01082004 8-K Exhibit 10.4




Exhibit 10.4



EXECUTION COPY 



SECURITY AGREEMENT



THIS SECURITY AGREEMENT (the "Agreement"), dated as of December 31, 2003, is
by and among COMMERCE ONE OPERATIONS, INC., a Delaware corporation maintaining its
principal place of business located at One Market Street, Steuart Tower, Suite 1300, San
Francisco, CA 94105 ("Operations"), COMMERCE ONE, INC., a Delaware corporation
maintaining its principal place of business located at One Market Street, Steuart Tower, Suite
1300, San Francisco, CA 94105 ("Commerce One" and together with Operations, the "Debtors"),
and COMVEST INVESTMENT PARTNERS II LLC, a Delaware limited liability company, as
an investor and as administrative agent ("ComVest," the "Administrative Agent" or "Secured
Party") for ComVest and DCC Ventures, LLC, a Nevada limited liability company  ("DCC" or
together with ComVest, the "Purchasers") of Commerce One's Senior Secured Non-Convertible
Promissory Notes and Warrants under the terms of that certain Note and Warrant Purchase
Agreement dated on or about the date hereof (the "Purchase Agreement").  Any capitalized term
used but not defined herein shall have the meaning ascribed thereto in the Purchase Agreement.



W I T N E S S E T H:



        WHEREAS, Commerce One has offered for sale to the Purchasers, and the Purchasers
have purchased from Commerce One, (i) Senior Secured Non-Convertible Promissory Notes of
Commerce One in the aggregate principal amount of Five Million Dollars ($5,000,000) (the
"Notes") and (ii)  Warrants to purchase shares of common stock, par value $.0001 per share, of
Commerce One (the "Warrants") under the terms of the Purchase Agreement;


        WHEREAS, under the terms and conditions of the Purchase Agreement, the Purchasers
have purchased the Notes and Warrants dated the date hereof and as set forth in Exhibits A and
B, respectively, annexed hereto and made a part hereof, with payment of the Notes and any other
obligations of Commerce One to the Purchasers, and each of them, to be secured as provided for
in the Purchase Agreement;


        WHEREAS, under the terms and conditions of the Purchase Agreement, in order to
induce the Purchasers to purchase the Notes and Warrant, (i) Operations agreed to execute and
deliver to the Secured Party a Guaranty as of even date herewith (the "Guaranty"), pursuant to
which Operations has agreed to guarantee the full repayment of the Notes and all other
obligations of Commerce One under the Purchase Agreement and (ii) the Debtors agreed to
execute and deliver to the Secured Party this Security Agreement granting the Secured Party a
first perfected priority lien and security interest in the Collateral (as described below) to secure
the Debtor's' respective payment and other obligations under the Purchase Agreement, the Notes
and other Closing Documents;


        WHEREAS, the Purchasers have appointed ComVest as Administrative Agent to act on
behalf of the Purchasers pursuant to the terms and conditions set forth in detail in the Purchase
Agreement and below, and expressly agree that the Administrative Agent will be deemed the







Secured Party for purposes of administering the security interests granted to the Purchasers
pursuant to the terms and conditions set forth in detail below;

        NOW, THEREFORE, in consideration of the premises and agreements hereinafter set
forth, the parties hereto agree as follows:




        1.       Creation of Security Interest; Term.
 

                In order to induce the Purchasers to enter into the Purchase Agreement and
purchase the Notes and Warrants, the Debtor hereby unconditionally and irrevocably grant to the
Secured Party a first perfected priority lien and security interest in the Collateral described in
Section 2 hereof (the "Collateral") to secure Debtors' prompt payment (alone, the
"Indebtedness"), performance and discharge in full of all of their respective obligations under the
Purchase Agreement, the Notes, the Guaranty, the Pledge Agreement, this Agreement and any
other instruments entered into in connection with and any further amounts which, pursuant to the
Purchase Agreement and/or any other security documents relating to the Notes, may be deemed
to be a part of and/or added to such obligations (together with the Indebtedness, the
"Obligations").  Upon the earlier of (i) the payment, performance and discharge in full of all
Obligations, (ii) Conversion of the Notes or (iii) sale of the SRM Assets and/or the Perfect
Commerce Note in accordance with Section 8 of this Agreement, the security interest granted
herein shall expire and so shall this Agreement.  The Secured Party's security interest shall have
priority and be superior to all other interests in the Collateral and shall rank senior in lien priority
to any existing or future indebtedness of the Debtor, other than the Permitted Liens and the
CambridgePark Indebtedness.  For purposes hereof, "CambridgePark Indebtedness" shall mean
the payments due by Commerce One to CambridgePark Investors Limited Partnership
("CambridgePark") in the aggregate amount of Seven Hundred and Fifty Thousand Dollars
($750,000), the repayment of which is secured by a security interest in certain accounts
receivable of Commerce One, in accordance with the Settlement Agreement, dated as of June 6,
2003, by and between Commerce One and CambridgePark.  For the purposes hereof, "Permitted
Liens" shall mean (i) liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Debtors maintain adequate
reserves, (ii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like liens
arising in the ordinary course of Debtors' respective business which are not overdue for a period
of more than thirty (30) days of which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained by Debtors; (iii) liens to
secure payment of workers' compensation, employment insurance, old age pensions, social
security or other like obligations incurred in the ordinary course of Debtors' respective
businesses; (iv) deposits to secure performance of bids, trade contracts (other than for borrowed
money), contracts for the purchase or property, leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature, in each case, incurred in the
ordinary course of the Debtors' respective businesses and not representing an obligation for
borrowed money; (v) easements, rights-of-way, restrictions and other similar encumbrances
affecting real property which, in the aggregate, are not substantial in amount, and which do not
in any case materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of the Debtors' respective businesses; (vi) liens arising by
virtue of any contractual (which shall be subject to standard and customary terms used in the
banking industry), statutory or common law provision relating to banker's liens, rights or set-off



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or similar rights and remedies as to deposit accounts or other funds maintained with a creditor
depository institution ; (vii) licenses and sublicenses granted in the ordinary course of business,
(viii)  liens (including with respect to capital leases)  on property (including accessions,
additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds
thereof) acquired or held by either or both Debtors or their respective subsidiaries incurred for
financing equipment, so long as such lien is confined to such equipment (including accessions,
additions, parts, replacements, fixtures, improvements and attachments thereto and the proceeds
thereof) , and (ix) the liens securing the CambridgePark Indebtedness.

        2.      Collateral.  The Collateral shall consist of the following:



                        (a)     all tangible and intangible assets of both Debtors used in
connection with the development, operation and maintenance of that portion of the Debtors'
business that provides supplier relationship management (SRM) business process applications
(the "SRM Business"), including but not limited to (i) inventory, both now owned and hereafter
acquired, including raw materials, work in process, finished goods, supplies and other tangible
personal property held for sale or lease or furnished or to be furnished under contracts of service
or used or consumed in the SRM Business, and any additions and accession thereto and
substitutions and replacements for any thereof, wherever located, (ii) Debtors' intangible
personal property, cash on hand and cash in and deposits with banks or other financial
institutions, whether now owned or hereafter acquired, including, without limitation, all
accounts, contract rights, goods, chattel paper, documents, instruments and general intangibles;
all tax refunds to which either Debtor may be or become entitled in connection with the SRM
Business; (iii) all existing and future accounts receivable of the Debtors and their respective
direct and indirect subsidiaries in connection with the SRM Business; (iv) all contracts, shares of
stock, bonds, notes, evidences of indebtedness and other securities, bills, notes, interests in life
insurance policies, copyrights, goodwill, trade names, trademarks, trademark applications,
patents, patent applications, copyrights, blue prints, drawings, claims, credits, choses in action,
licenses, permits, franchises and grants, any and all tangible and intangible products, discoveries,
developments, designs, improvements, inventions, formulas, processes, techniques, know-how,
data and software source code whether or not registrable or patentable under statute, whenever
made, conceived, reduced to practice, learned or developed by or for the Debtors in connection
with the SRM Business; and (v) all other real, personal and mixed (tangible and intangible)
property and rights related thereto, of every character and wherever situated, now owned and
hereafter acquired by the Debtors, including, without limitation, equipment, machinery, vehicles,
tools, furniture, fixtures, all attachments, accessions and other property used in connection with
the SRM Business, all additions, enlargements, extensions, modifications, repairs, substitutions
and replacements thereof, wherever located (collectively, the "SRM Assets");



                        (b)  all rights and obligations of Operations under the promissory notes,
dated January 24, 2003, issued by eScout LLC and eScout Acquisition LLC (a/k/a Perfect
Commerce) in favor of Operations, in the aggregate principal amount of Two Million One
Hundred Eighty-Two Dollars ($2,000,182) (together, the "Perfect Commerce Note");



                        (c)     all present and future books of account of the Debtors of every
kind or nature, invoices, purchase and sale agreements, ledger cards, bills or lading and other



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shipping evidence, statements, correspondence, memoranda, credit files and other data relating to
the SRM Business or the Perfect Commerce Note, together with tapes, disks, diskettes and other
data and software storage media and devices, file cabinets or containers in which the foregoing
are stored; and

                        (d)     all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds for property damage or personal injury related to the SRM
Business and all claims against third parties for loss or damage to or destruction of any of the
foregoing.



Notwithstanding the foregoing, the security interest granted herein does not extend to, and the
term "Collateral" does not include, (i) any license or contract rights to the extent the granting of a
security interest in it would be contrary to applicable law or that such rights are nonassignable by
their terms (but only to the extent such prohibition is enforceable under applicable law) without
the consent of the licensor or other party (but only to the extent such consent has not been
obtained)  (ii) the assets identified on the Disclosure Letter attached hereto and hereby made a
part hereof and (iii) that portion (if any) of the capital stock (or other equity interests of such
subsidiary) owned by Debtors with a jurisdiction of formation located outside of the United
States that is in excess of Sixty-Five Percent (65%) of the aggregate issued and outstanding
capital stock (or other equity interests of such subsidiary) .


        3.         Payment Obligations of the Debtor.



                (a)     The Debtors shall, to the extent applicable to each of them, pay to the
Purchasers any sum or sums due or which may become due pursuant to the Note, the Guaranty,
the Pledge Agreement or this Agreement, payable to the order of each of the Purchasers  in the
principal amount, together with accrued interest thereon, in accordance with the terms of the
Notes.  The Debtors shall also perform and discharge in full of all of their other respective
Obligations.


                (b)     Debtors shall account fully and faithfully to the Secured Party for
proceeds from disposition of the Collateral in any manner, as reasonably requested by the
Secured Party, and, following an Event of Default (as defined below) hereunder, shall pay or turn
over promptly in cash, negotiable instruments, drafts, assigned accounts or chattel paper all the
proceeds from each sale to be applied to Debtors' respective Obligations to the Secured Party,
subject, if other than cash, to final payment or collection.  The manner in which such proceeds
are applied to the Obligations shall be in the sole discretion of the Secured Party, provided such
application of proceeds is made by the Secured Party in good faith and in accordance with
Section 7 hereof.


                (c)     Following an Event of Default hereunder, the Debtors shall pay to the
Secured Party on demand all reasonable expenses and expenditures (including, but not limited to,
reasonable fees and expenses of legal counsel) incurred or paid by the Secured Party in
exercising or protecting its interests, rights and remedies under this Agreement, plus penalties
thereon at the lesser of (i) the per diem rates described in the Note or (ii) the highest rate of
interest then allowed by law.



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                (d)     If requested by the Secured Party, the Debtors shall pay immediately the
entire unpaid principal amounts of the Note, together with accrued interest thereon, to the
Purchasers whether created or incurred pursuant to this Agreement or otherwise, upon the
occurrence and during the continuance of an Event of Default hereunder.





4.        Representations, Warranties and Covenants of the Debtors.  Each of the Debtors
hereby represents and warrants to, and covenants with, the Purchasers and the Secured Party that:


        (a)     All information supplied and statements made by such Debtor in any
financial, credit or accounting statement or provided to the Purchasers and/or the Secured Party
prior to, contemporaneously with or subsequent to the execution of this Agreement are and shall
be true, correct, complete, valid and genuine in all material respects as of the date made.


        (b)     Subject to Section 8 hereof and as otherwise set forth in the Pledge
Agreement, the Collateral shall remain in such Debtor's possession or control at all times at such
Debtor's risk of loss until (i) sold, licensed or otherwise disposed of in the ordinary course of
business or as otherwise contemplated by the Purchase Agreement and Note, provided that the
Secured Party shall be granted a security interest in the proceeds and other consideration
received for such Collateral in accordance with Section 2 hereof, or (ii) as authorized in writing
by the Secured Party.


        (c)     Subject to Section 8 hereof, until an Event of Default, such Debtor may
use the Collateral in any lawful manner not inconsistent with this Agreement or with the terms or
conditions of any policy of insurance thereon and may also sell, license or otherwise dispose of
the Collateral in the ordinary course of business or as otherwise contemplated by the Purchase
Agreement and Note.  The Secured Party's security interest shall attach to all proceeds of sales,
licenses and other dispositions of the Collateral in accordance with Section 2 hereof.


        (d)     Such Debtor shall promptly notify the Secured Party in writing of any
change in the location of its chief executive office and principal place of business as set forth in
the introduction to this Agreement.



        (e)     Such Debtor shall pay prior to delinquency all material taxes, charges,
liens and assessments against the Collateral, except those that such Debtor is contesting in good
faith and for which adequate accruals have been made, and upon such Debtor's failure to do so
after ten (10) days' prior written notice, the Secured Party at its option may pay any of them and
shall be the sole judge of the legality or validity thereof and the amount necessary to discharge
the same.  Such payment shall become part of the Obligations secured by this Agreement and
shall be paid to the Purchasers by such Debtor immediately and without demand, with interest
thereon at the rate set forth in Section 3(c) hereof.



        (f)     Such Debtor shall have and maintain insurance at all times with respect to
all Collateral against risks of fire, theft and such other risks as is reasonable for its business and
as the Secured Party may reasonably require (but in no event shall such Debtor be obligated to
insure such Collateral in an amount greater than the replacement value thereof), including
extended coverage.  Within ten (10) days after the date hereof, such Debtor shall amend such
insurance policies to contain a standard mortgagee's endorsement providing for payment of any



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loss to the Secured Party and to provide for twenty (20) days' written minimum cancellation
notice to the Secured Party.  Following an Event of Default, subject to the provisions of Section
7 hereof, the Secured Party may act as attorney for such Debtor in obtaining, adjusting, settling
and canceling such insurance and endorsing any drafts drawn by insurers of the Collateral.  The
Secured Party may apply any proceeds of such insurance which may be received by it in
payment on account of the obligations secured hereby, whether due or not.

        (g)     Such Debtor shall, at its own expense, do, make, procure, execute and
deliver all acts, things, writings and assurances as the Secured Party may at any time reasonably
request to protect, assure or enforce its interests, rights and remedies created by, provided in or
emanating from this Agreement, including with respect to filings with the Patent and Trademark
Office.  Such Debtor shall execute financing statements and take whatever other actions are
reasonably requested by the Secured Party to perfect and continue the Secured Party's security
interests in the Collateral.  In addition, such Debtor shall use its best efforts to take all
appropriate action (including but not limited to all appropriate action requested by the Secured
Party) to perfect the Secured Party's security interest for any liens which may not be perfected by
the filing of a Form UCC-1 (including but not limited to filings with the U.S. Patent and
Trademark Office).  Prior to an Event of Default and upon the reasonable request of the Secured
Party for purposes of perfection only, such Debtor shall deliver to the Secured Party any and all
of the documents evidencing or constituting the Collateral, and such Debtor shall note the
Secured Party's interests upon any and all of such documents if not delivered to the Secured
Party for possession by it.  Further, such Debtor hereby agrees not to take any action or, to its
knowledge, omit to any action, that would cause the security interests granted hereby to be or
become unperfected.  Upon the occurrence and during the continuance of an  Event of Default
and upon the reasonable request of the Secured Party for purposes of enforcing the Secured
Party's rights hereunder, such Debtor shall deliver to the Secured Party any and all of the
documents evidencing or constituting the Collateral.  Such Debtor hereby agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a financing statement is
sufficient as a financing statement where permitted by law.


        (h)     Except in the ordinary course of business, as provided for in this
Agreement, the Purchase Agreement or the Note or as otherwise authorized by the Secured Party
in writing by a Majority Vote (as defined in Section 9 hereof), such Debtor shall not sell, lend,
license, rent, lease or otherwise dispose of the Collateral or any interest therein, and such Debtor
shall keep the Collateral, including the proceeds thereof, free from unpaid charges, including
taxes, and from liens, encumbrances and security interests other than the security interests
created by this Agreement in favor of the Secured Party (and Permitted Liens) .


        (i)     Such Debtor shall keep accurate and complete records of the Collateral
and its proceeds.


        (j)     Such Debtor has good and valid rights in and title to the Collateral and has
the full power and authority to grant to the Secured Party the security interests in the Collateral
created by this Agreement and to execute, deliver and perform its obligations in accordance with
the terms of this Agreement, without the consent or approval of any other person other than any
consent or approval that has been obtained.



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        (k)     Except as set forth on Schedule 4(k) hereof, such Debtor is the owner of
the Collateral free of all liens, claims and encumbrances, except (i) the security interest created
by this Security Agreement and granted in favor of the Secured Party and (ii) the Permitted
Liens.


                (l)     Except as set forth on Schedule 4(l), with respect to any and all Collateral,
such Debtor has not obtained and is not in the process of applying for any patents, trademarks or
copyrights  in the United States Copyright Office, the Patent and Trademark Office (or other
foreign jurisdictions related to such filings).  Such Debtor shall notify the Secured Party at least
thirty (30) days prior to the filing of any initial patent, trademark or copyright applications with
respect to the Collateral and will provide the Secured Party with all information necessary to
assist the Secured Party in perfecting its security interest in the Collateral prior to the filing of
any patent, copyright or trademark applications.


(m)      Such Debtor agrees that the Secured Party holds the Collateral as agent
for the Purchasers, and is hereby authorized to and may turn over to the Purchasers upon request
therefor any such Collateral after all obligations and indebtedness of Debtors to the Secured
Party have been fully paid and performed.  Notwithstanding the foregoing, the Debtors hereby
acknowledge and agree that in terms of payments in respect of the Notes and from the proceeds
of any Collateral, each Purchaser shall be treated ratably in accordance with its pro rata share of
the Notes based upon the ratio of the then outstanding principal amount of Purchaser's Note to
the outstanding principal balance of all of the Notes ("Pro Rata Share") and the Debtors shall
execute and deliver such additional documents and take such additional action as may be
necessary or desirable in the reasonable opinion of the Secured Party to effectuate the provisions
and purposes of the provisions of Section 7 hereof.


(n)     As to that portion of the Collateral which is accounts, such Debtor
represents, warrants and agrees with respect to each such account that:


 (i)    The account arose from the performance of services
by such Debtor which have been performed or from the lease or the
absolute sale of goods or provision of services by such Debtor in which
such Debtor had the sole and complete ownership, and the goods or
services have been delivered or provided to, as the case may be, the
account debtor.


 (ii)   The account is not subject to any prior or
subsequent assignment, claim, lien or security interest other than (i) the
security interest created by this Security Agreement and granted in favor
of the Secured Party and (ii) the Permitted Liens.


 (iii)  The account arose in the ordinary course of such
Debtor's business, and no notice of bankruptcy, insolvency or financial
embarrassment of the account debtor has been received by such Debtor.




(o)     The assets listed on the Disclosure Letter attached hereto are not used
primarily in the SRM Business.



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                (p)     Upon the occurrence of an Event of Default, and upon the request of the
Secured Party, the Debtors shall use their best efforts (with the cooperation of the Secured Party)
to obtain the consent of eScout LLC and eScout Acquisitions LLC to transfer the Perfect
Commerce Note to the Secured Party.




 5.         Events of Default.       The Debtors shall be in default under this
Agreement upon the happening of any condition or event set forth below (each, an "Event of
Default"):


(a)     The occurrence of any Event of Default (as defined in the Notes)
that is not cured within any applicable cure period;



(b)     Failure of Operations to pay any amounts due under the Guaranty as
and when due;



(c)     Application for, or consent to, the appointment of a receiver, trustee
or liquidator for Operations or any of its properties;



(d)     Filing by Operations of a voluntary petition in bankruptcy or a
petition or an answer seeking reorganization or an arrangement with creditors;



(e)     The entry against Operations of a court order approving a petition
filed against it under the federal bankruptcy laws, which order shall not have been vacated or set
aside or otherwise terminated within sixty (60) days;



(f)     With respect to any instrument or agreement for borrowed money to
which Operations is a party, (i) an event of default has occurred and has been declared by any
third party to such instrument or agreement, the amount of the declared default exceeds Fifty
Thousand Dollars ($50,000), and such third party has accelerated any payments due under such
instrument or agreement or (ii) an event of default has occurred and has been declared by any
third party to such instrument or agreement, the amount of the declared default exceeds Three
Hundred Thousand Dollars ($300,000), and Operations is not actively disputing such declaration
of default after making a good faith determination, with advise of its legal counsel, that such
amount is not due and that Operations has valid and reasonable defenses against non-payment of
such amount;



                (g)     Operations agrees to pay in full settlement of any litigation,
proceeding or action, or a judgment is entered by a court of competent jurisdiction with respect
to any litigation, proceeding or action involving Operations (other than any settlement entered
into or judgment entered with respect to obligations incurred by Operations in the ordinary
course of business and which were accrued for on the balance sheet of Operations in the ordinary
course of business), of at least Five Hundred Thousand Dollars ($500,000) in any one instance or
One Million One Hundred Thousand Dollars ($1,100,000) in the aggregate, in each case that is
not covered by any insurance maintained by Operations



                (h)     The security interest created hereunder shall cease to be  a valid



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first priority security interest in the Collateral (subject to the Permitted Liens);


                (i)     Any material provision of this Agreement, the Purchase
Agreement or any other Closing Documents for any reason ceases to be valid, binding and
enforceable in accordance with its terms (or Commerce One or Debtor shall challenge the
enforceability of any such document); or



                (k)     The creation of any liens (other than (i) the security interest created
by this Agreement and granted in favor of the Secured Party or (ii) the Permitted Liens) without
the prior written consent of the Secured Party in accordance with Section 9 hereof.





6.           Secured Parties' Rights and Remedies.


        (a)     Rights Exclusive of Default.  Until the termination of this Agreement,
upon reasonable notice to the Debtors:



                (i)     The Secured Party may enter each Debtor's premises at any
reasonable time during such Debtor's usual business hours without interruption of
such Debtor's business and without any breach of the peace to inspect the
Collateral and such Debtor's books and records pertaining to the Collateral, and
such Debtor shall assist the Secured Party in making any such inspection; and


                (ii)    At its option, the Secured Party may (x) agree to discharge taxes,
liens or security interests or other encumbrances at any time levied or placed on
the Collateral; (y) pay for the insurance on the Collateral; and (z) pay for the
maintenance and preservation of the Collateral.  Such Debtor agrees to reimburse
the Secured Party on demand for any payment made, or expense incurred by the
Secured Party pursuant to the foregoing authorization, plus interest thereon at the
rate set forth in Section 3(c) hereof, and will indemnify and hold the Secured
Party harmless from and against liability in connection therewith.





        (b)     Rights in Event of Default.  In addition to any other rights which the
Secured Party may have at law or hereunder, upon the occurrence and during the continuation of
an Event of Default, and at any time thereafter that such Event of Default remains uncured, the
Secured Party may:


        (i)     Declare all obligations secured hereby immediately due and
payable and shall have the rights and remedies of a "secured party" under the
UCC in effect in the local jurisdiction where the Collateral  is located, including,
without limitation, the right to sell, lease or otherwise dispose of any or all of the
Collateral and the right to take possession of the Collateral, and for that purpose
the Secured Party may enter any premises on which the Collateral or any part
thereof may be situated and remove the same therefrom, so long as the same may
be accomplished without a breach of the peace.  The Secured Party may require
the Debtors to assemble the Collateral and, to the extent reasonably practicable,
make it available to the Secured Party at a place to be designated by the Secured
Party which is reasonably convenient to the parties and thereafter hold the



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Collateral absolutely free from any claim or right whatsoever, and such demand,
notice and right or equity being hereby expressly waived and released.  Unless the
Collateral threatens to decline speedily in value or is of a type customarily sold on
a recognized market, the Secured Party will send the Debtors reasonable notice of
the time and place of any public sale thereof or of the time after which any private
sale or other disposition thereof is to be made.  The requirement of sending
reasonable notice shall be met if such notice is given to the Debtors at least ten
(10) days before the time of the sale or disposition.  Expenses of retaking,
holding, preparing for sale, selling or the like shall include the Secured Party's
reasonable fees and expenses (including, but not limited to, reasonable fees and
expenses of legal counsel), and the Debtors agree to pay such reasonable fees and
expenses, plus interest thereon at the rate set forth in Section 3(c) hereof.  The
Debtors shall remain jointly and severally liable for any deficiency hereunder or
under the Note;

                (ii)    Execute, sign, endorse, transfer or deliver in the name of the
Debtors, notes, checks, drafts or other instruments for the payment of money and
receipts, certificates of origin, applications for certificates of title or any other
documents, necessary to evidence, perfect or realize upon the security interest and
obligations created by this Agreement.


        (iii)   With respect to any such asset constituting Collateral, notify the
account of debtors or obligors of any accounts, chattel paper, negotiable
instruments or other evidences of indebtedness remitted by the Debtors to the
Secured Party as proceeds to pay the Secured Party directly;


        (iv)    Demand, sue for, collect or make any compromise or settlement
with reference to the Collateral as the Secured Party, in its sole discretion,
chooses; and


                (v)     Remedy any default and may waive any default without waiving or
being deemed to have waived any other prior or subsequent default.





(c)     Private Sale.   The Secured Party shall not incur any liability as a result of
a private sale of the Collateral, or any part thereof, at any sale pursuant to Section 6(b) hereof
conducted in good faith.  The Debtors hereby waive any claims against the Secured Party arising
by the reason of the fact that the price at which the Collateral, as the case may be, may have been
sold at such private sale was less than the price that might have been obtained at a public sale or
was less than the aggregate amount of the Obligations, even if the Secured Party accepts the first
offer received and does not offer the Collateral to more than one offeree.


(d)     Deficiency.  If the proceeds of sale, collection or other realization of or
upon the Collateral pursuant to this Section 6 are insufficient to cover the costs and expenses of
such realization and the payment in full of the Obligations, the Debtor shall remain liable for any
deficiency.





7.          Intercreditor Arrangement. 



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        (a)     ComVest Investment Partners II LLC, as the "Administrative Agent"
agrees, as to the certain rights and priorities of each with respect to the Obligations and with
respect to their respective liens upon and security interest in the Collateral, to provide for the
orderly sharing among the Secured Party of the proceeds of such Collateral upon any foreclosure
thereon or other disposition thereof, to the intercreditor arrangement set forth in this Section 7.


        (b)     Payments Held in Trust/Turnover; Application of Payments.


                (i)     In the event that any payment or distribution of assets of the
Debtors, whether in cash, property or securities, which is prohibited by this
Agreement, the Notes, the Warrants, the Purchase Agreement, the Registration
Rights Agreement, the Guaranty, the Pledge Agreement or the other Closing
Documents, shall be received by a Purchaser in contravention of such Closing
Documents such payment or distribution shall be held in trust for the benefit of
and shall be paid over to or delivered to the other Secured Party for application in
accordance with the terms hereof.


                (ii)    All payments of principal, interest, fees and expenses after the
issuance of the Notes, and proceeds of the Collateral shall be apportioned ratably
among the Secured Party, in accordance with each Purchaser's Pro Rata Share.





        (c)     Permitted Liens and Relative Priorities.  As among the Purchasers, and
notwithstanding the terms (including the description of Collateral), dating, execution, or delivery
of any document, instrument, or agreement; the time, order, method, or manner of granting,
attachment or perfection of any security interest or lien; the time of filing or recording of any
financing statements, assignments, deeds of trust, mortgages, or any other documents,
instruments, or agreements under the UCC or any other applicable law, and any provision of the
UCC or any other applicable law to the contrary, the Purchasers agree that the Administrative
Agent not individually, but on behalf of all of the Purchasers, shall have a security interest in and
lien upon the Collateral.  For purposes of the foregoing allocation of priorities, any claim of a
right to a setoff shall be treated in all respects as a security interest and no claimed right of setoff
shall be asserted to defeat or diminish the rights or priorities provided for herein.


                (d)     No Alteration of Priority.  The lien and security interest priorities provided
in Section 7(c) hereof shall not be altered or otherwise affected by any amendment, modification,
supplement, extension, renewal, restatement or refinancing of any of the Obligations nor by any
action or inaction which the Administrative Agent may take or fail to take in respect of the
Collateral.


                (e)     Nonavoidability and Perfection.  The provisions of this Section 7 are
intended solely to govern the respective priorities as among the Purchasers.  Each Purchaser
agrees that it will not directly or indirectly take any action to contest or challenge the validity,
legality, perfection, priority, availability, or enforceability of the liens of the other Purchasers or
the Administrative Agent upon the Collateral or seek to have the same avoided, disallowed, set
aside, or otherwise invalidated in any judicial proceeding or otherwise.  In the event that any
other Purchaser (either individually or together with others) breaches or causes to be breached
the terms of the preceding sentence, resulting (directly or indirectly) in the avoidance or
imperfection of the Administrative Agent's lien or security interest held on behalf of all of the
Purchasers in some or all of the Collateral, then the priority of the lien or security interest of the
Secured Party in any such affected Collateral shall continue to be governed by the terms of
Section 7(c) hereof irrespective of the avoidance or



11





imperfection of the Administrative Agent's
lien or security interest held on behalf of all of the Purchasers.



                (f)     Management of Collateral.  Notwithstanding anything to the contrary
contained in any of the Notes (with respect to provisions addressing management of Collateral
only):


                (i)     Until the Notes have been paid in full and subject to the remaining
provisions of this Section 7:  (i) the Administrative Agent, on behalf of the
Purchasers, shall have the exclusive right to manage, perform, and enforce the
terms of the Closing Documents with respect to the Collateral and to exercise and
enforce all privileges and rights thereunder in its reasonable discretion and its
exercise of its business judgment, including, without limitation, the exclusive
right to enforce or settle insurance claims with respect to Collateral, take or retake
control or possession of Collateral and to hold, prepare for sale, process, sell,
lease, dispose of, or liquidate Collateral; (ii) none of the Purchasers shall exercise
or take any action in furtherance of the sale, foreclosure, realization upon, or the
repossession or liquidation of any of the Collateral, including, without limitation:
(A) the exercise of any remedies or rights of a "Secured Creditor" under Article 9
of the UCC, such as, without limitation, the notification of account debtors; (B)
the exercise of any remedies or rights as a mortgagee or beneficiary (or by the
trustee on behalf of the beneficiary), including, without limitation, the
appointment of a receiver, or the commencement of any foreclosure proceedings
or the exercise of any power of sale, including, without limitation, the placing of
any advertisement for the sale of any Collateral; (C) the exercise of any remedies
available to a judgment creditor; or (D) any other remedy available in respect of
the Collateral available to such Secured Creditor under any of the Closing
Documents (the "Secured Party Remedies") with respect to Collateral; and
(iii) any and all proceeds of Collateral which shall come into the possession,
control, or custody of the Secured Party will be deemed to have been received for
the account of the Administrative Agent and all other Purchasers, and shall be
immediately paid over to the Administrative Agent for application in accordance
with the provisions hereof.  Each Purchaser waives any and all rights to affect the
method or challenge the appropriateness of any action by the Administrative
Agent with respect to the Collateral other than actions arising out of the gross
negligence or willful misconduct of the Administrative Agent, and waives any
claims or defenses they may have against the Administrative Agent, including any
such claims or defenses based on any actions or omissions of any such person in
connection with the perfection, maintenance, enforcement, foreclosure, sale,
liquidation or release of any lien or security interest therein, or any modification
or waiver of the Closing Documents specifically relating to the management of
the Collateral other than those arising out of the gross negligence or willful
misconduct of the Administrative Agent.



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        (ii)    The rights and priorities set forth in this Section 7 shall remain binding
irrespective of the terms of any plan of reorganization in any proceeding
commenced by or against the Debtor under any provision of the United States
Bankruptcy Code (11 U.S.C.   101, et seq.), as amended, and any successor
statute (the "Bankruptcy Code") or under any other federal or state bankruptcy or
insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other similar relief, and all
converted or succeeding cases in respect thereof (the "Bankruptcy Case") or other
provisions of the Bankruptcy Code or any similar federal or state statute.





                (g)     Sale of Collateral.  Until the Notes have been paid in full, only the
Administrative Agent on behalf of the Purchasers  shall have the right to restrict or permit, or
approve or disapprove, the sale, transfer or other disposition of the Collateral; provided, that the
proceeds of any given sale shall be applied to the Obligations of each Purchaser in accordance
with its Pro Rata Share and no such sale, transfer or other disposition shall be consented to by the
Administrative Agent with respect to all or substantially all of the Collateral without the consent
of the Secured Party by a Majority Vote (as defined in Section 9 hereof).


                (h)     Sections 9-504 and 9-505 Notice and Waiver of Marshalling.  Each
Purchaser hereby acknowledges that this Agreement shall constitute notice of the other
Purchaser's respective interests in the Collateral as provided by Sections 9-504 and 9-505 of the
UCC and each of the Purchasers waives any right to compel the other Purchaser to marshal any
of the Collateral or to seek payment from any particular assets of Debtors or from any third
party.


                (i)     Bankruptcy Issues.


                (i)     Except as provided in this Section 7(j), this Section 7 shall
continue in full force and effect after the commencement of a Bankruptcy Case
and shall apply with full force and effect with respect to all Collateral acquired by
Debtors, and to all Indebtedness incurred by the Debtors, subsequent to such
commencement to the extent consented to by the  Purchasers.


                (ii)    If either Debtor shall become subject to a Bankruptcy Case, and if
the Administrative Agent shall desire to permit the use of cash collateral or to
provide post-petition financing to such Debtor, the Administrative Agent shall
obtain the prior written consent of the Purchasers by a Majority Vote (as defined
in Section 9 hereof) for such use of cash collateral or post-petition financing.  No
objection will be raised by the Purchasers to the Administrative Agent's motion
for relief from the automatic stay in any proceeding under the Bankruptcy Code to
foreclose on and sell the Collateral.


                (iii)   In any Bankruptcy Case by or against the Debtor,


                (A)     the Administrative Agent may, and is hereby irrevocably
authorized and empowered (in its own name or in the name of the



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Purchasers or otherwise), but shall have no obligation, to, (1) demand, sue
for, collect and receive every payment or distribution in respect of the
Indebtedness and give acquittance therefor and (2) file claims and proofs
of claim in respect of all of the Indebtedness and take such other action
(including, without limitation, voting all of the Indebtedness or enforcing
any security interest or other lien securing payment of all of the
Indebtedness) as the Administrative Agent may reasonably deem
necessary or advisable for the exercise or enforcement of any of the rights
or interests of the Administrative Agent and the Purchasers; provided, that
if the Administrative Agent elects not to do any of the foregoing it shall
notify each Purchaser in writing in a manner such that such notice is
received by the Purchasers on a date no less than ten (10) business days
prior to the date any such action is required to be taken under applicable
law and regulation and each Purchaser may take all actions necessary
thereunder consistent with the terms of this Security Agreement; and

                (B)     the Purchasers will duly and promptly take such action as
the Administrative Agent may reasonably request (1) to collect the
Indebtedness and to file appropriate claims or proofs of claim with respect
thereto, (2) to execute and deliver to the Administrative Agent such
powers of attorney, assignments or other instruments as the Administrative
Agent may request in order to enable it to enforce any and all claims with
respect to, and any security interests and other liens securing payment of,
the Indebtedness, and (3) to collect and receive any and all payments or
distributions which may be payable or deliverable upon or with respect to
the Indebtedness for application to the Purchasers in accordance with this
Security Agreement.




(j)     Notice of Default and Certain Events.  Each Purchaser shall send written
notice to the other Purchasers upon the occurrence of any of the following as applicable:  (a) a
request to the Administrative Agent that the Administrative Agent declare any default under such
Closing Document, (b) a request to the Administrative Agent that the Administrative Agent
accelerate any Indebtedness, or (c) the intention of such Purchaser to exercise any of its
enforcement rights or remedies.  Each such notice shall be sent to the other Purchasers
contemporaneously with the sending of such notice to Debtors if and when sent under the
applicable Closing Document.  The failure of any Purchaser to give such notice shall not affect
the relative lien or security interest priorities or the other privileges of such Purchaser as
provided in this Security Agreement or give rise to any liability.


                (k)     Bailment.  With respect to any Collateral in which a security interest may
be perfected under the UCC or other relevant law only by possession ("Possessory Collateral"),
the Administrative Agent will act as pledgeholder for the Purchasers until the payment in full in
cash of the Indebtedness.  Each Purchaser acknowledges and agrees that:  (i) the Administrative
Agent makes no representation or warranty whatsoever as to the nature, extent, description,
validity or priority of any Possessory Collateral or the security interests in or liens upon any
Possessory Collateral; (ii) while any Possessory Collateral is held by the Administrative Agent,
the Administrative Agent shall not have any liability to, and shall be held harmless by, the



14





Purchasers, for any losses, damages, claim, or liability of any kind to the extent arising out of the
holding of such Possessory Collateral, other than losses, damages, claims, or liabilities arising
out of the Administrative Agent's gross negligence or willful misconduct; (iii) the
Administrative Agent need not act as a pledgeholder for the Purchasers with respect to any
Collateral in which a security interest may be perfected by means other than possession; (iv) the
Purchasers shall immediately deliver to the Administrative Agent any Possessory Collateral that
is now or in the future comes into their possession to be held by the Administrative Agent
pursuant to the terms hereof; and (v) the claim of each of the Purchasers in the security interests
in and liens upon the Possessory Collateral shall be governed by the terms of this Security
Agreement.

                (l)     Authority of Agents/Trustees.  Each of the Purchasers agrees that any
assignment or transfer of an interest in any of the Indebtedness held by it shall be made expressly
subject to the terms and conditions of this Security Agreement.


                (m)     Successor Administrative Agent.  The Administrative Agent may resign
and be discharged from all further duties and obligations hereunder by giving each of the
Purchasers thirty (30) days prior written notice or such shorter notice period as may be agreed
between the Administrative Agent and the Purchasers.  In addition, the Administrative Agent
may be removed at any time by the Purchasers by a Majority Vote (as defined in Section 9
hereof).  Upon the resignation or removal of the Administrative Agent, a successor
Administrative Agent shall be elected by the Purchasers by a Majority Vote (as defined in
Section 8 hereof).  Upon the appointment of a successor Administrative Agent, all of the
resigning or removed Administrative Agent's liens or security interests held on behalf of all of
the Purchasers in some or all of the Collateral shall be assigned to the successor Administrative
Agent, and the resigning or removed Administrative Agent shall do all acts necessary or
appropriate to accomplish the above to vest in the successor Administrative Agent all of the
powers of the resigning or removed Administrative Agent.





        Section 8.       Termination of Security Interests; Release of Collateral.


                (a)     Upon the earliest to occur of (i) a termination event set forth in Section
4(b) of the Notes, (ii) the Conversion of the Note, or (iii) payment in full of all Obligations, the
security interest created hereunder shall terminate and all rights in the Collateral, except to the
extent applied in payment of the Obligations, shall revert to the Debtors.


                (b)     Upon any such termination of the security interests or release of
Collateral, the Secured Party will, at the Debtors' expense, execute and deliver to the Debtors
such documents as the Debtors shall reasonably request to evidence the termination of the
security interest and/or the release of such Collateral, as the case may be.


                (c)     The Secured Party further agrees to execute without fee or charge (other
than reasonable attorney's fees) any releases, acknowledgements or waivers reasonably
requested by the Debtors in connection with the sale or encumbrance by Debtors of any asset that



15





does not constitute Collateral.



9.          Modification of Agreement.  Except as otherwise expressly provided by this
Agreement, the Administrative Agent is hereby authorized to take all actions as the Secured
Party under this Agreement (including, without limitation, issuing any consents or approvals),
and the Debtors are entitled to rely on any certification, notice or other communications from the
Administrative Agent which the Debtors believe to be genuine and correct and to have been
signed or sent by or on behalf of the Administrative Agent; provided, however, that no
modification, amendment or waiver of any provision of, this Agreement, nor any consent to any
departure by the Debtors herefrom, shall in any event be effective unless the same shall be in
writing by the Administrative Agent at the direction of a majority in aggregate principal amount
of then-outstanding Notes under the Purchase Agreement (the "Majority Vote") and then such
modification, amendment, waiver or consent shall be effective only in the specific instance and
for the purpose given; provided, further, however, that, without the written consent of each
Purchaser affected thereby, no such action shall (i) reduce the amount of principal or required
principal payments due to each holder of Notes beyond one (1) year; (ii) reduce the rate of
interest payable to the Purchasers; or (iii) postpone any date fixed for payment of principal.  No
notice to or demand on the Debtors in any case shall entitle the Debtors to any other or further
notice or demand in the same, similar or other circumstances.  When any amendment,
modification or waiver to this Agreement, the Notes, the Warrants, or the Purchase Agreement,
the Guaranty, the Registration Rights Agreement, the Pledge Agreement or other Closing
Documents is made in accordance with the terms of this Section 9, such amendment,
modification or waiver shall be enforceable against each Purchaser or the Purchasers, as
applicable, as if such Purchaser or Purchasers, as applicable,  had signed such amendment,
modification or waiver.  The terms of this Agreement may be amended, modified or waived only
in a written instrument signed by the party against whom enforcement may be sought.


10.          Remedies Cumulative, etc.  No right, power or remedy herein conferred upon or
reserved to the Administrative Agent or the Purchasers is intended to be exclusive of any other
right, power or remedy or remedies, and each and every right, power and remedy of the
Administrative Agent or the Purchasers pursuant to the Closing Documents or now or hereafter
existing at law or in equity or by statute or otherwise shall, to the extent permitted by law, be
cumulative and concurrent and shall be in addition to every other right, power or remedy
pursuant to this Agreement or the Notes, now or hereafter existing at law or in equity or by
statute or otherwise, and the exercise or beginning of the exercise by the Administrative Agent or
the Purchasers of any one or more of such rights, powers or remedies shall not preclude the
simultaneous or later exercise by the Administrative Agent and the Purchasers of any or all such
other rights, powers or remedies.


11.         No Waiver, etc.   To the fullest extent permitted by law, no failure or delay by the
Administrative Agent or the Purchasers to insist upon the strict performance of any term,
condition, covenant or agreement of this Agreement, the Purchase Agreement, the Notes, the
Warrants, the Guaranty, the Pledge Agreement, the Registration Rights Agreement, or the other
Closing Documents, or to exercise any right, power or remedy hereunder or thereunder or
consequent upon a breach hereof or thereof, shall constitute a waiver of any such term, condition
covenant, agreement, right, power or remedy or of any such breach, or preclude the
Administrative Agent or the Purchasers from exercising any such right, power or remedy at any
later time or times.



16







12.         Notices.  All notices, demands, requests, consents, approval or instructions
hereunder shall be in writing and delivered personally, sent by registered or certified mail,
postage prepaid, by nationally recognized overnight courier service, or by telecopy (or like
transmission), as follows:


(1)     if to the Debtor:

        One Market Street

        Steuart Tower, Suite 1300

        San Francisco, CA 94105

        Attn:  General Counsel



with a copy to:


Wilson Sonsini Goodrich & Rosati

650 Page Mill Road

Palo Alto, CA 94304

Attn:  N. Anthony Jeffries, Esq.



(2)     if to the Secured Party



        830 Third Avenue

        New York, New York 10022

        Attn:  Carl Kleidman



        with a copy to:



        Greenberg Traurig, LLP

        The MetLife Building

        200 Park Avenue

        New York, New York 10166

        Attn:  Alan I. Annex, Esq.





Any notice personally delivered shall be deemed to be given upon delivery.  Any notice so
addressed and mailed shall be deemed to be given when so mailed.  Any notices addressed and
otherwise delivered shall be deemed to be given when actually received by the addressee.  Any
of the above addresses and telecopy numbers may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address shall be effective
only upon receipt.


13.          Survival of Agreement.  Each representation, warranty, covenant and agreement
herein contained, shall survive the making by the Purchasers of the purchase of the Notes and
Warrants and the execution and delivery to the Purchasers of the Notes and Warrants,
notwithstanding any investigation at any time made by or on behalf of any party, and shall
continue in full force and effect so long as any obligation is outstanding and unpaid.



17






14.          Entire Agreement.  This Agreement (including those documents and instruments
referred to herein) contains the entire agreement with respect to the transactions contemplated
hereby, and supersedes all prior understandings, arrangements and agreements with respect to the
subject matter hereof.


15.         Transferability; Benefit of Agreement.  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and may be assigned only in accordance with Section
14(a) of the Purchase Agreement  The Purchasers shall expressly be third-party beneficiaries of
this Agreement.


16.         Governing Law.  This Agreement shall be governed by, construed under and
interpreted and enforced in accordance with laws of the State of New York, without giving effect
to principles of choice of law.  The Uniform Commercial Code as in effect in New York shall
govern this Agreement.  Any action or proceeding arising out of or relating to this Agreement
shall be commenced in a federal or state court having competent jurisdiction in the State of New
York, and for the purpose of any such action or proceeding, each of the parties and any assignees
thereof submits to the personal jurisdiction of the State of New York.  The parties hereby
irrevocably consent to the exclusive personal jurisdiction of any state or federal court for New
York County in the State of New York or the Southern District of New York.  The parties hereby
waive any objection to venue and any objection based on a more convenient form in any action
instituted under this Agreement.


17.         Further Assurances.  All property acquired by the Debtor after the date hereof,
which by the terms hereof is required or intended to be subjected to the lien of this Agreement,
shall, immediately upon the acquisition thereof and without further mortgage, conveyance or
assignment, become subject to the lien of this Agreement as fully as though now owned by
Debtor and specifically described herein.  Nevertheless, the parties will do all such further acts
and execute, acknowledge and deliver all such further conveyances, mortgages, financing
statements and assurances as the other shall reasonably require for accomplishing the purposes of
this Agreement.


18.         Captions.  The captions appearing herein are for the convenience of the parties
only and shall not be construed to affect the meaning of the provisions of this Agreement.


19.         Severability.  In the event that one or more of the provisions of this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions of this Agreement, but this
Agreement shall be construed as if such invalid, illegal or unenforceable provision and never
been contained herein.


20.         Counterparts.  This Agreement may be signed in one or more counterparts, each
of which shall be deemed to be an original, but all of which shall constitute one agreement.



[The remainder of this page intentionally left blank]



18







IN WITNESS WHEREOF, the undersigned have executed this Security Agreement as of
the date first above written.


                                                DEBTORS:


                                                COMMERCE ONE OPERATIONS,        

                                                        INC.





                                                By:     /s/ Mark B. Hoffman    

                                                                Name:   

                                                        Title:  





                                                COMMERCE ONE, INC.





                                                By:     /s/ Mark B. Hoffman    

                                                                Name:   

                                                        Title:  
















19







IN WITNESS WHEREOF, the undersigned have executed this Security Agreement as of
the date first above written.



                                        SECURED PARTY



                                        COMVEST INVESTMENT PARTNERS II  

                                                LLC, as Administrative Agent 





                                                By:      /s/ Harold Blue    

                                                                Name:   

                                                        Title:  
















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