Exhibit 10.28



 





Exhibit 10.28




SECURITY AGREEMENT




CALLIOPE




and




CHAD THERAPEUTICS, INC.




Dated: July 31, 2007




Security Agreement




 









 





	 	 	 	 	 	 	 
	1.

	 	General Definitions and Terms; Rules of Construction
	 	 	4	 
	 
	 	 	 	 	 	 
	2.

	 	Loan Facility
	 	 	5	 
	 
	 	 	 	 	 	 
	3.

	 	Repayment of the Loans
	 	 	7	 
	 
	 	 	 	 	 	 
	4.

	 	Procedure for Revolving Loans
	 	 	7	 
	 
	 	 	 	 	 	 
	5.

	 	Interest and Payments
	 	 	7	 
	 
	 	 	 	 	 	 
	6.

	 	Security Interest
	 	 	8	 
	 
	 	 	 	 	 	 
	7.

	 	Representations, Warranties and Covenants Concerning the Collateral
	 	 	9	 
	 
	 	 	 	 	 	 
	8.

	 	Payment of Accounts
	 	 	12	 
	 
	 	 	 	 	 	 
	9.

	 	Collection and Maintenance of Collateral
	 	 	12	 
	 
	 	 	 	 	 	 
	10.

	 	Inspections and Appraisals
	 	 	13	 
	 
	 	 	 	 	 	 
	11.

	 	Financial Reporting
	 	 	13	 
	 
	 	 	 	 	 	 
	12.

	 	Additional Representations and Warranties
	 	 	15	 
	 
	 	 	 	 	 	 
	13.

	 	Covenants
	 	 	25	 
	 
	 	 	 	 	 	 
	14.

	 	Further Assurances
	 	 	31	 
	 
	 	 	 	 	 	 
	15.

	 	Representations, Warranties and Covenants of Calliope
	 	 	31	 
	 
	 	 	 	 	 	 
	16.

	 	Power of Attorney
	 	 	33	 
	 
	 	 	 	 	 	 
	17.

	 	Term of Agreement
	 	 	33	 
	 
	 	 	 	 	 	 
	18.

	 	Termination of Lien
	 	 	34	 
	 
	 	 	 	 	 	 
	19.

	 	Events of Default
	 	 	34	 
	 
	 	 	 	 	 	 
	20.

	 	Remedies
	 	 	36	 
	 
	 	 	 	 	 	 
	21.

	 	Waivers
	 	 	37	 
	 
	 	 	 	 	 	 
	22.

	 	Expenses
	 	 	37	 
	 
	 	 	 	 	 	 
	23.

	 	Assignment
	 	 	38	 
	 
	 	 	 	 	 	 
	24.

	 	No Waiver; Cumulative Remedies
	 	 	38	 
	 
	 	 	 	 	 	 
	25.

	 	Application of Payments
	 	 	38	 






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	26.

	 	Indemnity
	 	 	39	 
	 
	 	 	 	 	 	 
	27.

	 	Revival
	 	 	39	 
	 
	 	 	 	 	 	 
	28.

	 	Borrowing Agency Provisions
	 	 	39	 
	 
	 	 	 	 	 	 
	29.

	 	Notices
	 	 	40	 
	 
	 	 	 	 	 	 
	30.

	 	Governing Law, Jurisdiction and Waiver of Jury Trial
	 	 	41	 
	 
	 	 	 	 	 	 
	31.

	 	Limitation of Liability
	 	 	42	 
	 
	 	 	 	 	 	 
	32.

	 	Entire Understanding; Maximum Interest
	 	 	42	 
	 
	 	 	 	 	 	 
	33.

	 	Severability
	 	 	43	 
	 
	 	 	 	 	 	 
	34.

	 	Survival
	 	 	43	 
	 
	 	 	 	 	 	 
	35.

	 	Captions
	 	 	43	 
	 
	 	 	 	 	 	 
	36.

	 	Counterparts; Telecopier Signatures
	 	 	43	 
	 
	 	 	 	 	 	 
	37.

	 	Construction
	 	 	43	 
	 
	 	 	 	 	 	 
	38.

	 	Publicity
	 	 	43	 
	 
	 	 	 	 	 	 
	39.

	 	Joinder
	 	 	43	 
	 
	 	 	 	 	 	 
	40.

	 	Legends
	 	 	44	 






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SECURITY AGREEMENT




     This Security Agreement is made as of July 30, 2007 by and among CALLIOPE CAPITAL CORPORATION,
a Delaware company having an address at c/o United Corporate Services, Inc. 874 Walker Road, Suite
C Dover Delaware 19904 (“Calliope”) and CHAD THERAPUTICS, INC., a California corporation
(the “Parent”).



BACKGROUND




     The Parent has requested that Calliope make advances available to the Parent; and




     Calliope has agreed to make such advances 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. General Definitions and Terms; Rules of Construction.



     (a) General Definitions. Capitalized terms used in this Agreement shall have the
meanings assigned to them in Annex A.



     (b) Accounting Terms. Any accounting terms used in this Agreement that 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, Annexes 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, Addenda,
Annexes 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, Addenda, Annexes and
Exhibits 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



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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. Loan Facility.



     (a) Revolving Loans.



          (i) Subject to the terms and conditions set forth herein and in the Ancillary Agreements,
Calliope may make revolving loans (the “Revolving Loans”) to the Parent from time to time
during the Term which, in the aggregate at any time outstanding, will not exceed the lesser of (x)
(I) the Capital Availability Amount minus (II) such reserves as Calliope may reasonably in its good
faith judgment deem proper and necessary from time to time (the “Reserves”) and (y) an
amount equal to (I) the Accounts Availability plus (II) the Inventory Availability, minus (III) the
Reserves. The amount derived at any time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II)
minus 2(a)(i)(y)(III) shall be referred to as the “Formula Amount.” The Parent shall
execute and deliver to Calliope on the Closing Date the Secured Revolving Note and the Secured
Convertible Term Note. The Parent hereby acknowledges and agrees that Calliope’s obligation to
purchase the Secured Revolving Note and the Secured Convertible Term Note from the Parent on the
Closing Date shall be contingent upon the satisfaction (or waiver by Calliope in its sole
discretion) of the items and matters set forth in the closing checklist provided by Calliope to the
Parent on or prior to the Closing Date. The Parent hereby further acknowledges and agrees that,
immediately prior to each borrowing hereunder and immediately after giving effect thereto, the
Parent shall be deemed to have certified to Calliope that at the time of each such proposed
borrowing and also after giving effect thereto (i) there shall exist no Event of Default, (ii) all
representations, warranties and covenants made by the Parent in connection with this Agreement and
the Ancillary Agreements are true, correct and complete and (iii) all of Parent’s covenant
requirements under this Agreement and the Ancillary Agreements have been met. The Parent hereby
agrees to provide a certificate confirming the foregoing concurrently with each request for a
borrowing hereunder.




          (ii) Notwithstanding the limitations set forth above, if requested by Parent, Calliope retains
the right to lend to Parent from time to time such amounts in excess of such limitations as
Calliope may determine in its sole discretion. In connection with each such request by Parent,
the Parent shall be deemed to have certified, as of the time of such proposed borrowing and
immediately after giving effect thereto, to the satisfaction of all Overadvance Conditions. For
purposes hereof, “Overadvance Conditions” means (i) no Event of Default shall exist and be
continuing as of such date; (ii) all representations, warranties and covenants made by the Parent
in connection with the Security Agreement and the Ancillary Agreements shall be true, correct and
complete as of such date; and (iii) the Parent shall have taken all action necessary to grant
Calliope “control” over all of the Parent’s ’ Deposit Accounts (the “Control Accounts”),
with any agreements establishing “control” to be in form and substance satisfactory to Calliope.
“Control” over such Control Accounts shall be released upon the indefeasible repayment in
full and termination of the Overadvance (together with all accrued interest and fees which remain
unpaid in respect thereof). The Parent hereby agrees to provide a certificate confirming the
satisfaction of the Overadvance Conditions concurrently with the request for same.




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          (iii) The Parent acknowledges that the exercise of Calliope’s discretionary rights hereunder
may result during the Term in increases or decreases in the advance percentages used in
determining Accounts Availability and/or Inventory Availability and Parent hereby consents to any
such increases or decreases which may limit or restrict advances requested by the Parent.




          (iv) If any interest, fees, costs or charges payable to Calliope hereunder are not paid when
due, Parent shall thereby be deemed to have requested, and Calliope is hereby authorized at its
discretion to make and charge to the Parent’ account, a Loan as of such date in an amount equal to
such unpaid interest, fees, costs or charges.




          (v) If Parent at any time fails to perform or observe any of the covenants contained in this
Agreement or any Ancillary Agreement, Calliope may, but need not, perform or observe such covenant
on behalf and in the name, place and stead of Parent (or, at Calliope’s option, in Calliope’s name)
and may, but need not, take any and all other actions which Calliope 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 Calliope in connection with or as a
result of the performance or observance of such agreements or the taking of such action by Calliope
shall be charged to the Parent’s account as a Revolving Loan and added to the Obligations. To
facilitate Calliope’s performance or observance of such covenants by Parent, Parent hereby
irrevocably appoints Calliope, or Calliope’s delegate, acting alone, as Parent’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 Parent
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 Parent.




          (vi) Calliope will account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such account rendered by
Calliope shall be deemed final, binding and conclusive unless Calliope is notified by Company Agent
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.




          (vii) During the Term, the Parent may borrow and prepay Loans in accordance with the terms and
conditions hereof.




          (viii) If any Eligible Account is not paid by the Account Debtor within ninety (90) days after
the date that such Eligible Account was invoiced or if any Account Debtor asserts a deduction,
dispute, contingency, set-off, or counterclaim with respect to any Eligible Account, (a
“Delinquent Account”), the Parent shall(i) repay Calliope for the amount of the Loans made
with respect to such Delinquent Account or (ii) immediately replace such Delinquent Account with an
otherwise Eligible Account.




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     (b) Term Loan. Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Calliope shall make a term loan (the “Term Loan”) to Company Agent
(for the benefit of Parent) in an aggregate amount equal to $750,000. The Term Loan shall be
advanced on the Closing Date and shall be, with respect to principal, payable in consecutive
monthly installments of principal commencing on November 1, 2007 and on the first day of each month
thereafter, subject to acceleration upon the occurrence of an Event of Default or termination of
this Agreement. The Term Loan shall be evidenced by the Secured Convertible Term Note.



     3. Repayment of the Loans. The Parent (a) may prepay the Obligations from time to
time in accordance with the terms and provisions of the Notes (and Section 17 hereof if such
prepayment is due to a termination of this Agreement); (b) shall repay on the Maturity Date (as
defined in the Secured Convertible Term Note) (i) the then aggregate outstanding principal balance
of the Term Loan together with accrued and unpaid interest, fees and charges and: (ii) all other
amounts owed Calliope under the Secured Convertible Term Note; (c) shall repay on the expiration of
the Term (i) the then aggregate outstanding principal balance of the Revolving Loans together with
accrued and unpaid interest, fees and charges and; (ii) all other amounts owed Calliope under this
Agreement and the Ancillary Agreements; and (d) subject to Section 2(a)(ii), shall repay on any day
on which the then aggregate outstanding principal balance of the Loans are in excess of the Formula
Amount at such time, Loans in an amount equal to such excess. 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 Loans. Company Agent may by written notice request a
borrowing of Revolving Loans prior to 12:00 noon (New York time) on the Business Day of its request
to incur, on the next Business Day, a Revolving Loan. Together with each request for a Revolving
Loan (or at such other intervals as Calliope may request), Company Agent shall deliver to Calliope
a Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall be
certified as true and correct by the Chief Executive Officer or Chief Financial Officer of Company
Agent together with all supporting documentation relating thereto. All Revolving Loans shall be
disbursed from whichever office or other place Calliope may designate from time to time and shall
be charged to the Parent’s account on Calliope’s books. The proceeds of each Revolving Loan made
by Calliope shall be made available to Company Agent on the Business Day following the Business Day
so requested in accordance with the terms of this Section 4 by way of credit to the applicable
Company’s operating account maintained with such bank as Company Agent designated to Calliope. Any
and all Obligations due and owing hereunder may be charged to the Parent’s account and shall
constitute Revolving Loans.



     5. Interest and Payments.



     (a) Interest.



          (i) Except as modified by Section 5(a)(iii) below, the Parent shall pay interest at the
Contract Rate on the unpaid principal balance of each Loan until such time as such Loan is
collected in full in good funds in dollars of the United States of America.




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          (ii) Interest and payments shall be computed on the basis of actual days elapsed in a year of
360 days. At Calliope’s option, Calliope may charge the Parent’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 as set forth in the
Notes (such increased rate, the “Default Rate”), and all outstanding Obligations, including
unpaid interest, shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.




          (iv) In no event shall the aggregate interest payable hereunder or under any Note 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 any 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).




          (v) The Parent 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) Payment; Certain Closing Conditions.



          (i) Payment. Upon execution of this Agreement by Parent and Calliope, the Parent
shall pay to Calliope Capital Management, LLC, the investment advisor of Calliope (“LCM”),
a non-refundable payment in an amount equal to three and one-half percent (3.50%) of the Total
Investment Amount. The foregoing payment is referred to herein as the “LCM Payment.” Such
payment shall be deemed fully earned on the Closing Date and shall not be subject to rebate or
proration for any reason.




          (ii) Overadvance Payment. Without affecting Calliope’s rights hereunder in the event
the Loans exceed the Formula Amount (each such event, an “Overadvance”), all such
Overadvances shall bear additional interest at a rate equal to two percent (2%) per month of the
amount of such Overadvances for all times such amounts shall be in excess of the Formula Amount.
All amounts that are incurred pursuant to this Section 5(b)(ii) shall be due and payable by the
Parent monthly, in arrears, on the first business day of each calendar month and upon expiration of
the Term.




          (iii) Expenses. The Parent shall reimburse Calliope for its expenses (including
reasonable legal fees and expenses) incurred in connection with the entering into of this Agreement
and the Ancillary Agreements, and expenses incurred in connection with Calliope’s due diligence
review of Parent and its Subsidiaries and all related matters. Amounts required to be paid under
this Section 5(b)(iii) will be paid on the Closing Date and shall be $45,000 for such expenses
referred to in this Section 5(b)(iii).




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          6. Security Interest.




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




          (b) Parent hereby (i) authorizes Calliope to file any financing statements, continuation
statements or amendments thereto that (x) indicate the Collateral (1) as all assets and personal
property of Parent 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
Calliope to have filed any initial financial statements, or amendments thereto if filed prior to
the date hereof. Parent 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 Calliope and agrees that it will not do so without the prior written consent of
Calliope, subject to Parent’s rights under Section 9-509(d)(2) of the UCC.




          (c) Parent hereby grants to Calliope an irrevocable, non-exclusive license (exercisable upon
the termination of this Agreement due to an occurrence and during the continuance of an Event of
Default without payment of royalty or other compensation to Parent) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by Parent, 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.





     (d) Calliope acknowledges that the Existing Indebtedness is secured by a first priority
lien on the Company’s assets, which indebtedness will be paid in its entirety
contemporaneously with the funding of the Loan Facility described above.



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




          (a) all of the Collateral (i) is owned by it free and clear of all Liens (including any claims
of infringement) except those in Calliope’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.




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     (b) it shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or any
other assets to anyone other than Calliope and except for Permitted Liens.



     (c) the Liens granted pursuant to this Agreement, upon due completion of the filings of UCC-1
financing statements in respect of each grantor of such Liens in the applicable filing offices of
the states of organization of such grantor and the completion of the other filings and 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 Calliope in duly executed form) constitute valid perfected
security interests in all of the Collateral in favor of Calliope as security for the prompt and
complete payment and performance of the Obligations, enforceable in accordance with the terms
hereof against any and all of its creditors and purchasers and, upon payment of the Existing
Indebtedness, such security interest shall be prior to all other Liens in existence on the date
hereof.



     (d) Except as disclosed on the attached Disclosure Schedule, 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) it shall not dispose of any of the Collateral whether by sale, lease or otherwise except
for the sale of Inventory in the ordinary course of business and for 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 $25,000 and only to the extent that (i) the proceeds
of any such disposition are used to acquire replacement Equipment which is subject to Calliope’s
first priority security interest or are used to repay Loans or to pay general corporate expenses,
or (ii) following the occurrence of an Event of Default which continues to exist the proceeds of
which are remitted to Calliope to be held as cash collateral for the Obligations.



     (f) it shall defend the right, title and interest of Calliope 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 Calliope “control” of any Investment Property, Deposit Accounts,
Letter-of-Credit Rights or electronic Chattel Paper owned by it, with any agreements establishing
control to be in form and substance satisfactory to Calliope, (ii) the prompt (but in no event
later than five (5) Business Days following Calliope’s request therefor) delivery to Calliope of
all original Instruments, Chattel Paper, negotiable Documents and certificated Stock owned by it
(in each case, accompanied by stock powers or other instruments of transfer executed in blank),
(iii) notification of Calliope’s interest in Collateral at Calliope’s request, and (iv) the
institution of litigation against third parties as shall be prudent in order to protect and
preserve its and/or Calliope’s respective and several interests in the Collateral.



     (g) it shall promptly, and in any event within five (5) Business Days after the same is
acquired by it, notify Calliope of any commercial tort claim (as defined in the UCC) acquired by it
and unless otherwise consented by Calliope, it shall enter into a supplement to this Agreement
granting to Calliope a Lien in such commercial tort claim.



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     (h) it shall place notations upon its Books and Records and any of its financial statements to
disclose Calliope’s Lien in the Collateral.



     (i) if it retains possession of any Chattel Paper or Instrument with Calliope’s consent, upon
Calliope’s request such Chattel Paper and Instruments shall be marked with the following legend:
“This writing and obligations evidenced or secured hereby are subject to the security interest of
Calliope ” Notwithstanding the foregoing, upon the reasonable request of Calliope, such Chattel
Paper and Instruments shall be delivered to Calliope.



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



     (k) it shall notify Calliope promptly and in any event within three (3) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that, to its knowledge, would cause
Calliope to consider any then existing Account and/or Inventory as no longer constituting an
Eligible Account or Eligible Inventory, as the case may be; (ii) of any material delay in its
performance of any of its obligations to any Account Debtor; (iii) of any assertion by any Account
Debtor of any material claims, offsets or counterclaims; (iv) of any allowances, credits and/or
monies granted by it 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.



     (l) all Eligible Accounts (i) represent complete bona fide transactions which require no
further act under any circumstances on its part to make such Accounts payable by the Account
Debtors, (ii) are not subject to any present, future 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 Parent. It has not made,
nor will it 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 it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Calliope in writing.



     (m) it shall keep and maintain its 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. It shall not permit any such
items to become a Fixture to real estate or accessions to other personal property.



     (n) it shall maintain and keep all of its Books and Records concerning the Collateral at its
executive offices listed in Schedule 12(aa).



     (o) it shall maintain and keep the tangible Collateral at the addresses listed in Schedule
12(aa), provided, that it may change such locations or open a new location, provided that it
provides Calliope at least thirty (30) days prior written notice of such changes or new location
and (ii) prior to such change or opening of a new location where Collateral having a



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value of more than $50,000 will be located, it executes and delivers to Calliope such
agreements deemed reasonably necessary or prudent by Calliope, including landlord agreements,
mortgagee agreements and warehouse agreements, each in form and substance satisfactory to Calliope,
to adequately protect and maintain Calliope’s security interest in such Collateral.




     (p) Schedule 7(p) lists all banks and other financial institutions at which it
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. It shall not establish any
depository or other bank account with any financial institution (other than the accounts set forth
on Schedule 7(p)) without Calliope’s prior written consent.



     (q) All Inventory manufactured by it 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.



     8. Payment of Accounts.



     (a) Parent will irrevocably direct all of its present and future Account Debtors and other
Persons obligated to make payments constituting Collateral to make such payments directly to the
lockboxes maintained by Parent (the “Lockboxes”) with North Fork Bank or such other
financial institution accepted by Calliope in writing as may be selected by Parent (the
“Lockbox Bank”) pursuant to the terms of the certain agreements among Parent, Calliope
and/or the Lockbox Bank dated as of July ___, 2007. On or prior to the Closing Date, Parent shall
and shall cause the Lockbox Bank to enter into all such documentation acceptable to Calliope
pursuant to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a
daily basis and deposit all checks received therein to an account designated by Calliope in writing
and (b) comply only with the instructions or other directions of Calliope concerning the Lockbox.
All of Parent’s invoices, account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of Parent or any other amount
constituting Collateral shall conspicuously direct that all payments be made to the Lockbox or such
other address as Calliope may direct in writing. If, notwithstanding the instructions to Account
Debtors, Parent receives any payments, Parent shall immediately remit such payments to Calliope in
their original form with all necessary endorsements. Until so remitted, Parent shall hold all such
payments in trust for and as the property of Calliope and shall not commingle such payments with
any of its other funds or property.



     (b) At Calliope’s election, following the occurrence of an Event of Default which is
continuing, Calliope may notify Parent’s Account Debtors of Calliope’s security interest in the
Accounts, collect them directly and charge the collection costs and expenses thereof to Company’s
and the Eligible Subsidiaries joint and several account.



     9. Collection and Maintenance of Collateral.



     (a) Calliope may verify Parent’s Accounts from time to time, but not more often than once
every three (3) months, unless an Event of Default has occurred and is



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continuing or Calliope believes that such verification is necessary to preserve or protect the
Collateral, utilizing an audit control company or any other agent of Calliope.




     (b) Proceeds of Accounts received by Calliope will be deemed received on the Business Day
after Calliope’s receipt of such proceeds in good funds in dollars of the United States of America
to an account designated by Calliope. Any amount received by Calliope after 12:00 noon (New York
time) on any Business Day shall be deemed received on the next Business Day.



     (c) As Calliope receives the proceeds of Accounts of Parent, it shall (i) apply such proceeds,
as required, to amounts outstanding under the Notes, and (ii) remit all such remaining proceeds
(net of interest, fees and other amounts then due and owing to Calliope hereunder) to Company Agent
(for the benefit of the applicable Parent) upon request (but no more often than twice a week).
Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of
Default, Calliope, at its option, may (a) apply such proceeds to the Obligations in such order as
Calliope shall elect, (b) hold all such proceeds as cash collateral for the Obligations and Parent
hereby grants to Calliope a security interest in such cash collateral amounts as security for the
Obligations and/or (c) do any combination of the foregoing.



     10. Inspections and Appraisals. Upon not less than one business day’s notice,
Calliope, and/or any agent of Calliope shall have the right during normal business hours to (a)
have access to, visit, inspect, review, evaluate and make physical verification and appraisals of
Parent’s properties and the Collateral, (b) inspect, audit and copy (or take originals if
necessary) and make extracts from Parent’s Books and Records, including management letters prepared
by the Accountants, and (c) discuss with Parent’s directors, principal officers, and independent
accountants, Parent’s business, assets, liabilities, financial condition, results of operations and
business prospects. Parent will deliver to Calliope any instrument necessary for Calliope to
obtain records from any service bureau maintaining records for Parent. If any internally prepared
financial information, including that required under this Section is unsatisfactory in any manner
to Calliope, Calliope may request that the Accountants review the same.



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



     (a) As soon as available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, Parent’s audited financial statements with a report of independent
certified public accountants of recognized standing selected by the Parent and acceptable to
Calliope (it being understood that the Parent’s current auditors, Rose Snyder & Jacobs shall be
deemed acceptable to Calliope) (the “Accountants”), which annual financial statements shall
be without qualification and shall include each of the Parent’s and each of its consolidated
Subsidiaries’ balance sheet as at the end of such fiscal year and the related statements of each of
the Parent’s and each of its consolidated Subsidiaries’ income, retained earnings and cash flows
for the fiscal year then ended, prepared on a consolidating and consolidated basis to include the
Parent and each consolidated Subsidiary of the Parent, all in reasonable detail and prepared in
accordance with GAAP, together with (i) if and when



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available, copies of any management letters prepared by the Accountants; and (ii) a
certificate of the Parent’s President, Chief Executive Officer 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;




     (b) As soon as available and in any event within forty five (45) days after the end of each
fiscal quarter of the Parent, an unaudited/internal balance sheet and statements of income,
retained earnings and cash flows of the Parent as at the end of and for such quarter and for the
year to date period then ended, prepared on a consolidating and consolidated basis to include the
Parent and each consolidated Subsidiary of the Parent, in reasonable detail and stating in
comparative form the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate
of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared 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) As soon as available and in any event within twenty five (25) days after the end of each
calendar month, an unaudited/internal balance sheet and statements of income, retained earnings and
cash flows of the Parent and its consolidated Subsidiaries as at the end of and for such month and
for the year to date period then ended, prepared on a consolidating and consolidated basis to
include the Parent and each consolidated Subsidiary of the Parent, in reasonable detail and stating
in comparative form the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate
of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared 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;



     (d) Within twenty five (25) days after the end of each month (or more frequently if Calliope
so requests), agings of Parent’s Accounts, unaudited trial balances and their accounts payable and
a calculation of Parent’s Accounts, Eligible Accounts, Inventory and/or Eligible Inventory,
provided, however, that if Calliope shall request the foregoing information more often than as set
forth in the immediately preceding clause, Parent shall have fifteen (15) days from each such
request to comply with Calliope’s demand; and



     (e) Promptly after (i) the filing thereof, copies of the Parent’s most recent registration
statements and annual, quarterly, monthly or other regular reports which the Parent files with the
Securities and Exchange Commission (the “SEC”), and (ii) the issuance thereof, copies of
such financial statements, reports and proxy statements as the Parent shall send to its
stockholders.



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     (f) The Parent shall deliver, or cause the applicable Subsidiary of the Parent to deliver,
such other information as the Purchaser shall reasonably request.



     12. Additional Representations and Warranties. Subject to the attached Disclosure
Schedule, Parent hereby represents and warrants to Calliope as follows:



     (a) Organization, Good Standing and Qualification. It and each of its Subsidiaries is
a corporation, partnership or limited liability company, as the case may be, duly organized,
validly existing and in good standing under the laws of its jurisdiction of organization. It and
each of its Subsidiaries has the corporate, limited liability company or partnership, as the case
may be, power and authority to own and operate its properties and assets and, insofar as it is or
shall be a party thereto, to (i) execute and deliver this Agreement and the Ancillary Agreements,
(ii) to issue and sell the Notes and the shares of Common Stock issuable upon conversion of the
Secured Convertible Term Note (the “Note Shares”), (iii) to issue and sell the Warrants and
the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”),
and to (iv) carry out the provisions of this Agreement and the Ancillary Agreements and to carry on
its business as presently conducted. It and each of its Subsidiaries is duly qualified and is
authorized to do business and is in good standing as a foreign corporation, partnership or limited
liability company, as the case may be, in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to do so has not had, or could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect.



     (b) Subsidiaries. The Parent has no Subsidiaries.



     (c) Capitalization; Voting Rights.



          (i) The authorized capital stock of the Parent, as of the date hereof consists of 50,000,000
shares, of which 40,000,000 are shares of Common Stock, par value $0.01 per share, 10,179,759
shares of which are issued and outstanding, and 1,000,000 are shares of preferred stock, par value
$0.01 per share of which 0 shares of preferred stock are issued and outstanding.




          (ii) Except as disclosed on the Disclosure Schedule, other than: (i) the shares reserved for
issuance under the Parent’s stock option plans; and (ii) shares which may be issued pursuant to
this Agreement and the Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy or stockholder
agreements, or arrangements or agreements of any kind for the purchase or acquisition from the
Parent of any of its securities. Except as disclosed on the Disclosure Schedule, neither the
offer, issuance or sale of any of the Notes or the Warrants or the issuance of any of the Note
Shares or the Warrant Shares, nor the consummation of any transaction contemplated hereby will
result in a change in the price or number of any securities of the Parent outstanding, under
anti-dilution or other similar provisions contained in or affecting any such securities.




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          (iii) All issued and outstanding shares of the Parent’s Common Stock: (i) have been duly
authorized and validly issued and are fully paid and non-assessable; and (ii) were issued in
compliance with all applicable state and federal laws concerning the issuance of securities.




          (iv) The rights, preferences, privileges and restrictions of the shares of the Common Stock
are as stated in the Parent’s Articles of Incorporation (the “Charter”). The Note Shares
and the Warrant Shares have been duly and validly reserved for issuance. When issued in compliance
with the provisions of this Agreement and the Parent’s Charter, the Securities will be validly
issued, fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Securities may be subject to restrictions on transfer
under state and/or federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.




     (d) Authorization; Binding Obligations. All corporate, partnership or limited
liability company, as the case may be, action on its and its Subsidiaries’ part (including their
respective officers and directors) necessary for the authorization of this Agreement and the
Ancillary Agreements, the performance of all of its and its Subsidiaries’ obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization, issuance and delivery of
the Notes and the Warrant has been taken or will be taken prior to the Closing Date. This
Agreement and the Ancillary Agreements, when executed and delivered and to the extent it is a party
thereto, will be its and its Subsidiaries’ valid and binding obligations enforceable against each
such Person in accordance with their terms, except:



          (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application affecting enforcement of creditors’ rights; and




          (ii) general principles of equity that restrict the availability of equitable or legal
remedies.



The issuance of the Notes and the subsequent conversion of the Secured Convertible Term Note into
Note Shares are not and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with. The issuance of the Warrants and the
subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived or complied with.




     (e) Liabilities;
Solvency. (i) it has no liabilities, except current liabilities
incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings.



          (ii) Both before and after giving effect to (a) the Loans incurred on the Closing Date or such
other date as Loans requested hereunder are made or incurred, (b) the disbursement of the proceeds
of, or the assumption of the liability in respect of, such Loans pursuant to the instructions or
agreement of Parent and (c) the payment and accrual of all transaction costs in connection with the
foregoing, Parent and each Subsidiary of Parent, is and will be, Solvent.




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     (f) Agreements; Action. Except as set forth on the Disclosure Schedule or as
disclosed in any Exchange Act Filings:



          (i) There are no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it is a party or to its knowledge by which it is
bound which may involve: (i) obligations (contingent or otherwise) of, or payments to, it in
excess of $50,000 (other than obligations of, or payments to, it arising from purchase or sale
agreements entered into in the ordinary course of business); or (ii) the transfer or license of any
patent, copyright, trade secret or other proprietary right to or from it (other than licenses
arising from the purchase of “off the shelf” or other standard products); or (iii) provisions
restricting the development, manufacture or distribution of its ’ products or services; or (iv)
indemnification by it with respect to infringements of proprietary rights.




          (ii) Since March 31, 2007 (the “Balance Sheet Date”) it has not: (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect to any class or
series of its capital stock; (ii) incurred any indebtedness for money borrowed or any other
liabilities (other than ordinary course obligations) individually in excess of $50,000 or, in the
case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in
the aggregate; (iii) made any loans or advances to any Person not in excess, individually or in the
aggregate, of $100,000, other than ordinary advances for travel expenses; or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights, other than the sale of its Inventory in the
ordinary course of business.




          (iii) For the purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed transactions involving
the same Person (including Persons it or any of its applicable Subsidiaries has reason to believe
are affiliated therewith or with any Subsidiary thereof) shall be aggregated for the purpose of
meeting the individual minimum dollar amounts of such subsections.




          (iv) the Parent maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Parent in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the rules and forms of the SEC.




          (v) The Parent makes and keeps books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of its assets. It maintains
internal control over financial reporting (“Financial Reporting Controls”) designed by, or
under the supervision of, its principal executive and principal financial officers, and effected by
its board of directors, management, and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, including that:




                    (1) transactions are executed in accordance with management’s general or specific
authorization;



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                    (2) unauthorized acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely detected;



                    (3) transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made only in accordance with
authorizations of the Parent’s management and board of directors;



                    (4) transactions are recorded as necessary to maintain accountability for assets; and



                    (5) the recorded accountability for assets is compared with the existing assets at reasonable
intervals, and appropriate action is taken with respect to any differences.



          (vi) There is no weakness in any of its Disclosure Controls or Financial Reporting Controls
that is required to be disclosed in any of the Exchange Act Filings, except as so disclosed.




     (g) Obligations to Related Parties. Except as set forth on the Disclosure Schedule,
it has no obligations to their respective officers, directors, stockholders or employees other
than:



          (i) for payment of salary for services rendered and for bonus payments;




          (ii) reimbursement for reasonable expenses incurred on its or its Subsidiaries’ behalf;




          (iii) for other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan approved by its and its
Subsidiaries’ Board of Directors, as applicable); and




          (iv) obligations listed in its Exchange Act Filings.



Except as described above or set forth on the Disclosure Schedule, none of its officers, directors
or, to the best of its knowledge, key employees or stockholders, any of its Subsidiaries or any
members of their immediate families, are indebted to it , individually or in the aggregate, in
excess of $50,000 or have any direct or indirect ownership interest in any Person with which it is
affiliated or with which it has a business relationship, or any Person which competes with it ,
other than passive investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with it . Except as described above, none of its officers,
directors or stockholders, or any member of their immediate families, is, directly or indirectly,
interested in any material contract with it and no agreements, understandings or proposed
transactions are contemplated between it and any such Person. Except as set forth on Schedule
12(g), it is not a guarantor nor indemnitor of any indebtedness of any other Person.




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     (h) Changes. Since the Balance Sheet Date, except as disclosed in any Schedule to
this Agreement or to any of the Ancillary Agreements, there has not been:



          (i) any change in its ’ business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects, which, individually or in the aggregate, has had, or could
reasonably be expected to have, a Material Adverse Effect;




          (ii) any resignation or termination of any of its or its Subsidiaries’ officers, key employees
or groups of employees;




          (iii) any material change, except in the ordinary course of business, in its ’ contingent
obligations by way of guaranty, endorsement, indemnity, warranty or otherwise;




          (iv) any damage, destruction or loss, whether or not covered by insurance, which has had, or
could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;




          (v) any waiver by it of a valuable right or of a material debt owed to it;




          (vi) any direct or indirect material loans made by it to any of its ’ stockholders,
employees, officers or directors, other than advances made in the ordinary course of business;




          (vii) any material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;




          (viii) any declaration or payment of any dividend or other distribution of its ’ assets;




          (ix) any labor organization activity related to it ;




          (x) any debt, obligation or liability incurred, assumed or guaranteed by it , except those for
immaterial amounts and for current liabilities incurred in the ordinary course of business;




          (xi) any sale, assignment or transfer of any Intellectual Property or other intangible assets;




          (xii) any change in any material agreement to which it is a party or by which either it is
bound which, either individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;




          (xiii) any other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect; or




          (xiv) any arrangement or commitment by it to do any of the acts described in subsection (i)
through (xiii) of this Section 12(h).




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     (i) Title to Properties and Assets; Liens, Etc. Except as set forth on the Disclosure
Schedule, it and each of its Subsidiaries has good and marketable title to their respective
properties and assets, and good title to its leasehold interests, in each case subject to no Lien,
other than Permitted Liens.


All facilities, Equipment, Fixtures, vehicles and other properties owned, leased or used by it are
in good operating condition and repair and are reasonably fit and usable for the purposes for which
they are being used. Except as set forth on the Disclosure Schedule, it and each of its
Subsidiaries is in compliance with all material terms of each lease to which it is a party or is
otherwise bound.




     (j) Intellectual Property.



          (i) It and each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now conducted and, to its
knowledge as presently proposed to be conducted, without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any kind relating to its
Intellectual Property, nor is it bound by or a party to any options, licenses or agreements of any
kind with respect to the Intellectual Property of any other Person other than such licenses or
agreements arising from the purchase of “off the shelf” or standard products.




          (ii) It has not received any communications alleging that it has violated any of the
Intellectual Property or other proprietary rights of any other Person, nor is it aware of any
basis therefor.




          (iii) It does not believe it is or will be necessary to utilize any inventions, trade secrets
or proprietary information of any of its employees made prior to their employment by it , except
for inventions, trade secrets or proprietary information that have been rightfully assigned to it .




     (k) Compliance with Other Instruments. It is not in violation or default of (x) any
term of its Charter or Bylaws, or (y) any provision of any indebtedness, mortgage, indenture,
contract, agreement or instrument to which it is party or by which it is bound or of any judgment,
decree, order or writ, which violation or default, in the case of this clause (y), has had, or
could reasonably be expected to have, either individually or in the aggregate, a Material Adverse
Effect. The execution, delivery and performance of and compliance with this Agreement and the
Ancillary Agreements to which it is a party, and the issuance of the Notes and the other Securities
each pursuant hereto and thereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or constitute a default under
any such term or provision, or result in the creation of any Lien upon any of its properties or
assets or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to it , their businesses or operations or any of their assets
or properties.



     (l) Litigation. Except as set forth on the Disclosure Schedule, there is no action,
suit, proceeding or investigation pending or, to its knowledge, overtly threatened against it that
prevents it from entering into this Agreement or the Ancillary Agreements, or from



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consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected
to have, either individually or in the aggregate, a Material Adverse Effect, or could result in any
change in its ’ current equity ownership, nor is it aware that there is any basis to assert any of
the foregoing. It is nota party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by it currently pending or which it intends to initiate.




     (m) Tax Returns and Payments. It and each of its Subsidiaries has timely filed all
tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and
payable on such returns, any assessments imposed, and all other taxes due and payable by it and
each of its Subsidiaries on or before the Closing Date, have been paid or will be paid prior to the
time they become delinquent. Except as set forth on the Disclosure Schedule, it has not been
advised:



          (i) that any of its returns, federal, state or other, have been or are being audited as of the
date hereof; or




          (ii) of any adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.



It has no knowledge of any liability of any tax to be imposed upon its properties or assets as of
the date of this Agreement that is not adequately provided for.




     (n) Employees. Except as set forth on the Disclosure Schedule, it has no collective
bargaining agreements with any of its employees. There is no labor union organizing activity
pending or, to its knowledge, threatened with respect to it. Except as disclosed in the Exchange
Act Filings or on the Disclosure Schedule, it is not a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing
plan, retirement agreement or other employee compensation plan or agreement. To its knowledge,
none of its ’ employees, nor any consultant with whom it has contracted, is in violation of any
term of any employment contract, proprietary information agreement or any other agreement relating
to the right of any such individual to be employed by, or to contract with, it because of the
nature of the business to be conducted by it; and to its knowledge the continued employment by it
and its Subsidiaries of their present employees, and the performance of its and its Subsidiaries
contracts with its independent contractors, will not result in any such violation. It is not aware
that any of its’ employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment, decree or order of any
court or administrative agency that would interfere with their duties to it . It has not received
any notice alleging that any such violation has occurred. Except for employees who have a current
effective employment agreement with it, none of its ’ employees has been granted the right to
continued employment by it or to any material compensation following termination of employment
with it . Except as set forth on Schedule 12(n), it is not aware that any officer, key
employee or group of employees intends to terminate his, her or their employment with it , as applicable, nor does it have a present
intention to terminate the employment of any officer, key employee or group of employees.



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     (o) Registration Rights and Voting Rights. Except as set forth on the Disclosure
Schedule and except as disclosed in Exchange Act Filings, it is not presently under any
obligation, and it has not granted any rights, to register any of its ’ presently outstanding
securities or any of its securities that may hereafter be issued. Except as set forth on the
Disclosure Schedule and except as disclosed in Exchange Act Filings, to its knowledge, none of its
’ stockholders has entered into any agreement with respect to its ’ voting of equity securities.



     (p) Compliance with Laws; Permits. It is not in violation of the Sarbanes-Oxley Act
of 2002 or any SEC related regulation or rule or any rule of the Principal Market promulgated
thereunder or any other applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of the conduct of its
business or the ownership of its properties which has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained and no registrations
or declarations are required to be filed in connection with the execution and delivery of this
Agreement or any Ancillary Agreement and the issuance of any of the Securities, except such as have
been duly and validly obtained or filed, or with respect to any filings that must be made after the
Closing Date, as will be filed in a timely manner. It and each of its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.



     (q) Environmental and Safety Laws. It is not in violation of any applicable statute,
law or regulation relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply with any such
existing statute, law or regulation. Except as set forth on the Disclosure Schedule, no Hazardous
Materials (as defined below) are used or have been used, stored, or disposed of by it or, to its
knowledge, by any other Person on any property owned, leased or used by it . For the purposes of
the preceding sentence, “Hazardous Materials” shall mean:



          (i) materials which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that govern the existence
and/or remedy of contamination on property, the protection of the environment from contamination,
the control of hazardous wastes, or other activities involving hazardous substances, including
building materials; and




          (ii) any petroleum products or nuclear materials.




     (r) Valid Offering. Assuming the accuracy of the representations and warranties of
Calliope contained in this Agreement, the offer and issuance of the Securities will be exempt from
the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of all applicable state
securities laws.



     (s) Full Disclosure. It and each of its Subsidiaries has provided Calliope with all
information requested by Calliope in connection with Calliope’s decision to enter into this



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Agreement, including all information Parent and its Subsidiaries believe is reasonably necessary to
make such investment decision. Neither this Agreement, the Ancillary Agreements nor the exhibits
and schedules hereto and thereto nor any other document delivered by it to Calliope or its
attorneys or agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, contain any untrue statement of a material fact nor omit to state a material
fact necessary in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading. Any financial projections and other
estimates provided to Calliope by it were based on its and its Subsidiaries’ experience in the
industry and on assumptions of fact and opinion as to future events which it , at the date of the
issuance of such projections or estimates, believed to be reasonable.




     (t) Insurance. It and each of its Subsidiaries has general commercial, product
liability, fire and casualty insurance policies with coverages which it believes are customary for
companies similarly situated to it and its Subsidiaries in the same or similar business.



     (u) SEC Reports and Financial Statements. Except as set forth on the Disclosure
Schedule, it and each of its Subsidiaries has filed all proxy statements, reports and other
documents required to be filed by it under the Exchange Act. The Parent has furnished Calliope
with copies of: (i) its Annual Report on Form 10-K for its fiscal years ended March 31, 2007; and
(ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended September 30, 2006 and
December 31, 2006, and the Form 8-K filings which it has made during the last twelve months
(collectively, the “SEC Reports”). Except as set forth on the Disclosure Schedule, each
SEC Report was, at the time of its filing, in substantial compliance with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and the notes thereto)
included in the SEC Reports, as of their respective filing dates, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were made, not
misleading. Such financial statements have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed) and fairly present in all material
respects the financial condition, the results of operations and cash flows of the Parent and its
Subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC
Report.



     (v) Listing. The Parent’s Common Stock is listed or quoted, as applicable, on the
Principal Market and satisfies all requirements for the continuation of such listing or quotation,
as applicable, and the Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable. The Parent has not received any notice that its Common Stock will be
delisted from, or no longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.



     (w) No Integrated Offering. Neither it, nor any of its Affiliates, nor any Person
acting on its or their behalf, has directly or indirectly made any offers or sales of any security
or solicited any offers to buy any security under circumstances that would cause the
offering of the Securities pursuant to this Agreement or any Ancillary Agreement to be
integrated with prior offerings by it for purposes of the Securities Act which would prevent it



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from issuing the Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the Securities to be
integrated with other offerings.




     (x) Stop Transfer. The Securities are restricted securities as of the date of this
Agreement. It will not issue any stop transfer order or other order impeding the sale and
delivery of any of the Securities at such time as the Securities are registered for public sale or
an exemption from registration is available, except as required by state and federal securities
laws.



     (y) Dilution. It specifically acknowledges that the Parent’s obligation to issue the
shares of Common Stock upon conversion of the Secured Convertible Term Note and exercise of the
Warrants is binding upon the Parent and enforceable regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the Parent.



     (z) Patriot Act. It certifies that, to the best of its knowledge, it has not been
designated, nor is or shall be owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224. It hereby acknowledges that Calliope seeks to comply with all applicable
laws concerning money laundering and related activities. In furtherance of those efforts, it
hereby represents, warrants and covenants that: (i) none of the cash or property that it will pay
or will contribute to Calliope has been or shall be derived from, or related to, any activity that
is deemed criminal under United States law; and (ii) no contribution or payment by it to Calliope,
to the extent that they are within its or any such Subsidiary’s control shall cause Calliope to be
in violation of the United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001. It shall promptly notify Calliope if any of these
representations, warranties and covenants ceases to be true and accurate regarding it . It shall
provide Calliope with any additional information regarding it and each Subsidiary thereof that
Calliope deems necessary or convenient to ensure compliance with all applicable laws concerning
money laundering and similar activities. It understands and agrees that if at any time it is
discovered that any of the foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering or similar
activities, Calliope may undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of Calliope’s investment in
it. It further understands that Calliope may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper authorities if
Calliope, in its sole discretion, determines that it is in the best interests of Calliope in light
of relevant rules and regulations under the laws set forth in subsection (ii) above.



     (aa) Company Name; Locations of Offices, Records and Collateral. The Disclosure
Schedule sets forth Parent’s name as it appears in official filings in the state of its
organization, the type of entity of Parent, the organizational identification number issued by
Parent’s state of organization or a statement that no such number has been issued, Parent’s state
of organization, and the location of Parent’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 Disclosure Schedule, such locations have not changed during the preceding twelve months. As



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of the Closing Date, during the prior five years, except as set forth in the Disclosure Schedule,
no Company has been known as or conducted business in any other name (including trade names).
Parent has only one state of organization.




     (bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974
(“ERISA”), and the regulations and published interpretations thereunder: (i) it has not
engaged in any Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of the
Code); (ii) it and each of its Subsidiaries has met all applicable minimum funding requirements
under Section 302 of ERISA in respect of its plans; (iii) it 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) it has no fiduciary
responsibility for investments with respect to any plan existing for the benefit of persons other
than its or such Subsidiary’s employees; and (v) it 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. Covenants. Parent, hereby covenants and agrees with Calliope as follows:



     (a) Stop-Orders. The Parent shall advise Calliope, promptly after it receives notice
of issuance by the SEC, any state securities commission or any other regulatory authority of any
stop order or of any order preventing or suspending any offering of any securities of the Parent,
or of the suspension of the qualification of the Common Stock of the Parent for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.



     (b) Listing. The Parent shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the Secured Convertible Term
Note and exercise of the Warrants on the Principal Market upon which shares of Common Stock are
listed or quoted, as applicable, (subject to official notice of issuance) and shall maintain such
listing or quotation, as applicable, so long as any other shares of Common Stock shall be so listed
or quoted, as applicable. The Parent shall maintain the listing or quotation, as applicable, of
its Common Stock on the Principal Market, and will comply in all material respects with the
Parent’s reporting, filing and other obligations under the rules of the American Stock Exchange.



     (c) Market Regulations. It shall notify the SEC, the American Stock Exchange and
applicable state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and valid issuance of
the Securities to Calliope and promptly provide copies thereof to Calliope.



     (d) Reporting Requirements. It shall timely file with the SEC all reports required to
be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required
by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.



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     (e) Use of Funds. It shall use the proceeds of the Loans[(i) to repay in full the
Existing Indebtedness and (ii) for general working capital purposes only.



     (f) Access to Facilities. It shall permit any representatives designated by Calliope
(or any successor of Calliope), upon reasonable notice and during normal business hours, at
Parent’s expense and accompanied by a representative of Parent (provided that no such prior notice
shall be required to be given and no such representative shall be required to accompany Calliope in
the event Calliope reasonably believes such access is necessary to preserve or protect the
Collateral or following the occurrence and during the continuance of an Event of Default),
toCalliopeCalliopeCalliope:



          (i) visit and inspect any of its or any such Subsidiary’s properties;




          (ii) examine its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract) and make copies thereof
or extracts therefrom; and




          (iii) discuss its or any such Subsidiary’s affairs, finances and accounts with its or any such
Subsidiary’s directors, officers and Accountants.



Notwithstanding the foregoing, it shall not provide any material, non-public information to
Calliope unless Calliope signs a confidentiality agreement and otherwise complies with Regulation
FD, under the federal securities laws.




     (g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon it and its Subsidiaries’ income, profits, property
or business, as the case may be; provided, however, that any such tax, assessment, charge or levy
need not be paid currently if (i) the validity thereof shall currently and diligently be contested
in good faith by appropriate proceedings, (ii) such tax, assessment, charge or levy shall have no
effect on the Lien priority of Calliope in the Collateral, and (iii) if it and/or such Subsidiary,
as applicable, shall have set aside on its and/or such Subsidiary’s books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that it shall, and shall cause each
of its Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as security therefor.



     (h) Insurance. (i) It shall bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral and it and each of its Subsidiaries will, , bear the full
risk of loss from any loss of any nature whatsoever with respect to the assets pledged to Calliope
as security for the Obligations. Furthermore, it will insure or cause the Collateral to be
insured in Calliope’ name as an additional insured and lender loss payee, with an appropriate loss
payable endorsement in form and substance satisfactory to Calliope, against loss or damage by fire,
flood, sprinkler leakage, theft, burglary, pilferage, loss in transit and other risks customarily
insured against by Parent in similar business similarly situated as it and its Subsidiaries
including but not limited to workers compensation, public and product liability and business
interruption, and such other hazards as Calliope shall specify in amounts and under insurance
policies and



Security Agreement




 









 




bonds by insurers acceptable to Calliope and all premiums thereon shall be paid by Parent and
the policies delivered to Calliope. If any Parent fails to obtain the insurance and in such
amounts of coverage as otherwise required pursuant to this Section (h), Calliope may procure such
insurance and the cost thereof shall be promptly reimbursed by the Parent, , and shall constitute
Obligations.




          (ii) Parent’s insurance coverage shall be impaired or invalidated by any act or neglect of
Parent and the insurer will provide Calliope with no less than thirty (30) days notice prior of
cancellation;




          (iii) Calliope, in connection with its status as a lender loss payee, will be assigned at all
times to a first lien position until such time as all Calliope Obligations have been indefeasibly
satisfied in full.




     (i) Intellectual Property. It shall, and shall cause each of its Subsidiaries to,
maintain in full force and effect its corporate existence, rights and franchises and all licenses
and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.



     (j) Properties. It shall, and shall cause each of its Subsidiaries to, keep its
properties in good repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and it shall, and shall cause each of its Subsidiaries to, at all times
comply with each provision of all leases to which it is a party or under which it occupies property
if the breach of such provision could reasonably be expected to have a Material Adverse Effect.



     (k) Confidentiality. It shall not, and shall not permit any of its Subsidiaries to,
disclose, and will not include in any public announcement, the name of Calliope, unless expressly
agreed to by Calliope or unless and until such disclosure is required by law, applicable regulation
or comment of the SEC Staff, and then only to the extent of such requirement. Notwithstanding the
foregoing, Parent and its Subsidiaries may disclose Calliope’s identity and the terms of this
Agreement and the Ancillary Agreements to its current and prospective debt and equity financing
sources. Calliope shall be permitted to discuss, distribute or otherwise transfer any non-public
information of the Parent in Calliope’s possession now or in the future to potential or actual (i)
direct or indirect investors in Calliope and (ii) third party assignees or transferees of all or a
portion of the obligations of Parent and/or any of its respective Subsidiaries hereunder and under
the Ancillary Agreement, to the extent that such investor or assignee or transferee enters into a
confidentiality agreement for the benefit of the Parent in such form as may be necessary to
addresses the Parent’s Regulation FD requirements.



     (l) Required Approvals. It shall not, and shall not permit any of its Subsidiaries
to, without the prior written consent of Calliope, (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than Parent’s
indebtedness to Calliope and as set forth on the Disclosure Schedule attached hereto and made a
part hereof; (ii) cancel any debt owing to it in excess of $50,000 in the aggregate during any 12
month period; (iii) assume, guarantee, endorse or otherwise become directly or contingently liable
in connection with any obligations of any other Person, except the



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endorsement of negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or indirectly declare, pay
or make any dividend or distribution on any class of its Stock or apply any of its funds, property
or assets to the purchase, redemption or other retirement of any of its or its Subsidiaries’ Stock,
or issue any preferred 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 (x) travel advances, (y) loans to its and its Subsidiaries’ officers and
employees not exceeding at any one time an aggregate of $10,000, and (z) loans to its existing
Subsidiaries so long as such Subsidiaries are designated as either a co-borrower hereunder or has
entered into such guaranty and security documentation required by Calliope, including, without
limitation, to grant to Calliope a first priority perfected security interest in substantially all
of such Subsidiary’s assets to secure the Obligations; (vi) create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof and listed in the Disclosure
Schedule unless such new Subsidiary is a wholly-owned Subsidiary and is designated by Calliope as
either a co-borrower or guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Calliope, including, without limitation, to grant to Calliope a first
priority perfected security interest in substantially all of such Subsidiary’s assets to secure the
Obligations; (vii) directly or indirectly, prepay any indebtedness (other than to Calliope and in
the ordinary course of business), or repurchase, redeem, retire or otherwise acquire any
indebtedness (other than to Calliope and in the ordinary course of business) except to make
scheduled payments of principal and interest thereof; (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, unless (1)
Parent is the surviving entity of such merger or consolidation, (2) no Event of Default shall exist
immediately prior to and after giving effect to such merger or consolidation, (3) Parent shall have
provided Calliope copies of all documentation relating to such merger or consolidation and (4)
Parent shall have provided Calliope with at least thirty (30) days’ prior written notice of such
merger or consolidation; (ix) materially change the nature of the business in which it is presently
engaged; (x) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any circumstances)
restrict its ’ right to perform the provisions of this Agreement or any of the Ancillary
Agreements; (xi) change its fiscal year or make any changes in accounting treatment and reporting
practices without prior written notice to Calliope except as required by GAAP or in the tax
reporting treatment or except as required by law; (xii) enter into any transaction with any
employee, director or Affiliate, except in the ordinary course on arms-length terms; (xiii) bill
Accounts under any name except the present name of Parent; or (xiv) sell, lease, transfer or
otherwise dispose of any of its properties or assets, or any of the properties or assets of its
Subsidiaries, except for (1) sales, leases, transfer or dispositions by Parent to any other
Company, (2) the sale of Inventory in the ordinary course of business, (3) sales permitted under
Section 7(e) hereof and (4) the disposition or
 transfer in the ordinary course of business during
any fiscal year of obsolete and worn-out Equipment and only to the extent that (x) the proceeds of
any such disposition are used to acquire replacement Equipment which is subject to Calliope’s first
priority security interest or are used to repay Loans or to pay general corporate expenses, or (y)
following the occurrence of an Event of Default which continues to exist, the proceeds of which are
remitted to Calliope to be held as cash collateral for the Obligations.




Security Agreement




 









 





     (m) Reissuance of Securities. The Parent shall reissue certificates representing the
Securities without the legends set forth in Section 39 below at such time as:



          (i) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)
under the Securities Act; or




          (ii) upon resale subject to an effective registration statement after such Securities are
registered under the Securities Act.



The Parent agrees to cooperate with Calliope in connection with all resales pursuant to Rule 144(d)
and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Parent and
its counsel receive reasonably requested representations from Calliope and broker, if any.




     (n) Opinion. On the Closing Date, it shall deliver to Calliope an opinion acceptable
to Calliope from Parent’s legal counsel. Parent will provide, at the Parent’s expense, such other
legal opinions in the future as are reasonably necessary for the resale and conversion of the
Secured Convertible Term Note and the exercise of the Warrants.



     (o) Legal Name, etc. It shall not, without providing Calliope with 30 days prior
written notice, change (i) its name as it appears in the official filings in the state of its
organization, (ii) the type of legal entity it is, (iii) its organization identification number, if
any, issued by its state of organization, (iv) its state of organization or (v) amend its
certificate of incorporation, by-laws or other organizational document.



     (p) Compliance with Laws. The operation of each of its and each of its Subsidiaries’
business is and shall 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 and safety and environmental matters.



     (q) Notices. It and each of its Subsidiaries shall promptly inform Calliope 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
could reasonably be expected to have singly or in the aggregate, a Material Adverse Effect; (ii)
any change which has had, or could reasonably be expected to have, a Material Adverse Effect; (iii)
any Event of Default or Default; and (iv) 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 it is a party or by which it or any of its or any such Subsidiary’s properties may be
bound the breach of which would have a Material Adverse Effect.



     (r) Margin Stock. It shall not permit any of the proceeds of the Loans made hereunder
to 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



Security Agreement




 









 




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.




     (s) Offering Restrictions. Except as previously disclosed in the SEC Reports or in
the Exchange Act Filings, or stock or stock options granted to its employees or directors, it shall
not, prior to the full repayment of the Notes (together with all accrued and unpaid interest and
fees related thereto) and termination of this Agreement the full exercise by Calliope of the
Warrants, (x) enter into any equity line of credit agreement or similar agreement with a floorless
pricing feature or (y) issue, or enter into any agreement to issue, any securities with a floorless
variable/floating conversion and/or pricing feature which are or could be (by conversion or
registration) free-trading securities (i.e. common stock subject to a registration statement).



     (t) Authorization and Reservation of Shares. The Parent shall at all times have
authorized and reserved a sufficient number of shares of Common Stock to provide for the full
conversion of the Secured Convertible Term Note and the full exercise of the Warrants.



     (u) FIRPTA. It is not a “United States real property holding corporation” as such
term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2
promulgated thereunder and it and each of its Subsidiaries shall at no time take any action or
otherwise acquire any interest in any asset or property to the extent the effect of which shall
cause it and/or such Subsidiary, as the case may be, to be a “United States real property holding
corporation” as such term is defined in Section 897(c)(2) of the Code and Treasury Regulation
Section 1.897-2 promulgated thereunder.



     (v) Investor Relations/Public Relations. The Parent hereby agrees to incorporate
into its annual budget an amount of funds reasonably necessary to maintain a comprehensive investor
relations and public relations program (an “IR/PR Program”), which IR/PR Program shall
incorporate elements customarily utilized by companies of similar size and in a similar industry as
the Parent and its Subsidiaries.



     (w) Financing Right of First Refusal.



          (i) Parent hereby grants to Calliope a right of first refusal to provide any Additional
Financing (as defined below) to be issued by Parent and/ (the “Additional Financing
Parties”), subject to the following terms and conditions. From and after the date hereof,
prior to the incurrence of any additional indebtedness and/or the sale or issuance of any equity
interests of the Additional Financing Parties (an “Additional Financing”), Company Agent
shall notify Calliope of such Additional Financing. In connection therewith, Company Agent shall
submit a fully executed term sheet (a “Proposed Term Sheet”) to Calliope setting forth the
terms, conditions and pricing of any such Additional Financing (such financing to be negotiated on
“arm’s length” terms and the terms thereof to be negotiated in good faith) proposed to be entered
into by the Additional Financing Parties. Calliope shall have the right, but not the obligation,
to deliver to Company Agent its own proposed term sheet (the “Calliope Term Sheet”) setting
forth the terms and conditions upon which Calliope would be willing to provide such Additional
Financing to the Additional Financing Parties. The Calliope Term Sheet shall contain terms no less
favorable to the Additional Financing Parties than those outlined in Proposed Term Sheet. Calliope
shall deliver to Company Agent the Calliope Term Sheet within ten Business Days of




Security Agreement




 









 




receipt of each such Proposed Term Sheet. If the provisions of the Calliope Term Sheet are at
least as favorable to the Additional Financing Parties as the provisions of the Proposed Term
Sheet, the Additional Financing Parties shall enter into and consummate the Additional Financing
transaction outlined in the Calliope Term Sheet.




          (ii) It shall not, and shall not permit its Subsidiaries to, agree, directly or indirectly, to
any restriction with any Person which limits the ability of Calliope to consummate an Additional
Financing with it .




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



     15. Representations, Warranties and Covenants of Calliope. Calliope hereby
represents, warrants and covenants to Parent as follows:



     (a) Requisite Power and Authority. Calliope has all necessary power and authority
under all applicable provisions of law to execute and deliver this Agreement and the Ancillary
Agreements and to carry out their provisions. All corporate action on Calliope’s part required for
the lawful execution and delivery of this Agreement and the Ancillary Agreements have been or will
be effectively taken prior to the Closing Date. Upon their execution and delivery, this Agreement
and the Ancillary Agreements shall be valid and binding obligations of Calliope, enforceable in
accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting enforcement of creditors’
rights, and (b) as limited by general principles of equity that restrict the availability of
equitable and legal remedies.



     (b) Investment Representations. Calliope understands that the Securities are being
offered pursuant to an exemption from registration contained in the Securities Act based in part
upon Calliope’s representations contained in this Agreement, including, without limitation, that
Calliope is an “accredited investor” within the meaning of Regulation D under the Securities Act.
Calliope has received or has had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to the Notes to be issued to it
under this Agreement and the Securities acquired by it upon the conversion of the Secured
Convertible Term Note and the exercise of the Warrants.



     (c) Calliope Bears Economic Risk. Calliope has substantial experience in evaluating
and investing in private placement transactions of securities in companies similar to the Parent so
that it is capable of evaluating the merits and risks of its investment in the Parent and has the
capacity to protect its own interests. Calliope must bear the economic risk of this investment
until the Securities are sold pursuant to (i) an effective registration statement under the
Securities Act, or (ii) an exemption from registration is available.



Security Agreement




 









 





     (d) Investment for Own Account. The Securities are being issued to Calliope for its
own account for investment only, and not as a nominee or agent and not with a view towards or for
resale in connection with their distribution.



     (e) Calliope Can Protect Its Interest. Calliope represents that by reason of its, or
of its management’s, business and financial experience, Calliope has the capacity to evaluate the
merits and risks of its investment in the Notes, and the Securities and to protect its own
interests in connection with the transactions contemplated in this Agreement, and the Ancillary
Agreements. Further, Calliope is aware of no publication of any advertisement in connection with
the transactions contemplated in the Agreement or the Ancillary Agreements.



     (f) Accredited Investor. Calliope represents that it is an accredited investor within
the meaning of Regulation D under the Securities Act.



     (g) Shorting. Neither Calliope nor any of its Affiliates or investment partners has,
will, or will cause any Person, to directly engage in “short sales” of the Parent’s Common Stock as
long as any amount under any Note shall remain outstanding.



     (h) Patriot Act. Calliope certifies that, to the best of Calliope’s knowledge,
Calliope has not been designated, and is not owned or controlled, by a “suspected terrorist” as
defined in Executive Order 13224. Calliope seeks to comply with all applicable laws concerning
money laundering and related activities. In furtherance of those efforts, Calliope hereby
represents, warrants and covenants that: (i) none of the cash or property that Calliope will use
to make the Loans has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement by Calliope to Parent to the extent
within Calliope’s control, shall cause Calliope to be in violation of the United States Bank
Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United
States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. Calliope
shall promptly notify the Company Agent if any of these representations ceases to be true and
accurate regarding Calliope. Calliope agrees to provide the Company any additional information
regarding Calliope that the Company deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. Calliope understands and
agrees that if at any time it is discovered that any of the foregoing representations are
incorrect, or if otherwise required by applicable law or regulation related to money laundering
similar activities, Calliope may undertake appropriate actions to ensure compliance with applicable
law or regulation, including but not limited to segregation and/or redemption of Calliope’s
investment in the Parent. Calliope further understands that the Parent may release information
about Calliope and, if applicable, any underlying beneficial owners, to proper authorities if the
Parent, in its sole discretion, determines that it is in the best interests of the Parent in light
of relevant rules and regulations under the laws set forth in subsection (ii) above.



     (i) Limitation on Acquisition of Common Stock. Notwithstanding anything to the
contrary contained in this Agreement, any Ancillary Agreement, or any document, instrument or
agreement entered into in connection with any other transaction entered into by and between
Calliope and Parent (and/or Subsidiaries or Affiliates of Parent), Calliope shall not acquire stock
in the Parent (including, without limitation, pursuant to a contract to purchase, by



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exercising an option or warrant, by converting any other security or instrument, by acquiring
or exercising any other right to acquire, shares of stock or other security convertible into shares
of stock in the Parent, or otherwise, and such options, warrants, conversion or other rights shall
not be exercisable) to the extent such stock acquisition would cause any interest (including any
original issue discount) payable by Parent to Calliope not to qualify as portfolio interest, within
the meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the
“Code”) by reason of Section 881(c)(3) of the Code, taking into account the constructive
ownership rules under Section 871(h)(3)(C) of the Code (the “Stock Acquisition
Limitation”). The Stock Acquisition Limitation shall automatically become null and void
without any notice to Parent upon the earlier to occur of either (a) the Parent’s delivery to
Calliope of a Notice of Redemption (as defined in the Secured Convertible Term Note) or (b) the
existence of an Event of Default at a time when the average closing price of the Common Stock as
reported by Bloomberg, L.P. on the Principal Market for the immediately preceding five trading days
is greater than or equal to 150% of the Fixed Conversion Price (as defined in the Secured
Convertible Term Note).




     16. Power of Attorney. Parent hereby appoints Calliope, or any other Person whom
Calliope may designate as Parent’s attorney with effect after the occurrence and during the
continuance of an Event of Default, with power to: (a)(i) execute any security related
documentation on Parent’s behalf and to supply any omitted information and correct patent errors in
any documents executed by Parent or on Parent’s behalf; (ii) to file financing statements against
Parent covering the Collateral (and, in connection with the filing of any such financing
statements, describe the Collateral as “all assets and all personal property, whether now owned
and/or hereafter acquired” (or any substantially similar variation thereof)); (iii) sign Parent’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 Account and notices to or from Account Debtors; and (iv) to do all other
things Calliope deems necessary to carry out the terms of Section 6 of this Security Agreement and
(b) upon the occurrence and during the continuance of an Event of Default; (v) endorse Parent’s
name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security
that may come into Calliope’ possession; (vi) verify the validity, amount or any other matter
relating to any Account by mail, telephone, telegraph or otherwise with Account Debtors; (vii) do
all other things necessary to carry out this Agreement, any Ancillary Agreement and all related
documents; and (viii) notify the post office authorities to change the address for delivery of
Parent’s mail to an address designated by Calliope, and to receive, open and dispose of all mail
addressed to Parent. Parent hereby ratifies and approves all acts of the attorney. Neither
Calliope, nor the attorney will be liable for any acts or omissions or for any error of judgment or
mistake of fact or law, except for gross negligence or willful misconduct. This power, being
coupled with an interest, is irrevocable so long as Calliope has a security interest and until the
Obligations have been fully satisfied.



     17. Term of Agreement. Calliope’s agreement to make Loans and extend financial
accommodations under and in accordance with the terms of this Agreement or any Ancillary Agreement
shall continue in full force and effect until the expiration of the Term. At Calliope’s election
following the occurrence of an Event of Default, Calliope may terminate this Agreement. The
termination of the Agreement shall not affect any of Calliope’s rights hereunder or any Ancillary
Agreement and the provisions hereof and thereof shall continue to be fully



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operative until all transactions entered into, rights or interests created and the Obligations
have been irrevocably disposed of, concluded or liquidated. Notwithstanding the foregoing,
Calliope shall release its security interests at any time after twenty (20) days notice upon
irrevocable payment to it of all Obligations if Parent shall have (i) provided Calliope with an
executed release of any and all claims which Parent may have or thereafter have under this
Agreement and all Ancillary Agreements and (ii) paid to Calliope any early payment fees due under
the Secured Convertible Term Note.




     18. Termination of Lien. The Liens and rights granted to Calliope 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 Parent’s account may from time to time be temporarily in a zero or credit position, until all
of the Obligations have been indefeasibly paid or performed in full and this Agreement has been
terminated in accordance with the terms of this Agreement. Calliope shall not be required to send
termination statements to Parent, 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 indefeasibly paid in full in immediately available funds.



     19. 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 when required hereunder, and, in any
such case, such failure shall continue for a period of three (3) days following the date upon which
any such payment was due;



     (b) failure by Parent to pay any taxes 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
Parent’s and/or such Subsidiary’s books;



     (c) failure to perform under, and/or committing any breach of, in any material respect, this
Agreement or any covenant contained herein, which failure or breach shall continue without remedy
for a period of thirty (30) days after the occurrence thereof;



     (d) any representation, warranty or statement made by Parent 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 prove to be false or
misleading in any material respect on the date as of which made or deemed made;



     (e) the occurrence of any default (or similar term) in the observance or performance of any
other agreement or condition relating to any indebtedness or contingent obligation of Parent in
amount in excess of $100,000, beyond the period of grace (if any), the effect of which default is
to cause, or permit the holder or holders of such indebtedness or beneficiary or beneficiaries of
such contingent obligation to cause, such indebtedness to become due prior to its stated maturity
or such contingent obligation to become payable;



     (f) attachments or levies in excess of $100,000 in the aggregate are made upon Parent’s assets
or a judgment is rendered against Parent’s property involving a liability of



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more than $100,000 which shall not have been vacated, discharged, stayed or bonded within
thirty (30) days from the entry thereof;




     (g) any change in Parent’s condition or affairs (financial or otherwise) which results in a
Material Adverse Effect;



     (h) 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, if such Lien is not reinstated
as a first priority Lien within thirty (30) days;



     (i) Parent 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 without challenge within ten (10)
days of the filing thereof, or failure to have dismissed within sixty (60) 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;



     (j) Parent 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;



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



     (l) any “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of the
Exchange Act, as in effect on the date hereof), other than Calliope, is or becomes the “beneficial
owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of
35% or more on a fully diluted basis of the then outstanding voting equity interest of the Parent
(other than a “Person” or “group” that beneficially owns 35% or more of such outstanding voting
equity interests of the Parent on the date hereof), (ii) the Board of Directors of the Parent
shall cease to consist of a majority of the Board of Directors of the Parent on the date hereof (or
directors appointed by a majority of the board of directors in effect immediately prior to such
appointment) or (iii) the Parent merges or consolidates with, or sells all or substantially all of
its assets to, any other person or entity;



     (m) the indictment of Parent or any of its named executive officers (as that term is used in
Item 402 of Regulation S-K promulgated by the Securities and Exhange Commission, hereinafter the
“NEOs”) under any criminal statute, or the commencement of criminal or civil proceedings in the
United States by any governmental authority against the Parent or any of its NEOs, pursuant to
which the prosecuting agency seeks forfeiture of a material portion of the Parent’s property;



     (n) an Event of Default (or similar term) shall occur under and as defined in any Note or in
any other Ancillary Agreement;



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     (o) Parent shall breach any term or provision of any Ancillary Agreement to which it is a
party (including, without limitation, Section 7(e) of the Registration Rights Agreement), in any
material respect which breach is not cured within any applicable cure or grace period provided in
respect thereof (if any);



     (p) Parent attempts to terminate, challenges the validity of, or its liability under this
Agreement or any Ancillary Agreement, or any proceeding shall be brought to challenge the validity,
binding effect of any Ancillary Agreement or any Ancillary Agreement ceases to be a valid, binding
and enforceable obligation of Parent (to the extent such Persons are a party thereto);



     (q) an SEC stop trade order or Principal Market trading suspension of the Common Stock shall
be in effect for five (5) consecutive trading days or five (5) days during a period of ten (10)
consecutive trading days, excluding in all cases a suspension of all trading on a Principal Market,
provided that the Parent shall not have been able to cure such trading suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal Market within sixty
(60) days of such notice; or



     (r) The Parent’s failure to deliver Common Stock to Calliope pursuant to and in the form
required by the Secured Convertible Term Note, the Warrant and this Agreement, if such failure to
deliver Common Stock shall not be cured within three (3) Business Days or Parent is required to
issue a replacement Note to Calliope and Parent shall fail to deliver such replacement Note within
seven (7) Business Days.



     20. Remedies. Following the occurrence of an Event of Default, Calliope shall have
the right to demand repayment in full of all Obligations, whether or not otherwise due. Until all
Obligations have been fully and indefeasibly satisfied, Calliope shall retain its Lien in all
Collateral. Calliope shall have, in addition to all other rights provided herein and in each
Ancillary Agreement, the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Calliope may be entitled, including
the right to take immediate possession of the Collateral, to require Parent to assemble the
Collateral, at Parent’ joint and several expense, and to make it available to Calliope at a place
designated by Calliope which is reasonably convenient to both parties and to enter any of the
premises of Parent 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 Parent, Parent agrees not to charge Calliope for storage thereof), and the right to
apply for the appointment of a receiver for Parent’s property. Further, Calliope may, at any time
or times after the occurrence of an Event of Default, sell and deliver all Collateral held by or
for Calliope at public or private sale for cash, upon credit or otherwise, at such prices and upon
such terms as Calliope, in Calliope’s sole discretion, deems advisable or Calliope may otherwise
recover upon the Collateral in any commercially reasonable manner as Calliope, in its sole
discretion, deems advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company Agent at Company Agent’s address as shown in Calliope’s records,
at least ten (10) days before the time of the event of which notice is being given. Calliope may
be the purchaser at any sale, if it is public. In connection with the exercise of the foregoing
remedies, Calliope is granted permission to use all of Parent’s Intellectual Property. The
proceeds of sale shall be applied first to all costs and expenses of sale, including attorneys’



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fees, and second to the payment (in whatever order Calliope elects) of all Obligations. After
the indefeasible payment and satisfaction in full of all of the Obligations, and after the payment
by Calliope of any other amount required by any provision of law, including Section 9-608(a)(1) of
the UCC (but only after Calliope has received what Calliope considers reasonable proof of a
subordinate party’s security interest), the surplus, if any, shall be paid to Company Agent (for
the benefit of the applicable Parent) or its representatives or to whosoever may be lawfully
entitled to receive the same, or as a court of competent jurisdiction may direct. The Parent shall
remain liable to Calliope for any deficiency. Parent and Calliope acknowledge that the actual
damages that would be incurred by Calliope after the occurrence of an Event of Default would be
difficult to quantify and that Parent and Calliope have agreed that the fees and obligations set
forth in this Section and in this Agreement would constitute fair and appropriate liquidated
damages in the event of any such termination. The parties hereto each hereby agrees that the
exercise by any party hereto of any right granted to it or the exercise by any party hereto of any
remedy available to it (including, without limitation, the issuance of a notice of redemption, a
borrowing request and/or a notice of default), in each case, hereunder or under any Ancillary
Agreement shall not constitute confidential information and no party shall have any duty to the
other party to maintain such information as confidential, except for the portions of such publicly
filed documents that are subject to confidential treatment request made by the Parent to the SEC.




     21. Waivers. To the full extent permitted by applicable law, Parent hereby 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 Calliope on which Parent may in any way be liable, and hereby ratifies and confirms whatever
Calliope may do in this regard; (b) all rights to notice and a hearing prior to Calliope’s taking
possession or control of, or to Calliope’s replevy, attachment or levy upon, any Collateral or any
bond or security that might be required by any court prior to allowing Calliope to exercise any of
its remedies; and (c) the benefit of all valuation, appraisal and exemption laws. Parent
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.



     22. Expenses. The Parent shall pay all of Calliope’ out-of-pocket costs and expenses,
including reasonable fees and disbursements of in-house or outside counsel and appraisers, in
connection with (x) subject to the limitations set forth in Section 5(b)(iii), the preparation,
execution and delivery of this Agreement and the Ancillary Agreements, and (y) 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. The Parent shall also pay all of Calliope’ reasonable and documented fees, charges,
out-of-pocket costs and expenses, including 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) Calliope’ obtaining performance of the Obligations under this
Agreement and any Ancillary Agreements, including, but not limited to, the enforcement or defense
of Calliope’ security interests, assignments of rights and Liens hereunder as valid perfected
security interests, (c) any attempt to inspect, verify,



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protect, collect, sell, liquidate or otherwise dispose of any Collateral, (d) any appraisals
or re-appraisals of any property (real or personal) pledged to Calliope by Parent as Collateral
for, or any other Person as security for, the Obligations hereunder and (e) any consultations in
connection with any of the foregoing. The Parent shall also pay Calliope’ customary bank charges
for all bank services (including wire transfers) performed or caused to be performed by Calliope
for Parent at Parent’s or such Subsidiary’s request or in connection with Parent’s loan account
with Calliope. All such costs and expenses together with all filing, recording and search fees,
taxes and interest payable by the Parent to Calliope shall be payable within five (5) days of
presentment 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 Parent and/or any Subsidiary thereof,
on the one hand, and Calliope on the other hand, which Calliope is or may be required to withhold
or pay (including, without limitation, as a result of a breach by Parent of Section 13(u)
herein), the Parent hereby indemnifies and holds Calliope harmless in respect of such taxes, and
the Parent will repay to Calliope the amount of any such taxes which shall be charged to the
Parent’ account; and until the Parent shall furnish Calliope with indemnity therefor (or supply
Calliope with evidence satisfactory to it that due provision for the payment thereof has been
made), Calliope may hold without interest any balance standing to Parent’s credit and Calliope
shall retain its Liens in any and all Collateral.




     23. Assignment. Calliope may assign any or all of the Obligations together with any
or all of the security therefor to any Person and any such assignee shall succeed to all of
Calliope’s rights with respect thereto; provided that Calliope shall not be permitted to effect any
such assignment to a competitor of Parent unless an Event of Default has occurred and is
continuing. Upon such assignment, Calliope shall be released from all responsibility for the
Collateral to the extent same is assigned to any transferee. Calliope 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 Calliope and such holder, be
entitled to the same benefits as Calliope with respect to any security for the Obligations in which
such holder is a participant. Parent 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 Parent were directly indebted to such holder in the amount of such participation.
No Company may assign any of its rights or obligations hereunder without the prior written consent
of Calliope. All of the terms, conditions, promises, covenants, provisions and warranties of this
Agreement shall inure to the benefit of undersigned, and shall bind the representatives,
successors and permitted assigns of Parent.



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



     25. Application of Payments. Parent irrevocably waives the right to direct the
application of any and all payments at any time or times hereafter received by Calliope from or on
Parent’s behalf and Parent hereby irrevocably agrees that Calliope shall have the continuing



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exclusive right to apply and reapply any and all payments received at any time or times
hereafter against the Obligations hereunder in such manner as Calliope may deem advisable
notwithstanding any entry by Calliope upon any of Calliope’s books and records.




     26. Indemnity. Parent hereby indemnifies and holds Calliope, and its respective
affiliates, 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 PARENT 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.



     27. Revival. The Parent further agrees that to the extent Parent makes a payment or
payments to Calliope, 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.



     28. Borrowing Agency Provisions.



     (a) Parent hereby irrevocably designates Company Agent to be its attorney and agent and in
such capacity to borrow, sign and endorse notes, and execute and deliver all instruments,
documents, writings and further assurances now or hereafter required hereunder, on behalf of
Parent, and hereby authorizes Calliope to pay over or credit all loan proceeds hereunder in
accordance with the request of Company Agent.



     (b) The handling of this credit facility as a co-borrowing facility with a borrowing agent in
the manner set forth in this Agreement is solely as an accommodation to the Parent and at their
request. Calliope shall not incur any liability to Parent as a result thereof. To induce Calliope
to do so and in consideration thereof, Parent hereby indemnifies Calliope and holds Calliope
harmless from and against any and all liabilities, expenses, losses, damages and



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claims of damage or injury asserted against Calliope by any Person arising from or incurred by
reason of the handling of the financing arrangements of the Parent as provided herein, reliance by
Calliope on any request or instruction from Company Agent or any other action taken by Calliope
with respect to this Paragraph 28.




     (c) All Obligations shall be joint and several, and the Parent shall make payment upon the
maturity of the Obligations by acceleration or otherwise, and such obligation and liability on the
part of the Parent shall in no way be affected by any extensions, renewals and forbearance granted
by Calliope to Parent, failure of Calliope to give Parent notice of borrowing or any other notice,
any failure of Calliope to pursue to preserve its rights against Parent, the release by Calliope of
any Collateral now or thereafter acquired from Parent, and such agreement by Parent to pay upon any
notice issued pursuant thereto is unconditional and unaffected by prior recourse by Calliope to
Parent or any Collateral for Parent’s Obligations or the lack thereof.



     (d) Parent expressly waives any and all rights of subrogation, reimbursement, indemnity,
exoneration, contribution or any other claim which Parent may now or hereafter have against the
other or other Person directly or contingently liable for the Obligations, or against or with
respect to any other’s property (including, without limitation, any property which is Collateral
for the Obligations), arising from the existence or performance of this Agreement, until all
Obligations have been indefeasibly paid in full and this Agreement has been irrevocably terminated.



     (e) Parent represents and warrants to Calliope that (i) Parent have common shareholders,
directors and officers, (ii) the businesses and corporate activities of Parent are closely related
to, and substantially benefit, the business and corporate activities of Parent, (iii) the financial
and other operations of Parent are performed on a combined basis as if Parent constituted a
consolidated corporate group, (iv) Parent will receive a substantial economic benefit from entering
into this Agreement and will receive a substantial economic benefit from the application of each
Loan hereunder, in each case, whether or not such amount is used directly by Parent and (v) all
requests for Loans hereunder by the Company Agent are for the exclusive and indivisible benefit of
the Parent as though, for purposes of this Agreement, the Parent constituted a single entity.



     29. Notices. Any notice or request hereunder may be given to Parent, Company Agent or
Calliope 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 three (3)
Business Days after the date when deposited in the mail or with the overnight mail carrier, and, in
the case of a telecopy, when confirmed.



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Notices shall be provided as follows:




	 	 	 	 	 
	 

	 	If to Calliope:
	 	Calliope Capital Corporation
	 

	 	 	 	c/o United Corporate Services, Inc. 874 Walker
	 

	 	 	 	Road, Suite C Dover Delaware 19904
	 

	 	 	 	Facsimile: 212-541-4410
	 
	 	 	 	 
	 

	 	With a copy to:
	 	Laurus Capital Management, LLC
	 

	 	 	 	335 Madison Avenue, 10th Fl.
	 

	 	 	 	New York, New York 10017
	 

	 	 	 	Attention: Portfolio Services
	 

	 	 	 	Telephone: (212) 541-5800
	 

	 	 	 	Telecopier: (212) 581-5037
	 
	 	 	 	 
	 

	 	If to Parent,
or Company Agent:
	 	Chad Therapeutics, Inc.
	 

	 	 	 	21622 Plummer Street
	 

	 	 	 	Chatsworth, CA 91311
	 

	 	 	 	Attention: Tracy Kern
	 

	 	 	 	Telephone: (818) 882-8803 ext.288
	 

	 	 	 	Facsimile: (818) 407-4122
	 
	 	 	 	 
	 

	 	With a copy to:	 	 
	 

	 	 	 	Morrison & Foerster 
	 

	 	 	 	555 West Fifth Street, Suite 3500
	 

	 	 	 	Los Angeles, California 90013-1024
	 
	 	 	 	 
	 

	 	 	 	Attention: Hillel T. Cohn, Esq.
	 

	 	 	 	Phone: (213) 892-5251
	 

	 	 	 	Fax: (213) 892-5454





or such other address as may be designated in writing hereafter in accordance with this Section 29
by such Person.




     30. 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 PRINCIPLES OF CONFLICTS OF LAW.



     (b) PARENT HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY
OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS
OR DISPUTES BETWEEN PARENT, ON THE ONE HAND, AND CALLIOPE, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO



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THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT CALLIOPE AND PARENT
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF
THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE CALLIOPE 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
CALLIOPE. PARENT EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND PARENT HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. PARENT 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 COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’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
CALLIOPE, AND/OR PARENT 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 HERETO OR THERETO.



     31. Limitation of Liability. Parent acknowledges and understands that in order to
assure repayment of the Obligations hereunder Calliope may be required to exercise any and all of
Calliope’s rights and remedies hereunder and agrees that, except as limited by applicable law,
neither Calliope nor any of Calliope’s agents shall be liable for acts taken or omissions made in
connection herewith or therewith except for actual bad faith.



     32. Entire Understanding; Maximum Interest. This Agreement and the Ancillary
Agreements contain the entire understanding between Parent and Calliope as to the subject matter
hereof and thereof and any promises, representations, warranties or guarantees not herein contained
shall have no force and effect unless in writing, signed by Parent’s and Calliope’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. Nothing contained in this



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Agreement, any Ancillary Agreement or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a rate of interest or
other charges in excess of the maximum rate permitted by applicable law. In the event that the
rate of interest or dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be credited against
amounts owed by the Parent to Calliope and thus refunded to the Parent.




     33. 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.



     34. Survival. The representations, warranties, covenants and agreements made herein
shall survive any investigation made by Calliope and the closing of the transactions contemplated
hereby to the extent provided therein. All statements as to factual matters contained in any
certificate or other instrument delivered by or on behalf of the Parent pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be representations and
warranties by the Parent hereunder solely as of the date of such certificate or instrument. All
indemnities set forth herein shall survive the execution, delivery and termination of this
Agreement and the Ancillary Agreements and the making and repaying of the Obligations.



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



     36. Counterparts; Telecopier Signatures. This Agreement may be executed in
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.



     37. 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.



     38. Publicity. Parent hereby authorizes Calliope to make appropriate announcements of
the financial arrangement entered into by and among Parent and Calliope, including, without
limitation, announcements which are commonly known as tombstones, in such publications and to such
selected parties as Calliope shall in its sole and absolute discretion deem appropriate, or as
required by applicable law.



     39. Joinder. It is understood and agreed that any Person that desires to become a
Company hereunder, or is required to execute a counterpart of this Agreement after the date hereof
pursuant to the requirements of this Agreement or any Ancillary Agreement, shall become a Company
hereunder by (a) executing a Joinder Agreement in form and substance



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satisfactory to Calliope, (b) delivering supplements to such exhibits and annexes to this
Agreement and the Ancillary Agreements as Calliope shall reasonably request and (c) taking all
actions as specified in this Agreement as would have been taken by Parent had it been an original
party to this Agreement, in each case with all documents required above to be delivered to Calliope
and with all documents and actions required above to be taken to the reasonable satisfaction of
Calliope.




     40. Legends. The Securities shall bear legends as follows;




     (a) The Secured Convertible Term Note shall bear substantially the following legend:




“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND
THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS
NOT REQUIRED.”



     (b) Any shares of Common Stock issued pursuant to conversion of the Secured Convertible Term
Note or exercise of the Warrants, shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed with the SEC:




“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”



     (c) The Warrants shall bear substantially the following legend:




“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS



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AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND
THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”



[Balance of page intentionally left blank; signature page follows.]




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     IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first
written above.



	 	 	 	 	 	 	 
	 	 	CHAD THERAPEUTICS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Earl Yager
 

Earl Yager
	 	 
	 

	 	Title:
	 	President & CEO	 	 
	 
	 	 	 	 	 	 
	 	 	CALLIOPE CAPITAL CORPORATION	 	 
	 
	 	 	 	 	 	 
	 	 	By: LAURUS CAPITAL MANAGEMENT, 

Its Investment Advisor	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:

Title:
	 	/s/ David Grin
 

David Grin
 

Director
 

	 	   






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Annex A — Definitions




     “Account Debtor” means any Person who is or may be obligated with respect to, or on
account of, an Account.



     “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, including: (a) all accounts receivable, other receivables, book
debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an account or contract
right under the UCC); (b) all of such Person’s rights in, to and under all purchase orders or
receipts for goods or services; (c) all of such Person’s rights to any goods represented by any of
the foregoing (including unpaid sellers’ rights of rescission, replevin, reclamation and stoppage
in transit and rights to returned, reclaimed or repossessed goods); (d) all rights to payment due
to such Person for Goods or other property sold, leased, licensed, assigned or otherwise disposed
of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be
incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or
other contract, arising out of the use of a credit card or charge card, or for services rendered or
to be rendered by such Person or in connection with any other transaction (whether or not yet
earned by performance on the part of such Person); and (e) all collateral security of any kind
given by any Account Debtor or any other Person with respect to any of the foregoing.



     “Accounts Availability” means ninety percent (90%) of the net face amount of Eligible
Accounts.



     “Affiliate” means, with respect to any Person, (a) any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common
control with such Person, (b) any other Person that, directly or indirectly, owns or controls,
whether beneficially, or as trustee, guardian or other fiduciary, 25% or more of the Stock having
ordinary voting power in the election of directors of such Person, (c) any other Person who is a
director, officer, joint venturer or partner (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above or (d) in the case of the Parent, the
immediate family members, spouses and lineal descendants of individuals who are Affiliates of such
Parent. For the purposes of this definition, control of a Person shall mean the power (direct or
indirect) to direct or cause the direction of the management and policies of such Person whether by
contract or otherwise; provided however, that the term “Affiliate” shall specifically exclude
Calliope.



     “Ancillary Agreements” means the Notes, the Warrants, the Registration Rights
Agreements, each Security Document 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 Parent, any of its Subsidiaries or any other Person or delivered to Calliope, relating to this
Agreement or to the transactions contemplated by this Agreement or



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otherwise relating to the relationship between or among Parent and Calliope, as same may be
amended, supplemented, restated or otherwise modified from time to time.




     “Balance Sheet Date” has the meaning given such term in Section 12(f)(ii).



     “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.



     “Business Day” means a day on which Calliope 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.



     “Capital Availability Amount” means $2,750,000.



     “Charter” has the meaning given such term in Section 12(c)(iv).



     “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 the date on which Parent shall first receive proceeds of the
initial Loans or the date hereof, if no Loan is made under the facility on the date hereof.



     “Code” has the meaning given such term in Section 15(i).



     “Collateral” means all of Parent’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 interests 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:



     (a) all Inventory;




     (b) all Equipment;




     (c) all Fixtures;




     (d) all Goods;




     (e) all General Intangibles;




     (f) all Accounts;




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




     (h) all Investment Property;



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2









 





     (i) all Stock;




     (j) all Chattel Paper;




     (k) all Letter-of-Credit Rights;




     (l) all Instruments;




     (m) all commercial tort claims set forth on Schedule 1(A);




     (n) all Books and Records;




     (o) all Intellectual Property;




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



     (q) (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 Calliope for the account of Parent (whether for safekeeping, custody, pledge,
transmission or otherwise); and



     (r) all products and Proceeds of all or any of the foregoing, tort claims and all claims and
other rights to payment including (i) insurance claims against third parties for loss of, damage
to, or destruction of, the foregoing Collateral 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.



     “Common Stock” means the shares of stock representing the Parent’s common equity
interests.



     “Company Agent” means the Parent.



     “Contract Rate” has the meaning given such term in the respective Note.



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



     “Deposit Accounts” means all “deposit accounts” as such term is defined in the UCC,
now or hereafter held in the name of any Person, including, without limitation, the Lockboxes.



     “Disclosure Controls” has the meaning given such term in Section 12(f)(iv).



     “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.



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     “Eligible Accounts” means each Account of Parent which conforms to the following
criteria: (a) shipment of the merchandise or the rendition of services has been completed; (b) no
return, rejection or repossession of the merchandise has occurred; (c) merchandise or services
shall not have been rejected or disputed by the Account Debtor and there shall not have been
asserted any offset, defense or counterclaim; (d) continues to be in full conformity with the
representations and warranties made by Parent to Calliope with respect thereto; (e) Calliope is,
and continues to be, satisfied with the credit standing of the Account Debtor in relation to the
amount of credit extended; (f) there are no facts existing or threatened which are likely to result
in any adverse change in an Account Debtor’s financial condition; (g) is documented by an invoice
in a form approved by Calliope and shall not be unpaid more than ninety (90) days from invoice
date; (h) not more than twenty-five percent (25%) of the unpaid amount of invoices due from such
Account Debtor remains unpaid more than ninety (90) days from invoice date, provided, however, that
invoices with 60 day payment terms may be considered Eligible Accounts if the unpaid amount of
invoices due from such Account Debtor remains unpaid no more than one hundred twenty (120) days
from invoice date ; (i) 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
Calliope or represents a check in payment of an Account; (j) the Account Debtor is located in the
United States; provided, however, Calliope may, from time to time, in the exercise
of its sole discretion and based upon satisfaction of certain conditions to be determined at such
time by Calliope, deem certain Accounts as Eligible Foreign Accounts notwithstanding that the
Account is due from an Account Debtor located outside of the United States; (k) Calliope has a
first priority perfected Lien in such Account and such Account is not subject to any Lien other
than Permitted Liens; (l) does not arise out of transactions with any employee, officer, director,
stockholder or Affiliate of Parent; (m) is payable to Parent; (n) does not arise out of a bill and
hold sale prior to shipment and does not arise out of a sale to any Person to which Parent is
indebted; (o) is net of any returns, discounts, claims, credits and allowances; (p) if the Account
arises out of contracts between Parent, on the one hand, and the United States, on the other hand,
any state, or any department, agency or instrumentality of any of them, Parent has so notified
Calliope, in writing, prior to the creation of such Account, and there has been compliance with any
governmental notice or approval requirements, including compliance with the Federal Assignment of
Claims Act; (q) 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
Parent or work, labor and/or services rendered by Parent; (r) does not arise out of progress
billings prior to completion of the order; (s) the total unpaid Accounts from such Account Debtor
does not exceed twenty-five percent (25%) of all Eligible Accounts; (t) Parent’s right to payment
is absolute and not contingent upon the fulfillment of any condition whatsoever; (u) Parent is able
to bring suit and enforce its remedies against the Account Debtor through judicial process; (v)
does not represent interest payments, late or finance charges owing to Parent, and (w) is otherwise
satisfactory to Calliope as determined by Calliope in the exercise of its sole discretion. In the
event Parent requests that Calliope include within Eligible Accounts certain Accounts of of
Parent’s acquisition targets, Calliope shall at the time of such request consider such inclusion,
but any such inclusion shall be at the sole option of Calliope and shall at all times be subject to
the execution and delivery to Calliope of all such documentation (including, without limitation,
guaranty and security documentation) as Calliope may require in its sole discretion.



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     “Eligible Inventory” means Inventory owned by a Company which Calliope, in its sole
and absolute discretion, determines: (a) is subject to a first priority perfected Lien in favor of
Calliope and is subject to no other Liens whatsoever (other than Permitted Liens); (b) is located
on premises with respect to which Calliope has received a landlord or mortgagee waiver acceptable
in form and substance to Calliope; (c) is not in transit; (d) 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; (e) is
currently either usable or salable in the normal course of Parent’s business; (f) is not placed by
Parent on consignment or held by Parent on consignment from another Person; (g) is in conformity
with the representations and warranties made by Parent to Calliope with respect thereto; (h) is not
subject to any licensing, patent, royalty, trademark, tradename or copyright agreement with any
third parties not disclosed on the Disclosure Schedules under the heading “Eligible Inventory IP
Agreements (i) does not require the consent of any Person for the completion of manufacture, sale
or other disposition of such Inventory and such completion, manufacture or sale does not constitute
a breach or default under any contract or agreement to which Parent is a party or to which such
Inventory is or may be subject; (j) is not work-in-process; (k) is covered by casualty insurance
acceptable to Calliope and under which Calliope has been named as a lender’s loss payee and
additional insured; and (l) not to be ineligible for any other reason.



     “Eligible Subsidiary” means each Subsidiary of the Parent set forth on Exhibit A
hereto, as the same may be updated from time to time with Calliope’s written consent.



     “Equipment” means all “equipment” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including any and all machinery, apparatus,
equipment, fittings, furniture, Fixtures, motor vehicles and other tangible personal property
(other than Inventory) of every kind and description that may be now or hereafter used in such
Person’s operations or that are owned by such Person or in which such Person may have an interest,
and all parts, accessories and accessions thereto and substitutions and replacements therefor.



     “ERISA” has the meaning given such term in Section 12(bb).



     “Event of Default” means the occurrence of any of the events set forth in Section 19.



     “Exchange Act” means the Securities Exchange Act of 1934, as amended.



     “Exchange Act Filings” means the Parent’s filings under the Exchange Act made prior to
the date of this Agreement.



     “Existing Indebtedness” means the indebtedness of the Parent to Wells Fargo Bank
arising in connection with that certain Account Purchase Agreement dated March 27, 2007 by and
between Wells Fargo Bank, National Association and Parent.



     “Financial Reporting Controls” has the meaning given such term in Section 12(f)(v).



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5









 





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



     “Formula Amount” has the meaning given such term in Section 2(a)(i).



     “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, manufactured homes, fixtures, standing timber that is cut and
removed for sale and unborn young of animals.



     “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.



     “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.



     “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 patents, trademarks, service marks, trade
names, copyrights, trade secrets, Licenses, information and other proprietary rights and processes.



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     “Inventory” means all “inventory”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including all inventory, merchandise, goods and
other personal property that are held by or on behalf of such Person for sale or lease or are
furnished or are to be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person’s business or in the
processing, production, packaging, promotion, delivery or shipping of the same, including all
supplies and embedded software.



     “Inventory Availability” means the lesser of (a) fifty percent (50%) of the value of
Parent’s Eligible Inventory (calculated on the basis of the lower of cost or market, on a first-in
first-out basis) and (b) $1,000,000.



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



     “Letter-of-Credit Rights” means “letter-of-credit rights” as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including rights to payment or performance
under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled
to demand payment or performance.



     “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” has the meaning given such term in Section 2(a)(i) and shall include all other
extensions of credit hereunder and under any Ancillary Agreement.



     “Lockboxes” has the meaning given such term in Section 8(a).



     “Material Adverse Effect” means a material adverse change with respect to (a) the
business, assets, liabilities, condition (financial or otherwise), properties, operations or
prospects of the Parent that materially and adversely affects the ability of the Parent to pay or
perform the Obligations in accordance with the terms hereof or any Ancillary Agreement or (b) the
sufficiency and/or value of the Collateral, the Liens on the Collateral or the priority of any such
Lien. Without limiting the foregoing, any event or occurrence which results, or could reasonably
be expected within the next 12 months to result in a loss of revenues in excess of 30% of the
Parent’s consolidated revenues, or which results, or could reasonably be expected within the next



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12 months to result in a reduction of more than 30% of the Parent’s total shareholders’ equity
determined on a consolidated basis, shall constitute a Material Adverse Effect.




     “NASD” has the meaning given such term in Section 13(b).



     “Note Shares” has the meaning given such term in Section 12(a).



     “Notes” means the Secured Revolving Note and the Secured Convertible Term Note made by
Parent in favor of Calliope in connection with the transactions contemplated hereby, as same may
be amended, supplemented, restated and/or otherwise modified from time to time.



     “Obligations” means all Loans, all advances, debts, liabilities, obligations,
covenants and duties owing by Parent and each of its Subsidiaries to Calliope (or any corporation
that directly or indirectly controls or is controlled by or is under common control with Calliope)
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 Parent and/or each of its Subsidiaries to
others which Calliope 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 or allowable in such proceeding), charges or any other payments Parent and each of its
Subsidiaries is required to make by law or otherwise arising under or as a result of this
Agreement, the Ancillary Agreements or otherwise, together with all reasonable expenses and
reasonable attorneys’ fees chargeable to the Parent’ or any of their Subsidiaries’ accounts or
incurred by Calliope in connection therewith.



     “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 worker’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 the Parent in conformity
with GAAP; (c) Liens in favor of Calliope; (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 the Parent in conformity with GAAP; and which have
no effect on the priority of Liens in favor of Calliope or the value



Security Agreement




8









 




of the assets in which Calliope has a Lien; (e) Purchase Money Liens securing Purchase Money
Indebtedness to the extent permitted in this Agreement and (f) Liens specified on Schedule
2 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.



     “Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ Capital
Market, NASDAQ National Market System, American Stock Exchange or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or market for the Common
Stock).



     “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 Parent 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 Parent 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 Parent 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 Parent 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.



     “Purchase Money Indebtedness” means (a) any indebtedness incurred for the payment of
all or any part of the purchase price of any fixed asset, including indebtedness under capitalized
leases, (b) any indebtedness incurred for the sole purpose of financing or refinancing all or any
part of the purchase price of any fixed asset, and (c) any renewals, extensions or refinancings
thereof (but not any increases in the principal amounts thereof outstanding at that time).



     “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.



Security Agreement




9









 





     “Registration Rights Agreements” means that certain Registration Rights Agreement
dated as of the Closing Date by and between the Parent and Calliope and each other registration
rights agreement by and between the Parent and Calliope, as same may be amended, modified and
supplemented from time to time.



     “Revolving Loans” shall have the meaning given such term in Section 2(a)(i).



     “SEC” means the Securities and Exchange Commission.



     “SEC Reports” has the meaning given such term in Section 12(u).



     “Secured Revolving Note” means that certain Secured Revolving Note dated as of the
Closing Date made by the Parent in favor of Calliope in the original face amount of Two Million
Seven Hundred Fifty Thousand Dollars ($2,750,000), as the same may be amended, supplemented,
restated and/or otherwise modified from time to time.



     “Secured Convertible Term Note” means that certain Secured Convertible Term Note dated
as of the Closing Date made by the Parent in favor of Calliope in the original face amount of Seven
Hundred Fifty Thousand Dollars ($750,000), as the same may be amended, supplemented, restated
and/or otherwise modified from time to time.



     “Securities” means the Notes and the Warrants and the shares of Common Stock which may
be issued pursuant to conversion of the Secured Convertible Term Note in whole or in part exercise
of such Warrants.



     “Securities Act” has the meaning given such term in Section 12(r).



     “Security Documents” means all security agreements, mortgages, cash collateral deposit
letters, pledges and other agreements which are executed by Parent in favor of Calliope.



     “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.



     “Solvent” means, with respect to any Person on a particular date, that on such date
(a) the fair value of the property of such Person is greater than the total amount of liabilities,
including contingent liabilities, of such Person; (b) the present fair salable value of the assets
of such Person is not less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured; (c) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay
as such debts and liabilities mature; and (d) such Person is not engaged in a business or
transaction, and is not about to engage in a business or transaction, for which such Person’s
property would constitute and unreasonably small capital. The amount of contingent liabilities
(such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the
amount that, in light of all the facts and circumstances existing at the time, represents the
amount that can reasonably be expected to become an actual or matured liability.



Security Agreement




10









 





     “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 SEC under the Securities Exchange Act of 1934).



     “Subsidiary” means, with respect to any Person, (i) any other Person 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 or other governing body of such other Person, are owned, directly or
indirectly, by such Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.



     “Supporting Obligations” means all “supporting obligations” as such term is defined in
the UCC.



     “Term” means the Closing Date through the close of business on the day immediately
preceding the third anniversary of the Closing Date, subject to acceleration at the option of
Calliope upon the occurrence of an Event of Default hereunder or other termination hereunder.



     “Term Loan” has the meaning given such term in Section 2(a)(c).



     “Total Investment Amount” means Three Million Five Hundred Thousand Dollars
($3,500,000).



     “UCC” means the Uniform Commercial Code as the same may, from time to 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, Calliope’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.



     “Warrant Shares” has the meaning given such term in Section 12(a).



     “Warrants” means that certain Common Stock Purchase Warrant dated as of the Closing
Date made by the Parent in favor of Calliope and each other warrant made by the Parent in favor
Calliope, as each of the same may be amended, restated, modified and/or supplemented from time to
time.



Security Agreement





11










 







Exhibit A




Eligible Subsidiaries




None




Security Agreement




 









 






Exhibit B




Borrowing Base Certificate




As of                            , 200__




	 	 	 	 	 	 	 	 	 	 	 	 	 
	ACCOUNTS RECEIVABLE per __________ Aging
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Ineligible Accounts:
	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts over 90 days from Invoice Date
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Credit Balances Over 90 days from Invoice Date
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Intercompany and Affiliate Accounts
	 	 	 	 	 	 	0.00	 	 	 	 	 
	__% Concentration Cap
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Contra Accounts
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Cash Sales and COD Accounts
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Foreign Receivables
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Government Receivables (without Assignment of
Claims)
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Discounts, Credits and Allowances
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Cross-age (__% Past Due)
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Bill and Hold Invoices
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Finance/Service/Late Charges
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Other:
	 	 	 	 	 	 	0.00	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	ELIGIBLE ACCOUNTS RECEIVABLE
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts Receivable Advance Rate
	 	 	90	%	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	ACCOUNTS RECEIVABLE AVAILABILITY
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	INVENTORY per __________ Balance Sheet
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Ineligible Inventory:
	 	 	 	 	 	 	 	 	 	 	 	 
	Work-in-Process
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Excess/Slow Moving
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Supplies/Packaging
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Damaged
	 	 	 	 	 	 	0.00	 	 	 	 	 
	Other:
	 	 	 	 	 	 	0.00	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	ELIGIBLE INVENTORY
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Inventory Advance Rate
	 	 	50	%	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Inventory Cap
	 	 	 	 	 	 	 	 	 	 	1,000,000.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 
	INVENTORY AVAILABILITY
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	TOTAL AVAILABILITY
	 	 	 	 	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Less Reserves
	 	 	 	 	 	 	 	 	 	 	0.00	 






Security Agreement




 









 






	 	 	 	 	 	 	 	 	 
	NET AVAILABILITY
	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 
	REVOLVING CREDIT LINE
	 	 	0.00	 	 	 	 	 
	MINIMUM BORROWING NOTE
	 	 	0.00	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	NET BORROWING AVAILABILITY (Lesser of Line or Net Availability)
	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 
	Less: Calliope Loans
	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 
	EXCESS/(DEFICIT) AVAILABILITY
	 	 	 	 	 	 	0.00	 
	 
	 	 	 	 	 	 	 





The undersigned hereby certifies that all of the foregoing information regarding the Eligible
Accounts and Eligible Inventory are true and correct on the date hereof and all such Accounts and
Inventory listed as Eligible are Eligible within the meaning given such term in the Security
Agreement dated ___/___/200___ among Borrower, the other Parent named therein and Calliope




                    , Borrowing Agent




By:                                                                     
            




Name:

Title:




Security Agreement




14