NOTE PURCHASE AGREEMENT
 
This Note Purchase Agreement (this “Agreement”) is entered into as of July 2,
2010 (the “Effective Date”) by and between STEELCLOUD, INC., a Virginia
corporation (the “Company”), and CLIPPER INVESTORS LLC, an Illinois limited
liability company (the “Investor”). The Company and the Investor are referred to
collectively herein as the “parties.”
 
RECITALS
 
A.           The Investor is willing, pursuant to the terms and conditions of
this Agreement, to purchase from the Company that certain Note (as defined
herein) which Note shall be convertible into securities of the Company on the
terms and subject to the conditions set forth herein.
 
B.           The Company wishes to sell the Note on the terms and conditions and
in the form referenced herein.
 
C.           The purpose of this Agreement is to set forth the understanding of
the parties relative to the matters above.  By this reference these Recitals are
incorporated into the Agreement which follows below.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of these premises, and the terms, conditions,
representations and covenants set forth herein, the parties hereby agree as
follows:
 
1.           DEFINITIONS.
 
1.1           Certain Defined Terms.  As used in this Agreement, the following
terms shall have the following respective meanings:
 
“Agreement” has the meaning ascribed to such term in the preamble.
 
“Affiliate” has the meaning such term is given in Rule 405 promulgated under the
Securities Act.
 
“Balance Sheet Date” has the meaning ascribed to such term in Section 6.5.
 
“Closing” has the meaning ascribed to such term in Section 3.1.
 
“Closing Date” has the meaning ascribed to such term in Section 3.1.
 
“Collateral” has the meaning ascribed to such term in the Security Agreement.
 
“Common Stock” means the Company’s $0.001 par value common stock.
 
“Company” has the meaning ascribed to such term in the preamble.
 
 
 

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“Company SEC Documents” means the Company’s (i) annual reports on Form 10-K for
its fiscal years ended October 31, 2009, 2008 and 2007; (ii) quarterly report on
Form 10-Q for its fiscal quarter ended April 30, 2010; (iii) proxy or
information statements relating to meetings of the shareholders of the Company
held (or actions taken without a meeting by such stockholders) since October 31,
2009, and (iv) all of its other reports, statements, schedules and registration
statements filed with the SEC since October 31, 2009.
 
“Conversion Notice” has the meaning ascribed to such term in Section 5.1.
 
“Conversion Shares” means the shares of Common Stock issuable upon the
conversion of the Note.
 
“Debt” means (i) Indebtedness for borrowed money, (ii) obligations evidenced by
bonds, debentures, notes or other similar instruments, (iii) obligations to pay
the deferred purchase price of property or services, (iv) obligations as lessee
under leases which shall have been or should be, in accordance with generally
accepted accounting principles, recorded as capital leases, and (v) obligations
under direct or indirect guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to assure a
creditor against loss in respect of, Indebtedness or obligations of others of
the kinds referred to in clause (i) through (iv) above.
 
“Default Rate” has the meaning ascribed to such term in Section 4.3.
 
“Effective Date” has the meaning ascribed to such term in the preamble.
 
“Event of Default” has the meaning ascribed to such term in Section 10.
 
“Financial Statements” has the meaning ascribed to such term in Section 6.5.
 
“Indebtedness” means all Debt and other obligations, contingent or otherwise,
which in accordance with generally accepted accounting principles should be
classified on the obligor’s balance sheet as liabilities, but in any event
including liabilities secured by any mortgage, pledge, lien or other security
interest existing on property owned or acquired by the obligor, whether or not
the liability secured thereby shall have been assumed, all guarantees of such
Indebtedness and other contingent obligations in respect of the Indebtedness of
others.
 
“Investor” has the meaning ascribed to such term in the preamble.
 
“Lien” means, with respect to any property or asset (whether tangible or
intangible), any mortgage, lien, pledge, charge, security interest, encumbrance,
or other adverse claim of any kind in respect of such property or asset.
 
“Loan Documents” means collectively this Agreement, the Note, the Security
Agreement, and the Registration Rights Agreement.

 
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“Material Adverse Effect” means any material adverse change in, or material
adverse effect on the business, assets, prospects, results of operations, value,
financial or other condition of the Company, or any event or circumstance that
could reasonably be expected to have any such effect or that could reasonably be
expected to prevent, hinder or delay the consummation of any of the transactions
contemplated by this Agreement, the other Loan Documents, or any of the other
documents, instruments or agreements contemplated hereby and thereby.
 
“Maturity Date” has the meaning ascribed to such term in Section 4.2.
 
“Note” has the meaning ascribed to such term in Section 2.1.
 
“Outstanding Balance” means the unpaid principal balance of the Note.
 
“Person” means an individual, corporation, partnership, association, trust,
government or political subdivision or agent or instrumentality thereof, or
other entity or organization.
 
“Preferred Stock and Warrant Purchase Agreement” means that certain Preferred
Stock and Warrant Purchase Agreement of even date herewith by and between the
Company and the Investor pursuant to which the Investor shall purchase 450,000
shares of the Company’s Series A Preferred Stock and warrants to purchase
20,000,000 shares of Common Stock.
 
“Purchase Price” has the meaning ascribed to such term in Section 2.2.
 
“Registration Rights Agreement” means the Registration Rights Agreement to be
delivered by the Company to the Investor pursuant to Section 3.2 hereof,
substantially in the form attached hereto as Exhibit B.
 
“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.
 
“SEC” means the Securities and Exchange Commission.
 
“Securities Act” means the Securities Act of 1933, as amended, or any similar
Federal law then in force.
 
“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended,
or any similar Federal law then in force.
 
“Security Agreement” means that certain Security Agreement, dated of even date
herewith, by and between the Company and the Investor, substantially in the form
attached hereto as Exhibit C.

1.2         Other Defined Terms.
 
(a)           Certain other words and phrases are defined or described elsewhere
in this Agreement and/or the Schedules and Exhibits hereto.
 
 
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(b)           Wherever used in this Agreement (i) the words “include” or
“including” shall be construed as incorporating, also, “but not limited to” or
“without limitation”, (ii) the word “day” means a calendar day unless otherwise
specified, (iii) the word “party” means each and every person or entity who is a
party to this Agreement, (iv) the word “law” (or “laws”) means any statute,
ordinance, resolution, regulation, code, rule, order, decree, judgment, writ,
injunction, mandate or other legally binding requirements of a government
entity, (v) the word “notice” shall mean notice in writing (whether or not
specifically stated) and shall include notices, consents, approvals and any
other written communication contemplated under this Agreement, (vi) the word
“or” shall mean either or both and (vii) the words “Business Day” shall mean any
day other than Saturday, Sunday or a day on which commercial banks located in
Chicago, Illinois are required or authorized by law to close.
 
(c)           Unless the context otherwise requires, words in the singular
number include the plural and vice versa.  All Schedules and Exhibits hereto are
hereby incorporated herein and made a part hereof.
 
2.           PURCHASE OF NOTES.
 
2.1         Authorization.  The Company has authorized the issuance and sale to
the Investor of a convertible note in the aggregate principal amount of One
Million One Hundred Thousand Dollars ($1,100,000), in the form attached hereto
as Exhibit A (the “Note”).
 
2.2         Sale and Purchase of Note.  Upon the terms and conditions contained
herein, the Company agrees to sell to the Investor, and the Investor agrees to
purchase from the Company, at the Closing (as hereinafter defined) and for the
aggregate purchase price of One Million One Hundred Thousand Dollars
($1,100,000) (the “Purchase Price”), the Note.
 
3.           CLOSING; CLOSING DELIVERIES.
 
3.1         Closing.  The sale to and purchase by the Investor of the Note shall
take place in a closing (the “Closing”) with the Closing to occur at the offices
of Ungaretti & Harris LLP, 70 West Madison, Suite 3500, Chicago, Illinois 60602
at 10:00 a.m. local time, on the date hereof, or at such other time, date or
place as the Company and the Investor shall mutually agree (the “Closing Date”).
 
3.2         Deliveries by the Company at the Closing.  The Investor shall have
received on or before the Closing Date, in form and substance satisfactory to
the Investor in its sole discretion:
 
(a)           the Note issued in the name of the Investor;
 
(b)           the Security Agreement, duly executed by the Company;
 
(c)           the Registration Rights Agreement, duly executed by the Company;
 
(d)           a certificate executed by the President of the Company stating
that the conditions specified in Sections 3.6(a) and 3.6(b) have been fulfilled
and stating that there shall have been no material adverse change in the
business, affairs, prospects, operations, properties, assets or condition of the
Company since the date of the Financial Statements;
 
 
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(e)           certified copies of (A) the resolutions of the Board of Directors
of the Company approving the Loan Documents and of all documents evidencing
other necessary corporate action and governmental approvals, if any, with
respect to such Loan Documents, and (B) the Certificate of Incorporation and the
Bylaws of the Company as in effect on the Closing Date;
 
(f)           the legal opinions of Gersten & Savage LLP, and Fettman, Tolchin &
Majors PC, counsel to the Company, in form and substance satisfactory to the
Investor and to the Investor’s counsel; and
 
(g)           such other certificates or documents the Investor or its counsel
may reasonably require.
 
3.3         Deliveries by the Investor at Closing.  The Company shall have
received on or before the Closing Date, in form and substance satisfactory to
the Company in its sole discretion:
 
(a)           the Purchase Price, by wire transfer of immediately available
funds; and
 
(b)           such other certificates or documents as the Investor or its
counsel may reasonably require.
 
3.4         Conditions of the Company’s Obligations at Closing.  The obligations
of the Company to the Investor under this Agreement are subject to the
fulfillment on or before the purchase or Closing of each of the following
conditions by the Investor:
 
(a)           Representations and Warranties.  The representations and
warranties of the Investor contained in Section 6 shall be true on and as of the
purchase or Closing with the same effect as though such representations and
warranties had been made on and as of the purchase or Closing.
 
(b)           Payment of Purchase Price.  Investor shall have delivered the
Purchase Price.
 
3.6         Conditions of the Investor’s Obligations at Closing.  The
obligations of the Investor under this Agreement are subject to the satisfaction
of the following conditions on or prior to the Closing Date, any of which may be
waived in whole or in part by the Investor:
 
(a)           Representations and Warranties.  All of the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects on the Closing Date with the same effect as if made on
the Closing Date.
 
(b)           Performance of Covenants.  All of the covenants and agreements of
the Company contained in this Agreement and required to be performed on or
before the Closing Date shall have been performed in all material respects to
the satisfaction of the Investor.
 
 
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(c)           Authorizations and Approvals.  All authorizations and approvals
required in connection with the issuance of the Note and the stock issuable upon
conversion of the Note shall have been obtained.
 
(d)           Legal Action.  There shall not have been instituted or threatened
any legal proceeding seeking to prohibit or threaten the consummation of the
transactions contemplated by this Agreement.  None of the parties hereto shall
be prohibited by any order, writ, injunction or decree of any governmental body
of competent jurisdiction from consummating the transactions contemplated by
this Agreement.
 
(e)           Due Diligence.  The Investor shall have completed its due
diligence investigation of the Company and shall be satisfied with results of
such investigation.
 
(f)           Adverse Change.  There shall have been no material adverse change
in the business, property or condition, financial or otherwise, of the Company
from that disclosed in the Company’s April 30, 2010 quarterly financials.
 
(g)           Disclosure Schedules.  All disclosure schedules delivered to the
Investor shall be in form and substance satisfactory to the Investor in its sole
and absolute discretion.
 
(h)           Closing Deliveries.  All agreements and other documents to be
delivered to the Investor pursuant to Section 3.2 hereof shall be in form and
substance satisfactory to the Investor in its sole and absolute discretion.
 
(i)           Preferred Stock and Warrant Purchase Agreement.  The parties
hereto shall have entered into the Preferred Stock and Warrant Purchase
Agreement, and the transactions contemplated by such Preferred Stock and Warrant
Purchase Agreement shall be consummated concurrently with the transactions
contemplated hereunder.
 
4.           PAYMENT OF NOTE.
 
4.1         Interest.  The Outstanding Balance in respect of the Note shall
accrue interest, beginning as of the date of the Note, at a rate of 12% per
annum.  Interest shall be payable on July 31, 2010 and on the last day of each
month thereafter, and on the first to occur of the conversion of the outstanding
balance of the Note as contemplated by Section 5.1, the Maturity Date, and the
acceleration of the Note.  Interest payable on the Note shall be calculated on
the basis of a year of 360 days consisting of twelve 30-day months.  If the date
for any payment of principal is extended (whether by operation of this
Agreement, any provision of law or otherwise), interest shall be payable for
such extended time at the rates provided herein.  Whenever any payment hereunder
shall be stated to be due on a day other than a Business Day, such payment shall
be due on the next succeeding Business Day.
 
4.2         Principal.  The Outstanding Balance shall be due and payable in cash
by 1:00 p.m. Chicago time on July 2, 2013 (the “Maturity Date”).
 
 
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4.3         Default Rate of Interest.  If the Company shall fail to pay on the
due date therefor, whether on the Maturity Date, by acceleration or otherwise,
any principal owing under the Notes, then interest shall accrue on such unpaid
principal from the due date to the date on which such principal is paid in full
at a rate per annum equal to eighteen percent (18%) (the “Default
Rate”).  Interest calculated at the Default Rate shall be due and payable upon
demand by the Investor.
 
4.4         Other Payment Terms.  All other terms and conditions governing the
payment of the Note shall be as set forth in the Note.
 
5.           INVESTOR’S CONVERSION OPTION.
 
5.1         Conversion of Note.   The Investor shall have the right at any time
and from time to time to convert all, or any part, of the outstanding balance
due under the Note into shares of Common Stock of the Company at the conversion
rate of $0.10 per share of Common Stock (subject to adjustment in the event of
stock splits or combinations).  To exercise such conversion right, the Investor
must give written notice to the Company (“Conversion Notice”) of such intent at
least five (5) days prior to such conversion and specify the portion of the
outstanding principal balance of the Notes to be so converted. No fractional
shares of the Company's Common Stock shall be issued upon conversion of the
Note. In lieu of the Company issuing any fractional shares to the Investor upon
the conversion of the Note, the Company shall pay to the Investor the amount of
outstanding principal that is not so converted in cash. Within five (5) days
after receipt of the Conversion Notice, (a) the Company at its expense will
issue and deliver to the Investor a certificate or certificates for the number
of full shares of Common Stock issuable upon such conversion and pay any
outstanding interest accrued under the Note, (b) the principal balance of the
Note shall be reduced by the amount so converted, and (c) upon conversion of all
of the outstanding principal balance due under the Note, the Investor shall
concurrently surrender the Note, marked paid, at the principal office of the
Company.  Upon conversion of all of the outstanding principal balance due under
the Note, and payment of any accrued and outstanding interest thereon, the
Company shall be forever released from all its obligations and liabilities under
the Note. Anything contained in the Note to the contrary notwithstanding, the
Note may not be prepaid without the Company providing the Investor not less than
thirty (30) days prior written notice of such prepayment and the Investor shall
not be required to accept any prepayment of the Note if following receipt of
such written notice the Investor has delivered a Conversion Notice to the
Company.
 
5.2         Reservation of Shares.  From and after the date hereof, the Company
shall reserve and keep available for issuance (i) such number of its authorized
but unissued shares of its Common Stock as will be sufficient to permit the
conversion in full of the Note into Common Stock, and in each case in accordance
with this Agreement and the terms of the Note.  All shares of Common Stock that
are so issuable shall, when issued upon conversion or exercise, be duly and
validly issued and fully paid and non-assessable.  If at any time the number of
authorized but unissued shares of Common Stock shall be insufficient to effect
the conversion or exercise of all the outstanding Note, the Company shall take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
 
5.3         Registration Rights.  The Investor shall be entitled to the rights
and benefits as a holder of Investor Registrable Securities under the
Registration Rights Agreement.
 
 
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6.           REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
 
The Company hereby represents and warrants to the Investor as follows:
 
6.1         Organization; Good Standing.  The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Virginia.  The Company has all requisite corporate power and authority and holds
all licenses, permits and other required authorizations from governmental
authorities necessary to conduct its business as it is now being conducted or as
proposed to be conducted and to own or lease the properties and assets it now
owns or holds under lease.  The Company is duly qualified or licensed and in
good standing as a foreign corporation in each jurisdiction wherein the
character of its properties or the nature of the activities conducted by it
makes such qualification or licensing necessary.
 
6.2         Authorization.  The Company has the full corporate power and
authority to enter into the Loan Documents and to perform all of its obligations
hereunder and thereunder.  The execution, delivery and performance of the Loan
Documents by the Company have been or will be, on or before the Closing Date,
duly authorized by all necessary corporate action.  This Agreement constitutes a
legal, valid and binding obligation of the Company enforceable in accordance
with its terms.  The Company, in light of its business or proposed business,
does not require any consent, approval, authorization or order of, or
declaration, filing or registration with, any court or governmental or
regulatory agency or board in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
 
6.3         Charter Documents.  The Company has heretofore delivered to counsel
for the Investor true, correct and complete copies of the Company’s Certificate
of Incorporation and Bylaws, each as in full force and effect on the date
hereof.  There will be no changes made to such Certificate of Incorporation or
Bylaws between the date hereof and the Closing Date, except as contemplated by
the Preferred Stock and Warrant Purchase Agreement.
 
6.4         Capitalization.  As of the Closing, the Company’s authorized
capitalization will consist of (i) 80,000,000 shares of Common Stock, of which
20,075,001 are issued and outstanding, (ii) 750,000 shares of Series A
Convertible Preferred Stock, par value $0.001 per share, of which none are
issued and outstanding, and (iii)1,250,000 shares of blank check preferred
stock.  All outstanding shares of Common Stock of the Company are validly
issued, fully paid and non-assessable.  The issuance of the Note hereunder and
the Conversion Shares pursuant to the provisions of this Agreement have been
duly and validly authorized.  No further approval or authorization of the
shareholders or the directors of the Company or of any governmental authority or
agency will be required for the issuance and sale of the Note or Conversion
Shares as contemplated by this Agreement.  No shareholder of the Company or any
other person is entitled to any preemptive rights with respect to the purchase
or sale of any securities by the Company.  The Conversion Shares, when issued
and delivered upon conversion of the Note, will be duly and validly issued,
fully paid and non-assessable.  Except as set forth on Schedule 6.4 attached
hereto, there are no outstanding options, warrants or other rights, commitments
or arrangements, written or oral, to which the Company is a party or by which it
is bound, to purchase or otherwise acquire any authorized but unissued shares of
capital stock of the Company or any security directly or indirectly convertible
into or exchangeable or exercisable for any capital stock of the Company.  No
stock plan, stock purchase, stock option or other agreement or understanding
between the Company and any holder of any securities or rights exercisable or
convertible for securities provides for acceleration or other changes in the
vesting provisions or other terms of such agreement or understanding as the
result of the occurrence of any event.
 
 
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6.5         Financial Statements.  The Company has furnished to the Investor its
unaudited balance sheet as of April 30, 2010 (the “Balance Sheet Date”), its
unaudited statement of operations for the six month period ended April 30, 2010,
and its unaudited statement of cash flows for the six month period ended April
30, 2010 (collectively the “Financial Statements”).  Except as set forth on
Schedule 6.5, the Financial Statements have been prepared in conformity with
generally accepted accounting principles consistently applied, are true and
correct in all material respects and fairly present the financial position and
results of operations of the Company as at, or for the period ended on, such
date.  Since the date of such Financial Statements, the Company has conducted
its business in a consistent manner without any change in accounting or credit
principles, policies or procedures.  At the date of such Financial Statements,
there were no debts, liabilities or obligations of the Company of any kind and
description, whether absolute or contingent, monetary or non-monetary, direct or
indirect, known or unknown or matured or unmatured, or of any other nature,
other than those disclosed in such Financial Statements.
 
6.6         Absence of Changes.  Except as set forth on Schedule 6.6, since the
Balance Sheet Date, there has not been:
 
(a)           any change in the business, assets, liabilities, financial
condition or results of operations of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not had a Materially Adverse Effect;
 
(b)           any change in the contingent obligations of the Company, by way of
contract, guaranty, endorsement, indemnity, warranty or otherwise, except
changes in the ordinary course of business that have not had a Material Adverse
Effect;
 
(c)           any damage, destruction or loss of the Company’s properties or
assets, whether or not covered by insurance;
 
(d)           any waiver by the Company of a material right or of a material
debt owed to it;
 
(e)           any satisfaction or discharge of any Lien or payment of any
obligation by the Company, except in the ordinary course of business and not
having a Material Adverse Effect;
 
(f)           any material change or amendment to a material agreement or
material arrangement by which the Company or any of its assets or properties is
bound or subject;
 
(g)           any material change in any compensation arrangement or agreement
with any employee, officer or director of the Company;
 
 
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(h)           any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets, other than the license of
software and products in the ordinary course of business;
 
(i)           any resignation or termination of employment of any officer or key
employee of the Company, and the Company does not know of the impending
resignation or termination of employment of any such officer or key employee;
 
(j)           receipt of notice of a loss of, or material order cancellation by,
any major customer of the Company;
 
(k)           any Lien created by the Company, with respect to any of its
material properties or assets, except Liens for taxes not yet due or payable;
 
(l)           any loans or guarantees made by the Company to or for the benefit
of its respective employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of business;
 
(m)           any declaration, setting aside, payment or other distribution in
respect of any of the capital stock of the Company, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company;
 
(n)           to the knowledge of the Company, any other event or condition of
any character that could reasonably be expected to result in a Material Adverse
Effect;
 
(o)           any issuance or alteration of the rights, preferences, privileges
or terms of any capital stock of the Company; or
 
(p)           any agreement or commitment by the Company to do any of the things
described in this Section 6.6.
 
           6.7           Compliance with Other Instruments.  Except as set forth
on Schedule 6.7, the Company is not in default in the performance of any
obligation, agreement, instrument or undertaking to which it is a party or by
which it is bound and there is no such obligation, agreement, instrument or
undertaking which adversely affects or in the future may adversely affect its
business, properties, prospects, operations or condition (financial or
otherwise).  The Company is not in violation of its Certificate of Incorporation
or Bylaws.  Neither the sale of the Note (or the issuance and delivery of the
Conversion Shares), the execution and delivery of this Agreement, nor the
fulfillment of the terms set forth in this Agreement and the consummation of the
transactions contemplated by this Agreement, will:  (i) conflict with or
constitute a breach of, or constitute a default under or an event which, with or
without notice or lapse of time or each, would be a breach of or default under
or violation of the Certificate of Incorporation or Bylaws of the Company or
would be a breach of or default under or violation of any agreement, document,
indenture, mortgage or other instrument or undertaking by which the Company is
bound or to which any of its properties are subject, or would be a violation of
any law, administrative regulation, judgment, order or decree applicable to the
Company; (ii) result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company; (iii) result in the loss
of any license, certificate, legal privilege or legal right enjoyed or possessed
by the Company; (iv) give any party to any agreement to which the Company is a
party a right of termination; or (v) require the consent of any other person or
entity under any agreement, indenture, mortgage, document or other instrument or
undertaking by which the Company is bound or to which any of its properties are
subject.
 
 
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           6.8           Taxes.  To the Company’s knowledge, the Company has
filed all necessary or appropriate federal, state, local and foreign tax returns
and reports and all taxes, fees, assessments and governmental charges of any
nature shown by such returns to be due and payable have been paid, except for
those amounts being contested in good faith and for which appropriate amounts
have been reserved in accordance with generally accepted accounting
principles.  There is no tax deficiency which has been, or to the knowledge of
the Company might be, asserted against the Company which would adversely affect
the business or operations, or proposed business or operations, of the
Company.  The Company has not been, and is not now being, audited by any
federal, state, local or foreign tax authorities.  To the Company’s knowledge,
the Company has made all required deposits for taxes applicable to the current
tax year.  All tax returns and reports of the Company were prepared in
accordance with the relevant rules and regulations of each taxing authority
having jurisdiction over the Company.
 
           6.9           Litigation.  Except as set forth on Schedule 6.9, there
is not now pending, and to the best knowledge of the Company there is not
threatened nor is there any basis for, any litigation, action, suit or
proceeding:  (a) to which the Company is or will be a party in or before or by
any court or governmental or regulatory agency or body; or (b) to which any of
the officers or employees of the Company is or will be a party in or before or
by any court or governmental or regulatory agency or body, concerning
termination by such person of his employment with any of such person’s former
employers.   In addition to the foregoing, there is no judgment, decree,
injunction, rule or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against the Company having, or
which, insofar as can be foreseen in the future, may have, any adverse effect on
the business or proposed business or operations, properties, assets or
condition, financial or otherwise, of the Company.
 
           6.10           Compliance with Law.  The Company is in compliance in
all material respects with all applicable statutes and regulations of the United
States and of all states, municipalities and agencies in respect of the conduct
of its business.  No failure by the Company to comply with such statutes and
regulations will have a material adverse effect on the Company.
 
           6.11           SEC Filings and the Sarbanes-Oxley Act.
 
(a)           Company SEC Documents.
 
(i)           As of its filing date, each Company SEC Document complied, and
each such Company SEC Document filed subsequent to the date hereof will comply,
as to form in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be.
 
(ii)           As of its filing date, each Company SEC Document filed pursuant
to the Exchange Act did not, and each such Company SEC Document filed subsequent
to the date hereof will not, contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
 
 
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(iii)           Each Company SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the Securities Act, as
of the date such statement or amendment became effective, did not contain (or,
in the case of any registration statement, as amended or supplemented, if
applicable, filed by the Company prior to the Closing Date, as of the date such
registration statement or amendment becomes effective, will not contain) any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
 
(b)           Prohibited Actions. The Company has not, since the enactment of
the Sarbanes-Oxley Act, taken any action prohibited by Section 402 of the
Sarbanes-Oxley Act.
 
           6.12           Subsidiaries.  Except as set forth on Schedule 6.12,
the Company does not have any investment or other ownership interest in any
other corporation, joint venture, general partnership, limited partnership or
other business entity.
 
           6.13           Registration Rights.  Except as set forth on Schedule
6.13 and except as to the rights granted in the Registration Rights Agreement,
there are no rights outstanding which permit or allow the holder thereof to
cause the Company to file a registration statement or which permit or allow the
holder thereof to include securities of the Company in a registration statement
filed by the Company.
 
           6.14           Outstanding Indebtedness.  Except as set forth on
Schedule 6.14 attached hereto and for trade payables incurred in the ordinary
cause of business, the Company does not have (a) any liability or obligation of
any nature, whether accrued, absolute, contingent or otherwise, and whether
direct, indirect, due or to become due; (b) any power of attorney outstanding,
nor any other agreement of agency, whether as principal or agent, nor has it any
obligation or liability, either actual, accrued, accruing or contingent, as
guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise in
respect of the obligation of any person; or (c) any liability to any officer,
director, shareholder or employee of the Company for money borrowed by the
Company or otherwise.
 
           6.15           Conflicting Agreements.  No officer or other employee
of the Company is a party to or bound by any agreement, contract or commitment,
or subject to any restrictions (including confidentiality or non-compete
restrictions) in connection with any previous or current employment of any such
person, which adversely affects, or in the future may reasonably be expected to
adversely affect, the business, or the proposed business, of the Company.
 
           6.16           Compliance with the Securities Act.  All securities of
the Company heretofore sold and issued by it were sold and issued in material
compliance with all applicable Federal and state securities laws.  Based upon
the representations of the Investor set forth herein, and assuming the truth of
such representations, the offer, sale and issuance of the Note (and the issuance
and delivery of the Conversion Shares) are exempt from the registration
requirements of the Securities Act.
 
 
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6.17      Minute Books.  The minute books of the Company made available to the
Investor contain a complete summary of all meetings of directors and
stockholders since the time of incorporation, to the extent such minute books
are held by or are reasonably available to the Company, and accurately reflect
all transactions referred to in such minutes accurately in all material
respects.
 
7.           REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
 
The Investor hereby severally represents and warrants to, and agrees with, the
Company as follows:
 
7.1        Investment Intent.  The Investor is acquiring the Note (and any
Conversion Shares) for its own account and not with a present view to, or for
sale in connection with, any distribution thereof in violation of the Securities
Act.  The Investor consents to the placement of the following legend on each
Note and Conversion Shares:
 
“[THE SHARES EVIDENCED BY THIS CERTIFICATE] [THIS NOTE AND THE SECURITIES
ISSUABLE UPON ITS EXERCISE] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES STATUTES OR REGULATIONS, AND MAY NOT
BE TRANSFERRED OR SOLD UNLESS (i) A REGISTRATION STATEMENT UNDER SUCH ACT IS
THEN IN EFFECT WITH RESPECT THERETO, (ii) A WRITTEN OPINION FROM COUNSEL FOR THE
ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE ISSUER HAS
BEEN OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED OR (iii) A ‘NO
ACTION’ LETTER OR ITS THEN EQUIVALENT HAS BEEN ISSUED BY THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER OR SALE.”
 
7.2         Restricted Securities.  The Investor understands that the Note (and
any Conversion Shares) will not be registered at the Closing under the
Securities Act for the reason that the sale provided for in this Agreement is
exempt pursuant to Section 4 of the Securities Act and that the reliance of the
Company on such exemption is predicated in part on the Investor’s
representations set forth herein.  The Investor further represents that it has
had access during the course of the transaction and prior to its purchase of the
Note to such information relating to the Company as it has desired and that it
has had the opportunity to ask questions of and receive answers from the Company
concerning the terms and conditions of the offering and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to it or to which it had access.  The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 6 of this Agreement or the right of the Investor to
rely thereon.  The Investor understands that the Note (and any Conversion
Shares) may not be sold, transferred or otherwise disposed of without
registration under the Securities Act or an exemption therefrom and that in the
absence of an effective registration statement covering the Note (or the
Conversion Shares) or an available exemption from registration under the
Securities Act, the Note (and any Conversion Shares) must be held indefinitely.
 
 
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7.3         Accredited Investor.  The Investor is an “accredited investor” as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The
Investor has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the purchase of the
Note and the Conversion Shares into which it may be converted.  The Investor is
not registered as a broker or dealer under Section 15(a) of the Securities
Exchange Act, affiliated with any broker or dealer registered under Section
15(a) of the Securities Exchange Act, or a member of the Financial Industry
Regulatory Authority.
 
7.4         No Conflicts.  The execution, delivery and performance of this
Agreement by the Investor and the consummation by the Investor of the
transactions contemplated hereby will not (i) result in a violation of the
certificate of incorporation, by-laws or other documents of organization of the
Investor, (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Investor is bound, or (iii)
result in a violation of any law, rule, regulation or decree applicable to the
Investor.
 
7.5         Disclosure of Information.  The Investor and its advisors, if any,
have had an opportunity to discuss the Company’s business, management, financial
affairs and the terms and conditions of the offering of the Note with the
Company’s management and have had an opportunity to review the Company’s
facilities and financials and to ask questions of the Company.  In determining
whether to enter into this Agreement and purchase the Note, the Investor has
relied solely on (i) the written information supplied by Company employees in
response to the written due diligence information request provided by the
Investor to the Company, and (ii) the PowerPoint presentations delivered by the
Company’s management to the Investor, titled “Investor Presentation April 9,
2010”, “Clipper Development Corp. May 28, 2010”, and “SteelCloud Confidential
SWOT Feb. 2010”, and the Investor has not received nor relied upon any oral
representation or warranty relating to the Company, this Agreement, or any of
the transactions or relationships contemplated hereby. The Investor understands
that its purchase of the Note involves a high degree of risk.  The Investor has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its purchase of the Note. 
The foregoing, however, does not limit or modify the representations and
warranties of the Company in Section 6 of this Agreement or the right of the
Investor to rely thereon.
 
8.           NO SUBORDINATION.
 
The Note will not be subordinate to any other indebtedness of the Company,
unless otherwise agreed to, in writing, by the Investor.
 
9.           NEGATIVE COVENANTS.
 
The Company will not do any of the following without the prior written consent
of the Investor:
 
 
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9.1.        Issue Any Equity Security.  At any time after the Effective Date,
the Company will not issue any equity securities, except that for purposes of
this covenant, any (a) shares of Common Stock issued or issuable upon conversion
of shares of Preferred Stock or outstanding Note; (b) shares of Common Stock
issued or issuable to any employee, officer or director of, or consultant to,
the Company pursuant to any plan or arrangement approved by the Board of
Directors of the Company; (c) shares of Common Stock or other securities issued
or issuable to any bank, equipment lessor or other similar financial institution
pursuant to any transaction or arrangement approved by the Board of Directors of
the Company; (d) shares of Common Stock or other securities issued or issuable
to any strategic partner pursuant to any transaction or arrangement approved by
the Board of Directors of the Company; (e) shares of Common Stock or other
securities issued or issuable as consideration for the acquisition of any
business entity by the Company by merger, purchase of all or substantially all
of the assets or capital stock of such entity, or other reorganization approved
by the Board of Directors of the Company whereby the Company owns not less than
a majority of the voting power of such entity (or the surviving or successor
entity); (f) shares of Common Stock issued or issuable upon exercise of any
warrants outstanding as of the date hereof.
 
9.2.        Liens.  Create or suffer to exist, or permit any of its subsidiaries
to create or suffer to exist, any Liens, upon or with respect to the Collateral
(as such term is defined in the Security Agreement), whether now owned or
hereafter acquired, or assign, or permit any of its subsidiaries to assign, any
right to receive income, in each case to secure or provide for the payment of
any Indebtedness of any Person or entity, other than Liens securing the Note.
 
9.3.        Debt.  Directly or indirectly create, incur, assume, guarantee, or
otherwise become or remain liable with respect to any Debt, except as follows:
 
(a)           the Note;
 
(b)           Debt of the Company (including, without limitation, capital lease
obligations except for capital lease obligations relating to facility leases) in
an aggregate principal amount not to exceed $50,000 at any one time outstanding;
 
(c)           capital lease obligations relating to facility leases in an
aggregate amount not to exceed $100,000 at any one time outstanding, including
any such capital lease obligations that are otherwise encompassed by (d) below;
and
 
(d)           Debt of the Company outstanding on the date hereof and any
refinancings, refundings, renewals or extensions thereof (without any increase
in the principal amount thereof or any shortening of the maturity of any
principal amount thereof).
 
9.4.        Guaranty.  Assume, guaranty, endorse or otherwise be or become
directly or contingently responsible or liable to assure the creditors of any
third party against loss, for the obligations of any Person including an
agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, assets, goods or services or an agreement to
maintain or cause any such Person to maintain a minimum working capital or net
worth.
 
9.5.        Sales of Assets.  Sell, lease, assign, transfer, abandon, or
otherwise dispose of, directly or indirectly, whether voluntary or involuntary,
any of its now owned or hereafter acquired assets without the written consent of
the Investor, other than sales, leases, or licenses of assets in the ordinary
course of the Company’s business.
 
 
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9.6.        Mergers.  Merge or consolidate with, or sell, assign, lease or
otherwise dispose of (in one transaction or in a series of related transactions)
all or substantially all of its assets (whether now owned or hereafter acquired)
to any Person, or acquire all or substantially all of the assets of the business
of any Person, or enter into any agreement to do any of the foregoing.
 
9.7.        Officer/Employee Distributions.  Except as occurs in the ordinary
course of business consistent with past practice as previously disclosed to the
Investor, grant or pay any extraordinary distributions, including bonuses or
extraordinary salary increases; or make loans or other forms of cash payments to
employees or officers or directors; or, make any payments of principal or
interest on any shareholder loans existing on its books; or give any
preferential treatment, directly or indirectly, to any officer, director or
employee.
 
9.8.        Dividends.  Except as required by the Preferred Stock, purchase or
retire, or otherwise acquire for value any of its capital stock now or hereafter
outstanding, or make any distribution of assets or loans to its stockholders,
whether in cash, assets or obligations, or allocate or otherwise set aside any
sum for the payment of any dividend or distribution by reduction of capital or
otherwise in respect of any shares of its capital stock.
 
9.9.        Capital Expenditures.  Purchase any assets, vehicles or equipment or
make any other capital expenditures in excess of an aggregate of $50,000 per
annum, except in the ordinary course of business consistent with past practice.
 
9.10.      Stock.  Change the number of authorized shares, voting rights of
shares, or class of shares, or engage in any “split-ups,” revisions,
reclassifications or other like change of its stock.
 
9.11.      Business.  Change the general character of its business as conducted
or as proposed to be conducted as of the date hereof or engage in any type of
business not reasonably related to its business as normally conducted, or change
its corporate name.
 
10.        EVENTS OF DEFAULT.
 
If any of the following (each, an “Event of Default”) shall occur:
 
10.1.      if any representation or warranty made to the Investor by the Company
in this Agreement, the Note, or the Security Agreement proves to have been
incorrect in any material respect as of the date hereof and as of the date on
which it is made, or any statement, certificate or data heretofore or hereafter
furnished to the Investor by the Company in connection with this Agreement
proves to have been incorrect in any material respect as of the date when the
facts therein set forth were stated or certified;
 
10.2.      if the Company fails to perform or comply with any covenant or
agreement in this Agreement, the Note or the Security Agreement;
 
10.3.      if the Company fails to pay principal of or interest on the Note, or
any other Indebtedness owing by the Company to the Investor now existing or
hereafter incurred by the Maturity Date;
 
 
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10.4.      if the Investor shall cease to have a valid and perfected security
interest in the Collateral for any reason whatsoever (other than any act or
omission by the Investor which results in such cessation);
 
10.5.      if an event of default shall have occurred under any document
executed in connection with any other Indebtedness of the Company or with
respect to any other Indebtedness of the Company which has not been cured, which
default accelerates such Indebtedness;
 
10.6.      except as otherwise provided herein or in the Security Agreement, if
the Collateral or any part or interest thereof or therein be disposed of, sold,
transferred or encumbered in any way without the consent of the Investor,
whether by operation of law or otherwise;
 
10.7.      if the Investor is not permitted, at all reasonable times and upon
reasonable prior notice, to enter upon the business or other premises at which
the Collateral is located, to inspect the same;
 
10.8.      a judgment for the payment of money in excess of $50,000 shall be
rendered against the Company and any such judgment shall remain unsatisfied and
in effect for any period of sixty (60) consecutive days without a stay of
execution;
 
10.9.      the Company shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of the Company or of all or a substantial part
of the assets of the Company, (ii) be unable, or admit in writing, the inability
to pay debts as they mature, (iii) make a general assignment for the benefit of
creditors; (iv) be adjudicated a bankrupt or insolvent, or (v) file a voluntary
petition in bankruptcy or a petition or an answer seeking reorganization or an
arrangement with creditors or to take advantage of any insolvency law or an
answer admitting the material allegations of a petition filed against the
Company in any bankruptcy, reorganization or insolvency law or an answer
admitting the material allegations of a petition filed against the Company in
any bankruptcy proceeding, reorganization or insolvency proceeding, or corporate
action shall be taken by the Company for the purpose of effecting any of the
foregoing;
 
10.10.    any proceeding is commenced against the Company (unless dismissed
within forty-five (45) calendar days) under any provision of the United States
Bankruptcy Code or under any other state or federal bankruptcy or insolvency
law, or seeking assignments for the benefit of creditors, formal or informal
moratoria, compositions, extensions generally with creditors, reorganization,
arrangement or other similar relief; or
 
10.11     an order, judgment or decree shall be entered, without the
application, approval or consent of the Company, by any court of competent
jurisdiction, approving a petition seeking reorganization of the Company or
appointing a receiver, trustee or liquidator of the Company or of all or a
substantial part of the assets of the Company, and such order, judgment or
decree shall continue unstayed and in effect for any period of one hundred
eighty (180) consecutive days;
 
THEN, if the Company has not cured the Event of Default within fifteen (15) days
after notice thereof from the Investor as provided in the Security Agreement,
the Investor may by written notice to the Company declare the principal of and
interest accrued on the Note, and all other liabilities of the Company to the
Investor to be forthwith due and payable, whereupon the same shall become
forthwith due and payable; provided that the Note shall become due and payable,
without any further action, upon the occurrence of any of the events set forth
in Section 10.1.
 
 
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11.        MISCELLANEOUS PROVISIONS.
 
11.1.      Governing Law. This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Illinois
without giving effect to principles of conflicts of laws.
 
11.2.      Survival.  The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any party hereto and the
closing of the transactions contemplated hereby.
 
11.3.      Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.  The Company may not assign any of its rights or delegate any of its
duties under this Agreement without obtaining the prior written consent of the
Investor.  The Investor may assign all or any part of its rights and obligations
hereunder.
 
11.4.      Entire Agreement.  The Loan Documents and the Exhibits and Schedules
thereto constitute the entire understanding and agreement between the parties
with regard to the subjects hereof and thereof and supersede all prior and
contemporaneous agreements, whether written or oral.
 
11.5.      Notices.  All notices hereunder shall be in writing and shall be
deemed to have been given at the time when hand delivered, when received if sent
by facsimile or by same day or overnight recognized commercial courier service,
or three days after being mailed by certified mail, addressed to the address
below stated of the party to which notice is given, or to such changed address
as such party may have fixed by notice:
 
If to the Company:
20110 Ashbrook Place, Suite 130
 
Ashburn, Virginia 20147
 
Attn: Brian H. Hajost
 
Fax: (703) 450-0407
   
With a copy to:
Edward J. Tolchin, Esq.
 
Fettmann, Tolchin & Majors, PC
 
10509 Judicial Drive
 
Suite 300
 
Fairfax, VA 22030
 
Fax: (703) 385-9893
   
If to the Investor:
1095 Fisher Lane
 
Winnetka, IL 60093
 
Fax:  (847) 784-9332

 
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With a copy to:
Ungaretti & Harris LLP
 
70 West Madison, Suite 3500
 
Chicago, Illinois 60602
 
Attn:  Michael W. Black
 
Fax:  (312) 523-2563

 
provided, however, that any notice of change of address shall be effective only
upon receipt.
 
11.6.      Amendments.  Any term of this Agreement may be amended only with the
written consent of the Company and the Investor.
 
11.7.      Delays or Omissions; Waivers.  No delay or omission to exercise any
right, power or remedy accruing to the Company or to the Investor, upon any
breach or default of any party hereto under this Agreement, shall impair any
such right, power or remedy of the Company, or the Investor nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of any similar breach of default thereafter occurring; nor shall any
waiver of any other breach or default theretofore or thereafter occurring.  No
waiver of any of the provisions contained in this Agreement shall be valid
unless made in writing and executed by the Company (if it is the waiving party)
or by the Investor (if the Investor is the waiving party).
 
11.8.      Expenses; Indemnification.  The Company agrees to pay all reasonable
expenses (including reasonable legal expenses and attorneys’ fees) of every kind
incidental to the collection of the Note or enforcement of this Agreement, the
Note and the Security Agreement.  The Company shall indemnify the Investor
against all reasonable claims for any fees, charges and commissions arising in
connection with the transactions contemplated by this Agreement, the Note and
the Security Agreement, excluding any gross negligence or willful misconduct by
the Investor or its representatives or agents acting in the course and scope of
this Agreement.
 
11.9.      Titles and Subtitles.  The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
 
11.10.    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.
 
11.11.    Severability.  If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith.  In the event that the parties cannot reach a mutually
agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
 
11.12.    Expenses.  The Company shall pay its own costs and expenses in
connection with this Agreement and the closing of the transactions contemplated
hereby.  In addition, in connection with the negotiation of the Loan Documents,
the Company shall pay the reasonable legal fees and expenses of Ungaretti &
Harris LLP, counsel to the Investor, in an amount not to exceed $40,000.
 
 
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11.13.    Construction.  This Agreement is the result of negotiations among, and
has been reviewed by, the Company, the Investor and their respective
counsel.  Accordingly, this Agreement shall be deemed to be the product of all
parties hereto, and no ambiguity shall be construed in favor of or against the
Company or the Investor.
 
[SIGNATURE PAGE FOLLOWS]

 
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IN WITNESS WHEREOF, the parties have executed this Note Purchase Agreement to be
effective as of the date first above written.
 
COMPANY:
 
STEELCLOUD, INC.,
a Virginia corporation
   
By:
/s/ Brian H. Hajost
Name:
Brian H. Hajost
Its:
President & CEO
   
INVESTOR:
   
CLIPPER INVESTORS LLC,
an Illinois limited liability company
   
By:
/s/ Kenneth A. Merlau
Name:
Kenneth A. Merlau
Its:
Manager

Signature Page to Note Purchase Agreement
 
 
 

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

 
 
EXHIBIT A
 
FORM OF CONVERTIBLE PROMISSORY NOTE
 
THIS NOTE AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES STATUTES
OR REGULATIONS, AND MAY NOT BE TRANSFERRED OR SOLD UNLESS (i) A REGISTRATION
STATEMENT UNDER SUCH ACT IS THEN IN EFFECT WITH RESPECT THERETO, (ii) A WRITTEN
OPINION FROM COUNSEL FOR THE ISSUER OR OTHER COUNSEL FOR THE HOLDER REASONABLY
ACCEPTABLE TO THE ISSUER HAS BEEN OBTAINED TO THE EFFECT THAT NO SUCH
REGISTRATION IS REQUIRED OR (iii) A “NO ACTION” LETTER OR ITS THEN EQUIVALENT
HAS BEEN ISSUED BY THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION WITH
RESPECT TO SUCH TRANSFER OR SALE.
 
STEELCLOUD, INC.

PROMISSORY NOTE

$1,100,000
July 2, 2010

STEELCLOUD, INC., a Virginia corporation (the “Company”), for value received,
hereby promises to pay to the order of CLIPPER INVESTORS LLC, an Illinois
limited liability company (the “Holder”), or its registered assigns, the
principal amount of One Million One Hundred Thousand Dollars ($1,100,000) on
July 2, 2013, with interest computed and payable as set forth in the Note
Purchase Agreement (defined below); provided that in no event shall the amount
payable as interest on this Note exceed the highest lawful rate permissible
under any law applicable hereto.  Payments of principal, premium, if any, and
interest hereon shall be made in lawful money of the United States of America by
the method and at the address for such purpose specified in the Note Purchase
Agreement, and such payments shall be overdue for purposes hereof if not made on
the scheduled date of payment therefor, without giving effect to any applicable
grace period.
 
This Note is issued pursuant to that certain Note Purchase Agreement dated July
2, 2010 (the “Note Purchase Agreement”) between the Company and the Holder, and
the Holder or its registered assigns are entitled to the benefits of the Note
Purchase Agreement and the other documents referred to in the Note Purchase
Agreement, including without limitation, the Security Agreement and the
Registration Rights Agreement, and may enforce the agreements contained therein
and exercise the remedies provided for thereby or otherwise available in respect
thereof, all in accordance with the terms thereof.  Capitalized terms used
herein without definition have the meanings ascribed to them in the Note
Purchase Agreement.
 
1. General.
 
1.1.           Assignment.  This Note and all rights hereunder are transferable,
in whole or in part, at the office or agency of the Company by the Holder or its
agent or attorney upon surrender of this Note together with the Assignment Form
attached hereto as Exhibit A, properly endorsed.
 
 
 

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

 

1.2.           Certain Waivers.  The parties hereto hereby waive presentment,
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance or enforcement of this Note.
 
1.3.           Governing Law.  This Note shall be construed in accordance with
and governed by the domestic substantive laws of the State of Illinois without
giving effect to any choice of law or conflicts of law provision or rule that
would cause the application of domestic substantive laws of any other
jurisdiction.
 
1.4.           Notices.  All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered in
accordance with the Note Purchase Agreement.
 
1.5.           Replacement.  Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Note and, in
the case of any such loss, theft or destruction of this Note, upon receipt of an
indemnity reasonably satisfactory to the Company or, in the case of any such
mutilation, upon the surrender and cancellation of this Note, the Company, at
its expense, shall execute and deliver, in lieu thereof, a new Note of like
tenor and dated the date of such lost, stolen, destroyed or mutilated Note, and
following such execution and delivery this Note shall not be deemed to be an
outstanding Note.
 
1.6.           Amendment.  Any term of this Note may be amended only with the
written consent of the Company and the Holder.
 
[signature page follows]
 
 
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IN WITNESS WHEREOF, the Company has executed this Note as of the date first
above written.

STEELCLOUD, INC.
 
By:
  
Name:
Title:

Signature Page to Note
 
 
 

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

 

EXHIBIT A TO NOTE

ASSIGNMENT FORM
 
(To assign the foregoing Note, execute
this form and supply the required information.)
 
FOR VALUE RECEIVED, the foregoing Note and all rights evidenced thereby are
hereby assigned to
 
_______________________________________________ whose address is
 
_______________________________________________________________

_______________________________________________________________
 
Dated:  ______________, _______
 

 
Holder’s Name:
             
Signature of Holder
     
or Authorized Signatory:
              
Title (if applicable):
             
Holder’s Address:
   

Signature Guaranteed:  ___________________________________________
 
NOTE:  The signature to this Assignment Form must correspond with the name as it
appears on the face of the Note, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust company.  Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Note.
 
 
 

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EXHIBIT B
 
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is entered into as of July
2, 2010, by and among STEELCLOUD, INC., a Virginia corporation (the “Company”),
CLIPPER INVESTORS LLC, an Illinois limited liability company (“Clipper”), and
CALEDONIA CAPITAL CORPORATION, a Delaware corporation (“Caledonia” and, together
with Clipper, the “Investors”).
 
The Company and Clipper are parties to (a) a Preferred Stock and Warrant
Purchase Agreement (the “Preferred Stock and Warrant Purchase Agreement”) and
(b) a Note Purchase Agreement (the “Note Purchase Agreement” and, together with
the Preferred Stock and Warrant Purchase Agreement, the “Purchase Agreements”),
each dated as of July 2, 2010.  The Company and Caledonia are parties to (i) an
Exchange Agreement dated as of July 2, 2010 pursuant to which Caledonia was
issued shares of the Company’s Preferred Stock in exchange for certain shares of
the Company’s Common Stock (the “Exchange Agreement”), and (ii) a Consolidated,
Amended and Restated Promissory Note dated July 2, 2010, made by the Company to
the order of Caledonia in the original principal amount of $570,000 (the
“Caledonia Note”).  In order to induce Clipper to enter into the Purchase
Agreements and Caledonia to enter into the Exchange Agreement, the Company has
agreed to provide the registration rights set forth in this Agreement.  The
execution and delivery of this Agreement is a condition to the closing of the
transactions contemplated by the Purchase Agreements, the Exchange Agreement and
the Caledonia Note.  Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in Section 8 hereof.
 
The parties hereto agree as follows:
 
1.            Demand Registrations.
 
(a)           Requests for Registration.  Each of Clipper and Caledonia may
request registration under the Securities Act of all or any portion of their
Investor Registrable Securities on Form S-1 or any similar long-form
registration (“Long-Form Registrations”) or, if then available, on Form S-2 or
S-3 (including pursuant to Rule 415 under the Securities Act) or any similar
short-form registration (“Short-Form Registrations”).  All registrations
requested pursuant to this Section 1(a) are referred to herein as “Demand
Registrations.”  Demand Registrations shall be Short-Form Registrations whenever
the Company is permitted to use any applicable short form.  Each request for a
Demand Registration shall specify the approximate number of Investor Registrable
Securities requested to be registered and the anticipated per share price range
for such offering.  Within five (5) business days after receipt of any such
request, the Company shall give written notice of such requested registration to
all other holders of Investor Registrable Securities and, subject to Section
1(d) below, shall include in such registration all Investor Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within thirty (30) days after the receipt of the Company’s
notice.
 
 
 

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(b)          Investor Long-Form Registrations.  Each of Clipper and Caledonia
shall be entitled to request not more than one (1) Long-Form Registration
pursuant to Section 1(a) for which the Company shall pay all Registration
Expenses (as defined in Section 5), whether or not such registration is
consummated.  All Long-Form Registrations shall be underwritten
registrations.  The selling stockholders and the Company shall bear the expenses
of the underwriter and placement agent, if any, pro rata in proportion to the
respective number of shares each is selling in such offering.
 
(c)           Investor Short-Form Registrations.  In addition to the Long-Form
Registrations provided pursuant to Section 1(b), each of Clipper and Caledonia
shall be entitled to request an unlimited number of Short-Form Registrations
pursuant to Section 1(a) for which the Company shall pay all Registration
Expenses, whether or not such registration is consummated.  The selling
stockholders and the Company shall bear the expenses of the underwriter and
placement agent, if any, pro rata in proportion to the respective number of
shares each is selling in such offering.  The Company shall use its best efforts
to make Short-Form Registrations on Form S-3 available for the sale of Investor
Registrable Securities and to maintain such S-3 eligibility thereafter.  If the
Company, pursuant to the request of the holder(s) of a majority of Investor
Registrable Securities, is qualified to and has filed with the Securities
Exchange Commission a registration statement under the Securities Act on Form
S-3 pursuant to Rule 415 under the Securities Act (the “Required Registration”),
then the Company shall use its best efforts to cause the Required Registration
to be declared effective under the Securities Act as soon as practicable after
filing, and, once effective, the Company shall cause such Required Registration
to remain effective for a period ending on the earlier of (i) the date on which
all Investor Registrable Securities included in such registration have been sold
pursuant to the Required Registration, or (ii) the date as of which the
holder(s) of the Investor Registrable Securities included in such registration
(assuming such holder(s) are affiliates of the Company) are able to sell all of
the Investor Registrable Securities included in such registration within a
ninety (90) day period in compliance with Rule 144 under the Securities Act.
 
(d)           Priority on Demand Registrations.  The Company shall not include
in any Demand Registration any securities that are not Investor Registrable
Securities without the prior written consent of the holder(s) of a majority of
the Investor Registrable Securities to be included in such registration.  If a
Demand Registration is an underwritten offering and the managing underwriters
advise the Company in writing that, in their opinion, the number of Investor
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Investor Registrable
Securities and other securities, if any, that can be sold in an orderly manner
in such offering within a price range acceptable to the holder(s) of a majority
of the Investor Registrable Securities to be included in such registration, then
the Company shall include in such registration, prior to the inclusion of any
securities that are not Investor Registrable Securities, the maximum number of
Investor Registrable Securities requested to be included that, in the opinion of
such underwriters, can be sold in an orderly manner within the price range of
such offering, allocated pro rata among the respective holders thereof on the
basis of the amount of Investor Registrable Securities owned by each such
holder.
 
 
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(e)           Restrictions on Demand Registrations.  The Company shall not be
obligated to effect any Demand Registration within 180 days after the effective
date of a previous Demand Registration.  The Company may postpone for up to 180
days the filing or the effectiveness of a registration statement for a Demand
Registration if such registration would, in the good faith judgment of the
Company’s board of directors, substantially interfere with any material
transaction being considered at the time of receipt of the request for such
Demand Registration, including any proposal or plan by the Company to acquire
financing, engage in any acquisition of assets (other than in the ordinary
course of business), or engage in any merger, consolidation, tender offer,
reorganization, or similar transaction; provided that, in such event, the
holder(s) of Investor Registrable Securities initially requesting such Demand
Registration shall be entitled to withdraw such request and the Company shall
pay all Registration Expenses in connection with such registration.  The Company
may delay a Demand Registration hereunder only once in any twelve (12) month
period.
 
(f)           Selection of Underwriters.  The Company in its reasonable
discretion shall have the right to select the investment banker(s) and
manager(s) to administer any underwritten offering hereunder.
 
(g)           Other Registration Rights.  Except as provided in this Agreement,
the Purchase Agreements, the Exchange Agreement, and the documents contemplated
thereby, the Company shall not grant to any Persons the right to request the
Company to register any equity securities of the Company, or any securities,
options or rights convertible or exchangeable into or exercisable for such
securities, without the prior written consent of the holder(s) of a majority of
the Investor Registrable Securities.
 
2.            Piggyback Registrations.
 
(a)           Right to Piggyback.  Whenever the Company proposes to register any
of its securities (including any proposed registration of the Company’s
securities by any third party) under the Securities Act (other than (i) pursuant
to a Demand Registration, which is addressed by Section 1, or (ii) in connection
with registrations on Form S-4, S-8 or any successor or similar forms for
transactions as to which no cash proceeds are attributable to the Company) and
the registration form to be used may be used for the registration of Investor
Registrable Securities (a “Piggyback Registration”), the Company shall give
prompt written notice (and in any event within three (3) business days after its
receipt of notice of any exercise of demand registration rights other than under
this Agreement) to all holders of Investor Registrable Securities of its
intention to effect such a registration and shall include in such registration
all Investor Registrable Securities with respect to which the Company has
received written requests for inclusion therein within thirty (30) days after
the receipt of the Company’s notice.
 
(b)           Piggyback Expenses.  The Registration Expenses of the holders of
Investor Registrable Securities shall be paid by the Company in all Piggyback
Registrations, whether or not such registration is consummated.
 
(c)           Priority on Primary Registrations.  If a Piggyback Registration is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that, in their opinion, the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the Company, then the Company shall include in such registration
the maximum number of securities that, in the opinion of such underwriters, can
be sold in an orderly manner within the price range of such offering, giving
priority (i) first, to the securities the Company proposes to sell, (ii) second,
to the Investor Registrable Securities requested to be included in such
registration (if any), allocated pro rata among the respective holders thereof
on the basis of the amount of Investor Registrable Securities owned by each such
holder, and (iii) third, to the other securities requested to be included in
such registration (if any).
 
 
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(d)           Priority on Secondary Registrations.  If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company’s
securities other than holders of Investor Registrable Securities (it being
understood that secondary registrations on behalf of holders of Investor
Registrable Securities are addressed in Section 1 above rather than this Section
2(d)), and the managing underwriters advise the Company in writing that, in
their opinion, the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holder(s) of a majority of the
Investor Registrable Securities to be included in such registration, then the
Company shall include in such registration, (i) first, the securities requested
to be included therein by the holders requesting such registration and the
Investor Registrable Securities requested to be included in such registration,
in each case that, in the opinion of such underwriters, can be sold in an
orderly manner within the price range of such offering (if any), pro rata among
the holders of such securities and the holders of such Investor Registrable
Securities on the basis of the number of shares of Common Stock owned by each
such holder, and (ii) second, the other securities requested to be included in
such registration that, in the opinion of such underwriters, can be sold in an
orderly manner within the price range of such offering (if any).
 
(e)           Other Registrations.  If the Company has previously filed a
registration statement with respect to Investor Registrable Securities pursuant
to Section 1 or pursuant to this Section 2, and if such previous registration
has not been withdrawn or abandoned, then, unless such previous registration is
a Required Registration, the Company shall not file or cause to be effected any
other registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or any successor form), whether on its own behalf or at
the request of any holder or holders of such securities, until a period of at
least 180 days has elapsed from the effective date of such previous
registration.
 
3.            Lockup Agreements
 
(a)           Each holder of Investor Registrable Securities shall not effect
any public sale or distribution (including sales pursuant to Rule 144 under the
Securities Act) of equity securities of the Company, or any securities, options
or rights convertible into or exchangeable or exercisable for such securities,
during the seven (7) days prior to and the 180-day period beginning on the
effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or any successor form), unless the
underwriters managing the registered public offering otherwise agree.
 
 
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(b)          The Company (i) shall not effect any public sale or distribution of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven (7) days prior to and during
the 180-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration in which Investor
Registrable Securities are included (except as part of such underwritten
registration or pursuant to registrations on Form S-8 or any successor form),
unless the underwriters managing the registered public offering otherwise agree,
and (ii) shall cause each holder of its equity securities, or any securities
convertible into or exchangeable or exercisable for equity securities, purchased
from the Company at any time after the date of this Agreement (other than in a
registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144 under the Securities Act) of
any such securities during such period (except as part of such underwritten
registration, if otherwise permitted), unless the underwriters managing the
registered public offering otherwise agree.
 
4.            Registration Procedures.  Whenever the holders of Investor
Registrable Securities have requested that any Investor Registrable Securities
be registered pursuant to this Agreement (subject to Section 1(e)), the Company
shall use its best efforts to effect the registration and the sale of such
Investor Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto the Company shall as expeditiously as
possible:
 
(a)           prepare and, within sixty (60) days after the receipt of a request
for registration, file with the Securities and Exchange Commission a
registration statement with respect to such Investor Registrable Securities and
use its best efforts to cause such registration statement to become effective as
soon as practicable thereafter (provided that, before filing a registration
statement or prospectus or any amendments or supplements thereto, the Company
shall furnish to the counsel selected by the holder(s) of a majority of the
Investor Registrable Securities covered by such registration statement copies of
all such documents proposed to be filed, which documents shall be subject to the
review and comment of such counsel);
 
(b)           notify in writing each holder of Investor Registrable Securities
of the effectiveness of each registration statement filed hereunder and prepare
and file with the Securities and Exchange Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than 180 days (or, if such registration statement relates
to an underwritten offering, such longer period as in the opinion of counsel for
the underwriters a prospectus is required by law to be delivered in connection
with sales of Investor Registrable Securities by an underwriter or dealer) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
 
(c)           furnish to each seller of Investor Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus), and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Investor Registrable
Securities owned by such seller;
 
 
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(d)           use its best efforts to register or qualify such Investor
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
of Investor Registrable Securities to consummate the disposition in such
jurisdictions of the Investor Registrable Securities owned by such seller of
Investor Registrable Securities (provided that the Company shall not be required
to (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 4(d), (ii) subject itself
to taxation in any such jurisdiction, or (iii) consent to general service of
process in any such jurisdiction);
 
(e)           promptly notify in writing each seller of such Investor
Registrable Securities, 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 (i)
contains an untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading in light of the circumstances under
which they were made or (ii) is otherwise not legally available to support sales
of Investor Registrable Securities, and the Company shall promptly prepare and
furnish to each such seller a reasonable number of copies of a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Investor Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading;
 
(f)           cause all such Investor Registrable Securities to be listed on a
national securities exchange or trading system and each securities exchange and
trading system (if any) on which similar securities issued by the Company are
then listed;
 
(g)           provide a transfer agent and registrar for all such Investor
Registrable Securities not later than the effective date of such registration
statement;
 
(h)           enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holder(s)
of a majority of the Investor Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of Investor Registrable Securities (including effecting a stock
split or a combination or shares);
 
(i)            make available for inspection by any underwriter participating in
any disposition pursuant to such registration statement, and any attorney,
accountant, or other agent retained by any such underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company’s officers, directors, employees, and independent accountants
to supply all information reasonably requested by any such underwriter,
attorney, accountant, or agent in connection with such registration statement
and assist and, at the request of any participating underwriter, use its best
efforts to cause such officers or directors to participate in presentations to
prospective purchasers;
 
(j)           otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months beginning with the first day
of the Company’s first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
 
 
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(k)           in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any equity securities included in such registration statement for sale in any
jurisdiction, the Company shall use its best efforts promptly to obtain the
withdrawal of such order;
 
(l)           use its best efforts to cause such Investor Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
sellers thereof to consummate the disposition of such Investor Registrable
Securities;
 
(m)          obtain one or more cold comfort letters, dated the effective date
of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), from the Company’s independent public accountants in
customary form and covering such matters of the type customarily covered by cold
comfort letters as the holder(s) of a majority of the Investor Registrable
Securities being sold in such registered offering reasonably request; and
 
(n)           provide a legal opinion of the Company’s outside counsel, dated
the effective date of such registration statement (or, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement), with respect to the registration statement, each
amendment and supplement thereto, the prospectus included therein (including the
preliminary prospectus) and such other documents relating thereto in customary
form and covering such matters of the type customarily covered by legal opinions
of such nature.
 
5.            Registration Expenses.
 
(a)           Subject to Section 5(b) below, all expenses incident to the
Company’s performance of or compliance with this Agreement, including all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, travel expenses, filing expenses, messenger
and delivery expenses, fees and disbursements of custodians, and fees and
disbursements of counsel for the Company, and fees and disbursements of all
independent certified public accountants, underwriters including, if necessary,
a “qualified independent underwriter” within the meaning of the rules of the
National Association of Securities Dealers, Inc. (in each case, excluding
discounts and commissions), and other Persons retained by the Company or by
holders of Investor Registrable Securities or their affiliates on behalf of the
Company (all such expenses being herein called “Registration Expenses”), shall
be borne as provided in this Agreement, except that the Company shall, in any
event, pay its internal expenses (including all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance,
and the expenses and fees for listing the securities to be registered in
accordance with Section 4(f).  The Company shall have no obligation to pay any
underwriting discounts attributable to the Investor Restristrable Securities
being sold by the holder thereof, which underwriting discounts shall be borne by
such holders.
 
 
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(b)           In connection with each Demand Registration and each Piggyback
Registration, the Company shall reimburse the holders of Investor Registrable
Securities included in such registration for the reasonable fees and
disbursements of one (1) counsel chosen by the holder(s) of a majority of the
Investor Registrable Securities included in such registration.
 
(c)           To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder’s securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
 
6.            Indemnification.
 
(a)           The Company agrees to indemnify and hold harmless, to the fullest
extent permitted by law, each holder of Investor Registrable Securities, its
officers, directors, agents, and employees, and each Person who controls such
holder (within the meaning of the Securities Act) against all losses, claims,
damages, liabilities, and expenses (or actions or proceedings, whether commenced
or threatened, in respect thereof), whether joint and several or several,
together with reasonable costs and expenses (including reasonable attorney’s
fees) to which any such indemnified party may become subject under the
Securities Act or otherwise (collectively, “Losses”) caused by, resulting from,
arising out of, based upon, or relating to (i) any untrue or alleged untrue
statement of material fact contained in (A) any registration statement,
prospectus or preliminary prospectus, or any amendment thereof or supplement
thereto or (B) any application or other document or communication (in this
Section 6, collectively called an “application”) executed by or on behalf of the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify any securities covered by
such registration under the blue sky or securities laws thereof or (ii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such holder and each such director, officer, and controlling Person
for any legal or any other expenses incurred by them in connection with
investigating or defending any such Losses; provided that the Company shall not
be liable to any holder in any such case to the extent that any such Losses
result from, arise out of, are based upon, or relate to an untrue statement or
alleged untrue statement, or omission or alleged omission, made in such
registration statement, any such prospectus, or preliminary prospectus or any
amendment or supplement thereto, or in any application, in each case, in
reliance upon, and in conformity with, written information prepared and
furnished in writing to the Company by such holder expressly for use therein or
by such holder’s failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same.  In
connection with an underwritten offering, the Company shall indemnify such
underwriters, their officers and directors, and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Investor
Registrable Securities.
 
 
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(b)           In connection with any registration statement in which a holder of
Investor Registrable Securities is participating, each such holder will furnish
to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, shall indemnify and hold
harmless the Company and its officers, directors, agents, and employees, and
each other Person who controls the Company (within the meaning of the Securities
Act) against any Losses to the extent caused by, resulting from, arising out of,
based upon, or relating to (i) any untrue or alleged untrue statement of
material fact contained in the registration statement, prospectus or preliminary
prospectus, or any amendment thereof or supplement thereto or in any
application, or (ii) any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or omission is
made in such registration statement, any such prospectus or preliminary
prospectus or any amendment or supplement thereto, or in any application, in
each case, in reliance upon and in conformity with written information prepared
and furnished to the Company by such holder expressly for use therein, and such
holder will reimburse the Company and each such other indemnified party for any
legal or any other expenses incurred by them in connection with investigating or
defending any such Losses; provided that the obligation to indemnify will be
individual, not joint and several, for each holder and shall be limited to the
net amount of proceeds received by such holder from the sale of Investor
Registrable Securities pursuant to such registration statement.
 
(c)           Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Person’s right to indemnification hereunder to the extent
such failure has not materially and actually prejudiced the indemnifying party)
and (ii) unless in such indemnified party’s reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party.  If
such defense is assumed, then (x) the indemnifying party will not be subject to
any liability for any settlement made by the indemnified party without the
indemnifying party’s consent (but such consent will not be unreasonably
withheld) and (y) the indemnifying party will not enter into any settlement
agreement with respect to such claim unless there is no finding or admission of
liability by the indemnified party in such settlement agreement.  An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
 
(d)           The indemnification provided for under this Agreement shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract, and will remain in full
force and effect regardless of any investigation made or omitted by or on behalf
of the indemnified party or any officer, director, or controlling Person of such
indemnified party and shall survive the transfer of securities.
 
 
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(e)           If the indemnification provided for in this Section 6 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amounts paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or action 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 hand in
connection with the statements or omissions which resulted in such loss, claim,
damage, liability or action as well as any other relevant equitable
considerations; provided that the maximum amount of liability in respect of such
contribution shall be limited, in the case of each seller of Investor
Registrable Securities, to an amount equal to the net proceeds actually received
by such seller from the sale of Investor Registrable Securities effected
pursuant to such registration.  The relative fault of the indemnifying party and
of the indemnified party shall be determined 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.
 
7.            Participation in Underwritten Registrations.  No Person may
participate in any underwritten registration hereunder unless such Person (i)
agrees to sell such Person’s securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements, and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements, and
other documents reasonably required under the terms of such underwriting
arrangements; provided that no holder of Investor Registrable Securities
included in any underwritten registration shall be required to make any
representations or warranties to the Company or the underwriters (other than
representations and warranties regarding such holder and such holder’s intended
method of distribution) or to undertake any indemnification obligations to the
Company or the underwriters with respect thereto, except as otherwise provided
in Section 6 hereof.
 
8.             Definitions.
 
(a)           “Common Stock” means the Company’s $0.001 par value common stock.
 
(b)           “Investor Registrable Securities” means, (i) the shares of Common
Stock issuable upon conversion of the Preferred Shares, the shares of Common
Stock issuable upon the exercise of the Warrants (all as defined in the
Preferred Stock and Warrant Purchase Agreement), and the shares of Common Stock
issuable upon conversion of the Note (as defined in the Note Purchase
Agreement), (ii) the shares of Common Stock issuable upon conversion of the
Preferred Shares issued to Caledonia pursuant to the Exchange Agreement and the
shares of Common Stock issuable upon conversion of the Caledonia Note, and (iii)
shares of Common Stock issued or issuable with respect to the securities
referred to in clauses (i) or (ii) above by way of dividend, distribution, split
or combination of securities, or any recapitalization, merger, consolidation or
other reorganization.  As to any particular Investor Registrable Securities,
such securities shall cease to be Investor Registrable Securities when they (A)
have been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer, or market maker
in compliance with Rule 144 under the Securities Act (or any similar rule then
in force), (B) have been effectively registered under a registration statement
including, without limitation, a registration statement on Form S-8 (or any
successor form), or (C) have been repurchased by the Company.  For purposes of
this Agreement, a Person shall be deemed to be a holder of Investor Registrable
Securities whenever such Person has the right to acquire such Investor
Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
 
 
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(c)           “Person” means an individual, a partnership, a limited liability
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, an investment fund, any other business
entity and a governmental entity or any department, agency or political
subdivision thereof.
 
(d)           “Securities Act” means the Securities Act of 1933, as amended, or
any successor federal law then in force, together with all rules and regulations
promulgated thereunder.
 
(e)           “Securities Exchange Act” means the Securities Exchange Act of
1934, as amended, or any successor federal law then in force, together with all
rules and regulations promulgated thereunder.
 
9.            Miscellaneous.
 
(a)           No Inconsistent Agreements; Entire Agreement.  The Company will
not enter into any agreement with respect to its securities that is inconsistent
with or violates the rights granted to the holders of Investor Registrable
Securities in this Agreement.  This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, that may have related to the subject matter hereof in any way.
 
(b)           Adjustments Affecting Investor Registrable Securities.  The
Company shall not take any action, or permit any change to occur, with respect
to its securities that would adversely affect the ability of the holders of
Investor Registrable Securities to include such Investor Registrable Securities
in a registration undertaken pursuant to this Agreement or that would adversely
affect the marketability of such Investor Registrable Securities in any such
registration (including effecting a share or unit split or a combination of
shares or units).
 
(c)           Remedies.  Any Person having rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages caused by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by
law.  The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that, in
addition to any other rights and remedies existing in its favor, any party shall
be entitled to specific performance and/or other injunctive relief from any
court of law or equity of competent jurisdiction (without posting any bond or
other security) in order to enforce or prevent violation of the provisions of
this Agreement.
 
(d)           Amendments and Waivers.  Except as otherwise provided herein, no
modification, amendment, or waiver of any provision of this Agreement shall be
effective against the Company or the holders of Investor Registrable Securities
unless such modification, amendment, or waiver is approved in writing by the
Company, Clipper and Caledonia.  No failure by any party to insist upon the
strict performance of any covenant, duty, agreement, or condition of this
Agreement or to exercise any right or remedy consequent upon a breach thereof
shall constitute a waiver of any such breach or any other covenant, duty,
agreement, or condition.
 
 
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(e)           Successors and Assigns.  All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not.  In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
holders of Investor Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Investor Registrable Securities.  The
Company may not assign any of its rights or obligations under this Agreement
without the prior written consent of the Investors.  Each Investor may assign
all or any part of its rights and obligations hereunder.
 
(f)           Severability.  Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
 
(g)           Counterparts.  This Agreement may be executed simultaneously in
two or more counterparts (including by means of facsimile), each of which shall
be deemed an original, and all of which taken together shall constitute one and
the same Agreement.
 
(h)           Descriptive Headings; Interpretation.  The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.
 
(i)           Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS
WITHOUT GIVING ANY EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS.
 
(j)            Notices.  All notices hereunder shall be in writing and shall be
deemed to have been given at the time when hand delivered, when received if sent
by facsimile or by same day or overnight recognized commercial courier service,
or three (3) days after being mailed by certified mail, addressed to the address
below stated of the party to which notice is given, or to such changed address
as such party may have fixed by notice:
 
To the Company:

SteelCloud, Inc.
20110 Ashbrook Place, Suite 130
Ashburn, Virginia 20147
Attn: Brian H. Hajost

 
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with a copy to:

Fettmann, Tolchin & Majors, PC
10509 Judicial Drive
Suite 300
Fairfax, VA 22030
Fax: 703-385-9893
Attn: Edward J. Tolchin, Esq.

To Clipper:

Clipper Investors LLC
1095 Fisher Lane
Winnetka, Illinois 60093
Attn: Kenneth A. Merlau

with a copy to:

Ungaretti & Harris LLP
70 West Madison, Suite 3500
Chicago, Illinois 60602
Attn:  Michael W. Black

To Caledonia:

Caledonia Capital Corporation
19441 Golf Vista Plaza, Suite 360
Leesburg, VA  20176,
Attn: Edward Murchie

with a copy to:

Grossberg,Yochelson, Fox & Beyda, LLP
2000 L Street, NW, Suite 675
Washington, DC 20036
Attn: Linton W. Hengerer

provided, however, that any notice of change of address shall be effective only
upon receipt
 
(k)           No Strict Construction.  The parties hereto have participated
jointly in the negotiation and drafting of this Agreement.  In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
 
[signature page follows]
 
 
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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as of the date first above written.
 
STEELCLOUD, INC.
 
By:
 
Name:
Its:
 
CLIPPER INVESTORS LLC
 
By:
 
Name:
Its:
 
CALEDONIA CAPITAL CORPORATION
 
By:
 
Name:
Its:

 

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EXHIBIT C
 
FORM OF SECURITY AGREEMENT
 
SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this “Agreement”) is made as of July 2, 2010 by
STEELCLOUD, INC., a Virginia corporation (the “Grantor”), for the benefit of
CLIPPER INVESTORS LLC, an Illinois limited liability company (“Clipper”) and
CALEDONIA CAPITAL CORPORATION, a Delaware corporation (“Caledonia” and,
collectively with Clipper, the “Lender”).

RECITALS:

WHEREAS, Grantor is indebted to Clipper in the principal amount of $1,100,000 as
evidenced by that certain Promissory Note dated of even date herewith (the
“Clipper Note”);

WHEREAS, Grantor is indebted to Caledonia in the principal amount of $570,000 as
evidenced by that certain Promissory Note dated of even date herewith (the
“Caledonia Note” and, together with the Clipper Note, the “Notes”);

WHEREAS, Lender holds shares of the Company’s Series A Convertible Preferred
Stock (the “Preferred Shares”); and

WHEREAS, as security for all of the Obligations (hereinafter defined), Lender is
requiring that Grantor enter into this Agreement and grant the security
interests contemplated hereby.

NOW, THEREFORE, for good and valuable consideration the receipt and adequacy of
which are hereby acknowledged by each of the parties hereto, it is agreed as
follows:

1.            Definitions.  As used herein, the following terms shall have the
meanings set forth in this Section:

“Accounts” shall have the meaning provided in the UCC.

“Chattel Paper” shall have the meaning provided in the UCC and shall include,
without limitation, all Electronic Chattel Paper and Tangible Chattel Paper.

“Collateral” shall mean all property in which a security interest is granted
hereunder.

“Commercial Tort Claim” shall have the meaning provided in the UCC.

“Controlled Property” shall mean property of every kind and description in which
Grantor has or may acquire any interest, now or hereafter at any time in the
possession or control of Lender for any reason and all dividends and
distributions on or other rights in connection with such property.
 
 
 

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“Data Processing Records and Systems” shall mean all of Grantor’s now existing
or hereafter acquired electronic data processing and computer records, software
(including, without limitation, all “Software” as defined in the UCC), systems,
manuals, procedures, disks, tapes and all other storage media and memory.

“Deposit Accounts” shall have the meaning provided in the UCC and shall include,
without limitation, any demand, time, savings, passbook or similar account
maintained with a bank.

“Document” shall have the meaning provided in the UCC.

“Electronic Chattel Paper” shall have the meaning provided in the UCC.

“Equipment” shall have the meaning provided in the UCC.

“Event of Default” shall have the meaning specified in Section 6 hereof.

“Fixtures” shall have the meaning provided in the UCC.

“General Intangibles” shall have the meaning provided in the UCC and shall
include, without limitation, all Payment Intangibles.

“Goods” shall have the meaning provided in the UCC and shall include embedded
“Software” to the extent included in “Goods” as defined in the UCC.

“Grantor” shall have the meaning provided in the preamble hereto.

“Instruments” shall have the meaning provided in the UCC.

“Insurance Proceeds” shall mean all proceeds of any and all insurance policies
payable to Grantor with respect to any Collateral, or on behalf of any
Collateral, whether or not such policies are issued to or owned by Grantor.

“Inventory” shall have the meaning provided in the UCC.

“Investment Property” shall have the meaning provided in the UCC.

“Lender” shall have the meaning set forth in the preamble hereto.

“Letter-of-Credit Rights “ shall have the meaning provided in the UCC.

“Obligations” shall mean all loans, advances, debts, liabilities, obligations,
covenants and duties owing by Grantor to Lender of any kind or nature, present
or future, arising under the Notes or the Preferred Shares.  The term includes,
but is not limited to, all principal, interest, fees, charges, expenses,
reasonable attorneys’ fees, and any other sum chargeable to Grantor under the
Notes.

 
 

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“Payment Intangibles” shall have the meaning provided in the UCC.

“Proceeds” shall have the meaning provided in the UCC.

“Products” shall mean any goods now or hereafter manufactured, processed or
assembled with any of the Collateral.

“Supporting Obligations” shall have the meaning provided in the UCC.

“Tangible Chattel Paper” shall have the meaning provided in the UCC.

“Tangible Collateral” shall mean all items of Collateral consisting of tangible
personal property.

“UCC” shall mean the Uniform Commercial Code as enacted in the State of
Virginia, as amended from time to time, provided that: (a) to the extent that
the UCC is used to define any term herein, and such term is defined differently
in different Articles of the UCC, the definition of such term contained in
Article 9 of the UCC shall govern; and (b) if, by reason of mandatory provisions
of law, any or all of the attachment, perfection or priority of, or remedies
with respect to, Lender’s security interest in any Collateral is governed by the
Uniform Commercial Code as enacted and in effect in a jurisdiction other than
the State of Virginia, the term “UCC” 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 or priority of, or
remedies with respect to, Lender’s security interest and for purposes of
definitions related to such provisions.

Other terms defined herein shall have the meanings ascribed to them herein.

2.           Security Interest.  As security for the payment of all Obligations,
Grantor hereby grants to Lender a security interest in all of Grantor’s right,
title and interest in and to the following, whether now owned or existing or
hereafter acquired or arising:

Accounts;
Chattel Paper;
 
Commercial Tort Claims;

Controlled Property;
Data Processing Records and Systems;
 
Deposit Accounts;

Documents;
 
Equipment and Fixtures;

General Intangibles;
Instruments;
Inventory;
 
Investment Property;

 
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Letter-of-Credit Rights;

 
Proceeds (whether cash or non-cash Proceeds, including Insurance Proceeds and
non-cash Proceeds of all types);

Products of all the foregoing; and
Supporting Obligations.

           3.              Representations and Covenants of Grantor.  Grantor
represents, warrants and covenants that:

3.1           Authorization.  The execution and performance of this Agreement
have been duly authorized by all necessary action and do not and will not: (a)
require any consent or approval of the stockholders of Grantor as has not been
previously obtained, or the consent of any governmental entity; or (b) violate
any provision of any indenture, contract, agreement or instrument to which it is
a party or by which it is bound.

3.2           Title to Collateral.  Grantor has good and marketable title to all
of the Collateral and none of the Collateral is subject to any security interest
except for the security interest created pursuant to this Agreement.

3.3           Disposition or Encumbrance of Collateral.  Grantor will not
encumber, sell or otherwise transfer or dispose of the Collateral without the
prior written consent of Clipper except as provided in this Section.  Until an
Event of Default has occurred and is continuing, Grantor may sell Collateral
consisting of: (a) Inventory in the ordinary course of business provided that
Grantor receives as consideration for such sale an amount not less than the fair
market value of the Inventory at the time of such sale; and (b) Equipment and
Fixtures which in the judgment of Grantor have become obsolete or unusable in
the ordinary course of business.

3.4           Validity of Accounts.  Grantor warrants that all Collateral
consisting of Accounts, Chattel Paper and Instruments included in Grantor’s
schedules, financial statements or books and records are bona fide existing
obligations created by the sale and actual delivery of Inventory or the
rendition of services to customers in the ordinary course of business, which
Grantor then owns free and clear of any security interest other than the
security interest created by this Agreement, and which are then unconditionally
owing to Grantor without defenses, offset or counterclaim except those arising
in the ordinary course of business that are immaterial in the aggregate and that
the unpaid principal amount of any such Chattel Paper or Instrument and any
security therefor is and will be as represented to Lender on the date of the
delivery thereof to Lender.

3.5           Maintenance of Tangible Collateral.  Grantor will maintain the
tangible Collateral in good condition and repair.  At the time of attachment and
perfection of the security interest granted pursuant hereto and thereafter, all
tangible Collateral will be located and will be maintained only at the locations
set forth on Exhibit A attached hereto.  Except as otherwise permitted by
Section 3.3, Grantor will not remove such Collateral from such locations unless,
prior to any such removal, Grantor has given written notice to Lender of the
location or locations to which Grantor desires to remove the Collateral, and
Clipper has given its written consent to such removal.  Lender’s security
interest attaches to all of the Collateral wherever located and Grantor’s
failure to inform Lender of the location of any item or items of Collateral
shall not impair Lender’s security interest thereon.

 
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3.6           Notation on Chattel Paper.  For purposes of the security interest
granted pursuant to this Agreement, Lender has been granted a direct security
interest in all Chattel Paper constituting part of the Collateral and such
Chattel Paper is not claimed merely as Proceeds of Inventory.  Upon Lender’s
request, Grantor will deliver to Lender the original of all Chattel
Paper.  Grantor will not execute any copies of such Chattel Paper constituting
part of the Collateral other than those which are clearly marked as a
copy.  Lender may stamp any such Chattel Paper with a legend reflecting Lender’s
security interest therein.

3.7           Instruments as Proceeds; Deposit Accounts.  Notwithstanding any
other provision in this Agreement concerning Instruments, Grantor covenants that
Instruments constituting cash Proceeds (for example, money and checks) shall be
deposited in Deposit Accounts.  Grantor has granted to Lender a direct security
interest in all Deposit Accounts constituting part of the Collateral and such
Deposit Accounts are not claimed merely as Proceeds of other Collateral.

3.8           Protection of Collateral.  All expenses of protecting, storing,
warehousing, insuring, handling and shipping of the Collateral, all costs of
keeping the Collateral free of any liens, encumbrances and security interests
prohibited by this Agreement and of removing the same if they should arise, and
any and all excise, property, sales and use taxes imposed by any state, federal
or local authority on any of the Collateral or in respect of the sale thereof,
shall be borne and paid by Grantor and if Grantor fails to promptly pay any
thereof when due, Lender may, at its option, but shall not be required to pay
the same whereupon the same shall constitute Obligations and shall bear interest
at the Interest Rate specified in the Note and shall be secured by the security
interest granted hereunder.

3.9           Insurance.  Grantor will procure and maintain, or cause to be
procured and maintained, insurance issued by responsible insurance companies
insuring the Tangible Collateral against damage and loss by theft, fire,
collision (in the case of motor vehicles), and such other risks as are usually
carried by owners of similar properties or as may be requested by Lender in an
amount equal to the replacement value thereof, and, in any event, in an amount
sufficient to avoid the application of any co-insurance provisions and payable,
in the case of any loss in excess of $25,000.00, to Grantor and Lender
jointly.  All such insurance shall contain an agreement by the insurer to
provide Lender with 30 days’ prior notice of cancellation and an agreement that
the interest of Lender shall not be impaired or invalidated by any act or
neglect of Grantor.  Grantor will maintain, with financially sound and reputable
insurers, insurance with respect to its properties and business against such
casualties and contingencies of such types (which may include, without
limitation, public and product liability, larceny, embezzlement, business
interruption or other criminal misappropriation insurance) and in such amounts
as may from time to time be required by Lender.  Grantor will deliver evidence
of such insurance and the policies of insurance or copies thereof to Lender upon
request.  Unless Grantor provides Lender with evidence of the insurance coverage
required by this Section, Lender may purchase, at Grantor’s expense, insurance
to protect Lender’s interest in the Collateral.  This insurance may, but need
not, protect Grantor’s interests.  The coverage that Lender purchases may not
pay any claim that Grantor makes or any claim that is made against Grantor in
connection with the Collateral.  Grantor may later cancel any insurance
purchased by Lender, but only after providing Lender with evidence that Grantor
has obtained insurance as required by this section.  If Lender purchases
insurance for the Tangible Collateral, Grantor will be responsible for the costs
of the insurance, including interest and any charges Lender may impose in
connection with the placement of the insurance, until the effective date of the
cancellation or expiration of the insurance.  The costs of the insurance may be
added to the Obligations.  The costs of the insurance may be more than the cost
of insurance Grantor may be able to obtain itself.

 
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3.10       Compliance with Law.  Grantor will not use the Collateral, or
knowingly permit the Collateral to be used, for any unlawful purpose or in
violation of any federal, state or municipal law.

3.11       Books and Records; Access.

(a)           Grantor will permit Lender and its representatives to examine
Grantor’s books and records (including Data Processing Records and Systems) with
respect to the Collateral and make extracts therefrom and copies thereof at any
time and from time to time, upon reasonable notice (unless an Event of Default
then exists, in which event no such notice shall be required) and Grantor will
furnish such information and reports to Lender and its representatives regarding
the Collateral as Lender and its representatives may from time to time
request.  Grantor will also permit Lender and its representatives to inspect the
Collateral at any time and from time to time as Lender and its representatives
may reasonably request.

(b)           Lender shall have authority, at any time, to place, or require
Grantor to place, upon Grantor’s books and records relating to Accounts, Chattel
Paper and other rights to payment covered by the security interest granted
hereby a notation or legend stating that such Accounts, Chattel Paper and other
rights to payment are subject to Lender’s security interest.

3.12       Notice of Default.  Immediately upon any officer of Grantor becoming
aware of the existence of any Event of Default, Grantor will give notice to
Lender that such Event of Default exists, stating the nature thereof, the period
of existence thereof, and what action Grantor proposes to take with respect
thereto.

3.13       Additional Documentation.  Grantor will execute, from time to time,
and authorizes Lender to execute from time to time as Grantor’s attorney-in-fact
and/or file, such financing statements, assignments, and other documents
covering the Collateral, including Proceeds, as Lender may request in order to
create, evidence, perfect, maintain or continue its security interest in the
Collateral (including additional Collateral acquired by Grantor after the date
hereof), and Grantor will pay the cost of filing the same in  all public offices
in which Lender may reasonably deem filing to be appropriate and will notify
Lender promptly upon acquiring any additional Collateral that may require an
additional filing.  Upon request, Grantor will deliver to Lender all Grantor’s
Documents, Chattel Paper and Instruments constituting part of the Collateral.

 
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3.14       State of Organization.  Grantor’s State of organization is the State
set forth in the preamble hereto and such State has been its State of
organization since the date of Grantor’s organization. Grantor will not change
its State of organization from such State without 30 days’ prior written notice
to Lender,  Lender’s written consent to such change, and Grantor’s delivery to
Lender acknowledgment copies of financing statements filed where appropriate to
continue the perfection of Lender’s security interest as a first priority
security interest therein.

3.15       Name of Grantor.  Grantor’s exact legal name and type of legal entity
is as set forth in the preamble hereto. Grantor  will not change its legal name
without 30 days’ prior written notice to Lender, Lender’s written consent to
such change, and Grantor’s delivery to Lender acknowledgment copies of financing
statements filed where appropriate to continue the perfection of Lender’s
security interest as a first priority security interest in the
Collateral.  Grantor has not used any other name within the past five
years.  Neither Grantor nor, to Grantor’s knowledge, any predecessor in title to
any of the Collateral has executed any financing statements or security
agreements presently effective as to the Collateral.

3.16       Disputes; etc.  Grantor shall advise Lender promptly of all disputes
and claims in excess of $50,000.00 for any one obligor on the Collateral in any
fiscal year or in excess of $100,000.00 in the aggregate for all obligors in any
fiscal year and settle or adjust them at no expense to Lender.  After the
occurrence and during the continuance of an Event of Default, Lender may at all
times settle or adjust such disputes and claims directly with the customers for
amounts and upon terms which Lender reasonably determines to be commercially
reasonable.  No discount, credit, allowance, adjustment or return shall be
granted by Grantor to any customer without Lender’s written consent other than
discounts, credits, allowances, adjustments and returns made or granted by
Grantor in the ordinary course of business prior to the occurrence and during
the continuance of an Event of Default.

3.17       Power of Attorney.  Grantor appoints Lender, or any other person whom
Lender may from time to time designate, as Grantor’s attorney with power to,
upon the occurrence and during the continuation of an Event of Default:  (a)
endorse Grantor’s name on any checks, notes, acceptances, drafts or other forms
of payment or security evidencing or relating to any Collateral that may come
into Lender’s possession; (b) sign Grantor’s name on any invoice or bill of
lading relating to any Collateral, on drafts against customers, on schedules and
confirmatory assignments of Accounts, Chattel Paper, Documents or other
Collateral, on notices of assignment, public records, on verifications of
accounts and on notices to customers; (c) notify the postal authorities to
change the address for delivery of Grantor’s mail to an address designated by
Lender (and Lender shall use reasonable efforts to provide Grantor with copies
of such mail, provided that the failure to provide such copies shall not
constitute a breach of this Agreement); (d) receive and open all mail addressed
to Grantor; (e) send requests for verification of Accounts, Chattel Paper,
Instruments or other Collateral to customers; and (f) do all things necessary to
carry out this Agreement.  Grantor ratifies and approves all acts of the
attorney taken within the scope of the authority granted.  Neither Lender nor
the attorney will be liable for any acts of commission or omission, nor for any
error in judgment or mistake of fact or law, unless such acts, errors, or
mistakes constitute gross negligence or willful misconduct on the part of Lender
or the attorney.  This power, being coupled with an interest, is irrevocable so
long as any Obligation remains unpaid.  Grantor waives presentment and protest
of all instruments and notice thereof, notice of default and dishonor and all
other notices to which Grantor may otherwise be entitled.

 
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3.18       Control.  Upon Lender’s request, Grantor will cooperate with Lender
in obtaining control with respect to Collateral consisting of Deposit Accounts,
Investment Property, Letter-of-Credit Rights, and Electronic Chattel Paper.

3.19       Further Acts.  Where Collateral is in the possession of a third
party, Grantor will, upon Lender’s request, join with Lender in notifying such
third party of Lender’s security interest and in obtaining an acknowledgment
from such third party that it is holding such Collateral for the benefit of
Lender.

3.20       Commercial Tort Claims.  Grantor shall promptly notify Lender of any
Commercial Tort Claim acquired by it and, unless otherwise consented to by
Lender, Grantor shall promptly enter into a supplement to this Agreement
granting to Lender a security interest in such Commercial Tort Claim.

4.           Collections.  Except as otherwise provided in this Section 4,
Grantor shall continue to collect, at its own expense, all amounts due or to
become due to Grantor under the Accounts constituting part of the Collateral and
all other Collateral.  In connection with such collections, Grantor may take
(and, at Lender’s direction given after the occurrence and during the
continuation of an Event of Default, shall take) such action as Grantor or
Lender may deem necessary or advisable to enforce collection of the Accounts and
such other Collateral; provided that Lender shall have the right at any time,
without giving written notice to Grantor of Lender’s intention to do so, to
notify the account debtors under any Accounts or obligors with respect to such
other Collateral of the assignment of such Accounts and such other Collateral to
Lender and to direct such account debtors or obligors to make payment of all
amounts due or to become due to Grantor thereunder directly to Lender and, upon
such notification and at the expense of Grantor, to enforce collection of any
such Accounts or other Collateral, and to adjust, settle or compromise the
amount or payment thereof in the same manner and to the same extent as Grantor
might have done, but unless and until Lender does so or gives Grantor other
instructions, Grantor shall make all collections for Lender.
 
 
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5.           Assignment of Insurance.  Grantor hereby assigns to Lender, as
additional security for payment of the Obligations, any and all monies due or to
become due under, and any and all other rights of Grantor with respect to, any
and all policies of insurance covering the Tangible Collateral.  So long as no
Event of Default has occurred and is continuing, Grantor may itself adjust and
collect for any losses of up to an aggregate amount of $25,000.00 for all
occurrences during any of Grantor’s fiscal years and Grantor may use the
resulting Insurance Proceeds for the replacement, restoration or repair of the
Tangible Collateral.  After the occurrence and during the continuance of an
Event of Default, or after the aggregate amount of losses arising out of all
occurrences during any of Grantor’s fiscal years exceeds $50,000.00, Lender may
(but need not) in its own name or in Grantor’s name execute and deliver proofs
of claim, receive such monies, and settle or litigate any claim against the
issuer of any such policy, and Grantor directs the issuer to pay any such monies
directly to Lender, and Lenders, at its sole discretion and regardless of
whether Lender exercises Lender’s right to collect Insurance Proceeds under this
Section, may apply any Insurance Proceeds to the payment of the Obligations,
whether due or not, in such order and manner as Lender may elect or may permit
Grantor to use such Insurance Proceeds for the replacement, restoration or
repair of the Collateral.

6.           Events of Default.  The occurrence of (i) any material breach by
Grantor of its obligations hereunder, and, if such breach is reasonably capable
of cure, the failure of Grantor to cure such breach within twenty (20) days
after receipt of written notice thereof from either Lender, or (ii) any Event of
Default as defined in the Note Purchase Agreement, shall constitute an Event of
Default hereunder (“Event of Default”).

7.           Rights and Remedies on Default.  Upon the occurrence of an Event of
Default, and at any time thereafter until such Event of Default is cured to the
satisfaction of Lender, and in addition to the rights granted to Lender under
Sections 4 and 5 hereof, Lender may exercise any one or more of the following
rights and remedies:

7.1         Acceleration of Obligations.  Declare any and all Obligations to be
immediately due and payable, and the same shall thereupon become immediately due
and payable without further notice or demand.

7.2         Deal with Collateral.  In the name of Grantor or otherwise, demand,
collect, receive and give receipt for, compound, compromise, settle and give
acquittance for and prosecute and discontinue any suits or proceedings in
respect of any or all of the Collateral.

7.3         Realize on Collateral.  Take any action which Lender may deem
reasonably necessary or desirable in order to realize on the Collateral,
including, without limitation, the power to perform any contract, to endorse in
the name of Grantor any checks, drafts, notes, or other instruments or documents
received in payment of or on account of the Collateral.  Lender may comply with
any applicable state or federal law requirements in connection with a
disposition of the Collateral and compliance will not be considered adversely to
affect the commercial reasonableness of any sale of the Collateral. Lender may
sell the Collateral without giving any warranties as to the Collateral. Lender
may specifically disclaim any warranties of title or the like.  This procedure
will not be considered adversely to affect the commercial reasonableness of any
sale of the Collateral.
 
 
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7.4         Access to Property.  Enter upon and into and take possession of all
or such part or parts of the properties of Grantor, including lands, offices,
Data Processing Records and Systems and other property as may be necessary or
appropriate in the reasonable judgment of Lender, to permit or enable Lender to
store, lease, sell or otherwise dispose of or collect all or any part of the
Collateral, and use and operate said properties for such purposes and for such
length of time as Lender may deem necessary or appropriate for said purposes
without the payment of any compensation to Grantor therefor.  Grantor shall
provide Lender with all information and assistance requested by Lender to
facilitate the storage, leasing, sale or other disposition or collection of the
Collateral after an Event of Default has occurred and is continuing.

7.5         Other Rights.  Exercise any and all other rights and remedies
available to it by law or by agreement, including rights and remedies under the
UCC as adopted in the relevant jurisdiction or any other applicable law, or
under the Loan Agreement and, in connection therewith, Lender may require
Grantor to assemble the Collateral and make it available to Lender at a place to
be designated by Lender, and any notice of intended disposition of any of the
Collateral required by law shall be deemed reasonable if such notice is mailed
or delivered to Grantor at its address as shown on Lender’s records at least 10
days before the date of such disposition.

7.6         Application of Proceeds.  All proceeds of Collateral shall be
applied in accordance with the UCC, and such proceeds applied toward the
Obligations shall be applied in such order as Lender may elect.

8.           Miscellaneous.

8.1         No Liability on Collateral.  It is understood that Lender does not
in any way assume any of Grantor’s obligations under any of the
Collateral.  Grantor hereby agrees to indemnify Lender against all liability
arising in connection with or on account of any of the Collateral, except for
any such liabilities arising on account of Lender’s negligence or willful
misconduct.

8.2         No Waiver.  Lender shall not be deemed to have waived any of its
rights hereunder or under any other agreement, instrument or paper signed by
Grantor unless such waiver be in writing and signed by Lender.  No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right.  A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future occasion.

8.3         Remedies Cumulative.  All rights and remedies of Lender shall be
cumulative and may be exercised singularly or concurrently, at their option, and
the exercise or enforcement of any one such right or remedy shall not bar or be
a condition to the exercise or enforcement of any other.

8.4         Governing Law.  This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Virginia, except to the extent that the perfection of the security
interest hereunder, or the enforcement of any remedies hereunder, with respect
to any particular Collateral shall be governed by the laws of a jurisdiction
other than the State of Virginia.

 
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8.5         Expenses.  Grantor agrees to pay the reasonable attorneys’ fees and
legal expenses incurred by Lender in the exercise of any right or remedy
available to it under this Agreement, whether or not suit is commenced.

8.6         Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of Grantor and Lender.

8.7         Severability.  Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

8.8         No Obligation to Pursue Others.  Lender has no obligation to attempt
to satisfy the Obligations by collecting them from any other person liable for
them and Lender may release, modify or waive any Collateral provided by any
other person to secure any of the Obligations, all without affecting Lender’s
rights against Grantor.  Grantor waives any right it may have to require Lender
to pursue any third person for any of the Obligations.

8.9         Notices.  Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other party, or whenever any of the parties desires to give or
serve upon any other a communication with respect to this Agreement, each such
notice, demand, request, consent, approval, declaration or other communication
shall be in writing and either shall be (i) delivered in person, (ii) sent by
nationally-recognized overnight courier service, or (iii) sent by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

(a)           If to Lender, at:

Clipper Investors LLC
1095 Fisher Lane
Winnetka, Illinois 60093
Attn:  Kenneth A. Merlau

and

Caledonia Capital Corporation
19441 Golf Vista Plaza, Suite 360
Leesburg, VA 20176
Attn: Edward Murchie

 
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With copies to:

Ungaretti & Harris LLP
70 West Madison, Suite 3500
Chicago, Illinois 60602
Attention: Michael W. Black

and

Grossberg, Yochelson, Fox & Beyda, LLP
2000 L Street, N.W., Suite 675
Washington, D.C. 20036-4907
Attention: Linton W. Hengerer

 
(b)
If to Grantor, at:

20110 Ashbrook Place, Suite 130
Ashburn, Virginia 20147
Attention: Brian Hajost
Fax No.: (703) 450-0407

With a copy to:

Edward J. Tolchin, Esq.
Fettmann, Tolchin & Majors, PC
10509 Judicial Drive
Suite 300
Fairfax, VA 22030
Fax: 703-385-9893

or at such other address as may be substituted by notice given as herein
provided.  The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice.  Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served (i) on the date on which personally delivered,
(ii) when received if sent by overnight courier service, or (iii) three (3)
business days after the same shall have been deposited in the United States
mail.  Failure or delay in delivering copies of any notice, demand, request,
consent, approval, declaration or other communication to the persons designated
above to receive copies shall in no way adversely affect the effectiveness of
such notice, demand, request, consent, approval, declaration or other
communication.

[signature page follows]

 
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date
and year first above written.

 
STEELCLOUD, INC., a Virginia corporation
       
By:
     
Its:
         

 
 

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EXHIBIT A

Location of Tangible Collateral

20110 Ashbrook Place, Suite 130
Ashburn, Virginia 20147

 
 

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NOTE PURCHASE AGREEMENT

DISCLOSURE SCHEDULES

Schedule 6.6: Absence of Changes

As disclosed in the Company’s SEC Documents, the Company has entered into a
material transaction with Caledonia Capital Corporation.

Schedule 6.7: Compliance with Other Instruments

The Company defaulted on the 13962 Park Center Lease, as well as with respect to
the Forbearance Agreement (defined in Schedule 6.9).

Schedule 6.9: Litigation

On May 22, 2009, the Company entered into a Stipulation/Consent Order with CRP
(the “Stipulation”), pursuant to an Affidavit and Statement of Account (the
“Affidavit”) stating, as declared by a general manager of Jones Lang LaSalle, a
property management company and agent for CRP Holdings A-1, LLC, referred to as
“CRP,” the landlord of 14040 Park Center Road, Suite 210, Herndon, Virginia
20171 (the “Premises”), that CRP, as landlord, was seeking a judgment against
the Company for: (i) possession of the Premises, and (ii) monetary damages for
nonpayment of rent due under a sublease (the “Sublease”), dated September 28,
2004, by and between the Company and NEC America, Inc. (“NEC”), and a subsequent
assignment of the Sublease to CRP from NEC, dated December 15, 2008.  In the
Stipulation the Company acknowledged that the balance due for rent and
additional rent for the Premises was $168,637.96, together with attorney’s fees
and court expenses of $7,041.00 through May 22, 2009, referred to as the
“Judgment Amount.”  Pursuant to the Stipulation, the Company paid $30,000 on May
22, 2009 toward the Judgment Amount.  Further the Company agreed to, and has,
vacated the Premises.  CRP agreed to stay enforcement of the Judgment Amount
until the earlier of (a) the Company’s receipt of capital in the amount of at
least $500,000, or (b) May 31, 2010 (the “Forbearance Agreement”).  The matter
was returned to the court’s files pending compliance with the terms of the
Stipulation.

Mr. Robert Frick, a former employee, claimed in a letter sent on May 13, 2009,
that the Company owes him $67,500 under a severance agreement.  Discussions are
on-going concerning this matter.  No lawsuit has been filed.

Attorney Recovery Systems, Inc., an assignee of NEC Corporation, a former
sublessor to the Company, has asserted a claim in a letter dated April 2, 2009,
that the Company owes $52,827.08 under the former sublease.  Discussions have
been held, but no resolution reached.  No lawsuit has been filed.

 
 

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On October 27, 2009, an attorney representing a company known as AITC forwarded
a letter asserting that the Company is holding $55,440 paid to it from the DC
government, which may be required to be refunded, directly or indirectly, to the
DC government, in whole or in substantial part.  On November 13, 2009, the
District of Columbia made the same assertion.  The claim relates to an
investigation by DC authorities into improper contracting activities by a former
DC employee and several others, including AITC employees.  The Company was not
implicated in the matter other than that it was the recipient of funds which
AITC is now claiming the Company should pay over to AITC to refund to DC or
should refund directly to DC.  The Company responded to AITC’s lawyer with a
copy to the District of Columbia’s representative on November 18, 2009, denying
the claim, and asserting an offset against it which exceeds the $55,440.  The
Company has not heard anything additional from AITC or the DC Government since
our last correspondence.

Schedule 6.12: Subsidiaries

Subsidiaries
The Company has inactive subsidiaries, which include:  International Data
Products, Puerto Rico Industrial Manufacturing Operations Acquisition
Corporation, and STMS Corporation.

Joint Venture
Company has inactive JV with SteelCloud MEA, LLC.

Schedule 6.13: Registration Rights

Caledonia Capital Corporation, Inc. has registration rights.

Schedule 6.14: Outstanding Indebtedness

Mr. Brian Hajost and Mr. Steven Snyder did not receive a paycheck for the pay
period ending May 15, 2010.  This action is reflected in the Company’s accrued
liabilities.

 
 

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