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Exhibit 10.2
     
LOAN AND SECURITY AGREEMENT
 

THIS LOAN AND SECURITY AGREEMENT (this "Agreement") dated as of the Effective
Date between SILICON VALLEY BANK, a California corporation ("Bank"), and
LANTRONIX, INC., a Delaware corporation ("Borrower"), provides the terms on
which Bank shall lend to Borrower and Borrower shall repay Bank. The parties
agree as follows:
    
1   ACCOUNTING  AND OTHER TERMS
    
Accounting terms not defined in this Agreement shall be construed following
GAAP.   Calculations and determinations must be made following
GAAP.  Capitalized terms not otherwise defined in this Agreement shall have the
meanings set forth in Section 13.  All other terms contained in this Agreement,
unless otherwise indicated, shall have the meaning provided by the Code to the
extent such terms are defined therein.
    
2   LOAN AND TERMS OF PAYMENT
    
2.1   Promise to Pay.    Borrower hereby unconditionally
promises to pay Bank the outstanding principal amount of all Credit Extensions
and accrued and unpaid interest thereon as and when due in accordance with this
Agreement.
    
2.1.1   Revolving Advances.
   
(a)   Availability.  Subject to the terms and conditions of this Agreement and
to deduction of Reserves, Bank will make Advances to Borrower up to an amount
("Net Borrowing  Availability") not to exceed the lesser of: (a) the Revolving
Line; or (b) the amounts available under the Borrowing Base.  Notwithstanding
the foregoing, the amount of outstanding Advances under this Agreement and that
certain Loan and Security Agreement (Exim Program) between Borrower and Bank of
approximate even date herewith shall not exceed $5,000,000 in the aggregate.
      
(b)   Streamline Period.  Omitted.
       
(c)   Termination;
Repayment.  The  Revolving Line terminates on the Revolving Line Maturity Date,
when the principal amount of all Advances, the unpaid interest thereon, and all
other Obligations relating to the Revolving Line shall be immediately due and
payable.
    
2.1.2   Letters of Credit Sublimit.
     
(a)   As part of the Revolving Line, Bank shall issue or have issued Letters of
Credit for Borrower's account. The face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed the Availability Amount. Such aggregate amounts utilized
hereunder shall at all times reduce the amount otherwise available for Advances
under the Revolving Line.  If, on
the Revolving Maturity Date, there are any outstanding Letters of Credit, then on such date Borrower shall provide
to Bank cash collateral in an amount equal to I 05% of the face amount of all
such Letters of Credit plus all interest, fees,
 and costs due or to become due in connection therewith (as estimated by Bank in its good faith business
judgment), to secure all of the Obligations relating to said Letters of
Credit.  All Letters of Credit shall be in form and substance acceptable to Bank
in its sole discretion and shall be subject to the terms and conditions of
Bank's standard Application and Letter of Credit Agreement (the
"Letter of Credit  Application").   Borrower agrees to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably
request. Borrower further agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guaranteed by Bank and
opened for Borrower's account or by Bank's interpretations of any Letter of
Credit issued by Bank for Borrower's account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or
mistake, whether of omission  or commission,  in following Borrower's
instructions or those contained
in the Letters of Credit or any modifications, amendments, or supplements thereto.
    
(b)   The obligation of Borrower to immediately reimburse Bank for drawings made
under Letters of Credit shall be absolute, unconditional, and irrevocable, and
shall be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.
    
 
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(c)   Borrower may request that Bank issue a Letter of Credit payable in a
Foreign Currency. If a demand for payment is made under any such Letter of
Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent
of the amount thereof (plus fees and charges in connection therewith such as
wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of
exchange in San Francisco, California, for sales of the Foreign Currency for
transfer to the country issuing such Foreign Currency.
  
(d)   To guard against fluctuations in currency exchange rates, upon the
issuance of any Letter of Credit payable in a Foreign Currency, Bank shall
create a reserve (the "Letter of Credit Reserve") under the Revolving Line in an
amount equal to ten percent (10%) of the face amount of such Letter of
Credit.  The amount of the Letter of Credit Reserve may be adjusted by Bank from
time to time to account for fluctuations in the exchange rate.  The availability
of funds under the Revolving Line shall be reduced by the amount of such Letter
of Credit Reserve for as long as such Letter of Credit remains outstanding.
      
2.1.3   Foreign  Exchange  Sublimit.   As part of the Revolving Line, Borrower
may enter into foreign exchange contracts with Bank under which Borrower commits
to purchase from or sell to Bank a specific amount of Foreign Currency (each, a
"FX Forward Contract") on a specified date (the "Settlement  Date").   FX
Forward Contracts shall have a Settlement Date of at least one (1) FX Business
Day after the contract date and shall be subject to a reserve often  percent
(10%) of each outstanding FX Forward Contract in a maximum aggregate amount
equal to $2,000,000 (the "FX Reserve").  The aggregate amount of FX  Forward
Contracts at any one time may not exceed ten (10) times the amount of the FX
Reserve.
    
2.1.4   Cash Management Services Sublimit.  Borrower may use up to $2,000,000
(the "Cash Management Services Sublimit") of the Revolving Line for Bank's cash
management services which may include merchant services, direct deposit of
payroll, business credit card, and check cashing services identified in Bank's
various cash management services agreements (collectively, the "Cash Management
Services"). Any amounts Bank pays on behalf of Borrower or any amounts that are
not paid by Borrower for any Cash Management Services will be treated as
Advances under the Revolving Line and will accrue interest at the interest rate
applicable to Advances.
  
2.1.5   Overall  Aggregate  Sublimit.   In no event shall the total amount of
(i) outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve), and (ii) the FX Reserve, and (iii) the
amount of the Revolving Line utilized for Cash Management Services, at any time
exceed $2,000,000 in the aggregate.
    
2.2   Overadvances. If at any time or for any reason the total of all
outstanding Advances and all other monetary Obligations exceeds Net Borrowing
Availability (an "Overadvance"), Borrower shall immediately pay the amount of
the excess to Bank, without notice or demand.  Without limiting Borrower's
obligation to repay to Bank the amount of any Overadvance, Borrower agrees to
pay Bank interest on the outstanding amount of any Overadvance, on demand, at
the Default Rate.
   
2.3   Payment of Interest  on the Credit Extensions.
     
(a)   Interest Rate; Advances.  Subject to Section 2.3(b), the amounts
outstanding under the Revolving Line shall accrue interest at a per annum rate
equal to 1.75 percentage points above the Prime Rate, which interest shall be
payable monthly.
     
(b)   Default Rate. Immediately upon the occurrence and during the continuance
of an Event of Default, Obligations shall bear interest at a rate per annum
which is five percentage points above the rate effective immediately before the
Event of Default (the "Default Rate").  Payment or acceptance of the increased
interest rate provided in this Section 2.3(b) is not a permitted alternative to
timely payment and shall not constitute a waiver of any Event of Default or
otherwise prejudice or limit any rights or remedies of Bank.
     
(c)   Adjustment to Interest Rate. Changes to the interest rate of any Credit
Extension based on changes to the Prime Rate shall be effective on the effective
date of any change to the Prime Rate and to the extent of any such change.
      
(d)   360-Day Year.  Interest shall be computed on the basis of a 360-day year
for the actual number of days elapsed.
  
 
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(e)   Debit of Accounts.  Bank may debit any of Borrower's deposit accounts,
including the Designated Deposit Account, for principal and interest payments or
any other amounts Borrower owes Bank when due. These debits shall not constitute
a set-off.
 
(f)   Minimum Monthly Interest.  Omitted.
 
(g)   Payment: Interest Computation: Float Charge.  Interest is
payable monthly on the last calendar day of each month.  In
computing interest on the Obligations, all Payments received after 12:00 p.m.
Pacific time on any day shall be deemed received on the next Business Day.  In
addition, so long as any principal or interest with respect to any Hard Credit
Extension (defined as Credit Extensions other than for Letters of Credit, FX
Forward Contracts or amounts utilized for Cash Management Services)  remains
outstanding,  Bank shall be entitled to charge Borrower
 a "float" charge in an amount equal to three (3) Business Days interest,
at the interest rate applicable  to the Advances,  on all Payments received by
Bank. Said float charge is not included  in interest  for purposes of
computing  Minimum Monthly Interest (if any) under this Agreement.   The float
charge for each month shall be payable on the last day of the month.  Bank shall
not, however, be required to credit Borrower's account for the amount of any
item of payment  which is unsatisfactory  to Bank in its good faith
business  judgment, and Bank may charge Borrower's  Designated  Deposit  Account
for the amount of any item of payment  which is returned  to Bank unpaid.
    
2.4   Fees. Borrower shall pay to Bank:
 
(a)   Effective Date; and Commitment  Fee.   A fully
earned, non-refundable commitment  fee of $37,500,  on the
 
(b)   Letter of Credit Fee.  Bank's customary fees and expenses for the issuance
or renewal of Letters of Credit upon the issuance or renewal of such Letter of
Credit by Bank; and
 
(c)   Termination Fee.  Subject to the terms of Section 4.1, a termination fee;
and
 
(d)   Unused Revolving Line Facility Fee. A fee (the "Unused Revolving Line
Facility Fee''), which fee shall be paid quarterly, in arrears, on a calendar
year basis, in an amount equal to 0.50% per annum of the average unused portion
of the Revolving Line, as determined by Bank.  Borrower shall not be entitled to
any credit, rebate or repayment of any Unused Revolving  Line Facility Fee
previously earned by Bank pursuant to this Section notwithstanding any
termination
of the within Agreement, or suspension or termination of Bank's obligation to
make loans and advances hereunder, including during any Streamline Period; and
   
(e)   Collateral Monitoring Fee.   A monthly collateral monitoring fee of
$2,000, payable in arrears on the last day of each month (prorated for any
partial month at the beginning and upon termination of this Agreement) in which
Borrower has Hard Credit Extensions outstanding; otherwise, a monthly collateral
monitoring fee of $500, payable in arrears on the last day of each month
(prorated for any partial month at the beginning and upon termination of this
Agreement); and
  
(f)   Bank Expenses.   All Bank Expenses (including reasonable attorneys' fees
and expenses, and expenses for documentation and negotiation of this Agreement)
incurred through  and after the Effective Date, when due.
   
(g)   Anniversary Fee.  A fully earned, non-refundable fee of $37,500, on the
first anniversary of the Effective Date; and if this Agreement is terminated
prior to the first anniversary of the Effective Date, either by Borrower or
Bank, Borrower shall pay such Anniversary Fee to Bank in addition to any
Termination Fee.
    
3   CONDITIONS OF LOANS
    
3.1   Conditions Precedent to Initial Credit Extension. Bank's obligation to
make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory  to Bank, such
 documents,  and  completion  of  such  other matters, as  Bank may
 reasonably deem  necessary  or appropriate, including, without limitation:
  
(a)   to which it is a party; Borrower shall have delivered duly executed
original signatures  to the Loan Documents
  
 
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(b)   Borrower shall have delivered its Operating Documents and a good standing
certificate of Borrower certified by the Secretary of State of the State of
Delaware as of a date no earlier than thirty (30) days prior to the Effective
Date;
 
(c)   Borrower shall have delivered duly executed original signatures to the completed
Borrowing Resolutions for Borrower;
 
(d)   Bank shall have received certified copies, dated as of a recent date, of
financing statement searches, as Bank shall request, accompanied by written
evidence (including any UCC termination statements) that the Liens indicated in
any such financing statements either constitute Permitted
Liens or have been or, in connection with the initial Credit Extension, will be
terminated or released;
 
(e)   Borrower shall have delivered the Perfection Certificate(s) executed by
Borrower;
 
(f)   Borrower  shall  have  delivered  the  insurance
policies  and/or  endorsements  required pursuant to Section 6.5 hereof; and
hereof.
 
(g)   Borrower shall have paid the fees and Bank Expenses then due as specified
in Section 2.4

3.2   Conditions Precedent to all
Credit Extensions.  Bank's obligations to make each Credit Extension, including
the initial Credit Extension, is subject to the following:
  
(a)   except as otherwise provided in Section 3.4(a), timely receipt of an executed
Payment/Advance Form;
  
(b)   the representations and warranties in Section 5 shall be true in all
material respects on the date of the Payment/Advance Form and on the Funding
Date of each Credit Extension; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date
shall be true, accurate and complete in all material respects as of such date, and no
Default or Event of Default shall have occurred and be continuing or result from
the Credit Extension.  Each Credit Extension is Borrower's representation and
warranty on that date that the representations and warranties in Section 5
remain true in all material respects; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date; and
  
(c)   in Bank's sole discretion, there has not been a Material Adverse Change.
 
3.3   Covenant to Deliver.
 
Borrower agrees to deliver to Bank each item required to be delivered to Bank under this
Agreement as a condition to any Credit Extension. Borrower expressly agrees that
the extension of a Credit Extension prior to the receipt by Bank of any such
item shall not constitute a waiver by Bank of Borrower's obligation to deliver
such item, and any such extension in the absence of a required item shall be in
Bank's sole discretion.
   
3.4   Procedures for Borrowing.  Subject to the prior satisfaction of all other
applicable conditions to the making of an Advance set forth in this Agreement,
to obtain an Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m. Pacific
time on the Funding Date of the Advance.  Together with such notification,
Borrower must promptly deliver to Bank by electronic mail or facsimile a
completed Transaction Report executed by a Responsible Officer or his or her
designee.  Bank shall credit Advances to the Designated Deposit Account.  Bank
may make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances
are necessary to meet Obligations which have become due. Bank may rely on any
telephone notice given by a person whom Bank believes is a Responsible Officer
or designee.
         
 
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4   CREATION OF SECURITY INTEREST
 
4.1   Grant of Security
Interest.  Borrower hereby grants Bank, to secure the payment and performance in
full of all of the Obligations, a continuing security interest in, and pledges
to Bank, the Collateral, wherever located, whether now owned or hereafter
acquired or arising, and all proceeds and products thereof. Borrower represents,
warrants, and covenants that the security interest granted herein is and shall
at all times continue to be a first priority perfected security interest in the
Collateral (subject only to Permitted Liens that may have superior priority to
Bank's  Lien under this Agreement).  If Borrower shall acquire a commercial tort
claim, Borrower shall promptly notify Bank in a writing signed by Borrower of
the general details thereof and grant to Bank in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance reasonably satisfactory
to Bank.
  
This Agreement may be terminated prior to the Revolving Maturity Date by
Borrower, effective three (3) Business Days after written notice of termination
is given to Bank or if Bank's obligation to fund Credit Extensions terminates
pursuant to the terms of Section 2.1.1(c). Notwithstanding any such termination,
Bank's lien and security interest in the Collateral shall continue until
Borrower fully satisfies its Obligations.   If such termination is at Borrower's
election or at Bank's election
due to the occurrence and continuance of an Event of Default, Borrower shall pay
to Bank, in addition to the payment of any other expenses or fees then-owing, a
termination fee in an amount equal to  2.0% of the Revolving Line if termination
occurs on or before the first anniversary of the Effective Date, and 1.0% of the
Revolving Line if termination occurs after the first anniversary of the
Effective Date and on or before the second anniversary of the Effective Date;
provided that no termination fee shall be charged if the credit facility
hereunder is replaced with a new facility from another division of Silicon
Valley Bank.  Upon payment in full of the Obligations and at such time as Bank's
obligation to make Credit Extensions has terminated, Bank shall release its
liens and security interests in the Collateral and all rights therein shall
revert to Borrower.
  
4.2   Authorization to File Financing Statements. Borrower hereby authorizes
Bank to file financing statements, without notice to Borrower, with all
appropriate jurisdictions to perfect or protect Bank's interest or rights
hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person, shall be deemed to violate the rights of Bank
under the Code.
  
5   REPRESENTATIONS AND WARRANTIES
 
Borrower represents and warrants as follows:
 
5.1   Due Organization and Authorization.  Borrower and each of its Subsidiaries
are duly existing and in good standing in their respective jurisdictions of
formation and are qualified and licensed to do business and are in good standing
in any jurisdiction in which the conduct of their business or their ownership of
property requires that they be qualified except where the failure to do so could
not reasonably be expected to have a Material Adverse Change. In connection with
this Agreement, Borrower has delivered to Bank a completed certificate signed by
Borrower entitled "Perfection Certificate".  Borrower represents and warrants to
Bank that (a) Borrower's exact legal name is that indicated on the Perfection
Certificate and on the signature page hereof; (b) Borrower is an organization of
the type and is organized in the jurisdiction set forth in the Perfection
Certificate; (c) the Perfection Certificate accurately sets forth Borrower's
organizational identification number or accurately states that Borrower has
none; (d) the Perfection Certificate accurately sets forth Borrower's place of
business, or, if more than one, its chief executive office as well as Borrower's
mailing address (if different than its chief executive office); (e) Borrower
(and each of its predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, organizational structure or type, or any
organizational number assigned by its jurisdiction; and (f) all other
information set forth on the Perfection Certificate pertaining to Borrower and
each of its Subsidiaries is accurate and complete.  If Borrower is not now a
Registered Organization but later becomes one, Borrower shall promptly notify
Bank of such occurrence and provide Bank
with Borrower's organizational identification number.
   
The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower's organizational documents, nor
constitute an event of default under any material agreement by
which Borrower is bound. Borrower is not in default under any agreement to
which it is a party or by which it is bound in which the default could
reasonably be expected to cause a Material Adverse Change.
   
5.2   Collateral.   Borrower has good title to the Collateral, free of  Liens
except Permitted Liens. Borrower has no deposit account other than the deposit
accounts with Bank and deposit accounts described in the Perfection Certificate
delivered to Bank in connection herewith.
  
 
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The Collateral is not in the possession of any third party bailee (such as a
warehouse). Except as hereafter disclosed to Bank in writing by Borrower, none
of the components of the Collateral shall be maintained at locations other than
as provided in the Perfection Certificate. In the event that Borrower, after the
date hereof, intends to store or otherwise deliver any portion of the Collateral
to a bailee, then Borrower will first receive the written consent of Bank and
such bailee must acknowledge in writing that the bailee is holding such
Collateral for the benefit of Bank.
    
All Inventory is in all material respects of good and marketable quality, free
from material defects.
  
Borrower is the sole owner of its Intellectual Property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business.  Each Patent is valid and enforceable and no part of the Intellectual
Property has been judged invalid or unenforceable, in whole or in part, and to
the best of Borrower's knowledge, no claim has been made that any part of the
Intellectual Property violates the rights of any third party except to the
extent such claim could not reasonably be expected to cause a Material Adverse
Change.
   
Except as noted on the Perfection Certificate, Borrower is not a party to, nor
is bound by, any material license or other agreement with respect to which
Borrower is the licensee that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower's interest in such license or agreement
or any other property. Borrower  hall provide written notice to Bank within
thirty days of entering or becoming bound by any such license or agreement which
is reasonably likely
to have a material impact on Borrower's business or financial condition (other
than over-the-counter software that is commercially available to the
public).  Borrower shall take such steps as Bank requests to obtain the consent
of, or waiver by, any person whose consent or waiver is necessary for all such
licenses or contract rights to be deemed "Collateral" and for Bank to have a
security interest in it that might otherwise be restricted or prohibited by law
or by the terms of any such license or agreement (such consent or authorization
may include a licensor's agreement to a contingent assignment of the license to
Bank if Bank determines that is necessary in its good faith judgment), whether
now existing or entered into in the future.
 
5.3   Accounts Receivable.
 
(a)   For each  Account with respect to  which Advances are  requested, on the
date each Advance is requested and made, such Account shall be an Eligible
Account, set forth in Section 13 below.
   
(b)   All statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the Accounts are and shall be true
and correct and all such invoices, instruments and other documents, and all of
Borrower's Books are genuine and in all respects what they purport to be. All
sales and other transactions underlying or giving rise to each Account shall
comply in all material respects with all applicable laws and governmental rules
and regulations. Borrower has and will have no knowledge of any actual or
imminent Insolvency Proceeding of any Account Debtor whose accounts are shown as
Eligible Accounts in any Borrowing Base Certificate. To the best of Borrower's
knowledge, all signatures and endorsements on all documents, instruments, and
agreements relating to all Accounts are and will be genuine, and all such
documents, instruments and agreements are and will be legally enforceable in
accordance with their terms.
   
5.4   Litigation.  There are no actions or proceedings pending or, to the
knowledge of the Responsible Officers, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than $50,000.
 
5.5   No Material Deviation in Financial  Statements.  All consolidated
financial statements for Borrower and any of its Subsidiaries delivered to Bank
fairly present in all material respects Borrower's consolidated financial
condition and Borrower's consolidated results of operations. There has not been
any material
deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements
submitted to Bank.
 
5.6   Solvency. Borrower is able to pay its debts (including trade debts) as
they mature.
   
5.7           Regulatory Compliance. Borrower is not an "investment company" or
a company "controlled" by an "investment company" under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve Board
of Governors). Borrower has complied in all material respects with the Federal
Fair Labor Standards Act. Borrower has not violated any laws, ordinances or
rules, the violation of which could reasonably be expected to cause a Material
Adverse Change. None of Borrower's or any of its Subsidiaries' properties or
assets has been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each of
its Subsidiaries have obtained all consents, approvals and authorizations of,
made all declarations or filings with, and given all notices to, all government
authorities that are necessary to continue its business as currently conducted.
       
 
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5.8           Subsidiaries; Investments. Borrower does have any Subsidiaries,
other than the Subsidiaries listed in the Perfection Certificate and other
Subsidiaries organized with the prior written consent of Bank, and does not own
any stock, partnership interest or other equity securities in any other Person,
except for Permitted Investments.
      
5.9   Tax Returns and Payments; Pension Contributions. Borrower has timely filed
all required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower.  Borrower may defer payment of any contested taxes, provided that
Borrower (a) in good faith contests its obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (b)
notifies Bank in writing of the commencement of, and any material development
in, the proceedings, (c) posts bonds or takes any other steps required to
prevent the governmental authority levying such contested taxes from obtaining a
Lien upon any of the Collateral that is other than a "Permitted Lien".  Borrower
is unaware of  any claims  or adjustments proposed for any of
 Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower.  Borrower has paid all amounts necessary to fund all
present pension, profit sharing and deferred compensation plans in accordance
with their terms, and Borrower has not withdrawn from participation in, and has
not permitted partial or complete termination of, or permitted the occurrence of
any other event with respect to, any such plan which could reasonably be
expected to result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other governmental
agency.
 
5.10   Use of Proceeds.  Borrower shall use the proceeds of the Credit Extensions
solely as working capital, and to fund its general business requirements and not
for personal, family, household or agricultural purposes.
 
5.11   Full Disclosure.  No written representation, warranty or other statement
of Borrower in any certificate or written statement given to Bank, as of the
date such representations, warranties, or other statements were made, taken
together with all such written certificates and written statements given to
Bank, contains any
untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the
certificates or statements not misleading (it being recognized by Bank that the
projections and forecasts provided by Borrower in good faith and based upon
reasonable assumptions are not viewed as facts and that actual results during
the period or periods covered by such projections and forecasts may differ from
the projected or forecasted results).
 
6   AFFIRMATIVE COVENANTS. Borrower shall do all of the following:
 
6.1   Government   Compliance.   Maintain  its  and  all  its
Subsidiaries'  legal existence  and  good standing in their respective
jurisdictions of formation and maintain qualification in each jurisdiction in
which the failure to so qualify would reasonably be expected to cause a Material
Adverse Change.  Borrower shall comply, and have each Subsidiary comply, with
all laws, ordinances and regulations to which it is subject, noncompliance with
which could reasonably be expected to cause a Material Adverse Change.
 
6.2   Financial Statements, Reports, Certificates.
 
(a)   Borrower shall provide Bank with the following
 
(i)   a Transaction Report weekly and at the time of each request for an Advance
if there are any Hard Credit Extensions; otherwise within fifteen (15) days
after the end of each month;
 
(ii)   within fifteen (15) days after the end of each month,
 
(A)   monthly accounts receivable agings, aged by invoice date,
 
(B)   monthly accounts payable agings, aged by invoice date, and outstanding or
held check registers, if any,
 
(C)   monthly reconciliations  of accounts receivable agings (aged by invoice
date), transaction reports, and general ledger,
    
 
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(iii)   as soon as available, and in any event within  thirty (30) days after
the end of each month, monthly unaudited financial statements;
 
(iv)   within thirty (30) days after the end of each month a monthly Compliance
Certificate signed by a Responsible Officer, certifying that as of the end of
such month, Borrower was in full compliance with all of the terms and conditions
of this Agreement, and setting forth calculations showing compliance with the
financial covenants set forth in this Agreement and such other information as
Bank shall reasonably request, including, without limitation, a statement that
at the end of such month there were no held checks;
 
(v)   [omitted];
  
(vi)   within thirty (30) days after the end of each fiscal year of Borrower,
(A) annual operating budgets (including income statements, balance sheets and
cash flow statements, by month) for the upcoming fiscal year of Borrower, and
(B) annual financial projections for the following fiscal year (on a quarterly
basis) as approved by Borrower's board of directors, together with any related
business forecasts used in the preparation of such annual financial projections
and (C) any interim updates thereof; and
   
(vii)   [omitted].
  
(b)   At all times that Borrower is subject to the reporting requirements under
the Securities Exchange Act of 1934, as amended, within five (5) days after
filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission or a link thereto on Borrower's or another website on the Internet.
 
(c)   Prompt written notice of (i) any material change in the composition of the
Intellectual Property, (ii) the registration of any Copyright, including any
subsequent ownership  right of Borrower in or to any Copyright, Patent or
Trademark  not shown in the IP Security Agreement, or (iii) Borrower's knowledge
of an event that materially adversely affects the value of the Intellectual
Property.
 
6.3   Accounts Receivable.
 
(a)   Schedules and Documents Relating to
Accounts.  Borrower shall deliver to Bank transaction reports and schedules of
collections, as provided in Section  6.2, on Bank's standard forms; provided,
however,  that Borrower's failure  to execute and deliver the same shall not
affect or limit Bank's  Lien and other rights in all of Borrower's Accounts, nor
shall Bank's  failure to advance or lend against a specific Account affect or
limit Bank's  Lien and other rights therein.   If requested  by Bank, Borrower
shall furnish  Bank with copies (or, at Bank's request, originals) of
 all contracts, orders, invoices,  and other similar documents, and all shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Accounts.   In addition, Borrower shall deliver to Bank, on its request, the
originals of all instruments, chattel paper, security agreements, guarantees and
other documents and property evidencing  or
securing any Accounts, in the same form as received, with all necessary endorsements, and copies of all credit
memos.
 
(b)   Disputes.  Borrower shall promptly notify Bank of all disputes or claims relating to
Accounts. Borrower may forgive (completely or partially), compromise, or settle
any Account for less than payment in full, or agree to do  any  of
the  foregoing  so long  as (i) Borrower  does  so  in  good  faith,  in a
commercially
reasonable manner, in the ordinary course of business, in arm's-length transactions, and reports the same to
Bank in the regular reports provided  to Bank; and (ii) no Default or Event of
Default has occurred  and is continuing; and (iii) after taking into account all
such discounts, settlements and forgiveness, the total outstanding  Advances
will not exceed the lesser of the Revolving Line or the Borrowing Base.
   
 
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(c)   Collection of Accounts.  Borrower shall have the right to collect all
Accounts, unless and until a Default or an Event of Default has occurred and is
continuing. Wire transfer payments will be remitted to Borrower's
cash collateral account maintained with Bank; all other forms of
payments shall be remitted to the lockbox to be established pursuant  to the
terms hereof.  Whether or not an Event of Default has occurred  and is
continuing,  Borrower  shall hold all payments on, and proceeds of, Accounts in
trust for Bank, and Borrower shall immediately deliver all such payments and
proceeds to Bank in their original form, duly endorsed, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof.  Bank may, in its good
faith business judgment, require that all proceeds of Accounts be deposited by
Borrower into a lockbox account, or such other "blocked account" as Bank may
specify, pursuant to a blocked account agreement in such form as Bank may
specify in its good faith business judgment. All collections shall be applied to
against any outstanding Obligations (as provided for in Section 9.4 hereof);
provided, however, if Borrower's outstanding Hard Credit Extensions are less
than $2,500,000 and no Default or Event of Default has occurred and is
continuing, the collections will be placed in Borrower's general operating
account maintained with Bank.
 
(d)   Returns.  Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any  Inventory to  Borrower, Borrower shall  promptly
(i) determine the reason for such return, (ii) issue a credit memorandum to the
Account Debtor in the appropriate amount, and (iii) provide a copy of such
credit memorandum to
Bank, upon request from Bank. In the event any attempted return occurs after the occurrence
and during the continuance of any Event of Default, Borrower shall hold the
returned Inventory in trust for Bank, and immediately notify Bank of the return
of the Inventory.
 
(e)   Verification.  Bank may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Accounts, either in the name of Borrower or Bank or such other name as Bank
may choose.
   
(f)   No Liability. Bank shall not be responsible or liable for any shortage or
discrepancy in, damage to, or loss or destruction of, any goods, the sale or
other disposition of which gives rise to an Account, or for any error, act,
omission, or delay of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Account, or for settling any Account in
good faith for less than the full amount thereof, nor shall Bank be deemed to be
responsible for any of Borrower's obligations under any contract or agreement
giving rise to an Account. Nothing herein shall, however, relieve Bank from
liability for its own gross negligence or willful misconduct.
    
6.4   Remittance of Proceeds.   Except as otherwise provided in Section 6.3(c),
deliver, in kind, all proceeds arising from the disposition of any Collateral to
Bank in the original form in which received by Borrower not later than the
following Business Day after receipt by Borrower, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Bank the proceeds of the sale of worn out or obsolete
Equipment disposed of by Borrower in good faith in an arm's length transaction
for an aggregate purchase price of$50,000  or less (for all such transactions in
any fiscal year).  Borrower agrees that it will not commingle proceeds of
Collateral with any of Borrower's other funds or property, but will hold such
proceeds separate and apart from such other funds and property and in an express
trust for Bank.  Nothing in this Section limits the restrictions on disposition
of Collateral set forth elsewhere in this Agreement.
  
6.5    Taxes; Pensions. Timely file all required tax returns and reports and
timely pay all foreign, federal, state and local taxes, assessments, deposits
and contributions owed by Borrower except for deferred payment of any taxes
contested pursuant to the terms of Section 5.9 hereof, and pay all amounts
necessary to fund all present pension, profit sharing and deferred compensation
plans in accordance with their terms.
      
6.6   Access to Collateral; Books and  Records.    At reasonable times, on one
(1) Business Day's notice (provided no notice is required if an Event
of Default has occurred and is continuing), Bank, or its agents, shall have the
right to inspect the Collateral and the right to audit and copy Borrower's
Books.  The initial audit of Borrower's Collateral and Books will be conducted
on the earlier of: (a) within sixty (60) days of the Effective Date or (b) prior
to the initial Advance hereunder, and thereafter, the parties contemplate that
such audits will be performed no more frequently than semi-annually, but nothing
herein restricts Bank's right to conduct such audits more frequently if (i) Bank
believes that it is advisable to do so in Bank's good faith business judgment,
or (ii) Bank believes in good faith that a Default or Event of Default has
occurred. The foregoing inspections and audits shall be at Borrower's expense,
and the charge therefor shall be $750 per person per day (or such higher amount
as shall represent Bank's then-current standard charge for the same), plus
reasonable out-of-pocket expenses.  In the event Borrower and Bank schedule an
audit more than ten (10) days in advance, and Borrower cancels or seeks to
reschedules the audit with less than ten (10) days written notice to Bank, then
(without limiting any of Bank's rights or remedies), Borrower shall pay Bank a
fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate
Bank for the anticipated costs and expenses of the cancellation or rescheduling.
    
 
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6.7   Insurance.   Keep its business and the Collateral insured for risks and in
amounts standard for companies in Borrower's industry and location and as Bank
may reasonably request. Insurance policies shall be in a form, with companies,
and in amounts that are satisfactory to Bank.  All property policies shall have
a lender's loss payable endorsement showing Bank as an additional lender loss
payee and waive subrogation against Bank, and all liability policies shall show,
or have endorsements showing, Bank as an additional insured.  All policies (or
the loss payable and additional insured endorsements) shall provide that the
insurer must give Bank at least twenty (20) days notice before canceling,
amending, or declining
to renew its policy.   At Bank's request, Borrower shall deliver certified
copies of policies and evidence of all premium payments.  Proceeds payable under
any policy shall, at Bank's option, be payable to Bank on account of the
Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default
has occurred and is continuing, Borrower shall have the option of applying the
proceeds of any casualty policy up to $50,000, in the aggregate, toward the
replacement or repair of destroyed or damaged property; provided that any such
replaced or repaired property (i) shall be of equal or like value as the
replaced or repaired Collateral and (ii) shall be deemed Collateral in which
Bank has been granted a first priority security interest, and (b) after the
occurrence and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Bank, be payable to
Bank on account of the Obligations.  If Borrower fails to obtain insurance as
required under this Section 6.7 or to pay any amount or furnish any required
proof of payment to third persons and Bank, Bank may make all or part of such
payment or obtain such insurance policies required in this Section 6.7, and take
any action under the policies Bank deems prudent.
 
6.8   Operating Accounts.
    
(a)   Maintain its primary depository and operating accounts and securities
accounts with Bank and Bank's affiliates which accounts shall represent at least
85% of the dollar value of Borrower's accounts at all financial institutions.
  
(b)   Provide Bank five (5) days prior written notice before establishing any Collateral
Account at or with any bank or financial institution other than Bank or its
Affiliates.   In addition, Borrower covenants and agrees that the Collateral
Account maintained at Morgan Stanley shall be closed within 60 days of the
Effective Date.  The provisions of the previous sentence shall not apply to
deposit accounts exclusively used for payroll, payroll taxes and other employee
wage and benefit payments to or for the benefit of Borrower's employees and
identified to Bank by Borrower as such.
 
6.9   Financial Covenants. 
 
Borrower shall maintain at all times, to be tested as of the last day of each
month, unless otherwise noted, on a consolidated basis:
 
(a)   Tangible Net Worth.  A Tangible Net Worth of at least $1,500,000 ("Minimum
Tangible Net Worth") plus (i) 50% of all consideration received after the date
hereof for equity securities and subordinated debt of the Borrower, plus (ii)
50% of the Borrower's net income in each fiscal quarter ending after the date
hereof.  Increases in the Minimum Tangible Net Worth based on consideration
received for equity securities and subordinated debt of the Borrower shall be
effective as of the end of the month in which such consideration is received,
and shall continue effective thereafter. Increases in the Minimum Tangible Net
Worth based on net income shall be effective on the last day of the fiscal
quarter in which said net income is realized, and shall continue effective
thereafter. In no event shall the Minimum Tangible Net Worth be decreased.
  
6.10   Intellectual Property Rights. Borrower shall: (a) protect, defend and
maintain the validity and enforceability of its intellectual property; (b)
promptly advise Bank in writing of material infringements of its intellectual
property; and (c) not allow any intellectual property material to Borrower's
business to be abandoned, forfeited or dedicated to the public without Bank's
written consent. If Borrower decides to register any copyrights or mask works in
the United States Copyright Office, Borrower shall: (x) provide Bank with at
least fifteen (15) days prior written notice of its intent to register such
copyrights or mask works together with a copy of the application it intends to
file with the United States Copyright Office (excluding exhibits thereto); (y)
execute an intellectual property security agreement or such other documents as
Bank may reasonably request to maintain the perfection and priority of Bank's
security interest in the copyrights or mask works intended to be registered with
the United States Copyright Office; and (z) record such intellectual property
security agreement with the United States Copyright Office contemporaneously
with filing the copyright or mask work application(s) with the United States
Copyright Office. Borrower shall promptly provide to Bank a copy of the
application(s) filed with the United States Copyright Office together with
evidence of the recording of the intellectual property security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in such copyrights or mask works. Borrower shall provide written notice
to Bank of any application filed by Borrower in the United States Patent and
Trademark Office for a patent or to register a trademark or service mark within
30 days after any such filing.
        
 
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6.11   Litigation Cooperation. From the date hereof and continuing through the
termination of this Agreement, make available to Bank, without expense to Bank,
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
  
6.12   Omitted.
 
6.13   Further Assurances.   Borrower shall execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's
 Lien in the Collateral or to effect the purposes of this Agreement.
  
7   NEGATIVE COVENANTS
 
Borrower shall not do any of the following without Bank's prior written consent:
 
7.1   Dispositions.  Convey, sell, lease, transfer or otherwise dispose of
(collectively, "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, except for (a) Transfers of Inventory
in the ordinary course of business; (b) Transfers of worn-out or obsolete
Equipment; and (c) Transfers consisting of Permitted Liens and Permitted
Investments.
 
7.2   Changes in Business, Management, Ownership, or Business Locations.
 
(a)   Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower and such Subsidiary,
as applicable, or reasonably related thereto;
 
(b)   liquidate or dissolve; or
 
(c)   permit a change in the record or beneficial ownership of an aggregate of
more than 20% of the outstanding shares of stock of Borrower, in one or more
transactions, compared to the ownership of outstanding shares of stock of
Borrower in effect on the date hereof (other than by the sale of Borrower's
equity securities in a public offering or to venture capital investors so long
as Borrower identifies to Bank the venture capital investors prior to the
closing of the transaction); or
      
(d)   without at least thirty (30) days prior written notice to Bank: (1) add
any new offices or business locations, including warehouses (unless such new
offices or business locations contain assets and property of Borrower with an
aggregate value of less than $10,000), (2) change its jurisdiction of
organization, (3) change its organizational structure or type, (4) change its
legal name, or (5) change its organizational number (if any) assigned by its
jurisdiction of organization.
   
7.3   Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person, except that a Subsidiary of
Borrower may merge or consolidate into another Subsidiary of Borrower or into
Borrower.
      
7.4   Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or
permit any Subsidiary to do so, other than Permitted Indebtedness.
 
7.5   Encumbrance.    Create, incur, or allow any Lien on any of its property or assets, or assign or
convey any right to receive income, including the
sale of any Accounts, or permit any of its Subsidiaries to do so, except for
Permitted Liens, or permit any Collateral not to be subject to the first
priority security interest granted
herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank)
with any Person which directly or indirectly prohibits or has the effect of
prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of Borrower's or any
Subsidiary's intellectual property, except as is otherwise permitted in Section
7.1 hereof and the definition of "Permitted Lien" herein.
  
 
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7.6   Maintenance of Collateral Accounts.  Maintain any Collateral Account
except pursuant to the terms of Section 6.8.(b) hereof.
 
7.7   Investments; Distributions.  (a) Directly or indirectly make any
Investment other than Permitted Investments, or permit any of its Subsidiaries
to do so; or (b) pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock, provided that (i) Borrower may
convert any of its convertible securities into other securities pursuant
to the terms of such convertible securities or otherwise in exchange thereof,
(ii) Borrower may pay dividends solely in common stock; and (iii) Borrower may
repurchase the stock of former employees or consultants pursuant to stock
repurchase agreements so long as no Default or Event of Default has occurred at
the time of such repurchase and would not exist after giving effect to such
repurchase, provided such repurchase does not exceed in the aggregate of $50,000
per fiscal year.
 
7.8   Transactions with Affiliates.  Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower, except for
transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are
no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-affiliated Person.
 
7.9   Subordinated Debt.  (a) Make or permit any payment on any Subordinated
Debt, except under the terms of the subordination, intercreditor, or other
similar agreement to which such Subordinated Debt is subject, or (b) amend any
provision in any document relating to the Subordinated Debt which would increase
the amount thereof or the amount of any permitted payments thereunder or
adversely affect the subordination thereof to Obligations owed to Bank.
 
7.10   Compliance.   Become an "investment company" or a company controlled by
an "investment company", under the Investment Company Act of 1940 or undertake
as one of its important activities extending credit to purchase or carry margin
stock (as defined in Regulation U of the Board of Governors of the Federal
Reserve System), or use the proceeds of any Credit Extension for that purpose;
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit
any Subsidiary to withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
present pension, profit sharing and deferred compensation plan which could
reasonably be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency.
 
8   EVENTS OF DEFAULT
  
Any  one  of  the  following shall  constitute an  event of  default
(an  "Event of  Default") under this Agreement:
 
8.1   Payment Default.  Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within three (3) Business Days after such Obligations are due and
payable.  During the cure period, the failure to cure the payment default is not
an Event of Default (but no Credit Extension will be made during the cure
period);
 
8.2   Covenant Default.
 
(a)   Borrower fails or neglects to perform any obligation in Sections 6.2, 6.3,
6.4, 6.6, 6.8, or 6.9, or violates any covenant in Section 7; or
  
(b)   Borrower fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant or agreement contained in this Agreement, any
Loan Documents, and as to any default (other than those specified in this
Section 8) under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure the default within ten (10) days after the
occurrence thereof; provided, however, that if the default cannot by its nature
be cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to cure the default
shall not be deemed an Event of Default (but no Credit Extensions shall be made
during such cure period). Grace periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in subsection (a) above;
     
 
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8.3   Material Adverse Change. A Material Adverse Change occurs;
 
8.4   Attachment.  (a)  Any  material  portion  of  Borrower's assets  is
attached,  seized,  levied  on,  or comes into possession  of a trustee or
receiver and the attachment,  seizure or levy is not removed in ten (10) days;
(b) the service of process upon Bank seeking to attach, by trustee or similar
process, any funds of Borrower, or any entity under control of Borrower
(including a subsidiary) on deposit with Bank; (c) Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business; (d) a judgment or other claim in excess of $10,000 becomes a Lien on
any of Borrower's assets; or (e) a notice of lien, levy, or assessment is filed
against any of  Borrower's assets  by any government  agency  and not
paid  within  ten (10)  days after  Borrower  receives notice.  These are not
Events of Default if stayed or if a bond is posted pending contest by Borrower
within ten days after the date such events occur (but no Credit Extensions shall
be made during the cure period);
 
8.5   Insolvency.  Borrower is unable to pay its debts (including trade debts)
as they become due or otherwise becomes insolvent; (b) Borrower begins an
Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower
and not dismissed or stayed within thirty (30) days (but no Credit Extensions
shall be made while of any of the conditions described in clause (a) exist
and/or until any Insolvency Proceeding is dismissed);
 
8.6   Other Agreements. There is a default in any agreement to which Borrower or
any Guarantor is a party with a third party or parties  resulting  in a right by
such third party or parties,  whether or not exercised,  to accelerate  the
maturity  of any Indebtedness  in an amount in excess of $50,000  or that
could  result in a Material Adverse Change with respect to Borrower's or any
Guarantor;  provided, however, that the Event of Default under this Section  8.6
caused  by the occurrence  of a default under  such other agreement  shall  be
cured  or waived for purposes of this Agreement upon Bank receiving written
notice from the party asserting such default of such cure or waiver of the
default under such other
agreement, if at the time of such cure or waiver under such other agreement (a)
Bank has not declared an Event of Default under this Agreement and/or exercised
any rights with respect thereto; (b) any such cure or waiver does not result in
an Event of Default under any other provision of this Agreement or
any Loan Document; and (c)
in connection with any such cure or waiver under such other agreement, the terms of
any agreement  with such third party are not modified  or amended  in any
manner  which  could in the good faith judgment of Bank be materially less
advantageous to Borrower or any Guarantor;
 
8.7   Judgments. A judgment or judgments for the payment of money in an amount,
individually or in the aggregate, of $50,000 or more (not covered by
independent third-party insurance) shall be rendered against Borrower and shall
remain unsatisfied  and unstayed for a period of ten (10) days after the entry
thereof (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment);
 
8.8   Misrepresentations.   Borrower or any Person acting for Borrower makes any representation,
warranty, or other statement now or later in this Agreement, any Loan Document
or in any writing delivered to Bank or to induce Bank
to enter this Agreement or any Loan Document, and such representation, warranty,
 or other statement is incorrect in any material respect when made;
   
8.9   Subordinated Debt. A default or breach occurs under any agreement between
Borrower and any creditor of Borrower that signed a subordination,
intercreditor, or other similar agreement with Bank, or any creditor that has
signed such an agreement with Bank breaches any terms of such agreement; or
  
8.10   Guaranty. (a) Any guaranty of any Obligations terminates or ceases for
any reason to be in full force and effect; (b) any Guarantor does not perform
any obligation or covenant under any guaranty of the Obligations; (c) any
circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8. occurs with
respect to any Guarantor, or (d) the death, liquidation, winding up, or
termination of existence of any Guarantor; or (e) (i) a material impairment in
the perfection or priority of Bank's Lien in the collateral provided by
Guarantor or in the value of such collateral or (ii) a material adverse change
in the general affairs, management, results of operation, condition (financial
or otherwise) or the prospect of repayment of the Obligations occurs with
respect to any Guarantor.
   
9   BANK'S RIGHTS AND REMEDIES
      
 
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9.1    Rights and Remedies. If an Event of Default has occurred and is
continuing, Bank may, without notice or demand, do any or all of the following:
 
(a)   declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
 
(b)   stop advancing money or extending credit for Borrower's benefit under this
Agreement or under any other agreement between Borrower and Bank;
 
(c)   demand that Borrower (i) deposit cash with Bank in an amount equal to the
aggregate amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letter of Credit fees scheduled to be paid or payable over the
remaining term of any Letters of Credit;
 
(d)   terminate any FA Contracts;
 
(e)   demand payment of, and collect any Accounts and General Intangibles
comprising Collateral, settle or adjust disputes and claims directly with
Account Debtors for amounts, on terms, and in any order that Bank considers
advisable, notify any Account Debtor or other Person owing Borrower money of
Bank's security interest in such funds, verify the amount of the same and
collect the same;
 
(f)   make any payments and do any acts it considers necessary or reasonable to
protect the Collateral and/or its security interest in the Collateral.  Borrower
shall assemble the Collateral if Bank requests and make it available as Bank
designates.  Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to
enter and
occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
 
(g)   apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii)  any amount held by Bank owing to or for the credit or the
account of Borrower;
 
(h)   ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale,
and sell the Collateral.  Bank is hereby granted a non-exclusive, royalty-free
license or other right to use, without charge, Borrower's
labels, patents, copyrights, mask works, rights of use of any name, trade secrets,
 trade names, trademarks, service marks, and advertising matter, or any similar
property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section, Borrower's  rights under all licenses
and all franchise agreements inure to Bank's benefit;
 
(i)   place a "hold" on any account maintained with Bank and/or deliver a notice
of exclusive control, any entitlement order, or other directions
or instructions pursuant to any Control Agreement or similar agreements
providing control of any Collateral;
 
(j)   demand and receive possession of Borrower's Books; and
 
(k)   exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).
  
9.2    Power of Attorney.  Borrower hereby irrevocably appoints Bank as its
lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to:   (a) endorse Borrower's name on any
checks or other forms of payment or security; (b) sign Borrower's name on any
invoice or bill of lading for any Account or drafts against Account Debtors; (c)
settle and adjust disputes and claims about the Accounts directly with Account
Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle,
and adjust all claims under Borrower's
 insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security
interest, and adverse claim in or to the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; and
(f) transfer the Collateral into the name of Bank or a third party as the Code
permits.  Borrower hereby appoints Bank as its lawful attorney-in-fact to sign
Borrower's name on any documents necessary to perfect or continue the perfection
of any security interest regardless of whether an Event of Default has
occurred  until all Obligations  have been satisfied  in full and Bank is under
no further  obligation  to make Credit
Extensions  hereunder.   Bank's  foregoing appointment  as Borrower's
attorney  in fact, and all of Bank's  rights and powers,  coupled  with an
interest,  are irrevocable  until all Obligations  have been  fully  repaid  and
performed  and Bank's  obligation to provide Credit Extensions terminates.
  
 
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9.3   Protective Payments.   If Borrower fails to obtain the insurance called
for by Section 6.7 or fails
to pay any premium thereon or fails to pay any other amount which Borrower is
obligated to pay under this Agreement or any other Loan Document, Bank may
obtain such insurance or make such payment, and all amounts so paid by Bank are
Bank Expenses and immediately due and payable, bearing interest at the then
highest applicable rate, and secured  by the Collateral.  Bank will make
reasonable  efforts to provide Borrower  with notice of Bank obtaining such
insurance at the time it is obtained or within a reasonable time
thereafter.   No payments by Bank are deemed an agreement to make similar
payments in the future or Bank's  waiver of any Event of Default.
 
9.4   Application of Payments and
Proceeds.  Unless an Event of Default has occurred and is continuing, Bank shall
apply any funds in its possession, whether from
Borrower account balances, payments, or proceeds realized  as the result of any
collection  of Accounts or other disposition  of the Collateral,  first, to Bank
Expenses, including without limitation, the reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred  by Bank  in the exercise  of its rights  under this
Agreement;  second,  to the interest  due upon any of the Obligations; and
third, to the principal of the Obligations and any applicable fees and other
charges, in such order as Bank shall determine  in its sole discretion.   Any
surplus shall be paid to Borrower or other Persons legally entitled thereto;
Borrower  shall  remain  liable  to Bank  for any  deficiency.  If an
Event  of  Default  has  occurred  and  is
continuing,  Bank  may  apply  any  funds  in  its possession, whether from
Borrower account  balances,  payments, proceeds realized as the result of any
collection of Accounts or other disposition  of the Collateral,  or otherwise,
to the Obligations in such order as Bank shall determine in its sole
discretion.   Any surplus shall be paid to Borrower or other Persons  legally
entitled  thereto; Borrower shall remain liable to Bank for any deficiency.   If
Bank, in its good faith business  judgment, directly or indirectly enters into a
deferred payment or other credit transaction  with any purchaser  at any sale of
Collateral,  Bank shall have the option, exercisable  at any time, of either
reducing the Obligations  by the principal  amount of the purchase  price or
deferring  the reduction  of the Obligations  until the actual receipt by Bank
of cash therefor.
   
9.5   Bank's Liability for Collateral.  So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person.  Borrower bears
all risk of loss, damage or destruction of the Collateral.
  
9.6           No Waiver; Remedies Cumulative. Bank's failure, at any time or
times, to require strict performance by Borrower of any provision of this
Agreement or any other Loan Document shall not waive, affect, or diminish any
right of Bank thereafter to demand strict performance and compliance herewith or
therewith. No waiver hereunder shall be effective unless signed by Bank and then
is only effective for the specific instance and purpose for which it is given.
Bank's rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law, or
in equity. Bank's exercise of one right or remedy is not an election, and Bank's
waiver of any Event of Default is not a continuing waiver. Bank's delay in
exercising any remedy is not a waiver, election, or acquiescence.
   
9.7   Demand Waiver. Borrower waives demand, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
    
10           NOTICES
 
All notices, consents, requests, approvals,
demands, or other communication (collectively, "Communication"),  other than
Advance requests made pursuant to Section 3.4, by any party to this Agreement or
any other  Loan Document  must be in writing and be delivered  or sent by
facsimile  at the addresses  or facsimile numbers listed below.   Bank or
Borrower  may change  its notice address  by giving  the other party  written
notice thereof.   Each such Communication shall be deemed to have been validly
served, given, or delivered: (a) upon the earlier of actual receipt and three
(3) Business Days after deposit in the U.S. mail, registered or certified mail,
return receipt requested,  with proper postage  prepaid;  (b) upon
transmission,  when sent by facsimile  transmission  (with such facsimile
promptly  confirmed  by delivery  of a copy by personal delivery or United
States mail as otherwise provided in this Section 10); (c) one (1) Business Day
after deposit with a reputable overnight courier with all charges prepaid; or
(d) when delivered, if hand-delivered by messenger, all of which shall be
addressed to the party to be notified and sent to the address or facsimile
number indicated below.  Advance requests made pursuant to Section 3.4 must be
in writing and may be in the form of electronic mail, delivered to Bank by
Borrower at the e­ mail address of Bank provided below and shall be deemed to
have been validly served, given, or delivered when sent (with such electronic
mail promptly confirmed by delivery of a copy by personal delivery or United
States mail as otherwise provided in this Section  10).   Bank or  Borrower may
change its address, facsimile number, or electronic mail address by  giving the
other party written notice thereof in accordance  with the terms of this Section
10.
   
 
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  If to Borrower: Lantronix, Inc.
15353 Barranca Parkway
Irvine, CA 92618
Attn: James Kerrigan, Chief Financial Officer
Fax: 949-450-7285
Email: jim.kerrigan@lantronix.com
        If to Bank:
Silicon Valley Bank
38 Technology Drive, Suite 150
Irvine, CA 92618
Attn: Mr. Kurt Miklinski
Fax: 949-789-1930
Email: kmiklinski@svbank.com

  
11   CHOICE  OF LAW. VENUE. JURY TRIAL WAIVER AND JUDICIAL REFERENCE.
  
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and  Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude
Bank from bringing suit or taking other legal action in any other jurisdiction
to realize on the Collateral or any other security for the Obligations, or to
enforce a judgment or other court order in favor of Bank.   Borrower expressly
submits and consents in advance to such jurisdiction in any action or suit
commenced in any such court, and Borrower hereby waives any objection that it
may have based upon lack of personal jurisdiction, improper venue, or forum non
conveniens and hereby consents to the granting of such legal or equitable relief
as is deemed appropriate by such court.   Borrower hereby waives personal
service of the summons, complaints, and other process issued in such
action or suit and agrees that service of such summons, complaints, and other process may be made by registered or
certified mail addressed to Borrower at the address set forth in Section 10 of
this Agreement and that service so made shall be deemed completed upon the
earlier to occur of Borrower's actual receipt thereof or three (3) days after
deposit in the U.S. mails, proper postage prepaid.
 
TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE
THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM  OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT,  BREACH OF DUTY AND ALL OTHER  CLAIMS.
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
  
WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES' AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and
all disputes or controversies of any nature  between them
arising at any time shall be decided by a reference to a private judge, mutually
selected by the parties (or, if they cannot agree, by the Presiding Judge
of the Santa Clara County, California Superior Court) appointed in accordance
with California Code of Civil Procedure
 Section 638 (or pursuant to comparable provisions of
federal law if the dispute falls within the exclusive jurisdiction of the
federal courts), sitting without a jury, in Santa Clara County, California; and
the parties hereby submit to the jurisdiction of such court. The reference
proceedings shall be conducted pursuant to and in accordance with the provisions
of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The
private judge shall have the power, among others, to grant provisional relief,
including without limitation, entering temporary restraining orders, issuing
preliminary and permanent injunctions and appointing  receivers. All  such
 proceedings  shall  be closed to the public and confidential  and all
records  relating  thereto  shall be permanently sealed.  If during the course
of any dispute, a party  desires to seek provisional  relief, but a judge has
not been appointed  at that point pursuant to the
judicial  reference  procedures,  then such party  may apply to the
Santa Clara County, California Superior Court  for such relief.  The proceeding
before the private  judge shall be conducted in the same  manner  as it would be
before a court  under  the rules of evidence
applicable  to  judicial  proceedings. The parties shall be entitled  to
discovery which shall be conducted in the same manner  as it would be before a
court   under  the  rules  of discovery applicable to judicial proceedings.
The private judge shall oversee discovery and may enforce all 
discovery rules and order applicable to judicial proceedings in the same
manner  as a trial  court  judge.  The parties  agree that the selected or
appointed  private  judge shall have the power to decide all issues in the
action or proceeding, whether of fact or of law, and shall report  a statement
of decision thereon pursuant to the California Code of Civil Procedure §
644(a).  Nothing in this paragraph shall limit the right of any party at
any time to exercise self-help remedies, foreclose against collateral, or obtain
provisional remedies. The private judge shall also determine all issues
relating to the applicability, interpretation, and enforceability of this
paragraph.
   

 
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12   GENERAL  PROVISIONS
 
12.1   Successors  and  Assigns.  This Agreement binds and is for the benefit of
the successors and permitted assigns of each party.   Borrower may not assign
this Agreement or any rights or obligations under it without Bank's prior
written consent (which may be granted or withheld in Bank's discretion).  Bank
has the right,
without the consent of or notice to Borrower, to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights, and benefits under this Agreement and the other Loan
Documents.
 
12.2   Indemnification. Borrower agrees to indemnify, defend and hold Bank and
its directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank harmless against:   (a) all obligations,
demands, claims, and liabilities (collectively, "Claims") asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses incurred, or paid by Bank from, following,
or arising from transactions between Bank and Borrower (including reasonable
attorneys' fees and expenses), except for Claims and/or losses directly caused
by Bank's gross negligence or willful misconduct.
      
12.3   Limitation of Actions. Any claim or cause of action by Borrower against
Bank, its directors, officers, employees, agents, accountants, attorneys, or any
other Person affiliated with or representing Bank based upon, arising from, or
relating to this Loan Agreement or any other Loan Document, or any other
transaction contemplated hereby or thereby or relating hereto or thereto, or any
other matter, cause or thing whatsoever, occurred, done, omitted or suffered to
be done by Bank, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by (a) the filing of a
complaint within one year from the earlier of (i) the date any of Borrower's
officers or directors had knowledge of the first act, the occurrence or omission
upon which such claim or cause of action, or any part thereof, is based, or (ii)
the date this Agreement is terminated, and (b) the service of a summons and
complaint on an officer of Bank, or on any other person authorized to accept
service on behalf of Bank, within thirty (30) days thereafter. Borrower agrees
that such one-year period is a reasonable and sufficient time for Borrower to
investigate and act upon any such claim or cause of action. The one-year period
provided herein shall not be waived, tolled, or extended except by the written
consent of Bank in its sole discretion. This provision shall survive any
termination of this Loan Agreement or any other Loan Document.
  
12.4   Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.
  
12.5   Severability of Provisions. Each provision of this Agreement is severable
from every other provision in determining the enforceability of any provision.
  
12.6   Amendments in Writing; Integration. All amendments to this Agreement must
be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.
  
 
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12.7   Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, constitute
one Agreement.
 
12.8    Survival.   All covenants, representations and warranties made in this
Agreement continue in full force until this Agreement has terminated pursuant to
its terms and all Obligations (other than inchoate indemnity obligations and any
other obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied.   The obligation of Borrower in Section 12.2 to
indemnify Bank shall survive until the statute of limitations with respect to
all claims and causes of action with respect to which ind enmity is given to
Bank shall have run.
 
12.9    Confidentiality. In handling any confidential information, Bank shall
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank's
Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Credit Extensions (provided, however, Bank shall use
commercially reasonable efforts to obtain such prospective transferee's or
purchaser's agreement to the terms of this provision); (c) as required by law,
regulation, subpoena, or other order; (d) to Bank's regulators or as otherwise
required in connection with Bank's examination or audit; and (e) as Bank
considers appropriate in exercising remedies under this
Agreement. Confidential information does not include information that either:
(i) is in the public domain or in Bank's possession when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank; or (ii) is disclosed
to Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.
 
12.10    Attorneys' Fees, Costs and Expenses. In any action or proceeding
between Borrower and Bank arising out of or relating to the Loan Documents, the
prevailing party shall be entitled to recover its reasonable attorneys' fees and
other costs and expenses incurred, in addition to any other relief to which it
may be entitled.
  
l3    DEFINITIONS
 
13.1    Definitions. As used in this Agreement, the following terms have the
following meanings:
 
"Account'' is any "account" as defined in the Code with such additions to such
term as may hereafter be made, and includes,  without limitation, all accounts
receivable  and other sums owing  to Borrower.
 
"Account Debtor"  is any "account debtor" as defined in the Code with such
additions to such term as may hereafter be made.
 
"Advance" or "Advances" means an advance (or advances) under the Revolving Line.
 
"Affiliate" of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's  managers and members.
 
"Agreement" is defined in the preamble hereof.
 
"Availability  Amount"  is at any time (a) the lesser of (i) the Revolving Line
or (ii) the Borrowing Base minus (b) the amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit) minus (c) an amount
equal to the Letter of Credit Reserves, minus (d) the FX Reserve, and minus (e)
the outstanding principal balance of any Advances (including any amounts used
for Cash Management Services).
 
"Bank" is defined in the preamble hereof.
 
"Bank  Expenses" are all audit fees and expenses, costs, and expenses (including
reasonable attorneys' fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including,
without limitation, those incurred in connection  with appeals or Insolvency
 Proceedings) or otherwise  incurred with respect to Borrower.
 
"Bankruptcy-Related Defaults" is defined in Section 9.1.
  
 
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"Borrower" is defined in the preamble hereof.
 
"Borrower's Books" are all Borrower's books and records including ledgers,
federal and state tax returns, records regarding Borrower's assets or
liabilities,  the Collateral, business operations  or financial condition,  and
all computer programs or storage or any equipment containing such information.
 
"Borrowing Base" is (a) 80% of Eligible Accounts, plus (b) 50%  of Eligible
Distributor  Accounts which cannot exceed 50% of the Advances made pursuant to
subclause (a) above, as determined by Bank from Borrower's most recent
Transaction  Report; provided,  however, that Bank may decrease  the
foregoing  percentages  in its good faith  business  judgment  based on events,
conditions,  contingencies,  or risks which,  as determined  by Bank, may
adversely affect Collateral.
 
"Borrowing  Resolutions" are,  with respect  to any Person,  those
resolutions  adopted  by such  Person's Board of Directors and delivered by such
Person to Bank approving the Loan Documents  to which such Person is a party and
the transactions  contemplated  thereby, together  with a
certificate  executed  by its secretary  on behalf of such Person
certifying  that (a) such Person has the authority  to execute, deliver, and
perform its obligations  under each  of the Loan Documents to which it is a
party, (b) sets forth  the  resolutions  then  in  full  force  and  effect
authorizing and ratifying the execution, delivery, and performance by such
Person of the Loan Documents to which it  is a party, (c) the names of the
Persons  authorized  to execute  the Loan Documents  on behalf  of such Person,
together  with a sample  of the  true signatures  of such Person,  and (d) that
Bank  may  conclusively  rely on such certificate unless and until such Person
shall have delivered to Bank a further certificate canceling or amending such
prior certificate.
 
"Business Day" is any day that is not a Saturday, Sunday or a day on which Bank
is closed.
 
"Cash Equivalents" means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency  or any State
thereof having maturities of not more than one. (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor's  Ratings
Group or Moody's Investors Service, Inc., (c) Bank's  certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.
 
"Cash Management Services" is defined in Section 2.1.4.
 
"Cash Management Services  Sublimit" is defined in Section 2.1.4.
  
"Code" is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; provided, that, to the extent
that the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank's Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of California, the term
"Code" shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes on the provisions thereof relating to
such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.
    
"Collateral" is any and all properties, rights and assets of Borrower described
on Exhibit A.
 
"Collateral Account" is any Deposit Account, Securities Account, or Commodity
Account.
 
"Commodity Account" is any "commodity  account" as defined in the Code  with
such additions to such term as may hereafter be made.
 
"Communication" is defined in Section 10.
 
"Compliance Certificate" is that certain certificate in the form attached hereto
as Exhibit E.
  
 
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"Contingent Obligation" is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by
that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and
(c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but "Contingent Obligation"
does not include endorsements in the ordinary course of business. The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
any guarantee or other support arrangement.
  
"Control Agreement" is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity account, Borrower, and Bank pursuant to which Bank
obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.
  
"Credit Extension" is any Advance, Letter of Credit, FX Forward Contract, amount
utilized for Cash Management Services, or any other extension of credit by Bank
for Borrower's benefit.
  
"Default" means any event which with notice or passage of time or both, would
constitute an Event of
 
"Default Rate" is defined in Section 2.3(b).
 
"Deferred Revenue"  is all amounts received or invoiced in advance of
performance under contracts and not yet recognized as revenue.
 
"Deposit Account" is any "deposit account" as defined in the Code with such
additions to such term as may hereafter be made.
 
"Designated  Deposit Account" is Borrower's deposit account, account number
3300187719, maintained with Bank.
 
"Dollars," "dollars" and "$" each mean lawful money of the United States.
 
"Effective Date" is the date Bank executes this Agreement and as indicated on
the signature page hereof.
 
"Eligible Accounts" are Accounts which arise in the ordinary course of
Borrower's business that meet all Borrower's representations and warranties in
Section 5.3.  Bank reserves the right at any time and from time to time after
the Effective Date, to adjust any of the criteria set forth below and to
establish new criteria in its good faith business judgment. Unless Bank agrees
otherwise in writing, Eligible Accounts shall not include:
 
(a)           Accounts for which the Account Debtor has not been invoiced;
 
(b)           Accounts that the Account Debtor has not paid within ninety (90)
days of invoice date;
 
(c)    Accounts owing from an Account Debtor, fifty percent (50%) or more of
whose Accounts have not been paid within ninety (90) days of invoice date;
 
(d)    Credit balances over ninety (90) days from invoice date;
    
(e)   Accounts owing from an Account Debtor, including Affiliates, whose total
obligations to Borrower exceed twenty-five (25%) of all Accounts, for the
amounts that exceed that percentage, unless Bank approves in writing;
 
(f)   Accounts owing from an Account Debtor which does not have its principal
place of business in the United States;
   
(g)   Accounts owing from an Account Debtor which is a federal, state or local
government entity or any department, agency, or instrumentality thereof except
for Accounts of the United States if Borrower has assigned its payment rights to
Bank and the assignment has been acknowledged under the Federal Assignment of
Claims Act of 1940, as amended;
     
 
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(h)   Accounts owing from an Account Debtor to the extent that Borrower is
indebted or obligated in any manner to the Account Debtor (as creditor, lessor,
supplier or otherwise - sometimes called "contra" accounts, accounts payable,
customer deposits or credit accounts), with the exception of customary credits,
adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of its business;
  
(i)          Accounts for demonstration or promotional equipment, or in which
goods are consigned, or sold on a "sale guaranteed", "sale or return", "sale on
approval", "bill and hold", or other terms if Account Debtor's payment may be
conditional;
 
(j)           Accounts for which the Account Debtor is Borrower's Affiliate,
officer, employee, or agent;
 
(k)         Accounts in which the Account Debtor disputes liability or makes any
claim (but only up to the disputed or claimed amount), or if the Account Debtor
is subject to an Insolvency Proceeding, or becomes insolvent,
or goes out of business;
 
(1)            Accounts owing from an Account Debtor with respect to which
Borrower has received deferred revenue (but only to the extent of such deferred
revenue); and
 
(m)           Accounts for which Bank in its good faith business judgment
determines collection to be doubtful;
 
(n)           other Accounts Bank deems ineligible in the exercise of its good
faith business judgment.
 
"Eligible Distributor  Account" means an otherwise Eligible Account for which
Borrower has not yet recognized revenue.
 
"Equipment" is all "equipment" as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.
 
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
 
"Event of Default" is defined in Section 8.
 
"Foreign Currency" means lawful money of a country other than the United States.
 
"Funding Date" is any date on which a Credit Extension  is made to or on account
of Borrower which shall be a Business Day.
 
"FX Business
 Day" is any day when (a) Bank's Foreign Exchange Department is conducting its normal
business and (b) the Foreign Currency being purchased or sold by Borrower is
available to Bank from the entity from which Bank shall buy or sell such Foreign
Currency.
 
"FX Forward Contract" is defined in Section 2.1.3.
 
"FX Reserve" is defined in Section 2.1.3.
 
"GAAP" is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
  
 
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"General Intangibles" is all "general intangibles" as defined in the Code in
effect on the date hereof with such  additions to  such term  as  may hereafter
be  made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone
numbers, domain names, claims, income and other tax refunds, security and other
deposits, options to purchase or sell real or personal property, rights in all
litigation presently or hereafter pending (whether in contract, tort or
otherwise), insurance policies (including without limitation key man, property
damage, and business interruption insurance), payments of insurance and rights
to payment of any kind.
 
"Guarantor" is any present or future guarantor of the Obligations.
 
"Indebtedness" is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.
  
"Insolvency Proceeding" is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
  
"Inventory" is all "inventory" as defined in the Code in effect
on the date hereof with such additions to such term as may hereafter
be made, and includes without limitation all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products, including
without limitation such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.
 
"Investment" is any beneficial  ownership  interest in any Person
(including  stock,  partnership interest or other securities), and any loan,
advance or capital contribution to any Person.
 
"IP  Agreement" is  that certain Intellectual Property Security Agreement
executed and delivered by Borrower to Bank dated as of the date hereof.
 
"Letter of Credit" means a standby letter of credit issued by Bank or another
institution based upon an application, guarantee, indemnity or similar agreement
on the part of Bank as set forth in Section 2.1.2.
 
"Letter of Credit  Application" is defined in Section 2.1.2(a).
 
"Letter of Credit Reserve" has the meaning set forth in Section 2.1.2(d).
 
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.
  
"Loan Documents" are, collectively, this Agreement, the Exim Agreement, the
Perfection Certificate, the IP Agreement, the Subordination Agreement, if any,
any note, or notes or guaranties executed by Borrower or any Guarantor, and any
other present or future agreement between Borrower or any Guarantor and/or for
the benefit of Bank in connection with this Agreement, all as amended, restated,
or otherwise modified.
   
"Material Adverse Change" is (a) a material impairment in the perfection or
priority of Bank's Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; or (c) a material impairment of the
prospect of repayment of any portion of the Obligations or (d) Bank determines,
based upon information available to it and in its reasonable judgment, that
there is a reasonable likelihood that Borrower shall fail to comply with one or
more of the financial covenants in Section 6 during the next succeeding
financial reporting period.
 
"Obligations" are Borrower's obligation to pay when due any debts, principal, interest, Bank Expenses
and other amounts Borrower owes Bank now or later, whether under this Agreement,
the Loan Documents, or otherwise, including, without limitation, all obligations
relating to letters of credit, cash management services, and foreign exchange
contracts, if any, and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned
 to Bank, and the performance of Borrower's  duties under the Loan Documents.
  
 
22

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"Operating  Documents"
 are, for any Person, such Person's formation documents, as certified with the
Secretary of State of such Person's state of formation on a date that is no
earlier than 30 days prior to the Effective Date, and, (a) if such Person is a
corporation, its bylaws in current form, (b) if such Person is a limited
liability company, its limited liability company agreement (or similar
agreement}, and (c) if such Person is a partnership, its partnership agreement
(or similar agreement), each of the foregoing with all current amendments or
modifications thereto.
 
"Payment/Advance Form" is that certain form attached hereto as Exhibit B.
 
"Perfection Certificate" is defined in Section 5 .I.
 
"Permitted Indebtedness" is:
 
(a)   Borrower's Indebtedness to Bank under this Agreement and the other Loan
Documents;
 
(b)   Indebtedness existing on the Effective Date and shown on the Perfection
Certificate;
 
(c)   Subordinated Debt;
 
(d)   unsecured Indebtedness to trade creditors incurred in the ordinary course
of business;
 
(e)   Indebtedness incurred as a result of endorsing negotiable instruments
received in the ordinary course of business;
 
(f)   Indebtedness secured by Permitted Liens;
 
(g)   extensions, refinancings, modifications, amendments and restatements of any items of Permitted
Indebtedness (a) through (g)above, provided that the principal amount thereof is
not increased or the terms thereof are not modified to impose
more burdensome terms upon Borrower or its Subsidiary, as the case may be.
 
"Permitted Investments" are:
 
(a)   Investments shown on the Perfection Certificate and existing on the
Effective Date;
 
(b)   Cash Equivalents;
 
(c)   Investments consisting of the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
Borrower;
 
(d)   Investments consisting of deposit accounts in which Bank has a perfected
security interest;
 
(e)   Investments accepted in connection with Transfers permitted by Section
7.1;
 
(f)   Investments of Subsidiaries in or to other Subsidiaries or Borrower and
Investments by Borrower in Subsidiaries not to exceed $250,000 in the aggregate
in any fiscal year;
 
(g)   Investments consisting of (i) travel advances and employee relocation loans and other employee
loans and advances in the ordinary course of business, and (ii) loans to
employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to employee
 stock purchase plans or agreements approved by Borrower's Board of Directors;
 
(h)   Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of  ustomers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business; and
 
(i)   Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates, in
the ordinary course of business; provided that this paragraph shall not apply to
Investments of Borrower in any Subsidiary.
  
 
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"Permitted Liens" are:
 
(a)   Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement and the other Loan Documents;
 
(b)   Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, if they have no priority over any of
Bank's Liens;
 
(c)   purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
$50,000 in the aggregate amount outstanding, or (ii) existing on Equipment when
acquired, if the Lien is confined to the property and improvements and the
proceeds of the Equipment;
   
(d)   statutory Liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other Persons imposed without action of
such parties, provided, they have no priority over any of Bank's Lien and the
aggregate amount of such Liens does not at any time exceed $50,000;
 
(e)   Liens to secure payment of workers' compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business, provided, they have no priority over any of Bank's
Liens and the aggregate amount of the Indebtedness secured by such Liens does
not at any time exceed $50,000;
 
(f)   Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
 
(g)   leases or subleases of real property granted in the ordinary course of
business, and leases, subleases, non-exclusive licenses or sublicenses of
property (other than real property or intellectual property) granted in the
ordinary course of Borrower's business, if the leases, subleases, licenses and
sublicenses do not prohibit granting Bank a security interest;
 
(h)   non-exclusive license of intellectual property granted to third parties in
the ordinary course of business;
 
(i)   Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Section 8.4 or 8.7;
 
"Person" is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
"Prime Rate" is Bank's most recently announced "prime rate," even if it is not
Bank's lowest rate.
 
"Registered Organization" is any "registered organization" as defined in the
Code with such additions to such term as may hereafter be made
 
"Responsible Officer" is any of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.
 
"Revolving Line" is an Advance or Advances in an aggregate amount of up to
$2,250,000 outstanding at any time.
 
"Revolving Line Maturity Date" is the earliest of (a) Two years from the
Effective Date or (b) the occurrence of an Event of Default.
 
"Securities Account" is any "securities account" as defined in the Code with
such additions to such term as may hereafter be made.
  
 
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"Settlement Date" is defined in Section 2.1.3.
 
"Subordinated Debt" is indebtedness incurred by Borrower subordinated to all of
Borrower's now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.
 
"Subsidiary" means, with respect to any Person, any Person of which more than
50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.
  
"Tangible Net Worth" is, on any date, the consolidated total assets of Borrower
and its Subsidiaries minus  (a) any amounts attributable to (i) goodwill, (ii)
intangible items including unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, (iii) notes, accounts receivable and other obligations
owing to Borrower from its officers or other Affiliates, and (iv) reserves not
already deducted from assets, minus (b) Total Liabilities, plus (c) Subordinated
Debt.
  
"Total Liabilities" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion of Subordinated Debt permitted by Bank to
be paid by Borrower, but excluding all other Subordinated Debt.
  
"Transaction Report" is a report in such form as Bank shall specify.
     
"Transfer" is defined in Section 7.1.
  
"Unused Revolving Line Facility Fee" is defined in Section 2.4(d).
        
14          Exim Agreement; Cross-Collateralization; Cross-Default. Bank and the Borrower are parties to
that certain Loan and Security Agreement (Exim Program) of even date herewith
(as amended from time to time, the "Exim Agreement"). Both this Agreement and
the Exim Agreement shall continue in full force and effect, and all rights and
remedies under this Agreement and the Exim Agreement are cumulative. The term
"Obligations" as used in this Agreement and in the Exim Agreement shall include
without limitation the obligation to pay when due all
Advances made pursuant to this Agreement (the "Non-Exim
Loans") and all interest thereon and the obligation to pay when due all Advances
made pursuant to the Exim Agreement (the "Exim Loans") and all interest thereon.
Without limiting the generality of the foregoing, all "Collateral'' as defined in this Agreement and as defined in the
Exim Agreement shall secure all Exim Loans and all Non-Exim Loans and all
interest thereon, and all other
Obligations. Any Event of Default under this Agreement shall also constitute an Event of Default under the Exim
Agreement, and any Event of Default under the Exim Agreement shall also
constitute an Event of Default under this Agreement. In the event Bank assigns
its rights under the Exim Agreement and/or under any Note evidencing Exim Loans
and/or its rights under this Agreement and/or under any Note evidencing Non-Exim
Loans, to any third party, including without limitation the Export-Import Bank
of the United States ("EximBank"), whether before or after the occurrence
of any Event of Default, Bank shall have the right (but
not any obligation), in its sole discretion, to allocate and apportion
Collateral to the Agreement and/or Note assigned and to specify the priorities
of the
respective security interests in such Collateral between itself and the assignee, all without notice to or consent of the
Borrower.
 
[Signature page follows.]
   
 
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IN WITNESS WHEREOF, the  parties  hereto  have  caused  this  Agreement  to  be  executed  as
of  the Effective Date.
  
BORROWER:
      LANTRONIX, INC.       By: /s/ James N. Kerrigan   Name: James N. Kerrigan
  Title: CFO       BANK:      
SILICON VALLEY BANK
      By: /s/ Kurt Miklinski   Name: Kurt Miklinski   Title: Vice President    
         

 
Exhibits
A    "Collateral"
B    [intentionally omitted]
C    [intentionally omitted]
D    [intentionally omitted]
E    Compliance Certificate
F    Transaction Report

  
 
26

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EXHIBIT A
 

The Collateral consists of all of Borrower's right, title and interest in and to
the following personal property:
 

All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments
(including any promissory notes), chattel paper (whether tangible or electronic), cash,
deposit accounts, fixtures, letters of credit rights (whether or not the
letter of credit is evidenced by a writing), securities, and all other
investment property, supporting  obligations,  and
financial  assets,  whether  now owned or
hereafter  acquired,  wherever  located; and all Borrower's Books relating to
the foregoing,  and any and all claims, rights and interests in any of the above
and all substitutions  for, additions, attachments,  accessories,  accessions
and improvements  to and replacements,  products, proceeds and insurance
proceeds of any or all of the foregoing.
 
 

 
 
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EXHIBIT E
 
COMPLIANCE CERTIFICATE
 

TO:    SILICON VALLEY BANK
FROM:     LANTRONIX, INC.

Date: _____________________

The undersigned authorized officer of Lantronix, Inc. ("Borrower") certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the "Agreement"), (1)  Borrower is in complete compliance for
the period ending ______________  with all required covenants except as noted
below, (2) there are no Events of Default, (3) all representations and
warranties in the Agreement are true and correct in all material respects on
this date except as noted below; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed
all required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of
the Agreement, and (5) no Liens have been levied or claims made against Borrower
or any of its Subsidiaries relating to unpaid employee payroll or benefits of
which Borrower has not previously provided written notification to
Bank.  Attached are the required documents supporting the certification. The
undersigned certifies that these are prepared in accordance with generally GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.  The undersigned acknowledges that no
borrowings may be requested at any time or date of determination that Borrower
is not in compliance with any of the terms of the Agreement, and that compliance
is determined not just at the date this certificate is delivered.  Capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Agreement.
   
Please indicate compliance status by circling Yes/No under “Complies” column.
 
Reporting Covenant
Required
Complies
     
Monthly financial statements with Compliance Certificate
Monthly within 30 days
Yes   No
Annual Operating Budget and Financial Projections
Within 30 days after start of Fiscal Year
Yes   No
10-Q, 10-K and 8-K
Within 5 days after filing with SEC
Yes   No
A/R & A/P Agings and Reconciliations
Monthly within 15 days
Yes   No
Transaction Report
Weekly and with each request for an Advance if Hard Credit Extensions
outstanding; otherwise, monthly within 15 days
Yes   No
 
The following Intellectual Property was registered after the Effective Date (if
no registrations, state “None”)
____________________________________________________________________________
 

Financial Covenant
Required
Actual
Complies
       
Maintain on a Monthly Basis:
     
Minimum Tangible Net Worth
$1,500,000 plus (i) 50% o new equity an subordinated debt plus (ii) 50% of
quarterly net income
$_______
Yes   No

  
 
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The following financial covenant analysis and information set forth in Schedule
1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above:  (If
no exceptions exist, state “No exceptions to note.”)

_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
 
  

LANTRONIX, INC.
 
 
By:__________________________
Name:________________________
Title:_________________________
BANK USE ONLY
 
Received by: _____________________
authorized signer
Date:                    _________________________
 
Verified: ________________________
authorized signer
Date:                    _________________________
 
Compliance Status:                                         Yes     No

     

 
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Schedule 1 to Compliance Certificate
  
Financial Covenants of Borrower
 
Dated: ____________________
  
Tangible Net Worth (Section 6.9(a))

Required Amount:
$1,500,000 plus (i) 50% of consideration for equity securities and
subordinated  debt plus (ii) 50% of Borrower's quarterly net income

 
Actual:

A.
Aggregate value of total assets of Borrower and its Subsidiaries
$           
 
B.
Aggregate value of goodwill of Borrower and its Subsidiaries
$           
 
C.
Aggregate value of intangible assets of Borrower and its Subsidiaries
$           
 
D.
Aggregate value of investments of Borrower and its Subsidiaries consisting of
minority investments in companies which investments are not publicly-traded
 
$           
 
E.
Aggregate value of any reserves not already deducted from assets
$           
 
F.
Aggregate value of liabilities of Borrower and its Subsidiaries (including all
Indebtedness) and current portion of Subordinated Debt permitted by Bank to be
paid by Borrower (but no other Subordinated Debt)
 
$           
 
G.
Aggregate value of Indebtedness of Borrower subordinated to Borrower’s
Indebtedness to Bank
$           
 
H.
Tangible Net Worth (line A minus line B minus line C minus line D minus line E
minus line F plus line G)
$           
 

Is line H equal to or greater than Required Amount?

________  No, not in
compliance                                                                             ________
Yes, in compliance
 
 
 
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Exhibit F
 
Transaction Report
 
[EXCEL spreadsheet to be provided separately]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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LOAN AND SECURITY AGREEMENT
  
(EXIM PROGRAM)
  
THIS LOAN AND SECURITY AGREEMENT (EXIM PROGRAM) (this "Agreement") dated as of
the Effective Date between SILICON VALLEY BANK, a California corporation
("Bank"), and LANTRONIX, INC., a Delaware corporation ("Borrower"), provides the
terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The
parties agree as follows:
 
1   ACCOUNTING AND OTHER TERMS
 
Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. Capitalized
terms not otherwise defined in this Agreement shall have the meanings set forth
in Section 13. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meaning provided by the Code to the extent such terms
are defined therein.
 
2   LOAN AND TERMS OF PAYMENT
 
2.1   Promise to Pay. Borrower hereby unconditionally promises to pay Bank the
outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.
 
2.1.1    Revolving Advances.
 
(a)   Availability. Subject to the terms and conditions of this Agreement and to
deduction of Reserves, Bank will make Advances to Borrower up to an amount ("Net
Borrowing Availability") not to exceed the lesser of: (a) the Revolving Line; or
(b) the amounts available under the Borrowing Base. Notwithstanding the
foregoing, the amount of outstanding Advances under this Agreement and that
certain Loan and Security Agreement between Borrower and Bank of approximate
even date herewith shall not exceed $5,000,000 in the aggregate.
 
(b)   Streamline Period. Omitted.
 
(c)   Termination; Repayment. The Revolving Line terminates on the Revolving
Line Maturity Date, when the principal amount of all Advances, the unpaid
interest thereon, and all other Obligations relating to the Revolving Line shall
be immediately due and payable.
 
2.1.2    Letters of Credit Sublimit.
 
(a)   As part of the Revolving Line, Bank shall issue or have issued Letters of
Credit for Borrower's account. The face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed the Availability Amount. Such aggregate amounts utilized
hereunder shall at all times reduce the amount otherwise available for Advances
under the Revolving Line. If, on the Revolving Maturity Date, there are any
outstanding Letters of Credit, then on such date Borrower shall provide to Bank
cash collateral in an amount equal to 105% of the face amount of all such
Letters of Credit plus all interest, fees, and costs due or to become due in
connection therewith (as estimated by Bank in its good faith business judgment),
to secure all of the Obligations relating to said Letters of Credit. All Letters
of Credit shall be in form and substance acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's standard
Application and Letter of Credit Agreement (the "Letter of Credit Application").
Borrower agrees to execute any further documentation in connection with the
Letters of Credit as Bank may reasonably request. Borrower further agrees to be
bound by the regulations and interpretations of the issuer of any Letters of
Credit guarantied by Bank and opened for Borrower's account or by Bank's
interpretations of any Letter of Credit issued by Bank for Borrower's account,
and Borrower understands and agrees that Bank shall not be liable for any error,
negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto.
 
(b)   The obligation of Borrower to immediately reimburse Bank for drawings made
under Letters of Credit shall be absolute, unconditional, and irrevocable, and
shall be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.
  
 
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(c)   Borrower may request that Bank issue a Letter of Credit payable in a
Foreign Currency.
 
If a demand for payment is made under any such Letter of Credit, Bank shall
treat such demand as an Advance to Borrower of the equivalent of the amount
thereof (plus fees and charges in connection therewith such as wire, cable,
SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in
San Francisco, California, for sales of the Foreign Currency for transfer to the
country issuing such Foreign Currency.
 
(d)   To guard against fluctuations in currency exchange rates, upon the
issuance of any Letter of Credit payable in a Foreign Currency, Bank shall
create a reserve (the "Letter of Credit Reserve") under the Revolving Line in an
amount equal to ten percent (10%) of the face amount of such Letter of Credit.
The amount of the Letter of Credit Reserve may be adjusted by Bank from time to
time to account for fluctuations in the exchange rate. The availability of funds
under the Revolving Line shall be reduced by the amount of such Letter of Credit
Reserve for as long as such Letter of Credit remains outstanding.
 
2.1.3   Foreign Exchange Sublimit. As part of the Revolving Line, Borrower may
enter into foreign exchange contracts with Bank under which Borrower commits to
purchase from or sell to Bank a specific amount of Foreign Currency (each, a "FX
Forward Contract") on a specified date (the "Settlement Date"). FX Forward
Contracts shall have a Settlement Date of at least one (1) FX Business Day after
the contract date and shall be subject to a reserve of ten percent (10%) of each
outstanding FX Forward Contract in a maximum aggregate amount equal to
$2,000,000 (the "FX Reserve"). The aggregate amount of FX Forward Contracts at
any one time may not exceed ten (10) times the amount of the FX Reserve.
  
2.1.4   Cash Management Services Sublimit. Borrower may use up to $2,000,000
(the "Cash Management Services Sublimit") of the Revolving Line for Bank's cash
management services which may include merchant services, direct deposit of
payroll, business credit card, and check cashing services identified in Bank's
various cash management services agreements (collectively, the "Cash Management
Services"). Any amounts Bank pays on behalf of Borrower or any amounts that are
not paid by Borrower for any Cash Management Services will be treated as
Advances under the Revolving Line and will accrue interest at the interest rate
applicable to Advances.
 
2.1.5   Overall Aggregate Sublimit. In no event shall the total amount of (i)
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit and any Letter of Credit Reserve), and (ii) the FX Reserve, and (iii) the
amount of the Revolving Line utilized for Cash Management Services, at any time
exceed $2,000,000 in the aggregate.
 
2.2   Overadvances. If at any time or for any reason the total of all
outstanding Advances and all other monetary Obligations exceeds Net Borrowing
Availability (an "Overadvance"), Borrower shall immediately pay the amount of
the excess to Bank, without notice or demand. Without limiting Borrower's
obligation to repay to Bank the amount of any Overadvance, Borrower agrees to
pay Bank interest on the outstanding amount of any Overadvance, on demand, at
the Default Rate.
 
2.3   Payment of Interest on the Credit Extensions.
 
(a)   Interest Rate; Advances. Subject to Section 2.3(b), the amounts
outstanding under the Revolving Line shall accrue interest at a per annum rate
equal to 1.75 percentage points above the Prime Rate, which interest shall be
payable monthly.
 
(b)            Default Rate. Immediately upon the occurrence and during the
continuance of an Event of Default, Obligations shall bear interest at a rate
per annum which is five percentage points above the rate effective immediately
before the Event of Default (the "Default Rate"). Payment or acceptance of the
increased interest rate provided in this Section 2.3(b) is not a permitted
alternative to timely payment and shall not constitute a waiver of any Event of
Default or otherwise prejudice or limit any rights or remedies of Bank.
 
(c)   Adjustment to Interest Rate. Changes to the interest rate of any Credit
Extension based on changes to the Prime Rate shall be effective on the effective
date of any change to the Prime Rate and to the extent of any such change.
 
(d)            360-Day Year. Interest shall be computed on the basis of a
360-day year for the actual number of days elapsed.
  
 
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(e)   Debit of Accounts. Bank may debit any of Borrower's deposit accounts,
including the Designated Deposit Account, for principal and interest payments or
any other amounts Borrower owes Bank when due. These debits shall not constitute
a set-off.
  
(f)   Minimum Monthly Interest. Omitted.
  
(g)   Payment; Interest Computation; Float Charge. Interest is payable monthly
on the last calendar day of each month. In computing interest on the
Obligations, all Payments received after 12:00 p.m. Pacific time on any day
shall be deemed received on the next Business Day. In addition, so long as any
principal or interest with respect to any Hard Credit Extension (defined as
Credit Extensions other than for Letters of Credit, FX Forward Contracts or
amounts utilized for Cash Management Services) remains outstanding, Bank shall
be entitled to charge Borrower a "float" charge in an amount equal to three (3)
Business Days interest, at the interest rate applicable to the Advances, on all
Payments received by Bank. Said float charge is not included in interest for
purposes of computing Minimum Monthly Interest (if any) under this Agreement.
The float charge for each month shall be payable on the last day of the month.
Bank shall not, however, be required to credit Borrower's account for the amount
of any item of payment which is unsatisfactory to Bank in its good faith
business judgment, and Bank may charge Borrower's Designated Deposit Account for
the amount of any item of payment which is returned to Bank unpaid.
 
2.4    Fees. Borrower shall pay to Bank:
 
(a)   Commitment Fee. A fully earned, non-refundable commitment fee of $33,750,
on the Effective Date; and
 
(b)   Letter of Credit Fee. Bank's customary fees and expenses for the issuance
or renewal of Letters of Credit upon the issuance or renewal of such Letter of
Credit by Bank; and
 
(c)   Termination Fee. Subject to the terms of Section 4.1, a termination fee;
and
 
(d)   Unused Revolving Line Facility Fee. A fee (the "Unused Revolving Line
Facility Fee"), which fee shall be paid quarterly, in arrears, on a calendar
year basis, in an amount equal to 0.50% per annum of the average unused portion
of the Revolving Line, as determined by Bank. Borrower shall not be entitled to
any credit, rebate or repayment of any Unused Revolving Line Facility Fee
previously earned by Bank pursuant to this Section notwithstanding any
termination of the within Agreement, or suspension or termination of Bank's
obligation to make loans and advances hereunder, including during any Streamline
Period; and
 
(e)   Collateral Monitoring Fee. Omitted; and
 
(f)   Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and
expenses, and expenses for documentation and negotiation of this Agreement)
incurred through and after the Effective Date, when due.
 
(g)   Anniversary Fee. A fully earned, non-refundable fee of $33,750, on the
first anniversary of the Effective Date; and if this Agreement is terminated
prior to the first anniversary of the Effective Date, either by Borrower or
Bank, Borrower shall pay such Anniversary Fee to Bank in addition to any
Termination Fee.
 
3   CONDITIONS OF LOANS
 
3.1   Conditions Precedent to Initial Credit Extension. Bank's obligation to
make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, such
documents, and completion of such other matters, as Bank may reasonably deem
necessary or appropriate, including, without limitation:
 
(a)   Borrower shall have delivered duly executed original signatures to the
Loan Documents to which it is a party;
 
(b)   Borrower shall have delivered its Operating Documents and a good standing
certificate of Borrower certified by the Secretary of State of the State of
Delaware as of a date no earlier than thirty (30) days prior to the Effective
Date;
 
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(c)   Borrower shall have delivered duly executed original signatures to the
completed Borrowing Resolutions for Borrower;
 
(d)   Bank shall have received certified copies, dated as of a recent date, of
financing statement searches, as Bank shall request, accompanied by written
evidence (including any UCC termination statements) that the Liens indicated in
any such financing statements either constitute Permitted Liens or have been or,
in connection with the initial Credit Extension, will be terminated or released;
 
(e)   Borrower shall have delivered the Perfection Certificate(s) executed by
Borrower;
 
(f)   Borrower shall have delivered the insurance policies and/or endorsements
required pursuant to Section 6.5 hereof; and
 
(g)   Borrower shall have paid the fees and Bank Expenses then due as specified
in Section 2.4 hereof.
 
3.2    Conditions Precedent to all Credit Extensions. Bank's obligations to make
each Credit Extension, including the initial Credit Extension, is subject to the
following:
 
(a)   except as otherwise provided in Section 3.4(a), timely receipt of an
executed Payment/Advance Form;
 
(b)   the representations and warranties in Section 5 shall be true in all
material respects on the date of the Payment/Advance Form and on the Funding
Date of each Credit Extension; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, and no Default or Event of Default shall have occurred and be
continuing or result from the Credit Extension. Each Credit Extension is
Borrower's representation and warranty on that date that the representations and
warranties in Section 5 remain true in all material respects; provided, however,
that such materiality qualifier shall not be applicable to any representations
and warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date; and
 
(c)   in Bank's sole discretion, there has not been a Material Adverse Change.
 
3.3    Covenant to Deliver.
 
Borrower agrees to deliver to Bank each item required to be delivered to Bank
under this Agreement as a condition to any Credit Extension. Borrower expressly
agrees that the extension of a Credit Extension prior to the receipt by Bank of
any such item shall not constitute a waiver by Bank of Borrower's obligation to
deliver such item, and any such extension in the absence of a required item
shall be in Bank's sole discretion.
   
3.4   Procedures for Borrowing. Subject to the prior satisfaction of all other
applicable conditions to the making of an Advance set forth in this Agreement,
to obtain an Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m. Pacific
time on the Funding Date of the Advance. Together with such notification,
Borrower must promptly deliver to Bank by electronic mail or facsimile a
completed Transaction Report executed by a Responsible Officer or his or her
designee. Bank shall credit Advances to the Designated Deposit Account. Bank may
make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due. Bank may rely on any
telephone notice given by a person whom Bank believes is a Responsible Officer
or designee.
 
4   CREATION OF SECURITY INTEREST
 
4.1   Grant of Security Interest. Borrower hereby grants Bank, to secure the
payment and performance in full of all of the Obligations, a continuing security
interest in, and pledges to Bank, the Collateral, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products thereof.
Borrower represents, warrants, and covenants that the security interest granted
herein is and shall at all times continue to be a first priority perfected
security interest in the Collateral (subject only to Permitted Liens that may
have superior priority to Bank's Lien under this Agreement). If Borrower shall
acquire a commercial tort claim, Borrower shall promptly notify Bank in a
writing signed by Borrower of the general details thereof and grant to Bank in
such writing a security interest therein and in the proceeds thereof, all upon
the terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to Bank.
  
 
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This Agreement may be terminated prior to the Revolving Maturity Date by
Borrower, effective three (3) Business Days after written notice of termination
is given to Bank or if Bank's obligation to fund Credit Extensions terminates
pursuant to the terms of Section 2.1.1(c). Notwithstanding any such termination,
Bank's lien and security interest in the Collateral shall continue until
Borrower fully satisfies its Obligations. If such termination is at Borrower's
election or at Bank's election due to the occurrence and continuance of an Event
of Default, Borrower shall pay to Bank, in addition to the payment of any other
expenses or fees then-owing, a termination fee in an amount equal to 2.0% of the
Revolving Line if termination occurs on or before the first anniversary of the
Effective Date, and 1.0% of the Revolving Line if termination occurs after the
first anniversary of the Effective Date and on or before the second anniversary
of the Effective Date; provided that no termination fee shall be charged if the
credit facility hereunder is replaced with a new facility from another division
of Silicon Valley Bank. Upon payment in full of the Obligations and at such time
as Bank's obligation to make Credit Extensions has terminated, Bank shall
release its liens and security interests in the Collateral and all rights
therein shall revert to Borrower.
 
4.2   Authorization to File Financing Statements. Borrower hereby authorizes
Bank to file financing statements, without notice to Borrower, with all
appropriate jurisdictions to perfect or protect Bank's interest or rights
hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person, shall be deemed to violate the rights of Bank
under the Code.
 
5   REPRESENTATIONS AND WARRANTIES
 
Borrower represents and warrants as follows:
 
5.1   Due Organization and Authorization. Borrower and each of its Subsidiaries
are duly existing and in good standing in their respective jurisdictions of
formation and are qualified and licensed to do business and are in good standing
in any jurisdiction in which the conduct of their business or their ownership of
property requires that they be qualified except where the failure to do so could
not reasonably be expected to have a Material Adverse Change. In connection with
this Agreement, Borrower has delivered to Bank a completed certificate signed by
Borrower entitled "Perfection Certificate". Borrower represents and warrants to
Bank that (a) Borrower's exact legal name is that indicated on the Perfection
Certificate and on the signature page hereof; (b) Borrower is an organization of
the type and is organized in the jurisdiction set forth in the Perfection
Certificate; (c) the Perfection Certificate accurately sets forth Borrower's
organizational identification number or accurately states that Borrower has
none; (d) the Perfection Certificate accurately sets forth Borrower's place of
business, or, if more than one, its chief executive office as well as Borrower's
mailing address (if different than its chief executive office); (e) Borrower
(and each of its predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, organizational structure or type, or any
organizational number assigned by its jurisdiction; and (f) all other
information set forth on the Perfection Certificate pertaining to Borrower and
each of its Subsidiaries is accurate and complete. If Borrower is not now a
Registered Organization but later becomes one, Borrower shall promptly notify
Bank of such occurrence and provide Bank with Borrower's organizational
identification number.
 
The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower's organizational documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which it is a party or
by which it is bound in which the default could reasonably be expected to cause
a Material Adverse Change.
  
5.2   Collateral. Borrower has good title to the Collateral, free of Liens
except Permitted Liens. Borrower has no deposit account other than the deposit
accounts with Bank and deposit accounts described in the Perfection Certificate
delivered to Bank in connection herewith.
 
The Collateral is not in the possession of any third party bailee (such as a
warehouse). Except as hereafter disclosed to Bank in writing by Borrower, none
of the components of the Collateral shall be maintained at locations other than
as provided in the Perfection Certificate. In the event that Borrower, after the
date hereof, intends to store or otherwise deliver any portion of the Collateral
to a bailee, then Borrower will first receive the written consent of Bank and
such bailee must acknowledge in writing that the bailee is holding such
Collateral for the benefit of Bank.
 
All Inventory is in all material respects of good and marketable quality, free
from material defects.
 
 
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Borrower is the sole owner of its Intellectual Property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business. Each Patent is valid and enforceable and no part of the Intellectual
Property has been judged invalid or unenforceable, in whole or in part, and to
the best of Borrower's knowledge, no claim has been made that any part of the
Intellectual Property violates the rights of any third party except to the
extent such claim could not reasonably be expected to cause a Material Adverse
Change.
 
Except as noted on the Perfection Certificate, Borrower is not a party to, nor
is bound by, any material license or other agreement with respect to which
Borrower is the licensee that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower's interest in such license or agreement
or any other property. Borrower shall provide written notice to Bank within
thirty days of entering or becoming bound by any such license or agreement which
is reasonably likely to have a material impact on Borrower's business or
financial condition (other than over-the-counter software that is commercially
available to the public). Borrower shall take such steps as Bank requests to
obtain the consent of, or waiver by, any person whose consent or waiver is
necessary for all such licenses or contract rights to be deemed "Collateral" and
for Bank to have a security interest in it that might otherwise be restricted or
prohibited by law or by the terms of any such license or agreement (such consent
or authorization may include a licensor's agreement to a contingent assignment
of the license to Bank if Bank determines that is necessary in its good faith
judgment), whether now existing or entered into in the future.
 
5.3    Accounts Receivable.
 
(a)   For each Account with respect to which Advances are requested, on the date
each Advance is requested and made, such Account shall be an Eligible Account,
set forth in Section 13 below.
 
(b)   All statements made and all unpaid balances appearing in all invoices,
instruments and other documents evidencing the Accounts are and shall be true
and correct and all such invoices, instruments and other documents, and all of
Borrower's Books are genuine and in all respects what they purport to be. All
sales and other transactions underlying or giving rise to each Account shall
comply in all material respects with all applicable laws and governmental rules
and regulations. Borrower has and will have no knowledge of any actual or
imminent Insolvency Proceeding of any Account Debtor whose accounts are shown as
Eligible Accounts in any Borrowing Base Certificate. To the best of Borrower's
knowledge, all signatures and endorsements on all documents, instruments, and
agreements relating to all Accounts are and will be genuine, and all such
documents, instruments and agreements are and will be legally enforceable in
accordance with their terms.
 
5.4           Litigation. There are no actions or proceedings pending or, to the
knowledge of the Responsible Officers, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than $
 
5.5           No Material Deviation in Financial Statements. All consolidated
financial statements for Borrower and any of its Subsidiaries delivered to Bank
fairly present in all material respects Borrower's consolidated financial
condition and Borrower's consolidated results of operations. There has not been
any material deterioration in Borrower's consolidated financial condition since
the date of the most recent financial statements submitted to Bank.
 
5.6           Solvency. Borrower is able to pay its debts (including trade
debts) as they mature.
 
5.7           Regulatory Compliance. Borrower is not an "investment company" or
a company "controlled" by an "investment company" under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve Board
of Governors). Borrower has complied in all material respects with the Federal
Fair Labor Standards Act. Borrower has not violated any laws, ordinances or
rules, the violation of which could reasonably be expected to cause a Material
Adverse Change. None of Borrower's or any of its Subsidiaries' properties or
assets has been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each of
its Subsidiaries have obtained all consents, approvals and authorizations of,
made all declarations or filings with, and given all notices to, all government
authorities that are necessary to continue its business as currently conducted.
 
5.8           Subsidiaries; Investments. Borrower does have any Subsidiaries,
other than the Subsidiaries listed in the Perfection Certificate and other
Subsidiaries organized with the prior written consent of Bank, and does not own
any stock, partnership interest or other equity securities in any other Person,
except for Permitted Investments.
   
 
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5.9   Tax Returns and Payments; Pension Contributions. Borrower has timely filed
all required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower. Borrower may defer payment of any contested taxes, provided that
Borrower (a) in good faith contests its obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (b)
notifies Bank in writing of the commencement of, and any material development
in, the proceedings, (c) posts bonds or takes any other steps required to
prevent the governmental authority levying such contested taxes from obtaining a
Lien upon any of the Collateral that is other than a "Permitted Lien". Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid all amounts necessary to fund all present pension,
profit sharing and deferred compensation plans in accordance with their terms,
and Borrower has not withdrawn from participation in, and has not permitted
partial or complete termination of, or permitted the occurrence of any other
event with respect to, any such plan which could reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental agency.
 
5.10   Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions
solely as working capital, and to fund its general business requirements and not
for personal, family, household or agricultural purposes.
 
5.11   Full Disclosure. No written representation, warranty or other statement
of Borrower in any certificate or written statement given to Bank, as of the
date such representations, warranties, or other statements were made, taken
together with all such written certificates and written statements given to
Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).
 
6   AFFIRMATIVE COVENANTS
 
Borrower shall do all of the following:
 
6.1   Government Compliance. Maintain its and all its Subsidiaries' legal
existence and good standing in their respective jurisdictions of formation and
maintain qualification in each jurisdiction in which the failure to so qualify
would reasonably be expected to cause a Material Adverse Change. Borrower shall
comply, and have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could reasonably be
expected to cause a Material Adverse Change.
 
6.2    Financial Statements, Reports, Certificates.
 
(a)           Borrower shall provide Bank with the following:
 
(i)    a Transaction Report weekly and at the time of each request for an
Advance if there are any Hard Credit Extensions; otherwise within fifteen (15)
days after the end of each month;
 
(ii)   within fifteen (15) days after the end of each month,
 
(A)  monthly accounts receivable agings, aged by invoice date,
 
(B)  monthly accounts payable agings, aged by invoice date, and outstanding or
held check registers, if any,
 
(C)  monthly reconciliations of accounts receivable agings (aged by invoice
date), transaction reports, and general ledger,
 
(iii)    as soon as available, and in any event within thirty (30) days after
the end of each month, monthly unaudited financial statements;
   
(iv)    within thirty (30) days after the end of each month a monthly Compliance
Certificate signed by a Responsible Officer, certifying that as of the end of
such month, Borrower was in full compliance with all of the terms and conditions
of this Agreement, and setting forth calculations showing compliance with the
financial covenants set forth in this Agreement and such other information as
Bank shall reasonably request, including, without limitation, a statement that
at the end of such month there were no held checks;
  
 
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(v)   [omitted];
 
(vi)   within thirty (30) days after the end of each fiscal year of Borrower,
(A) annual operating budgets (including income statements, balance sheets and
cash flow statements, by month) for the upcoming fiscal year of Borrower, and
(B) annual financial projections for the following fiscal year (on a quarterly
basis) as approved by Borrower's board of directors, together with any related
business forecasts used in the preparation of such annual financial projections
and (C) any interim updates thereof; and
 
(vii)   [omitted].
 
(b)   At all times that Borrower is subject to the reporting requirements under
the Securities Exchange Act of 1934, as amended, within five (5) days after
filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission or a link thereto on Borrower's or another website on the
Internet.
 
(c)   Prompt written notice of (i) any material change in the composition of the
Intellectual Property, (ii) the registration of any Copyright, including any
subsequent ownership right of Borrower in or to any Copyright, Patent or
Trademark not shown in the IP Security Agreement, or (iii) Borrower's knowledge
of an event that materially adversely affects the value of the Intellectual
Property.
 
6.3    Accounts Receivable.
 
(a)   Schedules and Documents Relating to Accounts. Borrower shall deliver to
Bank transaction reports and schedules of collections, as provided in Section
6.2, on Bank's standard forms; provided, however, that Borrower's failure to
execute and deliver the same shall not affect or limit Bank's Lien and other
rights in all of Borrower's Accounts, nor shall Bank's failure to advance or
lend against a specific Account affect or limit Bank's Lien and other rights
therein. If requested by Bank, Borrower shall furnish Bank with copies (or, at
Bank's request, originals) of all contracts, orders, invoices, and other similar
documents, and all shipping instructions, delivery receipts, bills of lading,
and other evidence of delivery, for any goods the sale or disposition of which
gave rise to such Accounts. In addition, Borrower shall deliver to Bank, on its
request, the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any Accounts,
in the same form as received, with all necessary endorsements, and copies of all
credit memos.
 
(b)   Disputes. Borrower shall promptly notify Bank of all disputes or claims
relating to Accounts. Borrower may forgive (completely or partially),
compromise, or settle any Account for less than payment in full, or agree to do
any of the foregoing so long as (i) Borrower does so in good faith, in a
commercially reasonable manner, in the ordinary course of business, in
arm's-length transactions, and reports the same to Bank in the regular reports
provided to Bank; and (ii) no Default or Event of Default has occurred and is
continuing; and (iii) after taking into account all such discounts, settlements
and forgiveness, the total outstanding Advances will not exceed the lesser of
the Revolving Line or the Borrowing Base.
 
(c)   Collection of Accounts. Borrower shall have the right to collect all
Accounts, unless and until a Default or an Event of Default has occurred and is
continuing. Wire transfer payments will be remitted to Borrower's cash
collateral account maintained with Bank; all other forms of payments shall be
remitted to the lockbox to be established pursuant to the terms hereof. Whether
or not an Event of Default has occurred and is continuing, Borrower shall hold
all payments on, and proceeds of, Accounts in trust for Bank, and Borrower shall
immediately deliver all such payments and proceeds to Bank in their original
form, duly endorsed, to be applied to the Obligations pursuant to the terms of
Section 9.4 hereof. Bank may, in its good faith business judgment, require that
all proceeds of Accounts be deposited by Borrower into a lockbox account, or
such other "blocked account" as Bank may specify, pursuant to a blocked account
agreement in such form as Bank may specify in its good faith business judgment.
All collections shall be applied to against any outstanding Obligations (as
provided for in Section 9.4 hereof); provided, however, if Borrower's
outstanding Hard Credit Extensions are less than $2,500,000 and no Default or
Event of Default has occurred and is continuing, the collections will be placed
in Borrower's general operating account maintained with Bank.
   
 
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(d)   Returns. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower, Borrower shall promptly
(i) determine the reason for such return, (ii) issue a credit memorandum to the
Account Debtor in the appropriate amount, and (iii) provide a copy of such
credit memorandum to Bank, upon request from Bank. In the event any attempted
return occurs after the occurrence and during the continuance of any Event of
Default, Borrower shall hold the returned Inventory in trust for Bank, and
immediately notify Bank of the return of the Inventory.
 
(e)   Verification. Bank may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Accounts, either in the name of Borrower or Bank or such other name as Bank
may choose.
 
(f)   No Liability. Bank shall not be responsible or liable for any shortage or
discrepancy in, damage to, or loss or destruction of, any goods, the sale or
other disposition of which gives rise to an Account, or for any error, act,
omission, or delay of any kind occurring in the settlement, failure to settle,
collection or failure to collect any Account, or for settling any Account in
good faith for less than the full amount thereof, nor shall Bank be deemed to be
responsible for any of Borrower's obligations under any contract or agreement
giving rise to an Account. Nothing herein shall, however, relieve Bank from
liability for its own gross negligence or willful misconduct.
 
6.4    Remittance of Proceeds. Except as otherwise provided in Section 6.3(c),
deliver, in kind, all proceeds arising from the disposition of any Collateral to
Bank in the original form in which received by Borrower not later than the
following Business Day after receipt by Borrower, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to Bank the proceeds of the sale of worn out or obsolete
Equipment disposed of by Borrower in good faith in an arm's length transaction
for an aggregate purchase price of $50,000 or less (for all such transactions in
any fiscal year). Borrower agrees that it will not commingle proceeds of
Collateral with any of Borrower's other funds or property, but will hold such
proceeds separate and apart from such other funds and property and in an express
trust for Bank. Nothing in this Section limits the restrictions on disposition
of Collateral set forth elsewhere in this Agreement.
 
6.5    Taxes; Pensions. Timely file all required tax returns and reports and
timely pay all foreign, federal, state and local taxes, assessments, deposits
and contributions owed by Borrower except for deferred payment of any taxes
contested pursuant to the terms of Section 5.9 hereof, and pay all amounts
necessary to fund all present pension, profit sharing and deferred compensation
plans in accordance with their terms.
 
6.6    Access to Collateral; Books and Records. At reasonable times, on one (1)
Business Day's notice (provided no notice is required if an Event of Default has
occurred and is continuing), Bank, or its agents, shall have the right to
inspect the Collateral and the right to audit and copy Borrower's Books. The
initial audit of Borrower's Collateral and Books will be conducted on the
earlier of: (a) within sixty (60) days of the Effective Date or (b) prior to the
initial Advance hereunder, and thereafter, the parties contemplate that such
audits will be performed no more frequently than semi-annually, but nothing
herein restricts Bank's right to conduct such audits more frequently if (i) Bank
believes that it is advisable to do so in Bank's good faith business judgment,
or (ii) Bank believes in good faith that a Default or Event of Default has
occurred. The foregoing inspections and audits shall be at Borrower's expense,
and the charge therefor shall be $750 per person per day (or such higher amount
as shall represent Bank's then-current standard charge for the same), plus
reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an
audit more than ten (10) days in advance, and Borrower cancels or seeks to
reschedules the audit with less than ten (10) days written notice to Bank, then
(without limiting any of Bank's rights or remedies), Borrower shall pay Bank a
fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate
Bank for the anticipated costs and expenses of the cancellation or rescheduling.
 
6.7    Insurance. Keep its business and the Collateral insured for risks and in
amounts standard for companies in Borrower's industry and location and as Bank
may reasonably request. Insurance policies shall be in a form, with companies,
and in amounts that are satisfactory to Bank. All property policies shall have a
lender's loss payable endorsement showing Bank as an additional lender loss
payee and waive subrogation against Bank, and all liability policies shall show,
or have endorsements showing, Bank as an additional insured. All policies (or
the loss payable and additional insured endorsements) shall provide that the
insurer must give Bank at least twenty (20) days notice before canceling,
amending, or declining to renew its policy. At Bank's request, Borrower shall
deliver certified copies of policies and evidence of all premium payments.
Proceeds payable under any policy shall, at Bank's option, be payable to Bank on
account of the Obligations. Notwithstanding the foregoing, (a) so long as no
Event of Default has occurred and is continuing, Borrower shall have the option
of applying the proceeds of any casualty policy up to $50,000, in the aggregate,
toward the replacement or repair of destroyed or damaged property; provided that
any such replaced or repaired property (i) shall be of equal or like value as
the replaced or repaired Collateral and (ii) shall be deemed Collateral in which
Bank has been granted a first priority security interest, and (b) after the
occurrence and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Bank, be payable to
Bank on account of the Obligations. If Borrower fails to obtain insurance as
required under this Section 6.7 or to pay any amount or furnish any required
proof of payment to third persons and Bank, Bank may make all or part of such
payment or obtain such insurance policies required in this Section 6.7, and take
any action under the policies Bank deems prudent.
  
 
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6.8    Operating Accounts.
 
(a)   Maintain its primary depository and operating accounts and securities
accounts with Bank and Bank's affiliates which accounts shall represent at least
85% of the dollar value of Borrower's accounts at all financial institutions.
 
(b)   Provide Bank five (5) days prior written notice before establishing any
Collateral Account at or with any bank or financial institution other than Bank
or its Affiliates. In addition, Borrower covenants and agrees that the
Collateral Account maintained at Morgan Stanley shall be closed within 60 days
of the Effective Date. The provisions of the previous sentence shall not apply
to deposit accounts exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of Borrower's employees
and identified to Bank by Borrower as such.
 
6.9    Financial Covenants.
 
Borrower shall maintain at all times, to be tested as of the last day of each
month, unless otherwise noted, on a consolidated basis:
 
(a)   Tangible Net Worth. A Tangible Net Worth of at least $1,500,000 ("Minimum
Tangible Net Worth") plus (i) 50% of all consideration received after the date
hereof for equity securities and subordinated debt of the Borrower, plus (ii)
50% of the Borrower's net income in each fiscal quarter ending after the date
hereof. Increases in the Minimum Tangible Net Worth based on consideration
received for equity securities and subordinated debt of the Borrower shall be
effective as of the end of the month in which such consideration is received,
and shall continue effective thereafter. Increases in the Minimum Tangible Net
Worth based on net income shall be effective on the last day of the fiscal
quarter in which said net income is realized, and shall continue effective
thereafter. In no event shall the Minimum Tangible Net Worth be decreased.
 
6.10   Intellectual Property Rights. Borrower shall: (a) protect, defend and
maintain the validity and enforceability of its intellectual property; (b)
promptly advise Bank in writing of material infringements of its intellectual
property; and (c) not allow any intellectual property material to Borrower's
business to be abandoned, forfeited or dedicated to the public without Bank's
written consent. If Borrower decides to register any copyrights or mask works in
the United States Copyright Office, Borrower shall: (x) provide Bank with at
least fifteen (15) days prior written notice of its intent to register such
copyrights or mask works together with a copy of the application it intends to
file with the United States Copyright Office (excluding exhibits thereto); (y)
execute an intellectual property security agreement or such other documents as
Bank may reasonably request to maintain the perfection and priority of Bank's
security interest in the copyrights or mask works intended to be registered with
the United States Copyright Office; and (z) record such intellectual property
security agreement with the United States Copyright Office contemporaneously
with filing the copyright or mask work application(s) with the United States
Copyright Office. Borrower shall promptly provide to Bank a copy of the
application(s) filed with the United States Copyright Office together with
evidence of the recording of the intellectual property security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in such copyrights or mask works. Borrower shall provide written notice
to Bank of any application filed by Borrower in the United States Patent and
Trademark Office for a patent or to register a trademark or service mark within
30 days after any such filing.
 
6.11   Litigation Cooperation. From the date hereof and continuing through the
termination of this Agreement, make available to Bank, without expense to Bank,
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
 
6.12    Omitted.
   
 
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6.13    Further Assurances. Borrower shall execute any further instruments and
take further action as Bank reasonably requests to perfect or continue Bank's
Lien in the Collateral or to effect the purposes of this Agreement.
 
7   NEGATIVE COVENANTS
 
Borrower shall not do any of the following without Bank's prior written consent:
 
7.1   Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, except for (a) Transfers of Inventory
in the ordinary course of business; (b) Transfers of worn-out or obsolete
Equipment; and (c) Transfers consisting of Permitted Liens and Permitted
Investments.
 
7.2    Changes in Business, Management, Ownership, or Business Locations.
 
(a)   Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower and such Subsidiary,
as applicable, or reasonably related thereto;
 
(b)   liquidate or dissolve; or
 
(c)   permit a change in the record or beneficial ownership of an aggregate of
more than 20% of the outstanding shares of stock of Borrower, in one or more
transactions, compared to the ownership of outstanding shares of stock of
Borrower in effect on the date hereof (other than by the sale of Borrower's
equity securities in a public offering or to venture capital investors so long
as Borrower identifies to Bank the venture capital investors prior to the
closing of the transaction); or
 
(d)   without at least thirty (30) days prior written notice to Bank: (1) add
any new offices or business locations, including warehouses (unless such new
offices or business locations contain assets and property of Borrower with an
aggregate value of less than $10,000), (2) change its jurisdiction of
organization, (3) change its organizational structure or type, (4) change its
legal name, or (5) change its organizational number (if any) assigned by its
jurisdiction of organization.
 
7.3   Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person, except that a Subsidiary of
Borrower may merge or consolidate into another Subsidiary of Borrower or into
Borrower.
 
7.4   Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or
permit any Subsidiary to do so, other than Permitted Indebtedness.
 
7.5   Encumbrance. Create, incur, or allow any Lien on any of its property or
assets, or assign or convey any right to receive income, including the sale of
any Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit any Collateral not to be subject to the first priority security
interest granted herein, or enter into any agreement, document, instrument or
other arrangement (except with or in favor of Bank) with any Person which
directly or indirectly prohibits or has the effect of prohibiting Borrower or
any Subsidiary from assigning, mortgaging, pledging, granting a security
interest in or upon, or encumbering any of Borrower's or any Subsidiary's
intellectual property, except as is otherwise permitted in Section 7.1 hereof
and the definition of "Permitted Lien" herein.
 
7.6   Maintenance of Collateral Accounts. Maintain any Collateral Account except
pursuant to the terms of Section 6.8.(b) hereof.
 
7.7   Investments; Distributions, (a) Directly or indirectly make any Investment
other than Permitted Investments, or permit any of its Subsidiaries to do so; or
(b) pay any dividends or make any distribution or payment or redeem, retire or
purchase any capital stock, provided that (i) Borrower may convert any of its
convertible securities into other securities pursuant to the terms of such
convertible securities or otherwise in exchange thereof, (ii) Borrower may pay
dividends solely in common stock; and (iii) Borrower may repurchase the stock of
former employees or consultants pursuant to stock repurchase agreements so long
as no Default or Event of Default has occurred at the time of such repurchase
and would not exist after giving effect to such repurchase, provided such
repurchase does not exceed in the aggregate of 550,000 per fiscal year.
   
 
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7.8   Transactions with Affiliates. Directly or indirectly enter into or permit
to exist any material transaction with any Affiliate of Borrower, except for
transactions that are in the ordinary course of Borrower's business, upon fair
and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-affiliated Person.
 
7.9   Subordinated Debt. (a) Make or permit any payment on any Subordinated
Debt, except under the terms of the subordination, intercreditor, or other
similar agreement to which such Subordinated Debt is subject, or (b) amend any
provision in any document relating to the Subordinated Debt which would increase
the amount thereof or the amount of any permitted payments thereunder or
adversely affect the subordination thereof to Obligations owed to Bank.
 
7.10   Compliance. Become an "investment company" or a company controlled by an
"investment company", under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock (as defined in Regulation U of the Board of Governors of the Federal
Reserve System), or use the proceeds of any Credit Extension for that purpose;
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit
any Subsidiary to withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
present pension, profit sharing and deferred compensation plan which could
reasonably be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency.
 
8   EVENTS OF DEFAULT
 
Any one of the following shall constitute an event of default (an "Event of
Default") under this Agreement:
 
8.1   Payment Default. Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within three (3) Business Days after such Obligations are due and
payable. During the cure period, the failure to cure the payment default is not
an Event of Default (but no Credit Extension will be made during the cure
period);
 
8.2           Covenant Default.
 
(a)   Borrower fails or neglects to perform any obligation in Sections 6.2, 6.3,
6.4, 6.6, 6.8, or 6.9, or violates any covenant in Section 7; or
 
(b)   Borrower fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant or agreement contained in this Agreement, any
Loan Documents, and as to any default (other than those specified in this
Section 8) under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure the default within ten (10) days after the
occurrence thereof; provided, however, that if the default cannot by its nature
be cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to cure the default
shall not be deemed an Event of Default (but no Credit Extensions shall be made
during such cure period). Grace periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in subsection (a) above;
 
8.3           Material Adverse Change. A Material Adverse Change occurs;
 
8.4           Attachment. (a) Any material portion of Borrower's assets is
attached, seized, levied on, or comes into possession of a trustee or receiver
and the attachment, seizure or levy is not removed in ten (10) days; (b) the
service of process upon Bank seeking to attach, by trustee or similar process,
any funds of Borrower, or any entity under control of Borrower (including a
subsidiary) on deposit with Bank; (c) Borrower is enjoined, restrained, or
prevented by court order from conducting a material part of its business; (d) a
judgment or other claim in excess of $10,000 becomes a Lien on any of Borrower's
assets; or (e) a notice of lien, levy, or assessment is filed against any of
Borrower's assets by any government agency and not paid within ten (10) days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower within ten days after the date such
events occur (but no Credit Extensions shall be made during the cure period);
  
 
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8.5           Insolvency. Borrower is unable to pay its debts (including trade
debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an
Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower
and not dismissed or stayed within thirty (30) days (but no Credit Extensions
shall be made while of any of the conditions described in clause (a) exist
and/or until any Insolvency Proceeding is dismissed);
 
8.6           Other Agreements. There is a default in any agreement to which
Borrower or any Guarantor is a party with a third party or parties resulting in
a right by such third party or parties, whether or not exercised, to accelerate
the maturity of any Indebtedness in an amount in excess of $50,000 or that could
result in a Material Adverse Change with respect to Borrower's or any Guarantor;
provided, however, that the Event of Default under this Section 8.6 caused by
the occurrence of a default under such other agreement shall be cured or waived
for purposes of this Agreement upon Bank receiving written notice from the party
asserting such default of such cure or waiver of the default under such other
agreement, if at the time of such cure or waiver under such other agreement
 
(a)   Bank has not declared an Event of Default under this Agreement and/or
exercised any rights with respect thereto;
 
(b)   any such cure or waiver does not result in an Event of Default under any
other provision of this Agreement or any Loan Document; and (c) in connection
with any such cure or waiver under such other agreement, the terms of any
agreement with such third party are not modified or amended in any manner which
could in the good faith judgment of Bank be materially less advantageous to
Borrower or any Guarantor;
 
8.7   Judgments. A judgment or judgments for the payment of money in an amount,
individually or in the aggregate, of $50,000 or more (not covered by independent
third-party insurance) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days after the entry thereof
(provided that no Credit Extensions will he made prior to the satisfaction or
stay of such judgment);
 
8.8   Misrepresentations. Borrower or any Person acting for Borrower makes any
representation,
warranty, or other statement now or later in this Agreement, any Loan Document
or in any writing delivered to Bank or to induce Bank to enter this Agreement or
any Loan Document, and such representation, warranty, or other statement is
incorrect in any material respect when made;
 
8.9   Subordinated Debt. A default or breach occurs under any agreement between
Borrower and any creditor of Borrower that signed a subordination,
intercreditor, or other similar agreement with Bank, or any creditor that has
signed such an agreement with Bank breaches any terms of such agreement; or
 
8.10   Guaranty. (a) Any guaranty of any Obligations terminates or ceases for
any reason to be in full force and effect; (b) any Guarantor does not perform
any obligation or covenant under any guaranty of the Obligations; (c) any
circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8. occurs with
respect to any Guarantor, or (d) the death, liquidation, winding up, or
termination of existence of any Guarantor; or (e) (i) a material impairment in
the perfection or priority of Bank's Lien in the collateral provided by
Guarantor or in the value of such collateral or (ii) a material adverse change
in the general affairs, management, results of operation, condition (financial
or otherwise) or the prospect of repayment of the Obligations occurs with
respect to any Guarantor.
 
9   BANK'S RIGHTS AND REMEDIES
 
9.1   Rights and Remedies. If an Event of Default has occurred and is
continuing, Bank may, without notice or demand, do any or all of the following:
 
(a)   declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
 
(b)   stop advancing money or extending credit for Borrower's benefit under this
Agreement or under any other agreement between Borrower and Bank;
 
(c)   demand that Borrower (i) deposit cash with Bank in an amount equal to the
aggregate amount of any Letters of Credit remaining undrawn, as collateral
security for the repayment of any future drawings under such Letters of Credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all Letter of Credit fees scheduled to be paid or payable over the
remaining term of any Letters of Credit;
 
(d)   terminate any FX Contracts;
  
 
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(e)   demand payment of, and collect any Accounts and General Intangibles
comprising Collateral, settle or adjust disputes and claims directly with
Account Debtors for amounts, on terms, and in any order that Bank considers
advisable, notify any Account Debtor or other Person owing Borrower money of
Bank's security interest in such funds, verify the amount of the same and
collect the same;
 
(f)   make any payments and do any acts it considers necessary or reasonable to
protect the Collateral and/or its security interest in the Collateral. Borrower
shall assemble the Collateral if Bank requests and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
 
(g)   apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;
 
(h)   ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
 
(i)   place a "hold" on any account maintained with Bank and/or deliver a notice
of exclusive control, any entitlement order, or other directions or instructions
pursuant to any Control Agreement or similar agreements providing control of any
Collateral;
 
(j)    demand and receive possession of Borrower's Books; and
 
(k)    exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).
 
9.2           Power of Attorney. Borrower hereby irrevocably appoints Bank as
its lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to: (a) endorse Borrower's name on any
checks or other forms of payment or security; (b) sign Borrower's name on any
invoice or bill of lading for any Account or drafts against Account Debtors; (c)
settle and adjust disputes and claims about the Accounts directly with Account
Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle,
and adjust all claims under Borrower's insurance policies; (e) pay, contest or
settle any Lien, charge, encumbrance, security interest, and adverse claim in or
to the Collateral, or any judgment based thereon, or otherwise take any action
to terminate or discharge the same; and (f) transfer the Collateral into the
name of Bank or a third party as the Code permits. Borrower hereby appoints Bank
as its lawful attorney-in-fact to sign Borrower's name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred until all Obligations
have been satisfied in full and Bank is under no further obligation to make
Credit Extensions hereunder. Bank's foregoing appointment as Borrower's attorney
in fact, and all of Bank's rights and powers, coupled with an interest, are
irrevocable until all Obligations have been fully repaid and performed and
Bank's obligation to provide Credit Extensions terminates.
 
9.3           Protective Payments. If Borrower fails to obtain the insurance
called for by Section 6.7 or fails to pay any premium thereon or fails to pay
any other amount which Borrower is obligated to pay under this Agreement or any
other Loan Document, Bank may obtain such insurance or make such payment, and
all amounts so paid by Bank are Bank Expenses and immediately due and payable,
bearing interest at the then highest applicable rate, and secured by the
Collateral. Bank will make reasonable efforts to provide Borrower with notice of
Bank obtaining such insurance at the time it is obtained or within a reasonable
time thereafter. No payments by Bank are deemed an agreement to make similar
payments in the future or Bank's waiver of any Event of Default.
   
 
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9.4           Application of Payments and Proceeds. Unless an Event of Default
has occurred and is continuing, Bank shall apply any funds in its possession,
whether from Borrower account balances, payments, or proceeds realized as the
result of any collection of Accounts or other disposition of the Collateral,
first, to Bank Expenses, including without limitation, the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Bank in the
exercise of its rights under this Agreement; second, to the interest due upon
any of the Obligations; and third, to the principal of the Obligations and any
applicable fees and other charges, in such order as Bank shall determine in its
sole discretion. Any surplus shall be paid to Borrower or other Persons legally
entitled thereto; Borrower shall remain liable to Bank for any deficiency. If an
Event of Default has occurred and is continuing, Bank may apply any funds in its
possession, whether from Borrower account balances, payments, proceeds realized
as the result of any collection of Accounts or other disposition of the
Collateral, or otherwise, to the Obligations in such order as Bank shall
determine in its sole discretion. Any surplus shall be paid to Borrower or other
Persons legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency. If Bank, in its good faith business judgment, directly or indirectly
enters into a deferred payment or other credit transaction with any purchaser at
any sale of Collateral, Bank shall have the option, exercisable at any time, of
either reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.
 
9.5           Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person. Borrower bears
all risk of loss, damage or destruction of the Collateral.
 
9.6           No Waiver; Remedies Cumulative. Bank's failure, at any time or
times, to require strict performance by Borrower of any provision of this
Agreement or any other Loan Document shall not waive, affect, or diminish any
right of Bank thereafter to demand strict performance and compliance herewith or
therewith. No waiver hereunder shall be effective unless signed by Bank and then
is only effective for the specific instance and purpose for which it is given.
Bank's rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law, or
in equity. Bank's exercise of one right or remedy is not an election, and Bank's
waiver of any Event of Default is not a continuing waiver. Bank's delay in
exercising any remedy is not a waiver, election, or acquiescence.
 
9.7           Demand Waiver. Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.
 
10   NOTICES
 
All notices, consents, requests, approvals, demands, or other communication
(collectively, "Communication"), other than Advance requests made pursuant to
Section 3.4, by any party to this Agreement or any other Loan Document must be
in writing and be delivered or sent by facsimile at the addresses or facsimile
numbers listed below. Bank or Borrower may change its notice address by giving
the other party written notice thereof. Each such Communication shall be deemed
to have been validly served, given, or delivered: (a) upon the earlier of actual
receipt and three (3) Business Days after deposit in the U.S. mail, registered
or certified mail, return receipt requested, with proper postage prepaid; (b)
upon transmission, when sent by facsimile transmission (with such facsimile
promptly confirmed by delivery of a copy by personal delivery or United States
mail as otherwise provided in this Section 10); (c) one (1) Business Day after
deposit with a reputable overnight courier with all charges prepaid; or (d) when
delivered, if hand-delivered by messenger, all of which shall be addressed to
the party to be notified and sent to the address or facsimile number indicated
below. Advance requests made pursuant to Section 3.4 must be in writing and may
be in the form of electronic mail, delivered to Bank by Borrower at the e­mail
address of Bank provided below and shall be deemed to have been validly served,
given, or delivered when sent (with such electronic mail promptly confirmed by
delivery of a copy by personal delivery or United States mail as otherwise
provided in this Section 10). Bank or Borrower may change its address, facsimile
number, or electronic mail address by giving the other party written notice
thereof in accordance with the terms of this Section 10.
   

 
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If to Borrower:
Lantronix, Inc.
15353 Barranca Parkway
Irvine, CA 92618
Attn: James Kerrigan, Chief Financial Officer
Fax: 949-450-7285
Email: jim.kerrigan@lantronix.com
       
If to Bank:
Silicon Valley Bank
38 Technology Drive, Suite 150
Irvine, CA 92618
Attn: Mr. Kurt Miklinski
Fax: 949-789-1930
Email: kmiklinski@svbank.com

   
11   CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE.
 
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California; provided,
however, that nothing in this Agreement shall be deemed to operate to preclude
Bank from bringing suit or taking other legal action in any other jurisdiction
to realize on the Collateral or any other security for the Obligations, or to
enforce a judgment or other court order in favor of Bank. Borrower expressly
submits and consents in advance to such jurisdiction in any action or suit
commenced in any such court, and Borrower hereby waives any objection that it
may have based upon lack of personal jurisdiction, improper venue, or forum non
conveniens and hereby consents to the granting of such legal or equitable relief
as is deemed appropriate by such court. Borrower hereby waives personal service
of the summons, complaints, and other process issued in such action or suit and
agrees that service of such summons, complaints, and other process may be made
by registered or certified mail addressed to Borrower at the address set forth
in Section 10 of this Agreement and that service so made shall be deemed
completed upon the earlier to occur of Borrower's actual receipt thereof or
three (3) days after deposit in the U.S. mails, proper postage prepaid.
 
TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR
RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED
UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A
MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY
HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
 
WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES' AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court. The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1, inclusive. The private judge shall have the
power, among others, to grant provisional relief, including without limitation,
entering temporary restraining orders, issuing preliminary and permanent
injunctions and appointing receivers. All such proceedings shall be closed to
the public and confidential and all records relating thereto shall be
permanently sealed. If during the course of any dispute, a party desires to seek
provisional relief, but a judge has not been appointed at that point pursuant to
the judicial reference procedures, then such party may apply to the Santa Clara
County, California Superior Court for such relief. The proceeding before the
private judge shall be conducted in the same manner as it would be before a
court under the rules of evidence applicable to judicial proceedings. The
parties shall be entitled to discovery which shall be conducted in the same
manner as it would be before a court under the rules of discovery applicable to
judicial proceedings. The private judge shall oversee discovery and may enforce
all discovery rules and order applicable to judicial proceedings in the same
manner as a trial court judge. The parties agree that the selected or appointed
private judge shall have the power to decide all issues in the action or
proceeding, whether of fact or of law, and shall report a statement of decision
thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in
this paragraph shall limit the right of any party at any time to exercise
self-help remedies, foreclose against collateral, or obtain provisional
remedies. The private judge shall also determine all issues relating to the
applicability, interpretation, and enforceability of this paragraph.
   
 
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12   GENERAL PROVISIONS
 
12.1   Successors and Assigns. This Agreement binds and is for the benefit of
the successors and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or obligations under it without Bank's prior written
consent (which may be granted or withheld in Bank's discretion). Bank has the
right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights, and benefits under this Agreement and the other Loan
Documents.
 
12.2   Indemnification. Borrower agrees to indemnify, defend and hold Bank and
its directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank harmless against: (a) all obligations,
demands, claims, and liabilities (collectively, "Claims") asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses incurred, or paid by Bank from, following,
or arising from transactions between Bank and Borrower (including reasonable
attorneys' fees and expenses), except for Claims and/or losses directly caused
by Bank's gross negligence or willful misconduct.
 
12.3   Limitation of Actions. Any claim or cause of action by Borrower against
Bank, its directors, officers, employees, agents, accountants, attorneys, or any
other Person affiliated with or representing Bank based upon, arising from, or
relating to this Loan Agreement or any other Loan Document, or any other
transaction contemplated hereby or thereby or relating hereto or thereto, or any
other matter, cause or thing whatsoever, occurred, done, omitted or suffered to
be done by Bank, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by (a) the filing of a
complaint within one year from the earlier of (i) the date any of Borrower's
officers or directors had knowledge of the first act, the occurrence or omission
upon which such claim or cause of action, or any part thereof, is based, or (ii)
the date this Agreement is terminated, and (b) the service of a summons and
complaint on an officer of Bank, or on any other person authorized to accept
service on behalf of Bank, within thirty (30) days thereafter. Borrower agrees
that such one-year period is a reasonable and sufficient time for Borrower to
investigate and act upon any such claim or cause of action. The one-year period
provided herein shall not be waived, tolled, or extended except by the written
consent of Bank in its sole discretion. This provision shall survive any
termination of this Loan Agreement or any other Loan Document.
 
12.4   Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.
 
12.5   Severability of Provisions. Each provision of this Agreement is severable
from every other provision in determining the enforceability of any provision.
 
12.6   Amendments in Writing; Integration. All amendments to this Agreement must
be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.
 
12.7   Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, constitute
one Agreement.
 
12.8   Survival. All covenants, representations and warranties made in this
Agreement continue in full force until this Agreement has terminated pursuant to
its terms and all Obligations (other than inchoate indemnity obligations and any
other obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to
indemnify Bank shall survive until the statute of limitations with respect to
all claims and causes of action with respect to which indemnity is given to Bank
shall have run.
  

 
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12.9   Confidentiality. In handling any confidential information, Bank shall
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank's
Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Credit Extensions (provided, however, Bank shall use
commercially reasonable efforts to obtain such prospective transferee's or
purchaser's agreement to the terms of this provision); (c) as required by law,
regulation, subpoena, or other order; (d) to Bank's regulators or as otherwise
required in connection with Bank's examination or audit; and (e) as Bank
considers appropriate in exercising remedies under this Agreement. Confidential
information does not include information that either: (i) is in the public
domain or in Bank's possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.
 
12.10    Attorneys' Fees, Costs and Expenses. In any action or proceeding
between Borrower and Bank arising out of or relating to the Loan Documents, the
prevailing party shall be entitled to recover its reasonable attorneys' fees and
other costs and expenses incurred, in addition to any other relief to which it
may be entitled.
 
13   DEFINITIONS
 
13.1   Definitions. As used in this Agreement, the following terms have the
following meanings:
 
"Account" is any "account" as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.
 
"Account Debtor" is any "account debtor" as defined in the Code with such
additions to such term as may hereafter be made.
 
"Advance" or "Advances" means an advance (or advances) under the Revolving Line.
 
"Affiliate" of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
 
"Agreement" is defined in the preamble hereof.
 
"Availability Amount" is at any time (a) the lesser of (i) the Revolving Line or
(ii) the Borrowing Base minus (b) the amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit) minus (c) an amount
equal to the Letter of Credit Reserves, minus (d) the FX Reserve, and minus (e)
the outstanding principal balance of any Advances (including any amounts used
for Cash Management Services).
 
"Bank" is defined in the preamble hereof.
 
"Bank Expenses" are all audit fees and expenses, costs, and expenses (including
reasonable attorneys' fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.
 
"Bankruptcy-Related Defaults" is defined in Section 9.1. "Borrower" is defined
in the preamble hereof.
 
"Borrower's Books" are all Borrower's books and records including ledgers,
federal and state tax returns, records regarding Borrower's assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.
 
"Borrowing Base" is (a) 90% of Eligible Accounts, plus (b) 50% of Eligible
Distributor Accounts which cannot exceed 50% of the Advances made pursuant to
subclause (a) above, as determined by Bank from Borrower's most recent
Transaction Report; provided, however, that Bank may decrease the foregoing
percentages in its good faith business judgment based on events, conditions,
contingencies, or risks which, as determined by Bank, may adversely affect
Collateral.
   
 
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"Borrowing Resolutions" are, with respect to any Person, those resolutions
adopted by such Person's Board of Directors and delivered by such Person to Bank
approving the Loan Documents to which such Person is a party and the
transactions contemplated thereby, together with a certificate executed by its
secretary on behalf of such Person certifying that (a) such Person has the
authority to execute, deliver, and perform its obligations under each of the
Loan Documents to which it is a party, (b) sets forth the resolutions then in
full force and effect authorizing and ratifying the execution, delivery, and
performance by such Person of the Loan Documents to which it is a party, (c) the
names of the Persons authorized to execute the Loan Documents on behalf of such
Person, together with a sample of the true signatures of such Persons, and (d)
that Bank may conclusively rely on such certificate unless and until such Person
shall have delivered to Bank a further certificate canceling or amending such
prior certificate.
 
"Business Day" is any day that is not a Saturday, Sunday or a day on which Bank
is closed.
 
"Cash Equivalents" means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc., (c) Bank's certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.
 
"Cash Management Services" is defined in Section 2.1.4.
 
"Cash Management Services Sublimit" is defined in Section 2.1.4.
 
"Code" is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; provided, that, to the extent
that the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection, or priority of, or remedies with
respect to, Bank's Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of California, the term
"Code" shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes on the provisions thereof relating to
such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.
 
"Collateral" is any and all properties, rights and assets of Borrower described
on Exhibit A.
   
"Collateral Account" is any Deposit Account, Securities Account, or Commodity
Account.
 
"Commodity Account" is any "commodity account" as defined in the Code with such
additions to such term as may hereafter be made.
 
"Communication" is defined in Section 10.
 
"Compliance Certificate" is that certain certificate in the form attached hereto
as Exhibit E.
 
"Contingent Obligation" is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by
that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and
(c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but "Contingent Obligation"
does not include endorsements in the ordinary course of business. The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
any guarantee or other support arrangement.
 
"Control Agreement" is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity account, Borrower, and Bank pursuant to which Bank
obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.
    
 
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"Credit Extension" is any Advance, Letter of Credit, FX Forward Contract, amount
utilized for Cash Management Services, or any other extension of credit by Bank
for Borrower's benefit.
   
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
 
"Default Rate" is defined in Section 2.3(b).
 
"Deferred Revenue" is all amounts received or invoiced in advance of performance
under contracts and not yet recognized as revenue.
 
"Deposit Account" is any "deposit account" as defined in the Code with such
additions to such term as may hereafter be made.
 
"Designated Deposit Account" is Borrower's deposit account, account number
3300187719, maintained with Bank.
 
"Dollars," "dollars" and "$" each mean lawful money of the United States.
    
"Effective Date" is the date Bank executes this Agreement and as indicated on
the signature page hereof.
 
"Eligible Accounts" are Accounts which arise in the ordinary course of
Borrower's business that meet all Borrower's representations and warranties in
Section 5.3 and which constitute "Eligible Export-Related Accounts Receivables"
(as defined in the Exim Borrower Agreement (defined in Section 14 hereof)). Bank
reserves the right at any time and from time to time after the Effective Date,
to adjust any of the criteria set forth below and to establish new criteria in
its good faith business judgment. Unless Bank agrees otherwise in writing,
Eligible Accounts shall not include:
 
(a)   Accounts for which the Account Debtor has not been invoiced;
 
(b)   Accounts that the Account Debtor has not paid within ninety (90) days of
invoice date;
 
(c)   Accounts owing from an Account Debtor, fifty percent (50%) or more of
whose Accounts have not been paid within ninety (90) days of invoice date;
 
(d)   Credit balances over ninety (90) days from invoice date;
 
(e)   Accounts owing from an Account Debtor, including Affiliates, whose total
obligations to Borrower exceed twenty-five (25%) of all Accounts, for the
amounts that exceed that percentage, unless Bank approves in writing;
 
(f)   omitted;
 
(g)   Accounts owing from an Account Debtor which is a federal, state or local
government entity or any department, agency, or instrumentality thereof except
for Accounts of the United States if Borrower has assigned its payment rights to
Bank and the assignment has been acknowledged under the Federal Assignment of
Claims Act of 1940, as amended;
 
(h)   Accounts owing from an Account Debtor to the extent that Borrower is
indebted or obligated in any manner to the Account Debtor (as creditor, lessor,
supplier or otherwise - sometimes called "contra" accounts, accounts payable,
customer deposits or credit accounts), with the exception of customary credits,
adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of its business;
 
(i)    Accounts for demonstration or promotional equipment, or in which goods
are consigned, or sold on a "sale guaranteed", "sale or return", "sale on
approval", "bill and hold", or other terms if Account Debtor's payment may be
conditional;
   
 
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(j)    Accounts for which the Account Debtor is Borrower's Affiliate, officer,
employee, or agent;
 
(k)    Accounts in which the Account Debtor disputes liability or makes any
claim (but only up to the disputed or claimed amount), or if the Account Debtor
is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of
business;
 
(1)           Accounts owing from an Account Debtor with respect to which
Borrower has received deferred revenue (but only to the extent of such deferred
revenue);
 
(m)   Accounts for which Bank in its good faith business judgment determines
collection to be doubtful; and
 
(n)   other Accounts Bank deems ineligible in the exercise of its good faith
business judgment.
 
"Eligible Distributor Account" means an otherwise Eligible Account for which
Borrower has not yet recognized revenue.
 
"Equipment" is all "equipment" as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.
 
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations. "Event of Default" is defined in Section 8.
 
"Foreign Currency" means lawful money of a country other than the United States.
 
"Funding Date" is any date on which a Credit Extension is made to or on account
of Borrower which shall be a Business Day.
 
"FX Business Day" is any day when (a) Bank's Foreign Exchange Department is
conducting its normal business and (b) the Foreign Currency being purchased or
sold by Borrower is available to Bank from the entity from which Bank shall buy
or sell such Foreign Currency.
   
"FX Forward Contract" is defined in Section 2.1.3. "FX Reserve" is defined in
Section 2.1.3.
 
"GAAP" is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
 
"General Intangibles" is all "general intangibles" as defined in the Code in
effect on the date hereof with such additions to such term as may hereafter be
made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other
tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort or otherwise), insurance policies (including without
limitation key man, property damage, and business interruption insurance),
payments of insurance and rights to payment of any kind.
 
"Guarantor" is any present or future guarantor of the Obligations.
   
 
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"Indebtedness" is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.
 
"Insolvency Proceeding" is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
"Inventory" is all "inventory" as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower's custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.
 
"Investment" is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.
 
"IP Agreement" is that certain Intellectual Property Security Agreement executed
and delivered by Borrower to Bank dated as of the date hereof.
 
"Letter of Credit" means a standby letter of credit issued by Bank or another
institution based upon an application, guarantee, indemnity or similar agreement
on the part of Bank as set forth in Section 2.1.2.
 
"Letter of Credit Application" is defined in Section 2.1.2(a).
 
"Letter of Credit Reserve" has the meaning set forth in Section 2.1.2(d).
 
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.
 
"Loan Documents" are, collectively, this Agreement, the Exim Agreement, the
Perfection Certificate, the IP Agreement, the Subordination Agreement, if any,
any note, or notes or guaranties executed by Borrower or any Guarantor, and any
other present or future agreement between Borrower or any Guarantor and/or for
the benefit of Bank in connection with this Agreement, all as amended, restated,
or otherwise modified.
 
"Material Adverse Change" is (a) a material impairment in the perfection or
priority of Bank's Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; or (c) a material impairment of the
prospect of repayment of any portion of the Obligations or (d) Bank determines,
based upon information available to it and in its reasonable judgment, that
there is a reasonable likelihood that Borrower shall fail to comply with one or
more of the financial covenants in Section 6 during the next succeeding
financial reporting period.
 
"Obligations" are Borrower's obligation to pay when due any debts, principal,
interest, Bank Expenses and other amounts Borrower owes Bank now or later,
whether under this Agreement, the Loan Documents, or otherwise, including,
without limitation, all obligations relating to letters of credit, cash
management services, and foreign exchange contracts, if any, and including
interest accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank, and the performance of Borrower's
duties under the Loan Documents.
 
"Operating Documents" are, for any Person, such Person's formation documents, as
certified with the Secretary of State of such Person's state of formation on a
date that is no earlier than 30 days prior to the Effective Date, and, (a) if
such Person is a corporation, its bylaws in current form, (b) if such Person is
a limited liability company, its limited liability company agreement (or similar
agreement), and (c) if such Person is a partnership, its partnership agreement
(or similar agreement), each of the foregoing with all current amendments or
modifications thereto.
 
"Payment/Advance Form" is that certain form attached hereto as Exhibit B.
 
"Perfection Certificate" is defined in Section 5.1.
  
 
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"Permitted Indebtedness" is:
   

(a)           Borrower's Indebtedness to Bank under this Agreement and the other
Loan Documents;
 
(b)           Indebtedness existing on the Effective Date and shown on the
Perfection Certificate;
 
(c)           Subordinated Debt;
 
(d)           unsecured Indebtedness to trade creditors incurred in the ordinary
course of business;
 
(e)           Indebtedness incurred as a result of endorsing negotiable
instruments received in the ordinary course of business;
 
(f)           Indebtedness secured by Permitted Liens;
 
(g)           extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (g) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
 
"Permitted Investments" are:
 
(a)   Investments shown on the Perfection Certificate and existing on the
Effective Date;
 
(b)   Cash Equivalents;
 
(c)   Investments consisting of the endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
Borrower;
 
(d)   Investments consisting of deposit accounts in which Bank has a perfected
security interest;
 
(e)   Investments accepted in connection with Transfers permitted by Section
7.1;
 
(f)    Investments of Subsidiaries in or to other Subsidiaries or Borrower and
Investments by Borrower in Subsidiaries not to exceed $250,000 in the aggregate
in any fiscal year;
 
(g)    Investments consisting of (i) travel advances and employee relocation
loans and other employee loans and advances in the ordinary course of business,
and (ii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plans or agreements approved by Borrower's Board of Directors;
 
(h)    Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business; and
 
(i)    Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates, in
the ordinary course of business; provided that this paragraph shall not apply to
Investments of Borrower in any Subsidiary.
 
"Permitted Liens" are:
 
(a)   Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement and the other Loan Documents;
 
(b)   Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, if they have no priority over any of
Bank's Liens;
 
(c)   purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
$50,000 in the aggregate amount outstanding, or (ii) existing on Equipment when
acquired, if the Lien is confined to the property and improvements and the
proceeds of the Equipment;
 
 
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(d)   statutory Liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other Persons imposed without action of
such parties, provided, they have no priority over any of Bank's Lien and the
aggregate amount of such Liens does not at any time exceed $50,000;
 
(e)   Liens to secure payment of workers' compensation, employment insurance,
old-age pensions, social security and other like obligations incurred in the
ordinary course of business, provided, they have no priority over any of Bank's
Liens and the aggregate amount of the Indebtedness secured by such Liens does
not at any time exceed $50,000;
 
(f)   Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
 
(g)   leases or subleases of real property granted in the ordinary course of
business, and leases, subleases, non-exclusive licenses or sublicenses of
property (other than real property or intellectual property) granted in the
ordinary course of Borrower's business, if the leases, subleases, licenses and
sublicenses do not prohibit granting Bank a security interest;
 
(h)   non-exclusive license of intellectual property granted to third parties in
the ordinary course of business;
 
(i)   Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Section 8.4 or 8.7;
 
"Person" is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
"Prime Rate" is Bank's most recently announced "prime rate," even if it is not
Bank's lowest rate.
 
"Registered Organization" is any "registered organization" as defined in the
Code with such additions to such term as may hereafter be made
 
"Responsible Officer" is any of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.
 
"Revolving Line" is an Advance or Advances in an aggregate amount of up to
$2,250,000 outstanding at any time.
 
"Revolving Line Maturity Date" is the earliest of (a) Two years from the
Effective Date or (b) the occurrence of an Event of Default.
 
"Securities Account" is any "securities account" as defined in the Code with
such additions to such term as may hereafter be made.
 
"Settlement Date" is defined in Section 2.1.3.
 
"Subordinated Debt" is indebtedness incurred by Borrower subordinated to all of
Borrower's now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.
 
"Subsidiary" means, with respect to any Person, any Person of which more than
50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.
 
"Tangible Net Worth" is, on any date, the consolidated total assets of Borrower
and its Subsidiaries minus  (a) any amounts attributable to (i) goodwill, (ii)
intangible items including unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, (iii) notes, accounts receivable and other obligations
owing to Borrower from its officers or other Affiliates, and (iv) reserves not
already deducted from assets, minus (b) Total Liabilities, plus (c) Subordinated
Debt.
  
 
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"Total Liabilities" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion of Subordinated Debt permitted by Bank to
be paid by Borrower, but excluding all other Subordinated Debt.
  
"Transaction Report" is a report in such form as Bank shall specify.
  
"Transfer" is defined in Section 7.1.
 
"Unused Revolving Line Facility Fee" is defined in Section 2.4(d).
 
14   Exim Provisions
 
14.1   Exim Guaranty. Borrower shall cause the Export Import Bank of the United
States (the "Exim Bank") to continue to guarantee the Loans made under this
Agreement, pursuant to a Master Guarantee Agreement, Loan Authorization
Agreement and (to the extent applicable) Delegated Authority Letter Agreement
(collectively, the "Exim Guaranty"), and Borrower shall cause the Exim Guaranty
to be in full force and effect throughout the term of this Agreement and so long
as any Advances hereunder are outstanding. If, for any reason, the Exim Guaranty
shall cease to be in full force and effect, of if the Exim Bank declares the
Exim Guaranty void or revokes any obligations thereunder or denies liability
thereunder, Bank shall have the right to accelerate the Obligations. Nothing in
any confidentiality agreement in this Agreement or in any other agreement shall
restrict Bank's right to make disclosures and provide information to the Exim
Bank in connection with the Exim Guaranty.
 
14.2   Exim Borrower Agreement; Costs. Borrower shall approximately concurrently
herewith execute and deliver a Borrower Agreement, in the form specified by the
Exim Bank, in favor of Bank and the Exim Bank (the "Exim Borrower Agreement").
This Agreement is subject to all of the terms and conditions of the Exim
Borrower Agreement, all of which are hereby incorporated herein by this
reference. Borrower expressly agrees to perform all of the obligations and
comply with all of the affirmative and negative covenants and all other terms
and conditions set forth in the Exim Borrower Agreement as though the same were
expressly set forth herein. In the event of any conflict between the terms of
the Exim Borrower Agreement and the other terms of this Agreement, whichever
terms are more restrictive shall apply. Borrower shall reimburse Bank for all
fees and all out of pocket costs and expenses incurred by Bank with respect to
the Exim Guaranty and the Exim Borrower Agreement, including without limitation
all facility fees and usage fees, and Silicon is authorized to debit Borrower's
account with Bank for such fees, costs and expenses when paid by Bank.
 
14.3   Non-Exim Agreement; Cross-Collateralization; Cross-Default. Bank and the
Borrower are parties to that certain Loan and Security Agreement of even date
herewith (as amended from time to time, the "Non­Exim Agreement"). Both this
Agreement and the Non-Exim Agreement shall continue in full force and effect,
and all rights and remedies under this Agreement and the Non-Exim Agreement are
cumulative. The term "Obligations" as used in this Agreement and in the Non-Exim
Agreement shall include without limitation the obligation to pay when due all
Advances made pursuant to this Agreement (the "Exim Loans") and all interest
thereon and the obligation to pay when due all Advances made pursuant to the
Non-Exim Agreement (the "Non-Exim Loans") and all interest thereon. Without
limiting the generality of the foregoing, all "Collateral" as defined in this
Agreement and as defined in the Non-Exim Agreement shall secure all Exim Loans
and all Non-Exim Loans and all interest thereon, and all other Obligations. Any
Event of Default under this Agreement shall also constitute an Event of Default
under the Non-Exim Agreement, and any Event of Default under the Non-Exim
Agreement shall also constitute an Event of Default under this Agreement. In the
event Bank assigns its rights under this Agreement and/or under any Note
evidencing Exim Loans and/or its rights under the Non-Exim Agreement and/or
under any Note evidencing Non-Exim Loans, to any third party, including without
limitation the Exim Bank, whether before or after the occurrence of any Event of
Default, Bank shall have the right (but not any obligation), in its sole
discretion, to allocate and apportion Collateral to the Agreement and/or Note
assigned and to specify the priorities of the respective security interests in
such Collateral between itself and the assignee, all without notice to or
consent of the Borrower.
 
[Signature page follows.]
   
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the Effective Date.
 
  
BORROWER:
      LANTRONIX, INC.       By: /s/ James N. Kerrigan   Name: James N. Kerrigan
  Title: CFO       BANK:      
SILICON VALLEY BANK
      By: /s/ Kurt Miklinski   Name: Kurt Miklinski   Title: Vice President    
         

 
Exhibits
A    "Collateral"
B    [intentionally omitted]
C    [intentionally omitted]
D    [intentionally omitted]
E    Compliance Certificate
F    Transaction Report
    

 
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EXHIBIT A
 
The Collateral consists of all of Borrower's right, title and interest in and to
the following personal property:
 
All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), securities, and all
other investment property, supporting obligations, and financial assets, whether
now owned or hereafter acquired, wherever located; and all Borrower's Books
relating to the foregoing, and any and all claims, rights and interests in any
of the above and all substitutions for, additions, attachments, accessories,
accessions and improvements to and replacements, products, proceeds and
insurance proceeds of any or all of the foregoing.
   
 
1

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EXHIBIT E
 
COMPLIANCE CERTIFICATE
 
TO:    SILICON VALLEY BANK
FROM:     LANTRONIX, INC.

Date: _____________________
   
The undersigned authorized officer of Lantronix, Inc. ("Borrower") certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the "Agreement"), (1) Borrower is in complete compliance for
the period ending  with all required covenants except as noted below, (2) there
are no Events of Default, (3) all representations and warranties in the
Agreement are true and correct in all material respects on this date except as
noted below; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4)
Borrower, and each of its Subsidiaries, has timely filed all required tax
returns and reports, and Borrower has timely paid all foreign, federal, state
and local taxes, assessments, deposits and contributions owed by Borrower except
as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement,
and (5) no Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank. Attached are the
required documents supporting the certification. The undersigned certifies that
these are prepared in accordance with generally GAAP consistently applied from
one period to the next except as explained in an accompanying letter or
footnotes. The undersigned acknowledges that no borrowings may be requested at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that compliance is determined not just at the
date this certificate is delivered. Capitalized terms used but not otherwise
defined herein shall have the meanings given them in the Agreement.
   
Please indicate compliance status by circling Yes/No under “Complies” column.
 
Reporting Covenant
Required
Complies
     
Monthly financial statements with Compliance Certificate
Monthly within 30 days
Yes   No
Annual Operating Budget and Financial Projections
Within 30 days after start of Fiscal Year
Yes   No
10-Q, 10-K and 8-K
Within 5 days after filing with SEC
Yes   No
A/R & A/P Agings and Reconciliations
Monthly within 15 days
Yes   No
Transaction Report
Weekly and with each request for an Advance if Hard Credit Extensions
outstanding; otherwise, monthly within 15 days
Yes   No
 
The following Intellectual Property was registered after the Effective Date (if
no registrations, state “None”)
____________________________________________________________________________
 

Financial Covenant
Required
Actual
Complies
       
Maintain on a Monthly Basis:
     
Minimum Tangible Net Worth
$1,500,000 plus (i) 50% o new equity an subordinated debt plus (ii) 50% of
quarterly net income
$_______
Yes   No

  
 
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The following financial covenant analysis and information set forth in Schedule
1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above:  (If
no exceptions exist, state “No exceptions to note.”)

_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
_____________________________________________________________________________________________________
 
  

LANTRONIX, INC.
 
 
By:__________________________
Name:________________________
Title:_________________________
BANK USE ONLY
 
Received by: _____________________
authorized signer
Date:                    _________________________
 
Verified: ________________________
authorized signer
Date:                    _________________________
 
Compliance Status:                                         Yes     No

         

 
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Schedule I to Compliance Certificate
 
Financial Covenants of Borrower
Dated: ____________________
  
Tangible Net Worth (Section 6.9(a))

Required Amount:
$1,500,000 plus (i) 50% of consideration for equity securities and
subordinated  debt plus (ii) 50% of Borrower's quarterly net income

 
Actual:

A.
Aggregate value of total assets of Borrower and its Subsidiaries
$           
 
B.
Aggregate value of goodwill of Borrower and its Subsidiaries
$           
 
C.
Aggregate value of intangible assets of Borrower and its Subsidiaries
$           
 
D.
Aggregate value of investments of Borrower and its Subsidiaries consisting of
minority investments in companies which investments are not publicly-traded
 
$           
 
E.
Aggregate value of any reserves not already deducted from assets
$           
 
F.
Aggregate value of liabilities of Borrower and its Subsidiaries (including all
Indebtedness) and current portion of Subordinated Debt permitted by Bank to be
paid by Borrower (but no other Subordinated Debt)
 
$           
 
G.
Aggregate value of Indebtedness of Borrower subordinated to Borrower’s
Indebtedness to Bank
$           
 
H.
Tangible Net Worth (line A minus line B minus line C minus line D minus line E
minus line F plus line G)
$           
 

Is line H equal to or greater than Required Amount?

________  No, not in
compliance                                                                             ________
Yes, in compliance
   
 
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Exhibit F
 
Transaction Report
 
[EXCEL spreadsheet to be provided separately]
 
 
 
 
 
 
 
 
 
1 

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