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    EXHIBIT
10.1

     

     

    FIRST
LOAN MODIFICATION AGREEMENT

     

    This First Loan Modification Agreement
(this “Loan Modification
Agreement”) is entered into as of the First Loan Modification Effective
Date, by and between SILICON
VALLEY BANK, a California corporation, with its principal place of
business at 3003 Tasman Drive, Santa Clara, California 95054 and with a
loan production office located at One Newton Executive Park, Suite 200, 2221
Washington Street, Newton, Massachusetts 02462 (“Bank”) and BRIDGELINE SOFTWARE, INC., a
Delaware corporation with its chief executive office located at 10 Sixth Road,
Woburn, Massachusetts 01801 (“Borrower”).

     

    1.   
DESCRIPTION OF EXISTING
INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations
which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to
a loan arrangement dated as of September 29, 2008, evidenced by, among other
documents, a certain Loan and Security Agreement dated as of September 29, 2008,
between Borrower and Bank, (as amended, the “Loan
Agreement”).  Capitalized terms used but not otherwise defined
herein shall have the same meaning as in the Loan Agreement.

     

     

    2.   
DESCRIPTION OF
COLLATERAL.  Repayment of the Obligations is secured by the
Collateral as described in the Loan Agreement (together with any other
collateral security granted to Bank, the “Security
Documents”).

     

     

    Hereinafter,
the Security Documents, together with all other documents evidencing or securing
the Obligations shall be referred to as the “Existing Loan
Documents”.

     

    3.               
DESCRIPTION OF CHANGE
IN TERMS.

     

    
      	
              A.     
        

            	
              Modifications
      to Loan Agreement.

            


    

     

    
      	
              1  
        

            	
              The
      Loan Agreement shall be amended by deleting the following Section 2.1.1(a)
      appearing therein in its entirety:

            


    

     

    “(a)           Availability.  Subject
to the terms and conditions of this Agreement, Bank shall make Advances not
exceeding the Availability Amount.  Amounts borrowed under the
Revolving Line may be repaid and, prior to the Revolving Line Maturity Date,
reborrowed, subject to the applicable terms and conditions precedent
herein.”

     

    and
inserting in lieu thereof the following:

     

    “(a)           Availability.  Subject
to the terms and conditions of this Agreement and to deduction of Reserves, Bank
will make Advances to Borrower up to the Availability Amount.  Amounts
borrowed under the Revolving Line may be repaid, and prior to the Revolving Line
Maturity Date, reborrowed, subject to the applicable terms and conditions
precedent herein.”

     

    
      	
              2  
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Sections 2.1.2(a) and 2.1.2(b)
      appearing therein, each in its
entirety:

            


    

     

    “(a)           As
part of the Revolving Line, Bank shall issue or have issued Letters of Credit
for Borrower’s account.  Such aggregate amounts utilized hereunder
shall at all times reduce the amount otherwise available for Advances under the
Revolving Line.  The face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed Five Hundred Thousand Dollars ($500,000.00), inclusive
of Credit Extensions relating to Sections 2.1.3 and
2.1.4.  The

     

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    aggregate
amount available to be used for the issuance of Letters of Credit may not exceed
(i) the lesser of (A) the Revolving Line or (B) the Borrowing Base, minus
(ii) the outstanding principal amount of any Advances (including any
amounts used for Cash Management Services and the face amount of any outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit and any
Letter of Credit Reserve), and minus (iii) the FX Reserve.  If, on the
Revolving Line Maturity Date, or the effective date of any termination of this
Agreement by Borrower, there are any outstanding Letters of Credit, then on such
date Borrower shall provide to Bank cash collateral in an amount equal to 105%
of the face amount of all such Letters of Credit (except for Letters of Credit
payable in Foreign Currency for which such percentage shall be 110%) plus all
interest, fees, and costs due or to become due in connection therewith (as
estimated by Bank in its good faith business judgment), to secure all of the
Obligations relating to said Letters of Credit.  All Letters of Credit
shall be in form and substance acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank’s standard Application and
Letter of Credit Agreement (the “Letter of Credit
Application”).  Borrower agrees to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably
request.  Borrower further agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Bank and
opened for Borrower’s account or by Bank’s interpretations of any Letter of
Credit issued by Bank for Borrower’s account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower’s instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto.

     

    (b)           The
obligation of Borrower to immediately reimburse Bank for drawings made under
Letters of Credit shall be absolute, unconditional, and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.”

     

    and
inserting in lieu thereof the following:

     

    “(a)           As
part of the Revolving Line and subject to deduction of Reserves, Bank shall
issue or have issued Letters of Credit for Borrower’s account.  The
face amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) may not exceed Five Hundred
Thousand Dollars ($500,000.00) inclusive of Credit Extensions relating to
Sections 2.1.3 and 2.1.4.  Such aggregate amounts utilized hereunder
shall at all times reduce the amount otherwise available for Advances under the
Revolving Line.  If, on the Revolving Line Maturity Date or after the
occurrence and during the continuance of an Event of Default there are any
outstanding 

     

     

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    Letters
of Credit, then on such date Borrower shall provide to Bank cash collateral in
an amount equal to 105% of the face amount of all such Letters of Credit plus
all interest, fees, and costs due or to become due in connection therewith (as
estimated by Bank in its good faith business judgment), to secure all of the
Obligations relating to said Letters of Credit.  All Letters of Credit
shall be in form and substance acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank’s standard Application and
Letter of Credit Agreement (the “Letter of Credit
Application”).  Borrower agrees to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably
request.  Borrower further agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Bank and
opened for Borrower’s account or by Bank’s interpretations of any Letter of
Credit issued by Bank for Borrower’s account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower’s instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto.

     

    (b)           The
obligation of Borrower to immediately reimburse Bank for drawings made under
Letters of Credit shall be absolute, unconditional, and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement, such
Letters of Credit, and the Letter of Credit Application.  Any amounts
Bank pays on behalf of Borrower for any Letters of Credit will be treated as
Advances under the Revolving Line and will accrue interest at the interest rate
applicable to Advances.”

     

    
      	
              3  
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 2.3(a) appearing
      therein in its entirety:

            


    

     

    “(a)           Interest
Rate.  Subject to Section 2.3(b), the principal amount
outstanding under the Revolving Line shall accrue interest at a floating per
annum rate equal to one percentage point (1.0%) above the Prime Rate, which
interest shall be payable monthly in accordance with Section 2.3(f)
below.”

     

    and
inserting in lieu thereof the following:

     

    “(a)           Interest
Rate.  Subject to Section 2.3(b), the principal amount
outstanding under the Revolving Line shall accrue interest at a floating per
annum rate equal to the greater of (i) two percentage points (2.0%) above the
Prime Rate and (ii) eight percent (8.0%), which interest shall in each case be
payable monthly in accordance with Section 2.3(f) below.”

     

    
      	
              4  
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 2.3(f) appearing
      therein in its entirety:

            


    

     

    “(f)           Payments.  Unless
otherwise provided, interest is payable monthly on the first calendar day of
each month.  Payments of principal and/or interest received after
12:00 p.m. Eastern time are considered received at the opening of business on
the next Business Day.  When a payment is due on a day that is not a
Business Day, the payment is due the next Business Day and additional fees or
interest, as applicable, shall continue to accrue.”

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    and
inserting in lieu thereof the following:

     

    “(f)           Payment; Interest
Computation; Float Charge.  Interest is payable monthly on the
last calendar day of each month.  In computing interest on the
Obligations, all Payments received after 12:00 p.m. Eastern time on any day
shall be deemed received on the next Business Day.  In addition, Bank
shall be entitled to charge Borrower a “float” charge in an amount equal to
three (3) Business Days interest, at the interest rate applicable to the
Advances, on all Payments received by Bank.  The float charge for each
month shall be payable on the last day of the month.  Bank shall not,
however, be required to credit Borrower’s account for the amount of any item of
payment which is unsatisfactory to Bank in its good faith business judgment, and
Bank may charge Borrower’s Designated Deposit Account for the amount of any item
of payment which is returned to Bank unpaid.”

     

    
      	
              5  
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Sections 3.2(a) and 3.2(b),
      appearing therein, each in its
entirety:

            


    

     

    “(a)           except
as otherwise provided in Section 3.4(a), timely receipt of an executed
Payment/Advance Form;

     

    (b)           the
representations and warranties in Section 5 shall be true in all material
respects on the date of the Payment/Advance Form and on the Funding Date of each
Credit Extension; provided, however, that such materiality qualifier shall not
be applicable to any representations and warranties that already are qualified
or modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, and no
Event of Default shall have occurred and be continuing or result from the Credit
Extension.  Each Credit Extension is Borrower’s representation
and warranty on that date that the representations and warranties in Section 5
remain true in all material respects; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date; and”

     

    and
inserting in lieu thereof the following:

     

    “(a)           except
as otherwise provided in Section 3.4(a), timely receipt of an executed
Transaction Report;

     

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    (b)           the
representations and warranties in Section 5 shall be true in all material
respects on the date of the Transaction Report and on the Funding Date of each
Credit Extension; provided, however, that such materiality qualifier shall not
be applicable to any representations and warranties that already are qualified
or modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, and no
Default or Event of Default shall have occurred and be continuing or result from
the Credit Extension.  Each Credit Extension is Borrower’s
representation and warranty on that date that the representations and warranties
in Section 5 remain true in all material respects; provided, however, that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date; and”

     

    
      	
              6   
       

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 3.4, appearing therein
      in its entirety:

            


    

     

    “3.4           Procedures for
Borrowing.

     

    Subject
to the prior satisfaction of all other applicable conditions to the making of an
Advance set forth in this Agreement, to obtain an Advance (other than Advances
under Sections 2.1.2 or 2.1.4), Borrower shall notify Bank (which notice shall
be irrevocable) by electronic mail, facsimile, or telephone by 12:00 noon
Eastern time on the Funding Date of the Advance.  Together with any
such electronic or facsimile notification, Borrower shall deliver to Bank by
electronic mail or facsimile a completed Payment/Advance Form executed by a
Responsible Officer or his or her designee.  Bank may rely on any
telephone notice given by a person whom Bank reasonably believes is a
Responsible Officer or designee.  Bank shall credit Advances to the
Designated Deposit Account.  Bank may make Advances under this
Agreement based on instructions from a Responsible Officer or his or her
designee or without instructions if the Advances are necessary to meet
Obligations which have become due.”

     

    and
inserting in lieu thereof the following:

     

    “3.4           Procedures for
Borrowing.

     

    Subject
to the prior satisfaction of all other applicable conditions to the making of an
Advance set forth in this Agreement, to obtain an Advance (other than Advances
under Sections 2.1.2 or 2.1.4), Borrower shall notify Bank (which notice shall
be irrevocable) by electronic mail, facsimile, or telephone by 12:00 noon
Eastern time on the Funding Date of the Advance.  Together with any
such electronic or facsimile notification, Borrower shall deliver to Bank by
electronic mail or facsimile a completed Transaction Report, executed by a
Responsible Officer or his or her designee.  Bank may rely on any
telephone notice given by a person whom Bank reasonably believes is a
Responsible Officer or 

     

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    designee.  Bank
shall credit Advances to the Designated Deposit Account.  Bank may
make Advances under this Agreement based on instructions from a Responsible
Officer or his or her designee or without instructions if the Advances are
necessary to meet Obligations which have become due.”

     

    
      	
              7  
        

            	
              The
      Loan Agreement shall be amended by deleting the following Section 5.2,
      appearing therein in its entirety:

            


    

     

    “5.2           Collateral.  Borrower
has good title to, has rights in, and the power to transfer each item of the
Collateral upon which it purports to grant a Lien hereunder, free and clear of
any and all Liens except Permitted Liens.  Borrower has no deposit
accounts other than the deposit accounts with Bank, the deposit accounts, if
any, described in the Perfection Certificate delivered to Bank in connection
herewith, or of which Borrower has given Bank notice and taken such actions as
are necessary to give Bank a perfected security interest therein.  The
Accounts are bona fide, existing obligations of the Account
Debtors.

     

    The Collateral is not in the possession
of any third party bailee (such as a warehouse) except as otherwise provided in
the Perfection Certificate.  None of the components of the Collateral
shall be maintained at locations other than as provided in the Perfection
Certificate or as permitted pursuant to Section 7.2.  In the event
that Borrower, after the date hereof, intends to store or otherwise deliver any
portion of the Collateral to a bailee, then Borrower will first receive the
written consent of Bank and such bailee must execute and deliver a bailee
agreement in form and substance satisfactory to Bank in its sole
discretion.

     

    Except as noted on the Perfection
Certificate, Borrower is not a party to, nor is bound by, any material license
or other agreement with respect to which Borrower is the licensee (a) that
prohibits or otherwise restricts Borrower from granting a security interest in
Borrower’s interest in such license or agreement or any other property, or
(b) for which a default under or termination of could interfere with the
Bank’s right to sell any Collateral.  Borrower shall provide written
notice to Bank within ten (10) days of entering or becoming bound by any such
license or agreement (other than over-the-counter software that is commercially
available to the public).  Borrower shall take such steps as Bank
requests to obtain the consent of, or waiver by, any person whose consent or
waiver is necessary for (x) all such licenses or agreements to be deemed
“Collateral” and for Bank to have a security interest in it that might otherwise
be restricted or prohibited by law or by the terms of any such license or
agreement, whether now existing or entered into in the future, and (y) Bank
to have the ability in the event of a liquidation of any Collateral to dispose
of such Collateral in accordance with Bank’s rights and remedies under this
Agreement and the other Loan Documents.”

     

     

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    and
inserting in lieu thereof the following:

     

    “5.2           Collateral.  Borrower
has good title to, has rights in, and the power to transfer each item of
Collateral upon which it purports to grant a Lien hereunder, free and clear of
any and all Liens except Permitted Liens.  Borrower has no deposit
accounts other than the deposit accounts with Bank and deposit accounts
described in the Perfection Certificate delivered to Bank in connection
herewith.

     

    The
Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection
Certificate.  None of the components of the Collateral shall be
maintained at locations other than as provided in the Perfection
Certificate.  In the event that Borrower, after the date hereof,
intends to store or otherwise deliver any portion of the Collateral to a bailee,
then Borrower will first receive the written consent of Bank and such bailee
must execute and deliver a bailee agreement in form and substance satisfactory
to Bank in its sole discretion.

     

    Borrower
is the sole owner of its intellectual property, except for non-exclusive
licenses granted to its customers in the ordinary course of
business.  Each patent is valid and enforceable and no part of the
intellectual property has been judged invalid or unenforceable, in whole or in
part, and to the best of Borrower’s knowledge, no claim has been made that any
part of the Intellectual Property violates the rights of any third
party.

     

    Except as
noted on the Perfection Certificate, Borrower is not a party to, nor is bound
by, any material license or other agreement with respect to which Borrower is
the licensee (a) that prohibits or otherwise restricts Borrower from
granting a security interest in Borrower’s interest in such license or agreement
or any other property, or (b) for which a default under or termination of
could interfere with the Bank’s right to sell any
Collateral.  Borrower shall provide written notice to Bank within ten
(10) days of entering or becoming bound by any such license or agreement (other
than over-the-counter software that is commercially available to the
public).  Borrower shall take such steps as Bank requests to obtain
the consent of, or waiver by, any person whose consent or waiver is necessary
for (x) all such licenses or agreements to be deemed “Collateral” and for
Bank to have a security interest in it that might otherwise be restricted or
prohibited by law or by the terms of any such license or agreement, whether now
existing or entered into in the future, and (y) Bank to have the ability in
the event of a liquidation of any Collateral to dispose of such Collateral in
accordance with Bank’s rights and remedies under this Agreement and the other
Loan Documents.”

     

    
      	
              8  
        

            	
              The
      Loan Agreement shall be amended by deleting the following Section
      6.2(a)(ii), appearing therein in its
entirety:

            


    

     

    “(ii) as
soon as available, but no later than one hundred twenty (120) days after the last day
of Borrower’s fiscal year, audited consolidated financial statements prepared
under GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank in its reasonable discretion;”

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    and
inserting in lieu thereof the following:

     

    “(ii) as
soon as available, but no later than one hundred fifty (150) days after the last day
of Borrower’s fiscal year, audited consolidated financial statements prepared
under GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank in its reasonable discretion;”

     

    
      	
              9  
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 6.2(b), appearing
      therein in its entirety:

            


    

     

    “(b)           Within
thirty (30) days after the last day of each month, deliver to Bank a duly
completed Borrowing Base Certificate signed by a Responsible Officer, with aged
listings of accounts receivable and accounts payable (by invoice
date).”

     

    and
inserting in lieu thereof the following:

     

    “(b)           (i)
weekly, on the last Business Day of each week, and with each request for a
Credit Extension, deliver to Bank a duly completed Transaction Report, signed by
a Responsible Officer; and

     

     (ii)
monthly, within fifteen (15) days after the last day of each month, deliver to
Bank aged listings of accounts receivable and accounts payable (aged by invoice
date).”

     

    
      	
              10 
        

            	
              ­ The Loan Agreement
      shall be amended by deleting the following Section 6.2(d), appearing
      therein in its entirety:

            


    

     

    “(d)           Allow
Bank to audit Borrower’s Collateral at Borrower’s expense.  Such
audits shall be conducted no more often than once every six (6) months unless an
Event of Default has occurred and is continuing.  Notwithstanding the
foregoing, no Credit Extension may be requested prior to the Initial
Audit.”

     

    and
inserting in lieu thereof the following:

     

    “(d)           Prompt
written notice of (i) any material change in the composition of the intellectual
property, (ii) the registration of any copyright (including any subsequent
ownership right of Borrower in or to any copyright), patent or trademark not
previously disclosed to Bank, or (iii) Borrower’s knowledge of an event
that materially adversely affects the value of the intellectual
property”

     

    
      	
              11 
        

            	
              The
      Loan Agreement shall be amended by deleting the following Section 6.7,
      appearing therein in its entirety:

            


    

     

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    “6.7           Financial
Covenants.

     

    Borrower
shall maintain at all times, to be tested as of the last day of each month,
unless otherwise noted, on a consolidated basis with respect to Borrower and its
Subsidiaries:

     

    (a)           Adjusted Quick
Ratio.  A ratio of Quick Assets to Total Liabilities minus
Deferred Revenue of at least 1.5 to 1.0;

     

    and

     

    (b)           EBITDA.  Maintain,
measured as of the end of each fiscal quarter for the prior two (2) fiscal
quarters, EBITDA of at least Two Hundred Fifty Thousand Dollars
($250,000.00).”

     

    and
inserting in lieu thereof the following:

     

    “6.7           Financial
Covenants.

     

    Borrower
shall maintain at all times, unless otherwise noted, on a consolidated basis
with respect to Borrower and its Subsidiaries:

     

    (a)           Minimum
Profit.  Minimum Adjusted Net Income, measured quarterly, on
the last day of each fiscal quarter, on a trailing three month basis, of not
less than Fifty Thousand Dollars ($50,000.00); and

     

    (b)           Minimum
Liquidity.  Unrestricted cash at Bank plus the Availability
Amount of not less than One Million Dollars ($1,000,000.00).

     

    
      	
              12 
        

            	
              The
      Loan Agreement shall be amended by deleting the following Section 6.8,
      appearing therein in its entirety:

            


    

     

    “6.8           Protection of Intellectual Property
Rights.  Borrower shall:  (a) take commercially
reasonable measures on advice of counsel to protect, defend and maintain the
validity and enforceability of its intellectual property; (b) promptly advise
Bank in writing of material infringements of its intellectual property; and (c)
not allow any intellectual property material to Borrower’s business to be
abandoned, forfeited or dedicated to the public without Bank’s written
consent.”

     

    and
inserting in lieu thereof the following:

     

    “6.8           Protection and Registration of
Intellectual Property Rights.  Borrower shall: (a) take commercially reasonable measures on advice of
counsel to protect, defend and
maintain the validity and enforceability of its intellectual property; (b)
promptly advise Bank in writing of material infringements of its intellectual
property; and (c) not allow any intellectual property material to Borrower’s
business to be abandoned, forfeited or dedicated to the public without Bank’s
written consent.  If Borrower decides to register any copyrights or
mask works in the United States Copyright Office, Borrower shall: (x) provide
Bank with at least fifteen (15) days prior written notice of its intent to
register such copyrights or mask works together with a copy of the application
it intends to file with the United States Copyright Office (excluding exhibits
thereto); (y) execute an intellectual 

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    property
security agreement or such other documents as Bank may reasonably request to
maintain the perfection and priority of Bank’s security interest in the
copyrights or mask works intended to be registered with the United States
Copyright Office; and (z) record such intellectual property security agreement
with the United States Copyright Office contemporaneously with filing the
copyright or mask work application(s) with the United States Copyright
Office.  Borrower shall promptly provide to Bank a copy of the
application(s) filed with the United States Copyright Office together with
evidence of the recording of the intellectual property security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in such copyrights or mask works.  Borrower shall provide
written notice to Bank of any application filed by Borrower in the United States
Patent and Trademark Office for a patent or to register a trademark or service
mark within 30 days after any such filing.”

     

    
      	
              13 
        

            	
              Section
      6 of the Loan Agreement shall be amended by adding the following new
      Sections at the end thereof:

            


    

     

    “6.11  Accounts
Receivable.

     

    (a)           Schedules and Documents
Relating to Accounts.
Borrower shall deliver to Bank transaction reports and schedules of
collections, as provided in Section 6.2, on Bank’s standard forms; provided,
however, that Borrower’s failure to execute and deliver the same shall not
affect or limit Bank’s Lien and other rights in all of Borrower’s Accounts, nor
shall Bank’s failure to advance or lend against a specific Account affect or
limit Bank’s Lien and other rights therein.  If requested by Bank,
Borrower shall furnish Bank with copies (or, at Bank’s request, originals) of
all contracts, orders, invoices, and other similar documents, and all shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Accounts.  In addition, Borrower shall deliver to Bank, on its
request, the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any Accounts,
in the same form as received, with all necessary endorsements, and copies of all
credit memos.

     

    (b)           Disputes.  Borrower
shall promptly notify Bank of all disputes or claims relating to
Accounts.  Borrower may forgive (completely or partially), compromise,
or settle any Account for less than payment in full, or agree to do any of the
foregoing so long as (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, in arm’s-length
transactions, and reports the same to Bank in the regular reports provided to
Bank; (ii) no Default or Event of Default has occurred and is continuing;
and (iii) after taking into account all such discounts, settlements and
forgiveness, the total outstanding Advances will not exceed the Availability
Amount.

     

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (c)           Collection of
Accounts.  Borrower shall have the right to collect all
Accounts, unless and until a Default or an Event of Default has occurred and is
continuing.  All payments on, and proceeds of, Accounts shall be
deposited directly by the applicable Account Debtor into a lockbox account, or
such other “blocked account” as Bank may specify, pursuant to a blocked account
agreement in form and substance satisfactory to Bank in its sole
discretion.  Whether or not an Event of Default has occurred and is
continuing, Borrower shall hold all payments on, and proceeds of, Accounts in
trust for Bank, and Borrower shall promptly deliver all such payments and
proceeds to Bank in their original form, duly endorsed, to be applied to the
Obligations pursuant to the terms of Section 9.4 hereof.

     

    (d)           Returns.  Provided no
Event of Default has occurred and is continuing, if any Account Debtor returns
any Inventory to Borrower, Borrower shall promptly (i) determine the reason
for such return, (ii) issue a credit memorandum to the Account Debtor in
the appropriate amount, and (iii) provide a copy of such credit memorandum
to Bank, upon request from Bank.  In the event any attempted return
occurs after the occurrence and during the continuance of any Event of Default,
Borrower shall hold the returned Inventory in trust for Bank,
and immediately notify Bank of the return of the Inventory.

     

    (e)           Verification.  Bank may, from
time to time, verify directly with the respective Account Debtors the validity,
amount and other matters relating to the Accounts, either in the name of
Borrower or Bank or such other name as Bank may choose.

     

    (f)           No Liability.  Bank shall not
be responsible or liable for any shortage or discrepancy in, damage to, or loss
or destruction of, any goods, the sale or other disposition of which gives rise
to an Account, or for any error, act, omission, or delay of any kind occurring
in the settlement, failure to settle, collection or failure to collect any
Account, or for settling any Account in good faith for less than the full amount
thereof, nor shall Bank be deemed to be responsible for any of Borrower’s
obligations under any contract or agreement giving rise to an
Account.  Nothing herein shall, however, relieve Bank from liability
for its own gross negligence or willful misconduct.”

     

    6.12 Remittance of
Proceeds.  Except as otherwise provided in Section 6.11(c),
Borrower shall deliver, in kind, all proceeds arising from the disposition of
any Collateral to Bank in the original form in which received by Borrower not
later than the following Business Day after receipt by Borrower, to be applied
to the Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no Default
or Event of Default has occurred and is continuing, Borrower shall not be
obligated to remit to Bank the proceeds of the sale of worn out or obsolete
Equipment disposed of by Borrower in good faith in an arm’s length transaction
for an aggregate purchase price of $25,000 or less (for all such transactions in
any fiscal year).  Borrower agrees that it will not commingle proceeds
of Collateral with any of Borrower’s other funds or property, but will hold such
proceeds separate and 

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    apart
from such other funds and property and in an express trust for
Bank.  Nothing in this Section limits the restrictions on disposition
of Collateral set forth elsewhere in this Agreement.

     

    6.13 Access to Collateral; Books and
Records. At reasonable times, on one (1) Business Day’s notice (provided
no notice is required if an Event of Default has occurred and is continuing),
Bank, or its agents, shall have the right, on an semi-annual basis (or more
frequently if an Event of Default has occurred and is continuing), to inspect
the Collateral and the right to audit and copy Borrower’s Books.  The
foregoing inspections and audits shall be at Borrower’s expense, and the charge
therefor shall be $750 per person per day (or such higher amount as shall
represent Bank’s then-current standard charge for the same), plus reasonable
out-of-pocket expenses.  In the event Borrower and Bank schedule an
audit more than ten (10) days in advance, and Borrower cancels or seeks to
reschedules the audit with less than ten (10) days written notice to Bank, then
(without limiting any of Bank’s rights or remedies), Borrower shall pay Bank a
fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate
Bank for the anticipated costs and expenses of the cancellation or
rescheduling.”

     

    
      	
              14 
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 7.1, appearing therein
      in its entirety:

            


    

     

    “7.1           Dispositions.  Convey,
sell, lease, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of
its Subsidiaries to Transfer, all or any part of its business or property,
except for Transfers (a) of Inventory in the ordinary course of business;
(b) of worn-out or obsolete Equipment; (c) in connection with Permitted Liens
and Permitted Investments; and (d) of non-exclusive licenses for the use of
the property of Borrower or its Subsidiaries in the ordinary course of
business.”

     

    and
inserting in lieu thereof the following:

     

    “7.1           Dispositions.  Convey,
sell, lease, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of
its Subsidiaries to Transfer, all or any part of its business or property,
except for Transfers (a) of Inventory in the ordinary course of business;
(b) of worn-out or obsolete Equipment; and (c) in connection with Permitted
Liens and Permitted Investments. Borrower shall not enter into an agreement with
any Person other than Bank which restricts the subsequent granting of a security
interest in Borrower’s intellectual property. ”

     

    
      	
              15 
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 8.2(a), appearing
      therein in its entirety:

            


    

     

    “(a)
Borrower fails or neglects to perform any obligation in Sections 6.2, 6.4, 6.5,
6.6 or 6.7, or violates any covenant in Section 7; or”

     

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    and
inserting in lieu thereof the following:

     

    “(a)
Borrower fails or neglects to perform any obligation in Sections 6.2, 6.4, 6.5,
6.6, 6.7, 6.11 or 6.12, or violates any covenant in Section 7; or”

     

    
      	
              16 
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following Section 9.4, appearing therein
      in its entirety:

            


    

     

    “9.4           Application of Payments and Proceeds.  Borrower
shall have no right to specify the order or the accounts to which Bank shall
allocate or apply any payments required to be made by Borrower to Bank or
otherwise received by Bank under this Agreement when any such allocation or
application is not specified elsewhere in this Agreement.  If an Event
of Default has occurred and is continuing, Bank may apply any funds in its
possession, whether from Borrower account balances, payments, proceeds realized
as the result of any collection of Accounts or other disposition of the
Collateral, or otherwise, to the Obligations in such order as Bank shall
determine in its sole discretion.  Any surplus shall be paid to
Borrower or other Persons legally entitled thereto; Borrower shall remain liable
to Bank for any deficiency.  If Bank, in its good faith business
judgment, directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale of Collateral, Bank shall have the
option, exercisable at any time, of either reducing the Obligations by the
principal amount of the purchase price or deferring the reduction of the
Obligations until the actual receipt by Bank of cash therefor.”

     

    and
inserting in lieu thereof the following:

     

    “9.4           Application of Payments and
Proceeds.  Unless an Event of Default has occurred and is
continuing, Bank may apply any funds in its possession, whether from Borrower
account balances, payments, or proceeds realized as the result of any collection
of Accounts or other disposition of the Collateral, first, to Bank
Expenses, including without limitation, the reasonable costs, expenses,
liabilities, obligations and attorneys’ fees incurred by Bank in the exercise of
its rights under this Agreement; second, to the interest due upon any of the
Obligations; and third, to the principal of the Obligations and any applicable
fees and other charges, in such order as Bank shall determine in its sole
discretion.  Any surplus shall be paid to Borrower or other Persons
legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency.  If an Event of Default has occurred and is continuing,
Bank may apply any funds in its possession, whether from Borrower account
balances, payments, proceeds realized as the result of any collection of
Accounts or other disposition of the Collateral, or otherwise, to the
Obligations in such order as Bank shall determine in its sole
discretion.  Any surplus shall be paid to Borrower or to other Persons
legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency.  If Bank, in its good faith business judgment, directly or
indirectly enters into a 

     

     

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    deferred
payment or other credit transaction with any purchaser at any sale of
Collateral, Bank shall have the option, exercisable at any time, of either
reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.”

     

    
      	
              17 
        

            	
              ­The Loan Agreement
      shall be amended by deleting the following text contained in Section 12.1
      therein in its entirety:

            


    

     

    “12.1                      Termination Prior to Maturity
Date.  This Agreement may be terminated prior to the Revolving
Line Maturity Date by Borrower, effective three (3) Business Days after written
notice of termination is given to Bank or if Bank’s obligation to fund Credit
Extensions terminates pursuant to the terms of Section
2.1.1(b).  Notwithstanding any such termination, Bank’s lien and
security interest in the Collateral shall continue until Borrower fully
satisfies its Obligations.  If such termination is at Borrower’s
election or at Bank’s election due to the occurrence and continuance of an Event
of Default, Borrower shall pay to Bank, in addition to the payment of any other
expenses or fees then-owing, a termination fee in an amount equal to Twenty-Five
Thousand Dollars ($25,000.00), provided that no termination fee shall be
charged if the credit facility hereunder is replaced with a new facility from
another division of Silicon Valley Bank.  Upon payment in full of the
Obligations and at such time as Bank’s obligation to make Credit Extensions has
terminated, Bank shall release its liens and security interests in the
Collateral and all rights therein shall revert to Borrower.”

     

    and
inserting in lieu thereof the following:

     

    “12.1                      Termination Prior to Maturity
Date.  This Agreement may be terminated prior to the Revolving
Line Maturity Date by Borrower, effective three (3) Business Days after written
notice of termination is given to Bank or if Bank’s obligation to fund Credit
Extensions terminates pursuant to the terms of Section
2.1.1(b).  Notwithstanding any such termination, Bank’s lien and
security interest in the Collateral shall continue until Borrower fully
satisfies its Obligations.  If such termination is at Borrower’s
election or at Bank’s election due to the occurrence and continuance of an Event
of Default, Borrower shall pay to Bank, in addition to the payment of any other
expenses or fees then-owing, a termination fee in an amount equal to one and
one-half percent (1.50%) of the Revolving Line (i.e. Forty Five Thousand Dollars
($45,000.00)), provided that no termination fee shall be charged if the
credit facility hereunder is replaced with a new facility from another division
of Silicon Valley Bank.  Upon payment in full of the Obligations and
at such time as Bank’s obligation to make Credit Extensions has terminated, Bank
shall release its liens and security interests in the Collateral and all rights
therein shall revert to Borrower.”

     

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    
      	
              18 
        

            	
              The
      Loan Agreement shall be amended by deleting the following definitions
      appearing alphabetically in Section 13.1
  thereof:

            


    

     

    ““EBITDA” shall mean (a) Net
Income, plus (b) Interest Expense, plus (c) to the extent deducted in the
calculation of Net Income, depreciation expense, amortization expense, and
non-cash stock compensation expense, plus (d) income tax expense.

     

    “Interest Expense” means for
any fiscal period, interest expense (whether cash or non-cash) determined in
accordance with GAAP for the relevant period ending on such date, including, in
any event, interest expense with respect to any Credit Extension and other
Indebtedness of Borrower and its Subsidiaries, including, without limitation or
duplication, all commissions, discounts, or related amortization and other fees
and charges with respect to letters of credit and bankers’ acceptance financing
and the net costs associated with interest rate swap, cap, and similar
arrangements, and the interest portion of any deferred payment obligation
(including leases of all types).

     

    “Payment/Advance Form” is that
certain form attached hereto as Exhibit
B.

     

    “Quick Assets” is, on any date,
Borrower’s consolidated unrestricted cash, Cash Equivalents, and investments
with Bank with maturities of fewer than 12 months determined according to GAAP,
maintained with Bank, and net billed accounts receivable.

     

    “Total Liabilities” is on any
day, obligations that should, under GAAP, be classified as liabilities on
Borrower’s consolidated balance sheet, including all Indebtedness, but excluding
all other Subordinated Debt.”

     

    
      	
              19 
        

            	
              The
      Loan Agreement shall be amended by inserting the following definition
      appearing alphabetically in Section 13.1
  thereof:

            


    

     

    ““Adjusted Net Income” is, on
any date of measurement, the sum of Borrower’s Net Income plus, to the extent
deducted from the calculation of Net Income, non-cash stock compensation
expense, depreciation expense and any amortization of goodwill.

     

    “Default” means any event which
with notice or passage of time or both, would constitute an Event of
Default.

     

    “First Loan Modification
Agreement” is that certain First Loan Modification Agreement, by and
between Borrower and Bank, dated as of the First Loan Modification Effective
Date.

     

    “First Loan Modification Effective
Date” is the date indicated on the signature page to the First Loan
Modification Agreement.

     

    “IP Agreement” is that certain
Intellectual Property Security Agreement executed and delivered by Borrower to
Bank dated as of the First Loan Modification Effective Date.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    “Payment” means all checks,
wire transfers and other items of payment received by Bank (including proceeds
of Accounts and payment of all the Obligations in full) for credit to Borrower’s
outstanding Credit Extensions or, if the balance of the Credit Extensions has
been reduced to zero, for credit to its Deposit Accounts.

     

    “Reserves” means, as of any
date of determination, such amounts as Bank may from time to time establish and
revise in good faith reducing the amount of Advances, Letters of Credit and
other financial accommodations which would otherwise be available to Borrower
under the lending formulas:  (a) to reflect events, conditions,
contingencies or risks which, as determined by Bank in good faith, do or may
affect (i) the Collateral or any other property which is security for the
Obligations or its value (including without limitation any increase in
delinquencies of Accounts), (ii) the assets or business of Borrower or any
guarantor, or (iii) the security interests and other rights of Bank in the
Collateral (including the enforceability, perfection and priority thereof); or
(b) to reflect Bank’s good faith belief that any collateral report or financial
information furnished by or on behalf of Borrower or any guarantor to Bank is or
may have been incomplete, inaccurate or misleading in any material respect; or
(c) in respect of any state of facts which Bank determines in good faith
constitutes an Event of Default or may, with notice or passage of time or both,
constitute an Event of Default.

     

    “Transaction Report” is the
Bank’s standard reporting package provided by Bank to Borrower.”

     

    
      	
              20 
        

            	
              The
      Loan Agreement shall be amended by deleting the following definitions
      appearing in Section 13.1 thereof:

            


    

     

    ““Borrowing Base Certificate” is
that certain certificate in the form attached hereto as Exhibit
C.

     

    “Eligible Accounts” means
Accounts which arise in the ordinary course of Borrower’s business that meet all
Borrower’s representations and warranties in Section 5.3.  Bank
reserves the right, at any time after the Effective Date, to adjust any of the
criteria set forth below and to establish new criteria in its reasonable good
faith business judgment.  Unless Bank agrees otherwise in writing,
Eligible Accounts shall not include:

    


    
      	
              (a)  

            	
              Accounts
      that the Account Debtor has not paid within ninety (90) days of invoice
      date regardless of invoice payment period
terms;

            


    

     

    
      	
              (b)  

            	
              Accounts
      owing from an Account Debtor, fifty percent (50%) or more of whose
      Accounts have not been paid within ninety (90) days of invoice
      date;

            


    

     

    
      	
              (c)  

            	
              Accounts
      owing from an Account Debtor which does not have its principal place of
      business in the United States, unless Bank otherwise approves of in
      writing, on a case by case basis at the sole discretion of
      Bank;

            


    

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    
      	
              (d)  

            	
              Accounts
      billed and/or payable outside of the United States, unless Bank otherwise
      approves of in writing, on a case by case basis at the sole discretion of
      Bank;

            


    

     

    
      	
              (e)  

            	
              Accounts
      owing from an Account Debtor to the extent that Borrower is indebted or
      obligated in any manner to the Account Debtor (as creditor, lessor,
      supplier or otherwise - sometimes called “contra” accounts, accounts
      payable, customer deposits or credit accounts), with the exception of
      customary credits, adjustments and/or discounts given to an Account Debtor
      by Borrower in the ordinary course of its
  business;

            


    

     

    
      	
              (f)  

            	
              Accounts
      for which the Account Debtor is Borrower’s Affiliate, officer, employee,
      or agent;

            


    

     

    
      	
              (g)  

            	
              Accounts
      with credit balances over ninety (90) days from invoice
    date;

            


    

     

    
      	
              (h)  

            	
              Accounts
      owing from an Account Debtor, including Affiliates, whose total
      obligations to Borrower exceed twenty-five (25%) of all Accounts, for the
      amounts that exceed that percentage, unless Bank approves in
      writing;

            


    

     

    
      	
              (i)  

            	
              Accounts
      owing from an Account Debtor which is a United States government entity or
      any department, agency, or instrumentality thereof unless Borrower has
      assigned its payment rights to Bank and the assignment has been
      acknowledged under the Federal Assignment of Claims Act of 1940, as
      amended;

            


    

     

    
      	
              (j)  

            	
              Accounts
      for demonstration or promotional equipment, or in which goods are
      consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on
      approval”, or other terms if Account Debtor’s payment may be
      conditional;

            


    

     

    
      	
              (k)  

            	
              Accounts
      owing from an Account Debtor that has not been invoiced or where goods or
      services have not yet been rendered to the Account Debtor (sometimes
      called memo billings or
pre-billings);

            


    

     

    
      	
              (l)  

            	
              Accounts
      subject to contractual arrangements between Borrower and an Account Debtor
      where payments shall be scheduled or due according to completion or
      fulfillment requirements where the Account Debtor has a right of offset
      for damages suffered as a result of Borrower’s failure to perform in
      accordance with the contract (sometimes called contracts accounts
      receivable, progress billings, milestone billings, or fulfillment
      contracts);

            


    

     

     

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    
      	
              (m)  

            	
              Accounts
      owing from an Account Debtor the amount of which may be subject to
      withholding based on the Account Debtor’s satisfaction of Borrower’s
      complete performance (but only to the extent of the amount withheld;
      sometimes called retainage
billings);

            


    

     

    
      	
              (n)  

            	
              Accounts
      subject to trust provisions, subrogation rights of a bonding company, or a
      statutory trust;

            


    

     

    
      	
              (o)  

            	
              Accounts
      owing from an Account Debtor that has been invoiced for goods that have
      not been shipped to the Account Debtor unless Bank, Borrower, and the
      Account Debtor have entered into an agreement acceptable to Bank in its
      sole discretion wherein the Account Debtor acknowledges that (i) it has
      title to and has ownership of the goods wherever located, (ii) a bona fide
      sale of the goods has occurred, and (iii) it owes payment for such goods
      in accordance with invoices from Borrower (sometimes called “bill and
      hold” accounts);

            


    

     

    
      	
              (p)  

            	
              Accounts
      that represent non-trade receivables or that are derived by means other
      than in the ordinary course of Borrower’s
  business;

            


    

     

    
      	
              (q)  

            	
              Accounts
      for which Borrower has permitted Account Debtor’s payment to extend beyond
      90 days;

            


    

     

    
      	
              (r)  

            	
              Accounts
      subject to chargebacks or others payment deductions taken by an Account
      Debtor;

            


    

     

    
      	
              (s)  

            	
              Accounts
      in which the Account Debtor disputes liability or makes any claim (but
      only up to the disputed or claimed amount), or if the Account Debtor is
      subject to an Insolvency Proceeding, or becomes insolvent, or goes out of
      business;

            


    

     

    
      	
              (t)  

            	
              Accounts
      for which Bank in its good faith business judgment determines collection
      to be doubtful; and

            


    

     

    
      	
              (u)  

            	
              other
      Accounts Bank deems ineligible in the exercise of its reasonable good
      faith business judgment.

            


    

     

    “Loan Documents” are,
collectively, this Agreement, the Perfection Certificate, any note, or notes or
guaranties executed by Borrower, and any other present or future agreement by
Borrower and/or for the benefit of Bank in connection with this Agreement, all
as amended, restated, or otherwise modified.

     

    “Prime Rate” is the greater of
(a) Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest
rate, and (b) five percent (5.0%).

     

    “Revolving Line” is an Advance
or Advances in an amount equal to One Million Two Hundred Fifty Thousand Dollars
($1,250,000.00).

     

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    “Revolving Line Maturity
Date” is
September 28, 2009.”

     

    and
inserting in lieu thereof the following:

     

    ““Borrowing Base Certificate” is
that certain borrowing base certificate included within each Transaction
Report.

     

    “Eligible Accounts” means
Accounts which arise in the ordinary course of Borrower’s business that meet all
Borrower’s representations and warranties in Section 5.3.  Bank
reserves the right, at any time after the Effective Date, to adjust any of the
criteria set forth below and to establish new criteria in its reasonable good
faith business judgment.  Unless Bank agrees otherwise in writing,
Eligible Accounts shall not include:

     

    
      	
              (a)  

            	
              Accounts
      that the Account Debtor has not paid within ninety (90) days of invoice
      date regardless of invoice payment period
terms;

            


    

     

    
      	
              (b)  

            	
              Accounts
      owing from an Account Debtor, fifty percent (50%) or more of whose
      Accounts have not been paid within ninety (90) days of invoice
      date;

            


    

     

    
      	
              (c)  

            	
              Accounts
      owing from an Account Debtor which does not have its principal place of
      business in the United States;

            


    

     

    
      	
              (d)  

            	
              Accounts
      billed and/or payable outside of the United
  States;

            


    

     

    
      	
              (e)  

            	
              Accounts
      owing from an Account Debtor to the extent that Borrower is indebted or
      obligated in any manner to the Account Debtor (as creditor, lessor,
      supplier or otherwise - sometimes called “contra” accounts, accounts
      payable, customer deposits or credit accounts), with the exception of
      customary credits, adjustments and/or discounts given to an Account Debtor
      by Borrower in the ordinary course of its
  business;

            


    

     

    
      	
              (f)  

            	
              Accounts
      for which the Account Debtor is Borrower’s Affiliate, officer, employee,
      or agent;

            


    

     

    
      	
              (g)  

            	
              Accounts
      with credit balances over ninety (90) days from invoice
    date;

            


    

     

    
      	
              (h)  

            	
              Accounts
      owing from an Account Debtor, including Affiliates, whose total
      obligations to Borrower exceed twenty-five (25%) of all Accounts, for the
      amounts that exceed that percentage, unless the Bank approves in
      writing;

            


    

     

    
      	
              (i)  

            	
              Accounts
      owing from an Account Debtor which is a United States government entity or
      any department, agency, or instrumentality thereof unless Borrower has
      assigned its payment rights to Bank and the assignment has been
      acknowledged under the Federal Assignment of Claims Act of 1940, as
      amended;

            


    

     

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    
      	
              (j)  

            	
              Accounts
      for demonstration or promotional equipment, or in which goods are
      consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on
      approval”, or other terms if Account Debtor’s payment may be
      conditional;

            


    

     

    
      	
              (k)  

            	
              Accounts
      owing from an Account Debtor that has not been invoiced or where goods or
      services have not yet been rendered to the Account Debtor (sometimes
      called memo billings or
pre-billings);

            


    

     

    
      	
              (l)  

            	
              Accounts
      subject to contractual arrangements between Borrower and an Account Debtor
      where payments shall be scheduled or due according to completion or
      fulfillment requirements where the Account Debtor has a right of offset
      for damages suffered as a result of Borrower’s failure to perform in
      accordance with the contract (sometimes called contracts accounts
      receivable, progress billings, milestone billings, or fulfillment
      contracts);

            


    

     

    
      	
              (m)  

            	
              Accounts
      owing from an Account Debtor the amount of which may be subject to
      withholding based on the Account Debtor’s satisfaction of Borrower’s
      complete performance (but only to the extent of the amount withheld;
      sometimes called retainage
billings);

            


    

     

    
      	
              (n)  

            	
              Accounts
      subject to trust provisions, subrogation rights of a bonding company, or a
      statutory trust;

            


    

     

    
      	
              (o)  

            	
              Accounts
      owing from an Account Debtor with respect to which Borrower has received
      Deferred Revenue (but only to the extent of such Deferred
      Revenue);

            


    

     

    
      	
              (p)  

            	
              Accounts
      owing from an Account Debtor that has been invoiced for goods that have
      not been shipped to the Account Debtor unless Bank, Borrower, and the
      Account Debtor have entered into an agreement acceptable to Bank in its
      sole discretion wherein the Account Debtor acknowledges that (i) it has
      title to and has ownership of the goods wherever located, (ii) a bona fide
      sale of the goods has occurred, and (iii) it owes payment for such goods
      in accordance with invoices from Borrower (sometimes called “bill and
      hold” accounts);

            


    

     

    
      	
              (q)  

            	
              Accounts
      that represent non-trade receivables or that are derived by means other
      than in the ordinary course of Borrower’s
  business;

            


    

     

     

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    
      	
              (r)  

            	
              Accounts
      for which Borrower has permitted Account Debtor’s payment to extend beyond
      90 days;

            


    

     

    
      	
              (s)  

            	
              Accounts
      subject to chargebacks or others payment deductions taken by an Account
      Debtor;

            


    

     

    
      	
              (t)  

            	
              Accounts
      in which the Account Debtor disputes liability or makes any claim (but
      only up to the disputed or claimed amount), or if the Account Debtor is
      subject to an Insolvency Proceeding, or becomes insolvent, or goes out of
      business;

            


    

     

    
      	
              (u)  

            	
              Accounts
      for which Bank in its good faith business judgment determines collection
      to be doubtful; and

            


    

     

    
      	
              (v)  

            	
              other
      Accounts Bank deems ineligible in the exercise of its reasonable good
      faith business judgment.

            


    

     

    “Loan Documents” are,
collectively, this Agreement, the Perfection Certificate, the IP Agreement, any
note, or notes or guaranties executed by Borrower, and any other present or
future agreement by Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, restated, or otherwise modified.

     

    “Prime Rate” is the Bank’s most
recently announced “prime rate,” even if it is not Bank’s lowest
rate.

     

    “Revolving Line” is an Advance
or Advances in an amount equal to Three Million Dollars
($3,000,000.00).

     

    “Revolving Line Maturity Date”
is December 28, 2009.”

     

    
      	
              21 
        

            	
              The
      Payment/Advance Request Form appearing as Exhibit B to
      the Loan Agreement is hereby deleted in its
  entirety.

            


    

     

     

    
      	
              22 
        

            	
              The
      Borrowing Base Certificate appearing as Exhibit C to
      the Loan Agreement is hereby deleted in its
  entirety.

            


    

     

     

    
      	
              23 
        

            	
              The
      Collateral description appearing as Exhibit A to
      the Loan Agreement is hereby replaced with the Collateral description
      attached as Exhibit A
      hereto.

            


    

     

     

    
      	
              24 
        

            	
              The
      Compliance Certificate appearing as Exhibit D to
      the Loan Agreement is hereby replaced with the Compliance Certificate
      attached as Exhibit B
      hereto.

            


    

     

    4.   
FEES.  Borrower
shall pay to Bank a modification fee equal to Seventeen Thousand Five Hundred
Dollars ($17,500.00), Ten Thousand Dollars ($10,000) of which has been paid to
the Bank (the “Good Faith
Deposit”).  The Good Faith Deposit shall be used to pay Bank
Expenses.  Such modification fee (including the Good Faith Deposit)
shall be deemed fully earned as of the date hereof, and the balance of such
modification fee (Seven Thousand Five Hundred Dollars ($7,500.00)) shall be due
on the date hereof.  Borrower shall also reimburse Bank for all
reasonable legal fees and expenses incurred in connection with this amendment to
the Existing Loan Documents.

     

    5.   
RATIFICATION OF PERFECTION
CERTIFICATE.  Borrower shall not, without providing the Bank
with thirty (30) days prior written notice: (i) relocate its principal executive
office or add any new offices or business locations or keep any Collateral in
any additional locations, (ii) change its jurisdiction of organization, (iii)
change its organizational structure or type, (iv) change its legal name, or (v)
change any organizational number (if any) 

     

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    assigned
by its jurisdiction of organization.  In addition, the Borrower hereby
certifies that no Collateral is in the possession of any third party bailee
(such as at a warehouse).  In the event that Borrower, after the date
hereof, intends to store or otherwise deliver the Collateral to such a bailee,
then Borrower shall first receive, the prior written consent of Bank and such
bailee must acknowledge in writing that the bailee is holding such Collateral
for the benefit of Bank. Borrower is not a party to, nor is bound by, any
license or other agreement with respect to which Borrower is the licensee
(a) that prohibits or otherwise restricts Borrower from granting a security
interest in Borrower’s interest in such license or agreement or any other
property, or (b) for which a default under or termination of could
interfere with the Bank’s right to sell any Collateral.  Borrower
hereby ratifies, confirms and reaffirms, all and singular, the terms and
disclosures contained in a certain Perfection Certificate dated as of September
29, 2008, and acknowledges, confirms and agrees the disclosures and information
Borrower provided to Bank in the Perfection Certificate has not changed, as of
the date hereof.

     

    6.   
AUTHORIZATION TO
FILE.  Borrower hereby authorizes Bank to file UCC financing
statements without notice to Borrower, with all appropriate jurisdictions, as
Bank deems appropriate, in order to further perfect or protect Bank’s interest
in the Collateral, including a notice that any disposition of the Collateral, by
either the Borrower or any other Person, shall be deemed to violate the rights
of the Bank under the Code.

     

    7.   
CONSISTENT
CHANGES.  The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.

     

    8.   
RATIFICATION OF LOAN
DOCUMENTS.  Borrower hereby ratifies, confirms, and reaffirms
all terms and conditions of all security or other collateral granted to the
Bank, and confirms that the indebtedness secured thereby includes, without
limitation, the Obligations.

     

    9.   
NO DEFENSES OF
BORROWER.  Borrower hereby acknowledges and agrees that
Borrower has no offsets, defenses, claims, or counterclaims against Bank with
respect to the Obligations, or otherwise, and that if Borrower now has, or ever
did have, any offsets, defenses, claims, or counterclaims against Bank, whether
known or unknown, at law or in equity, all of them are hereby expressly WAIVED
and Borrower hereby RELEASES Bank from any liability thereunder.

     

    10.  
  
CONTINUING
VALIDITY.  Borrower understands and agrees that in modifying
the existing Obligations, Bank is relying upon Borrower’s representations,
warranties, and agreements, as set forth in the Existing Loan
Documents.  Except as expressly modified pursuant to this Loan
Modification Agreement, the terms of the Existing Loan Documents remain
unchanged and in full force and effect.  Bank’s agreement to
modifications to the existing Obligations pursuant to this  Loan
Modification Agreement in no way shall obligate Bank to make any future
modifications to the Obligations.  Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Obligations.  It is
the intention of Bank and Borrower to retain as liable parties all makers of
Existing Loan Documents, unless the party is expressly released by Bank in
writing.  No maker will be released by virtue of this Loan
Modification Agreement.

     

    11.  
   RIGHT OF
SET-OFF.  In consideration of Bank’s agreement to enter into
this Loan Modification Agreement, Borrower hereby reaffirms and hereby grants to
Bank, a lien, security interest and right of set off as security for all
Obligations to Bank, whether now existing or hereafter arising upon and against
all deposits, credits, collateral and property, now or hereafter in the
possession, custody, safekeeping or control of Bank or any entity under the
control of Silicon Valley Bank  (including a Bank subsidiary) or in
transit to any of them.  At any time after the occurrence and during
the continuance of an Event of Default, without demand or notice, Bank may set
off the same or any part thereof and apply the same to any liability or
obligation of Borrower even though unmatured and regardless of the adequacy of
any other collateral securing the loan.  ANY AND ALL RIGHTS TO REQUIRE
BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL
WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH
RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

     

    12.            
 JURISDICTION/VENUE.  Borrower
accepts for itself and in connection with its properties, unconditionally, the
exclusive jurisdiction of any state or federal court of competent jurisdiction
in the Commonwealth of Massachusetts in any action, suit, or proceeding of any
kind against it which arises out of or by reason of this Loan Modification
Agreement; provided, however, that if for any reason Bank cannot avail itself of
the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa
Clara County, California.  

     

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    NOTWITHSTANDING
THE FOREGOING,  THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR
PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE
ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER
OR ITS PROPERTY.

     

    13.            
 COUNTERSIGNATURE.  This
Loan Modification Agreement shall become effective only when it shall have been
executed by Borrower and Bank.

     

     

    [The
remainder of this page is intentionally left blank]

    


     

    


     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    This Loan Modification Agreement is
executed as a sealed instrument under the laws of the Commonwealth of
Massachusetts as of the First Loan Modification Effective Date.

     

     

     

    
      
        	BORROWER: 	 	 	BANK:	 
	 	 	 	 	 
	BRIDGELINE
      SOFTWARE, INC.	 	 	SILICON
      VALLEY BANK	 
	 	 	 	 	 
	 	 	 	 	 
	
                By: 
      /s/ Gary M. Cebula

              	 	 	
                By: 
      /s/ Philip T. Silvia

              	 
	
                Name: 
      Gary M. Cebula

              	 	 	
                Name:  
      Philip T. Silvia

              	 
	
                Title:   
      CFO

              	 	 	
                Title:   
       Relationship Manager

              	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	

                First
      Loan Modification Effective Date: December 29,
  2008

              


      

    

     

     

                                                                                        

    
    

    


     

    56120/01603

     

     

     

     

     

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
A

     

    EXHIBIT
A

    


    The
Collateral consists of all of Borrower’s right, title and interest in and to the
following personal property:

     

    All
goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), securities, and all
other investment property, supporting obligations, and financial assets, whether
now owned or hereafter acquired, wherever located; and

     

    all
Borrower’s Books relating to the foregoing, and any and all claims, rights and
interests in any of the above and all substitutions for, additions, attachments,
accessories, accessions and improvements to and replacements, products, proceeds
and insurance proceeds of any or all of the foregoing.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    EXHIBIT
B

     

     

    EXHIBIT D - COMPLIANCE
CERTIFICATE

    


    


    TO:                 SILICON
VALLEY
BANK                                                                                                Date:______________________

    FROM:          
BRIDGELINE SOFTWARE, INC.

    


     

    The
undersigned authorized officer of Bridgeline Software, Inc. (“Borrower”) certifies that
under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), (1) Borrower is
in complete compliance for the period ending _______________ with all required
covenants except as noted below, (2) there are no Events of Default,
(3) all representations and warranties in the Agreement are true and
correct in all material respects on this date except as noted below; provided,
however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4)
Borrower, and each of its Subsidiaries, has timely filed all required tax
returns and reports, and Borrower has timely paid all foreign, federal, state
and local taxes, assessments, deposits and contributions owed by Borrower except
as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement,
and (5) no Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank.  Attached
are the required documents supporting the certification.  The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.  The undersigned acknowledges that
no borrowings may be requested at any time or date of determination that
Borrower is not in compliance with any of the terms of the Agreement, and that
compliance is determined not just at the date this certificate is
delivered.  Capitalized terms used but not otherwise defined herein
shall have the meanings given them in the Agreement.

     

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

            
	
               

               
      

            
	
              Reporting
      Covenant

            	
              Required

            	
              Complies

            
	 
      	 
      	 
      
	
              Monthly
      financial statements with Compliance
      Certificate

            	
              Monthly
      within 30 days

            	
              Yes   No

            
	
              Annual
      financial statement (CPA Audited)

            	
              FYE
      within 150 days

            	
              Yes   No

            
	
              10-Q,
      10-K and 8-K

            	
              Within
      5 days after filing with SEC

            	
              Yes   No

            
	
              A/R
      & A/P Agings

            	
              Monthly
      within 15 days

            	
              Yes   No

            
	
              Board-approved
      projections

            	
              Annually,
      w/in 45 days of approval

            	
              Yes   No

            
	
              Transaction
      Report

            	
              Weekly
      and with each request for a Credit
      Extension

            	
              Yes   No

            
	 
      


    

     

     

    
      	
              Financial
      Covenant

            	
              Required

            	
              Actual

            	
              Complies

            
	 
      	 
      	 
      	 
      
	
              Maintain
      at all times (tested):

            	 
      	 
      	 
      
	
              Minimum
      Adjusted Net Income (quarterly, T3M)

            	
              $     50,000.00

            	
              $_________

            	
              Yes   No

            
	
              Minimum
      Liquidity (certified monthly)

            	
              $1,000,000.00

            	
              $_________

            	
              Yes   No

            


    

    
    

     

     

     

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    The
following financial covenant analyses and information set forth in Schedule 1
attached hereto are true and accurate as of the date of this
Certificate.

    


    The
following are the exceptions with respect to the certification
above:  (If no exceptions exist, state “No exceptions to
note.”)

     

     

      
        

      

    

     

    
      

    

     

     

     

     

     

     

     

    
      
        	BRIDGELINE
      SOFTWARE, INC.	 	 	BANK USE ONLY	 
	 	 	 	 	 
	 	 	 	 	 
	
                By:

              	 	 	
                Received
      by:

              	 
	
                Name:

              	 	 	
                authorized
      signer

              	 
	
                Title: 

              	 	 	
                Date:

              	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	Verified:	 
	 	 	 	
                authorized
      signer

              	 
	 	 	 	 	 
	 	 	 	Date:	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	Compliance
      Status:                        
      Yes     No	 
	 	 	 	 	 


      

    

     

     

    
 

    
    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Schedule 1 to Compliance
Certificate

    


    Financial Covenants of
Borrower

     

     

    
 

    In the event of a conflict between this
Schedule and the Loan Agreement, the terms of the Loan Agreement shall
govern.

    


    Dated:     ____________________

    


    


    I.           Adjusted Net Income (Section
6.7(a))

    


    Required:                      Minimum
Adjusted Net Income, measured quarterly, on the last day of each fiscal quarter,
on a training three month basis, of not less than Fifty Thousand Dollars
($50,000.00).

    


    Actual:

    
      	
              A.

            	
              Trailing
      three month Net Income

            	
              $___           

               

            
	
              B.

            	
              To
      the extent deducted from the calculation of Net Income, non-cash stock
      compensation expense, depreciation expense and any amortization of
      goodwill

               

            	
              $___           

               

            
	
              C.

            	
              Adjusted
      Net Income (line A plus line B)

            	
              $___           

               

            


    

     

    Is line C
equal to or greater than $50,000.00?

    


    ___  No, not in
compliance                                                                                     ___
Yes, in compliance

     

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    II.           Minimum Liquidity (Section
6.7(b))

    


    Required:                      Maintain
unrestricted cash at Bank plus the Availability Amount of not less than One
Million Dollars ($1,000,000.00)

    


    Actual:

    


    
      	
              A.

            	
              Unrestricted
      Cash at Bank

            	
              $___           
      

               

            
	
              B.

            	
              Availability
      Amount

            	
              $___           

               

            
	
              C.

            	
              Liquidity
      (line A plus line B

            	
              $___  
              

               

            


    

     

     

    Is line C
equal to or greater than $1,000,000.00?

    


     ___ No, not in
compliance                                                                                     ___ Yes, in
compliance