Exhibit 10.11

AGREEMENT, dated as of July 1, 1999, between General Physics Corporation, a Delaware corporation with principal executive offices at 9 West 57th Street, Suite 4170, New York, New York 10019 (the "Company"), and Douglas Sharp, residing at 4410 Lantern Drive, Titusville, Florida 32796 ("Employee").

W I T N E S S E T H

WHEREAS, the Company desires to employ Employee upon the terms and subject to the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises, the mutual promises, covenants, and conditions herein contained and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto intending to be legally bound hereby agree as follows:

Section 1. Employment.

The Company hereby agrees to continue to employ Employee, and Employee hereby agrees to continue to serve the Company, all upon the terms and subject to the conditions set forth in this Agreement.

Section 2. Capacity and Duties.

Employee is and shall be employed in the capacity of Group President of the Company and shall have the duties, responsibilities, and authorities normally performed by the group president of a company and such other duties, responsibilities, and authorities as are assigned to him by the Board of Directors of the Company (the "Board") so long as such additional duties, responsibilities, and authorities are consistent with Employee's position and level of authority as Group President of the Company. Employee shall devote substantially all of his business time and attention to promote and advance the business of the Company.

Section 3. Term of Employment.

Unless sooner terminated in accordance with the provisions of this Agreement, the term of employment of Employee by the Company pursuant to this Agreement shall be for the period (the "Employment Period") commencing on the date hereof and ending on June 30, 2004; provided, however, that if this Agreement has not been terminated in accordance with the provisions hereof prior to June 30, 2002, the Employment Period shall be extended on June 30, 2002 to June 30, 2005.

Section 4. Place of Employment.

Employee's principal place of work shall not be relocated outside of the Titusville, Florida area without the approval of the Company's President.

Section 5. Compensation.

During the Employment Period, subject to all the terms and conditions of this Agreement and as compensation for all services to be rendered by Employee under this Agreement, the Company shall pay to or provide Employee with the following:

(a) Base Salary. Commencing July 1, 1999, the Company shall pay to Employee a base annual salary at the rate of $230,000. Each July 1 during the Employment Period, commencing July 1, 2000, the base annual salary shall be increased, as determined by the Board, by a minimum of the greater of (i) 3% and
(ii) the percentage increase in the Consumer Price Index (as hereinafter defined) in effect for the month of April preceding the July 1 in question compared to the Consumer Price Index in effect for the prior month of April. The "Consumer Price Index" shall mean the Consumer Price Index for all Urban Consumers published by the Bureau of Labor Statistics, United States Department of Labor, or the supplement or successor thereto if publication of such index should be discontinued. The base salary will be payable at such intervals (at least monthly) as salaries are paid generally to other executive officers of the Company.

(b) Signing Bonus. Upon execution of this Agreement, the Company shall pay to Employee a $300,000 signing bonus.

(c) Bonus. Each December during the Employment Period, commencing in 2000, the Board shall determine Employee's bonus (the "Bonus") for the year then ending, based upon the formula attached hereto as Schedule A.

(d) Options. The Company shall cause GP Strategies Corporation ("GPS") to grant to Employee under GPS's option plan, options to purchase 100,000 shares of the common stock of GPS at an exercise price equal to the market price on the date of grant. Such options shall vest 20% on the date hereof and 20% on each July 1 commencing July 1, 2000, shall terminate on June 30, 2004, and shall accelerate as provided in Section 11(d)(ii)(C).

(e) Vacation. Employee shall be entitled to vacation in accordance with the Company's policy for its senior executives. Vacation may be carried into the subsequent year if not used in the year earned.

(f) Automobile. The Company shall provide Employee with an automobile of his choice (comparable to the automobile currently provided by the Company to Employee) at the Company's expense and shall pay the maintenance, gas, and insurance expenses in connection with such automobile. Such automobile shall be equipped with a car phone to be paid for by the Company.

(g) Life and Disability Insurance. The Company shall maintain the existing life and disability insurance policies covering Employee.

(h) Employee Benefit Plans. Employee shall be entitled to participate in all employee benefit plans maintained by the Company for its senior executives or employees, including without limitation the Company's medical and 401(k) plans.

Section 6. Expenses.

The Company shall reimburse Employee for all reasonable expenses (including, but not limited to, business travel and customer entertainment expenses) incurred by him in connection with his employment hereunder in accordance with the written policy and guidelines established by the Company for executive officers.

Section 7. Non-Competition, Non-Solicitation.

Employee agrees that he will not during the period he is employed by the Company under this Agreement or otherwise and for a period of nine months thereafter, directly or indirectly, (a) solicit the employment of, or encourage to leave the employment of GPS or the Company or any of their respective subsidiaries, any person who is now employed by GPS or the Company or any of their respective subsidiaries, (b) hire any employee or former employee of GPS or the Company or any of their respective subsidiaries, or (c) compete with or be engaged in the same business as GPS or the Company or any of their respective subsidiaries, or be employed by, or act as consultant or lender to, or be a director, officer, employee, owner, or partner of, any business or organization which, during the period Employee is employed by the Company under this Agreement or otherwise, directly or indirectly competes with or is engaged in the same business as GPS or the Company or any of their respective subsidiaries, except that in each case the provisions of this Section 7 will not be deemed breached merely because Employee owns not more than 1% of the outstanding common stock of a corporation, if, at the time of its acquisition by Employee, such stock is listed on a national securities exchange, is reported on NASDAQ, or is regularly traded in the over-the-counter market by a member of a national securities exchange. If the Employment Period ends on June 30, 2005, the Company shall pay Employee during the period after the Employment Period that Employee is subject to this Section 7, provided that Employee is in full compliance with this Section 7, at the rate of his base annual salary received from the Company during the last year of the Employment Period, payable at such intervals (at least monthly) as salaries are paid generally to executive officers of the Company, which obligation shall cease after nine months or such earlier time as the Company, in its sole discretion, releases Employee from the provisions of this Section 7.

Section 8. Patents.

Any interest in patents, patent applications, inventions, copyrights, developments, and processes ("Such Inventions") which Employee now or hereafter during the period he is employed by the Company under this Agreement or otherwise may own or develop relating to the fields in which the Company or any of its subsidiaries may then be engaged shall belong to the Company; and forthwith upon request of the Company, Employee shall execute all such assignments and other documents and take all such other action as the Company may reasonably request in order to vest in the Company all his right, title, and interest in and to Such Inventions free and clear of all liens, charges, and encumbrances.

Section 9. Confidential Information.

All confidential information which Employee may now possess, may obtain during or after the Employment Period, or may create prior to the end of the period he is employed by the Company under this Agreement or otherwise relating to the business of the Company or of any its customers or suppliers shall not be published, disclosed, or made accessible by him to any other person, firm, or corporation either during or after the termination of his employment or used by him except during the Employment Period in the business and for the benefit of the Company, in each case without prior written permission of the Company. Employee shall return all tangible evidence of such confidential information to the Company prior to or at the termination of his employment.

Section 10. Termination.

Employee's employment hereunder may be terminated without any breach of this Agreement only under the following circumstances:

(a) Death. Employee's employment hereunder shall terminate upon his death.

(b) Disability. If, as a result of Employee's incapacity due to physical or mental illness, Employee shall have been absent from his duties hereunder on a full-time basis for the entire period of six consecutive months, and within 30 days after a Notice of Termination (as defined in Section 10(e)) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate Employee's employment hereunder.

(c) Cause. The Company may terminate Employee's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate Employee's employment hereunder upon (i) the willful and continued failure by Employee to substantially perform his duties or obligations hereunder (other than any such failure resulting from Employee's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes Employee has not substantially performed his duties or obligations, or (ii) the willful engaging by Employee in misconduct which is materially monetarily injurious to the Company. For purposes of this paragraph, no act, or failure to act, on Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for Cause without (i) reasonable notice to Employee setting forth the reasons for the Company's intention to terminate for Cause, (ii) an opportunity for Employee, together with his counsel, to be heard before the Board, and (iii) delivery to Employee of a Notice of Termination from the Board finding that in the good faith opinion of the Board Employee was guilty of conduct set forth above in clause (i) or (ii) of the preceding sentence, and specifying the particulars thereof in detail.

(d) Termination by Employee. Employee may terminate his employment hereunder (i) for Good Reason (as defined below) or (ii) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, Employee shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of Employee's doctor. For purposes of this Agreement, "Good Reason" shall mean (i) a change in control of GPS (as defined below), (ii) a management change in control of GPS (as defined below), (iii) a failure by the Company to comply with any material provision of this Agreement which has not been cured within ten days after notice of such noncompliance has been given by Employee to the Company, or (iv) any purported termination of Employee's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of
Section 10(e) (and for purposes of this Agreement no such purported termination shall be effective). For purposes of this Agreement, a "change in control" of GPS shall mean any of the following, but only if not approved by the Board of Directors of GPS, (i) a change in control of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than a change of control resulting in control by Jerome Feldman or John C. McAuliffe or a group including Jerome Feldman or John C. McAuliffe, (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Jerome Feldman or John C. McAuliffe or a group including Jerome Feldman or John C. McAuliffe, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of GPS representing 20% or more of the combined voting power of GPS's then outstanding securities, (iii) GPS and its affiliates owning less than a majority of the voting stock of the Company, (iv) the sale of all or substantially all of the assets of the Company, or (v) at any time when there has not been a management change of control of GPS, individuals who were either nominated for election by the Board of Directors of GPS or were elected by the Board of Directors of GPS cease for any reason to constitute at least a majority of the Board of Directors of GPS. For purposes of this Agreement, a "management change in control" of GPS shall mean either of the following (i) an event that would have constituted a change of control of GPS if it had not been approved by the Board of Directors of GPS or (ii) a change in control of GPS of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act, resulting in control by a buy-out group including Jerome Feldman but not John C. McAuliffe. For purposes of the foregoing definitions, a group shall not be deemed to include John C. McAuliffe if he declines the opportunity to join such group.

(e) Notice of Termination. Any termination of Employee's employment by the Company or by Employee (other than termination pursuant to
Section 10(a)) shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated.

(f) Date of Termination. "Date of Termination" shall mean (i) if Employee's employment is terminated by his death, the date of his death, (ii) if Employee's employment is terminated pursuant to Section 10(b), 30 days after Notice of Termination is given (provided that Employee shall not have returned to the performance of his duties on a full-time basis during such 30 day period), and (iii) if Employee's employment is terminated for any other reason, the date specified in the Notice of Termination, which shall not be earlier than the date on which the Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is resolved, either by mutual written agreement of the parties or by a judgment, order, or decree of a court of competent jurisdiction.

Section 11. Compensation Upon Termination or During Disability.

(a) During any period that Employee fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), Employee shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 10(b), provided that payments so made to Employee during the disability period shall be reduced by the sum of the amounts, if any, payable to Employee at or prior to the time of any such payment under disability benefit plans of the Company and which were not previously applied to reduce any such payment.

(b) If Employee's employment is terminated by his death, the Company shall pay to Employee's spouse, or if he leaves no spouse to his estate, an amount equal to his full salary at the rate then in effect for a period of one year after the date of death.

(c) If Employee's employment shall be terminated for Cause, the Company shall pay Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given.

(d) If (i) in breach of this Agreement, the Company shall terminate Employee's employment other than pursuant to Section 10(b) or 10(c) (it being understood that a purported termination pursuant to Section 10(b) or 10(c) which is disputed and finally determined not to have been proper shall be a termination by the Company in breach of this Agreement) or (ii) Employee shall terminate his employment for Good Reason (other than as a result of a management change of control), then

(A) the Company shall (I) pay Employee his full salary and provide Employee his benefits through the Date of Termination at the rate or level in effect at the time Notice of Termination is given and
(II) pay Employee his full Bonus for the calendar year in which the Date of Termination occurs, at such time as such Bonus would have been paid if Employee's employment by the Company had not so terminated;

(B) in lieu of any further salary or bonus payments to Employee for periods subsequent to the Date of Termination, the Company shall pay as severance pay to Employee an amount equal to (1) Employee's average annual cash compensation received from the Company during the three full calendar years immediately preceding the Date of Termination, multiplied by (2) the greater of (w) the number of years (including partial years) that would have been remaining in the Employment Period if Employee's employment by the Company had not so terminated but the Employment Period were not thereafter extended pursuant to the proviso of Section 3 and (x) three, such payment to be made (y) if Employee's termination is based on a change of control of the Company, in a lump sum on or before the fifth day following the Date of Termination, or (z) if Employee's termination results from any other cause, in substantially equal semimonthly installments on the fifteenth and last days of each month commencing with the month in which the Date of Termination occurs and continuing for the number of consecutive semimonthly payment dates (including the first such date as aforesaid) equal to the product obtained by multiplying the number of years (including partial years) applicable under clause (w) above by 24;

(C) all options to purchase the Company's common stock granted to Employee under the Company's option plan or otherwise shall immediately become fully vested and shall terminate on such date as they would have terminated if Employee's employment by the Company had not terminated and, if Employee's termination is based on a change of control of the Company and Employee elects, not more than 30 days after the Date of Termination, to surrender any or all of such options to the Company, the Company shall pay Employee on or before the fifth day following such surrender a lump sum cash payment equal to the excess of (1) the fair market value on the Date of Termination of the securities issuable upon exercise of the options surrendered over (2) the aggregate exercise price of the options surrendered;

                                    (D) the Company shall maintain in full force
                           and effect, for the continued benefit of Employee,
                           for a number of years equal to the greater of (1) the
                           number of years (including partial years) that would
                           have been remaining in the Employment Period if
                           Employee's employment by the Company had not so
                           terminated but the Employment Period were not
                           thereafter extended pursuant to the proviso of
                           Section 3 and (2) three, all employee benefit plans
                           and programs in which Employee was entitled to
                           participate immediately prior to the Date of
                           Termination provided that Employee's continued
                           participation is possible under the general terms and
                           provisions of such plans and programs. In the event
                           that Employee's participation in any such plan or
                           program is barred, the Company shall arrange to
                           provide Employee with benefits substantially similar
                           to those which Employee would otherwise have been
                           entitled to receive under such plans and programs
                           from which his continued participation is barred; and
                                    (E) if termination of Employee's employment
                           arises out of a breach by the Company of this
                           Agreement, the Company shall pay all other damages to
                           which Employee may be entitled as a result of such
                           breach, including damages for any and all loss of
                           benefits to Employee under the Company's employee
                           benefit plans which Employee would have received if
                           the Company had not breached this Agreement and had
                           Employee's employment continued for the then
                           remaining term of the Employment Period but the
                           Employment Period were not thereafter extended
                           pursuant to the proviso of Section 3, and including
                           all reasonable legal fees and expenses incurred by
                           him as a result of such termination.

                   (e)     If Employee shall  terminate his  employment for Good
Reason as a result of a management  change of control, then

                                    (A) the Company shall (I) pay Employee his

full salary and provide Employee his benefits through the Date of Termination at the rate or level in effect at the time Notice of Termination is given and
(II) pay Employee his full Bonus for the calendar year in which the Date of Termination occurs, at such time as such Bonus would have been paid if Employee's employment by the Company had not so terminated;

(B) in lieu of any further salary or bonus payments to Employee for periods subsequent to the Date of Termination, the Company shall pay as severance pay to Employee an amount equal to Employee's average annual cash compensation received from the Company during the three full calendar years immediately preceding the Date of Termination, such payment to be made in a lump sum on or before the fifth day following the Date of Termination;

(C) all options to purchase the Company's common stock granted to Employee under the Company's option plan or otherwise shall immediately become fully vested and shall terminate on such date as they would have terminated if Employee's employment by the Company had not terminated and, if Employee elects, not more than 30 days after the Date of Termination, to surrender any or all of such options to the Company, the Company shall pay Employee on or before the fifth day following such surrender a lump sum cash payment equal to the excess of (1) the fair market value on the Date of Termination of the securities issuable upon exercise of the options surrendered over (2) the aggregate exercise price of the options surrendered; and

(D) the Company shall maintain in full force and effect, for the continued benefit of Employee, for one year, all employee benefit plans and programs in which Employee was entitled to participate immediately prior to the Date of Termination provided that Employee's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee's participation in any such plan or program is barred, the Company shall arrange to provide Employee with benefits substantially similar to those which Employee would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred.

(f) If Employee shall terminate his employment under Section
10(d)(ii), the Company shall pay Employee his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given.

(g) Employee shall not be required to mitigate the amount of any payment provided for in this Section 11 by seeking other employment or otherwise.

(h) Notwithstanding anything in this Agreement to the contrary, the Company shall not be obligated to pay any portion of any amount otherwise payable to Employee pursuant to this Section 11 if the Company could not reasonably deduct such portion solely by operation of Section 280G of the Internal Revenue Code of 1986, as amended.

Section 12. Successors; Binding Agreement.

(a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and reasonably substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 12(a) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

(b) Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to commutation, encumbrance, or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees, and shall be binding upon and inure to the benefit of the Company and its successors under Section 12(a). If Employee should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate.

Section 13. No Third Party Beneficiaries.

This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement (except as provided in Sections 11(b) and 12).

Section 14. Fees and Expenses.

The Company shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence, and counsel) incurred by Employee as a result of a contest or dispute over Employee's termination of employment if
(a) such contest or dispute is resolved in whole or in part in Employee's favor or (b) Employee reasonably believed in good faith that he had a valid claim. In addition, the Company shall pay Employee interest, at the prime rate of Fleet Bank, National Association, on any amounts payable to Employee hereunder that are not paid when due.

Section 15. Representations and Warranties of Employee.

Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder and (b) Employee is under no physical or mental disability that would hinder his performance of duties under this Agreement.

Section 16. Life Insurance.

If requested by the Company, Employee shall submit to such physical examinations and otherwise take such actions and execute and deliver such documents as may be reasonably necessary to enable the Company, at its expense and for its own benefit, to obtain life insurance on the life of Employee. Employee has no reason to believe that his life is not insurable with a reputable insurance company at rates now prevailing in the City of New York for healthy men of his age.

Section 17. Modification.

This Agreement and the Schedule hereto set forth the entire understanding of the parties with respect to the subject matter hereof, supersede all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party.

Section 18. Notices.

Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or delivered against receipt to the party to whom it is to be given at the address of such party set forth in the preamble to this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 18). Notice to the estate of Employee shall be sufficient if addressed to Employee as provided in this
Section 18. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof.

Section 19. Waiver.

Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing.

Section 20. Headings.

The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

Section 21. Counterparts; Governing Law.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflict of laws.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written.

GENERAL PHYSICS CORPORATION

By:

Douglas Sharp

The undersigned hereby guarantees the performance by General Physics Corporation of its obligations under the foregoing Agreement.

GP STRATEGIES CORPORATION

By:

Exhibit 10.32

HYDRO MED SCIENCES, INC.

series B convertible preferred stock

PURCHASE AGREEMENT

May 30, 2003

1.       Agreement To Sell And Purchase......................................1

         1.1      Authorization of Shares....................................1

         1.2      Sale and Purchase..........................................1

2.       Closing, Delivery And Payment.......................................2

         2.1      Closing....................................................2

         2.2      Delivery at Closing........................................2

         2.3      Deferred Closing...........................................2


3.       Representations And Warranties Of The Company.......................2

         3.1      Organization, Good Standing and Qualification..............3

         3.2      Subsidiaries...............................................3

         3.3      Capitalization; Voting Rights..............................3

         3.4      Authorization; Binding Obligations.........................4

         3.5      Financial Statements.......................................4

         3.6      Liabilities................................................5

         3.7      Agreements; Action.........................................5

         3.8      Obligations to Related Parties.............................6

         3.9      Changes....................................................6

         3.10     Title to Properties and Assets; Liens, Etc.................7

         3.11     Intellectual Property......................................8

         3.12     Compliance with Other Instruments..........................8

         3.13     Litigation.................................................9

         3.14     Tax Returns and Payments...................................9

         3.15     Employees..................................................9

         3.16     Obligations of Management.................................10

         3.17     Registration Rights.......................................10

         3.18     Compliance with Laws; Permits.............................10

         3.19     Environmental and Safety Laws.............................10

         3.20     Offering Valid............................................10

         3.21     Full Disclosure...........................................11

         3.22     Minute Books..............................................11

         3.24     Insurance.................................................11

         3.25     Qualified Small Business Stock............................11

4.       Representations And Warranties Of The Investor.....................11

         4.1      Requisite Power and Authority.............................11

         4.2      Investment Representations................................11

         4.3      Transfer Restrictions.....................................13

5.       Conditions To Closing..............................................13

         5.1      Conditions to Investor' Obligations at the Closing........13

         5.2      Conditions to Obligations of the Company at the
                  Closing...................................................15

         5.3      Conditions to Deferred Investor's Obligations at
                  the Deferred Closing......................................16

         5.4      Conditions to Obligations of the Company at the
                  Deferred Closing..........................................17

6.       Miscellaneous......................................................18

         6.1      Governing Law.............................................18

         6.2      Survival..................................................18

         6.3      Expenses..................................................18

         6.4      Attorneys' Fees...........................................18

         6.5      Successors and Assigns....................................18

         6.6      Entire Agreement..........................................18

         6.7      Severability..............................................19

         6.8      Amendment and Waiver......................................19

         6.9      Delays or Omissions.......................................19

         6.10     Notices...................................................19

         6.11     Titles and Subtitles......................................19

         6.12     Counterparts..............................................20

         6.13     Broker's Fees.............................................20

         6.14     Pronouns..................................................20

List of Exhibits

Schedule of Investors                                               Exhibit A
Certificate                                                         Exhibit B
Amended and Restated Investor Rights Agreement                      Exhibit C
Amended and Restated Right of First Refusal and Co-Sale Agreement   Exhibit D
List of Stockholders, Optionholders and Warrantholders              Exhibit E
Form of Legal Opinion                                               Exhibit F
Schedule of Exceptions

HYDRO MED SCIENCES INC.

series B convertible preferred stock

PURCHASE AGREEMENT

This Stock Purchase Agreement (this "Agreement") is made and entered into as of May 30, 2003, by and among Hydro Med Sciences Inc., a Delaware corporation (the "Company"), and the investors whose names and addresses are set forth on the Schedule of Investors attached hereto as EXHIBIT A (the "Investors").

RECITALS

The Company has authorized the sale and issuance of an aggregate of 23,448,272 shares of its Series B Convertible Preferred Stock pursuant to this Agreement (the "Shares").

The Investors desire to purchase the Shares on the terms and conditions set forth herein.

The Company desires to issue and sell the Shares to the Investors on the terms and conditions set forth herein.

AGREEMENT

In consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows:

1. AGREEMENT TO SELL AND PURCHASE.

1.1 Authorization of Shares. On or prior to the Initial Closing (as hereinafter defined), the Company shall have authorized (a) the sale and issuance to the Investors of the Shares and (b) the issuance of such shares of Common Stock to be issued upon conversion of the Shares (the "Conversion Shares"). The Shares and the Conversion Shares shall each have the rights, preferences, privileges and restrictions set forth in the Company's Restated Certificate of Incorporation, in the form attached hereto as EXHIBIT B (the "Certificate").

1.2 Sale and Purchase.

(a) Subject to the terms and conditions hereof, at the Closing the Company hereby agrees to issue and sell to each Investor, severally and not jointly, and each Investor agrees to purchase from the Company, severally and not jointly, the number of Shares set forth opposite each Investor's name on EXHIBIT A at a purchase price of $0.725 per share.

(b) Subject to the terms and conditions hereof, GP Strategies Corporation, a Delaware corporation, or an affiliated entity (the "Deferred Investor" or the "Parent"), shall have the option to purchase up to 6,896,551 Shares at a purchase price of $0.725 per share (the "Deferred Investment") during the period (the "Deferred Investment Period") commencing on the date hereof and ending on

the first to occur of: (i) March 31, 2004, (ii) the date an Acquisition or Transfer (as defined in the Certificate) is consummated, or (iii) the date the Series B Preferred stock is automatically converted into Common Stock as provided in Section 6(b) of Article 4(C)(2) of the Certificate. If the Deferred Investor exercises its option to purchase the Deferred Investment, the Company hereby agrees to issue and sell to the Deferred Investor, and the Deferred Investor agrees to purchase from the Company, the number of Shares that the Deferred Investor elects to purchase at the Deferred Closing (as hereinafter defined) on the terms and conditions set forth in this Agreement. The Company shall give the Deferred Investor at least 60 days prior written notice of the anticipated closing date of any Qualified Public Offering (as defined in the Certificate).

2. CLOSINGS, DELIVERY AND PAYMENT.

2.1 Closing. The initial closing of the sale and purchase of the Shares under this Agreement (the "Initial Closing") shall take place at 9:00 a.m. on the date hereof, at 380 Lexington Ave., New York, New York or at such other time or place as the Company and the Investors may mutually agree (such date is hereinafter referred to as the "Initial Closing Date"). Subsequent closings will take place at such place and time as the Company shall designate; provided, that no Closing may occur subsequent to June 30, 2003 (each such subsequent closing and the Initial Closing are collectively referred to herein as a "Closing" and the date of each subsequent Closing and the Initial Closing Date are collectively referred to herein as a "Closing Date").

2.2 Delivery at Closing. At each Closing, subject to the terms and conditions hereof, the Company will deliver to each Investor a certificate(s) representing the number of Shares to be purchased at such Closing by such Investor, against payment of the purchase price therefor by check made payable to the order of the Company, wire transfer of immediately available funds, or any combination of the foregoing.

2.3 Deferred Closing. The closing and sale of the Deferred Investment under this Agreement (the "Deferred Closing") shall take place at any time agreed upon by the Deferred Investor and the Company, but no later than 90 days after the date the Deferred Investor notifies the Company of its intention to exercise the Deferred Investment (the "Deferred Investment Closing Date"). At the Deferred Closing, subject to the terms and conditions hereof, the Company will deliver to the Deferred Investor a certificate(s) representing the number of Shares to be purchased at the Deferred Closing, against payment of the purchase price therefor (the "Deferred Purchase Price") by check made payable to the order of the Company, wire transfer of immediately available funds, or any combination of the foregoing.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

Except as set forth on a Schedule of Exceptions delivered by the Company to the Investors at the Closing (the "Schedule of Exceptions") specifically identifying the relevant Section or Sections hereof, or as described in the Confidential Private Placement Memorandum of SMH Hydro Med II LLC dated April 23, 2003 (the "Memorandum"), the Company hereby represents and warrants to each Investor as of the date of this Agreement as set forth below.

3.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver the Certificate and this Agreement, the Amended and Restated Investor Rights Agreement in the form attached hereto as EXHIBIT C (the "Amended and Restated Investor Rights Agreement"), the Amended and Restated Right of First Refusal and Co-Sale Agreement in the form attached hereto as EXHIBIT D (the "Amended and Restated Right of First Refusal and Co-Sale Agreement") (collectively, the "Related Agreements"), and any other agreements contemplated hereby, to issue and sell the Shares, the Conversion Shares, and to carry out the provisions of this Agreement, the Related Agreements and the Certificate and to carry on its business as presently conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business.

3.2 Subsidiaries. The Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement.

3.3 Capitalization; Voting Rights.

(a) The authorized capital stock of the Company, immediately prior to the Initial Closing, consists of (i) 50,000,000 shares of common stock, par value $.001 per share ("Common Stock"), 10,000,000 shares of which are issued and outstanding, and (ii) 35,000,000 shares of preferred stock, par value $.001 per share ("Preferred Stock"), (A) 7,000,000 shares of which are designated Series A Convertible Preferred Stock (the "Series A Preferred"), of which 7,000,000 shares are issued and outstanding, and (B) 24,500,000 shares of which are designated Series B 10% Convertible Preferred Stock (the "Series B Preferred"), none of which are issued and outstanding. The Parent currently owns 100% of the shares of Common Stock.

(b) Under the Hydro Med Sciences, Inc. Equity Incentive Plan (the "Incentive Plan") and as of March 31, 2003, (i) no shares have been issued pursuant to restricted stock purchase agreements and/or the exercise of outstanding options,
(ii) options to purchase 1,720,500 shares have been granted and are currently outstanding (as listed on EXHIBIT E), and (iii) 3,779,500 shares of Common Stock remain available for future issuance to officers, directors, employees and consultants of the Company. Since March 31, 2003, the Company has not issued any options to purchase shares of Common Stock or any other rights to purchase shares of Common Stock pursuant to the Incentive Plan.

(c) Other than as set forth on EXHIBIT E, except as may be granted pursuant to this Agreement and the other Related Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal, whether in favor of the Company or any other person), proxy or stockholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities.

(d) All issued and outstanding shares of the Common Stock and Preferred Stock
(i) have been duly authorized and validly issued to the persons listed on EXHIBIT E hereto, are fully paid and nonassessable, and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities.

(e) The rights, preferences, privileges and restrictions of the Shares are as stated in the Certificate. The Conversion Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Certificate, as the case may be, the Shares and the Conversion Shares will be validly issued, fully paid and nonassessable, and, except as provided in the Related Agreements, will be free of any liens or encumbrances; provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed.

3.4 Authorization; Binding Obligations. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization of this Agreement, the Certificate and the Related Agreements, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Certificate, as the case may be, has been taken or will be taken prior to the Closing. This Agreement and the Related Agreements, when executed and delivered, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions in Section 2.9 of the Amended and Restated Investor Rights Agreement may be limited by applicable laws. The sale of the Shares and the subsequent conversion of the Shares into Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with.

3.5 Financial Statements. The Company has made available to the Investor its (or to the extent applicable, those of any predecessor in interest) (a) unaudited balance sheet as of December 31, 2002, and unaudited statements of income, cash flows, and stockholders' equity for the fiscal year then ended (collectively, the "2002 Statements"), (b) unaudited balance sheet as of March 31, 2003 (the "Statement Date") and unaudited statements of income, cash flows, and stockholders' equity for the three-month period ending on the Statement Date (the "Year to Date Statements" and together with the 2002 Statements, the "Financial Statements"). Except as set forth on the Schedule of Exceptions, the Financial Statements, together with the notes thereto, are complete and correct in all material respects, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except as disclosed therein, and present fairly the financial condition and position of the Company as of the dates indicated.

3.6 Liabilities. The Company has no material liabilities and, to the best of its knowledge, knows of no material liabilities, in each case except as disclosed in the Financial Statements and except for current liabilities incurred in the

ordinary course of business subsequent to the Statement Date that have not been, either in any individual case or in the aggregate, material.

3.7 Agreements; Action.

(a) There are no material agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof.

(b) Except as set forth in the Schedule of Exceptions, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or to its knowledge by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), (ii) the transfer or license of any material patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), (iii) provisions restricting the development, manufacture or distribution of the Company's products or services or (iv) indemnification by the Company with respect to infringements of proprietary rights (other than indemnification obligations arising from purchase or license agreements entered into in the ordinary course of business).

(c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the Financial Statements) individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $250,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business.

(d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.

(e) The Company has not engaged in the past twelve months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up, of the Company.

3.8 Obligations to Related Parties. Except as set forth on the Schedule of Exceptions, there are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company, (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company), and
(d) obligations for indemnification under the Company's organizational documents and applicable law. Except as set forth on the Schedule of Exceptions, none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company, or any members of their immediate families, are indebted to the Company or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than 1% of such company) which may compete with the Company. No officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any contract with the Company (other than such contracts as relate to any such person's ownership of capital stock or other securities of the Company). Except as may be disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation.

3.9 Changes. Since the Statement Date, except as set forth on the Schedule of Exceptions, there has not been, to the Company's knowledge:

(a) Any change in the assets, liabilities, financial condition, or operations of the Company from that reflected in the Financial Statements, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is reasonably expected to have a material adverse effect on such assets, liabilities, financial condition, or operations of the Company;

(b) Any resignation or termination of any officer, key employee or group of employees of the Company; and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer, key employee or group of employees;

(c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise;

(d) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of the Company;

(e) Any waiver by the Company of a valuable right or of a material debt owed to it;

(f) Any direct or indirect loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business;

(g) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder;

(h) Any declaration or payment of any dividend or other distribution of the assets of the Company;

(i) Any labor organization activity related to the Company;

(j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business;

(k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets;

(l) Any change in any material agreement to which the Company is a party or by which it is bound which materially and adversely affects the business, assets, liabilities, financial condition, operations or prospects of the Company;

(m) Any other event or condition of any character that, either individually or cumulatively, has materially and adversely affected the business, assets, liabilities, financial condition, or operations of the Company; or

(n) Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above.

3.10 Title to Properties and Assets; Liens, Etc. The Company has good and marketable title to its material tangible properties and assets, including the tangible properties and assets reflected in the most recent balance sheet included in the Financial Statements, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent,
(b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All material facilities, machinery, equipment, fixtures, vehicles and other tangible assets owned, leased or used by the Company are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. The Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound.

3.11 Intellectual Property

(a) Set forth in the Schedule of Exceptions is a true and complete list of all patents, patent applications, trademarks, service marks, trademark and service mark applications, trade names, copyright registrations and licenses presently

used by the Company (with the exception of licenses and rights in off the shelf software publications and sold as such). The Company has full title and ownership of, or is duly licensed or otherwise authorized to use, all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products.

(b) The Company has not received any communications alleging that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity.

(c) The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company. No former or current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's proprietary information and inventions agreement. The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been assigned to the Company and which are disclosed in the Schedule of Exceptions hereto.

(d) Neither the execution, delivery nor performance of this Agreement or the Related Agreements, nor the carrying on of the Company's business by the employees of the Company, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any employee is now obligated.

3.12 Compliance with Other Instruments. The Company is not in violation or default of any material term of its certificate of incorporation or Bylaws, or of any provision of any material mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ. The execution, delivery and performance of and compliance with this Agreement, the Certificate and the Related Agreements, and the issuance and sale of the Shares pursuant hereto, and of the Conversion Shares pursuant to the Certificate, will not, with or without the passage of time or giving of notice or both, result in any such material violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties.

3.13 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement, the Certificate, or the Related Agreements or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company. The foregoing includes, without limitation, actions pending or, to the Company's knowledge, threatened or any basis therefor known by the Company involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate.

3.14 Tax Returns and Payments. The Company has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent. The Company has not been advised (a) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed adjustment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for.

3.15 Employees. The Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. The Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement, including, but not limited to, any Employee Pension Benefit Plan as defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as amended. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. The Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees.

3.16 Obligations of Management. Each officer and key employee of the Company is currently devoting substantially all of his or her business time to the conduct of the business of the Company. The Company is not aware that any officer or key employee of the Company is planning to work less than full time at the Company in the future. No officer or key employee is currently working or, to the Company's knowledge, plans to work for a competitive enterprise, whether or not such officer or key employee is or will be compensated by such enterprise.

3.17 Registration Rights. Except as required pursuant to the Amended and Restated Investor Rights Agreement, the Company is presently not under any obligation, and has not granted any rights, to Register (as defined in Section 1.1 of the Amended and Restated Investor Rights Agreement) any of the Company's presently outstanding securities or any of its securities that may hereafter be issued.

3.18 Compliance with Laws; Permits. The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of the Shares and the Conversion Shares, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted.

3.19 Environmental and Safety Laws. The Company is not in violation in any material respect of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation.

3.20 Offering Valid. Assuming the accuracy of the representations and warranties of each Investor contained in Section 4.2 hereof, the offer, sale and issuance of the Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws.

3.21 Full Disclosure. The Company has provided each Investor with all information requested in writing by the Investor in connection with its decision to purchase the Shares. Neither this Agreement, the Related Agreements, the Certificate nor any other certificate delivered by the Company to the Investor or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein not misleading.

3.22 Minute Books. The minute books of the Company made available to the Investors' counsel contain a complete summary in all material respects of all meetings of directors and stockholders since the time of incorporation.

3.23 Insurance. The Company has general commercial, product liability, fire and casualty insurance policies and, to the best of its knowledge, such policies provide coverage customary for companies similarly situated to the Company.

3.24 Qualified Small Business Stock. The Company will use reasonable efforts to comply with the reporting and record keeping requirements of Section 1202 of the Code and any regulations promulgated thereunder.

4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.

Each Investor hereby represents and warrants to the Company as follows:

4.1 Requisite Power and Authority. Such Investor has all necessary power and authority to execute and deliver this Agreement and the Related Agreements to which it is a party and to carry out their provisions. All action on such Investor's part required for the lawful execution and delivery of this Agreement, and the Related Agreements to which it is a party, has been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements to which it is a party will be valid and binding obligations of such Investor, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) as limited by general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions of Section 2.9 of the Amended and Restated Investor Rights Agreement may be limited by applicable laws.

4.2 Investment Representations. Such Investor understands that none of the Shares or the Conversion Shares has been registered under the Securities Act. Such Investor also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Investor's representations contained in the Agreement. Investor hereby represents and warrants as follows:

(a) Investor Bears Economic Risk. Such Investor has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Such Investor must bear the economic risk of this investment indefinitely unless the Shares (or the Conversion Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. Such Investor understands that the Company has no present intention of registering the Shares, the Conversion Shares, or any shares of its Common Stock. Such Investor also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow such Investor to transfer all or any portion of the Shares or the Conversion Shares under the circumstances, in the amounts or at the times Investor might propose.

(b) Acquisition for Own Account. Such Investor is acquiring the Shares, and the Conversion Shares for such Investor's own account for investment only, and not with a view towards their distribution.

(c) Investor Can Protect Its Interest. Such Investor represents that by reason of its, or of its management's, business or financial experience, such Investor has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement and the Related Agreements. Further, such Investor is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement.

(d) Accredited Investor. Such Investor represents that it is an "accredited investor" within the meaning of Regulation D under the Securities Act.

(e) Company Information. Such Investor has received and read all information it has deemed necessary or appropriate for purposes of considering its investment hereunder, including, without limitation, the Financial Statements and has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. Such Investor has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment.

(f) Rule 144. Such Investor acknowledges and agrees that the Shares, and, if issued, the Conversion Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Such Investor has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations.

(g) Residence. If the Investor is an individual, then the Investor resides in the state or province identified in the address of the Investor set forth on EXHIBIT A; if the Investor is a partnership, corporation, limited liability company or other entity, then the principal place of business of the Investor and, if different, the office or offices in which its investment decision was made, is located at the address or addresses of the Investor set forth on EXHIBIT A.

4.3 Transfer Restrictions. Investors acknowledge and agree that the Shares and, if issued, the Conversion Shares are subject to restrictions on transfer as set forth in the Amended and Restated Investor Rights Agreement.

5. CONDITIONS TO CLOSING.

5.1 Conditions to Investors' Obligations at the Closing. The Investors' obligations to purchase the Shares at the Closing are subject to the satisfaction, at or prior to the Closing Date, of the following conditions:

(a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing.

(b) Minimum Investment. The Company shall have received at least $11,000,000 in aggregate gross proceeds from Investors' subscriptions for Series B Convertible Preferred Stock, exclusive of the Deferred Investment by GP Strategies Corporation pursuant to Section 1.2(b).

(c) Legal Investment. On the Closing Date, the sale and issuance of the Shares and the proposed issuance of the Conversion Shares shall be legally permitted by all laws and regulations to which the Investors and the Company are subject.

(d) Consents, Permits and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Related Agreements (except for such as may be properly obtained subsequent to the Closing).

(e) Amendment of Certificate. The Certificate shall have been filed with the Secretary of State of the State of Delaware and shall continue to be in full force and effect as of the Closing Date.

(f) Corporate Documents. The Company shall have delivered to the Investors or their counsel copies of all corporate documents of the Company as the Investors shall reasonably request.

(g) Reservation of Conversion Shares. The Conversion Shares issuable upon conversion of the Shares shall have been duly authorized and reserved for issuance upon such conversion.

(h) Compliance Certificate. The Company shall have delivered to the Investors a Compliance Certificate, executed by the President of the Company, dated the Closing Date, to the effect that the conditions specified in subsections (a),
(c), (d) and (f) of this Section 5.1 have been satisfied.

(i) Secretary's Certificate. The Investors shall have received from the Company's Secretary, a certificate having attached thereto (i) the Certificate as in effect at the time of the Closing, (ii) the Company's Bylaws as in effect at the time of the Closing, (iii) the resolutions approved by the Board of Directors of the Company authorizing the transactions contemplated hereby, (iv) good standing certificates (including tax good standing) with respect to the Company from the applicable authority(ies) in Delaware and any other jurisdiction in which the Company is qualified to do business, dated a recent date before the Closing, and (v) all required stockholder consents to the transaction as described in this Agreement.

(j) Amended and Restated Investor Rights Agreement. The Amended and Restated Investor Rights Agreement substantially in the form attached hereto as EXHIBIT C shall have been executed and delivered by the parties thereto.

(k) Amended and Restated Right of First Refusal and Co-Sale Agreement. The Amended and Restated Right of First Refusal and Co-Sale Agreement substantially in the form attached hereto as EXHIBIT D shall have been executed and delivered by the parties thereto. The stock certificates representing the shares subject to the Amended and Restated Right of First Refusal and Co-Sale Agreement shall have been delivered to the Secretary of the Company and shall have had appropriate legends placed upon them to reflect the restrictions on transfer set forth on the Amended and Restated Right of First Refusal and Co-Sale Agreement.

(l) Board of Directors. Upon the Initial Closing, the authorized size of the Board of Directors of the Company shall be seven members, and the Board shall consist of (i) three directors nominated by the Investors, voting as a separate class, one of whom shall be designated by the Corporate Opportunities Fund, L.P. and who shall initially be James C. Gale, one of whom shall be designated by Wheatley MedTech Partners L.P., and who shall initially be David Dantzker, and one of whom shall be designated by SMH Hydro Med II, LLC; (ii) one director nominated by the holders of Common Stock, voting as a separate class; (iii) two outside directors, who have relevant industry experience and who are not employees of the Company or Parent or otherwise would not be considered independent, nominated by mutual agreement of (X) the holders of Common Stock, (Y) the holders of the Series A Preferred, and (Z) the Investors; and (iv) one director who also is a member of the Company's senior management.

(m) Legal Opinion. The Investors shall have received from Pepper Hamilton, LLP, legal counsel to the Company, an opinion addressed to them, dated as of the Initial Closing Date, in substantially the form attached hereto as EXHIBIT F.

(n) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Investors and their counsel, and the Investors and their counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

(o) Due Diligence. The due diligence conducted by the Investors and their representatives in connection with the proposed transactions contemplated hereby shall not have caused the Investors or their representatives to become aware of any material facts relating to the business, assets, results of operations, condition (financial or otherwise), or prospects of the Company which, in the good faith judgment of the Investors, make it inadvisable for the Investors to proceed with the consummation of the transactions contemplated hereby.

(p) No Material Adverse Change. The business, assets, financial condition, operations, results of operations and prospects of the Company are substantially as have been represented to the Investors. Since March 31, 2003, there shall not

have been any material adverse change in the business, assets, results of operations, condition (financial or otherwise) or prospects of the Company.

5.2 Conditions to Obligations of the Company at the Closing. The Company's obligation to issue and sell the Shares is subject to the satisfaction, on or prior to the Closing, of the following conditions:

(a) Representations and Warranties True. The representations and warranties in
Section 4 made by the Investors shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date.

(b) Minimum Investment. The Company shall have received at least $11,000,000 in aggregate gross proceeds from the Investors' subscriptions for Series B Convertible Preferred Stock, exclusive of the Deferred Investment by GP Strategies Corporation pursuant to Section 1.2(b).

(c) Performance of Obligations. The Investors shall have performed and complied with all agreements and conditions herein required to be performed or complied with by Investors on or before the Closing.

(d) Filing of Certificate. The Certificate shall have been filed with the Secretary of State of the State of Delaware.

(e) Securities Exemption. The offer and sale of the Shares to the Investors pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act and the registration requirements and/or qualification requirements of all other applicable state securities laws.

(f) Amended and Restated Investor Rights Agreement. The Amended and Restated Investor Rights Agreement substantially in the form attached hereto as EXHIBIT C shall have been executed and delivered by the Investors.

(g) Amended and Restated Right of First Refusal and Co-Sale Agreement. The Amended and Restated Right of First Refusal and Co-Sale Agreement substantially in the form attached hereto as EXHIBIT D shall have been executed and delivered by the parties thereto.

(h) Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Related Agreements (except for such as may be properly obtained subsequent to the Closing).

(i) Board of Directors and Stockholder Approval. The Board of Directors and the holders of the requisite number of the issued and outstanding shares of capital stock of the Company shall have approved the transactions contemplated by this Agreement.

5.3 Conditions to Deferred Investor's Obligations at the Deferred Closing. The Deferred Investor's obligations to purchase the Shares at the Deferred Closing are subject to the satisfaction, at or prior to the Deferred Investment Closing Date, of the following conditions:

(a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct as of the Deferred Closing Date with the same force and effect as if they had been made as of the Deferred Closing Date, and the Company shall have performed all obligations and conditions required to be performed or observed by it under this Section 5.3 on or prior to the Deferred Closing; provided, however, that the Company may update the Schedule of Exceptions as of the Deferred Closing Date and for purposes of the representations and warranties set forth in Section 3.5, the term "Year to Date Statements" shall refer to the unaudited balance sheet of the Company as of the last day of the calendar quarter ended at least 30 days prior to the Deferred Investment Closing Date, and the related unaudited statements of income, partner's capital, and cash flows for the three, six, or nine-month period then ended.

(b) Legal Investment. On the Deferred Closing Date, the sale and issuance of the Shares proposed to be issued to the Deferred Investor, and the proposed issuance of the Conversion Shares issuable upon conversion thereof, shall be legally permitted by all laws and regulations to which the Deferred Investor and the Company are subject.

(c) Consents, Permits and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for the sale and issuance of the Shares to the Deferred Investor (except for such as may be properly obtained subsequent to the Deferred Closing).

(d) Corporate Documents. The Company shall have delivered to the Deferred Investor or its counsel copies of all corporate documents of the Company as the Deferred Investor shall reasonably request.

(e) Reservation of Conversion Shares. The Conversion Shares issuable upon conversion of the Shares proposed to be issued to the Deferred Investor shall have been duly authorized and reserved for issuance upon such conversion.

(f) Compliance Certificate. The Company shall have delivered to the Deferred Investor a Compliance Certificate, executed by the President of the Company, dated the Deferred Closing Date, to the effect that the conditions specified in subsections (a), (c) and (e) of this Section 5.3 have been satisfied.

(g) Secretary's Certificate. The Deferred Investor shall have received from the Company's Secretary, a certificate having attached thereto (i) the Certificate as in effect at the time of the Deferred Closing, (ii) the Company's Bylaws as in effect at the time of the Deferred Closing, (iii) the resolutions approved by the Board of Directors of the Company authorizing the transactions contemplated hereby, (iv) good standing certificates (including tax good standing) with respect to the Company from the applicable authority(ies) in Delaware and any other jurisdiction in which the Company is qualified to do business, dated a

recent date before the Deferred Closing, and (v) all required stockholder consents to the transactions as described in this Agreement.

(h) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Deferred Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Deferred Investor and its counsel, and the Deferred Investor and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.

5.4 Conditions to Obligations of the Company at the Deferred Closing. The Company's obligation to issue and sell the Shares comprising the Deferred Investment to the Deferred Investor is subject to the satisfaction, on or prior to the Deferred Closing, of the following conditions:

(a) Representations and Warranties True. The representations and warranties in
Section 4 made by the Deferred Investor shall be true and correct in all material respects at the date of the Deferred Closing, with the same force and effect as if they had been made on and as of said date.

(b) Performance of Obligations. The Deferred Investor shall have performed and complied with all agreements and conditions herein required to be performed or complied with by the Deferred Investor on or before the Deferred Closing.

(c) Securities Exemption. The offer and sale of the Shares to the Deferred Investor pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act and the registration requirements and/or qualification requirements of all other applicable state securities laws.

(d) Amended and Restated Investor Rights Agreement. The Amended and Restated Investor Rights Agreement in the form delivered to the Company by the Investors at the Closing shall have been executed and delivered by the Deferred Investor.

(e) Amended and Restated Right of First Refusal and Co-Sale Agreement. The Amended and Restated Right of First Refusal and Co-Sale Agreement in the form delivered to the Company by the Investors at the Closing shall have been executed and delivered by the Deferred Investor.

(f) Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Related Agreements (except for such as may be properly obtained subsequent to the Deferred Closing).

6. MISCELLANEOUS.

6.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of New York, without reference to principles of conflict of laws.

6.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Investors and the closing of the transactions contemplated hereby for a period of one year following the Deferred Investment Period. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument.

6.3 Expenses. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement, the Certificate and the Related Agreements.

6.4 Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

6.5 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time.

6.6 Entire Agreement. This Agreement, the exhibits and schedules hereto, the Related Agreements and the other documents delivered pursuant hereto, all of even date herewith between the parties hereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein.

6.7 Severability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

6.8 Amendment and Waiver.

(a) This Agreement may be amended or modified only upon the written consent of the Company and the Investors.

(b) The obligations of the Company and the rights of the holders of the Shares and the Conversion Shares under this Agreement may be waived only with the written consent of the holders of at least a majority of the Shares (treated as if converted and including any Conversion Shares into which the Shares have been converted that have not been sold to the public). The rights of the Company under this Agreement may be waived only by the prior written consent of the Company.

6.9 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, the Related Agreements or the Certificate, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Investors' part of any breach, default or noncompliance under this Agreement, the Related Agreements or under the Certificate or any waiver on such party's part of any provisions or conditions of the Agreement, the Related Agreements or the Certificate must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, the Related Agreements, the Certificate, by law, or otherwise afforded to any party, shall be cumulative and not alternative.

6.10 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof and to the Investors at the addresses set forth on EXHIBIT A attached hereto or at such other address as the Company or the Investors may designate by ten days advance written notice to the other parties hereto.

6.11 Titles and Subtitles. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

6.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

6.13 Broker's Fees. Each party hereto represents and warrants that except for Sanders Morris Harris Inc., a Texas corporation, no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 6.13 being untrue.

6.14 Pronouns. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have executed the PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

COMPANY:                                INVESTORS:

HYDRO MED SCIENCES, INC.
                                        SMH HYDRO MED II, LLC


By:                                     By:
    -------
Name: David S. Tierney                  Name: James C. Gale
Title:   President                      Title:   Manager

                                        CORPORATE OPPORTUNITIES FUND, L.P.

                                        By:  SMM Corporate Management, LLC,
                                                General Partner


                                        By:  ________________________________
                                                Name: James C. Gale
                                                Title: Manager
                                        CORPORATE OPPORTUNITIES FUND
                                                  (INSTITUTIONAL), L.P.

                                        By:  SMM Corporate Management, LLC,
                                                General Partner


                                        By:  ________________________________
                                                Name: James C. Gale
                                                Title: Manager

                                        LIFE SCIENCES OPPORTUNITIES FUND, L.P.

                                        By:  SMH Life Sciences Management, LLC,
                                                General Partner


                                        By:  ________________________________
                                                Name: James C. Gale
                                                Title: Manager

                                        WHEATLEY MEDTECH PARTNERS L.P.

                                        By:  Wheatley MedTech Partners LLC,
                                                General Partner

                                        By: ________________________________
                                        Name:__________________________
                                        Title:___________________________

                                        WHEATLEY ASSOCIATES III, L.P.

                                        By:  Wheatley Partners III, LLC,
                                                General Partner

                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________

                                        WHEATLEY PARTNERS III, L.P.

                                        By:  Wheatley Partners III, LLC,
                                                General Partner

                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________

                                        WHEATLEY FOREIGN PARTNERS III, L.P.

                                        By:  Wheatley Partners III, LLC,
                                                General Partner

                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________

                                        PALADIN LABS INC.


                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________


                                        FALCON SEABOARD HOLDINGS, L.P.


                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________


                                        DEFERRED INVESTOR:

                                        GP STRATEGIES CORPORATION


                                        By: ________________________________
                                               Name:__________________________
                                               Title:___________________________

Schedule of Investors                                                 Exhibit A

Certificate                                                           Exhibit B

Amended and Restated Investor Rights Agreement                        Exhibit C

Amended and Restated Right of First Refusal and Co-Sale Agreement     Exhibit D

List of Stockholders, Optionholders and Warrantholders                Exhibit E

Form of Legal Opinion                                                 Exhibit F

                                                                      AGGREGATE
NAME AND ADDRESS                           SHARES           PURCHASE PRICE

SMH Hydro Med II LLC
600 Travis, Suite 3100                    4,358,620          $3,160,000.00
Houston, Texas 77002
       Attention: John Malanga

Corporate Opportunities Fund, L.P.
c/o SMM Corporate Management LLC           863,448             $626,000.00
126 East 56 Street
New York, New York 10022
       Attention: James C. Gale
                                          4,653,793          $3,374,000.00
Corporate Opportunities Fund
         (Institutional), L.P.
c/o SMM Corporate Management LLC
126 East 56 Street
New York, New York 10022
       Attention: James C. Gale

Wheatley MedTech Partners L.P.
80 Cuttermill Road, Suite 311              689,655             $499,999.88
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn.: David R. Dantzker, M.D.
          Lawrence Wagenberg

Wheatley Partners III, L.P.               964,964*            $699,598.90*
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn.: David R. Dantzker, M.D.
          Barry K. Fingerhut

Wheatley Associates III, L.P.
80 Cuttermill Road, Suite 311             203,822*            $147,770.95*
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn.: David R. Dantzker, M.D.
          Barry K. Fingerhut

Wheatley Foreign Partners III, L.P.
80 Cuttermill Road, Suite 311             210,524*            $152,629.90*
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn.: David R. Dantzker, M.D.
          Barry K. Fingerhut

Life Sciences Opportunities Fund, L.P.
c/o SMM Corporate Management LLC          1,379,310          $1,000,000.00
126 East 56 Street
New York, New York 10022
Attention: James C. Gale

Paladin Labs, Inc.
6111 Royalmount Avenue                    1,379,310          $1,000,000.00
Suite 102
Montreal, Quebec H4P 2T4
Attention:  Samira Sakhia


Falcon Seaboard Holdings, L.P.
109 North Post Oak Lane                    468,865             $340.000.00
Houston, Texas 77024
Attention: Gene Dewhurst


GP Strategies Corporation**
9 West 57th Street                       6,896,551**       $5,000,000.00**
New York, New York 10019
Attention: Andrea Kantor

* Wheatley Partners III, L.P., Wheatley Associates II, L.P., and Wheatley Foreign Partners III, L.P. have the right to purchase up to an additional 1,379,310 Shares on or before June 30, 2003.

** Subject to exercise of option granted to GP Strategies Corporation (or an affiliated entity of GP Strategies Corporation) to purchase all or a portion of its $5,000,000 allocation on or before March 31, 2004, and fund such purchase within 90 days following its exercise.

                                                              Series A
                                                             Convertible
                          Common Stock Preferred Stock
                                      --------------------------------------
GP Strategies Corporation              10,000,000.00
                                                          -
SMH Hydro Med, LLC
                                      -                    4,000,000.00
Corporate Opportunities Fund, LP
                                      -                       313,000.00
Corporate Opportunities Fund
(Institutional), LP                   -                    1,687,000.00
Wheatley MedTech Partners, LP
                                      -                    1,000,000.00
                                      --------------------------------------

10,000,000.00 7,000,000.00

       Incentive Stock Options             Qualified        Non-Qualified        Total          Vested     Vested Shares
--------------------------------------------------------------------------------------------------------------------------
Nadia A. Coyman                                 2,000.00          -                2,000.00         25.00%          500.00

Cuza                                            5,000.00          -                5,000.00         25.00%        1,250.00

Stephenie Decker                                7,000.00          -                7,000.00         25.00%        1,750.00

Daniel J. Hayes                                30,000.00          -               30,000.00         25.00%        7,500.00

William Jimenez                                12,000.00          -               12,000.00         25.00%        3,000.00

Nelva Jolly                                    2,500.00           -                2,500.00         25.00%          625.00

Renee King                                    20,000.00           -               20,000.00         25.00%        5,000.00

David Kuchler                                 10,000.00           -               10,000.00         25.00%        2,500.00

Scott Kuo                                     18,000.00           -               18,000.00         25.00%        4,500.00

Petr Kuzma                                   100,000.00           -              100,000.00         25.00%       25,000.00

Kathy Long                                     7,000.00           -                7,000.00         25.00%        1,750.00

Judith Pearson                                 4,000.00           -                4,000.00         25.00%        1,000.00

Kevin Reed                                     3,000.00           -                3,000.00         25.00%          750.00

Matthew L. Rue III                           300,000.00           -              300,000.00         25.00%       75,000.00

David S. Tierney                             400,000.00        600,000.00      1,000,000.00         25.00%      250,000.00

John Spitznagel                               80,000.00           -               80,000.00         25.00%       20,000.00

Hubert Huckel                                 80,000.00           -               80,000.00         25.00%       20,000.00

Ogden Reid                                    40,000.00           -               40,000.00         25.00%       10,000.00
                                      ------------------------------------------------------------------------------------
                                           1,120,500.00        600,000.00      1,720,500.00                     380,125.00
                                      ====================================================================================

Upon the Company's receipt of Regulatory Approval (as defined in the License Agreement dated October 3, 2002 (the "License Agreement"), between the Company and Paladin Labs Inc. ("Paladin")) to market the Product (as defined in the License Agreement) within Canada, the Company shall have the option to issue and sell to Paladin, and upon the exercise of such option by the Company, Paladin shall purchase from the Company, (1) such number of shares of the same class and series of capital stock that were sold in the then most recently completed equity financing of the Company as is equal to US$500,000 divided by the per share price paid in such financing, or (2) if the Company's common stock is then listed on a national securities exchange or is quoted on Nasdaq or another quotation and reporting service, then such number of shares of common stock as is equal to US$500,000 divided by the then current market price of the common stock, for an aggregate purchase price of US$500,000.

Exhibit 10.33

AMENDMENT NO. 1 TO

series B convertible preferred stock

PURCHASE AGREEMENT

This Amendment No. 1 to Stock Purchase Agreement (this "Amendment") is made and entered into as of November 18, 2003, by and among Valera Pharmaceuticals, Inc., a Delaware corporation (f/k/a Hydro Med Sciences, Inc.) (the "Company"), and the investors whose names and addresses are set forth on the signature pages hereto (the "Investors"), and amends the Stock Purchase Agreement dated May 30, 2003 among the Company and the Investors (the "Agreement").

RECITALS

The Company and the Investors desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment..

AGREEMENT

In consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows:

1. Capitalized Terms. All capitalized terms used herein that are not otherwise defined herein shall have the meanings assigned to them in the Agreement unless the context hereof requires otherwise.

2. Section 1.2(b). Section 1.2(b) of the Agreement is deleted in its entirety and replaced with the following:

(b) Subject to the terms and conditions hereof, GP Strategies Corporation, a Delaware corporation, or an affiliated entity (the "Deferred Investor" or the "Parent"), shall have the option to purchase up to 6,896,551 shares of a series of Preferred Stock to be designated by the Company upon the exercise of this option by the Deferred Investor (the "Series B-1 Preferred Stock") at a purchase price of $0.725 per share (the "Deferred Investment") during the period (the "Deferred Investment Period") commencing on the date hereof and ending on the first to occur of: (i) March 31, 2004, (ii) the date an Acquisition or Transfer (as defined in the Certificate) is consummated, or (iii) the date the Series B Preferred stock is automatically converted into Common Stock as provided in Section 6(b) of Article 4(C)(2) of the Certificate. The Series B-1 Preferred Stock shall be identical to the Series B Convertible Preferred Stock except that the Series B-1 Preferred Stock shall be non-voting stock and shall be convertible into shares of non-voting Common Stock; provided that (x) upon the sale or transfer of any shares of Series B-1 Preferred Stock to any person or entity not affiliated with the Deferred Investor (as determined pursuant to 13 C.F.R. 121.103) (a "Non-Affiliate"), such shares of Series B-1 Preferred Stock thereafter shall be convertible

into shares of voting Common Stock and (y) upon the sale or transfer of any shares of non-voting Common Stock to any Non-Affiliate, such shares of non-voting Common Stock shall automatically be converted into shares of voting Common Stock. The holders of shares of Series B-1 stock and shares of non-voting Common Stock shall not (A) have the right to vote such shares for the election of directors or any other matters submitted to the stockholders of the Company, (B) be entitled to elect any members of the Board of Directors of the Company on account of such shares and (C) be entitled to vote as a separate class on any matters except as required by law. If the Deferred Investor exercises its option to purchase the Deferred Investment, the Company hereby agrees to issue and sell to the Deferred Investor, and the Deferred Investor agrees to purchase from the Company, the number of shares of Series B-1 Preferred Stock that the Deferred Investor elects to purchase at the Deferred Closing (as hereinafter defined) on the terms and conditions set forth in this Agreement. The Company shall give the Deferred Investor at least 60 days prior written notice of the anticipated closing date of any Qualified Public Offering (as defined in the Certificate).

3. References. With respect to each reference in the Agreement to the Deferred Closing, the Agreement is amended by replacing all references to the "Shares" with "shares of Series B-1 Preferred Stock."

4. Rights. Except as set forth in Section 2 above with respect to voting rights, the holders of shares of Series B-1 Preferred Stock shall have all of the rights and preferences of the holders of shares of Series B Preferred Stock, including all such rights under the Amended and Restated Investor Rights Agreement and the Amended and Restated Right of First Refusal and Co-Sale Agreement.

5. No Other Amendment. Except as specifically amended pursuant to this Amendment, the Agreement remains in full force and effect in accordance with its terms.

6. Governing Law. This Amendment shall be governed in all respects by the laws of the State of Delaware without regard to the conflicts of laws principles of any jurisdiction.

7. Counterparts. This Amendment may be executed in any number of counterparts, including by facsimile signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have executed this AMENDMENT NO. 1 TO PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

COMPANY:                           INVESTORS:

HYDRO MED SCIENCES, INC.
                                   SMH HYDRO MED II, LLC


By:                                By:
    -------
Name: David S. Tierney             Name: James C. Gale
Title:   President                 Title:   Manager

                                   CORPORATE OPPORTUNITIES FUND, L.P.

                                   By:  SMM Corporate Management, LLC,
                                           General Partner


                                   By:  ________________________________
                                           Name: James C. Gale
                                           Title: Manager
                                   CORPORATE OPPORTUNITIES FUND
                                             (INSTITUTIONAL), L.P.

                                   By:  SMM Corporate Management, LLC,
                                           General Partner


                                   By:  ________________________________
                                           Name: James C. Gale
                                           Title: Manager

                                   LIFE SCIENCES OPPORTUNITIES FUND, L.P.

                                   By:  SMH Life Sciences Management, LLC,
                                           General Partner


                                   By:  ________________________________
                                           Name: James C. Gale
                                           Title: Manager

                                   WHEATLEY MEDTECH PARTNERS L.P.

                                   By:  Wheatley MedTech Partners LLC,
                                           General Partner

                                   By: __________________
                                   Name:__________________________
                                   Title:___________________________

                                   WHEATLEY ASSOCIATES III, L.P.

                                   By:  Wheatley Partners III, LLC,
                                           General Partner

                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________

                                   WHEATLEY PARTNERS III, L.P.

                                   By:  Wheatley Partners III, LLC,
                                           General Partner

                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________

                                   WHEATLEY FOREIGN PARTNERS III, L.P.

                                   By:  Wheatley Partners III, LLC,
                                           General Partner

                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________

                                   PALADIN LABS INC.


                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________


                                   FALCON SEABOARD HOLDINGS, L.P.


                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________


                                   DEFERRED INVESTOR:

                                   GP STRATEGIES CORPORATION


                                   By: ________________________________
                                          Name:__________________________
                                          Title:___________________________

Exhibit 10.34

HYDRO MED SCIENCES, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

May 30, 2003

                                TABLE OF CONTENTS

                                                                          PAGE

SECTION 1         GENERAL...................................................1

         1.1      Definitions...............................................1

SECTION 2         RESTRICTIONS ON TRANSFER; REGISTRATION....................3

         2.1      Restrictions on Transfer..................................3

         2.2      Demand Registration.......................................5

         2.3      Piggyback Registrations...................................6

         2.4      Form S-2 and S-3 Registration.............................7

         2.5      Expenses of Registration..................................9

         2.6      Obligations of the Company................................9

         2.7      Termination of Registration Rights.......................11

         2.8      Delay of Registration; Furnishing Information............11

         2.9      Indemnification..........................................11

         2.10     Assignment of Registration Rights........................13

         2.11     Amendment of Registration Rights.........................14

         2.12     Limitation on Subsequent Registration Rights.............14

         2.13     "Market Stand-Off" Agreement.............................14

         2.14     Agreement to Furnish Information.........................14

         2.15     Rule 144 Reporting.......................................14

SECTION 3         COVENANTS................................................15

         3.1      Basic Financial Information and Reporting................15

         3.2      Inspection Rights........................................15

         3.3      Confidentiality of Records...............................16

         3.4      Reservation of Common Stock..............................16

         3.5      Stock Vesting............................................16

         3.6      Special Relationships of Prospective Employees...........16

         3.7      Directors' Liability and Indemnification.................17

         3.8      Reimbursement of Expenses................................17

         3.9      Qualified Small Business.................................17

         3.10     Election of Directors....................................17

         3.11     Observer Rights..........................................17

         3.12     Termination of Covenants.................................18

SECTION 4         PREEMPTIVE RIGHTS........................................18

         4.1      Subsequent Offerings.....................................18

         4.2      Exercise of Preemptive Rights............................18

         4.3      Termination and Waiver of Preemptive Right...............19

         4.4      Transfer of Preemptive Rights............................19

         4.5      Excluded Securities......................................19

SECTION 5         MISCELLANEOUS............................................20

         5.1      Governing Law............................................20

         5.2      Survival.................................................20

         5.3      Successors and Assigns...................................20

         5.4      Entire Agreement.........................................20

         5.5      Severability.............................................20

         5.6      Amendment and Waiver.....................................20

         5.7      Delays or Omissions......................................21

         5.8      Notices..................................................21

         5.9      Attorneys' Fees..........................................21

         5.10     Titles and Subtitles.....................................21

         5.11     Additional Investors.....................................21

         5.12     Counterparts.............................................22

         5.13     Joinder of Spouses.......................................22

HYDRO MED SCIENCES, INC.

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (this "Agreement") is entered into as of May 30, 2003, by and among HYDRO MED SCIENCES, INC., a Delaware corporation (the "Company"), the stockholders of the Company listed as "Common Stock Investors" on Exhibit A hereto (collectively, the "Common Stock Investors", and each individually, a "Common Stock Investor"), the investors listed as the "Series B Investors" on Exhibit A hereto (the "Series B Investors"), and the stockholders of the Company listed as "Series A Investors" on Exhibit A hereto (the "Series A Investors" and, together with the Common Stock Investors and the Series B Investors, the "Investors").

RECITALS

The Series B Investors are purchasing shares of the Company's Series B Convertible Preferred Stock pursuant to that certain Stock Purchase Agreement (the "Purchase Agreement") of even date herewith (the "Financing").

The obligations in the Purchase Agreement are conditioned upon the execution and delivery of this Agreement.

In connection with the consummation of the Financing, the parties desire to enter into this Agreement in order to grant registration, information rights and other rights to the Investors as set forth below.

AGREEMENT

In consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties agree hereto as follows:

1. GENERAL.

1.1. Definitions. As used in this Agreement the following terms shall have the following respective meanings:

"Board of Directors" means the Company's Board of Directors.

"Certificate" means the Company's Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on May 30, 2003.

"Common Stock" means the Company's common stock, par value $.001 per share.

"Equity Securities" means (i) any Common Stock, Preferred Stock, or other security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock, or other security of the Company (including any option to purchase such a convertible security),

(iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock, or other security of the Company, or (iv) any such warrant or right.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Form S-2" means such form under the Securities Act as in effect on the date hereof or any successor or similar registration form under the Securities Act subsequently adopted by the SEC that permits inclusion or incorporation of certain information by reference to other documents filed by the Company with the SEC.

"Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor or similar registration form under the Securities Act subsequently adopted by the SEC, which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

"GP Strategies" means GP Strategies Corporation, a Delaware corporation.

"Holder" means any person owning of record Registrable Securities, or securities convertible into Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities or securities in accordance with Section 2.10 hereof.

"Preferred Stock" means the Company's preferred stock, par value $.001 per share.

"Qualified Offering" a firm commitment underwritten public offering of the Company's Common Stock, pursuant to an effective registration statement under the Securities Act (i) at a public offering price per share, before deductions for underwriter discounts and commissions, of at least three
(3) times the higher of the then-applicable conversion price of the Series B Convertible Preferred Stock or Series A Convertible Preferred Stock, and (ii) with aggregate proceeds to the Company of at least $25,000,000 before deductions for underwriter discounts and commissions and any and all expenses of such underwritten offering incurred by the Company.

"Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document.

"Registrable Securities" means (a) Common Stock of the Company issued or issuable upon conversion of the Shares, (b) for purposes of Section 2.3 and 2.4 only (and to the extent such provisions relate to Section 2.3 or 2.4, Sections 2.1, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 2.12, 2.13, 2.14, 2.15 or Section 5), Common Stock owned by GP Strategies, and (c) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 2 of this Agreement are not assigned.

"Registrable Securities then outstanding" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities, excluding any Registrable Securities as to which the rights under
Section 2 have terminated pursuant to Section 2.7.

"Registration Expenses" mean all expenses incurred by the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company).

"SEC" or "Commission" means the Securities and Exchange Commission.

"Securities Act" means the Securities Act of 1933, as amended.

"Selling Expenses" mean all underwriting discounts and selling commissions applicable to the sale.

"Series A Convertible Preferred Stock" means shares of the Company's Preferred Stock designated as Series A Convertible Preferred Stock, par value $.001 per share.

"Series B Convertible Preferred Stock" means shares of the Company's Preferred Stock designated as Series B 10% Convertible Preferred Stock, par value $.001 per share.

"Shares" mean (i) Series B Convertible Preferred Stock issued pursuant to the Purchase Agreement held by the Series B Investors hereto and their permitted assigns, (ii) Series A Convertible Preferred Stock held by the Series A Investors and their permitted assigns, and (iii) for purposes of
Section 2.3 and 2.4 only (and to the extent such provisions relate to Section 2.3 or 2.4, Sections 2.1, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 2.12, 2.13 and 2.14 or Section 5), shares of Common Stock held by GP Strategies and its permitted assigns.

"Special Registration Statement" means a registration statement relating to any employee benefit plan or with respect to any corporate reorganization or other transaction under Rule 145 of the Securities Act.

2. RESTRICTIONS ON TRANSFER; REGISTRATION.

2.1. Restrictions on Transfer.

(a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until:

(i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

(ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances.

Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement, detailed statement or opinion of counsel shall be necessary for a transfer by a party hereto which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, (D) to the party's family member or trust for the benefit of an individual party, (E) an entity which is controlled by, controls or is under common control with the transferor (an "Affiliate"), or (F) a Common Stock Investor to another Common Stock Investor or then current employees of the Company; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he, she or it were an original party hereunder.

(b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or under any other agreement):

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE STATE SECURITIES OR BLUE SKY LAWS OF ANY JURISDICTION. SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.

(c) If such Shares or Registrable Securities are proposed to be disposed of, the Company shall be obligated to reissue promptly certificates without the foregoing legend at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities may lawfully be so disposed of thereafter without registration, qualification, or legend.

2.2. Demand Registration.

(a) Subject to the conditions of this Section 2.2, if the Company shall receive a written request from a Holder or Holders of at least 50% of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of a majority of the Registrable Securities owned by such Initiating Holders, then the Company shall, within 30 days of receipt thereof, give written notice of such request to all Holders and, subject to the limitations of this Section 2.2, use its commercially reasonable efforts to file a registration statement under the Securities Act with the Commission covering all Registrable Securities that the Initiating Holders request to be registered.

(b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company shall include such information in the written notice referred to in
Section 2.2(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company (which underwriter or underwriters shall be reasonably acceptable to a majority in interest of the Initiating Holders). Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated first to the Holders who are holders of Series B Convertible Preferred Stock (or shares of Common Stock issued upon conversion thereof) and Series A Convertible Preferred Stock (or shares of Common Stock issued upon conversion thereof) on a pro rata basis based on the total number of Registrable Securities held by such Holders of Series B Convertible Preferred Stock and Series A Convertible Preferred Stock; provided, however, that the number of shares of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of the Company are first entirely excluded from the underwriting and registration. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.

(c) The Company shall not be required to effect a registration pursuant to this
Section 2.2:

(1) prior to the earlier of (A) six months following a Qualified Offering, and (B) December 31, 2004;

(2) after the Company has effected two (2) registrations pursuant to Section 2.2(a), and such registrations have been declared or ordered effective;

(3) during the period starting with the date of filing of, and ending on the date 90 days following the effective date of, any registration statement (other than a Special Registration Statement) of the Company;

(4) if within 30 days of receipt of a written request from Initiating Holders pursuant to Section 2.2(a), the Company gives notice to the Holders of the Company's intention to make a Qualified Offering within 90 days;

(5) if the Company shall furnish to the Initiating Holders, a certificate signed by the Chairman of the Board of Directors stating that in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve-month period; or

(6) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 2.4 below.

2.3. Piggyback Registrations. The Company shall notify all Holders of Registrable Securities in writing at least 20 days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding Special Registration Statements) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within 15 days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.

(a) Underwriting. If the registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors

require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders who are holders of Series B Convertible Preferred Stock (or shares of Common Stock issued upon conversion thereof) and Series A Convertible Preferred Stock (or shares of Common Stock issued upon conversion thereof) on a pro rata basis based on the total number of Registrable Securities held by such Holders of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; and third, to the Holders who are holders of Common Stock (issued otherwise than upon conversion of Series B Convertible Preferred Stock or Series A Convertible Preferred Stock) on a pro rata basis based on the total number of Registrable Securities held by such Holders; provided, however, that the number of shares of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of the Company (other than securities being offered by the Company and Registrable Securities being offered by the Holders) are first entirely excluded from the underwriting and registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder that is a partnership or corporation, the partners, retired partners, stockholders and Affiliates of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing person shall be deemed to be a single "Holder," and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares of Registrable Securities owned by all entities and individuals included in such "Holder," as defined in this sentence.

(b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with
Section 2.5 hereof.

2.4. Form S-2 and S-3 Registration. In case the Company shall receive from a Holder or Holders of at least 50% of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-2 or Form S-3 or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will:

(a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and

(b) as soon as practicable, use its best efforts to file such registration statement as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4:

(i) if Form S-2 or Form S-3, as the case may be, is not available for such offering by the Holders, or

(ii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors stating that in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company and its stockholders for such Form S-2 or Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the registration statement for a period of not more than 90 days after receipt of the request of the Holder or Holders under this Section 2.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve-month period, or

(iii) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance, or

(iv) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such Form S-2 or Form S-3 registration statement, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $3,000,000; or

(v) if the Company has filed a registration statement at the request of Holders under this Section 2.4 within the preceding six months.

(c) Subject to the foregoing, the Company shall file a Form S-2 or Form S-3 registration statement, as the case may be, covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 2.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 2.2 or 2.3, respectively.

(d) If the registration statement under which the Company gives notice under this Section 2.4 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Holders who are holders of Series B Convertible Preferred Stock (or shares

of Common Stock issued upon conversion thereof) and Series A Convertible Preferred Stock (or shares of Common Stock issued upon conversion thereof) on a pro rata basis based on the total number of Registrable Securities held by such Holders of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock; and second, to the Holders who are holders of Common Stock issued other than upon conversion of the Series B Convertible Preferred Stock or Series A Convertible Preferred Stock on a pro rata basis based on the total number of Registrable Securities held by such Holders; provided, however, that the number of shares of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of the Company (other than securities being offered by the Company and Registrable Securities being offered by the Holders) are first entirely excluded from the underwriting and registration. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners, stockholders and Affiliates of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing person shall be deemed to be a single "Holder," and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares of Registrable Securities owned by all entities and individuals included in such "Holder," as defined in this sentence.

2.5. Expenses of Registration. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 2.2 or any registration under
Section 2.3 or Section 2.4 herein shall be borne by the Company; provided, however, that the Company shall not be required to pay any Registration Expenses incurred in connection with any registration, qualification or compliance proceedings begun pursuant to a request under Section 2.2 if such request is subsequently withdrawn by the Holders of a majority of the Registrable Securities to be included in such registration, qualification or compliance (in which case all participating Holders shall bear all such Registration Expenses). All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered and sold.

2.6. Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective (i) in the case of any registration under
Section 2.2, for up to 180 days or, if earlier, until the Holder or Holders have completed the distribution related thereto and (ii) in the case of any registration under Section 2.4, indefinitely or, if earlier, until the Holder or Holders have completed the distribution related thereto.

(b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in paragraph (a) above.

(c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

(d) Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included 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 the light of the circumstances then existing. The Company will use reasonable efforts to amend or supplement such prospectus in order to cause such prospectus not to include 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 the light of the circumstances then existing.

(g) Use its reasonable efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters.

(h) Use reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and to be qualified for trading on each system on which securities issued by the Company are from time to time qualified.

(i) Use its reasonable efforts to provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement and thereafter maintain such transfer agent and registrar.

(j) Use its reasonable efforts to provide a CUSIP number for all Registrable Securities, not later than the effective date of the applicable registration statement.

2.7. Termination of Registration Rights. All registration rights granted under Sections 2.2, 2.3, and 2.4 shall terminate and be of no further force and effect with respect to any Holder when all Registrable Securities held by and issuable to such Holder (and its Affiliates, partners, former partners, members and former members) may be sold under Rule 144 during any 90-day period.

2.8. Delay of Registration; Furnishing Information.

(a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this
Section 2.

(b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3, or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities.

2.9. Indemnification. In the event any Registrable Securities are included in a registration statement under Section 2.2, 2.3, or 2.4:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) 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, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will pay as incurred to each such Holder, partner, officer, director, underwriter or 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 indemnity agreement contained in this Section 2.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, or by any partner, member, officer, director, underwriter or controlling person of such Holder; and provided, further, that such indemnity shall not apply with respect to any

untrue statement or alleged untrue statement or omission or alleged omission in any preliminary or final prospectus if the prospectus (as amended or supplemented), as provided to the person claiming indemnification prior to the time the Company made the sale to the person making the claim of a Violation, did not contain such statement or alleged statement or omission or alleged omission.

(b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder in writing expressly for use in connection with such registration; and each such Holder will pay as incurred any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this
Section 2.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 2.9 exceed the net proceeds from the offering received by such Holder.

(c) Promptly after receipt by an indemnified party under this Section 2.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.9, but the omission so to deliver written notice to the

indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.9.

(d) If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the net proceeds from the offering received by such Holder.

(e) The obligations of the Company and Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this Agreement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.

2.10. Assignment of Registration Rights.

(a) The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (i) is a subsidiary, parent, Affiliate, general partner, limited partner, retired partner, member, retired member or shareholder of a Holder, (ii) is a Holder's family member or trust for the benefit of an individual Holder or (iii) acquires at least 100,000 shares of such Holder's Registrable Securities (as adjusted for any stock dividend, combination, splits, reorganization, and the like); provided, however, (A) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (B) such transferee shall agree to be subject to all restrictions set forth in this Agreement.

(b) Notwithstanding anything to the contrary contained in this Section 2.10, no assignment under Section 2.10(a) shall be valid if the transferee of the Registrable Securities of a Holder is determined in good faith by the Board of Directors to be a direct competitor of the Company.

2.11. Amendment of Registration Rights. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 2, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder.

2.12. Limitation on Subsequent Registration Rights. Other than as provided in
Section 5.11, after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of at least a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights pari passu or senior to those granted to the Holders hereunder.

2.13. "Market Stand-Off" Agreement. Each Holder hereby agrees that such Holder shall not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale of, any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed 180 days following the effective date of a registration statement of the Company filed under the Securities Act; provided that such agreement shall apply only to the Company's initial Qualified Offering.

2.14. Agreement to Furnish Information. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act.

2.15. Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to:

(a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public;

(b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and

(c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance

with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration.

3. COVENANTS.

3.1. Basic Financial Information and Reporting.

(a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied.

(b) As long as shares of Series B Convertible Preferred Stock, Series A Convertible Preferred Stock, and/or Registrable Securities issued therefor are outstanding, the Company shall deliver or provide to each Series B Investor and Series A Investor (so long as such Investor continues to hold 10% of the Shares originally purchased by said Series B Investor or Series A Investor and/or Registrable Securities issued therefor) of each respective class, and as long as GP Strategies holds at least 10% of the outstanding Common Stock, the Company shall deliver and provide to GP Strategies:

(i) Within 90 days after the end of each fiscal year of the Company, a balance sheet of the Company, as at the end of such fiscal year, and a statement of income and a statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Board of Directors; and

(ii) (A) At least 30 days prior to the beginning of each fiscal year, an annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto); and (B) within 20 days after the end of each quarter, a balance sheet of the Company as of the end of each such quarter, and a statement of income and a statement of cash flows of the Company for such quarter and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made.

3.2. Inspection Rights. As long as Series B Convertible Preferred Stock and Series A Convertible Preferred Stock, and/or Registrable Securities issued therefor are outstanding, each Series B Investor and Series A Investor (so long as such Investor continues to hold 10% of the Shares originally purchased by said Investor and/or Registrable Securities issued therefor), and as long as GP

Strategies holds at least 10% of the outstanding Common Stock, GP Strategies, after giving reasonable advance notice to the Company, shall have the right during normal business hours to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 3.2 with respect to a direct competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed.

3.3. Confidentiality of Records. Each Investor agrees to use, and to use its reasonable commercial efforts to insure that its authorized representatives use, the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information to any partner, Affiliate, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of and agrees to abide by the confidentiality provisions of this Section
3.3. Notwithstanding the foregoing, each Investor (and each employee, representative, or other agent of such Investor) may disclose to any and all persons, without limitations of any kind, the tax treatment and tax structure of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analysis) that are provided to such Investor relating to such tax treatment and tax structure.

3.4. Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Shares, all Common Stock issuable from time to time upon such conversion.

3.5. Stock Vesting. Except as otherwise provided by the Board of Directors, all stock options and other stock equivalents issued by the Company after the date of this Agreement to employees, directors, consultants and other service providers of the Company shall be subject to vesting as follows: (a) 25% of such stock shall vest at the end of the first year following the date of issuance, and (b) 75% of such stock shall vest on a monthly basis over the remaining three years. With respect to any shares of stock purchased by any such person, except as otherwise provided by the Board of Directors, the Company will enter into an agreement in connection with each such issuance of stock to an employee, director or consultant of the Company that provides that upon the termination of the employment or service of such employee, director or consultant, with or without cause with respect to any unvested shares or options owned or held by an employee, director or consultant of the Company, such unvested shares or options shall be forfeited to the Company or its assignee.

3.6. Special Relationships of Prospective Employees. The Company shall not hire or contract for the services, directly or indirectly, whether as an employee, independent contractor, consultant or in any other capacity, of any person who is a spouse, sibling, parent, child, or other family member of a current officer, director, employee, independent contractor or consultant to the Company without the unanimous consent of the Board of Directors of the Company.

3.7. Directors' Liability and Indemnification. The Company's Certificate of Incorporation and Bylaws shall provide (a) for elimination of the liability of directors to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law.

3.8. Reimbursement of Expenses. The Company shall reimburse each nonemployee member of the Board of Directors for all reasonable and customary actual expenses incurred in connection with their service as a member of the Board of Directors, including without limitation all actual travel and lodging expenses incurred in connection with the attendance by any such member at a meeting of the Board of Directors or any committee thereof.

3.9. Qualified Small Business. The Company will use its best efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Internal Revenue Code of 1986, as amended, any regulations promulgated thereunder and any similar state laws and regulations, and agrees not to repurchase any stock of the Company if such repurchase would cause the Shares not to so qualify as "Qualified Small Business Stock."

3.10. Election of Directors.

(a) In any election of directors of the Company, the Investors shall vote at any regular meeting or special meeting of stockholders of the Company (or by written consent) such number of shares of voting capital stock then owned by them (or as to which they then have voting power) as may be necessary to elect the following individuals to the Board of Directors:

(i) One director designated by the Corporate Opportunities Fund, L.P., who shall initially be James C. Gale;

(ii) One director designated by Wheatley MedTech Partners L.P.;

(iii) One director designated by GP Strategies;

(iv) One director designated by SMH Hydro Med II, LLC;

(v) Two directors who have relevant industry experience and are not employees of the Company or GP Strategies, nominated by mutual agreement of the Investors (the "Outside Directors"); and

(vi) The President or Chief Executive Officer of the Company.

(b) Any director nominated pursuant to Section 3.10(a)(i), (ii), (iii) or (iv) may be removed by, and shall not be removed except by, Corporate Opportunities Fund, L.P., Wheatley MedTech Partners L.P., GP Strategies, and SMH Hydro Med II, LLC, respectively.

3.11. Observer Rights. As long as SMH Hydro Med LLC or Paladin Labs, Inc., respectively, hold any Shares, the Company shall, if such Investors do not otherwise have a representative on the Board of Directors, invite a

representative of each such Investor to attend all meetings of its Board of Directors and the committees of the Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel.

3.12. Termination of Covenants. All covenants of the Company contained in
Section 3 of this Agreement shall expire and terminate as to each Investor upon the earlier of (a) the effective date of the registration statement pertaining to the initial Qualified Offering, or (b) upon (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions, including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Company or (ii) a sale of all or substantially all of the assets of the Company (a "Change in Control"); provided that in the event that the Company's stockholders of record as constituted immediately prior to any such transaction (on a fully diluted basis) will, immediately after such transaction (by virtue of securities issued as consideration for the Company's acquisition or sale or otherwise), hold at least 50% of the voting power of the surviving or acquiring entity, such transaction shall not be deemed to constitute a Change in Control.

4. PREEMPTIVE RIGHTS.

4.1. Subsequent Offerings. In the event the Company issues and sells Equity Securities (as defined below) other than the Equity Securities excluded by
Section 4.5 hereof, each Investor shall have a preemptive right to purchase such number of shares of Equity Securities necessary for such Investor to maintain its percentage ownership position in the Company on an as converted basis. Each Investor's preemptive share is equal to the ratio of (a) the number of shares of the Company's Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Series B Convertible Preferred Stock or Series A Convertible Preferred Stock) of which such Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Series B Convertible Preferred Stock, Series A Convertible Preferred Stock, or other security of the Company or upon the exercise of any outstanding warrants, options, or rights to subscribe to or purchase any Common Stock, Preferred Stock, or other security) immediately prior to the issuance of the Equity Securities.

4.2. Exercise of Preemptive Rights. If the Company issues any Equity Securities, it shall give each Investor written notice of such issuance, describing the Equity Securities and the price and the terms and conditions upon which the Company issued the same and shall provide each Investor with access to any information regarding such offering and the Company, provided to the purchasers of Equity Securities. Each Investor shall have 45 days from the giving of such notice to exercise its preemptive right to purchase Equity Securities for the price and upon the terms and conditions specified in the notice by giving

written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale.

4.3. Termination and Waiver of Preemptive Rights. The preemptive rights established by this Section 4 shall terminate following the Company's initial Qualified Offering.

4.4. Transfer of Preemptive Rights. The preemptive rights of each Investor under this Section 4 may be transferred to the same parties, subject to the same restrictions, as any transfer of registration rights pursuant to Section 2.10.

4.5. Excluded Securities. The preemptive rights established by this Section 4 shall have no application to any of the following Equity Securities:

(a) Up to 5,500,000 shares (as may be adjusted for any stock dividend, combinations, splits, recapitalizations and the like) of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued after the date hereof to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors;

(b) Up to 6,896,552 shares (as may be adjusted for any stock dividend, combinations, splits, recapitalizations and the like) of Series B Convertible Preferred Stock issued or to be issued after the date hereof to GP Strategies;

(c) capital stock of the Company issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement, and capital stock issued pursuant to or upon the exercise of any such rights or agreements granted after the date of this Agreement; provided that in the case of rights or agreements granted after the date of this Agreement, such rights or agreements were approved by the Board of Directors, including representatives designated by Sanders Morris Harris and Wheatley MedTech Partners L.P.;

(d) shares of Common Stock issued in connection with any stock split, dividend, combination, distribution, or recapitalization;

(e) shares of Common Stock issued in connection with any merger, consolidation, acquisition, or similar business combination approved by the Board of Directors;

(f) shares of Common Stock issued upon conversion of the Shares;

(g) any Equity Securities issued pursuant to any equipment leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution approved by the Board of Directors; and

(h) any Equity Securities issued in connection with strategic transactions involving the Company and other entities, including (i) joint ventures, manufacturing, marketing or distribution arrangements or (ii) technology transfer or development arrangements; provided that such strategic transactions

and the issuance of shares therein, has been approved by the Board of Directors.

5. MISCELLANEOUS.

5.1. Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware, without regard to principals of conflict of laws.

5.2. Survival. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument.

5.3. Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities in accordance with this Agreement, such notice to specify the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price.

5.4. Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. This Agreement replaces and supercedes the Investor Rights Agreement dated December 27, 2001 by and among the Company, the Common Investors, and the Series A Investors.

5.5. Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

5.6. Amendment and Waiver.

(a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the Holders of at least a majority of the Registrable Securities.

(b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the Holders of at least a majority of the Registrable Securities.

(c) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Series B Convertible Preferred Stock as "Series B Investors," "Holders," and parties hereto.

(d) For the purposes of determining the number of Holder or Investors entitled to vote or exercise any rights hereunder, the Company shall be entitled to rely solely on the list of record holders of its stock as maintained by or on behalf of the Company.

5.7. Delays or Omissions. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative.

5.8. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or Exhibit A hereto or at such other address as such party may designate by ten days advance written notice to the other parties hereto.

5.9. Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all reasonable fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

5.10. Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

5.11. Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares of Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an "Investor" hereunder.

5.12. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

5.13. Joinder of Spouses. The undersigned spouses of each Investor, if applicable, join in the execution and delivery of this Agreement for the express purpose of binding any interest he or she may have in the Shares or Common Stock.

[THIS SPACE INTENTIONALLY LEFT BLANK]

COMPANY:                            SERIES B INVESTORS:

HYDRO MED SCIENCES, INC.            SMH HYDRO MED II LLC


By:                                 By:
    -------
     Name: David S. Tierney                Name: James C. Gale
     Title: President                      Title:  Manager

                                    CORPORATE OPPORTUNITIES FUND, L.P.
                                    By:  SMM Corporate Management, LLC,
                                            General Partner


                                    By:  ________________________________
                                            Name: James C. Gale
                                            Title: Manager

                                    CORPORATE OPPORTUNITIES FUND (INSTITUTIONAL
                                    By:  SMM Corporate Management, LLC,
                                            General Partner


                                    By:  ________________________________
                                            Name: James C. Gale
                                            Title: Manager

                                    LIFE SCIENCES OPPORTUNITIES FUND, L.P.
                                    By:  SMH Life Sciences Management, LLC,
                                            General Partner


                                    By:  ________________________________
                                            Name: James C. Gale
                                            Title: Manager

                                    WHEATLEY MEDTECH PARTNERS L.P.
                                    By: Wheatley MedTech Partners LLC,
                                            General Partner


                                    By: ________________________________
                                           Name:__________________________
                                           Title:___________________________

                                    WHEATLEY PARTNERS III, L.P.
                                    By: Wheatley Partners III, LLC,
                                            General Partner


                                    By: ________________________________
                                           Name:__________________________
                                           Title:___________________________


                                    WHEATLEY ASSOCIATES III, L.P.
                                    By: Wheatley Partners III, LLC,
                                            General Partner


                                    By: ________________________________
                                           Name:__________________________
                                           Title:___________________________


                                    WHEATLEY FOREIGN PARTNERS III, L.P.
                                    By: Wheatley Partners III, LLC,
                                            General Partner


                                    By: ________________________________
                                           Name:__________________________
                                           Title:___________________________


                                    PALADIN LABS INC.


                                    By:_________________________________
                                          Name:____________________________
                                          Title: _____________________________

                                    FALCON SEABOARD HOLDINGS, L.P.


                                    By:_________________________________
                                          Name:____________________________
                                          Title: _____________________________

SERIES A INVESTORS:

SMH HYDRO MED LLC

By:
Name: James C. Gale
Title: Manager

CORPORATE OPPORTUNITIES FUND, L.P.
By: SMM Corporate Management, LLC,
General Partner

By: ________________________________
Name: James C. Gale
Title: Manager

CORPORATE OPPORTUNITIES FUND
(INSTITUTIONAL), L.P.
By: SMM Corporate Management, LLC,
General Partner

By: ________________________________
Name: James C. Gale
Title: Manager

WHEATLEY MEDTECH PARTNERS L.P.
By: Wheatley MedTech Partners LLC,
General Partner

By: ________________________________
Name:__________________________
Title:___________________________

COMMON STOCK INVESTORS:

GP STRATEGIES CORPORATION

By:_________________________________
Name:____________________________
Title:_____________________________

406523 000088 HOUSTON 256618.1 A-3

EXHIBIT A

common stock investors

GP Strategies Corporation
9 West 57th Street
New York, New York 10019

SERIES B INVESTORS

As of May 30, 2003

SMH Hydro Med II LLC
600 Travis, Suite 3100
Houston, Texas 77002
Attention: John Malanga

Corporate Opportunities Fund, L.P.
Corporate Opportunities Fund (Institutional), L.P. Life Sciences Opportunities Fund, L.P.
c/o SMM Corporate Management LLC
126 East 56 Street
New York, New York 10022
Attention: James C. Gale

Wheatley MedTech Partners L.P.
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn: David R. Dantzker, M.D./
Lawrence Wagenburg

Wheatley Partners III, L.P.
Wheatley Associates III, L.P.
Wheatley Foreign Partners, III, L.P.
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn: David R. Dantzker, M.D./
Barry K. Fingerhut

Paladin Labs, Inc.
6111 Royalmount Avenue
Suite 102
Montreal, Quebec H4P 2T4
Attention: Samira Sakhia

Falcon Seaboard Holdings, L.P.
109 N. Post Oak Lane
Houston, Texas 77024

GP Strategies Corporation
9 West 57th Street
New York, New York 10019
Attention: Andrea Kantor

Series A Investors

SMH Hydro Med LLC
600 Travis, Suite 3100
Houston, Texas 77002
Attention: John Malanga

Corporate Opportunities Fund, L.P.
Corporate Opportunities Fund (Institutional), L.P. c/o SMM Corporate Management LLC
126 East 56 Street
New York, New York 10022
Attention: James C. Gale

Wheatley MedTech Partners L.P.
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn: David R. Dantzker, M.D./
Lawrence Wagenburg

Exhibit 10.35

HYDRO MED SCIENCES, INC.

AMENDED AND RESTATED RIGHT OF FIRST REFUSAL
AND CO-SALE AGREEMENT

THIS AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT (this "Agreement") is made and entered into as of May 30, 2003, by and among Hydro Med Sciences, Inc., a Delaware corporation (the "Company"), each of the persons and entities listed on Exhibit A hereto (the "Investors"), each of the persons listed as "Common Stockholders" on Exhibit B hereto (the "Common Stockholders"), and each of the persons listed as "Series A Stockholders" on Exhibit C hereto (the "Series A Stockholders" and together with the Common Stockholders, the "Current Stockholders").

RECITALS

The Common Stockholders are the beneficial owners of an aggregate 10,000,000 shares of Common Stock of the Company.

The Series A Stockholders are the beneficial owners of an aggregate 7,000,000 shares of Series A Convertible Preferred Stock of the Company.

The Investors are purchasing shares of the Company's Series B Convertible Preferred Stock, pursuant to that certain Stock Purchase Agreement (the "Purchase Agreement") of even date herewith (the "Financing").

The obligations in the Purchase Agreement are conditioned upon the execution and delivery of this Agreement.

In connection with the consummation of the Financing, the Company, the Common Stockholders, the Series A Stockholders, and the Investors have agreed to the first refusal and co-sale rights as set forth below.

In consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows:

1. DEFINITIONS.

(a) "Common Stock" shall mean shares of the Company's common stock, par value $.001 per share, and shares of Common Stock issued or issuable upon conversion of the Company's outstanding Series A Convertible Preferred Stock or Series B Convertible Preferred Stock or exercise of any option, warrant, or other security or right of any kind convertible into or exchangeable for Common Stock.

(b) "Preferred Stock" shall mean shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock.

(c) "Preferred Stockholder" shall mean the Investors and the Series A Stockholders.

(d) "Series A Convertible Preferred Stock" shall mean shares of the Company's preferred stock, par value $.001 per share, designated as "Series A Convertible Preferred Stock."

(e) "Series B Convertible Preferred Stock" shall mean shares of the Company's preferred stock, par value $.001 per share, designated as "Series B 10% Convertible Preferred Stock."

(f) "Stock" shall mean shares of Common Stock or Preferred Stock now owned or subsequently acquired by the Current Stockholders or the Investors by gift, purchase, dividend, option exercise or any other means whether or not such securities are only registered in a Current Stockholder's or Investor's name or beneficially or legally owned by such Current Stockholder or Investor, including any interest of a spouse in any of the Stock, whether that interest is asserted pursuant to marital property laws or otherwise. The number of shares of Stock owned by each Current Stockholder as of the date hereof is set forth on Exhibit B or Exhibit C, as applicable, which Exhibit may be amended from time to time by the Company to reflect changes in the number of shares owned by the Current Stockholders, but the failure to so amend shall have no effect on such Stock being subject to this Agreement.

(g) "Stockholder" shall mean the holders of Stock, including the Investors and the Current Stockholders.

(h) For the purpose of this Agreement, the term "Transfer" shall include any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by request, merger or consolidation, devise or descent, or other transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, of any of the Stock.

2. NOTICE OF TRANSFERS.

(a) Before any Common Stockholder, in the case of Section 3 or 5 of this Agreement, or any Investor or Series A Stockholder, in the case of
Section 4 of this Agreement, may effect any Transfer of Stock, such Common Stockholder, Investor, or Series A Stockholder, as applicable (the "Selling Stockholder"), must give at the same time to (i) the Company, (ii) if a Common Stockholder, each other Common Stockholder (if any) and each Investor and Series A Stockholder, (iii) if an Investor, each other Investor and each Common Stockholder and Series A Stockholder, and (iv) if a Series A Stockholder, each other Series A Stockholder and each Investor and Common Stockholder, a written notice signed by the Selling Stockholder (the "Selling Stockholder's Notice") stating: (a) the Selling Stockholder's bona fide intention to transfer such Stock; (b) the number of shares of Stock proposed to be transferred to each proposed purchaser or other transferee ("Proposed Transferee"); (c) the name, address and relationship, if any, to the Selling Stockholder of each Proposed Transferee; (d) the bona fide cash price or, in reasonable detail, other

consideration, per share for which the Selling Stockholder proposes to transfer such Stock to each Proposed Transferee (the "Offered Price"); (e) the proposed time of payment; and (f) any other relevant terms of the proposed sale. Upon the request of the Company, any Investor, any Series A Stockholder, or any Common Stockholder, the Selling Stockholder will promptly furnish to the Company, all other Investors, all other Series A Stockholders, and all other Common Stockholders such other information as may be reasonably requested to establish that the offer and Proposed Transferee(s) are bona fide.

3. RIGHT OF FIRST REFUSAL WITH RESPECT TO COMMON STOCKHOLDERS.

(a) The Company shall have a right of first refusal (the "Company's Right of First Refusal") to purchase all or any part of the Stock of any Common Stockholder proposed to be transferred by such Common Stockholder ("Offered Stock"), if the Company gives written notice of the exercise of such right to the Selling Stockholder within 20 days (the "Company's Refusal Period") after the date of the Selling Stockholder's Notice to the Company. Prior to the expiration of the Company's Refusal Period, the Company shall send written notice (the "Company's Notice") to the Selling Stockholder, each Investor, each Series A Stockholder, and all Common Stockholders other than the Selling Stockholder ("Other Common Stockholders") specifying (i) that the Company intends to exercise the Company's Right of First Refusal in full or in part,
(ii) that the Company does not intend to exercise the Company's Right of First Refusal in full, or (iii) that the Company is not lawfully able to repurchase all or any portion of the Offered Stock.

(b) If the Company does not exercise its right of first refusal in full, each Investor, Series A Stockholder, and Other Common Stockholder will have a right of first refusal (the "Investors' Right of First Refusal") to purchase some or all of the Offered Stock not purchased by the Company. The Investors' Right of First Refusal may be exercised as follows:

(i) Each Investor, Series A Stockholder, and Other Common Stockholder desiring to purchase some or all of the Offered Stock must, within the 20-day period commencing on the date of the Company's Notice or expiration of the period therefor (the "Investor Refusal Period"), give written notice to the Selling Stockholder and to the Company of such Investor's, Series A Stockholder's, or Other Common Stockholder's election to purchase the Offered Stock, and the number of shares and type of the Offered Stock that such Investor, Series A Stockholder or Other Common Stockholder desires to purchase. If the total number of shares specified in the elections of the Investors, Series A Stockholders, and Other Common Stockholders exceeds the number of shares of Offered Stock available for purchase, then (unless the electing Investors, Series A Stockholders, and Other Common Stockholders otherwise agree in writing) each Investor, Series A Stockholder, and Other Common Stockholder electing to purchase will have the right to purchase that number of shares of Offered Stock that is obtained by multiplying the number of shares of Offered Stock available for purchase by a fraction (A) the numerator of which will be the number of shares of Common Stock then held by such Investor, Series A Stockholder, or Other Common Stockholder, and (B) the denominator of which will be the sum of the total number of shares of Common Stock then held by all Investors, Series A Stockholders, and Other Common Stockholders electing to purchase the Offered Stock.

(ii) Within five days after expiration of the Investor Refusal Period, the Company will give written notice (the "Investors' Notice")

to the Selling Stockholder, the Investors, the Series A Stockholders, and the Other Common Stockholders specifying (A) that some or all of the Offered Stock was subscribed by the Company, the Investors, the Series A Stockholders, and/or the Other Common Stockholders exercising their respective Rights of First Refusal and (B) that the Transfer proposed by the Selling Stockholder is subject to the co-sale rights pursuant to Section 6 hereof with respect to the Offered Stock.

(c) The purchase price for the Offered Stock to be purchased by the Company, by an Investor, by a Series A Stockholder, or by an Other Common Stockholder exercising its Right of First Refusal under this Agreement will be the Offered Price (subject, in the case of the Company, to any rights the Company may have under any other agreement to purchase all or some of such Offered Stock at a lower price), and will be payable as set forth in Section 3(d) hereof. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration will be determined by the Board of Directors of the Company in good faith, which determination will be binding upon the Company, the Investors, the Series A Stockholders, the Other Common Stockholders, and the Selling Stockholder absent fraud or error.

(d) Payment of the purchase price for Offered Stock purchased by the Company or by an Investor, Series A Stockholder, or Other Common Stockholder exercising its respective Right of First Refusal shall be made within 10 days after the date of the Investors' Notice; provided that, if the Company elects to purchase all of the Offered Stock, payment of the purchase price for such Offered Stock shall be made within 10 days after the earlier of
(i) the date of the Company's Notice or (ii) the expiration of the Company's Refusal Period. Payment of the purchase price will be made, at the option of the Company or, as the case may be, by an Investor, Series A Stockholder, or Other Common Stockholder to the Selling Stockholder (i) in cash or by cashier's check,
(ii) by wire transfer of immediately available funds, or (iii) by any combination of the foregoing.

(e) Upon the date that payment is made for the Offered Stock purchased by the Company or the Investors, Series A Stockholders, or Other Common Stockholders pursuant to their respective Rights of First Refusal hereunder, the Selling Stockholder will have no further rights as a holder of such Offered Stock and the Selling Stockholder will forthwith cause all certificate(s) evidencing such Offered Stock to be surrendered to the Company for cancellation, or, as to purchases by Investor(s), Series A Stockholder(s), or Other Common Stockholder(s), for transfer to the purchasing Investor(s), Series A Stockholder(s), or Other Common Stockholder(s).

(f) If the Company, the Investors, the Series A Stockholders, or the Other Common Stockholders have not elected pursuant to their respective Rights of First Refusal set forth in paragraphs (a) and (b) of this Section 3 to purchase all of the Offered Stock, then the Selling Stockholder shall have the right either to (i) elect to sell to the Company, the Investors, the Series A Stockholders, or the Other Common Stockholders whatever portion of the Offered Stock that Company, the Investors, the Series A Stockholders, and the Other Common Stockholders have elected to purchase pursuant to paragraphs (a) and (b) of this Section 3 and transfer the remaining Offered Stock to any person named as a Proposed Transferee in the Selling Stockholder's Notice, or (ii) withdraw all offers under this Section 3 and either retain the Offered Stock or transfer the Offered Stock proposed to be

sold by the Selling Stockholder to any person named as a Proposed Transferee in the Selling Stockholder's Notice, in either case at the Offered Price or at a higher price, provided that such transfer (i) is consummated within 120 days after the date of the Selling Stockholder's Notice and (ii) is in accordance with the terms and conditions of this Agreement (including the co-sale rights provided for in Section 6). If the Offered Stock is transferred in accordance with the terms and conditions of this Agreement, then the Proposed Transferee(s) of the Offered Stock will thereafter hold such Offered Stock free of all restrictions on transfer imposed by this Agreement. If the Offered Stock is not so transferred during such 120-day period, then the Selling Stockholder will not transfer any of such Offered Stock without complying again in full with the provisions of this Agreement.

(g) The exercise or non-exercise of the rights of the Investors, the Series A Stockholders, or the Other Common Stockholders hereunder to participate in one or more Transfers of Offered Stock made by such Selling Stockholder shall not adversely affect their rights to participate in subsequent Transfers of Offered Stock subject to this Section 3. An Investor or Series A Stockholder that exercises its right to purchase Offered Stock pursuant to
Section 4(b)(ii) shall not be entitled to exercise its co-sale right under
Section 6.

4. RIGHT OF FIRST REFUSAL WITH RESPECT TO PREFERRED STOCKHOLDERS.

(a) The Company shall have a right of first refusal (the "Company's Preferred Right of First Refusal") to purchase all or any part of the Stock of any Preferred Stockholder proposed to be transferred by such Preferred Stockholder ("Offered Preferred Stock"), if the Company gives written notice of the exercise of such right to the Selling Stockholder within 20 days (the "Company's Preferred Refusal Period") after the date of the Selling Stockholder's Notice to the Company. Prior to the expiration of the Company's Preferred Refusal Period, the Company shall send written notice (the "Company's Preferred Notice") to the Selling Stockholder and to each other Series A Stockholder, Investor, and Common Stockholder specifying (i) that the Company intends to exercise the Company's Preferred Right of First Refusal in full or in part, (ii) that the Company does not intend to exercise the Company's Preferred Right of First Refusal in full, or (iii) that the Company is not lawfully able to repurchase all or any portion of the Offered Preferred Stock.

(b) If the Company does not exercise its right of first refusal in full, each other Preferred Stockholder and each Common Stockholder will have a right of first refusal (the "Stockholders' Right of First Refusal") to purchase some or all of the Offered Preferred Stock not purchased by the Company. The Stockholders' Right of First Refusal may be exercised as follows:

(i) Each Preferred Stockholder (other than the Selling Stockholder) and each Common Stockholder desiring to purchase some or all of the Offered Preferred Stock must, within the 20-day period commencing on the date of the Company's Preferred Notice or expiration of the period therefor (the "Stockholder Refusal Period"), give written notice to the Selling Stockholder and to the Company of such Preferred Stockholder's or Common Stockholder's election to purchase the Offered Preferred Stock, and the number of shares and type of the Offered Preferred Stock that such Preferred Stockholder or Common Stockholder desires to purchase. If the total number of shares specified in the

elections of the Preferred Stockholders and Common Stockholders exceeds the number of shares of Offered Preferred Stock available for purchase, then (unless the electing Preferred Stockholders and Common Stockholders otherwise agree in writing) each Preferred Stockholder and Common Stockholder electing to purchase will have the right to purchase that number of shares of Offered Preferred Stock that is obtained by multiplying the number of shares of Offered Preferred Stock available for purchase by a fraction (A) the numerator of which will be the number of shares of Common Stock then held by such Preferred Stockholder or Common Stockholder, and (B) the denominator of which will be the sum of the total number of shares of Common Stock then held by all Preferred Stockholders and Common Stockholders electing to purchase the Offered Preferred Stock.

(ii) Within five days after expiration of the Stockholder Refusal Period, the Company will give written notice (the "Preferred Stockholders' Notice") to the Selling Stockholder, the other Preferred Stockholders and the Common Stockholders specifying that some or all of the Offered Preferred Stock was subscribed by the Company, the other Preferred Stockholders and/or the Common Stockholders exercising their respective Rights of First Refusal.

(c) The purchase price for the Offered Preferred Stock to be purchased by the Company, by a Preferred Stockholder or by a Common Stockholder exercising its Right of First Refusal under this Agreement will be the Offered Price (subject, in the case of the Company, to any rights the Company may have under any other agreement to purchase all or some of such Offered Preferred Stock at a lower price), and will be payable as set forth in Section 4(d) hereof. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration will be determined by the Board of Directors of the Company in good faith, which determination will be binding upon the Company, the Preferred Stockholders, the Common Stockholders, and the Selling Stockholder absent fraud or error.

(d) Payment of the purchase price for Offered Preferred Stock purchased by the Company, a Preferred Stockholder, or a Common Stockholder exercising its respective Right of First Refusal shall be made within 10 days after the date of the Preferred Stockholders' Notice; provided that, if the Company elects to purchase all of the Offered Preferred Stock, payment of the purchase price for such Offered Preferred Stock shall be made within 10 days after the earlier of (i) the date of the Company's Preferred Notice or (ii) the expiration of the Company's Preferred Refusal Period. Payment of the purchase price will be made, at the option of the Company or, as the case may be, by a Preferred Stockholder or Common Stockholder to the Selling Stockholder (i) in cash or by cashier's check, (ii) by wire transfer of immediately available funds, or (iii) by any combination of the foregoing.

(e) Upon the date that payment is made for the Offered Preferred Stock purchased by the Company, the other Preferred Stockholders, or the Common Stockholders pursuant to their respective Rights of First Refusal hereunder, the Selling Stockholder will have no further rights as a holder of such Offered Preferred Stock and the Selling Stockholder will forthwith cause all certificate(s) evidencing such Offered Preferred Stock to be surrendered to the Company for cancellation, or, as to purchases by the Preferred Stockholder(s) or Common Stockholder(s), for transfer to the purchasing Investor(s).

(f) If the Company, the other Preferred Stockholders, or the Common Stockholders have not elected pursuant to their respective Rights of First Refusal hereunder to purchase all of the Offered Preferred Stock, then the Selling Stockholder shall have the right either to (i) elect to sell to the Company, the other Preferred Stockholders or the Common Stockholders whatever portion of the Offered Preferred Stock that Company, the other Preferred Stockholders, and the Common Stockholders have elected to purchase pursuant to paragraphs (a) and (b) of this Section 4 and transfer the remaining Offered Preferred Stock to any person named as a Proposed Transferee in the Selling Stockholder's Notice, or (ii) withdraw all offers under this Section 3 and either retain the Offered Preferred Stock or transfer the Offered Preferred Stock proposed to be sold by the Selling Stockholder to any person named as a Proposed Transferee in the Selling Stockholder's Notice, in either case, at the Offered Price or at a higher price, provided that such transfer (i) is consummated within 120 days after the date of the Selling Stockholder's Notice and (ii) is in accordance with the terms and conditions of this Agreement. If the Offered Preferred Stock is transferred in accordance with the terms and conditions of this Agreement, then the Proposed Transferee(s) of the Offered Preferred Stock will thereafter hold such Offered Preferred Stock free of all restrictions on transfer imposed by this Agreement. If the Offered Investor Stock is not so transferred during such 120-day period, then the Selling Stockholder will not transfer any of such Offered Preferred Stock without complying again in full with the provisions of this Agreement.

(g) The exercise or non-exercise of the rights of the Preferred Stockholders and the Common Stockholders hereunder to participate in one or more Transfers of Offered Preferred Stock made by such Selling Stockholder shall not adversely affect their rights to participate in subsequent Transfers of Offered Preferred Stock subject to this Section 4.

5. CO-SALE RIGHT.

(a) In the event the Company, the Investors, the Series A Stockholders, and/or the Other Common Stockholders fail to exercise their respective rights to purchase all of the Offered Stock of a Common Stockholder subject to Section 3(a) and/or (b) hereof, following the exercise or expiration of the rights of purchase set forth in Section 3(a) and 3(b), then the Common Stockholder shall deliver to the Company, which the Company shall in turn promptly deliver to each Investor and Series A Stockholder, written notice (the "Co-Sale Notice") that each Investor and Series A Stockholder shall have the right, exercisable upon written notice to the Selling Stockholder within 15 days after receipt of the Co-Sale Notice by the Investors and Series A Stockholders, to participate in such Transfer of Stock by the Common Stockholder to the Proposed Transferee ("Co-Sale Stock") on the same terms and conditions. Such notice shall indicate the number of shares of Common Stock such Investor or Series A Stockholder wishes to sell under its right to participate. To the extent one or more of the Investors or Series A Stockholders exercise such right of participation in accordance with the terms and conditions set forth below, the number of shares of Co-Sale Stock that such Selling Stockholder may sell in the transaction shall be correspondingly reduced.

(b) Each Investor and Series A Stockholder may sell all or any part of that number of shares equal to the product obtained by multiplying
(i) the aggregate number of shares of Co-Sale Stock covered by the Selling Stockholder Notice by (ii) a fraction the numerator of which is the number of

shares of Common Stock owned by such Investor or Series A Stockholder at the time of the Transfer and the denominator of which is the total number of shares of Common Stock owned by such Selling Stockholder and the Investors and Series A Stockholders at the time of the Transfer. If not all of the Investors and Series A Stockholders elect to sell their share of the Co-Sale Stock proposed to be transferred within said 15-day period, then the Selling Stockholder shall promptly notify in writing the Investors and Series A Stockholders who do so elect and shall offer such Investors and Series A Stockholders the additional right to participate in the sale of such additional shares of Co-Sale Stock proposed to be transferred on the same percentage basis as set forth above in this Section 5(b). The Investors and Series A Stockholders shall have five days after the receipt of such notice to notify the Selling Stockholder of their election to sell all or a portion thereof of the unsubscribed shares.

(c) Each Investor and Series A Stockholder who elects to participate in the Transfer pursuant to this Section 5 (a "Participant") shall effect its participation in the Transfer by promptly delivering to the Selling Stockholder for transfer to the Proposed Transferee one or more certificates, properly endorsed for transfer, which represent:

(i) number of shares of Common Stock which such Participant elects to sell; or

(ii) that number of shares of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock which is at such time convertible into the number of shares of Common Stock which such Participant elects to sell; provided, however, that if the Proposed Transferee objects to the delivery of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock in lieu of Common Stock, such Participant shall convert such Series A Convertible Preferred Stock and Series B Convertible Preferred Stock into Common Stock and deliver Common Stock as provided in Section 5(c)(i) above. The Company agrees to make any such conversion concurrent with the actual transfer of such shares to the Proposed Transferee.

(d) The stock certificate or certificates that the Participant delivers to such Selling Stockholder pursuant to Section 5(c) shall be transferred to the Proposed Tranferee in consummation of the sale of the Common Stock pursuant to the terms and conditions specified in the Co-Sale Notice, and the Selling Stockholder shall concurrently therewith remit to such Participant that portion of the sale proceeds to which such Participant is entitled by reason of its participation in such sale. To the extent that any Proposed Transferee prohibits such assignment or otherwise refuses to purchase shares or other securities from a Participant exercising its rights of co-sale hereunder, such Selling Stockholder shall not sell to such Proposed Transferee any Co-Sale Stock unless and until, simultaneously with such sale, such Selling Stockholder shall purchase such shares or other securities from such Participant on the same terms and conditions specified in the Co-Sale Notice.

(e) To the extent that the Investors and Series A Stockholders do not elect to participate in the sale of the Co-Sale Stock subject to the Co-Sale Notice, such Selling Stockholder may, not later than 120 days following delivery to the Company of the Co-Sale Notice, enter into an agreement providing for the closing of the Transfer of the Co-Sale Stock covered by the Co-Sale Notice within 30 days of such agreement on terms and conditions not materially more favorable to the Selling Stockholder than those described in

the Co-Sale Notice. Any proposed Transfer on terms and conditions materially more favorable than those described in the Co-Sale Notice, as well as any subsequent proposed transfer of any of the Co-Sale Stock by a Selling Stockholder, shall again be subject to the co-sale rights of the Investors and Series A Stockholders and shall require compliance by a Selling Stockholder with the procedures described in this Section 5.

(f) The exercise or non-exercise of the rights of the Investors and Series A Stockholders hereunder to participate in one or more Transfers of Co-Sale Stock made by such Selling Stockholder shall not adversely affect their rights to participate in subsequent Transfers of Co-Sale Stock subject to this Section 5.

6. EXEMPT TRANSFERS.

(a) Notwithstanding the foregoing, the rights of first refusal and the co-sale rights of the Company, the Investors, and the Series A Stockholders under Sections 3, 4 and 5 shall not apply to (i) any Transfer to the ancestors, descendants or spouse of the Common Stockholders or to trusts for the benefit of such persons, (ii) any Transfer or Transfers by a Common Stockholder to another Common Stockholder or to an individual employed by the Company at the time of such transfer (the "Employee"), but only if the transferring Common Stockholder first offers the shares to all other Common Stockholders or Employees, as applicable, and each member of the applicable group is allowed to participate pro rata with the other members of that group,
(iii) any pledge of Stock made pursuant to a bona fide loan transaction that creates a mere security interest; (iv) any Transfer by a Common Stockholder or Preferred Stockholder which is a partnership, limited liability company or corporation to the partners, members or stockholders of such entity without the payment of consideration therefor, or (v) any bona fide gift; provided that in the event of any transfer made pursuant to one of the exemptions provided by clauses (i), (ii), (iii), (iv), or (v), (A) the transferor shall inform the Company and the Investors of such pledge, transfer or gift prior to effecting it and (B) the pledgee, transferee or donee shall furnish the Company and the Investors with a written agreement to be bound by and comply with all provisions of this Agreement. Such transferred Stock shall remain "Stock" hereunder, and such pledgee, transferee or donee shall be treated as a "Common Stockholder" (to the extent such transfer was from a Common Stockholder) for purposes of this Agreement.

(b) Notwithstanding the foregoing, the provisions of Sections 3, 4, and 5 shall not apply to the sale of any Stock to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act").

(c) This Agreement is subject to, and shall in no manner limit, any other right that the Company may have to repurchase securities from the Common Stockholders pursuant to a stock restriction agreement or other agreement between the Company and the Common Stockholders.

7. PROHIBITED TRANSFERS.

(a) In the event that a Stockholder (a "Prohibited Transferee") should Transfer any Stock in contravention of the right of first

refusal or co-sale rights of the Investors, Series A Stockholders, and/or Common Stockholders under Sections 3, 4 or 5, as the case may be, under this Agreement (a "Prohibited Transfer"), each Investor, Series A Stockholder, or Common Stockholder, as the case may be, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the option provided below, and the Prohibited Transferee shall be bound by the applicable provisions of such option.

(b) In the event of a Prohibited Transfer, each Investor, Series A Stockholder, and/or Common Stockholder, as the case may be, shall have the right to purchase from (to the extent the Prohibited Transferee still owns Stock) or sell to Prohibited Transferee, as applicable, the type and number of shares of Common Stock equal to the number of shares such Investor or Series A Stockholder would have been entitled to purchase from or sell to the purchaser under Sections 3 and 5 hereof, or such Common Stockholder would have been entitled to purchase under Section 3 and 4 hereof, had the Prohibited Transfer been effected pursuant to and in compliance with the terms hereof. Such sale shall be made on the following terms and conditions:

(i) The price per share at which the shares are to be purchased from or sold to the Prohibited Transferee shall be equal to the price per share paid by the Proposed Transferee to the Prohibited Transferee in such Prohibited Transfer. The Prohibited Transferee shall also reimburse each Investor, Series A Stockholder, or Common Stockholder for any and all fees and expenses, including legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of the Investor's rights under Sections 3, 4, or 5, the Series A Stockholder's rights under Section 3, 4, or 5, or the Common Stockholder's rights under Section 3 or 4.

(ii) Within 30 days after the date on which an Investor, Series A Stockholder, or Common Stockholder, as the case may be, received notice of the Prohibited Transfer or otherwise became aware of the Prohibited Transfer, such Investor, Series A Stockholder, or Common Stockholder shall, if exercising the option created hereby, deliver to the Prohibited Transferee payment for the aggregate purchase price or the certificate or certificates representing shares to be purchased or sold, each certificate to be properly endorsed for transfer.

(iii) The Prohibited Transferee shall, upon receipt of the purchase price or certificate or certificates for the shares to be purchased or sold by an Investor, Series A Stockholder, or Common Stockholder, pursuant to this Section 7(b), deliver to the Investor, Series A Stockholder or Common Stockholder the certificate or certificates representing the shares to be purchased or pay the aggregate purchase price therefor, as applicable, and the amount of reimbursable fees and expenses, as specified in Section 7(b)(i), in cash or by other means acceptable to the Investor, the Series A Stockholder, or the Common Stockholder.

(iv) Notwithstanding the foregoing, (A) any attempt by a Common Stockholder to Transfer Stock in violation of Sections 3 or 5 shall be voidable at the option of a majority-in-interest of the Other Common Stockholders, the Investors and Series A Stockholders (voting as a single class on an as converted basis) if a majority in interest of the Other Common Stockholders, the Investors and Series A Stockholders (taken as a single class on an as converted basis) do not elect to exercise the option set forth in this
Section 7, and (B) any attempt by a Preferred Stockholder to Transfer Stock in

violation of Section 4 hereof shall be voidable at the option of a majority-in-interest of the Common Stockholders and the other Preferred Stockholders if a majority in interest of the Common Stockholders and the other Preferred Stockholders do not elect to exercise the option set forth in this
Section 7, and the Company agrees it will not effect such a Transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of a majority in interest of the Investors, the Series A Stockholders, and/or the Common Stockholders, as the case may be.

8. DRAG ALONG RIGHT. Notwithstanding anything contained herein to the contrary, if at any time (i) the holders of a 75% majority-in-interest of the Common Stock, the Series A Convertible Preferred Stock, and the Series B Convertible Preferred Stock (voting as a single class on an as converted basis), and (ii) the Board of Directors of the Company shall approve (x) a bona fide arms length proposal from a person for the transfer, directly or indirectly, of all of the Common Stock to such person, (y) the merger or consolidation of the Company with or into another person in which the stockholders of the Company will receive cash or securities of any other person for their shares or (z) the sale by the Company of all or substantially all of its assets to a person, in each of the above cases for a specified price payable in cash or otherwise and on specified terms and conditions (a "Sale Proposal"), then the Board of Directors of the Company shall deliver a notice (a "Required Sale Notice") with respect to such Sale Proposal to each Common Stockholder and each Preferred Stockholder stating that the Sale Proposal has been approved in the manner provided in this Section
8. Each such Common Stockholder and Preferred Stockholder, upon receipt of a Required Sale Notice, shall be obligated, which obligation shall be enforceable by the Company, if applicable, to sell their Stock and participate in the transaction (a "Required Sale") contemplated by the Sale Proposal, vote their shares of Stock in favor of such Sale Proposal at any meeting of stockholders of the Company called to vote on or approve such Sale Proposal and otherwise to take all necessary action to cause the Company, the Common Stockholders and the Preferred Stockholders to consummate such Required Sale.

9. LEGEND.

(a) Each certificate representing shares of Stock now or hereafter owned by the Common Stockholders, the Series A Stockholders, or the Investors shall be endorsed with the following legend:

"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND BETWEEN THE STOCKHOLDER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY."

(b) The Common Stockholders, the Series A Stockholders, and the Investors agree that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 9(a) above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement.

10. MISCELLANEOUS.

(a) Conditions to Exercise of Rights. Exercise of the Investors' or Series A Stockholders' rights under this Agreement shall be subject to and conditioned upon, and the Common Stockholders and the Company shall use their best efforts to assist each Investor or Series A Stockholder in, compliance with applicable laws.

(b) Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware, without reference to principles of conflict of laws.

(c) Amendment. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) as to the Company, only the Company, (ii) as to the Investors, persons holding more than a majority-in-interest of the Common Stock held by the Investors and their assignees, pursuant to Section 10(d) hereof, and
(iii) as to the Series A Stockholders, persons holding more than a majority-in-interest of the Common Stock held by Series A Stockholders and their assignees, pursuant to Section 10(d) hereof, and (iv) as to the Common Stockholders, only the Common Stockholders (unless such amendment and waiver is less restrictive to the Common Stockholders, in which case a majority-in-interest of the Common Stock held by the Common Stockholders); provided, that no consent of any Common Stockholder shall be necessary for any amendment and/or restatement which includes additional holders of Series B Convertible Preferred Stock as "Investors" and parties hereto. Any amendment or waiver effected in accordance with clauses (i), (ii), (iii) and (iv) of this
Section 10(c) shall be binding upon each Investor, Series A Stockholder, Common Stockholder, the Company, and their successors and assigns.

(d) Assignment of Rights. This Agreement constitutes the entire agreement between the parties relative to the specific subject matter hereof. Any previous agreement among the parties relative to the specific subject matter hereof is superseded by this Agreement. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives.

(e) Term. This Agreement shall continue in full force and effect from the date hereof through the earliest of the following dates, on which date it shall terminate in its entirety:

(i) the date of the closing of a firmly underwritten public offering of the Common Stock pursuant to a registration statement filed with the Securities and Exchange Commission, and declared effective under the Securities Act, which results in the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock being converted into Common Stock;

(ii) the date of the closing of a sale, lease, or other disposition of all or substantially all of the Company's assets or the Company's merger into or consolidation with any other corporation or other entity, or any other corporate reorganization, in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately

after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction, provided that this Section 10(e)(ii) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company; or

(iii) the date as of which the parties hereto terminate this Agreement by written consent of a majority in interest of the Preferred Stockholders and a majority in interest of the Common Stockholders (voting on a fully diluted basis).

(f) Ownership. Except as disclosed on Schedule 10(f), the Current Stockholders represent and warrant that each is the sole legal and beneficial owner of those shares of Stock he, she or it currently holds subject to the Agreement and that no other person has any interest (other than a community property interest) in such shares.

(g) Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to (i) each Investor at the address set forth on Exhibit A hereto,
(ii) each Series A Stockholder at the address set forth on Exhibit C hereto, or
(iii) at such other address as such party may designate by ten days advance written notice to the other parties hereto. All communications shall be sent to the Common Stockholders at their respective address of record with the Company or at such other address as such party may designate by ten days advance written notice to the other parties hereto.

(h) Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

(i) Attorneys' Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

(j) Entire Agreement. This Agreement and the Exhibits hereto, along with the Purchase Agreement and each of the Exhibits thereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. This Agreement replaces and supercedes the Right of First Refusal and Co-Sale Agreement dated December 27, 2001, by and among the Company, the Common Stockholders, and the Series A. Stockholders.

(k) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(l) Joinder of Spouses. The undersigned spouses of each Investor and Current Stockholder, if applicable, join in the execution and delivery of this Agreement for the express purpose of binding any interest he or she may have in the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Common Stock, as applicable.

[THIS SPACE INTENTIONALLY LEFT BLANK]

COMPANY:                        INVESTORS:

HYDRO MED SCIENCES, INC.        SMH HYDRO MED II LLC


By:                             By:
    -------
     Name: David S. Tierney            Name: James C. Gale
     Title: President                  Title: Manager

                                LIFE SCIENCES OPPORTUNITIES FUND, L.P.

                                By:    SMH Life Sciences Management, LLC,
                                       General Partner


                                By:
                                       Name: James C. Gale
                                       Title: Manager

                                CORPORATE OPPORTUNITIES FUND, L.P.

                                By:    SMM Corporate Management, LLC,
                                       General Partner


                                By:
                                       Name: James C. Gale
                                       Title: Manager

                                CORPORATE OPPORTUNITIES FUND(INSTITUTIONAL),L.P.

                                By:    SMM Corporate Management, LLC,
                                       General Partner


                                By:
                                       Name: James C. Gale
                                       Title: Manager

                                WHEATLEY MEDTECH PARTNERS L.P.

                                By:    Wheatley Medtech Partners LLC,
                                       General Partner


                                By:
                                       Name:
                                       Title:

                                WHEATLEY PARTNERS III, L.P.

                                By:    Wheatley Partners III, LLC,
                                       General Partner


                                By:
                                       Name:
                                         Title: ___________________________


                                WHEATLEY ASSOCIATES III, L.P.

                                By:    Wheatley Partners III, LLC,
                                       General Partner


                                By:
                                       Name:
                                         Title:___________________________


                                WHEATLEY FOREIGN PARTNERS III, L.P.

                                By:    Wheatley Partners III, LLC,
                                       General Partner


                                By:
                                       Name:
                                         Title:___________________________

PALADIN LABS INC.

By:
Name:
Title:

FALCON SEABOARD HOLDINGS, L.P.

By:
Name:
Title:

COMMON STOCKHOLDERS:

GP STRATEGIES CORPORATION

By:
Name:
Title:

SERIES A STOCKHOLDERS:

SMH HYDRO MED LLC

By:
Name: James C. Gale
Title: Manager

CORPORATE OPPORTUNITIES FUND, L.P.

By: SMM Corporate Management, LLC,
General Partner

By:
Name: James C. Gale
Title: Manager

CORPORATE OPPORTUNITIES FUND(INSTITUTIONAL),L.P.

By: SMM Corporate Management, LLC,
General Partner

By:
Name: James C. Gale
Title: Manager

WHEATLEY MEDTECH PARTNERS L.P.

By: Wheatley Medtech Partners LLC,
General Partner

By:
Name:
Title:

EXHIBIT A

LIST OF INVESTORS

As of April __, 2003

SMH Hydro Med II LLC
600 Travis, Suite 3100
Houston, Texas 77002
Attention: John Malanga

Corporate Opportunities Fund, L.P.
Corporate Opportunities Fund (Institutional), L.P. Life Sciences Opportunities Fund, L.P.
c/o SMM Corporate Management LLC
126 East 56 Street
New York, New York 10022
Attention: James C. Gale

Wheatley MedTech Partners L.P.
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn: David R. Dantzker, M.D./
Lawrence Wagenburg

RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT
EXHIBIT B

STOCK OWNERSHIP

GP Strategies Corporation
9 West 57th Street
New York, New York 10019

EXHIBIT C

Series A Stockholders

SMH Hydro Med LLC
600 Travis, Suite 3100
Houston, Texas 77002
Attention: John Malanga

Corporate Opportunities Fund, L.P.
Corporate Opportunities Fund
(Institutional), L.P.
c/o SMM Corporate Management LLC
126 East 56 Street
New York, New York 10022
Attention: James C. Gale

Wheatley MedTech Partners L.P.
80 Cuttermill Road, Suite 311
Great Neck, New York 11021

With a copy to:

Wheatley Partners
825 Third Avenue, 32nd Floor
New York, New York 10022
Attn: David R. Dantzker, M.D./
Lawrence Wagenburg

GP Strategies Corporation
9 West 57th Street
New York, New York 10019

Exhibit 10.36
PROMISSORY NOTE

$2,800,000.00 New York, New York December 19, 2003

The undersigned, FIVE STAR PRODUCTS, INC., hereby promises to pay to the order of JL DISTRIBUTORS, INC. ("Payee"; Payee, and any subsequent holder[s] hereof, being hereinafter referred to collectively as "Holder") on September 30, 2004, at the offices of Holder or at such other place or places as Holder may from time to time designate in writing, in lawful money of the United States of America, the principal amount of Two Million, Eight Hundred Thousand and no/100 Dollars ($2,800,000.00), with interest at the rate of 8% per annum from the date hereof, payable quarterly on December 31, 2003, March 31, 2004, June 30, 2004, and September 30, 2004.

1. Prepayment. The undersigned may at any time or from time to time prepay all or any part of the principal amount of this Note, with accrued interest on the amount prepaid to the date of prepayment, but without penalty or premium.

2. Events of Default. If any of the following events (each, an "Event of Default") shall occur:

(a) The undersigned shall default in the payment of any installment of interest on this Note when due, and such default shall continue for a period of ten (10) days after written notice thereof shall have been sent to the undersigned by Holder; or

(b) A voluntary case in bankruptcy shall be begun by the undersigned or any order for relief against the undersigned shall be entered in an involuntary case in bankruptcy; or

(c) The undersigned shall fail, or admit in writing its inability, to pay its debts as they mature, by acceleration or otherwise; or make a settlement with or general assignment for the benefit or creditors; or a committee of creditors shall be appointed for the undersigned or a receiver or receivers or a custodian or custodians shall be appointed for or shall take possession of all or a substantial part of the undersigned's property;

then (i) in the case of an Event of Default described in clause (b) or (c) above, the outstanding principal of this Note and all accrued interest thereon shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived; and (ii) in the case of an Event of Default described in clause (a) above, Holder may at any time (unless all defaults theretofore shall have been remedied), by written notice to the undersigned, declare the principal of and the accrued interest on this Note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived.

3. Change of Control. At any time after a change of control of the undersigned (as defined below) has occurred, Holder may, by written notice to the undersigned, declare the principal of and the accrued interest on this Note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived. For purposes of this Note, a "change of control of the undersigned" shall mean (a) a change of control of the undersigned of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than a change of control of the undersigned resulting in control by Holder or a group including Holder, (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Holder or a group including Holder, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the undersigned representing 20% or more of the combined voting power of the undersigned's then outstanding securities, or (c) at any time individuals who were either nominated for election by the Board of Directors of the undersigned or were elected by the Board of Directors of the undersigned cease for any reason to constitute at least a majority of the Board of Directors of the undersigned.

4. Governing Law. This Note shall be construed in accordance with and governed by the laws of the State of New York.

FIVE STAR PRODUCTS, INC.

By: ___________________________
Name: Charles Dawson
Title: President

Exhibit 10.37
PROMISSORY NOTE

$2,800,000.00 New York, New York March 31, 2004

The undersigned, FIVE STAR PRODUCTS, INC., hereby promises to pay to the order of JL DISTRIBUTORS, INC. ("Payee"; Payee, and any subsequent holder[s] hereof, being hereinafter referred to collectively as "Holder") on June 30, 2005, at the offices of Holder or at such other place or places as Holder may from time to time designate in writing, in lawful money of the United States of America, the principal amount of Two Million, Eight Hundred Thousand and no/100 Dollars ($2,800,000.00), with interest at the rate of 8% per annum from the date hereof, payable quarterly on June 30, 2004, September 30, 2004, December 31, 2004, March 31, 2005 and June 30, 2005.

1. Prepayment. The undersigned may at any time or from time to time prepay all or any part of the principal amount of this Note, with accrued interest on the amount prepaid to the date of prepayment, but without penalty or premium.

2. Events of Default. If any of the following events (each, an "Event of Default") shall occur:

(a) The undersigned shall default in the payment of any installment of interest on this Note when due, and such default shall continue for a period of ten (10) days after written notice thereof shall have been sent to the undersigned by Holder; or

(b) A voluntary case in bankruptcy shall be begun by the undersigned or any order for relief against the undersigned shall be entered in an involuntary case in bankruptcy; or

(c) The undersigned shall fail, or admit in writing its inability, to pay its debts as they mature, by acceleration or otherwise; or make a settlement with or general assignment for the benefit or creditors; or a committee of creditors shall be appointed for the undersigned or a receiver or receivers or a custodian or custodians shall be appointed for or shall take possession of all or a substantial part of the undersigned's property;

then (i) in the case of an Event of Default described in clause (b) or (c) above, the outstanding principal of this Note and all accrued interest thereon shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived; and (ii) in the case of an Event of Default described in clause (a) above, Holder may at any time (unless all defaults theretofore shall have been remedied), by written notice to the undersigned, declare the principal of and the accrued interest on this Note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived.

3. Change of Control. At any time after a change of control of the undersigned (as defined below) has occurred, Holder may, by written notice to the undersigned, declare the principal of and the accrued interest on this Note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived. For purposes of this Note, a "change of control of the undersigned" shall mean (a) a change of control of the undersigned of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than a change of control of the undersigned resulting in control by Holder or a group including Holder, (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Holder or a group including Holder, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the undersigned representing 20% or more of the combined voting power of the undersigned's then outstanding securities, or (c) at any time individuals who were either nominated for election by the Board of Directors of the undersigned or were elected by the Board of Directors of the undersigned cease for any reason to constitute at least a majority of the Board of Directors of the undersigned.

4. Governing Law. This Note shall be construed in accordance with and governed by the laws of the State of New York.

FIVE STAR PRODUCTS, INC.

By: __________________________________
Name: Charles Dawson
Title: President

Exhibit 10.38

TAX SHARING AGREEMENT

TAX SHARING AGREEMENT (this "Agreement") dated as of February 1, 2004 between GP Strategies Corporation, a Delaware corporation ("GP Strategies"), and Five Star Products, Inc., a Delaware corporation, ("Five Star").

WHEREAS, GP Strategies anticipates that it may increase its ownership to at least 80% of Five Star's outstanding stock and, in such case, Five Star would become, for federal income tax purposes, part of the affiliated group of which GP Strategies is the common parent and GP Strategies and Five Star and their respective subsidiaries would join in the filing of a consolidated federal income tax return for a group of affiliated companies of which GP Strategies is the common parent and Five Star is a member (the "GP Strategies Consolidated Group"); and

WHEREAS, GP Strategies and Five Star wish to provide for the payment of tax liabilities and entitlement to refunds, allocate responsibility and provide for cooperation in the filing of tax returns, provide for the realization and payment of tax benefits arising out of adjustments to the tax returns of the parties, and to provide for certain other matters;

NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound, GP Strategies and Five Star agree as follows:

1. Definitions.

For purposes of this Agreement:

(a) "Taxes" means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property (including, without limitation, real property Taxes and any assessments, special or otherwise), windfall profits, customs, duties or other Taxes, fees, assessments or charges of any kind whatever, together with any interest and penalties, additions to tax or additional amounts with respect thereto (and "Tax" means any one of the foregoing Taxes).

(b) "Returns" means all returns, declarations, reports, statements and other documents required under a Tax Law (as hereinafter defined) either (i) to be filed with a Governmental Authority (as hereinafter defined) in respect of Taxes; or (ii) to be provided to a person other than a Governmental Authority (and "Return" means any one of the foregoing Returns).

(c) "Code" means the Internal Revenue Code of 1986, as amended. All citations to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto.

(d) "Section" means a section of this Agreement, unless indicated otherwise.

(e) "Governmental Authority" means the government of the United States or any foreign country or any state, province, municipality or other political subdivision of the United States or any foreign country, or any agency, department, board, instrumentality, authority or commission (including regulatory and administrative bodies) of any of the foregoing.

(f) "Tax Law" means a statute, regulation or administrative rule enacted or promulgated for the determination, imposition, assessment or collection of any Tax.

(g) "Common Consolidated Tax Return" shall mean any consolidated, combined or unitary Return that includes at least one member of the GP Strategies Consolidated Group (other than Five Star or any of its subsidiaries) and Five Star or any of its subsidiaries.

(h) "Tax Attribute" shall mean any net operating loss, capital loss, credit or other tax attribute (other than the basis of property) relevant to the calculation of a tax liability.

(i) "Applicable Federal Rate" shall have the meaning set forth in Section 1274(d) of the Code for a short term rate, compounded quarterly.

(j) "Accounting Firm" means (i) the nationally recognized accounting firm that is the principal independent auditor of both GP Strategies and Five Star at the time of a dispute governed by Section 7 hereof; or (ii) if the firm described in clause (i) is unwilling or unable to serve under Section 7, the nationally recognized accounting firm appointed by the firm described in clause (i); or (iii) if GP Strategies and Five Star do not use the same accounting firm as their principal independent auditor, then the nationally recognized accounting firm jointly selected by the principal independent auditors of GP Strategies and Five Star at the time of a dispute governed by
Section 7 hereof.

(k) "Disaffiliation" means any event that results in Five Star no longer being a member of the GP Strategies Consolidated Group.

(l) "Disaffiliation Date" means the date on which Disaffiliation occurs.

(m) "Affiliation" means that GP Strategies has become the owner of at least 80% of the outstanding Five Star stock and Five Star has become a member of the GP Strategies Consolidated Group.

(n) "Affiliation Date" means the first day on which Five Star is a member of the GP Strategies Consolidated Group for federal income tax purposes.

2. Returns and Payments.

(a) Filing of Returns.

(i) GP Strategies shall prepare and shall timely file or cause to be timely filed (1) all Returns filed on a separate company basis for any member of the GP Strategies Consolidated Group other than Five Star or any of its subsidiaries, (2) all Returns filed on a consolidated, combined or unitary basis that include members of the GP Strategies Consolidated Group (other than Five Star or any of its subsidiaries) that is not a Common Consolidated Tax Return, and (3) all Common Consolidated Tax Returns. Subject to
Section 2(c), GP Strategies shall make full and timely payment of all Taxes shown due on all Returns described in this Section 2(a)(i).

(ii) Five Star shall prepare, at its own expense, and shall timely file or cause to be timely filed (1) all Returns filed on a separate company basis for Five Star or any of its subsidiaries, (2) all Returns filed on a consolidated, combined or unitary basis that include Five Star or any of its subsidiaries other than any Common Consolidated Tax Return, and (3) all Returns with respect to Five Star or any of its subsidiaries for any taxable year or other taxable period beginning after the Disaffiliation Date. Five Star shall make full and timely payment of all Taxes shown due on all Returns described in this Section 2(a)(ii).

(iii) To the extent required or permitted by law or administrative practice, in the case of any Common Consolidated Tax Return that includes the Disaffiliation Date, the taxable year of Five Star and its subsidiaries shall be treated as closing at the close of the Disaffiliation Date.

(b) Obligation to Remit Taxes. Five Star and GP Strategies shall each timely remit or cause to be remitted any Taxes due in respect of any Tax for which it is required to file a Return hereunder and shall be entitled to reimbursement for such payments only to the extent provided in Section 2(c).

(c) Tax Sharing Obligations.

(i) Five Star's Obligations. Other than liabilities dealt with elsewhere in this Agreement, Five Star shall be liable for and shall indemnify and hold GP Strategies and its subsidiaries (other than Five Star and its subsidiaries) harmless against any Tax liability of Five Star or any of its subsidiaries, including the portion of any Tax liability resulting from the inclusion of Five Star or any of its subsidiaries in a Common Consolidated Tax Return as determined under Section 2(c)(iii).

(ii) GP Strategies' Obligations. Other than liabilities dealt with elsewhere in this Agreement, GP Strategies shall be liable for, and shall hold Five Star and its subsidiaries harmless against any Tax liability of any member of the GP Strategies Consolidated Group other than Five Star and its subsidiaries.

(iii) Five Star's Share of the Common Consolidated Tax Return Liability. Five Star's proportionate share of the Tax liability with respect to a Common Consolidated Tax Return, or with respect to any estimated Tax payment relating to any such Return, shall be determined by multiplying the separate return Tax liability, if any, of Five Star and its subsidiaries (the "Five Star Subgroup") by 80%. For purposes of this determination, the separate return Tax liabilities of the Five Star Subgroup shall be determined as if (1) the Common Consolidated Tax Return included only the Tax items of the Five Star Subgroup, applying the principles of Section 1552(a)(2) of the Code and Treas. Reg. ss. 1.1552-1(a)(2) and (2) any Tax Attribute attributable to the Five Star Subgroup were available solely to the Five Star Subgroup.

(iv) Notification and Contest Procedures.

(1) GP Strategies shall, in good faith, calculate Five Star's Tax liability, if any, under Section 2(c)(iii) and notify Five Star of the amount of such liability, if any (the "GP Strategies Notification Letter"). Notification of a Five Star Tax liability and payment obligation under this clause (1) of this Section 2(c)(iv) shall constitute a request for payment, and, subject to clause (2) of this Section 2(c)(iv), Five Star shall pay such amount, in immediately available funds, to GP Strategies within 30 days after receipt of the GP Strategies Notification Letter, provided that Five Star shall not be obligated to make such payment to GP Strategies earlier than 10 days prior to the due date for the filing or making of the relevant Return or estimated Tax payment.

(2) If Five Star determines in good faith that the amount of its Tax liability under Section 2(c)(iii) differs from the corresponding amount in the GP Strategies Notification Letter, Five Star shall notify GP Strategies of such difference (the "Five Star Tax Adjustment Amount") (such determination, with calculations in reasonable detail, being referred to as the "Five Star Notification Letter," which Five Star shall deliver to GP Strategies no later than 30 days after the date of receipt of the GP Strategies Notification Letter). If GP Strategies determines in good faith that Five Star's determination of the Five Star Tax Adjustment Amount is incorrect, GP Strategies shall notify Five Star of such determination (the "Second GP Strategies Notification Letter") within 30 days of receipt of the Five Star Notification Letter. If the dispute is not resolved by mutual accord within 30 days of Five Star's receipt of the Second GP Strategies Notification Letter, the dispute shall be resolved under the provisions of Section 7. Until GP Strategies and Five Star reach agreement, or any dispute between them is resolved pursuant to
Section 7, as to the Five Star Tax Adjustment Amount, the provisions of this
Section 2(c) shall continue to apply and payments shall be made by the parties in the amounts set forth in the GP Strategies Notification Letter in accordance with clause (1) of this Section 2(c)(iv). Within 30 days of reaching an agreement or resolution, GP Strategies shall pay to Five Star, or Five Star shall pay to GP Strategies, the agreed amount after taking into account any payments made under clause (1) of this Section 2(c)(iv), together with interest at a rate equal to the Applicable Federal Rate from the date of Five Star's payment pursuant to this Section 2(c)(iv).

(v) Subsequent Adjustments. If the items used to determine the Tax liabilities in Section 2(c)(iii) are adjusted by reason of an amended

return, claim for refund, examination by a Governmental Authority, or the final decision of any court, the amount due from or to Five Star under Section 2(c)(iii) shall be recomputed using the adjusted items. Five Star agrees to pay to GP Strategies any additional amount owed including interest at the rate applicable to underpayments of the GP Strategies Consolidated Group pursuant to
Section 6621 of the Code (with full credit given for any prior payments for the year), and GP Strategies agrees to pay to Five Star any overpayment made by Five Star including interest at the rate applicable to underpayments of the GP Strategies Consolidated Group pursuant to Section 6621 of the Code.

Payments to be made by GP Strategies to Five Star pursuant to this Section 2(c)(v) shall be made, in the case of a refund, within 30 days after GP Strategies has received such refund. In the case of a credit, such payments by GP Strategies to Five Star shall be made within 30 days after GP Strategies has received written notification from a Governmental Authority reflecting adjustments for such credit to a Return of the GP Strategies Consolidated Group. Payments to be made by Five Star to GP Strategies shall be made, in the case of any additional Tax, no later than 5 days before the due date of any required Tax payment by GP Strategies. In the case of a reduction in credit of Tax, such payment by Five Star to GP Strategies shall be made within 30 days after GP Strategies has received written notification from a Governmental Authority reflecting an adjustment for such reduction to a Return of the GP Strategies Consolidated Group.

All payments required under this Section 2(c)(v) shall be paid by Five Star to GP Strategies or by GP Strategies to Five Star, as the case may be, regardless of whether Five Star is a member of the GP Strategies Consolidated Group.

3. Affiliation and Disaffiliation of Five Star.

(a) Unless the Affiliation shall occur on or before December 1, 2004, this Agreement shall have no application and GP Strategies, the GP Strategies Consolidated Group or Five Star shall have no obligation to each other under this Agreement.

(b) This Agreement shall have no application and GP Strategies, the GP Strategies Consolidated Group or Five Star shall have no obligation to each other under this Agreement with respect to any taxable period that begins before the Affiliation Date or after the Disaffiliation Date, provided however, that this Agreement shall apply to any taxable period that includes the Affiliation Date and any final short taxable period of Five Star that includes the Disaffiliation Date. After the filing of all Returns related to periods beginning before the Disaffiliation Date, Five Star will be informed of the amount of consolidated carryovers as of the end of such taxable year or period that are attributable to Five Star, as provided by applicable Tax Law.

4. Record Retention.

After the Disaffiliation Date, GP Strategies and Five Star shall each make available to the other, as reasonably requested, and to any Governmental Authority that is duly authorized to request information, records

or documents, all information, records or documents of GP Strategies and Five Star and its subsidiaries for all periods prior to or including the Disaffiliation Date and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations including extensions thereof, provided that notice of any such extension is given to the party which did not grant the extension.

5. Audits and Contests.

GP Strategies shall, at its expense, have the right to control on the taxpayer's behalf any Tax audit and any administrative or court proceeding concerning Taxes for which GP Strategies is responsible for filing a Return under Section 2(a)(i) and to concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes, provided however, that Five Star will be entitled to participate in any such audit or proceeding concerning Taxes for which Five Star is liable under Section 2 and GP Strategies shall not concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes for which Five Star is liable under
Section 2 without the consent of Five Star (which consent shall not be unreasonably withheld).

Five Star shall, at its expense, have the right to control on the taxpayer's behalf any Tax audit and any administrative or court proceeding concerning Taxes for which Five Star is responsible for filing a Return under
Section 2(a)(ii) and to concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes.

6. Duty to Cooperate.

GP Strategies and Five Star shall provide reasonable cooperation to each other in connection with (i) the preparation or filing of any Return, Tax election, Tax consent or certification, or any claim for refund, (ii) any determination of liability for Taxes, and (iii) any audit, examination or other proceeding in respect of Taxes of GP Strategies. Such cooperation shall include making available, on a reasonable basis, employees of GP Strategies or Five Star, as the case may be, whose out-of-pocket costs, if any, such as travel and lodging, shall be reimbursed by the party to which such employees are made available.

7. Dispute Resolution.

In the event of a dispute concerning this Agreement, the parties shall, in good faith, attempt to resolve such dispute. If the dispute is not resolved then the parties shall submit such dispute to the Accounting Firm whose decision shall be binding on the parties. The Accounting Firm's fee shall be borne equally by GP Strategies and Five Star.

8. Notices.

All notices and other communications required or permitted hereunder shall be in writing and shall be given by hand delivery, telecopier, commercial courier service with guaranteed one-day delivery, or prepaid first class mail to the following addresses:

If to GP Strategies:

GP Strategies Corporation
777 Westchester Avenue
White Plains, NY 10604
Attn: Andrea Kantor, Esq.

If to Five Star:

Five Star Products, Inc.
777 Westchester Avenue
White Plains, NY 10604
Attn: Charles Dawson

9. Successors.

This Agreement shall be binding on and inure to the benefit of any successor, by merger, acquisition of assets or otherwise, to any of the parties hereto (including but not limited to any successor of GP Strategies or Five Star succeeding to the Tax Attributes of either under Section 381 of the Code), to the same extent as if the successor had been an original party to this Agreement. In the event that National Patent Development Corporation ("NPDC") were to acquire all of the stock of Five Star held by GP Strategies in connection with the anticipated spin off of NPDC, NPDC shall be considered the successor of GP Strategies for purposes of the preceding sentence.

10. Amendments.

This Agreement shall not be modified, amended, supplemented or terminated except in writing executed by both parties hereto.

11. Governing Law.

This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware.

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the date first written above.

GP STRATEGIES CORPORATION

By:______________________________
Scott N. Greenberg, President

FIVE STAR PRODUCTS, INC.

By:_______________________________
Charles Dawson, President

Exhibit 10.39

FIVE STAR PRODUCTS, INC
777 Westchester Avenue
White Plains, NY 10604

January 22, 2004

GP Strategies Corporation
777 Westchester Avenue
White Plains, NY 10604

Gentlemen:

In connection with the offer by Five Star Products, Inc. ("Five Star") to purchase up to 5,000,000 shares of its common stock pursuant to a tender offer (the "Tender Offer") which it intends to commence on or about February 6, 2004, Five Star and GP Strategies Corporation ("GP Strategies") hereby agree as follows:

1. If Five Star acquires at least 3,750,000 shares of its common stock pursuant to the Tender Offer, GP Strategies shall exchange for Five Star common stock a sufficient principal amount of the Five Star 8% Senior Unsecured Note due September 30, 2004 (the "Five Star Note") to allow GP Strategies to increase its ownership to at least 80% of our common stock. The exchange price for the Five Star Note shall equal the same price that Five Star is paying to its stockholders in the Tender Offer. Such exchange shall occur as soon as legally permissible following termination of the Tender Offer.

2. If, pursuant to Clause 1 above, GP Strategies shall increase its ownership to at least 80% of the Five Star common stock and Five Star would become, for federal tax purposes, part of the affiliated group of which GP Strategies is the common parent, Five Star and GP Strategies shall inter into the Tax Sharing Agreement substantially in the form attached hereto as Exhibit A, promptly following the date upon which Five Star becomes part of the affiliated group.

Very truly yours,

FIVE STAR PRODUCTS, INC.

GP STRATEGIES CORPORATION

Exhibit "A"

TAX SHARING AGREEMENT

TAX SHARING AGREEMENT (this "Agreement") dated as of February 1, 2004 between GP Strategies Corporation, a Delaware corporation ("GP Strategies"), and Five Star Products, Inc., a Delaware corporation, ("Five Star").

WHEREAS, GP Strategies anticipates that it may increase its ownership to at least 80% of Five Star's outstanding stock and, in such case, Five Star would become, for federal income tax purposes, part of the affiliated group of which GP Strategies is the common parent and GP Strategies and Five Star and their respective subsidiaries would join in the filing of a consolidated federal income tax return for a group of affiliated companies of which GP Strategies is the common parent and Five Star is a member (the "GP Strategies Consolidated Group"); and

WHEREAS, GP Strategies and Five Star wish to provide for the payment of tax liabilities and entitlement to refunds, allocate responsibility and provide for cooperation in the filing of tax returns, provide for the realization and payment of tax benefits arising out of adjustments to the tax returns of the parties, and to provide for certain other matters;

NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound, GP Strategies and Five Star agree as follows:

1. Definitions.

For purposes of this Agreement:

(a) "Taxes" means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property (including, without limitation, real property Taxes and any assessments, special or otherwise), windfall profits, customs, duties or other Taxes, fees, assessments or charges of any kind whatever, together with any interest and penalties, additions to tax or additional amounts with respect thereto (and "Tax" means any one of the foregoing Taxes).

(b) "Returns" means all returns, declarations, reports, statements and other documents required under a Tax Law (as hereinafter defined) either (i) to be filed with a Governmental Authority (as hereinafter defined) in respect of Taxes; or (ii) to be provided to a person other than a Governmental Authority (and "Return" means any one of the foregoing Returns).

(c) "Code" means the Internal Revenue Code of 1986, as amended. All citations to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto.

(d) "Section" means a section of this Agreement, unless indicated otherwise.

(e) "Governmental Authority" means the government of the United States or any foreign country or any state, province, municipality or other political subdivision of the United States or any foreign country, or any

agency, department, board, instrumentality, authority or commission (including regulatory and administrative bodies) of any of the foregoing.

(f) "Tax Law" means a statute, regulation or administrative rule enacted or promulgated for the determination, imposition, assessment or collection of any Tax.

(g) "Common Consolidated Tax Return" shall mean any consolidated, combined or unitary Return that includes at least one member of the GP Strategies Consolidated Group (other than Five Star or any of its subsidiaries) and Five Star or any of its subsidiaries.

(h) "Tax Attribute" shall mean any net operating loss, capital loss, credit or other tax attribute (other than the basis of property) relevant to the calculation of a tax liability.

(i) "Applicable Federal Rate" shall have the meaning set forth in Section 1274(d) of the Code for a short term rate, compounded quarterly.

(j) "Accounting Firm" means (i) the nationally recognized accounting firm that is the principal independent auditor of both GP Strategies and Five Star at the time of a dispute governed by Section 7 hereof; or (ii) if the firm described in clause (i) is unwilling or unable to serve under Section 7, the nationally recognized accounting firm appointed by the firm described in clause (i); or (iii) if GP Strategies and Five Star do not use the same accounting firm as their principal independent auditor, then the nationally recognized accounting firm jointly selected by the principal independent auditors of GP Strategies and Five Star at the time of a dispute governed by
Section 7 hereof.

(k) "Disaffiliation" means any event that results in Five Star no longer being a member of the GP Strategies Consolidated Group.

(l) "Disaffiliation Date" means the date on which Disaffiliation occurs.

(m) "Affiliation" means that GP Strategies has become the owner of at least 80% of the outstanding Five Star stock and Five Star has become a member of the GP Strategies Consolidated Group.

(n) "Affiliation Date" means the first day on which Five Star is a member of the GP Strategies Consolidated Group for federal income tax purposes.

2. Returns and Payments.

(a) Filing of Returns.

(i) GP Strategies shall prepare and shall timely file or cause to be timely filed (1) all Returns filed on a separate company basis for any member of the GP Strategies Consolidated Group other than Five Star or any of its subsidiaries, (2) all Returns filed on a consolidated, combined or unitary basis that include members of the GP Strategies Consolidated Group (other than Five Star or any of its subsidiaries) that is not a Common Consolidated Tax Return, and (3) all Common Consolidated Tax Returns. Subject to
Section 2(c), GP Strategies shall make full and timely payment of all Taxes shown due on all Returns described in this Section 2(a)(i).

(ii) Five Star shall prepare, at its own expense, and shall timely file or cause to be timely filed (1) all Returns filed on a separate

company basis for Five Star or any of its subsidiaries, (2) all Returns filed on a consolidated, combined or unitary basis that include Five Star or any of its subsidiaries other than any Common Consolidated Tax Return, and (3) all Returns with respect to Five Star or any of its subsidiaries for any taxable year or other taxable period beginning after the Disaffiliation Date. Five Star shall make full and timely payment of all Taxes shown due on all Returns described in this Section 2(a)(ii).

(iii) To the extent required or permitted by law or administrative practice, in the case of any Common Consolidated Tax Return that includes the Disaffiliation Date, the taxable year of Five Star and its subsidiaries shall be treated as closing at the close of the Disaffiliation Date.

(b) Obligation to Remit Taxes. Five Star and GP Strategies shall each timely remit or cause to be remitted any Taxes due in respect of any Tax for which it is required to file a Return hereunder and shall be entitled to reimbursement for such payments only to the extent provided in Section 2(c).

(c) Tax Sharing Obligations.

(i) Five Star's Obligations. Other than liabilities dealt with elsewhere in this Agreement, Five Star shall be liable for and shall indemnify and hold GP Strategies and its subsidiaries (other than Five Star and its subsidiaries) harmless against any Tax liability of Five Star or any of its subsidiaries, including the portion of any Tax liability resulting from the inclusion of Five Star or any of its subsidiaries in a Common Consolidated Tax Return as determined under Section 2(c)(iii).

(ii) GP Strategies' Obligations. Other than liabilities dealt with elsewhere in this Agreement, GP Strategies shall be liable for, and shall hold Five Star and its subsidiaries harmless against any Tax liability of any member of the GP Strategies Consolidated Group other than Five Star and its subsidiaries.

(iii) Five Star's Share of the Common Consolidated Tax Return Liability. Five Star's proportionate share of the Tax liability with respect to a Common Consolidated Tax Return, or with respect to any estimated Tax payment relating to any such Return, shall be determined by multiplying the separate return Tax liability, if any, of Five Star and its subsidiaries (the "Five Star Subgroup") by 80%. For purposes of this determination, the separate return Tax liabilities of the Five Star Subgroup shall be determined as if (1) the Common Consolidated Tax Return included only the Tax items of the Five Star Subgroup, applying the principles of Section 1552(a)(2) of the Code and Treas. Reg. ss. 1.1552-1(a)(2) and (2) any Tax Attribute attributable to the Five Star Subgroup were available solely to the Five Star Subgroup.

(iv) Notification and Contest Procedures.

(1) GP Strategies shall, in good faith, calculate Five Star's Tax liability, if any, under Section 2(c)(iii) and notify Five Star of the amount of such liability, if any (the "GP Strategies Notification Letter"). Notification of a Five Star Tax liability and payment obligation under this clause (1) of this Section 2(c)(iv) shall constitute a request for payment, and, subject to clause (2) of this Section 2(c)(iv), Five Star shall pay such amount, in immediately available funds, to GP Strategies within 30 days after receipt of the GP Strategies Notification Letter, provided that Five Star shall not be obligated to make such payment to GP Strategies earlier than 10 days prior to the due date for the filing or making of the relevant Return or estimated Tax payment.

(2) If Five Star determines in good faith that the amount of its Tax liability under Section 2(c)(iii) differs from the corresponding amount in the GP Strategies Notification Letter, Five Star shall notify GP Strategies of such difference (the "Five Star Tax Adjustment Amount") (such determination, with calculations in reasonable detail, being referred to as the "Five Star Notification Letter," which Five Star shall deliver to GP Strategies no later than 30 days after the date of receipt of the GP Strategies Notification Letter). If GP Strategies determines in good faith that Five Star's determination of the Five Star Tax Adjustment Amount is incorrect, GP Strategies shall notify Five Star of such determination (the "Second GP Strategies Notification Letter") within 30 days of receipt of the Five Star Notification Letter. If the dispute is not resolved by mutual accord within 30 days of Five Star's receipt of the Second GP Strategies Notification Letter, the dispute shall be resolved under the provisions of Section 7. Until GP Strategies and Five Star reach agreement, or any dispute between them is resolved pursuant to
Section 7, as to the Five Star Tax Adjustment Amount, the provisions of this
Section 2(c) shall continue to apply and payments shall be made by the parties in the amounts set forth in the GP Strategies Notification Letter in accordance with clause (1) of this Section 2(c)(iv). Within 30 days of reaching an agreement or resolution, GP Strategies shall pay to Five Star, or Five Star shall pay to GP Strategies, the agreed amount after taking into account any payments made under clause (1) of this Section 2(c)(iv), together with interest at a rate equal to the Applicable Federal Rate from the date of Five Star's payment pursuant to this Section 2(c)(iv).

(v) Subsequent Adjustments. If the items used to determine the Tax liabilities in Section 2(c)(iii) are adjusted by reason of an amended return, claim for refund, examination by a Governmental Authority, or the final decision of any court, the amount due from or to Five Star under Section 2(c)(iii) shall be recomputed using the adjusted items. Five Star agrees to pay to GP Strategies any additional amount owed including interest at the rate applicable to underpayments of the GP Strategies Consolidated Group pursuant to
Section 6621 of the Code (with full credit given for any prior payments for the year), and GP Strategies agrees to pay to Five Star any overpayment made by Five Star including interest at the rate applicable to underpayments of the GP Strategies Consolidated Group pursuant to Section 6621 of the Code.

Payments to be made by GP Strategies to Five Star pursuant to this Section 2(c)(v) shall be made, in the case of a refund, within 30 days after GP Strategies has received such refund. In the case of a credit, such payments by GP Strategies to Five Star shall be made within 30 days after GP Strategies has received written notification from a Governmental Authority reflecting adjustments for such credit to a Return of the GP Strategies Consolidated Group. Payments to be made by Five Star to GP Strategies shall be made, in the case of any additional Tax, no later than 5 days before the due date of any required Tax payment by GP Strategies. In the case of a reduction in credit of Tax, such payment by Five Star to GP Strategies shall be made within 30 days after GP Strategies has received written notification from a Governmental Authority reflecting an adjustment for such reduction to a Return of the GP Strategies Consolidated Group.

All payments required under this Section 2(c)(v) shall be paid by Five Star to GP Strategies or by GP Strategies to Five Star, as the case may be, regardless of whether Five Star is a member of the GP Strategies Consolidated Group.

3. Affiliation and Disaffiliation of Five Star.

(a) Unless the Affiliation shall occur on or before December 1, 2004, this Agreement shall have no application and GP Strategies, the GP Strategies Consolidated Group or Five Star shall have no obligation to each other under this Agreement.

(b) This Agreement shall have no application and GP Strategies, the GP Strategies Consolidated Group or Five Star shall have no obligation to each other under this Agreement with respect to any taxable period that begins before the Affiliation Date or after the Disaffiliation Date, provided however, that this Agreement shall apply to any taxable period that includes the Affiliation Date and any final short taxable period of Five Star that includes the Disaffiliation Date. After the filing of all Returns related to periods beginning before the Disaffiliation Date, Five Star will be informed of the amount of consolidated carryovers as of the end of such taxable year or period that are attributable to Five Star, as provided by applicable Tax Law.

4. Record Retention.

After the Disaffiliation Date, GP Strategies and Five Star shall each make available to the other, as reasonably requested, and to any Governmental Authority that is duly authorized to request information, records or documents, all information, records or documents of GP Strategies and Five Star and its subsidiaries for all periods prior to or including the Disaffiliation Date and shall preserve all such information, records and documents until the expiration of any applicable statute of limitations including extensions thereof, provided that notice of any such extension is given to the party which did not grant the extension.

5. Audits and Contests.

GP Strategies shall, at its expense, have the right to control on the taxpayer's behalf any Tax audit and any administrative or court proceeding concerning Taxes for which GP Strategies is responsible for filing a Return under Section 2(a)(i) and to concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes, provided however, that Five Star will be entitled to participate in any such audit or proceeding concerning Taxes for which Five Star is liable under Section 2 and GP Strategies shall not concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes for which Five Star is liable under
Section 2 without the consent of Five Star (which consent shall not be unreasonably withheld).

Five Star shall, at its expense, have the right to control on the taxpayer's behalf any Tax audit and any administrative or court proceeding concerning Taxes for which Five Star is responsible for filing a Return under
Section 2(a)(ii) and to concede, compromise or contest any assessment or assertion of liability with respect to any such Taxes.

6. Duty to Cooperate.

GP Strategies and Five Star shall provide reasonable cooperation to each other in connection with (i) the preparation or filing of any Return, Tax election, Tax consent or certification, or any claim for refund, (ii) any determination of liability for Taxes, and (iii) any audit, examination or other proceeding in respect of Taxes of GP Strategies. Such cooperation shall include making available, on a reasonable basis, employees of GP Strategies or Five Star, as the case may be, whose out-of-pocket costs, if any, such as travel and lodging, shall be reimbursed by the party to which such employees are made available.

7. Dispute Resolution.

In the event of a dispute concerning this Agreement, the parties shall, in good faith, attempt to resolve such dispute. If the dispute is not resolved then the parties shall submit such dispute to the Accounting Firm whose decision shall be binding on the parties. The Accounting Firm's fee shall be borne equally by GP Strategies and Five Star.

8. Notices.

All notices and other communications required or permitted hereunder shall be in writing and shall be given by hand delivery, telecopier, commercial courier service with guaranteed one-day delivery, or prepaid first class mail to the following addresses:

If to GP Strategies:

GP Strategies Corporation
777 Westchester Avenue
White Plains, NY 10604
Attn: Andrea Kantor, Esq.

If to Five Star:

Five Star Products, Inc.
777 Westchester Avenue
White Plains, NY 10604
Attn: Charles Dawson

9. Successors.

This Agreement shall be binding on and inure to the benefit of any successor, by merger, acquisition of assets or otherwise, to any of the parties hereto (including but not limited to any successor of GP Strategies or Five Star succeeding to the Tax Attributes of either under Section 381 of the Code), to the same extent as if the successor had been an original party to this Agreement. In the event that National Patent Development Corporation ("NPDC") were to acquire all of the stock of Five Star held by GP Strategies in connection with the anticipated spin off of NPDC, NPDC shall be considered the successor of GP Strategies for purposes of the preceding sentence.

10. Amendments.

This Agreement shall not be modified, amended, supplemented or terminated except in writing executed by both parties hereto.

11. Governing Law.

This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware.

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the date first written above.

GP STRATEGIES CORPORATION

By:______________________________
Name:
Title:

FIVE STAR PRODUCTS, INC.

By:_______________________________
Name:
Title:

Exhibit 10.40

AGREEMENT OF SUBORDINATION & ASSIGNMENT

This AGREEMENT OF SUBORDINATION & ASSIGNMENT made and dated as of June 20, 2003, by JL DISTRIBUTORS, INC., a corporation of the State of Delaware with its principal corporate place of business at 777 Westchester Avenue, Fourth Floor, White Plains, Westchester County, New York 10604 (hereinafter referred to as "CREDITOR")

in favor of

FLEET CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Rhode Island with offices at 750 Walnut Avenue, Third Floor, Cranford, New Jersey 07016 (hereinafter referred to as "LENDER")

WITNESSES THAT:

(1) WHEREAS, FIVE STAR GROUP, INC., a corporation of the State of Delaware with its principal corporate place of business at 903 Murray Road, P.O. Box 1960, East Hanover, Morris County, New Jersey (hereinafter referred to as "DEBTOR") and LENDER are parties to a certain Loan and Security Agreement dated even date herewith (such certain Loan and Security Agreement and all extensions, modifications (including without limitation modifications increasing or decreasing the amount of the Revolving Loan described below), refinancings, renewals, substitutions, replacements and/or redatings thereof being called the "Loan Agreement" in this Agreement);

(2) WHEREAS, pursuant to the Loan Agreement, DEBTOR has obtained the benefits of a $25,000,000 revolving loan facility (called the "Revolving Loan" in this Agreement and more fully defined in Article I of the Loan Agreement) from LENDER; and

(3) WHEREAS, it is a condition of the obligation of LENDER to execute the Loan Agreement and to extend to DEBTOR the benefits of the Revolving Loan that this Agreement shall have been executed and shall be in full force and effect; and

(4) WHEREAS, CREDITOR desires that LENDER enter into the Loan Agreement and extend the Revolving Loan to DEBTOR as aforesaid and, as a result, executes this Agreement as an inducement to LENDER to do so;

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration and in order to induce LENDER from time to time to extend and/or to continue to extend credit, advances or loans to DEBTOR under the Loan Agreement, CREDITOR hereby agrees as follows:

(1) (a) (i) Subject to the provisions of subparagraph (b) and subparagraph (c) below, no "Claims" which CREDITOR now has or may hereafter have or acquire against DEBTOR or any of its property or any of its rights in any property can be paid unless and until DEBTOR has paid and satisfied in full all "Liabilities" which are owed by DEBTOR to LENDER.

(ii) For purposes of this Agreement, the term "Claims" means all claims and demands (and all interest accrued or that may hereafter accrue thereon) which CREDITOR now has or may hereafter have or acquire against DEBTOR or any of its property or any of its rights in any property which, in each and all of the foregoing cases, arise out of DEBTOR's obligations to CREDITOR under
(x) that certain Asset Purchase Agreement dated August 31, 1998 between JL DISTRIBUTORS, INC. (as seller and then known as FIVE STAR GROUP, INC.) and BORROWER (as buyer and then known as "FIVE STAR ACQUISITION CORP.") relating to BORROWER's purchase

of the assets of said JL DISTRIBUTORS, INC. (then known as FIVE STAR GROUP, INC.) and (y) that certain $4,500,000 note dated August 2, 2002 (the "Subordinated SellerNote"), a copy of which is attached hereto as Exhibit "A".

(iii) For purposes of this Agreement, the term "Liabilities" shall have the same meaning in this Agreement that it has in the Loan Agreement.

(b) Notwithstanding the provisions of subparagraph (a) above, DEBTOR may pay and CREDITOR may receive payments of interest on the Subordinated Seller Note so long as no Event of Default has occurred and is continuing under the Loan Agreement.

(c) Notwithstanding the provisions of subparagraph (a) above, DEBTOR may pay and CREDITOR may receive limited repayments of principal (each a "principal paydown") on the Subordinated Seller Note if the following conditions have been satisfied:

(i) No Event of Default has occurred and is continuing under the Loan Agreement.

(ii) The amount of any permitted "principal paydown" will be calculated and paid once each year, after LENDER's receipt and review of BORROWER's audited fiscal year-end financial statements prepared and submitted as required by the Loan Agreement.

(iii) The "principal paydown" for BORROWER's 2002 fiscal year can be made no sooner than April 1, 2003 and cannot exceed the lesser of (A) $1,250,000 or (B) the sum of $1,000,000 plus 50% of BORROWER's Net Income after taxes (determined based on generally accepted accounting principles, consistently applied over the period to which they relate) for BORROWER's 2002 fiscal year .The "principal paydown" for BORROWER's 2003 fiscal year and for each fiscal year thereafter can be made no sooner than April 1 of the immediately following fiscal year [e.g., the "principal paydown" based on BORROWER's 2003 fiscal year Net Income after taxes cannot be made until April 1, 2004] and cannot exceed the lesser of (A) $1,250,000 or (B) the sum of $1,000,000 plus 50% of BORROWER's Net Income after taxes (determined based on generally accepted accounting principles, consistently applied over the period to which they relate) for the fiscal year immediately preceding the date of distribution [e.g., the "principal paydown" made by BORROWER in 2004 must be based on BORROWER's 2003 Net Income after taxes].

(iv) The full amount of the "principal paydown" made in any fiscal year, if treated as a scheduled payment in the year BORROWER's Net Income after taxes was earned, will not cause the Fixed Charge Coverage (as determined in accordance with the Loan Agreement) to be less than 1.13 to 1.0 for the year in which such income was earned (provided, however, that this subsection (iv) shall not apply to any "principal paydown" made during BORROWER's 2003 fiscal year).

(v) Immediately prior to the "principal paydown", the Fixed Charge Coverage (as determined in accordance with the Loan Agreement) for the year in which BORROWER's Net Income after taxes was earned must be greater than 1.25 to 1.0.

(vi) If only the component of the "principal paydown" consisting of 50% of BORROWER's Net Income after taxes for the year in which such income was earned is treated as a scheduled payment, the Fixed Charge Coverage (as determined in accordance with the Loan Agreement) for the year in which such income was earned must be at least 1.25 to 1.0.

(vii) After giving effect to the"principal paydown", the "loan value" of "Eligible Inventory" and "Eligible Receivables" must exceed the outstanding principal balance of the Revolving Loan by at least $1,500,000 (the terms "loan value", "Eligible Inventory" and "Eligible Receivables" to have the same meaning herein that they have in the Loan Agreement).

(viii) The amount of the "principal paydown", when deducted from BORROWER's "Tangible Net Worth" (as determined in accordance with the Loan Agreement) will not cause such Tangible Net Worth to be less than $6,000,000.

(ix) The ratio of BORROWER's "Total Debt to its Tangible Net Worth" (as determined in accordance with the Loan Agreement) will not, when the "principal paydown" is taken into account, cause such ratio of Total Debt to Tangible Net Worth to be more than 6.0 to 1.0.

(x) The average "loan value" of "Eligible Inventory" and "Eligible Receivables" during the three full calendar months preceding the date of the "principal paydown" must exceed by at least $2,500,000 BORROWER's average daily usage under the Revolving Loan during the same three month period (the terms "loan value", "Eligible Inventory" and "Eligible Receivables" to have the same meaning herein that they have in the Loan Agreement).

(xi) Each allowed annual "principal paydown" is for one year only and is non cumulative so that any "principal paydown" which is not made in any year will not accrue to and cannot be used in future years.

(xii) The "principal paydown", if treated for accounting purposes as made in the fiscal year from which the payment has been earned, cannot be made if the amount and effect of the payment would have given rise to a covenant default, if such "principal paydown" had in fact been made in such fiscal year.

(2) In all events, no collateral or other security may be given by DEBTOR to CREDITOR to secure payment of any sum due on any of the Claims, and no such collateral or other security shall be received, accepted or retained by CREDITOR unless and until DEBTOR has paid and satisfied in full all the Liabilities.

(3) CREDITOR waives any and all notice of the acceptance of this Agreement and of the creation, extension, modification (including without limitation any modification increasing or decreasing the amount of the Liabilities), refinancing, renewal, substitution, replacement, redating and/or accrual of any of the Liabilities or of the reliance of LENDER upon this Agreement.

(4) CREDITOR hereby consents that, without notice to or further assent by CREDITOR, and without impairing the subordination contained in this Agreement (a) the obligation of DEBTOR or of any other party for or upon any of the Liabilities may, from time to time, in whole or in part, be renewed, extended, modified, accelerated, compromised or released by LENDER, as it may deem advisable and whether with or without consideration, (b) any collateral and/or liens securing any of the Liabilities may, from time to time, in whole or in part, be exchanged, sold, impaired, released, surrendered or otherwise disposed of by LENDER, as it may deem advisable and whether with or without consideration, and (c) any deposit balance or balances to the credit of DEBTOR may, from time to time, in whole or in part, be paid out, surrendered, released or otherwise disposed of by LENDER, as it in its discretion may deem advisable and whether with or without consideration.

(5) CREDITOR hereby transfers and assigns to LENDER, as collateral security for any and all of the Liabilities, all Claims of CREDITOR against DEBTOR, and hereby authorizes AGENT, in its own name or in the name of CREDITOR, to collect and enforce said Claims by suit, proof of debt in any proceeding under the Bankruptcy Act, or amendments thereto, or any decedent's estate, insolvency or liquidation proceeding, or otherwise.

(6) Should any payment (except as set forth in Paragraph 1(b) and Paragraph 1(c) above) or security or anything of any value whatsoever be received by CREDITOR for or on account of said Claims, prior to the payment and satisfaction in full of the Liabilities, CREDITOR agrees that it will forthwith deliver the same to LENDER in precisely the form received, except for CREDITOR's endorsement or assignment where necessary, for application on account

of the Liabilities, and that until so delivered, CREDITOR shall hold the same in trust as the property of LENDER.

(7) CREDITOR further agrees that, should any signature, endorsement, assignment or other form of transfer be required to effect the transfer of any such payment, security or other thing of value to LENDER, or in any other respect to carry out the terms of this Agreement, to make and deliver all signatures, endorsements, transfers, assignments and other instruments required by LENDER to effectuate the purposes of this Agreement as herein expressed or reasonably implied; and in the event of the failure of CREDITOR to do so within 15 days of written request by LENDER, LENDER is hereby irrevocably constituted and appointed the agent and attorney in fact of CREDITOR to do so, with full power of substitution in the premises.

(8) CREDITOR and DEBTOR represent to LENDER that DEBTOR now owes CREDITOR the principal sum of $4,500,000 and that DEBTOR's obligation to repay such sum is evidenced by the Subordinated Seller Note, a copy of which is attached hereto as Exhibit "A". Such sum is owed without counterclaim, defense or offset and may be prepaid only as so allowed by Paragraph 1(b) and Paragraph 1(c) above.

(9) CREDITOR and DEBTOR further agree that at no time hereafter will any part of said indebtedness be represented by any other negotiable instruments or writings, except the Subordinated Seller Note or such other negotiable instruments or writings, if any, as LENDER shall request to be executed and delivered to it for the purpose of evidencing said indebtedness or any part thereof, and in that case said negotiable instruments or other writings shall either be payable to LENDER or delivered to LENDER, or, if payable to CREDITOR, shall be endorsed and/or assigned by CREDITOR and delivered to LENDER.

(10) CREDITOR and DEBTOR agree that the rights granted to LENDER hereunder shall continue in full force and effect notwithstanding the fact that BORROWER's account may, from time to time, be temporarily in a credit position and shall continue until the Loan Agreement is terminated and all the Liabilities are paid in full.

(11) DEBTOR hereby agrees that (a) it will render to LENDER upon demand, from time to time, a statement of the account of CREDITOR with DEBTOR; (b) LENDER shall have access, from time to time, to its books and records in order that LENDER may make full and free examination of the state of the accounts of CREDITOR with DEBTOR (with the right to make copies thereof); and (c) it will duly comply with and perform each and every term of this Agreement on its part required to be performed.

(12) DEBTOR agrees that a breach by either DEBTOR or CREDITOR in the performance of any of the terms of this Agreement shall be an Event of Default as that term is defined in the Loan Agreement.

(13) The term "DEBTOR" as used throughout this Agreement shall include the corporation named herein as DEBTOR, and shall also include, but not be limited to, (a) any successor individual or individuals, association, partnership or corporation to which all or substantially all of the business or assets of DEBTOR shall have been transferred and (b) any other corporation into or with which DEBTOR shall have been merged, consolidated, reorganized, or absorbed.

(14) No waiver of any right or remedy, and no modification of this Agreement shall be effective unless in writing signed by the party to be charged, and then only to the extent therein set forth.

(15) The rights and remedies of LENDER under this Agreement, shall be cumulative, and may be exercised independently or concurrently with any other rights and remedies LENDER may have, and such rights and remedies may be exercised from time to time in whole or in part as LENDER in its sole discretion, may determine.

(16) No delay on the part of LENDER in exercising any right, power or privilege hereunder or elsewhere conferred shall operate as a waiver thereof.

(17) This Agreement is binding upon the undersigned, and their respective heirs, executors, administrators, successors or assigns, shall inure to the benefit of LENDER and its successors and assigns, and shall be governed by, and construed in accordance with the laws of the State of New Jersey.

(18) CREDITOR AND DEBTOR MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE LOAN AGREEMENT AND MAKE THE REVOLVING LOAN. IN WITNESS WHEREOF, each of the undersigned has caused these presents to be properly executed as of the date first above written.

WITNESS:                             FIVE STAR GROUP, INC.
                                              (DEBTOR)


                                     By:
-------------------------           --------------------------------------------
John Moran                          Steve Schilit
                                    Executive Vice President

WITNESS:                            JL DISTRIBUTORS, INC.
                                              (CREDITOR)


                                              By:
-------------------------           --------------------------------------------
Steve Schilit                       John Moran, Vice President

EXHIBIT "A"

True copy of subordinated note

Exhibit 10.60

MANAGEMENT SERVICES AGREEMENT

This Agreement is made as of January 1, 2004 between GP Strategies Corporation, a Delaware corporation ("GP") and GSE Systems, Inc., a Delaware corporation ("GSE").
W I T N E S S E T H WHEREAS, GP has processes, systems, equipment and personnel capable of supporting the business operations of its own and other businesses; and

WHEREAS, GSE has need of the types of business support services that GP can provide and GSE wishes to avail itself of services GP can provide; and

WHEREAS GP and GSE desire in this Agreement to evidence the terms upon which GP shall provide mutually agreed services;

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

ARTICLE I. - MANAGEMENT SERVICES

During the term of this Agreement, GP shall provide the following support services to the extent and in the areas described (collectively, the "Services"):

1. Supervision and administration of payroll and employee-benefit services covering GSE employees, including the administration of health care claims.

2. Obtaining and maintaining in force all insurance policies necessary or appropriate in connection with GSE's activities, provided that GP shall have no obligation to pay premiums or other fees under such insurance policies on GSE's behalf (and GP shall be promptly reimbursed for any insurance-related cost it incurs on GSE's behalf).

3. GP shall provide GSE with financial analysis and support, accounting and audit service and support, and accounts payable services using the systems, processes and practices utilized by GP.

4. GP shall provide GSE with legal advice through its in-house counsel, and supervision of matters referred to outside counsel, including assistance with respect to the preparation and review of SEC reports, general corporate and securities matters, corporate governance issues, issues relating to compliance with the Sarbanes-Oxley Act, claims, litigation, the preparation and review of contracts and other matters. GP shall have the authority to engage on behalf of GSE outside counsel satisfactory to GSE, provided that such engagement shall be approved in advance by GSE and further provided that all fees and expenses in connection with services rendered by such counsel shall be borne by GSE.

5. GP shall assist GSE to comply with federal, state and local laws, rules and regulations applicable to GSE's activities, including the preparation and filing of tax returns, reports and other documents required of GSE by any public authority or agency.

6. GP shall advise GSE in banking, financial and cash management affairs, and shall use its best efforts to obtain payment and performance bonds and letters of credit for GSE. Any fees charged by GP for obtaining such bonds or letters of credit for GSE shall be based on commercially reasonable terms and payment thereof is subject to approval by GSE's independent directors. To the extent requested by GSE, GP shall prepare and present to GSE's Board of Directors recommendations as to the appropriate means of financing GSE's activities and shall assist in the supervision of banking and other cash control matters.

7. GP shall assist GSE in matters relating to purchasing, leasing, procurement, disposal and other activities relating to resources utilized in its business, and GSE shall receive the financial benefit of such activities. By way of example only, if GP negotiates a volume discount or other savings relating to purchasing, such benefits shall flow directly to GSE.

8. GP shall assist GSE with invoicing and collection services, but GP shall not be a guarantor of the collectability of any amounts owed to GSE. 9. GP shall provide network support services and financial system support services using the systems and processes used by GP. This includes providing the actual financial system that GSE will utilize.

10. GP shall provide human resources advice and services to GSE management and GSE employees, including assistance regarding employment issues, benefits, policies and procedures and the administration thereof.

11. GP shall assist GSE with such other general and administrative services as are necessary to enable GSE to function in the ordinary course of business.

12. GP shall provide GSE with executive management support to assist GSE with business performance and development.

ARTICLE II. - PERSONNEL AND EXPENSES

GP shall employ and maintain a staff adequate, in its judgment, to provide management and administrative services to GSE pursuant to this Agreement. In addition to the Compensation stated in Article VI, GSE shall reimburse GP any for any reasonable travel and temporary living expenses incurred while traveling and other reasonable out-of-pocket costs incurred by its employees in providing the services described in Article I of this Agreement. GP shall invoice GSE quarterly and GSE shall, within 30 days after the receipt of each such invoice, remit payment to GP.

GSE shall pay directly to the provider/vendor, or shall reimburse GP after the payment therefor by GP, all costs related to services furnished by third parties, such as legal and accounting fees, insurance premiums, facility costs, printing costs, costs of consulting services furnished by independent contractors, and all taxes and other services requested by GSE or reasonably required to carry out the objectives of this Agreement. GP agrees to work with GSE in good faith to minimize the use of third parties for any services contemplated hereunder and any such third party use shall be governed by Articles I and III.

ARTICLE III. - EXTENT OF GP's AUTHORITY

GP shall not have the authority to obligate GSE for any expenditure in excess of $10,000 or other obligation not outlined herein without prior approval from an officer or other authorized manager of GSE.

ARTICLE IV. - CONFIDENTIAL INFORMATION

For purposes of this Agreement, "Confidential Information" shall mean information disclosed to GP or known by GP or any of its officers, directors, stockholders, agents or employees as a consequence of or through the performance by GP of this Agreement, which in the reasonable judgment of GSE is not generally known in any industry in which GSE is engaged, about GSE's products, processes and services, including information relating to research, development, inventions, manufacturing, purchasing, accounting, engineering, marketing, merchandising and selling. Except as may be required by law or as required in the fulfillment of its duties under this Agreement, GP will not, directly or indirectly, use, disseminate or disclose any Confidential Information, and GP shall take all steps reasonably necessary to prevent the dissemination or disclosure of Confidential Information by any of its agents or employees. Upon termination of this Agreement, GP will return to GSE all documents, records, notebooks and similar repositories of such Confidential Information, including

copies thereof, then in GP's possession, whether prepared by GP, its agents, employees or others. However, nothing in this Article IV shall require GP to segregate records, electronic data or other information that would increase the cost of providing the services under this Agreement unless GSE pays the additional cost of doing so.

ARTICLE V. - COOPERATION

A. GSE shall make available to GP such information, records and other data as may be needed by GP to perform the services required by this Agreement. Any material misstatement by GSE or any failure by GSE to inform GP of any material fact with respect to GSE shall relieve GP of any liability relating to such material fact or omission arising under this Agreement.

B. Each party hereto will, and will cause their respective subsidiaries to, give one another reasonable access (including duplication rights) to any books, records, contracts, instruments and other information used in the businesses of GP and GSE prior to the date hereof which may prove reasonably necessary to the other party in connection with their respective businesses both before and after the date hereof.

ARTICLE VI. - COMPENSATION

As compensation for the services provided by GP hereunder, in addition to the reimbursement payable to GP under Article II above, GP shall receive a total yearly fee of Six Hundred Eighty Five Thousand Dollars ($685,000), which fee shall be applicable to the first year and, if exercised, the second year of this Agreement. The total yearly fee of $685,000 shall be reduced to $620,000 for the first year, and $590,000 for the second year, in the event that GP does not provide a loan guarantee to GSE in the amount of $1,800,000. Thereafter, any fee for the services provided by GP hereunder shall be agreed upon by GP and GSE not less than 30 days prior to the commencement of any year, subject to approval by GSE's independent directors. The fee compensation for all services shall be payable in equal quarterly installments on the last day of each calendar year quarter (with the first such quarterly fee being due on April 1, 2004).

ARTICLE VII. - LIMITATION OF LIABILITY

In providing services hereunder, GP shall have a duty to act, and to cause its agents to act, in a reasonably prudent manner, but neither GP nor any officer, director, employee or agent of GP shall be liable to GSE for any error of judgment or mistake of law or for any loss incurred by GSE in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of GP or from GP's disregard of obligations and duties under this Agreement.

ARTICLE VIII. - indemnificatIon

GSE shall indemnify and hold harmless GP, its subsidiaries (other than GSE and its subsidiaries) and their respective stockholders, officers, directors and employees from and against any and all losses, liabilities, claims, damages, costs and expenses (including reasonable attorneys' fees and other expenses of litigation) to which such party may become subject arising out of the provision by GP to GSE of services under this Agreement, but such indemnity shall not protect any person against any liability to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or disregard of obligations and duties hereunder. Notwithstanding the foregoing, in no event shall GSE be liable for any consequential damages.

ARTOC;E IX - ARBITRATION

In the event the parties hereto shall not be able to agree as to the amount of any services rendered or expenses incurred under this Agreement, or as to any other matter relating to this Agreement, the matter shall be settled by

arbitration in New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association and the award rendered by such arbitrator(s) shall not be subject to appeal and may be entered in any court having jurisdiction thereof.

ARTICLE X. - TERM

The term of this Agreement shall commence on the date hereof and shall continue for a period of one (1) year, subject to earlier termination only upon the mutual consent of the parties hereto or at the election of one of the parties upon default by the other in performance of its obligations hereunder, provided that this Agreement may be renewed by GSE for successive one-year terms upon notifying GP in writing at least three (3) months prior to the end of the initial term of this Agreement or any renewal thereof. After the initial term, and only for any renewal period, GSE may terminate the Agreement at any time for its own convenience upon providing GP with at least sixty (60) days prior written notice.

ARTOC;E XI. - OTHER PROVISIONS

1. Any notice provided for herein shall be in writing and shall be deemed to have been given if and when delivered personally or otherwise actually received after it is (i) deposited in the United States mail, certified, return receipt requested, postage prepaid, (ii) hand delivered by a recognized courier service or otherwise, or (iii) faxed (with receipt confirmed) to the recipient addressed as follows:

If to GP:

777 Westchester Ave, 4th Floor
White Plains, New York 10604

Attn: Scott Greenberg, President Fax: (914) 249-9745

If to GSE:

9189 Red Branch Road
Columbia, Maryland 21045

Attn: Jerry Jen
Fax: (410) 772-3599

Or addressed to any such party at any such other address as such party shall have furnished by written notice to the other.

2. This Agreement contains the entire agreement between the parties with respect to the transactions contemplated herein and supersedes all previous written or oral negotiations, commitments and writings with respect to such transactions.

3. Neither this Agreement nor any term hereof may be changed, amended, modified, waived, discharged or terminated other than by an agreement in writing signed by the parties hereto, and the waiver of any provision of this Agreement shall not constitute a general waiver or a waiver of any other provision hereof.

4. In the event any provision of this Agreement is declared to be invalid or unenforceable the remainder of this Agreement shall be considered valid and enforceable in accordance with its terms, and the parties shall endeavor to replace the invalid or unenforceable provision with a new provision as close as possible to the original that is valid and enforceable.

5. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

6. This Agreement shall be governed by the laws of the State of New York and inure to the benefit of the successors and assigns of the parties hereto, provided that this Agreement may not be assigned by either of the parties hereto without the prior written consent of the other party hereto.

7. This Agreement is subject to the prior approval of GSE's independent directors.

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

GP STRATEGIES CORPORATION                          GSE SYSTEMS, INC.


By:                                                By: ________________________
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