Untitled Document


Exhibit 10.11



  

SECOND AMENDED
  AND RESTATED LOAN AND SECURITY AGREEMENT

  

THIS SECOND AMENDED AND RESTATED
  LOAN AND SECURITY AGREEMENT (this "Agreement") dated as of the
  Effective Date is between SILICON VALLEY BANK, a California corporation ("Bank"),
  and SOCKET MOBILE, INC., a Delaware corporation ("Borrower"),
  provides the terms on which Bank shall lend to Borrower and Borrower shall repay
  Bank. The parties agree as follows: 

  

RECITALS

  

A. Borrower and Bank have entered
  into that certain Amended and Restated Loan and Security Agreement dated March
  24, 2008 (as the same has been amended, restated, or otherwise modified from
  time to time, the "Original Domestic Agreement") pursuant to which
  Bank has agreed to extend and make available to Borrower certain credit facilities.

  

B. Borrower and Bank have agreed
  to amend and restate the Original Domestic Agreement in its entirety pursuant
  to the terms of this Agreement.

  

NOW, THEREFORE, for good and valuable
  consideration, the receipt and sufficiency of which are hereby acknowledged,
  the Bank and Borrower agree that the Original Domestic Agreement is amended
  and restated in its entirety as follows:

  

1. ACCOUNTING AND OTHER TERMS

  

Accounting terms not defined in
  this Agreement shall be construed following GAAP. Calculations and determinations
  must be made following GAAP. The term "financial statements" includes
  the notes and schedules. The terms "including" and "includes"
  always mean "including (or includes) without limitation," in this
  or any Loan Document. Capitalized terms not otherwise defined in this Agreement
  shall have the meanings set forth in Section 13. All other terms contained in
  this Agreement, unless otherwise indicated, shall have the meanings provided
  by the Code, to the extent such terms are defined therein.

  

2. LOAN AND TERMS OF PAYMENT

  

2.1 Promise to Pay.
  Borrower hereby unconditionally promises to pay Bank the unpaid principal amount
  of all Advances hereunder with all interest, fees and finance charges due thereon
  as and when due in accordance with this Agreement.

  

2.1.1 Financing of Accounts.

  

(a) Availability. Subject
  to the terms of this Agreement, Borrower may request that Bank finance specific
  Eligible Accounts. Bank may, in its sole discretion in each instance, finance
  such Eligible Accounts by extending credit to Borrower in an amount equal to
  the result of the Advance Rate multiplied by the face amount of the Eligible
  Account (the "Advance"). Bank may, in its sole discretion, change
  the percentage of the Advance Rate for a particular Eligible Account on a case
  by case basis. When Bank makes an Advance, the Eligible Account becomes a "Financed
  Receivable." 

  

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(b) Maximum Advances. The
  aggregate outstanding amount of all Advances, outstanding at any time may not
  exceed One Million Dollars ($1,000,000). Notwithstanding any other term or provision
  of this Agreement, the aggregate amount of Advances hereunder together with
  the aggregate amount of loan advances under the EXIM Agreement shall not at
  any event exceed Two Million Five Hundred Thousand Dollars ($2,500,000). 

  

(c) Borrowing Procedure.
  Borrower will deliver an Invoice Transmittal for each Eligible Account it offers.
  Bank may rely on information set forth in or provided with the Invoice Transmittal.

  

(d) Credit Quality; Confirmations.
  Bank may, at its option, conduct a credit check of the Account Debtor for each
  Account requested by Borrower for financing hereunder in order to approve any
  such Account Debtor's credit before agreeing to finance such Account. Bank may
  also verify directly with the respective Account Debtors the validity, amount
  and other matters relating to the Accounts (including confirmations of Borrower's
  representations in Section 5.3) by means of mail, telephone or otherwise, either
  in the name of Borrower or Bank from time to time in its sole discretion.

  

(e) Accounts Notification/Collection.
  Bank may notify any Person owing Borrower money of Bank's security interest
  in the funds and verify and/or collect the amount of the Account.

  

(f) Maturity. This Agreement
  shall terminate and all Obligations outstanding hereunder shall be immediately
  due and payable on the Maturity Date.

  

(g) Bank's Discretion. Notwithstanding
  anything to the contrary contained herein, this Agreement may be terminated
  by Borrower or Bank at any time, and Bank is not obligated to finance any Eligible
  Accounts. Bank and Borrower hereby acknowledge and agree that Bank's agreement
  to finance Eligible Accounts hereunder is discretionary in each instance. Accordingly,
  there shall not be any recourse to Bank, nor liability of Bank, on account of
  any delay in Bank's making of, and/or any decline by Bank to make, any loan
  or advance requested hereunder. If this Agreement is terminated by Bank or Borrower
  for any reason, Borrower shall pay to Bank a termination fee in an amount equal
  to one percent (1.0%) of the Facility Amount (the "Early Termination
  Fee"). The Early Termination Fee shall be due and payable on the effective
  date of such termination and thereafter shall bear interest at a rate equal
  to the highest rate applicable to any of the Obligations. Notwithstanding the
  foregoing, Bank agrees to waive the Early Termination Fee if Bank agrees to
  refinance and re-document this Agreement under another division of Bank (in
  its sole and exclusive discretion) prior to the Maturity Date.

  

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2.1.2 EXIM Agreement.
  Bank and Borrower are parties to an EXIM Agreement. Both this Agreement and
  the EXIM Agreement shall continue in full forced and effect, and all rights
  and remedies under this Agreement and EXIM Agreement are cumulative. The term
  "Obligations" as used in the Agreement and in the EXIM Agreement shall
  include, without limitation, the obligation to pay when due all Credit Extensions
  made pursuant to this Agreement (the "Non-EXIM Loans") and
  all interest thereof and the obligation to apply when due all Credit Extensions
  made pursuant to the EXIM Agreement (the "EXIM Loans") and
  all interest thereon. Without limiting the generality of the foregoing, all
  "Collateral" as defined in this Agreement and defined in the EXIM
  Agreement shall secure all EXIM Loans and all Non-EXIM Loans and all interest
  thereon, and all other Obligations. Any Event of Default under this Agreement
  shall also constitute an Event of Default under the EXIM Agreement and any Event
  of Default under the EXIM Agreement shall constitute an Event of Default under
  this Agreement. In the event Bank assigns its right under the EXIM Agreement
  or its rights under this Agreement to any third party, including without limitation,
  the Export-Import Bank of the United States ("EXIM Bank"),
  whether before or after the occurrence of any Event of Default, Bank shall the
  right (but not any obligation), it its sole discretion, to allocate and apportion
  Collateral to this Agreement and/or to specify the priorities of the respective
  security interests in such Collateral between itself and the assignee, all without
  notice to, or consent of, Borrower. 

  

2.2 Collections, Finance Charges,
  Remittances and Fees. The Obligations shall be subject to the following
  fees and Finance Charges. Unpaid fees and Finance Charges may, in Bank's discretion,
  accrue interest and fees as described in Section 9.2 hereof.

  

2.2.1 Collections.
  Collections will be credited to the Financed Receivable Balance for such Financed
  Receivable, but if there is an Event of Default, Bank may apply Collections
  to the Obligations in any order it chooses. If Bank receives a payment for both
  a Financed Receivable and a non-Financed Receivable, the funds will first be
  applied to the Financed Receivable and, if there is no Event of Default then
  existing, the excess will be remitted to Borrower, subject to Section 2.2.6.

  

2.2.2 Facility Fee.
  A fully earned, non refundable facility fee of Twenty Five Thousand Dollars
  ($25,000) is due upon execution of this Agreement (the "Facility Fee").

  

2.2.3 Finance Charges.
  In computing Finance Charges on the Obligations under this Agreement, all Collections
  received by Bank shall be deemed applied by Bank on account of the Obligations
  three (3) Business Days after receipt of the Collections. Borrower will pay
  a finance charge (the "Finance Charge") on the Financed Receivable
  Balance which is equal to the Applicable Rate divided by 360 multiplied by the
  number of days each such Financed Receivable is outstanding multiplied by the
  outstanding Financed Receivable Balance. The Finance Charge is payable when
  the Advance made based on such Financed Receivable is payable in accordance
  with Section 2.3 hereof. Because the Advance Rate may differ based on the type
  of Eligible Account, the Bank will from time to time, adjust the Finance Charge
  on Advances made at an Advance Rate of 60% so that the effective Finance Charge
  on such Advances is reasonably equivalent to the Finance Charge which applies
  to Advances based on an 80% Advance Rate. After an Event of Default, the Applicable
  Rate will increase an additional five percent (5.0%) per annum effective immediately
  upon the occurrence of such Event of Default.

  

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2.2.4 Collateral Handling
  Fee. Borrower will pay to Bank a collateral handling fee equal to seven
  tenths of one percent (0.70%) per month of the Financed Receivable Balance for
  each Financed Receivable outstanding based upon a 360 day year (the "Collateral
  Handling Fee"). This fee is charged on a daily basis which is equal
  to the Collateral Handling Fee divided by 30, multiplied by the number of days
  each such Financed Receivable is outstanding, multiplied by the outstanding
  Financed Receivable Balance. The Collateral Handling Fee is payable when the
  Advance made based on such Financed Receivable is payable in accordance with
  Section 2.3 hereof. In computing Collateral Handling Fees under this Agreement,
  all Collections received by Bank shall be deemed applied by Bank on account
  of Obligations three (3) Business Days after receipt of the Collections. After
  an Event of Default, the Collateral Handling Fee will increase an additional
  0.50% effective immediately upon such Event of Default.

  

2.2.5 Accounting.
  After each Reconciliation Period, Bank will provide an accounting of the transactions
  for that Reconciliation Period, including the amount of all Financed Receivables,
  all Collections, Adjustments, Finance Charges, Collateral Handling Fee and the
  Facility Fee. If Borrower does not object to the accounting in writing within
  thirty (30) days it shall be considered accurate. All Finance Charges and other
  interest and fees are calculated on the basis of a 360 day year and actual days
  elapsed.

  

2.2.6 Deductions.
  Bank may deduct fees, Finance Charges, Advances which become due pursuant to
  Section 2.3, and other amounts due pursuant to this Agreement from any Advances
  made or Collections received by Bank.

  

2.2.7 Lockbox; Account Collection
  Services.

  

(a) Borrower shall direct each Account
  Debtor (and each depository institution where proceeds of Accounts are on deposit)
  to remit payments with respect to the Accounts to a lockbox account established
  with Bank or to wire transfer payments to a cash collateral account that Bank
  controls (collectively, the "Lockbox"). It will be considered
  an immediate Event of Default if the Lockbox is not set-up and operational on
  the Effective Date.

  

(b) In the event Borrower receives
  any proceeds that should be paid into the Lockbox, upon receipt by Borrower
  of such proceeds, Borrower shall immediately transfer and deliver same to Bank,
  along with a detailed cash receipts journal. Provided no Event of Default exists
  or an event that with notice or lapse of time will be an Event of Default, within
  three (3) days of receipt of such amounts by Bank, Bank will turn over to Borrower
  the proceeds of the Accounts other than Collections with respect to Financed
  Receivables and the amount of Collections in excess of the amounts for which
  Bank has made an Advance to Borrower, less any amounts due to Bank, such as
  the Finance Charge, the Facility Fee, payments due to Bank, other fees and expenses,
  or otherwise; provided, however, Bank may hold such excess amount with respect
  to Financed Receivables as a reserve until the end of the applicable Reconciliation
  Period if Bank, in its discretion, determines that other Financed Receivable(s)
  may no longer qualify as an Eligible Account at any time prior to the end of
  the subject Reconciliation Period. This Section does not impose any affirmative
  duty on Bank to perform any act other than as specifically set forth herein.
  All Accounts and the proceeds thereof are Collateral and if an Event of Default
  occurs, Bank may apply the proceeds of such Accounts to the Obligations.

  

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2.2.8 Bank Expenses.
  Borrower shall pay all Bank Expenses (including reasonable attorneys' fees and
  expenses, plus expenses, for documentation and negotiation of this Agreement)
  incurred through and after the Effective Date, when due.

  

2.3 Repayment of Obligations;
  Adjustments.

  

2.3.1 Repayment. Borrower
  will repay each Advance on the earliest of: (a) the date on which payment is
  received of the Financed Receivable with respect to which the Advance was made,
  (b) the date on which the Financed Receivable is no longer an Eligible Account,
  (c) the date on which any Adjustment is asserted to the Financed Receivable
  (but only to the extent of the Adjustment if the Financed Receivable remains
  otherwise an Eligible Account), (d) the date on which there is a breach of any
  warranty or representation set forth in Section 5.3, or a breach of any covenant
  in this Agreement or (e) the Maturity Date (including any early termination).
  Each payment will also include all accrued Finance Charges and Collateral Handling
  Fees with respect to such Advance and all other amounts then due and payable
  hereunder.

  

2.3.2 Repayment on Event of
  Default. When there is an Event of Default, Borrower will, if Bank demands
  (or, upon the occurrence of an Event of Default under Section 8.3, immediately
  without notice or demand from Bank) repay all of the Advances. The demand may,
  at Bank's option, include the Advance for each Financed Receivable then outstanding
  and all accrued Finance Charges, the Early Termination Fee, Collateral Handling
  Fee, attorneys' and professional fees, court costs and expenses, and any other
  Obligations.

  

2.3.3 Debit of Accounts.
  Bank may debit any of Borrower's deposit accounts for payments or any amounts
  Borrower owes Bank hereunder. Bank shall promptly notify Borrower when it debits
  Borrower's accounts. These debits shall not constitute a set-off.

  

2.3.4 Adjustments.
  If, at any time during the term of this Agreement, any Account Debtor asserts
  an Adjustment, Borrower issues a credit memorandum, or any of the representations
  and warranties in Section 5.3 or covenants in this Agreement are no longer true
  in all material respects, Borrower will promptly advise Bank.

  

2.4 Power of Attorney.
  Borrower irrevocably appoints Bank and its successors and assigns as attorney-in-fact
  and authorizes Bank, regardless of whether there has been an Event of Default,
  to: (a) sell, assign, transfer, pledge, compromise, or discharge all or any
  part of the Financed Receivables; (b) demand, collect, sue, and give releases
  to any Account Debtor for monies due and compromise, prosecute, or defend any
  action, claim, case or proceeding about the Financed Receivables, including
  filing a claim or voting a claim in any bankruptcy case in Bank's or Borrower's
  name, as Bank chooses; (c) prepare, file and sign Borrower's name on any notice,
  claim, assignment, demand, draft, or notice of or satisfaction of lien or mechanics'
  lien or similar document; (d) notify all Account Debtors to pay Bank directly;
  (e) receive, open, and dispose of mail addressed to Borrower; (f) endorse Borrower's
  name on checks or other instruments (to the extent necessary to pay amounts
  owed pursuant to this Agreement); and (g) execute on Borrower's behalf any instruments,
  documents, financing statements to perfect Bank's interests in the Financed
  Receivables and Collateral and do all acts and things necessary or expedient,
  as determined solely and exclusively by Bank, to protect, preserve, and otherwise
  enforce Bank's rights and remedies under this Agreement, as directed by Bank.

  

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3. CONDITIONS OF LOANS

  

3.1 Conditions Precedent to
  Initial Advance. Bank's agreement to make the initial Advance is subject
  to the condition precedent that Bank shall have received, in form and substance
  satisfactory to Bank, such documents, and completion of such other matters,
  as Bank may reasonably deem necessary or appropriate, including, without limitation:

  

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

  

(b) an Addendum to the Intellectual
  Property Security Agreement;

  

(c) Perfection Certificate by Borrower;

  

(d) Account Control Agreement/ Investment
  Account Control Agreement;

  

(e) evidence satisfactory to Bank
  that the insurance policies required by Section 6.4 hereof are in full force
  and effect, together with appropriate evidence showing lender loss payable and/or
  additional insured clauses or endorsements in favor of Bank;

  

(f) payment of the fees and Bank
  Expenses then due and payable;

  

(g) Certificate of Foreign Qualification
  in California;

  

(h) Certificate of Good Standing
  from Delaware; and

  

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

  

3.2 Conditions Precedent to
  all Advances. Bank's agreement to make each Advance, including the initial
  Advance, is subject to the following:

  

(a) receipt of the Invoice Transmittal;

  

(b) Bank shall have (at its option)
  conducted the confirmations and verifications as described in Section 2.1.1(d);
  and

  

(c) each of the representations
  and warranties in Section 5 shall be true on the date of the Invoice Transmittal
  and on the effective date of each Advance and no Event of Default shall have
  occurred and be continuing, or result from the Advance. Each Advance is Borrower's
  representation and warranty on that date that the representations and warranties
  in Section 5 remain true.

  

(d) in Bank's sole discretion, any
  material impairment in the general affairs, management, results of operation,
  financial condition or the prospect of repayment of the Obligations, or there
  has not been any material adverse deviation by Borrower from the most recent
  business plan of Borrower presented to and accepted by Bank.

  

  

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4. CREATION OF SECURITY INTEREST

  

4.1 Grant of Security Interest.
  Borrower hereby grants Bank, to secure the payment and performance in full of
  all of the Obligations, a continuing security interest in, and pledges to Bank,
  the Collateral, wherever located, whether now owned or hereafter acquired or
  arising, and all proceeds and products thereof. Borrower represents, warrants,
  and covenants that the security interest granted herein shall be a first priority
  security interest in the Collateral. If Borrower shall at any time, acquire
  a commercial tort claim, Borrower shall promptly notify Bank in a writing signed
  by Borrower of the general details thereof and grant to Bank in such writing
  a security interest therein and in the proceeds thereof, all upon the terms
  of this Agreement, with such writing to be in form and substance satisfactory
  to Bank.

  If this Agreement is terminated, Bank's Lien in the Collateral shall continue
  until the Obligations (other than inchoate indemnity obligations) are repaid
  in full in cash. Upon payment in full in cash of the Obligations and at such
  time as Bank's obligation to make Advances has terminated, Bank shall, at Borrower's
  sole cost and expense, release its Liens in the Collateral and all rights therein
  shall revert to Borrower.

  

4.2 Authorization to File
  Financing Statements. Borrower hereby authorizes Bank to file financing
  statements, without notice to Borrower, with all appropriate jurisdictions to
  perfect or protect Bank's interest or rights hereunder, including a notice that
  any disposition of the Collateral, by either Borrower or any other Person, shall
  be deemed to violate the rights of Bank under the Code. Any such financing statements
  may indicate the Collateral as "all assets of the Debtor" or words
  of similar effect, or as being of an equal or lesser scope, or with greater
  detail, all in Bank's discretion.

  

5. REPRESENTATIONS AND WARRANTIES

  

Borrower represents and warrants
  as follows:

  

5.1 Due Organization and Authorization.
  Borrower is duly existing and in good standing as a Registered Organization
  in the State of Delaware and is qualified and licensed to do business and are
  in good standing in any jurisdiction in which the conduct of their respective
  business or ownership of property requires that they be qualified except where
  the failure to do so could not reasonably be expected to have a material adverse
  effect on Borrower's business. In connection with this Agreement, Borrower has
  delivered to Bank a completed certificate signed by Borrower, entitled "Perfection
  Certificate". Borrower represents and warrants to Bank that (a) Borrower's
  exact legal name is that indicated on the Perfection Certificate and on the
  signature page hereof; (b) Borrower is an organization of the type and is organized
  in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection
  Certificate accurately sets forth Borrower's organizational identification number
  or accurately states that Borrower has none; (d) the Perfection Certificate
  accurately sets forth Borrower's place of business, or, if more than one, its
  chief executive office as well as Borrower's mailing address (if different than
  its chief executive office); (e) Borrower (and each of its predecessors) has
  not, in the past five (5) years, changed its jurisdiction of formation, organizational
  structure or type, or any organizational number assigned by its jurisdiction;
  and (f) all other information set forth on the Perfection Certificate pertaining
  to Borrower and each of its Subsidiaries is accurate and complete (it being
  understood and agreed that Borrower may from time to time update certain information
  in the Perfection Certificate after the Effective Date to the extent permitted
  by one or more specific provisions in this Agreement). If Borrower is not now
  a Registered Organization but later becomes one, Borrower shall promptly notify
  Bank of such occurrence and provide Bank with Borrower's organizational identification
  number.

  

 

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The execution, delivery and performance
  by Borrower of the Loan Documents to which it is a party have been duly authorized,
  and do not (i) conflict with any of Borrower's organizational documents, (ii)
  contravene, conflict with, constitute a default under or violate any material
  Requirement of Law, (iii) contravene, conflict or violate any applicable order,
  writ, judgment, injunction, decree, determination or award of any Governmental
  Authority by which Borrower or any its Subsidiaries or any of their property
  or assets may be bound or affected, (iv) require any action by, filing, registration,
  or qualification with, or Governmental Approval from, any Governmental Authority
  (except such Governmental Approvals which have already been obtained and are
  in full force and effect) or (v) constitute an event of default under any material
  agreement by which Borrower is bound. Borrower is not in default under any agreement
  to which it is a party or by which it is bound in which the default could have
  a material adverse effect on Borrower's business.

  

5.2 Collateral. Borrower
  has good title, 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.

  

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 to the extent such claim could not reasonably be expected to have
  a material adverse effect on Borrower's business. 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. Without prior consent from Bank, Borrower shall not enter into,
  or become bound by, any such license or agreement which is reasonably likely
  to have a material impact on Borrower's business or financial condition. 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 all such licenses or contract
  rights 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.

  

 

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5.3 Financed Receivables.
  Borrower represents and warrants for each Financed Receivable:

  

(a) Such Financed Receivable is
  an Eligible Account;

  

(b) Borrower is the owner of and
  has the legal right to sell, transfer, assign and encumber such Financed Receivable;

  

(c) The correct amount is on the
  Invoice Transmittal and is not disputed;

  

(d) Payment is not contingent on
  any obligation or contract and Borrower has fulfilled all its obligations as
  of the Invoice Transmittal date;

  

(e) Such Financed Receivable is
  based on an actual sale and delivery of goods and/or services rendered, is due
  to Borrower, is not past due or in default, has not been previously sold, assigned,
  transferred, or pledged and is free of any liens, security interests and encumbrances
  other than Permitted Liens;

  

(f) There are no defenses, offsets,
  counterclaims or agreements for which the Account Debtor may claim any deduction
  or discount;

  

(g) Borrower reasonably believes
  no Account Debtor is insolvent or subject to any Insolvency Proceedings;

  

(h) Borrower has not filed or had
  filed against it Insolvency Proceedings and does not anticipate any filing;

  

(i) Bank has the right to endorse
  and/ or require Borrower to endorse all payments received on Financed Receivables
  and all proceeds of Collateral; and

  

(j) No representation, warranty
  or other statement of Borrower in any certificate or written statement given
  to Bank contains any untrue statement of a material fact or omits to state a
  material fact necessary to make the statement contained in the certificates
  or statement not misleading.

  

5.4 Litigation. There
  are no actions or proceedings pending or, to the knowledge of Borrower's Responsible
  Officers, threatened in writing by or against Borrower or any Subsidiary in
  which an adverse decision could reasonably be expected to cause a Material Adverse
  Change.

  

5.5 No Material Deviation
  in Financial Statements. All consolidated financial statements for Borrower
  and any Subsidiaries delivered to Bank fairly present in all material respects
  Borrower's consolidated financial condition and Borrower's consolidated results
  of operations. There has not been any material deterioration in Borrower's consolidated
  financial condition since the date of the most recent financial statements submitted
  to Bank.

  

 

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5.6 Solvency. The
  fair salable value of Borrower's assets (including goodwill minus disposition
  costs) exceeds the fair value of its liabilities; Borrower is not left with
  unreasonably small capital after the transactions in this Agreement; and Borrower
  is able to pay its debts (including trade debts) as they mature.

  

5.7 Regulatory Compliance.
  Borrower is not an "investment company" or a company "controlled"
  by an "investment company" under the Investment Company Act of 1940,
  as amended. Borrower is not engaged as one of its important activities in extending
  credit for margin stock (under Regulations X, T and U of the Federal Reserve
  Board of Governors). Neither Borrower nor any of its Subsidiaries is a "holding
  company" or an "affiliate" of a "holding company" or
  a "subsidiary company" of a "holding company" as each term
  is defined and used in the Public Utility Holding Company Act of 2005. Borrower
  has complied in all material respects with the Federal Fair Labor Standards
  Act. Borrower has not violated any laws, ordinances or rules, the violation
  of which could reasonably be expected to cause a Material Adverse Change. None
  of Borrower's or any Subsidiary's properties or assets has been used by Borrower
  or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons,
  in disposing, producing, storing, treating, or transporting any hazardous substance
  other than legally. Borrower and each of its Subsidiaries have obtained all
  consents, approvals and authorizations of, made all declarations or filings
  with, and given all notices to, all Governmental Authorities that are necessary
  to continue their respective businesses as currently conducted.

  

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

  

5.9 Tax Returns and Payments;
  Pension Contributions. Borrower and each Subsidiary have timely filed
  all required tax returns and reports, and Borrower and each Subsidiary have
  timely paid all foreign, federal, state and local taxes, assessments, deposits
  and contributions owed by Borrower and each Subsidiary. Borrower may defer payment
  of any contested taxes, provided that Borrower (a) in good faith contests its
  obligation to pay the taxes by appropriate proceedings promptly and diligently
  instituted and conducted, (b) notifies Bank in writing of the commencement of,
  and any material development in, the proceedings, (c) posts bonds or takes any
  other steps required to prevent the governmental authority levying such contested
  taxes from obtaining a Lien upon any of the Collateral that is other than a
  "Permitted Lien". Borrower is unaware of any claims or adjustments
  proposed for any of Borrower's prior tax years which could result in additional
  taxes becoming due and payable by Borrower. Borrower has paid all amounts necessary
  to fund all present pension, profit sharing and deferred compensation plans
  in accordance with their terms, and Borrower has not withdrawn from participation
  in, and has not permitted partial or complete termination of, or permitted the
  occurrence of any other event with respect to, any such plan which could reasonably
  be expected to result in any liability of Borrower, including any liability
  to the Pension Benefit Guaranty Corporation or its successors or any other governmental
  agency.

  

 

10



5.10 Full Disclosure.
  No written representation, warranty or other statement of Borrower in any certificate
  or written statement given to Bank, as of the date such representation, warranty,
  or other statement was made, taken together with all such written certificates
  and written statements given to Bank, contains any untrue statement of a material
  fact or omits to state a material fact necessary to make the statements contained
  in the certificates or statements not misleading (it being recognized by Bank
  that projections and forecasts provided by Borrower in good faith and based
  upon reasonable assumptions are not viewed as facts and that actual results
  during the period or periods covered by such projections and forecasts may differ
  from the projected or forecasted results).

  

6. AFFIRMATIVE COVENANTS

  

Borrower shall do all of the following:

  

6.1 Government Compliance.

  

(a) Maintain its and all its Subsidiaries'
  legal existence and good standing in their respective jurisdictions of formation
  and maintain qualification in each jurisdiction in which the failure to so qualify
  would reasonably be expected to have a material adverse effect on Borrower's
  business or operations. Borrower shall comply, and have each Subsidiary comply,
  with all laws, ordinances and regulations to which it is subject, noncompliance
  with which could have a material adverse effect on Borrower's business.

  

(b) Obtain all of the Governmental
  Approvals necessary for the performance by Borrower of its obligations under
  the Loan Documents to which it is a party and the grant of a security interest
  to Bank in all of its property. Borrower shall promptly provide copies of any
  such obtained Governmental Approvals to Bank.

  

6.2 Financial Statements,
  Reports, Certificates.

  

(a) Deliver to Bank: (i) as soon
  as available, but no later than thirty (30) days after the last day of each
  month, a company prepared balance sheet and income statement covering Borrower's
  operations during the period certified by a Responsible Officer and in a form
  acceptable to Bank; (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 reasonably acceptable to Bank; (iii) in the event that
  Borrower's stock becomes publicly held, within five (5) days of filing, copies
  of all statements, reports and notices made available to Borrower's security
  holders or to any holders of Subordinated Debt and all reports on Form 10-K,
  10-Q and 8 K filed with the Securities and Exchange Commission; (iv) a prompt
  report of any legal actions pending or threatened against Borrower or any Subsidiary
  that could result in damages or costs to Borrower or any Subsidiary of One Hundred
  Thousand Dollars ($100,000.00) or more; (v) prompt notice of any material change
  in the composition of the Intellectual Property Collateral, or the registration
  of any copyright, including any subsequent ownership right of Borrower in or
  to any copyright, patent or trademark not shown in the IP Agreement or knowledge
  of an event that materially adversely affects the value of the Intellectual
  Property Collateral; (vi) as soon as available, annual financial projections
  for the following fiscal year commensurate in form and substance with those
  provided to Borrower's venture capital investors; and (vii) budgets, sales projections,
  operating plans, "sell-through" reports, or other financial information
  reasonably requested by Bank.

  

 

11



(b) Within thirty (30) days after
  the last day of each month, deliver to Bank with the monthly financial statements
  a Compliance Certificate signed by a Responsible Officer in the form of Exhibit
  B.

  

(c) Allow Bank to audit Borrower's
  Collateral, including, but not limited to, Borrower's Accounts at Borrower's
  expense, upon reasonable notice to Borrower; provided, however, prior to the
  occurrence of an Event of Default, Borrower shall be obligated to pay for not
  more than two (2) audits per year and such audits will not last more than 2-3.
  After the occurrence of an Event of Default, Bank may audit Borrower's Collateral,
  including, but not limited to, Borrower's Accounts at Borrower's expense and
  at Bank's sole and exclusive discretion and without notification and authorization
  from Borrower.

  

(d) Upon Bank's request, provide
  a written report respecting any Financed Receivable, if payment of any Financed
  Receivable does not occur by its due date and include the reasons for the delay.

  

(e) Provide Bank with, as soon as
  available, but no later than thirty (30) following each Reconciliation Period,
  an aged listing of accounts receivable and accounts payable by invoice date,
  in form acceptable to Bank.

  

(f) Provide Bank with, as soon as
  available, but no later than thirty (30) days following each Reconciliation
  Period, a Deferred Revenue report, in form acceptable to Bank.

  

6.3 Taxes. Borrower
  shall make, and cause each Subsidiary to make, timely payment of all foreign,
  federal, state, and local taxes or assessments (other than taxes and assessments
  which Borrower is contesting in good faith, with adequate reserves maintained
  in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates
  attesting to such payments.

  

6.4 Insurance. Keep
  its business and the Collateral insured for risks and in amounts standard for
  companies in Borrower's industry and location, and as Bank may reasonably request.
  Insurance policies shall be in a form, with companies, and in amounts that are
  satisfactory to Bank. All property policies shall have a lender's loss payable
  endorsement showing Bank as the sole lender loss payee and waive subrogation
  against Bank, and all liability policies shall show, or have endorsements showing,
  Bank as an additional insured .All policies (or the loss payable and additional
  insured endorsements) shall provide that the insurer must give Bank at least
  twenty (20) days notice before canceling, amending, or declining to renew its
  policy. At Bank's request, Borrower shall deliver certified copies of policies
  and evidence of all premium payments. Proceeds payable under any policy shall,
  at Bank's option, be payable to Bank on account of the Obligations. If Borrower
  fails to obtain insurance as required under this Section 6.4 or to pay any amount
  or furnish any required proof of payment to third persons and Bank, Bank may
  make all or part of such payment or obtain such insurance policies required
  in this Section 6.4, and take any action under the policies Bank deems prudent.

  

 

12



6.5 Accounts.

  

(a) To permit Bank to monitor Borrower's
  financial performance and condition, Borrower, and all Borrower's Subsidiaries,
  shall maintain Borrower's and such Subsidiaries', primary depository, operating
  accounts and securities accounts with Bank and Bank's affiliates, which accounts
  shall represent at least 75% of the dollar value of Borrower's and such Subsidiaries'
  accounts at all financial institutions.

  

(b) Borrower shall identify to Bank,
  in writing, any deposit or securities account opened by Borrower with any institution
  other than Bank. In addition, for each such account that Borrower at any time
  opens or maintains, Borrower shall, at Bank's request and option, pursuant to
  an agreement in form and substance acceptable to Bank, cause the depository
  bank or securities intermediary to agree that such account is the collateral
  of Bank pursuant to the terms hereunder. The provisions of the previous sentence
  shall not apply to deposit accounts exclusively used for payroll, payroll taxes
  and other employee wage and benefit payments to or for the benefit of Borrower's
  employees.

  

6.6 Financial Covenants.
  Borrower shall maintain at all times, to be tested as of the last day of each
  month, unless otherwise noted: 

  

(a) Liquidity. Borrower's unrestricted
  cash and Cash Equivalents plus the Availability of at least $250,000.

  

6.7 Protection and Registration
  of Intellectual Property Rights. Borrower shall: (a) 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 (i) obtains any patent, registered trademark or
  servicemark, registered copyright, registered mask work, or any pending application
  for any of the foregoing, whether as owner, licensee or otherwise, or (ii) applies
  for any patent or the registration of any trademark or servicemark, then Borrower
  shall immediately provide written notice thereof to Bank and shall execute such
  intellectual property security agreements and other documents and take such
  other actions as Bank shall request in its good faith business judgment to perfect
  and maintain a first priority perfected security interest in favor of Bank in
  such property. 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 Borrower's 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 property security agreement and such other documents
  and take such other actions as Bank may request in its good faith business judgment
  to perfect and maintain a first priority perfected security interest in favor
  of Bank 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 copies of all applications that it files
  for patents or for the registration of trademarks, servicemarks, copyrights
  or mask works, together with evidence of the recording of the intellectual property
  security agreement necessary for Bank to perfect and maintain a first priority
  perfected security interest in such property.

  

 

13



6.8 Litigation Cooperation.
  From the date hereof and continuing through the termination of this Agreement,
  make available to Bank, without expense to Bank, Borrower and its officers,
  employees and agents and Borrower's Books and records, to the extent that Bank
  may deem them reasonably necessary to prosecute or defend any third-party suit
  or proceeding instituted by or against Bank with respect to any Collateral or
  relating to Borrower.

  

6.9 Further Assurances.
  Borrower shall execute any further instruments and take further action as Bank
  reasonably requests to perfect or continue Bank's security interest in the Collateral
  or to effect the purposes of this Agreement.

  

7. NEGATIVE COVENANTS

  

Borrower shall not do any of the
  following without Bank's prior written consent.

  

7.1 Dispositions.
  Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively
  a "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.

  

7.2 Changes in Business, Ownership,
  Management or Business Locations. Engage in or permit any of its Subsidiaries
  to engage in any business other than the businesses currently engaged in by
  Borrower or reasonably related thereto, or have a material change in its ownership
  (other than by the sale of Borrower's equity securities in a public offering
  or to venture capital investors so long as Borrower identifies to Bank the venture
  capital investors prior to the closing of the investment), or management. Borrower
  shall not, without at least thirty (30) days prior written notice to Bank: (a)
  relocate its chief executive office, or add any new offices or business locations,
  including warehouses (unless such new offices or business locations contain
  less than Five Thousand Dollars ($5,000.00) in Borrower's assets or property),
  or (b) change its jurisdiction of organization, or (c) change its organizational
  structure or type, or (d) change its legal name, or (e) change any organizational
  number (if any) assigned by its jurisdiction of organization.

  

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

  

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

  

7.5 Encumbrance. Create,
  incur, or allow any Lien on any of its property, or assign or convey any right
  to receive income, including the sale of any Accounts, or permit any of its
  Subsidiaries to do so, except for Permitted Liens, or permit any Collateral
  not to be subject to the first priority security interest granted herein.

  

 

14



7.6 Distributions; Investments.
  (a) Directly or indirectly acquire or own any Person, or make any Investment
  in any Person, other than Permitted Investments, or permit any of its Subsidiaries
  to do so; or (b) pay any dividends or make any distribution or payment or redeem,
  retire or purchase any capital stock.

  

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

  

7.8 Subordinated Debt.
  (a) Make or permit any payment on any Subordinated Debt, except under the terms
  of the subordination, intercreditor, or other similar agreement to which such
  Subordinated Debt is subject, or (b) amend any provision in any document relating
  to the Subordinated Debt which would increase the amount thereof or adversely
  affect the subordination thereof to Obligations owed to Bank.

  

7.9 Compliance. Become
  an "investment company" or a company controlled by an "investment
  company", under the Investment Company Act of 1940, as amended, or undertake
  as one of its important activities extending credit to purchase or carry margin
  stock (as defined in Regulation U of the Board of Governors of the Federal Reserve
  System), or use the proceeds of any Advance for that purpose; fail to meet the
  minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
  Transaction, each as defined in ERISA, to occur; fail to comply with the Federal
  Fair Labor Standards Act or violate any other law or regulation, if the violation
  could reasonably be expected to have a material adverse effect on Borrower's
  business, or permit any of its Subsidiaries to do so; withdraw or permit any
  Subsidiary to withdraw from participation in, permit partial or complete termination
  of, or permit the occurrence of any other event with respect to, any present
  pension, profit sharing and deferred compensation plan which could reasonably
  be expected to result in any liability of Borrower, including any liability
  to the Pension Benefit Guaranty Corporation or its successors or any other governmental
  agency.

  

8. EVENTS OF DEFAULT

  

Any one of the following shall constitute
  an event of default (an "Event of Default") under this Agreement:

  

8.1 Payment Default.
  Borrower fails to pay any of the Obligations when due;

  

8.2 Covenant Default.
  Borrower fails or neglects to perform any obligation in Section 6 or violates
  any covenant in Section 7 or fails or neglects to perform, keep, or observe
  any other material term, provision, condition, covenant or agreement contained
  in this Agreement, any Loan Documents, or in any present or future agreement
  between Borrower and Bank;

  

8.3 Material Adverse Change.
  A Material Adverse Change occurs;

  

 

15



8.4 Attachment; Levy; Restraint
  on Business. (a) (i) The service of process seeking to attach, by trustee
  or similar process, any funds of Borrower or of any entity under control of
  Borrower (including a Subsidiary) on deposit with Bank or any Bank Affiliate,
  or (ii) a notice of lien, levy, or assessment is filed against any of Borrower's
  assets by any government agency, and the same under subclauses (i) and (ii)
  hereof are not, within ten (10) days after the occurrence thereof, discharged
  or stayed (whether through the posting of a bond or otherwise); provided, however,
  no Advances shall be made during any ten (10) day cure period; or (b) (i) any
  material portion of Borrower's assets is attached, seized, levied on, or comes
  into possession of a trustee or receiver, or (ii) any court order enjoins, restrains,
  or prevents Borrower from conducting any part of its business;

  

8.5 Insolvency. (a)
  Borrower is unable to pay its debts (including trade debts) as they become due
  or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding;
  or (c) an Insolvency Proceeding is begun against Borrower and not dismissed
  or stayed within thirty (30) days (but no Advances shall be made while of any
  of the conditions described in clause (d) exist and/or until any Insolvency
  Proceeding is dismissed);

  

8.6 Other Agreements.
  If there is a default in any agreement to which Borrower is a party with a third
  party or parties resulting in a right by such third party or parties, whether
  or not exercised, to accelerate the maturity of any Indebtedness in an amount
  in excess of One Hundred Thousand Dollars ($100,000) or that could result in
  a Material Adverse Change;

  

8.7 Judgments. One
  or more judgments, orders, or decrees for the payment of money in an amount,
  individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000)
  (not covered by independent third-party insurance as to which liability has
  been accepted by such insurance carrier) shall be rendered against Borrower
  and shall remain unsatisfied, unvacated, or unstayed for a period of ten (10)
  days after the entry thereof (provided that no Advances will be made prior to
  the satisfaction, vacation, or stay of such judgment, order, or decree);

  

8.8 Misrepresentations.
  Borrower or any Person acting for Borrower makes any representation, warranty,
  or other statement now or later in this Agreement, any Loan Document or in writing
  delivered to Bank or to induce Bank to enter this Agreement or any Loan Document,
  and such representation, warranty, or other statement is incorrect in any material
  respect when made;

  

8.9 EXIM Agreement.
  The occurrence of any Event of Default under the EXIM Agreement. 

  

8.10 Subordinated Debt.
  A default or breach occurs under any agreement between Borrower and any creditor
  of Borrower that signed a subordination agreement, intercreditor agreement,
  or other similar agreement with Bank, or any creditor that has signed such an
  agreement with Bank breaches any terms of the agreement;

  

9. BANK'S RIGHTS AND REMEDIES

  

9.1 Rights and Remedies.
  When an Event of Default occurs and continues Bank may, without notice or demand,
  do any or all of the following:

  

 

16



(a) Declare all Obligations immediately
  due and payable (but if an Event of Default described in Section 8.3 occurs
  all Obligations are immediately due and payable without any action by Bank);

  

(b) Stop advancing money or extending
  credit for Borrower's benefit under this Agreement or under any other agreement
  between Borrower and Bank;

  

(c) Settle or adjust disputes and
  claims directly with Account Debtors for amounts, on terms and in any order
  that Bank considers advisable and notify any Person owing Borrower money of
  Bank's security interest in such funds and verify the amount of such account.
  Borrower shall collect all payments in trust for Bank and, if requested by Bank,
  immediately deliver the payments to Bank in the form received from the Account
  Debtor, with proper endorsements for deposit;

  

(d) Make any payments and do any
  acts it considers necessary or reasonable to protect its security interest in
  the Collateral. Borrower shall assemble the Collateral if Bank requests and
  make it available as Bank designates. Bank may enter premises where the Collateral
  is located, take and maintain possession of any part of the Collateral, and
  pay, purchase, contest, or compromise any Lien which appears to be prior or
  superior to its security interest and pay all expenses incurred. Borrower grants
  Bank a license to enter and occupy any of its premises, without charge, to exercise
  any of Bank's rights or remedies;

  

(e) Apply to the Obligations any
  (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank
  owing to or for the credit or the account of Borrower;

  

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

  

(g) Place a "hold" on
  any account maintained with Bank and/or deliver a notice of exclusive control,
  any entitlement order, or other directions or instructions pursuant to any control
  agreement or similar agreements providing control of any Collateral;

  

(h) Demand and receive possession
  of Borrower's Books; and

  

(i) Exercise all rights and remedies
  available to Bank under the Loan Documents or at law or equity, including all
  remedies provided by the Code (including disposal of the Collateral pursuant
  to the terms thereof).

  

9.2 Protective Payments.
  If Borrower fails to obtain insurance called for by Section 6.4 or fails to
  pay any premium thereon or fails to pay any other amount which Borrower is obligated
  to pay under this Agreement or by any other Loan Document, Bank may obtain such
  insurance or make such payment, and all amounts so paid by Bank are Bank Expenses
  and immediately due and payable, bearing interest at the then highest applicable
  rate, and secured by the Collateral. Bank will make reasonable effort to provide
  Borrower with notice of Bank obtaining such insurance at the time it is obtained
  or within a reasonable time thereafter. No payments by Bank are deemed an agreement
  to make similar payments in the future or Bank's waiver of any Event of Default.

  

 

17



9.3 Bank's Liability for Collateral.
  So long as Bank complies with reasonable banking practices regarding the safekeeping
  of Collateral in possession or under the control of Bank, Bank shall not be
  liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss
  or damage to the Collateral; (c) any diminution in the value of the Collateral;
  or (d) any act or default of any carrier, warehouseman, bailee, or other Person.
  Borrower bears all risk of loss, damage or destruction of the Collateral.

  

9.4 Remedies Cumulative.
  Bank's failure, at any time or times, to require strict performance by Borrower
  of any provision of this Agreement or any other Loan Document shall not waive,
  affect, or diminish any right of Bank thereafter to demand strict performance
  and compliance herewith or therewith. No waiver hereunder shall be effective
  unless signed by Bank and then is only effective for the specific instance and
  purpose for which it is given. Bank's rights and remedies under this Agreement
  and the other Loan Documents are cumulative. Bank has all rights and remedies
  provided under the Code, by law, or in equity. Bank's exercise of one right
  or remedy is not an election, and Bank's waiver of any Event of Default is not
  a continuing waiver. Bank's delay in exercising any remedy is not a waiver,
  election, or acquiescence.

  

9.5 Demand Waiver.
  Borrower waives demand, notice of default or dishonor, notice of payment and
  nonpayment, notice of any default, nonpayment at maturity, release, compromise,
  settlement, extension, or renewal of accounts, documents, instruments, chattel
  paper, and guarantees held by Bank on which Borrower is liable.

  

10. NOTICES.

  

All notices, consents, requests,
  approvals, demands, or other communication by any party to this Agreement or
  any other Loan Document must be in writing and shall be deemed to have been
  validly served, given, or delivered: (a) upon the earlier of actual receipt
  and three (3) Business Days after deposit in the U.S. mail, first class, registered
  or certified mail return receipt requested, with proper postage prepaid; (b)
  upon transmission, when sent by facsimile transmission; (c) one (1) Business
  Day after deposit with a reputable overnight courier with all charges prepaid;
  or (d) when delivered, if hand-delivered by messenger, all of which shall be
  addressed to the party to be notified and sent to the address or facsimile number
  provided at the beginning of this Agreement. Bank or Borrower may change its
  address or facsimile number by giving the other party written notice thereof
  in accordance with the terms of this Section 10.

  

 

18



11. CHOICE OF LAW, VENUE,
  JURY TRIAL WAIVER AND JUDICIAL REFERENCE

  

California law governs the Loan
  Documents without regard to principles of conflicts of law. Borrower and Bank
  each submit to the exclusive jurisdiction of the State and Federal courts in
  Santa Clara County, California; provided, however, that nothing in this Agreement
  shall be deemed to operate to preclude Bank from bringing suit or taking other
  legal action in any other jurisdiction to realize on the Collateral or any other
  security for the Obligations, or to enforce a judgment or other court order
  in favor of Bank. Borrower expressly submits and consents in advance to such
  jurisdiction in any action or suit commenced in any such court, and Borrower
  hereby waives any objection that it may have based upon lack of personal jurisdiction,
  improper venue, or forum non conveniens and hereby consents to the granting
  of such legal or equitable relief as is deemed appropriate by such court. Borrower
  hereby waives personal service of the summons, complaints, and other process
  issued in such action or suit and agrees that service of such summons, complaints,
  and other process may be made by registered or certified mail addressed to Borrower
  at the address set forth in Section 10 of this Agreement and that service so
  made shall be deemed completed upon the earlier to occur of Borrower's actual
  receipt thereof or three (3) days after deposit in the U.S. mails, proper postage
  prepaid.

  

TO THE FULLEST EXTENT PERMITTED
  BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL
  OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT,
  THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT,
  BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR
  BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER
  WITH ITS COUNSEL.

  

WITHOUT INTENDING IN ANY WAY TO
  LIMIT THE PARTIES' AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY,
  if the above waiver of the right to a trial by jury is not enforceable, the
  parties hereto agree that any and all disputes or controversies of any nature
  between them arising at any time shall be decided by a reference to a private
  judge, mutually selected by the parties (or, if they cannot agree, by the Presiding
  Judge of the Santa Clara County, California Superior Court) appointed in accordance
  with California Code of Civil Procedure Section 638 (or pursuant to comparable
  provisions of federal law if the dispute falls within the exclusive jurisdiction
  of the federal courts), sitting without a jury, in Santa Clara County, California;
  and the parties hereby submit to the jurisdiction of such court. The reference
  proceedings shall be conducted pursuant to and in accordance with the provisions
  of California Code of Civil Procedure §§ 638 through 645.1, inclusive.
  The private judge shall have the power, among others, to grant provisional relief,
  including without limitation, entering temporary restraining orders, issuing
  preliminary and permanent injunctions and appointing receivers. All such proceedings
  shall be closed to the public and confidential and all records relating thereto
  shall be permanently sealed. If during the course of any dispute, a party desires
  to seek provisional relief, but a judge has not been appointed at that point
  pursuant to the judicial reference procedures, then such party may apply to
  the Santa Clara County, California Superior Court for such relief. The proceeding
  before the private judge shall be conducted in the same manner as it would be
  before a court under the rules of evidence applicable to judicial proceedings.
  The parties shall be entitled to discovery which shall be conducted in the same
  manner as it would be before a court under the rules of discovery applicable
  to judicial proceedings. The private judge shall oversee discovery and may enforce
  all discovery rules and order applicable to judicial proceedings in the same
  manner as a trial court judge. The parties agree that the selected or appointed
  private judge shall have the power to decide all issues in the action or proceeding,
  whether of fact or of law, and shall report a statement of decision thereon
  pursuant to the California Code of Civil Procedure § 644(a). Nothing in
  this paragraph shall limit the right of any party at any time to exercise self-help
  remedies, foreclose against collateral, or obtain provisional remedies. The
  private judge shall also determine all issues relating to the applicability,
  interpretation, and enforceability of this paragraph.

  

 

19



12. GENERAL PROVISIONS

  

12.1 Successors and Assigns.
  This Agreement binds and is for the benefit of the successors and permitted
  assigns of each party. Borrower may not assign this Agreement or any rights
  or obligations under it without Bank's prior written consent which may be granted
  or withheld in Bank's discretion. Bank has the right, without the consent of
  or notice to Borrower, to sell, transfer, negotiate, or grant participation
  in all or any part of, or any interest in, Bank's obligations, rights and benefits
  under this Agreement, the Loan Documents or any related agreement.

  

12.2 Indemnification.
  Borrower agrees to indemnify, defend, and hold Bank and its officers, directors,
  employees, agents, attorneys or any other Person affiliated with or representing
  Bank (each, an "Indemnified Person") harmless against: (a) all obligations,
  demands, claims, and liabilities (collectively, "Claims") asserted
  by any other party in connection with the transactions contemplated by the Loan
  Documents; and (b) all losses or Bank Expenses incurred, or paid by such Indemnified
  Person from, following, or arising from transactions between Bank and Borrower
  (including reasonable attorneys' fees and expenses), except for Claims and/or
  losses directly caused by such Indemnified Person's gross negligence or willful
  misconduct.

  

12.3 Time of Essence.
  Time is of the essence for the performance of all Obligations in this Agreement.

  

12.4 Severability of Provisions.
  Each provision of this Agreement is severable from every other provision in
  determining the enforceability of any provision.

  

12.5 Correction of Loan Documents.
  Bank may correct patent errors and fill in any blanks in this Agreement and
  the other Loan Documents consistent with the agreement of the parties.

  

12.6 Amendments in Writing;
  Integration. All amendments to this Agreement must be in writing signed
  by both Bank and Borrower. This Agreement and the Loan Documents represent the
  entire agreement about this subject matter, and supersede prior negotiations
  or agreements. All prior agreements, understandings, representations, warranties,
  and negotiations between the parties about the subject matter of this Agreement
  and the Loan Documents merge into this Agreement and the Loan Documents.

  

12.7 Counterparts.
  This Agreement may be executed in any number of counterparts and by different
  parties on separate counterparts, each of which, when executed and delivered,
  are an original, and all taken together, constitute one Agreement.

  

12.8 Survival. All
  covenants, representations and warranties made in this Agreement continue in
  full force until this Agreement has terminated pursuant to its terms and all
  Obligations (other than inchoate indemnity obligations and any other obligations
  which, by their terms, are to survive the termination of this Agreement) have
  been satisfied. The obligation of Borrower in Section 12.2 to indemnify Bank
  shall survive until the statute of limitations with respect to such claim or
  cause of action shall have run.

  

 

20



12.9 Confidentiality.
  In handling any confidential information, Bank shall exercise the same degree
  of care that it exercises for its own proprietary information, but disclosure
  of information may be made: (a) to Bank's Subsidiaries or Affiliates; (b) to
  prospective transferees or purchasers of any interest in the Advances (provided,
  however, Bank shall use commercially reasonable efforts to obtain such prospective
  transferee's or purchaser's agreement to the terms of this provision); (c) as
  required by law, regulation, subpoena, or other order; (d) to Bank's regulators
  or as otherwise required in connection with Bank's examination or audit; (e)
  as Bank considers appropriate in exercising remedies under the Loan Documents;
  and (f) to third-party service providers of Bank so long as such service providers
  have executed a confidentiality agreement with Bank with terms no less restrictive
  than those contained herein. Confidential information does not include information
  that either: (i) is in the public domain or in Bank's possession when disclosed
  to Bank, or becomes part of the public domain after disclosure to Bank; or (ii)
  is disclosed to Bank by a third party, if Bank does not know that the third
  party is prohibited from disclosing the information.

  

Bank may use confidential information
  for any purpose, including, without limitation, for the development of client
  databases, reporting purposes, and market analysis, so long as Bank does not
  disclose Borrower's identity or the identity of any person associated with Borrower
  unless otherwise expressly permitted by this Agreement. The provisions of the
  immediately preceding sentence shall survive the termination of this Agreement.

  

12.10 Attorneys' Fees, Costs
  and Expenses. In any action or proceeding between Borrower and Bank
  arising out of or relating to the Loan Documents, the prevailing party shall
  be entitled to recover its reasonable attorneys' fees and other costs and expenses
  incurred, in addition to any other relief to which it may be entitled.

  

13. DEFINITIONS

  

13.1 Definitions.
  In this Agreement:

  

"Account" is any
  "account" as defined in the Code with such additions to such term
  as may hereafter be made, and includes, without limitation, all accounts receivable
  and other sums owing to Borrower.

  

"Account Debtor"
  is as defined in the Code and shall include, without limitation, any person
  liable on any Financed Receivable, such as, a guarantor of the Financed Receivable
  and any issuer of a letter of credit or banker's acceptance.

  

"Adjustments" are
  all discounts, allowances, returns, disputes, counterclaims, offsets, defenses,
  rights of recoupment, rights of return, warranty claims, or short payments,
  asserted by or on behalf of any Account Debtor for any Financed Receivable.

  

"Advance" is defined
  in Section 2.1.1.

  

 

21



"Advance Rate"
  is eighty percent (80.0%), net of any offsets related to each specific Account
  Debtor, provided, however, that with respect to any Account Debtor which is
  a distributor, the Advance Rate shall be sixty percent (60%). 

  

"Affiliate" of
  any Person is a Person that owns or controls directly or indirectly the Person,
  any Person that controls or is controlled by or is under common control with
  the Person, and each of that Person's senior executive officers, directors,
  partners and, for any Person that is a limited liability company, that Person's
  managers and members.

  

"Applicable Rate"
  is a per annum rate equal to the greater of either (i) the Prime Rate plus two
  percent (2.0%), or (ii) six percent (6.0%).

  

"Availability"
  means, as the date of determination, an amount equal to One Million Dollars
  ($1,000,000) minus all outstanding Credit Extensions. 

  

"Bank Expenses"
  are all audit fees and expenses, costs, and expenses (including reasonable attorneys'
  fees and expenses) for preparing, amending, negotiating, administering, defending
  and enforcing the Loan Documents (including, without limitation, those incurred
  in connection with appeals or Insolvency Proceedings) or otherwise incurred
  with respect to Borrower.

  

"Borrower's Books"
  are all Borrower's books and records including ledgers, federal and state tax
  returns, records regarding Borrower's assets or liabilities, the Collateral,
  business operations or financial condition, and all computer programs or storage
  or any equipment containing such information.

  

"Business Day"
  is any day that is not a Saturday, Sunday or a day on which Bank is closed.

  

"Cash Equivalents"
  means (a) marketable direct obligations issued or unconditionally guaranteed
  by the United States or any agency or any State thereof having maturities of
  not more than one (1) year from the date of acquisition; (b) commercial paper
  maturing no more than one (1) year after its creation and having the highest
  rating from either Standard & Poor's Ratings Group or Moody's Investors
  Service, Inc.; (c) Bank's certificates of deposit issued maturing no more than
  one (1) year after issue. 

  

"Code" is the Uniform
  Commercial Code, as the same may, from time to time, be enacted and in effect
  in the State of California; provided, that, to the extent that the Code is used
  to define any term herein or in any Loan Document and such term is defined differently
  in different Articles or Divisions of the Code, the definition of such term
  contained in Article or Division 9 shall govern; provided further, that in the
  event that, by reason of mandatory provisions of law, any or all of the attachment,
  perfection, or priority of, or remedies with respect to, Bank's Lien on any
  Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction
  other than the State of California, the term "Code" shall mean the
  Uniform Commercial Code as enacted and in effect in such other jurisdiction
  solely for purposes on the provisions thereof relating to such attachment, perfection,
  priority, or remedies and for purposes of definitions relating to such provisions.

  

 

22



"Collateral" is
  any and all properties, rights and assets of Borrower described on Exhibit A.

  

"Collateral Handling Fee"
  is defined in Section 2.2.3.

  

"Collections" are
  all funds received by Bank from or on behalf of an Account Debtor for Financed
  Receivables.

  

"Compliance Certificate"
  is attached as Exhibit B.

  

"Contingent Obligation"
  is, for any Person, any direct or indirect liability, contingent or not, of
  that Person for (a) any indebtedness, lease, dividend, letter of credit or other
  obligation of another such as an obligation directly or indirectly guaranteed,
  endorsed, co-made, discounted or sold with recourse by that Person, or for which
  that Person is directly or indirectly liable; (b) any obligations for undrawn
  letters of credit for the account of that Person; and (c) all obligations from
  any interest rate, currency or commodity swap agreement, interest rate cap or
  collar agreement, or other agreement or arrangement designated to protect a
  Person against fluctuation in interest rates, currency exchange rates or commodity
  prices; but "Contingent Obligation" does not include endorsements
  in the ordinary course of business. The amount of a Contingent Obligation is
  the stated or determined amount of the primary obligation for which the Contingent
  Obligation is made or, if not determinable, the maximum reasonably anticipated
  liability for it determined by the Person in good faith; but the amount may
  not exceed the maximum of the obligations under any guarantee or other support
  arrangement.

  

"Current Liabilities"
  are all obligations and liabilities of Borrower to Bank, plus, without duplication,
  the aggregate amount of Borrower's Total Liabilities that mature within one
  (1) year.

  

"Deferred Revenue"
  is all amounts received or invoiced, as appropriate, in advance of performance
  under contracts and not yet recognized as revenue.

  

"Early Termination Fee"
  is defined in Section 2.1.1.

  

"Effective Date"
  is the date Bank executes this Agreement as indicated on the signature page
  hereof.

  

"Eligible Accounts"
  are billed Accounts in the ordinary course of Borrower's business that meet
  all Borrower's representations and warranties in Section 5.3, have been, at
  the option of Bank, confirmed in accordance with Section 2.1.1(d), and are due
  and owing from Account Debtors deemed creditworthy by Bank in its sole discretion.
  Without limiting the fact that the determination of which Accounts are eligible
  hereunder is a matter of Bank discretion in each instance, Eligible Accounts
  shall not include the following Accounts (which listing may be amended or changed
  in Bank's discretion with notice to Borrower):

  

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

  

 

23



(b) Accounts billed in the United
  States and owing from an Account Debtor which does not have its principal place
  of business in the United States or Canada unless such Accounts are otherwise
  Eligible Accounts and (i) covered in full by credit insurance satisfactory to
  Bank, less any deductible, (ii) supported by letter(s) of credit acceptable
  to Bank, (iii) supported by a guaranty from the Export-Import Bank of the United
  States, or (iv) that Bank otherwise approves of in writing;

  

(c) Accounts billed and payable
  outside of the United States unless the Bank has a first priority, perfected
  security interest or other enforceable Lien in such Accounts;

  

(d) 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;

  

(e) Accounts for which the Account
  Debtor is Borrower's Affiliate, officer, employee, or agent; 

  

(f) 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;

  

(g) 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;

  

(h) 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);

  

(i) 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);

  

(j) 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);

  

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

  

(l) 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);

  

 

24



(m) Accounts for which the Account
  Debtor has not been invoiced;

  

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

  

(o) Accounts subject to chargebacks
  or others payment deductions taken by an Account Debtor (but only to the extent
  the chargeback is determined invalid and subsequently collected by Borrower);

  

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

  

(q) 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; and

  

(r) Accounts for which Bank in its
  good faith business judgment determines collection to be doubtful.

  

"ERISA" is the
  Employee Retirement Income Security Act of 1974, and its regulations.

  

"Events of Default"
  are set forth in Article 8.

  

"Exim Agreement"
  means that certain Second Amended and Restated Export-Import Bank Loan and Security
  Agreement by and between Borrower and the Bank, dated as of the effective date,
  as the same may be modified, amended, supplemented or restated from time to
  time. 

  

"Facility Amount"
  is One Million Two Hundred Fifty Thousand Dollars ($1,250,000).

  

"Facility Fee"
  is defined in Section 2.2.1.

  

"Finance Charges"
  is defined in Section 2.2.2.

  

"Financed Receivables"
  are all those Eligible Accounts, including their proceeds which Bank finances
  and makes an Advance, as set forth in Section 2.1.1. A Financed Receivable stops
  being a Financed Receivable (but remains Collateral) when the Advance made for
  the Financed Receivable has been fully paid.

  

"Financed Receivable Balance"
  is the total outstanding gross face amount, at any time, of any Financed Receivable.

  

"GAAP" is generally
  accepted accounting principles set forth in the opinions and pronouncements
  of the Accounting Principles Board of the American Institute of Certified Public
  Accountants and statements and pronouncements of the Financial Accounting Standards
  Board or in such other statements by such other Person as may be approved by
  a significant segment of the accounting profession, which are applicable to
  the circumstances as of the date of determination.

  

 

25



"General Intangibles"
  is all "general intangibles" as defined in the Code in effect on the
  date hereof with such additions to such term as may hereafter be made, and includes
  without limitation, all copyright rights, copyright applications, copyright
  registrations and like protections in each work of authorship and derivative
  work, whether published or unpublished, any patents, trademarks, service marks
  and, to the extent permitted under applicable law, any applications therefor,
  whether registered or not, any trade secret rights, including any rights to
  unpatented inventions, payment intangibles, royalties, contract rights, goodwill,
  franchise agreements, purchase orders, customer lists, route lists, telephone
  numbers, domain names, claims, income and other tax refunds, security and other
  deposits, options to purchase or sell real or personal property, rights in all
  litigation presently or hereafter pending (whether in contract, tort or otherwise),
  insurance policies (including without limitation key man, property damage, and
  business interruption insurance), payments of insurance and rights to payment
  of any kind. 

  

"Governmental Approval"
  is any consent, authorization, approval, order, license, franchise, permit,
  certificate, accreditation, registration, filing or notice, of, issued by, from
  or to, or other act by or in respect of, any Governmental Authority.

  

"Governmental Authority"
  is any nation or government, any state or other political subdivision thereof,
  any agency, authority, instrumentality, regulatory body, court, central bank
  or other entity exercising executive, legislative, judicial, taxing, regulatory
  or administrative functions of or pertaining to government, any securities exchange
  and any self-regulatory organization.

  

"Indebtedness"
  is (a) indebtedness for borrowed money or the deferred price of property or
  services, such as reimbursement and other obligations for surety bonds and letters
  of credit, (b) obligations evidenced by notes, bonds, debentures or similar
  instruments, (c) capital lease obligations and (d) Contingent Obligations.

  

"Indemnified Person"
  is defined in Section 12.2.

  

"Insolvency Proceeding"
  is any proceeding by or against any Person under the United States Bankruptcy
  Code, or any other bankruptcy or insolvency law, including assignments for the
  benefit of creditors, compositions, extensions generally with its creditors,
  or proceedings seeking reorganization, arrangement, or other relief.

  

"Intellectual Property Collateral"
  is defined in the IP Agreement.

  

"Inventory" is
  all "inventory" as defined in the Code in effect on the date hereof
  with such additions to such term as may hereafter be made, and includes without
  limitation all merchandise, raw materials, parts, supplies, packing and shipping
  materials, work in process and finished products, including without limitation
  such inventory as is temporarily out of Borrower's custody or possession or
  in transit and including any returned goods and any documents of title representing
  any of the above.

  

 

26



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

  

"Invoice Transmittal"
  shows Eligible Accounts which Bank may finance and, for each such Account, includes
  the Account Debtor's, name, address, invoice amount, invoice date and invoice
  number.

  

"IP Agreement"
  is that certain Intellectual Property Security Agreement executed and delivered
  by Borrower to Bank dated as of March 10, 2004, as amended through the Effective
  Date by that certain Intellectual Property Security Agreement Addendum. 

  

"Lien" is a claim,
  mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance
  of any kind, whether voluntarily incurred or arising by operation of law or
  otherwise against any property.

  

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

  

"Lockbox" is defined
  in Section 2.2.6.

  

"Material Adverse Change"
  is: (a) a material impairment in the perfection or priority of Bank's security
  interest in the Collateral or in the value of such Collateral; (b) a material
  adverse change in the business, operations, or condition (financial or otherwise)
  of Borrower; or (c) a material impairment of the prospect of repayment of any
  portion of the Obligations; (d) Bank determines, based upon information available
  to it and in its reasonable judgment, that there is a reasonable likelihood
  that Borrower shall fail to comply with one or more of the financial covenants
  in Section 6 during the next succeeding financial reporting period.

  

"Maturity Date"
  is February 15, 2009.

  

"Obligations" are
  Borrower's obligation to pay when due any debts, principal, interest, Bank Expenses,
  and other amounts Borrower owes Bank now or later, whether under this Agreement,
  the Loan Documents, or otherwise, including, without limitation, any interest
  accruing after Insolvency Proceedings begin and debts, liabilities, or obligations
  of Borrower assigned to Bank, and the performance of Borrower's duties under
  the Loan Documents.

  

"Perfection Certificate"
  is a certain Perfection Certificate completed and delivered by Borrower to Bank
  in connection with this Agreement.

  

"Permitted Indebtedness"
  is:

  

(a) Borrower's indebtedness to Bank
  under this Agreement or the Loan Documents;

  

(b) Subordinated Debt;

  

 

27



(c) Indebtedness to trade creditors
  incurred in the ordinary course of business; and

  

(d) Indebtedness secured by Permitted
  Liens.

  

"Permitted Investments"
  are: (i) marketable direct obligations issued or unconditionally guaranteed
  by the United States or its agency or any state maturing within 1 year from
  its acquisition, (ii) commercial paper maturing no more than 1 year after its
  creation and having the highest rating from either Standard & Poor's Corporation
  or Moody's Investors Service, Inc., (iii) Bank's certificates of deposit issued
  maturing no more than 1 year after issue, and (iv) any other investments administered
  through Bank. NOTE: Additional permitted investment provisions may be added
  with Credit Officer approval.

  

"Permitted Liens"
  are:

  

(a) Liens arising under this Agreement
  or other Loan Documents;

  

(b) Liens for taxes, fees, assessments
  or other government charges or levies, either not delinquent or being contested
  in good faith and for which Borrower maintains adequate reserves on its Books,
  if they have no priority over any of Bank's security interests;

  

(c) Leases or subleases and non-exclusive
  licenses or sublicenses granted in the ordinary course of Borrower's business,
  if the leases, subleases, licenses and sublicenses permit granting Bank a security
  interest;

  

(d) Liens incurred in the extension,
  renewal or refinancing of the indebtedness secured by Liens described in (a)
  through (c), but any extension, renewal or replacement Lien must be limited
  to the property encumbered by the existing Lien and the principal amount of
  the indebtedness may not increase.

  

"Person" is any
  individual, sole proprietorship, partnership, limited liability company, joint
  venture, company, trust, unincorporated organization, association, corporation,
  institution, public benefit corporation, firm, joint stock company, estate,
  entity or government agency.

  

"Prime Rate" is
  Bank's most recently announced "prime rate," even if it is not Bank's
  lowest rate.

  

"Reconciliation Day"
  is the last calendar day of each month.

  

"Reconciliation Period"
  is each calendar month.

  

"Registered Organization"
  is any "registered organization" as defined in the Code with such
  additions to such term as may hereafter be made.

  

"Requirement of Law"
  is as to any Person, the organizational or governing documents of such Person,
  and any law (statutory or common), treaty, rule or regulation or determination
  of an arbitrator or a court or other Governmental Authority, in each case applicable
  to or binding upon such Person or any of its property or to which such Person
  or any of its property is subject.

  

 

28



"Responsible Officer"
  is each of the Chief Executive Officer, President, Chief Financial Officer and
  Controller of Borrower. 

  

"Subordinated Debt"
  is indebtedness incurred by Borrower subordinated to all of Borrower's now or
  hereafter indebtedness to Bank (pursuant to a subordination, intercreditor,
  or other similar agreement in form and substance satisfactory to Bank entered
  into between Bank and the other creditor), on terms acceptable to Bank.

  

"Subsidiary" is,
  with respect to any Person, any Person of which more than 50.0% of the voting
  stock or other equity interests (in the case of Persons other than corporations)
  is owned or controlled directly or indirectly by such Person or one or more
  of Affiliates of such Person.

  

"Total Liabilities"
  is on any day, obligations that should, under GAAP, be classified as liabilities
  on Borrower's consolidated balance sheet, including all Indebtedness, and current
  portion of Subordinated Debt permitted by Bank to be paid by Borrower, but excluding
  all other Subordinated Debt.

  

[Signature page follows.]

  

 

 

29



IN WITNESS WHEREOF, the parties
  hereto have caused this Agreement to be executed as of the Effective Date.

  

BORROWER:

SOCKET MOBILE, INC.

By   /s/ David W. Dunlap  

  Name:  David W. Dunlap  

  Title:  Vice President of Finance and Administration and

  Chief Financial Officer (Duly Authorized Officer and

  Principal Financial and Accounting Officer)



  BANK:

SILICON VALLEY BANK

By  /s/ Aman Johal  

  Name:  Aman Johal  

  Title:  Relationship Manager

Effective Date: December 31, 2008

  

  

 



EXHIBIT A

  

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

  

All goods, equipment, inventory,
  contract rights or rights to payment of money, leases, license agreements, franchise
  agreements, general intangibles (including payment intangibles) accounts (including
  health-care receivables), 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), commercial tort claims, securities, and all other investment property,
  supporting obligations, and financial assets, whether now owned or hereafter
  acquired, wherever located; and any copyright rights, copyright applications,
  copyright registrations and like protections in each work of authorship and
  derivative work, whether published or unpublished, now owned or later acquired;
  any patents, trademarks, service marks and applications therefor; trade styles,
  trade names, any trade secret rights, including any rights to unpatented inventions,
  know how, operating manuals, license rights and agreements and confidential
  information, now owned or hereafter acquired; or any claims for damages by way
  of any past, present and future infringement of any of the foregoing; 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

  

  

 SPECIALTY FINANCE
  DIVISION

  Compliance Certificate

  

I, an authorized officer of Socket
  Mobile, Inc. ("Borrower") certify under the Loan and Security Agreement
  (the "Agreement") between Borrower and Silicon Valley Bank ("Bank")
  as follows (all capitalized terms used herein shall have the meaning set forth
  in the Agreement):

  

Borrower represents and warrants
  for each Financed Receivable:

  

Each Financed Receivable is an Eligible
  Account.

  

Borrower is the owner with legal
  right to sell, transfer, assign and encumber such Financed Receivable;

  

The correct amount is on the Invoice
  Transmittal and is not disputed;

  

Payment is not contingent on any
  obligation or contract and Borrower has fulfilled all its obligations as of
  the Invoice Transmittal date;

  

Each Financed Receivable is based
  on an actual sale and delivery of goods and/or services rendered, is due to
  Borrower, is not past due or in default, has not been previously sold, assigned,
  transferred, or pledged and is free of any liens, security interests and encumbrances
  other than Permitted Liens;

  

There are no defenses, offsets,
  counterclaims or agreements for which the Account Debtor may claim any deduction
  or discount;

  

It reasonably believes no Account
  Debtor is insolvent or subject to any Insolvency Proceedings;

  

It has not filed or had filed against
  it Insolvency Proceedings and does not anticipate any filing;

  

Bank has the right to endorse and/
  or require Borrower to endorse all payments received on Financed Receivables
  and all proceeds of Collateral.

  

No representation, warranty or other
  statement of Borrower in any certificate or written statement given to Bank
  contains any untrue statement of a material fact or omits to state a material
  fact necessary to make the statement contained in the certificates or statement
  not misleading.

  

Additionally, Borrower represents
  and warrants as follows:

  

Borrower and each Subsidiary is
  duly existing and in good standing in its state of formation and qualified and
  licensed to do business in, and in good standing in, any state in which the
  conduct of its business or its ownership of property requires that it be qualified
  except where the failure to do so could not reasonably be expected to cause
  a Material Adverse Change. The execution, delivery and performance of the Loan
  Documents have been duly authorized, and do not conflict with Borrower's organizational
  documents, nor constitute an event of default under any material agreement by
  which Borrower is bound. Borrower is not in default under any agreement to which
  or by which it is bound in which the default could reasonably be expected to
  cause a Material Adverse Change.

  

 



Borrower has good title to the Collateral,
  free of Liens except Permitted Liens. All inventory is in all material respects
  of good and marketable quality, free from material defects.

  

Borrower is not an "investment
  company" or a company "controlled" by an "investment company"
  under the Investment Company Act of 1940, as amended. Neither Borrower nor any
  of its Subsidiaries is a "holding company" or an "affiliate"
  of a "holding company" or a "subsidiary company" of a "holding
  company" as each term is defined and used in the Public Utility Holding
  Company Act of 2005. Borrower is not engaged as one of its important activities
  in extending credit for margin stock (under Regulations X, T and U of the Federal
  Reserve Board of Governors). Borrower has complied in all material respects
  with the Federal Fair Labor Standards Act. Borrower has not violated any laws,
  ordinances or rules, the violation of which could reasonably be expected to
  cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties
  or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's
  knowledge, by previous Persons, in disposing, producing, storing, treating,
  or transporting any hazardous substance other than legally. Borrower and each
  Subsidiary has timely filed all required tax returns and paid, or made adequate
  provision to pay, all material taxes, except those being contested in good faith
  with adequate reserves under GAAP. Borrower and each Subsidiary has obtained
  all consents, approvals and authorizations of, made all declarations or filings
  with, and given all notices to, all government authorities that are necessary
  to continue its business as currently conducted except where the failure to
  obtain or make such consents, declarations, notices or filings would not reasonably
  be expected to cause a Material Adverse Change.

  



  



	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) + CC	FYE within 120days	
      Yes No

    
	10 Q, 10 K and 8-K	Within 5 days after filing with SEC	
      Yes No

    
	Borrowing Base Certificate A/R & A/P Agings	Monthly within 30 days	
      Yes No

    
	 	 	
      

    
	The following Intellectual Property was registered
      after the Closing Date (if no registrations, state "None")






  

	Financial Covenant	
      Required

    	
      Actual

    	
      Complies

    
	 	 	 	 
	Maintain on a Monthly Basis: 	 	 	 
	Minimum Liquidity	
      $250,000

    	
      $________ 

    	
      Yes No

    


 

  



All representations and warranties
  in the Agreement are true and correct in all material respects on this date,
  and Borrower represents that there is no existing Event of Default.

  

Sincerely,

Socket Mobile, Inc. 



  ____________________________________

  Signature

____________________________________

  Title

  ____________________________________

  Date