EX-10.1






EXHIBIT 10.1




SECURED PROMISSORY NOTE




$2,600,000 March 23, 2006



FOR VALUE RECEIVED, XYBERNAUT CORPORATION, a Delaware corporation, and XYBERNAUT SOLUTIONS,
INC., a Virginia corporation, debtors and chapter 11 debtors-in-possession (together, “Borrowers”)
(Case No. 05-12801), hereby unconditionally and jointly and severally promise to pay to the order
of EAST RIVER CAPITAL LLC, a Delaware limited liability company (“Holder” or “Lender””), in lawful
money of the United States of America and in immediately available funds, the lesser of (i) the
principal sum of Two Million Six Hundred Thousand Dollars ($2,600,000) (the “Commitment Amount”)
and (ii) the aggregate unpaid principal amount of all loans made by or through Holder to Borrowers
pursuant to this Note (the “Loans”), together with interest accrued thereon as herein provided and
all premiums, fees and expenses and other amounts payable hereunder (the “Obligations”). The
Lender may increase the Commitment Amount up to an amount not to exceed Three Million Two Hundred
Thousand Dollars ($3,200,000) upon mutual written agreement of the Lender and Borrowers, and with
the consent of the Official Committee of Unsecured Creditors appointed in the bankruptcy cases (the
“Case") of Borrowers.



This Promissory Note (this “Note”) is the Note referred to in and is executed and delivered in
connection with that certain Security Agreement dated as of March 23, 2006, by and between
Borrowers and Holder (as the same may from time to time be amended, modified or supplemented or
restated, the “Security Agreement”), a copy of which is attached hereto as Exhibit A. Additional
rights of Holder are set forth in the Security Agreement. All capitalized terms used herein and
not otherwise defined herein shall have the respective meanings given to them in the Security
Agreement.



1. Borrowings. Upon the terms and conditions set forth herein, Holder agrees to make Loans
from time to time in amounts upon the written request of Borrowers on and after the date hereof
until 30 days before the Maturity Date in an aggregate principal amount not to exceed the
Commitment Amount on the terms and conditions set forth herein. Borrowers shall provide such
written request (a “Loan Request”), together with telephonic notice thereof, to Holder on or before
12:00 noon at least three (3) business days prior to the requested date of such borrowing. Amounts
repaid hereunder may not be reborrowed. Each request must be in a minimum amount of $50,000 and,
if greater, shall be in integral multiples of $10,000.




	 	2.	 	Repayment. Except for those Obligations payable on an earlier date, the
Obligations shall be due and payable in full on September 1, 2006 (the “Maturity
Date”).






	 	3.	 	Interest. The outstanding principal balance of this Note shall not bear
interest except for default interest under section 5 hereof.





4. Place of Payment. All amounts payable hereunder shall be payable by wire transfer to
Holder in accordance with wire transfer instructions to be separately provided to Borrowers in
writing, unless another manner of payment shall be specified in writing by Holder.



5. Application of Payments, Default Rate. Payment on this Note shall be applied first to
accrued interest, if any, second, to the Premium (as defined below), third, to fees and expenses of
the Lender, and thereafter to the outstanding principal balance hereof. Any amount outstanding on
the Obligations hereunder not paid when due, whether at stated maturity, by acceleration or
otherwise, shall bear interest at a rate per annum (computed on the basis of a 360-day year, actual
days elapsed) of fifteen percent (15.0 %) from the date due until the date of payment.




	 	6.	 	Security. The full amount of the Obligations are secured by the Collateral
identified and described as security therefor in the Security Agreement executed by and
delivered by Borrowers. Borrowers shall not, directly or indirectly, create, permit or
suffer to exist, and shall defend the Collateral against and take such other action as
is necessary to remove, any Lien on or in the Collateral, or in any portion thereof,
except as permitted pursuant to the Security Agreement.






	 	7.	 	Use of Proceeds. Borrowers covenant that the Loans shall be used solely as
follows: repayment of outstanding advances, fees and expenses payable under the
debtor-in-possession financing facility with LC Capital Master Fund, Ltd. (“LC Fund”)
approved by the Court in October, 2005 (the “LC Fund DIP Facility”) in an amount up to
Five Hundred Fifty Thousand Dollars ($550,000), establishment of the Escrow Accounts as
provided in Section 8 hereof, working capital needs, general corporate purposes, the
costs and expenses associated with the Case, and payment of fees and expenses of Lender
payable hereunder.






	 	8.	 	Escrow Accounts. The initial Loans shall be used to establish an escrow
account (the “Lender Escrow") in the amount of Four Hundred Thousand Dollars ($400,000)
for the benefit of Lender, which amount may be later reduced to an amount not less than
$200,000 upon mutual written consent of the Lender and the Borrowers. The funds
deposited in the Lender Escrow may be used, at the Lender’s option and in accordance
with instruction by the Lender to the Escrow Agent (as such term is defined in the
Escrow Agreement substantially in the form annexed hereto as Exhibit B (the “Escrow
Agreement")), for payment to the Lender of the Obligations, including, without
limitation, fees and expenses of the Lender, that are due and payable under this Note
and have not been paid by the Borrowers. The subsequent Loans shall be used (a) to
establish an escrow account (the “Professionals Escrow") in the amount of Five Hundred
Thousand Dollars ($500,000), and (b) to increase the Lender Escrow to the total amount
of Six Hundred Thousand Dollars ($600,000). The funds deposited in the Professionals
Escrow may be used, in accordance with the instructions of the Borrowers and as long as
the Borrowers are not in default as of the date of payment of such funds, for payment
of administrative claims for professional fees and expenses incurred in the Case that
have been allowed and authorized by the Bankruptcy Court. Upon the occurrence and
during the continuance of an Event of Default hereunder, (a) the funds deposited in the
Professionals Escrow may not be used for payment of professional fees and expenses and
the Borrowers may not instruct the Escrow Agent as to the disposition of any funds in
the Professionals Escrow, and (b) the funds deposited in the Professionals Account may
be used, at the Lender’s option and in accordance with instruction by the Lender to the
Escrow Agent, for payment to the Lender of the Obligations, including, without
limitation, fees and expenses of the Lender, that are due and payable under this Note
and have not been paid by the Borrowers. Each of the escrow accounts (collectively,
the “Escrow Accounts”) shall be governed by and subject to the terms and conditions of
this Note and the Escrow Agreement.






	 	9.	 	Premium. Holder shall have earned and shall be paid hereunder an additional
amount (the “Premium”) equal to the greater of (a) One Million Two Hundred Thousand
Dollars ($1,200,000) and (b) 62.5 % (sixty-two and one-half percent) of each dollar
advanced hereunder. The Premium is earned upon advance of any Initial Loan and paid
when principal becomes due hereunder or when all or any amount of the Loans is repaid.






	 	10.	 	Fees and Expenses. Borrowers shall pay Lender a monthly administration fee of
Five Thousand Dollars ($5,000), which shall be due and payable on the first day of each
month. In addition, Borrowers shall pay for all costs and expenses incurred by Lender
in connection with the Loans, the Loan Documents, and the enforcement of rights and
remedies under the Loan Documents, including, without limitation, reasonable attorneys’
and financial advisor’s fees and expenses. All reasonable expenses incurred by Lender,
including but not limited to attorneys’ fees and expenses for purposes of preparing,
negotiating, drafting, executing, delivering, closing, administrating or obtaining
final approval of the Loan Documents, shall be payable by Borrowers upon demand without
the need for an order of the Court ordering such payment.






	 	11.	 	Collateral Sales. Borrowers are presently engaged in and will continue to
engage in efforts to sell Collateral (particularly, Collateral consisting of
intellectual property identified on Exhibit 2 to the Security Agreement). The proceeds
of the sale or other disposition of Collateral (including the sale or other disposition
of property, whether directly or indirectly and including by way of a sale of
Borrowers’ business (including by way of a section 363 sale as part of a chapter 11
plan(s)), that had been included in the Collateral (even if the Loans have been repaid)
(subject only to the final sentence of this Section 11), net only of the expenses
directly attributable (excluding any commission, incentive or similar fee payable to
broker or investment bankers to such sale or disposition) (“Collateral Proceeds”),
shall upon Borrowers’ receipt be paid as follows: (a) eighty-five percent (85%) to
Holder to reduce the Obligations, and (b) fifteen percent (15%) to LC Fund for a period
of one year following confirmation of a plan of reorganization for the Borrowers or
until such earlier date established by an order of the Bankruptcy Court, and
thereafter one hundred percent (100%) to Holder; provided, however, that in the
event that the Final DIP Order eliminates and extinguishes any obligation of the
Borrowers to LC Fund under the LC Fund DIP Facility, then one hundred percent (100%) of
the Collateral Proceeds shall be paid to Holder. For the avoidance of doubt, while no
Event of Default exists, Collateral consisting of accounts receivable and inventory
created in the ordinary course of business may be used by Borrowers in the ordinary
course of their business.






	 	12.	 	Existing Ownership. Borrowers shall not without the prior express written
consent of Lender (i) issue any capital stock, (ii) cancel any authorized stock, or
(iii) alter existing shareholder structure, or take any other action, so as to further
or cause an ownership change within the meaning of section 382 of the Internal Revenue
Code. Upon acquiring information or knowledge that any person or entity may take
action to become a “5% shareholder” within the meaning of section 382 of the Internal
Revenue Code, Borrowers shall immediately advise Lender of such circumstance, shall
consult in good faith with Lender as to any commercially reasonable actions that
Borrowers may take to prevent such person or entity becoming a “5% shareholder,” and
shall take any and all such commercially reasonable actions mutually agreed upon with
Lender.






	 	13.	 	Sales Process/Plan Milestones. Borrowers covenant to use their best efforts to
cause the events set forth on Exhibit C to occur by the dates indicated thereon (the
“Milestones”).






	 	14.	 	Board of Director Meetings. Borrowers shall provide Holder with reasonable
prior notice of all meetings (including telephonic meetings) of the boards of directors
of Borrowers, and permit an authorized representative of Holder to attend and observe
all such meetings.






	 	15.	 	Access to Books and Records. Borrowers shall permit any authorized
representative of Lender to inspect any of their properties and books and records,
including financial and accounting records, and to make copies and take extracts
therefrom, all upon reasonable notice at such reasonable times and as often as may be
reasonably requested; provided that Lender shall not unreasonably interfere
with the Borrowers’ operations.






	 	16.	 	Conditions Precedent. Holder’s obligation to make the initial and each
successive Loan hereunder is subject to the satisfaction of the following conditions
precedent:






	 	(a)	 	Interim and Final Orders. The Court shall have issued the
Financing Orders satisfactory to Lender, including the Interim DIP Order and
Final DIP Order, (1) approving the terms of this Promissory Note, authorizing
the transactions contemplated hereby and by the Security Agreement, and
granting Holder perfected, valid, and enforceable first priority Liens and
security interests upon all real and personal property, including intellectual
property, of Borrowers, all senior to any existing Liens and security interests
other than (x) those Liens and encumbrances not exceeding $100,000 in the
aggregate and scheduled on Exhibit 3 to the Security Agreement (“Permitted
Liens"), and (y) except as provided otherwise in the Final DIP Order, a shared
Lien pari passu with LC Fund in the ratio of fifteen percent (15%) to secure
the “Secured Obligations” to LC Fund under the LC Fund DIP Facility, and
eighty-five percent (85%) to secure the Obligations to the Holder, and all on
terms and conditions acceptable to Holder; (2) granting Holder a superpriority
administrative expense claim in the amount of the Obligations, with priority
over all administrative expenses, priority and unsecured claims against
Borrowers now existing or hereafter arising, of any kind or nature whatsoever;
(3) prohibiting any liens that would be senior to or pari passu with the Liens
securing the Obligations (except as permitted under this Note and the Security
Agreement); (4) authorizing and directing Borrowers to pay Holder’s fees and
expenses in connection with or payable under this Note and the Security
Agreement; (5) providing that Holder is entitled to all of the protections and
benefits of Section 364(e) of the Bankruptcy Code; and (6) containing such
other terms and conditions as Holder may determine. Such Financing Orders
shall be in full force and effect and shall not have been amended, stayed or
vacated. The Financing Orders or a separate order of the Court shall provide
that portions of this Note and motions related hereto that describe the
Milestones shall be filed under seal, although such information shall be
available to the committees appointed under Section 1102 of the Bankruptcy Code
and the Office of the United States Trustee.






	 	(b)	 	Initial Loans. Upon entry of the Interim DIP Order, subject to
the terms and conditions herein, Borrowers may borrow initial Loans (“Initial
Loans") in an amount not to exceed One Million Nine Hundred Thousand Dollars
($1,900,000). Prior to entry of the Final DIP Order, the Loans shall not
exceed One Million Nine Hundred Thousand Dollars ($1,900,000) in the aggregate.






	 	(c)	 	Loan Documents. Borrowers shall have executed and delivered to
Holder this Note, the Escrow Agreement, the Security Agreement, such other
documents necessary to grant to Holder a perfected first priority security
interest in and lien on the Collateral, and such other documents, instruments
and agreements reasonably requested by Holder, all in form and substance
satisfactory to Holder.






	 	(d)	 	Subsequent Loans. Upon entry of the Final DIP Order which
shall provide, among other things, that Borrowers have no further obligations
to LC Fund under the LC Fund DIP Financing Facility, and subject to the terms
and conditions herein, Borrowers may borrow subsequent Loans in an amount,
together with the Initial Loans advanced, not to exceed the Commitment Amount.
As a condition to borrowing subsequent Loans, the Borrowers and each of the
directors of the Borrowers shall have executed and deposited into escrow any
and all documents, in form and substance satisfactory to Lender, reasonably
requested by Lender to confirm that they will comply with their respective
obligations under Section 23.






	 	(e)	 	Collateral Value/Appraisals. Borrowers have delivered to
Holder the Intellectual Asset Valuation Report, dated June 27, 2005, prepared
by IPI Innovations Financial Services, Inc. (“IPI”) that values the Collateral
consisting of the intellectual property identified on Exhibit 2 to the Security
Agreement (the “IPI Valuation”), demonstrating that the Collateral supports
repayment of the Obligations. IPI has not withdrawn or modified or disavowed
the IPI Valuation. IPI’s engagement with the Borrowers for other matters has
been terminated.






	 	(f)	 	No Defaults. No Default or Event of Default shall have
occurred and be continuing or would result from the proposed borrowing.






	 	(g)	 	Due Authorization. Borrowers shall have provided to Lender
evidence satisfactory to Lender in its discretion of due authorization to enter
into the Note, the Security Agreement and the Escrow Agreement and perform all
obligations hereunder and thereunder.






	 	(h)	 	Representations and Warranties. All representations and
warranties contained herein, in the Security Agreement or in the Escrow
Agreement shall be true and correct on and as of the date of such borrowing (or
if such representation or warranty expressly relates to an earlier date, then
as of such earlier date).






	 	(i)	 	Fees and Expenses Paid. Holder’s fees and expenses (including
attorneys’ and financial advisor’s fees) incurred to date shall have been paid
in full in cash.






	 	17.	 	Default. Each of the following events shall be an “Event of Default”
hereunder:






	 	(a)	 	Borrowers fail to pay timely any principal amount when due
under this Note on the date the same becomes due and payable or any other
amounts due under this Note on the date the same becomes due and payable;






	 	(b)	 	Borrowers shall fail to pay or reimburse when due, or if there
is no specified due date, upon demand, any other amounts owed to Lender under
this Note;






	 	(c)	 	A breach by either Borrower of any covenant, agreement,
representation or warranty under this Note, the Security Agreement, the Escrow
Agreement or any Financing Order;






	 	(d)	 	Any challenge in a legal proceeding to the validity or
enforceability of this Note, the Security Agreement, the Escrow Agreement, or
any Financing Order or any term hereunder or thereunder;






	 	(e)	 	Reversal, modification, rescission, amendment or vacating of
any Financing Order;






	 	(f)	 	An “Event of Default” has occurred and is continuing under and
as defined in the Security Agreement;






	 	(g)	 	Failure of the Borrowers to meet any of the Milestones;






	 	(h)	 	Failure of the Borrowers to fund any of the Escrow Accounts in
accordance with Section 8 hereof and the Escrow Agreement;






	 	(i)	 	Failure of the Borrowers or any of the directors of the
Borrowers to comply with their respective obligations under Section 23.






	 	(j)	 	The filing of any motion to approve a sale of all or a
substantial portion of either Borrower’s assets, unless the Holder consents or
the motion is accompanied by a Bona Fide Offer for such assets that would yield
sufficient proceeds to pay the Obligations in full (including, for the
avoidance of doubt, the Premium);






	 	(k)	 	The filing of any plan(s) of reorganization for either Borrower
which does not provide for the payment in cash in full of the Obligations on or
before the Maturity Date;






	 	(l)	 	Dismissal of the Case, conversion of the Case to a chapter 7
liquidation or the appointment of a trustee or an examiner in the Case with
expanded powers;






	 	(m)	 	The occurrence of a material adverse change in (1) the
condition or business prospects (financial or otherwise) of Borrowers, taken as
a whole, since the date of this Note, or (2) the value or salability of the
Collateral such that the aggregate value of the intellectual property
identified on Exhibit 2 to the Security Agreement may be less than $10 million;






	 	(n)	 	Either Borrower taking any action before the Court contrary to
Lender’s rights under the Note, the Security Agreement, the Escrow Agreement or
any Financing Order;






	 	(o)	 	Borrowers shall use the proceeds of the Loans in a manner not
provided for under Section 7 hereof; and






	 	(p)	 	The filing of a motion to approve post-petition financing that
will be secured by Liens on the Collateral that are equal or senior to the
Liens granted to Holder in connection herewith.





Upon the occurrence of an Event of Default hereunder, but subject to the terms of the
Financing Orders, all unpaid principal, accrued interest, Premium, and other amounts owing
hereunder shall, at the option of Holder, be immediately due, payable and collectible by Holder
pursuant to applicable law and the commitments hereunder terminated, and Holder may exercise all
rights and remedies under this Note, the Security Agreement, the Escrow Agreement and applicable
law. Upon an Event of Default, if after five (5) days written notice from Holder the default has
not been cured, Borrowers consent to the immediate modification of the automatic stay of Section
362 of the Bankruptcy Code to the extent necessary to permit Holder to exercise all rights and
remedies under this Note, the Security Agreement, the Escrow Agreement and applicable law.




	 	18.	 	Representations and Warranties of Borrowers. Each Borrower hereby represents
and warrants to the Holder that:






	 	(a)	 	Organization and Good Standing. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to carry on its business as now
conducted.






	 	(b)	 	Authorization. The execution, delivery and performance by
Borrower of this Note, the Security Agreement and the Escrow Agreement are
within Borrower’s corporate power; have been duly authorized by all necessary
or proper corporate action and, on the date of initial funding of the Loan
hereunder and on each subsequent funding date, will be authorized by a
Financing Order which remains in full force and effect and has not been
amended, stayed or vacated; will not violate any applicable law; does not
require the consent or approval of any governmental authority or any other
person (other than entry of the applicable Financing Order) and except such
consents as have been obtained.






	 	(c)	 	Valid Obligation. This Note, Security Agreement and the Escrow
Agreement constitute valid and legally binding obligations of Borrower,
enforceable against Borrower in accordance with their terms.






	 	(d)	 	Non-contravention of Other Instruments. Borrower is not in
violation or default (i) of any provision of its Certificate of Incorporation
or Bylaws, or (ii) in any material respect of any post-petition instrument,
judgment, order, writ, decree or contract to which it is a party or by which it
is bound which violation or default would have a material adverse effect on
Borrower or its subsidiaries, taken as a whole. The execution, delivery and
performance of this Note, the Security Agreement and the Escrow Agreement, and
the consummation of the transactions contemplated hereby and thereby, will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such post-petition provision, instrument, judgment, order, writ, decree or
contract (including but not limited to any credit agreements, guaranties or
debt related agreements to which Borrower or any affiliate of Borrower may be a
party) or an event that results in the creation of any lien, charge or
encumbrance upon any assets of Borrower or its Subsidiaries or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to Borrower, its business or
operations or any of its assets or properties.






	 	(e)	 	Title to Collateral. Except as expressly provided otherwise in
the Security Agreement, all assets and property of Borrower are included in the
Collateral. Borrower owns and holds good and marketable title to the assets
and property, including, without limitation, intangible property and contract
rights (including without limitation the intellectual property identified on
Exhibit 2 to the Security Agreement), constituting the Collateral and that
there are no liens, claims or encumbrances on the Collateral other than those
consisting of Permitted Liens and with respect to the intellectual property
identified on Exhibit 2 to the Security Agreement, other than the licenses,
assignments or other transfers of rights or interests, covenants not to sue, or
adverse claims, with respect to such property (“Adverse Interests”) that are
identified as Permitted Liens, there are no Adverse Interests, and any
maintenance fees with respect to such property are current.






	 	(f)	 	Balance Sheets. The balance sheets attached as Exhibit D
hereto (as of January 31, 2006 for each Borrower) in all material respects
fairly represent the assets and liabilities of Borrowers as of the dates set
forth therein.






	 	19.	 	Waiver. Borrowers waive presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection w hen incurred, including, without limitation, reasonable attorneys’ fees,
costs and other expenses.





The right to plead any and all statutes of limitations as a defense to any demands hereunder
is hereby waived to the full extent permitted by law.




	 	20.	 	Indemnification. Borrowers hereby indemnify Holder for any fees, costs and
expenses (including counsel and financial advisor fees and expenses) incurred in
connection with this Note, the other Loan Documents, and any order approving same,
other than fees, costs and expenses arising directly as a result of Holder’s gross
negligence or willful misconduct.






	 	21.	 	Governing Law. This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York, excluding conflict of laws
principles that would cause the application of laws of any other jurisdiction, except
to the extent governed by the Bankruptcy Code.






	 	22.	 	Successors and Assigns. The provisions of this Note and the Security Agreement
shall inure to the benefit of and be binding on any successor to Borrowers and to any
successor or assign of Holder.






	 	23.	 	Issuance of Stock; Reconstitution of Boards of Directors. If the Borrowers
fail to pay the Obligations in full on or prior to the Maturity Date, (for purposes of
this Section 23, a “Section 23 Default”) then, at the option of Lender and to the
extent permitted by applicable law: (a) Borrowers shall pay Lender the sum of Four
Hundred Thousand Dollars ($400,000) as a late payment fee, (b) each Borrower shall
issue to Holder, for the sum of Four Hundred Thousand Dollars ($400,000), payable by
setoff against the Obligations owed to the Lender hereunder, all authorized unissued
 shares of common stock of such Borrower, legally available for issuance, and/or (c)
each Borrower shall, pursuant to (i) the Financing Orders and (ii) Section 303 of the
General Corporation Law of the State of Delaware, 8 Del. C. § 303 (“Section 303”),
reconstitute its board of directors (including, if necessary, name, constitute or
appoint directors in place of or in addition to all or some of the directors then in
office) so that the majority of the board of directors of each Borrower is satisfactory
to Lender in its sole and absolute discretion; provided, however, that in the
event that at the Maturity Date the Borrowers are then parties to one or more existing
contracts with a credible buyer(s) with respect to a Bona Fide Offer(s) that will
provide funds to Borrowers in an aggregate amount sufficient to enable Borrowers to
repay the Obligations in full within thirty (30) days after the Maturity Date, the
issuance of stock and reconstitution of the boards of directors provided for in this
Section 23 shall not occur unless and until Borrowers fail to pay the Obligations in
full on or before thirty (30) days after the Maturity Date; provided, further,
however, that the issuance of stock and reconstitution of the boards of directors
pursuant hereto shall not be deemed to satisfy Borrowers’ obligation to repay the
Obligations, which shall remain in effect under this Note. Borrowers further agree
that, to the fullest extent permitted by applicable law: (a) if all of the current
directors choose to resign from their positions on the boards of directors before
reconstitution of the boards of directors pursuant hereto, prior to such resignations
becoming effective the Borrowers shall, pursuant to (i) the Financing Orders and (ii)
Section 303, appoint the Chief Executive Officer as a director to serve in such
capacity upon the resignations of such directors, and (b) the Borrowers shall cooperate
in good faith with Lender and take any and all actions necessary to facilitate the
actions contemplated by this Section 23, including, without limitation, as a condition
precedent to any subsequent Loans the execution and deposit into escrow by the
Borrowers and directors of any and all documents, in form and substance satisfactory to
Lender, reasonably requested by Lender to confirm that they will comply with their
respective obligations under this Section 23.






	 	24.	 	Warrants. Holder shall receive warrants for the right to purchase 5% of the
capital stock of Borrowers, as reorganized under a chapter 11 plan, on a fully diluted
basis at nominal cost, subject to anti-dilution protection; provided that to
the extent that the Commitment Amount is increased above Two Million Six Hundred
Thousand Dollars ($2,600,000), Holder shall receive additional warrants for an
additional 1.3% of such capital stock. In addition, Holder shall have the right to
participate in any rights offering for the stock of Borrowers by having the option to
purchase any unsubscribed stock. For such period of time as Holder holds warrants or
stock of Borrowers, Holder shall have the right to appoint, at its election, a member
of, or observer to, the board of directors of each reorganized Borrower.






	 	25.	 	Assignments and Participations. Borrowers agree and acknowledge that the
Lender has the right to sell participations in any of the Loans and assign its rights
and interests hereunder to third parties. Borrowers hereby consent to the sale by
Lenders of participations in the Loans.






	 	26.	 	Payment Procedures. Payments of principal and interest on this Note shall be
made to the Holder at its principal office in New York City, in such coin or currency
of the United States of America as at the time of payment shall be legal tender for the
payment of public and private debt. If any payment of principal or interest on this
Note shall become due on a day that is not a business day, such payment shall be made
on the next succeeding day that is a business day.






	 	27.	 	Press Releases. Borrowers will not use Holder’s or its affiliates’ name(s) in
any press release without Holder’s prior written consent.






	 	28.	 	Effectiveness. This Note shall not become effective, shall not bind the
Borrowers, and shall be null and void unless and until, (a) on or before 5:00 p.m.,
eastern standard time, on March 20, 2006, the Borrowers execute this Note and the
Security Agreement, and, in addition, (b) on or before 5:00 p.m., eastern standard
time, on March 23, 2006, the Interim DIP Order, in form and substance satisfactory to
Holder, has been entered by the Court and is in full force and effect.




1









	 	 	 
	BORROWERS	 	XYBERNAUT CORPORATION
	 	 	XYBERNAUT SOLUTIONS, INC.
	
 
	 	By:/s/ Perry L. Nolen
	
 
	 	 
	
 
	 	Name: Perry L. Nolen
	
 
	 	 
	
 
	 	Title: President & CEO
	
 
	 	 
	HOLDER

	 	EAST RIVER CAPITAL LLC






By:/s/ James A. Coyne


Name: James A. Coyne

Title: Manager, East River LLC

2


EXHIBIT A



3




Security AgreementEXHIBIT B




4




Escrow Agreement

EXHIBIT C




[CONFIDENTIAL]




5




1 Confidential Treatment has been requested for the redacted portion. The

confidential, redacted portions have been filed separately with the SEC.EXHIBIT

D




Balance Sheets




Xybernaut Corporation Balance Statement – January 31, 2006




	 	 	 	 	 	 	 	 	 
	ASSETS
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Current assets:
	 	 	 	 	 	 	 	 
	Cash In Banks
	 		(71,415	)	 	 	 	 
	Petty Cash
	 		300		 	 	 	 
	Restricted Cash
	 		—		 	 	 	 
	Pre Petiton Accounts receivable
	 		94,678		 	 	 	 
	Post Petiton Accounts receivable
	 		146,815		 	 	 	 
	Less AR — Other, Reserve, Contra
	 		(498,063	)	 	 	 	 
	Inventory
	 		2,009,118		 	 	 	 
	Prepaid and other current assets
	 		740,595		 	 	 	 
	DTDF — Japan
	 		680,099		 	 	 	 
	DTDF — GmbH
	 		12,533,177		 	 	 	 
	DTDF — Gmbh R&D
	 		4,820,238		 	 	 	 
	DTDF — China
	 		286,197		 	 	 	 
	DTDF — XSI
	 		(1,085,757	)	 	 	 	 
	DTDF — Korea
	 		293,924		 	 	 	 
	DTDF — RESERVE
	 		(18,000,000	)	 	 	 	 
	Total current assets
	 	 	 	 	 		1,949,907	
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Fixed assets:
	 	 	 	 	 	 	 	 
	Property and equipment
	 		2,149,704		 	 	 	 
	Less: accumulated depreciation
	 		-2,009,591		 	 	 	 
	Total fixed assets
	 	 	 	 	 		140,113	
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Other assets:
	 	 	 	 	 	 	 	 
	Investment in subsidiaries
	 		605,584		 	 	 	 
	Patents, net
	 		679,778		 	 	 	 
	Trademarks, net
	 		23,103		 	 	 	 
	Tooling, net
	 		—		 	 	 	 
	Other
	 		213,350		 	 	 	 
	Total other assets
	 	 	 	 	 		1,521,816	
	 
	 	 	 	 	 	 	 	 
	TOTAL ASSETS
	 	 	 	 	 		3,611,836	
	 
	 	 	 	 	 	 	 	 











Period Ending January 2006 Balance Statement Page 2



	 	 	 	 	 	 	 	 	 
	LIABILITIES AND EQUITY
	 	 	 	 	 	 	 	 
	Post-Petition Liabilities
	 	 	 	 	 	 	 	 
	Accounts Payable
	 		161,692		 	 	 	 
	Accrued DIP Loan Payable
	 		297,246		 	 	 	 
	Accrued restructuring costs
	 	 	 	 	 	 	 	 
	Deferred Product and Warranty Revenue
	 		170,490		 	 	 	 
	Accrued Professional fees
	 		1,603,365		 	 	 	 
	Accrued Purchases
	 		82,858		 	 	 	 
	Salaries/Commissions Payable
	 		155,959		 	 	 	 
	Total Post Petition Liabilities
	 		2,471,610		 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Pre-Petition Liabilities
	 	 	 	 	 	 	 	 
	Priority Claims
	 		105,810		 	 	 	 
	Secured Debts
	 		—		 	 	 	 
	Unsecured Debt
	 		1,602,425		 	 	 	 
	Accrued expenses
	 		324,020		 	 	 	 
	Total Pre Petition Liabilities
	 		2,032,255		 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Total liabilities
	 	 	 	 	 		4,503,865	
	 
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Stockholders’ equity:
	 	 	 	 	 	 	 	 
	Common stock
	 		1,946,209		 	 	 	 
	Additional paid-in capital
	 		183,745,591		 	 	 	 
	Cumulative translation adjustment
	 		38,695		 	 	 	 
	Accumulated other comprehensive income (XSI)
	 		37,130		 	 	 	 
	Retained earnings, beginning
	 		(171,411,927	)	 	 	 	 
	Current Retained Earnings — Pre Petition
	 		(10,953,998	)	 	 	 	 
	Current Retained Earnings — Post Petition
	 		(4,293,729	)	 	 	 	 
	Total stockholders’ equity
	 	 	 	 	 		(892,029	)
	 
	 	 	 	 	 	 	 	 
	TOTAL LIABILITIES AND EQUITY
	 	 	 	 	 		3,611,836	
	 
	 	 	 	 	 	 	 	 











6



XYBERNAUT SOLUTIONS, INC. — BALANCE SHEET

As of January 31, 2006




	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current Assets
Cash
	 	 	 	 	 		95,289.58		 	 	 	 
	Pre-Petition Accounts Receivable
	 	 	 	 	 		34,982.37		 	 	 	 
	Post-Petition Accounts Receivable
	 	 	 	 	 		386,765.52		 	 	 	 
	Receivables from Officers
	 	 	 	 	 		0.00		 	 	 	 
	Employees, Affiliates
	 	 	 	 	 		0.00		 	 	 	 
	Note Receivables
	 	 	 	 	 		0.00		 	 	 	 
	Inventory
	 	 	 	 	 		0.00		 	 	 	 
	Other Current Assets:
	 	 	 	 	 	 	 	 	 	 	 	 
	Due to / From Xybernaut
	 	 	 	 	 		1,085,756.62		 	 	 	 
	Unbilled Accounts Receivable
	 	 	 	 	 		313,209.35		 	 	 	 
	Prepaid Other
	 	 	 	 	 		6,458.33		 	 	 	 
	Accounts Receivable Other XSI
	 	 	 	 	 		0.00		 	 	 	 
	Employee Advances
	 	 	 	 	 		0.00		 	 	 	 
	Total Current Assets
	 	 	 	 	 	 	 	 	 		1,922,461.77	
	Fixed Assets
Land
	 	 	 	 	 		0.00		 	 	 	 
	Buildings
	 	 	 	 	 		0.00		 	 	 	 
	Equipment, Furniture & Fixtures
	 	 	 	 	 		230,769.84		 	 	 	 
	Less Accumulated Depreciation
	 	 	 	 	 		(161,224.05	)	 	 	 	 
	Total Fixed Assets
	 	 	 	 	 	 	 	 	 		69,545.79	
	Other Assets
Retainage
	 	 	 	 	 		32,838.00		 	 	 	 
	Deposits
	 	 	 	 	 		6,750.10		 	 	 	 
	Total Other Assets
	 	 	 	 	 	 	 	 	 		39,588.10	
	Total Assets
	 	 	 	 	 	 	 	 	 		2,031,595.66	
	Post-Petition Liabilities
Accounts Payable
	 	 	 	 	 		203,412.44		 	 	 	 
	Salaries Payable
	 	 	 	 	 		76,290.12		 	 	 	 
	Accounts Payable -Other
	 	 	 	 	 		2,844.94		 	 	 	 
	Commissions Payable
	 	 	 	 	 		8,194.19		 	 	 	 
	Accrued Vacation
	 	 	 	 	 		33,808.08		 	 	 	 
	Accrued Rent & Storage
	 	 	 	 	 		0.00		 	 	 	 
	Taxes Payable
	 	 	 	 	 		0.00		 	 	 	 
	Accrued Interest
	 	 	 	 	 		0.00		 	 	 	 
	Deferred Revenue
	 	 	 	 	 		153,472.52		 	 	 	 
	Total Post-Petition Liabilities
	 	 	 	 	 	 	 	 	 		478,022.29	
	Pre-Petition Liabilities
Priority Claims
	 	 	 	 	 		21,888.15		 	 	 	 
	Secured Debts
	 	 	 	 	 		0.00		 	 	 	 
	Unsecured Debtor
	 	 	 	 	 		19,319.49		 	 	 	 
	Total Pre-Petition Liabilities
	 	 	 	 	 	 	 	 	 		41,207.64	
	Owners Equity (Deficit)
Capital Stock or Owner Investment
	 	 	 	 	 		15,849.68		 	 	 	 
	Paid In Capital Surplus
	 	 	 	 	 		605,059.88		 	 	 	 
	Retained Earnings (Deficit)
Pre-Petition
	 	 	 	 	 		732,590.92		 	 	 	 
	Post-Petition
	 	 	 	 	 		158,865.25		 	 	 	 
	Total Owners Equity
	 	 	 	 	 	 	 	 	 		1,512,365.73	
	Total Liabilities and Owner’s Equity
	 		2,031,595.66		 	 	 	 	 	 	 	 







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