**EXHIBIT 10.13****LOAN AND SECURITY AGREEMENT**     **THIS LOAN AND SECURITY AGREEMENT**(this “**Agreement**”) dated as of the Effective Datebetween **SILICON VALLEY BANK**, a California corporation (“**Bank**”), and **RAE SYSTEMS INC.**, a Delawarecorporation (“**Borrower**”), provides the terms on which Bank shall lend to Borrower and Borrowershall repay Bank. The parties agree as follows:     **1****ACCOUNTING AND OTHER TERMS**     Accounting terms not defined in this Agreement shall be construed following GAAP.Calculations and determinations must be made following GAAP. Capitalized terms not otherwisedefined in this Agreement shall have the meanings set forth in Section 13. All other termscontained in this Agreement, unless otherwise indicated, shall have the meaning provided by theCode to the extent such terms are defined therein.     **2****LOAN AND TERMS OF PAYMENT**     **2.1 Promise to Pay**. Borrower hereby unconditionally promises to pay Bank the outstandingprincipal amount of all Credit Extensions and accrued and unpaid interest thereon as and when duein accordance with this Agreement.     **2.1.1 Revolving Advances**.          (a) Availability. Bank shall make Advances subject to the terms and conditions ofthis Agreement; provided however, the aggregate amount of all outstanding Advances shall not exceed(i) the lesser of (1) the Revolving Line or (2) the Borrowing Base minus (ii) the amount of alloutstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) plus an amountequal to the Letter of Credit Reserves, minus (iii) the FX Reserve, minus (iv) the outstandingamounts used for Cash Management Services. Amounts borrowed under the Revolving Line may be repaidand, so long as no Default has occurred and is continuing and prior to the Revolving Line MaturityDate, reborrowed, subject to the applicable terms and conditions precedent herein.          (b) Termination; Repayment. The Revolving Line terminates on the Revolving LineMaturity Date, when the principal amount of all Advances, the unpaid interest thereon, and allother Obligations relating to the Revolving Line shall be immediately due and payable.     **2.1.2 Letters of Credit Sublimit**.          (a) As part of the Revolving Line, Bank shall issue or have issued Letters of Credit forBorrower’s account. The face amount of outstanding Letters of Credit (including drawn butunreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed the (i) the lesserof (1) the Revolving Line or (2) the Borrowing Base minus (ii) an amount equal to the Letter ofCredit Reserves, minus (iii) the FX Reserve, minus (iv) the outstanding principal balance of anyAdvances (including any amounts used for Cash Management Services). Such aggregate amountsutilized hereunder shall at all times reduce the amount otherwise available for Advances under theRevolving Line. If, on the Revolving Maturity Date, there are any outstanding Letters of Credit,then on such date Borrower shall provide to Bank cash collateral in an amount equal to 105% of theface amount of all such Letters of Credit plus all interest, fees, and costs due or to become duein connection therewith (as estimated by Bank in its good faith business judgment), to secure allof the Obligations relating to said Letters of Credit. All Letters of Credit shall be in form andsubstance acceptable to Bank in its sole discretion and shall be subject to the terms andconditions of Bank’s standard Application and Letter of Credit Agreement (the “**Letter of CreditApplication**”). Borrower agrees to execute any further documentation in connection with the Lettersof Credit as Bank may reasonably request.          (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Lettersof Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly inaccordance with the terms of this Agreement, such Letters of Credit, and the Letter of CreditApplication.
 

 
          (c) Borrower may request that Bank issue a Letter of Credit payable in a Foreign Currency. Ifa demand for payment is made under any such Letter of Credit, Bank shall treat such demand as anAdvance to Borrower of the equivalent of the amount thereof (plus fees and charges in connectiontherewith such as wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate ofexchange in San Francisco, California, for sales of the Foreign Currency for transfer to thecountry issuing such Foreign Currency.          (d) To guard against fluctuations in currency exchange rates, upon the issuance of any Letterof Credit payable in a Foreign Currency, Bank shall create a reserve (the “**Letter of CreditReserve**”) under the Revolving Line in an amount equal to ten percent (10%) of the face amount ofsuch Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank fromtime to time to account for fluctuations in the exchange rate. The availability of funds under theRevolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as suchLetter of Credit remains outstanding.     **2.1.3 Foreign Exchange Sublimit**. As part of the Revolving Line, Borrower may enter intoforeign exchange contracts with Bank under which Borrower commits to purchase from or sell to Banka specific amount of Foreign Currency (each, a “**FX Forward Contract**”) on a specified date (the“**Settlement Date**”). FX Forward Contracts shall have a Settlement Date of at least one (1) FXBusiness Day after the contract date and shall be subject to a reserve of ten percent (10%) (in amaximum aggregate amount equal to $5,000,000) of each outstanding FX Forward Contract (the “**FXReserve**”). The aggregate amount of FX Forward Contracts at any one time may not exceed ten (10)times the amount of the FX Reserve. The obligations of Borrower relating to this section may notexceed the lesser of $5,000,000 or the (i) the lesser of (1) the Revolving Line or (2) theBorrowing Base minus (ii) the amount of all outstanding Letters of Credit (including drawn butunreimbursed Letters of Credit) plus an amount equal to the Letter of Credit Reserves, minus (iii)the outstanding principal balance of any Advances (including any amounts used for Cash ManagementServices).     **2.1.4 Cash Management Services Sublimit**. Borrower may use up to the (i) lesser of (1) theRevolving Line or (2) the Borrowing Base minus (ii) the amount of all outstanding Letters of Credit(including drawn but unreimbursed Letters of Credit) plus an amount equal to the Letter of CreditReserves, minus (iii) the FX Reserve, and minus (iv) the outstanding principal balance of anyAdvances (the “**Cash Management Services Sublimit**”) of the Revolving Line for Bank’s cash managementservices which may include merchant services, direct deposit of payroll, business credit card, andcheck cashing services identified in Bank’s various cash management services agreements(collectively, the “**Cash Management Services**”). Any amounts Bank pays on behalf of Borrower or anyamounts that are not paid by Borrower for any Cash Management Services will be treated as Advancesunder the Revolving Line and will accrue interest at the interest rate applicable to Advances.     **2.2 Overadvances**. If, at any time, the Credit Extensions under Sections 2.1.1, 2.1.2, 2.1.3and 2.1.4 exceed the lesser of either (a) the Revolving Line or (b) the Borrowing Base, Borrowershall immediately pay to Bank in cash such excess.     **2.3 Payment of Interest on the Credit Extensions**.          (a) Interest Rate. Subject to Section 2.3(b), the principal amount outstanding underthe Revolving Line shall accrue interest at a floating per annum rate equal to the Prime Rate minusone half one percentage point (0.50%), which interest shall be payable monthly in accordance withSection 2.3(f) below.          (b) Default Rate. Immediately upon the occurrence and during the continuance of anEvent of Default, Obligations shall bear interest at a rate per annum which is five percentagepoints above the rate effective immediately before the Event of Default (the “**Default Rate**”).Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not apermitted alternative to timely payment and shall not constitute a waiver of any Event of Defaultor otherwise prejudice or limit any rights or remedies of Bank.          (c) Adjustment to Interest Rate. Changes to the interest rate of any Credit Extensionbased on changes to the Prime Rate shall be effective on the effective date of any change to thePrime Rate and to the extent of any such change.          (d) 360-Day Year. Interest shall be computed on the basis of a 360-day year for theactual number of days elapsed.
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          (e) Debit of Accounts. Bank may debit any of Borrower’s deposit accounts, includingthe Designated Deposit Account, for principal and interest payments or any other amounts Borrowerowes Bank when due. These debits shall not constitute a set-off.          (f) Payments. Unless otherwise provided, interest is payable monthly on the firstcalendar day of each month. Payments of principal and/or interest received after 12:00 p.m.Pacific time are considered received at the opening of business on the next Business Day. When apayment is due on a day that is not a Business Day, the payment is due the next Business Day andadditional fees or interest, as applicable, shall continue to accrue.     **2.4 Fees**. Borrower shall pay to Bank:          (a) Commitment Fee. A fully earned, non-refundable commitment fee of $15,000, on theEffective Date;          (b) Letter of Credit Fee. Bank’s customary fees and expenses for the issuance orrenewal of Letters of Credit issued, upon the issuance, each anniversary of the issuance, and therenewal of such Letter of Credit;          (c) Unused Revolving Line Facility Fee. A fee (the “**Unused Revolving Line FacilityFee**”), payable quarterly, in arrears, on a calendar year basis, in an amount equal to one quarterof one percent (0.25%) per annum of the average unused portion of the Revolving Line, as determinedby Bank. Borrower shall not be entitled to any credit, rebate or repayment of any Unused RevolvingLine Facility Fee previously earned by Bank pursuant to this Section notwithstanding anytermination of the Agreement or the suspension or termination of Bank’s obligation to make loansand advances hereunder; and          (d) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees andexpenses), plus expenses, for documentation and negotiation of this Agreement) incurred through andafter the Effective Date, when due. Bank shall notify Borrower when such expenses reach $5,000 andeach multiple thereof.     **3****CONDITIONS OF LOANS**     **3.1 Conditions Precedent to Initial Credit Extension**. Bank’s obligation to make the initialCredit Extension is subject to the condition precedent that Bank shall have received, in form andsubstance satisfactory to Bank, such documents, and completion of such other matters, as Bank mayreasonably deem necessary or appropriate, including, without limitation:          (a) Borrower shall have delivered duly executed original signatures to the Loan Documents towhich it is a party;          (b) Borrower shall have delivered duly executed original signatures to the Control Agreementby and among Borrower, Bank and First Bank & Trust;          (c) Borrower shall have delivered its Operating Documents and a good standing certificate ofBorrower certified by the Secretary of State of the State of Delaware;          (d) Borrower shall have delivered duly executed original signatures to the completed BorrowingResolutions for Borrower;          (e) Borrower shall have delivered a payoff letter from First Bank & Trust;          (f) Borrower shall have delivered evidence that (i) the Liens securing Indebtedness owed byBorrower to First Bank & Trust will be terminated and (ii) the documents and/or filings evidencingthe perfection of such Liens, including without limitation any financing statements and/or controlagreements, have or will, concurrently with the initial Credit Extension, be terminated;          (g) Bank shall have received certified copies, dated as of a recent date, of financingstatement searches, as Bank shall request, accompanied by written evidence (including any UCCtermination statements) that
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the Liens indicated in any such financing statements either constitute Permitted Liens or havebeen or, in connection with the initial Credit Extension, will be terminated or released;          (h) Borrower shall have delivered the Perfection Certificate executed by Borrower;          (i) Borrower shall have delivered a legal opinion of Borrower’s counsel dated as of theEffective Date together with the duly executed original signatures thereto;          (j) Borrower shall have delivered evidence satisfactory to Bank that the insurance policiesrequired by Section 6.5 hereof are in full force and effect, together with appropriate evidenceshowing loss payable and/or additional insured clauses or endorsements in favor of Bank; and          (k) Borrower shall have delivered executed true and complete copies of the KLH sellingshareholders notes; and          (l) Borrower shall have paid the fees and Bank Expenses then due as specified in Section 2.4hereof.     **3.2 Conditions Precedent to all Credit Extensions**. Bank’s obligations to make each CreditExtension, including the initial Credit Extension, is subject to the following:          (a) except as otherwise provided in Section 3.4, timely receipt of an executed Payment/AdvanceForm;          (b) the representations and warranties in Section 5 shall be true in all material respects onthe date of the Payment/Advance Form and on the Funding Date of each Credit Extension; provided,however, that such materiality qualifier shall not be applicable to any representations andwarranties that already are qualified or modified by materiality in the text thereof; and provided,further that those representations and warranties expressly referring to a specific date shall betrue, accurate and complete in all material respects as of such date, and no Default or Event ofDefault shall have occurred and be continuing or result from the Credit Extension. Each CreditExtension is Borrower’s representation and warranty on that date that the representations andwarranties in Section 5 remain true in all material respects; provided, however, that suchmateriality qualifier shall not be applicable to any representations and warranties that alreadyare qualified or modified by materiality in the text thereof; and provided, further that thoserepresentations and warranties expressly referring to a specific date shall be true, accurate andcomplete in all material respects as of such date; and          (c) in Bank’s good faith judgment, there has not been a Material Adverse Change.     **3.3 Covenant to Deliver**.     Borrower agrees to deliver to Bank each item required to be delivered to Bank under thisAgreement as a condition to any Credit Extension. Borrower expressly agrees that the extension ofa Credit Extension prior to the receipt by Bank of any such item shall not constitute a waiver byBank of Borrower’s obligation to deliver such item, and any such extension in the absence of arequired item shall be in Bank’s sole discretion.     **3.4 Procedures for Borrowing**.     Subject to the prior satisfaction of all other applicable conditions to the making of anAdvance set forth in this Agreement, to obtain an Advance (other than Advances under Sections 2.1.2or 2.1.4), Borrower shall notify Bank (which notice shall be irrevocable) by electronic mail,facsimile, or telephone by 12:00 p.m. Pacific time on the Funding Date of the Advance. Togetherwith any such electronic or facsimile notification, Borrower shall deliver to Bank by electronicmail or facsimile a completed Payment/Advance Form executed by a Responsible Officer or his or herdesignee. Bank may rely on any telephone notice given by a person whom Bank believes is aResponsible Officer or designee. Bank shall credit Advances to the Designated Deposit Account.Bank may make Advances under this Agreement based on instructions from a Responsible Officer or hisor her designee or without instructions if the Advances are necessary to meet Obligations whichhave become due.     **4****CREATION OF SECURITY INTEREST**
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     **4.1 Grant of Security Interest**. Borrower hereby grants Bank, to secure the payment andperformance in full of all of the Obligations, a continuing security interest in, and pledges toBank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and allproceeds and products thereof. Borrower represents, warrants, and covenants that the securityinterest granted herein is and shall at all times continue to be a first priority perfectedsecurity interest in the Collateral (subject only to Permitted Liens that may have superiorpriority to Bank’s Lien under this Agreement). If Borrower shall acquire a commercial tort claim,Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereofand grant to Bank in such writing a security interest therein and in the proceeds thereof, all uponthe terms of this Agreement, with such writing to be in form and substance reasonably satisfactoryto Bank.     If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until theObligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon paymentin full in cash of the Obligations and at such time as Bank’s obligation to make Credit Extensionshas terminated, Bank shall, at Borrower’s sole cost and expense, release its Liens in theCollateral and all rights therein shall revert to Borrower.     **4.2 Authorization to File Financing Statements**. Borrower hereby authorizes Bank to filefinancing statements, without notice to Borrower, with all appropriate jurisdictions to perfect orprotect Bank’s interest or rights hereunder, including a notice that any disposition of theCollateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bankunder the Code.     **5****REPRESENTATIONS AND WARRANTIES**     Borrower represents and warrants as follows:     **5.1 Due Organization and Authorization**. Borrower and each of its Subsidiaries are dulyexisting and in good standing in their respective jurisdictions of formation and are qualified andlicensed to do business and are in good standing in any jurisdiction in which the conduct of theirbusiness or their ownership of property requires that they be qualified except where the failure todo so could not reasonably be expected to have a material adverse effect on Borrower’s business.In connection with this Agreement, Borrower has delivered to Bank completed certificates in formsatisfactory to Bank signed by Borrower entitled “Perfection Certificate”. Borrower represents andwarrants to Bank that (a) Borrower’s exact legal name is that indicated on the PerfectionCertificate and on the signature page hereof; (b) Borrower is an organization of the type and isorganized in the jurisdiction set forth in the Perfection Certificate; (c) the PerfectionCertificate accurately sets forth Borrower’s organizational identification number or accuratelystates that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’splace of business, or, if more than one, its chief executive office as well as Borrower’s mailingaddress (if different than its chief executive office); (e) other than its merger with Nettaxi.comin 2002, Borrower (and each of its predecessors) has not, in the past five (5) years, changed itsjurisdiction of formation, organizational structure or type, or any organizational number assignedby its jurisdiction; and (f) all other information set forth on the Perfection Certificatepertaining to Borrower and each of its Subsidiaries is accurate and complete. If Borrower is notnow a Registered Organization but later becomes one, Borrower shall promptly notify Bank of suchoccurrence and provide Bank with Borrower’s organizational identification number.     The execution, delivery and performance of the Loan Documents have been duly authorized, anddo not conflict with Borrower’s organizational documents, nor constitute an event of default underany material agreement by which Borrower is bound. Borrower is not in default under any agreementto which it is a party or by which it is bound in which the default could reasonably be expected tohave a material adverse effect on Borrower’s business.     **5.2 Collateral**. Borrower has good title to, has rights in, and the power to transfer eachitem of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any andall Liens except Permitted Liens. Except to the extent permitted in Section 6.6(a), Borrower hasno deposit accounts other than the deposit accounts with Bank, the deposit accounts, if any,described in the Perfection Certificate delivered to Bank in connection herewith, or of whichBorrower has given Bank notice and taken such actions as are necessary to give Bank a perfectedsecurity interest therein except as set forth in Section 6.6(b). The Eligible Accounts included inthe Borrowing Base Certificate are bona fide, existing obligations of the Account Debtors.     The Collateral consisting of tangible personal property is not in the possession of any thirdparty bailee (such as a warehouse) except (i) as otherwise provided in the Perfection Certificate,or (ii) as disclosed to Bank in writing and in accordance with this Section 5.2 below. In theevent that Borrower, after the date hereof, intends to
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store or otherwise deliver Collateral consisting of tangible personal property with a fair marketvalue in excess of $250,000 to a bailee located in the United States (provided however, theaggregate fair market value of Collateral at all locations not subject to a bailee agreement shallnot exceed $1,000,000), then Borrower will first receive from such bailee an executed baileeagreement in form and substance satisfactory to Bank in its reasonably discretion.     Borrower is the sole owner of its intellectual property, except for non-exclusive licenses andsimilar arrangements granted to its customers in the ordinary course of business, othernon-perpetual licenses that may be exclusive in some respects other than territory, but that do notresult in a legal transfer of Borrower’s title in the licensed property and licenses ofintellectual property from third parties. Each patent is valid and enforceable, and no part of theintellectual property has been judged invalid or unenforceable, in whole or in part, and to thebest of Borrower’s knowledge, no claim has been made that any part of the intellectual propertyviolates the rights of any third party except to the extent such claim could not reasonably beexpected to have a material adverse effect on Borrower’s business. Except as noted on thePerfection Certificate, as of the Effective Date, Borrower is not a party to, nor is bound by, anymaterial license or other agreement with respect to which Borrower is the licensee that prohibitsor otherwise restricts Borrower from granting a security interest in Borrower’s interest in suchlicense or agreement or any other property (where such prohibition or restriction is enforceableunder applicable law, including Section 9408 of the Code).     **5.3 Accounts Receivable**. For any Eligible Domestic Account and Eligible Foreign Account inany Borrowing Base Certificate, all statements made and all unpaid balances appearing in allinvoices, instruments and other documents evidencing such Eligible Domestic Accounts and EligibleForeign Accounts are and shall be true and correct and all such invoices, instruments and otherdocuments, and all of Borrower’s Books are genuine and in all respects what they purport to be.All sales and other transactions underlying or giving rise to each Eligible Domestic Account andEligible Foreign Account shall comply in all material respects with all applicable laws andgovernmental rules and regulations. Borrower has no knowledge of any actual or imminent InsolvencyProceeding of any Account Debtor whose accounts are an Eligible Domestic Account and EligibleForeign Account in any Borrowing Base Certificate. To the best of Borrower’s knowledge, allsignatures and endorsements on all documents, instruments, and agreements relating to all EligibleDomestic Accounts and Eligible Foreign Accounts are genuine, and all such documents, instrumentsand agreements are legally enforceable in accordance with their terms.     **5.4 Litigation**. Except as disclosed to Bank from time to time pursuant to Section 6.2 andwhich are reasonably satisfactory to Bank, there are no actions or proceedings pending or, to theknowledge of the Responsible Officers, threatened in writing by or against Borrower or any of itsSubsidiaries involving more than $500,000.     **5.5 No Material Deviation in Financial Statements**. All consolidated financial statements forBorrower and any of its Subsidiaries delivered to Bank fairly present in all material respectsBorrower’s consolidated financial condition and Borrower’s consolidated results of operations.There has not been any material deterioration in Borrower’s consolidated financial condition sincethe date of the most recent financial statements submitted to Bank.     **5.6 Solvency**. The fair salable value of Borrower’s and each Guarantor’s assets (includinggoodwill minus disposition costs) exceeds the fair value of its respective liabilities; NeitherBorrower nor any Guarantor is left with unreasonably small capital after the transactions in thisAgreement; and Borrower and each Guarantor are able to pay their debts (including trade debts) asthey mature.     **5.7 Regulatory Compliance**. Borrower is not an “investment company” or a company “controlled”by an “investment company” under the Investment Company Act. Borrower is not engaged as one of itsimportant activities in extending credit for margin stock (under Regulations T and U of the FederalReserve Board of Governors). Borrower has complied in all material respects with the Federal FairLabor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation ofwhich could reasonably be expected to have a material adverse effect on its business. None ofBorrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or anySubsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing,storing, treating, or transporting any hazardous substance other than legally. Borrower and eachof its Subsidiaries have obtained all consents, approvals and authorizations of, made alldeclarations or filings with, and given all notices to, all government authorities that arenecessary to continue its business as currently conducted.
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     **5.8 Subsidiaries; Investments**. Borrower does not own any stock, partnership interest or otherequity securities except for Permitted Investments.     **5.9 Tax Returns and Payments; Pension Contributions**. Borrower has timely filed all requiredtax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes,assessments, deposits and contributions owed by Borrower. Borrower may defer payment of anycontested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxesby appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank inwriting of the commencement of, and any material development in, the proceedings, (c) posts bondsor takes any other steps required to prevent the governmental authority levying such contestedtaxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”.Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax yearswhich could result in additional taxes becoming due and payable by Borrower. Borrower has paid allamounts necessary to fund all present pension, profit sharing and deferred compensation plans inaccordance with their terms, and Borrower has not withdrawn from participation in, and has notpermitted partial or complete termination of, or permitted the occurrence of any other event withrespect to, any such plan which could reasonably be expected to result in any liability ofBorrower, including any liability to the Pension Benefit Guaranty Corporation or its successors orany other governmental agency.     **5.10 Use of Proceeds**. Borrower shall use the proceeds of the Credit Extensions solely asworking capital and to fund its general business requirements, including acquisitions and capitalexpenditures, each to the extent permitted hereunder.     **5.11 Full Disclosure**. No written representation, warranty or other statement of Borrower inany certificate or written statement given to Bank, as of the date such representations,warranties, or other statements were made, taken together with all such written certificates andwritten statements given to Bank, contains any untrue statement of a material fact or omits tostate a material fact necessary to make the statements contained in the certificates or statementsnot misleading (it being recognized by Bank that the projections and forecasts provided by Borrowerin good faith and based upon reasonable assumptions are not viewed as facts and that actual resultsduring the period or periods covered by such projections and forecasts may differ from theprojected or forecasted results).     **6****AFFIRMATIVE COVENANTS**     Borrower shall do all of the following:     **6.1 Government Compliance**. Borrower shall, and shall cause each of its Subsidiaries to,maintain its legal existence and good standing in its jurisdiction of formation and eachjurisdiction in which the nature of its business requires them to be so qualified, except where thefailure to take such action would not reasonably be expected to have a material adverse effect onBorrower’s and its Subsidiaries’ business or operations, taken as a whole; provided, that(a) the legal existence of any Subsidiary that is not a Guarantor may be terminated or permitted tolapse, and any qualification of such Subsidiary to do business may be terminated or permitted tolapse, if, in the good faith judgment of Borrower, such termination or lapse is in the bestinterests of Borrower and its Subsidiaries, taken as a whole, and (b) Borrower may not permit itsqualification to do business in the jurisdiction of its chief executive office to terminate orlapse; and provided, further, that this Section 6.1 shall not be construed toprohibit any other transaction that is otherwise permitted in Section 7 of this Agreement.     Borrower shall comply, and shall have each Subsidiary comply, with all laws, ordinances andregulations to which it is subject, noncompliance with which could have a material adverse effecton Borrower’s business.     **6.2 Financial Statements, Reports, Certificates.**          (a) Deliver to Bank: (i) as soon as available, but no later than the earlier of (A) five (5)days after filing with the Securities Exchange Commission or (B) fifty (50) days after the end ofeach fiscal quarter, the Borrower’s 10Q; (ii) as soon as available, but no later than the earlierof (A) five (5) days after filing with the Securities Exchange Commission or (B) ninety (90) daysafter the end of each fiscal year, the Borrower’s 10K and an unqualified opinion of the financialstatements prepared by an independent certified public accounting firm reasonably acceptable toBank; (iii) as soon as available, but no later than five (5) days after filing with the SecuritiesExchange Commission, the Borrower’s 8K reports; (iv) within 45 days after the end of each fiscalyear, annual financial projections (which shall include projected balance sheets, income statementsand cash flow
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statements) for the following fiscal year (on a quarterly basis) as approved by Borrower’sboard of directors, together with any related business forecasts used in the preparation of suchannual financial projections; (v) a prompt report of any legal actions pending or threatenedagainst Borrower or any Subsidiary that could result in damages or costs to Borrower or anySubsidiary of $1,000,000 or more; and (vi) budgets, sales projections, operating plans or otherfinancial information Bank reasonably requests.     Borrower’s 10K, 10Q, and 8K reports required to be delivered pursuant to Section 6.2(a) shallbe deemed to have been delivered on the date on which Borrower posts such report or provides a linkthereto on Borrower’s or another website on the Internet; provided, that Borrower shallprovide paper copies to Bank of the Compliance Certificates required by Section 6.2(d).     (b) Within 30 days after the last day of each month, Borrower will deliver to Bank a cashbalance report detailing investment type and maturity dates.     (c) When the outstanding Obligations under Section 2.1 are equal to or greater than $3,000,000for longer than 3 consecutive Business Days during any calendar month, within thirty (30) daysafter the last day of such month, deliver to Bank a duly completed Borrowing Base Certificatesigned by a Responsible Officer, with aged listings of accounts receivable and accounts payable (byinvoice date).     (d) Within five (5) days after filing the 10Q and 10K, as applicable, with the SecuritiesExchange Commission or (B) fifty (50) days after the end of each fiscal quarter, deliver to Bankwith the quarterly financial statements, a duly completed Compliance Certificate signed by aResponsible Officer setting forth calculations showing compliance with the financial covenants setforth in this Agreement.     (e) The initial field examination shall be completed within 60 days of the Effective Date.Thereafter, allow Bank to audit Borrower’s Collateral at Borrower’s expense. Such audits shall beconducted no more often than once every twelve (12) months unless a Default or an Event of Defaulthas occurred and is continuing. Bank shall notify Borrower when such expenses reach $2,500 andeach multiple thereof.     **6.4 Post closing item.**Borrower shall obtain Comerica Bank’s authorization to file theexecuted Reassignment and Release of Security Interest of Security Interest dated as of January 23,2007 with the Patent and Trademark Office or Bank shall have received evidence of such filing byComerica Bank reasonably satisfactory to Bank, within 30 days of the Effective Date.     **6.5 Taxes; Pensions**. Make, and cause each of its Subsidiaries to make, timely payment of allforeign, federal, state, and local taxes or assessments (other than taxes and assessments whichBorrower is contesting pursuant to the terms of Section 5.9 hereof) and shall deliver to Bank, ondemand, appropriate certificates attesting to such payments, and pay all amounts necessary to fundall present pension, profit sharing and deferred compensation plans in accordance with their terms.     **6.6 Insurance**. Keep its business and the Collateral insured for risks and in amounts standardfor companies in Borrower’s industry and location and as Bank may reasonably request. Insurancepolicies shall be in a form, with companies, and in amounts that are satisfactory to Bank. Allproperty policies shall have a lender’s loss payable endorsement showing Bank as lender loss payeeand waive subrogation against Bank, and all liability policies shall show, or have endorsementsshowing, Bank as an additional insured. All policies (or the loss payable and additional insuredendorsements) shall provide that the insurer must give Bank at least twenty (20) days notice beforecanceling, amending, or declining to renew its policy. At Bank’s request, Borrower shall delivercertified copies of policies and evidence of all premium payments. Proceeds payable under anypolicy shall, at Bank’s option, be payable to Bank on account of the Obligations. Notwithstandingthe foregoing, (a)(x) so long as no Event of Default has occurred and is continuing, Borrower shallhave the option of applying the proceeds of any casualty policy up to $1,000,000, in the aggregate,toward the replacement or repair of destroyed or damaged property; provided that any such replacedor repaired property (i) shall be of equal or like value as the replaced or repaired Collateral and(ii) shall be deemed Collateral in which Bank has been granted a first priority security interest(subject to Permitted Liens), and (b)(y) after the occurrence and during the continuance of anEvent of Default, all proceeds payable under such casualty policy shall, at the option of Bank, bepayable to Bank on account of the Obligations. If Borrower fails to obtain insurance as requiredunder this Section 6.5 or to pay any amount or furnish any required proof of payment to thirdpersons and Bank, Bank may make all or part of such payment or obtain such insurance policiesrequired in this Section 6.5, and take any action under the policies Bank deems prudent.
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     **6.7 Operating Accounts**.     (a) Within 3 months of the Effective Date, maintain a significant portion of its and itsDomestic Subsidiaries’ domestic depository and operating accounts and domestic securities accountswith Bank and Bank’s affiliates.     (b) Provide Bank five (5) days prior written notice before establishing any Collateral Accountat or with any bank or financial institution other than Bank or its Affiliates. In addition, foreach Collateral Account that Borrower at any time maintains, Borrower shall cause the applicablebank or financial institution (other than Bank) at or with which any Collateral Account ismaintained to execute and deliver a Control Agreement or other appropriate instrument with respectto such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with theterms hereunder. The provisions of the previous sentence shall not apply to deposit accountsexclusively used for payroll, payroll taxes and other employee wage and benefit payments to or forthe benefit of Borrower’s employees and identified to Bank by Borrower as such.     **6.8 Financial Covenants**.          Borrower shall maintain at all times, unless otherwise noted, on a consolidated basis withrespect to Borrower and its Subsidiaries:          (a) Quick Ratio. Tested as of the last day of each fiscal quarter, a ratio of QuickAssets to Current Liabilities of at least 1.0 to 1.0.          (b) Tangible Net Worth. Tested as of the last day of each fiscal quarter, a TangibleNet Worth of at least $35,000,000, increasing by 50% of Net Income and 50% of net cash proceeds ofequity issuances after the Effective Date.     **6.9 Protection of Intellectual Property Rights**. Borrower shall: (a) protect, defend andmaintain the validity and enforceability of its intellectual property material to its businessconsistent with reasonable business practices for companies similar to Borrower, in Borrower’sindustry; (b) promptly advise Bank in writing of material infringements of its intellectualproperty; and (c) not allow any intellectual property material to Borrower’s business to beabandoned, forfeited or dedicated to the public unless Borrower’s Board of Directors determinesthat such abandonment, forefeiture or dedication is reasonable.     **6.10 Litigation Cooperation**. From the date hereof and continuing through the termination ofthis Agreement, make available to Bank, without expense to Bank, Borrower and its officers,employees and agents and Borrower’s books and records, to the extent that Bank may deem themreasonably necessary to prosecute or defend any third-party suit or proceeding instituted by oragainst Bank with respect to any Collateral or relating to Borrower.     **6.11 Designated Senior Indebtedness**. Borrower shall designate all principal of, interest(including all interest accruing after the commencement of any bankruptcy or similar proceeding,whether or not a claim for post-petition interest is allowable as a claim in any such proceeding),and all fees, costs, expenses and other amounts accrued or due under this Agreement as “DesignatedSenior Indebtedness”, or such similar term, in any future Subordinated Debt incurred by Borrowerafter the date hereof, if such Subordinated Debt contains such term or similar term and if theeffect of such designation is to grant to Bank the same or similar rights as granted to Bank as aholder of “Designated Senior Indebtedness” under any indenture.     **6.12 Further Assurances**. Borrower shall execute any further instruments and take furtheraction as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or toeffect the purposes of this Agreement.     **7****NEGATIVE COVENANTS**     Borrower shall not do any of the following without Bank’s prior written consent:     **7.1 Dispositions**. Convey, sell, lease, transfer or otherwise dispose of (collectively“**Transfer**”), or permit any of its Subsidiaries to Transfer, all or any part of its business orproperty, except for:
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          (a) Transfers in the ordinary course of business for reasonably equivalent consideration,including Transfers with Foreign Subsidiaries that are not prohibited by Section 7.8;          (b) Transfers (i) to Borrower, (ii) to any Guarantor, (iii) between any Subsidiaries that arenot Guarantors or (iv) from Borrower or any Guarantor to any of their Subsidiaries that are notGuarantors in an aggregate amount (when added together with Investments under item (m) of thedefinition of “Permitted Investments”), does not exceed $10,000,000 in the aggregate during fiscalyear 2007 or $5,000,000 in the aggregate during fiscal year 2008;          (c) Transfers of property for fair market value, including Transfers with Foreign Subsidiariesthat are not prohibited by Section 7.8;          (d) Transfers of property in connection with sale-leaseback transactions;          (e) Transfers of property to the extent such property is exchanged for credit against, orproceeds are promptly applied to, the purchase price of other property used or useful in thebusiness of Borrower or its Subsidiaries;          (f) Transfers constituting non-exclusive licenses and similar arrangements for the use of theproperty of Borrower or its Subsidiaries in the ordinary course of business and other non-perpetuallicenses that may be exclusive in some respects other than territory but that do not result in alegal transfer of Borrower’s title in the licensed property;          (g) Transfers otherwise permitted by the Loan Documents;          (h) sales or discounting of delinquent accounts in the ordinary course of business;          (i) Transfers associated with the making or disposition of a Permitted Investment;          (j) Transfers in connection with a permitted acquisition of a portion of the assets or rightsacquired; and          (k) Transfers not otherwise permitted in this Section 7.1, provided, that the aggregate bookvalue of all such Transfers by Borrower and its Subsidiaries, together, shall not exceed (whenadded together with the amount of Investments pursuant to item (o) of the definition of “PermittedInvestments”) in any fiscal year, $1,000,000.     **7.2 Changes in Business; Change in Control; Jurisdiction of Formation**.     Engage in any material line of business other than those lines of business conducted byBorrower and its Subsidiaries on the date hereof and any businesses reasonably related,complementary or incidental thereto or reasonable extensions thereof; permit or suffer any Changein Control. Borrower will not, without prior written notice, change its jurisdiction of formation.     **7.3 Mergers or Acquisitions.**          (a) Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with anyPerson; provided however,               (i) any Subsidiary that is not a Guarantor may merge or consolidate into Borrower or anySubsidiary,               (ii) any Guarantor may merge or consolidate with another Guarantor or into the Borrower; and               (iii) nothing in this clause (a) shall prohibit any merger or consolidation if (A) (1) noEvent of Default has occurred and is continuing or would result from such action during the term ofthis Agreement,
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or (2) if Borrower or a Guarantor is a party to such transaction, Borrower or such Guarantor,as the case maybe, is the surviving or successor entity business or (B) such merger orconsolidation is a Transfer otherwise permitted pursuant to Section 7.1 hereof; or     (b) acquire, or permit any of its Subsidiaries to acquire, all or substantially all of thecapital stock or property of a Person; provided however nothing in this clause (b) above shallprohibit any acquisition if (1) no Event of Default has occurred and is continuing or would resultfrom such action during the term of this Agreement, or (2) such acquisition is a Transfer otherwisepermitted pursuant to Section 7.1 hereof.     **7.4 Indebtedness**. Create, incur, assume, or be liable for any Indebtedness, or permit anySubsidiary to do so, other than Permitted Indebtedness.     **7.5 Encumbrance**. Create, incur, or allow any Lien on any of its property, or assign or conveyany right to receive income, including the sale of any Accounts, or permit any of its Subsidiariesto do so, except for Permitted Liens, permit any Collateral not to be subject to the first prioritysecurity interest granted herein,or enter into any agreement, document, instrument or otherarrangement (except with or in favor of Bank) with any Person which directly or indirectlyprohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging,pledging, granting a security interest in or upon, or encumbering any of Borrower’s or anySubsidiary’s intellectual property, except as is otherwise permitted in Section 7.1 hereof and thedefinition of “Permitted Lien” herein.     **7.6 Maintenance of Collateral Accounts**. Maintain any Collateral Account except pursuant tothe terms of Section 6.6.(b) hereof.     **7.7 Distributions; Investments**. (a) Directly or indirectly acquire or own any Person, or makeany Investment in any Person, other than Permitted Investments, or permit any of its Subsidiariesto do so; or (b) pay any dividends or make any distribution or payment or redeem, retire orpurchase any capital stock other than Permitted Distributions.     **7.8 Transactions with Affiliates**. Directly or indirectly enter into or permit to exist anymaterial transaction with any Affiliate of Borrower except for transactions that are in theordinary course of Borrower’s business, upon fair and reasonable terms (when viewed in the contextof any series of transactions of which it may be a part, if applicable) that are no less favorableto Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.     **7.9 Subordinated Debt**. Make or permit any payment on or amendments of any Subordinated Debt,except (a) payments pursuant to the terms of the applicable Subordination Agreement; (b) paymentsmade with Borrower’s capital stock or other Subordinated Debt; or (c) amendments to SubordinatedDebt so long as such Subordinated Debt remains subordinated in right of payment to this Agreementand any Liens securing such Subordinated Debt remain subordinate in priority to Bank’s Lienhereunder and such amendment is not adverse to the rights of Bank.     **7.10 Compliance**. Become an “investment company” or a company controlled by an “investmentcompany”, under the Investment Company Act of 1940 or undertake as one of its important activitiesextending credit to purchase or carry margin stock (as defined in Regulation U of the Board ofGovernors of the Federal Reserve System), or use the proceeds of any Credit Extension for thatpurpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event orProhibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair LaborStandards Act or violate any other law or regulation, if the violation could reasonably be expectedto have a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to doso; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or completetermination of, or permit the occurrence of any other event with respect to, any present pension,profit sharing and deferred compensation plan which could reasonably be expected to result in anyliability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or itssuccessors or any other governmental agency.     **8****EVENTS OF DEFAULT**     Any one of the following shall constitute an event of default (an “**Event of Default**”) underthis Agreement:
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     **8.1 Payment Default**. Borrower fails to (a) make any payment of principal or interest on anyCredit Extension on its due date, or (b) pay any other Obligations within five (5) Business Daysafter such Obligations are due and payable. During the cure period, the failure to cure thepayment default is not an Event of Default (but no Credit Extension will be made during the cureperiod);     **8.2 Covenant Default**.          (a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.6, 6.7, 6.10, 6.11or violates any covenant in Section 7; or          (b) Borrower fails or neglects to perform, keep, or observe any other term, provision,condition, covenant or agreement contained in this Agreement, any Loan Documents, and as to anydefault (other than those specified in Section 8 below) under such other term, provision,condition, covenant or agreement that can be cured, has failed to cure the default within ten (10)days after the occurrence thereof; provided, however, that if the default cannot by its nature becured within the ten (10) day period or cannot after diligent attempts by Borrower be cured withinsuch ten (10) day period, and such default is likely to be cured within a reasonable time, thenBorrower shall have an additional period (which shall not in any case exceed thirty (30) days) toattempt to cure such default, and within such reasonable time period the failure to cure thedefault shall not be deemed an Event of Default (but no Credit Extensions shall be made during suchcure period). Grace periods provided under this section shall not apply, among other things, tofinancial covenants or any other covenants set forth in subsection (a) above;     **8.3 Material Adverse Change**. A Material Adverse Change occurs;     **8.4 Attachment**. (a) Any material portion of Borrower’s assets is attached, seized, levied on,or comes into possession of a trustee or receiver and the attachment, seizure or levy is notremoved in ten (10) days; (b) the service of process upon Borrower seeking to attach, by trustee orsimilar process, any funds of Borrower on deposit with Bank, or any entity under control of Bank(including a subsidiary); (c) Borrower is enjoined, restrained, or prevented by court order fromconducting a material part of its business; (d) a judgment or other claim in excess of $750,000becomes a Lien on any of Borrower’s assets; or (e) a notice of lien, levy, or assessment is filedagainst any material portion of Borrower’s assets by any government agency and not paid within ten(10) days after Borrower receives notice. These are not Events of Default if stayed or if a bondis posted pending contest by Borrower (but no Credit Extensions shall be made during the cureperiod);     **8.5 Insolvency**. Borrower is unable to pay its debts (including trade debts) as they becomedue or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) anInsolvency Proceeding is begun against Borrower and not dismissed or stayed within thirty (30) days(but no Credit Extensions shall be made while of any of the conditions described in clause (a)exist and/or until any Insolvency Proceeding is dismissed);     **8.6 Other Agreements**. If Borrower fails to (a) make any payment that is due and payable withrespect to any Material Indebtedness and such failure continues after the applicable grace ornotice period, if any, specified in the agreement or instrument relating thereto, or (b) perform orobserve any other condition or covenant, or any other event shall occur or condition exist underany agreement or instrument relating to any Material Indebtedness, and such failure continues afterthe applicable grace or notice period, if any, specified in the agreement or instrument relatingthereto and the effect of such failure, event or condition is to cause the holder or holders ofsuch Material Indebtedness to accelerate the maturity of such Material Indebtedness or cause themandatory repurchase of any Material Indebtedness;     **8.7 Judgments**. A judgment or judgments for the payment of money in an amount, individually orin the aggregate, of at least $750,000 (not covered by independent third-party insurance) shall berendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) daysafter the entry thereof (provided that no Credit Extensions will be made prior to the satisfactionor stay of such judgment);     **8.8 Misrepresentations**. Borrower or any Person acting for Borrower makes any representation,warranty, or other statement now or later in this Agreement, any Loan Document or in any writingdelivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and suchrepresentation, warranty, or other statement is incorrect in any material respect when made;
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     **8.9 Subordinated Debt**. A default or breach occurs under any agreement between Borrower andany creditor of Borrower that signed a subordination, intercreditor, or other similar agreementwith Bank, or any creditor that has signed such an agreement with Bank breaches any terms of suchagreement; or     **8.10 Guaranty**. (a) Any guaranty of any Obligations terminates or ceases for any reason to bein full force and effect; (b) any Guarantor does not perform any obligation or covenant under anyguaranty of the Obligations; (c) any circumstance described in Sections 8.4, 8.5, 8.7, or 8.8.occurs with respect to any Guarantor, or (d) the liquidation, winding up, or termination ofexistence of any Guarantor.     **9****BANK’S RIGHTS AND REMEDIES**     **9.1 Rights and Remedies**. While an Event of Default occurs and continues Bank may, withoutnotice or demand, do any or all of the following:          (a) declare all Obligations immediately due and payable (but if an Event of Default describedin Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);          (b) stop advancing money or extending credit for Borrower’s benefit under this Agreement orunder any other agreement between Borrower and Bank;          (c) demand that Borrower (i) deposits cash with Bank in an amount equal to the aggregateamount of any Letters of Credit remaining undrawn, as collateral security for the repayment of anyfuture drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay suchamounts, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over theremaining term of any Letters of Credit;          (d) terminate any FX Contracts;          (e) settle or adjust disputes and claims directly with Account Debtors for amounts on termsand in any order that Bank considers advisable, notify any Person owing Borrower money of Bank’ssecurity interest in such funds, and verify the amount of such account;          (f) make any payments and do any acts it considers necessary or reasonable to protect theCollateral and/or its security interest in the Collateral. Borrower shall assemble the Collateralif Bank requests and make it available as Bank designates. Bank may enter premises where theCollateral is located, take and maintain possession of any part of the Collateral, and pay,purchase, contest, or compromise any Lien which appears to be prior or superior to its securityinterest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any ofits premises, without charge, to exercise any of Bank’s rights or remedies;          (g) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) anyamount held by Bank owing to or for the credit or the account of Borrower;          (h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise forsale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license orother right to use, without charge, Borrower’s labels, patents, copyrights, mask works, rights ofuse of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, orany similar property as it pertains to the Collateral, in completing production of, advertising forsale, and selling any Collateral and, in connection with Bank’s exercise of its rights under thisSection, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;          (i) place a “hold” on any account maintained with Bank and/or deliver a notice of exclusivecontrol, any entitlement order, or other directions or instructions pursuant to any ControlAgreement or similar agreements providing control of any Collateral;          (j) demand and receive possession of Borrower’s Books; and          (k) exercise all rights and remedies available to Bank under the Loan Documents or at law orequity, including all remedies provided under the Code (including disposal of the Collateralpursuant to the terms thereof).
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     **9.2 Power of Attorney**. Borrower hereby irrevocably appoints Bank as its lawfulattorney-in-fact, exercisable upon the occurrence and during the continuance of an Event ofDefault, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b)sign Borrower’s name on any invoice or bill of lading for any Account or drafts against AccountDebtors; (c) settle and adjust disputes and claims about the Accounts directly with AccountDebtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust allclaims under Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge,encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment basedthereon, or otherwise take any action to terminate or discharge the same; and (f) transfer theCollateral into the name of Bank or a third party as the Code permits. Borrower hereby appointsBank as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfector continue the perfection of any security interest regardless of whether an Event of Default hasoccurred until all Obligations have been satisfied in full and Bank is under no further obligationto make Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s attorney in fact,and all of Bank’s rights and powers, coupled with an interest, are irrevocable until allObligations have been fully repaid and performed and Bank’s obligation to provide Credit Extensionsterminates.     **9.3 Accounts Verification; Collection**. Whether or not an Event of Default has occurred and iscontinuing, Bank may notify any Person owing Borrower money of Bank’s security interest in suchfunds and verify the amount of such account. After the occurrence of an Event of Default, anyamounts received by Borrower shall be held in trust by Borrower for Bank, and, if requested byBank, Borrower shall immediately deliver such receipts to Bank in the form received from theAccount Debtor, with proper endorsements for deposit.     **9.4 Protective Payments**. If Borrower fails to obtain the insurance called for by Section 6.5or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated topay under this Agreement or any other Loan Document, Bank may obtain such insurance or make suchpayment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearinginterest at the then highest applicable rate, and secured by the Collateral. Bank will makereasonable efforts to provide Borrower with notice of Bank obtaining such insurance at the time itis obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement tomake similar payments in the future or Bank’s waiver of any Event of Default.     **9.5 Application of Payments and Proceeds**. Unless an Event of Default has occurred and iscontinuing, Bank shall apply any funds in its possession, whether from Borrower account balances,payments, or proceeds realized as the result of any collection of Accounts or other disposition ofthe Collateral, first, to Bank Expenses, including without limitation, the reasonable costs,expenses, liabilities, obligations and attorneys’ fees incurred by Bank in the exercise of itsrights under this Agreement; second, to the interest due upon any of the Obligations; and third, tothe principal of the Obligations and any applicable fees and other charges, in such order as Bankshall determine in its sole discretion. Any surplus shall be paid to Borrower or other Personslegally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If an Event ofDefault has occurred and is continuing, Bank may apply any funds in its possession, whether fromBorrower account balances, payments, proceeds realized as the result of any collection of Accountsor other disposition of the Collateral, or otherwise, to the Obligations in such order as Bankshall determine in its sole discretion. Any surplus shall be paid to Borrower or other Personslegally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, in itsgood faith business judgment, directly or indirectly enters into a deferred payment or other credittransaction with any purchaser at any sale of Collateral, Bank shall have the option, exercisableat any time, of either reducing the Obligations by the principal amount of the purchase price ordeferring the reduction of the Obligations until the actual receipt by Bank of cash therefor.     **9.6 Bank’s Liability for Collateral**. So long as Bank complies with reasonable bankingpractices regarding the safekeeping of the Collateral in the possession or under the control ofBank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) anyloss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any actor default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss,damage or destruction of the Collateral.     **9.7 No Waiver; Remedies Cumulative**. Bank’s failure, at any time or times, to require strictperformance by Borrower of any provision of this Agreement or any other Loan Document shall notwaive, affect, or diminish any right of Bank thereafter to demand strict performance and complianceherewith or therewith. No waiver hereunder shall be effective unless signed by Bank and then isonly effective for the specific instance and purpose for which it is given. Bank’s rights andremedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights andremedies provided under the Code, by law, or in equity. Bank’s exercise of one
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right or remedy is not an election, and Bank’s waiver of any Event of Default is not acontinuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, oracquiescence.     **9.8 Demand Waiver**. Borrower waives demand, notice of default or dishonor, notice of paymentand nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement,extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held byBank on which Borrower is liable.     **10****NOTICES**     All notices, consents, requests, approvals, demands, or other communication (collectively,“**Communication**”) by any party to this Agreement or any other Loan Document must be in writing andshall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actualreceipt and three (3) Business Days after deposit in the U.S. mail, first class, registered orcertified mail return receipt requested, with proper postage prepaid; (b) upon transmission, whensent by electronic mail or facsimile transmission; (c) one (1) Business Day after deposit with areputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered bymessenger, all of which shall be addressed to the party to be notified and sent to the address,facsimile number, or email address indicated below. Bank or Borrower may change its address orfacsimile number by giving the other party written notice thereof in accordance with the terms ofthis Section 10.       If to Borrower: RAE Systems Inc.    3775 North First Street    San Jose, California 95134    Attn: Chief Financial Officer    Fax: (408) 952-8480       If to Bank: Silicon Valley Bank    3979 Freedom Circle, Suite 600    Santa Clara, California 95054    Attn: Tom Smith    Fax: (408) 654-5517     **11****CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER**California law governs the Loan Documents without regard to principles of conflicts of law.Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts inSanta Clara County, California; provided, however, that nothing in this Agreement shall be deemedto operate to preclude Bank from bringing suit or taking other legal action in any otherjurisdiction to realize on the Collateral or any other security for the Obligations, or to enforcea judgment or other court order in favor of Bank. Borrower expressly submits and consents inadvance to such jurisdiction in any action or suit commenced in any such court, and Borrower herebywaives any objection that it may have based upon lack of personal jurisdiction, improper venue, orforum non conveniens and hereby consents to the granting of such legal or equitable relief as isdeemed appropriate by such court. Borrower hereby waives personal service of the summons,complaints, and other process issued in such action or suit and agrees that service of suchsummons, complaints, and other process may be made by registered or certified mail addressed toBorrower at the address set forth in Section 10 of this Agreement and that service so made shall bedeemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) daysafter deposit in the U.S. mails, proper postage prepaid.TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIALOF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS ORANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THISWAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HASREVIEWED THIS WAIVER WITH ITS COUNSEL.WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO ATRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the partieshereto agree that any and all disputes or controversies of any nature between them arising at anytime
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shall be decided by a reference to a private judge, mutually selected by the parties (or, if theycannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court)appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant tocomparable provisions of federal law if the dispute falls within the exclusive jurisdiction of thefederal courts), sitting without a jury, in Santa Clara County, California; and the parties herebysubmit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant toand in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1,inclusive. The private judge shall have the power, among others, to grant provisional relief,including without limitation, entering temporary restraining orders, issuing preliminary andpermanent injunctions and appointing receivers. All such proceedings shall be closed to the publicand confidential and all records relating thereto shall be permanently sealed. If during thecourse of any dispute, a party desires to seek provisional relief, but a judge has not beenappointed at that point pursuant to the judicial reference procedures, then such party may apply tothe Santa Clara County, California Superior Court for such relief. The proceeding before theprivate judge shall be conducted in the same manner as it would be before a court under the rulesof evidence applicable to judicial proceedings. The parties shall be entitled to discovery whichshall be conducted in the same manner as it would be before a court under the rules of discoveryapplicable to judicial proceedings. The private judge shall oversee discovery and may enforce alldiscovery rules and order applicable to judicial proceedings in the same manner as a trial courtjudge. The parties agree that the selected or appointed private judge shall have the power todecide all issues in the action or proceeding, whether of fact or of law, and shall report astatement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothingin this paragraph shall limit the right of any party at any time to exercise self-help remedies,foreclose against collateral, or obtain provisional remedies. The private judge shall alsodetermine all issues relating to the applicability, interpretation, and enforceability of thisparagraph.     **12****GENERAL PROVISIONS**     **12.1 Successors and Assigns**. This Agreement binds and is for the benefit of the successorsand permitted assigns of each party. Borrower may not assign this Agreement or any rights orobligations under it without Bank’s prior written consent (which may be granted or withheld inBank’s discretion). Bank has 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’sobligations, rights, and benefits under this Agreement and the other Loan Documents.     **12.2 Indemnification**. Borrower agrees to indemnify, defend and hold Bank and its directors,officers, employees, agents, attorneys, or any other Person affiliated with or representing Bankharmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”)asserted by any other party in connection with the transactions contemplated by the Loan Documents;and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or arising fromtransactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), exceptfor Claims and/or losses directly 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 in thisAgreement.     **12.4 Severability of Provisions**. Each provision of this Agreement is severable from everyother provision in determining the enforceability of any provision.     **12.5 Amendments in Writing; Integration**. All amendments to this Agreement must be in writingsigned by both Bank and Borrower. This Agreement and the Loan Documents represent the entireagreement about this subject matter and supersede prior negotiations or agreements. All prioragreements, understandings, representations, warranties, and negotiations between the parties aboutthe subject matter of this Agreement and the Loan Documents merge into this Agreement and the LoanDocuments.     **12.6 Counterparts**. This Agreement may be executed in any number of counterparts and bydifferent parties on separate counterparts, each of which, when executed and delivered, are anoriginal, and all taken together, constitute one Agreement.     **12.7 Survival**. All covenants, representations and warranties made in this Agreement continuein full force until this Agreement has terminated pursuant to its terms and all Obligations (otherthan inchoate indemnity obligations and any other obligations which, by their terms, are to survivethe termination of this Agreement) have
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been satisfied. The obligation of Borrower in Section 12.2 to indemnify Bank shall surviveuntil the statute of limitations with respect to such claim or cause of action shall have run.     **12.8 Confidentiality**. In handling any confidential information, Bank shall exercise the samedegree of care that it exercises for its own proprietary information, but disclosure of informationmay be made: (a) to Bank’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasersof any interest in the Credit Extensions (provided, however, Bank shall use commercially reasonableefforts to obtain such prospective transferee’s or purchaser’s agreement to the terms of thisprovision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulatorsor as otherwise required in connection with Bank’s examination or audit; and (e) as Bank considersappropriate in exercising remedies under this Agreement. Confidential information does not includeinformation that either: (i) is in the public domain or in Bank’s possession when disclosed toBank, or becomes part of the public domain after disclosure to Bank; or (ii) is disclosed to Bankby a third party, if Bank does not know that the third party is prohibited from disclosing theinformation.     **12.9 Attorneys’ Fees, Costs and Expenses**. In any action or proceeding between Borrower andBank arising out of or relating to the Loan Documents, the prevailing party shall be entitled torecover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to anyother relief to which it may be entitled.     **13****DEFINITIONS**     **13.1 Definitions**. As used in this Agreement, the following terms have the following meanings:     “**Account**” is any “account” as defined in the Code with such additions to such term as mayhereafter be made, and includes, without limitation, all accounts receivable and other sums owingto Borrower.     “**Account Debtor**” is any “account debtor” as defined in the Code with such additions to suchterm as may hereafter be made.     “**Advance**” or “**Advances**” means an advance (or advances) under the Revolving Line.     “**Affiliate**” of any Person is a Person that owns or controls directly or indirectly the Person,any Person that controls or is controlled by or is under common control with the Person, and eachof that Person’s senior executive officers, directors, partners and, for any Person that is alimited liability company, that Person’s managers and members.     “**Agreement**” is defined in the preamble hereof.     “**Bank**” is defined in the preamble hereof.     “**Bank Expenses**” are all audit fees and expenses, costs, and expenses (including reasonableattorneys’ fees and expenses) for preparing, negotiating, administering, defending and enforcingthe Loan Documents (including, without limitation, those incurred in connection with appeals orInsolvency Proceedings) or otherwise incurred with respect to Borrower.     “**Bankruptcy-Related Defaults**” is defined in Section 9.1.     “**Borrower**” is defined in the preamble hereof     “**Borrower’s Books**” are all Borrower’s books and records including ledgers, federal and statetax returns, records regarding Borrower’s assets or liabilities, the Collateral, businessoperations or financial condition, and all computer programs or storage or any equipment containingsuch information.     “**Borrowing Base**” is (a) $7,000,000 plus (b) 80% of Eligible Accounts, as determined by Bankfrom Borrower’s most recent Borrowing Base Certificate; provided, however, that Bank may decreasethe foregoing percentages in its good faith business judgment based on events (including withoutlimitation, the initial field audit examination and the on-going periodic examinations),conditions, contingencies, or risks which, as determined by Bank, may adversely affect Collateral.
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     “**Borrowing Base Certificate**” is that certain certificate in the form attached hereto asExhibit C.     “**Borrowing Resolutions**” are, with respect to any Person, those resolutions adopted by suchPerson’s Board of Directors and delivered by such Person to Bank approving the Loan Documents towhich such Person is a party and the transactions contemplated thereby, together with a certificateexecuted by its secretary on behalf of such Person certifying that (a) such Person has theauthority to execute, deliver, and perform its obligations under each of the Loan Documents towhich it is a party, (b) that attached to such certificate is a true, correct, and complete copy ofthe resolutions then in full force and effect authorizing and ratifying the execution, delivery,and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of thePerson(s) authorized to execute the Loan Documents on behalf of such Person, together with a sampleof the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on suchcertificate unless and until such Person shall have delivered to Bank a further certificatecanceling or amending such prior certificate.     “**Business Day**” is any day that is not a Saturday, Sunday or a day on which Bank is closed.     **“Cash Equivalents”**means (a) marketable direct obligations issued or unconditionallyguaranteed by the United States or any agency or any State thereof having maturities of not morethan one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1)year after its creation and having the highest rating from either Standard & Poor’s Ratings Groupor Moody’s Investors Service, Inc., (c) Bank’s certificates of deposit issued maturing no more thanone (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of theassets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) ofthis definition.     **“Cash Management Services”**is defined in Section 2.1.4.     **“Cash Management Services Sublimit”**is defined in Section 2.1.4.     “**Change in Control**” means any event, transaction, or occurrence as a result of which (a) any“person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Actof 1934, as an amended (the “**Exchange Act**”)), other than a trustee or other fiduciary holdingsecurities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within themeaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities ofBorrower, representing fifty percent (50%) or more of the combined voting power of Borrower’s thenoutstanding securities; or (b) during any period of twelve consecutive calendar months, individualswho at the beginning of such period constituted the Board of Directors of Borrower (together withany new directors whose election by the Board of Directors of Borrower was approved or ratified byat least a majority of the directors then still in office who either were directions at thebeginning of such period or whose election or nomination for election was previously so approved)cease for any reason other than death or disability to constitute a majority of the directors thenin office.     “**Code**” is the Uniform Commercial Code, as the same may, from time to time, be enacted and ineffect in the State of California; provided, that, to the extent that the Code is used to defineany term herein or in any Loan Document and such term is defined differently in different Articlesor Divisions of the Code, the definition of such term contained in Article or Division 9 shallgovern; provided further, that in the event that, by reason of mandatory provisions of law, any orall of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on anyCollateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than theState of California, the term “**Code**” shall mean the Uniform Commercial Code as enacted and ineffect in such other jurisdiction solely for purposes on the provisions thereof relating to suchattachment, perfection, priority, or remedies and for purposes of definitions relating to suchprovisions.     “**Collateral**” is any and all properties, rights and assets of Borrower described on ExhibitA.     “**Collateral Account**” is any Deposit Account, Securities Account, or Commodity Accountmaintained by Borrower or a Domestic Subsidiary where such account is located in the United States.     “**Commodity Account**” is any “commodity account” as defined in the Code with such additions tosuch term as may hereafter be made.     “**Communication**” is defined in Section 10.
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     “**Compliance Certificate**” is that certain certificate in the form attached hereto asExhibit D**.**     “**Contingent Obligation**” is, for any Person, any direct or indirect liability, contingent ornot, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligationof another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discountedor sold with recourse by that Person, or for which that Person is directly or indirectly liable;(b) any obligations for undrawn letters of credit for the account of that Person; and (c) allobligations from any interest rate, currency or commodity swap agreement, interest rate cap orcollar agreement, or other agreement or arrangement designated to protect a Person againstfluctuation in interest rates, currency exchange rates or commodity prices; but “ContingentObligation” does not include endorsements in the ordinary course of business. The amount of aContingent Obligation is the stated or determined amount of the primary obligation for which theContingent Obligation is made or, if not determinable, the maximum reasonably anticipated liabilityfor it determined by the Person in good faith; but the amount may not exceed the maximum of theobligations under any guarantee or other support arrangement.     “**Control Agreement**” is any control agreement entered into among the depository institution atwhich Borrower maintains a Deposit Account or the securities intermediary or commodity intermediaryat which Borrower maintains a Securities Account or a Commodity account, Borrower, and Bankpursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account,Securities Account, or Commodity Account.     “**Credit Extension**” is any Advance, Letter of Credit, FX Forward Contract, amount utilized forCash Management Services or any other extension of credit by Bank for Borrower’s benefit.     “**Current Liabilities**” are all obligations and liabilities of Borrower to Bank, plus, withoutduplication, the aggregate amount of Borrower’s Total Liabilities that mature within one (1) year.     “**Default**” means any event which with notice or passage of time or both, would constitute anEvent of Default.     “**Default Rate**” is defined in Section 2.3(b).     “**Deposit Account**” is any “deposit account” as defined in the Code with such additions to suchterm as may hereafter be made.     “**Designated Deposit Account**” is Borrower’s deposit account, account number 3300556715,maintained with Bank.     “**Dollars***,*” “**dollars**” and “**$**” each mean lawful money of the United States.     “**Domestic Subsidiary**” means a Subsidiary organized under the laws of the United States or anystate or territory thereof or the District of Columbia.     “**Effective Date**” is the date Bank executes this Agreement and as indicated on the signaturepage hereof.     “**Eligible Accounts**” are Accounts which arise in the ordinary course of Borrower’s businessthat meet all Borrower’s representations and warranties in Section 5.3. Bank reserves the right atany time and from time to time after the Effective Date, to adjust any of the criteria set forthbelow and to establish new criteria in its good faith business judgment. Unless Bank agreesotherwise in writing, Eligible Accounts shall not include:     (a) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date;     (b) Accounts owing from an Account Debtor, fifty percent (50%) or more of whose Accounts havenot been paid within ninety (90) days of invoice date;     (c) Credit balances over ninety (90) days from invoice date;     (d) Accounts owing from an Account Debtor, including Affiliates, whose total obligations toBorrower exceed twenty-five (25%) of all Accounts, for the amounts that exceed that percentage,unless Bank approves in writing;
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     (e) Accounts owing from an Account Debtor which does not have its principal place of businessin the United States except for Eligible Foreign Accounts;     (f) Accounts owing from an Account Debtor which is a federal, state or local government entityor any department, agency, or instrumentality thereof except for Accounts of the United States ifBorrower has assigned its payment rights to Bank and the assignment has been acknowledged under theFederal Assignment of Claims Act of 1940, as amended;     (g) Accounts owing from an Account Debtor to the extent that Borrower is indebted or obligatedin any manner to the Account Debtor (as creditor, lessor, supplier or otherwise — sometimes called“contra” accounts, accounts payable, customer deposits or credit accounts), with the exception ofcustomary credits, adjustments and/or discounts given to an Account Debtor by Borrower in theordinary course of its business;     (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, orsold on a “sale guaranteed”, “sale or return”, “sale on approval”, “bill and hold”, or other termsif Account Debtor’s payment may be conditional;     (i) Accounts for which the Account Debtor is Borrower’s Affiliate, officer, employee, oragent;     (j) Accounts in which the Account Debtor disputes liability or makes any claim (but only up tothe disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding,or becomes insolvent, or goes out of business;     (k) Accounts owing from an Account Debtor with respect to which Borrower has received deferredrevenue (but only to the extent of such deferred revenue);     (l) Accounts for which Bank in its good faith business judgment determines collection to bedoubtful; and     (m) other Accounts Bank deems ineligible in the exercise of its good faith business judgment.     “**Eligible Foreign Accounts**” are Accounts for which the Account Debtor does not have itsprincipal place of business in the United States but are otherwise Eligible Accounts that are (a)either covered by credit insurance satisfactory to Bank, less any deductible or supported byletter(s) of credit acceptable to Bank; and (b) approved by Bank in writing.     “**Equipment**” is all “equipment” as defined in the Code with such additions to such term as mayhereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles(including motor vehicles and trailers), and any interest in any of the foregoing.     “**ERISA**” is the Employment Retirement Income Security Act of 1974, and its regulations.     “**Event of Default**” is defined in Section 8.     **“Foreign Currency”**means lawful money of a country other than the United States.     **“Foreign Subsidiary”**means any Subsidiary which is not a Domestic Subsidiary.     “**Funding Date**” is any date on which a Credit Extension is made to or on account of Borrowerwhich shall be a Business Day.     “**FX Business Day**” is any day when (a) Bank’s Foreign Exchange Department is conducting itsnormal business and (b) the Foreign Currency being purchased or sold by Borrower is available toBank from the entity from which Bank shall buy or sell such Foreign Currency.     “**FX Forward Contract**” is defined in Section 2.1.3.
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     “**FX Reserve**” is defined in Section 2.1.3.     “**GAAP**” is generally accepted accounting principles set forth in the opinions andpronouncements of the Accounting Principles Board of the American Institute of Certified PublicAccountants and statements and pronouncements of the Financial Accounting Standards Board or insuch other statements by such other Person as may be approved by a significant segment of theaccounting profession, which are applicable to the circumstances as of the date of determination.     “**General Intangibles**” is all “general intangibles” as defined in the Code in effect on thedate hereof with such additions to such term as may hereafter be made, and includes withoutlimitation, all copyright rights, copyright applications, copyright registrations and likeprotections in each work of authorship and derivative work, whether published or unpublished, anypatents, trademarks, service marks and, to the extent permitted under applicable law, anyapplications therefor, whether registered or not, any trade secret rights, including any rights tounpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchiseagreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims,income and other tax refunds, security and other deposits, options to purchase or sell real orpersonal property, rights in all litigation presently or hereafter pending (whether in contract,tort or otherwise), insurance policies (including without limitation key man, property damage, andbusiness interruption insurance), payments of insurance and rights to payment of any kind.     “**Guarantor**” is any present or future guarantor of the Obligations.     “**Indebtedness**” is (a) indebtedness for borrowed money or the deferred price of property orservices, such as reimbursement and other obligations for surety bonds and letters of credit, (b)obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital leaseobligations, and (d) Contingent Obligations.     “**Insolvency Proceeding**” is any proceeding by or against any Person under the United StatesBankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefitof creditors, compositions, extensions generally with its creditors, or proceedings seekingreorganization, arrangement, or other relief.     “**Inventory**” is all “inventory” as defined in the Code in effect on the date hereof with suchadditions to such term as may hereafter be made, and includes without limitation all merchandise,raw materials, parts, supplies, packing and shipping materials, work in process and finishedproducts, including without limitation such inventory as is temporarily out of Borrower’s custodyor possession or in transit and including any returned goods and any documents of titlerepresenting any of the above.     “**Investment**” is any beneficial ownership interest in any Person (including stock, partnershipinterest or other securities), and any loan, advance or capital contribution to any Person.     “**Letter of Credit”**means a standby letter of credit issued by Bank or another institutionbased upon an application, guarantee, indemnity or similar agreement on the part of Bank as setforth in Section 2.1.2.     “**Letter of Credit Application**” is defined in Section 2.1.2(a).     “**Letter of Credit Reserve**” has the meaning set forth in Section 2.1.2(d).     “**Lien**” is a mortgage, lien, deed of trust, charge, pledge, security interest or otherencumbrance.     “**Loan Amount**” in respect of each Equipment Advance is the original principal amount of suchEquipment Advance.     “**Loan Documents**” are, collectively, this Agreement, the Perfection Certificate, theSubordination Agreement, any note, or notes or guaranties executed by Borrower or any Guarantor,and any other present or future agreement between Borrower any Guarantor and/or for the benefit ofBank in connection with this Agreement, all as amended, restated, or otherwise modified.     **“Material Adverse Change”**is (a) a material impairment in the perfection or priority of Bank’sLien in the Collateral or in the value of such Collateral; (b) a material adverse change in thebusiness, operations, or condition (financial or otherwise) of Borrower and the Guarantors, takenas a whole; or (c) a material impairment of
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the prospect of repayment of any portion of the Obligations or (d) Bank determines, based uponinformation available to it and in its reasonable judgment, that there is a reasonable likelihoodthat Borrower shall fail to comply with one or more of the financial covenants in Section 6 duringthe next succeeding financial reporting period.     “**Material Indebtedness**” is any Indebtedness the principal amount of which is equal to orgreater than $1,000,000.     “**Net Income**” means, as calculated on a consolidated basis for Borrower and its Subsidiariesfor any period as at any date of determination, the net profit (or loss), after provision fortaxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.     “**Obligations**” are Borrower’s obligation to pay when due any debts, principal, interest, BankExpenses and other amounts Borrower owes Bank now or later, whether under this Agreement, the LoanDocuments, or otherwise, including, without limitation, all obligations relating to letters ofcredit, cash management services, and foreign exchange contracts, if any, and including interestaccruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrowerassigned to Bank, and the performance of Borrower’s duties under the Loan Documents.     **“Operating Documents”**are, for any Person, such Person’s formation documents, as certifiedwith the Secretary of State of such Person’s state of formation, and, (a) if such Person is acorporation, its bylaws in current form, (b) if such Person is a limited liability company, itslimited liability company agreement (or similar agreement), and (c) if such Person is apartnership, its partnership agreement (or similar agreement), each of the foregoing with allcurrent amendments or modifications thereto.     “**Payment/Advance Form**” is that certain form attached hereto as Exhibit B.     “**Perfection Certificate**” is defined in Section 5.1.     “**Permitted Distributions**” means:     (a) purchases of capital stock from former employees, consultants and directors pursuant torepurchase agreements or other similar agreements in an aggregate amount not to exceed $500,000 inany fiscal year provided that at the time of such purchase no Default or Event of Default hasoccurred and is continuing;     (b) distributions or dividends consisting solely of Borrower’s capital stock;     (c) purchases for value of any rights distributed in connection with any stockholder rightsplan;     (d) purchases of capital stock or options to acquire such capital stock with the proceedsreceived from a substantially concurrent issuance of capital stock or convertible securities;     (e) purchases of capital stock pledged as collateral for loans to employees;     (f) purchases of capital stock in connection with the exercise of stock options or stockappreciation rights by way of cashless exercise or in connection with the satisfaction ofwithholding tax obligations;     (g) purchases of fractional shares of capital stock arising out of stock dividends, splits orcombinations or business combinations; and     (h) the settlement or performance of such Person’s obligations under any equity derivativetransaction, option contract or similar transaction or combination of transactions.     “**Permitted Indebtedness**” is:     (a) Borrower’s Indebtedness to Bank under this Agreement or any other Loan Document;     (b) any Indebtedness shown on the Perfection Certificate and satisfactory to Bank;     (c) Subordinated Debt;
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     (d) unsecured Indebtedness to trade creditors and with respect to surety bonds and similarobligations incurred in the ordinary course of business;     (e) guaranties of Permitted Indebtedness;     (f) Indebtedness incurred as a result of endorsing negotiable instruments received in theordinary course of business;     (g) Indebtedness consisting of interest rate, currency, or commodity swap agreements, interestrate cap or collar agreements or arrangements designated to protect a Person against fluctuationsin interest rates, currency exchange rates, or commodity prices;     (h) Indebtedness between Borrower and any of its Subsidiaries or among any of Borrower’sSubsidiaries;     (i) capitalized leases and purchase money Indebtedness not to exceed $1,000,000 in theaggregate in any fiscal year secured by Permitted Liens;     (j) Indebtedness incurred by a Foreign Subsidiary that is not a Guarantor;     (k) refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is notincreased except by an amount equal to a reasonable premium or other reasonable amount paid inconnection with such refinancing and by an amount equal to any existing, but unutilized, commitmentthereunder; and     (l) other Indebtedness, if, on the date of incurring any Indebtedness pursuant to this clause(l), the outstanding aggregate amount of all Indebtedness incurred pursuant to this clause (l) doesnot exceed $1,000,000.     “**Permitted Investments**” are:     (a) Investments existing on the Effective Date;     (b) (i) marketable direct obligations issued or unconditionally guaranteed by the UnitedStates or its agencies or any State maturing within 1 year from its acquisition, (ii) commercialpaper maturing no more than 2 years after its creation and having the highest rating from eitherStandard & Poor’s Corporation or Moody’s Investors Service, Inc., and (iii) Bank’s certificates ofdeposit maturing no more than 2 years after issue;     (c) Investments approved by the Borrower’s Board of Directors or otherwise pursuant to aBoard-approved investment policy;     (d) Investments in or to Borrower or any of its Subsidiaries existing on the date hereof andany Investment by Borrower in any Guarantor after the date hereof;     (e) Investments consisting of Collateral Accounts in the name of Borrower or any Subsidiary solong as Bank has a first priority, perfected security interest in such Collateral Accounts;     (f) Investments consisting of extensions of credit to Borrower’s or its Subsidiaries’customers in the nature of accounts receivable, prepaid royalties or notes receivable arising fromthe sale or lease of goods, provision of services or licensing activities of Borrower;     (g) Investments received in satisfaction or partial satisfaction of obligations owed byfinancially troubled obligors;     (h) Investments acquired in exchange for any other Investments in connection with or as aresult of a bankruptcy, workout, reorganization or recapitalization;     (i) Investments acquired as a result of a foreclosure with respect to any secured Investment;
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     (j) Investments consisting of interest rate, currency, or commodity swap agreements, interestrate cap or collar agreements or arrangements designated to protect a Person against fluctuationsin interest rates, currency exchange rates, or commodity prices;     (k) Investments consisting of loans and advances to employees in an aggregate amount not toexceed $250,000 at any time;     (l) (i) Investments by any Subsidiary in or to the Borrower or any Guarantor; and (ii)Investments by any Subsidiary that is not a Guarantor in or to any other Subsidiary that is not aGuarantor;     (m) (i) (A) Investments by Borrower or any Guarantor in or to any Subsidiary that is not aGuarantor and (B) Investments by RAE Systems (Asia) Limited or its Subsidiaries in a Chinese jointventure; provided however, the sum of (1) the amounts invested under clause (A) that are notrelated (directly or indirectly) to the funding or reimbursement of amounts necessary to fundInvestments of the type described in clause (B), plus (2) the amount invested under clause(B), plus (3) the amount of Transfers under Section 7.1(b)(iv), does not exceed $10,000,000in the aggregate during fiscal year 2007 and (ii) Investments by Borrower or any Guarantor in or toany Subsidiary that is not a Guarantor, in an aggregate amount (when added together with Transfersunder Section 7.1(b)(iv)), does not exceed $5,000,000 in the aggregate during fiscal year 2008;     (n) other Investments in joint ventures, strategic alliances, licensing and similararrangements customary in Borrower’s industry; provided that such Investments do not requireBorrower or Subsidiary to transfer assets with a value in excess of $1,000,000 in any fiscal year;and     (o) Investments not otherwise permitted hereunder, provided, that the aggregate book value ofall such Investments by Borrower and its Subsidiaries, together, shall not exceed (when addedtogether with the amount of Transfers pursuant to Section 7.1(k) $1,000,000 in any fiscal year.     “**Permitted Liens**” are:     (a) (i) Liens securing Permitted Indebtedness described under clause (b) of the definition of“Permitted Indebtedness” or (ii) Liens arising under this Agreement or other Loan Documents;     (b) Liens for taxes, fees, assessments or other government charges or levies, either notdelinquent or being contested in good faith and for which Borrower maintains adequate reserves onits Books, if they have no priority over any of Bank’s Liens;     (c) Liens (including with respect to capital leases) (i) on property (including accessions,additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceedsthereof) acquired or held by Borrower or its Subsidiaries incurred for financing such property(including accessions, additions, parts, replacements, fixtures, improvements and attachmentsthereto, and the proceeds thereof), or (ii) existing on property (and accessions, additions, parts,replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) whenacquired, if the Lien is confined to such property (including accessions, additions, parts,replacements, fixtures, improvements and attachments thereto, and the proceeds thereof);     (d) Liens incurred in the extension, renewal or refinancing of the indebtedness secured byLiens described in (a) through (c), but any extension, renewal or replacement Lien must be limitedto the property encumbered by the existing Lien and the principal amount of the indebtedness itsecures may not increase;     (e) leases or subleases of real property granted in the ordinary course of business, andleases, subleases, non-exclusive licenses or sublicenses of property (other than real property orintellectual property) granted in the ordinary course of Borrower’s business, if theleases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest;     (f) non-exclusive license of intellectual property granted to third parties in the ordinarycourse of business,and licenses of intellectual property that could not result in a legal transferof title of the licensed property that may be exclusive in respects other than territory and thatmay be exclusive as to territory only as to discreet geographical areas outside of the UnitedStates;
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     (g) leases or subleases granted in the ordinary course of Borrower’s business, including inconnection with Borrower’s leased premises or leased property;     (h) Liens in favor of custom and revenue authorities arising as a matter of law to secure thepayment of custom duties in connection with the importation of goods;     (i) Liens on insurance proceeds securing the payment of financed insurance premiums;     (j) customary Liens granted in favor of a trustee to secure fees and other amounts owing tosuch trustee under an indenture or other similar agreement;     (k) Liens consisting of pledges of cash, cash equivalents or government securities to secureswap or foreign exchange contracts or letters of credit;     (l) Liens arising from judgments, decrees or attachments in circumstances not constituting anEvent of Default under Sections 8.4 or 8.7;     (m) Liens in favor of other financial institutions arising in connection with Borrower’sdeposit or securities accounts held at such institutions;     (n) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liensarising in the ordinary course of business which are not overdue for a period of more than 30 daysor which are being contested in good faith and by appropriate proceeding if adequate reserves withrespect thereto are maintained on the books of the applicable Person;     (o) Liens on property of Foreign Subsidiaries that are not Guarantors;     (p) pledges or deposits in the ordinary course of business in connection with workers’compensation, unemployment insurance and compliance with other social security requirementsapplicable to Borrower; and     (q) deposits to secure the performance of bids, trade contracts (other than for borrowedmoney), contracts for the purchase of property, leases, statutory obligations, surety and appealbonds, performance bonds and other obligations of a like nature, in each case, incurred in theordinary course of business and not representing an obligation for borrowed money.     “**Person**” is any individual, sole proprietorship, partnership, limited liability company, jointventure, company, trust, unincorporated organization, association, corporation, institution, publicbenefit corporation, firm, joint stock company, estate, entity or government agency.     “**Prime Rate**” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowestrate.     “**Quick Assets**” is, on any date, Borrower’s consolidated, unrestricted cash, Cash Equivalents,net billed accounts receivable and short and long term investments.     “**Registered Organization**” is any “registered organization” as defined in the Code with suchadditions to such term as may hereafter be made.     “**Responsible Officer**” is any of the Chief Executive Officer, President, Chief FinancialOfficer, Treasurer and Controller of Borrower.     “**Revolving Line**” is an Advance or Advances in an aggregate amount of up to $15,000,000outstanding at any time.     **“Revolving Line Maturity Date”**is March 14, 2008.
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     “**Securities Account**” is any “securities account” as defined in the Code with such additions tosuch term as may hereafter be made.     “**Settlement Date**” is defined in Section 2.1.3.     “**Subordinated Debt**” is (a) Indebtedness incurred by Borrower subordinated to Borrower’sIndebtedness owed to Bank and which is reflected in a written agreement in a manner and formreasonably acceptable to Bank and approved by Bank in writing, and (b) to the extent the terms ofsubordination do not change adversely to Bank, refinancings, refundings, renewals, amendments orextensions of any of the foregoing.     “**Subsidiary**” means, with respect to any Person, any Person of which more than 50% of thevoting stock or other equity interests is owned or controlled, directly or indirectly, by suchPerson or one or more Affiliates of such Person.     “**Tangible Net Worth**” is, on any date, the consolidated total assets of Borrower and itsSubsidiaries minus (a) any amounts attributable to (i) goodwill, (ii) intangible itemsincluding unamortized debt discount and expense, patents, trade and service marks and names,copyrights and research and development expenses except prepaid expenses, and (iii) reserves notalready deducted from assets, minus (b) Total Liabilities including all Subordinated Debt.     “**Total Liabilities**” is on any day, obligations that should, under GAAP, be classified asliabilities on Borrower’s consolidated balance sheet, including all Indebtedness.     “**Transfer**” is defined in Section 7.1.     “**Unused Revolving Line Facility Fee”**is defined in Section 2.4(c).**[**Signature page follows.**]**
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     **IN WITNESS WHEREOF**, the parties hereto have caused this Agreement to be executed as of theEffective Date.     BORROWER:       RAE SYSTEMS INC.       By