**SECURITY
      AGREEMENT**




This
      Security Agreement (this “ Agreement ”),
      dated
      as of June 23, 2006, is made by **DRUGMAX,
      INC.** ,
      a
      Nevada corporation (“ Borrower ”),
      in
      favor of **DEERFIELD
      SPECIAL SITUATIONS FUND, L.P.** ,
      a
      Delaware limited partnership, as collateral agent for the holders (the
“Holders”) of the Notes referred to below (the “ Collateral
      Agent ”).




**W** **I** **T** **NE** **S** **S** **E** **T** **H**




WHEREAS,
      pursuant to that certain Note and Warrant Purchase Agreement dated as of the
      date hereof (as amended, supplemented or otherwise modified from time to time,
      the “ Note
      and Warrant Purchase Agreement ”)
      entered into by and among Deerfield Special Situations Fund, L.P., Deerfield
      Special Situations Fund International, Limited (collectively, the “ Lenders ”)
      and
      Borrower, the Lenders agreed to make a loan to Borrower, upon the terms and
      subject to the conditions set forth under, and evidenced by, secured promissory
      notes issued by Borrower (the “ Notes ”).




WHEREAS,
      the Note and Warrant Purchase Agreement requires as a condition to extending
      the
      aforementioned loan to Borrower, the Lenders have required Borrower to execute
      and deliver this Agreement and certain other security documents to secure the
      Obligations (as defined below) of Borrower.




ACCORDINGLY,
      in consideration of the mutual covenants contained in the Notes and Warrant
      Purchase Agreement and herein, the parties hereby agree as follows:




1.  Definitions.
      All terms defined in the UCC and not otherwise defined herein have the meanings
      assigned to them in the UCC. In addition, the following terms have the meanings
      set forth below or in the referenced Section of this Agreement:




“ Accounts ”
and
      “ Accounts
      Receivable ”
means
      all of Borrower’s “accounts”, as such term is defined in the UCC, including each
      and every right of Borrower to the payment of money, whether such right to
      payment now exists or hereafter arises, whether such right to payment arises
      out
      of a sale, lease or other disposition of goods or other property, out of a
      rendering of services, out of a loan, out of the overpayment of taxes or other
      liabilities, or otherwise arises under any contract or agreement, whether such
      right to payment is created, generated or earned by Borrower or by some other
      Person who subsequently transfers such Person’s interest to Borrower, whether
      such right to payment is or is not already earned by performance, and howsoever
      such right to payment may be evidenced, together with all other rights and
      interests (including all Liens) which Borrower may at any time have by law
      or
      agreement against any account debtor or other obligor obligated to make any
      such
      payment or against any property of such account debtor or other obligor; all
      including but not limited to all present and future Accounts, Contract Rights,
      loans and obligations receivable, credit card receivables, Health-Care-Insurance
      Receivables, Chattel Paper, bonds, notes and other debt instruments, tax refunds
      and rights to payment in the nature of general intangibles.




“ Affiliate ”
shall
      mean, with respect to any specified Person, any other Person that directly
      or
      indirectly, through one or more intermediaries, has control of, is controlled
      by, or is under common control with, such specified Person. For these purposes,
      “control” means the possession, directly or indirectly, of the power to direct
      or cause the direction of the management of any Person, whether through the
      ownership of voting securities, by contract or otherwise.







“ Business
      Day ”
means
      a
      day of the year other than a Saturday or Sunday on which banks are not required
      or authorized to close in New York, New York.




“ Chattel
      Paper ”
has
      the
      meaning given that term in the UCC.




“ Collateral ”
means
      all of Borrower’s Accounts (including Health Care Insurance Receivables),
      Accounts Receivable, Contract Rights, Commercial Tort Claims, Chattel Paper
      (whether Tangible or Electronic), Deposit Accounts, Documents, Equipment,
      General Intangibles (including Payment Intangibles and Software), Goods,
      Instruments (including any Promissory Notes), Inventory, Investment Property,
      Letter-of-Credit Rights, all Patents (including all patent applications), all
      Patent Licenses, all Trademarks (including all trademark applications), all
      Trademark Licenses, Vehicles and all Supporting Obligations; together with
      (i)
      all substitutions and replacements for and products of any of the foregoing;
      (ii) in the case of all goods, all accessions; (iii) all accessories,
      attachments, parts, equipment and repairs now or hereafter attached or affixed
      to or used in connection with any goods; (iv) all warehouse receipts, bills
      of
      lading and other documents of title now or hereafter covering such goods; (v)
      any money, or other assets of Borrower that now or hereafter come into
      Collateral Agent’s or any Holder’s possession, custody, or control; and (vi)
      proceeds of any and all of the foregoing.




“ Commercial
      Tort Claims ”
has
      the
      meaning given that term in the UCC.




“ Contract
      Rights ”
      includes, without limitation, “contract rights” as now or formerly defined in
      the UCC and also any right to payment under a contract not yet earned by
      performance and not evidenced by an instrument or Chattel Paper.




“ Deposit
      Accounts ”
means
      a
      demand, time, savings, passbook, or other similar account maintained by a bank.
      The term does not include investment property or accounts evidenced by an
      instrument.




“ Documents ”
has
      the
      meaning given that term in the UCC.




“ Electronic
      Chattel Paper ”
means
      Chattel Paper evidenced by a record or records consisting of information stored
      in an electronic medium.




“ Equipment ”
means
      all of Borrower’s equipment, as such term is defined in the UCC, whether now
      owned or hereafter acquired, including but not limited to all present and future
      machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
      equipment, office and recordkeeping equipment, parts, tools, supplies, and
      including specifically the goods described in any equipment schedule or list
      herewith or hereafter furnished to Collateral Agent by Borrower.




“ Event
      of Default ”
has
      the
      meaning given in Section 5.




“ Farm
      Products ”
has
      the
      meaning given that term in the UCC.




“ Financial
      Assets ”
has
      the
      meaning given such term in the UCC.




2


“ General
      Intangibles ”
means
      all of Borrower’s general intangibles, as such term is defined in the UCC,
      whether now owned or hereafter acquired; and also all rights to payment for
      credit extended; deposits; amounts due to Borrower; credit memoranda in favor
      of
      Borrower; warranty claims; tax refunds and abatements; insurance refunds and
      premium rebates; all means and vehicles of investment or hedging, including,
      without limitation, options, warrants, and futures contracts; records; customer
      lists; telephone numbers; goodwill; causes of action; judgments; payments under
      any settlement or other agreement; literary rights; rights to performance;
      royalties; license and/or franchise fees; rights of admission; licenses;
      franchises; license agreements, including all rights of Borrower to enforce
      same; permits, certificates of convenience and necessity, and similar rights
      granted by any governmental authority; patents, patent applications, patents
      pending, and other intellectual property; developmental ideas and concepts;
      proprietary processes; blueprints, drawings, designs, diagrams, plans, reports,
      and charts; catalogs; manuals; technical data; computer software programs
      (including the source and object codes therefor), computer records, computer
      software, rights of access to computer record service bureaus, service bureau
      computer contracts, and computer data; tapes, disks, semi-conductors chips
      and
      printouts; trade secrets rights, copyrights, mask work rights and interests,
      and
      derivative works and interests; user, technical reference, and other manuals
      and
      materials; trade names, trademarks, service marks, and all goodwill relating
      thereto; applications for registration of the foregoing; and all other general
      intangible property of Borrower in the nature of intellectual property;
      proposals; cost estimates, and reproductions on paper, or otherwise, of any
      and
      all concepts or ideas, and any matter related to, or connected with, the design,
      development, manufacture, sale, marketing, leasing, or use of any or all
      property produced, sold, or leased, by Borrower or credit extended or services
      performed, by Borrower, whether intended for an individual customer or the
      general business of Borrower, or used or useful in connection with research
      by
      Borrower.




“ Goods ”
has
      the
      meaning given that term in the UCC.




“ Health-Care-Insurance
      Receivables ”
means
      an interest in, or claim under, a policy of insurance which is a right to
      payment of a monetary obligation for healthcare goods or services provided.




“ Instruments ”
has
      the
      meaning given that term in the UCC.




“ Inventory ”
means
      all of Borrower’s inventory, as such term is defined in the UCC, whether now
      owned or hereafter acquired, whether consisting of whole goods, spare parts
      or
      components, supplies or materials, whether acquired, held or furnished for
      sale,
      for lease or under service contracts or for manufacture or processing, and
      wherever located.




“ Investment
      Property ”
means
      all of Borrower’s investment property, as such term is defined in the UCC,
      whether now owned or hereafter acquired, including but not limited to all
      securities, security entitlements, securities accounts, commodity contracts,
      commodity accounts, stocks, bonds, mutual fund shares, money market shares
      and
      U.S. Government securities.




“ Letter-of-Credit
      Rights ”
means
      a
      right to payment or performance under a letter of credit, whether or not the
      beneficiary has demanded or is at the time entitled to demand payment or
      performance. The term does not include the right of a beneficiary to demand
      payment or performance under a letter of credit.




3


“ Lien ”
means
      any security interest, mortgage, deed of trust, pledge, lien, charge,
      encumbrance, title retention agreement or analogous instrument or device,
      including the interest of each lessor under any capitalized lease and the
      interest of any bondsman under any payment or performance bond, in, of or on
      any
      assets or properties of a Person, whether now owned or hereafter acquired and
      whether arising by agreement or operation of law.




“ Obligations ”
means
      the unpaid principal amount of, and interest on, the Notes and all other
      obligations and liabilities of the Borrower to the Holders or the Collateral
      Agent, whether direct or indirect, absolute or contingent, due or to become
      due,
      or now existing or hereafter incurred, which may arise under, out of, or in
      connection with, the Notes, the Note and Warrant Purchase Agreement or this
      Agreement and any other document executed and delivered in connection therewith
      or herewith, whether on account of principal, interest, reimbursement
      obligations, fees, indemnities, costs, or otherwise.




“ Patents ”
means
      (a) all letters patent of the United States and all reissues and extension
      thereof, including, without limitation, any thereof referred to in Schedule
      I
      hereto, and (b) all applications for letters patent of the United States and
      all
      divisions, continuations and continuations-in-part thereof or any other country,
      including, without limitation, any thereof referred to in Schedule I
      thereto.




“ Patent
      License ”
means
      all agreements, whether written or oral, providing for the grant by Borrower
      of
      any right to manufacture, use or sell any invention covered by a Patent,
      including, without limitation, any thereof referred to in Schedule I
      hereto.




“ Payment
      Intangibles ”
means
      a
      General Intangible under which the Account debtor’s principal obligation is a
      monetary obligation.




“ Permitted
      Liens ”
means
      (i) the Security Interest, (ii) Liens permitted pursuant to Section 5.12(b)
      of
      the Note and Warrant Purchase Agreement, (iii) covenants, restrictions, rights,
      easements and minor irregularities in title which do not materially interfere
      with the Borrower’s business or operations as presently conducted, and (iii) as
      to after acquired property, any Lien subject to which such property is
      acquired.




" Person "
      shall
      mean any individual, partnership, corporation, limited liability company,
      unincorporated organization or association, trust or other entity.




“ Promissory
      Notes ”
means
      an instrument that evidences a promise to pay a monetary obligation, does not
      evidence an order to pay, and does not contain an acknowledgment by a bank
      that
      the bank has received for deposit a sum of money of funds.




“ Securities ”
has
      the
      meaning given that term in the UCC.




“ Security
      Interest ”
has
      the
      meaning given in Section 2.




4


“ Software ”
means
      a
      computer program and any supporting information provided in connection with
      a
      transaction relating to the program. The term does not include a computer
      program that is included in the definition of Goods.




“ Supporting
      Obligations ”
means
      a
      Letter-of-Credit Right, or secondary obligation that supports the payment or
      performance of an Account, Chattel Paper, a Document, a General Intangible,
      an
      Instrument or Investment Property.




“ Tangible
      Chattel Paper ”
means
      Chattel Paper evidenced by a record or records consisting of information that
      is
      inscribed on a tangible medium.




“ Trademarks ”
means
      (a) all trademarks, trade names, corporate names, company names, business names,
      fictitious business names, trade styles, service marks, logos and other source
      or business identifiers, and the goodwill associated therewith, now existing
      or
      hereafter adopted or acquired, all registrations and recordings thereof, and
      all
      applications in connection therewith, whether in the United States Patent and
      Trademark Office or in any similar office or agency of the United States, any
      State thereof or any other country or any political subdivision thereof, or
      otherwise, including, without limitation, any thereof referred to in Schedule
      II
      hereto, and (b) all renewals thereof.




“ UCC ”
means
      Uniform Commercial Code as in effect from time to time in the State of New
      York;
      provided, however, if by mandatory provisions of law, the perfection or the
      effect of perfection or non-perfection of the security interest granted
      hereunder in the Collateral is governed by the Uniform Commercial Code of a
      jurisdiction other than New York, “UCC” means the Uniform Commercial Code as in
      effect in such other jurisdiction for purposes of provisions hereof relating
      to
      such perfection or effect of perfection of non-perfection.




“ Vehicles ”
means
      all cars, trucks, trailers, construction and earth moving equipment and other
      vehicles covered by a certificate of title law or any state and, in any event,
      shall include, without limitation, the vehicles listed on Schedule III hereto
      and all tires and other appurtenances to any of the foregoing.




2.  Grant
      of Security Interest .
      As
      security for the prompt and complete payment and performance when due (whether
      at the stated maturity, by acceleration or otherwise) of the Obligations,
      Borrower hereby grants to Collateral Agent, as agent for the Holders, a security
      interest (the “ Security
      Interest ”)
      in the
      Collateral now owned or at any time hereafter acquired by Borrower or in which
      Borrower now has or at any time in the future may acquire any right, title
      or
      interest.




3.  Representations,
      Warranties and Agreements .
      Borrower hereby represents, warrants and agrees as follows:




(a)  ***Power
      and Authority; Authorization*** .
      Borrower has the corporate power and authority and the legal right to execute
      and deliver, to perform its obligations under, and to grant the Security
      Interest in the Collateral pursuant to, this Agreement and has taken all
      necessary corporate action to authorize its execution, delivery and performance
      of, and grant of the Security Interest in the Collateral pursuant to, this
      Agreement.




5


(b)  ***Enforceability*** .
      This
      Agreement constitutes a legal, valid and binding obligation of Borrower
      enforceable in accordance with its terms, except as enforceability may be
      limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
      affecting the enforcement of creditors’ rights generally.




(c)  ***No
      Conflict*** .
      The
      execution, delivery and performance of this Agreement will not violate any
      provision of any requirement of law or contractual obligation of Borrower and
      will not result in the creation or imposition of any Lien on any of the
      properties or revenues of Borrower pursuant to any requirement of law or
      contractual obligation of Borrower, except as contemplated hereby.




(d)  ***No
      Consents, Etc*** .
      No
      consent or authorization of, filing with, or other act by or in respect of,
      any
      arbitrator or governmental authority and no consent of any other Person
      (including, without limitation, any equity holder or creditor of Borrower),
      is
      required in connection with (i) the execution, delivery, performance, validity
      or enforceability of this Agreement; (ii) the perfection or maintenance of
      the
      Security Interest created hereby (including the first priority nature of such
      Security Interest); or (iii) the exercise by Collateral Agent of any rights
      provided for in this Agreement.




(e)  ***No
      Litigation*** .
      No
      litigation, investigation or proceeding of or before any arbitrator or
      governmental authority is pending or, to the knowledge of Borrower, threatened
      by or against Borrower or against any of its properties or revenues with respect
      to this Agreement or any of the transactions contemplated hereby.




(f)  ***Title*** .
      Borrower (i) has absolute title to each item of Collateral in existence on
      the
      date hereof, free and clear of all Liens except the Security Interest and the
      Permitted Liens, (ii) will have, at the time Borrower acquires any rights in
      Collateral hereafter arising, absolute title to each such item of Collateral
      free and clear of all Liens except Permitted Liens, (iii) will keep all
      Collateral free and clear of all Liens except Permitted Liens, and (iv) will
      defend the Collateral against all claims or demands of all Persons other than
      Collateral Agent. Without the prior written consent of Collateral Agent,
      Borrower will not sell or otherwise dispose of, or grant any option with respect
      to, the Collateral or any interest therein, outside the ordinary course of
      business; provided that for these purposes, the sale by Borrower of the business
      and assets of a single pharmacy shall constitute the sale in the ordinary course
      of business if such sale was approved by Wells Fargo Retail Financing or any
      other Senior Lender (as such term is defined in the Note and Warrant Purchase
      Agreement) and if requested by Borrower, Collateral Agent shall promptly issue
      to Borrower a UCC-3 termination statement with respect to the business and
      assets sold.




(g)  ***Priority*** .
      This
      Agreement creates a valid and perfected security interest in the Collateral
      subject to the prior Lien of Wells Fargo Retail Finance and any subsequent
      Senior Lender (as that term is defined in the Note and Warrant Purchase
      Agreement), securing the payment of the Obligations, and all filings and other
      actions necessary or desirable to perfect and protect such security interest
      have been duly taken. No certificate or other instrument has been issued at
      any
      time to evidence any Securities included in the Collateral that has not been
      delivered to Collateral Agent pursuant to Section 3(s)(i) of this
      Agreement;




(h)  ***Chief
      Executive Office; Identification Number*** .
      Borrower’s chief executive office and principal place of business is located at
      the address set forth under its signature below. Borrower’s federal employer
      identification number is correctly set forth under its signature
      below.




6


(i)  ***Changes
      in Name or Location*** .
      Borrower will not change its name without prior written notice to Collateral
      Agent. Borrower will not change its chief executive office or principal business
      address without prior written notice to Collateral Agent.




(j)  ***Fixtures;
      Real Property*** .
      Borrower will not permit any tangible Collateral to become part of or to be
      affixed to any real property without first assuring to the reasonable
      satisfaction of Collateral Agent that the Security Interest will be prior and
      senior to any Lien then held or thereafter acquired by any mortgagee of such
      real property or the owner or purchaser of any interest therein. Borrower does
      not own any interest in any real property except as previously disclosed in
      writing to Collateral Agent.




(k)  ***Accounts*** .
      The
      amount represented by Borrower to Collateral Agent from time to time as owing by
      each Account debtor or by all Account debtors in respect of the Accounts will
      at
      such time be the correct amount actually owing by such Account debtor or debtors
      thereunder. No amount payable to Borrower under or in connection with any
      Account is evidenced by any Instrument or Chattel Paper which has not been
      delivered to Collateral Agent.




(l)  ***Rights
      to Payment*** .
      Each
      right to payment and each instrument, document, chattel paper and other
      agreement constituting or evidencing Collateral is (or will be when arising,
      issued or assigned to Collateral Agent) the valid, genuine and legally
      enforceable obligation, subject to no defense, setoff or counterclaim (other
      than those arising in the ordinary course of business), of the account debtor
      or
      other obligor named therein or in Borrower’s records pertaining thereto as being
      obligated to pay such obligation. Borrower will neither agree to any material
      modification or amendment nor agree to any forbearance, release or cancellation
      of any such obligation, and will not subordinate any such right to payment
      to
      claims of other creditors of such account debtor or other obligor.




(m)  ***Farm
      Products, Fixtures, As-extracted Collateral*** .
      None of
      the Collateral constitutes, or is the Proceeds of, Farm Products, Fixtures
      or
      As-extracted Collateral.




(n)  ***Patents
      and Trademarks*** .
      Schedule I hereto includes all Patents and Patent Licenses owned by Borrower
      in
      its own name as of the date hereof. Schedule II hereto includes all Trademarks
      and Trademark Licenses owned by Borrower in its own name as of the date hereof.
      To the best of Borrower’s knowledge, each Patent and Trademark is valid,
      subsisting, unexpired, enforceable and has not been abandoned. Except as set
      forth in either such Schedule, none of such Patents and Trademarks is the
      subject of any licensing or franchise agreement. No holding, decision or
      judgment has been rendered by any governmental authority which would limit,
      cancel or question the validity of any Patent or Trademark. No action or
      proceeding is pending (i) seeking to limit, cancel or question the validity
      of
      any Patent or Trademark, or (ii) which, if adversely determined, would have
      material adverse effect on the value of any Patent or Trademark.




(o)  ***Vehicles*** .
      Schedule III is a complete and correct list of all Vehicles owned by
      Borrower.




7


(p)  ***[Intentionally
      Omitted]*** .




(q)  ***Miscellaneous
      Covenants*** .
      Borrower will:




(i)  keep
      all
      tangible Collateral in good repair, working order and condition, normal
      depreciation excepted, and will, from time to time, replace any worn, broken
      or
      defective parts thereof;




(ii)  promptly
      pay all taxes (other than income taxes on the income of Collateral Agent) and
      other governmental charges levied or assessed upon or against any Collateral
      or
      upon or against the creation, perfection or continuance of the Security
      Interest;




(iii)  at
      all
      reasonable times, permit Collateral Agent or its representatives to examine
      or
      inspect any Collateral, wherever located, and to examine, inspect and copy
      Borrower’s books and records pertaining to the Collateral and its business and
      financial condition and to send and discuss with account debtors and other
      obligors requests for verifications of amounts owed to Borrower;




(iv)  keep
      accurate and complete records pertaining to the Collateral and pertaining to
      Borrower’s business and financial condition and submit to Collateral Agent such
      periodic reports concerning the Collateral and Borrower’s business and financial
      condition as Collateral Agent may from time to time reasonably
      request;




(v)  promptly
      notify Collateral Agent of any loss of or material damage to any Collateral
      or
      of any adverse change, known to Borrower, in the prospect of payment of any
      material sums due on or under any Instrument, Chattel Paper, or Account
      constituting Collateral;




(vi)  promptly
      deliver to Collateral Agent any Instrument, Document or Chattel Paper
      constituting Collateral, duly endorsed or assigned by Borrower;




(vii)  maintain
      with financially sound and reputable companies, insurance policies (i) insuring
      all tangible Collateral against loss by fire, explosion, theft and such other
      casualties as may be reasonably satisfactory to Collateral Agent and (ii)
      insuring Borrower and Collateral Agent against liability for personal injury
      and
      property damage relating to such tangible Collateral, such policies to be in
      such form and amounts and having such coverage as may be reasonably satisfactory
      to Collateral Agent, with losses payable to Borrower and Collateral Agent as
      their respective interests may appear. All such insurance shall (i) contain
      a
      breach of warranty clause in favor of Collateral Agent, (ii) provide that no
      cancellation, material reduction in amount or material change in coverage
      thereof shall be effective until at least thirty (30) days after receipt by
      Collateral Agent of written notice thereof, (iii) name Collateral Agent as
      an
      insured and (iv) be reasonably satisfactory in all other respects to Collateral
      Agent.




(viii)  from
      time
      to time execute such financing statements as Collateral Agent may reasonably
      require in order to perfect the Security Interest and, if any Collateral
      consists of a Vehicle, execute such documents as may be required to have the
      Security Interest properly noted on a certificate of title;




8


(ix)  pay
      when
      due or reimburse Collateral Agent on demand for all costs of collection of
      any
      of the Obligations and all other out-of-pocket expenses (including in each
      case
      all reasonable attorneys’ fees) incurred by Collateral Agent in connection with
      the creation, perfection, satisfaction, protection, defense or enforcement
      of
      the Security Interest or the creation, continuance, protection, defense or
      enforcement of this Agreement or any or all of the Obligations, including
      expenses incurred in any litigation or bankruptcy or insolvency
      proceedings;




(x)  execute,
      deliver or endorse any and all instruments, documents, assignments, security
      agreements and other agreements and writings, at the sole expense of Borrower,
      which Collateral Agent may at any time reasonably request in order to secure,
      protect, perfect or enforce the Security Interest and Collateral Agent’s rights
      under this Agreement;




(xi)  not
      use
      or keep any Collateral, or permit it to be used or kept, for any unlawful
      purpose or in violation of any federal, state or local law, statute or
      ordinance;




(xii)  Other
      than in the ordinary course of business as generally conducted by Borrower
      over
      a period of time, Borrower will not grant any extension of the time of payment
      of any of the Accounts, compromise, compound or settle the same for less than
      the full amount thereof, release, wholly or partially, any Person liable for
      the
      payment thereof, or allow any credit or discount whatsoever thereon;
      and




(xiii)  not
      exercise any right or take any action with respect to the Collateral that would
      dilute or adversely affect Collateral Agent’s rights in the Collateral or impose
      any restrictions upon the sale, transfer or disposition thereof.




(r)  ***Deposit
      Accounts*** .
      If
      Borrower maintains any Deposit Account at any depository bank, Borrower shall
      promptly notify Collateral Agent thereof and, upon Collateral Agent’s request,
      cause the depository bank to comply at any time with instructions of Collateral
      Agent directing the direction of funds credited to such deposit account without
      further consent of Borrower, pursuant to a control agreement in form and
      substance satisfactory to Collateral Agent in Collateral Agent’s sole
      discretion.




(s)  ***Investment
      Property*** .




(i)  Certificated
      Securities .
      If
      Borrower shall now or hereafter at any time hold or acquire any certificated
      Securities, Borrower shall forthwith endorse, assign and deliver the same to
      Collateral Agent, accompanied by such instruments of transfer of assignment
      duly
      executed in blank as Collateral Agent may from time to time
      specify.




9


(ii)  Uncertificated
      Securities; Financial Assets .
      If any
      Securities now or hereafter acquired by Borrower are uncertificated and are
      issued to Borrower or its nominee directly by the issuer thereof, Borrower
      shall
      immediately notify Collateral Agent thereof and, at Collateral Agent’s request
      and option, pursuant to an agreement in form and substance satisfactory to
      Collateral Agent, cause the issuer to agree to comply with instructions from
      Collateral Agent as to such Securities, without further consent of Borrower
      or
      such nominee. If any Securities, whether certificated or uncertificated,
      Financial Assets or other Investment Property now or hereafter acquired by
      Borrower are held by Borrower or its nominee through a securities intermediary
      or commodity intermediary, Borrower shall immediately notify Collateral Agent
      thereof and, at Collateral Agent’s request and option, pursuant to a control
      agreement in form and substance satisfactory to Collateral Agent, cause such
      securities intermediary or (as the case may be) commodity intermediary to agree
      to comply with entitlement orders or other instructions from Collateral Agent
      to
      such securities intermediary as to such Securities, Financial Assets or other
      Investment Property (including securities entitlements), or (as the case may
      be)
      to apply any value distributed on account of any commodity contract as directed
      by Collateral Agent to such commodity intermediary, in each case without further
      consent of Borrower or such nominee.




(t)  ***Collateral
      in the Possession of a Bailee*** .
      If any
      Goods are at any time in the possession of a bailee, Borrower shall promptly
      notify Collateral Agent thereof and, if requested by Collateral Agent, shall
      promptly obtain an acknowledgement from the bailee, in form and substance
      satisfactory to Collateral Agent, that the bailee holds such Collateral for
      the
      benefit of Collateral Agent and shall act upon the instructions of Collateral
      Agent, without the further consent of Borrower.




(u)  ***Electronic
      Chattel Paper and Transferable Records*** .
      If
      Borrower at any time holds or acquires an interest in any electronic chattel
      paper or any “transferable record,” as that term is defined in Section 201 of
      the Electronic Signatures in Global and National Commerce Act, or in §16 of the
      Uniform Electronic Transactions Act as in effect in any relevant jurisdiction,
      Borrower shall promptly notify Collateral Agent thereof and, at the request
      of
      Collateral Agent , shall take such action as Collateral Agent may reasonably
      request to vest in Collateral Agent control under UCC §9-105 of such electronic
      chattel paper or control under Section 201 of the Electronic Signatures in
      Global and National Commerce Act or, as the case may be, §16 of the Uniform
      Electronics Transactions Act, as so in effect in such jurisdiction, of such
      transferable record.




(v)  ***Letter-of-Credit
      Rights*** .
      If
      Borrower is at any time a beneficiary under a Letter of Credit now or hereafter
      issued in favor of Borrower, Borrower shall promptly notify Collateral Agent
      thereof and, at the request and option of Collateral Agent, Borrower shall,
      pursuant to an agreement in form and substance satisfactory to Collateral Agent,
      arrange for the issuer and any confirmer of such Letter of Credit to consent
      to
      an assignment to Collateral Agent of the proceeds of any drawing under the
      Letter of Credit.




(w)  ***Patents
      and Trademarks*** .




(i)  Borrower
      (either itself or through licensees) will, except with respect to any Trademark
      that Borrower shall reasonably determine is of negligible economic value to
      it,
      (i) continue to use each Trademark on each and every trademark class of goods
      applicable to its current line as reflected in its current catalogs, brochures
      and price lists in order to maintain such Trademark in full force free from
      any
      claim of abandonment for non-use, (ii) maintain as in the past the quality
      of
      products and services offered under such Trademark, (iii) employ such Trademark
      with the appropriate notice of registration, (iv) not adopt or use any mark
      which is confusingly similar or a colorable imitation of such Trademark unless
      Collateral Agent shall obtain a perfected security interest in such mark
      pursuant to this Agreement, and (v) not (and not permit any licensee or
      sublicensee thereof to) do any act or knowingly omit to do any act whereby
      any
      Trademark may become invalidated.




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(ii)  Borrower
      will not, except with respect to any Patent that Borrower shall reasonably
      determine is of negligible economic value to it, do any act, or omit to do
      any
      act, whereby any Patent may become abandoned or dedicated.




(iii)  Borrower
      will notify Collateral Agent immediately if it knows, or has reason to know,
      that any application or registration relating to any Patent or Trademark may
      become abandoned or dedicated, or of any adverse determination or development
      (including, without limitation, the institution of, or any such determination
      or
      development in, any proceeding in the United States Patent and Trademark Office
      or any court or tribunal in any country) regarding Borrower's ownership of
      any
      Patent or Trademark or its right to register the same or to keep and maintain
      the same.




(iv)  Whenever
      Borrower, either by itself or through any agent, employee, licensee or designee,
      shall file an application for the registration of any Patent or Trademark with
      the United States Patent and Trademark Office or any similar office or agency
      in
      any other country or any political subdivision thereof, Borrower shall report
      such filing to Collateral Agent within five (5) Business Days after the last
      day
      of the fiscal quarter in which such filing occurs. Upon request of Collateral
      Agent, Borrower shall execute and deliver any and all agreements, instruments,
      documents, and papers as Collateral Agent may request to evidence Collateral
      Agent's security interest in any Patent or Trademark and the goodwill and
      general intangibles of Borrower relating thereto or represented thereby, and
      Borrower hereby constitutes Collateral Agent its attorney-in-fact to execute
      and
      file all such writings for the foregoing purposes, all acts of such attorney
      being hereby ratified and confirmed; such power being coupled with an interest
      is irrevocable until the Obligations are paid in full.




(v)  Borrower
      will take all reasonable and necessary steps, including, without limitation,
      in
      any proceeding before the United States Patent and Trademark Office, or any
      similar office or agency in any other country or any political subdivision
      thereof, to maintain and pursue each application (and to obtain the relevant
      registration) and to maintain each registration of the Patents and Trademarks,
      including, without limitation, filing of applications for renewal, affidavits
      of
      use and affidavits of incontestability.




(vi)  In
      the
      event that any Patent or Trademark included in the Collateral is infringed,
      misappropriated or diluted by a third party, Borrower shall promptly notify
      Collateral Agent after it learns thereof and shall, unless Borrower shall
      reasonably determine that such Patent or Trademark is of negligible economic
      value to Borrower, promptly sue for infringement, misappropriation or dilution,
      to seek injunctive relief where appropriate and to recover any and all damages
      for such infringement, misappropriation or dilution, or take such other actions
      as Borrower shall reasonably deem appropriate under the circumstances to protect
      such Patent or Trademark.




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(x)  ***Commercial
      Tort Claims*** .
      If
      Borrower shall at any time hold or acquire a commercial tort claim, Borrower
      shall immediately notify Collateral Agent in writing signed by Borrower of
      the
      details thereof and grant to Collateral Agent 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
      Collateral Agent.




(y)  ***Collateral
      Agent’s Right to Take Action*** .
      Borrower authorizes Collateral Agent to file such financing statements and
      continuation statements without the signature of Borrower as Collateral Agent
      deems reasonably necessary to perfect (or continue the perfection of) the
      Security Interest in the Collateral. Borrower hereby ratifies its authorization
      for Collateral Agent to have filed any financing or continuation statements
      or
      amendments thereto if such have been filed prior to the date hereof. Further,
      if
      Borrower at any time fails to perform or observe any agreement contained in
      Section 3(f), and if such failure continues for a period of ten (10) Business
      Days after Collateral Agent gives Borrower written notice thereof, Collateral
      Agent may (but need not) perform or observe such agreement on behalf and in
      the
      name, place and stead of Borrower (or, at Collateral Agent’s option, in
      Collateral Agent’s own name) and may (but need not) take any and all other
      actions which Collateral Agent may reasonably deem necessary to cure or correct
      such failure (including, without limitation the payment of taxes, the
      satisfaction of security interests, liens, or encumbrances, the performance
      of
      obligations under contracts or agreements with account debtors or other
      obligors, the procurement and maintenance of insurance, the execution of
      financing statements, the endorsement of instruments, and the procurement of
      repairs or transportation); and, except to the extent that the effect of such
      payment would be to render any loan or forbearance of money usurious or
      otherwise illegal under any applicable law, Borrower shall thereupon pay
      Collateral Agent on demand the amount of all moneys expended and all costs
      and
      expenses (including reasonable attorneys’ fees) incurred by Collateral Agent in
      connection with or as a result of Collateral Agent’s performing or observing
      such agreements or taking such actions, together with interest thereon from
      the
      date expended or incurred by Collateral Agent at the highest rate then
      applicable to any of the Obligations.




(z)  ***Power
      of Attorney*** .
      Borrower hereby irrevocably appoints (which appointment is coupled with an
      interest) Collateral Agent, or its delegate, as the attorney-in-fact of Borrower
      with the right (but not the duty) from time to time, following the occurrence
      and during the continuance of an Event of Default, to: (a) create, prepare,
      complete, execute, deliver, endorse or file, in the name and on behalf of
      Borrower, any and all instruments, documents, financing statements, applications
      for insurance and other agreements and writings required to be obtained,
      executed, delivered or endorsed by Borrower under this Section 3; (b) to convert
      the Collateral into cash, including, without limitation, the sale (either public
      or private) of all or any portion or portions of the Collateral; (c) to enforce
      collection of the Collateral, either in its own name or in the name of Borrower,
      including, without limitation, executing releases, compromising or settling
      with
      any Account debtors and prosecuting, defending, compromising or releasing any
      action relating to the Collateral; (d) to receive, open and dispose of all
      mail
      addressed to Borrower and to take therefrom any remittances or proceeds of
      Collateral in which Collateral Agent has a security interest; (e) to notify
      post
      office authorities to change the address for delivery of mail addressed to
      Borrower to such address as Collateral Agent shall designate; (f) to endorse
      the
      name of Borrower in favor of Collateral Agent upon any and all checks, drafts,
      money orders, notes, acceptances or other instruments of the same or different
      nature; (g) to sign and endorse the name of Borrower on and to receive as
      secured party any of the Collateral, any invoices, schedules of Collateral,
      freight or express receipts, or bills of lading, storage receipts, warehouse
      receipts, or other documents of title of the same or different nature relating
      to the Collateral; (h) to sign the name of Borrower on any notice to the Account
      debtors or on verification of the Collateral; and (i) to sign and file or record
      on behalf of Borrower any financing or other statement in order to perfect
      or
      protect Collateral Agent’s security interest. Collateral Agent shall not be
      obliged to do any of the acts or exercise any of the powers hereinabove
      authorized, but if Collateral Agent elects to do any such act or exercise any
      such power, it shall not be accountable for more than it actually receives
      as a
      result of such exercise of power, and it shall not be responsible to Borrower
      except for willful misconduct in bad faith. All powers conferred upon Collateral
      Agent by this Agreement, being coupled with an interest, shall be irrevocable
      so
      long as any Obligation of Borrower to Collateral Agent shall remain
      unpaid.




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4.  Assignment
      of Insurance .
      Borrower hereby assigns to Collateral Agent, as additional security for the
      payment of the Obligations, any and all moneys (including but not limited to
      proceeds of insurance and refunds of unearned premiums) due or to become due
      under, and all other rights of Borrower under or with respect to, any and all
      policies of insurance covering the Collateral, and Borrower hereby directs
      the
      issuer of any such policy to pay any such moneys directly to Collateral Agent,
      following the occurrence and during the continuance of an Event of Default.
      After the occurrence of an Event of Default, Collateral Agent may (but need
      not), in its own name or in Borrower’s name, execute and deliver proofs of
      claim, receive all such moneys, endorse checks and other instruments
      representing payment of such moneys, and adjust, litigate, compromise or release
      any claim against the issuer of any such policy.




5.  Events
      of Default .
      Each of
      the following occurrences shall constitute an event of default under this
      Agreement (herein called “ Event
      of Default ”):
      (i)
      an Event of Default shall occur under (and as defined in) the Notes; or (ii)
      the
      Borrower shall fail to observe or perform any material covenant or material
      agreement herein binding on it and such failure is not cured within ten calendar
      days after notice thereof is given to the Borrower.




6.  Remedies
      upon Event of Default .
      Upon
      the occurrence and during the continuance of an Event of Default, Collateral
      Agent may exercise any one or more of the following rights and remedies: (i)
      declare all unmatured Obligations to be immediately due and payable, and the
      same shall thereupon be immediately due and payable, without presentment or
      other notice or demand; (ii) exercise and enforce any or all rights and remedies
      available upon default to a secured party under the UCC, including but not
      limited to the right to take possession of any Collateral, proceeding without
      judicial process or by judicial process (without a prior hearing or notice
      thereof, which Borrower hereby expressly waives), and the right to sell, lease
      or otherwise dispose of any or all of the Collateral, and in connection
      therewith, Collateral Agent may require Borrower to make the Collateral
      available to Collateral Agent at a place to be designated by Collateral Agent
      which is reasonably convenient to both parties, and if notice to Borrower of
      any
      intended disposition of Collateral or any other intended action is required
      by
      law in a particular instance, such notice shall be deemed commercially
      reasonable if given (in the manner specified in Section 10 at least ten (10)
      days prior to the date of intended disposition or other action; and (iii)
      exercise or enforce any or all other rights or remedies available to Collateral
      Agent by law or agreement against the Collateral, against Borrower or against
      any other Person or property. Collateral Agent is hereby granted a nonexclusive,
      worldwide and royalty-free license to use or otherwise exploit all intellectual
      property owned by or licensed to Borrower that Collateral Agent deems necessary
      or appropriate to the disposition of any Collateral.




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7.  Other
      Personal Property .
      Unless,
      at the time Collateral Agent takes possession of any tangible Collateral, or
      within seven (7) days thereafter, Borrower gives written notice to Collateral
      Agent of the existence of any goods, papers or other property of Borrower,
      not
      affixed to or constituting apart of such Collateral, but which are located
      or
      found upon or within such Collateral, describing such property, Collateral
      Agent
      shall not be responsible or liable to Borrower for any action taken or omitted
      by or on behalf of Collateral Agent with respect to such property.




8.  Security
      Interest Absolute .
      All
      rights of Collateral Agent hereunder, the grant of a security interest in the
      Collateral and all obligations of Borrower hereunder, shall be absolute and
      unconditional irrespective of (i) any lack of validity or enforceability of
      any
      Note, any agreement with respect to any of the Obligations or any other
      agreement or instrument relating to any of the foregoing, (ii) any change in
      time, manner or place of payment of, or in any other term of, all or any of
      the
      Obligations, or any other amendment or waiver of or any consent to any departure
      from the Notes or any other agreement or instrument, (iii) any exchange, release
      or non-perfection of any other collateral, or any release or amendment or waiver
      of or consent to or departure from any guarantee, for all or any of the
      Obligations, or (iv) any other circumstance which might otherwise constitute
      a
      defense available to (other than the defense of indefeasible payment), or a
      discharge of, Borrower in respect of the Obligations or in respect of this
      Agreement.




9.  Continuing
      Security Interest .
      This
      Agreement shall create a continuing security interest in the Collateral and
      shall (i) remain in full force and effect until the indefeasible payment in
      full
      of the Obligations and all other amounts payable under this Agreement. Upon
      the
      indefeasible payment in full of the Obligations and all other amounts payable
      under this Agreement, the Security Interest granted in this Agreement shall
      terminate and all rights to the Collateral shall revert to Borrower. Upon any
      such termination, Collateral Agent shall (i) return to Borrower such of the
      Collateral as shall not have been sold or otherwise applied pursuant to the
      terms of this Agreement, and (ii) execute and deliver to Borrower such documents
      as Borrower shall reasonably request to evidence such termination.




10.  Notice .
      All
      notices and other communications hereunder shall be in writing and shall be
      (a)
      personally delivered, (b) sent by first class United States mail, (c) sent
      by
      overnight courier of national reputation, or (d) transmitted by facsimile,
      in
      each case addressed or telecopied to the party to whom notice is being given
      at
      its address or telecopier number as set forth below its signature or, as to
      each
      party, at such other address or facsimile number as may hereafter be designated
      by such party in a written notice to the other party complying as to delivery
      with the terms of this Section. All such notices, requests, demands and other
      communications shall be deemed to have been given on (i) the date received
      if
      personally delivered, (ii) five (5) days after being deposited in the mail
      if
      delivered by mail, (iii) the date received if sent by overnight courier, or
      (iv)
      the date of receipt if delivered by facsimile.




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11.  Intercreditor
      and Subordination Agreement .
      All
      rights of Collateral Agent hereunder are subject to the terms of that certain
      Intercreditor and Subordination Agreement dated as of June 23, 2006 among Wells
      Fargo Retail Financing, Collateral Agent, Lenders and the other parties thereto
      (as the same may be amended from time to time, the “ WFRF
      Intercreditor Agreement ”)
      and
      any Intercreditor and Subordination Agreement entered into with any subsequent
      Senior Lender (as such term is defined in the Note and Warrant Purchase
      Agreement). Notwithstanding anything to the contrary that may be set forth
      in
      this Agreement, the obligations of Borrower under Sections 3q(vi), 3(r), 3(s),
      3(t), 3(u) and 3(v) of this Agreement shall only be in effect following the
      termination or expiration of the WFRF Intercreditor Agreement and any
      Intercreditor and Subordination Agreement entered into with any subsequent
      Senior Lender.




12.  Miscellaneous .
      This
      Agreement does not contemplate a sale of accounts, or chattel paper. This
      Agreement can be waived, modified, amended, terminated or discharged, and the
      Security Interest can be released, only explicitly in a writing signed by
      Collateral Agent, and, in the case of amendment or modification, in a writing
      signed by both parties. A waiver signed by Collateral Agent shall be effective
      only in the specific instance and for the specific purpose given. Mere delay
      or
      failure to act shall not preclude the exercise or enforcement of any of
      Collateral Agent’s rights or remedies. All rights and remedies of Collateral
      Agent shall be cumulative and may be exercised singularly or concurrently,
      at
      Collateral Agent’s option, and the exercise or enforcement of any one such right
      or remedy shall neither be a condition to nor bar the exercise or enforcement
      of
      any other. Collateral Agent’s duty of care with respect to Collateral in its
      possession (as imposed by law) shall be deemed fulfilled if Collateral Agent
      exercises reasonable care in physically safekeeping such Collateral or, in
      the
      case of Collateral in the custody or possession of a bailee or other third
      Person, exercises reasonable care in the selection of the bailee or other third
      Person, and Collateral Agent need not otherwise preserve, protect, insure or
      care for any Collateral. Collateral Agent shall not be obligated to preserve
      any
      rights Borrower may have against prior parties, to realize on the Collateral
      at
      all or in any particular manner or order, or to apply any cash proceeds of
      Collateral in any particular order of application. This Agreement shall be
      binding upon and inure to the benefit of Borrower and Collateral Agent and
      their
      respective successors and assigns and shall take effect when signed by Borrower
      and delivered to Collateral Agent, and Borrower waives notice of Collateral
      Agent’s acceptance hereof. A carbon, photographic or other reproduction of this
      Agreement or of any financing statement signed by Borrower shall have the same
      force and effect as the original for all purposes of a financing statement.
      This
      Agreement shall be governed by and construed in accordance with the substantive
      laws (other than conflict laws) of the State of New York, except to the extent
      that the validity or perfection of the Security Interest hereunder, or remedies
      hereunder, in respect of any particular Collateral are governed by the laws
      of a
      jurisdiction other than the State of New York. If any provision or application
      of this Agreement is held unlawful or unenforceable in any respect, such
      illegality or unenforceability shall not affect other provisions or applications
      which can be given effect and this Agreement shall be construed as if the
      unlawful or unenforceable provision or application had never been contained
      herein or prescribed hereby. All representations and warranties contained in
      this Agreement shall survive the execution, delivery and performance of this
      Agreement and the creation and payment of the Obligations. Borrower hereby
      submits to the non-exclusive jurisdiction of the courts of the State of New
      York
      sitting in New York City and the United States District Court for the Southern
      District of New York with respect to all suits and actions arising under or
      out
      of this Agreement and hereby waives any objection to the venue of any such
      court
      with respect to any such suit or action and any claim that any such suit or
      action brought in such court has been brought in an inconvenient
      forum.






**THE
      PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
      ON OR
      PERTAINING TO THIS AGREEMENT.**




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