Unassociated Document


    
      Exhibit
        10.01

       

      LOAN
        AND SECURITY AGREEMENT

       

      GERBER
        FINANCE INC.

       

      as
        Lender

       

      and

       

      NUTRITION
        21, INC., NUTRITION 21, LLC, and ICELAND HEALTH LLC

       

      as
        Co-Borrowers

       

      Dated:
        June 30, 2007

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      LOAN
        AND SECURITY AGREEMENT

       

      This
        Loan
        and Security Agreement is made as of June 30, 2007 by and between GERBER
        FINANCE INC.,
        a New
        York corporation (“Lender”) and NUTRITION
        21, INC.,
        a New
        York corporation, NUTRITION
        21, LLC,
        a New
        York limited liability company, and ICELAND
        HEALTH LLC,
        a New
        York company, (collectively “Borrower”).
        Each
        Borrower shall be jointly and severally liable for all Obligations arising
        under
        this Agreement.

       

      BACKGROUND

       

      Borrower
        has requested that Lender make loans and advances available to Borrower;
        and

       

      Lender
        has agreed to make such loans and advances to Borrower on the terms and
        conditions set forth in this Agreement.

       

      AGREEMENT

       

      NOW,
        THEREFORE, in consideration of the mutual covenants and undertakings and
        the
        terms and conditions contained herein, the parties hereto agree as
        follows:

       

      1.        (a) General
        Definitions.
        When
        used
        in this Agreement, the following terms shall have the following
        meanings:

       

      “Account
        Debtor”
means
        any Person who is or may be obligated with respect to, or on account of,
        an
        Account, Chattel Paper or General Intangibles (including a Payment
        Intangible).

       

      “Accountants”
has
        the
        meaning given to such term in Section 11(a).

       

      “Accounts”
means
        all “accounts”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person.

       

      “Accounts
        Availability”
means
        the amount of Revolving Credit Advances against Eligible Accounts Lender
        may
        from time to time make available to Borrower up to seventy percent (70%)
        of the
        net face amount of Nutrition 21 Inc.’s Eligible Accounts and up to eighty-five
        percent (85%) of the net face amount of Nutrition 21 LLC’s Eligible
        Accounts.

       

      “Affiliate”
of
        any
        Person means (a) any Person (other than a Subsidiary) which, directly or
        indirectly, is in control of, is controlled by, or is under common control
        with
        such Person, or (b) any Person who is a director or officer (i) of such Person,
        (ii) of any Subsidiary of such Person or (iii) of any Person described in
        clause
        (a) above. For purposes of this definition, control of a Person shall mean
        the
        power, direct or indirect, (i) to vote five percent (5.00%) or more of the
        securities having ordinary voting power for the election of directors of
        such
        Person, or (ii) to direct or cause the direction of the management and policies
        of such Person whether by contract or otherwise.

       

      “Ancillary
        Agreements”
means
        the Note, each Guaranty Agreement, each Validity Agreement, each Guaranty
        Security Agreement, each Mortgage, each Intercreditor Agreement, each
        Subordination Agreement, each Life Insurance Assignment and all other
        agreements, instruments, documents, mortgages, pledges, powers of attorney,
        consents, assignments, contracts, notices, security agreements, trust agreements
        and guarantees whether heretofore, concurrently, or hereafter executed by
        or
on
        behalf
        of Borrower or any other Person or delivered to Lender, relating to this
        Agreement or to the transactions contemplated by this Agreement.

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

    

     

    
      “Books
        and Records”
means
        all books, records, board minutes, contracts, licenses, insurance policies,
        environmental audits, business plans, files, computer files, computer discs
        and
        other data and software storage and media devices, accounting books and records,
        financial statements (actual and pro forma), filings with Governmental
        Authorities and any and all records and instruments relating to the Collateral
        or otherwise necessary or helpful in the collection thereof or the realization
        thereupon.

       

      “Borrowing
        Base Certificate”
means
        a
        certificate in the form of Exhibit
        C.

       

      “Business
        Day”
means
        a
        day on which Lender is open for business and that is not a Saturday, a Sunday
        or
        other day on which banks are required or permitted to be closed in the State
        of
        New York.

       

      “Change
        of Control”
means,
        with respect to any Person on or after the Closing Date, that any change
        in the
        composition of such Person’s stockholders as of the Closing Date shall occur
        which would result in any stockholder or group acquiring 49.9% or more of
        any
        class of Stock of such Person, or that any Person (or group of Persons acting
        in
        concert) shall otherwise acquire, directly or indirectly (including through
        Affiliates), the power to elect a majority of the board of directors of such
        Person or otherwise direct the management or affairs of such Person by obtaining
        proxies, entering into voting agreements or trusts, acquiring securities
        or
        otherwise.

       

      “Chattel
        Paper”
means
        all “chattel paper,” as such term is defined in the UCC, including electronic
        chattel paper, now owned or hereafter acquired by any Person.

       

      “Closing
        Date”
means
        June 30, 2007 or such other date as may be agreed upon by the parties
        hereto.

       

      “Collateral”
means
        all of Borrower’s property and assets, whether real or personal, tangible or
        intangible, and whether now owned or hereafter acquired, or in which it now
        has
        or at any time in the future may acquire any right, title or interest including
        all of the following property in which it now has or at any time in the future
        may acquire any right, title or interest:

       

      (i) all
        Inventory;

       

      (ii) all
        Equipment;

       

      (iii) all
        Fixtures;

       

      (iv) all
        General Intangibles including but not limited to those set forth in Exhibit
        12
        (i) but excluding those set forth in Exhibit
        12 (j);

       

      (v) all
        Deposit Accounts, other bank accounts and all funds on deposit
        therein;

       

      (vi) all
        Chattel Paper;

       

      (vii) all
        Letter-of-Credit Rights;


      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

       

      (viii) all
        Instruments;

       

      (ix) all
        commercial tort claims set forth on Exhibit
        1(A);

       

      (x) all
        Books
        and Records;

       

      (xi) all
        credit card receipts;

       

      (xii) all
        Subsidiaries’ (i) Accounts (ii) Deposit Accounts (iii) Chattel Paper (iv)
        Letter-of-Credit Rights (v) money, cash and cash equivalents.

       

      (xiii) all
        Supporting Obligations including letters of credit and guarantees issued
        in
        support of Accounts, Chattel Paper, General Intangibles and Investment
        Property;

       

      (xiv)
        (i)
        all
        money, cash and cash equivalents and (ii) all cash held as cash collateral
        to
        the extent not otherwise constituting Collateral, all other cash or property
        at
        any time on deposit with or held by Lender for the account of Borrower (whether
        for safekeeping, custody, pledge, transmission or otherwise); and

       

      (xv)    
         all
        products and Proceeds of all or any of the foregoing, tort claims and all
        claims
        and other rights to payment including insurance claims against third parties
        for
        loss of, damage to, or destruction of, and (ii) payments due or to become
        due
        under leases, rentals and hires of any or all of the foregoing and Proceeds
        payable under, or unearned premiums with respect to policies of insurance
        in
        whatever form.

       

      “Collateral
        Account”
means
        an account in Lender’s name under the dominion and control of Lender maintained
        at a financial institution acceptable to Lender into which all cash, checks,
        notes, drafts and other similar items relating to or constituting Proceeds
        of or
        payments made in respect of any Collateral shall be deposited.

       

      “Contract
        Rate”
means
        an interest rate per annum equal to the sum of (i) the Prime Rate plus
        (ii)
        three percent (3%).

       

      “Default”
means
        any act or event which, with the giving of notice or passage of time or both,
        would constitute an Event of Default.

       

      “Default
        Rate”
has
        the
        meaning given to such term in Section 5(a)(iii).

       

      “Deposit
        Accounts”
means
        all “deposit accounts” as such term is defined in the UCC, now or hereafter held
        in the name of any Person.

       

      “Documents”
means
        all “documents”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including all bills of lading,
        dock
        warrants, dock receipts, warehouse receipts, and other documents of title,
        whether negotiable or non-negotiable.

       

      


      
        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

      

      
        “Eligible
          Accounts”
means
          and includes each Account of Borrower which conforms to the following criteria:
          (a) shipment of the merchandise or the rendition of services has been completed;
          (b) merchandise or services shall not have been repossessed, returned,
          rejected
          or disputed by the Account Debtor and there shall not have been asserted
          any
          offset, defense or counterclaim; (c) continues to be in full
          conformity with the representations and warranties made by Borrower to
          Lender
          with respect thereto; (d) Lender is, and continues to be, satisfied with
          the
          credit standing of the Account Debtor in relation to the amount of credit
          extended; (e) there are no facts existing or threatened which are likely
          to
          result in any adverse change in an Account Debtor’s financial condition; (f) is
          documented by an invoice in a form approved by Lender and shall not be
          unpaid
          more than ninety (90) days from invoice date; (g) less than thirty three
          percent
          (33%) of the unpaid amount of invoices due from such Account Debtor remain
          unpaid more than ninety (90) days from invoice date; (h) is not evidenced
          by
          chattel paper or an instrument of any kind with respect to or in payment
          of the
          Account unless such instrument is duly endorsed to and in possession of
          Lender
          or represents a check in payment of a Account; (i) if the Account Debtor
          is
          located outside of the United States, the goods which gave rise to such
          Account
          were shipped after receipt by Borrower from or on behalf of the Account
          Debtor
          of an irrevocable letter of credit, assigned and delivered to Lender and
          confirmed by a financial institution acceptable to Lender and is in form
          and
          substance acceptable to Lender, payable in the full amount of the Account
          in
          United States dollars at a place of payment located within the United States;
          (j) Lender has a first priority perfected Lien in such Account and such
          Account
          is not subject to any other Lien other than Permitted Liens; (k) does not
          arise
          out of transactions with any employee, officer, agent, director, stockholder
          or
          Affiliate of Borrower; (l) is payable to Borrower; (m) does not arise with
          respect to goods which are delivered on a cash-on-delivery basis or placed
          on
          consignment, guaranteed sale or other terms by reason of which the payment
          by
          the Account Debtor may be conditional; (n) is not an obligation of an Account
          Debtor that has suspended business, made a general assignment for the benefit
          of
          creditors, is unable to pay its debts as they become due or as to which
          a
          petition has been filed (voluntary or involuntary) under any law relating
          to
          bankruptcy, insolvency, reorganization or relief of debtors; (o) does not
          arise
          out of a bill and hold sale prior to shipment; (p) does not arise out of
          a sale
          to any Person to which Borrower is indebted, unless the amount of such
          indebtedness, and any anticipated indebtedness, is deducted in determining
          the
          face amount of such Account; (q) is net of any returns, discounts, claims,
          credits and allowances; (r) if the Account arises out of contracts between
          Borrower and the United States, any state, or any department, agency or
          instrumentality of any of them, Borrower has so notified Lender, in writing,
          prior to the creation of such Account, and, if Lender so requests, there
          has
          been compliance with any governmental notice or approval requirements,
          including
          compliance with the Federal Assignment of Claims Act; (s) is a good and
          valid
          account representing an undisputed bona fide indebtedness incurred by the
          Account Debtor therein named, for a fixed sum as set forth in the invoice
          relating thereto with respect to an unconditional sale and delivery upon
          the
          stated terms of goods sold by Borrower, or work, labor and/or services
          rendered
          by Borrower; (t) the total unpaid Accounts from such Account Debtor does
          not
          exceed twenty percent (20%) of all Eligible Accounts; (u) does not arise
          out of
          progress billings prior to completion of the order; (v) Borrower’s right to
          payment is absolute and not contingent upon the fulfillment of any condition
          whatsoever; (w) Borrower is able to bring suit and enforce its remedies
          against
          the Account Debtor through judicial process; (x) does not arise out of
          a sale to
          Walgreens unless Walgreens purchases inventory under the terms and conditions
          of
          this section; (y) does not represent interest payments, late or finance
          charges
          or service charges owing to Borrower; (z) if it arises out of a sale to
          CVS, is
          not unpaid more than one hundred and twenty (120) days from invoice date;
          (aa)
          is otherwise satisfactory to Lender as determined in good faith by Lender
          in the
          reasonable exercise of its discretion.

      

       

      “Eligible
        Inventory”
means
        Inventory owned by Borrower which Lender, in its sole and absolute discretion,
        determines: (a) is subject to a first priority perfected Lien in favor of
        Lender
        and is subject to no other Liens whatsoever other than Permitted Liens; (b)
        is
        located in a public warehouse known to Lender; (c) is located on premises
        with
        respect to which Lender has received a landlord, mortgagee or warehouse
        agreement acceptable in form and substance to Lender; (d) is not in transit;
        (e)
        is not covered by a negotiable document of title, unless such document and
        evidence of acceptable insurance covering
        such Inventory has been delivered to Lender; (f) is in good condition and
        meets
        all standards imposed by any governmental agency, or department or division
        thereof having regulatory Governmental Authority over such Inventory, its
        use or
        sale including the Federal Fair Labor Standards Act of 1938 as amended, and
        all
        rules, regulations and orders thereunder; (g) is currently either usable
        or
        salable in the normal course of Borrower’s business; (h) is not placed by
        Borrower on consignment or held by Borrower on consignment from another Person;
        (i) is in conformity with the representations and warranties made by Borrower
        to
        Lender with respect thereto; (j) is not subject to any licensing, patent,
        royalty (except for chromium picolinate), trademark, trade name or copyright
        agreement with any third parties; (k) does not require the consent of any
        Person
        for the completion of manufacture, sale or other disposition of such Inventory
        by Lender following an Event of Default and such completion, manufacture
        or sale
        does not constitute a breach or default under any contract or agreement to
        which
        Borrower is a party or to which such Inventory is or may be subject; (l)
        is not
        work-in-process; (m) is covered by casualty insurance acceptable to Lender;(n)
        does not include Selenomax; (o) does not include inventory owned or sold
        to
        Iceland Health, LLC and (o) not to be ineligible for any other
        reason.

      


      
        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

      

       

      “Equipment”
means
        all “equipment” as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located.

       

      “ERISA”
shall
        have the mean
        the
        Employee Retirement Income Security Act of 1974 and
        the
        regulations and published interpretations therewith.

       

      “Event
        of Default”
means
        the occurrence of any of the events set forth in Section 18.

       

      “Fixtures”
means
        all “fixtures” as such term is defined in the UCC, now owned or hereafter
        acquired by any Person.

       

      “Formula
        Amount”
shall
        have the meaning given to such term in Section 2(a).

       

      “GAAP”
means
        generally accepted accounting principles, practices and procedures in effect
        from time to time in the United States of America.

       

      “General
        Intangibles”
means
        all “general intangibles” as such term is defined in the UCC, now owned or
        hereafter acquired by any person including all right, title and interest
        that
        such Person may now or hereafter have in or under any contract, all Payment
        Intangibles, customer lists, Licenses, Intellectual Property, interests in
        partnerships, joint ventures and other business associations, permits,
        proprietary or confidential information, inventions (whether or not patented
        or
        patentable), technical information, procedures, designs, knowledge, know-how,
        Software, data bases, data, skill, expertise, experience, processes, models,
        drawings, materials, Books and Records, Goodwill (including the Goodwill
        associated with any Intellectual Property), all rights and claims in or under
        insurance policies (including insurance for fire, damage, loss, and casualty,
        whether covering personal property, real property, tangible rights or intangible
        rights, all liability, life, key-person, and business interruption insurance,
        and all unearned premiums), uncertificated securities, choses in action,
        deposit
        accounts, rights to receive tax refunds and other payments, rights to received
        dividends, distributions, cash, Instruments and other property in respect
        of or
        in exchange for pledged Stock and Investment Property, and rights of
        indemnification.

       

      “Goods”
means
        all “goods”, as such term is defined in the UCC, now owned or hereafter acquired
        by any Person, wherever located, including embedded software to the extent
        included in “goods” as defined in the UCC.

       

      
        “Goodwill”
means
          all goodwill, trade secrets, proprietary or confidential information, technical
          information, procedures, formulae, quality control standards, designs,
          operating
          and training manuals, customer lists, and distribution agreements now owned
          or
          hereafter acquired by any Person.

      

      


      
        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

      

       

      “Governmental
        Authority”
means
        any nation or government, any state or other political subdivision thereof,
        and
        any agency, department or other entity exercising executive, legislative,
        judicial, regulatory or administrative functions of or pertaining to
        government.

       

      “Indemnified
        Person”
shall
        have the meaning given to such term in Section 25.

       

      “Instruments”
means
        all “instruments”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located, including all certificated securities
        and all promissory notes and other evidences of indebtedness, other than
        instruments that constitute, or are a part of a group of writings that
        constitute, Chattel Paper.

       

      “Intellectual
        Property”
means
        any and all Licenses, patents, patent registrations, copyrights, copyright
        registrations, trademarks, trademark registrations, trade secrets and customer
        lists now owned, licensed to, or hereafter acquired by Borrower and may or
        may
        not be set forth in Exhibit
        12.

       

      “Inventory”
means
        all “inventory”, as such term is defined in the UCC, now owned or hereafter
        acquired by any Person, wherever located.

       

      “Investment
        Property”
means
        all “investment property”, as such term is defined in the UCC, now owned or
        hereafter acquired by any Person, wherever located.

       

      “Inventory
        Availability”
means
        the amount of Revolving Credit Advances against Eligible Inventory Lender
        may
        from time to time make available to Borrower up to the lesser of (a) up to
        thirty percent (30%) of the value of Nutrition 21, Inc.’s Eligible Inventory
        (calculated on the basis of the lower of cost or market, on a first-in first-out
        basis) plus (b) up to fifty percent (50%) of the value of Nutrition 21, LLC’s
        Eligible Inventory (calculated on the basis of the lower or cost or market,
        on a
        first-in-out basis) or (c) up to 80% of the amount of Accounts
        Availability.

       

      “License”
means
        any rights under any written agreement now or hereafter acquired by any Person
        to use any trademark, trademark registration, copyright, copyright registration
        or invention for which a patent is in existence or other license of rights
        or
        interests now held or hereafter acquired by any Person.

       

      “Lien”
means
        any mortgage, security deed, deed of trust, pledge, hypothecation, assignment,
        security interest, lien (whether statutory or otherwise), charge, claim or
        encumbrance, or preference, priority or other security agreement or preferential
        arrangement held or asserted in respect of any asset of any kind or nature
        whatsoever including any conditional sale or other title retention agreement,
        any lease having substantially the same economic effect as any of the foregoing,
        and the filing of, or agreement to give, any financing statement under the
        UCC
        or comparable law of any jurisdiction.

       

      “Loans”
means
        the Revolving Credit Advances and all extensions of credit hereunder or under
        any Ancillary Agreement, including Letter of Credit Obligations.

       

      “Material
        Adverse Effect”
means
        a
        material adverse effect on (a) the condition, operations, assets, business
        of
        the Borrowers as a whole, (b) Borrowers’ ability to pay or perform the
        Obligations in accordance with the terms hereof or any Ancillary Agreement,
        (c)
        the value of the Collateral,
        the Liens on the Collateral or the priority of any such Liens or (d) the
        practical realization of the benefits of Lender’s rights and remedies under this
        Agreement and the Ancillary Agreements.

       

      
        “Maximum
          Capital Expenditure Amount”
means
          $50,000.

      

      


      
        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

      

       

      “Maximum
        Legal Rate”
shall
        have the meaning given to such term in Section 5(a)(iv).

       

      “Maximum
        Revolving Amount”
means
        Five Million Dollars ($5,000,000).

       

      “Minimum
        Average Monthly Loan Amount”
means
        $1,000,000 for the first three months within the Closing Date and $1,500,000
        thereafter. 

       

      “Note”
means
        the promissory note of Borrower executed in favor of Lender substantially
        in the
        form of Exhibit
        A.

       

      “Obligations”
means
        all Loans, all advances, debts, liabilities, obligations, covenants and duties
        owing by Borrower to Lender (or any corporation that directly or indirectly
        controls or is controlled by or is under common control with Lender) of every
        kind and description (whether or not evidenced by any note or other instrument
        and whether or not for the payment of money or the performance or
        non-performance of any act), direct or indirect, absolute or contingent,
        due or
        to become due, contractual or tortious, liquidated or unliquidated, whether
        existing by operation of law or otherwise now existing or hereafter arising
        including any debt, liability or obligation owing from Borrower to others
        which
        Lender may have obtained by assignment or otherwise and further including
        all
        interest (including interest accruing at the then applicable rate provided
        in
        this Agreement after the maturity of the Loans and interest accruing at the
        then
        applicable rate provided in this Agreement after the filing of any petition
        in
        bankruptcy, or the commencement of any insolvency, reorganization or like
        proceeding, whether or not a claim for post-filing or post-petition interest
        is
        allowed in such proceeding), charges or any other payments Borrower is required
        to make by law or otherwise arising under or as a result of this Agreement
        and
        the Ancillary Agreements, together with all reasonable expenses and reasonable
        attorneys’ fees chargeable to Borrower’s account or incurred by Lender in
        connection with Borrower’s account whether provided for herein or in any
        Ancillary Agreement.

       

      “Payment
        Intangibles”
means
        all “payment intangibles” as such term is defined in the UCC, now owned or
        hereafter acquired by any Person, including, a General Intangible under which
        the Account Debtor’s principal obligation is a monetary obligation.

       

      “Permitted
        Liens”
means
        (a) Liens of carriers, warehousemen, artisans, bailees, mechanics and
        materialmen incurred in the ordinary course of business securing sums not
        overdue; (b) Liens incurred in the ordinary course of business in connection
        with workmen’s compensation, unemployment insurance or other forms of
        governmental insurance or benefits, relating to employees, securing sums
        (i) not
        overdue or (ii) being diligently contested in good faith provided that adequate
        reserves with respect thereto are maintained on the books of Borrower in
        conformity with GAAP; (c) Liens in favor of Lender; (d) Liens for taxes (i)
        not
        yet due or (ii) being diligently contested in good faith by appropriate
        proceedings, provided that adequate reserves with respect thereto are maintained
        on the books of Borrower in conformity with GAAP; provided,
        that,
        the
        Lien shall have no effect on the priority of Liens in favor of Lender or
        the
        value of the assets in which Lender has a Lien; (e) Purchase Money Liens
        securing Purchase Money Indebtedness to the extent permitted in this Agreement
        and (f) Liens specified on Schedule
        1(B)
        hereto.

       

      
        “Person”
means
          any individual, sole proprietorship, partnership, limited liability partnership,
          joint venture, trust, unincorporated organization, association, corporation,
          limited liability company, institution, public benefit corporation, entity
          or
          government (whether federal, state, county, city, municipal or otherwise,
          including any instrumentality, division, agency, body or department thereof),
          and shall include such Person’s successors and assigns.

      

    

    
      


      
        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

      

       

      “Prime
        Rate”
means
        the “prime rate” which is normally published in the “Money Rates” of The Wall
        Street Journal (Eastern Edition, New York Metro); provided, however, if the
        Money Rates Column of The Wall Street Journal (Eastern Edition, New York
        Metro)
        ceases to be published or otherwise does not designate a “prime rate” as of a
        Business Day, Lender shall have the right to obtain such information from
        a
        similar business publication of its selection. The Prime Rate shall be increased
        or decreased as the case may be for each increase or decrease in the Prime
        Rate
        in an amount equal to such increase or decrease in the Prime Rate; each change
        to be effective as of the day of the change in such rate.

       

      “Proceeds”
means
        “proceeds”, as such term is defined in the UCC and, in any event, shall include:
        (a) any and all proceeds of any insurance, indemnity, warranty or guaranty
        payable to Borrower or any other Person from time to time with respect to
        any
        Collateral; (b) any and all payments (in any form whatsoever) made or due
        and
        payable to Borrower from time to time in connection with any requisition,
        confiscation, condemnation, seizure or forfeiture of any Collateral by any
        governmental body, governmental authority, bureau or agency (or any person
        acting under color of governmental authority); (c) any claim of Borrower
        against
        third parties (i) for past, present or future infringement of any Intellectual
        Property or (ii) for past, present or future infringement or dilution of
        any
        trademark or trademark license or for injury to the goodwill associated with
        any
        trademark, trademark registration or trademark licensed under any trademark
        License; (d) any recoveries by Borrower against third parties with respect
        to
        any litigation or dispute concerning any Collateral, including claims arising
        out of the loss or nonconformity of, interference with the use of, defects
        in,
        or infringement of rights in, or damage to, Collateral; (e) all amounts
        collected on, or distributed on account of, other Collateral, including
        dividends, interest, distributions and Instruments with respect to Investment
        Property and pledged Stock; and (f) any and all other amounts , rights to
        payment or other property acquired upon the sale, lease, license, exchange
        or
        other disposition of Collateral and all rights arising out of
        Collateral.

       

      “Projections”
means
        the projected balance sheets, statements of income and cash flow for Borrower
        and its Subsidiaries by month for the next fiscal year prepared in a manner
        consistent with GAAP and accompanied by senior management’s discussion and
        analysis of such plan.

       

      “Purchase
        Money Lien”
means
        any Lien upon any fixed assets that secures the Purchase Money Indebtedness
        related thereto but only if such Lien shall at all times be confined solely
        to
        the asset the purchase price of which was financed or refinanced through
        the
        incurrence of the Purchase Money Indebtedness secured by such Lien and only
        if
        such Lien secures only such Purchase Money Indebtedness.

       

      “Reserves”
means
        reserves established by Lender from time to time in its good faith credit
        judgment, including to protect Lender’s interest in the Collateral, to protect
        Lender against possible non-payment of Accounts for any reason by Account
        Debtors, to protect against the diminution in value of any Collateral, to
        protect Lender against the possible non-payment of any Obligations, to protect
        Lender for any unpaid taxes, to protect Lender in respect of any state of
        facts
        that could constitute a Default or Event of Default and to protect Lender
        for
        any
        Letter
        of Credit Obligations.

       

      “Revolving
        Credit Advances”
shall
        have the meaning given to such term in Section 2(a).

       

      
        “Software”
means
          all “software” as such term is defined in the UCC, now owned or hereafter
          acquired by any Person, including all computer programs and all supporting
          information provided in connection with a transaction related to any
          program.

         

        “Stock”
means
          all certificated and uncertificated shares, options, warrants, membership
          interests, general or limited partnership interests, participation or other
          equivalents (regardless of how designated) of or in a corporation, partnership,
          limited liability company or equivalent entity whether voting or nonvoting,
          including common stock, preferred stock, or any other “equity security” (as such
          term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
          by the Securities and Exchange Commission under the Securities Exchange
          Act of
          1934).

      

      


      
        
          
            
            

          

          
            9

            
              

            

          

          
            
            

          

        

      

       

      “Subchapter
        S Distributions”
mean
        dividends declared and paid by Borrower to its shareholders, or which could
        have
        been declared and paid by Borrower, in an amount not to exceed the Subchapter
        S
        Tax Liabilities.

       

      “Subchapter
        S Tax Liabilities”
means
        the amount of state and federal income tax paid or to be paid by Borrower’s
        shareholders on taxable income earned by Borrower and attributable to the
        shareholder as a result of Borrower’s Subchapter S tax status, assuming the
        highest marginal income tax rate for federal and state (for the state or
        states
        in which any shareholder is liable for income taxes with respect to such
        income)
        income tax purposes, after taking into account any deduction for state income
        taxes in calculating the federal income tax liability and all other deductions,
        credits, deferrals and other reductions available to the shareholders from
        or
        through Borrower.

       

      “Subsidiary”
of
        any
        Person means a corporation or other entity whose shares of stock or other
        ownership interests having ordinary voting power (other than stock or other
        ownership interests having such power only by reason of the happening of
        a
        contingency) to elect a majority of the directors of such corporation, or
        other
        Persons performing similar functions for such entity, are owned, directly
        or
        indirectly, by such Person.

       

      “Supporting
        Obligations”
means
        all “supporting obligations” as such term is defined in the UCC, including
        letters of credit and guaranties issued in support of Accounts, Chattel Paper,
        Documents, General Intangibles, Instruments, or Investment
        Property.

       

      “Tangible
        Net Worth”
        at a
        particular date means (a) the aggregate amount of all assets of Borrower
        as may
        be properly classified as such in accordance with GAAP consistently applied
        excluding (i)
        all
        amounts owed to Borrower from any employee, officer, agent, director,
        stockholder or Affiliate of Borrower, (ii)
        goodwill, organizational expenses, research and development expenses,
        trademarks, trade names, copyrights, patents, patent applications, licenses
        and
        rights in any thereof, and other similar intangibles, (iii) all deferred
        charges
        or unamortized debt discount and expense, (iv) all reserves carried and not
        deducted from assets, (v) treasury stock and capital stock, obligations or
        other
        securities of, or capital contributions to, or investments in, any of its
        Subsidiaries, (vi) securities which are not readily marketable, (vii) cash
        held
        in a sinking or other analogous fund established for the purpose of redemption,
        retirement or prepayment of capital stock or indebtedness and (viii) such
        other assets as are properly classified as intangible assets under GAAP,
        less
        (b) the aggregate amount of all liabilities of Borrower.

       

      “Term”
means
        the Closing Date through the Termination Date subject to acceleration upon
        the
        occurrence of an Event of Default hereunder or other termination
        hereunder.

       

      “Termination
        Date”
means
        June 29, 2009.

       

      
        “UCC”
means
          the Uniform Commercial Code as the same may, from time be in effect in
          the State
          of New York; provided, 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, Lender’s Lien on any Collateral is governed by the Uniform
          Commercial Code as in effect in a jurisdiction other than the State of
          New York,
          the term “UCC” shall mean the Uniform Commercial Code as in effect in such other
          jurisdiction for purposes of the provisions of this Agreement relating
          to such
          attachment, perfection, priority or remedies and for purposes of definitions
          related to such provisions; provided further, that to the extent that UCC
          is
          used to define any term herein or in any Ancillary Agreement and such term
          is
          defined differently in different Articles or Divisions of the UCC, the
          definition of such term contained in Article or Division 9 shall
          govern.

      

      


      
        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

      

       

      
        (b) Accounting
          Terms.
          Any
          accounting terms used in this Agreement which are not specifically defined
          shall
          have the meanings customarily given them in accordance with GAAP and all
          financial computations shall be computed, unless specifically provided
          herein,
          in accordance with GAAP consistently applied.

         

        (c) Other
          Terms.
          All
          other terms used in this Agreement and defined in the UCC, shall have the
          meaning given therein unless otherwise defined herein.

         

        (d) Rules
          of Construction.
          All
          Schedules, Addenda and Exhibits hereto or expressly identified to this
          Agreement
          are incorporated herein by reference and taken together with this Agreement
          constitute but a single agreement. The words “herein”, hereof” and “hereunder”
or other words of similar import refer to this Agreement as a whole, including
          the Exhibits and Schedules thereto, as the same may be from time to time
          amended, modified, restated or supplemented, and not to any particular
          section,
          subsection or clause contained in this Agreement. Wherever from the context
          it
          appears appropriate, each term stated in either the singular or plural
          shall
          include the singular and the plural, and pronouns stated in the masculine,
          feminine or neuter gender shall include the masculine, the feminine and
          the
          neuter. The term “or” is not exclusive. The term “including” (or any form
          thereof) shall not be limiting or exclusive. All references to statutes
          and
          related regulations shall include any amendments of same and any successor
          statutes and regulations. All references in this Agreement or in the Schedules
          to this Agreement to sections, schedules, disclosure schedules, exhibits,
          and
          attachments shall refer to the corresponding sections, schedules, disclosure
          schedules, exhibits, and attachments of or to this Agreement. All references
          to
          any instruments or agreements, including references to any of this Agreement
          or
          the Ancillary Agreements shall include any and all modifications or amendments
          thereto and any and all extensions or renewals thereof.

         

        2. Revolving
          Credit Advances.

         

        (a) Subject
          to the terms and conditions set forth herein and in the Ancillary Agreements,
          Lender may, in its sole discretion, make revolving credit advances (the
          “Revolving Credit Advances”) to Borrower from time to time during the Term
          which, in the aggregate at any time outstanding together with all outstanding
          Letter of Credit Obligations, will not exceed the lesser of (x) the Maximum
          Revolving Amount or (y) an amount equal to the sum of:

         

        (i) Accounts
          Availability, plus

         

        (ii) Inventory
          Availability, minus

         

        (iii) such
          Reserves as Lender may reasonably deem proper and necessary from time to
          time..

         

        (b) The
          amount derived at any time from Section 2(a)(y)(i), plus (ii), minus (iii)
          shall
          be referred to as the “Formula Amount”. Notwithstanding the limitations set
          forth above, Lender retains the right to lend Borrower from time to time
          such
          amounts in excess of such limitations as Lender may determine in its sole
          discretion.

         

        
          
            
            

          

          
            11

            
              

            

          

          
            
            

          

        

         

        (c) Borrower
          acknowledges that the exercise of Lender’s discretionary rights hereunder may
          result during the term of this Agreement in one or more increases or decreases
          in the advance percentages used in determining Accounts Availability and
          Inventory Availability and Borrower hereby consents to any such increases
          or
          decreases which may limit or restrict advances requested by
          Borrower.

         

        (d) If
          Borrower does not pay any interest, fees, costs or charges to Lender when
          due,
          Borrower shall thereby be deemed to have requested, and Lender is hereby
          authorized at its discretion to make and charge to Borrower’s account, a
          Revolving Credit Advance to Borrower as of such date in an amount equal
          to such
          unpaid interest, fees, costs or charges. 

         

        (e) If
          Borrower at any time fails to perform or observe any of the covenants contained
          in this Agreement or any Ancillary Agreement, Lender may, but need not,
          perform
          or observe such covenant on behalf and in the name, place and stead of
          Borrower
          (or, at Lender’s option, in Lender’s name) and may, but need not, take any and
          all other actions which Lender may deem necessary to cure or correct such
          failure (including the payment of taxes, the satisfaction of Liens, the
          performance of obligations owed to Account Debtors, lessors or other obligors,
          the procurement and maintenance of insurance, the execution of assignments,
          security agreements and financing statements, and the endorsement of
          instruments). The amount of all monies expended and all costs and expenses
          (including attorneys’ fees and legal expenses) incurred by Lender in connection
          with or as a result of the performance or observance of such agreements
          or the
          taking of such action by Lender shall be charged to Borrower’s account as a
          Revolving Credit Advance and added to the Obligations. To facilitate Lender’s
          performance or observance of such covenants of Borrower, Borrower hereby
          irrevocably appoints Lender, or Lender’s delegate, acting alone, as Borrower’s
          attorney in fact (which appointment is coupled with an interest) with the
          right
          (but not the duty) from time to time to create, prepare, complete, execute,
          deliver, endorse or file in the name and on behalf of Borrower any and
          all
          instruments, documents, assignments, security agreements, financing statements,
          applications for insurance and other agreements and writings required to
          be
          obtained, executed delivered or endorsed by Borrower.

         

        (f) Lender
          will account to Borrower monthly with a statement of all Loans and other
          advances, charges and payments made pursuant to this Agreement, and such
          account
          rendered by Lender shall be deemed final, binding and conclusive unless
          Lender
          is notified by Borrower in writing to the contrary within thirty (30) days
          of
          the date each account was rendered specifying the item or items to which
          objection is made.

         

        (g) During
          the Term, Borrower may borrow, prepay and reborrow Revolving Credit Advances,
          all in accordance with the terms and conditions hereof. 

         

        3. Repayment
          of the Revolving Credit Advances.
          Borrower shall be required to (a) make a mandatory repayment hereunder
          at any
          time that the aggregate outstanding principal balance of the Revolving
          Credit
          Advances made by Lender to Borrower hereunder is in excess of the Formula
          Amount, in an amount equal to such excess, and (b) repay on the expiration
          of
          the Term (i) the then aggregate outstanding
          principal balance of Revolving Credit Advances made by Lender to Borrower
          hereunder together with accrued and unpaid interest, fees and charges and
          (ii)
          all other amounts owed Lender under this Agreement and the Ancillary Agreements.
          Any payments of principal, interest, fees or any other amounts payable
          hereunder
          or under any Ancillary Agreement shall be made prior to 12:00 noon (New
          York
          time) on the due date thereof in immediately available funds.

         

        4. Procedure
          for Revolving Credit Advances.
          Borrower may by written or telephonic notice request a borrowing of Revolving
          Credit Advances prior to 11:00 a.m. (New York time) on the Business Day
          of its
          request to incur, on that day, a Revolving Credit Advance. All Revolving
          Credit
          Advances shall be disbursed from whichever office or other place Lender
          may
          designate from time to time and, together with any and all other Obligations
          of
          Borrower to Lender, shall be charged to Borrower’s account on Lender’s books.
          The proceeds of each Revolving Credit Advance made by Lender shall be made
          available to Borrower on the Business Day so requested by way of credit
          to
          Borrower’s operating account maintained with such bank as Borrower designated to
          Lender. Any and all Obligations due and owing hereunder may be charged
          to
          Borrower’s account and shall constitute Revolving Credit Advances.

         

        
          
            
            

          

          
            12

            
              

            

          

          
            
            

          

        

         

        5. Interest
          and Fees. 

         

        (a) Interest.

         

        (i) Except
          as
          modified by Section 5(a)(iii) below, Borrower shall pay interest on the
          unpaid
          principal balance of the Loans for each day they are outstanding at the
          Contract
          Rate.

         

        (ii) Interest
          and fees shall be computed on the basis of actual days elapsed in a year
          of 360
          days. Interest shall be payable in arrears on the last day of each month
          and
          upon termination of this Agreement, or, at Lender’s option, Lender may charge
          Borrower’s account for said interest.

         

        (iii) Effective
          upon the occurrence of any Event of Default and for so long as any Event
          of
          Default shall be continuing, the Contract Rate shall automatically be increased
          by three percentage points (3%) per annum (such increased rate, the “Default
          Rate”), and all outstanding Obligations, including unpaid interest and Letter
          of
          Credit Fees, shall continue to accrue interest from the date of such Event
          of
          Default at the Default Rate applicable to such Obligations. 

         

        (iv) Notwithstanding
          the foregoing, in no event shall the aggregate interest exceed the maximum
          rate
          permitted under any applicable law or regulation, as in effect from time
          to time
          (the “Maximum Legal Rate”) and if any provision of this Agreement or Ancillary
          Agreement is in contravention of any such law or regulation, interest payable
          under this Agreement and each Ancillary Agreement shall be computed on
          the basis
          of the Maximum Legal Rate (so that such interest will not exceed the Maximum
          Legal Rate) and once the amount of interest payable hereunder or under
          the
          Ancillary Agreements is less than the Maximum Legal Rate, Lender shall
          not
          reduce interest payable hereunder or any Ancillary Agreement below the
          amount
          computed based upon the Maximum Legal Rate until the aggregate amount of
          interest paid equals the amount of interest which would have been payable
          if the
          Maximum Legal Rate had not been imposed.

         

        (v) Borrower
          shall pay principal, interest and all other amounts payable hereunder,
          or under
          any Ancillary Agreement, without any deduction whatsoever, including any
          deduction for any set-off or counterclaim.

         

        (b) Fees. 

         

        (i) Minimum
          Loan Fee.
          In
          the
          event the average closing daily unpaid balances of all Loans hereunder
          during
          any calendar month is less than the Minimum Average Monthly Loan Amount,
          Borrower shall pay to Lender a minimum loan fee at a rate per annum equal
          to the
          Contract Rate on the amount by which the Minimum Average Monthly Loan Amount
          exceeds such average closing daily unpaid balances. Such fee shall be charged
          to
          Borrower’s account on the first day of each month with respect to the prior
          month.

         

        
          
            
            

          

          
            13

            
              

            

          

          
            
            

          

        

         

        (ii) Closing
          Fee.
          Upon
          execution of this Agreement by Borrower and Lender, Borrower shall pay
          to Lender
          a closing fee in an amount equal to one percent (1%) of the Maximum Revolving
          Amount. The closing fee shall be deemed earned as of the Closing Date and
          shall
          not be subject to rebate or proration for any reason.

         

        (iii) Facility
          Fee.
          Borrower hereby agrees to pay Lender a facility fee in an amount equal
          to one
          percent (1%) of the Maximum Revolving Amount for each anniversary of the
          Closing
          Date which occurs prior to the Termination Date. The facility fee for the
          period
          ending on the Termination Date shall be deemed fully earned on the Closing
          Date
          and shall be payable by a charge to Borrower’s account upon the earlier of each
          anniversary of the Closing Date or the termination of this Agreement for
          any
          reason.

         

        (iv) Collateral
          Monitoring Fee.
          Borrower shall pay Lender a collateral monitoring fee of $2,000 per month,
          payable on the Closing Date and on the first day of each month
          thereafter.

         

        (v)
           Field
          Examination Fee.
          Upon
          Lender’s performance of any collateral monitoring and/or verification including
          any field examination, collateral analysis or other business analysis,
          the need
          for which is to be determined by Lender and which monitoring is undertaken
          by
          Lender or for Lender’s benefit, an amount equal to the established rate by
          Lender from time to time (which rate on the Closing Date is $750 per person
          per
          day), per person, for each person employed to perform such monitoring together
          with all costs, disbursements and expenses incurred by Lender and the person
          performing such collateral monitoring and/or verification shall be charged
          to
          Borrower’s account.

         

                 
          (vii) Overline/Overadvance
          Fees.
          Lender
          may, from time to time, impose fees in addition to those provided in this
          Agreement under circumstances where Borrower requests Revolving Credit
          Advances
          which would cause Borrower to exceed the Maximum Revolving Amount and/or
          the
          Formula Amount. 

        
           

          6. Security
            Interest.

           

          (a) To
            secure
            the prompt payment to Lender of the Obligations, Borrower hereby assigns,
            pledges and grants to Lender a continuing security interest in and Lien
            upon all
            of the Collateral. All of Borrower’s Books and Records relating to the
            Collateral shall, until delivered to or removed by Lender, be kept by
            Borrower
            in trust for Lender until all Obligations have been paid in full. Each
            confirmatory
            assignment schedule or other form of assignment hereafter executed by
            Borrower
            shall be deemed to include the foregoing grant, whether or not the same
            appears
            therein.

           

          (b) Except
            as
            set forth in Schedule 6(d), as additional security for the payment and
            performance of the Obligations, Borrower hereby assigns to Lender any
            and all
            monies (including proceeds of insurance and refunds of unearned premiums)
            due or
            to become due under, and all other rights of Borrower with respect to,
            any and
            all policies of insurance now or at any time hereafter covering the Collateral
            or any evidence thereof or any business records or valuable papers pertaining
            thereto, and Borrower hereby directs the issuer of any such policy to
            pay all
            such monies directly to Lender. At any time, whether or not a Default
            or Event
            of Default then exists, Lender may (but need not), in Lender’s name or in
            Borrower’s name, execute and deliver proof of claim, receive all such monies,
            endorse checks and other instruments representing payment of such monies,
            and
            adjust, litigate, compromise or release any claim against the issuer
            of any such
            policy.

           

          
            
              
              

            

            
              14

              
                

              

            

            
              
              

            

          

           

          (c) Borrower
            hereby (i) authorizes Lender to file any financing statements, continuation
            statements or amendments thereto that (x) indicate the Collateral (1)
            as all
            assets of Borrower (or any portion of Borrower’s assets) or words of similar
            effect, regardless of whether any particular asset comprised in the Collateral
            falls within the scope of Article 9 of the UCC of such jurisdiction,
            or (2) as
            being of an equal or lesser scope or with greater detail, and (y) contain
            any
            other information required by Part 5 of Article 9 of the UCC for the
            sufficiency
            or filing office acceptance of any financing statement, continuation
            statement
            or amendment and (ii) ratifies its authorization for Lender to have filed
            any
            initial financial statements, or amendments thereto if filed prior to
            the date
            hereof. Borrower acknowledges that it is not authorized to file any financing
            statement or amendment or termination statement with respect to any financing
            statement without the prior written consent of Lender and agrees that
            it will
            not do so without the prior written consent of Lender, subject to Borrower’s
            rights under Section 9-509(d)(2) of the UCC.

           

          (d) Borrower
            hereby grants to Lender an irrevocable, non-exclusive license (exercisable
            upon
            the occurrence and during the continuance of an Event of Default without
            payment
            of royalty or other compensation to Borrower) to use, transfer, license
            or
            sublicense any Intellectual Property now owned, licensed to, or hereafter
            acquired by Borrower, and wherever the same may be located, and including
            in
            such license access to all media in which any of the licensed items may
            be
            recorded or stored and to all computer and automatic machinery software
            and
            programs used for the compilation or printout thereof, and represents,
            promises
            and agrees that any such license or sublicense is not and will not be
            in
            conflict with the contractual or commercial rights of any third Person;
            provided, that such license will terminate on the termination of this
            agreement
            and the payment in full of all Obligations.

           

          7. Representations,
            Warranties and Covenants Concerning the Collateral.
            Borrower represents, warrants (each of which such representations and
            warranties
            shall be deemed repeated upon
            the
            making of each request for a Revolving Credit Advance and made as of
            the time of
            each and every Revolving Credit Advance hereunder) and covenants as
            follows:

           

          (a) All
            of
            the Collateral (i) is owned by Borrower free and clear of all Liens (including
            any claims of infringement) except those in Lender’s favor and Permitted Liens
            and (ii) is not subject to any agreement prohibiting the granting of
            a Lien or
            requiring notice of or consent to the granting of a Lien.

           

          (b) Borrower
            shall not encumber, mortgage, pledge, assign or grant any Lien in any
            Collateral
            or any of Borrower’s other assets to anyone other than Lender and except for
            Permitted Liens.

           

          (c) The
            Liens
            granted pursuant to this Agreement, upon completion of the filings and
            other
            actions listed on Schedule
            7(c)
            (which,
            in the case of all filings and other documents referred to in said Schedule,
            have been delivered to Lender in duly executed form) constitute valid
            perfected
            security interests in all of the Collateral in favor of Lender as security
            for
            the prompt and complete payment and performance of the Obligations, enforceable
            in accordance with the terms hereof against any and all creditors of
            and any
            purchasers from Borrower (other than purchasers of Inventory in the ordinary
            course of business) and such security interests are prior to all other
            Liens on
            the Collateral in existence on the date hereof except for Permitted Liens
            as
            disclosed in Schedule 1B or that have priority by operation of law.


           

          
            
              
              

            

            
              15

              
                

              

            

            
              
              

            

          

           

          (d) No
            effective security agreement, mortgage, deed of trust, financing statement,
            equivalent security or Lien instrument or continuation statement covering
            all or
            any part of the Collateral is or will be on file or of record in any
            public
            office, except those relating to Permitted Liens. 

           

          (e) Borrower
            shall not dispose of any of the Collateral whether by sale, lease or
            otherwise
            except for (i) the sale of Inventory in the ordinary course of business,
            and
            (ii) the disposition or transfer in the ordinary course of business during
            any
            fiscal year of obsolete and worn-out Equipment having an aggregate fair
            market
            value of not more than $20,000 and only to the extent that (x) the proceeds
            of
            any such disposition are used to acquire replacement Equipment which
            is subject
            to Lender’s first priority security interest or (y) the proceeds of which are
            remitted to Lender in reduction of the Obligations.

           

          (f) Borrower
            shall defend the right, title and interest of Lender in and to the Collateral
            against the claims and demands of all Persons whomsoever, and take such
            actions,
            including (i) all actions necessary to grant Lender “control” of any Investment
            Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel
            Paper
            owned by Borrower, with any agreements establishing control to be in
            form and
            substance satisfactory to Lender, (ii) the prompt delivery to Lender
            of all
            original Instruments, Chattel Paper, negotiable Documents and certificated
            Stock
            owned by Borrower (in each case, accompanied by stock powers, allonges
            or other
            instruments of transfer executed in blank), (iii) notification of Lender’s
            interest in Collateral at Lender’s request, and (iv) the institution of
            litigation against third parties as shall be prudent in order to protect
            and
            preserve Borrower’s and Lender’s respective and several interests in the
            Collateral.

           

          (g) Borrower
            shall promptly, and in any event within two (2) Business Days after the
            same is
            acquired by it, notify Lender of any commercial tort claim (as defined
            in the
            UCC) acquired by it and unless otherwise consented by Lender, Borrower
            shall
            enter into a supplement to this Loan Agreement granting to Lender a Lien
            in such
            commercial tort claim.

           

          (h) Borrower
            shall place notations upon Borrower’s Books and Records and any financial
            statement of Borrower to disclose Lender’s Lien in the Collateral.

           

          (i) If
            Borrower retains possession of any Chattel Paper or Instrument with Lender’s
            consent, such Chattel Paper and Instruments shall be marked with the
            following
            legend: “This writing and the obligations evidenced or secured hereby are
            subject to the security interest of Gerber Finance Inc.”

           

          (j) Borrower
            shall perform all other steps requested by Lender to create and maintain
            in
            Lender’s favor a valid perfected first Lien in all Collateral subject only to
            Permitted Liens.

           

          (k) As
            of the
            date of each Borrowing Base Certificate delivered to Lender, each Account
            listed
            thereon as an Eligible Account shall be an Eligible Account and all Inventory
            listed thereon as Eligible Inventory shall be Eligible Inventory. Borrower
            shall
            notify Lender promptly and in any event within two (2) Business Days
            after
            obtaining knowledge thereof (i) of any event or circumstance that to
            Borrower’s
            knowledge would cause Lender to consider any then existing Account or
            Inventory
            as no longer constituting an Eligible Account or Eligible Inventory,
            as the case
            may be; (ii) of any material delay in Borrower’s performance of any of its
            obligations to any Account Debtor; (iii) of any assertion by an Account
            Debtor
            of any material claims, offsets or counterclaims; (iv) of any allowances,
            credits and/or monies granted by Borrower to any Account Debtor; (v)
            of all
            material adverse information relating to the financial condition of an
            Account
            Debtor; (vi) of any material return of goods; and (vii) of any loss,
            damage or
            destruction of any of the Collateral.

           

          
            
              
              

            

            
              16

              
                

              

            

            
              
              

            

          

           

          (l) All
            Accounts (i) represent complete bona fide transactions which require
            no further
            act under any circumstances on Borrower’s part to make such Accounts payable by
            the Account Debtors, (ii) to the best of Borrower’s knowledge, are not subject
            to any present, future or contingent offsets or counterclaims, and (iii)
            do not
            represent bill and hold sales, consignment sales, guaranteed sales, sale
            or
            return or other similar understandings or obligations of any Affiliate
            or
            Subsidiary of Borrower, except for those which are Eligible Accounts.
            Borrower
            has not made, and will not make, any agreement with any Account Debtor
            for any
            extension of time for the payment of any Account, any compromise or settlement
            for less than the full amount thereof, any release of any Account Debtor
            from
            liability therefor, or any deduction therefrom except a discount or allowance
            for prompt or early payment allowed by Borrower in the ordinary course
            of its
            business consistent with historical practice and as previously disclosed
            to
            Lender in writing. Schedule
            7(l)
            sets
            forth each contract of Borrower with any Account Debtor that gives such
            Account
            Debtor the right (under such contract, under common law or otherwise)
            to offset
            any Accounts for Borrower’s failure to perform under such contract and Borrower
            has obtained an offset waiver for each such contract in form and substance
            satisfactory to Lender.

           

          (m) Borrower
            shall keep and maintain the Equipment in good operating condition, except
            for
            ordinary wear and tear, and shall make all necessary repairs and replacements
            thereof so that the value and operating efficiency shall at all times
            be
            maintained and preserved. Borrower shall not permit any such items to
            become a
            Fixture to real estate or accessions to other personal property.

           

          (n) All
            Inventory manufactured by Borrower in the United States of America shall
            be
            produced in accordance with the requirements of the Federal Fair Labor
            Standards
            Act of 1938, as amended and all rules, regulations and orders related
            thereto or
            promulgated thereunder.

           

          (o) Borrower
            shall maintain and keep all of Borrower’s Books and Records concerning the
            Collateral at Borrower’s executive offices listed in Schedule
            12(d).

           

          (p) Borrower
            shall maintain and keep the Collateral at the addresses listed in Schedule
            12(d),
            provided, that Borrower may change such locations or open a new location
            provided, that Borrower provides Lender thirty (30) days prior written
            notice of
            such change or new location and (ii) prior to such change or opening
            of a new
            location it executes and delivers to Lender such financing statements
            and other
            agreements as Lender may request, including landlord agreements, mortgagee
            agreements and warehouse agreements, each in form and substance satisfactory
            to
            Lender.

           

          (q) Schedule
            7(q)
            lists
            all banks and other financial institutions at which Borrower maintains
            deposits
            and/or other accounts, and such Schedule correctly identifies the name,
            address
            and telephone number of each such depository, the name in which the account
            is
            held, a description of the purpose
            of the account, and the complete account number. Borrower shall not establish
            any depository or other bank account of any with any financial institution
            (other than the accounts set forth on Schedule
            7(q)
            without
            Lender’s prior written consent.

           

          8. Collateral
            Accounts.
            Borrower
            will irrevocably direct all present and future Account Debtors and other
            Persons
            obligated to make payments constituting Collateral to make such payments
            directly to the Collateral Account. All of Borrower’s invoices, account
            statements and other written or oral communications directing, instructing,
            demanding or requesting payment of any Account of Borrower or any other
            amount
            constituting Collateral shall conspicuously direct that all payments
            be made to
            the Collateral Account and shall include the address for the Collateral
            Account.
            If, notwithstanding the instructions to Account Debtors to make payments
            to the
            Collateral Account, Borrower receives any payments, Borrower shall immediately
            deposit such payments into the Collateral Account. Until so deposited,
            Borrower
            shall hold all such payments in trust for and as the property of Lender
            and
            shall not commingle such payments with any of its other funds or
            property.

           

          
            
              
              

            

            
              17

              
                

              

            

            
              
              

            

          

           

          (b) All
            deposits in the Collateral Account shall constitute Proceeds. Lender
            from time
            to time may apply deposited funds in the Collateral Account to the payment
            of
            the Obligations, in any order or manner of application satisfactory to
            Lender.

           

          (c) All
            items
            deposited in the Collateral Account shall be subject to final payment.
            If any
            such item is returned uncollected, Borrower will immediately pay Lender,
            or, for
            items deposited in the Collateral Account, the bank maintaining such
            account,
            the amount of that item, or such bank at its discretion may charge any
            uncollected item to Borrower’s commercial account or other account at such bank.
            Borrower shall be liable as an endorser on all items deposited in the
            Collateral
            Account, whether or not in fact endorsed by Borrower.

           

          9. Collection
            and Maintenance of Collateral.

           

          (a) Lender
            may at any time verify Borrower’s Accounts utilizing an audit control company or
            any other agent of Lender. Lender or Lender’s designee may notify Account
            Debtors, at any time at Lender’s sole discretion, of Lender’s security interest
            in Accounts, collect them directly and charge the collection costs and
            expenses
            to Borrower’s account, but, unless and until Lender does so or gives Borrower
            other instructions, Borrower shall collect all Accounts for Lender, receive
            all
            payments thereon for Lender’s benefit in trust as Lender’s trustee and
            immediately deliver them to Lender in their original form with all necessary
            endorsements or, as directed by Lender, deposit such payments as directed
            by
            Lender pursuant to Section 8. 

           

          (b) For
            purposes of determining the balance of the Loans outstanding, Lender
            will credit
            (conditional upon final collection) all such payments to Borrower’s account upon
            receipt by Lender of good funds in dollars of the United States of America
            in
            Lender’s account, provided, however, for purposes of computing interest on the
            Obligations, Lender will credit (conditional upon final collection) all
            such
            payments to Borrower’s account three (3) Business Days after receipt by Lender
            of such funds in dollars of the United States of America in Lender’s account.
            Any amount received by Lender after 12:00 noon (New York time) on any
            Business
            Day shall be deemed received on the next Business Day. 

           

          10. Inspections.
            At
            all
            times during normal business hours, with reasonable notice, Lender shall
            have
            the right to (a) have access to, visit, inspect, review, evaluate and
            make
            physical verification and appraisals of Borrower’s properties and the
            Collateral, (b) inspect, examine and copy and make extracts from Borrower’s
            Books and Records, including management letters prepared by independent
            accountants,
            and (c) discuss with Borrower’s principal officers, and independent accountants,
            Borrower’s business, assets, liabilities, financial condition, results of
            operations and business prospects. Borrower will deliver to Lender any
            instrument necessary for Lender to obtain records from any service bureau
            maintaining records for Borrower. If any internally prepared financial
            information, including that required under this paragraph is unsatisfactory
            in
            any manner to Lender, Lender may request that the Accountant’s review the
            same.

           

          11. Financial
            Reporting.
            Borrower will deliver, or cause to be delivered, to Lender each of the
            following, which shall be in form and detail acceptable to Lender:

           

          (a) As
            soon
            as available, and in any event within ninety (90) days after the end
            of each
            fiscal year of Borrower, Borrower’s audited financial statements with the
            unqualified opinion of independent certified public accountants of recognized
            standing selected by Borrower and acceptable to Lender (the “Accountants”),
            which annual financial statements shall include Borrower’s balance sheet as at
            the end of such fiscal year and the related statements of Borrower’s income,
            retained earnings and cash flows for the fiscal year then ended, prepared,
            if
            Lender so requests, on a consolidating and consolidated basis to include
            any
            Affiliates, all in reasonable detail and prepared in accordance with
            GAAP,
            together with (i) copies of all management letters prepared by such accountants;
            (ii) a report signed by the Accountants stating that in making the
            investigations necessary for said opinion report they obtained no knowledge,
            except as specifically stated, of any Default or Event of Default; and
            (iii) a
            certificate of Borrower’s President or Chief Financial Officer stating that such
            financial statements have been prepared in accordance with GAAP and whether
            or
            not such officer has knowledge of the occurrence of any Default or Event
            of
            Default hereunder and, if so, stating in reasonable detail the facts
            with
            respect thereto;

           

          
            
              
              

            

            
              18

              
                

              

            

            
              
              

            

          

           

          (b) As
            soon
            as available and in any event within thirty (30) days after the end of
            each
            month, an unaudited/internal balance sheet and statements of income,
            retained
            earnings and cash flows of Borrower as at the end of and for such month
            and for
            the year to date period then ended, prepared, if Lender so requests,
            on a
            consolidating and consolidated basis to include any Affiliates, in reasonable
            detail and stating in comparative form the figures for the corresponding
            date
            and periods in the previous year, all prepared substantially in accordance
            with
            GAAP, subject to year-end audit adjustments; and accompanied by a certificate
            of
            Borrower’s President or Chief Financial Officer, stating (i) that such financial
            statements have been prepared substantially in accordance with GAAP,
            subject to
            year-end audit adjustments, and (ii) whether or not such officer has
            knowledge
            of the occurrence of any Default or Event of Default hereunder not theretofore
            reported and remedied and, if so, stating in reasonable detail the facts
            with
            respect thereto;

           

          (c) Within
            fifteen (15) days after the end of each month or more frequently if Lender
            so
            requests, agings of Borrower’s Accounts and its accounts payable, an Inventory
            report, and a calculation of Borrower’s Accounts, Eligible Accounts, Inventory
            and Eligible Inventory as at the end of such month or shorter time period
            in the
            form of Exhibit
            B;

           

          (d) At
            least
            thirty (30) days before the beginning of each fiscal year of Borrower,
            the
            Projections, each in reasonable detail, representing Borrower’s good faith
            Projections and certified by Borrower’s President or Chief Financial Officer as
            being the most accurate Projections available and identical to the Projections
            used by Borrower for internal planning purposes, together with such supporting
            schedules and information as Lender may in its discretion require;

           

          (e) Together
            with each request for a Loan (but in no event later than the first day
            of each
            month) and at such intervals as Lender may request a Borrowing Base Certificate
            in the form of Exhibit
            C
            as of
            the last day of the previous Borrowing Base Certificate detailing ineligible
            Accounts and Inventory of adjustment to the Formula Amount, certified
            as true
            and correct by the President or Chief Financial Officer of Borrower;
            

           

          (f) Together
            with each request for a Loan (but in no event later than the first day
            of each
            month) and at such other intervals as Lender may require: (i) copies
            of all
            entries to the sales journal and the cash receipt journal; (ii) copies
            of all
            credit memos; and (iii) copies of all invoices in excess of five thousand
            dollars ($5,000), together with proof of delivery, in each case as and
            for the
            immediately preceding week; 

           

          (g) Promptly
            following Lender’s request, receivable schedules, copies of invoices to Account
            Debtors, shipping documents, delivery receipts and such other material,
            reports,
            records or information as Lender may request;

           

          
            
              
              

            

            
              19

              
                

              

            

            
              
              

            

          

           

          (h) Promptly
            upon their distribution, copies of all financial statements, reports
            and proxy
            statements which Borrower shall have sent to its stockholders, promptly
            after
            the sending or filing thereof, copies of all regular and periodic reports
            which
            Borrower shall file with the Securities and Exchange Commission or any
            national
            securities exchange; and

           

          (i) Borrower
            will cause each Guarantor to comply with the financial reporting requirements
            set forth in their respective Guaranties.

           

          12. Additional
            Representations, Warranties and Covenants.
            Borrower
            represents, warrants (each of which such representations and warranties
            shall be
            deemed repeated upon the making of a request for a Revolving Credit Advance
            and
            made as of the time of each Revolving Credit Advance made hereunder),
            and
            covenants as follows:

           

          (a) Borrower
            is a corporation or limited liability company, as applicable, duly organized
            and
            validly existing under the laws of the jurisdiction of its incorporation,
            organization or formation and duly qualified and in good standing in
            every other
            state or jurisdiction in which the nature of Borrower’s business requires such
            qualification.

           

          (b) The
            execution, delivery and performance of this Agreement and the Ancillary
            Agreements (i) have been duly authorized, (ii) are not in contravention
            of
            Borrower’s certificate of incorporation or formation, by-laws, operating
            agreement or of any indenture, agreement or undertaking to which Borrower
            is a
            party or by which Borrower is bound and (iii) are within Borrower’s corporate
            powers.

           

          (c) This
            Agreement and the Ancillary Agreements executed and delivered by Borrower
            are
            Borrower’s legal, valid and binding obligations, enforceable in accordance with
            their terms.

           

          (d) Schedule
            8
            sets
            forth Borrower’s name as it appears in official filing in the state of its
            incorporation or organization, the type of entity of Borrower, the
            organizational identification number issued by Borrower’s state of incorporation
            or organization or a statement that no such number has been issued, Borrower’s
            state of organization or incorporation, and the location of Borrower’s chief
            executive office, corporate offices, warehouses, other locations of Collateral
            and locations where records with respect to Collateral are kept (including
            in
            each case the county of such locations) and, except as set forth in such
            Schedule
            8,
            such
            locations have not changed during the preceding twelve months. As of
            the Closing
            Date, during the prior five years, except as set forth in Schedule
            8,
            Borrower has not been known as
            or
            conducted business in any other name (including trade names). Borrower
            has only
            one state of incorporation or organization.

           

          (e) Borrower
            will not change (i) its name as it appears in the official filings in
            the state
            of its incorporation or formation, (ii) the type of legal entity it is,
            (iii)
            its organization identification number, if any, issued by its state of
            incorporation or organization, (iv) its state of incorporation or organization
            or (v) amend its certificate of incorporation, by-laws, certificate of
            formation, operating agreement or other organizational document.

           

          (f) Borrower
            is solvent, able to pay its debts as they mature, has capital sufficient
            to
            carry on its business and all businesses in which Borrower is about to
            engage
            and the fair saleable value of its assets (calculated on a going concern
            basis)
            is in excess of the amount of its liabilities.

           

          (g) There
            is
            no pending or threatened litigation, action or proceeding which involves
            the
            possibility of having a Material Adverse Effect.

           

          
            
              
              

            

            
              20

              
                

              

            

            
              
              

            

          

           

          (h) All
            balance sheets and income statements which have been delivered to Lender
            fairly,
            accurately and properly state Borrower’s financial condition on a basis
            consistent with that of previous financial statements and there has been
            no
            material adverse change in Borrower’s financial condition as reflected in such
            statements since the date thereof and such statements do not fail to
            disclose
            any fact or facts which might have a Material Adverse Effect on Borrower’s
            financial condition.

           

          (i) Borrower
            possesses all of the Intellectual Property necessary to conduct its business.
            There has been no assertion or claim of violation or infringement with
            respect
            to any Intellectual Property. Schedule
            12
            sets
            forth all Intellectual Property of Borrower.

           

          (j) Borrower
            will pay or discharge when due all taxes, assessments and governmental
            charges
            or levies imposed upon Borrower or any of the Collateral unless such
            amounts are
            being diligently contested in good faith by appropriate proceedings provided
            that (i) adequate reserves with respect thereto are maintained on the
            books of
            Borrower in conformity with GAAP and (ii) the related Lien shall have
            no effect
            on the priority of the Liens in favor of Lender or the value of the assets
            in
            which Lender has a Lien.

           

          (k) Borrower
            will promptly inform Lender in writing of: (i) the commencement of all
            proceedings and investigations by or before and/or the receipt of any
            notices
            from, any governmental or nongovernmental body and all actions and proceedings
            in any court or before any arbitrator against or in any way concerning
            any event
            which might singly or in the aggregate, have a Material Adverse Effect;
            (ii) any
            amendment of Borrower’s certificate of incorporation, by-laws, certification of
            formation, operating agreement or other organizational document; (iii)
            any
            change which has had or might have a Material Adverse Effect; (iv) any
            Event of
            Default or Default; (v) any default or any event which with the passage
            of time
            or giving of notice or both would constitute a default under any agreement
            for
            the payment of money to which Borrower is a party or by which Borrower
            or any of
            Borrower’s properties may be bound which would have a Material Adverse Effect
            and (vii) any change in Borrower’s name or any other name used in its
            business.

           

          (l) Borrower
            will not (i) create, incur, assume or suffer to exist indebtedness for
            borrowed
            money in excess of $3 million at any time outstanding whether secured
            or
            unsecured, other than Borrower’s indebtedness to Lender and as set forth on
Schedule
            12(l)
            attached
            hereto and made a part hereof; (ii) cancel any debt owing to it; (iii)
            assume,
            guarantee, endorse or otherwise become directly or contingently
            liable in connection with any obligations in excess of $3 million for
            borrowed
            money and $1 million for any other obligations at any time outstanding
            of any
            Person other than another Borrower except the endorsement of negotiable
            instruments by Borrower for deposit or collection or similar transactions
            in the
            ordinary course of business; (iv) directly or indirectly declare, pay
            or make
            any cash or property dividend or distribution on its common stock or
            apply any
            of its funds, property or assets to the purchase, redemption or other
            retirement
            of its common stock;(v) purchase or hold beneficially any Stock or other
            securities or evidences of indebtedness of, make or permit to exist any
            loans or
            advances to, or make any investment or acquire any interest whatsoever
            in, any
            other Person, including any partnership or joint venture, except (i)
            travel
            advances or loans to Borrower’s officers and employees not exceeding at any one
            time an aggregate of $125,000 or (ii) for any such acquisition or contribution
            to a joint venture which is for an effective purchase price or capital
            or other
            contribution valued not in excess of $15 million; (vi) create or permit
            to exist
            any Subsidiary, other than any Subsidiary in existence on the date hereof
            and
            listed in Schedule 12(m) or any Subsidiary formed in furtherance of an
            acquisition or contribution permitted as aforesaid or hereafter;(vii)
            directly
            or indirectly, prepay any indebtedness (other than to Lender), or repurchase,
            redeem, retire or otherwise acquire any indebtedness; (viii) enter into
            any
            merger, consolidation or other reorganization with or into any other
            Person or
            acquire all or a portion of the assets or Stock of any Person or permit
            any
            other Person to consolidate with or merge with it, in either case for
            an
            effective purchase price valued in excess of $15 million; (ix) materially
            change
            the nature of the business in which it is presently engaged; (x) change
            its
            fiscal year or make any changes in accounting treatment and reporting
            practices
            without prior written notice to Lender except as required by GAAP or
            in the tax
            reporting treatment or except as required by law; (xi) enter into any
            transaction with any employee, director or Affiliate, except in the ordinary
            course on arms-length terms; or (xii) bill Accounts under any name except
            the
            present name of Borrower, and any Subsidiary permitted under clause
            (vi).

           

          
            
              
              

            

            
              21

              
                

              

            

            
              
              

            

          

           

          (m) All
            Projections of Borrower’s performance prepared by Borrower or at Borrower’s
            direction and delivered to Lender will represent, at the time of delivery
            to
            Lender, Borrower’s best estimate of Borrower’s future financial performance and
            will be based upon assumptions which are reasonable in light of Borrower’s past
            performance and then current business conditions.

           

          (n) None
            of
            the proceeds of the Loans hereunder will be used directly or indirectly
            to
“purchase” or “carry” “margin stock” or to repay indebtedness incurred to
“purchase” or “carry” “margin stock” within the respective meanings of each of
            the quoted terms under Regulation U of the Board of Governors of the
            Federal
            Reserve System as now and from time to time hereafter in effect. 

           

          (o) Borrower
            will bear the full risk of loss from any loss of any nature whatsoever
            with
            respect to the Collateral. At Borrower’s own cost and expense in amounts and
            with carriers acceptable to Lender, Borrower shall (i) keep all its insurable
            properties and properties in which it has an interest insured against
            the
            hazards of fire, flood, sprinkler leakage, those hazards covered by extended
            coverage insurance and such other hazards, and for such amounts, as is
            customary
            in the case of companies engaged in businesses similar to Borrower’s including
            business interruption insurance; (ii) maintain a bond in such amounts
            as is
            customary in the case of companies engaged in businesses similar to Borrower’s
            insuring against larceny, embezzlement or other criminal misappropriation
            of
            insured’s officers and employees who may either singly or jointly with others
            at
            any time have access to the assets or funds of Borrower either directly
            or
            through Governmental Authority to draw upon such funds or to direct generally
            the disposition of such assets; (iii) maintain public and product liability
            insurance against claims for personal injury, death or property damage
            suffered
            by others; (iv) maintain all such worker’s compensation or similar insurance as
            may be required under the laws of any state or jurisdiction in which
            Borrower is
            engaged in business; and (v) furnish Lender with (x) copies of all policies
            and
            evidence of the maintenance
            of such policies at least thirty (30) days before any expiration date,
            (y)
            endorsements to such policies naming Lender as “co-insured” or “additional
            insured” and appropriate loss payable endorsements in form and substance
            satisfactory to Lender, naming Lender as loss payee, and (z) evidence
            that as to
            Lender the insurance coverage shall not be impaired or invalidated by
            any act or
            neglect of Borrower and the insurer will provide Lender with at least
            thirty
            (30) days notice prior to cancellation. Borrower shall instruct the insurance
            carriers that in the event of any loss thereunder, the carriers shall
            make
            payment for such loss to lender and not to Borrower and Lender jointly.
            If any
            insurance losses are paid by check, draft or other instrument payable
            to
            Borrower and Lender jointly, Lender may endorse Borrower’s name thereon and do
            such other things as Lender may deem advisable to reduce the same to
            cash.
            Lender is hereby authorized to adjust and compromise claims. All loss
            recoveries
            received by Lender upon any such insurance may be applied to the Obligations,
            in
            such order as Lender in its sole discretion shall determine. Any surplus
            shall
            be paid by Lender to Borrower or applied as may be otherwise required
            by law.
            Any deficiency thereon shall be paid by Borrower to Lender, on
            demand.

           

          (p) 
            (i) 
            Borrower
            has delivered to Lender all environmental assessments, audits, reports,
            permits,
            licenses and other documents describing or relating in any way to Borrower’s
            business or its property. 

           

          
            
              
              

            

            
              22

              
                

              

            

            
              
              

            

          

           

          (ii) The
            operation of each Borrower’s business is and will continue to be in compliance
            in all material respects with all applicable federal, state and local
            laws,
            rules and ordinances, including to all laws, rules, regulations and orders
            relating to taxes, payment and withholding of payroll taxes, employer
            and
            employee contributions and similar items, securities, employee retirement
            and
            welfare benefits, employee health safety and environmental matters.

           

          (iii) Borrower’s
            obligation and the indemnifications hereunder shall survive the termination
            of
            this Agreement;

           

          (iv) For
            purposes of Section 12(f), all references to Borrower’s property shall be deemed
            to include all of Borrower’s right, title and interest in and to all owned
            and/or leased premises.

           

          (q) Based
            upon the ERISA:
            (i)
            Borrower has not engaged in any Prohibited Transactions as defined in
            Section
            406 of ERISA and Section 4975 of the Internal Revenue Code, as amended;
            (ii)
            Borrower has met all applicable minimum funding requirements under Section
            302
            of ERISA in respect of its plans; (iii) Borrower has no knowledge of
            any event
            or occurrence which would cause the Pension Benefit Guaranty Corporation
            to
            institute proceedings under Title IV of ERISA to terminate any employee
            benefit
            plan(s); (iv) Borrower has no fiduciary responsibility for investments
            with
            respect to any plan existing for the benefit of persons other than Borrower’s
            employees; and (v) Borrower has not withdrawn, completely or partially,
            from any
            multi-employer pension plan so as to incur liability under the Multiemployer
            Pension Plan Amendments Act of 1980.

          
             

            13. Financial
              Covenants.

             

            (a) Borrower
              shall not at any time permit its Tangible Net Worth to be less than
              ($5,000,000). 

             

            (b) Borrower
              and its Subsidiaries’ liabilities at the end of each month shall not exceed two
              times Borrower’s Net Worth. 

             

            (c) Borrower
              and its Subsidiaries shall not incur a loss of greater than $3,000,000
              (three
              million dollars) for the first half of Borrower’s fiscal year ending
              2008.

             

            (d) Borrower
              and its Subsidiaries shall not incur a loss in any fiscal quarter as
              of March
              31, 2008 and thereafter.

             

            (e) Borrower
              and its Subsidiaries shall be profitable for the fiscal year ending
              June 30,
              2008.

             

            (f) For
              purposes of this Agreement, a breach of any financial covenants set
              forth herein
              shall be deemed to have occurred as of any date of determination by
              Lender or as
              of the last day of any specified measurement period, regardless of
              when the
              financial statements reflecting such breach are delivered to
              Lender.

             

            14. Further
              Assurances.
              At
              any
              time and from time to time, upon the written request of Lender and
              at the sole
              expense of Borrower, Borrower shall promptly and duly execute and deliver
              any
              and all such further instruments and documents and take such further
              action as
              Lender may request (a) to obtain the full benefits of this Agreement
              and the
              Ancillary Agreements, (b) to protect, preserve and maintain Lender’s rights in
              the Collateral and under this Agreement or any Ancillary Agreement,
              or (c) to
              enable Lender to exercise all or any of the rights and powers herein
              granted or
              any Ancillary Agreement.

             

            
              
                
                

              

              
                23

                
                  

                

              

              
                
                

              

            

             

            15. Power
              of Attorney.
              Borrower hereby appoints Lender or any other Person whom Lender may
              designate as
              Borrower’s attorney, with power to: (i) endorse Borrower’s name on any checks,
              notes, acceptances, money orders, drafts or other forms of payment
              or security
              that may come into Lender’s possession; (ii) sign Borrower’s name on any invoice
              or bill of lading relating to any Accounts, drafts against Account
              Debtors,
              schedules and assignments of Accounts, notices of assignment, financing
              statements and other public records, verifications of Accounts and
              notices to or
              from Account Debtors; (iii) verify the validity, amount or any other
              matter
              relating to any Account by mail, telephone, telegraph or otherwise
              with Account
              Debtors; (iv) execute customs declarations and such other documents
              as may be
              required to clear Inventory through Customs; (v) do all things necessary
              to
              carry out this Agreement, any Ancillary Agreement and all related documents;
              and
              (vi) on or after the occurrence and continuation of an Event of Default,
              notify
              the post office authorities to change the address for delivery of Borrower’s
              mail to an address designated by Lender, and to receive, open and dispose
              of all
              mail addressed to Borrower. Borrower hereby ratifies and approves all
              acts of
              the attorney. Neither Lender nor the attorney will be liable for any
              acts or
              omissions or for any error of judgment or mistake of fact or law. This
              power,
              being coupled with an interest, is irrevocable so long as Lender has
              a security
              interest and until the Obligations have been fully satisfied.

             

            16. Term
              of Agreement.
              Any
              obligation of Lender to make Loans and extend their financial accommodations
              under this Agreement or any Ancillary Agreement shall continue in full
              force and
              effect until the expiration of the Term. The termination of the Agreement
              shall
              not affect any of Lender’s rights hereunder or any Ancillary Agreement and the
              provisions hereof and thereof shall continue to be fully operative
              until all
              transactions entered into, rights or interests created and the Obligations
              have
              been disposed of, concluded or liquidated. The Termination Date shall
              be
              automatically extended for successive periods of one (1) year each
              unless
              Borrower shall have provided Lender with a written notice of termination,
              at
              least sixty (60) days prior to the expiration of the Termination Date
              or any
              renewal of the Termination Date. Notwithstanding the foregoing, Lender
              shall
              release its security interests at any time after thirty (30) days notice
              upon
              payment to it of all Obligations if Borrower shall have (i) provided
              Lender with
              an
              executed release of any and all claims which Borrower may have or thereafter
              have under this
              Agreement and/or any Ancillary Agreement and (ii) paid to Lender an
              early
              payment fee in an amount equal to the Minimum Loan interest for one
              year plus
one
              percent (1%) of the Maximum Revolving Amount if
              incurred prior to the first anniversary of this Agreement. Such
              early payment fee shall also be due and payable by Borrower to Lender
              upon
              termination of this Agreement by Lender after the occurrence of an
              Event of
              Default.

             

            17. Termination
              of Lien.
              The
              Liens and rights granted to Lender hereunder and any Ancillary Agreements
              and
              the financing statements filed in connection herewith or therewith
              shall
              continue in full force and effect, notwithstanding the termination
              of this
              Agreement or the fact that Borrower’s account may from time to time be
              temporarily in a zero or credit position, until (a) all of the Obligations
              of
              Borrower have been paid or performed in full after the termination
              of this
              Agreement or Borrower has furnished Lender with an indemnification
              satisfactory
              to Lender with respect thereto and (b) Borrower has an executed release
              of any
              and all claims which Borrower may have or thereafter have under this
              Agreement
              or any other Ancillary Agreement. Accordingly, Borrower waives any
              rights which
              it may have under the UCC to demand the filing of termination statements
              with
              respect to the Collateral, and Lender shall not be required to send
              such
              termination statements to Borrower, or to file them with any filing
              office,
              unless and until this Agreement and the Ancillary Agreements shall
              have been
              terminated in accordance with their terms and all Obligations paid
              in full in
              immediately available funds.

             

            
              
                
                

              

              
                24

                
                  

                

              

              
                
                

              

            

             

            18. Events
              of Default.
              The
              occurrence of any of the following shall constitute an Event of
              Default:

             

            (a) failure
              to make payment of any of the Obligations within three (3) Business
              Days of the
              date when required hereunder;

             

            (b) failure
              to pay any taxes within fifteen (15) days when due unless such taxes
              are being
              contested in good faith by appropriate proceedings and with respect
              to which
              adequate reserves have been provided on Borrower’s books;

             

            (c) failure
              to perform under and/or committing any breach of this Agreement or
              any Ancillary
              Agreement or any other agreement between Borrower and Lender, provided
              that,
              with respect to the breach of an affirmative covenant, Borrower shall
              have five
              (5) days to cure such breach from the earlier of (i) the date Borrower
              became
              aware of such breach or (ii) Lender notifies Borrower of such
              breach;

             

            (d) the
              occurrence of a default under any agreement to which Borrower is a
              party with
              third parties which has a Material Adverse Effect;

             

            (e) any
              representation, warranty or statement made by Borrower hereunder, in
              any
              Ancillary Agreement, any certificate, statement or document delivered
              pursuant
              to the terms hereof, or in connection with the transactions contemplated
              by this
              Agreement should at any time be false or misleading in any material
              respect;

             

            (f) if
              any
              Guarantor or Validity Guarantor attempts to terminate, challenges the
              validity
              of, or its liability under any Guaranty Agreement, any Guarantor Security
              Agreement or any Validity Agreement or if any individual Guarantor
              or Validity
              Guarantor shall die and Borrower shall fail to provide Lender with
              a replacement
              Guarantor acceptable to Lender within thirty (30) days of such occurrence
              or if
              any other Guarantor shall cease to exist;

             

            (g) should
              any Guarantor default in its obligations under any Guaranty Agreement,
              any
              Guarantor Security Agreement or any Validity Guarantor or if any proceeding
              shall be brought to challenge the validity, binding effect of any Guaranty
              Agreement, or any Guarantor Security Agreement or any Validity Guaranty,
              or
              should any Guarantor or Validity Guarantor breach any representation,
              warranty
              or covenant contained in any Guaranty Agreement, any Validity Agreement
              or any
              Guarantor Security Agreement or should any Guaranty Agreement or Guarantor
              Security Agreement cease to be a valid, binding and enforceable
              obligation;

             

            (h) an
              attachment or levy is made upon any of Borrower’s assets having an aggregate
              value in excess of $25,000, or a judgment is rendered against Borrower
              or any of
              Borrower’s property involving a liability of more than $25,000, which shall
              not
              have been vacated, discharged, stayed or bonded pending appeal within
              thirty
              (30) days from the entry thereof;

             

            (i) any
              change in Borrower’s condition or affairs (financial or otherwise) which in
              Lender’s opinion impairs the Collateral or the ability of Borrower to perform
              its Obligations;

             

            (j) any
              Lien
              created hereunder or under any Ancillary Agreement for any reason ceases
              to be
              or is not a valid and perfected Lien having a first priority
              interest;

             

            
              
                
                

              

              
                25

                
                  

                

              

              
                
                

              

            

             

            (k) if
              Borrower shall (i) apply for, consent to or suffer to exist the appointment
              of,
              or the taking of possession by, a receiver, custodian, trustee or liquidator
              of
              itself or of all or a substantial part of its property, (ii) make a
              general
              assignment for the benefit of creditors, (iii) commence a voluntary
              case under
              the federal bankruptcy laws (as now or hereafter in effect), (iv) be
              adjudicated
              a bankrupt or insolvent, (v) file a petition seeking to take advantage
              of any
              other law providing for the relief of debtors, (vi) acquiesce to, or
              fail to
              have dismissed, within thirty (30) days, any petition filed against
              it in any
              involuntary case under such bankruptcy laws, or (vii) take any action
              for the
              purpose of effecting any of the foregoing;

             

            (l) Borrower
              shall admit in writing its inability, or be generally unable to pay
              its debts as
              they become due or cease operations of its present business;

             

            (m) any
              Affiliate or any Subsidiary or any Guarantor shall (i) apply for, consent
              to or
              suffer to exist the appointment of, or the taking possession by, a
              receiver,
              custodian, trustee or liquidator of itself or of all or a substantial
              part of
              its property, (ii) admit in writing its inability, or be generally
              unable, to
              pay its debts as they become due or cease operations of its present
              business,
              (iii) make a general assignment for the benefit of creditors, (iv)
              commence a
              voluntary case under the federal bankruptcy laws (as now or hereafter
              in
              effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
              seeking to take advantage of any other law providing for the relief
              of debtors,
              (vii) acquiesce to, or fail to have dismissed, within thirty (30) days,
              any
              petition filed against it in any involuntary case under such bankruptcy
              laws or
              (viii) take any action for the purpose of effecting any of the
              foregoing;

             

            (n) Borrower
              directly or indirectly sells, assigns, transfers, conveys, or suffers
              or permits
              to occur any sale, assignment, transfer or conveyance of any assets
              of Borrower
              or any interest therein, except as permitted herein;

             

            (o) Borrower
              fails to operate in the ordinary course of business;

             

            (p) Lender
              shall in good faith deem itself insecure or unsafe or shall fear diminution
              in
              value, removal or waste of the Collateral;

             

            (q) a
              default
              by Borrower in the payment, when due, of any principal of or interest
              on any
              indebtedness for money borrowed; 

             

            (r) the
              occurrence of a Change of Control or a change in either President,
              Chief
              Executive Officer or Chief Financial Officer of Borrower; 

             

            (s) the
              indictment or threatened indictment of Borrower, any officer of Borrower
              or any
              Guarantor under any criminal statute, or commencement or threatened
              commencement
              of criminal or civil proceeding against Borrower, any officer of Borrower
              or any
              Guarantor pursuant to which statute or proceeding penalties or remedies
              sought
              or available include forfeiture of any of the property of Borrower
              or any
              Guarantor;

             

            19. Remedies.
              Upon
              the occurrence of an Event of Default pursuant to Section 18(k) herein,
              all
              Obligations shall be immediately due and payable and this Agreement
              shall be
              deemed terminated; upon the occurrence and continuation of any other
              of the
              Events of Default, Lender shall have the right to demand repayment
              in full of
              all Obligations, whether or not otherwise due. Until all Obligations
              have been
              fully satisfied, Lender shall retain its Lien in all Collateral. Lender
              shall
              have, in addition to all other rights provided herein, the rights and
              remedies
              of a secured party under the UCC, and under other applicable law, all
              other
              legal and equitable rights to which Lender may be entitled, including
              the right
              to take immediate possession of the Collateral, to require Borrower
              to assemble
              the Collateral, at Borrower’s expense, and to make it available to Lender at a
              place designated by Lender which is reasonably convenient to both parties
              and to
              enter any of the premises of Borrower or wherever the Collateral shall
              be
              located, with or without force or process of law, and to keep and store
              the same
              on said premises until sold (and if said premises be the property of
              Borrower,
              Borrower agrees not to charge Lender for storage thereof), and the
              right to
              apply for the appointment of a receiver for Borrower’s property.
              Further, Lender may, at any time or times after default by Borrower,
              sell and
              deliver all Collateral held by or for Lender at public or private sale
              for cash,
              upon credit or otherwise, at such prices and upon such terms as Lender,
              in
              Lender’s sole discretion, deems advisable or Lender may otherwise recover
              upon
              the Collateral in any commercially reasonable manner as Lender, in
              its sole
              discretion, deems advisable. The requirement of reasonable notice shall
              be met
              if such notice is mailed postage prepaid to Borrower at Borrower’s address as
              shown in Lender’s records, at least ten (10) days before the time of the event
              of which notice is being given. Lender may be the purchaser at any
              sale, if it
              is public. In connection with the exercise of the foregoing remedies,
              Lender is
              granted permission to use all of Borrower’s trademarks, tradenames, tradestyles,
              patents, patent applications, licenses, franchises and other proprietary
              rights
              which are used in connection with (a) Inventory for the purpose of
              disposing of
              such Inventory and (b) Equipment for the purpose of completing the
              manufacture
              of unfinished goods. The proceeds of sale shall be applied first to
              all costs
              and expenses of sale, including attorneys’ fees, and second to the payment (in
              whatever order Lender elects) of all Obligations (including the cash
              collateralization of any Letter of Credit Obligations). After the indefeasible
              payment and satisfaction in full in cash of all of the Obligations,
              and after
              the payment by Lender of any other amount required by any provision
              of law,
              including Section 608(a)(1) of the Code (but only after Lender has
              received what
              Lender considers reasonable proof of a subordinate party’s security interest),
              the surplus, if any, shall be paid to Borrower or its representatives
              or to
              whosoever may be lawfully entitled to receive the same, or as a court
              of
              competent jurisdiction may direct. Borrower shall remain liable to
              Lender for
              any deficiency.

             

            
              
                
                

              

              
                26

                
                  

                

              

              
                
                

              

            

             

            20. Waivers.
              To the
              full extent permitted by applicable law, Borrower waives (a) presentment,
              demand
              and protest, and notice of presentment, dishonor, intent to accelerate,
              acceleration, protest, default, nonpayment, maturity, release, compromise,
              settlement, extension or renewal of any or all of this Agreement and
              the
              Ancillary Agreements or any other notes, commercial paper, Accounts,
              Contracts,
              Documents, Instruments, Chattel Paper and guaranties at any time held
              by Lender
              on which Borrower may in any way be liable, and hereby ratifies and
              confirms
              whatever Lender may do in this regard; (b) all rights to notice and
              a hearing
              prior to Lender’s taking possession or control of, or to Lender’s replevy,
              attachment or levy upon, any Collateral or any bond or security that
              might be
              required by any court prior to allowing Lender to exercise any of its
              remedies;
              and (c) the benefit of all valuation, appraisal and exemption laws.
              Borrower
              acknowledges that it has been advised by counsel of its choices and
              decisions
              with respect to this Agreement, the Ancillary Agreements and the transactions
              evidenced hereby and thereby. 

             

            21. Expenses.
              Borrower
              shall pay all of Lender’s out-of-pocket costs and expenses, including reasonable
              fees and disbursements of counsel and appraisers, in connection with
              the
              preparation, execution and delivery of this Agreement and the Ancillary
              Agreements, and in
              connection with the prosecution or defense of any action, contest,
              dispute, suit
              or proceeding concerning any matter in any way arising out of, related
              to or
              connected with this Agreement or any Ancillary Agreement. Borrower
              shall also
              pay all of Lender’s fees, charges, out-of-pocket costs and expenses, including
              reasonable fees and disbursements of counsel and appraisers, in connection
              with
              (a) the preparation, execution and delivery of any waiver, any amendment
              thereto
              or consent proposed or executed in connection with the transactions
              contemplated
              by this Agreement or the Ancillary Agreements, (b) Lender’s obtaining
              performance of the Obligations under this Agreement and any Ancillary
              Agreement,
              including, but not limited to, the enforcement or defense of Lender’s security
              interests, assignments of rights and Liens hereunder as valid perfected
              security
              interests, (c) any attempt to inspect, verify, protect, collect, sell,
              liquidate
              or otherwise dispose of any Collateral, (d) any appraisals or re-appraisals
              of
              any property (real or personal) pledged to Lender by Borrower as Collateral
              for,
              or any other Person as security for, Borrower’s Obligations hereunder and (e)
              any consultations in connection with any of the foregoing. Borrower
              shall also
              pay Lender’s customary bank charges for all bank services (including wire
              transfers) performed or caused to be performed by Lender for Borrower
              at
              Borrower’s request or in connection with Borrower’s loan account with Lender.
              All such costs and expenses together with all filing, recording and
              search fees,
              taxes and interest payable by Borrower to Lender shall be payable on
              demand and
              shall be secured by the Collateral. If any tax by any Governmental
              Authority is
              or may be imposed on or as a result of any transaction between Borrower
              and
              Lender which Lender is or may be required to withhold or pay, Borrower
              agrees to
              indemnify and hold Lender harmless in respect of such taxes, and Borrower
              will
              repay to Lender the amount of any such taxes which shall be charged
              to
              Borrower’s account; and until Borrower shall furnish Lender with indemnity
              therefor (or supply Lender with evidence satisfactory to it that due
              provision
              for the payment thereof has been made), Lender may hold without interest
              any
              balance standing to Borrower’s credit and Lender shall retain its Liens in any
              and all Collateral.

             

            
              
                
                

              

              
                27

                
                  

                

              

              
                
                

              

            

             

            22. Assignment
              By Lender.
              Lender
              may assign any or all of the Obligations together with any or all of
              the
              security therefor and any transferee shall succeed to all of Lender’s rights
              with respect thereto. Upon such transfer, Lender shall be released
              from all
              responsibility for the Collateral to the extent same is assigned to
              any
              transferee. Lender may from time to time sell or otherwise grant participations
              in any of the Obligations and the holder of any such participation
              shall,
              subject to the terms of any agreement between Lender and such holder,
              be
              entitled to the same benefits as Lender with respect to any security
              for the
              Obligations in which such holder is a participant. Borrower agrees
              that each
              such holder may exercise any and all rights of banker’s lien, set-off and
              counterclaim with respect to its participation in the Obligations as
              fully as
              though Borrower were directly indebted to such holder in the amount
              of such
              participation.

             

            23. No
              Waiver; Cumulative Remedies.
              Failure
              by Lender to exercise any right, remedy or option under this Agreement,
              any
              Ancillary Agreement or any supplement hereto or thereto or any other
              agreement
              between Borrower and Lender or delay by Lender in exercising the same,
              will not
              operate as a waiver; no waiver by Lender will be effective unless it
              is in
              writing and then only to the extent specifically stated. Lender’s rights and
              remedies under
              this Agreement and the Ancillary Agreements will be cumulative and
              not exclusive
              of any other right or remedy which Lender may have.

             

            24. Application
              of Payments.
              Borrower irrevocably waives the right to direct the application of
              any and all
              payments at any time or times hereafter received by Lender from or
              on Borrower’s
              behalf and Borrower hereby irrevocably agrees that Lender shall have
              the
              continuing exclusive right to apply and reapply any and all payments
              received at
              any time or times hereafter against Borrower’s Obligations hereunder in such
              manner as Lender may deem advisable notwithstanding any entry by Lender
              upon any
              of Lender’s books and records.

             

            25. Indemnity.
              Borrower agrees to indemnify and hold Lender and its affiliates, and
              their
              respective employees, attorneys and agents (each, an “Indemnified Person”),
              harmless from and against any and all suits, actions, proceedings,
              claims,
              damages, losses, liabilities and expenses of any kind or nature whatsoever
              (including attorneys’ fees and disbursements and other costs of investigation or
              defense, including those incurred upon any appeal) which may be instituted
              or
              asserted against or incurred by any such Indemnified Person as the
              result of
              credit having been extended, suspended or terminated under this Agreement
              or any
              of the Ancillary Agreements or with respect to the execution, delivery,
              enforcement, performance and administration of, or in any other way
              arising out
              of or relating to, this Agreement, the Ancillary Agreements or any
              other
              documents or transactions contemplated by or referred to herein or
              therein and
              any actions or failures to act with respect to any of the foregoing,
              except to
              the extent that any such indemnified liability is finally determined
              by a court
              of competent jurisdiction to have resulted solely from such Indemnified
              Person’s
              gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL
              BE
              RESPONSIBLE OR LIABLE TO BORROWER OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
              ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
              DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY
              OR
              CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING
              BEEN
              EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
              AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER
              OR
              THEREUNDER.

             

            
              
                
                

              

              
                28

                
                  

                

              

              
                
                

              

            

             

            26. Revival.
              Borrower
              further agrees that to the extent Borrower makes a payment or payments
              to
              Lender, which payment or payments or any part thereof are subsequently
              invalidated, declared to be fraudulent or preferential, set aside and/or
              required to be repaid to a trustee, receiver or any other party under
              any
              bankruptcy act, state or federal law, common law or equitable cause,
              then, to
              the extent of such payment or repayment, the obligation or part thereof
              intended
              to be satisfied shall be revived and continued in full force and effect
              as if
              said payment had not been made.

             

            27. Notices.
              Any
              notice or request hereunder may be given to Borrower or Lender at the
              respective
              addresses set forth below or as may hereafter be specified in a notice
              designated as a change of address under this Section. Any notice or
              request
              hereunder shall be given by registered or certified mail, return receipt
              requested, hand delivery, overnight mail or telecopy
              (confirmed by mail). Notices and requests shall be, in the case of
              those by hand
              delivery, deemed to have been given when delivered to any officer of
              the party
              to whom it is addressed, in the case of those by mail or overnight
              mail, deemed
              to have been given when deposited in the mail or with the overnight
              mail
              carrier, and, in the case of a telecopy, when confirmed.   
              

          

          
            

              
                	Notices
                        shall
                        be provided as follows:
	 	 
	
                        If
                          to Lender:

                      	
                        Gerber
                          Finance Inc.

                      
	 	
                        110
                          East 55th
                          Street, 7th
                          Floor

                      
	 	
                        New
                          York, New York 10022-1540

                      
	 	
                        Attention:
                          Jennifer McGuinness 

                      
	 	
                        Telephone:
                          212-888-3833

                      
	 	
                        Telecopier:
                          212-888-1637

                      
	 	 
	
                        If
                          to Borrower:

                      	
                        Nutrition
                          21, Inc., Nutrition 21, LLC, and Iceland Health, LLC

                      
	 	
                        4
                          Manhattanville Road

                      
	 	
                        Purchase,
                          New York 10577

                      
	 	
                        Attention:
                          Alan J. Kirschbaum

                      
	
                         

                      	
                        Telecopier:
                          877-270-9170

                      
	 	Telephone:
                        914-701-4548


              

            

             

            28. Governing
              Law, Jurisdiction and Waiver of Jury Trial.

             

            (a) THIS
              AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
              AND
              ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
              TO
              CONTRACTS MADE AND PERFORMED IN SUCH STATE WITHOUT REGARD TO THE CONFLICT
              OF
              LAWS PRINCIPLES THEREOF.

             

            
              
                
                

              

              
                29

                
                  

                

              

              
                
                

              

            

             

            (b) BORROWER
              HEREBY CONSENTS AND AGREES THAT THE FEDERAL COURTS LOCATED IN THE SOUTHERN
              DISTRICT OF NEW YORK AND THE STATE COURTS LOCATED IN NEW YORK COUNTY,
              THE STATE
              OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
              ANY CLAIMS
              OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT
              OR ANY OF
              THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED
              TO THIS
              AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED,
              THAT
              LENDER AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS
              MAY HAVE TO
              BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED,
              THAT
              NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER
              FROM
              BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
              TO COLLECT
              THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
              FOR THE
              OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR
              OF LENDER.
              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 WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
              IMPROPER
              VENUE OR FORUM NON CONVENIENS.
              BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
              OTHER
              PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
              SUCH
              SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
              MAIL
              ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN SECTION
              27
              AND THAT
              SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER’S ACTUAL
              RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS,
              PROPER
              POSTAGE PREPAID.

             

            (c) THE
              PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
              SUCH
              APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
              OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES
              HERETO
              WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING
              BROUGHT TO
              RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE
              BETWEEN
              LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL
              TO THE
              RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,
              ANY
              ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.

             

            29. Limitation
              of Liability.
              Borrower acknowledges and understands that in order to assure repayment
              of the
              Obligations hereunder Lender may be required to exercise any and all
              of Lender’s
              rights and remedies hereunder and agrees that neither Lender nor any
              of Lender’s
              agents shall be liable for acts taken or omissions made in connection
              herewith
              or therewith except for actual bad faith.

             

            30. Entire
              Understanding.
              This
              Agreement and the Ancillary Agreements contain the entire understanding
              between
              Borrower and Lender and any promises, representations, warranties or
              guarantees
              not herein contained shall have no force and effect unless in writing,
              signed by
              Borrower’s and Lender’s respective officers. Neither this Agreement, the
              Ancillary Agreements, nor any portion or provisions thereof may be
              changed,
              modified, amended, waived, supplemented, discharged, cancelled or terminated
              orally or by any course of dealing, or in any manner other than by
              an agreement
              in writing, signed by the party to be charged.

             

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

             

            
              
                
                

              

              
                30

                
                  

                

              

              
                
                

              

            

             

            32. Captions.
              All
              captions are and shall be without substantive meaning or content of
              any kind
              whatsoever.

             

            33. Counterparts;
              Telecopier Signatures.
              This
              Agreement may be executed in one or more counterparts, each of which
              shall
              constitute an original and all of which taken together shall constitute
              one and
              the same agreement. Any signature delivered by a party via telecopier
              transmission shall be deemed to be any original signature hereto.

             

            34. Construction.
              The
              parties acknowledge that each party and its counsel have reviewed this
              Agreement
              and that the normal rule of construction to the effect that any ambiguities
              are
              to be resolved against the drafting party shall not be employed in
              the
              interpretation of this Agreement or any amendments, schedules or exhibits
              thereto.

             

            35. Publicity.
              Borrower hereby authorizes Lender to make appropriate announcements
              of the
              financial arrangement entered into by and between Borrower and Lender,
              including, without limitation, announcements which are commonly known
              as
              tombstones, in such publications and to such selected parties as Lender
              shall in
              its sole and absolute discretion deem appropriate.

             

            IN
              WITNESS WHEREOF, this Agreement has been duly executed as of the day
              and year
              first above written.

             

          

        

      

    

    
      	NUTRITION
              21, INC.	NUTRITION
              21, LLC
	 	 
	By:	
                 
                /s/ Alan J. Kirschbaum 
                
                

              

            	By:
              	
                 
                /s/ Alan J. Kirschbaum

              
                

              

            
	Alan
              J. Kirschbaum	Alan
              J. Kirschbaum
	Chief
              Financial Officer	Chief
              Financial Officer


    

    
           

      
        	ICELAND
                HEALTH, LLC	GERBER
                FINANCE INC.
	 	 
	By:	
                   
                  /s/ Alan J. Kirschbaum

                
                  

                

              	By:	
                   
                  /s/ Frederick Meagher

                
                  

                

              
	
                Alan
                  J. Kirschbaum

              	
                Frederick
                  Meagher

              
	
                Chief
                  Financial Officer

              	
                Executive
                  Vice President

              


      

        

      
        
          
          

        

        
          31

          
            

          

        

        
          
          

        

      

    

    
       

      Exhibit
        A

       

      PROMISSORY
        NOTE

       

      
        	$5,000,000	
                 June
                  30, 2007

              


      

       

      This
        Promissory Note (this “Note”) is executed and delivered under and pursuant to
        the terms of that certain Loan and Security Agreement dated as of June 30,
        2007
        (as amended, modified, supplemented or restated from time to time, the “Loan
        Agreement”) by and between Nutrition 21, Inc., a New York corporation, Nutrition
        21, LLC., a New York limited liability company, and Iceland Health Inc.,
        a New
        York corporation, (collectively “Borrower”), and Gerber Finance Inc. (“Lender”).
        Capitalized terms not otherwise defined herein shall have the meanings ascribed
        thereto in the Loan Agreement.

       

      FOR
        VALUE
        RECEIVED, Borrower promises to pay to the order of Lender at its offices
        located
        at 110 East 55th
        Street,
        New York, New York 10022 or at such other place as the holder hereof may
        from
        time to time designate to Borrower in writing:

       

      (i) the
        principal sum of FIVE MILLION AND 00/100 DOLLARS ($5,000,000), or if different
        from such amount, the unpaid principal balance of Loans as may be due and
        owing
        from time to time under the Loan Agreement, payable in accordance with the
        provisions of the Loan Agreement, subject to acceleration upon the occurrence
        of
        an Event of Default under the Loan Agreement, or earlier termination of the
        Loan
        Agreement pursuant to the terms thereof; and

       

      (ii) interest
        on the principal amount of this Note from time to time outstanding, payable
        at
        the applicable Contract Rate in accordance with the provisions of the Loan
        Agreement. Upon and after the occurrence of an Event of Default, and during
        the
        continuation thereof, interest shall be payable at the applicable Default
        Rate.
        In no event, however, shall interest hereunder exceed the maximum interest
        rate
        permitted by law. 

       

      This
        Note
        is the Note referred to in the Loan Agreement and is secured, inter alia,
        by the
        liens granted pursuant to the Loan Agreement and the Ancillary Agreements,
        is
        entitled to the benefits of the Loan
        Agreement and the Ancillary Agreements, and is subject to all of the agreements,
        terms and conditions therein contained. 

       

      This
        Note
        may be voluntarily prepaid, in whole or in part, on the terms and conditions
        set
        forth in the Loan Agreement.

       

      If
        an
        Event of Default under Section 18(k) of the Loan Agreement shall occur, then
        this Note shall immediately become due and payable, without notice, together
        with attorneys’ fees if the collection hereof is placed in the hands of an
        attorney to obtain or enforce payment hereof. If any other Event of Default
        shall occur under the Loan Agreement or any of the Ancillary Agreements which is
        not cured within any applicable grace period, then this Note may, as provided
        in
        the Loan Agreement, be declared to be immediately due and payable, without
        notice, together with attorneys’ fees, if the collection hereof is placed in the
        hands of an attorney to obtain or enforce payment hereof.

       

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

       

      To
        the
        fullest extent permitted by applicable law, Borrower waives:
        (a) presentment, demand and protest, and notice of presentment, dishonor,
        intent to accelerate, acceleration, protest, default, nonpayment, maturity,
        release, compromise, settlement, extension or renewal of any or all of the
        Obligations, the Loan Agreement, this Note or any other Ancillary Agreement;
        (b)
        all rights to notice and a hearing prior to Lender’s taking possession or
        control of, or to Lender’s replevy, attachment or levy upon, the Collateral or
        any bond or security that might be required by any court prior to allowing
        Lender to exercise any of its remedies; and (c) the benefit of all valuation,
        appraisal and exemption laws.

       

      
        
          
          

        

        
          32

          
            

          

        

        
          
          

        

      

       

      Borrower
        acknowledges that this Note is executed as part of a commercial transaction
        and
        that the proceeds of this Note will not be used for any personal or consumer
        purpose.

       

      Borrower
        agrees to pay to Lender all fees and expenses described in the Loan Agreement
        and the Ancillary Agreements.

      
        	 	 	 
	 	
                NUTRITION
                  21, INC.

              
	 
 	 
 	 
 
	 	By:  	     
                /s/ Alan J. Kirschbaum
	 	
                
                  

                

                     
                  Alan J. Kirschbaum

                     
                  Chief Financial Officer

              
	 	 
	 	NUTRITION
                21, LLC
	 	 
	 	By:	
                     
                  /s/ Alan J. Kirschbaum 
                  
                  

                

                     
                  Alan J. Kirschbaum

              
	 	 	     
                Chief Financial Officer
	 	 	 
	 	ICELAND
                HEALTH, LLC
	 	 
	 	By:	
                     
                  /s/ Alan J. Kirschbaum 
                  
                  

                

                     
                  Alan J. Kirschbaum

              
	 	 	     
                Chief Financial Officer


      

       

      
        	
                STATE
                  OF NEW YORK

              	
                )

              
	 	
                :
                  ss.:

              
	COUNTY
                OF WESTCHESTER	)


      

       

      On
        the
        16th day of July, 2007, before me personally came Alan J. Kirschbaum, to
        me
        known, who being by me duly sworn, did depose and say that he is the
Chief
        Financial Officer
        of
        Nutrition 21, Inc., the corporation described in and which executed the
        foregoing instrument; and that he was authorized to sign her/his name thereto
        by
        order of the board of directors of said corporation.

        
          	
                       
                    Rosalee J. Golczewski 
                    
                    

                  

                  Notary
                    Public

                


        

      

       

      
        
          
          

        

        
          33

          
            

          

        

        
          
          

        

      

       

      
        
          	
                  STATE
                    OF NEW YORK

                	
                  )

                
	 	
                  :
                    ss.:

                
	COUNTY
                  OF WESTCHESTER	)


        

         

      

      On
        the
        16th day of July, 2007, before me personally came Alan J. Kirschbaum to me
        known, who being by me duly sworn, did depose and say that he is the
Chief
        Financial Officer
        of
        Nutrition 21, LLC, the company described in and which executed the foregoing
        instrument; and that he was authorized to sign her/his name thereto by order
        of
        the board of directors of said corporation.

      
        	
                     
                  Rosalee J. Golczewski 
                  
                  

                

                Notary
                  Public

              


      

       

      
        
           

          
            
              	
                      STATE
                        OF NEW YORK

                    	
                      )

                    
	 	
                      :
                        ss.:

                    
	COUNTY
                      OF WESTCHESTER	)


            

             

          

        

      

      On
        the
        16th day of July, 2007, before me personally came Alan J. Kirschbaum to me
        known, who being by me duly sworn, did depose and say that he is the
Chief
        Financial Officer of Iceland
        Health, LLC, the company described in and which executed the foregoing
        instrument; and that he was authorized to sign her/his name thereto by order
        of
        the board of directors of said corporation.

      
        
          	
                       
                    Rosalee J. Golczewski 
                    
                    

                  

                  Notary
                    Public

                


        

         

        
          
            
            

          

          
            34

            
              

            

          

          
            
            

          

        

      

       

      Exhibit
        B

      FORM
        OF
        MONTHLY STATEMENT REPORT

      NUTRITION
        21, INC., NUTRITION 21, LLC

      ICELAND
        HEALTH, LLC

      


      
        	
                GERBER
                  FINANCE INC.

              	
                REMINDER:

              
	
                110
                  East 55th Street, 7th Floor

              	
                To
                  avoid a late reporting fee, this must be

              
	
                New
                  York, New York 10022

              	
                received
                  by the 15th of the month

              
	
                Telephone
                  (212) 888-3833 

              	
                following
                  the month herein reported.

              
	
                Facsimile
                  (212) 888-1637

              	 


      

      


      For
        Month Ending:    , 20__  

      
        

      

      
        
          	
                  A.
                    RECEIVABLES*

                	
                  B.
                    INVENTORY**

                
	
                                                      In-House

                	 	 	 
	 	 	 
	
                  Current            
                    

                	$________________	
                  Finished
                    Goods

                	$____________________
	
                  31
                    - 60 Days          
                    

                	$________________	
                  Work-in-Progress

                	$____________________
	
                  61
                    - 90 Days          
                    

                	$________________	
                  Raw
                    Materials

                	$____________________
	
                  Over
                    90
                    Days         

                	$________________	
                  Goods
                    In Transit

                	$____________________
	 	 	 	 
	
                  TOTAL                 
                    

                	$________________	
                  TOTAL

                	$____________________


        

      

      


      *Must
        be
        accompanied with the detailed invoice date A/R aging and a roll-forward
        schedule. 

      **
        Must
        be accompanied with the perpetual inventory report  

      C. BORROWINGS/LOAN
        BALANCES***

       

      
        	
                Bank
                  - Cash Balance 

              	
                $_____________

              	
                 

              	
                Gerber
                  Balance

              	
                $_____________

              	
              	
                 

              
	
                Bank
                  - Loan Balance

              	
                $_____________

              	
                 

              	
                Gerber
                  Open L/C’s

              	
                $_____________

              	
              	
                 

              
	
                Other
                  Accounts Payable

              	
                $_____________

              	
                 

              	
                Other
                  Notes Payable

              	
                $_____________

              	
              	
                 

              


      

      


      ***Must
        be accompanied with a copy of accounts payable aging, operating account bank
        statement and A/R lender monthly statement (if applicable).

      D.
        SALES

      Confirmed
        Sales
        Orders             $___________  

      
        	 	
                Current

              	
                 

              	
                Last
                  Year

              	
                 

              
	
                Total
                  sales for month

              	
                
                  $__________________

                

              	
                 

              	
                
                  $__________________

                

              	
                 

              
	
                Total
                  sales year to date

              	
                
                  $__________________

                

              	
                 

              	
                
                  $__________________

                

              	
                 

              


      

      
        

      

      E.
        DISCLOSURE
        

        

      
        	 	
                (Circle
                  One)

              
	
                Have
                  any judgments been entered against and/or is there any litigation
                  pending
                  or threatened against you or your company?

              	
                YES

              	
                NO

              
	
                Has
                  any Material Adverse Effect occurred in the affairs of your company’s
                  business, including without limitation any default in the payment
                  of
                  borrowed money or the failure to meet any Obligations as the same
                  become
                  due during the reported month?

              	
                YES

              	
                NO

              
	
                Are
                  any tax liabilities, including payroll, sales, franchise, state
                  and
                  federal past due?

              	
                YES

              	
                NO

              
	
                Are
                  there any inter-company transactions during the month herein
                  reported?

              	
                YES

              	
                NO

              


      

      If
        you
        have answered YES to any of the above disclosures please attach a detailed
        explanation.

      I
        certify
        that the above information is true and accurate based upon our books and
        records
        and to the best of our knowledge and belief.

       

      
        	
                Date: ________________________

              	
                By:
                  ___________________________________

              
	 	
                 Name
                  & Title (must be authorized to
                  sign)

              


      

      


      
        
           

        

        
          35