OPTEX
SYSTEMS, INC.

    


    PENINSULA
BANK BUSINESS FUNDING,

    A
DIVISION OF THE PRIVATE BANK OF THE PENINSULA

    


    LOAN
AND SECURITY AGREEMENT



    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    This
Loan
And Security Agreement is entered into as of March 4, 2010, by and
between Peninsula
Bank Business Funding, a division of The Private Bank of the Peninsula
(“Bank”) and OPTEX
SYSTEMS, INC. a Delaware corporation (“Borrower”).

     

    Recitals

     

    Borrower
wishes to obtain credit from time to time from Bank, and Bank desires to extend
credit to Borrower.  This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.

     

    Agreement

     

    The
parties agree as follows:

     

    1.           Definitions
and Construction.

     

    1.1           Definitions.  As
used in this Agreement, the following terms shall have the following
definitions:

     

    “Accounts”
means all presently existing and hereafter arising accounts, contract rights,
payment intangibles, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower’s Books relating to any of the
foregoing.

     

    “Advance”
or “Advances” means a cash advance or cash advances under the Revolving
Facility.

     

    “Affiliate”
means, with respect to any Person, any Person that owns or controls directly or
indirectly such Person, any Person that controls or is controlled by or is under
common control with such Person, and each of such Person’s senior executive
officers, directors, and/or partners.

     

    “Bank
Expenses” means all:  reasonable costs or expenses (including
reasonable attorneys’ fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
reasonable Collateral audit fees; and Bank’s reasonable attorneys’ fees and
expenses incurred in amending, enforcing (excluding fees and expenses incurred
by Bank if it is not the prevailing party in any litigation), or defending the
Loan Documents (including fees and expenses of appeal), incurred before, during
and after an Insolvency Proceeding, whether or not suit is brought.

     

    “Borrower’s
Books” means all of Borrower’s books and records including:  ledgers;
records concerning Borrower’s assets or liabilities, the Collateral, business
operations or financial condition; and all computer programs, or tape files, and
the equipment, containing such information.

     

    “Borrowing
Base” means an amount equal to the sum of the following, in each case as
determined by Bank with reference to the most recent client summary using Bank’s
Factor SQL system: (i) eighty percent (80%) of Eligible Accounts and Eligible
Foreign Accounts, plus (ii) seventy percent (70%) of Eligible Canadian Accounts,
plus (iii) an amount equal to the lesser of (x) sixty percent (60%) of the
Eligible TACOM Accounts, or (y) Three Hundred Fifty Thousand Dollars
($350,000).  For purposes of calculating the Borrowing Base under
clause (iii) of the preceding definition (i.e., regarding Eligible TACOM
Accounts), it shall not be a requirement that the payment rights with respect to
such Accounts have been assigned to Bank under the Assignment of Claims Act of
1940 (31 U.S.C. Section 3727).

     

    “Business
Day” means any day that is not a Saturday, Sunday, or other day on which banks
in the State of California are authorized or required to close.


    
      
         


      

      
        1.

        
          

        

      

      
         


      

    

     

    “Change
in Control” shall mean a transaction in which any “person” or “group” (within
the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.

     

    “Closing
Date” means the date of this Agreement.

     

    “Code”
means the California Uniform Commercial Code.

     

    “Collateral”
means the property described on Exhibit A attached
hereto.

     

    “Contingent
Obligation” means, as applied to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another;
(ii) any obligations with respect to undrawn letters of credit, corporate
credit cards, or merchant services issued or provided for the account of that
Person; and (iii) all obligations arising under any agreement or
arrangement designed to protect such Person against fluctuation in interest
rates, currency exchange rates or commodity prices; provided, however, that the
term “Contingent Obligation” shall not include endorsements for collection or
deposit in the ordinary course of business.  The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by Bank in good faith;
provided, however, that such amount shall not in any event exceed the maximum
amount of the obligations under the guarantee or other support
arrangement.

     

    “Copyrights”
means any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof.

     

    “Credit
Extension” means each Advance or any other extension of credit by Bank for the
benefit of Borrower hereunder.

     

    “Current
Assets” means, as of any applicable date, all amounts that should, in accordance
with GAAP, be included as current assets on the consolidated balance sheet of
Borrower and its Subsidiaries as at such date.

     

    “Current
Liabilities” means, as of any applicable date, all amounts that should, in
accordance with GAAP, be included as current liabilities on the consolidated
balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the
extent not already included therein, all outstanding Credit Extensions made
under this Agreement.

     

    “Daily
Balance” means the amount of the Obligations owed at the end of a given
day.

     

    “EBITDA”
means, for a given period, all earnings of the Borrower before all (a) interest
and tax obligations, (b) depreciation and (c) amortization for such period, all
determined in accordance with GAAP on a consistent basis with the latest
financial statements of the Holding Company and its consolidated Subsidiaries,
but excluding the effect of extraordinary and/or non-reoccurring gains or losses
for such period.

     

    “Eligible
Accounts” means those Accounts that arise in the ordinary course of Borrower’s
business that are not subject to any offset by the account debtor and comply
with all of Borrower’s representations and warranties to Bank set forth in
Section 5.4; provided, that standards of eligibility may be fixed and
revised from time to time by Bank in Bank’s reasonable judgment and upon
notification thereof to Borrower in accordance with the provisions
hereof.  Unless otherwise agreed to by Bank, Eligible Accounts shall
not include the following:

     

    (a)           Accounts
that the account debtor has failed to pay within ninety (90) days of invoice
date;


    
      
         


      

      
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    (b)           Accounts
with respect to an account debtor, twenty-five percent (25%) of whose Accounts
the account debtor has failed to pay within ninety (90) days of invoice
date;

     

    (c)           [Intentionally
omitted];

     

    (d)           Accounts
with respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, bill and hold, or other terms by reason of which the
payment by the account debtor may be conditional;

     

    (e)           Accounts
with respect to which the account debtor is an Affiliate of Borrower or an
officer, employee, or agent of Borrower;

     

    (f)           Accounts
with respect to which the account debtor does not have its principal place of
business in the United States, except for Eligible Canadian Accounts and
Eligible Foreign Accounts;

     

    (g)           Accounts
with respect to which the account debtor is the United States or any department,
agency, or instrumentality of the United States, except for Accounts of the
United States if the payee has assigned its payment rights to Bank, the
assignment has been acknowledged under the Assignment of Claims Act of 1940 (31
U.S.C. Section 3727), and such assignment otherwise complies with the Assignment
of Claims Act to Bank’s reasonable satisfaction in the exercise of its
reasonable credit judgment;

     

    (h)           Accounts
with respect to which (i) Borrower has invoiced the account debtor for goods
and/or services that have not been rendered or delivered to the account debtor,
or (ii) Borrower is liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower or for deposits or other property of
the account debtor held by Borrower, but only to the extent of any amounts owing
to the account debtor against amounts owed to Borrower;

     

    (i)           Accounts
with respect to any account debtor (other than General Dynamics Land Systems),
including Subsidiaries and Affiliates of the account debtor, (x) whose total
obligations to Borrower exceed thirty percent (30%) of all Accounts, and (y)
Accounts with respect to General Dynamics Land Systems (including Subsidiaries
and Affiliates of General Dynamics Land Systems), whose total obligations to
Borrower exceed the lesser of (i) fifty percent (50%) of all Accounts or (ii)
the aggregate sum of One Million Dollars ($1,000,000), in each case to the
extent the obligations referred to in the immediately preceding clauses (x) and
(y) exceed the aforementioned percentages or dollar amounts, as the case may be,
except as approved in writing by Bank;

     

    (j)           Accounts
with respect to which the account debtor disputes liability or makes any claim
with respect thereto as to which Bank believes, in its reasonable credit
judgment, that there may be a basis for dispute (but only to the extent of the
amount subject to such dispute or claim), or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business; and

     

    (k)           Accounts
the collection of which Bank determines its reasonable credit judgment are
likely to be uncollectible in whole or in part.

     

     “Eligible
Canadian Accounts” means Accounts that satisfy the requirements of the
definition of Eligible Accounts but with respect to which the account debtor has
its principal place of business in Canada.

     

    “Eligible
Foreign Accounts” means Accounts that satisfy the requirements of the definition
of Eligible Accounts but with respect to which the account debtor does not have
its principal place of business in the United States or Canada but that
(i) are supported by a credit insurance policy naming Bank as an additional
insured (including the declarations page, policy form, and all endorsements)
issued by a carrier acceptable to Bank and having account debtor limits,
deductibles, and other terms and conditions as may be satisfactory to Bank in
its sole and absolute discretion or (ii)  Bank approves in writing on a
case-by-case basis.

     

    “Eligible
TACOM Accounts” means Accounts with respect to which Tank-Automotive and
Armaments Command is the account debtor and that satisfy all the conditions and
requirements of the definition of  “Eligible Accounts” set forth in
this Agreement other than the conditions and requirements set forth in paragraph
(g) of that definition.


    
      
         


      

      
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     “Equipment”
means all present and future machinery, equipment, tenant improvements,
furniture, fixtures, vehicles, tools, parts and attachments in which Borrower
has any interest.

     

     “ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations thereunder.

     

    “Event of
Default” has the meaning assigned in Article 8.

     

    “GAAP”
means generally accepted accounting principles as in effect from time to
time.

     

    “Holding
Company” means Optex Systems Holdings, Inc., a Delaware
corporation.

     

    “Indebtedness”
means (a) all indebtedness for borrowed money or the deferred purchase
price of property or services, including without limitation reimbursement and
other obligations with respect to surety bonds and letters of credit,
(b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

     

    “Insolvency
Proceeding” means any proceeding commenced by or against any person or entity
under any provision of the United States Bankruptcy Code, as amended, or under
any other bankruptcy or insolvency law, including assignments for the benefit of
creditors, formal or informal moratoria, compositions, extension generally with
its creditors, or proceedings seeking reorganization, arrangement, or other
relief.

     

    “Intellectual Property Collateral”
means all of Borrower’s right, title, and interest in and to the following:
Copyrights, Trademarks and Patents; all trade secrets, all design rights, claims
for damages by way of past, present and future infringement of any of the rights
included above, all licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights; all amendments, renewals and
extensions of any of the Copyrights, Trademarks or Patents; and all proceeds and
products of the foregoing, including without limitation all payments under
insurance or any indemnity or warranty payable in respect of any of the
foregoing.

     

    “Inventory”
means all inventory in which Borrower has or acquires any interest, including
work in process and finished products intended for sale or lease or to be
furnished under a contract of service, of every kind and description now or at
any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of its
custody or possession or in transit and including any returns upon any accounts
or other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing any
of the above, and Borrower’s Books relating to any of the
foregoing.

     

    “Investment”
means any beneficial ownership of (including stock, partnership interest or
other securities) any Person, or any loan, advance or capital contribution to
any Person.

     

    “IRC”
means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.

     

    “Lien”
means any mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.

     

    “Loan
Documents” means, collectively, this Agreement, any note or notes executed by
Borrower, and any other agreement entered into in connection with this
Agreement, all as amended or extended from time to time.

     

    “Material
Adverse Effect” means a material adverse effect on (i) the business
operations, condition (financial or otherwise) or prospects of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents or
(iii) the value or priority of Bank’s security interests in the
Collateral.


    
      
         


      

      
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     “Material
Contract” shall mean (a) any contract or other agreement written or oral, of
Borrower involving monetary liability of or to any Person in an amount in excess
of $50,000 in any fiscal year and (b) any other contract or other agreement,
whether written or oral, to which any Borrower is a party as to which the
breach, nonperformance, cancellation or failure to renew by any party thereto
would have a material adverse effect on the business, assets, condition
(financial or otherwise) or results of operations or prospects of Borrower or
the validity or enforceability of this Agreement, or any of the rights and
remedies of Bank under this Agreement.

     

    “Negotiable
Collateral” means all letters of credit of which Borrower is a beneficiary,
notes, drafts, instruments, securities, documents of title, and chattel paper,
and Borrower’s Books relating to any of the foregoing.

     

    “Obligations”
means all debt, principal, interest, Bank Expenses and other amounts owed to
Bank by Borrower pursuant to this Agreement or any other agreement, whether
absolute or contingent, due or to become due, now existing or hereafter arising,
including any interest that accrues after the commencement of an Insolvency
Proceeding and including any debt, liability, or obligation owing from Borrower
to others that Bank may have obtained by assignment or otherwise.

     

    “Patents”
means all patents, patent applications and like protections including without
limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

     

    “Periodic
Payments” means all installments or similar recurring payments that Borrower may
now or hereafter become obligated to pay to Bank pursuant to the terms and
provisions of any instrument, or agreement now or hereafter in existence between
Borrower and Bank.

     

    “Permitted
Indebtedness” means:

     

    (a)           Indebtedness
of Borrower in favor of Bank arising under this Agreement or any other Loan
Document;

     

    (b)           Indebtedness
existing on the Closing Date and disclosed in the Schedule;

     

    (c)           Indebtedness
secured by a lien described in clause (c) of the defined term “Permitted
Liens,” provided (i) such Indebtedness does not exceed the lesser of the
cost or fair market value of the equipment financed with such Indebtedness and
(ii) such Indebtedness does not exceed Five Hundred Thousand Dollars
($500,000) in the aggregate at any given time;

     

    (d)           Subordinated
Debt; and

     

    (e)           Indebtedness
to trade creditors in the ordinary course of business in connection with
obtaining goods and services.

     

    “Permitted
Investment” means:

     

    (a)           Investments
existing on the Closing Date disclosed in the Schedule; and

     

    (b)           (i) marketable
direct obligations issued or unconditionally guaranteed by the United States of
America or any agency or any State thereof maturing within one (1) year from the
date of acquisition thereof, (ii) commercial paper maturing no more than
one (1) year from the date of creation thereof and currently having rating of at
least A-2 or P-2 from either Standard & Poor’s Corporation or
Moody’s Investors Service, (iii) certificates of deposit maturing no more
than one (1) year from the date of investment therein issued by Bank and
(iv) Bank’s money market accounts.

     

     “Permitted
Liens” means the following:

     

    (a)           Any
Liens existing on the Closing Date and disclosed in the Schedule or arising
under this Agreement or the other Loan Documents;


    
      
         


      

      
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    (b)           Liens
for taxes, fees, assessments or other governmental charges or levies, either not
delinquent or being contested in good faith by appropriate proceedings, provided
the same have no priority over any of Bank’s security interests;

     

    (c)           Liens
(i) upon or in any equipment which was not financed by Bank acquired or
held by Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment;

     

    (d)           Liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (a) through (c)
above, provided that any extension, renewal or replacement Lien shall be limited
to the property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase;
and

     

    (e)           Liens
in favor of Borrower’s account debtors respecting specific items of equipment
that have been ordered by such account debtors and whose contracts with Borrower
expressly permit Borrower to obtain progress payments for such items prior to
the final delivery of such items to the account debtor, but only to the extent
(i) such items of equipment are specifically described in the portion of the
Schedule captioned “Permitted Customer Liens,” (ii) such Liens are limited to
the account debtors and in the amounts specified in such definition, and (iii)
Borrower is not in breach or default of Borrower’s obligations to such account
debtors.

     

    “Person”
means any individual, sole proprietorship, partnership, limited liability
company, joint venture, trust, unincorporated organization, association,
corporation, institution, public benefit corporation, firm, joint stock company,
estate, entity or governmental agency.

     

    “Prime
Rate” means the variable rate of interest, per annum, that appears in The Wall Street
Journal from time to time, whether or not such announced rate is the
lowest rate available from Bank.

     

     “Responsible
Officer” means each of the Chief Executive Officer, the Chief Operating Officer,
the Chief Financial Officer and the Controller of Borrower.

     

    “Revolving
Facility” means the facility under which Borrower may request Bank to issue
Advances, as specified in Section 2.1(a) hereof.

     

    “Revolving
Line” means a credit extension of up to Two Million Dollars
($2,000,000).

     

     “Revolving
Maturity Date” means March 4, 2011.

     

    “Schedule”
means the schedule of exceptions attached hereto and approved by Bank, if
any.

     

    “Subordinated
Debt” means any debt incurred by Borrower that is subordinated to the debt owing
by Borrower to Bank on terms acceptable to Bank (and identified as being such by
Borrower and Bank).

     

    “Subsidiary”
means any corporation, company or partnership in which (i) any general
partnership interest or (ii) more than 50% of the stock or other units of
ownership which by the terms thereof has the ordinary voting power to elect the
Board of Directors, managers or trustees of the entity, at the time as of which
any determination is being made, is owned by Borrower, either directly or
through an Affiliate.

     

     “Trademarks”
means any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Borrower connected with and symbolized by
such trademarks.

     

    1.2           Accounting
Terms.  All accounting terms not specifically defined herein
shall be construed in accordance with GAAP and all calculations made hereunder
shall be made in accordance with GAAP.  When used herein, the terms
“financial statements” shall include the notes and schedules
thereto.


    
      
         


      

      
        6.

        
          

        

      

      
         


      

    

     

    2.           Loan and
Terms Of Payment.

     

    2.1          Credit
Extensions.

     

    Borrower
promises to pay to the order of Bank, in lawful money of the United States of
America, the aggregate unpaid principal amount of all Credit Extensions made by
Bank to Borrower hereunder.  Borrower shall also pay interest on the
unpaid principal amount of such Credit Extensions at rates in accordance with
the terms hereof.

     

    (a)          Revolving
Advances.

     

    (i)           Subject
to and upon the terms and conditions of this Agreement, Borrower may request
Advances in an aggregate outstanding amount not to exceed the lesser of
(i) the Revolving Line or (ii) the Borrowing Base.  Subject
to the terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1(a) may be repaid and re-borrowed at any time prior to the
Revolving Maturity Date, at which time all Advances under this
Section 2.1(a) shall be immediately due and payable.  Borrower
may prepay any Advances without penalty or premium.

     

    (ii)           Whenever
Borrower desires an Advance, Borrower will notify Bank by facsimile transmission
or telephone no later than 11:00 a.m. Pacific time, on the Business Day that is
one (1) day before the Advance is to be made.  Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of Exhibit B
hereto.  Borrower will deliver copies of invoices in connection with
any Advance request and all supporting documents, plus transaction files for all
invoices and payment application in an electronic format acceptable to Bank for
processing.  Documents received by 11:00 a.m. California time on
accounts acceptable to Bank will be processed on the same Business
Day.  Documents received after then will be processed on the next
Business Day.  Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer or a
designee of a Responsible Officer, or without instructions if in Bank’s
discretion such Advances are necessary to meet Obligations which have become due
and remain unpaid.  Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrower shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such
reliance.  Bank will credit the amount of Advances made under this
Section  to Borrower’s deposit account.

     

    2.2          Overadvances.  If
the aggregate amount of the outstanding Advances exceeds the lesser of the
Revolving Line or the Borrowing Base at any time, Borrower shall immediately pay
to Bank, in cash, the amount of such excess.

     

    2.3          Interest Rates, Payments, and
Calculations.

     

    (a)          Interest
Rates.

     

    (i)           Advances.  Except as
set forth in Section 2.3(b), and subject to Section 2.3(a)(ii) below, the
Advances shall bear interest, on the outstanding Daily Balance thereof, at a
rate equal to three and one-half percent (3.5%) above the Prime Rate (the
“Advance Rate”).  In no event, however, shall the Advance Rate be less
than eight and one-half percent (8.5%) per annum, irrespective of the Prime
Rate.

     

    (ii)           Minimum
Interest.  Irrespective of the amount of Advances outstanding
from time to time, Borrower shall pay Bank a minimum interest payment of not
less than Sixteen Thousand Dollars ($16,000) per quarter (the “Minimum Interest
Payment”).  Any payments of interest actually made by Borrower during
each calendar quarter shall be credited to the Minimum Interest Payment required
to be paid for such quarter.

     

    
      
         


      

      
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    (b)           Late Fee; Default
Rate.  If any payment is not made within ten (10) Business Days
after the date such payment is due, Borrower shall pay Bank a late fee equal to
the lesser of (i) five percent (5%) of the amount of such unpaid amount or
(ii) the maximum amount permitted to be charged under applicable
law.  All Obligations shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal to
five (5) percentage points above the interest rate applicable immediately prior
to the occurrence of the Event of Default.

     

    (c)           Payments.  Interest
hereunder shall be due and payable on the last Business Day of each month during
the term hereof.  Minimum Interest Payments shall be due and payable
on the last Business Day of each quarter during the term hereof.  Bank
shall, at its option, charge such interest, all Minimum Interest Payments, all
Bank Expenses, and all Periodic Payments against any of Borrower’s deposit
accounts or against the Revolving Line, in which case those amounts shall
thereafter accrue interest at the rate then applicable hereunder.  Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.  All payments shall be free and clear of any
taxes, withholdings, duties, impositions or other charges, to the end that Bank
will receive the entire amount of any Obligations payable hereunder, regardless
of source of payment.

     

    (d)           Lockbox.    Immediately
after the Closing, Borrower shall require all account debtors (by, among other
things, instructing the account debtors) to wire any amounts owing to Borrower
to such account (the “Collateral Account”) as Bank shall specify, and to mail
all payments made by check to a post office box under Bank ’s
control.  All invoices shall specify such post office box as the
payment address.  Bank shall have sole authority to collect such
payments and deposit them to the Collateral Account.  If Borrower
receives any amount despite such instructions, Borrower shall immediately
deliver such payment to Bank in the form received, except for an endorsement to
the order of Bank and, pending such delivery, shall hold such payment in trust
for Bank.  One (1) Business Day after clearance of any checks, Bank
shall credit all amounts paid into the Collateral Account first, against any
amounts outstanding under the Revolving Line, and then, of any remaining balance
of such amount, to Borrower’s operating account.  Borrower shall enter
into such lockbox agreement as Bank shall reasonably request from time to
time.  Bank will provide reports of invoice entry and payment to
Borrower on each Business Day, and will from time to time deliver a detailed
aging of open invoices upon Borrower’s request.

     

    (e)           Computation.  In the
event the Prime Rate is changed from time to time hereafter, the applicable rate
of interest hereunder shall be increased or decreased, effective as of the day
the Prime Rate is changed, by an amount equal to such change in the Prime
Rate.  All interest chargeable under the Loan Documents shall be
computed on the basis of a three hundred sixty (360) day year.

     

    2.4          Crediting
Payments.  Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as Borrower specifies.  After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment.  Notwithstanding anything to the contrary contained herein,
any wire transfer or payment received by Bank after 12:00 noon Pacific time
shall be deemed to have been received by Bank as of the opening of business on
the immediately following Business Day.  Whenever any payment to Bank
under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such
extension.

     

    2.5          Fees.

     

    (a)           Facility Fee.  On
the Closing Date, Borrower shall pay to Bank a Facility Fee equal to Twenty
Thousand Dollars ($20,000) which shall be nonrefundable.  Bank
acknowledges receipt of an application fee of Five Thousand Dollars ($5,000),
which is fully earned and non-refundable and which shall not be credited to the
Facility Fee.

     

    (b)           Bank Expenses.  On
the Closing Date, Borrower shall pay to Bank all Bank Expenses incurred through
the Closing Date, including reasonable attorneys’ fees and expenses and, after
the Closing Date, Borrower shall pay to Bank all Bank Expenses, including
reasonable attorneys’ fees and expenses, as and when they are incurred by
Bank.


    
      
         


      

      
        8.

        
          

        

      

      
         


      

    

     

    2.6          Term.  This
Agreement shall become effective on the Closing Date and, subject to
Section 12.7, shall continue in full force and effect for so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions under this Agreement.  Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default.  Notwithstanding termination,
Bank’s Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.

     

    3.           Conditions
of Loans.

     

    3.1          Conditions Precedent to Initial
Credit Extension.  The obligation of Bank to make the initial
Credit Extension is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, the
following:

     

    (a)           this
Agreement;

     

    (b)           a
certificate of the Secretary of Borrower with respect to incumbency and
resolutions authorizing the execution and delivery of this
Agreement;

     

    (c)           UCC
National Form Financing Statement;

     

    (d)           an
intellectual property security agreement;

     

    (e)           one
or more warrants executed by the Holding Company granting Bank the right to
purchase stock pursuant to the terms and conditions set forth in such
warrant(s);

     

    (f)           a
certificate of insurance naming Bank as loss payee and additional
insured;

     

    (g)           payment
of the fees and Bank Expenses then due specified in Section 2.5
hereof;

     

    (h)          current
financial statements of Borrower;

     

    (i)           an
audit of the Collateral, the results of which shall be satisfactory to
Bank;

     

    (j)           copies
of all contracts between Borrower and Borrower’s account debtors;

     

    (k)          an
Unconditional Guaranty in form and substance acceptable to Bank executed and
delivered by the Holding Company;

     

    (l)           a
certificate of the Secretary of the Holding Company with respect to incumbency
and resolutions authorizing the execution and delivery of the Unconditional
Guaranty referred to in the subsection immediately above; and

     

    (m)         such
other documents, and completion of such other matters, as Bank may reasonably
deem necessary or appropriate.

     

    3.2          Conditions Precedent to all Credit
Extensions.  The obligation of Bank to make each Credit
Extension, including the initial Credit Extension, is further subject to the
following conditions:

     

    (a)    
      timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and


    
      
         


      

      
        9.

        
          

        

      

      
         


      

    


    (b)           the
representations and warranties contained in Section 5 shall be true and correct in all material respects
on and as of the date of such Payment/Advance Form and on the effective date of
each Credit Extension as though made at and as of each such date, and no Event
of Default shall have occurred and be continuing, or would exist after giving
effect to such Credit Extension.  The making of each Credit Extension
shall be deemed to be a representation and warranty by Borrower on the date of
such Credit Extension as to the accuracy of the facts referred to in this
Section 3.2.

     

    4.           Creation of
Security Interest.

     

    4.1           Grant of Security
Interest.  Borrower grants and pledges to Bank a continuing
security interest in all presently existing and hereafter acquired or arising
Collateral in order to secure prompt repayment of any and all Obligations and in
order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Documents.  Except as set forth in the Schedule,
such security interest constitutes a valid, first priority security interest in
the presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof.

     

    4.2           Delivery of Additional Documentation
Required.  Borrower shall from time to time execute and deliver
to Bank, at the request of Bank, all Negotiable Collateral, all financing
statements and other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and continue the perfection of Bank’s security
interests in the Collateral and in order to fully consummate all of the
transactions contemplated under the Loan Documents.  Borrower from
time to time may deposit with Bank specific time deposit accounts to secure
specific Obligations. Borrower authorizes Bank to hold such balances in pledge
and to decline to honor any drafts thereon or any request by Borrower or any
other Person to pay or otherwise transfer any part of such balances for so long
as the Obligations are outstanding.

     

    4.3           Right to
Inspect.  Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower’s usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing), to inspect Borrower’s Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower’s financial condition or the amount, condition of, or
any other matter relating to, the Collateral.

     

    5.           Representations
and Warranties.

     

    Borrower
represents and warrants as follows:

     

    5.1           Due Organization and
Qualification.  Borrower and each Subsidiary is a corporation
duly existing under the laws of its state of incorporation and qualified and
licensed to do business in any state in which the conduct of its business or its
ownership of property requires that it be so qualified.

     

    5.2           Due Authorization; No
Conflict.  The execution, delivery, and performance of the Loan
Documents are within Borrower’s powers, have been duly authorized, and are not
in conflict with nor constitute a breach of any provision contained in
Borrower’s Articles of Incorporation or Bylaws, nor will they constitute an
event of default under any Material Contract to which Borrower is a party or by
which Borrower is bound.  Borrower is not in default under any
Material Contract to which it is a party or by which it is bound.

     

    5.3           No Prior
Encumbrances.  Borrower has good and marketable title to its
property, free and clear of Liens, except for Permitted Liens.

     

    5.4           Bona Fide Eligible
Accounts.  The Eligible Accounts are bona fide existing
obligations.  The property and services giving rise to such Eligible
Accounts has been delivered or rendered to the account debtor or to the account
debtor’s agent for immediate and unconditional acceptance by the account
debtor.  Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor that is included in Bank’s Factor
SQL system (or in any Borrowing Base Certificate delivered by Borrower to Bank)
as an Eligible Account.

     

    5.5           Merchantable
Inventory.  All Inventory is in all material respects of good
and marketable quality, free from all material defects, except for Inventory for
which adequate reserves have been made and/or obsolete
Inventory.


    
      
         


      

      
        10.

        
          

        

      

      
         


      

    

     

    5.6           Intellectual Property
Collateral.  Borrower is the sole owner of the Intellectual
Property Collateral, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business.  Borrower owns or
licenses or otherwise has the right to use all Patents, Trademarks and
Copyrights necessary for the operation of its business as presently
conducted.   As of the date hereof, Borrower has no Intellectual
Property Collateral registered, or subject to pending applications, in the
United States Patent and Trademark Office, the United States Copyright Office,
or any similar office or agency in the United States, any State thereof, any
political subdivision thereof or in any other country.  Each of the
Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party.  Except as set forth in the
Schedule, Borrower’s rights as a licensee of intellectual property do not give
rise to more than five percent (5%) of its gross revenue in any given month,
including without limitation revenue derived from the sale, licensing, rendering
or disposition of any product or service.  Except as set forth in the
Schedule, Borrower is not a party to, or bound by, any agreement that restricts
the grant by Borrower of a security interest in Borrower’s rights under such
agreement.

     

    5.7           Name; Location of Chief Executive
Office.  Except as disclosed in the Schedule, Borrower has not
done business under any name other than that specified on the signature page
hereof.  The chief executive office of Borrower is located at the
address indicated in Section 10 hereof.  All Borrower’s Inventory
and Equipment is located only at the location set forth in Section 10
hereof.

     

    5.8           Litigation.  Except
as set forth in the Schedule, there are no actions or proceedings pending by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect, or a material
adverse effect on Borrower’s interest or Bank’s security interest in the
Collateral.

     

    5.9           No Material Adverse Change in
Financial Statements.  All consolidated and consolidating
financial statements related to Borrower and any Subsidiary that Bank has
received from Borrower fairly present in all material respects Borrower’s
financial condition as of the date thereof and Borrower’s consolidated and
consolidating results of operations for the period then ended.  There
has not been a material adverse change in the consolidated or the consolidating
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank.

     

    5.10        Solvency, Payment of
Debts.  Borrower is solvent and able to pay its debts
(including trade debts) as they mature.

     

    5.11        Regulatory
Compliance.  Borrower and each Subsidiary have met the minimum
funding requirements of ERISA with respect to any employee benefit plans subject
to ERISA, and no event has occurred resulting from Borrower’s failure to comply
with ERISA that could result in Borrower’s incurring any material
liability.  Borrower is not an “investment company” or a company
“controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940.  Borrower is not engaged principally, or as one
of the important activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulations T
and U of the Board of Governors of the Federal Reserve
System).  Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act.  Borrower has not violated any statutes,
laws, ordinances or rules applicable to it, violation of which could have a
Material Adverse Effect.

     

    5.12        Environmental
Condition.  Except as disclosed in the Schedule, none of
Borrower’s or any Subsidiary’s properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower’s knowledge, none of
Borrower’s properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.


    
      
         


      

      
        11.

        
          

        

      

      
         


      

    

     

    5.13        Taxes.  Borrower and
each Subsidiary have filed or caused to be filed all tax returns required to be
filed, and have paid, or have made adequate provision for the payment of, all
taxes reflected therein.

     

    5.14        Subsidiaries.  Borrower
does not own any stock, partnership interest or other equity securities of any
Person, except for Permitted Investments.

     

    5.15        Government
Consents.  Borrower and each Subsidiary have obtained all
material consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower’s business as currently
conducted.

     

    5.16        Accounts.  None of
Borrower’s nor any Subsidiary’s property is maintained or invested with a Person
other than Bank.

     

    5.17        Full Disclosure.  No
representation, warranty or other statement made by Borrower in any certificate
or written statement furnished to Bank contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained in such certificates or statements not
misleading.

     

    6.           Affirmative
Covenants.

     

    Borrower
shall do all of the following:

     

    6.1          Good
Standing.  Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which it is
required under applicable law.  Borrower shall maintain, and shall
cause each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.

     

    6.2          Government
Compliance.  Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA.  Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.


    
      
         


      

      
        12.

        
          

        

      

      
         


      

    

     

    6.3          Financial Statements, Reports,
Certificates.  Borrower shall deliver the following to
Bank:  (a) as soon as available, but in any event within
forty-five (45) days after the end of each of Borrower’s fiscal quarters, a
consolidated balance sheet, income, and cash flow statement as contained in the
Holding Company’s 10-Q report filed with the Securities and Exchange Commission
covering Borrower’s and the Holding Company’s consolidated operations during
such period, prepared in accordance with GAAP, consistently applied, in a form
acceptable to Bank and certified by a Responsible Officer; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower’s
fiscal year, audited consolidated financial statements of Borrower and the
Holding Company prepared in accordance with GAAP, consistently applied, together
with an unqualified opinion on such financial statements of an independent
certified public accounting firm reasonably acceptable to Bank; (c) copies of
all statements, reports and notices sent or made available generally by Borrower
or the Holding Company to its security holders or to any holders of Subordinated
Debt and, if applicable, all reports on Forms 10-K and 10-Q filed with the
Securities and Exchange Commission; (d) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower,
the Holding Company or any Subsidiary that could result in damages or costs to
Borrower, the Holding Company, or any Subsidiary of One Hundred Thousand Dollars
($100,000) or more; and (e) such budgets, sales projections, operating
plans, other financial information including information related to the
verification of Borrower’s Accounts as Bank may reasonably request from time to
time.

     

    Promptly
upon request by Bank, Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto or in
such other form required by Bank, together with aged listings of accounts
receivable and accounts payable.

     

    Borrower
shall deliver to Bank with the quarterly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of Exhibit D
hereto.

     

    Bank
shall have a right from time to time hereafter to audit Borrower’s Accounts and
appraise Collateral at Borrower’s expense, provided that such audits will be
conducted no more often than every six (6) months unless an Event of Default has
occurred and is continuing.

     

    6.4          Inventory;
Returns.  Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made.  Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement.  Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than One
Hundred Thousand Dollars ($100,000).

     

    6.5          Taxes.  Borrower
shall make, and shall cause each Subsidiary to make, due and timely payment or
deposit of all material federal, state, and local taxes, assessments, or
contributions required of it by law, and will execute and deliver to Bank, on
demand, appropriate certificates attesting to the payment or deposit thereof;
and Borrower will make, and will cause each Subsidiary to make, timely payment
or deposit of all material tax payments and withholding taxes required of it by
applicable laws, including, but not limited to, those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Bank with proof satisfactory to Bank indicating that
Borrower or a Subsidiary has made such payments or deposits; provided that
Borrower or a Subsidiary need not make any payment if the amount or validity of
such payment is contested in good faith by appropriate proceedings and is
reserved against (to the extent required by GAAP) by Borrower.

     

    6.6          Insurance.

     

    (a)           Borrower,
at its expense, shall keep the Collateral insured against loss or damage by
fire, theft, explosion, sprinklers, and all other hazards and risks, and in such
amounts, as ordinarily insured against by other owners in similar businesses
conducted in the locations where Borrower’s business is conducted on the date
hereof.  Borrower shall also maintain insurance relating to Borrower’s
business, ownership and use of the Collateral in amounts and of a type that are
customary to businesses similar to Borrower’s.


    
      
         


      

      
        13.

        
          

        

      

      
         


      

    

     

    (b)           All
such policies of insurance shall be in such form, with such companies, and in
such amounts as are reasonably satisfactory to Bank.  All such
policies of property insurance shall contain a lender’s loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof, and all liability insurance policies shall show the Bank as an
additional insured and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any
reason.  Upon Bank’s request, Borrower shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor.  All proceeds payable under any such policy shall,
at the option of Bank, be payable to Bank to be applied on account of the
Obligations.

     

    6.7          Accounts.  Within
ninety (90) days after the Closing, Borrower shall establish (and shall cause
each of its Subsidiaries to establish) and thereafter maintain its primary
depository, operating, and investment accounts with Bank.

     

    6.8          EBITDA.  Borrower
shall maintain EBITDA of not less than the following amounts as of the following
dates:  (a) as of the last day of Borrower’s second fiscal quarter
ending March 28, 2010, Two Hundred Fifty Thousand Dollars ($250,000); (b) as of
the last day of Borrower’s third fiscal quarter ending June 27, 2010, Three
Hundred Fifty Thousand Dollars ($350,000); (c) as of the last day of Borrower’s
fourth fiscal quarter ending September 26, 2010, Four Hundred Fifty Thousand
Dollars ($450,000); and (d) as of the last day of  Borrower’s first
fiscal quarter ending December 26, 2010, an amount to be mutually agreed upon by
Borrower and Bank not later than September 30, 2010.  In the event
that Borrower and Bank cannot mutually agree upon an amount, then the amount for
Borrower’s first fiscal quarter ending December 26, 2010, shall be Four Hundred
Fifty Thousand Dollars ($450,000).

     

    6.9          Minimum
Cash.  Borrower shall maintain at all times an unencumbered
cash balance of not less than Five Hundred Thousand Dollars ($500,000), measured
on a quarterly basis as of the end of each of Borrower’s fiscal
quarters.

     

    6.10        Intellectual Property
Rights.

     

    (a)           Borrower
shall promptly give Bank written notice of any applications or registrations of
intellectual property rights filed with the United States Patent and Trademark
Office, including the date of such filing and the registration or application
numbers, if any.  Borrower shall (i) give Bank not less than 30 days
prior written notice of the filing of any applications or registrations with the
United States Copyright Office, including the title of such intellectual
property rights to be registered, as such title will appear on such applications
or registrations, and the date such applications or registrations will be filed,
and (ii) prior to the filing of any such applications or registrations, shall
execute such documents as Bank may reasonably request for Bank to maintain its
perfection in such intellectual property rights to be registered by Borrower,
and upon the request of Bank, shall file such documents simultaneously with the
filing of any such applications or registrations.  Upon filing any
such applications or registrations with the United States Copyright Office,
Borrower shall promptly provide Bank with (i) a copy of such applications or
registrations, without the exhibits, if any, thereto, (ii) evidence of the
filing of any documents requested by Bank to be filed for Bank to maintain the
perfection and priority of its security interest in such intellectual property
rights, and (iii) the date of such filing.

     

    (b)           Bank
may audit Borrower's Intellectual Property Collateral to confirm compliance with
this Section, provided such audit may not occur more often than twice per year,
unless an Event of Default has occurred and is continuing.  Bank shall
have the right, but not the obligation, to take, at Borrower's sole expense, any
actions that Borrower is required under this Section to take but which Borrower
fails to take, after 15 days' notice to Borrower.  Borrower shall
reimburse and indemnify Bank for all reasonable costs and reasonable expenses
incurred in the reasonable exercise of its rights under this
Section.

     

    6.11        Further
Assurances.  At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this
Agreement.


    
      
         


      

      
        14.

        
          

        

      

      
         


      

    

    

      7.           Negative
Covenants.

       

      Borrower
will not do any of the following:

       

      7.1           Dispositions.  Convey,
sell, lease, transfer or otherwise dispose of (collectively, a “Transfer”), or
permit any of its Subsidiaries to Transfer, all or any part of its business or
property, other than:  (i) Transfers of Inventory in the ordinary
course of business; (ii) Transfers of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; or (iii) Transfers of worn-out or obsolete
Equipment which was not financed by Bank.

       

      7.2           Change in Business; Change in Control
or Executive Office.  Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto); or cease to conduct business in the manner conducted by
Borrower as of the Closing Date; or suffer or permit a Change in Control; or
without thirty (30) days prior written notification to Bank, relocate its chief
executive office or state of incorporation or change its legal name; or without
Bank’s prior written consent, change the date on which its fiscal year
ends.

       

      7.3           Mergers or
Acquisitions.  Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another
Person.

       

      7.4           Indebtedness.  Create,
incur, assume or be or remain liable with respect to any Indebtedness, or permit
any Subsidiary so to do, other than Permitted Indebtedness.

       

      7.5           Encumbrances.  Create,
incur, assume or suffer to exist any Lien with respect to any of its property,
or assign or otherwise convey any right to receive income, including the sale of
any Accounts, or permit any of its Subsidiaries so to do, except for Permitted
Liens, or agree with any Person other than Bank not to grant a security interest
in, or otherwise encumber, any of its property, or permit any Subsidiary to do
so.

       

      7.6           Distributions.  Pay
any dividends or make any other distribution or payment on account of or in
redemption, retirement or purchase of any capital stock, or permit any of its
Subsidiaries to do so, except that Borrower may repurchase the stock of former
employees pursuant to stock repurchase agreements as long as an Event of Default
does not exist prior to such repurchase or would not exist after giving effect
to such repurchase.

       

      7.7           Investments.  Directly
or indirectly acquire or own, or make any Investment in or to any Person, or
permit any of its Subsidiaries so to do, other than Permitted Investments; or
maintain or invest any of its property with a Person other than Bank or permit
any of its Subsidiaries to do so unless such Person has entered into an account
control agreement with Bank in form and substance satisfactory to Bank; or
suffer or permit any Subsidiary to be a party to, or be bound by, an agreement
that restricts such Subsidiary from paying dividends or otherwise distributing
property to Borrower.

       

      7.8           Transactions with
Affiliates.  Except as set forth in Schedule 7.8, directly or
indirectly enter into or permit to exist any material transaction with any
Affiliate of Borrower except for transactions that are in the ordinary course of
Borrower’s business, upon fair and reasonable terms that are no less favorable
to Borrower than would be obtained in an arm’s length transaction with a
non-affiliated Person.

       

      7.9           Subordinated
Debt.  Make any payment in respect of any Subordinated Debt, or
permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any provision contained in
any documentation relating to the Subordinated Debt without Bank’s prior written
consent.

       

      7.10         Inventory and Equipment. Store
the Inventory or the Equipment with a bailee, warehouseman, or other third party
unless the third party has been notified of Bank’s security interest and Bank
(a) has received an acknowledgment from the third party that it is holding or
will hold the Inventory or Equipment for Bank’s benefit or (b) is in pledge
possession of the warehouse receipt, where negotiable, covering such Inventory
or Equipment. Store or maintain any Equipment or Inventory at a location other
than the location set forth in Section 10 of this Agreement.


      
        
           


        

        
          15.

          
            

          

        

        
           


        

      

       

      7.11         Compliance.  Become
an “investment company” or be controlled by an “investment company,” within the
meaning of the Investment Company Act of 1940, or become principally engaged in,
or undertake as one of its important activities, the business of extending
credit for the purpose of purchasing or carrying margin stock, or use the
proceeds of any Credit Extension for such purpose.  Fail to meet the
minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair
Labor Standards Act or violate any law or regulation, which violation could have
a Material Adverse Effect, or a material adverse effect on the Collateral or the
priority of Bank’s Lien on the Collateral, or permit any of its Subsidiaries to
do any of the foregoing.

       

      8.           Events of
Default.

       

      Any one
or more of the following events shall constitute an Event of Default by Borrower
under this Agreement:

       

      8.1           Payment Default.  If
Borrower fails to pay (a) any of the principal or interest when due or (b) any
of the other Obligations within ten (10) Business Days of the date due, provided
that no Credit Extensions shall be made during such ten (10) Business Day
period;

       

      8.2           Covenant Default.

       

        (a)           If
Borrower fails to perform any obligation under Sections 6.2, 6.3, 6.5, 6.6, 6.7,
6.8, or 6.9 if Borrower violates any of the covenants contained in Article 7 of
this Agreement; or

       

        (b)           If
Borrower fails or neglects to perform or observe any other material term,
provision, condition, covenant contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition or covenant
that can be cured, has failed to cure such default within ten days after
Borrower receives notice thereof or any officer of Borrower becomes aware
thereof; provided, however, that if the default cannot by its nature be cured
within the ten day period or cannot after diligent attempts by Borrower be cured
within such ten day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed 30 days) to attempt to cure such default, and
within such reasonable time period the failure to have cured such default shall
not be deemed an Event of Default but no Credit Extensions will be
made.

       

      8.3           Material Adverse
Effect.  If there occurs any circumstance or circumstances that
could have a Material Adverse Effect;

       

      8.4           Attachment.  If any
portion of Borrower’s assets is attached, seized, subjected to a writ or
distress warrant, or is levied upon, or comes into the possession of any
trustee, receiver or person acting in a similar capacity and such attachment,
seizure, writ or distress warrant or levy has not been removed, discharged or
rescinded within ten (10) Business Days, or if Borrower is enjoined, restrained,
or in any way prevented by court order from continuing to conduct all or any
material part of its business affairs, or if a judgment or other claim becomes a
lien or encumbrance upon any material portion of Borrower’s assets, or if a
notice of lien, levy, or assessment is filed of record with respect to any of
Borrower’s assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, and the same is not paid within ten (10) Business Days after Borrower
receives notice thereof, provided that none of the foregoing shall constitute an
Event of Default where such action or event is stayed or an adequate bond has
been posted pending a good faith contest by Borrower (provided that no Credit
Extensions will be required to be made during such cure period);

       

      8.5           Insolvency.  If
Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by
Borrower, or if an Insolvency Proceeding is commenced against Borrower and is
not dismissed or stayed within sixty (60) days (provided that no Credit
Extensions will be made prior to the dismissal of such Insolvency
Proceeding);


      
        
           


        

        
          16.

          
            

          

        

        
           


        

      

       

      8.6           Other
Agreements.  If there is a default or other failure to perform
in any agreement to which Borrower is a party or by which it is bound resulting
in a right by a third party or parties, whether or not exercised, to accelerate
the maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or which could have a Material Adverse Effect;

       

      8.7           Judgments.  If a
judgment or judgments for the payment of money in an amount, individually or in
the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a period
of thirty (30) days (provided that no Credit Extensions will be made prior to
the satisfaction or stay of such judgment); or

       

      8.8           Misrepresentations.  If
any material misrepresentation or material misstatement exists now or hereafter
in any warranty or representation set forth herein or in any certificate
delivered to Bank by any Responsible Officer pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan
Document.

       

      8.9           Guaranty.  If any
guaranty of all or a portion of the Obligations (a “Guaranty”) ceases for any
reason to be in full force and effect, or any guarantor fails to perform any
obligation under any Guaranty or a security agreement securing any Guaranty
(collectively, the “Guaranty Documents”), or any event of default occurs under
any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty,
or any material misrepresentation or material misstatement exists now or
hereafter in any warranty or representation set forth in any Guaranty Document
or in any certificate delivered to Bank in connection with any Guaranty
Document, or if any of the circumstances described in Sections 8.3 through 8.8
occur with respect to any guarantor or any guarantor dies or becomes subject to
any criminal prosecution, or any circumstances arise causing Bank, in good
faith, to become insecure as to the satisfaction of any of any guarantor’s
obligations under the Guaranty Documents.

       

      9.           Bank’s
Rights and Remedies.

       

      9.1           Rights and
Remedies.  Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:

       

       (a)           Declare
all Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable (provided that upon the
occurrence of an Event of Default described in Section 8.5, all Obligations
shall become immediately due and payable without any action by
Bank);

       

       (b)           Cease
advancing money or extending credit to or for the benefit of Borrower under this
Agreement or under any other agreement between Borrower and Bank;

       

       (c)           Settle
or adjust disputes and claims directly with account debtors for amounts, upon
terms and in whatever order that Bank reasonably considers
advisable;

       

       (d)           Make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral.  Borrower agrees to
assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate.  Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank’s determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith.  With respect to any of Borrower’s
owned premises, Borrower hereby grants Bank a license to enter into possession
of such premises and to occupy the same, without charge, in order to exercise
any of Bank’s rights or remedies provided herein, at law, in equity, or
otherwise;

       

       (e)           Set
off and apply to the Obligations any and all (i) balances and deposits of
Borrower held by Bank, or (ii) indebtedness at any time owing to or for the
credit or the account of Borrower held by Bank;


      
        
           


        

        
          17.

          
            

          

        

        
           


        

      

       

       (f)      
     Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral.  Bank is hereby granted a license or other
right, solely pursuant to the provisions of this Section 9.1, to use,
without charge, Borrower’s labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank’s exercise of its rights under this
Section 9.1, Borrower’s rights under all licenses and all franchise
agreements shall inure to Bank’s benefit;

       

       (g)           Dispose
of the Collateral by way of one or more contracts or transactions, for cash or
on terms, in such manner and at such places (including Borrower’s premises) as
Bank determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Bank deems appropriate;

       

       (h)           Bank
may credit bid and purchase at any public sale; and

       

       (i)           Any
deficiency that exists after disposition of the Collateral as provided above
will be paid immediately by Borrower.

       

      9.2           Power of
Attorney.  Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank’s designated officers, or employees) as Borrower’s true and
lawful attorney to:  (a) send requests for verification of Accounts or
notify account debtors of Bank’s security interest in the Accounts; (b) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower’s policies of insurance; (f) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable; and
(g) to file, in its sole discretion, one or more financing or continuation
statements and amendments thereto, relative to any of the
Collateral.  The appointment of Bank as Borrower’s attorney in fact,
and each and every one of Bank’s rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid and
performed and Bank’s obligation to provide Credit Extensions hereunder is
terminated.

       

      9.3           Accounts
Collection.  At any time after the occurrence of an Event of
Default, Bank may notify any Person owing funds to Borrower of Bank’s security
interest in such funds and verify the amount of such
Account.  Borrower shall collect all amounts owing to Borrower for
Bank, receive in trust all payments as Bank’s trustee, and immediately deliver
such payments to Bank in their original form as received from the account
debtor, with proper endorsements for deposit.

       

      9.4           Bank Expenses.  If
Borrower fails to pay any amounts or furnish any required proof of payment due
to third persons or entities, as required under the terms of this Agreement,
then Bank may do any or all of the following after reasonable notice to
Borrower:  (a) make payment of the same or any part thereof;
(b) set up such reserves under a loan facility in Section 2.1 as Bank deems
necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in
Section 6.6 of this Agreement, and take any action with respect to such
policies as Bank deems prudent.  Any amounts so paid or deposited by
Bank shall constitute Bank Expenses, shall be immediately due and payable, and
shall bear interest at the then applicable rate hereinabove provided, and shall
be secured by the Collateral.  Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.

       

      9.5           Bank’s Liability for
Collateral.  So long as Bank complies with reasonable banking
practices, Bank shall not in any way or manner be liable or responsible
for:  (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause;
(c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.  All risk of loss, damage or destruction of the Collateral
shall be borne by Borrower.


      
        
           


        

        
          18.

          
            

          

        

        
           


        

      

       

      9.6           Remedies
Cumulative.  Bank’s rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be
cumulative.  Bank shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in
equity.  No exercise by Bank of one right or remedy shall be deemed an
election, and no waiver by Bank of any Event of Default on Borrower’s part shall
be deemed a continuing waiver.  No delay by Bank shall constitute a
waiver, election, or acquiescence by it.  No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.

       

      9.7           Demand;
Protest.  Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.

       

      10.        Notices.

       

      Unless
otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by
telefacsimile to Borrower or to Bank, as the case may be, at its addresses set
forth below:

      
         

        
          
            	
                    If
      to Borrower:

                  	
                    OPTEX
      SYSTEMS, INC.

                  
	 
      	
                    1420
      Presidential Drive

                  
	 
      	
                    Richardson,
      TX 75081

                  
	 
      	
                    Attn:  Stanley
      Hirschman, President

                  
	 
      	
                    FAX:  (972)
      680-0650

                  
	 
      	 
      
	
                    If
      to Bank:

                  	
                    Peninsula
      Bank Business Funding,

                  
	 
      	
                    a
      division of The Private Bank of the Peninsula

                  
	 
      	
                    400
      Emerson Street

                  
	 
      	
                    Palo
      Alto, CA 94301

                  
	 
      	
                    Attn:  Mike
      Hansen

                  
	 
      	
                    FAX:  (650)
      289-0124

                  


          

        

         

      

      The
parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the
other.

       

      11.        CHOICE OF
LAW AND VENUE; JURY TRIAL WAIVER.

       

      This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of California, without regard to principles of conflicts of
law.  Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California.  BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS.  EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT.  EACH PARTY REPRESENTS AND WARRANTS THAT IT
HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.


      
        
           


        

        
          19.

          
            

          

        

        
           


        

      

       

      If the
jury waiver set forth in this Section is not enforceable, then any dispute,
controversy or claim arising out of or relating to this Agreement, the Loan
Documents or any of the transactions contemplated therein shall be settled by
judicial reference pursuant to Code of Civil Procedure Section 638 et seq.
before a referee sitting without a jury, such referee to be mutually acceptable
to the parties or, if no agreement is reached, by a referee appointed by the
Presiding Judge of the California Superior Court for Santa Clara
County.  This Section shall not restrict a party from exercising
remedies under the Code or from exercising pre-judgment remedies under
applicable law.  The prevailing party in any proceeding under this
Section 11 shall be entitled to recover, in addition to any award, all costs of
such proceeding, including reasonable attorneys’ fees as determined by the judge
or referee in such proceeding.

       

      12.        General
Provisions.

       

      12.1        Successors and
Assigns.  This Agreement shall bind and inure to the benefit of
the respective successors and permitted assigns of each of the parties;
provided, however, that neither this Agreement nor any rights hereunder may be
assigned by Borrower without Bank’s prior written consent, which consent may be
granted or withheld in Bank’s sole discretion.  Bank shall have the
right without the consent of or notice to Borrower to sell, transfer, negotiate,
or grant participation in all or any part of, or any interest in, Bank’s
obligations, rights and benefits hereunder.

       

      12.2        Indemnification.  Borrower
shall defend, indemnify and hold harmless Bank and its officers, employees, and
agents against:  (a) all obligations, demands, claims, and
liabilities claimed or asserted by any other party in connection with the
transactions contemplated by this Agreement; and (b) all losses or Bank
Expenses in any way suffered, incurred, or paid by Bank as a result of or in any
way arising out of, following, or consequential to transactions between Bank and
Borrower whether under this Agreement, or otherwise (including without
limitation reasonable attorneys’ fees and expenses), except for losses caused by
Bank’s gross negligence or willful misconduct.

       

      12.3        Time of
Essence.  Time is of the essence for the performance of all
obligations set forth in this Agreement.

       

      12.4        Severability of
Provisions.  Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

       

      12.5        Amendments in Writing,
Integration.  Neither this Agreement nor the Loan Documents can
be amended or terminated orally.  All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement and the Loan
Documents, if any, are merged into this Agreement and the Loan
Documents.

       

      12.6        Counterparts.  This
Agreement may be executed in any number of counterparts and by different parties
on separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement.

       

      12.7        Survival.  All
covenants, representations and warranties made in this Agreement shall continue
in full force and effect so long as any Obligations remain outstanding or Bank
has any obligation to make Credit Extensions to Borrower.  The
obligations of Borrower to indemnify Bank with respect to the expenses, damages,
losses, costs and liabilities described in Section 12.2 shall survive until
all applicable statute of limitations periods with respect to actions that may
be brought against Bank have run.

       

      12.8        Confidentiality.  In
handling any confidential information Bank and all employees and agents of Bank,
including but not limited to accountants, shall exercise the same degree of care
that it exercises with respect to its own proprietary information of the same
types to maintain the confidentiality of any non-public information thereby
received or received pursuant to this Agreement except that disclosure of such
information may be made (i) to the subsidiaries or affiliates of Bank in
connection with their present or prospective business relations with Borrower,
(ii) to prospective transferees or purchasers of any interest in the Loans,
provided that they have entered into a comparable confidentiality agreement in
favor of Borrower and have delivered a copy to Borrower, (iii) as required
by law, regulations, rule or order, subpoena, judicial order or similar order,
(iv) as may be required in connection with the examination, audit or
similar investigation of Bank and (v) as Bank may determine in connection
with the enforcement of any remedies hereunder.  Confidential
information hereunder shall not include information that
either:  (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (b) is disclosed to
Bank by a third party, provided Bank does not have actual knowledge that such
third party is prohibited from disclosing such information.


      
        
           


        

        
          20.

          
            

          

        

        
           


        

      

    

     

    12.9        Patriot Act
Notice.  Bank hereby notifies Borrower that, pursuant to the
requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed into
law on October 26, 2001) (the “Patriot Act”), it is required to obtain, verify
and record information that identifies the Borrower, which information includes
names and addresses and other information that will allow Bank, as applicable,
to identify the Borrower in accordance with the Patriot Act.

     

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

     

    
      
        
          
            
              
                	 
      	
                        OPTEX
      SYSTEMS, INC., a Delaware corporation

                      
	 
      	 
      	 
      
	 
      	
                        By:

                      	 
      
	 
      	 
      	 
      
	 
      	
                        Title:

                      	 
      
	 
      	 
      
	 
      	
                        Peninsula
      Bank Business Funding,

                      
	 
      	
                        a
      division of The Private Bank of the Peninsula

                      
	 
      	 
      	 
      
	 
      	
                        By:

                      	 
      
	 
      	 
      	 
      
	 
      	
                        Title:

                      	 
      


              

            

          

        

      

    


    
      
         


      

      
        21.

        
          

        

      

      
         


      

    


    
      
        
          	
                  DEBTOR:

                	
                  OPTEX
      SYSTEMS, INC.

                
	 	 
	
                  SECURED
      PARTY:

                	
                  PENINSULA
      BANK BUSINESS FUNDING,

                
	 
      	
                  A
      DIVISION OF THE PRIVATE BANK OF THE
PENINSULA

                


        

      

    

     

    EXHIBIT
A

     

    COLLATERAL
DESCRIPTION ATTACHMENT

    TO
LOAN AND SECURITY AGREEMENT

     

    All
personal property of Borrower (herein referred to as “Borrower” or “Debtor”)
whether presently existing or hereafter created or acquired, and wherever
located, including, but not limited to:

     

    (a)           all
accounts (including health-care-insurance receivables), chattel paper (including
tangible and electronic chattel paper), deposit accounts, documents (including
negotiable documents), equipment (including all accessions and additions
thereto), general intangibles (including payment intangibles and software),
goods (including fixtures), instruments (including promissory notes), inventory
(including all goods held for sale or lease or to be furnished under a contract
of service, and including returns and repossessions), investment property
(including securities and securities entitlements), letter of credit rights,
money, and all of Debtor’s books and records with respect to any of the
foregoing, and the computers and equipment containing said books and
records;

     

    (b)           any
and all cash proceeds and/or noncash proceeds of any of the foregoing,
including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to
payment.  All terms above have the meanings given to them in the
California Uniform Commercial Code, as amended or supplemented from time to
time.


    
      
         


      

      
        1

        
          

        

      

      
         


      

    

     

    
      


    EXHIBIT
B

     

    ADVANCE
REQUEST FORM

    


    Date:
_____________                


    
      
        Client:  OPTEX
SYSTEMS, INC.

        Client
ID:

         

        Line
Limit:

      

    

    
        


    

    
      
        
          
            	
                    1.  Availability
      (from Client Summary):

                  	
                    ____________

                  
	 
      	 
      
	
                    2.  $25
      Wire Fee (if applicable):

                  	
                    ____________

                  
	 
      	 
      
	
                    3.  Advance
      Request:

                  	
                    ____________

                  
	 
      	 
      
	
                    4.  Ending
      Availability (1- 2-3):

                  	
                    ____________

                  


          

        

      

    

     

    The
Undersigned Represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and The Private Bank of the
Peninsula.

    


    Client:
____________________________________________________

    


    Authorized
Signor: _____________________________________________

    


    
      
        
          
            
              
                
                  
                    
                      	
                              Bank
      Use Only

                            	 	 
      	 
      
	 	 	 	 	 
	
                              Received
      by:

                            	 
      	 	
                              Date:

                            	 
      
	 
      	
                              AUTHORIZED
      SIGNER

                            	 	 
      	 
      
	 
      	 
      	 	 
      	 
      
	
                              Approved
      by:

                            	 
      	 	
                              Date:

                            	 
      
	 
      	
                              AUTHORIZED
      SIGNER

                            	 	 
      	 
      


                    

                  

                

              

            

          

        

      

    

    


    IF
FUNDING TODAY PLEASE FAX BACK OR E-MAIL PDF BY 11:00 AM

           

    
      
        
          

        

      

      Technology
& Asset Based Lending For Emerging Growth Companies

    

    


    400
Emerson Street, Palo Alto,
CA  94301        Telephone
(650) “The Bank”
843-2265         Fax: (650)
323-6527

    www.The-Private-Bank.com


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
C

     

    BORROWING
BASE CERTIFICATE

     

      
        

      

    

    
      
        	
                Borrower:  OPTEX
      SYSTEMS, INC.

              	
                Bank:  Peninsula
      Bank Business Funding,

              
	 
      	
                a
      division of The Private Bank of the Peninsula

              
	
                Commitment
      Amount:  $2,000,000

              	 
      


      

    

    
      
        

      

    

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        	
                                                ACCOUNTS
      RECEIVABLE

                                              	 
      	 	 
      
	
                                                1.

                                              	
                                                Accounts
      Receivable Book Value as of ___

                                              	 
      	 	
                                                $___________

                                              
	
                                                2.

                                              	
                                                Additions
      (please explain on reverse)

                                              	 
      	 	
                                                $___________

                                              
	
                                                3.

                                              	
                                                TOTAL
      ACCOUNTS RECEIVABLE

                                              	 
      	 	
                                                $___________

                                              
	 
      	 
      	 
      	 	 
      
	
                                                ACCOUNTS
      RECEIVABLE DEDUCTIONS (without duplication)

                                              	 
      	    	 
      
	
                                                4.

                                              	
                                                Amounts
      over 90 days due

                                              	
                                                $___________

                                              	 	 
      
	
                                                5.

                                              	
                                                Balance
      of 25% over 90 day accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                6.

                                              	
                                                Concentration
      Limits

                                              	 
      	 	 
      
	
                                                7.

                                              	
                                                Foreign
      Accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                8.

                                              	
                                                Governmental
      Accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                9.

                                              	
                                                Contra
      Accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                10.

                                              	
                                                Demo
      Accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                11.

                                              	
                                                Intercompany/Employee
      Accounts

                                              	
                                                $___________

                                              	 	 
      
	
                                                12.

                                              	
                                                Other
      (please explain on reverse)

                                              	
                                                $___________

                                              	 	 
      
	
                                                13.

                                              	
                                                TOTAL
      ACCOUNTS RECEIVABLE DEDUCTIONS

                                              	 
      	 	
                                                $___________

                                              
	
                                                14.

                                              	
                                                Eligible
      Accounts (#3 minus #13)

                                              	 
      	 	
                                                $___________

                                              
	
                                                15.

                                              	
                                                LOAN
      VALUE OF ACCOUNTS (__% of #14)

                                              	 
      	 	
                                                $___________

                                              
	 
      	 
      	 
      	 	 
      
	
                                                BALANCES

                                              	 
      	 	 
      
	
                                                16.

                                              	
                                                Maximum
      Loan Amount

                                              	 
      	 	
                                                $___________

                                              
	
                                                17.

                                              	
                                                Total
      Funds Available [Lesser of #16 or #15]

                                              	 
      	 	
                                                $___________

                                              
	
                                                18.

                                              	
                                                Present
      balance owing on Line of Credit

                                              	 
      	 	
                                                $___________

                                              
	
                                                19.

                                              	
                                                Outstanding
      under Sublimits (if any)

                                              	 
      	 	
                                                $___________

                                              
	
                                                20.

                                              	
                                                RESERVE
      POSITION (#17 minus #18 and #19)

                                              	 
      	 	
                                                $___________

                                              


                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    The
undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Peninsula Bank Business Funding,
a division of The Private Bank of the Peninsula.

     

    
      
        
          	
                  OPTEX
      SYSTEMS, INC.

                
	 
      	 
      
	
                  By:

                	 
      
	 
      	
                  Authorized
      Signer

                


        

      

    


    
      
         


      

      
        1.

        
          

        

      

      
         


      

    


    EXHIBIT
D

    COMPLIANCE
CERTIFICATE

     

    
      
        
          	
                  TO:

                	
                  PENINSULA
      BANK BUSINESS FUNDING, A DIVISION OF THE PRIVATE BANK OF THE
      PENINSULA

                
	 
      	 
      
	
                  FROM:

                	
                  OPTEX
      SYSTEMS, INC.

                


        

      

    

     

    The
undersigned authorized officer of OPTEX SYSTEMS, INC. hereby certifies that in
accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the “Agreement”), (i) Borrower is in complete
compliance for the period ending _______________ with all required covenants
except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct as of the date
hereof.  Attached herewith are the required documents supporting the
above certification.  The Officer further certifies that these are
prepared in accordance with Generally Accepted Accounting Principles (GAAP) and
are consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.

     

    Please
indicate compliance status by circling Yes/No under “Complies”
column.

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            	
                                                    Reporting Covenant

                                                  	 	
                                                    Required

                                                  	 	
                                                    Complies

                                                  
	 
      	 	 
      	 	 
      	 	 
      
	
                                                    CPA-reviewed
      financial statements & compliance certificate

                                                  	 	
                                                    Quarterly
      within 45 days of quarter-end

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    Annual
      financial statements (CPA Audited)

                                                  	 	
                                                    FYE
      within 90 days

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    10K
      and 10Q

                                                  	 	
                                                    (as
      applicable)

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    A/R
      & A/P Agings, Borrowing Base Cert.

                                                  	 	
                                                    Monthly
      within 20 days

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    A/R
      Audit

                                                  	 	
                                                    Initial
      and Semi-Annual

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    IP
      Report

                                                  	 	
                                                    Quarterly
      within 30 days

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	 
      	 	 
      	 	 
      	 	 
      
	
                                                    Financial Covenant

                                                  	 	
                                                    Required

                                                  	 	
                                                    Actual

                                                  	 	
                                                    Complies

                                                  
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	
                                                    EBITDA

                                                  	 	
                                                    $________

                                                  	 	
                                                    $_______

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  
	
                                                    Minimum
      Cash

                                                  	 	
                                                    $500,000

                                                  	 	
                                                    $_______

                                                  	 	
                                                    Yes

                                                  	 	
                                                    No

                                                  


                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    


    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    	
                                            Comments Regarding
      Exceptions:  See Attached.

                                          	 	
                                            BANK
      USE ONLY

                                          
	 
      	 	 
      	 
      
	 
      	 	
                                            Received
      by:

                                          	 
      
	
                                            Sincerely,

                                          	 	 
      	
                                            AUTHORIZED
      SIGNER          

                                          
	 
      	 	 
      	 
      
	 
      	 	
                                            Date:

                                          	 
      
	 
      	 	 
      	 
      
	 
      	 	
                                            Verified:

                                          	 
      
	
                                            SIGNATURE

                                          	 	 
      	
                                            AUTHORIZED
      SIGNER         

                                          
	 
      	 	 
      	 
      
	 
      	 	
                                            Date:

                                          	 
      
	
                                            TITLE

                                          	 	 
      	 
      
	 
      	 	
                                            Compliance
      Status                            Yes            
      No

                                          
	 
      	 	 
      
	
                                            DATE

                                          	 	 
      


                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    


    
      
         


      

      
        1.

        
          

        

      

      
         


      

    

     

    
      SCHEDULE
OF EXCEPTIONS

       

      Permitted
Indebtedness  (Section 1.1)

       

      None

      


      Permitted
Investments  (Section 1.1)

       

      None

      


      Permitted
Liens  (Section 1.1)

       

      Permitted Customer
Liens (Section 1.1) The following Permitted Customer Liens:

      


      None

      


      Inbound
Licenses  (Section 5.6)

       

      None

      


      Prior
Names  (Section 5.7)

       

      None

      


      Litigation  (Section 5.8)

       

      None

       

      Transactions with
Affiliates  (Section 7.8)

       

      None


      
        
           


        

        
          1.

          
            

          

        

        
           


        

      


      CORPORATE
RESOLUTIONS TO BORROW

       

        
          

        

      

      
        
        

        Borrower:                OPTEX
SYSTEMS, INC. 

          
            

          

        

      

      


      I, the
undersigned Secretary or Assistant Secretary of OPTEX SYSTEMS, INC. (the
“Corporation”), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of Delaware.

       

      I FURTHER
CERTIFY that attached hereto as Attachments 1 and 2 are true and complete
copies of the Articles of Incorporation, as amended, and the Restated Bylaws of
the Corporation, each of which is in full force and effect on the date
hereof.

       

      I FURTHER
CERTIFY that at a meeting of the Directors of the Corporation, duly called and
held, at which a quorum was present and voting (or by other duly authorized
corporate action in lieu of a meeting), the following resolutions (the
“Resolutions”) were adopted.

       

      BE IT
RESOLVED, that any one (1) of the following named officers, employees, or agents
of this Corporation, whose actual signatures are shown below:

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    	
                                            NAMES

                                          	 	
                                            POSITION

                                          	 	
                                            ACTUAL SIGNATURES

                                          
	 
      	 	 
      	 	 
      
	
                                            Stanley Hirschman

                                          	 	
                                            President
      & Secretary

                                          	 	 
      
	 
      	 	 
      	 	 
      
	
                                            Karen Hawkins

                                          	 	
                                            Vice
      President-Finance

                                          	 	 
      
	 
      	 	 
      	 	 
      
	
                                            Danny Schoening

                                          	 	
                                            Chief
      Operating Officer

                                          	 	 
      
	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      


                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

      acting
for and on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:

       

      Borrow Money.  To
borrow from time to time from Peninsula Bank Business Funding, a division of The
Private Bank of the Peninsula (“Bank”), on such terms as may be agreed upon
between the officers, employees, or agents of the Corporation and Bank, such sum
or sums of money as in their judgment should be borrowed, without
limitation.

       

      Execute Loan
Documents.  To execute and deliver to Bank that certain Loan
and Security Agreement dated as of  March 4, 2010 (the “Loan
Agreement”) and any other agreement entered into between Corporation and Bank in
connection with the Loan Agreement, including any amendments, all as amended or
extended from time to time (collectively, with the Loan Agreement, the “Loan
Documents”), and also to execute and deliver to Bank one or more renewals,
extensions, modifications, refinancings, consolidations, or substitutions for
the Loan Documents, or any portion thereof.

       

      Grant Security.  To
grant a security interest to Bank in the Collateral described in the Loan
Documents, which security interest shall secure all of the Corporation’s
Obligations, as described in the Loan Documents.

       

      Negotiate Items.  To
draw, endorse, and discount with Bank all drafts, trade acceptances, promissory
notes, or other evidences of indebtedness payable to or belonging to the
Corporation or in which the Corporation may have an interest, and either to
receive cash for the same or to cause such proceeds to be credited to the
account of the Corporation with Bank, or to cause such other disposition of the
proceeds derived therefrom as they may deem advisable.

       

      
        
          
          

        

        
          1.

          
            

          

        

        
          
          

        

      

       

      Warrants.  To issue
Bank warrants to purchase the Corporation’s capital stock.

       

      Letters of
Credit.  To execute letter of credit applications and other
related documents pertaining to Bank’s issuance of letters of
credit.

       

      Corporate Credit
Cards.  To execute corporate credit card applications and
agreements and other related documents pertaining to Bank’s provision of
corporate credit cards.

       

      Further Acts.  In
the case of lines of credit, to designate additional or alternate individuals as
being authorized to request advances thereunder, and in all cases, to do and
perform such other acts and things, to pay any and all fees and costs, and to
execute and deliver such other documents and agreements as they may in their
discretion deem reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.

       

      BE IT
FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions
and performed prior to the passage of these resolutions are hereby ratified and
approved, that these Resolutions shall remain in full force and effect and Bank
may rely on these Resolutions until written notice of their revocation shall
have been delivered to and received by Bank.  Any such notice shall
not affect any of the Corporation’s agreements or commitments in effect at the
time notice is given.

       

      I FURTHER
CERTIFY that the officers, employees, and agents named above are duly elected,
appointed, or employed by or for the Corporation, as the case may be, and occupy
the positions set forth opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever.

       

      IN
WITNESS WHEREOF, I have hereunto set my hand on March 4, 2010, and attest that
the signatures set opposite the names listed above are their genuine
signatures.

       

      
        
          
            
              
                	 
      	
                        CERTIFIED
      AND ATTESTED BY:

                      
	 
      	 
      	 
      
	 
      	
                        X

                      	 
      


              

            

          

        

      


      
        
           


        

        
          2.