EXHIBIT
      10.2

    PLEDGE
      AND SECURITY AGREEMENT

     

    PLEDGE
      AND SECURITY AGREEMENT (this “Agreement”),
      dated
      as of June 25, 2008, is by and among Precision Optics Corporation, Inc., a
      Massachusetts corporation (the “Borrower”),
      and
      such other parties as may become Grantors hereunder on or after the date hereof
      (together with the Borrower, the “Grantors”
and,
      individually, a “Grantor”)
      and
      the Investors named as such in the Purchase Agreement, dated June 25, 2008
      (the
“Purchase
      Agreement”),
      among
      the Borrower and such Investors (collectively, the “Purchasers”).

     

    WHEREAS,
      pursuant to the terms of the Purchase Agreement, the Purchasers are acquiring
      from the Borrower, $600,000 in an aggregate principal amount of the Borrower’s
      10% Senior Secured Convertible Notes (the “Notes”);
      and

    


    WHEREAS,
      the
      Grantors wish to grant security interests in favor of the Purchasers as herein
      provided to secure the obligations of the Borrower under the Notes;

     

    NOW
      THEREFORE,
      in
      consideration of the promises contained herein and for other good and valuable
      consideration, the receipt and sufficiency of which are hereby acknowledged,
      the
      parties hereto agree as follows:

     

    1.
       Definitions.
      All
      capitalized terms used herein without definitions shall have the respective
      meanings provided therefor in the Purchase Agreement or the Notes. As used
      herein the term “Obligations”
shall
      mean all principal, interest (including interest accrued after the filing of
      a
      bankruptcy or similar petition whether or not a claim therefor is enforceable),
      fees, expenses and indemnities payable from time to time by the Grantors under
      the Notes and the other Transaction Documents, including reimbursements under
      Section 11. The term “State,”
as
      used herein, means the State of New York. All terms defined in the Uniform
      Commercial Code of the State and used herein shall have the same definitions
      herein as specified therein. However, if a term is defined in Article 9 of
      the
      Uniform Commercial Code of the State differently than in another Article of
      the
      Uniform Commercial Code of the State, the term has the meaning specified in
      Article 9.

     

    2.
       Grant
      of Security Interest.
      Each
      Grantor hereby grants to the Purchasers, to secure the payment and performance
      in full of all of the Obligations, a security interest in and so pledges to
      the
      Purchasers the following properties, assets and rights of such Grantor, wherever
      located, whether now owned or hereafter acquired or arising, and all proceeds
      and products thereof (all of the same being hereinafter called the “Collateral”):
      

     

    (i) goods
      (including inventory, equipment and any accessions thereto), 

     

    (ii) instruments
      (including promissory notes),

     

    (iii) documents,

     

    (iv) accounts,

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (v) chattel
      paper (whether tangible or electronic),

     

    (vi) deposit
      accounts,

     

    (vii) letter-of-credit
      rights (whether or not the letter of credit is evidenced by a
      writing),

     

    (viii) commercial
      tort claims,

     

    (ix) securities
      and all other investment property (“Investment
      Property”),

     

    (x) supporting
      obligations,

     

    (xi) contract
      rights or rights to the payment of money, insurance claims and proceeds,


     

    (xii) general
      intangibles including, without limitation, all payment intangibles, patents,
      patent applications, trademarks, trademark applications, trade names,
      copyrights, copyright applications, software, engineering drawings, service
      marks, customer lists, goodwill, and all licenses, permits, agreements of any
      kind or nature pursuant to which the Grantors possess, use or have authority
      to
      possess or use property (whether tangible or intangible) of others or others
      possess, use or have authority to possess or use property (whether tangible
      or
      intangible) of the Grantors, and all recorded data of any kind or nature,
      regardless of the medium of recording including, without limitation, all
      software, writings, plans, specifications and schematics; and

     

    (xiii) all
      now
      existing and hereafter acquired or arising (A) capital stock, equity securities
      or interests or other Investment Property (including the capital stock described
      on Schedule
      A
      hereto),
      (B) all cash dividends and cash distributions with respect to the foregoing
      (“Dividends”),
      (C)
      all non-cash dividends paid on capital securities, liquidating dividends paid
      on
      capital securities, shares of capital securities resulting from (or in
      connection with the exercise of) stock splits, reclassifications, warrants,
      options, non-cash dividends, mergers, consolidations, and all other
      distributions (whether similar or dissimilar to the foregoing) on or with
      respect to any capital securities constituting Collateral (excluding Dividends,
      “Distributions”),
      and
      (D) all certificates, agreements (including stockholders agreements, partnership
      agreements, operating agreements and limited liability company agreements),
      books, records, writings, data bases, information and other property relating
      to, used or useful in connection with, evidencing, embodying, incorporating
      or
      referring to, any of the foregoing. 

     

    The
      Purchasers acknowledge that the attachment of the security interest in any
      commercial tort claim as original collateral is subject to the Grantor’s
      compliance with §4.7.

     

    Notwithstanding
      the foregoing, Collateral shall not include any of the following (collectively,
      the “Excluded
      Collateral”)
      (1)
      vehicles subject to a certificate of title statute, (2) rights under licenses,
      permits and contracts in which a security interest may not be granted except
      to
      the extent that such prohibition is not enforceable under the applicable Uniform
      Commercial Code, provided,
      that
      the Grantors shall not permit any such prohibitions in any contracts, licenses
      and permits entered into after the date hereof except in the ordinary course
      consistent with past practice and (3) the property listed on Schedule
      2
      attached
      hereto.

    


    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    3.
       Authorization
      to File Financing Statements.
      The
      Grantors hereby irrevocably authorize the Purchasers at any time and from time
      to time to file in any applicable Uniform Commercial Code jurisdiction any
      initial financing statements and amendments thereto against each Grantor that
      (a) indicate the Collateral (i) as all assets of such Grantor or words of
      similar effect, regardless of whether any particular asset comprised in the
      Collateral falls within the scope of Article 9 of the Uniform Commercial Code
      of
      the State or such jurisdiction, or (ii) as being of an equal or lesser scope
      or
      with greater detail, and (b) contain any other information required by part
      5 of
      Article 9 of the Uniform Commercial Code of the State for the sufficiency or
      filing office acceptance of any financing statement or amendment, including
      (i)
      whether such Grantor is an organization, the type of organization and any
      organization identification number issued to such Grantor and, (ii) in the
      case
      of a financing statement filed as a fixture filing or indicating Collateral
      as
      as-extracted collateral or timber to be cut, a sufficient description of real
      property to which the Collateral relates. The Grantors agree to furnish any
      such
      information to the Purchasers promptly upon request. Each Grantor also ratifies
      its authorization for the Purchasers to have filed in any Uniform Commercial
      Code jurisdiction any like initial financing statements or amendments thereto
      if
      filed prior to the date hereof.

     

    4.
       Other
      Actions.
      Further
      to insure the attachment, perfection and first priority (subject to Permitted
      Liens) of, and the ability of the Purchasers to enforce, the Purchasers’
security interest in the Collateral, the Grantors agree, in each case at the
      Grantor’s own expense, to take the following actions with respect to the
      following Collateral:

     

    4.1.
       Promissory
      Notes and Tangible Chattel Paper.
      If any
      Grantor shall at any time hold or acquire any promissory notes or tangible
      chattel paper, such Grantor shall forthwith endorse, pledge and deliver the
      same
      to the Purchasers, accompanied by such instruments of transfer or assignment
      duly executed in blank as the Purchasers may from time to time
      specify.

     

    4.2.
       Deposit
      Accounts.
      For
      each deposit account (each, a “Deposit
      Account”)
      that
      any Grantor at any time opens or maintains at any depository bank (each, a
      “Depository
      Bank”),
      the
      Grantor shall, at the Purchasers’ request and option, pursuant to an agreement
      in form and substance satisfactory to the Purchasers (each, a “Deposit
      Account Control Agreement”),
      upon
      an Event of Default either (a) cause the Depositary Bank to agree to comply
      at
      any time with instructions from the Purchasers to such Depositary Bank directing
      the disposition of funds from time to time credited to such Deposit Account,
      without further consent of the Grantor, or (b) arrange for the Purchasers to
      become the customers of the Depositary Bank with respect to the Deposit Account,
      with the Grantors being permitted, only with the consent of the Purchasers,
      to
      exercise rights to withdraw funds from such Deposit Account. The Purchasers
      agree with the Grantors that the Purchasers shall not give any such instructions
      or withhold any withdrawal rights from the Grantors, unless an Event of Default
      has occurred and is continuing, or, after giving effect to any withdrawal not
      otherwise permitted by the Transaction Documents, would occur. The provisions
      of
      this paragraph shall not apply to (i) any Deposit Account for which the
      Grantors, the Depositary Bank and the Purchasers have entered into a cash
      collateral agreement specially negotiated among any Grantor, the Depositary
      Bank
      and the Purchasers for the specific purpose set forth therein (ii) Deposit
      Accounts for which any Purchaser is the depositary, and (iii) items on deposit
      in any Deposit Account constituting sales tax remittances.

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    4.3.
       Investment
      Property.
      If any
      Grantor shall at any time hold or acquire any certificated securities, the
      Grantor shall forthwith endorse, pledge and deliver the same to the Purchasers,
      accompanied by such instruments of transfer or assignment duly executed in
      blank
      as the Purchasers may from time to time specify. If any securities now or
      hereafter acquired by any Grantor are uncertificated and are issued to the
      Grantor or its nominee directly by the issuer thereof, the Grantor shall
      immediately notify the Purchasers thereof and, at the Purchasers’ request and
      option, pursuant to an agreement in form and substance satisfactory to the
      Purchasers, either (a) cause the issuer to agree to comply with instructions
      from the Purchasers as to such securities, without further consent of the
      Grantor or such nominee, or (b) arrange for the Purchasers to become the
      registered owners of the securities. If any securities, whether certificated
      or
      uncertificated, or other investment property now or hereafter acquired by any
      Grantor are held by the Grantor or its nominee through a securities intermediary
      or commodity intermediary, the Grantor shall immediately notify the Purchasers
      thereof and, at the Purchasers’ request and option, pursuant to an agreement in
      form and substance satisfactory to the Purchasers, either (i) cause such
      securities intermediary or (as the case may be) commodity intermediary to agree
      to comply with entitlement orders or other instructions from the Purchasers
      to
      such securities intermediary as to such securities or other investment property,
      or (as the case may be) to apply any value distributed on account of any
      commodity contract as directed by the Purchasers to such commodity intermediary,
      in each case without further consent of the Grantor or such nominee, or (ii)
      in
      the case of financial assets or other investment property held through a
      securities intermediary, arrange for the Purchasers to become the entitlement
      holders with respect to such investment property, with the Grantor being
      permitted, only with the consent of the Purchasers, to exercise rights to
      withdraw or otherwise deal with such investment property. The Purchasers agree
      with the Grantors that the Purchasers shall not give any such entitlement orders
      or instructions or directions to any such issuer, securities intermediary or
      commodity intermediary, and shall not withhold its consent to the exercise
      of
      any withdrawal or dealing rights by the Grantors, unless an Event of Default
      has
      occurred and is continuing, or, after giving effect to any such investment
      and
      withdrawal rights not otherwise permitted by the Transaction Documents, would
      occur. The provisions of this paragraph shall not apply to any financial assets
      credited to a securities account for which any Purchaser is the securities
      intermediary.

     

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    4.4.
       Collateral
      in the Possession of a Bailee.
      If any
      goods are at any time in the possession of a bailee, the Grantors shall promptly
      notify the Purchasers thereof and, if requested by the Purchasers, shall
      promptly obtain an acknowledgment from the bailee, in form and substance
      satisfactory to the Purchasers, that the bailee holds such Collateral for the
      benefit of the Purchasers and shall act upon the instructions of the Purchasers,
      without the further consent of the Grantor. The Purchasers agree with the
      Grantors that the Purchasers shall not give any such instructions unless an
      Event of Default has occurred and is continuing or would occur after taking
      into
      account any action by the Grantors with respect to the bailee.

     

    4.5.
       Electronic
      Chattel Paper and Transferable Records.
      If any
      Grantor at any time holds or acquires an interest in any electronic chattel
      paper or any “transferable
      record,”
as
      that term is defined in Section 201 of the federal Electronic Signatures in
      Global and National Commerce Act, or in §16 of the Uniform Electronic
      Transactions Act as in effect in any relevant jurisdiction, the Grantor shall
      promptly notify the Purchasers thereof and, at the request of the Purchasers,
      shall take such action as the Purchasers may reasonably request to vest in
      the
      Purchasers control, under §9-105 of the Uniform Commercial Code, of such
      electronic chattel paper or control under Section 201 of the federal Electronic
      Signatures in Global and National Commerce Act or, as the case may be, §16 of
      the Uniform Electronic Transactions Act, as so in effect in such jurisdiction,
      of such transferable record. The Purchasers agree with the Grantors that the
      Purchasers will arrange, pursuant to procedures satisfactory to the Purchasers
      and so long as such procedures will not result in the Purchasers’ loss of
      control, for the Grantors to make alterations to the electronic chattel paper
      or
      transferable record permitted under UCC §9-105 or, as the case may be, Section
      201 of the federal Electronic Signatures in Global and National Commerce Act
      or
§16 of the Uniform Electronic Transactions Act for a party in control to make
      without loss of control, unless an Event of Default has occurred and is
      continuing or would occur after taking into account any action by the Grantors
      with respect to such electronic chattel paper or transferable
      record.

     

    4.6.
       Letter-of-credit
      Rights.
      If any
      Grantor is at any time a beneficiary under a letter of credit now or hereafter
      issued in favor of the Grantor, the Grantor shall promptly notify the Purchasers
      thereof and, at the request and option of the Purchasers, the Grantor shall,
      pursuant to an agreement in form and substance satisfactory to the Purchasers,
      either (i) arrange for the issuer and any confirmer of such letter of credit
      to
      consent to an assignment to the Purchasers of the proceeds of any drawing under
      the letter of credit or (ii) arrange for the Purchasers to become the transferee
      beneficiaries of the letter of credit, with the Purchasers agreeing, in each
      case, that the proceeds of any drawing under the letter to credit are to be
      applied as provided in the Note.

     

    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

     

    4.7.
       Commercial
      Tort Claims.
      If any
      Grantor shall at any time hold or acquire a commercial tort claim, the Grantor
      shall immediately notify the Purchasers in a writing signed by the Grantor
      of
      the brief details thereof and grant to the Purchasers in such writing a security
      interest therein and in the proceeds thereof, all upon the terms of this
      Agreement, with such writing to be in form and substance satisfactory to the
      Purchasers.

     

    5.
       Other
      Actions as to any and all Collateral.
      The
      Grantors further agree to take any other action reasonably requested by the
      Purchasers to insure the attachment, perfection and first priority (subject
      to
      Permitted Liens) of, and the ability of the Purchasers to enforce, the
      Purchasers’ security interest in any and all of the Collateral including,
      without limitation, (a) executing, delivering and, where appropriate, filing
      financing statements and amendments relating thereto under the Uniform
      Commercial Code, to the extent, if any, that any Grantor’s signature thereon is
      required therefor, (b) causing the Purchasers’ names to be noted as secured
      parties on any certificate of title for a titled good if such notation is a
      condition to attachment, perfection or priority of, or ability of the Purchasers
      to enforce, the Purchasers’ security interest in such Collateral, (c) complying
      with any provision of any statute, regulation or treaty of the United States
      as
      to any Collateral if compliance with such provision is a condition to
      attachment, perfection or priority of, or ability of the Purchasers to enforce,
      the Purchasers’ security interest in such Collateral, (d) obtaining governmental
      and other third party consents and approvals, including without limitation
      any
      consent of any licensor, lessor or other person obligated on Collateral, (e)
      obtaining waivers from landlords in form and substance satisfactory to the
      Purchasers, (f) taking all actions required by any earlier versions of the
      Uniform Commercial Code or by other law, as applicable in any relevant Uniform
      Commercial Code jurisdiction, or by other law as applicable in any foreign
      jurisdiction, (g) delivery to the Purchasers of stock certificates (and stock
      powers duly executed in blank in favor of the Purchasers) covering all of the
      capital stock described on Schedule
      A,
      and (h)
      if the Maturity Date is extended, at the time of such extension entering into
      with the Purchasers and a service company reasonably acceptable to the
      Purchasers and Grantors, a contract requiring (i) the service company to file
      continuation statements and (ii) the Grantors to pay the cost of all filings
      and
      creation of continuation and termination statements.

     

    6.
       Relation
      to Other Security Documents.
      The
      provisions of this Agreement supplement the provisions of the other Transaction
      Documents. Nothing contained in any such Transaction Document shall derogate
      from any of the rights or remedies of the Purchasers hereunder. The provisions
      of this Agreement shall be read and construed with the other Security Documents
      referred to below in the manner so indicated.

     

    6.1.
       Copyright
      Security Agreements.
      If
      required by the Purchasers, concurrently herewith each Grantor is also executing
      and delivering to the Purchasers the Copyright Security Agreement (attached
      hereto as Exhibit
      I)
      pursuant to which the Grantor is granting to the Purchasers security interests
      in certain Collateral consisting of copyrights, and copyright registrations.
      The
      provisions of the Copyright Security Agreement are supplemental to the
      provisions of this Agreement, and nothing contained in the Copyright Security
      Agreement shall derogate from any of the rights or remedies of the Purchasers
      hereunder. Neither the delivery of, nor anything contained in, the Copyright
      Security Agreement shall be deemed to prevent or postpone the time of attachment
      or perfection of any security interest in such Collateral created
      hereby.

     

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

     

    6.2.
       Trademark
      Security Agreements.
      If
      required by the Purchasers, concurrently herewith each Grantor is also executing
      and delivering to the Purchasers the Trademark Security Agreement (attached
      hereto as Exhibit
      II)
      pursuant to which the Grantor is granting to the Purchasers security interests
      in certain Collateral consisting of trademarks, and trademark registrations.
      The
      provisions of the Trademark Security Agreement are supplemental to the
      provisions of this Agreement, and nothing contained in the Trademark Security
      Agreement shall derogate from any of the rights or remedies of the Purchasers
      hereunder. Neither the delivery of, nor anything contained in, the Trademark
      Security Agreement shall be deemed to prevent or postpone the time of attachment
      or perfection of any security interest in such Collateral created
      hereby.

     

    6.3.
       Patent
      Security Agreements.
      If
      required by the Purchasers, concurrently herewith each Grantor is also executing
      and delivering to the Purchasers the Patent Security Agreement (attached hereto
      as Exhibit
      III)
      pursuant to which the Grantor is granting to the Purchasers security interests
      in certain Collateral consisting of patents, and patent registrations. The
      provisions of the Patent Security Agreement are supplemental to the provisions
      of this Agreement, and nothing contained in the Patent Security Agreement shall
      derogate from any of the rights or remedies of the Purchasers hereunder. Neither
      the delivery of, nor anything contained in, the Patent Security Agreement shall
      be deemed to prevent or postpone the time of attachment or perfection of any
      security interest in such Collateral created hereby.

     

    7.
       Representations
      and Warranties Concerning Grantor’s Legal Status.
      Each
      Grantor has concurrently herewith delivered to the Purchasers a certificate
      signed by each Grantor and entitled “Perfection Certificate” (the “Perfection
      Certificate”).
      Each
      Grantor represents and warrants to the Purchasers as follows: (a) the Grantor’s
      exact legal name is that indicated on the Perfection Certificate and on the
      signature page hereof, (b) the Grantor is an organization of the type and
      organized in the jurisdiction set forth in the Perfection Certificate, (c)
      the
      Perfection Certificate accurately sets forth the Grantor’s organizational
      identification number or accurately states that the Grantor has none, (d) the
      Perfection Certificate accurately sets forth the Grantor’s place of business or,
      if more than one, its chief executive office as well as the Grantor’s mailing
      address if different and (e) all other information set forth on the Perfection
      Certificate pertaining to the Grantor is accurate and complete in all material
      respects.

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

     

    8.
       Covenants
      Concerning Grantor’s Legal Status.
      Each
      Grantor covenants with the Purchasers as follows: (a) without providing at
      least
      30 days prior written notice to the Purchasers, the Grantor will not change
      its
      name, its place of business or, if more than one, chief executive office, or
      its
      mailing address or organizational identification number if it has one, (b)
      if
      the Grantor does not have an organizational identification number and later
      obtains one, the Grantor shall forthwith notify the Purchasers of such
      organizational identification number, and (c) the Grantor will not change its
      type of organization, jurisdiction of organization or other legal
      structure.

     

    9.
       Representations
      and Warranties Concerning Collateral.
      Each
      Grantor further represents and warrants to the Purchasers as follows: (a) the
      Grantor is the owner of or has other rights in or power to transfer the
      Collateral, free from any adverse lien, security interest or other encumbrance,
      except for the security interest created by this Agreement and the Permitted
      Liens, (b) none of the Collateral constitutes, or is the proceeds of,
“farm
      products”
as
      defined in §9-102(a)(34) of the Uniform Commercial Code of the State, (c) none
      of the account debtors or other persons obligated on any of the Collateral
      is a
      governmental authority subject to the Federal Assignment of Claims Act or like
      federal, state or local statute or rule in respect of such Collateral, (d)
      the
      Grantor holds no commercial tort claim except as indicated on Schedule
      B
      hereto
      as modified from time to time, (e) except as described on Schedule
      9,
      during
      the past five years the Grantor has at all times operated its business in
      compliance with all applicable provisions of the federal Fair Labor Standards
      Act, as amended, and with all applicable provisions of federal, state and local
      statutes and ordinances dealing with the control, shipment, storage or disposal
      of hazardous materials or substances and (f) all other information set forth
      on
      the Perfection Certificate pertaining to the Collateral is accurate and complete
      in all material respects.

     

    10.
       Covenants
      Concerning Collateral Etc.
      Each
      Grantor further covenants with the Purchasers as follows: (a) the Collateral,
      to
      the extent not delivered to the Purchasers pursuant to §4, will be kept at those
      locations listed on the Perfection Certificate and the Grantor will not remove
      the Collateral from such locations, without providing at least 30 days prior
      written notice to the Purchasers, (b) except for the security interest herein
      granted and
      Permitted Liens, the Grantor shall be the owner of or have other rights in
      the
      Collateral free from any lien, security interest or other encumbrance, and
      the
      Grantor shall defend the same against all claims and demands of all persons
      at
      any time claiming the same or any interests therein adverse to the Purchasers,
      (c) the Grantor shall not pledge, mortgage or create, or suffer to exist a
      security interest in the Collateral in favor of any person other than the
      Purchasers except for Permitted Liens, (d) the Grantor will not use the
      Collateral in violation of any policy of insurance thereon, (e) the Grantor
      will
      permit the Purchasers, or their designee, to inspect the Collateral, wherever
      located, at any reasonable, mutually agreeable time upon prior notice of at
      least three Business Days (unless a Default or an Event of Default has occurred
      and is continuing, in which event no prior notice shall be required), (f) the
      Grantor will pay promptly when due all taxes, assessments, governmental charges
      and levies upon the Collateral or incurred in connection with the use or
      operation of such Collateral or incurred in connection with this Agreement
      other
      than any taxes contested in good faith and for which appropriate reserves have
      been established by the Grantor, (g) the Grantor will operate its business
      in
      compliance with all applicable provisions of the federal Fair Labor Standards
      Act, as amended, and with all applicable provisions of federal, state and local
      statutes and ordinances dealing with the control, shipment, storage or disposal
      of hazardous materials or substances, and (h) the Grantor will not sell or
      otherwise dispose, or offer to sell or otherwise dispose, of the Collateral
      or
      any interest therein except for as permitted by the Notes.

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

     

    11.
       Insurance.

     

    11.1.
       Maintenance
      of Insurance.
      Each
      Grantor will maintain with financially sound and reputable insurers insurance
      with respect to its properties and business against such casualties and
      contingencies as shall be in accordance with general practices of businesses
      engaged in similar activities in similar geographic areas; provided,
      however,
      that
      the Borrower shall at all times maintain with financially sound and reputable
      insurers such insurance in amounts not less than the insurance maintained by
      the
      Borrower as of the date hereof. Such insurance shall be in such minimum amounts
      that the Grantor will not be deemed a coinsurer under applicable insurance
      laws,
      regulations and policies and otherwise shall be in such amounts, contain such
      terms, be in such forms and be for such periods as may be reasonably
      satisfactory to the Purchasers. In addition, all such insurance shall be payable
      to the Purchasers, on a pro rata basis, as additional loss payees. Without
      limiting the foregoing, the Grantors will (i) keep all of its physical property
      insured with casualty or physical hazard insurance on an “all risks” basis, with
      broad form flood and earthquake coverages and electronic data processing
      coverage, with a full replacement cost endorsement and an “agreed amount” clause
      in an amount equal to 100% of the full replacement cost of such property, (ii)
      maintain all such workers’ compensation or similar insurance as may be required
      by law and (iii) maintain, in amounts and with deductibles equal to those
      generally maintained by businesses engaged in similar activities in similar
      geographic areas, general public liability insurance against claims of bodily
      injury, death or property damage occurring, on, in or about the properties
      of
      the Grantors; business interruption insurance; and product liability
      insurance.

     

    11.2.
       Insurance
      Proceeds.
      The
      proceeds of any casualty insurance in respect of any casualty loss of any of
      the
      Collateral shall, subject to the rights, if any, of other parties with a prior
      interest in the property covered thereby, (i) so long as no Default or Event
      of
      Default has occurred and is continuing and to the extent that the amount of
      such
      proceeds is less than $300,000, be disbursed to the Grantor for direct
      application by the Grantor solely to the repair or replacement of the Grantor’s
      property so damaged or destroyed and (ii) in all other circumstances, be held
      by
      the Purchasers as cash collateral for the Obligations and (except to the extent
      disbursed pursuant to the next sentence) may be applied to the Obligations.
      The
      Purchasers may, at their sole option, disburse from time to time all or any
      part
      of such proceeds so held as cash collateral, upon such terms and conditions
      as
      the Purchasers may reasonably prescribe, for direct application by the Grantor
      solely to the repair or replacement of the Grantor’s property so damaged or
      destroyed, or the Purchasers may apply all or any part of such proceeds to
      the
      Obligations.

     

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

     

    11.3.
       Notice
      of Cancellation etc.
      All
      policies of insurance shall provide for at least 30 days prior written
      cancellation notice to the Purchasers, unless a shorter period is mandated
      under
      applicable law. In the event of failure by any Grantor to provide and maintain
      insurance as herein provided, the Purchasers may, at their option, provide
      such
      insurance and charge the amount thereof to the Grantor. Each Grantor shall
      furnish the Purchasers with certificates of insurance and policies evidencing
      compliance with the foregoing insurance provision.

     

    12.
       Collateral
      Protection Expenses; Preservation of Collateral.

     

    12.1.
       Expenses
      Incurred by Purchasers.
      If any
      grantor fails or refuses to do so, in their discretion, the Purchasers may
      discharge taxes and other encumbrances at any time levied or placed on any
      of
      the Collateral, make repairs thereto and pay any necessary filing fees or
      insurance premiums. Each Grantor agrees to reimburse the Purchasers on demand
      for any and all expenditures so made. The Purchasers shall have no obligation
      to
      the Grantors to make any such expenditures, nor shall the making thereof relieve
      the Grantor of any default. Any expenses incurred under this Section 12 shall
      constitute Obligations.

     

    12.2.
       Purchasers’
      Obligations and Duties.
      Anything herein to the contrary notwithstanding, each Grantor shall remain
      liable under each contract or agreement comprised in the Collateral to be
      observed or performed by the Grantor thereunder. The Purchasers shall not have
      any obligation or liability under any such contract or agreement by reason
      of or
      arising out of this Agreement or the receipt by the Purchasers of any payment
      relating to any of the Collateral, nor shall the Purchasers be obligated in
      any
      manner to perform any of the obligations of the Grantor under or pursuant to
      any
      such contract or agreement, to make inquiry as to the nature or sufficiency
      of
      any payment received by the Purchasers in respect of the Collateral or as to
      the
      sufficiency of any performance by any party under any such contract or
      agreement, to present or file any claim, to take any action to enforce any
      performance or to collect the payment of any amounts which may have been
      assigned to the Purchasers or to which the Purchasers may be entitled at any
      time or times. The Purchasers’ sole duty with respect to the custody, safe
      keeping and physical preservation of the Collateral in their possession, under
      §9-207 of the Uniform Commercial Code of the State or otherwise, shall be to
      deal with such Collateral in the same manner as the Purchasers deal with similar
      property for their own accounts.

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    13.
       Securities
      and Deposits.
      The
      Purchasers may at any time following and during the continuance of an Event
      of
      Default, at their option, transfer to themselves or any nominee any securities
      constituting Collateral, receive any income thereon and hold such income as
      additional Collateral or apply it to the Obligations. Whether or not any
      Obligations are due, the Purchasers may following and during the continuance
      of
      an Event of Default demand, sue for, collect, or make any settlement or
      compromise which it deems desirable with respect to the Collateral. Regardless
      of the adequacy of Collateral or any other security for the Obligations, any
      deposits or other sums at any time credited by or due from the Purchasers to
      the
      Grantors may at any time be applied to or set off against any of the Obligations
      then due and owing.

     

    14.
       Notification
      to Account Debtors and Other Persons Obligated on
      Collateral.
      If an
      Event of Default shall have occurred and be continuing, the Grantors shall,
      at
      the request of the Purchasers, notify account debtors and other persons
      obligated on any of the Collateral of the security interest of the Purchasers
      in
      any account, chattel paper, general intangible, instrument or other Collateral
      and that payment thereof is to be made directly to the Purchasers or to any
      financial institution designated by the Purchasers as their agent therefor,
      and
      the Purchasers may themselves, if an Event of Default shall have occurred and
      be
      continuing, without notice to or demand upon the Grantor, so notify account
      debtors and other persons obligated on Collateral. After the making of such
      a
      request or the giving of any such notification, the Grantors shall hold any
      proceeds of collection of accounts, chattel paper, general intangibles,
      instruments and other Collateral received by the Grantor as trustee for the
      Purchasers without commingling the same with other funds of the Grantor and
      shall turn the same over to the Purchasers in the identical form received,
      together with any necessary endorsements or assignments. The Purchasers shall
      apply the proceeds of collection of accounts, chattel paper, general
      intangibles, instruments and other Collateral received by the Purchasers to
      the
      Obligations, such proceeds to be immediately entered after final payment in
      cash
      or other immediately available funds of the items giving rise to
      them.

     

    15.
       Investment
      Property.
      (i) The
      Grantors, at their cost and expense (including the cost and expense of any
      of
      the following referenced consents, approvals etc.) will promptly execute and
      deliver or cause the execution and delivery of all applications, certificates,
      instruments, registration statements, and all other documents and papers the
      Purchasers may request during the continuance of an Event of Default in
      connection with the obtaining of any consent, approval, registration,
      qualification, permit, license, accreditation, or authorization of any other
      official body or other Person necessary or appropriate for the effective
      exercise of any rights hereunder or under the other Transaction Documents.
      Without limiting the generality of the foregoing, the Grantors agree that in
      the
      event the Purchasers shall exercise their rights hereunder or pursuant to the
      other Transaction Documents during the continuance of an Event of Default,
      to
      sell, transfer, or otherwise dispose of, or vote, consent, operate, or take
      any
      other action in connection with any of the Collateral, the Grantors shall
      execute and deliver (or cause to be executed and delivered) all applications,
      certificates, assignments and other documents that the Purchasers request to
      facilitate such actions and shall otherwise promptly, fully, and diligently
      cooperate with the Purchasers and any other Persons in making any application
      for the prior consent or approval of any official body or any other Person
      to
      the exercise by the Purchasers of any such rights relating to all or any of
      the
      Collateral.

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    (ii) The
      Grantors agree promptly upon the occurrence and continuance of an Event of
      Default and without any request therefor by the Purchasers, so long as such
      Event of Default shall continue, (i) to deliver (properly endorsed where
      required hereby or requested by Purchasers) to the Purchasers all Dividends
      and
      Distributions with respect to Investment Property and all proceeds of the
      Collateral, in each case thereafter received by the Grantor, all of which shall
      be held by Purchasers as additional Collateral; and (ii) with respect to
      Collateral consisting of general partner interests or limited liability company
      interests, to make modifications to all necessary documents to admit the
      Purchasers as general partners or members, respectively.

     

    (iii) Except
      when an Event of Default has occurred and is continuing, the Grantors may
      continue to vote all Investment Property included in the Collateral except
      in a
      manner which is inconsistent or in violation of the Transaction Documents.
      The
      Grantors agree promptly upon the occurrence and during the continuance of an
      Event of Default, (i) that Purchasers may exercise (to the exclusion of the
      Grantor) the voting power and all other incidental rights of ownership with
      respect to any Collateral constituting Investment Property of the Grantor and
      the Grantor hereby grants Purchasers an irrevocable proxy, exercisable under
      such circumstances, to vote such Investment Property; and (ii) that it shall
      promptly deliver to the Purchasers such additional proxies and other documents
      as may be necessary to allow the Purchasers to exercise such voting
      power.

     

    (iv) All
      Dividends, Distributions, interest, principal, cash payments, payment
      intangibles and proceeds which may at any time and from time to time be held
      by
      any Grantor but which the Grantor is then obligated to deliver to the
      Purchasers, shall, until delivery to the Purchasers, be held by the Grantor
      separate and apart from its other property in trust for the Purchasers. The
      Purchasers agree that unless an Event of Default shall have occurred and be
      continuing, the Grantors will have the exclusive voting power with respect
      to
      any Investment Property constituting the Grantor’s Collateral and the Purchasers
      will, upon the written request of any Grantor, promptly deliver such proxies
      and
      other documents, if any, as shall be reasonably requested by the Grantor which
      are necessary to allow the Grantor to exercise that voting power; provided
      that
      no
      vote shall be cast, or consent, waiver, or ratification given, or action taken
      by the Grantor that would violate any provision of any Transaction
      Document.

     

    The
      Grantors hereby acknowledge that the sale by Purchasers of any Investment
      Property pursuant to the terms hereof in compliance with the Securities Act,
      as
      well as applicable “Blue Sky” or other state securities laws may require strict
      limitations as to the manner in which Purchasers or any subsequent transferee
      of
      the Investment Property may dispose thereof. The Grantors acknowledge and agree
      that, to protect Purchasers’ interests, it may be necessary to sell the
      Investment Property at a price less than the maximum price attainable if a
      sale
      were delayed or made in another manner, such as a public offering under the
      Securities Act. The Grantors do not have an objection to a sale in such manner
      and the Grantors agree that Purchasers do not have an obligation to obtain
      the
      maximum possible price for all or any part of the Investment Property. Without
      limiting the generality of the foregoing, the Grantors agree that Purchasers
      may, pursuant to the terms hereof and subject to applicable law, from time
      to
      time attempt to sell all or any part of the Investment Property by a private
      placement, restricting the bidders and prospective purchasers to those Persons
      who will represent and agree that they are purchasing for investment only and
      not for distribution. In so doing, Purchasers may solicit offers to buy the
      Investment Property or any part thereof for cash from a limited number of
      investors deemed by Purchasers, in their reasonable judgment, to be
      institutional investors or other responsible Persons who might be interested
      in
      purchasing the Investment Property. If Purchasers shall solicit such offers,
      then acceptance by Purchasers of one of the offers shall be deemed to be a
      commercially reasonable method of disposition of the Collateral.

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

    16.
       Power
      of Attorney.

     

    16.1.
       Appointment
      and Powers of Purchasers.
      The
      Grantors hereby irrevocably constitute and appoint the Purchasers and any
      officer or agent thereof, with full power of substitution, as its true and
      lawful attorney-in-fact with full irrevocable power and authority in the place
      and stead of the Grantors or in the Purchasers’ own name, for the purpose of
      carrying out the terms of this Agreement, to take any and all appropriate action
      and to execute any and all documents and instruments that may be necessary
      or
      desirable to accomplish the purposes of this Agreement and, without limiting
      the
      generality of the foregoing, hereby gives said attorney the power and right,
      on
      behalf of the Grantors, without notice to or assent by the Grantors, to do
      the
      following:

     

    (a)
      upon
      the occurrence and during the continuance of an
      Event
      of Default, generally to sell, transfer, pledge, make any agreement with respect
      to or otherwise deal with any of the Collateral in such manner as is consistent
      with the Uniform Commercial Code of the State and as fully and completely as
      though the Purchasers were the absolute owners thereof for all purposes, and
      to
      do at the Grantors’ expense, at any time, or from time to time, all acts and
      things which the Purchasers deem necessary to protect, preserve or realize
      upon
      the Collateral and the Purchasers’ security interest therein, in order to effect
      the intent of this Agreement, all as fully and effectively as the Grantor might
      do, including, without limitation, (i) the filing and prosecuting of
      registration and transfer applications with the appropriate federal or local
      agencies or authorities with respect to trademarks, copyrights and patentable
      inventions and processes, (ii) upon written notice to the Grantors, the exercise
      of voting rights with respect to voting securities, which rights may be
      exercised, if the Purchasers so elect, with a view to causing the liquidation
      in
      a commercially reasonable manner of assets of the issuer of any such securities
      and (iii) the execution, delivery and recording, in connection with any sale
      or
      other disposition of any Collateral, of the endorsements, assignments or other
      instruments of conveyance or transfer with respect to such Collateral;
      and

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

     

    (b)
      to
      the extent that the Grantors’ authorization given in §3 is not sufficient, to
      file such financing statements with respect hereto, with or without the Grantor’
signature, as the Purchasers may deem appropriate and to execute in the
      Grantor’s name such financing statements and amendments thereto and continuation
      statements which may require the Grantor’s signature.

     

    16.2.
       Ratification
      by Grantors.
      To the
      extent permitted by law, the Grantors hereby ratify all that said attorney
      shall
      lawfully do or cause to be done by virtue hereof. This power of attorney is
      a
      power coupled with an interest and shall be irrevocable.

     

    16.3.
       No
      Duty on Purchasers.
      The
      powers conferred on the Purchasers hereunder are solely to protect its interests
      in the Collateral and shall not impose any duty upon it to exercise any such
      powers. The Purchasers shall be accountable only for the amounts that they
      actually receive as a result of the exercise of such powers and neither any
      Purchaser nor any of its officers, directors, employees or agents shall be
      responsible to the Grantor for any act or failure to act, except for such
      Purchaser’s own gross negligence or willful misconduct.

     

    17.
       Remedies.
      If an
      Event of Default shall have occurred and be continuing, the Purchasers may,
      without notice to or demand upon the Grantors, declare this Agreement to be
      in
      default, and the Purchasers shall thereafter have in any jurisdiction in which
      enforcement hereof is sought, in addition to all other rights and remedies,
      the
      rights and remedies of a purchaser under the Uniform Commercial Code of the
      State or of any jurisdiction in which Collateral is located, including, without
      limitation, the right to take possession of the Collateral, and for that purpose
      the Purchasers may, so far as the Grantors can give authority therefor, enter
      upon any premises on which the Collateral may be situated and remove the same
      therefrom. The Purchasers may in their discretion require the Grantors to
      assemble all or any part of the Collateral at such location or locations within
      the jurisdiction(s) of the Grantors’ principal office(s) or at such other
      locations as the Purchasers may reasonably designate. Unless the Collateral
      is
      perishable or threatens to decline speedily in value or is of a type customarily
      sold on a recognized market, the Purchasers shall give to the Grantors at least
      ten Business Days prior written notice of the time and place of any public
      sale
      of Collateral or of the time after which any private sale or any other intended
      disposition is to be made. The Grantors hereby acknowledge that ten Business
      Days prior written notice of such sale or sales shall be reasonable notice.
      In
      addition, the Grantors waive any and all rights that it may have to a judicial
      hearing in advance of the enforcement of any of the Purchasers’ rights
      hereunder, including, without limitation, its right following an Event of
      Default to take immediate possession of the Collateral and to exercise its
      rights with respect thereto.

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    18.
       Standards
      for Exercising Remedies.
      To
      the
      extent that applicable law imposes duties on the Purchasers to exercise remedies
      in a commercially reasonable manner, the Grantors acknowledge and agree that
      it
      is not commercially unreasonable for the Purchasers (a) to fail to incur
      expenses reasonably deemed significant by the Purchasers to prepare Collateral
      for disposition or otherwise to complete raw material or work in process into
      finished goods or other finished products for disposition, (b) to fail to obtain
      third party consents for access to Collateral to be disposed of, or to obtain
      or, if not required by other law, to fail to obtain governmental or third party
      consents for the collection or disposition of Collateral to be collected or
      disposed of, (c) to fail to exercise collection remedies against account debtors
      or other persons obligated on Collateral or to remove liens or encumbrances
      on
      or any adverse claims against Collateral, (d) to exercise collection remedies
      against account debtors and other persons obligated on Collateral directly
      or
      through the use of collection agencies and other collection specialists, (e)
      to
      advertise dispositions of Collateral through publications or media of general
      circulation, whether or not the Collateral is of a specialized nature, (f)
      to
      contact other persons, whether or not in the same business as the Grantor,
      for
      expressions of interest in acquiring all or any portion of the Collateral,
      (g)
      to hire one or more professional auctioneers to assist in the disposition of
      Collateral, whether or not the collateral is of a specialized nature, (h) to
      dispose of Collateral by utilizing Internet sites that provide for the auction
      of assets of the types included in the Collateral or that have the reasonable
      capability of doing so, or that match buyers and sellers of assets, (i) to
      dispose of assets in wholesale rather than retail markets, (j) to disclaim
      disposition warranties, (k) to purchase insurance or credit enhancements to
      insure the Purchasers against risks of loss, collection or disposition of
      Collateral or to provide to the Purchasers a guaranteed return from the
      collection or disposition of Collateral, or (1) to the extent deemed appropriate
      by the Purchasers, to obtain the services of other brokers, investment bankers,
      consultants and other professionals to assist the Purchasers in the collection
      or disposition of any of the Collateral. The Grantors acknowledge that the
      purpose of this §18 is to provide non-exhaustive indications of what actions or
      omissions by the Purchasers would not be commercially unreasonable in the
      Purchasers’ exercise of remedies against the Collateral and that other actions
      or omissions by the Purchasers shall not be deemed commercially unreasonable
      solely on account of not being indicated in this §18. Without limitation upon
      the foregoing, nothing contained in this §18 shall be construed to grant any
      rights to the Grantors or to impose any duties on the Purchasers that would
      not
      have been granted or imposed by this Agreement or by applicable law in the
      absence of this §18.

     

    19.
       No
      Oral Change; Amendments; Security Agreement Supplements for Additional
      Grantors.
      No
      amendment of any provision of this Agreement shall be effective unless it is
      in
      writing and signed by the Grantors and the Purchasers, and no waiver of any
      provision of this Agreement, and no consent to any departure by the Grantors
      therefrom, shall be effective unless it is in writing and signed by the
      Purchasers, and then such waiver or consent shall be effective only in the
      specific instance and for the specific purpose for which given. Notwithstanding
      the foregoing, additional Persons may become Grantors under this Agreement
      without consent of any other Grantor through execution and delivery to the
      Purchasers of an Assumption Agreement in the form of Annex 1 hereto or any
      other
      form of supplement acceptable to the Purchasers. Nothing in this Section 19
      shall be construed to permit any Grantor to form a Subsidiary unless expressly
      permitted to do so under the Note.

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    20.
       Suretyship
      Waivers by Grantors.
      Each
      Grantor waives demand, notice, protest, notice of acceptance of this Agreement,
      notice of loans made, credit extended, Collateral received or delivered or
      other
      action taken in reliance hereon and all other demands and notices of any
      description. With respect to both the Obligations and the Collateral, the
      Grantors assent to any extension or postponement of the time of payment or
      any
      other indulgence, to any substitution, exchange or release of or failure to
      perfect any security interest in any Collateral, to the addition or release
      of
      any party or person primarily or secondarily liable, to the acceptance of
      partial payment thereon and the settlement, compromising or adjusting of any
      thereof, all in such manner and at such time or times as the Purchasers may
      deem
      advisable. The Purchasers shall have no duty as to the collection or protection
      of the Collateral or any income thereon, nor as to the preservation of rights
      against prior parties, nor as to the preservation of any rights pertaining
      thereto beyond the safe custody thereof as set forth in §11.2. The Grantors
      further waive any and all other suretyship defenses.

     

    21.
       Marshalling.
      The
      Purchasers shall not be required to marshal any present or future collateral
      security (including but not limited to this Agreement and the Collateral) for,
      or other assurances of payment of, the Obligations or any of them or to resort
      to such collateral security or other assurances of payment in any particular
      order, and all of its rights hereunder and in respect of such collateral
      security and other assurances of payment shall be cumulative and in addition
      to
      all other rights, however existing or arising. To the extent that it lawfully
      may, each Grantor hereby agrees that it will not invoke any law relating to
      the
      marshalling of collateral which might cause delay in or impede the enforcement
      of the Purchasers’ rights under this Agreement or under any other instrument
      creating or evidencing any of the Obligations or under which any of the
      Obligations is outstanding or by which any of the Obligations is secured or
      payment thereof is otherwise assured, and, to the extent that it lawfully may,
      each Grantor hereby irrevocably waives the benefits of all such
      laws.

     

    22.
       Proceeds
      of Dispositions; Expenses.
      The
      Grantors shall pay to the Purchasers on demand any and all expenses, including
      reasonable attorneys’ fees and disbursements, incurred or paid by the Purchasers
      in protecting, preserving or enforcing the Purchasers’ rights under or in
      respect of any of the Obligations or any of the Collateral. After deducting
      all
      of said expenses, the residue of any proceeds of collection or sale of the
      Obligations or Collateral shall, to the extent actually received in cash, be
      applied to the payment of the Obligations in such order or preference as the
      Purchasers may determine, proper allowance and provision being made for any
      Obligations not then due. Upon the final payment and satisfaction in full of
      all
      of the Obligations and after making any payments required by Sections
      9-608(a)(1)(C) or 9615(a)(3) of the Uniform Commercial Code of the State, any
      excess shall be returned to the Grantors, and the Grantors shall remain liable
      for any deficiency in the payment of the Obligations.

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

     

    23.
       Overdue
      Amounts.
      Until
      paid, all amounts due and payable by the Grantors hereunder shall be a debt
      secured by the Collateral and shall bear, whether before or after judgment,
      interest at the rate of interest set forth in the Note.

     

    24.
       Governing
      Law; Consent to Jurisdiction.
      

     

    (a)
       Governing
      Law.
      This
      Agreement shall be governed by, and construed in accordance with, the law of
      the
      State (other than those conflict of law rules that would defer to the
      substantive laws of another jurisdiction). Without in any way limiting the
      preceding choice of law, the parties elect to be governed by the law of the
      State in accordance with, and are relying (at least in part) on, Section 5-1401
      of the General Obligations Law of the State, as amended, or any corresponding
      or
      succeeding provisions thereof.

     

    (b)
       Submission
      to Jurisdiction.
      The
      Grantors hereby submit to the exclusive personal jurisdiction of the United
      States District Court for the Southern District of New York and of the Supreme
      Court of the State of New York sitting in New York County (including its
      Appellate Division), and of any other appellate court in the State of New York,
      for the purposes of all legal proceedings arising out of or relating to this
      Agreement or the transactions contemplated hereby.

     

    (c)
       Waiver
      of Venue.
      The
      Grantors hereby irrevocably waive, to the fullest extent permitted by applicable
      law, any objection that it may now or hereafter have to the laying of the venue
      of any such proceeding brought in such a court and any claim that any such
      proceeding brought in such a court has been brought in an inconvenient forum.
      Without in any way limiting the preceding consents to personal jurisdiction
      and
      venue, the parties agree to submit to the jurisdiction of the courts of the
      State of New York in accordance with Section 5-1402 of the General Obligations
      Law of the State, as amended, or any corresponding or succeeding provisions
      thereof.

     

    (d)
       Service
      of Process.
      Each
      party to this Agreement irrevocably consents to service of process in the manner
      provided for notices in the Purchase Agreement. Nothing in this Agreement will
      affect the right of any party to this Agreement to serve process in any other
      manner permitted by law.

     

    25.
       Waiver
      of Jury Trial.
      THE
      GRANTORS AND THE PURCHASERS HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT
      PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
      PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
      CONTEMPLATED HEREBY. 

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

     

    26.
       Miscellaneous;
      Agreement to be Bound by Provisions of Transaction Documents Applicable to
      Grantor.
      The
      headings of each section of this Agreement are for convenience only and shall
      not define or limit the provisions thereof. This Agreement and all rights and
      obligations hereunder shall be binding upon the Grantors and their respective
      successors and assigns, and shall inure to the benefit of the Purchasers and
      their respective successors and assigns. If any term of this Agreement shall
      be
      held to be invalid, illegal or unenforceable, the validity of all other terms
      hereof shall in no way be affected thereby, and this Agreement shall be
      construed and be enforceable as if such invalid, illegal or unenforceable term
      had not been included herein. The Grantors acknowledge receipt of a copy of
      this
      Agreement. Each Grantor agrees to be bound by each provision of every other
      Transaction Document which purports to be applicable to it as if such provision
      were set forth herein.

     

    27.
       Action
      by Majority of Purchasers.
      All
      actions authorized to be taken or to not taken by the Purchasers hereunder
      shall
      be taken or not taken by the written consent of the holders of a majority in
      principal amount of the Notes then outstanding.

     

    


    28. Subsidiaries.
      Borrower shall cause each existing and future Subsidiary that has assets of
      $10,000 or more to complete, execute and deliver to the Purchasers, the form
      of
      Assumption Agreement attached as Annex
      1
      and such
      other documents as the Purchasers shall reasonably request, including, without
      limitation, evidence of good standing of such Affiliate and lien searches,
      all
      in form and substance acceptable to the Purchasers.

    


    29. Limited
      Recourse Guaranty.
      Each
      Subsidiary that becomes a Grantor (each a “Subsidiary
      Grantor”)
      hereby
      unconditionally guarantees the payment when due of all Obligations, provided,
      however, that recourse under this provision is limited to the assets of the
      Subsidiary Grantor that are, or will be, included as part of the Collateral.
      This guaranty is irrevocable and will not be affected by any release of any
      Grantor or surrender, exchange, compromise or release any Collateral, by any
      failure to perfect any liens, by any irregularity, enforceability or invalidity
      of any Obligations or any part thereof or any security or guaranty thereof.
      Each
      Subsidiary Grantor waives all defenses based on suretyship or on impairment
      of
      Collateral. Without notice to, or the consent of, any Subsidiary Grantor, the
      terms of the Obligations and any related documents may be changed, extended,
      renewed or compromised.

    


    30. Administrative
      and Collateral Agency; Actions of Purchasers.
      Each
      Purchaser hereby designates Special Situations Fund III QP, L.P. (the “Agent”)
      as its agent hereunder to act on its behalf and to deal with the Grantor and
      the
      Collateral in all matters in connection with this Agreement, including, but
      not
      limited to, the enforcement of its rights hereunder, notwithstanding anything
      to
      the contrary in the Purchase Agreement or in the Notes. The Grantor shall
      deliver to Agent all items required to be delivered from time to time to
      Purchasers hereunder. The written consent of the holders of a majority in
      principal amount of the Notes then outstanding shall be required to authorize
      the Agent to take any action hereunder. References to the Purchasers hereunder
      shall be deemed to be references to the Agent, on behalf of and for the benefit
      of the Purchasers, unless the context otherwise requires

    


    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

     

    [The
      remainder of this page has been intentionally left blank.]

    


    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF, intending to be legally bound, the Grantors and Purchasers
      have
      caused this Agreement to be duly executed as of the date first above
      written.

     

    
      	
              GRANTOR:

            
	 
	
              PRECISION
                OPTICS CORPORATION, INC.

            
	 	 
	
              By:

            	
              
                /s/
                  Richard E. Forkey

              

            
	
              Name:

            	
              Richard
                E. Forkey

            
	
              Title:

            	
              President,
                Chief Executive Officer and

            
	Treasurer


    

     

    PURCHASERS:

    


    SPECIAL
      SITUATIONS FUND III QP, L.P.

    SPECIAL
      SITUATIONS PRIVATE EQUITY FUND, L.P.

    


    
      	
              By:

            	
              /s/
                Austin W. Marxe

            
	
               

            	
              
                Name:
                  Austin W. Marxe

              

            
	
               

            	
              
                Title:
                  General Partner

              

            
	 	 
	/s/
              Arnold Schumsky
	Arnold
              Schumsky


    

     

    [Signature
      Page to Pledge and Security Agreement]


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Schedule
      A

     

    Capital
      Stock

     

    Pledged
      Stock

    


    
      	
              Pledgor

            	 	
              Issuer

            	 	
              Shares

              Pledged

            	 	
              Certificate

              Number(s)

            	 
	 	 	 	 	 	 	 	 	 	 	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Exhibit
      I

     

    Copyright
      Security Agreement

     

    COPYRIGHT
      SECURITY AGREEMENT,
      dated
      as of _______________, 2008 (this “Agreement”),
      is by
      and among the parties identified as “Grantors” on the signature pages hereto and
      such other parties as may become Grantors hereunder after the date hereof
      (individually a “Grantor”,
      and
      collectively the “Grantors”)
      and
      the Purchasers named on the signature pages hereto (the “Purchasers”).

     

    Grantor
      and Purchasers hereby agree as follows:

     

    SECTION
      1.

     

    Definitions;
      Interpretation.

     

    (a) Defined
      Terms.
      All
      capitalized terms used in this Agreement and not otherwise defined herein shall
      have the meanings assigned to them in the Purchase Agreement, dated as of June
      25, 2008, by and between Precision Optics Corporation, Inc. (the “Borrower”)
      and
      the Purchasers (the “Purchase
      Agreement”)
      and
      the Notes.

     

    (b) Certain
      Defined Terms.
      As used
      in this Agreement, the following terms shall have the following
      meanings:

     

    “Collateral”
has
      the
      meaning set forth in Section 2.

     

    “Copyright
      Office”
means
      the United States Copyright Office.

     

    “Notes”
means
      $600,000 in aggregate principal amount of the Borrower’s 10% Senior Secured
      Convertible Notes issued by the Borrower to the Purchasers.

     

    “UCC”
means
      the Uniform Commercial Code as in effect in the State of New York.

     

    (c) Terms
      Defined in UCC.
      Where
      applicable in the context of this Agreement and except as otherwise defined
      herein, terms used in this Agreement shall have the meanings assigned to them
      in
      the UCC. 

     

    (d) Construction.
      In this
      Agreement, the following rules of construction and interpretation shall be
      applicable: (i) no reference to “proceeds” in this Agreement authorizes any
      sale, transfer, or other disposition of any Collateral by Grantor; (ii)
“includes” and “including” are not limiting; (iii) “or” is not exclusive; and
      (iv) “all” includes “any” and “any” includes “all.” To the extent not
      inconsistent with the foregoing, the rules of construction and interpretation
      applicable to the Security Agreement shall also be applicable to this Agreement
      and are incorporated herein by this reference.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    SECTION
      2.
      

     

    Security
      Interest.

     

    (a) Grant
      of Security Interest.
      As
      security for the payment and performance of the Obligations, each Grantor hereby
      assigns, transfers and conveys to the Purchasers, and grants a security interest
      in and mortgage to the Purchasers of, all such Grantor’s right, title and
      interest in, to and under the following property, in each case whether now
      or
      hereafter existing or arising or in which such Grantor now has or hereafter
      owns, acquires or develops an interest and wherever located (collectively,
      the
“Collateral”):

     

    (i) All
      of
      such Grantor’s present and future United States registered copyrights and
      copyright registrations, including such Grantor’s United States registered
      copyrights and copyright registrations listed in Schedule
      A
      to this
      Agreement, all of such Grantor’s present and future United States applications
      for copyright registrations, including such Grantor’s United States applications
      for copyright registrations listed in Schedule
      B
      to this
      Agreement, and all of such Grantor’s present and future copyrights that are not
      registered in the Copyright Office including, without limitation, derivative
      works (collectively, the “Copyrights”),
      and
      any and all royalties, payments, and other amounts payable to Grantor in
      connection with the Copyrights, together with all renewals and extensions of
      the
      Copyrights, the right to recover for all past, present, and future infringements
      of the Copyrights, and all manuscripts, documents, writings, tapes, disks,
      storage media, computer programs, computer databases, computer program flow
      diagrams, source codes, object codes and all tangible property embodying or
      incorporating the Copyrights, and all other rights of every kind whatsoever
      accruing thereunder or pertaining thereto;

     

    (ii) All
      of
      such Grantor’s right, title and interest in and to any and all present and
      future license agreements with respect to the Copyrights;

     

    (iii) All
      present and future accounts and other rights to payment arising from, in
      connection with or relating to the Copyrights; and

     

    (iv) All
      cash
      and non-cash proceeds of any and all of the foregoing.

     

    (b) Continuing
      Security Interest.
      Each
      Grantor agrees that this Agreement shall create a continuing security interest
      in the Collateral which shall remain in effect until terminated in accordance
      with Section 11.

     

    SECTION
      3.
      

     

    Supplement
      to Security Agreement.

     

    This
      Agreement has been entered into in conjunction with the security interests
      granted to Purchasers under the Security Agreement, and other security documents
      referred to therein. The rights and remedies of the Purchasers with respect
      to
      the security interests granted herein are without prejudice to, and are in
      addition to those set forth in the Security Agreement or any other security
      documents referred to therein, all terms and provisions of which are
      incorporated herein by reference.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    SECTION
      4.
      

     

    Representations
      and Warranties.

     

    Each
      Grantor represents and warrants to Purchasers that:

     

    (a) Copyright
      Registrations.
      A true
      and correct list of all of such Grantor’s United States registered copyrights
      and copyright registrations is set forth in Schedule
      A.

     

    (b) Applications
      for Copyright Registration.
      A true
      and correct list of all of such Grantor’s United States applications for
      copyright registrations is set forth in Schedule
      B.

     

    SECTION
      5.
      

     

    Further
      Acts.

     

    On
      a
      continuing basis, each Grantor shall make, execute, acknowledge and deliver,
      and
      file and record in the proper filing and recording places, all such instruments
      and documents, and take all such action as may be necessary or advisable or
      may
      be requested by Purchasers to carry out the intent and purposes of this
      Agreement, or for assuring, confirming or protecting the grant or perfection
      of
      the security interest granted or purported to be granted hereby, to ensure
      such
      Grantor’s compliance with this Agreement or to enable Purchasers to exercise and
      enforce their rights and remedies hereunder with respect to the Collateral,
      including any documents for filing with the Copyright Office or any applicable
      state office. Purchasers may record this Agreement, an abstract thereof, or
      any
      other document describing Purchasers’ interest in the Copyrights with the
      Copyright Office, at the expense of such Grantor. In addition, each Grantor
      authorizes Purchasers to file financing statements describing the Collateral
      in
      any UCC filing office deemed appropriate by Purchasers. If any Grantor shall
      at
      any time hold or acquire a commercial tort claim arising with respect to the
      Collateral, such Grantor shall immediately notify Purchasers in a writing signed
      by such Grantor of the brief details thereof and grant to the Purchasers in
      such
      writing a security interest therein and in the proceeds thereof, all upon the
      terms of this Agreement, with such writing to be in form and substance
      satisfactory to the Purchasers.

     

    SECTION
      6.

     

    Authorization
      to Supplement.

     

    Each
      Grantor shall give the Purchasers prompt notice of any additional United States
      copyright registrations or applications therefor after the date hereof. Each
      Grantor authorizes the Purchasers unilaterally to modify this Agreement by
      amending Schedule
      A
      or
B
      to
      include any future United States registered copyrights or applications therefor
      of such Grantor. Notwithstanding the foregoing, no failure to so modify this
      Agreement or amend Schedules
      A
      or
B
      shall in
      any way affect, invalidate or detract from Purchasers’ continuing security
      interest in all Collateral, whether or not listed on Schedule
      A
      or
B.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    SECTION
      7.
      

     

    Binding
      Effect.

     

    This
      Agreement shall be binding upon, inure to the benefit of and be enforceable
      by
      each Grantor, Purchasers and their respective successors and assigns. No Grantor
      may assign, transfer, hypothecate or otherwise convey its rights, benefits,
      obligations or duties hereunder except as specifically permitted by the
      Notes.

     

    SECTION
      8.
      

     

    Governing
      Law.

     

    This
      Agreement shall be governed by, and construed in accordance with, the law of
      the
      State of New York, except as required by mandatory provisions of law or to
      the
      extent the perfection or priority of the security interests hereunder, or the
      remedies hereunder, in respect of any Collateral are governed by the law of
      a
      jurisdiction other than the State of New York.

     

    SECTION
      9.
      

     

    Entire
      Agreement; Amendment.

     

    No
      amendment of any provision of this Agreement shall be effective unless it is
      in
      writing and signed by the Grantors and the Purchasers, and no waiver of any
      provision of this Agreement, and no consent to any departure by the Grantors
      therefrom, shall be effective unless it is in writing and signed by the
      Purchasers, and then such waiver or consent shall be effective only in the
      specific instance and for the specific purpose for which given. Notwithstanding
      the foregoing, (i) additional Persons may become Grantors under this Agreement
      without consent of any other Grantor through execution and delivery to the
      Purchasers of an Assumption Agreement in the form of Annex 1 hereto or any
      other
      form of supplement acceptable to the Purchasers, and (ii) Purchasers
      unilaterally may re-execute this Agreement or modify, amend or supplement the
      Schedules hereto as provided in Section 6 hereof. To the extent that any
      provision of this Agreement conflicts with any provision of the Notes, the
      provision giving Purchasers greater rights or remedies shall govern, it being
      understood that the purpose of this Agreement is to add to, and not detract
      from, the rights granted to Purchasers under the Notes. Nothing in this Section
      9 shall be construed to permit any Grantor to form a Subsidiary unless expressly
      permitted to do so under the Notes.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    SECTION
      10.
      

     

    Counterparts.

     

    This
      Agreement may be executed in any number of counterparts and by different parties
      hereto in separate counterparts, each of which when so executed shall be deemed
      to be an original and all of which taken together shall constitute but one
      and
      the same agreement. Delivery of an executed counterpart of this Agreement by
      facsimile shall be equally as effective as delivery of a manually executed
      counterpart. Any party hereto delivering a counterpart of this Agreement by
      facsimile shall also deliver a manually executed counterpart, but the failure
      to
      so deliver a manually executed counterpart shall not affect the validity,
      enforceability, or binding effect hereof.

     

    SECTION
      11.
      

     

    Termination.

     

    Upon
      the
      indefeasible payment and performance in full of all Obligations, the security
      interests created by this Agreement shall terminate and the Purchasers (at
      the
      Grantors’ expense) shall promptly execute and deliver to the Grantors such
      documents and instruments reasonably requested by the Grantors as shall be
      necessary to evidence termination of all such security interests given by the
      Grantors to Purchasers hereunder, including cancellation of this Agreement
      by
      written notice from Purchasers to the Copyright Office.

     

    SECTION
      12.

     

    No
      Inconsistent Requirements.

     

    Each
      Grantor acknowledges that this Agreement and the other documents, agreements
      and
      instruments entered into or executed in connection herewith may contain
      covenants and other terms and provisions variously stated regarding the same
      or
      similar matters, and each Grantor agrees that all such covenants, terms and
      provisions are cumulative and all shall be performed and satisfied in accordance
      with their respective terms.

     

    SECTION
      13.
      

     

    Severability.

     

    If
      one or
      more provisions contained in this Agreement shall be invalid, illegal or
      unenforceable in any respect in any jurisdiction or with respect to any party,
      such invalidity, illegality or unenforceability in such jurisdiction or with
      respect to such party shall, to the fullest extent permitted by applicable
      law,
      not invalidate or render illegal or unenforceable any such provision in any
      other jurisdiction or with respect to any other party, or any other provisions
      of this Agreement.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    SECTION
      14.
      

     

    Notices.

     

    All
      notices and other communications hereunder shall be in writing and shall be
      mailed, sent or delivered in accordance with the Purchase
      Agreement.

     

    [Signature
      Page Follows]

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


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

     

    
      	
              GRANTORS:

            
	
              PRECISION
                OPTICS CORPORATION, INC.

            
	 	 
	 	
               

            
	
              By:

            	
              Name:
                Richard E. Forkey

            
	 	
              Title:
                President, Chief Executive Officer and 

              Treasurer~

            
	 	 
	
              [NAMES
                OF SUBSIDIARY GRANTORS]

            
	 	 
	
              By:

            	
               

            
	 	
              Name:

            
	 	
              Title:

            


    

     

    PURCHASERS:

    


    SPECIAL
      SITUATIONS FUND III QP, L.P.

    SPECIAL
      SITUATIONS PRIVATE EQUITY FUND, L.P.

    


    
      	
              By:

            	
               

            
	 	
              Name:
                Austin W. Marxe

            
	 	
              Title:
                General Partner

            
	 
	 
	
              Arnold
                Schumsky

            


    

     

    [Signature
      Page to Copyright Security Agreement]


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    SCHEDULE
      A

     

    to
      the Copyright Security Agreement

     

    Grantor:
      [___________]

     

    Registered
      Copyrights

     

    
      	
              Title of Work

            	 	
              Registration Number

            	 	
              Date of Registration

            	 
	 	 	 	 	 	 	 	 


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    SCHEDULE
      B

     

    to
      the Copyright Security Agreement

     

    Grantor:
      [______________]

     

    Copyright
      Applications

     

    
      	
              Title
                of Work

            	 	
              Application
                Number

            
	 	 	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Annex
      1
      to

    Copyright
      Security Agreement

     

    ASSUMPTION
      AGREEMENT,
      dated
      as of ________________, 200__, made by ______________________________ (the
      “Additional
      Grantor”),
      in
      favor of the Purchasers named on the signature pages to the Copyright Security
      Agreement (as defined below) (the “Purchasers”)
      of
      $600,000 in aggregate principal amount of the 10% Senior Secured Convertible
      Notes (collectively, the “Notes”)
      issued
      by Precision Optics Corporation, Inc. (the “Borrower”)
      to the
      Purchasers pursuant to the terms of a Purchase Agreement, dated June 25, 2008
      (the “Purchase
      Agreement”),
      by
      and between the Borrower and the Purchasers. All capitalized terms not defined
      herein shall have the meaning ascribed to them in the Purchase Agreement and
      the
      Notes.

    


    WITNESSETH

     

    WHEREAS,
      the
      Grantors have entered into the Copyright Security Agreement dated as of
      ________________, 2008 (as it may be amended, supplemented or otherwise modified
      from time to time, the “Copyright
      Security Agreement”)
      in
      favor of the Purchasers; and 

     

    WHEREAS,
      the
      Additional Grantor has agreed to execute and deliver this Assumption Agreement
      in order to become a party to the Copyright Security Agreement; 

     

    NOW,
      THEREFORE, IT IS AGREED:

     

    1.
      Copyright
      Security Agreement.
      By
      executing and delivering this Assumption Agreement, the Additional Grantor,
      as
      provided in Section 9 of the Copyright Security Agreement, hereby becomes a
      party to the Copyright Security Agreement as a Grantor thereunder with the
      same
      force and effect as if originally named therein as a Grantor and, without
      limiting the generality of the foregoing, hereby expressly assumes all
      obligations and liabilities of a Grantor thereunder.

     

    2.
      Representations
      and Warranties Concerning Grantor’s Legal Status. 
      The
      Additional Grantor has previously delivered to the Purchasers a certificate
      signed by the Additional Grantor and entitled “Perfection Certificate” (the
“Perfection
      Certificate”).
      The
      Additional Grantor represents and warrants to the Purchasers as follows: (a)
      the
      Additional Grantor’s exact legal name is that indicated on the Perfection
      Certificate and on the signature page hereof, (b) the Additional Grantor is
      an
      organization of the type and organized in the jurisdiction set forth in the
      Perfection Certificate, (c) the Perfection Certificate accurately sets forth
      the
      Additional Grantor’s organizational identification number or accurately states
      that the Additional Grantor has none, (d) the Perfection Certificate accurately
      sets forth the Additional Grantor’s place of business or, if more than one, its
      chief executive office as well as the Additional Grantor’s mailing address if
      different, (e) all other information set forth on the Perfection Certificate
      pertaining to the Grantor is accurate and complete including but not limited
      to
      information pertaining to copyrights and (f) each of the representations and
      warranties contained in the Transaction Documents relating to it are true and
      correct on and as the date hereof (after giving effect to this Assumption
      Agreement) as if made on and as of such date.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    3.
      Governing
      Law.
      THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
      IN
      ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. WITHOUT IN ANY WAY LIMITING
      THE PRECEDING CHOICE OF LAW, THE UNDERSIGNED (AND BY THEIR ACCEPTANCE HEREOF,
      THE PURCHASERS) ELECTS TO BE GOVERNED BY NEW YORK LAW IN ACCORDANCE WITH, AND
      ARE RELYING (AT LEAST IN PART) ON SECTION 5-1401 OF THE GENERAL OBLIGATIONS
      LAW
      OF THE STATE OF NEW YORK, AS AMENDED, OR ANY CORRESPONDING OR SUCCEEDING
      PROVISIONS THEREOF

     

    IN
      WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be
      duly
      executed and delivered as of the date first above written.

     

    
      	
              [ADDITIONAL
                GRANTOR]

            
	 
	
              By:

            	
               

            
	
              Name:

            
	
              Title:

            


    

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Exhibit
      II

    


    Trademark
      Security Agreement

    


    TRADEMARK
      SECURITY AGREEMENT,
      dated
      as of June 25, 2008 (this “Agreement”),
      is by
      and among the parties identified as “Grantors” on the signature pages hereto and
      such other parties as may become Grantors hereunder after the date hereof
      (individually a “Grantor”,
      and
      collectively the “Grantors”)
      and
      the Purchasers named on the signature pages hereto (the “Purchasers”).

    


    Grantors
      and Purchasers hereby agree as follows:

    


    SECTION
      1.

    


    Definitions;
      Interpretation.

    


    (a) Defined
      Terms.
      All
      capitalized terms used in this Agreement and not otherwise defined herein shall
      have the meanings assigned to them in the Purchase Agreement, dated as of June
      25, 2008, by and between Precision Optics Corporation, Inc. (the “Borrower”)
      and
      the Purchasers (the “Purchase
      Agreement”)
      and
      the Notes.

     

    (b) Certain
      Defined Terms.
      As used
      in this Agreement, the following terms shall have the following
      meanings:

    


    "Collateral"
      has the
      meaning set forth in Section 2.

    


    “Notes”
means
      $600,000 in aggregate principal amount of the Borrower’s 10% Senior Secured
      Convertible Notes issued by the Borrower to the Purchasers.

     

    "Trademark
      Office"
      means
      the United States Patent & Trademark Office.

    


    SECTION
      2.

    


    Security
      Interest

    


    To
      secure
      the complete and timely payment and satisfaction of the Obligations, each
      Grantor hereby grants to Purchasers, and hereby reaffirms its prior grant
      pursuant to the Security Agreement of, a continuing security interest in such
      Grantor’s entire right, title and interest in and to the following (all of the
      following items or types of property being herein collectively referred to
      as
      the “Collateral”), whether now owned or existing or hereafter created or
      acquired:

    


    (a) Each
      trademark listed on Schedule 1 annexed hereto, together with any reissues,
      continuations or extensions thereof (each a “Trademark”), and all of the
      goodwill of the business connected with the use of, and symbolized by, each
      Trademark; and

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    (b) All
      products and proceeds of the forgoing, including without limitation, any claim
      by Grantor against third parties for past, present or future (a) infringement
      or
      dilution of any Trademark, or (b) injury to the goodwill associated with any
      Trademark.

    


    SECTION
      3

    


    Supplement
      to Security Agreement

    


    This
      Agreement has been entered into in conjunction with the security interests
      granted to Purchasers under the Security Agreement, and other security documents
      referred to therein. The rights and remedies of the Purchasers with respect
      to
      the security interests granted herein are without prejudice to, and are in
      addition to those set forth in the Security Agreement or any other security
      documents referred to therein, all terms and provisions of which are
      incorporated herein by reference.

    


    SECTION
      4

    


    Representations
      and Warranties

    


    Each
      Grantor represents and warrants to Purchasers that:

    


    (a) Grantor
      is the sole and exclusive owner of the entire and unencumbered right, title
      and
      interest in and to each Trademark, free and clear of any liens, charges and
      encumbrances, including without limitation licenses and covenants by Grantor
      not
      to sue third persons, except for Permitted Liens.

    


    (b) Grantor
      has no notice of any suits or actions commenced or threatened with reference
      to
      any Trademark; and

    


    (c) Grantor
      has the unqualified right to execute and deliver this Agreement and perform
      its
      terms.

    


    SECTION
      5

    


    Further
      Acts

    


    Grantor
      agrees that until Grantor's Obligations shall have been satisfied in full,
      Grantor shall not, without the prior written consent of Purchasers, sell or
      assign its interest in, or grant any license under, any Trademark or enter
      into
      any other agreement with respect to any Trademark (except as permitted under
      the
      Transaction Documents), and Grantor further agrees that it shall not take any
      action or permit any action to be taken by others subject to its control,
      including licensees, or fail to take any action which would affect the validity
      or enforcement of the rights transferred to Purchasers under this
      Agreement.

    


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    SECTION
      6

    


    Purchasers’
      Right to Sue

    


    After
      an
      Event of Default occurs and while it continues, Purchasers shall have the right,
      but shall in no way be obligated, to bring suit in its own name to enforce
      the
      Trademarks and, if Purchasers shall commence any such suit, Grantor shall,
      at
      the request of Purchasers, do any and all lawful acts and execute any and all
      proper documents reasonably required by Purchasers in aid of such enforcement
      and Grantor shall promptly, upon demand, reimburse and indemnify Purchasers
      for
      all reasonable costs and expenses incurred by Purchasers in the exercise of
      its
      rights under this Section 7.

    


    SECTION
      7

    


    Cumulative
      Remedies; Power of Attorney

    


    Purchasers
      hereby acknowledges and affirms that the rights and remedies with respect to
      the
      Trademarks, whether established hereby or by the Security Agreement, or by
      any
      other agreements or by law shall be cumulative and may be exercised singularly
      or concurrently. Grantor hereby authorizes Purchasers upon the occurrence and
      during the continuance of an Event of Default, to make, constitute and appoint
      any officer or agent of Purchasers as Purchasers may select, in their sole
      discretion, as Grantor's true and lawful attorney-in-fact, with power to (a)
      endorse Grantor's name on all applications, documents, papers and instruments
      necessary or desirable for Purchasers in the use of the Trademarks or (b) take
      any other actions with respect to the Trademarks as Purchasers deem to be in
      the
      best interest of Purchasers, or (c) grant or issue any exclusive or
      non-exclusive license under the Trademarks to anyone, or (d) assign, pledge,
      convey or otherwise transfer title in or dispose of the Trademarks to anyone.
      Grantor hereby ratifies all that such attorneys shall lawfully do or cause
      to be
      done after the occurrence and during the continuance of an Event of Default
      by
      virtue hereof. This power of attorney shall be irrevocable until Grantor's
      Obligations shall have been paid in full. Grantor hereby further acknowledges
      and agrees that the use by Purchasers of the Trademarks after the occurrence
      and
      during the continuance of an Event of Default shall be worldwide, except as
      limited by their terms, and without any liability for royalties or related
      charges from Purchasers to Grantor.

    


    SECTION
      8

    


    Binding
      Effect

    


    This
      Agreement shall be binding upon, inure to the benefit of and be enforceable
      by
      each Grantor, Purchasers and their respective successors and assigns. No Grantor
      may assign, transfer, hypothecate or otherwise convey its rights, benefits,
      obligations or duties hereunder except as specifically permitted by the
      Notes.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    SECTION
      9

    


    Governing
      Law

    


    This
      Agreement shall be governed by, and construed in accordance with, the law of
      the
      State of New York, except as required by mandatory provisions of law or to
      the
      extent the perfection or priority of the security interests hereunder, or the
      remedies hereunder, in respect of any Collateral are governed by the law of
      a
      jurisdiction other than the State of New York.

    


    SECTION
      10

    


    Entire
      Agreement; Amendment

    


    No
      amendment of any provision of this Agreement shall be effective unless it is
      in
      writing and signed by the Grantors and the Purchasers, and no waiver of any
      provision of this Agreement, and no consent to any departure by the Grantors
      therefrom, shall be effective unless it is in writing and signed by the
      Purchasers, and then such waiver or consent shall be effective only in the
      specific instance and for the specific purpose for which given. Notwithstanding
      the foregoing, (a) additional Persons may become Grantors under this Agreement
      without consent of any other Grantor through execution and delivery to the
      Purchasers of an Assumption Agreement in the form of Annex 1 hereto or any
      other
      form of supplement acceptable to the Purchasers, and (b) Purchasers unilaterally
      may modify, amend or supplement the Schedules hereto, and such modified, amended
      or supplemented Schedules shall be deemed to be accurate absent manifest error.
      To the extent that any provision of this Agreement conflicts with any provision
      of the Notes, the provision giving Purchasers greater rights or remedies shall
      govern, it being understood that the purpose of this Agreement is to add to,
      and
      not detract from, the rights granted to Purchasers under the Notes. Nothing
      in
      this Section 10 shall be construed to permit any Grantor to form a Subsidiary
      unless expressly permitted to do so under the Notes.

    


    SECTION
      11

    


    Counterparts

    


    This
      Agreement may be executed in any number of counterparts and by different parties
      hereto in separate counterparts, each of which when so executed shall be deemed
      to be an original and all of which taken together shall constitute but one
      and
      the same agreement. Delivery of an executed counterpart of this Agreement by
      facsimile shall be equally as effective as delivery of a manually executed
      counterpart. Any party hereto delivering a counterpart of this Agreement by
      facsimile shall also deliver a manually executed counterpart, but the failure
      to
      so deliver a manually executed counterpart shall not affect the validity,
      enforceability, or binding effect hereof.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    SECTION
      12.

    


    Termination

    


    Upon
      the
      indefeasible payment and performance in full of all Obligations, the security
      interests created by this Agreement shall terminate and the Purchasers (at
      the
      Grantors’ expense) shall promptly execute and deliver to the Grantors such
      documents and instruments reasonably requested by the Grantors as shall be
      necessary to evidence termination of all such security interests given by the
      Grantors to Purchasers hereunder, including cancellation of this Agreement
      by
      written notice from Purchasers to the Trademark Office.

    


    SECTION
      13

    


    No
      Inconsistent Requirements

    


    Each
      Grantor acknowledges that this Agreement and the other documents, agreements
      and
      instruments entered into or executed in connection herewith may contain
      covenants and other terms and provisions variously stated regarding the same
      or
      similar matters, and each Grantor agrees that all such covenants, terms and
      provisions are cumulative and all shall be performed and satisfied in accordance
      with their respective terms.

    


    SECTION
      14

    


    Severability

    


    If
      one or
      more provisions contained in this Agreement shall be invalid, illegal or
      unenforceable in any respect in any jurisdiction or with respect to any party,
      such invalidity, illegality or unenforceability in such jurisdiction or with
      respect to such party shall, to the fullest extent permitted by applicable
      law,
      not invalidate or render illegal or unenforceable any such provision in any
      other jurisdiction or with respect to any other party, or any other provisions
      of this Agreement.

    


    SECTION
      15

    


    Notices

    


    All
      notices and other communications hereunder shall be in writing and shall be
      mailed, sent or delivered in accordance with the Purchase
      Agreement.

    


    [Signature
      Page Follows]

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    


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

     

    
      	
              GRANTORS:

            
	
              PRECISION
                OPTICS CORPORATION, INC.

            
	 	 
	
              By:

            	
               

            
	 	
              Name:
                Richard E. Forkey

            
	 	
              Title:
                President, Chief Executive Officer and 

              Treasurer

            
	 	 
	
              [NAMES
                OF SUBSIDIARY GRANTORS]

            
	 	 
	
              By:

            	
               

            
	 	
              Name:

            
	 	
              Title:

            


    

     

    PURCHASERS:

    


    SPECIAL
      SITUATIONS FUND III QP, L.P.

    SPECIAL
      SITUATIONS PRIVATE EQUITY FUND, L.P.

    


    
      	
              By:

            	
               

            
	 	
              Name:
                Austin W. Marxe

            
	 	
              Title:
                General Partner

            
	 	 
	
               

            
	
              Arnold
                Schumsky 

            


    

    


    
      [Signature
        Page to Trademark Security Agreement]

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    SCHEDULE
      A

    to
      the Trademark Security Agreement

    


    Grantor:
      [_________]

    


    TRADEMARK
      REGISTRATIONS

    


    Trademarks
      owned by Grantors: 

    


    
      	
              Trademark Description

            	 	
              U.S. Registration No.

            	 	
              Date Registered

            	 
	 	 	 	 	 	 	 	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

        

    SCHEDULE
      B

    to
      the Trademark Security Agreement

    


    Grantor:
      [_________] 

    


    TRADEMARK
      APPLICATIONS

    


    
      	
              Trademark Application Description

            	 	
              U.S. Application No.

            	 	
              Date Applied

            	 
	 	 	 	 	 	 	 	 


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    Annex
      1
      to

    Trademark
      Security Agreement

     

    ASSUMPTION
      AGREEMENT,
      dated
      as of ________________, 200__, made by ______________________________ (the
      “Additional
      Grantor”),
      in
      favor of the Purchasers named on the signature pages to the Trademark Security
      Agreement (as defined below) (the “Purchasers”)
      of
      $600,000 in aggregate principal amount of the 10% Senior Secured Convertible
      Notes (collectively, the “Notes”)
      issued
      by Precision Optics Corporation, Inc. (the “Borrower”)
      to the
      Purchasers pursuant to the terms of a Purchase Agreement, dated June 25, 2008
      (the “Purchase
      Agreement”),
      by
      and between the Borrower and the Purchasers. All capitalized terms not defined
      herein shall have the meaning ascribed to them in the Purchase Agreement and
      the
      Notes.

    


    WITNESSETH

     

    WHEREAS,
      the
      Grantors have entered into the Trademark Security Agreement dated as of June
      25,
      2008 (as it may be amended, supplemented or otherwise modified from time to
      time, the “Trademark
      Security Agreement”)
      in
      favor of the Purchasers; and 

     

    WHEREAS,
      the
      Additional Grantor has agreed to execute and deliver this Assumption Agreement
      in order to become a party to the Trademark Security Agreement; 

     

    NOW,
      THEREFORE, IT IS AGREED:

     

    1.
      Trademark
      Security Agreement.
      By
      executing and delivering this Assumption Agreement, the Additional Grantor,
      as
      provided in Section 10 of the Trademark Security Agreement, hereby becomes
      a
      party to the Trademark Security Agreement as a Grantor thereunder with the
      same
      force and effect as if originally named therein as a Grantor and, without
      limiting the generality of the foregoing, hereby expressly assumes all
      obligations and liabilities of a Grantor thereunder.

     

    2.
      Representations
      and Warranties Concerning Grantor’s Legal Status. 
      The
      Additional Grantor has previously delivered to the Purchasers a certificate
      signed by the Additional Grantor and entitled “Perfection Certificate” (the
“Perfection
      Certificate”).
      The
      Additional Grantor represents and warrants to the Purchasers as follows: (a)
      the
      Additional Grantor’s exact legal name is that indicated on the Perfection
      Certificate and on the signature page hereof, (b) the Additional Grantor is
      an
      organization of the type and organized in the jurisdiction set forth in the
      Perfection Certificate, (c) the Perfection Certificate accurately sets forth
      the
      Additional Grantor’s organizational identification number or accurately states
      that the Additional Grantor has none, (d) the Perfection Certificate accurately
      sets forth the Additional Grantor’s place of business or, if more than one, its
      chief executive office as well as the Additional Grantor’s mailing address if
      different (e) all other information set forth on the Perfection Certificate
      pertaining to the Grantor is accurate and complete including but not limited
      to
      information pertaining to trademarks and (f) each of the representations and
      warranties contained in the Transaction Documents relating to the Additional
      Grantor are true and correct on and as the date hereof (after giving effect
      to
      this Assumption Agreement) as if made on and as of such date.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    3.
      Governing
      Law.
      THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
      IN
      ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. WITHOUT IN ANY WAY LIMITING
      THE PRECEDING CHOICE OF LAW, THE UNDERSIGNED (AND BY THEIR ACCEPTANCE HEREOF,
      THE PURCHASERS) ELECTS TO BE GOVERNED BY NEW YORK LAW IN ACCORDANCE WITH, AND
      ARE RELYING (AT LEAST IN PART) ON SECTION 5-1401 OF THE GENERAL OBLIGATIONS
      LAW
      OF THE STATE OF NEW YORK, AS AMENDED, OR ANY CORRESPONDING OR SUCCEEDING
      PROVISIONS THEREOF

     

    IN
      WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be
      duly
      executed and delivered as of the date first above written.

     

    
      	
              [ADDITIONAL
                GRANTOR]

            
	 
	
              By:

            	 
	Name:
	Title:


    

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Exhibit
      III

    


    Patent
      Security Agreement

    


    PATENT
      SECURITY AGREEMENT,
      dated
      as of June 25, 2008 (this “Agreement”),
      is by
      and among the parties identified as “Grantors” on the signature pages hereto and
      such other parties as may become Grantors hereunder after the date hereof
      (individually a “Grantor”,
      and
      collectively the “Grantors”)
      and
      the Purchasers named on the signature pages hereto (the “Purchasers”).

    


    W
      I T N E S S E T H:

    


    WHEREAS,
      pursuant to a Security Agreement dated as of the date hereof (as such agreement
      may be amended, amended and restated, supplemented or otherwise modified from
      time to time, the “Security
      Agreement”),
      between the Grantors and the Purchasers and in order to obtain the benefits
      referred to therein, the Grantors have granted to the Purchasers a security
      interest in substantially all of the Grantor’s property, including, without
      limitation, the Collateral referred to in Section 2 below; and

    


    WHEREAS,
      pursuant to the Security Agreement, the Grantor has agreed to execute this
      Agreement in respect of its Collateral for recording with the Patent Office
      and
      any other office in which a security interest in the Collateral may be recorded
      under the laws of any other applicable jurisdiction;

    


    NOW,
      THEREFORE,
      in
      consideration of the premises and the mutual covenants and agreements
      hereinafter set forth, the Grantor and the Purchasers agree as
      follows:

    


    SECTION
      1.
      

     

    Definitions;
      Interpretation.

     

    (a) Defined
      Terms.
      All
      capitalized terms used in this Agreement and not otherwise defined herein shall
      have the meanings assigned to them in the Purchase Agreement, dated as of June
      25, 2008, by and between Precision Optics Corporation, Inc. (the “Borrower”)
      and
      the Purchasers (the “Purchase
      Agreement”)
      and
      the Notes.

     

    (b) Certain
      Defined Terms.
      As used
      in this Agreement, the following terms shall have the following
      meanings:

     

    “Collateral”
has
      the
      meaning set forth in Section 2.

     

    “Notes”
means
      $600,000 in aggregate principal amount of the Borrower’s 10% Senior Secured
      Convertible Notes issued by the Borrower to the Purchasers.

     

    “Patent
      Office”
means
      the United States Patent and Trademark Office.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “UCC”
means
      the Uniform Commercial Code as in effect in the State of New York.

     

    (c) Terms
      Defined in UCC.
      Where
      applicable in the context of this Agreement and except as otherwise defined
      herein, terms used in this Agreement shall have the meanings assigned to them
      in
      the UCC. 

     

    (d) Construction.
      In this
      Agreement, the following rules of construction and interpretation shall be
      applicable: (i) no reference to “proceeds” in this Agreement authorizes any
      sale, transfer, or other disposition of any Collateral by Grantor; (ii)
“includes” and “including” are not limiting; (iii) “or” is not exclusive; and
      (iv) “all” includes “any” and “any” includes “all.” To the extent not
      inconsistent with the foregoing, the rules of construction and interpretation
      applicable to the Security Agreement shall also be applicable to this Agreement
      and are incorporated herein by this reference.

    


    SECTION
      2

    


    Grant
      of
      Security

    


    (a) The
      Grantor hereby grants to the Purchasers a security interest in and to all of
      the
      Grantor’s right, title and interest in and to the following (the “Collateral”):

    


    (i)
       the
      United States, international, and foreign patents, patent applications and
      patent licenses set forth on Schedule
      A
      and
B
      hereto,
      as Schedule
      A
      and
B
      may be
      supplemented from time to time by supplements to the Security Agreement and
      this
      Agreement which may be executed and delivered by the Grantor to the Purchasers,
      from time to time, together with all reissues, divisions, continuations,
      continuations-in-part, extensions and reexaminations thereof, and all rights
      therein provided by international treaties or conventions (the “Patents”);
      

    


    (ii)
       any
      and
      all claims for damages for past, present and future infringement,
      misappropriation or breach with respect to the Patents, with the right, but
      not
      the obligation, to sue for and collect, or otherwise recover, such damages;
      and


    


    (iii)
       any
      and
      all proceeds of the foregoing. 

    


    (b) The
      pledge and collateral assignment of, and the grant of a security interest in,
      the Collateral by the Grantor under this Agreement secures the payment of all
      Obligations of the Grantor now or hereafter existing, whether direct or
      indirect, absolute or contingent, and whether for principal, reimbursement
      obligations, interest, premiums, penalties, fees, indemnifications, contract
      causes of action, costs, expenses or otherwise.

    


    (c)  The
      Grantor authorizes and requests that the Commissioner of Patents and Trademarks
      and any other applicable government officer record this Agreement.

    


    SECTION
      3.
      

     

    Supplement
      to Security Agreement.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    This
      Agreement has been entered into in conjunction with the security interests
      granted to Purchasers under the Security Agreement, and other security documents
      referred to therein. The rights and remedies of the Purchasers with respect
      to
      the security interests granted herein are without prejudice to, and are in
      addition to those set forth in the Security Agreement or any other security
      documents referred to therein, all terms and provisions of which are
      incorporated herein by reference.

    


    SECTION
      4.
      

     

    Representations
      and Warranties.

     

    Each
      Grantor represents and warrants to Purchasers that:

     

    (a) Patent
      Registrations.
      A true
      and correct list of all of such Grantor’s Patents is set forth on Schedule
      A.

     

    (b) Applications
      for Patents.
      A true
      and correct list of all of such Grantor’s applications for Patents is set forth
      on Schedule
      B.

    


    SECTION
      5.

    


    Further
      Acts.

     

    On
      a
      continuing basis, each Grantor shall make, execute, acknowledge and deliver,
      and
      file and record in the proper filing and recording places, all such instruments
      and documents, and take all such action as may be reasonably necessary or
      advisable or may be reasonably requested by Purchasers to carry out the intent
      and purposes of this Agreement, or for assuring, confirming or protecting the
      grant or perfection of the security interest granted or purported to be granted
      hereby, to ensure such Grantor’s compliance with this Agreement or to enable
      Purchasers to exercise and enforce their rights and remedies hereunder with
      respect to the Collateral, including any documents for filing with the Patent
      Office or any applicable state office. Purchasers may record this Agreement,
      an
      abstract thereof, or any other document describing Purchasers’ interest in the
      Patents with the Patent Office, at the expense of such Grantor. In addition,
      each Grantor authorizes Purchasers to file financing statements describing
      the
      Collateral in any UCC filing office deemed appropriate by Purchasers. If any
      Grantor shall at any time hold or acquire a commercial tort claim arising with
      respect to the Collateral, such Grantor shall immediately notify Purchasers
      in a
      writing signed by such Grantor of the brief details thereof and grant to the
      Purchasers in such writing a security interest therein and in the proceeds
      thereof, all upon the terms of this Agreement, with such writing to be in form
      and substance satisfactory to the Purchasers.

     

    SECTION
      6.
      

     

    Authorization
      to Supplement.

     

    Each
      Grantor shall give the Purchasers prompt notice of any additional United States
      Patent registrations or applications therefor after the date hereof. Each
      Grantor authorizes the Purchasers unilaterally to modify this Agreement by
      amending Schedule
      A
      or
B
      to
      include any future United States registered Patents or applications therefor
      of
      such Grantor. Notwithstanding the foregoing, no failure to so modify this
      Agreement or amend Schedules
      A
      or
B
      shall in
      any way affect, invalidate or detract from Purchasers’ continuing security
      interest in all Collateral, whether or not listed on Schedule
      A
      or
B.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    SECTION
      7.
      

     

    Binding
      Effect.

     

    This
      Agreement shall be binding upon, inure to the benefit of and be enforceable
      by
      each Grantor, Purchasers and their respective successors and assigns. No party
      may assign, transfer, hypothecate or otherwise convey its rights, benefits,
      obligations or duties hereunder except as specifically permitted by the
      Notes.

     

    SECTION
      8.
      

     

    Governing
      Law.

     

    This
      Agreement shall be governed by, and construed in accordance with, the law of
      the
      State of New York, except as required by mandatory provisions of law or to
      the
      extent the perfection or priority of the security interests hereunder, or the
      remedies hereunder, in respect of any Collateral are governed by the law of
      a
      jurisdiction other than the State of New York.

     

    SECTION
      9.
      

     

    Entire
      Agreement; Amendment.

     

    No
      amendment of any provision of this Agreement shall be effective unless it is
      in
      writing and signed by the Grantors and the Purchasers, and no waiver of any
      provision of this Agreement, and no consent to any departure by the Grantors
      therefrom, shall be effective unless it is in writing and signed by the
      Purchasers, and then such waiver or consent shall be effective only in the
      specific instance and for the specific purpose for which given. Notwithstanding
      the foregoing, (i) additional Persons may become Grantors under this Agreement
      without consent of any other Grantor through execution and delivery to the
      Purchasers of an Assumption Agreement in the form of Annex 1 hereto or any
      other
      form of supplement acceptable to the Purchasers, and (ii) Purchasers
      unilaterally may re-execute this Agreement, to the extent necessary, to modify,
      amend or supplement Schedules A or B hereto as provided in Section 6 hereof.
      To
      the extent that any provision of this Agreement conflicts with any provision
      of
      the Notes, the provision giving Purchasers greater rights or remedies shall
      govern, it being understood that the purpose of this Agreement is to add to,
      and
      not detract from, the rights granted to Purchasers under the Notes. Nothing
      in
      this Section 9 shall be construed to permit any Grantor to form a Subsidiary
      unless expressly permitted to do so under the Note.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    SECTION
      10.
      

     

    Counterparts.

     

    This
      Agreement may be executed in any number of counterparts and by different parties
      hereto in separate counterparts, each of which when so executed shall be deemed
      to be an original and all of which taken together shall constitute but one
      and
      the same agreement. Delivery of an executed counterpart of this Agreement by
      facsimile shall be equally as effective as delivery of a manually executed
      counterpart. Any party hereto delivering a counterpart of this Agreement by
      facsimile shall also deliver a manually executed counterpart, but the failure
      to
      so deliver a manually executed counterpart shall not affect the validity,
      enforceability, or binding effect hereof.

     

    SECTION
      11.
      

     

    Termination.

     

    Upon
      the
      indefeasible payment and performance in full of all Obligations, the security
      interests created by this Agreement shall terminate and the Purchasers (at
      the
      Grantors’ expense) shall promptly execute and deliver to the Grantors such
      documents and instruments reasonably requested by the Grantors as shall be
      necessary to evidence termination of all such security interests given by the
      Grantors to Purchasers hereunder, including cancellation of this Agreement
      by
      written notice from Purchasers to the Patent Office.

     

    SECTION
      12.

     

    No
      Inconsistent Requirements.

     

    Each
      Grantor acknowledges that this Agreement and the other documents, agreements
      and
      instruments entered into or executed in connection herewith may contain
      covenants and other terms and provisions variously stated regarding the same
      or
      similar matters, and each Grantor agrees that all such covenants, terms and
      provisions are cumulative and all shall be performed and satisfied in accordance
      with their respective terms.

     

    SECTION
      13.
      

     

    Severability.

     

    If
      one or
      more provisions contained in this Agreement shall be invalid, illegal or
      unenforceable in any respect in any jurisdiction or with respect to any party,
      such invalidity, illegality or unenforceability in such jurisdiction or with
      respect to such party shall, to the fullest extent permitted by applicable
      law,
      not invalidate or render illegal or unenforceable any such provision in any
      other jurisdiction or with respect to any other party, or any other provisions
      of this Agreement.

     

    SECTION
      14.
      

     

    Notices.

     

    All
      notices and other communications hereunder shall be in writing and shall be
      mailed, sent or delivered in accordance with the Purchase
      Agreement.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    [Signature
      Page Follows]

    


    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


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

     

    
      	
              GRANTORS:

            
	
              PRECISION
                OPTICS CORPORATION, INC.

            
	 	 
	
              By:

            	 
	 	
              Name:
                Richard E. Forkey

            
	 	
              Title:
                President, Chief Executive Officer and Treasurer

            
	 	 
	
              [NAMES
                OF SUBSIDIARY GRANTORS]

            
	 	 
	
              By:

            	 
	 	
              Name:

            
	 	
              Title:

            


    

    


    PURCHASERS:

    


    SPECIAL
      SITUATIONS FUND III QP, L.P.

    SPECIAL
      SITUATIONS PRIVATE EQUITY FUND, L.P.

    


    
      	
              By:

            	
               

            
	 	
              Name:
                Austin W. Marxe

            
	 	
              Title:
                General Partner

            
	 
	
               

            
	
              Arnold
                Schumsky

            


    

    
       

      [Signature
        Page to Patent Security Agreement]

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    


    SCHEDULE
      A

    


    to
      the Patent Security Agreement

    


    Grantor:
      [_________]

    


    Registered
      Patents: 

    


    
      	
              Patent No.

            	 	
              Date of Registration

            	 	
              Date of Expiration

            
	 	 	 	 	 


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    SCHEDULE
      B

    


    to
      Patent Security Agreement

    


    Grantor:
      [_________] 

    


    Applications
      for Patents:

    


    
      	
              Patent No.

            	 	
              Date of Registration

            	 	
              Date of Expiration

            
	 	 	 	 	 
	 	 	 	 	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Annex
      1
      to

    Patent
      Security Agreement

     

    ASSUMPTION
      AGREEMENT,
      dated
      as of ________________, 200__, made by ______________________________ (the
      “Additional
      Grantor”),
      in
      favor of the Purchasers named on the signature pages to the Patent Security
      Agreement (as defined below) (the “Purchasers”)
      of
      $600,000 in aggregate principal amount of the 10% Senior Secured Convertible
      Notes (collectively, the “Notes”)
      issued
      by Precision Optics Corporation, Inc. (the “Borrower”)
      to the
      Purchasers pursuant to the terms of a Purchase Agreement, dated June 25, 2008
      (the “Purchase
      Agreement”),
      by
      and between the Borrower and the Purchasers. All capitalized terms not defined
      herein shall have the meaning ascribed to them in the Purchase Agreement and
      the
      Notes.

    
 

    WITNESSETH

     

    WHEREAS,
      the
      Grantors have entered into the Patent Security Agreement dated as of June 25,
      2008 (as it may be amended, supplemented or otherwise modified from time to
      time, the “Patent
      Security Agreement”)
      in
      favor of the Purchasers; and 

     

    WHEREAS,
      the
      Additional Grantor has agreed to execute and deliver this Assumption Agreement
      in order to become a party to the Patent Security Agreement; 

     

    NOW,
      THEREFORE, IT IS AGREED:

     

    1.
      Patent
      Security Agreement.
      By
      executing and delivering this Assumption Agreement, the Additional Grantor,
      as
      provided in Section 9 of the Patent Security Agreement, hereby becomes a party
      to the Patent Security Agreement as a Grantor thereunder with the same force
      and
      effect as if originally named therein as a Grantor and, without limiting the
      generality of the foregoing, hereby expressly assumes all obligations and
      liabilities of a Grantor thereunder.

     

    2.
      Representations
      and Warranties Concerning Grantor’s Legal Status. 
      The
      Additional Grantor has previously delivered to the Purchasers a certificate
      signed by the Additional Grantor and entitled “Perfection Certificate” (the
“Perfection
      Certificate”).
      The
      Additional Grantor represents and warrants to the Purchasers as follows: (a)
      the
      Additional Grantor’s exact legal name is that indicated on the Perfection
      Certificate and on the signature page hereof, (b) the Additional Grantor is
      an
      organization of the type and organized in the jurisdiction set forth in the
      Perfection Certificate, (c) the Perfection Certificate accurately sets forth
      the
      Additional Grantor’s organizational identification number or accurately states
      that the Additional Grantor has none, (d) the Perfection Certificate accurately
      sets forth the Additional Grantor’s place of business or, if more than one, its
      chief executive office as well as the Additional Grantor’s mailing address if
      different (e) all other information set forth on the Perfection Certificate
      pertaining to the Grantor is accurate and complete including but not limited
      to
      information pertaining to Patents and (f) each of the representations and
      warranties contained in the Transaction Documents relating to it are true and
      correct on and as of the date hereof (after giving effect to this Assumption
      Agreement) as if made on and as of such date.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    3.
      Governing
      Law.
      THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
      IN
      ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. WITHOUT IN ANY WAY LIMITING
      THE PRECEDING CHOICE OF LAW, THE UNDERSIGNED (AND BY THEIR ACCEPTANCE HEREOF,
      THE PURCHASERS) ELECTS TO BE GOVERNED BY NEW YORK LAW IN ACCORDANCE WITH, AND
      ARE RELYING (AT LEAST IN PART) ON SECTION 5-1401 OF THE GENERAL OBLIGATIONS
      LAW
      OF THE STATE OF NEW YORK, AS AMENDED, OR ANY CORRESPONDING OR SUCCEEDING
      PROVISIONS THEREOF.

     

    IN
      WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be
      duly
      executed and delivered as of the date first above written.

     

    
      	
              [ADDITIONAL
                GRANTOR]

            
	 
	
              By:

            	 
	
              Name:

            
	
              Title:

            


    

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Schedule
      B

     

    Commercial
      Tort Claims

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    


    Annex
      1
      to

    Pledge
      and Security Agreement

     

    ASSUMPTION
      AGREEMENT,
      dated
      as of ________________, 200__, made by ______________________________ (the
      “Additional
      Grantor”),
      in
      favor of the Purchasers named on the signature pages to the Security Agreement
      (as defined below) (the “Purchasers”)
      of
      $600,000 in aggregate principal amount of the 10% Senior Secured Convertible
      Notes (collectively, the “Notes”)
      issued
      by Precision Optics Corporation, Inc. (the “Borrower”)
      to the
      Purchasers pursuant to the terms of a Purchase Agreement, dated June 25, 2008
      (the “Purchase
      Agreement”),
      by
      and between the Borrower and the Purchasers. All capitalized terms not defined
      herein shall have the meaning ascribed to them in the Purchase Agreement and
      the
      Notes.

    


    WITNESSETH

     

    WHEREAS,
      the
      Grantors have entered into the Pledge and Security Agreement dated as of June
      25, 2008 (as it may be amended, supplemented or otherwise modified from time
      to
      time, the “Security
      Agreement”)
      in
      favor of the Purchasers; and 

     

    WHEREAS,
      the
      Additional Grantor has agreed to execute and deliver this Assumption Agreement
      in order to become a party to the Security Agreement; 

     

    NOW,
      THEREFORE, IT IS AGREED:

     

    1.
      Security
      Agreement.
      By
      executing and delivering this Assumption Agreement, the Additional Grantor,
      as
      provided in Section 19 of the Security Agreement, hereby becomes a party to
      the
      Security Agreement as a Grantor thereunder with the same force and effect as
      if
      originally named therein as a Grantor and, without limiting the generality
      of
      the foregoing, hereby expressly assumes all obligations and liabilities of
      a
      Grantor thereunder.

     

    2.
      Representations
      and Warranties Concerning Grantor’s Legal Status. 
      The
      Additional Grantor has previously delivered to the Purchasers a certificate
      signed by the Additional Grantor and entitled “Perfection Certificate” (the
“Perfection
      Certificate”)
      (form
      of Perfection Certificate to be completed is attached hereto as Schedule
      1).
      The
      Additional Grantor represents and warrants to the Purchasers as follows: (a)
      the
      Additional Grantor’s exact legal name is that indicated on the Perfection
      Certificate and on the signature page hereof, (b) the Additional Grantor is
      an
      organization of the type and organized in the jurisdiction set forth in the
      Perfection Certificate, (c) the Perfection Certificate accurately sets forth
      the
      Additional Grantor’s organizational identification number or accurately states
      that the Additional Grantor has none, (d) the Perfection Certificate accurately
      sets forth the Additional Grantor’s place of business or, if more than one, its
      chief executive office as well as the Additional Grantor’s mailing address if
      different (e) all other information set forth on the Perfection Certificate
      pertaining to the Grantor is accurate and complete and (f) each of the
      representations and warranties contained in the Transaction Documents relating
      to it are true and correct on and as the date hereof (after giving effect to
      this Assumption Agreement) as if made on and as of such date.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    3.
      Governing
      Law.
      THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
      IN
      ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (OTHER THAN THOSE CONFLICT
      OF
      LAW RULES THAT WOULD DEFER TO THE SUBSTANTIVE LAWS OF ANOTHER JURISDICTION).
      WITHOUT IN ANY WAY LIMITING THE PRECEDING CHOICE OF LAW, THE UNDERSIGNED (AND
      BY
      THEIR ACCEPTANCE HEREOF, THE PURCHASERS) ELECTS TO BE GOVERNED BY NEW YORK
      LAW
      IN ACCORDANCE WITH, AND ARE RELYING (AT LEAST IN PART) ON SECTION 5-1401 OF
      THE
      GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, AS AMENDED, OR ANY
      CORRESPONDING OR SUCCEEDING PROVISIONS THEREOF.

     

    IN
      WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be
      duly
      executed and delivered as of the date first above written.

     

    
      	
              [ADDITIONAL
                GRANTOR]

            
	 
	
              By:

            	 
	 	
              Name:

            
	 	
              Title:

            


    

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Schedule
      1

     

    to

     

    Assumption
      Agreement to Pledge and Security Agreement

    PERFECTION
      CERTIFICATE

     

    The
      undersigned, the    and    of
      [Additional Grantor] a [state of organization] [entity] (the “Company”), hereby
      certifies, with reference to a certain Pledge and Security Agreement dated
      as of
      June 25, 2008 (terms defined in such Security Agreement having the same meanings
      herein as specified therein), between the Grantors and the Purchasers named
      therein.

     

    1.  Names.  (a) The
      exact
      corporate name of the Company as that name appears on its [Certificate
      of Incorporation]
      is as
      follows:

     

    (b) The
      following is a list of all other names (including trade names or similar
      appellations) used by the Company, or any other business or organization to
      which the Company became the successor by merger, consolidation, acquisition,
      change in form, nature or jurisdiction of organization or otherwise, now or
      at
      any time during the past five years:

     

    2.  Other
      Identifying Factors.  (a) The
      following is the type of organization of the Company:

     

    (b) The
      following is the jurisdiction of the Company’s organization:

     

    (c) The
      following is the Company’s state issued organizational identification number
[state
      “None” if the state does not issue such a number]:

     

    (d) The
      following is the Company’s federal employer identification number:

     

    (e) Attached
      hereto as Schedule 2
      is the
      information required above in this §2 for any other business or organization to
      which the Company became the successor by merger, consolidation, acquisition,
      change in form, nature or jurisdiction of organization or otherwise, now or
      at
      any time during the past five years:

    


    3.  Chief
      Executive Office.  

     

    (a) The
      chief
      executive office of the Company is located at the following
      address:

    


    
      	
              Address

            	 	
              County

            	 	
              State

            
	 	 	 	 	 
	 	 	 	 	 


    

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    (b) The
      principal mailing address of the Company is the following address, if different
      from the chief executive office address:

    


    
      	
              Mailing
                Address

            	 	
              County

            	 	
              State

            
	 	 	 	 	 
	 	 	 	 	 


    

    


    4.  Other
      Current Locations.  

     

    (a) The
      following are all other locations in the United States of America in which
      the
      Company maintains any books or records relating to any of the Collateral
      consisting of accounts, contract rights, chattel paper, general intangibles
      or
      mobile goods:

    


    
      	
              Address

            	 	
              County

            	 	
              State

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 


    

    


    (b) The
      following are all other places of business of the Company in the United States
      of America:

    


    
      	
              Address

            	 	
              County

            	 	
              State

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 


    

     

    (c) The
      following are all other locations in the United States of America where any
      of
      the Collateral consisting of inventory or equipment is located:

    


    
      	
               

              Address

            	 	
               

              County

            	 	
               

              State

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 


    

    


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (d) The
      following are the names and addresses of all persons or entities other than
      the
      Company, such as lessees, consignees, warehousemen or purchasers of chattel
      paper, which have possession or are intended to have possession of any of the
      Collateral consisting of chattel paper, inventory or equipment:

    


    
      	
               

              Name

            	 	
               

              Mailing
                Address

            	 	
               

              County

            	 	
               

              State

            
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 


    

     

    5.  Prior
      Locations.  (a) Set
      forth
      below is the information required by §3 and by subparagraphs (a) and (b) of §4
      with respect to each location or place of business previously maintained by
      the
      Company at any time during the past five years in a state in which the Company
      has previously maintained a location or place of business at any time during
      the
      past four months:

    


    
      	
               

              Address

            	 	
               

              County

            	 	
               

              State

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 


    

     

    (b) Set
      forth
      below is the information required by subparagraphs (c) and (d) of §4 with
      respect to each other location at which, or other person or entity with which,
      any of the Collateral consisting of inventory or equipment has been previously
      held at any time during the past twelve months:

    


    
      	
               

              Name

            	 	
               

              Address

            	 	
               

              County

            	 	
               

              State

            
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 


    

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    6.  Fixtures.  Attached
      hereto as Schedule
      6
      is the
      information required by UCC §9-402(5) or by Rev. UCC §9-502(b) of each state in
      which any of the Collateral consisting of fixtures are or are to be located
      and
      the name and address of each real estate recording office where a mortgage
      on
      the real estate on which such fixtures are or are to be located would be
      recorded.

     

    7.  Intellectual
      Property.  Attached
      hereto as Schedule
      7
      is a
      complete list of all United States and foreign patents, copyrights, trademarks,
      trade names and service marks registered or for which applications are pending
      in the name of the Company.

     

    8.  Securities;
      Instruments.  Attached
      hereto as Schedule
      8
      is a
      complete list of all stocks, bonds, debentures, notes and other securities
      and
      investment property owned by the Company (provide
      name of issuer, a description of security and value):

     

    9.  Motor
      Vehicles.  The
      following is a complete list of all motor vehicles owned by the Company
(describe
      each vehicle by make, model and year and indicate for each the state in which
      registered and the state in which based):

    


    
      	
               

              Vehicle

            	 	
               

              State
                of Registration

            	 	
               

              State
                in Which Based

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 


    

     

    10. Other
      Titled Collateral.  The
      following is a complete list of aircraft and boats and all other inventory,
      equipment and other goods of the Company which are subject to any certificate
      of
      title or other registration statute of the United States, any state or any
      other
      jurisdiction (provide
      description of covered goods and indicate registration system and
      jurisdiction):

    


    

      
        	
                Goods

              	 	
                Registration
                  System

              	 	
                Jurisdiction

              
	 	 	 	 	 


      

    

    


     

    11. Bank
      Accounts.  The
      following is a complete list of all bank accounts (including securities and
      commodities accounts) maintained by the Company (provide
      name and address of depository bank, type of account and account
      number):

    

      
        	
                Depository
                  Bank

              	 	
                Bank
                  Address

              	 	
                Type
                  of Account

              	 	
                Acct.
                  No.

              
	 	 	 	 	 	 	 


      

    

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    12. Unusual
      Transactions.  Except
      for those purchases, acquisitions and other transactions described on
Schedule
      2
      or on
Schedule
      12
      attached
      hereto, all of the Collateral has been originated by the Company in the ordinary
      course of the Company’s business or consists of goods which have been acquired
      by the Company in the ordinary course from a person in the business of selling
      goods of that kind.

     

     

    13. Termination
      Statements.  An
      authorized termination statement on Form UCC-3 in form acceptable to Purchasers
      has been duly filed in each applicable jurisdiction identified in §§2, 3, 4 and
      5 or on Schedule
      2
      and
Schedule
      12
      hereto
[or,
      in the case of Schedule
      2
      or
Schedule
      12
      a
      release acceptable to Purchasers from the person from which the Company
      purchased or otherwise acquired the Collateral identified on such schedule]
      and
      has
      been delivered to Purchasers. Attached hereto as Schedule 13
      is a
      true copy of each such filing duly acknowledged by the filing
      officer[
      and
      of each such release].

     

    14. Schedule
      of Filing.  Attached
      hereto as Schedule 14
      is a
      schedule setting forth filing information with respect to the filings described
      in §13 above.

     

    15. Filing
      Fees.  All
      filing fees and taxes payable in connection with the filings described in §13
      have been paid.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, we have hereunto signed this Certificate on
      __________.

     

    
      	 
	
              Title:

            
	 
	 
	
              Title:

            


    

    


    
      [Signature
        Page to Perfection Certificate]