**Exhibit10.2**

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**SECURITYAGREEMENT**

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This **SECURITY AGREEMENT** (this“Agreement”), is entered into as of June 26, 2002, by and among **ELGARELECTRONICS CORPORATION**, a California corporation (“Borrower”), **ELGARHOLDINGS, INC.**, a Delaware corporation (“Parent”; Borrower andParent are referred to hereinafter each individually as a “Debtor”, andindividually and collectively, jointly and severally, as the “Debtors”), and **ABLECOFINANCE LLC**, a Delaware limited liability company, as collateralagent for the Lender Group (in such capacity, together with its successors, ifany, in such capacity, “Collateral Agent”), with reference to the following:

 

WHEREAS, Borrowerand Parent are parties to that certain Financing Agreement (the “FinancingAgreement”), of even date herewith, with the Lenders (as hereinafter defined),Ableco Finance LLC, a Delaware limited liability company, as administrativeagent for the Lender Group (in such capacity, together with its successors, ifany, in such capacity, “Administrative Agent”) and Collateral Agent, pursuantto which (i) the Lender Group (as defined herein) has agreed to make certainfinancial accommodations to Borrower, and (ii) Parent has agreed to guaranteethe obligations of Borrower to the Lender Group;

 

WHEREAS, Borroweris a Subsidiary of Parent, and Parent will benefit by virtue of the financialaccommodations to Borrower; and

 

WHEREAS, eachDebtor desires to secure its obligations under the Loan Documents to which itis party by granting to Collateral Agent, for the benefit of the Lender Group,security interests in the Collateral as set forth herein.

 

NOW THEREFORE, inconsideration of the premises set forth above, the terms and conditionscontained herein and other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, and each intending to be boundhereby, Collateral Agent and each Debtor agree as follows:

 

# **1.             DEFINITIONSAND CONSTRUCTION.**

 

**1.1.         Definitions.** All capitalized termsused herein and not otherwise defined herein shall have the meanings ascribedto them in the Financing Agreement.  Asused in this Agreement, the following terms shall have the followingdefinitions:

 

“Accounts”means all currently existing and hereafter arising accounts, contract rights,and all other forms of obligations owing to one or more of the Debtors arisingout of the sale, license, or lease of goods or General Intangibles or therendition of services by the Debtors, irrespective of whether earned byperformance, any and all such rights or obligations evidenced by chattel paper,instruments or documents, any and all credit insurance, guaranties, or securitytherefor, and any and all supporting obligations in respect of any of theforegoing.

 

“Account Debtor”means any Person who is or who may become obligated under, with respect to, oron account of, an Account, chattel paper, or a General Intangible.

 

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“AdministrativeAgent” has the meaning ascribed thereto in the recitals to this Agreement.

 

“Agreement”has the meaning ascribed thereto in the preamble to this Agreement and anyjoinders, extensions, riders, supplements, notes, amendments, or modificationsto or in connection with this Agreement.

 

“BankruptcyCode” means the United States Bankruptcy Code (11 U.S.C. § 101 et seq.), asamended, and any successor statute.

 

“Borrower”has the meaning ascribed thereto in the preamble to this Agreement.

 

“Code”means the Uniform Commercial Code in effect in the State of New York from timeto time.

 

“Collateral”means all of each Debtor’s right, title, and interest in and to each of thefollowing: the Accounts; Debtors’ Books; the Equipment; the GeneralIntangibles; the Inventory; the Investment Property; the Negotiable Collateral;any money, or other assets of any Debtor which now or hereafter come into the possession,custody, or control of Collateral Agent or any other member of the LenderGroup; and the proceeds and products, whether tangible or intangible, of any ofthe foregoing, including proceeds of insurance covering any or all of theCollateral, and any and all Accounts, Debtors’ Books, Equipment, GeneralIntangibles, Inventory, Investment Property, Negotiable Collateral, realproperty, money, deposit accounts, or other tangible or intangible propertyresulting from the sale, exchange, collection, or other disposition of any ofthe foregoing, or any portion thereof or interest therein, and the proceedsthereof.

 

“CollateralAccess Agreement” means a landlord waiver, mortgagee waiver, bailee letter,or acknowledgement agreement of any warehouseman, processor, lessor, consignee,or other Person in possession of, having a Lien upon, or having rights orinterests in the Equipment or Inventory, in each case, in form and substancesatisfactory to Collateral Agent.

 

“CollateralAgent” has the meaning ascribed thereto in the preamble to this Agreement.

 

“copyright”shall have the meaning ascribed to such term in the Copyright Act, and includesunregistered copyrights.

 

“Copyright Act”means the United States Copyright Act of 1976, as amended, and any successorstatute, and the rules promulgated thereunder.

 

“Debtor”and “Debtors” have the respective meanings set forth in the preamble tothis Agreement.

 

“Debtors’ Books”means all of each Debtor’s now owned or hereafter acquired books and records,including:  ledgers; records indicating,summarizing, or evidencing such Debtor’s properties or assets (including theCollateral) or liabilities; all information relating to such Debtor’s businessoperations or financial condition; and all computer programs, disc or tape 

 

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files,printouts, runs, or other computer prepared information in respect of suchbooks and records.

 

“Equipment”means all of each Debtor’s present and hereafter acquired right, title, andinterest with respect to machinery, machine tools, motors, equipment,furniture, furnishings, fixtures, vehicles (including motor vehicles andtrailers), tools, parts, dies, jigs, goods (other than consumer goods, farmproducts, or Inventory), wherever located, and any interest of any Debtor inany of the foregoing, and all attachments, accessories, accessions,replacements, substitutions, additions, and improvements to any of theforegoing, wherever located.

 

“Event ofDefault” has the meaning ascribed to it in Section 6.

 

“FinancingAgreement” has the meaning ascribed thereto in the recitals to thisAgreement.

 

“GeneralIntangibles” means all of each Debtor’s present and future generalintangibles and other personal property (including contract rights, rightsarising under common law, statutes, or regulations, choses or things in action,goodwill, patents, trade names, trademarks, servicemarks, copyrights, sourcecode, mask works, internet-related general intangibles (including domain names,web sites, and all contents contained therein and located thereat), blueprints,drawings, purchase orders, customer lists, monies due or recoverable frompension funds, route lists, rights to payment and other rights under anyagreements (whether royalty agreements, licensing agreements, or any otheragreements), infringements claims, computer programs, information contained inor on computer discs or computer tapes or other information storage media,literature, reports, catalogs, deposit accounts, insurance premium rebates, taxrefunds, and tax refund claims), other than goods, Accounts, InvestmentProperty, and Negotiable Collateral, and any and all supporting obligations inrespect of any of the foregoing.

 

“Inventory”means all present and future inventory in which any Debtor has any right,title, or interest, including goods held for sale, license, or lease or to befurnished under a contract of service and all of each Debtor’s present andfuture raw materials, work in process, piece goods, trim and finished goods,and packing and shipping materials, wherever located, and any documents oftitle representing any of the above, and all such other property the sale,license, lease, or other disposition of which would give rise to an Account orcash (including intellectual property the license of which would give rise toan Account or cash).

 

“InvestmentProperty” means all of each Debtor’s now owned or hereafter acquired right,title and interest with respect to “investment property” as that term isdefined in the Code, and any and all supporting obligations in respect thereof.

 

“InsolvencyProceeding” means any proceeding commenced by or against any Person underany provision of the Bankruptcy Code or under any other bankruptcy orinsolvency law, assignments for the benefit of creditors, formal or informalmoratoria, compositions, extensions generally with creditors, or proceedingsseeking reorganization, arrangement, or other similar relief.

 

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“Lender Group”means collectively the Lenders, Administrative Agent and Collateral Agent.

 

“Lenders”means, individually and collectively, each of the lenders identified on thesignature pages of the Financing Agreement, and any other Person made a partythereto in accordance with the provisions of Section 12.07 thereof(together with their respective successors and assigns).

 

“Lender GroupExpenses” means all costs or expenses (including taxes, and insurancepremiums) required to be paid by any Debtor under this Agreement, the FinancingAgreement, or any other Loan Document that are paid or incurred by the LenderGroup.

 

“Lender-RelatedPerson” means, with respect to any Lender, such Lender, together with suchLender’s Affiliates, and the officers, directors, employees, counsel, agents,and attorneys-in-fact of such Lender and such Lender’s Affiliates.

 

“NegotiableCollateral” means all of each Debtor’s present and future letters ofcredit, notes, drafts, instruments, Investment Property, documents, personalproperty leases (wherein any Debtor is the lessor), chattel paper, Debtors’Books relating to any of the foregoing, and any and all supporting obligationsin respect of the foregoing.

 

“Parent”has the meaning ascribed thereto in the preamble to this Agreement.

 

“PermittedProtest” means the right of Debtors to protest any Lien (other than anysuch Lien that secures the Secured Obligations), or tax (other than payrolltaxes or taxes that are the subject of a United States federal tax lien withrespect to which a notice of Lien has been filed), provided that (a) a reservewith respect to such obligation is established on the books of Debtors in anamount that is reasonably satisfactory to Collateral Agent, (b) any suchprotest is instituted and diligently prosecuted by Debtors in good faith, and (c)Collateral Agent is reasonably satisfied that, while any such protest ispending, there will be no impairment of the enforceability, validity, orpriority of any of the Liens of Collateral Agent in and to the Collateral forthe benefit of the Lender Group.

 

“SecuredObligations” shall mean, with respect to each Debtor, all liabilities,Obligations, or undertakings owing by such Debtor to Agent or the Lender Groupof any kind or description arising out of or outstanding under, advanced orissued pursuant to, or evidenced by the Financing Agreement, the other LoanDocuments to which such Debtor is a party, or this Agreement, irrespective ofwhether for the payment of money, whether direct or indirect, absolute orcontingent, due or to become due, voluntary or involuntary, whether nowexisting or hereafter arising, and including all interest (including interestthat accrues after the filing of a case under the Bankruptcy Code) and any andall costs, fees (including attorneys fees), and expenses which such Debtor isrequired to pay pursuant to any of the foregoing.

 

**1.2.         Code.**  Any terms used in this Agreement which aredefined in the Code shall be construed and defined as set forth in the Codeunless otherwise defined herein.

 

**1.3.         Construction.**  Unless the context of this Agreement clearlyrequires otherwise, references to the plural include the singular, referencesto the singular include 

 

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theplural, the term “including” is not limiting, and the term “or” has, exceptwhere otherwise indicated, the inclusive meaning represented by the phrase“and/or.”  The words “hereof,” “herein,”“hereby,” “hereunder,” and similar terms in this Agreement refer to thisAgreement as a whole and not to any particular provision of thisAgreement.  Section,  subsection, clause, schedule, and exhibitreferences are to this Agreement unless otherwise specified.  Any reference in this Agreement or in any ofthe other Loan Documents to this Agreement or any of the other Loan Documentsshall include all alterations, amendments, restatements, changes, extensions,modifications, renewals, replacements, substitutions, and supplements, theretoand thereof, as applicable.  In theevent of a direct conflict between the terms and provisions of this Agreementand the Financing Agreement, it is the intention of the parties hereto thatboth such documents shall be read together and construed, to the fullest extentpossible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot beresolved as aforesaid, the terms and provisions of the Financing Agreementshall control and govern; provided, however, that the inclusion herein ofadditional obligations on the part of a Debtor and supplemental rights and remediesin favor of Collateral Agent, in each case in respect of the Collateral, shallnot be deemed a conflict with the Financing Agreement.

 

**1.4.         Schedulesand Exhibits.**  Allof the schedules and exhibits attached to this Agreement shall be deemed incorporatedherein by reference.

 

# **2.**             CREATION OFSECURITY INTEREST.

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## **2.1.         Grant of Security Interest.**

 

(a)           Each Debtor hereby grants toCollateral Agent, for the benefit of the Lender Group, continuing securityinterests in all currently existing and hereafter acquired or arisingCollateral in order to secure prompt repayment of any and all of the SecuredObligations in accordance with the terms and conditions of the Loan Documentsand in order to secure prompt performance by each Debtor of each such Debtor’s covenantsand duties under the Loan Documents.

 

(b)           Notwithstanding anything herein tothe contrary, the Collateral shall not include any agreement with a third partyexisting on the date hereof that prohibits the grant of a Lien on suchagreement or any of any Debtor’s rights thereunder without the consent of suchparty or under which a consent to such grant is otherwise required, whichconsent has not been obtained, except to the extent rights under any suchprohibition are invalidated by Sections 9-406, 9-407, 9-408, and 9-409 of theCode; provided, however, that the Collateral shall include (A)the proceeds of the above to the extent such proceeds are otherwise included inthe Collateral, and (B) all items excluded pursuant to this subsection (b) fromand after the date on which the requisite consent is obtained.  Furthermore, each Debtor agrees to use itscommercially reasonable efforts to obtain and maintain in full force and effectall consents contemplated pursuant to this subsection (b).

 

(c)           Collateral Agent’s security interestsin the Collateral for the benefit of the Lender Group shall attach to allCollateral without further act on the part of the Lender Group or any Debtor.

 

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(d)           Except as expressly set forth in thisAgreement or any other Loan Document, no Debtor has any authority, express orimplied, to dispose of any item or portion of the Collateral.

 

**2.2.         NegotiableCollateral.**  Inthe event that any Collateral, including proceeds, is evidenced by or consistsof Negotiable Collateral in the form of notes, drafts, instruments, documents,or chattel paper, Debtor shall, promptly upon the request of Collateral Agent,endorse and assign such notes, drafts, instruments, documents, or chattel paperto Collateral Agent and deliver physical possession of such notes, drafts,instruments, documents, or chattel paper to Collateral Agent.

 

**2.3.         Collectionof Accounts, General Intangibles, Negotiable Collateral.** At anytime after and during the continuanceof an Event of Default, Collateral Agent or Collateral Agent’s designee may:(a) notify customers or Account Debtors of any Debtor that the Accounts,General Intangibles, or Negotiable Collateral have been assigned to CollateralAgent or that Collateral Agent has a security interest therein for the benefitof the Lender Group ; and (b) collect the Accounts, General Intangibles, andNegotiable Collateral directly and charge, or cause Administrative Agent tocharge for the benefit of Collateral Agent, the collection costs and expensesincurred by Collateral Agent in connection with any such collection of theAccounts to the Loan Account.

 

**2.4.         Deliveryof Additional Documentation Required.** Each Debtor shall execute, and deliver toCollateral Agent, prior to or concurrently with such Debtor’s execution anddelivery of this Agreement and at any time thereafter at the request ofCollateral Agent, all financing statements, continuation financing statements,fixture filings, security agreements, chattel mortgages, pledges, mortgages,deeds of trust, assignments, endorsements of certificates of title,applications for title, affidavits, reports, notices, schedules of accounts,letters of authority, and all other documents that Collateral Agent mayreasonably request, in form satisfactory to Collateral Agent, to perfect andcontinue perfected Collateral Agent’s security interests in the Collateral forthe benefit of the Lender Group and in order to fully consummate all of thetransactions contemplated under the Loan Documents.

 

**2.5.         Power ofAttorney.**  EachDebtor hereby irrevocably makes, constitutes, and appoints Collateral Agent(and any of Collateral Agent’s officers, employees, or agents (includingAdministrative Agent) designated by Collateral Agent) as such Debtor’s true andlawful attorney, with power to:  (a) ifsuch Debtor refuses to, or fails timely to execute and deliver any of thedocuments described in Section 2.4, sign the name of such Debtor on anyof the documents described in Section 2.4; (b) at any time that an Eventof Default has occurred and is continuing or the Lender Group, or CollateralAgent on behalf thereof, deems itself insecure (in accordance with Section1-208 of the Code), sign such Debtor’s name on any invoice or bill of ladingrelating to any Account, drafts against Account Debtors, schedules andassignments of Accounts, verifications of Accounts, and notices to AccountDebtors; (c) send requests for verification of Accounts; (d) after theoccurrence and during the continuance of an Event of Default, endorse suchDebtor’s name on any checks, notices, acceptances, money orders, drafts, orother item of payment or security that may come into Collateral Agent’s or anyother member of the Lender Group’s possession; (e) at any time that an Event ofDefault has occurred and is continuing or the Lender Group, or Collateral Agenton behalf thereof, deems itself insecure (in

 

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accordancewith Section 1-208 of the Code), notify the post office authorities to changethe address for delivery of such Debtor’s mail to an address designated byCollateral Agent, to receive and open all mail addressed to such Debtor, and toretain all mail relating to the Collateral and forward all other mail to suchDebtor; (f) at any time that an Event of Default has occurred and is continuingor the Lender Group, or Collateral Agent on behalf thereof, deems itselfinsecure (in accordance with Section 1-208 of the Code), make, settle, andadjust all claims under such Debtor’s policies of insurance and make alldeterminations and decisions with respect to such policies of insurance; and(g) at any time that an Event of Default has occurred and is continuing or theLender Group, or Collateral Agent on behalf thereof, deems itself insecure (inaccordance with Section 1-208 of the Code), settle and adjust disputes andclaims respecting the Accounts directly with Account Debtors, for amounts andupon terms which Collateral Agent determines to be reasonable, and CollateralAgent may cause to be executed and delivered any documents and releases whichCollateral Agent determines to be necessary. The appointment of Collateral Agent as each Debtor’s attorney, and eachand every one of Collateral Agent’s rights and powers, being coupled with aninterest, is irrevocable until all of the Secured Obligations have been fullyand finally performed and paid in cash and the obligations of the Lender Groupto extend credit under the Financing Agreement have been irrevocablyterminated.

 

**2.6.         Right toInspect.** Collateral Agent (through any of its officers, employees, or agents)shall have the right, from time to time during normal business hours, at theexpense of such Debtor, to inspect Debtors’ Books and to check, test, andappraise the Collateral in order to verify each Debtor’s financial condition orthe amount, quality, value, condition of, or any other matter relating to, theCollateral.

 

# **3.**             REPRESENTATIONSAND WARRANTIES.

 

Each Debtorrepresents and warrants as follows:

 

**3.1.         No PriorEncumbrances.** Each Debtor has good and defensible title to the Collateral, free andclear of all Liens except Permitted Liens.

 

**3.2.         Locationof Inventory and Equipment.**  The Inventory and Equipment are not stored with a bailee,warehouseman, or similar party (without Collateral Agent’s prior writtenconsent) and are located only at the locations identified on Schedule6.01(ff) of the Financing Agreement or otherwise permitted by Section4.2.

 

**3.3.         InventoryRecords.** EachDebtor now keeps, and hereafter at all times shall keep, correct and accuraterecords itemizing and describing the kind, type, quality, and quantity of theInventory, and each Debtor’s cost therefor.

 

## **3.4.         [Intentionally Omitted].**

 

**3.5.         Relianceby Collateral Agent; Cumulative.** The warranties, representations, andagreements set forth herein shall be conclusively presumed to have been reliedupon by Collateral Agent and the Lender Group, and shall be cumulative and inaddition to any and all other warranties, representations, and agreements whichany Debtor shall now or hereinafter give, or cause to be given, to CollateralAgent or the Lender Group.

 

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# **4.             AFFIRMATIVECOVENANTS.**

 

Each Debtorcovenants and agrees that, until payment in full in cash of the SecuredObligations, and unless Collateral Agent shall otherwise consent in writing,each Debtor shall do all of the following:

 

## **4.1.         [Intentionally Omitted].**

 

**4.2.         Locationof Inventory and Equipment.** Keep the Inventory and Equipment only at the locations identifiedon Schedule 6.01(ff) of the Financing Agreement; provided, however, thatany Debtor may amend such schedule so long as such amendment occurs by writtennotice to Collateral Agent within 30 days after the date on which the Inventoryor Equipment is moved to such new location, so long as such new location iswithin the continental United States, and so long as, at the time of suchwritten notification, Debtors provide or authorize, as applicable, anyfinancing statements or fixture filings necessary to perfect and continueperfected Collateral Agent’s security interests in such assets and also provideto Collateral Agent a Collateral Access Agreement with respect to such newlocation, if such assets have a book value in excess of $250,000 (whenaggregated with all other Collateral at the same location).

 

**4.3.         Title toEquipment.** UponCollateral Agent’s request, deliver to Collateral Agent, properly endorsed, anyand all evidences of ownership of, certificates of title, or applications fortitle to any items of Equipment.

 

**4.4.         Maintenanceof Equipment.** Keep and maintain the Equipment in good operating condition and repair(ordinary wear and tear excepted), and make all necessary replacements theretoso that the value and operating efficiency thereof shall at all times bemaintained and preserved.  Except byoperation of law, no Debtor shall permit any item of Equipment to become afixture to real estate or an accession to other property, and the Equipment isnow and shall at all times remain personal property.

 

**4.5.         Taxes.**  Cause all assessments and taxes, whetherreal, personal, or otherwise, due or payable by, or imposed, levied, orassessed against any Debtor or any of such Debtor’s property to be paid infull, before delinquency or before the expiration of any extension period,except to the extent that the validity of such assessment or tax shall be thesubject of a Permitted Protest.  EachDebtor shall make due and timely payment or deposit of all taxes, assessments,or contributions required of it by law, and will deliver to Collateral Agentupon request an official receipt (or, if an official receipt is not available,such other documentation as shall be satisfactory to the Collateral Agent)showing payment thereof.  Each Debtorwill make timely payment or deposit of all tax payments and withholding taxesrequired of it by applicable laws, and will, upon request, furnish CollateralAgent with proof satisfactory to Collateral Agent indicating that each Debtorhas made such payments or deposits, other than assessments or taxes that arethe subject of a Permitted Protest. Upon request, each Debtor shall deliver satisfactory evidence of paymentof applicable excise taxes in each jurisdictions in which (a) such Debtorconducts business or is required to pay any such excise tax, (b) where suchDebtor’s failure to pay any such applicable excise tax would result in a Lienon the properties or assets of such 

 

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Debtor,or (c) where such Debtor’s failure to pay any such applicable excise tax wouldconstitute a Material Adverse Effect.

 

**4.6.         LenderGroup Expenses.** Such Debtor shall immediately and without demand reimburse CollateralAgent for all sums expended by Collateral Agent which constitute Lender GroupExpenses and each Debtor hereby authorizes and approves all advances andpayments by Collateral Agent for items constituting Lender Group Expenses.

 

# **5.             NEGATIVECOVENANTS.**

 

Each Debtorcovenants and agrees that until payment in full in cash of the SecuredObligations, it will not do any of the following without the prior writtenconsent of the Collateral Agent:

 

**5.1.         ChangeName.**  Except aspermitted by Section 7.02 of the Financing Agreement, change suchDebtor’s name, FEIN, business structure, or identity, or add any new fictitiousname.

 

**5.2.         Natureof Business; Fiscal Year.** (a) Make any change in the principal nature of such Debtor’sbusiness, as such business is described in Section 6.01(l) of theFinancing Agreement, or (b) without the prior written consent of CollateralAgent, which consent shall not unreasonably be withheld, change the date of itsfiscal year.

 

**5.3.         Inventoryand Equipment with Bailees.** The Inventory and Equipment shall not at any time now or hereafterbe stored with a bailee, warehouseman, or similar party without CollateralAgent’s prior written consent.

 

# **6.             EVENTSOF DEFAULT.**

 

The occurrence ofan “Event of Default” as defined in the Financing Agreement shall constitute an“Event of Default” under this Agreement.

 

# **7.             COLLATERALAGENT’S RIGHTS AND REMEDIES.**

 

**7.1.         Rightsand Remedies.** Upon the occurrence, and during the continuation, of an Event ofDefault, the Required Lenders (at their election but without notice of theirelection and without demand) may, except to the extent otherwise expresslyprovided or required below, authorize and instruct Collateral Agent to do anyone or more of the following on behalf of the Lender Group (and CollateralAgent, acting upon the instructions of the Required Lenders, shall do the sameon behalf of the Lender Group), all of which are authorized by each Debtor:

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#### (a)           Proceeddirectly and at once, without notice, against any Debtor to collect and recoverthe full amount or any portion of the Secured Obligations, without firstproceeding against any other Debtor, or against any security or collateral forthe Secured Obligations.

 

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#### (b)           Withoutnotice to any Debtor (such notice being expressly waived), and withoutconstituting a retention of any collateral in satisfaction of an obligation(within the meaning of the Code), set off and apply to the Secured Obligationsany and all (i) balances and deposits of any Debtor held by the Lender Group(including any amounts received in the Blocked Account or any lockboxaccounts), or (ii) indebtedness at any time owing to or for the credit or theaccount of any Debtor held by the Lender Group;

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#### (c)           Holdor cause to be held, as cash collateral, any and all balances and deposits ofany Debtor held by the Lender Group, and any amounts received in the BlockedAccount or any lockbox accounts, to secure the full and final repayment in cashof all of the Secured Obligations;

 

#### (d)           Exercisein respect of the Collateral, in addition to other rights and remedies providedfor herein and in the Financing Agreement and the other Loan Documents orotherwise available to it, all the rights and remedies available to it at law(including those of a secured party under the Code) or in equity.

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#### (e)           Settleor adjust disputes and claims directly with Account Debtors for amounts andupon terms which Collateral Agent considers advisable, and in such cases,Collateral Agent shall credit, or shall cause Administrative Agent to credit,the Loan Account with only the net amounts received by Collateral Agent inpayment of such disputed Accounts after deducting all Lender Group Expensesincurred or expended in connection therewith;

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#### (f)            Causeeach Debtor to hold all returned Inventory in trust for Collateral Agent,segregate all returned Inventory from all other property of any Debtor or insuch Debtor’s possession and conspicuously label said returned Inventory as theproperty of Collateral Agent;

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#### (g)           Withoutnotice or demand, make such payments and do such acts as Collateral Agent considersnecessary or reasonable to protect its security interest in theCollateral.  Each Debtor agrees toassemble the Collateral if Collateral Agent so requires, and to make theCollateral available to Collateral Agent as Collateral Agent maydesignate.  Each Debtor authorizesCollateral Agent to enter the premises where the Collateral is located, to takeand maintain possession of the Collateral, or any part of it, and to pay,purchase, contest, or compromise any encumbrance, charge, or lien which in CollateralAgent’s determination appears to be prior or superior to its security interestand to pay all expenses incurred in connection therewith.  With respect to each Debtor’s ownedpremises, each Debtor hereby grants Collateral Agent a license to enter intopossession of such premises and to occupy the same, without charge, for up toone hundred twenty (120) days in order to exercise any of Collateral Agent’srights or remedies provided herein, at law, in equity, or otherwise;

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#### (h)           Ship,reclaim, recover, store, finish, maintain, repair, prepare for sale, advertisefor sale, and sell (in the manner provided for herein) the Collateral.  Collateral Agent is hereby granted a licenseor other right to use, without charge, each Debtor’s labels, patents,copyrights, rights of use of any name, trade secrets, trade names, trademarks,service marks, and advertising matter, or any property of a similar nature, asit pertains to the 

 

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#### Collateral, incompleting production of advertising for sale and selling any Collateral, andeach Debtor’s rights under all licenses and all franchise agreements shallinure to the Lender Group’s benefit;

 

#### (i)            Sellall or any part of the Collateral at either a public or private sale, or both,by way of one or more contracts or transactions, for cash or on terms, in suchmanner and at such places (including each Debtor’s premises) as CollateralAgent determines is commercially reasonable. It is not necessary that the Collateral be present at any suchsale.  Collateral Agent on behalf of theLender Group shall have the right upon any such public sale or sales, and, tothe extent permitted by law, upon any such private sale or sales, to purchasethe whole or any part of the Collateral so sold, free of any right or equity ofredemption in any Debtor, which right or equity is hereby waived or released tothe extent permitted by law;

 

#### (j)            CollateralAgent shall give notice of any disposition of the Collateral as follows:

 

(i) Collateral Agent shallgive Debtors and each holder of a security interest in the Collateral who hasfiled with Collateral Agent a written request for notice, a notice in writingof the time and place of public sale, or, if the sale is a private sale or someother disposition other than a public sale is to be made of the Collateral,then the time on or after which the private sale or other disposition is to bemade;

 

(ii) The notice shall bepersonally delivered or mailed, postage prepaid, to Debtors as provided in Section12.01 of the Financing Agreement, at least 10 days before the date fixedfor the sale, or at least 10 days before the date on or after which the privatesale or other disposition is to be made; no notice needs to be given prior tothe disposition of any portion of the Collateral that is perishable orthreatens to decline speedily in value or that is of a type customarily sold ona recognized market.  Notice to Personsother than Debtors claiming an interest in the Collateral, shall be sent tosuch addresses as they have furnished in writing to Collateral Agent;

 

(iii) If the sale is tobe a public sale, Collateral Agent also shall give notice of the time and placeby publishing a notice one time at least 10 days before the date of the sale ina newspaper of general circulation in the county in which the sale is to beheld;

 

#### (k)           Byan instrument in writing, appoint a receiver (which term shall include areceiver and manager) of all or any part of the Collateral and may remove orreplace such receiver from time to time or may institute proceedings in anycourt of competent jurisdiction for the appointment of such receiver;

 

#### (l)            RequireDebtors to establish one or more lockbox or other restricted accountssatisfactory to Collateral Agent for the collection of Accounts, GeneralIntangibles, or Negotiable Collateral;

 

#### (m)          Notifycustomers or Account Debtors that the Accounts, General Intangibles, orNegotiable Collateral have been assigned to Collateral Agent or that CollateralAgent has a security interest therein;

 

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#### (n)           Collectthe Accounts of Debtors, General Intangibles, and Negotiable Collateraldirectly, and charge the collection costs and expenses as Lender GroupExpenses; but, unless and until the Collateral Agent does so or gives Debtorsother written instructions, each Debtor shall collect all of Accounts, GeneralIntangibles, and Negotiable Collateral for the Lender Group, receive in trustall payments thereon as the Collateral Agent’s trustee, and promptly deliversaid payments to Administrative Agent for the benefit of the Lender Group intheir original form as received from such Account Debtor;

 

#### (o)           Anydeficiency which exists after disposition of the Collateral as provided abovewill be paid promptly by Debtors up to the maximum amount, if any, of eachDebtor’s liability under the Financing Agreement or any other LoanDocument.  Any excess will be returnedto Debtors, without interest and subject to the rights of third parties, byCollateral Agent as provided in the Loan Documents.

 

Except as requiredby law, Collateral Agent may take any or all of the foregoing action withoutdemand, presentment, protest, advertisement or notice of any kind to or uponDebtors or any other Person.

 

**7.2.         RemediesCumulative.**  Therights and remedies of Collateral Agent and the Lender Group under thisAgreement, the Loan Documents, and all other agreements shall becumulative.  Collateral Agent and theLender Group shall have all other rights and remedies not inconsistent herewithas provided under the Code, by law, or in equity.  No exercise by Collateral Agent or the Lender Group of one rightor remedy shall be deemed an election, and no waiver by Collateral Agent or theLender Group of any Event of Default on any Debtor’s part shall be deemed acontinuing waiver. No delay by Collateral Agent or the Lender Group shallconstitute a waiver, election, or acquiescence by it.

 

**8.             TAXESAND EXPENSES REGARDING THE COLLATERAL.**  If any Debtor failsto pay any monies (whether taxes, rents, assessments, insurance premiums, orotherwise) due to third persons or entities, or fails to make any deposits orfurnish any required proof of payment or deposit, all as required under theterms of this Agreement, then, to the extent that Collateral Agent determinesthat such failure by such Debtor could have a material adverse effect on theLender Group’s security interest in the Collateral, in Collateral Agent’sdiscretion and without prior notice to Debtors, Collateral Agent may do any orall of the following: (a) make payment of the same or any part thereof; (b) setup, or cause Administrative Agent to set up, such reserves in the Loan Accountas Collateral Agent deems necessary to protect the Lender Group from theexposure created by such failure; or (c) obtain and maintain insurance policiesinsuring such Debtor’s ownership and use of the Collateral, and take any actionwith respect to such policies as Collateral Agent deems prudent.  Any amounts paid or deposited by CollateralAgent shall constitute Lender Group Expenses, shall immediately becomeadditional Secured Obligations, shall bear interest at the applicable ratedescribed in the Financing Agreement, and shall be secured by theCollateral.  Any payments made byCollateral Agent shall not constitute an agreement by Collateral Agent to makesimilar payments in the future or a waiver by Collateral Agent of any Event ofDefault under this Agreement. Collateral Agent need not inquire as to, or contest the validity of, anysuch expense, tax, security interest, encumbrance, or lien and the receipt ofthe usual official notice for the payment thereof shall be conclusive 

 

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evidencethat the same was validly due and owing. Collateral Agent shall use its reasonable efforts to provide notice toDebtors of any action taken by it under this Section 8.

 

# **9.**             WAIVERS;INDEMNIFICATION.

 

**9.1.         Demand;Protest; etc.**  Tothe extent permitted by law, each Debtor waives demand, protest, notice ofprotest, 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, andguarantees at any time held by Collateral Agent on which such Debtor may in anyway be liable.

 

**9.2.         CollateralAgent’s Liability for Collateral.**  So long as Collateral Agent complies withits obligations, if any, under the Code, Collateral Agent shall not in any wayor manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage theretooccurring or arising in any manner or fashion from any cause; (c) anydiminution in the value thereof; or (d) any act or default of any carrier,warehouseman, bailee, forwarding agency, or other Person.  All risk of loss, damage, or destruction ofthe Collateral shall be borne by the Debtors.

 

**9.3.         Indemnification.**  Each Debtor agrees to defend, indemnify,save, and hold Collateral Agent and each Lender-Related Person harmless against:(a) all obligations, demands, claims, and liabilities claimed or asserted byany other Person, and (b) all losses (including attorneys fees anddisbursements) in any way suffered, incurred, or paid by Collateral Agent orany Lender-Related Person as a result of or in any way arising out of,following, or consequential to transactions with Debtors or any Debtor, whetherunder this Agreement, the Financing Agreement, or the other Loan Documents, butexcluding any obligations, demands, claims, liabilities, and losses caused byCollateral Agent’s or any Lender-Related Person’s gross negligence or willfulmisconduct as determined by a final judgment of a court of competentjurisdiction.  This provision shallsurvive the termination of this Agreement.

 

**10.          NOTICES.** All notices and other communicationshereunder to Collateral Agent shall be in writing and shall be mailed, sent ordelivered in accordance with the Financing Agreement and all notices and othercommunications hereunder to Debtors shall be in writing and shall be mailed,sent or delivered in care of Borrower in accordance with the FinancingAgreement.

 

**11.          GOVERNINGLAW.  THIS AGREEMENT SHALL BEGOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEWYORK.**

 

**12.          DESTRUCTIONOF DEBTORS’ DOCUMENTS.**  All written information, schedules,agings, reports or similar papers delivered to Collateral Agent may bedestroyed or otherwise disposed of by Collateral Agent four (4) months afterthey are delivered to or received by Collateral Agent, unless Debtors request,in writing, the return of said documents, schedules or other papers and makesarrangements, at Debtors’ expense, for their return.

 

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# **13.          GENERALPROVISIONS.**

 

**13.1.       Effectiveness.** This Agreement shallbe binding and deemed effective when executed by each Debtor and executed byCollateral Agent.

** **

**13.2.       Successorsand Assigns.**  ThisAgreement shall bind and inure to the benefit of the respective successors andassigns of each of the parties; provided, however, that no Debtor may assignthis Agreement or any rights or duties hereunder without prior written consentof the Lender Group and any prohibited assignment shall be absolutelyvoid.  No consent to an assignment bythe Lender Group shall release Debtors from their Secured Obligations.  On behalf of the Lender Group, CollateralAgent may assign this Agreement and its rights and duties hereunder and noconsent or approval by Debtors is required in connection with any suchassignment.

 

**13.3.       SectionHeadings.** Headings and numbers have been set forth herein for convenienceonly.  Unless the contrary is compelledby the context, everything contained in each section applies equally to thisentire Agreement.

 

**13.4.       Interpretation.** Neither thisAgreement nor any uncertainty or ambiguity herein shall be construed orresolved against Collateral Agent, the Lender Group, or the Debtors, whetherunder any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties andshall be construed and interpreted according to the ordinary meaning of thewords used so as to fairly accomplish the purposes and intentions of allparties hereto.

** **

**13.5.       Severabilityof Provisions.** Each provision of this Agreement shall be severable from every otherprovision of this Agreement for the purpose of determining the legalenforceability of any specific provision.

** **

**13.6.       Amendmentsin Writing.** ThisAgreement can only be amended by a writing signed by both Collateral Agent and eachDebtor.

** **

**13.7.       Counterparts.**  This Agreement may be executed in any numberof counterparts and by different parties on separate counterparts, each ofwhich, when executed and delivered, shall be deemed to be an original, and allof which, when taken together, shall constitute but one and the same Agreement.

 

## **13.8.       [Intentionally Omitted]**

 

**13.9.       Revivaland Reinstatement of Obligations.**  If the incurrence or payment of the SecuredObligations by any Debtor or the transfer by Debtors to Collateral Agent or theLender Group of any property of any Debtor should for any reason subsequentlybe declared to be void or voidable under any state or federal law relating tocreditors’ rights, including provisions of the Bankruptcy Code relating tofraudulent conveyances, preferences, and other voidable or recoverable paymentsof money or transfers of property (collectively, a “Voidable Transfer”), and ifCollateral Agent or the Lender Group is required to repay or restore, in wholeor in part, any such Voidable Transfer, or elects to do so upon the reasonableadvice of its counsel, then, as to any such Voidable Transfer, or the amountthereof that Collateral Agent or the Lender Group is required or elects torepay or restore, and as to all reasonable costs, expenses, and attorneys feesof Collateral Agent or the Lender Group related thereto, the liability 

 

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ofDebtors automatically shall be revived, reinstated, and restored and shallexist as though such Voidable Transfer had never been made.

 

 

[Signature page follows.]

 

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IN WITNESSWHEREOF, the parties hereto have caused this Agreement to be executed anddelivered as of the date first above written.

 
|   | **ELGAR ELECTRONICS CORPORATION,**  a California corporation    |
|--------|---------------------------------------------------------------------------|
|   |                                                                      |
|   |                                                                      |
|   | By:                                                                       | /s/ Joseph A. Stroud |   |
|   | Name:                                                                     | Joseph A. Stroud |
|   | Title:                                                                    | Chief Financial Officer |
|   |                                                                      |
|   |                                                                      |
|   | **ELGAR HOLDINGS, INC.,**  a Delaware corporation     |
|   |                                                                      |
|   |                                                                      |
|   | By:                                                                       | /s/ Joseph A. Stroud |   |
|   | Name:                                                                     | Joseph A. Stroud |
|   | Title:                                                                    | Chief Financial Officer |

 

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|   | **ABLECO FINANCE LLC,**a Delaware limited liability company |
|--------|-------------------------------------------------------------|
|   |                                                        |
|   |                                                        |
|   | By:                                                         | /s/ Kevin Genda |   |
|   | Name:                                                       | Kevin Genda |
|   | Title:                                                      | Senior Vice President |

 

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