**EXHIBIT 10.1**   **LOAN AND SECURITY AGREEMENT****by and among****VISUAL NETWORKS, INC.,****VISUAL NETWORKS INTERNATIONAL OPERATIONS, INC.,****VISUAL NETWORKS OPERATIONS, INC.,****AVESTA TECHNOLOGIES, LLC,****and****NET2NET, LLC,****as Borrowers****and****SILICON VALLEY BANK,****as Bank****June 17, 2005**  
 

 
**LOAN AND SECURITY AGREEMENT**     **THIS LOAN AND SECURITY AGREEMENT**(this “Agreement”) dated June 17, 2005, between **SILICONVALLEY BANK**(“Bank”), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and havinga loan production office at 8020 Towers Crescent Drive, Suite 475, Vienna, Virginia 22182 and**VISUAL NETWORKS, INC.**, a Delaware corporation (the “Company”), **VISUAL NETWORKS INTERNATIONALOPERATIONS, INC.**, a Delaware corporation (“Visual Networks International Operations”), **VISUALNETWORKS OPERATIONS, INC.**, a Delaware corporation (“Visual Networks Operations”), **AVESTATECHNOLOGIES, LLC**, a Delaware limited liability company (“Avesta Technologies”), and **NET2NET, LLC**,a Delaware limited liability company (“Net2Net”) (Visual Networks International Operations, VisualNetworks Operations, Avesta Technologies and Net2Net, each a “Subsidiary” and collectively,“Subsidiaries”) (Company and Subsidiaries, each a “Borrower” and collectively, “Borrowers”), whoseaddress is c/o the Company at 2092 Gaither Road, Rockville, Maryland 20850, provides the terms onwhich Bank will lend to Borrowers and Borrowers will repay Bank. The parties agree as follows:**1.****ACCOUNTING AND OTHER TERMS**     Accounting terms not defined in this Agreement will be construed following GAAP. Calculationsand determinations must be made following GAAP. The term “financial statements” includes the notesand schedules. The terms “including” and “includes” always mean “including (or includes) withoutlimitation,” in this or any Loan Document.**2.****LOAN AND TERMS OF PAYMENT**     **2.1 Promise to Pay.**          Borrowers jointly and severally promise to pay Bank the unpaid principal amount of all CreditExtensions and interest on the unpaid principal amount of the Credit Extensions.          **2.1.1 Revolving Advances.**          (a) At all times in which all Senior Secured Convertible Debentures have not been paid in fullby Borrowers (such period being called, the “Non-Formula Period”), Bank will make Advances notexceeding the Committed Revolving Line.          (b) At all times other than during the Non-Formula Period (such periods being called, the“Formula Period”) Bank will make Advances not exceeding the lesser of (A) the Committed RevolvingLine or (B) the Borrowing Base. Advances during the Non-Formula Period will be repaid in full withthe initial Advance during the Formula Period. Amounts borrowed under this Section may be repaidand reborrowed during the term of this Agreement. All Advances shall be evidenced by the RevolvingPromissory Note to be executed and delivered by Borrowers to Bank on the Closing Date and shall berepaid in accordance with the terms of this Agreement.          (c) To obtain an Advance, Company must notify Bank by facsimile or telephone by 3:00 p.m.Eastern time on the Business Day the Advance is to be made. Company must promptly confirm thenotification by delivering to Bank the Loan Payment/Advance Request Form attached as ExhibitB (the “Payment/Advance Form”). Bank will credit Advances to Company’s deposit account. Bankmay make Advances under this Agreement based on instructions from a Responsible Officer of Companyor his or her designee or without instructions if the Advances are necessary to meet Obligationswhich have become due. Bank may rely on any telephone notice given by a person whom Bankreasonably believes is a Responsible Officer of Company or designee. Borrowers will indemnify Bankfor any loss Bank suffers due to such reliance.          (d) The Committed Revolving Line terminates on the Non-Formula Period Maturity Date, when allAdvances made during the Non-Formula Period are immediately due and payable. In the event thatBorrower satisfies the conditions to convert the Committed Revolving Line to the Formula Period,the Committed Revolving Line will continue until the Formula Period Maturity Date, when all FormulaPeriod Advances are immediately due and payable.          (e) Bank’s obligation to lend the undisbursed portion of the Committed Revolving Line willterminate if, in Bank’s sole discretion, there has been a material adverse change in the generalaffairs,
 

 
management, results of operation, condition (financial or otherwise) or the prospect ofrepayment of the Obligations, or there has been any material adverse deviation by Borrowers fromthe most recent business plan of Borrowers presented to and accepted by Bank prior to the executionof this Agreement.     **2.2 Overadvances.**          If during the Non-Formula Period, Borrowers’ Obligations under Section 2.1.1 exceed theCommitted Revolving Line, or if during the Formula Period, Borrower’s Obligations under Section2.1.1 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,Borrowers shall immediately pay Bank the excess.     **2.3 Interest Rate, Payments.**          (a) Interest Rate. (i) Advances during the Non-Formula Period accrue interest on theoutstanding principal balance at a per annum rate equal to six percent (6%) above the Prime Rate(the “Non-Formula Period Interest Rate”); (ii) Advances during the Formula Period accrue intereston the outstanding principal balance at a per annum rate equal to two percent (2%) above the PrimeRate (the “Formula Period Interest Rate”; together with Non-Formula Period Interest Rate beingcalled collectively the “Interest Rates”, and individually, the “Interest Rate”). After an Eventof Default, Obligations accrue interest at five percent (5%) above the Interest Rate effectiveimmediately before the Event of Default. The Interest Rates on the Obligations increase or decreasewhen the Prime Rate changes. Interest is computed on a 360-day year for the actual number of dayselapsed.          (b) Payments. Interest due on the Committed Revolving Line is payable on the PaymentDate of each month. Bank may debit any of any Borrowers’ deposit accounts including Account Number                                         for principal and interest payments owing or any amounts any Borrowerowes Bank under any of the Loan Documents. Bank will promptly notify Company when it debits anysuch accounts. These debits are not a set-off. Payments received after 12:00 noon Eastern timeare considered received at the opening of business on the next Business Day. When a payment is dueon a day that is not a Business Day, the payment is due the next Business Day and additional feesor interest accrue.          (c) Lockbox. All proceeds of Collateral shall be deposited by each Borrower into alockbox account.**2.4 Joint Liability.**          Each Person included in the term “Borrower” hereby covenants and agrees with Bank as follows:          (a) The Obligations include all present and future indebtedness, duties, obligations, andliabilities under the Loan Documents, whether now existing or contemplated or hereafter arising, ofany one or more of the Borrowers.          (b) Reference in this Agreement and the other Loan Documents to the “Borrower” or otherwisewith respect to any one or more of the Persons now or hereafter included in the definition of“Borrower” shall mean each and every such Person and any one or more of such Persons, jointly andseverally, unless the context requires otherwise.          (c) Each Person included in the term “Borrower” in the discretion of its respective managementis to agree among themselves as to the allocation of the benefits of the proceeds of the CommittedRevolving Line, provided, however, that each such Person shall be deemed to have represented andwarranted to Bank at the time of allocation that each benefit and use of proceeds is permittedunder this Agreement.          (d) For administrative convenience, each Person included in the term “Borrower” herebyirrevocably appoints the Company as each Borrower’s attorney-in-fact, with power of substitution(with the prior written consent of Bank in the exercise of its sole and absolute discretion), inthe name of the Company or in the name of any Borrower or otherwise to take any and all actionswith respect to this Agreement, the other Loan Documents, the Obligations and/or the Collateral(including, without limitation,
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the proceeds thereof) as the Company may so elect from time to time, including, withoutlimitation, actions to (i) request advances under the Committed Revolving Line, and direct Bank todisburse or credit the proceeds of any Advance directly to an account of the Company, any one ormore of such Persons or otherwise, which direction shall evidence the making of such Advance andshall constitute the acknowledgment by each such Person of the receipt of the proceeds of suchAdvance, (ii) enter into, execute, deliver, amend, modify, restate, substitute, extend and/or renewthis Agreement, any other Loan Documents, security agreements, mortgages, deposit accountagreements, instruments, certificates, waivers, letter of credit applications, releases, documentsand agreements from time to time, and (iii) endorse any check or other item of payment in the nameof such Person or in the name of the Company. The foregoing appointment is coupled with aninterest, cannot be revoked without the prior written consent of Bank, and may be exercised fromtime to time through the Company’s Responsible Officer, or other Person or Persons designated bythe Company to act from time to time on behalf of the Company.          (e) Each Person included in the term “Borrower” hereby irrevocably authorizes Bank to makeAdvances to any one or more of such Persons, pursuant to the provisions of this Agreement upon thewritten, oral or telephone request of any one or more of the Persons who is from time to time aResponsible Officer of the Company under the provisions of the most recent certificate of corporateresolutions and/or incumbency of the Person included in the term “Borrower” on file with Bank andalso upon the written, oral or telephone request of any one of the Persons who is from time to timea Responsible Officer of the Company under the provisions of the most recent certificate ofcorporate resolutions and/or incumbency for the Company on file with Bank.          (f) Bank assumes no responsibility or liability for any errors, mistakes, and/or discrepanciesin the oral, telephonic, written or other transmissions of any instructions, orders, requests andconfirmations by any one or more of the Persons included in the term “Borrower” in connection withany Credit Extension or any other transaction in connection with the provisions of this Agreement.**2.5 Inter-Company Debt, Contribution.**          Without implying any limitation on the joint and several nature of the Obligations, Bankagrees that, notwithstanding any other provision of this Agreement, the Persons included in theterm “Borrower” may create reasonable inter-company indebtedness between or among the Personsincluded in the term “Borrower” with respect to the allocation of the benefits and proceeds of theCredit Extensions under this Agreement. The Persons included in the term “Borrower” agree amongthemselves, and Bank consents to that agreement, that each such Person shall have rights ofcontribution from all of the such Persons to the extent such Person incurs Obligations in excess ofthe proceeds of the Advances received by, or allocated to such Person. All such indebtedness andrights shall be, and are hereby agreed by the Persons included in the term “Borrower” to be,subordinate in priority and payment to the indefeasible repayment in full in cash of theObligations, and, unless Bank agrees in writing otherwise, shall not be exercised or repaid inwhole or in part until all of the Obligations have been indefeasibly paid in full in cash. EachPerson included in the term “Borrower” agrees that all of such inter-company indebtedness andrights of contribution are part of the Collateral and secure the Obligations. Each Person includedin the term “Borrower” hereby waives all rights of counter claim, recoupment and offset between oramong themselves arising on account of that indebtedness and otherwise. No Person included in theterm “Borrower” shall evidence the inter-company indebtedness or rights of contribution by note orother instrument, and shall not secure such indebtedness or rights of contribution with any Lien orsecurity.**2.6 Borrowers are Integrated Group.**          Each Person included in the term “Borrower” hereby represents and warrants to Bank that eachof them will derive benefits, directly and indirectly, from each Credit Extension, both in theirseparate capacity and as a member of the integrated group to which each such Person belongs andbecause the successful operation of the integrated group is dependent upon the continued successfulperformance of the functions of the integrated group as a whole, because (i) the terms of theCredit Extension provided under this Agreement are more favorable than would otherwise would beobtainable by such Persons individually, and (ii) the additional administrative and other costs andreduced flexibility associated with
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individual loan arrangements which would otherwise be required if obtainable wouldsubstantially reduce the value to such Persons of the Credit Extension.**2.7 Primary Obligations.**          The obligations and liabilities of each Person included in the term “Borrower” shall beprimary, direct and immediate, shall not be subject to any counterclaim, recoupment, set off,reduction or defense based upon any claim that such Person may have against any one or more of theother Persons included in the term “Borrower”, Bank and/or any other guarantor and shall not beconditional or contingent upon pursuit or enforcement by Bank of any remedies it may have againstPersons included in the term “Borrower” with respect to this Agreement, or any of the other LoanDocuments, whether pursuant to the terms thereof or by operation of law. Without limiting thegenerality of the foregoing, Bank shall not be required to make any demand upon any of the Personsincluded in the term “Borrower”, or to sell the Collateral or otherwise pursue, enforce or exhaustits or their remedies against the Persons included in the term “Borrower” or the Collateral eitherbefore, concurrently with or after pursuing or enforcing its rights and remedies hereunder. Anyone or more successive or concurrent actions or proceedings may be brought against each Personincluded in the term “Borrower”, either in the same action, if any, brought against any one or moreof the Persons included in the term “Borrower” or in separate actions or proceedings, as often asBank may deem expedient or advisable. Without limiting the foregoing, it is specificallyunderstood that any modification, limitation or discharge of any of the liabilities or obligationsof any one or more of the Persons included in the term “Borrower”, any other guarantor or anyobligor under any of the Loan Documents, arising out of, or by virtue of, any bankruptcy,arrangement, reorganization or similar proceeding for relief of debtors under federal or state lawinitiated by or against any one or more of the Persons included in the term “Borrower”, in theirrespective capacities as borrowers and guarantors under this Agreement, or under any of the LoanDocuments shall not modify, limit, lessen, reduce, impair, discharge, or otherwise affect theliability of any other Borrower under this Agreement in any manner whatsoever, and this Agreementshall remain and continue in full force and effect. It is the intent and purpose of this Agreementthat each Person included in the term “Borrower” shall and does hereby waive all rights andbenefits which might accrue to any other guarantor by reason of any such proceeding, and thePersons included in the term “Borrower” agree that they shall be liable for the full amount of theobligations and liabilities under this Agreement regardless of, and irrespective to, anymodification, limitation or discharge of the liability of any one or more of the Persons includedin the term “Borrower”, any other guarantor or any other obligor under any of the Loan Documents,that may result from any such proceedings.     **2.8 Fees.**          Borrowers will pay:          (a) Facility Fee. A fully earned, nonrefundable fee in the amount of Forty ThousandDollars ($40,000), payable on the Closing Date.          (b) [***]          (c) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees andreasonable expenses) incurred through and after the date of this Agreement, are payable when due.**3.****CONDITIONS OF LOANS**     **3.1 Conditions Precedent to Initial Credit Extension.**          Bank’s obligation to make the initial Credit Extension is subject to:          (a) this Agreement;          (b) the Revolving Promissory Note          (c) a certificate of the Secretary or member, as applicable, of each Borrower with respect toarticles of incorporation, operating agreement, bylaws, incumbency and resolutions authorizing theexecution and delivery of this Agreement;          (d) financing statements (Forms UCC-1); [***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCHOMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THESECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
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          (e) insurance certificates;          (f) payment of the fees and Bank Expenses then due specified in Sections 2.8(a) and 2.8(c)hereof;          (g) Certificate of Foreign Qualification (if applicable); and          (h) such other documents, and completion of such other matters, as Bank may reasonably deemnecessary or appropriate.     **3.2 Conditions Precedent to First Advance During Formula Period.**          In addition to the conditions precedent in Section 3.1 hereof, Bank’s obligation to make theinitial Advance during Formula Period is subject to:          (a) Bank shall have received written confirmation from the Company that all existing holdersof the Senior Secured Convertible Debentures have been paid in full; and          (b) Bank has a first priority security interest on the Collateral (subject only to PermittedLiens).     **3.3 Conditions Precedent to all Credit Extensions.**          Bank’s obligations to make each Credit Extension, including the initial Credit Extension, issubject to the following:          (a) timely receipt of any Payment/Advance Form; and          (b) the representations and warranties in Section 5 must be true on the date of thePayment/Advance Form and on the effective date of each Credit Extension and no Event of Default mayhave occurred and be continuing, or result from the Credit Extension. Each Credit Extension isBorrowers’ representation and warranty on that date that the representations and warranties ofSection 5 remain true.**4.****CREATION OF SECURITY INTEREST**     **4.1 Grant of Security Interest.**          Each Borrower grants Bank a continuing security interest in all presently existing and lateracquired Collateral to secure all Obligations and performance of each of Borrowers’ duties underthe Loan Documents, which in accordance with the provisions of Section 12.11, prior to therepayment in full of the Senior Secured Convertible Debentures are paripasu withthe rights of the holders of the Senior Secured Convertible Debentures. Except for PermittedLiens, any security interest will be a first priority security interest in the Collateral. Bankupon the occurrence and during the continuance of any Event of Default, may place a “hold” on anydeposit account of any Borrower maintained with Bank. If this Agreement is terminated, Bank’s lienand security interest in the Collateral will continue until Borrowers fully satisfy theirObligations.     **4.2 Authorization to File.**          Each Borrower authorizes Bank to file financing statements without notice to any Borrower,with all appropriate jurisdictions, as Bank deems appropriate, in order to perfect or protectBank’s interest in the Collateral.     **4.3 Release of Intellectual Property.**          Bank agrees that during the Formula Period upon written request of Borrowers, Bank will filepartial releases, at Borrowers’ expense, on its Lien on the Intellectual Property, provided that noEvent of Default shall have occurred and be continuing at such time.**5.****REPRESENTATIONS AND WARRANTIES**          Each Borrower represents and warrants as follows:
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     **5.1 Due Organization and Authorization.**          Each Borrower and each Subsidiary is duly existing and in good standing in the state set forthin the first page of this Agreement and qualified and licensed to do business in, and in goodstanding in, any state in which the conduct of its business or its ownership of property requiresthat it be qualified, except where the failure to do so could not reasonably be expected to cause aMaterial Adverse Change. Each Borrower and each Subsidiary’s exact legal name is as set forth onthe first page of this Agreement. The execution, delivery and performance of the Loan Documentshave been duly authorized, and do not conflict with any Borrower’s formation documents, norconstitute an event of default under any material agreement by which Borrower is bound. Borroweris not in default under any agreement to which, or by which it is bound, in which the default couldreasonably be expected to cause a Material Adverse Change.     **5.2 Collateral.**          (a) Each Borrower has good title to its Collateral, free of Liens except Permitted Liens. TheAccounts are bona fide, existing obligations, and the service or property has been performed ordelivered to the account debtor or its agent for immediate shipment to and unconditional acceptanceby the account debtor. No Borrower has any notice of any actual or imminent Insolvency Proceedingof any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate.All Inventory is in all material respects of good and marketable quality, free from materialdefects.          (b) In addition, during the Non-Formula Period only:     (i) except as noted on the Schedule, no Borrower is a party to, nor is bound by, anymaterial license or other material agreement with respect to which any Borrower is thelicensee that prohibits or otherwise restricts such Borrower from granting a securityinterest in that Borrower’s interest in such license or agreement or any other property; and     (ii) each Borrower is the sole owner of the Intellectual Property, except fornon-exclusive licenses granted to its customers in the ordinary course of business. EachPatent is valid and enforceable and no part of the Intellectual Property has been judgedinvalid or unenforceable, in whole or in part, and except as set forth in the Schedule noclaim has been made that any part of the Intellectual Property violates the rights of anythird party, except to the extent such claim could not reasonably be expected to cause aMaterial Adverse Change.     **5.3 Litigation.**          Except as set forth in the Schedule, there are no actions or proceedings pending or, to theknowledge of any Borrower’s Responsible Officers, threatened by or against any Borrower or anySubsidiary in which a likely adverse decision could reasonably be expected to cause a MaterialAdverse Change.     **5.4 No Material Adverse Change in Financial Statements.**          All consolidated financial statements for any Borrower, and any Subsidiary, delivered to Bankfairly present in all material respects Company’s consolidated financial condition and Company’sconsolidated results of operations. There has not been any material deterioration in anyBorrower’s consolidated financial condition since the date of the most recent consolidatedfinancial statements submitted to Bank.     **5.5 Solvency.**          The fair salable value of Borrowers’ assets (including goodwill minus disposition costs)exceeds the fair value of its liabilities; the Borrowers are not left with unreasonably smallcapital after the transactions in this Agreement or any of the Loan Documents; and Borrower is ableto pay its debts (including trade debts) as they mature.     **5.6 Regulatory Compliance.**          No Borrower is an “investment company” or a company “controlled” by an “investment company”under the Investment Company Act. No Borrower is engaged as one of its important activities in
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extending credit for margin stock (under Regulations T and U of the Federal Reserve Board ofGovernors). Each Borrower has complied in all material respects with the Federal Fair LaborStandards Act. Each Borrower has not violated any laws, ordinances or rules, the violation ofwhich could reasonably be expected to cause a Material Adverse Change. None of any Borrower’s orany Subsidiary’s properties or assets has been used by any Borrower or any Subsidiary or, to thebest of any Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating,or transporting any hazardous substance other than legally. Except as set forth in the Schedule,each Borrower and each Subsidiary has timely filed all required tax returns and paid, or madeadequate provision to pay, all material taxes, except those being contested in good faith withadequate reserves under GAAP. Each Borrower and each Subsidiary has obtained all consents,approvals and authorizations of, made all declarations or filings with, and given all notices to,all government authorities that are necessary to continue its business as currently conducted,except where the failure to do so could not reasonably be expected to cause a Material AdverseChange.     **5.7 Subsidiaries.**          No Borrower owns any stock, partnership interest or other equity securities except forPermitted Investments.     **5.8 Full Disclosure.**          No written representation, warranty or other statement of any Borrower in any certificate orwritten statement given to Bank (taken together with all such written certificates and writtenstatements to Bank) contains any untrue statement of a material fact or omits to state a materialfact necessary to make the statements contained in the certificates or statements not misleading.It being recognized by Bank that the projections and forecasts provided by any Borrower in goodfaith and based upon reasonable assumptions are not viewed as facts and that actual results duringthe period or periods covered by such projections and forecasts may differ from the projected andforecasted results.     **5.9 Securities Purchase Agreement Transaction.**          Bank has received true and correct copies of the Securities Purchase Agreement and each of theother Security Purchase Agreement Documents, executed, delivered and/or furnished on or before theClosing Date in connection with the Securities Purchase Agreement Transaction. Neither theSecurities Purchase Agreement nor any of the other Securities Purchase Agreement Documents havebeen modified, changed, supplemented, canceled, amended or otherwise altered or affected, except asotherwise disclosed to Bank in writing on or before the Closing Date. The Securities PurchaseAgreement Transaction has been effected, closed and consummated pursuant to, and in accordancewith, the terms and conditions of the Securities Purchase Agreement and with all applicable laws.**6.****AFFIRMATIVE COVENANTS**          Borrowers will do all of the following for so long as Bank has an obligation to make anyCredit Extension, or there are outstanding Obligations:     **6.1 Government Compliance.**          Each Borrower will maintain its and all Subsidiaries’ legal existence and good standing as aRegistered Organization in only the State set forth on the first page of this Agreement andmaintain qualification in each jurisdiction in which the failure to so qualify would reasonably beexpected to cause a material adverse effect on any Borrower’s business or operations. EachBorrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations towhich it is subject, noncompliance with which could have a material adverse effect on anyBorrower’s business or operations or would reasonably be expected to cause a Material AdverseChange. The Borrower may merge any Borrower or any Subsidiary of a Borrower into any otherBorrower or dissolve any Borrower if substantially all of the assets of such Borrower are firsttransferred to any other Borrower.     **6.2 Financial Statements, Reports, Certificates.**          (a) Company will deliver to Bank: (i) as soon as available, but no later than thirty (30)days after the last day of each month, a company prepared consolidated balance sheet and incomestatement covering Company’s consolidated operations during the period certified by a ResponsibleOfficer and in a
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form acceptable to Bank; (ii) as soon as available, but no later than ninety (90) days afterthe last day of Company’s fiscal year, audited consolidated financial statements prepared underGAAP, consistently applied, together with an unqualified opinion on the financial statements froman independent certified public accounting firm reasonably acceptable to Bank; (iii) as soon asavailable, but no later than ninety (90) days after the last day of Company’s fiscal year, theCompany’s 10-K filing; (iv) a prompt report of any legal actions pending or threatened against anyBorrower or any Subsidiary that could result in damages or costs to any Borrower or any Subsidiaryof $500,000 or more; and (v) budgets, sales projections, operating plans or other financialinformation Bank reasonably requests; and (vi) during the Non-Formula Period only, prompt notice ofany material change in the composition of the Intellectual Property, including any subsequentownership right of any Borrower in or to any Copyright, Patent or Trademark not shown in anyintellectual property security agreement between Borrowers and Bank or knowledge of an event thatmaterially adversely affects the value of the Intellectual Property. Bank agrees that informationreceived by Bank pursuant to this Section will be subject to the provisions of Section 12.8 of thisAgreement.          (b) Within thirty (30) days after the last day of each month, Company will deliver to Bank aBorrowing Base Certificate signed by a Responsible Officer of Company in the form of ExhibitC, with aged listings of accounts receivable and accounts payable.          (c) Within thirty (30) days after the last day of each month, Company will deliver to Bankwith the monthly financial statements a Compliance Certificate signed by a Responsible Officer ofCompany in the form of Exhibit D.          (d) Allow Bank to audit Borrowers’ Collateral at Borrower’s expense. Such audits will beconducted no more often than every six (6) months unless an Event of Default has occurred and iscontinuing.     **6.3 Inventory; Returns.**          Borrowers will keep all Inventory in good and marketable condition, free from materialdefects. Returns and allowances between any Borrower and its account debtors will follow eachBorrower’s customary practices as they exist at execution of this Agreement. Company must promptlynotify Bank of all returns, recoveries, disputes and claims, that involve more than $200,000.     **6.4 Taxes.**          Each Borrower will make, and cause each Subsidiary to make, timely payment of all materialfederal, state, and local taxes or assessments (other than taxes and assessments which any Borroweris contesting in good faith, with adequate reserves maintained in accordance with GAAP) and willdeliver to Bank, on demand, appropriate certificates attesting to the payment.     **6.5 Insurance.**          Each Borrower will keep its business and the Collateral insured for risks and in amountsstandard for such Borrower’s industry, and as Bank may reasonably request. Insurance policies willbe in a form, with companies, and in amounts that are satisfactory to Bank in Bank’s reasonablediscretion. All property policies will have a lender’s loss payable endorsement showing Bank as anadditional loss payee and all liability policies will show the Bank as an additional insured andprovide that the insurer must give Bank at least twenty (20) days notice before canceling itspolicy. At Bank’s request, Borrowers will deliver certified copies of policies and evidence of allpremium payments. Proceeds payable under any policy will, at Bank’s option, be payable to Bank onaccount of the Obligations.     **6.6 Primary Accounts.**          Each Borrower will maintain its primary operating and investment accounts with Bank.     **6.7 Financial Covenants.**          During the Formula Period only, Borrowers will maintain as of the last day of each month(unless otherwise stated below):          (a) **Liquidity Ratio**. A Liquidity Ratio of at least 1.50 to 1.00.
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          (b) **Minimum Revenue**: Borrowers will achieve minimum ninety (90) day rolling revenue of notless than the following amounts for each of the following periods:       Ninety day Period Rolling Revenue June 30, 2005, $10,250,000; July 31, 2005 and    August 31, 2005         September 30, 2005 and $11,000,000; October 31, 2005         November 30, 2005 and $11,250,000 December 31, 2005              In addition to any and all other rights and remedies of Bank under the Loan Documents, in theevent Borrower fails to comply with the obligations of Section 6.7, [***].     **6.8 Subordination of Inside Debt.**          All present and future indebtedness of Borrowers to its officers, directors and shareholders(other than Indebtedness currently outstanding under the Senior Secured Convertible Debentures)(“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordinationagreement on Bank’s standard form. Borrowers represent and warrant that there is no Inside Debtpresently outstanding. Prior to incurring any Inside Debt in the future, Borrowers shall cause thePerson to whom such Inside Debt will be owed to execute and deliver to Bank a subordinationagreement on Bank’s standard form.     **6.9 Registration of Intellectual Property Rights.**          During the Non-Formula Period only, each Borrower:          (a) shall not register any Copyrights with the United States Copyright Office unless it: (i)has given at least fifteen (15) days’ prior notice to Bank of its intent to register suchCopyrights and has provided Bank with a copy of the application it intends to file with the UnitedStates Copyright Office (excluding exhibits thereto); (ii) executes a security agreement or suchother documents as Bank may reasonably request in order to maintain the perfection and priority ofBank’s security interest in the Copyrights proposed to be registered with the United StatesCopyright Office; and (iii) records such security documents with the United States Copyright Officecontemporaneously with filing the Copyright application(s) with the United States Copyright Office.Each Borrower shall promptly provide to Bank a copy of the Copyright application(s) filed with theUnited States Copyright Office, together with evidence of the recording of the security documentsnecessary for Bank to maintain the perfection and priority of its security interest in suchCopyrights;          (b) shall provide written notice to Bank of any application filed by Borrower in the UnitedStates Patent Trademark Office for a patent or to register a trademark or service mark withinthirty (30) days of any such filing; and          (c) will (i) protect, defend and maintain the validity and enforceability of the IntellectualProperty and promptly advise Bank in writing of material infringements and (ii) not allow anyIntellectual Property material to each Borrower’s business to be abandoned, forfeited or dedicatedto the public without Bank’s written consent.     **6.10 Additional Provisions Regarding Collateral.**          (a) Borrowers will provide written notice to Bank within thirty (30) days of entering orbecoming bound by any such license or agreement which are reasonably likely to have a materialimpact on Borrowers’ business or financial condition (other than over-the-counter software that iscommercially available to the public). [***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCHOMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THESECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
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          (b) Borrowers shall take such steps as Bank reasonably requests to obtain the consent of,authorization by, or waiver by, any person whose consent or waiver is necessary for all suchlicenses or contract rights to be deemed “Collateral” and for Bank to have a security interest init that might otherwise be restricted or prohibited by law or by the terms of any such license oragreement (such consent or authorization may include a licensor’s agreement to a contingentassignment of the license to Bank if the Bank determines that is necessary in its good faithjudgment), whether now existing or entered into in the future.     **6.11 Further Assurances.**          Borrowers will execute any further instruments and take further action as Bank reasonablyrequests to perfect or continue Bank’s security interest in the Collateral or to effect thepurposes of this Agreement.**7.****NEGATIVE COVENANTS**          Borrowers will not do any of the following without Bank’s prior written consent, for so longas Bank has an obligation to make Credit Extensions or there are any outstanding Obligations:     **7.1 Dispositions.**          Convey, sell, lease, transfer or otherwise dispose of (collectively “Transfer”), or permit anyof its Subsidiaries to Transfer, all or any part of its business or property, except forTransfers (i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses andsimilar arrangements for the use of the property of any Borrower or its Subsidiaries in theordinary course of business; or (iii) of worn-out or obsolete Equipment.     **7.2 Changes in Business, Ownership, Management or Business Locations.**          Engage in or permit any of its Subsidiaries to engage in any business other than thebusinesses currently engaged in by any Borrower or reasonably related thereto or have a materialchange in its management or a change in its ownership of greater than twenty five percent (25%)(other than by the sale of Borrowers’ equity securities in a public offering or to venture capitalinvestors so long as Borrowers identify and advise Bank of the venture capital investors prior tothe closing of the investment). Borrowers will not, without at least thirty (30) days priorwritten notice, change their legal name, change their state of formation, relocate any Borrower’schief executive office or add any new offices or business locations.     **7.3 Mergers or Acquisitions.**          Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with anyother Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all ofthe capital stock or property of another Person, except where (i) no Event of Default has occurredand is continuing or would result from such action during the term of this Agreement; (ii) aBorrower will be or will control the surviving entity; and (iii) a Subsidiary may merge orconsolidate into another Subsidiary or into a Borrower.     **7.4 Indebtedness.**          Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so,other than Permitted Indebtedness.     **7.5 Encumbrance.**          Create, incur, or allow any Lien on any of its property, or assign or convey any right toreceive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so,except for Permitted Liens, or permit any Collateral not to be subject to the first prioritysecurity interest granted here, subject to Permitted Liens. In addition, during the Non-FormulaPeriod only, Borrowers shall not sell, transfer, assign, mortgage, pledge, lease, grant a securityinterest in, or encumber, or enter into any agreement, document, instrument or other arrangement(except with or in favor of the Bank) with any Person which directly or indirectly prohibits or hasthe effect of prohibiting Borrowers from selling, transferring,
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assigning, mortgaging, pledging, leasing, granting a security interest in or upon, orencumbering any of Borrowers’ Intellectual Property.     **7.6 Distributions; Investments.**          Except as expressly permitted by Section 7.3, (i) directly or indirectly acquire or own anyPerson, or make any Investment in any Person, other than Permitted Investments, or permit any ofits Subsidiaries to do so, or (ii) pay any dividends or make any distribution or payment or redeem,retire or purchase any capital stock, except for any repurchase of stock or stock options fromformer employees or directors of Borrowers in an aggregate amount not to exceed $100,000 under theterms of applicable repurchase agreements, provided that at the time of such repurchase, no Eventof Default has occurred, is continuing or would exist after giving effect to any such repurchase.     **7.7 Transactions with Affiliates.**          Other than intercompany transaction between or among Borrowers and their Subsidiaries,directly or indirectly enter into or permit to exist any material transaction with any Affiliate ofany Borrower except for transactions that are in the ordinary course of such Borrower’s business,upon fair and reasonable terms that are no less favorable to any Borrower than would be obtained inan arm’s length transaction with a nonaffiliated Person.     **7.8 Subordinated Debt.**          Make or permit any payment on any Subordinated Debt, except under the terms of theSubordinated Debt, or amend any provision in any document relating to the Subordinated Debt withoutBank’s prior written consent.     **7.9 Compliance.**          Become an “investment company” or a company controlled by an “investment company,” under theInvestment Company Act of 1940 or undertake as one of its important activities extending credit topurchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; failto meet the minimum funding requirements of ERISA, permit a Reportable Event or ProhibitedTransaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor StandardsAct or violate any other law or regulation, if the violation could reasonably be expected to have amaterial adverse effect on Borrower’s business or operations or would reasonably be expected tocause a Material Adverse Change, or permit any of its Subsidiaries to do so.**8.****EVENTS OF DEFAULT**          Any one of the following is an Event of Default:     **8.1 Payment Default.**          If Borrowers fail to pay any of the Obligations when due within three (3) days after their duedate. During the three (3) day period the failure to cure the default is not an Event of Default(but no Credit Extension will be made during the cure period);     **8.2 Covenant Default.**          (a) If Borrowers fail to perform any obligation under Sections 6.2 or 6.7 or violates any ofthe covenants contained in Article 7 of this Agreement, or          (b) If any Borrower fails or neglects to perform, keep, or observe any other material term,provision, condition, covenant, or agreement contained in this Agreement, in any of the LoanDocuments, or in any other present or future agreement between any Borrower and Bank and as to anydefault under such other term, provision, condition, covenant or agreement that can be cured, hasfailed to cure such default within ten (10) days after the occurrence thereof; provided, however,that if the default cannot by its nature be cured within the ten (10) day period or cannot afterdiligent attempts by Borrowers be cured within such ten (10) day period, and such default is likelyto be cured within a reasonable time, then Borrowers shall have an additional reasonable period(which shall not in any case exceed thirty (30) days) to attempt to cure such default, and withinsuch reasonable time period the failure to have cured
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such default shall not be deemed an Event of Default (provided that no Credit Extensions willbe made during such cure period).     **8.3 Material Adverse Change.**          If there (i) occurs a material adverse change in the business, operations, or condition(financial or otherwise) of any Borrower, or (ii) is a material impairment of the prospect ofrepayment of any portion of the Obligations or (iii) is a material impairment of the value orpriority of Bank’s security interests in the Collateral.     **8.4 Attachment.**          If any material portion of any Borrower’s assets is attached, seized, levied on, or comes intopossession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10)days, or if any Borrower is enjoined, restrained, or prevented by court order from conducting amaterial part of its business or if a judgment or other claim becomes a Lien on a material portionof any Borrower’s assets, or if a notice of lien, levy, or assessment is filed against any of anyBorrower’s assets by any government agency and not paid within ten (10) days after such Borrowerreceives notice. These are not Events of Default if stayed or if a bond is posted pending contestby such Borrower (but no Credit Extensions will be made during the cure period);     **8.5 Insolvency.**          If any Borrower becomes insolvent or if any Borrower begins an Insolvency Proceeding or anInsolvency Proceeding is begun against any Borrower and not dismissed or stayed within 30 days (butno Credit Extensions will be made before any Insolvency Proceeding is dismissed);     **8.6 Other Agreements.**          If there is a default under Borrowers’ indebtedness to the existing holders of the SeniorSecured Convertible Debentures pursuant to the terms of the Securities Purchase Agreement or in anyagreement between any Borrower and a third party that gives the third party the right to accelerateany Indebtedness exceeding $200,000 or that could cause a Material Adverse Change;     **8.7 Judgments.**          If a money judgment(s) in the aggregate of at least $250,000 is rendered against any Borrowerand is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before thejudgment is stayed or satisfied);     **8.8 Misrepresentations.**          If any Borrower or any Person acting for any Borrower makes any material misrepresentation ormaterial misstatement now or later in any warranty or representation in this Agreement or in anywriting delivered to Bank or to induce Bank to enter this Agreement or any Loan Document; or     **8.9 Subsidiaries.**          Any circumstance described in Sections 8.3, 8.4, 8.5 or 8.7 occurs to any Subsidiary of anyBorrower, which could, if taken as a whole, have a material adverse effect on the Borrowers.**9.****BANK’S RIGHTS AND REMEDIES**     **9.1 Rights and Remedies.**          When an Event of Default occurs and continues Bank may, without notice or demand, do any orall 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 any Borrower’s benefit under this Agreementor under any other agreement between any Borrower and Bank;
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          (c) Settle or adjust disputes and claims directly with account debtors for amounts, on termsand in any order that Bank in good faith considers advisable;          (d) Make any payments and do any acts it considers necessary or reasonable to protect itssecurity interest in the Collateral. Borrowers will assemble the Collateral if Bank requires andmake it available as Bank designates. Bank may lawfully enter premises where the Collateral islocated, take and maintain possession of any part of the Collateral, and pay, purchase, contest, orcompromise any Lien which appears to be prior or superior to its security interest and pay allexpenses incurred. Each Borrower grants Bank a license to lawfully enter and occupy any of itspremises, without charge, to exercise any of Bank’s rights or remedies;          (e) Apply to the Obligations any (i) balances and deposits of any Borrower with Bank or itsAffiliate it holds, or (ii) amount held by Bank owing to or for the credit or the account of anyBorrower;          (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise forsale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or otherright to use, without charge, each Borrower’s labels, Patents, Copyrights, rights of use of anyname, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similarproperty as it pertains to the Collateral, in completing production of, advertising for sale, andselling any Collateral and, in connection with Bank’s exercise of its rights under this Section,each Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit; and          (g) Bank may place a “hold” on any account maintained with Bank and deliver a notice ofexclusive control, any entitlement order, or other directions or instructions pursuant to anycontrol agreement or similar agreements providing control of any Collateral;          (h) Dispose of the Collateral according to the Code; and          (i) In addition to Bank’s rights in this Section, if any Borrower fails to comply with anyobligation under Section 6.7, [***].     **9.2 Power of Attorney.**          Effective only when an Event of Default occurs and during its continuance, each Borrowerirrevocably appoints Bank as its lawful attorney to: (i) endorse any Borrower’s name on any checksor other forms of payment or security; (ii) sign each Borrower’s name on any invoice or bill oflading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claimsunder any Borrower’s insurance policies; (iv) settle and adjust disputes and claims about theAccounts directly with account debtors, for amounts and on terms Bank determines reasonable; and(v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank mayexercise the power of attorney to sign each Borrower’s name on any documents necessary to perfector continue the perfection of any security interest regardless of whether an Event of Default hasoccurred. Bank’s appointment as each Borrower’s attorney in fact, and all of Bank’s rights andpowers, coupled with an interest, are irrevocable until all Obligations have been fully repaid andperformed and Bank’s obligation to provide Credit Extensions terminates.     **9.3 Accounts Collection.**          When an Event of Default occurs and during its continuance, Bank may notify any Person owingany Borrower money of Bank’s security interest in the funds and verify the amount of the Account.Each Borrower must collect all payments in trust for Bank and, if requested by Bank, immediatelydeliver the payments to Bank in the form received from the account debtor, with proper endorsementsfor deposit.     **9.4 Bank Expenses.**          If any Borrower fails to pay any amount or furnish any required proof of payment to thirdpersons, Bank may make all or part of the payment or obtain insurance policies required in Section6.5, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are BankExpenses and immediately due and payable, bearing interest at the then applicable rate and securedby the Collateral. No payments by Bank are deemed an agreement to make similar payments in thefuture or Bank’s waiver of any Event of Default. [***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCHOMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THESECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
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     **9.5 Bank’s Liability for Collateral.**          If Bank complies with reasonable banking practices and the Code, it is not liable for: (a) thesafekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in thevalue of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or otherPerson. Each Borrower bears all risk of loss, damage or destruction of the Collateral.     **9.6 Remedies Cumulative.**          Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreementsare cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity.Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event ofDefault is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. Nowaiver is effective unless signed by Bank and then is only effective for the specific instance andpurpose for which it was given.     **9.7 Demand Waiver.**          Each Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment,notice of any default, nonpayment at maturity, release, compromise, settlement, extension, orrenewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on whichany Borrower is liable.**10.****NOTICES**          All notices or demands by any party about this Agreement or any other related agreement mustbe in writing and be personally delivered or sent by an overnight delivery service, by certifiedmail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth atthe beginning of this Agreement. A party may change its notice address by giving the other partywritten notice.**11.****CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER**          Virginia 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 in theCommonwealth of Virginia provided, however, that if for any reason the Bank can not avail itself ofthe courts of the Commonwealth of Virginia, each Borrower and Bank each submit to the jurisdictionof the State and Federal Courts in Santa Clara County, California.**EACH BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTIONARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT,BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTERINTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.****12.****GENERAL PROVISIONS**     **12.1 Successors and Assigns.**          This Agreement binds and is for the benefit of the successors and permitted assigns of eachparty. Borrowers may not assign this Agreement or any rights under it, other than as a result ofan acquisition permitted under Section 7.3, without Bank’s prior written consent which may begranted or withheld in Bank’s discretion. Bank has the right, without the consent of or notice toBorrowers, to sell, transfer, negotiate, or grant participation in all or any part of, or anyinterest in, Bank’s obligations, rights and benefits under this Agreement.     **12.2 Indemnification.**          Each Borrower will indemnify, defend and hold harmless Bank and its officers, employees, andagents against: (a) all obligations, demands, claims, and liabilities asserted by any other partyin connection with the transactions contemplated by the Loan Documents; and (b) all losses or BankExpenses incurred, or paid by Bank from, following, or consequential to transactions between Bankand any Borrower (including reasonable attorneys fees and expenses), except for losses caused byBank’s gross negligence or willful misconduct.
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     **12.3 Time of Essence.**          Time is of the essence for the performance of all obligations in this Agreement.     **12.4 Severability of Provision.**          Each provision of this Agreement is severable from every other provision in determining theenforceability of any provision.     **12.5 Amendments in Writing, Integration.**          All amendments to this Agreement must be in writing and signed by each Borrower and Bank.This Agreement represents the entire agreement about this subject matter, and supersedes priornegotiations or agreements [***]. Except as set forth in the previous sentence, all prioragreements, understandings, representations, warranties, and negotiations between the parties aboutthe subject matter of this Agreement merge into this Agreement and the Loan Documents. Borrowersmay terminate this Agreement on not less than five (5) Business Days’ prior written notice to Bank,provided that at the time of such notice all Obligations are paid in full, and no Event of Defaulthas occurred and is continuing.     **12.6 Counterparts.**          This Agreement may be executed in any number of counterparts and by different parties onseparate counterparts, each of which, when executed and delivered, are an original, and all takentogether, constitute one Agreement.     **12.7 Survival.**          All covenants, representations and warranties made in this Agreement continue in full forcewhile any Obligations remain outstanding. The obligations of each Borrower in Section 12.2 toindemnify Bank will survive until all statutes of limitations for actions that may be broughtagainst Bank have run.     **12.8 Confidentiality.**          In handling any confidential information, Bank will exercise the same degree of care that itexercises for its own proprietary information, but disclosure of information may be made (i) toBank’s subsidiaries or affiliates, (ii) to prospective transferees or purchasers of any interest inthe loans (provided, however, Bank shall use commercially reasonable efforts in obtaining suchprospective transferee or purchasers agreement to the terms of this provision), (iii) as requiredby law, regulation, subpoena, or other order, (iv) as required in connection with Bank’sexamination or audit and (v) as Bank considers appropriate in exercising remedies under thisAgreement. Confidential information does not include information that either: (a) is in the publicdomain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain afterdisclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that thethird party is prohibited from disclosing the information.     **12.9 Effective Date.**          Notwithstanding anything set forth in this Agreement or any Loan Document to the contrary,this Agreement and all of the Loan Documents shall not be effective until the date on which theBank executes this Agreement as indicated on the signature page to this Agreement.     **12.10 Attorneys’ Fees, Costs and Expenses.**          In any action or proceeding between any Borrower and Bank arising out of the Loan Documents,the prevailing party will be entitled to recover its reasonable attorneys’ fees and otherreasonable costs and expenses incurred, in addition to any other relief to which it may beentitled .     **12.11 Third Party Beneficiaries.**          This Agreement provides that Bank’s first priority security interest on the Collateral will bepari passu with the rights of the holders of the Senior Secured Convertible Debentures.This Agreement and the duties and obligations contained herein shall be solely for the benefit ofBank and the holders of the Senior Secured Convertible Debentures, as third-party beneficiaries,and shall give such holders of the [***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCHOMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THESECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
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Senior Secured Convertible Debentures the right to prohibit Bank from taking any enforcementaction with respect to the Collateral which would violate Section 9 of the Securities PurchaseAgreement.**13.****DEFINITIONS**     **13.1 Definitions.**          In this Agreement:          “**Accounts**” has the meaning set forth in the Code and includes all existing and later arisingaccounts, contract rights, and other obligations owed any Borrower in connection with its sale orlease of goods (including licensing software and other technology) or provision of services, allcredit insurance, guaranties, other security and all merchandise returned or reclaimed by anyBorrower and each Borrower’s Books relating to any of the foregoing.          “**Advance**” or “**Advances**” is a loan advance (or advances) under the Committed Revolving Line.          “**Affiliate**” of a 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.          “**Bank Expenses**” are all audit fees and expenses and reasonable costs and expenses (includingreasonable attorneys’ fees and expenses) for preparing, negotiating, administering, defending andenforcing the Loan Documents (including appeals or Insolvency Proceedings).          “**Borrower’s Books**” are all of each Borrower’s books and records including ledgers, recordsregarding each Borrower’s assets or liabilities, the Collateral, business operations or financialcondition and all computer programs or discs or any equipment containing the information.          “**Borrowing Base**” is eighty percent (80%) of Eligible Accounts as determined by Bank fromBorrower’s most recent Borrowing Base Certificate; provided, however, that Bank maylower the percentage of the Borrowing Base after performing an audit of Borrower’s Collateral.          “**Business Day**” is any day that is not a Saturday, Sunday or a day on which the Bank is closed.          “**Closing Date**” is the date of this Agreement.          “**Code**” is the Uniform Commercial Code, in effect in the Commonwealth of Virginia as in effectfrom time to time.          “**Collateral**” is the property described on Exhibit A.          “**Committed Revolving Line**” is Advances of up to Four Million Dollars ($4,000,000).          “**Contingent Obligation**” is, for any Person, any direct or indirect liability, contingent ornot, of that Person for (i) 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;(ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) 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 the guarantee or other support arrangement.          “**Copyrights**” are all copyright rights, applications or registrations and like protections ineach work or authorship or derivative work, whether published or not (whether or not it is a tradesecret) now or later existing, created, acquired or held.          “**Credit Extension**” is each Advance**,**or any other extension of credit by Bank for anyBorrower’s benefit.
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          “**Eligible Accounts**” are Accounts in the ordinary course of a Borrower’s business that meet allof each Borrower’s representations and warranties in Section 5; but Bank may changeeligibility standards by giving Company prior written notice. Unless Bank agrees otherwise inwriting, Eligible Accounts will not include:          (a) Accounts that the account debtor has not paid within 90 days of invoice date;          (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90days of invoice date;          (c) Credit balances over 90 days from invoice date;          (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrowersexceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approvesin writing except for those certain Accounts from SBC Communications Inc., MCI, Inc., SprintCorporation, Verizon Communications Inc., AT&T Corp., for which the percentage may be 35%;          (e) Accounts for which the account debtor does not have its principal place of business in theUnited States;          (f) Accounts for which the account debtor is a federal, state or local government entity orany department, agency, or instrumentality except for Accounts of the United States if the payeehas assigned its payment rights to Bank and the assignment has been acknowledged under theAssignment of Claims Act of 1940 (31 U.S.C. 3727);          (g) Accounts for which any Borrower owes the account debtor, but only up to the amount owed(sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts);          (h) Accounts for demonstration or promotional equipment, or in which goods are consigned,sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if accountdebtor’s payment may be conditional;          (i) Accounts for which the account debtor is a Borrower’s Affiliate, officer, employee, oragent;          (j) Accounts in which the account debtor disputes liability or makes any claim and Bankbelieves there may be a basis for dispute (but only up to the disputed or claimed amount), or ifthe Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out ofbusiness;          (k) Accounts for which Bank reasonably determines collection to be doubtful.          “**Equipment**” has the meaning set forth in the Code and includes all present and futuremachinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts andattachments in which any Borrower has any interest.          “**ERISA**” is the Employment Retirement Income Security Act of 1974, and its regulations.          “**Formula Period Maturity Date**” is December 31, 2005.          “**GAAP**” is generally accepted accounting principles.          “**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**” are proceedings 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.          “**Intellectual Property**” is:          (a) Copyrights, Trademarks and Patents including amendments, renewals, extensions, and alllicenses or other rights to use and all license fees and royalties from the use;
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          (b) Any trade secrets and any intellectual property rights in computer software and computersoftware products now or later existing, created, acquired or held;          (c) All design rights which may be available to any Borrower now or later created, acquired orheld;          (d) Any claims for damages (past, present or future) for infringement of any of the rightsabove, with the right, but not the obligation, to sue and collect damages for use or infringementof the intellectual property rights above;          (e) All Proceeds and products of the foregoing, including all insurance, indemnity or warrantypayments.          “**Inventory**” has the meaning set forth in the Code and includes is present and future inventoryin which any Borrower has any interest, including merchandise, raw materials, parts, supplies,packing and shipping materials, work in process and finished products intended for sale or lease orto be furnished under a contract of service, of every kind and description now or later owned by orin the custody or possession, actual or constructive, of any Borrower, including inventorytemporarily out of its custody or possession or in transit and including returns on any accounts orother Proceeds from the sale or disposition of any of the foregoing and any documents of title.          “**Investment**” is any beneficial ownership of (including stock, partnership interest or othersecurities) any Person, or any loan, advance or capital contribution to any Person.          “**Letter-of-credit right**” means a right to payment or performance under a letter of credit,whether or not the beneficiary has demanded or is at the time entitled to demand payment orperformance.          “**Lien**” is a mortgage, lien, deed of trust, charge, pledge, security interest or otherencumbrance.          “**Liquidity Ratio**” means the ratio of (i) the sum of (a) Quick Assets, plus (b) Accounts to(ii) the aggregate amount of outstanding Obligations.          “**Loan Documents**” are, collectively, this Agreement, the Revolving Promissory Note,any note, or notes or guaranties executed by any Borrower, and any other present or futureagreement between any Borrower and/or for the benefit of Bank in connection with this Agreement,all as amended, extended or restated.          “**Material Adverse Change**” means the occurrence of any of the events set forth in Section 8.3.          “**Non-Formula Period Maturity Date**” is October 31, 2005.          “**Obligations**” are debts, principal, interest, Bank Expenses and other amounts Borrower owesBank now or later, including cash management services, letters of credit and foreign exchangecontracts, if any and including interest accruing after Insolvency Proceedings begin and debts,liabilities, or obligations of any Borrower assigned to Bank.          “**Patents**” are patents, patent applications and like protections, including improvements,divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.          “**Payment Date**” is the fourteenth (14th) day of each month.          “**Permitted Indebtedness**” is:          (a) During the Non-Formula Period only, each Borrower’s indebtedness to the holders of theSenior Secured Convertible Debentures;          (b) Each Borrower’s indebtedness to Bank under this Agreement or any other Loan Document;          (c) Indebtedness existing on the Closing Date and shown on the Schedule;          (d) Subordinated Debt;          (e) Indebtedness to trade creditors incurred in the ordinary course of business;          (f) Indebtedness secured by Permitted Liens;
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          (g) Indebtedness between any Borrowers who are parties to the Loan Documents; and          (h) Extensions, refinancings, modifications, amendments and restatements of any item above,provided that the principal amount is not increased or the terms thereof are not modified to imposemore burdensome terms upon Borrowers.          **“Permitted Investments”**are:          (a) Investments shown on the Schedule and existing on the Closing Date;          (b) Investments in Subsidiaries; and          (c) (i) marketable direct obligations issued or unconditionally guaranteed by the UnitedStates or its agency or any State maturing within one (1) year from its acquisition, (ii)commercial paper maturing no more than one (1) year after its creation and having the highestrating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., and (iii)Bank’s certificates of deposit issued maturing no more than one (1) year after issue.          **“Permitted Liens”**are:          (a) Liens existing on the Closing Date and shown on the Schedule or arising under thisAgreement 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 such Borrower maintains adequate reserveson its Books, if they have no priority over any of Bank’s security interests;          (c) Purchase money Liens (i) on Equipment acquired or held by a Borrower or its Subsidiariesincurred for financing the acquisition of the Equipment, or (ii) existing on equipment whenacquired, if the Lien is confined to the property and improvements and the Proceeds of theequipment;          (d) Licenses or sublicenses granted in the ordinary course of a Borrower’s business and anyinterest or title of a licensor or under any license or sublicense, if the licenses andsublicenses permit granting Bank a security interest;          (e) Leases or subleases granted in the ordinary course of Borrower’s business, including inconnection with Borrower’s leased premises or leased property;          (f) Liens in favor of the existing holders of the Senior Secured Convertible Debentures, whichLiens are pari passu with Bank’s Lien; and          (g) 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 belimited to the property encumbered by the existing Lien and the principal amount of theindebtedness may not increase.          “**Person**” is any individual, sole proprietorship, partnership, limited liability company, jointventure, company association, trust, unincorporated organization, association, corporation,institution, public benefit corporation, firm, joint stock company, estate, entity or governmentagency.          “**Prime Rate**” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowestrate.          “**Proceeds**” has the meaning described in the Code as in effect from time to time.          “**Quick Assets**” is, on any date, the Borrowers’ consolidated, unrestricted cash and cashequivalents determined according to GAAP.          “**Registered Organization**” means an organization organized solely under the law of a singlestate or the United States and as to which the state or the United States must maintain a publicrecord showing the organization to have been organized.          “**Responsible Officer**” is each of the Chief Executive Officer, the President, the ChiefFinancial Officer and the Controller of any Borrower.
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          “**Revolving Promissory Note**” means that certain Revolving Promissory Note of even date herewithin the maximum principal amount of Four Million Dollars ($4,000,000) from Borrowers in favor ofBank, together with all renewals, amendments, modifications and substitutions, therefor.          “**Schedule**” is any attached schedule of exceptions.          “**Securities Purchase Agreement**” means that certain securities purchase agreement dated March25, 2002 issued by the Company and certain Subsidiaries to the holders thereunder.          “**Securities Purchase Agreement Documents**” means collectively the Securities Purchase Agreementand any and all other agreements, documents or instruments (together with any and all amendments,modifications, and supplements thereto, restatements thereof, and substitutes therefor) previously,now or hereafter executed and delivered by the Borrower, the Seller, or any other Person inconnection with the Securities Purchase Agreement Transaction.          “**Securities Purchase Agreement Transaction**” means the purchase agreement transaction of theSenior Secured Convertible Debentures contemplated by the provisions of the Securities PurchaseAgreement.          “**Senior Secured Convertible Debentures**” means those certain senior secured convertibledebentures issued by the Company and certain Subsidiaries pursuant to the Securities PurchaseAgreement.          “**Subordinated Debt**” is debt incurred by any Borrower subordinated to Borrowers’ indebtednessowed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bankand approved by Bank in writing.          **“Subsidiary”**is for any Person, or any other business entity of which more than fifty percent(50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly,by the Person or one or more Affiliates of the Person.          “**Supporting Obligation**” means a Letter-of-credit right, secondary obligation or obligation ofa secondary obligor or that supports the payment or performance of an account, chattel paper, adocument, a general intangible, an instrument or investment property.          “**Trademarks**” are trademark and servicemark rights, registered or not, applications to registerand registrations and like protections, and the entire goodwill of the business of each Borrowerconnected with the trademarks.*[Signatures appear on the following page]*
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             BORROWERS:           WITNESS/ATTEST:   **VISUAL NETWORKS, INC.**           /s/ Sean Hunt   By: /s/Lawrence Barker (SEAL)               Name: Lawrence Barker