company,  which is
HACCP certified, and produces and sells products subject to stringent laboratory
tests   certified  by  the  China  Ministry  of  Health.   This  plant  produces
nutraceuticals,   which  enrich  feed  used  by  HQ's  cooperative   aquaculture
operations. In addition to headquarters in Seattle and operational offices based
in Haikou,  Hainan,  HQ has offices in Hong Kong,  Beijing,  and  Shanghai.  The
current number of shares issued and outstanding as of December 31, 2005 for HQSM
are 129,138,555 shares of common stock. (http://www.hqfish.com).

Certain  statements  in this press  release  that are not  historical  facts are
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  Such statements may be identified by the use of
words  such as  "anticipate,"  "believe,"  "expect,"  "future,"  "may,"  "will,"
"would," "should," "plan," "projected," "intend," and similar expressions.  Such
forward-looking  statements,  involve known and unknown risks, uncertainties and
other factors that may cause the actual results,  performance or achievements of
HQ  Sustainable  Maritime  Industries,  Inc.  (the  Company)  to  be  materially
different from those  expressed or implied by such  forward-looking  statements.
The  Company's  future  operating  results  are  dependent  upon  many  factors,
including  but not limited to the  Company's  ability to: (i) obtain  sufficient

<PAGE>

capital or a strategic  business  arrangement to fund its expansion plans;  (ii)
build the management and human resources and infrastructure necessary to support
the growth of its business;  (iii) competitive  factors and developments  beyond
the Company's  control;  and (iv) other risk factors  discussed in the Company's
periodic  filings  with  the  Securities  and  Exchange  Commission,  which  are
available for review at www.sec.gov under "Search for Company Filings."

Consulting  For  Strategic  Growth  I, Ltd.  ("CFSG")  provides  HQ  Sustainable
Maritime  Industries,  Inc. (HQ) with consulting,  business  advisory,  investor
relations,  public relations and corporate development services,  for which CFSG
receives a fixed monthly fee for the duration of the  agreement.  Independent of
CFSG's  receipt of cash  compensation  from HQ, CFSG may choose to purchase  the
common  stock of the company  and  thereafter  sell those  shares at any time it
deems appropriate to do so.

Contact:
     CONTACTS:
     Norbert Sporns
     Chief Executive Officer
     HQ Sustainable Maritime Industries
     Tel: 917-291-3679
     Fax: 450-465-7348
     Email: Email Contact

     Stanley Wunderlich
     Chief Executive Officer
     Consulting for Strategic Growth 1
     Tel: 800-625-2236
     Fax: 212-337-8089
     Email: Email Contact

     Daniel Stepanek
     Media Relations
     Consulting for Strategic Growth 1
     Tel: 212-896-1202
     Fax: 212-697-0910
     Email: Email Contact

_______________________

<PAGE>

                                    EXHIBIT I

                          LIMITED STANDSTILL AGREEMENT

         This AGREEMENT (the  "Agreement") is made as of the ___ day of January,
2006,  by the  signatories  hereto (each a  "Holder"),  in  connection  with his
ownership  of shares of HQ  Sustainable  Maritime  Industries,  Inc., a Delaware
corporation (the "Company").

         NOW, THEREFORE,  for good and valuable  consideration,  the sufficiency
and receipt of which  consideration  are hereby  acknowledged,  Holder agrees as
follows:

1.       Background.

         a. Holder is the actual and/or beneficial owner of the amount of shares
of the Common  Stock,  $0.001 par value,  of the  Company  ("Common  Stock") and
rights to purchase Common Stock designated on the signature page hereto, some or
all of which are owned by virtue of  Holder's  ownership  of a note  convertible
into Common Stock.

         b. Holder  acknowledges that the Company has entered into or will enter
into  an  agreement  with  each  subscriber  ("Subscription  Agreement")  to the
Company's secured convertible promissory notes and warrants (the "Subscribers"),
for  the  sale  to the  Subscribers  of an  aggregate  of up to  $10,000,000  of
principal  amount of secured  convertible  promissory  notes and  warrants  (the
"Offering").  Holder  understands  that, as a condition to  proceeding  with the
Offering, the Subscribers have required, and the Company has agreed to obtain an
agreement  from the Holder to refrain from selling any securities of the Company
from the date of the  Subscription  Agreement until the sooner of (i) the end of
the Exclusion  Period as defined in the  Subscription  Agreement,  or (ii) until
less than one-third of the initial issued  principal  amount of the Notes issued
pursuant  to  the  Subscription   Agreement  is  outstanding  (the  "Restriction
Period").

2.       Share Restriction.

         a. Holder hereby agrees that during the Restriction  Period, the Holder
will not sell or otherwise dispose of any shares of Common Stock or any options,
warrants  or other  rights  to  purchase  shares  of  Common  Stock or any other
security  of the Company  which  Holder owns or has a right to acquire as of the
date hereof or acquires hereafter during the Restriction  Period,  other than in
connection  with an offer made to all  shareholders of the Company in connection
with any merger,  consolidation  or similar  transaction  involving the Company.
Holder  further  agrees that the Company is authorized to and the Company agrees
to place "stop  orders" on its books to prevent any transfer of shares of Common
Stock or other  securities  of the Company  held by Holder in  violation of this
Agreement.

         b. Any subsequent issuance to and/or acquisition of shares or the right
to acquire shares by Holder will be subject to the provisions of this Agreement.

         c. Notwithstanding the foregoing  restrictions on transfer,  the Holder
may, at any time and from time to time during the Restriction  Period,  transfer
the Common Stock (i) as bona fide gifts or transfers by will or intestacy,  (ii)
to any trust for the  direct  or  indirect  benefit  of the  undersigned  or the
immediate  family  of the  Holder,  provided  that any such  transfer  shall not
involve a disposition  for value,  (iii) to a  partnership  which is the general
partner of a  partnership  of which the Holder is a general  partner,  provided,
that,  in the case of any gift or transfer  described  in clauses  (i),  (ii) or
(iii),  each donee or transferee  agrees in writing to be bound by the terms and
conditions  contained  herein in the same  manner as such  terms and  conditions
apply to the  undersigned.  For purposes  hereof,  "immediate  family" means any
relationship by blood, marriage or adoption, not more remote than first cousin.

<PAGE>

3.       Miscellaneous.

         a. At any  time,  and from  time to time,  after  the  signing  of this
Agreement  Holder will execute such additional  instruments and take such action
as may be reasonably  requested by the  Subscribers  to carry out the intent and
purposes of this Agreement.

         b.  This  Agreement  shall  be  governed,  construed  and  enforced  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 securities laws of the state
in which Holder resides and federal  securities  laws may apply.  Any proceeding
brought to enforce this  Agreement may be brought  exclusively in courts sitting
in New York County, New York.

         c. This  Agreement  contains  the entire  agreement  of the Holder with
respect to the subject matter hereof.

         d.  This   Agreement   shall  be  binding   upon   Holder,   its  legal
representatives, successors and assigns.

         e. This  Agreement  may be signed and  delivered by facsimile  and such
facsimile signed and delivered shall be enforceable.

         f. The  Company  agrees  not to take any  action or allow any act to be
taken which would be inconsistent  with this Agreement nor to amend or terminate
this Agreement without the consent of the Subscribers.

         g. The  Subscribers  are third party  beneficiaries  of this Agreement,
with right of enforcement.

         IN WITNESS  WHEREOF,  and intending to be legally bound hereby,  Holder
has executed this Agreement as of the day and year first above written.

                                        HOLDER:

                                        ________________________________________
                                        (Signature of Holder)

                                        ________________________________________
                                        (Print Name of Holder)

                                        ________________________________________
                                        Number of Shares of Common Stock
                                        Beneficially Owned

                                        ________________________________________
                                        Note Principal Owned on the date of
                                        This Agreement

                                        COMPANY:

                                        HQ SUSTAINABLE MARITIME INDUSTRIES, INC.

                                        By:_____________________________________SECOND AMENDED FUND ESCROW AGREEMENT

 

            THIS SECOND AMENDED FUND ESCROW AGREEMENT is made and entered into this ______ day of January, 2006, by and among GOLDEN WEST BREWING COMPANY, INC. (the "Company"), a Delaware corporation; and CORPORATE STOCK TRANSFER, INC., the "Escrow Agent").

1.            Purpose.  The Company desires to make a public offering (the "Public Offering") of up to 1,000,000 Shares of Common Stock, $.0001 par value (the "Shares") in a direct public offering at the offering price of $0.50 per Share.  The Public Offering is to be made pursuant to a registration statement (the "Registration Statement") and prospectus (the "Prospectus") included therein which has been filed with the United States Securities and Exchange Commission on Form SB-2 under the Securities Act of 1933, as amended, and pursuant to filings that have been made or will be made with the applicable authorities of states in which the offering will be made. The Company will not engage the services of a broker-dealer to serve as underwriter in the Public Offering. The Company wishes to make provision to escrow the gross proceeds from the sale of the first 400,000 Shares sold in the Public Offering.  The Company and the Escrow Agent desire to enter into an agreement with respect to the above-described escrow arrangements.

2.            Deposit of Proceeds.  The Company agrees to deliver to the Escrow Agent, immediately upon receipt thereof, all proceeds from the sale of the first 400,000 Shares sold in the Public Offering at the offering price of $0.50 per Share (a total of up to $200,000), together with a written account of each sale. The written account shall set forth, among other things, the names and addresses of the purchasers, the number of Shares purchased by each, the amount paid therefor, and whether the consideration received was in the form of cash or evidenced by a check.

3.            Escrow Account.  All money delivered to the Escrow Agent pursuant hereto shall be deposited immediately by the Escrow Agent in a separate account established by the Escrow Agent pursuant to this Agreement (the "Escrow Account").  The Escrow Account shall be created and maintained subject to the customary rules and regulations of the Escrow Agent pertaining to such account, and shall be entitled "Golden West Brewing Company, Inc. Escrow Account." 

4.            Escrow Period.  During the Escrow Period (as herein after defined), all amounts deposited in the Escrow Account shall not become the property of the Company or any other entity, and except as provided herein, the Escrow Agent shall make or permit no disbursements from the Escrow Account.

                a.            The Escrow Period shall begin with the commencement of the Public Offering, which shall be the effective date of the aforesaid Registration Statement, and shall terminate on the first to occur of the following: 

                               1.            The failure to sell a minimum of 400,000 Shares within ninety days (which may be extended an additional 90 days by the Company) after the commencement date of the Public Offering;

                               2.            The deposit in escrow of at least $200,000 from the sale of at least 400,000 Shares during the aforementioned offering period.

                               3.            A date which is 90 days from the commencement date of the Offering, unless extended for up to an additional 90 days at the discretion of the Company.

5            Delivery of Proceeds on Deposit of $200,000.  In the event the Escrow Period terminates because of the deposit and collection in the Escrow Account of a minimum $200,000 from the sale of 400,000 Shares, the Escrow Agent shall deliver and pay over to the Company all amounts deposited in the Escrow Account, with interest, less the Escrow Agent's fees.  Immediately following such payments, the Escrow Agent shall be completely discharged of its obligations hereunder and released of any further liabilities or responsibilities hereunder. 

6.            Delivery of Proceeds if $200,000 Not Deposited.  In the event the Escrow Period terminates because of the provisions of paragraph 5(a)(1)  or 5(a)(3)  above, the Escrow Agent, as promptly as possible after such termination and on the basis of its records of the Escrow Account, shall return to each of the purchasers of the Shares in the Public Offering the amounts paid in by them for the purchase of the Shares without any deductions therefrom, including Escrow Agent fees.  The amount paid to each purchaser shall be free and clear of any claims of the Company or of any of its creditors.  In addition, all interest earned shall be distributed pro rata to the purchasers of the Shares, along with the proceeds.  The Escrow Agent shall be required to make such payment only to the person named in the written account of each sale to be furnished by the Company pursuant to paragraph 2  hereof, and payment shall only be made on cleared and collected funds.  At such time as the Escrow Agent shall have made all the payments and remittances provided in this paragraph, the Escrow Agent shall be completely discharged and released of any and all further liabilities and responsibilities hereunder. 

7.            Notices.  The Company agrees to give to the Escrow Agent written notice of the date upon which the Public Offering is commenced, as soon as practicable thereafter.

               a.            The Escrow Agent is hereby expressly authorized to disregard any and all notices or warnings given by any of the parties hereto, or by any other person, firm or corporation, excepting only orders or process of court, and is hereby expressly authorized to comply with and obey any and all process, orders, judgments or decrees of any court, and in case the Escrow Agent obeys or complies with any such process, order, judgment or decree of any court it shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding that any such process, order, judgment or decree be subsequently reversed, modified, annulled, set aside or vacated, or found to have been issued or entered without jurisdiction. 

               b.            Any notice required or desired to be given by the Escrow Agent to any party to this Escrow Agreement may be given by mailing the same addressed to such party at the address given below the signature of such party or the most recent address of such party shown on the records of the Escrow Agent, and notice so mailed shall for all purposes hereof be effectual as though served upon such party in person at the time of depositing such notice in the mail.

8.            Protection of Escrow Agent.   The Escrow Agent, in its actions pursuant to this Agreement, shall be fully protected in every reasonable exercise of its discretion and shall have no obligations hereunder either to the Company or to any other party, except as expressly set forth herein. 

9.            Fee and Costs.  The Company shall pay the Escrow Agent a fee of $                  plus $                  per disbursement pursuant to paragraph 7 hereof for the Escrow
Agent's performance of its obligations hereunder.

10.            Receipts of Funds.  Written notice acknowledging receipt of the deposited funds from the Company will be delivered from time to time by the Escrow Agent to the Company.

11.            Record
Availability.            The Escrow Agent shall allow State securities administrators to inspect and make copies of its records pertaining to the above-described escrow arrangement at any reasonable time wherever the records are located.

12.            Liability of Escrow Agent.  In performing any of its duties hereunder, the Escrow Agent shall not incur any liability to anyone for any damages, losses, or expenses, except as may arise from its own negligent action, negligent failure to act or willful misconduct.  The Escrow Agent shall not incur any liability with respect to  any action taken or omitted in good faith upon advice of its counsel or counsel for the Company given with respect to any questions relating to the duties and responsibilities of the Escrow Agent under this Agreement, or  any action taken or omitted in reliance upon any instrument, including the written advice provided for herein, not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which instrument the Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by a proper person or persons, and to conform with the provisions of this Agreement. 

13.            Indemnification.  The Company hereby agrees to indemnify and hold harmless the Escrow Agent against any and all losses, damages, claims and liabilities (including counsel fees) incurred or assessed against it in connection with the performance of this Agreement, except as may arise from its own negligent action, negligent failure to act or willful misconduct.

14.            Disputes.  In the event of any dispute between the parties hereto as to the facts of default, the validity or meaning of these instructions or any other fact or matter relating to the transaction between the parties, the Escrow Agent is instructed as follows:

                 a.            That it shall be under no obligation to act, except under process or order of court, or until it has been adequately indemnified to its full satisfaction, and shall sustain no liability for its failure to act pending such process or court order or indemnification.

                 b.            That it may in its sole and absolute discretion, deposit the property described or so much thereof as remains in its hands with the then Clerk, or acting Clerk, of the District Court of the City and County of Denver, State of Colorado, and interplead the parties hereto, and upon so depositing such property and filing its complaint in interpleader it shall be relieved of all liability under the terms hereof as to the property so deposited, and furthermore, the parties hereto for themselves, their legal representatives, successors and assigns do hereby submit themselves to the jurisdiction of said court and do hereby appoint the then Clerk, or acting Clerk, of said court as their Agent for the service of all process in connection with such proceedings.  The institution of any such interpleader action shall not impair the rights of the Escrow Agent under paragraph numbered, above. 

15.            Assignment and Transfer.  No assignment, transfer, conveyance or hypothecation of any right, title or interest in and to the subject matter of this Agreement shall be binding upon the Escrow Agent unless written notice thereof shall be served upon the Escrow Agent and all fees, costs and expenses incident thereto shall have been paid and then only upon the Escrow
Agent's assent thereto in writing.

16.            Amendments.  This Agreement may be supplemented, altered, amended, modified or revoked by writing only, signed by all of the parties hereto, and approved by the Escrow Agent, upon payment of all fees, costs and expenses incident thereto.

17.            Binding Effect.  The provisions of these instructions shall be binding upon the legal representatives, successors and assigns of the parties hereto.

18.            Applicable Law.  This Agreement shall be construed according to the laws of the State of Colorado.

            IN WITNESS WHEREOF, the Company, and the Escrow Agent have executed this Second Amended Fund Escrow Agreement on the day and year first above written.

	 	
GOLDEN WEST BREWING COMPANY, INC.

	 	 
	 	
By:     /s/ John Power                             

	 	
          John Power, President

	 	 
	 	
CORPORATE STOCK TRANSFER, INC.

	 	 
	 	
By:     /s/ Carylyn K. Bell                      

	 	
          Carylyn K. Bell, President

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