SECURITY AGREEMENT

 

 

                               SECURITY AGREEMENT

 

         THIS SECURITY AGREEMENT (the "Agreement") entered into this 20th day of

May,   2005,   by and between   Techsphere   Systems   International,   LLC, a Georgia

limited   liability   company (the   "Debtor") and Cyber Defense   Systems,   Inc., a

Florida corporation (the "Secured Party").

 

         In consideration of the mutual covenants   contained herein, the parties

agree as follows:

 

         1. GRANT OF SECURITY   INTEREST.   The Debtor   hereby   grants the Secured

Party a security interest in the following-described   property (collectively the

"Collateral"):

 

                  (a)   Accounts   Receivable   and Other   Intangibles.   All of the

Debtor's   accounts,   contract   rights,   instruments,   documents,   chattel paper,

general   intangibles    (including,    but   not   limited   to,   software,    payment

intangibles,   chooses in action, tax refunds, and insurance proceeds); any other

obligations or indebtedness owed to the Debtor from whatever source arising; all

rights of the Debtor to receive any payments in money or in kind; all guaranties

of the foregoing and security   therefor;   all the right,   title, and interest of

the Debtor in and with respect to the goods,   services,   or other   property that

gave rise to or that secure any of the   foregoing   and   insurance   policies   and

proceeds relating thereto; all rights of the Debtor as an unpaid seller of goods

and services,   including, but not limited to, the rights of stoppage in transit,

replevin,   reclamation, and resale; and all of the foregoing, whether or not now

owned or hereafter created or acquired.

 

                  (b)   Inventory.   All goods,   merchandise,   and other   personal

property now owned or hereafter acquired by the Debtor that are held for sale or

lease,   or are furnished to or to be furnished under any contract of services or

are raw materials,   work-in- process, supplies, or materials used or consumed in

the   Debtor's   business,   and   all   products   thereof,   and   all   substitutions,

replacements, additions, or accessions therefor or thereto.

 

                  (c)   Machinery,    Equipment,    Furniture,   and   Fixtures.   All

machinery   and   equipment   and   furniture   and fixtures now owned,   or hereafter

acquired,   by the Debtor and used or   acquired   for use in the   business   of the

Debtor,    together   with   all   accessions   thereto   and   all   substitutions   and

replacements thereof and parts therefor.

 

                  (d) Proceeds.   All cash and noncash proceeds of the foregoing,

including,   but not limited to,   insurance   proceeds,   cash,   checks,   monies on

deposit   in any bank or   banks,   and   accounts   receivable;   provided   that this

provision   shall not be   construed as a waiver of any   restriction   contained in

this Security Agreement against alienating or encumbering the Collateral.

 

                  (e) Documents and Similar   Items.   All ledger   sheets,   files,

records,   documents,   and   instruments   (including,   but not limited to computer

programs,   tapes, disks, diskettes,   and related electronic processing software)

evidencing an interest in or relating to the above.

 

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         2.        OBLIGATIONS   SECURED. The obligations secured by this Security

                  Agreement are:

 

                  (a) Promissory Note. Payment of the principal and interest due

upon   the   Promissory   Note   dated   May 20,   2005   in the   principal   amount   of

$1,000,000.00   (plus   such   additional   amount as may be   provided   pursuant   to

Section 1 of that certain   Agreement   between   Debtor and Secured   Party of even

date),   in which the   Debtor is the   maker   and the   Secured   Party is the payee

("Promissory Note").

 

                  (b) Other Covenants and Conditions.   Performance or observance

by the Debtor of the other   covenants and conditions of the Promissory   Note and

of the covenants and conditions of this Security Agreement.

 

                  (c) [intentionally omitted]

 

                  (d) Expenses of Secured Party.   All expenses   incurred or paid

by the Secured Party for purposes of conserving and   protecting the   Collateral,

including,   but not   limited   to,   reasonable   attorney's   fees and other   legal

expenses incurred in connection with retaking,   holding, preparing for sale, and

selling the Collateral.

 

                  (e)   Legal   Expenses.   Reasonable   attorney's   fees and   other

expenses   incurred by the Secured   Party in any legal   proceeding,   in the trial

court or on appeal,   brought to enforce or to collect any obligation   secured by

this   Security   Agreement,   or to enforce any term or provision of this Security

Agreement,   including   any legal   proceeding   brought to   foreclose or otherwise

realize upon the Collateral.

 

         3. DEBTOR'S   REPRESENTATIONS AND WARRANTIES.   The Debtor represents and

warrants to the Secured Party that:

 

                  (a)   Organization.   The Debtor is a limited   liability company

duly   organized,   validly   existing,   and in good standing under the laws of the

state of Georgia,   with all   corporate   powers   necessary   to own its assets and

property   and to carry on its   business   as now   owned and   conducted.   Debtor's

organizational identification number is ____________.

 

                  (b)   Authority.   The   Debtor   has   full   corporate   power   and

authority   to execute   and   deliver   this   Security   Agreement,   to perform   the

Debtor's   obligations   under this   Security   Agreement,   and the   execution   and

delivery of this agreement has been duly   authorized and approved by the Debtors

board of managers.   This Security   Agreement   will not result in or constitute a

default   or an event   that,   with   notice   or lapse of time or both,   would be a

default,   breach,   or   violation of the   articles of   organization   or operating

agreement or any other charter   document of the Debtor,   or any lease,   license,

promissory note, conditional sales contract,   commitment,   indenture,   mortgage,

deed of trust,   or other   agreement,   instrument,   or   arrangement   to which the

Debtor is a party or by which the Debtor, or any of the Collateral, is bound.

 

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                  (c) Ownership of   Collateral.   Debtor is the sole owner of the

Collateral, free and clear of any and all liens or encumbrances, and will defend

the same against all claims and demands of all persons.

 

                  (d)   Accounts   Receivable.   Each   of the   accounts   receivable

included in the Collateral is genuine,   valid,   and represents an existing claim

arising out of products   sold or services   rendered by the Debtor to the account

debtor.

 

         4.        DEBTOR'S RIGHTS AND COVENANTS.

 

                  (a) Possession of   Collateral.   Until there is a default under

the terms of this Security   Agreement,   the Debtor may retain   possession of the

Collateral   and may use the   Collateral in a manner not   inconsistent   with this

Security Agreement.

 

                  (b) No Disposition   of   Collateral.   Except for its inventory,

which the Debtor may sell,   lease, or otherwise   transfer in the ordinary course

of the Debtor's business,   the Debtor shall not sell, transfer,   lease, license,

or otherwise dispose of the Collateral.

 

                  (c) Use of Collateral. The Debtor shall keep the Collateral in

good order and repair and shall   protect the   Collateral   from waste,   loss,   or

damage.   The Debtor shall not cause or permit the   Collateral   to be attached or

affixed to real   estate in such   manner   that it will   become a fixture.   Debtor

shall not use or permit the use of the Collateral in violation of any applicable

law, statute, ordinance, or regulation. Except for the sale of inventory and the

use of   equipment in the ordinary   course of the Debtor's   business,   the Debtor

shall not remove any collateral   from the address set forth below for the giving

of notices to the Debtor.

 

                  (d) Liens, Encumbrances,   and Taxes. The Debtor shall keep the

Collateral free and clear of any and all liens and encumbrances,   excepting only

the lien   created by this   Security   Agreement   and the liens   created   upon the

purchase of machinery   and   equipment.   The Debtor shall pay when due all taxes,

fees, or assessments imposed upon or with respect to the Collateral.

 

                  (e)   Records   and   Inspection.   The Debtor   shall at all times

maintain   complete and accurate records of the Debtor's   business,   specifically

including   Debtor's accounts   receivable and contract rights, in accordance with

generally accepted accounting   procedures and practices.   The Secured Party, and

the Secured Party's agents or   representatives,   shall have the right to inspect

and audit the Debtor's   books and records at all reasonable   times.   The Secured

Party,   and the Secured Party's agents or   representatives,   shall also have the

right to come upon   Debtor's   place of business for the purpose of inspecting or

examining   the   Collateral   or to   take a   physical   inventory   of the   Debtor's

inventory and stock of merchandise.

 

                  (f) Insurance.   The Debtor shall keep the   Collateral   insured

against fire or other   casualty in an amount equal to its full   insurable   value

with loss   payable to the Secured   Party and the Debtor as their   interests   may

appear at the time of loss, with priority in payment to the Secured Party.   Such

 

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