Exhibit 10.3           Form of Note and Security Agreement dated as of January
15, 2010 between Braintech, Inc. and each of Rick Weidinger, Ken Brooks, David
Baird, Frederick Bohlander and Colin Eagen.
 
NOTE AND SECURITY AGREEMENT
 
(SILICON VALLEY BANK PLEDGORS)
 
 
THIS NOTE AND SECURITY AGREEMENT (this “Agreement”) dated as of January 15, 2010
(the “Effective Date”) among (a) Rick Weidinger, Kenneth Brooks, David Baird,
Frederick Bohlander, and Colin Eagen, and any other person listed in Exhibit A
(each, a “Pledgor,” and collectively, “Pledgors”), and (b) BRAINTECH, INC., a
Nevada corporation (“Braintech, Inc”), BRAINTECH INDUSTRIAL, INC., a Delaware
corporation (“Braintech Industrial”) and BRAINTECH GOVERNMENT & DEFENSE, INC., a
Delaware corporation (“Braintech Government”) (hereinafter, Braintech, Inc.,
Braintech Industrial and Braintech Government are jointly and severally,
individually and collectively, referred to as “Borrower”), provides the terms on
which Pledgors shall lend to Borrower and Borrower shall repay Pledgors.  The
parties agree as follows:
 
WHEREAS:
 
A.           Borrower has entered into a Loan and Security Agreement (Term Loan)
dated as of October 30, 2009 (“Term Loan Agreement”) with Silicon Valley Bank
(“SVB”) for a term loan (“Term Loan”) of up to $2,200,000.00.
 
B.           Each Pledgor has provided a Pledge (as defined hereinafter) to SVB
as collateral security to enable Borrower to receive extensions of credit under
the Term Loan.
 
C.           Each Pledgor has entered into a Subordination Agreement dated as of
October 30, 2009 in favor of SVB, and either a Non-Recourse Letter of Credit
Agreement or a Non-Recourse Pledged Account Agreement dated as of October 30,
2009 in favor of SVB.
 
D.           Braintech and each Pledgor have executed a Pledge and Stock
Purchase Agreement of even date herewith (“PSPA”).
 
Now therefore, in consideration of the actions described in the above recitals
and the terms and conditions of this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
21.           NOTE AND TERMS OF PAYMENT
 
21.1           Note.  Borrower hereby issues this note (“Note”) to each Pledgor
in the amount indicated in Exhibit A.
 
21.2           Promise to Pay.  The amount of a Pledge is deemed to be advanced
to Borrower only in the event that SVB draws on the Letter of Credit or takes
funds from a Pledged Account (any such draw on the Letter of Credit or such
taking of funds from a Pledged Account, a “Draw”).  In such event, (i) the
Return shall be added to the amount of the Note of the affected Pledgor, and
(ii) Borrower hereby unconditionally promises to pay the affected Pledgor the
outstanding principal amount of his Note and the applicable Return.  By way of
example and not limitation:
 
(i)           If SVB draws on the Letter of Credit in the amount of $100,000, a
Return of $50,000 shall be added to the $750,000 face amount of Rick Weidinger’s
Note, for a total Note amount of $800,000.
 
(ii)           If SVB draws on the Letter of Credit in the amount of $750,000, a
Return of $375,000 shall be added to the $750,000 face amount of Rick
Weidinger’s Note, for a total Note amount of $1,125,000.
 
(iii)           If SVB takes $50,000 from a Pledged Account containing $100,000,
a Return of $25,000 shall be added to the $100,000 face amount of the applicable
Pledgor’s Note, for a total Note amount of $125,000.
 
(iv)           If SVB takes $100,000 from a Pledged Account containing $100,000,
a Return of $50,000 shall be added to the $100,000 face amount of the applicable
Pledgor’s Note, for a total Note amount of $150,000.
 
21.3           Interest.  Interest on the outstanding principal amount of a Note
of the affected Pledgor and the corresponding Return shall accrue from the date
of a Draw on the Pledged Account of such Pledgor, until such Draw and the
corresponding Return is paid in full.  Interest shall accrue at the rate of
eight percent (8%) per annum payable monthly on the first business day of each
month commencing the month after the date of such Draw until such Draw and the
corresponding Return is repaid in full.  In computing interest, the date of the
Draw shall be included and the date of payment shall be excluded.  Interest
shall be computed on the basis of a 360-day year for the actual number of days
elapsed.  For the avoidance of doubt, interest shall be paid only on the face
amount of the affected Pledgor’s Note and the corresponding Return, and shall
not be paid on any expenses or on any other amount so long as any such expense
or other amounts are promptly paid.
 
21.4           Repayment.  Payment of each Draw and the corresponding Return
shall be due within 30 days of the date of such Draw.  Payment of the
outstanding principal amount of this Note, including any outstanding Returns,
together with all accrued interest, less the amount of any Pledge held in
connection with a Pledged Account that is released to the Pledgor by SVB, and
any amount not drawn by SVB under a Non-Recourse Letter of Credit Agreement upon
its cancellation, expiration or return by SVB to the issuing bank, shall be
fully due and payable upon the Maturity Date.
 
22.           CREATION OF SECURITY INTEREST
 
22.1         Grant of Security Interest.  Borrower hereby grants Pledgors, and
each of them, on a pari passu basis, to secure the payment and performance in
full of all of the Obligations, a continuing security interest in, and pledges
to Pledgors, the Collateral, wherever located, whether now owned or hereafter
acquired or arising, and all proceeds and products thereof.
 
22.2           Priority of Security Interest.  Borrower represents, warrants,
and covenants that the security interest granted herein is and shall at all
times continue to be a first priority perfected security interest in the
Collateral (subject only to Permitted Liens that may have superior priority to
Pledgors’ Lien under this Agreement).  If Borrower shall acquire a commercial
tort claim, Borrower shall promptly notify Pledgors in a writing signed by
Borrower of the general details thereof and grant to Pledgors in such writing a
security interest therein and in the proceeds thereof, all upon the terms of
this Agreement, with such writing to be in form and substance reasonably
satisfactory to Pledgors.
 
If this Agreement is terminated, Pledgors’ Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are repaid in
full in cash.  Upon payment in full in cash of the Obligations, Pledgors shall,
at Borrower’s sole cost and expense, release its Liens in the Collateral and all
rights therein shall revert to Borrower.
 

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22.3           Authorization to File Financing Statements.  Borrower hereby
authorizes Pledgors to file financing statements, without notice to Borrower,
with all appropriate jurisdictions to perfect or protect Pledgors’ interest or
rights hereunder, including a notice that any disposition of the Collateral, by
either Borrower or any other Person, shall be deemed to violate the rights of
Pledgors under the Code.  Such financing statements may indicate the Collateral
as “all assets of the Debtor” or words of similar effect, or as being of an
equal or lesser scope, or with greater detail, all in Pledgors’ discretion.
 
23.           REPRESENTATIONS AND WARRANTIES
 
 
   Borrower represents and warrants as follows:
23.1           Due Organization and Authorization.  Except for Shafi, Inc. and
Shafi Innovation, Inc., Borrower and each of its Subsidiaries are duly existing
and in good standing as Registered Organizations in their respective
jurisdictions of formation and are qualified and licensed to do business and are
in good standing in any jurisdiction in which the conduct of their respective
business or ownership of property requires that they be qualified except where
the failure to do so could not reasonably be expected to have a material adverse
effect on Borrower’s business.  In connection with this Agreement, Borrower has
delivered to Pledgors a completed certificate signed by Borrower (the
“Perfection Certificate”).  Borrower represents and warrants to Pledgors that
(a) Borrower’s exact legal name is that indicated on the Perfection Certificate
and on the signature page hereof; (b) Borrower is an organization of the type
and is organized in the jurisdiction set forth in the Perfection Certificate;
(c) the Perfection Certificate accurately sets forth Borrower’s organizational
identification number or accurately states that Borrower has none; (d) the
Perfection Certificate accurately sets forth Borrower’s place of business, or,
if more than one, its chief executive office as well as Borrower’s mailing
address (if different than its chief executive office); (e) Borrower (and each
of its predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, organizational structure or type, or any
organizational number assigned by its jurisdiction; and (f) all other
information set forth on the Perfection Certificate pertaining to Borrower and
each of its Subsidiaries (except for Shafi, Inc. and Shafi Innovation, Inc.) is
accurate and complete (it being understood and agreed that Borrower may from
time to time update certain information in the Perfection Certificate after the
Effective Date to the extent permitted by one or more specific provisions in
this Agreement).  If Borrower is not now a Registered Organization but later
becomes one, Borrower shall promptly notify Pledgors of such occurrence and
provide Pledgors with Borrower’s organizational identification number.
 

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The execution, delivery and performance by Borrower of the Pledgor Loan
Documents to which it is a party have been duly authorized, and do not (i)
conflict with any of Borrower’s organizational documents, (ii) contravene,
conflict with, constitute a default under or violate any material Requirement of
Law, (iii) contravene, conflict or violate any applicable order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority by
which Borrower or any its Subsidiaries or any of their property or assets may be
bound or affected, (iv) require any action by, filing, registration, or
qualification with, or Governmental Approval from, any Governmental Authority
(except such Governmental Approvals which have already been obtained and are in
full force and effect), or (v) constitute an event of default under any material
agreement by which Borrower is bound.  Borrower is not in default under any
agreement to which it is a party or by which it is bound in which the default
could have a material adverse effect on Borrower’s business. Concurrently with
this Agreement and the other Pledgor Loan Documents, Borrower will deliver to
Pledgors a certificate of the Secretary of each Borrower with respect to
articles, bylaws, incumbency and resolutions adopted by such Borrower’s board of
directors authorizing the execution and delivery of this Agreement and the other
Pledgor Loan Documents to which such Borrower is a party and the transactions
contemplated thereby and certifying that (a) such Person has the authority to
execute, deliver, and perform its obligations under each of the Pledgor Loan
Documents to which it is a party, (b) that attached as Exhibit A to such
certificate is a true, correct, and complete copy of the resolutions then in
full force and effect authorizing and ratifying the execution, delivery, and
performance by such Person of the Pledgor Loan Documents to which it is a party,
(c) the name(s) of the Person(s) authorized to execute the Pledgor Loan
Documents on behalf of such Person, together with a sample of the true
signature(s) of such Person(s), and (d) that Pledgors may conclusively rely on
such certificate unless and until such Person shall have delivered to Pledgors a
further certificate canceling or amending such prior certificate.
 
23.2           Collateral.  Borrower has good title, has rights in, and the
power to transfer each item of the Collateral upon which it purports to grant a
Lien hereunder, free and clear of any and all Liens except Permitted
Liens.  Borrower has no deposit accounts other than the deposit accounts with
SVB, the deposit accounts, if any, described in the Perfection Certificate
delivered to Pledgors in connection herewith, or of which Borrower has given
Pledgors notice and taken such actions as are necessary to give Pledgors a
perfected security interest therein.  The Accounts are bona fide, existing
obligations of the Account Debtors.  All Inventory is in all material respects
of good and marketable quality, free from material defects.
 
The Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection Certificate.  None of
the components of the Collateral shall be maintained at locations other than as
provided in the Perfection Certificate or as permitted pursuant to Section
5.2.  In the event that Borrower, after the date hereof, intends to store or
otherwise deliver any portion of the Collateral to a bailee, then Borrower will
first receive the written consent of Pledgors and such bailee must execute and
deliver a bailee agreement in form and substance satisfactory to Pledgors in its
sole discretion.
 
Borrower is the sole owner of its intellectual property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business.  Each patent is valid and enforceable, and no part of the intellectual
property has been judged invalid or unenforceable, in whole or in part, and to
the best of Borrower’s knowledge, no claim has been made that any part of the
intellectual property violates the rights of any third party except to the
extent such claim could not reasonably be expected to have a material adverse
effect on Borrower’s business.  Except as noted on the Perfection Certificate,
Borrower is not a party to, nor is bound by, any material license or other
agreement with respect to which Borrower is the licensee (a) that prohibits or
otherwise restricts Borrower from granting a security interest in Borrower’s
interest in such license or agreement or any other property, or (b) for which a
default under or termination of could interfere with Pledgors’ right to sell any
Collateral.  Without prior consent from Pledgors, Borrower shall not enter into,
or become bound by, any such license or agreement which is reasonably likely to
have a material impact on Borrower’s business or financial condition.  Borrower
shall take such steps as Pledgors requests to obtain the consent of, or waiver
by, any person whose consent or waiver is necessary for all such licenses or
contract rights to be deemed “Collateral” and for Pledgors to have a security
interest in it that might otherwise be restricted or prohibited by law or by the
terms of any such license or agreement, whether now existing or entered into in
the future.
 
23.3           Litigation.  Except as set forth on the Perfection Certificate,
there are no actions or proceedings pending or, to the knowledge of Borrower’s
Responsible Officers, threatened in writing by or against Borrower or any
Subsidiary in which an adverse decision could reasonably be expected to cause a
Material Adverse Change.
 

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23.4           No Material Deterioration in Financial Statements.  All
consolidated financial statements for Borrower and any Subsidiaries delivered to
Pledgors fairly present in all material respects Borrower’s consolidated
financial condition and Borrower’s consolidated results of operations.  There
has not been any material deterioration in Borrower’s consolidated financial
condition since the date of the most recent financial statements submitted to
Pledgors.
 
23.5           Solvency.  The fair salable value of Borrower’s assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
 
23.6           Regulatory Compliance.  Borrower is not an “investment company”
or a company “controlled” by an “investment company” under the Investment
Company Act of 1940, as amended.  Borrower is not engaged as one of its
important activities in extending credit for margin stock (under Regulations X,
T and U of the Federal Reserve Board of Governors).  Neither Borrower nor any of
its Subsidiaries is a “holding company” or an “affiliate” of a “holding company”
or a “subsidiary company” of a “holding company” as each term is defined and
used in the Public Utility Holding Company Act of 2005.  Borrower has complied
in all material respects with the Federal Fair Labor Standards Act.  Borrower
has not violated any laws, ordinances or rules, the violation of which could
reasonably be expected to cause a Material Adverse Change.  None of Borrower’s
or any Subsidiary’s properties or assets has been used by Borrower or any
Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally.  Borrower and each of its Subsidiaries have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all Government Authorities that are necessary to
continue their respective businesses as currently conducted.
 
23.7           Subsidiaries; Investments.  Except for Shafi, Inc. and Shafi
Innovation, Inc., Borrower does not own any stock, partnership interest or other
equity securities except for Permitted Investments.
 
23.8           Tax Returns and Payments; Pension Contributions.  Except for
Shafi, Inc. and Shafi Innovation, Inc., Borrower and each Subsidiary have timely
filed all required tax returns and reports, and Borrower and each Subsidiary
have timely paid all foreign, federal, state and local taxes, assessments,
deposits and contributions owed by Borrower and each Subsidiary.  Borrower may
defer payment of any contested taxes, provided that Borrower (a) in good faith
contests its obligation to pay the taxes by appropriate proceedings promptly and
diligently instituted and conducted, (b) notifies Pledgors in writing of the
commencement of, and any material development in, the proceedings, (c) posts
bonds or takes any other steps required to prevent the governmental authority
levying such contested taxes from obtaining a Lien upon any of the Collateral
that is other than a “Permitted Lien”.  Borrower is unaware of any claims or
adjustments proposed for any of Borrower's prior tax years which could result in
additional taxes becoming due and payable by Borrower.  Borrower has paid all
amounts necessary to fund all present pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not
withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to,
any such plan which could reasonably be expected to result in any liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.
 
23.9           Use of Proceeds.  Draws may only be made hereunder in the manner
and for the purposes described in Section 1.2 above and not for personal,
family, household or agricultural purposes.
 
23.10           Full Disclosure.  No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Pledgors,
as of the date such representation, warranty, or other statement was made, taken
together with all such written certificates and written statements given to
Pledgors, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Pledgors that projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).
 
23.11           Inactive Subsidiary.  Braintech Consumer & Service, Inc.,
Borrower’s Subsidiary, does not and will not conduct any business or own any
assets and will remain an inactive entity.  Pledgors hereby reserves the right
to require that such entity be joined as a co-borrower or guarantor in the
future, and Borrower hereby agrees to execute all documentation required by
Pledgors in connection with such joinder.

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24.           AFFIRMATIVE COVENANTS
 
Borrower shall do all of the following:
24.1           Government Compliance.  Except for Shafi, Inc. and Shafi
Innovation, Inc., maintain its and all its Subsidiaries’ legal existence and
good standing in their respective jurisdictions of formation and maintain
qualification in each jurisdiction in which the failure to so qualify would
reasonably be expected to have a material adverse effect on Borrower’s business
or operations.  Borrower shall comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower’s business.
 
24.2           Financial Statements, Reports, Certificates.  Deliver to Pledgors
concurrently with the delivery to SVB copies of all reporting, certificates and
other information delivered to SVB pursuant to Section 6.2 of the Term Loan
Agreement.  In addition, upon request, Borrower’s CEO Rick Weidinger shall
provide a quarterly briefing/update to the Pledgors, either in person for those
who can attend or by conference call for those who cannot.
 
24.3           Taxes.  Borrower shall make, and cause each Subsidiary (except
for Shafi, Inc. and Shafi Innovation, Inc.) to make, timely payment of all
federal, state, and local taxes or assessments (other than taxes and assessments
which Borrower is contesting in good faith, with adequate reserves maintained in
accordance with GAAP) and will deliver to Pledgors, on demand, appropriate
certificates attesting to such payments.
 
24.4           Insurance.  Keep its business and the Collateral insured for
risks and in amounts standard for companies in Borrower’s industry and location,
and as Pledgors may reasonably request.  Insurance policies shall be in a form,
with companies, and in amounts that are satisfactory to Pledgors.  At Pledgors’
request, Borrower shall deliver certified copies of policies and evidence of all
premium payments.  If this Note is not fully paid after the earlier to occur of
(a) both (i) payment in full of all amounts due to SVB under Loan Documents (as
defined in the Term Loan Agreement) and (ii) termination of the Term Loan
Agreement and the Working Capital Loan Agreement, then all liability policies
shall show, or have endorsements showing Pledgors as an additional insured.  All
policies (or the additional insured endorsements) shall provide that the insurer
must give Pledgors at least twenty (20) days notice before canceling, amending,
or declining to renew its policy.  Proceeds payable under any policy shall, at
Pledgors’ option, be payable to Pledgors on account of the Obligations.  If
Borrower fails to obtain insurance as required under this Section 4.4 or to pay
any amount or furnish any required proof of payment to third persons and
Pledgors, Pledgors may make all or part of such payment or obtain such insurance
policies required in this Section 4.4, and take any action under the policies
Pledgors deem prudent.
 
24.5           Accounts.  Borrower shall identify to Pledgors, in writing, any
deposit or securities account opened by Borrower with any institution, including
SVB.  In addition, for each such account and any other account that Borrower at
any time opens or maintains, Borrower shall, at Pledgors’ request and option,
pursuant to an agreement in form and substance acceptable to Pledgors, use
reasonable best efforts to cause SVB or the depository bank or securities
intermediary, as applicable, to agree that such account is the collateral of
Pledgors pursuant to the terms hereunder, which control agreement may not be
terminated without the prior written consent of Pledgors.  The provisions of the
previous sentence shall not apply to deposit accounts exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of Borrower’s employees.  Such control agreements shall be subject
to the terms of this Agreement and the Subordination Agreement between each
Pledgor and SVB.
 
24.6           Inventory; Returns.  Keep all Inventory in good and marketable
condition, free from material defects.  Returns and allowances between Borrower
and its Account Debtors shall follow Borrower’s customary practices as they
exist at the Effective Date.  Borrower must promptly notify Pledgors of all
returns, recoveries, disputes and claims that involve more than One Hundred
Thousand Dollars ($100,000.00).
 
24.7           Protection and Registration of Intellectual Property
Rights.  Borrower shall:  (a) protect, defend and maintain the validity and
enforceability of its intellectual property; (b) promptly advise Pledgors in
writing of material infringements of its intellectual property; and (c) not
allow any intellectual property material to Borrower’s business to be abandoned,
forfeited or dedicated to the public without Pledgors’ written consent.  If
Borrower (i) obtains any patent, registered trademark or servicemark, registered
copyright, registered mask work, or any pending application for any of the
foregoing, whether as owner, licensee or otherwise, or (ii) applies for any
patent or the registration of any trademark or servicemark, then Borrower shall
promptly provide written notice thereof to Pledgors and shall execute such
intellectual property security agreements and other documents and take such
other actions as Pledgors shall request in its good faith business judgment to
perfect and maintain a first priority perfected security interest in favor of
Pledgors in such property.  If Borrower decides to register any copyrights or
mask works in the United States Copyright Office, Borrower shall: (x) provide
Pledgors with at least fifteen (15) days prior written notice of Borrower’s
intent to register such copyrights or mask works together with a copy of the
application it intends to file with the United States Copyright Office
(excluding exhibits thereto); (y) execute an intellectual property security
agreement and such other documents and take such other actions as Pledgors may
request in its good faith business judgment to perfect and maintain a first
priority perfected security interest in favor of Pledgors in the copyrights or
mask works intended to be registered with the United States Copyright Office;
and (z) record such intellectual property security agreement with the United
States Copyright Office contemporaneously with filing the copyright or mask work
application(s) with the United States Copyright Office.  Borrower shall promptly
provide to Pledgors copies of all applications that it files for patents or for
the registration of trademarks, servicemarks, copyrights or mask works, together
with evidence of the recording of the intellectual property security agreement
necessary for Pledgors to perfect and maintain a first priority perfected
security interest in such property.  Each Borrower shall execute and deliver to
Pledgors concurrently with this Agreement an Intellectual Property Security
Agreement in substantially the form of the SVB IP Agreement given by each such
Borrower to SVB.
 

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24.8           Litigation Cooperation.  From the date hereof and continuing
through the termination of this Agreement, make available to Pledgors, without
expense to Pledgors, Borrower and its officers, employees and agents and
Borrower's books and records, to the extent that Pledgors may deem them
reasonably necessary to prosecute or defend any third-party suit or proceeding
instituted by or against Pledgors with respect to any Collateral or relating to
Borrower.
 
24.9           Further Assurances.  Execute any further instruments and take
further action as Pledgors reasonably requests to perfect or continue Pledgors’
Lien in the Collateral or to effect the purposes of this Agreement.
 
25.           NEGATIVE COVENANTS
 
 
Borrower shall not do any of the following without the Pledgor Committee’s prior
written consent:
25.1           Dispositions.  Convey, sell, lease, transfer, assign, or
otherwise dispose of (collectively a “Transfer”), or permit any of its
Subsidiaries to Transfer, all or any part of its business or property, except
for Transfers (a) of Inventory in the ordinary course of business; (b) of
worn-out or obsolete Equipment; and (c) in connection with Permitted Liens and
Permitted Investments.
 
25.2           Changes in Business, Ownership, Management, or Business
Locations.  Engage in or permit any of its Subsidiaries to engage in any
business other than the businesses currently engaged in by Borrower or
reasonably related thereto, or have a material change in its ownership (other
than by the sale of Borrower’s equity securities in a public offering or to
venture capital investors so long as Borrower identifies to Pledgors the venture
capital investors prior to the closing of the investment), or have a change in
management such that any Key Person ceases to hold such office with Borrower and
a replacement reasonably satisfactory to Pledgors is not made within ninety (90)
days after such Key Person’s departure from Borrower.  Borrower shall not,
without at least thirty (30) days prior written notice to Pledgors: (a) relocate
its chief executive office, or add any new offices or business locations,
including warehouses  (unless such new offices or business locations contain
less than Fifty Thousand Dollars ($50,000.00) in Borrower’s assets or property),
or (b) change its jurisdiction of organization, or (c) change its organizational
structure or type, or (d) change its legal name, or (e) change any
organizational number (if any) assigned by its jurisdiction of organization.
 
25.3           Mergers or Acquisitions.  Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person.  A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower.
 
25.4           Indebtedness.  Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than (a) Permitted
Indebtedness, and (b) with respect to Shafi, Inc. and Shafi Innovation, Inc.,
Indebtedness existing on the Effective Date and disclosed on the Perfection
Certificate.
 
25.5           Encumbrance.  Create, incur, allow, or suffer any Lien on any of
its property, or assign or convey any right to receive income, including the
sale of any Accounts, or permit any of its Subsidiaries to do so, except for (a)
Permitted Liens and (b) with respect to Shafi, Inc. and Shafi Innovation, Inc.,
Liens existing on the Effective Date and disclosed on the Perfection
Certificate, or permit any Collateral not to be subject to the first priority
security interest granted herein, or enter into any agreement, document,
instrument or other arrangement (except with or in favor of Pledgors) with any
Person which directly or indirectly prohibits or has the effect of prohibiting
Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a
security interest in or upon, or encumbering any of Borrower’s or any
Subsidiary’s intellectual property, except as is otherwise permitted in Section
5.1 hereof and the definition of “Permitted Liens” herein.
 

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25.6           Distributions; Investments.  (a) Directly or indirectly acquire
or own any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so; or (b) pay any
dividends or make any distribution or payment or redeem, retire or purchase any
capital stock.
 
25.7           Transactions with Affiliates.  Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower,
except for transactions that are in the ordinary course of Borrower’s business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm’s length transaction with a non-affiliated Person.
 
25.8           Compliance.  Become an “investment company” or a company
controlled by an “investment company”, under the Investment Company Act of 1940,
as amended, or undertake as one of its important activities extending credit to
purchase or carry margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System), or use the proceeds of the Term Loan
for that purpose; fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, each as defined in ERISA, to
occur; fail to comply with the Federal Fair Labor Standards Act or violate any
other law or regulation, if the violation could reasonably be expected to have a
material adverse effect on Borrower’s business, or permit any of its
Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from
participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any present pension, profit
sharing and deferred compensation plan which could reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental agency.
 
26.           EVENTS OF DEFAULT
 
Any one of the following shall constitute an event of default (an “Event of
Default”) under this Agreement:
26.1           Default under Term Loan Agreement.  An Event of Default has
occurred under the Term Loan Agreement and such default has not been cured
within any applicable cure period under the Term Loan Agreement;
 
26.2           SVB Action on any Pledge.  SVB exercises any rights or remedies
with respect to any Pledge in connection with an Event of Default under the Term
Loan Agreement;
 
26.3           Breach.  The occurrence of a breach of Borrower’s obligations,
covenants, representations or warranties under this Agreement; or
 
26.4           Misrepresentations.  Borrower or any Person acting for Borrower
makes any representation, warranty, or other statement now or later in this
Agreement, any Pledgor Loan Document or in writing delivered to Pledgors or to
induce Pledgors to enter this Agreement or any Pledgor Loan Document, and such
representation, warranty, or other statement is incorrect in any material
respect when made.
 
27.           PLEDGORS’ RIGHTS AND REMEDIES
 
27.1           Rights and Remedies.  While an Event of Default occurs and
continues Pledgors may, without notice or demand, do any or all of the
following:
 
(i)           declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 of the Term Loan Agreement occurs all
Obligations are immediately due and payable without any action by Pledgors);
 
(ii)           settle or adjust disputes and claims directly with Account
Debtors for amounts on terms and in any order that Pledgors considers advisable,
notify any Person owing Borrower money of Pledgors’ security interest in such
funds, and verify the amount of such account;
 
(iii)           make any payments and do any acts it considers necessary or
reasonable to protect the Collateral and/or its security interest in the
Collateral.  Borrower shall assemble the Collateral if Pledgors request and make
it available as Pledgors designates.  Pledgors may enter premises where the
Collateral is located, take and maintain possession of any part of the
Collateral, and pay, purchase, contest, or compromise any Lien which appears to
be prior or superior to its security interest and pay all expenses incurred.
Borrower grants Pledgors a license to enter and occupy any of its premises,
without charge, to exercise any of Pledgors’ rights or remedies;
 
(iv)           apply to the Obligations (i) any balances and deposits of
Borrower held by Pledgors, or (ii) any amount held by Pledgors owing to or for
the credit or the account of Borrower;
 

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(v)           ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral.  Pledgors are hereby
granted a non-exclusive, royalty-free license or other right to use, without
charge, Borrower’s labels, Patents, Copyrights, mask works, rights of use of any
name, trade secrets, trade names, Trademarks, and advertising matter, or any
similar property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with
Pledgors’ exercise of their rights under this Section 7.1, Borrower’s rights
under all licenses and all franchise agreements inure to Pledgors’ benefit;
 
(vi)           place a “hold” on any account maintained with Pledgors and/or
deliver a notice of exclusive control, any entitlement order, or other
directions or instructions pursuant to any Control Agreement or similar
agreements providing control of any Collateral;
 
(vii)           demand and receive possession of Borrower’s Books; and
 
(viii)           exercise all rights and remedies available to Pledgors under
the Pledgor Loan Documents or at law or equity, including all remedies provided
under the Code (including disposal of the Collateral pursuant to the terms
thereof).
 
27.2           Power of Attorney.  Borrower hereby irrevocably appoints the
members of the Pledgor Committee, and each of them, as its lawful
attorney-in-fact, exercisable upon the occurrence and during the continuance of
an Event of Default, to: (a) endorse Borrower’s name on any checks or other
forms of payment or security; (b) sign Borrower’s name on any invoice or bill of
lading for any Account or drafts against Account Debtors; (c) settle and adjust
disputes and claims about the Accounts directly with Account Debtors, for
amounts and on terms Pledgors determine reasonable; (d) make, settle, and adjust
all claims under Borrower’s insurance policies; (e) pay, contest or settle any
Lien, charge, encumbrance, security interest, and adverse claim in or to the
Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; and (f) transfer the Collateral into the name
of Pledgors or a third party as the Code permits.  Borrower hereby appoints the
members of the Pledgor Committee, and each of them, as its lawful
attorney-in-fact to sign Borrower’s name on any documents necessary to perfect
or continue the perfection of Pledgors’ security interest in the Collateral
regardless of whether an Event of Default has occurred until all Obligations
have been satisfied in full, SVB is under no further obligation to make advances
under the Term Loan Agreement, and SVB has released the Pledged Accounts and
returned the Letter(s) of Credit to the issuing bank(s) or the undrawn Letter(s)
of Credit has expired or been cancelled, as applicable.  Pledgors’ foregoing
appointment as Borrower’s attorney in fact, and all of Pledgors’ rights and
powers, coupled with an interest, are irrevocable until all Obligations have
been fully repaid and performed, all amounts due under the Term Loan Agreement
have been repaid, and SVB’s obligation to make advances under the Term Loan
Agreement terminates.
 
27.3           Protective Payments.  If Borrower fails to obtain the insurance
called for by Section 4.4 or fails to pay any premium thereon or fails to pay
any other amount which Borrower is obligated to pay under this Agreement or any
other Pledgor Loan Document, Pledgors may obtain such insurance or make such
payment, and all amounts so paid by Pledgors are Pledgors Expenses and
immediately due and payable, bearing interest at the then highest rate
applicable to the Obligations, and secured by the Collateral.  Pledgors will
make reasonable efforts to provide Borrower with notice of Pledgors obtaining
such insurance at the time it is obtained or within a reasonable time
thereafter.  No payments by Pledgors are deemed an agreement to make similar
payments in the future or Pledgors’ waiver of any Event of Default.
 
27.4           Application of Payments and Proceeds Upon Default.  If an Event
of Default has occurred and is continuing, Pledgors may apply any funds in their
possession, whether from Borrower account balances, payments, proceeds realized
as the result of any collection of Accounts or other disposition of the
Collateral, or otherwise, to the Obligations in such order as Pledgors shall
determine in their sole discretion.  Any surplus shall be paid to Borrower or
other Persons legally entitled thereto; Borrower shall remain liable to Pledgors
for any deficiency.  If Pledgors, in their good faith business judgment,
directly or indirectly enter into a deferred payment or other credit transaction
with any purchaser at any sale of Collateral, Pledgors shall have the option,
exercisable at any time, of either reducing the Obligations by the principal
amount of the purchase price or deferring the reduction of the Obligations until
the actual receipt by Pledgors of cash therefor.
 
27.5           Pledgors’ Liability for Collateral.  So long as Pledgors comply
with reasonable secured lender practices regarding the safekeeping of the
Collateral in the possession or under the control of Pledgors, Pledgors shall
not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other Person.  Borrower bears all risk of loss, damage or destruction of the
Collateral.
 

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27.6           No Waiver; Remedies Cumulative.  Pledgors’ failure, at any time
or times, to require strict performance by Borrower of any provision of this
Agreement or any other Pledgor Loan Document shall not waive, affect, or
diminish any right of Pledgors thereafter to demand strict performance and
compliance herewith or therewith.  No waiver hereunder shall be effective unless
signed by the party granting the waiver and then is only effective for the
specific instance and purpose for which it is given.  Pledgors’ rights and
remedies under this Agreement and the other Pledgor Loan Documents are
cumulative.  Pledgors have all rights and remedies provided under the Code, by
law, or in equity.  Pledgors’ exercise of one right or remedy is not an election
and shall not preclude Pledgors from exercising any other remedy under this
Agreement or other remedy available at law or in equity, and Pledgors’ waiver of
any Event of Default is not a continuing waiver.  Pledgors’ delay in exercising
any remedy is not a waiver, election, or acquiescence.
 
27.7           Demand Waiver.  Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Pledgors on which
Borrower is liable.
 
27.8           Borrower Liability.  Each Borrower hereby appoints the others as
agent for the other for all purposes hereunder.  Each Borrower hereunder shall
be jointly and severally obligated to repay all Notes regardless of which
Borrower actually receives the benefit of the applicable Pledge as if each
Borrower hereunder directly received the benefit of all Pledges.  Each Borrower
waives (a) any suretyship defenses available to it under the Code or any other
applicable law, and (b) any right to require Pledgors to: (i) proceed against
any Borrower or any other person; (ii) proceed against or exhaust any security;
or (iii) pursue any other remedy.  Pledgors may exercise or not exercise any
right or remedy they have against any Borrower or any security they hold
(including the right to foreclose by judicial or non-judicial sale) without
affecting any Borrower’s liability.  Notwithstanding any other provision of this
Agreement or other related document, each Borrower irrevocably waives all rights
that it may have at law or in equity (including, without limitation, any law
subrogating Borrower to the rights of Pledgors under this Agreement) to seek
contribution, indemnification or any other form of reimbursement from any other
Borrower, or any other Person now or hereafter primarily or secondarily liable
for any of the Obligations, for any payment made by Borrower with respect to the
Obligations in connection with this Agreement or otherwise and all rights that
it might have to benefit from, or to participate in, any security for the
Obligations as a result of any payment made by Borrower with respect to the
Obligations in connection with this Agreement or otherwise.  Any agreement
providing for indemnification, reimbursement or any other arrangement prohibited
under this Section 7 shall be null and void.  If any payment is made to a
Borrower in contravention of this Section 7, such Borrower shall hold such
payment in trust for Pledgors and such payment shall be promptly delivered to
Pledgors for application to the Obligations, whether matured or unmatured.
 
28.           NOTICES
 
All notices, consents, requests, approvals, demands, or other communication by
any party to this Agreement or any other Pledgor Loan Document must be in
writing and shall be deemed to have been validly served, given, or delivered:
(a) upon the earlier of actual receipt and three (3) Business Days after deposit
in the U.S. mail, first class, registered or certified mail return receipt
requested, with proper postage prepaid; (b) upon transmission, when sent by
electronic mail or facsimile transmission; (c) one (1) Business Day after
deposit with a reputable overnight courier with all charges prepaid; or (d) when
delivered, if hand-delivered by messenger, all of which shall be addressed to
the party to be notified and sent to the address, facsimile number, or email
address indicated below.  Pledgors or Borrower may change their respective
mailing or electronic mail address or facsimile number by giving the other party
written notice thereof in accordance with the terms of this Section 8.
 

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    If to Borrower:          Braintech, Inc.
                Braintech Industrial, Inc.
Braintech Government & Defense, Inc.
1750 Tyson’s Boulevard, Suite 350
McLean, Virginia 22102
Attn:         Thomas E. McCabe
Fax:           703-637-9772
Email:        tmccabe@braintech.com
 
    If to Pledgors:           Pledgor Committee
1750 Tyson’s Boulevard, Suite 350
McLean, Virginia 22102
Attn:         Kenneth Brooks, Chairman
Fax:           703-637-9772
 
29.           CHOICE OF LAW, VENUE, JURY TRIAL WAIVER, AND JUDICIAL REFERENCE
 
Nevada law governs this Agreement and the other Pledgor Loan Documents without
regard to principles of conflicts of law.  Borrower and Pledgors each submit to
the exclusive jurisdiction of the State and Federal courts in Las Vegas, Nevada;
provided, however, that nothing in this Agreement shall be deemed to operate to
preclude Pledgors from bringing suit or taking other legal action in any other
jurisdiction to realize on the Collateral or any other security for the
Obligations, or to enforce a judgment or other court order in favor of
Pledgors.  Borrower expressly submits and consents in advance to such
jurisdiction in any action or suit commenced in any such court, and Borrower
hereby waives any objection that it may have based upon lack of personal
jurisdiction, improper venue, or forum non conveniens and hereby consents to the
granting of such legal or equitable relief as is deemed appropriate by such
court.  Borrower hereby waives personal service of the summons, complaints, and
other process issued in such action or suit and agrees that service of such
summons, complaints, and other process may be made by registered or certified
mail addressed to Borrower at the address set forth in Section 8 of this
Agreement and that service so made shall be deemed completed upon the earlier to
occur of Borrower’s actual receipt thereof or three (3) days after deposit in
the U.S. mails, proper postage prepaid.

BORROWER AND PLEDGORS EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS
OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND
ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER
INTO THIS AGREEMENT.  EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
 
30.           GENERAL PROVISIONS
 
30.1           Successors and Assigns.  This Agreement binds and is for the
benefit of the successors and permitted assigns of each party.  Borrower may not
assign this Agreement or any rights or obligations under it without Pledgors’
prior written consent (which may be granted or withheld in Pledgors’
discretion).  Pledgors has the right, without the consent of or notice to
Borrower, to sell, transfer, assign, negotiate, or grant participation in all or
any part of, or any interest in, Pledgors’ obligations, rights, and benefits
under this Agreement and the other Loan Documents.
 
30.2           Indemnification.  Borrower agrees to indemnify, defend and hold
each of the Pledgors, or any other Person affiliated with or representing
Pledgors (each, an “Indemnified Person”) harmless against:  (a) all obligations,
demands, claims, and liabilities (collectively, “Claims”) claimed or asserted by
any other party in connection with the transactions contemplated by the Pledgor
Loan Documents; and (b) all losses or expenses (including Pledgors Expenses) in
any way suffered, incurred, or paid by such Indemnified Person as a result of,
following from, consequential to, or arising from transactions between Pledgors
and Borrower (including reasonable attorneys’ fees and expenses), except for
Claims and/or losses directly caused by such Indemnified Person’s gross
negligence or willful misconduct.
 
30.3           Time of Essence.  Time is of the essence for the performance of
all Obligations in this Agreement.
 

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30.4           Severability of Provisions.  Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
 
30.5           Amendments in Writing; Waiver; Integration.  No purported
amendment or modification of this Agreement, or waiver, discharge or termination
of any obligation under this Agreement, shall be enforceable or admissible
unless, and only to the extent, expressly set forth in a writing signed by the
party against which enforcement or admission is sought.  Without limiting the
generality of the foregoing, no oral promise or statement, nor any action,
inaction, delay, failure to require performance or course of conduct shall
operate as, or evidence, an amendment, supplement or waiver or have any other
effect on this Agreement.  Any waiver granted shall be limited to the specific
circumstance expressly described in it, and shall not apply to any subsequent or
other circumstance, whether similar or dissimilar, or give rise to, or evidence,
any obligation or commitment to grant any further waiver.  This Agreement,
together with the Pledgor Loan Documents and the other documents described
herein, represents the entire agreement about this subject matter and supersede
prior negotiations or agreements.  All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement merge into this Agreement and the other Pledgor
Loan Documents.
 
30.6           Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, is an original, and all taken together, constitute
one Agreement.
 
30.7           Survival.  All covenants, representations and warranties made in
this Agreement continue in full force until this Agreement has terminated
pursuant to its terms and all Obligations (other than inchoate indemnity
obligations and any other obligations which, by their terms, are to survive the
termination of this Agreement) have been paid in full and satisfied.  The
obligation of Borrower in Section 10.2 to indemnify Pledgors shall survive until
the statute of limitations with respect to such claim or cause of action shall
have run.
 
30.8           Confidentiality.  In handling any confidential information,
Pledgors shall exercise the same degree of care that they exercise for their own
proprietary information, but disclosure of information may be made: (a) as
required by law, regulation, subpoena, or other order; (b) to Pledgors’
regulators or as otherwise required in connection with Pledgors’ examination or
audit; (c) as Pledgors consider appropriate in exercising remedies under this
Agreement; and (d) to third-party service providers of Pledgors so long as such
service providers have executed a confidentiality agreement with Pledgors with
terms no less restrictive than those contained herein.  Confidential information
does not include information that is either: (i) in the public domain or in
Pledgors’ possession when disclosed to Pledgors, or becomes part of the public
domain after disclosure to Pledgors; or (ii) disclosed to Pledgors by a third
party if Pledgors does not know that the third party is prohibited from
disclosing the information.
 
30.9           Attorneys’ Fees, Costs and Expenses.  In any action or proceeding
between Borrower and Pledgors arising out of or relating to the Pledgor Loan
Documents, the prevailing party shall be entitled to recover its reasonable
attorneys’ fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
 
30.10           Right of Set Off.  Borrower hereby grants to Pledgors, a lien,
security interest and right of set off as security for all Obligations to
Pledgors, whether now existing or hereafter arising upon and against all
deposits, credits, collateral and property, now or hereafter in the possession,
custody, safekeeping or control of Pledgors or any entity under the control of
Pledgors (including a Pledgors subsidiary) or in transit to any of them.  At any
time after the occurrence and during the continuance of an Event of Default,
without demand or notice, Pledgors may set off the same or any part thereof and
apply the same to any liability or obligation of Borrower even though unmatured
and regardless of the adequacy of any other collateral securing the
Obligations.  ANY AND ALL RIGHTS TO REQUIRE PLEDGORS TO EXERCISE THEIR RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS,
PRIOR TO EXERCISING THEIR RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS
OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
 
30.11           Electronic Execution of Documents.  The words “execution,”
“signed,” “signature” and words of like import in any Pledgor Loan Document
shall be deemed to include electronic signatures or the keeping of records in
electronic form, each of which shall be of the same legal effect, validity and
enforceability as a manually executed signature or the use of a paper-based
recordkeeping systems, as the case may be, to the extent and as provided for in
any applicable law, including, without limitation, any state law based on the
Uniform Electronic Transactions Act.
 

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30.12           Captions.  The headings used in this Agreement are for
convenience only and shall not affect the interpretation of this Agreement.
 
30.13           Construction of Agreement.  The parties mutually acknowledge
that they and their attorneys have participated in the preparation and
negotiation of this Agreement.  In cases of uncertainty this Agreement shall be
construed without regard to which of the parties caused the uncertainty to
exist.
 
30.14           Relationship.  The relationship of the parties to this Agreement
is determined solely by the provisions of this Agreement.  The parties do not
intend to create any agency, partnership, joint venture, trust, fiduciary or
other relationship with duties or incidents different from those of parties to
an arm’s-length contract.
 
30.15           Third Parties.  Nothing in this Agreement, whether express or
implied, is intended to: (a) confer any benefits, rights or remedies under or by
reason of this Agreement on any persons other than the express parties to it and
their respective permitted successors and assigns; (b) relieve or discharge the
obligation or liability of any person not an express party to this Agreement; or
(c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.
 
31.           DEFINITIONS
 
31.1           Definitions.  As used in the Pledgor Loan Documents, the word
“shall” is mandatory, the word “may” is permissive, the word “or” is not
exclusive, the words “includes” and “including” are not limiting, the singular
includes the plural, and numbers denoting amounts that are set off in brackets
are negative.  As used in this Agreement, the following capitalized terms have
the following meanings:
 
 
“Account” is any “account” as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.
 
“Account Debtor” is any “account debtor” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Affiliate” is, with respect to any Person, each other Person that owns or
controls directly or indirectly the Person, any Person that controls or is
controlled by or is under common control with the Person, and each of that
Person’s senior executive officers, directors, partners and, for any Person that
is a limited liability company, that Person’s managers and members.
 
“Agreement” is defined in the preamble hereof.
 
“Borrower” is defined in the preamble hereof.
 
“Borrower’s Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.
 
“Business Day” is any day that is not a Saturday, Sunday or a day on which
Pledgors is closed.
 
“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of Nevada; provided, that, to the extent that
the Code is used to define any term herein or in any Pledgor Loan Document and
such term is defined differently in different Articles or Divisions of the Code,
the definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Pledgors’ Lien on any Collateral is governed by the Uniform
Commercial Code in effect in a jurisdiction other than the State ofNevada, the
term “Code” shall mean the Uniform Commercial Code as enacted and in effect in
such other jurisdiction solely for purposes of the provisions thereof relating
to such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.
 
 
“Collateral” is any and all properties, rights and assets of Borrower described
on Exhibit B.
 
 
“Collateral Account” is any Deposit Account, Securities Account, or Commodity
Account.
 

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“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation, in each
case, directly or indirectly guaranteed, endorsed, co-made, discounted or sold
with recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account of
that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but “Contingent
Obligation” does not include endorsements in the ordinary course of
business.  The amount of a Contingent Obligation is the stated or determined
amount of the primary obligation for which the Contingent Obligation is made or,
if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under any guarantee or other support arrangement.
 
“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity Account, Borrower, and Pledgors pursuant to which
Pledgors obtain control (within the meaning of the Code) over such Deposit
Account, Securities Account, or Commodity Account.
 
“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Dollars,” “dollars” or use of the sign “$” means only lawful money of the
United States and not any other currency, regardless of whether that currency
uses the “$” sign to denote its currency or may be readily converted into lawful
money of the United States.
 
“Draw” is defined in Section 1.2.
 
“Effective Date” is defined in the preamble hereof.
 
“Equipment” is all “equipment” as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.
 
“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.
 
“Event of Default” is defined in Section 6.
 
“Exchange Act” is the Securities Exchange Act of 1934, as amended.
 
“GAAP” is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
“Governmental Approval” is any consent, authorization, approval, order, license,
franchise, permit, certificate, accreditation, registration, filing or notice,
of, issued by, from or to, or other act by or in respect of, any Governmental
Authority.

 
“Governmental Authority” is any nation or government, any state or other
political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization.
 
“Guarantor” is any present or future guarantor of the Obligations.  For the
avoidance of doubt, the Pledgors are not Guarantors.
 

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“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.
 
“Indemnified Person” is defined in Section 10.2.
 
“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Intellectual Property Collateral” is defined in the SVB IP Agreement.
 
“Intellectual Property Security Agreement” is (a) that certain Intellectual
Property Security Agreement dated as of the Effective Date between Pledgors and
Braintech, Inc., (b) that certain Intellectual Property Security Agreement dated
as of the Effective Date between Pledgors and Braintech Industrial, and (c) that
certain Intellectual Property Security Agreement dated as of the Effective Date
between Pledgors and Braintech Government as described in Section 4.7.
 
“Inventory” is all “inventory” as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.
 
“Investment” is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.
 
“Key Person” is either of Borrower’s Chief Executive Officer or Chief Financial
Officer.
 
“Letter of Credit” is that certain letter of credit from Rick Weidinger.
 
“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security
interest or other encumbrance of any kind, whether voluntarily incurred or
arising by operation of law or otherwise against any property.
 
“Majority Pledgors” is defined in the PSPA.
 
“Material Adverse Change” is (a) a material impairment in the perfection or
priority of Pledgors’ Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; (c) a material impairment of the prospect
of repayment of any portion of the Obligations; or (d) Pledgors determine, based
upon information available to them and in their reasonable judgment, that there
is a reasonable likelihood that Borrower shall fail to comply with one or more
of the financial covenants in the Term Loan Agreement during the next succeeding
financial reporting period.
 
“Maturity Date” is the first date upon which all of the following have
occurred:  (i) termination of the Term Loan, (ii) release of all of the Pledged
Accounts provided by Pledgors to SVB (to the extent any funds remain in such
Pledged Accounts), and (iii) expiration, cancellation or return by SVB of the
undrawn Non-Recourse Letter(s) of Credit to the issuing bank(s) (to the extent
any amounts remain undrawn).
 
“Obligations” are Borrower’s obligations to pay when due any debts, principal,
interest, Pledgors Expenses and other amounts Borrower owes Pledgors now or
later, whether under this Agreement, the other Pledgor Loan Documents or
otherwise, including, without limitation, any interest accruing after Insolvency
Proceedings begin and debts, liabilities or obligations of Borrower assigned to
Pledgors, and to perform Borrower’s duties under the Pledgor Loan Documents.
 
“Perfection Certificate” is defined in Section 3.1.
 
“Permitted Indebtedness” is:
 
(a)           Indebtedness to SVB under the Term Loan Agreement, the Working
Capital Loan Agreement, or the SVB Loan Documents;
 

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(b)           Indebtedness incurred in the ordinary course of business;
 
(c)           With respect to Shafi, Inc. and Shafi Innovation, Inc.,
Indebtedness existing on the Effective Date and disclosed on the Perfection
Certificate; and
 
(d)           Indebtedness secured by Permitted Liens; and.
 
(e)           Indebtedness created under the Pledgor Loan Documents.
 
“Permitted Investments” are: (i)  marketable direct obligations issued or
unconditionally guaranteed by the United States or its agency or any state
maturing within 1 year from its acquisition, (ii) commercial paper maturing no
more than 1 year after its creation and having the highest rating from either
Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (iii)
Pledgors’ certificates of deposit issued maturing no more than 1 year after
issue, (iv) any other investments administered through Pledgors, and (v)
investments made on or prior to December 31, 2010 in Braintech Canada, Inc. for
the ordinary and necessary current operating expenses of such entity in an
aggregate amount not to exceed (a) Two Hundred Thousand Dollars ($200,000.00)
from September 1, 2009 through and including December 31, 2009, and (b) One
Hundred Thousand Dollars ($100,000.00) from January 1, 2010 through and
including December 31, 2010.
 
“Permitted Liens” are:
 
(a)           Liens arising under this Agreement or other Pledgor Loan
Documents;
 
(b)           Liens in favor of SVB;
 
(c)           Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Pledgors’ security interests;
 
(d)           Purchase money Liens securing no more than One Hundred Thousand
Dollars ($100,000.00) in the aggregate amount outstanding (i) on equipment
acquired or held by Borrower incurred for financing the acquisition of the
equipment, or (ii) existing on equipment when acquired, if the Lien is confined
to the property and improvements and the proceeds of the equipment;
 
(e)           Leases or subleases and non-exclusive licenses or sublicenses
granted in the ordinary course of Borrower’s business, if the leases, subleases,
licenses and sublicenses permit granting Pledgors a security interest;
 
(f)           With respect to Shafi, Inc. and Shafi Innovation, Inc., Liens
existing on the Effective Date and disclosed on the Perfection Certificate; and
(g)           Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (f), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
 
 
“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
“Pledge(s)” are the Pledged Accounts and the Letter of Credit.
 
“Pledged Accounts” are those certain money market accounts pledged to SVB by (a)
Kenneth Brooks, (b) David Baird, (c) Frederick Bohlander, and (d) Colin Eagen.
 
“Pledgor” is defined in the preamble hereof.
 
“Pledgor Committee” is defined in the PSPA.
 
“Pledgor Loan Documents” are, collectively, this Agreement, the PSPA, the
Perfection Certificate, the Intellectual Property Security Agreement, any
subordination agreements, any note, or notes or guaranties executed by Borrower
or any Guarantor for the benefit of Pledgors, and any other present or future
agreement between Borrower, any Guarantor and the Pledgors in connection with
this Agreement, all as amended, restated, or otherwise modified.
 

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“Pledgors Expenses” are all initial and ongoing expenses relating to the
establishment, transfer and/or ongoing maintenance of the Pledges.
 
“PSPA” is defined in Recital D.  .
 
“Registered Organization” is any “registered organization” as defined in the
Code with such additions to such term as may hereafter be made.
 
“Requirement of Law” is as to any Person, the organizational or governing
documents of such Person, and any law (statutory or common), treaty, rule or
regulation or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject.
 
“Responsible Officer” is any of the Chief Executive Officer, President, Chief
Financial Officer, Controller and Manager of Accounting of Borrower.
 
“Return” is an additional amount to be added to the amount of this Note in the
event SVB takes any part of a Pledged Account or draws on the Letter of Credit,
which additional amount shall be equal to fifty percent (50%) of the part of
such Pledged Account taken by SVB or fifty percent (50%) of the draw on the
Letter of Credit.
 
“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.
 
“Speros Parties” is Peter Speros, Angie Speros and Speros Ventures LLC.
 
“Subsidiary” is, as to any Person, a corporation, partnership, limited liability
company or other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person.  Unless the context otherwise requires, each reference
to a Subsidiary herein shall be a reference to a Subsidiary of Borrower.
 
“SVB” is defined in the preamble hereof.
 
“SVB IP Agreement” is (a) that certain Intellectual Property Security Agreement
dated as of the Effective Date between SVB and Braintech, Inc., (b) that certain
Intellectual Property Security Agreement dated as of the Effective Date between
SVB and Braintech Industrial, and (c) that certain Intellectual Property
Security Agreement dated as of the Effective Date between SVB and Braintech
Government.
 
“SVB Loan Documents” are, collectively, the Term Loan Agreement, the Working
Capital Loan Agreement, the SVB perfection certificate, the SVB IP Agreements,
any subordination agreements, any note, or notes or guaranties executed by
Borrower or any guarantor as defined in the Term Loan Agreement or the Working
Capital Agreement, and any other present or future agreement between Borrower
any guarantor entity and/or for the benefit of SVB in connection with the Term
Loan Agreement, all as amended, restated, or otherwise modified.
 
“Term Loan” is defined in the recitals hereof.
 
“Term Loan Agreement” is defined in the recitals hereof.
 
“Transfer” is defined in Section 5.1.
 
“Working Capital Loan Agreement” is that certain Loan and Security Agreement
(Accounts Receivable Line of Credit) between Borrower and SVB dated as of the
Effective Date, together with all documents delivered in connection therewith,
as amended from time to time.
 
[Signature page follows.]

 
 
 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as a sealed instrument under the laws of the State of Nevada as of the Effective
Date.
BORROWER:
 
BRAINTECH, INC.
 
By:_________________________________________
 
Name:______________________________________
 
Title:_______________________________________
 

 
BRAINTECH INDUSTRIAL, INC.
 
By:_________________________________________
 
Name:______________________________________
 
Title:_______________________________________
 

 
BRAINTECH GOVERNMENT & DEFENSE, INC.
 
By:_________________________________________
 
Name:______________________________________
 
Title:_______________________________________
 

 
PLEDGOR: __________________________________                                                               
 
(signature)
 
 
Name:______________________________________

 
 

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EXHIBIT A – PLEDGORS

 

 
 

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EXHIBIT B – COLLATERAL DESCRIPTION

 
The Collateral consists of all of Borrower’s right, title and interest in and to
the following personal property:
All goods, equipment, inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, general intangibles (including
payment intangibles) accounts (including health-care receivables), documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), commercial tort claims,
securities, and all other investment property, supporting obligations, and
financial assets, whether now owned or hereafter acquired, wherever located; and
any copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or
unpublished, now owned or later acquired; any patents, trademarks, service marks
and applications therefor; trade styles, trade names, any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; and
 
 
All Borrower’s books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements ,
products, proceeds and insurance proceeds of any or all of the foregoing.