FORBEARANCE AGREEMENT

 

                               

                      FORBEARANCE AGREEMENT

    

     THIS FORBEARANCE AGREEMENT ("Agreement") dated as of July

22, 2005 by and between AMERICAN WATER STAR, INC., a Nevada

corporation  ("Company") and LAURUS MASTER FUND, LTD., a Cayman

Islands company ("Laurus").

                               

                           BACKGROUND

    

     Laurus is the holder of Secured Convertible Term Note dated

as of October 26, 2004 in the original principal amount of

$5,000,000 made by Company in favor of Laurus (as amended,

supplemented, restated or modified from time to time, the "Note")

which was issued pursuant to a Securities Purchase Agreement

dated as of October 26, 2004 by and between Company and Laurus

(as amended, supplemented, restated or modified from time to

time, the "Purchase Agreement").

    

     In connection with the Purchase Agreement, Company entered

into, among other agreements, a Registration Rights Agreement

dated as of October 26, 2004 (as amended, supplemented, restated

or modified from time to time, the "Registration Rights

Agreement" and together with the Note, the Purchase Agreement and

the other Related Agreements (as defined in the Purchase

Agreement), collectively, the "Documents").

    

     Simultaneously with the execution of this Agreement each of

All Star Beverages, Inc., All Star Beverages Arizona, Inc., All

Star Beverages JAX, Inc., All Star Beverages Mississippi, Inc.

and Hawaiian Tropicals, Inc. (each, a "Subsidiary" and

collectively the "Subsidiaries") shall execute and deliver in

favor of Laurus a Subsidiary Guaranty and a Master Security

Agreement (collectively, the "Subsidiary Documents").

    

     Various defaults have occurred under the Documents as listed

on Exhibit A annexed hereto ("Designated Defaults") by reason of

which Laurus has the full legal right to exercise its rights and

remedies under the Documents.  Company has requested that Laurus

forbear for a period of time from exercising its rights and

remedies under the Documents.  Laurus is prepared to establish a

period of forbearance on the terms and conditions set forth

below.

                               

                            AGREEMENT

    

     In consideration of the foregoing and of the mutual promises

and covenants herein contained, it is agreed:

    

     1.   Definitions.  All capitalized terms not otherwise defined

herein shall have the meanings given to them in the Note.

    

     2.   Acknowledgement.  Company acknowledges that the Designated

Defaults have occurred and exist as of the date hereof, that any

and all cure periods set forth in the Documents have expired, and

that Company is unconditionally obligated to pay all of its

obligations and liabilities to Laurus (collectively, the

"Obligations"), all without defense, setoff or counterclaim of

any kind or nature whatsoever.

    

     3.   Outstanding Obligations.  Company hereby affirms and

acknowledges that (i) as of the date hereof, the aggregate

outstanding principal amount of the Obligations owing by the

Company to Laurus under the Documents equals $5,000,000, (ii) as

of July 31, 2005, the aggregate accrued interest and fees owing

by the Company to Laurus equals $1,286,098.61 ((i) and (ii)

collectively, the "Amount") and (iii) the Amount is a valid

obligation of Company and is due and owing without defense,

claim, setoff or counterclaim of any kind or nature whatsoever.

 

     4.   Forbearance.  During the period commencing on the date

hereof and ending on the earlier to occur of (i) October 26, 2007

or (ii) the date of any Forbearance Default (as hereinafter

defined) (the "Forbearance Period"), Laurus will forbear from

exercising its rights and remedies with respect to the Designated

Defaults.  Such forbearance shall not derogate from Laurus' right

to collect, receive and/or apply proceeds of Company's accounts

receivable to the Obligations.  Subject to the provisions of

Section 6 hereof, all Obligations owing by the Company to Laurus

under the Documents shall be due and payable in full at the end

of the Forbearance Period, unless such payment terms are

otherwise modified by such other written agreement by and between

Company and Laurus.

 

     5.   Forbearance Defaults.  Each of the following shall

constitute a Forbearance Default:

         

          (a)  the existence of any default (other than a Designated

Default) under any Document or any Subsidiary Document;

         

          (b)  Company shall fail to keep or perform any of the terms,

obligations, covenants or agreements contained herein;

          

          (c)  any representation or warranty of Company herein shall be

false, misleading or incorrect in any respect; or

         

          (d)  the occurrence of a Fraud Event or Laurus' reasonable belief

that a Fraud Event has occurred.  For purposes hereof, the term

"Fraud Event" shall mean the occurrence of any of the following

events:  (i) Company or any Subsidiary has misappropriated (or

any Subsidiary or Company has caused the other to misappropriate)

any proceeds of any Collateral (as defined in the Documents),

(ii) Company or any Subsidiary has embezzled funds from the

other, (iii) any Subsidiary and/or Company has converted (or

Company or any Subsidiary has caused the other to convert) any

real or personal property of Company or any Subsidiary, including

but not limited to any Collateral, (iv) any Subsidiary and/or

Company has committed (or Company or any Subsidiary has caused

the other to commit) fraud against Laurus, including any material

and willful misrepresentation made (or caused to be made) by any

Subsidiary and/or by Company with respect to any of the

representations and warranties contained in the Documents or the

accuracy of any information provided to Laurus concerning the

Collateral, or in any other document delivered to Laurus in

connection with the transactions contemplated by the Documents

or, (v) any director or shareholder of Company or of any

Subsidiary shall have taken any action referred to in any of the

foregoing clauses (i) - (iv).

    

     6.   Rights and Remedies.  Upon the occurrence of a Forbearance

Default, at the option of Laurus, all Obligations shall be

immediately due and payable.  Upon all Obligations becoming due

and payable, Laurus shall be immediately entitled to enforce all

of its rights and remedies under the Documents.

 

     7.   Additional Note.  In consideration of the agreements set

forth herein and notwithstanding anything contained in the

Documents to the contrary, all accrued and unpaid interest and

fees owing pursuant to the Note and the other Documents through

July 31, 2005 shall be evidenced by and payable by Company in

accordance with the terms of a Secured Convertible Term Note,

dated as of the date hereof (the "Additional Note"), in the form

set forth in Exhibit B hereto.  The Additional Note will be

issued in addition to, and not in replacement or satisfaction of,

the Note.

 

     8.   Covenants and Acknowledgments.  The Company and All-Star

Beverages, Inc., as applicable, (a) shall register the shares of

the Company's Common Stock issuable upon the conversion of the

Additional Note in the Company's next Registration Statement (as

defined in the Registration Rights Agreement), (b) acknowledges

that the term "Note" set forth in the Registration Rights

Agreement shall mean the collective reference to the Original

Note and the Additional Note and (c) the obligations and

liabilities secured by the Master Security Agreement dated as of

October 26, 2004 shall include, without limitation, the Company's

obligations and liabilities to Laurus hereunder and under the

Additional Note.

 

     9.   Representations and Warranties.  Company hereby represents

and warrants as follows:

         

          (a)  This Agreement, the Additional Note and the Documents are

and shall continue to be legal, valid and binding obligations of

Company and are enforceable against Company in accordance with

their respective terms.

         

          (b)