Document:

REGISTRATION RIGHTS AGREEMENT

         REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 12,
2005, by and between SAMARITAN PHARMACEUTICALS, INC., a Nevada corporation, (the
"Company"), and FUSION CAPITAL FUND II, LLC (together with it permitted assigns,
the "Buyer"). Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Common Stock Purchase
Agreement by and between the parties hereto, dated as of the date hereof (as
amended, restated, supplemented or otherwise modified from time to time, the
"Purchase Agreement").

                                    WHEREAS:

         A. The Company has agreed, upon the terms and subject to the conditions
of the Purchase Agreement, to issue to the Buyer (i) up to Forty Million Dollars
($40,000,000) of the Company's common stock, par value $0.001 per share (the
"Common Stock") (the "Purchase Shares"), and (ii) such number of shares of
Common Stock as is required pursuant to Section 4(f) of the Purchase Agreement
(the "Commitment Shares"); and

         B. To induce the Buyer to enter into the Purchase Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the "1933 Act"), and applicable state
securities laws.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyer hereby agree as follows:

         1.       DEFINITIONS.

                  As used in this Agreement, the following terms shall have the
following meanings:

                  a. "Investor" means the Buyer, any transferee or assignee
thereof to whom a Buyer assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section 9
and any transferee or assignee thereof to whom a transferee or assignee assigns
its rights under this Agreement and who agrees to become bound by the provisions
of this Agreement in accordance with Section 9.

                  b. "Person" means any person or entity including any
corporation, a limited liability company, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.

                  c. "Register," "registered," and "registration" refer to a
registration effected by preparing and filing one or more registration
statements of the Company in compliance with the 1933 Act and pursuant to Rule
415 under the 1933 Act or any successor rule providing for offering securities
on a continuous basis ("Rule 415"), and the declaration or ordering of
effectiveness of such registration statement(s) by the United States Securities
and Exchange Commission (the "SEC").

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                  d. "Registrable Securities" means the Purchase Shares which
have been, or which may from time to time be, issued or issuable upon purchases
of the Available Amount under the Purchase Agreement (without regard to any
limitation or restriction on purchases) and the Commitment Shares issued or
issuable to the Investor and any shares of capital stock issued or issuable with
respect to the Purchase Shares, the Commitment Shares or the Purchase Agreement
as a result of any stock split, stock dividend, recapitalization, exchange or
similar event or otherwise, without regard to any limitation on purchases under
the Purchase Agreement.

                  e. "Registration Statement" means the registration statement
of the Company covering only the sale of the Registrable Securities.

         2.       REGISTRATION.

                                    a. Mandatory Registration. The Company shall
within ten (10) Trading Days from the date hereof file with the SEC the
Registration Statement. The Registration Statement shall register only the
Registrable Securities and no other securities of the Company. The Investor and
its counsel shall have a reasonable opportunity to review and comment upon such
registration statement or amendment to such registration statement and any
related prospectus prior to its filing with the SEC. Investor shall furnish all
information reasonably requested by the Company for inclusion therein. The
Company shall use its best efforts to have the Registration Statement or
amendment declared effective by the SEC at the earliest possible date. The
Company shall use reasonable best efforts to keep the Registration Statement
effective pursuant to Rule 415 promulgated under the 1933 Act and available for
sales of all of the Registrable Securities at all times until the earlier of (i)
the date as of which the Investor may sell all of the Registrable Securities
without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto) or (ii) the date on which (A) the Investor shall have sold
all the Registrable Securities and no Available Amount remains under the
Purchase Agreement (the "Registration Period"). The Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.

                  b. Rule 424 Prospectus. The Company shall, as required by
applicable securities regulations, from time to time file with the SEC, pursuant
to Rule 424 promulgated under the 1933 Act, the prospectus and prospectus
supplements, if any, to be used in connection with sales of the Registrable
Securities under the Registration Statement. The Investor and its counsel shall
have a reasonable opportunity to review and comment upon such prospectus prior
to its filing with the SEC. The Investor shall use its reasonable best efforts
to comment upon such prospectus within one (1) Trading Day from the date the
Investor receives the final version of such prospectus.

                  c. Sufficient Number of Shares Registered. In the event the
number of shares available under the Registration Statement is insufficient to
cover all of the Registrable Securities, the Company shall amend the
Registration Statement or file a new registration statement (a "New Registration
Statement"), so as to cover all of such Registrable Securities as soon as
practicable, but in any event not later than ten (10) Trading Days after the
necessity therefor arises. The Company shall use it reasonable best efforts to
cause such amendment and/or New Registration Statement to become effective as
soon as practicable following the filing thereof.

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         3. RELATED OBLIGATIONS.

         With respect to the Registration Statement and whenever any Registrable
Securities are to be registered pursuant to Section 2(b) including on any New
Registration Statement, the Company shall use its reasonable best efforts to
effect the registration of the Registrable Securities in accordance with the
intended method of disposition thereof and, pursuant thereto, the Company shall
have the following obligations:

                  a. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to any
registration statement and the prospectus used in connection with such
registration statement, which prospectus is to be filed pursuant to Rule 424
promulgated under the 1933 Act, as may be necessary to keep the Registration
Statement or any New Registration Statement effective at all times during the
Registration Period, and, during such period, comply with the provisions of the
1933 Act with respect to the disposition of all Registrable Securities of the
Company covered by the Registration Statement or any New Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such registration statement.

                  b. The Company shall permit the Investor to review and comment
upon the Registration Statement or any New Registration Statement and all
amendments and supplements thereto at least two (2) Trading Days prior to their
filing with the SEC, and not file any document in a form to which Investor
reasonably objects. The Investor shall use its reasonable best efforts to
comment upon the Registration Statement or any New Registration Statement and
any amendments or supplements thereto within two (2) Trading Days from the date
the Investor receives the final version thereof. The Company shall furnish to
the Investor, without charge any correspondence from the SEC or the staff of the
SEC to the Company or its representatives relating to the Registration Statement
or any New Registration Statement.

                  c. Upon request of the Investor, the Company shall furnish to
the Investor, (i) promptly after the same is prepared and filed with the SEC, at
least one copy of such registration statement and any amendment(s) thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits, (ii) upon the effectiveness of any registration
statement, a copy of the prospectus included in such registration statement and
all amendments and supplements thereto (or such other number of copies as the
Investor may reasonably request) and (iii) such other documents, including
copies of any preliminary or final prospectus, as the Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by the Investor.

                  d. The Company shall use reasonable best efforts to (i)
register and qualify the Registrable Securities covered by a registration
statement under such other securities or "blue sky" laws of such jurisdictions
in the United States as the Investor reasonably requests, (ii) prepare and file
in those jurisdictions, such amendments (including post-effective amendments)
and supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify

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the Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities for sale under the securities
or "blue sky" laws of any jurisdiction in the United States or its receipt of
actual notice of the initiation or threatening of any proceeding for such
purpose.

                  e. As promptly as practicable after becoming aware of such
event or facts, the Company shall notify the Investor in writing of the
happening of any event or existence of such facts as a result of which the
prospectus included in any registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
promptly prepare a supplement or amendment to such registration statement to
correct such untrue statement or omission, and deliver a copy of such supplement
or amendment to the Investor (or such other number of copies as the Investor may
reasonably request). The Company shall also promptly notify the Investor in
writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a registration statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to the Investor by facsimile on the same day of
such effectiveness and by overnight mail), (ii) of any request by the SEC for
amendments or supplements to any registration statement or related prospectus or
related information, and (iii) of the Company's reasonable determination that a
post-effective amendment to a registration statement would be appropriate.

                  f. The Company shall use its reasonable best efforts to
prevent the issuance of any stop order or other suspension of effectiveness of
any registration statement, or the suspension of the qualification of any
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify the Investor of the issuance of such
order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.

                  g. The Company shall (i) cause all the Registrable Securities
to be listed on each securities exchange on which securities of the same class
or series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation and quotation of all the Registrable Securities on the
Principal Market. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section.

                  h. The Company shall cooperate with the Investor to facilitate
the timely preparation and delivery of certificates (not bearing any restrictive
legend) representing the Registrable Securities to be offered pursuant to any
registration statement and enable such certificates to be in such denominations
or amounts as the Investor may reasonably request and registered in such names
as the Investor may request.

                  i. The Company shall at all times provide a transfer agent and
registrar with respect to its Common Stock.

                  j. If reasonably requested by the Investor, the Company shall
(i) immediately incorporate in a prospectus supplement or post-effective
amendment such information as the Investor believes should be included therein
relating to the sale and distribution of Registrable Securities, including,
without limitation, information with respect to the number of Registrable
Securities being sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities; (ii) make all required
filings of such prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment; and (iii) supplement or make amendments to any
registration statement.

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                  k. The Company shall use its reasonable best efforts to cause
the Registrable Securities covered by the any registration statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.

                  l. Within one (1) Trading Day after any registration statement
which includes the Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investor) confirmation that such registration statement has been declared
effective by the SEC in the form attached hereto as Exhibit A. Thereafter, if
requested by the Buyer at any time, the Company shall require its counsel to
deliver to the Buyer a written confirmation whether or not the effectiveness of
such registration statement has lapsed at any time for any reason (including,
without limitation, the issuance of a stop order) and whether or not the
registration statement is current and available to the Buyer for sale of all of
the Registrable Securities.

                  m. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investor of Registrable
Securities pursuant to any registration statement.

         4. OBLIGATIONS OF THE INVESTOR.

                  a. The Company shall notify the Investor in writing of the
information the Company reasonably requires from the Investor in connection with
any registration statement hereunder. The Investor shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request.

                  b. The Investor agrees to cooperate with the Company as
reasonably requested by the Company in connection with the preparation and
filing of any registration statement hereunder.

                  c. The Investor agrees that, upon receipt of any notice from
the Company of the happening of any event or existence of facts of the kind
described in Section 3(f) or the first sentence of 3(e), the Investor will
immediately discontinue disposition of Registrable Securities pursuant to any
registration statement(s) covering such Registrable Securities until the
Investor's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(f) or the first sentence of 3(e). Notwithstanding
anything to the contrary, the Company shall cause its transfer agent to promptly
deliver shares of Common Stock without any restrictive legend in accordance with
the terms of the Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale prior to the Investor's receipt of a notice from the Company of the
happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e) and for which the Investor has not yet settled.

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         5. EXPENSES OF REGISTRATION.

                  All reasonable expenses, other than sales or brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company, shall be paid by the Company.

         6.       INDEMNIFICATION.

                  a. To the fullest extent permitted by law, the Company will,
and hereby does, indemnify, hold harmless and defend the Investor, each Person,
if any, who controls the Investor, the members, the directors, officers,
partners, employees, agents, representatives of the Investor and each Person, if
any, who controls the Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, attorneys' fees, amounts paid in
settlement or expenses, joint or several, (collectively, "Claims") incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto ("Indemnified Damages"), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in the Registration
Statement, any New Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other "blue sky" laws of any jurisdiction in
which Registrable Securities are offered ("Blue Sky Filing"), or the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, (iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to the Registration Statement or
any New Registration Statement or (iv) any material violation by the Company of
this Agreement (the matters in the foregoing clauses (i) through (iv) being,
collectively, "Violations"). The Company shall reimburse each Indemnified Person
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement, any New Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) or Section 3(e); (ii) with respect to any superceded
prospectus, shall not inure to the benefit of any such person from whom the
person asserting any such Claim purchased the Registrable Securities that are
the subject thereof (or to the benefit of any person controlling such person) if
the untrue statement or omission of material fact contained in the superceded
prospectus was corrected in the revised prospectus, as then amended or
supplemented, if such revised prospectus was timely made available by the
Company pursuant to Section 3(c) or Section 3(e), and the Indemnified Person was

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promptly advised in writing not to use the incorrect prospectus prior to the use
giving rise to a violation and such Indemnified Person, notwithstanding such
advice, used it; (iii) shall not be available to the extent such Claim is based
on a failure of the Investor to deliver or to cause to be delivered the
prospectus made available by the Company, if such prospectus was timely made
available by the Company pursuant to Section 3(c) or Section 3(e); and (iv)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investor pursuant to Section 9.

                  b. In connection with the Registration Statement or any New
Registration Statement, the Investor agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement or any New Registration Statement,
each Person, if any, who controls the Company within the meaning of the 1933 Act
or the 1934 Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
about the Investor set forth on Exhibit B attached hereto and furnished to the
Company by the Investor expressly for use in connection with such registration
statement; and, subject to Section 6(d), the Investor will reimburse any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
the Investor as a result of the sale of Registrable Securities pursuant to such
registration statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investor
pursuant to Section 9.

                  c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding) involving
a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information

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reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the consent of the Indemnified
Party or Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action.

                  d. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.

                  e. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.

         7.       CONTRIBUTION.

                  To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.

         8. REPORTS AND DISCLOSURE UNDER THE SECURITIES ACTS.

                  With a view to making available to the Investor the benefits
of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Investor to sell
securities of the Company to the public without registration ("Rule 144"), the
Company agrees, at the Company's sole expense, to:

                  a. make and keep public information available, as those terms
are understood and defined in Rule 144;

                  b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements and the filing of such reports
and other documents is required for the applicable provisions of Rule 144; and

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                  c. furnish to the Investor so long as the Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting and or disclosure provisions of
Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual
or quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably requested
to permit the Investor to sell such securities pursuant to Rule 144 without
registration.

                  d. take such additional action as is requested by the Investor
to enable the Investor to sell the Registrable Securities pursuant to Rule 144,
including, without limitation, delivering all such legal opinions, consents,
certificates, resolutions and instructions to the Company's Transfer Agent as
may be requested from time to time by the Investor and otherwise fully cooperate
with Investor and Investor's broker to effect such sale of securities pursuant
to Rule 144.

                  The Company agrees that damages may be an inadequate remedy
for any breach of the terms and provisions of this Section 8 and that Investor
shall, whether or not it is pursuing any remedies at law, be entitled to
equitable relief in the form of a preliminary or permanent injunctions, without
having to post any bond or other security, upon any breach or threatened breach
of any such terms or provisions.

9. ASSIGNMENT OF REGISTRATION RIGHTS.

                  The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Investor,
including by merger or consolidation. The Investor may not assign its rights
under this Agreement without the written consent of the Company, other than to
an affiliate of the Investor controlled by Steven G. Martin or Joshua B.
Scheinfeld.

         10. AMENDMENT OF REGISTRATION RIGHTS.

                  Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and the Investor.

         11.      MISCELLANEOUS.

                  a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.

                  b. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) Trading Day after deposit
with a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:

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         If to the Company:
                  Samaritan Pharmaceuticals, Inc.
                  101 Convention Center Drive, Suite 310
                  Las Vegas, Nevada 89109
                  Telephone:        702-735-7001
                  Facsimile:        702-995-0120
                  Attention:        Janet Greeson, CEO

         With a copy to:
                  Kirkpatrick & Lockhart Nicholson Graham LLP
                  Miami Center, 20th Floor,
                  201 South Biscayne Blvd.
                  Miami, FL 33131-2399
                  Telephone:        305-539-3300
                  Facsimile:        305-358-7095
                  Attention:        Clayton Parker

         If to the Investor:
                  Fusion Capital Fund II, LLC
                  222 Merchandise Mart Plaza, Suite 9-112
                  Chicago, IL 60654
                  Telephone:        312-644-6644
                  Facsimile:        312-644-6244
                  Attention:        Steven G.  Martin

or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) Trading Days prior to the effectiveness of such
change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

                  c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.

                  d. The corporate laws of the State of Nevada shall govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by the internal laws of the
State of Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of Illinois. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting the City of Chicago, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the

                                       10

<PAGE>

venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

                  e. This Agreement, and the Purchase Agreement constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement and the Purchase Agreement supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof and thereof.

                  f. Subject to the requirements of Section 9, this Agreement
shall inure to the benefit of and be binding upon the permitted successors and
assigns of each of the parties hereto.

                  g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

                  h. This Agreement may be executed in identical counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This Agreement, once executed by a party, may be
delivered to the other party hereto by facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.

                  i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

                  j. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent and no rules
of strict construction will be applied against any party.

                  k. This Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.

                                   * * * * * *

<PAGE>

         IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.

                                  THE COMPANY:

                                  SAMARITAN PHARMACEUTICALS, INC.

                                  By: /s/ Janet Greeson, Ph.D.
                                  Name: Janet Greeson, Ph.D.
                                  Title: Chief Executive Officer

                                  BUYER:

                                  FUSION CAPITAL FUND II, LLC
                                  BY: FUSION CAPITAL PARTNERS, LLC
                                  BY: SGM HOLDINGS CORP.

                                  By: /s/ Steven G. Martin
                                  Name: Steven G. Martin
                                  Title: President

                                       12

<PAGE>

                                    EXHIBIT A

                        TO REGISTRATION RIGHTS AGREEMENT

                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT

[Date]

[TRANSFER AGENT]

________________
________________

Re: [__________]

Ladies and Gentlemen:

          We are counsel to SAMARITAN PHARMACEUTICALS, INC., a Nevada
corporation (the "Company"), and have represented the Company in connection with
that certain Common Stock Purchase Agreement, dated as of _______, 2005 (the
"Purchase Agreement"), entered into by and between the Company and Fusion
Capital Fund II, LLC (the "Buyer") pursuant to which the Company has agreed to
issue to the Holder shares of the Company's Common Stock, par value $0.001 per
share (the "Common Stock"), in an amount up to Forty Million Dollars
($40,000,000) (the "Purchase Shares"), in accordance with the terms of the
Purchase Agreement. Pursuant to the Stock Purchase Agreement, the Company issued
to the Buyer 1,700,000 shares of Common Stock (the "Commitment Shares").
Pursuant to the Purchase Agreement, the Company also has entered into a
Registration Rights Agreement, dated as of ______, 2005, with the Buyer (the
"Registration Rights Agreement") pursuant to which the Company agreed, among
other things, to register the Purchase Shares, and the Commitment Shares under
the Securities Act of 1933, as amended (the "1933 Act"). In connection with the
Company's obligations under the Purchase Agreement and the Registration Rights
Agreement, on _______, 200_, the Company filed a Registration Statement (File
No. 333-_________) (the "Registration Statement") with the Securities and
Exchange Commission (the "SEC") relating to the sale of the Purchase Shares, and
the Commitment Shares.

          In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at 5:00 P.M.
on __________, 200_ and we have no knowledge, after telephonic inquiry of a
member of the SEC's staff, that any stop order suspending its effectiveness has
been issued or that any proceedings for that purpose are pending before, or
threatened by, the SEC and the Purchase Shares and the Commitment Shares are
available for sale under the 1933 Act pursuant to the Registration Statement.

          The Buyer has confirmed it shall comply with all securities laws and
regulations applicable to it including applicable prospectus delivery
requirements upon sale of the Purchase Shares and the Commitment Shares.

                                                     Very truly yours,
                                                     [Company Counsel]
                                                     By:____________________
CC:       Fusion Capital Fund II, LLC

<PAGE>

                                    EXHIBIT B

                        TO REGISTRATION RIGHTS AGREEMENT

     Information About The Investor Furnished To The Company By The Investor
         Expressly For Use In Connection With The Registration Statement

As of the date of the Purchase Agreement, Fusion Capital beneficially owned
_______ shares of common stock of the Company. Steven G. Martin and Joshua B.
Scheinfeld, the principals of Fusion Capital, are deemed to be beneficial owners
of all of the shares of common stock owned by Fusion Capital. Messrs. Martin and
Scheinfeld have shared voting and investment power over the shares being offered
under the prospectus filed with the SEC in connection with the transactions
contemplated under the Purchase Agreement.<PAGE>

                          LOAN AND SECURITY AGREEMENT
                (Accounts Receivable & Inventory Line of Credit)

        This Loan and Security Agreement (Accounts Receivable & Inventory Line
of Credit), is entered into as of MAY 5, 2005, between BFI BUSINESS FINANCE, a
California corporation (the "Lender"), with its headquarters' office located at
1655 The Alameda, San Jose, CA 95126 and MENDOCINO BREWING COMPANY, INC., A
CALIFORNIA CORPORATION (SOMETIMES, "MENDOCINO") AND RELETA BREWING COMPANY LLC,
A DELAWARE LIMITED LIABILITY COMPANY (SOMETIMES, "RELETA") (Mendocino and Releta
are sometimes hereinafter collectively referred to as "Borrower"). Mendocino's
sole places of business (if it has only one), chief executive office (if it has
more than one place of business) or residence (if an individual) located at 1601
AIRPORT ROAD, UKIAH, CALIFORNIA 95482 (the "Chief Executive Office" for
Mendocino), and Releta's sole places of business (if it has only one), chief
executive office (if it has more than one place of business) or residence (if an
individual) located at 131 EXCELSIOR AVENUE, SARATOGA SPRINGS, NEW YORK 12866
(the "Chief Executive Office" for Releta) .

                                    RECITALS

        A.      Borrower has requested Lender to make loans to Borrower for
business purposes.

        B.      Lender is willing to make such loans to Borrower, on the terms
and conditions set forth in this Agreement, and Borrower agrees to make the
payments required by this Agreement and to comply with the other terms and
conditions of this Agreement.

                                   AGREEMENT

        For good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as set forth below.

        1.      DEFINITIONS AND CONSTRUCTION.

                1.1.    DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:

                "ACCOUNTING PERIOD" has the meaning given in Section 9.4 hereof.

                "ACCOUNT DEBTOR" means a person obligated on an Account, Chattel
Paper, or General Intangible.

                "ACCOUNTS" means all currently existing and hereafter arising
accounts as defined in the Code, as such definition may be changed from time to
time, and shall include, but not be limited to a right to payment of a monetary
obligation for property sold or services rendered, and any and all credit
insurance, guaranties, or security therefor.

                "ADDENDUM" means that certain Addendum A hereto, if applicable.

                "ADVANCE(S)" has the meaning given in Section 2.1.1 hereof.

                "ADMINISTRATIVE FEE" has the meaning given in Section 2.2.10
hereof.

                "AFFILIATE" means, when used with respect to any Person, any
other Person which, directly or indirectly, controls or is controlled by or is
under common control with such Person. For purposes of this definition,
"control" (including the correlative meanings of the terms "controlled by" and
"under common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.

                "AGREEMENT" means this Loan and Security Agreement (Accounts
Receivable & Inventory Line of Credit) together with all addenda, exhibits and
schedules hereto, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.

                "ALLOWABLE AMOUNT" means the lesser of the Borrowing Base and
the Maximum Amount.

                "A R BORROWING BASE" has the meaning set forth in the definition
of Borrowing Base.

                "AUTHENTICATE" shall have the meaning given in the Code, as such
definition may be amended from time to time, which means to sign, execute, or
otherwise adopt a symbol, or encrypt or similarly process a record in whole or
in part, with the present intention of the authenticating person to identify the
person and adopt or accept a record.

                "AUTHORIZED OFFICER" means any officer or employee of Borrower
as set forth in that certain Signature Authorization of even date herewith, as
it may be amended from time to time.

                                  Page 1 of 32
<PAGE>

                "AVERAGE DAILY BALANCE" means the average of the Daily Balance,
which shall be calculated taking into account that no payment made by check
shall be deemed to be made until THREE (-3-) BUSINESS DAYS after receipt of
Lender of such checks to allow for clearance thereof, as provided in Section 3.3
hereof.

                "BANKRUPTCY CODE" means Title 11 of the United States Code, as
amended and any successor statute.

                "BASIC TERM" has the meaning set forth in Section 6.1 hereof.

                "BORROWER" has the meaning set forth in the preamble to this
Agreement, individually and collectively.

                "BORROWER'S BOOKS" means all of Borrower's books and records
including ledgers, records indicating, summarizing, or evidencing Borrower's
properties or assets (including, without limitation, the Collateral) or
liabilities, all information relating to Borrower's business operations or
financial condition, and all computer programs, disc or tape files, printouts,
runs, or other computer prepared information, and the equipment containing such
information.

                "BORROWING BASE" means the sum of the following:

                (a)     EIGHTY PERCENT (80%) IN THE CASE OF MENDOCINO AND
SEVENTY PERCENT (70%) IN THE CASE OF RELETA of the Net Face Amount of Prime
Accounts, but in any event not in an aggregate amount in excess of the Maximum
Account Advance (the "A R Borrowing Base"); plus

                (b)     FIFTY PERCENT (50%) of the Current Market Cost of raw
materials that constitute Eligible Inventory; plus FIFTY PERCENT (50%) of the
Current Market Cost of finished goods that constitute Eligible Inventory, but in
any event not in an aggregate amount in excess of the Maximum Inventory Advance
(the "Inventory Borrowing Base").

                "BUSINESS DAY" means any day which is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close.

                "CERCLA" has the meaning given in the definition of
Environmental Laws.

                "CHATTEL PAPER" has the meaning given in the Code, as such
definition may be amended from time to time, which defines Chattel Paper as a
record or records that evidence both (a) a monetary obligation; and (b) a
security interest in (1) specific goods; (2) a security interest in specific
goods and software used in the goods; (3) a security interest in specific goods
and license of software used in the goods; or (4) a lease of specific goods and
license of software used in the goods.

                "CHIEF EXECUTIVE OFFICE" has the meaning set forth in the
preamble to this Agreement.

                "CLEARANCE DAYS" has the meaning given in Section 3.3 hereof.

                "CLOSING DATE" means the date of the initial advance hereunder.

                "CODE" or "UCC" means the California Uniform Commercial Code, or
any successor statute, as amended from time to time, which is also known as the
UCC.

                "COLLATERAL" means all of the personal property and Trade
Fixtures now owned or hereafter acquired by Borrower whether now existing or
hereafter arising and wherever located, including without limitation: (a) all
Accounts; (b) all Chattel Paper including without limitation Electronic Chattel
Paper; (c) all Inventory; (d) all Equipment; (e) all Trade Fixtures; (f) all
Fixtures, but only if connected with Real Property Collateral (g) all
Instruments; (h) all Financial Assets, including without limitation, Investment
Property; (i) all Documents; (j) all Deposit Accounts; (k) all Letter of Credit
Rights; (l) all General Intangibles including without limitation copyrights,
trademarks, and patents, Payment Intangibles and Software; (m) all Supporting
Obligations; (n) any Commercial Tort Claim listed on any schedule provided
herewith or hereafter; (o) all returned or repossessed goods arising from or
relating to any Accounts or Chattel Paper; (p) all certificates of title and
certificates of origin or manufacturers statements of origin relating to any of
the foregoing, now owned or hereafter acquired; (q) all property similar to any
of the foregoing hereafter acquired by Borrower; (r) all ledger sheets, files,
records, documents, instruments, and other books and records (including without
limitation related electronic data processing Software) evidencing an interest
in or relating to the above; (s) all money, cash or cash equivalents; and (t) to
the extent not otherwise included in the foregoing, all proceeds, products,
insurance claims, and other rights to payment and all accessions to,
replacements for, attachments to, substitutions for, and rents and profits of,
and noncash proceeds of, each of the foregoing. Notwithstanding any contrary
term of this Agreement, Collateral shall not include any waste or other
materials that have been or may be designated as toxic or hazardous.

                "COLLATERAL ACCOUNT" has the meaning give in Section 3.7.2
hereof.

                "COLLATERAL CONTROL ACCOUNT" has the meaning given in Section
3.7.3 hereof.

                "COLLATERAL STATE" has the meaning given in Section 9.14 hereof.

                                  Page 2 of 32
<PAGE>

                "COMMERCIAL TORT CLAIM" has the meaning give in the Code, as
such definition may be amended from time to time, which means a claim arising in
tort with respect to which the claimant is an organization or if the claimant is
an individual, the claim arose in (a) the course of the claimant's business or
professions; and (b) does not include damages arising out of personal injury to
or death of an individual.

                "CUMULATIVE MINIMUM ANNUAL INTEREST PAYMENT" has the meaning
given in Section 2.2.2 hereof.

                "CURRENT MARKET COST" means, as determined by Lender in good
faith, the lower of (a) cost of Inventory, computed on a first-in-first-out
basis in accordance with GAAP; or (b) market value of Inventory.

                "DAILY BALANCE" means the principal amount of any Obligations
owed at the end of a given day.

                "DEEMED PRIME RATE" shall have the meaning given in the
definition of Prime Rate.

                "DEFAULT RATE" has the meaning given in Section 2.2.4 hereof.

                "DELINQUENT ACCOUNTS" shall mean Accounts which remain
uncollected for more than ninety (90) days from the invoice date.

                "DEPOSIT" has the meaning given in Section 2.2.11 hereof.

                "DEPOSIT ACCOUNT(S)" has the meaning given in the Code, as such
definition may be amended from time to time, including without limitation, a
demand, time, savings, passbook or similar account maintained with a bank.

                "DILUTION RATE" shall mean the percentage rate at which
Borrower's Prime Accounts are subject to reduction due to credits, returns, and
allowances.

                "DOCUMENTATION FEE/LEGAL DEPOSIT " shall have the meaning set
forth in Section 2.2.11 hereof.

                "Documents" has the meaning given in the Code, as such
definition may be amended from time to time.

                "ELECTRONIC CHATTEL PAPER" has the meaning given in the Code, as
such definition may change from time to time, which defines Electronic Chattel
Paper as Chattel Paper evidenced by a record or records consisting of
information stored in an electronic medium.

                "ELIGIBLE INVENTORY" means:

                (a)     Inventory acceptable to Lender, in its reasonable and
sole discretion, for lending purposes;

                (b)     Inventory held for sale or lease in the ordinary course
of Borrower's business;

                (c)     Inventory located at Borrower's Chief Executive Office
or Warehouse, provided however, that if any such location is owned by a party
other than Borrower, Lender shall have obtained from the owner thereof an
agreement relative to Lender's rights with respect to such Inventory, in form
and content satisfactory to Lender;

                (d)     Inventory in which Lender has a first priority,
perfected security interest;

                (e)     Inventory not subject to a security interest, lien, or
other encumbrance in favor of any other Person;

                (f)     Inventory of good and merchantable quality that is free
from defect and that is not slow moving, obsolete, returned, perishable, or
manufactured under a license agreement;

                (g)     Inventory owned and in the lawful possession of
Borrower;

                (h)     Inventory which does not consist of packaging and
shipping materials; and

                (i)     Inventory that does not consist of supplies used or
consumed in Borrower's business or work-in-process.

General criteria for Eligible Inventory may be established and revised from time
to time by Lender in good faith. Any Inventory that is not Eligible Inventory
shall nevertheless be part of the Collateral.

                "ENVIRONMENTAL LAWS" means all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment, including ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, petroleum
or petroleum products, chemicals, or industrial, toxic or hazardous substances
or wastes or

                                  Page 3 of 32
<PAGE>

the clean-up or other remediation thereof, including without limitation 42
U.S.C. 9601 (14), Comprehensive Environmental Response, Compensation and
Liability Act of 1980 set forth at 42 U.S.C. 9601 et seq. ("CERCLA"), or the
Resource Conservation and Recovery Act of 1986 set forth at 42 U.S.C. 9601 et
seq. ("RCRA") and all successor statutes and amendments thereto.

                "EPA" means the United States Environmental Protection Agency.

                "Equipment" means all of Borrower's now owned and hereafter
acquired equipment as defined in the Code, as such definition may be amended
from time to time, and wherever located, and shall include, but not be limited
to, all goods (other than inventory, farm products, or consumer goods) including
without limitation machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, Trade Fixtures (but not
including Fixtures unless Real Property Collateral has been pledged to Lender),
all attachments, accessions and property now or hereafter affixed thereto or
used in connection therewith, and substitutions and replacements thereof,
wherever located.

                "ERISA" shall have the meaning given in Section 9.19.

                "EVENT OF DEFAULT" means those events described in Section 11
hereof.

                "FEIN" shall have the meaning given in Section 8.1.15.

                "FINANCIAL ASSETS" has the meaning given in the Code, which
defines Financial Assets as any of the following: (a) a security; (b) an
obligation of a person or a share, participation, or other interest in a person
or in property or an enterprise of a person, that is, or is of a type, dealt in
or traded on financial markets or that is recognized in any area in which it is
issued or dealt in as a medium for investment; and (c) any property that is held
by a securities intermediary for another person in a securities account that has
expressly agreed with the other person that the property is to be treated as a
financial asset.

                "FIXTURES" has the meaning given in the Code, as such definition
may be amended from time to time, which defines Fixtures as goods that have
become so related to particular real property that an interest in them arises
under property law, but shall not include Trade Fixtures.

                "GAAP" means 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 pronouncements of the
Financial Accounting Standards Board (or any successor authority) that are
applicable as of the date of determination.

                "GENERAL INTANGIBLES" means general intangibles as defined in
the Code, as such definition may be amended from time to time, (and shall
include, but not be limited to, registered and unregistered patents, trademarks,
service marks, copyrights, trade names, applications for the foregoing, trade
secrets, goodwill, processes, drawings, blueprints, customer lists, licenses,
whether as licensor or licensee, choses in action and other claims and existing
and future leasehold interests in Equipment, Payment Intangibles and Software),
all whether arising under the laws of the United States of America or any other
country.

                "GOOD FAITH DEPOSIT" shall have the meaning set forth in Section
2.2.11 hereof.

                "GUARANTOR" means, individually and collectively,
-------N/A-------.

                "GUARANTY" means that certain General Continuing Guaranty or
those certain General Continuing Guaranties, signed by Guarantor concurrently
with the execution of this Agreement and the Loan Documents and/or the Term Loan
Documents, as amended from time to time hereafter.

                "HAZARDOUS SUBSTANCES" and "HAZARDOUS WASTES" means all or any
of the following:

                (a)     substances that are defined or listed in, or otherwise
classified pursuant to, any applicable laws or regulations as "hazardous
substances," "hazardous materials," "hazardous wastes," "toxic substances," or
any other formulation intended to define, list, or classify substances by reason
of deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, reproductive toxicity, or "EP toxicity";

                (b)     oil, petroleum, or petroleum derived substances, natural
gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and
other wastes associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources;

                (c)     any flammable substances or explosives or any
radioactive materials; and

                (d)     asbestos in any form or electrical equipment which
contains any oil or dielectric fluid containing levels of polychlorinated
biphenyls in excess of fifty (50) parts per million.

                "INDEBTEDNESS" means all of the following:

                (a)     all indebtedness for borrowed money (whether by loan or
the issuance and sale of debt securities);

                                  Page 4 of 32

<PAGE>

                (b)     that portion of obligations with respect to capital
leases that is properly classified as a liability on a balance sheet in
conformity with GAAP;

                (c)     acceptances, bonds, indentures, notes payable, and
drafts accepted representing extensions of credit whether or not representing
obligations for borrowed money;

                (d)     any obligation owed for all or any part of the deferred
purchase price of property or services if the purchase price is due more than
six (6) months from the date the obligation is incurred or is evidenced by a
note or similar written instrument;

                (e)     all indebtedness secured by any lien on any property or
asset owned or held by Borrower regardless of whether the indebtedness secured
thereby shall have been assumed by Borrower or is nonrecourse to the credit of
Borrower;

                (f)     contingent obligations to the extent such obligations
are no longer contingent but become absolute and remain unpaid;

                (g)     all obligations, contingent or otherwise, relative to
the face amount of any letter of credit, letter of credit guaranties, bankers
acceptances, interest rate swaps, controlled disbursement accounts, or other
financial products;

                (h)     any unfunded obligation of Borrower or any of its
subsidiaries to a Multiemployer Plan required to be accrued by GAAP; and

                (i)     obligations of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower), any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person.

                "INSOLVENCY PROCEEDING" means any case, proceeding, or matter
commenced by or against any Person under any provision of the Bankruptcy Code or
under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.

                "INSTRUMENT" has the meaning given in the Code, as such
definition may be amended from time to time, which defines an Instrument as a
negotiable instrument or any other writing that evidences a right to payment of
a monetary obligation, is not itself a security agreement or lease, and is of a
type that in the ordinary course of business is transferred by delivery with any
necessary endorsement or assignment. Instrument shall include but not be limited
to promissory notes.

                "INVENTORY" means all present and future inventory, as defined
in the Code, as such definition may be amended from time to time, in which
Borrower has any interest and wherever located, and shall include but not be
limited to, goods held for sale or lease or to be furnished under a contract of
service and all of Borrower's present and future raw materials, work in process,
finished goods, and packing and shipping materials, wherever located, and any
documents of title representing any of the above.

                "INVENTORY BORROWING BASE" has the meaning set forth in the
definition of Borrowing Base.

                "INVESTMENT PROPERTY" has the meaning given in the Code, as such
definition may be amended from time to time, which defines Investment Property
as securities, security accounts, commodity contracts, or commodity accounts.

                "IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.

                "LENDER" has the meaning set forth in the preamble to this
Agreement.

                "LENDER EXPENSES" includes without limitation all of the
following:

                (a)     costs or expenses (including without limitation taxes,
photocopying, notarization, telecommunication, insurance premiums, and postage)
paid by Lender;

                (b)     costs and expenses required to be paid by Borrower under
any of the Loan Documents that are paid or advanced by Lender;

                (c)     documentation, filing, recording, publication, appraisal
(including periodic Collateral appraisals) and search fees assessed, paid, or
incurred by Lender in connection with Lender's transactions with Borrower;

                (d)     costs and expenses incurred by Lender in the
disbursement of funds to Borrower (by wire transfer or otherwise);

                (e)     charges paid or incurred by Lender resulting from the
dishonor of checks; costs and expenses paid or incurred by Lender to correct any
default or enforce any provision of the Loan Documents, or in gaining possession
of, maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral or any portion thereof, irrespective
of whether a sale is consummated;

                                  Page 5 of 32
<PAGE>

                (f)     costs and expenses paid or incurred by Lender in
examining Borrower's Books; and

                (g)     costs and expenses of third party claims or any other
suit paid or incurred by Lender in enforcing or defending the Loan Documents and
adjusting or settling disputes and claims with Account Debtors with respect to
the Accounts; and Lender's reasonable attorneys' fees and expenses (whether for
legal services incurred by and expenses from outside counsel and/or from
in-house counsel) incurred in advising, structuring, drafting, reviewing,
administering, amending, terminating, enforcing (including attorneys' fees and
expenses incurred in such adjusted or settled disputes and claims, and in
connection with a "workout," a "restructuring," or an Insolvency Proceeding
concerning Borrower or any Guarantor of the Obligations, irrespective of whether
suit is brought). The attorneys' fees incurred by Lender in any Insolvency
Proceeding shall include, without limitation, those incurred in connection with
debtor-in-possession financing, motions for relief from automatic stay, and
actions to determine dischargeability, and defending, or concerning the Loan
Documents.

                "LETTER OF CREDIT RIGHTS" has the meaning given in the Code, as
such definition may be amended from time to time, which defines Letter of Credit
Rights as a right to payment or performance under a letter of credit, whether or
not beneficiary has demanded or is at the time entitled to demand payment or
performance.

                "LOAN DOCUMENTS" means collectively, this Agreement, the Term
Loan Documents, the Guaranty, and all notes, other guarantees, security
agreements, subordination agreements, and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement or otherwise, as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.

                "LOAN FEE" has the meaning given in Section 2.2.9 hereof.

                "MATERIAL ADVERSE CHANGE" means a material adverse change in any
one or more of the following: (a) Borrower's, any subsidiary's, or any
Guarantor's assets, operations, business, or financial condition, or business or
financial or financial prospects; (b) Borrower's ability to pay and perform the
Obligations when due; (c) any property in which Lender holds a Security
Interest; (d) the perfection or priority of any such Security Interest; or (e)
Lender's rights and remedies under any Loan Documents.

                "MAXIMUM ACCOUNT ADVANCE" means TWO MILLION and 00/100 Dollars
($2,000,0000.00).

                "MAXIMUM AMOUNT" means TWO MILLION and 00/100 Dollars
($2,000,000.00).

                "MAXIMUM INVENTORY ADVANCE" means the lesser of SIX HUNDRED
THOUSAND and 00/100 Dollars ($600,000.00) or FIFTY PERCENT (50%) of the A R
Borrowing Base.

                "MINIMUM MONTHLY INTEREST PAYMENT" has the meaning given in
Section 2.2.3 hereof.

                "NET FACE AMOUNT" means, with respect to an Account, the gross
face amount of such Account less all trade discounts or other deductions to
which the Account Debtor is entitled.

                "OBLIGATIONS" means (a) the due and punctual payment of all
amounts due or to become due under this Agreement; (b) the performance of all
obligations of Borrower under the Loan Documents; and (c) all present and future
obligations owing by Borrower to Lender whether or not for the payment of money,
whether or not evidenced by any note or other instrument, whether direct or
indirect, absolute or contingent, due or to become due, joint or several,
primary or secondary, liquidated or unliquidated, secured or unsecured, original
or renewed or extended, whether arising before, during or after the commencement
of any bankruptcy case in which Borrower is a debtor, (each, a "Insolvency
Proceeding"), including but not limited to Lender Expenses and any obligations
arising pursuant to letters of credit or acceptance transactions or any other
financial accommodations; and all principal, interest, fees, charges, Lender
Expenses, attorneys' fees and accountants' fees chargeable to Borrower or
incurred by Lender in connection with the Loan Documents. Except to the extent
otherwise provided, this Agreement does not secure any obligation described
above which is secured by a consensual lien on real property.

                "OBLIGOR" means Borrower and all Guarantors.

                "OLD LENDER" means THE CIT GROUP/BUSINESS CREDIT, INC.

                "OVERADVANCE" means the amount by which the Obligations exceed
the Allowable Amount.

                "PAYMENT INTANGIBLES" means a General Intangible under which the
Account Debtor's principal obligation is a monetary obligation.

                "PERMITTED INDEBTEDNESS" means Indebtedness evidenced by this
Agreement or the Loan Documents and the Indebtedness set forth in the latest
financial statements of Borrower submitted to Lender on or prior to the Closing
Date or secured by Permitted Liens or refinancings, renewals, or extensions of
the foregoing, provided (a) the terms and conditions of such refinancings,
renewals, or extensions do not materially impair the prospects of repayment of
the Obligations by Borrower; (b) the net cash proceeds of such refinancings,
renewals, or extensions do not result in an increase in the aggregate principal
amount of the Indebtedness so refinanced, renewed, or extended; (c) such
refinancings, renewals, or extensions do not result in a shortening of the
average weighted maturity of the Indebtedness so refinanced, renewed, or
extended; and (d) that to the extent that the Indebtedness that is refinanced
was subordinated in right of payment to the Obligations, then the subordination
terms and conditions of the refinancing of the Indebtedness must be at least as
favorable to Lender as those applicable to the refinanced Indebtedness;

                                  Page 6 of 32

<PAGE>

                "PERMITTED LIENS" means all of the following:

                (a)     liens and security interests held by Lender or agreed to
by Lender in the Term Loan Documents;

                (b)     liens for unpaid taxes of Borrower that are not yet due
and payable;

                (c)     liens and security interests granted against Equipment
disclosed in writing by Borrower to Lender and consented to by Lender in
writing;

                (d)     purchase money security interests and liens of lessors
under capital leases to the extent that the acquisition or lease of the
underlying asset was permitted under this Agreement, and so long as the security
interest or lien only secures the purchase price of the asset;

                (e)     easements, rights of way, reservations, covenants,
conditions, restrictions, zoning variances, and other similar encumbrances that
do not materially interfere with the use or value of the property subject
thereto; and

                (f)     obligations and duties as lessee under any lease
existing on the date of this Agreement.

                "PERSON" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint ventures, limited liability
companies, limited liability partnerships, trusts, land trusts, business trusts,
or other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.

                "POST OFFICE BOX" has the meaning given in Section 3.7.2 hereof.

                "PREMISES" means the locations of Borrower consisting of its
Chief Executive Office and any and all Warehouses.

                "PREPAYMENT" has the meaning given in Section 6.3 hereof.

                "PREPAYMENT FEE" means the fee described in Section 6.3 hereof.

                "PRIME ACCOUNTS" means those Accounts of Borrower that meet all
of the following criteria:

                (a)     are acceptable to Lender;

                (b)     are creditworthy;

                (c)     have been validly assigned as Collateral to Lender,
giving Lender a first priority security interest therein and in all proceeds
thereof;

                (d)     as of the date of determining whether an Account is
"prime" or not, no invoice is more than sixty (60) days past due or remains
uncollected more than ninety (90) days from the date of such invoice;

                (e)     strictly comply with all Borrower's warranties and
representations to Lender;

                (f)     have been created by absolute sales of Borrower's
merchandise or services;

                (g)     are genuine, bona fide and collectible;

                (h)     Borrower will have good, unencumbered and absolute title
to Collateral free of all third party claims;

                (i)     are not subject to any dispute, right of offset,
counterclaim, or right of cancellation or return;

                (j)     all property giving rise to such Accounts will have been
delivered from Borrower's Premises to, and unconditionally accepted by, each
Account Debtor;

                (k)     Borrower has performed all things required of Borrower
by the terms of all agreements or purchase orders giving rise to such Accounts;

                (l)     are due and unconditionally payable on terms of thirty
(30) days or less, or on such other terms (as may be acceptable to Lender) which
are expressly set forth on the face of all invoices, copies of which shall be
delivered to Lender, and no account will then be past due;

                (m)     are not Accounts with respect to which goods are placed
on consignment, guaranteed sale, or other terms by which the payment by the
Account Debtor may be conditional;

                (n)     are not Accounts with respect to which the Account
Debtor is an officer, employee, partner, joint venturer or agent of Borrower;
CAlsa (rev. 02.14.2005) Page 8 of 32 Initial Here ..

                                  Page 7 of 32

<PAGE>

                (o)     are not Accounts with respect to which the Account
Debtor is a resident of a country other than the United States of America;

                (p)     are not Accounts with respect to which the Account
Debtor is the United States of America or any department, agency or
instrumentality of the United States of America;

                (q)     are not Accounts with respect to which the Account
Debtor is any state of the United States of America or any city, county, town,
municipality or division thereof;

                (r)     are not Accounts with respect to which the Account
Debtor disputes liability or makes any claim, or have any defense, crossclaim,
counterclaim or offset;

                (s)     are not Accounts with respect to which any Insolvency
Proceeding is filed by or against the Account Debtor, or if an Account Debtor
becomes insolvent, fails or goes out of business;

                (t)     are not Accounts with respect to which Borrower is or
may become liable to the Account Debtor for goods sold or services rendered by
the Account Debtor to Borrower;

                (u)     are not Accounts which in the aggregate from one Account
Debtor constitutes twentyfive percent (25%) of total Accounts, but the portion
not in excess of such percentage may be deemed Prime Accounts; and

                (v)     are not Accounts from any one Account Debtor of which
twenty-five percent (25%) is ninety (90) days old or older.

                "PRIME RATE" means the variable rate of interest announced as
the "prime" rate in the Western Edition of the Wall Street Journal which is in
effect from time to time; provided that the Prime Rate shall at all times be
deemed to be not less than five and seventy five hundredths percent (5.75%) per
annum (the "Deemed Prime Rate").

                "RCRA" has the meaning given in the definition of Environmental
Laws.

                "REAL PROPERTY COLLATERAL" means that or those certain item(s)
of real property pledged by Borrower and/or Guarantor respectively, pursuant to
this Agreement and the Loan Documents.

                "RENEWAL TERM" shall have the meaning given in Section 6.1.

                "REPORT OF ASSIGNMENT" means the form with which invoices are
transmitted to Lender.

                "SOFTWARE" has the meaning given in the Code, which defines
Software as a computer program and any supporting information provided in
connection with a transaction relating to the program.

                "SOLVENT" means that a Person is able to pay its debts and other
liabilities, contingent obligations and other commitments as they mature in the
normal course of business, and such Person does not intend to, and does not
believe that it will, incur debts beyond such Person's ability to pay as such
debts mature. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.

                "SUPPORTING OBLIGATIONS" has the meaning given in the Code, as
such definition may be amended from time to time, which defines a Supporting
Obligation as 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 a Financial Asset, including without limitation,
Investment Property.

                "TERM LOAN" means the loan extended by Lender to Borrower
pursuant to the Term Loan Documents described in Section 24.15 hereof, if
applicable.

                "TERM LOAN DOCUMENTS" means those documents described in Section
24.15 hereof, if any, and all amendments and renewals thereof.

                "TERMINATION NOTICE" has the meaning given in Section 6.1
hereof.

                "TRADE FIXTURES" means equipment and furnishings which are used
in Borrower's business or operations which become affixed to the Premises or
other location, but which can be removed without causing undue damage to such
Premises, or to such other location.

                "UCC" has the meaning given in the definition of Code.

                "VOIDABLE TRANSFER" has the meaning given in Section 24.11
hereof.

                "WAREHOUSE" means that or those warehouse(s) located at
----------N/A----------.

                1.2.    Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and

                                  Page 8 of 32

<PAGE>

schedules thereto. Whenever the term "Borrower" is used in respect of a
financial covenant or a related definition, it shall be understood to mean
Borrower on a consolidated basis unless the context clearly requires otherwise.

                1.3.    Code. All other terms contained in this Agreement, which
are not specifically defined herein, shall have the meanings provided in the
Code to the extent the same are used herein.

                1.4.    Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the term "including" is not
limiting, and the term "or" has, except where otherwise indicated, the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and similar terms in this Agreement refer to this
Agreement as a whole and not to any particular provision of this Agreement. Any
section, subsection, clause, schedule, and exhibit references are to this
Agreement unless otherwise specified. Any reference in this Agreement or in the
Loan Documents to this Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements, thereto and thereof, as
applicable.

                1.5.    Authenticated Documents Any reference herein to a
"writing", a "written document", or an executed document shall also mean an
"Authenticated" writing or document or "Authentication" unless Lender shall
otherwise require an original writing.

                1.6.    Schedules and Exhibits. All of the schedules and
exhibits attached to this Agreement shall be deemed incorporated herein by
reference as though set forth in full herein.

        2.      Loan and Terms of Payment.

                2.1.    Revolving Advances Against Accounts and Inventory.

                        2.1.1.  Advances Not to Exceed Borrowing Base. Subject
to the terms and conditions of this Agreement, from the Closing Date until
termination of this Agreement, Lender shall, from time to time, at the request
of Borrower, make advances (the "Advances") to Borrower so long as, before and
after such Advance, the Obligations do not exceed the Allowable Amount. Amounts
borrowed pursuant to this Section may be repaid and, subject to the terms and
conditions of this Agreement, reborrowed at any time during the term of this
Agreement.

                        2.1.2.  Reduction of Advance Rates. Lender may, in its
discretion, from time to time, upon not less than five (5) days' prior notice to
Borrower, reduce the Borrowing Base to the extent that Lender determines in good
faith that: (a) the Dilution Rate with respect to the Accounts for any period
(based on the ratio of (1) the aggregate amount of reductions in Accounts other
than as a result of payments in cash to (2)) the aggregate amount of total
sales) has increased in any material respect or may be reasonably anticipated to
increase in any material respect above historical levels; (b) the general
creditworthiness of Account Debtors has declined; (c) the number of days of the
turnover of the Inventory for any period has changed in any material respect;
(d) the liquidation value of the Eligible Inventory, or any category thereof,
has decreased; or (e) the nature and quality of the Inventory has deteriorated.
In determining whether to reduce the Borrowing Base, Lender may consider events,
conditions, contingencies, or risks that are also considered in determining
Prime Accounts or Eligible Inventory

                        2.1.3.  Authorization for Advances. Subject to the terms
and conditions of this Agreement, Lender is authorized to make Advances (a) upon
telephonic, facsimile or other instructions received from anyone purporting to
be an Authorized Officer of Borrower; or (b) at the sole discretion of Lender,
and notwithstanding any other provision in this Agreement, if necessary to meet
any Obligations, including but not limited to any interest not paid when due.
Notwithstanding anything to the contrary contained herein, Lender shall not be
obligated to make an Advance if, before or as a result thereof, the Obligations
shall exceed the Allowable Amount.

                        2.1.4.  Establish Deposit Account; Provide Control
Agreement. Borrower agrees to establish and maintain a single designated Deposit
Account for the purpose of receiving the proceeds of the Advances requested by
Borrower and made by Lender hereunder. Unless otherwise agreed by Lender and
Borrower, any Advance requested by Borrower and made by Lender hereunder shall
be made to such designated Deposit Account. Borrower agrees to provide Lender
with a control agreement in form and substance acceptable to Lender, signed by
the bank or financial institution at which the Deposit Account is located. If
Borrower's bank or financial institution refuses to or does not cooperate in
executing such control agreement, Borrower shall move its account to a financial
institution willing to execute a control agreement.

                2.2.    Interest: Rates, Payments, Fees, and Calculations.

                        2.2.1.  Interest Rates.

                        (a)     On Advances Against Accounts. All Advances
against Accounts hereunder shall bear interest, on the Average Daily Balance, at
a PER ANNUM rate of THREE AND SEVENTY FIVE HUNDREDTHS PERCENT 3.75% in excess of
(1) the Prime Rate; or (2) the Deemed Prime Rate, whichever is higher.

                        (b)     On Advances Against Inventory. All Advances
against Inventory hereunder shall bear interest, on the Average Daily Balance,
at a PER ANNUM rate of THREE AND SEVENTY FIVE HUNDREDTHS PERCENT 3.75% in excess
of (1) the Prime Rate; or (2) the Deemed Prime Rate, whichever is higher.

                        2.2.2.  Cumulative Minimum Annual Interest Payment.
Interest payable under this Agreement, on a cumulative annual basis, shall not
be less than ----------N/A---------- AND 00/100 DOLLARS ($----------
N/A----------) (the "Cumulative Minimum Annual Interest Payment").

                                  Page 9 of 32

<PAGE>

                        2.2.3.  Minimum Monthly Interest Payment. Interest
together with the Administrative Fee payable under this Agreement on a monthly
basis, shall not be less than FIVE THOUSAND NINE HUNDRED FIFTY EIGHT AND 35/100
DOLLARS ($5,958.35) (the "Minimum Monthly Interest Payment").

                        2.2.4.  Default Rate. All Obligations shall bear
interest, from and after the occurrence and during the continuance of an Event
of Default, at a rate equal to an additional THREE PERCENT (3.00%) PER ANNUM in
excess of the applicable interest rate as set forth in Section 2.2.1 (the
"Default Rate"). Lender's failure to assess interest at the Default Rate as
provided hereunder shall not be deemed a waiver by Lender to charge such Default
Rate. Lender reserves the right, and Borrower hereby acknowledges that Lender
may, recalculate interest at the Default Rate.

                        2.2.5.  Interest Payments. Subject to Section 2.2.4,
interest on the Obligations shall be payable monthly, in arrears, shall be
computed at the applicable interest rate as set forth in Section 2.2.1, and
shall be due on the last day of each month following the accrual thereof.
INTEREST SHALL BE PAYABLE COMMENCING ON JUNE 1, 2005. Any interest not paid when
due shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.

                        2.2.6.  Calculation of Interest.

All interest charged hereunder shall be computed on the basis of a three hundred
sixty (360) day year for the actual number of days elapsed. Notwithstanding
anything to the contrary contained herein, any interest rate calculated
hereunder shall be rounded up to the closest one-quarter of one percent (1/4 of
1%), with no adjustments made for rate changes of less than one-quarter of one
percent (1/4 of 1%). Lender shall, for the purpose of the computation of
interest due hereunder, add the Clearance Days to any payments by check, which
is acknowledged by the parties to constitute an integral aspect of the pricing
of Lender's facility to Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by Borrower or Lender. Should any
check not be honored when presented for payment, then Borrower shall be deemed
not to have made such payment, and interest shall be recalculated accordingly.

                        2.2.7.  Computation upon Change in Prime Rate. In the
event the Prime Rate changes, the applicable interest rate hereunder
automatically and immediately shall be increased or decreased by an amount equal
to such change in the Prime Rate.

                        2.2.8.  Principal Payments. Commencing on
----------N/A---------- and continuing on the first (1st) day of every month
through ----------N/A----------, Borrower shall make equal monthly principal
payments in the sum of ----------N/A---------- DOLLARS
($----------N/A----------).

                        2.2.9.  Loan Fee. At the time of funding hereof,
annually (every twelve (12) months) thereafter, and while any Obligations remain
outstanding to Lender, Borrower agrees to pay Lender a loan fee equal to ONE
PERCENT (1.00%) of the Maximum Amount (the "Loan Fee").

                        2.2.10. Administrative Fee. While any Obligations remain
outstanding to Lender, on or before the first (1st) day of each month, Borrower
agrees to pay Lender an administrative fee equal to FOUR TENTHS OF ONE PERCENT
(0.40%) PER MONTH of the Average Daily Balance during the preceding month (the
"Administrative Fee").

                        2.2.11. Deposits and Fees for Lender Expenses. Borrower
shall pay to Lender the Lender Expenses incurred by Lender in connection with
the negotiation and preparation of this Agreement and the Loan Documents,
including but not limited to Lender.

                        (a)     Lender has received or will receive a deposit in
the amount of THREE THOUSAND AND 00/100 DOLLARS ($3,000.00) (the "Good Faith
Deposit") to be applied against such Lender Expenses consisting of hard costs.
Any unpaid portion of the Good Faith Deposit shall be due and payable at the
funding hereof. In the event that such Lender Expenses are less than the Good
Faith Deposit, any such excess amount will be applied to the Loan Fee and then
to Administrative Fee, or if the Loan Fee and Administrative Fee have been paid
in full, such excess amount shall be refunded to Borrower.

                        (b)     Lender has received or will receive a
documentation fee/legal deposit in the amount of THREE THOUSAND and 00/100
Dollars ($3,000.00) to be applied against Lender Expenses consisting of document
preparation and legal fees and costs, (the "Documentation Fee/Legal Deposit").
Any unpaid portion of the Documentation Fee/Legal Deposit shall be due and
payable at the funding hereof.

                        2.2.12. Semi-Annual Audit Fees. Borrower shall pay to
Lender on demand SEMIANNUAL AUDIT FEES OF SEVEN HUNDRED FIFTY AND 00/100 DOLLARS
($750.00) each, plus actual out of pocket costs related to each audit.

        3.      Payment of Advances.

                3.1.    Delivery to Lender. Borrower shall remit to Lender all
payments received by Borrower on Accounts pledged to Lender. Borrower shall pay,
on demand, (a) the Net Face Amount of all Delinquent Accounts; or (b) the Net
Face Amount of Accounts more than sixty (60) days past due. Borrower shall pay
the entire unpaid balance of the Obligations immediately upon: (a) the
occurrence of an Event of Default; or (b) in the case of termination, as set
forth in Section 6.1, whether by notice, lapse of time or otherwise, whichever
occurs first.

                                 Page 10 of 32

<PAGE>

                3.2.    Application of Payments. Payments received shall be
applied first against fees and Lender Expenses, if any, then against interest
and then against principal. To the extent Borrower uses Advances under this
Agreement to purchase any Collateral, Borrower's repayment of the Advances shall
apply on a "first-infirst- out" basis so that the portion of the Advances used
to purchase a particular item of Collateral shall be paid in the chronological
order in which Borrower purchased the Collateral.

                3.3.    Clearance Days. Payments made by check shall be deemed
to be made THREE (-3-) BUSINESS DAYS after receipt by Lender of such check to
allow for, and subject to clearance of such check (the "Clearance Days").

                3.4.    Overadvances. In the event of an Overadvance, as
applicable, such event shall not limit, waive or otherwise affect any rights of
Lender in that circumstance or on any future occasions and Borrower shall, upon
demand by Lender, which may be made at any time or from time to time,
immediately repay to Lender the entire amount of the Overadvance.

                3.5.    Payment of Obligations. Notwithstanding anything to the
contrary contained in this Agreement, no payment received by Lender shall
constitute payment thereof unless and until final payment thereof has been
received.

                3.6.    Statements of Obligations. Lender shall render
statements to Borrower of the Obligations, including principal, interest, fees,
and an itemization of all charges and expenses constituting Lender Expenses
owing, and such statements shall be conclusively presumed to be correct and
accurate and constitute an account stated between Borrower and Lender unless,
within thirty (30) days after receipt thereof by Borrower, Borrower shall have
delivered to Lender by registered or certified mail at its address specified
herein, written objection thereto describing the error or errors contained in
any such statements.

                3.7.    Notification of Accounts. Lender and Borrower have
agreed to the terms set forth below with respect to notification of Accounts.

                        3.7.1.  Right of Lender to Notify Accounts. Lender may,
at any time, irrespective of whether an Event of Default has occurred, without
notice to or the assent of Borrower: (a) notify any Account Debtor that the
underlying Account has been assigned to Lender by Borrower and that payment
thereof is to be made to the order of and directly and solely to Lender; and (b)
send, or cause to be sent by its designee, written or telephonic requests (which
may identify the sender by a pseudonym) for verification of any Account directly
to the appropriate Account Debtor or any bailee with respect thereto. At
Lender's request, all invoices and statements sent to any Account Debtor or any
bailee shall state that the relevant Account has been assigned to Lender and
that any payments in respect thereof are payable directly and solely to Lender.

                        3.7.2.  Collateral Account. Borrower shall direct, at
Borrower's expense and in the manner requested by Lender from time to time, that
remittances and all other collections and proceeds of Accounts and other
Collateral be (a) deposited into a lock box account (the "Collateral Account")
maintained in Lender's name as set forth in EXHIBIT A; or (b) sent to Lender or
a post office box (the "Post Office Box") designated by or in the name of
Lender, or in the name of Borrower, but as to which access is limited solely to
Lender also as set forth in EXHIBIT A. In connection with the Collateral
Account, Borrower shall execute such lockbox agreement as Lender shall require.
Borrower shall maintain with Lender, and Borrower hereby grants to Lender a
security interest in, the Deposit Account representing the Collateral Account,
over which Borrower shall have no control and into which the proceeds of all
Collateral shall be deposited immediately upon their receipt.

                        3.7.3.  Collateral Control Account. Lender may, on
occasion, agree to permit Borrower to maintain a Deposit Account in addition to
the Collateral Account (the "Collateral Control Account"), provided (a) Lender
has received a control agreement in form and substance acceptable to Lender,
which is fully executed by the financial institution where such account is
located; and (b) such account is a blocked account to which only Lender may have
access. A description of said Collateral Control Account is set forth in EXHIBIT
A hereto.

                        3.7.4.  Procedure Regarding Mail Delivered to the Post
Office Box. All mail delivered to the Post Office Box shall be opened by Lender,
checks contained therein shall be endorsed by Lender, and all such items shall
be deposited by Lender into the Collateral Account.

                        3.7.5.  Wire Transfers. Borrower shall direct all
Account Debtors on Accounts who make payments by electronic transfer of funds to
wire such funds directly to the Collateral Account.

                        3.7.6.  Monies Held in Trust. Borrower shall hold in
trust for Lender all amounts Borrower may receive in payment of or relating to
any Accounts despite directions to make payment to the Post Office Box or the
Collateral Account, and immediately deliver such payments to Lender in their
original form as received, with proper endorsements. Borrower and all of its
Affiliates, subsidiaries, shareholders, directors, employees or agents shall,
acting as trustee for Lender, receive, as the property of Lender, any monies,
checks, notes, drafts, or any other payment relating to and/or proceeds of
Accounts or other Collateral which come into their possession or under their
control and immediately upon receipt thereof, shall deposit or cause the same to
be deposited in the Collateral Account, or remit the same or cause the same to
be remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's own funds. Borrower shall continue to remit such payments to Lender
until such time as Borrower's Obligations have been paid in full.

                        3.7.7.  Authorization. Notwithstanding any other
provision of this Agreement, Borrower irrevocably authorizes Lender to transfer
into the Collateral Account any funds in payment of or relating

                                 Page 11 of 32

<PAGE>

to the Accounts that have been deposited into other deposit accounts with Lender
or that Lender has otherwise received.

                        3.7.8.  Lender's Right to Items in Collateral Account.
Lender shall have all right, title and interest in all of the items contained
from time to time in the Collateral Account and their proceeds.

                        3.7.9.  Lender Has Sole Control Over Account. Neither
Borrower, nor any Person or entity claiming through Borrower shall have any
right in or control over the use of, or any right to withdraw any amount from
the Collateral Account which shall be under Lender's sole control. Unless the
instruments so deposited in the Collateral Account are dishonored, or unless
Lender shall in Lender's discretion have remitted the amount thereof to
Borrower, Lender shall credit the amount thereof against Borrower's Obligations
to Lender.

                        3.7.10. Lender Authorization.

                        (a)     Borrower hereby irrevocably authorizes Lender
and any designee of Lender, at Borrower's sole expense, to exercise at any time
in Lender's or such designee's discretion all or any of the following powers as
attorney in fact of Borrower until all of the Obligations have been paid in
full: (1) receive, take, endorse, assign, deliver, accept and deposit, in the
name of Lender or Borrower, any and all cash, checks, commercial paper, drafts,
remittances and other instruments and documents relating to the Collateral or
the proceeds thereof (whether checks or other forms of payment are (i) in the
name of Borrower; (ii) any other name under which it now does business or does
business in the future;(iii) or names of its products now or in the future, and
Borrower additionally agrees not to make any protest of any kind against Lender
for negotiating such checks or other items described herein); (2) take or bring,
in the name of Lender or Borrower, all steps, actions, suits or proceedings
deemed by Lender necessary or desirable to effect collection of or other
realization upon the Accounts and other Collateral; (3) after an Event of
Default, extend the time of payment of, compromise or settle for cash, credit,
return of merchandise, and upon any terms or conditions, any and all Accounts or
other Collateral which includes a monetary obligation and discharge or release
any Account Debtor or other obligor (including filing of any public record
releasing any lien granted to Borrower by such Account Debtor), without
affecting any of the Obligations; (4) execute in the name of Borrower and file
against Borrower in favor of Lender financing statements or amendments with
respect to the Collateral; (5) pay any sums necessary to discharge any lien or
encumbrance which is senior to Lender's security interest in the Collateral,
which sums shall be included as Obligations hereunder; (6) at any time,
irrespective of whether an Event of Default has occurred, without notice to or
the assent of Borrower, notify any Account Debtor obligated with respect to any
Account, that the underlying Account has been assigned to Lender by Borrower and
that payment thereof is to be made to the order of and directly and solely to
Lender; (7) after an Event of Default, change the address for delivery of mail
to Borrower and to receive and open mail addressed to Borrower; (8) send
requests for verification of Accounts; (9) to make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance; (10) to settle and adjust
disputes and claims respecting the Accounts directly with Account Debtors, for
amounts and upon terms which Lender determines to be reasonable; (11) Lender may
cause to be executed and delivered any documents and releases which Lender
determines to be necessary; and (12) qualify Borrower to do business in any
state.

                        (b)     Borrower authorizes Lender to accept, indorse
and deposit on behalf of Borrower any checks tendered by an Account Debtor "in
full payment" of its obligation to Borrower. Borrower shall not assert against
Lender any claim arising therefrom, irrespective of whether such action by
Lender affects an accord and satisfaction of Borrower's claims, under ss.3-311
of the Code, or otherwise.

                        (c)     BORROWER HEREBY RELEASES AND EXCULPATES LENDER,
LENDER'S OFFICERS, EMPLOYEES, AGENTS, DESIGNEES, ATTORNEYS, AND ACCOUNTANTS FROM
ANY AND ALL LIABILITY ARISING FROM ANY ACTS UNDER THIS AGREEMENT OR RELATED TO
THIS AGREEMENT IN ANY MANNER OR IN FURTHERANCE THEREOF, WHETHER OF OMISSION OR
COMMISSION, AND WHETHER BASED UPON ANY ERROR OF JUDGMENT OR MISTAKE OF LAW OR
FACT AND WHETHER BASED UPON ANY LEGAL THEORY, INCLUDING WITHOUT LIMITATION,
BREACH OF CONTRACT, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS, EXCEPT FOR LIABILITY DIRECTLY CAUSED BY LENDER'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. IN NO EVENT SHALL LENDER HAVE ANY LIABILITY TO
BORROWER FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.

        4.      Audits. Lender shall have the right to conduct audits of
Borrower's Accounts, Inventory, and Borrower's Books on a semi-annual basis
during the term of this Agreement. The cost of each audit shall be paid by
Borrower, which cost per audit shall not exceed the sum set forth in Section
2.2.12. Borrower shall pay such cost within five (5) Business Days of receipt of
invoice and if such cost is not paid by such date, Lender may charge such cost
against the Obligations at such time or if not charged at such time, upon
termination. In addition, upon the occurrence of an Event of Default, Lender may
conduct such additional audits as it deems appropriate, also at Borrower's cost,
but not subject to any limitation contained in Section 2.2.12.

                4.1.    Delivery of Collateral. At such times as Lender may
request and in the manner specified by Lender, Borrower shall deliver to Lender
or Lender's representative original invoices, agreements, proof of rendition of
services and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to any of the Collateral, together with customer
statements, schedules describing the proceeds or statements of account and
confirmatory assignments to Lender of the proceeds in form and substance
satisfactory to Lender and duly executed by Borrower. Without limiting the
provisions of any other section of this Agreement, Borrower will promptly notify
Lender, in writing, of Borrower's granting of credits, discounts, allowances,
deductions, return authorizations or the like with respect to any proceeds. In
no event shall any such schedule or confirmatory assignment (or the absence
thereof or omission of any proceeds therefrom) limit or in any way be construed
as a waiver, limitation, or modification of the liens or rights of Lender or the
warranties, representations,

                                 Page 12 of 32

<PAGE>

and covenants of Borrower under this Agreement. In addition, in the event that
any Collateral, including proceeds, is evidenced by or consists of Chattel
Paper, Documents, Instruments, or Financial Assets, including without
limitation, Investment Property, Borrower shall, immediately upon written
request therefor from Lender, endorse and assign such Chattel Paper, Documents,
Instruments, or Financial Assets, including without limitation, Investment
Property over to Lender and deliver actual physical possession of such Chattel
Paper, Documents, Instruments, or Financial Assets, including without
limitation, Investment Property to Lender with, if applicable, stock powers in
blank executed by Borrower.

        5.      Conditions Precedent to Advances.

                5.1.    Conditions Precedent to Initial Advance. The obligation
of Lender to make the initial Advance is subject to the fulfillment, to the
satisfaction of Lender and its counsel, of each of the conditions set forth
below on or before the Closing Date.

                        5.1.1.  Lien in First Position. Lender shall be
satisfied that its lien against the Collateral is a first priority perfected
security interest.

                        5.1.2.  UCC Search. Lender shall have received searches
with results reflecting the filing of its financing statements and fixture
filings.

                        5.1.3.  Documents Contemplated Herein. Lender shall have
received all of the Loan Documents, duly executed, and each such document shall
be in full force and effect.

                        5.1.4.  Authorization. Lender shall have received such
certificate of authorization, corporate resolution, unanimous written consent,
or other writing as Lender deems appropriate under the circumstances, duly
executed by the secretary, general partner, managing member, or other
appropriate representative of Borrower, authorizing the execution and delivery
of this Agreement and the other Loan Documents to which Borrower is a party and
authorizing one or more specific officers, general partners, managing members,
or other persons to execute and deliver same to Lender.

                        5.1.5.  Bylaws, etc. Lender shall have received copies
of Borrower's By-laws and Articles, Certificate of Incorporation, Articles of
Organization, Partnership Agreement, Trust Agreement, or Operating Agreement all
duly certified as appropriate, as amended, modified, or supplemented to the
Closing Date.

                        5.1.6.  Certificate From State of California (for
Mendocino);and New York and Delaware (for Releta). Lender shall have received a
certificate of status, corporate or otherwise, with respect to Borrower dated as
of a date acceptable to Lender, by the Secretary of State of California for
Mendocino; and New York and Delaware for Releta , which certificate shall
indicate that Borrower is in good standing in such state.

                        5.1.7.  Certificates From States Other Than California
(for Mendocino); and New York and Delaware (for Releta). Lender shall have
received certificates of status, corporate or otherwise, with respect to
Borrower dated as of a date acceptable to Lender, issued by the Secretary of
State of the states in which its failure to be duly qualified or licensed would
have a Material Adverse Change in the financial condition or properties and
assets of Borrower, and shall indicate that Borrower is in good standing.

                        5.1.8.  Insurance Policies and Endorsements. Lender
shall have received the certified copies of the policies of insurance, together
with the endorsements thereto, as further described in Section 9 hereof, as are
required hereby, the form and substance of which shall be satisfactory to Lender
and its counsel.

                        5.1.9.  Certificates of Title. Lender shall have
received duly executed certificates of title with respect to that portion of the
Collateral that is subject to certificates of title, if any.

                        5.1.10. Evidence of Payment of Taxes. Lender shall have
received satisfactory evidence that all returns required to be filed by Borrower
have been timely filed and all taxes upon Borrower or its properties, assets,
income and franchises (including real property taxes and payroll taxes) have
been paid prior to delinquency, except such taxes that are the subject of a
Permitted Protest.

                        5.1.11. Subordination Agreements. Lender shall have
received subordination agreements in form satisfactory to Lender from all
parties that Lender shall require.

                        5.1.12. Guaranty. Lender shall have received the duly
executed Guaranty from Guarantor, and Guarantor shall have executed the
Acknowledgment and Agreement by Guarantor set forth at the end of this
Agreement.

                        5.1.13. Payment of All Fees and Lender Expenses. All
fees and Lender Expenses required to be paid in connection with this Agreement
shall have been paid.

                        5.1.14. Deed of Trust From Guarantor. Lender shall have
received the Deed of Trust for the Real Property Collateral commonly known as
----------N/A----------, which secures the obligations of Guarantor under the
Guaranty and which shall be in ----------N/A---------- (----------N/A----------)
PRIORITY against such Real Property Collateral.

                        5.1.15. Bailment Agreements; Waiver and Consents by Real
Property Owner(s). Borrower shall execute and deliver, or cause to be executed
and delivered to Lender such agreements, documents, and instruments in form and
substance acceptable to Lender, as Lender may deem reasonably necessary or
desirable

                                 Page 13 of 32
<PAGE>

to protect its interests in the Collateral at the Premises, including without
limitation, UCC-1 Financing Statements and Waivers and Consents by Real Property
Owner(s) and/or Bailment and Security Agreements. The Inventory and Equipment
shall not, at any time now or hereafter, be stored with a bailee, warehouseman,
or similar party without Lender's prior written consent. Additionally, Borrower
shall not open any new locations unless Borrower (a) gives Lender thirty (30)
days' prior written notice of the intended opening of any such new location; and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments in form and substance acceptable to
Lender, as Lender may deem reasonably necessary or desirable to protect its
interests in the Collateral at such location, including without limitation,
UCC-1 Financing Statements and Waiver and Consent by Real Property Owner(s)
and/or Bailment and Security Agreements.

                        5.1.16. Pre-Funding Audit. Lender shall have performed a
pre-funding audit of Borrower's Accounts and Inventory, with results
satisfactory to Lender.

                        5.1.17. Key Person Life Insurance. Lender shall have
received an assignment of Borrower's interest in the key person insurance on the
life of ----------N/A---------- in the amount of ----------N/A----- ----- AND
00/100 DOLLARS ($----------N/A----------).

                        5.1.18. Assignment of Insurance Claims. Lender shall
have received an assignment of Borrower's claim against its insurance company in
the sum of approximately ----------N/A---------- AND 00/100 DOLLARS
($----------N/A----------).

                        5.1.19. Payment to Old Lender; Termination of Old
Lender's Security Interest. Old Lender shall have been paid in full and Old
Lender's security interest in any assets of Borrower and all Collateral shall
have been terminated.

                        5.1.20. Control Agreements. Borrower shall execute, or
cause to be executed, and Lender shall have received such control agreements, in
form and substance satisfactory to Lender and its counsel, regarding Deposit
Accounts, Investment Property, or such other Collateral as Lender may require.

                        5.1.21. Other Documents and Legal Matters. All other
documents in connection with the transactions contemplated by this Agreement
shall have been delivered or executed or recorded and shall be in form and
substance satisfactory to Lender and its counsel, including without limitation a
Report of Assignment of Invoices and all procedure requirements, whether
pursuant to a procedure manual or otherwise, shall have been met.

                5.2.    Conditions Precedent to All Advances. The items set
forth below shall be conditions precedent to all Advances hereunder and under
the Loan Documents.

                        5.2.1.  Representations and Warranties. The
representations and warranties contained in this Agreement and the other Loan
Documents shall be true and correct in all respects on and as of the date of
such Advance, as though made on and as of such date (except to the extent that
such representations and warranties relate solely to an earlier date).

                        5.2.2.  No Event of Default. No Event of Default or
event which with the giving of notice or passage of time would constitute an
Event of Default shall have occurred and be continuing on the date of such
Advance, nor shall either result from the making of the Advance.

                        5.2.3.  No Injunction, etc. No injunction, writ,
restraining order, or other order of any nature prohibiting, directly or
indirectly, the making of such Advance shall have been issued and remain in
force by any governmental authority against Borrower, Lender, or any Affiliate.

                        5.2.4.  Procedural Requirements. Borrower shall have
submitted a Report of Assignment and followed such other procedures as Lender
may require pursuant to a procedure manual or otherwise.

        6.      Basic Term; Termination; Prepayment Fee.

                6.1.    Basic Term. This Agreement will be effective upon the
Closing Date, will continue in full force and effect for TWELVE (12) MONTHS
thereafter (the "Basic Term"), and shall be further automatically extended, for
successive periods equal to the term of the Basic Term (each, a "Renewal Term"),
unless Borrower shall have given the Lender written notice of its intention to
terminate (a "Termination Notice") at least thirty (30) days prior to the
anniversary of each Basic Term anniversary, whereupon this Agreement shall
terminate as of the date fixed in the Termination Notice. Notwithstanding any
contrary provisions herein, Lender reserves the right to terminate this
Agreement at its sole discretion upon giving thirty (30) days' prior written
notice to Borrower pursuant to provisions of Section 15 hereof.

                6.2.    Termination; Payments Due upon Termination. Upon
termination of this Agreement whether pursuant to Section 6 or due to the
occurrence of an Event of Default pursuant to Section 11, Borrower shall pay the
Obligations to Lender.

                6.3.    Prepayment Fee. The Obligations may be prepaid by
Borrower at any time and to the extent such Prepayment occurs, Borrower shall
pay to Lender a sum equal to the amount of (a) the Cumulative Minimum Annual
Interest Payment less interest paid during the Basic Term or Renewal Term; or
(b) an amount equal to the Minimum Monthly Interest Payment times the number of
months remaining in the Basic Term or Renewal Term, as applicable (the
"Prepayment Fee"). In addition, Borrower shall also pay any prepayment penalties
provided for in the Term Loan Documents or any other agreement with Lender.
"Prepayment" includes

                                 Page 14 of 32
<PAGE>

any payment or other reduction of the balance of the Obligations, regardless of
whether susuch payment or other reduction (1) is voluntary or involuntary; (2)
is occasioned by Lender's acceleration of the Obligations or demand hereunder;
(3) is made by Borrower or other third party, including Guarantor; (4) results
from Lender's receipt or collection of proceeds of its Collateral, including
insurance proceeds and condemnation awards; (5) results from Lender's exercise
of its right of setoff; and/or (6) is made during an Insolvency Proceeding, or
is made pursuant to any plan of reorganization or liquidation.

                6.4.    Other Obligations Upon Termination of this Agreement.
Upon termination of this Agreement whether pursuant to Section 6 or due to the
occurrence of an Event of Default pursuant to Section 11, the Obligations owed
under the Term Loan Documents or any other Loan Documents shall be accelerated
and shall be due, owing and payable at such time, including without limitation,
all Lender Expenses.

                6.5.    Rights upon Termination. No termination of this
Agreement shall relieve or discharge Borrower of Borrower's duties, Obligations,
or covenants hereunder, including without limitation the obligation to continue
to turn over sales information and invoices, and Lender's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Lender's obligation to provide Advances
hereunder is terminated.

        7.      Creation of Security Interest.

                7.1.    Grant of Security Interest. In order to secure the
payment and performance in full of all of the Obligations, Borrower hereby
grants to Lender a continuing security interest in the Collateral.

                7.2.    Express Authority of Lender to Execute UCC Financing
Statement(s). Notwithstanding any provision hereof, Lender is hereby expressly
authorized to execute and file on behalf of Borrower, UCC Financing
Statement(s), including but not limited to corrections, amendments, and
modifications thereof, including, without limitation, the use of an abbreviated
description of Collateral such as "All Assets of the Borrower" on any and all of
the foregoing.

                7.3.    Delivery of Additional Documentation Required. At any
time upon the request of Lender, Borrower shall hereby authorize the preparation
and filing by Lender and/or shall execute and deliver to Lender all financing
statements, continuation financing statements, control agreements, fixture
filings, security agreements, chattel mortgages, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of Accounts, letters of authority, and all other
documents that Lender may reasonably request, in form satisfactory to Lender, to
perfect and continue the perfection of Lender's security interests in the
Collateral, and in order to fully consummate all of the transactions
contemplated hereby and under the Loan Documents.

        8.      Representations, Warranties, and Covenants.

                8.1.    Borrower's Representations, Warranties, and Covenants.
So long as Borrower is indebted to Lender, Borrower warrants, represents, and
agrees that the statements set forth herein are true and correct and shall
remain so.

                        8.1.1.  Borrower Sole Owner of Collateral; Personal
Property; First Priority Security Interest. All Collateral is (a) solely owned
by Borrower; (b) shall remain personal property at all times except to the
extent granted in connection with the pledge of Real Property Collateral; and
(c) all security interests against any Collateral given or caused to be given by
Borrower to Lender are and will be first priority security interests thereon
(except insofar as Borrower has notified Lender to the contrary in writing and
Lender has consented to such prior security interest by a third party).

                        8.1.2.  No Other Liens. Borrower has good and
indefeasible title to the Collateral and the Collateral is free and clear of all
liens, encumbrances, security interests, and adverse claims or restrictions on
transfer or pledge except: (a) Permitted Liens; and (b) as disclosed in writing
by Borrower to Lender; and further, (c) all such liens, encumbrances, security
interests, and adverse claims that have either previously or concurrently
herewith, been consented to in writing by Lender.

                        8.1.3.  Condition of Collateral; No Transfer of
Collateral. The Collateral is (a) kept in good condition and repair; (b) is not
subject to waste; and (c) will not (except for sales of Inventory in the
ordinary course of business) be sold, transferred, assigned or removed from the
Premises without first obtaining Lender's prior written consent.

                        8.1.4.  Facts, Figures and Representations True and
Correct. All facts, figures, and representations given, or caused to be given,
by Borrower to Lender in connection with the value of the Collateral or
regarding each Advance or Account or pertaining to anything done under this
Agreement shall be true and correct.

                        8.1.5.  Books and Records. Borrower's Books and records
fully and accurately reflect all of Borrower's assets and liabilities (absolute
and contingent) and are kept in the ordinary course of business in accordance
with GAAP.

                        8.1.6.  Fair Market Value of Collateral. The fair market
value of the Collateral is, and shall at all times be, not less than the value
carried on Borrower's financial statements (less normal depreciation caused by
ordinary wear and tear) and as represented to Lender.

                                 Page 15 of 32
<PAGE>

                        8.1.7.  Taxes. All taxes of any governmental or taxing
authority due or payable by, or imposed or assessed against Borrower, have been
paid and shall be paid in full before delinquency.

                        8.1.8.  No Actions, Litigation, etc. Except as disclosed
in writing by Borrower to Lender, (a) there are no actions or proceedings
pending by or against Borrower or Guarantor before any court or administrative
agency; and (b) Borrower does not have knowledge or belief of any pending,
threatened, or imminent litigation, governmental investigations, or claims,
complaints, actions, or prosecutions involving Borrower or any Guarantor of the
Obligations, except for (1) ongoing collection matters in which Borrower is the
plaintiff; and (2) matters arising after the date hereof that, if decided
adversely to Borrower or Guarantor, would not (i)materially impair the prospect
of repayment of the Obligations; or (ii) materially impair the value or priority
of Lender's security interests in the Collateral.

                        8.1.9.  Legal Power and Authority. Borrower has the
legal power and authority to enter into this Agreement and the Loan Documents
and to perform and discharge Borrower's Obligations hereunder and under the Loan
Documents. The Persons signing this Agreement and the Loan Documents on behalf
of Borrower are authorized to do so.

                        8.1.10. Payments on Accounts. Every payment falling due
on Accounts assigned to Lender will be duly paid and received by Lender on or
before the earlier of (a) ninety (90) days from the date of each invoice; or (b)
sixty (60) days from the due date of each invoice.

                        8.1.11. Prime Accounts. All Accounts against which
Borrower seeks Advances from Lender are now Prime Accounts and Borrower shall
only seek Advances against Accounts if such Accounts are believed by Borrower to
be Prime Accounts as defined above.

                        8.1.12. Eligible Inventory. All Inventory against which
Borrower seeks Advances from Lender is and shall be Eligible Inventory as
defined above.

                        8.1.13. Location of Inventory. Except as permitted
herein, the Inventory is not and shall not be stored with a bailee,
warehouseman, or similar party (without Lender's prior written consent) and is
located and shall be located only at the Premises.

                        8.1.14. Inventory Records. Borrower now keeps, and
hereafter at all times shall keep, correct and accurate records itemizing and
describing the kind, type, quality, and quantity of the Inventory, and
Borrower's cost therefor.

                        8.1.15. Location of Chief Executive Office; FEIN;
Organizational Number. The Chief Executive Office of Borrower is located at the
address indicated in the preamble to this Agreement. Borrower's Federal Employer
Identification Number (the "FEIN") is 68-0318293 FOR MENDOCINO AND 68-0398450
FOR RELETA and the number assigned by California (for Mendocino) and Delaware
(for Releta), the state of Borrower's organization, for Borrower's
organizational identification number is CA C1876489 FOR MENDOCINO AND DE
D2799258 FOR RELETA.

                        8.1.16. Due Organization and Qualification. Borrower is
a duly formed, organized, and existing corporation, limited liability company,
limited partnership, general partnership, or other legal entity in good
standing, qualified, and licensed to do business in the state of its
incorporation or formation and in any other state where the failure to be so
licensed or qualified could reasonably be expected to have a Material Adverse
Change to the business, operations, conditions (financial or otherwise),
finances or prospects of Borrower, or on the value of the Collateral to Lender.

                        8.1.17. Due Authorization; No Conflict. The execution,
delivery, and performance of the Loan Documents are within Borrower's powers,
have been duly authorized, and are not in conflict with nor constitute a breach
of any provision contained in Borrower's By-laws and Articles, Certificate of
Incorporation, Articles of Organization, Partnership Agreement, Trust Agreement,
or Operating Agreement, nor will they constitute an event of default under any
material agreement to which Borrower is a party or by which its properties or
assets may be bound.

                        8.1.18. Financial Statements Fairly Represent Borrower's
Financial Condition; No Material Adverse Change in Financial Condition. All
financial statements relating to Borrower or any Guarantor of the Obligations
that have been delivered by Borrower to Lender have been prepared in accordance
with GAAP and fairly present Borrower's (or such Guarantor's, as applicable)
financial condition as of the date thereof and Borrower's results of operations
for the period then ended. There has not been a Material Adverse Change in the
financial condition of Borrower (or such Guarantor, as applicable) since the
date of the latest financial statements submitted to Lender on or before the
Closing Date.

                        8.1.19. Solvency. No transfer of property is being made
by Borrower and no Obligation is being incurred by Borrower in connection with
the transactions contemplated by this Agreement or the other Loan Documents with
the intent to hinder, delay, or defraud either present or future creditors of
Borrower.

                        8.1.20. Environmental Condition. Except as disclosed in
writing by Borrower to Lender, none of Borrower's properties or assets has ever
been used by Borrower or, to the best of Borrower's knowledge, by previous
owners or operators in the disposal of, or to produce, store, handle, treat,
release, or transport, any Hazardous Substances or Hazardous Wastes. None of the
Premises of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any Environmental Laws as a disposal site
for Hazardous Substances or Hazardous Wastes, or a candidate for closure
pursuant to any Environmental Laws. No

                                 Page 16 of 32

<PAGE>

lien arising under any Environmental Laws has attached to any revenues or to any
real or personal property owned or operated by Borrower. Borrower has not
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental agency concerning
any action or omission by Borrower resulting in the releasing or disposing of
Hazardous Substances or Hazardous Wastes into the environment. Borrower is not
using and neither Borrower nor to the best of Borrower's knowledge, any prior
owner, occupant, or operator of the Premises has used Hazardous Substances or
Hazardous Wastes at or upon, or in any way affecting, the Premises in any manner
which violates or violated any Environmental Laws if such violation could,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Change with respect to any of the Premises or property of Borrower or to
result in a Material Adverse Change.

                8.2.    Reliance by Lender; Cumulative Representations and
Warranties. Each warranty and representation contained in this Agreement
automatically shall be deemed repeated with each Advance and shall be
conclusively presumed to have been relied on by Lender regardless of any
investigation made or information possessed by Lender. The warranties and
representations set forth herein shall be cumulative and in addition to any and
all other warranties and representations that Borrower now or hereafter shall
give, or cause to be given, to Lender.

        9.      Affirmative Covenants. Borrower covenants and agrees that, so
long as any credit hereunder shall be available and until full and final payment
of the Obligations, and unless Lender shall otherwise consent in writing, the
following statements shall be true and Borrower shall do all of the actions set
forth below.

                9.1.    Preserve Good Standing. Borrower shall do all things
necessary to preserve its good standing as a CORPORATION (FOR MENDOCINO) AND
LIMITED LIABILITY COMPANY (FOR RELETA) under the laws of the states where
Borrower is authorized to do business, specifically the state(s) of CALIFORNIA
(FOR MENDOCINO); AND NEW YORK (FOR RELETA), and under the laws of California
(for Mendocino) and Delaware (for Releta), the state of its organization.
Further, Borrower shall maintain the state of California (for Mendocino) and
Delaware (for Releta) as the state in which Borrower is organized or
incorporated.

                9.2.    Preliminary Annual Financial Statements. Borrower shall
provide Lender, as soon as possible after the end of each fiscal year of
Borrower, and in any event within sixty (60) days thereafter, preliminary year
end financial statements, including but not limited to, the balance sheet and
income statement for such year.

                9.3.    Reviewed Annual Financial Statements. Borrower shall
provide Lender, as soon as possible after the end of each fiscal year but in any
event within one hundred twenty (120) days of the end of Borrower's fiscal year:

                (a)     a complete copy of Borrower's financial statements,
including but not limited to (1) the management letter, if any; (2) the balance
sheet as of the close of the fiscal year; and (3) the income statement for such
year, together with a statement of cash flows, reviewed by a firm of independent
certified public accountants of recognized standing and acceptable to Lender, or
if permitted by Lender in writing, by Borrower; and

                (b)     a statement certified by the chief financial officer of
Borrower that Borrower is in compliance with all the terms, conditions,
covenants, and warranties of this Agreement.

                9.4.    Other Financial Statements. No later than thirty (30)
days after the close of each month (each, an "Accounting Period"), Borrower
shall provide Lender with Borrower's balance sheet as of the close of such
Accounting Period and its income statement for that portion of the then current
fiscal year through the end of such Accounting Period certified by Borrower's
chief financial officer as being complete, correct, and fairly representing its
financial condition and results of operations.

                9.5.    Tax Returns. Borrower shall provide Lender copies of
each of Borrower's federal income tax returns, and any amendments thereto,
within one hundred twenty (120) days after the end of Borrower's fiscal year.

                9.6.    Inventory Product Activity. Borrower shall provide
Lender a full, complete, and accurate summary of all Borrower's inventory
activity on a MONTHLY basis from Borrower within two (2) days of the end of the
prior period and on a monthly basis from any and all public Warehouses within
fifteen (15) days of the end of the prior month.

                9.7.    Monthly Accounts Payable Aging Report. Borrower shall
provide Lender on a monthly basis with a full, complete, and accurate accounts
payable aging report within fifteen (15) days of the end of the prior month.

                9.8.    Accounting System. Borrower shall maintain a standard
and modern system of accounting in accordance with GAAP with ledger and account
cards or computer tapes, discs, printouts, and records pertaining to the
Collateral which contain information as from time to time may be reasonably
requested by Lender. Borrower also shall keep proper books of account showing
all sales, claims, and allowances on its Inventory.

                9.9.    Designation of Inventory. Borrower shall now and from
time to time hereafter, but not less frequently than monthly, execute and
deliver to Lender a written designation of Inventory specifying Borrower's cost
and the wholesale market value of Borrower's raw materials, work in process, and
finished goods, and further specifying such other information as Lender may
reasonably request.

                9.10.   Taxes. All assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against Borrower or any of its property have been paid, and shall hereafter be

                                 Page 17 of 32
<PAGE>

paid in full, before delinquency or before the expiration of any extension
period. Borrower shall make due and timely payment or deposit of all federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Lender, on demand, appropriate certificates and/or
payroll and other tax receipts attesting to the payment thereof or deposit with
respect thereto. Borrower will make timely payment or deposit of all payroll and
other tax payments and withholding taxes required of it by applicable laws,
including those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Lender with
proof satisfactory to Lender indicating that Borrower has made such payments or
deposits.

                9.11.   Insurance. Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as are ordinarily insured
against by other owners in similar businesses. Borrower also shall maintain
business interruption, public liability, product liability, and property damage
insurance relating to Borrower's ownership and use of the Collateral, as well as
insurance against larceny, embezzlement, and criminal misappropriation.
Additionally, Borrower shall maintain Workers' Compensation insurance coverage
for all employees.

                9.12.   Lender as Loss Payee. All such policies of insurance
shall be in such form, with such companies, and in such amounts as may be
reasonably satisfactory to Lender. All such policies of insurance (except those
of public liability and property damage) shall contain a 438BFU lender's loss
payable endorsement, or an equivalent endorsement in a form satisfactory to
Lender, showing Lender as sole loss payee thereof, and shall contain a waiver of
warranties, and shall specify that the insurer must give at least thirty (30)
days' prior written notice to Lender before canceling its policy for any reason.
Borrower shall deliver to Lender certified copies of such policies of insurance
and evidence of the payment of all premiums therefor. All proceeds payable under
any such policy shall be payable to Lender to be applied on account of the
Obligations.

                9.13.   No Setoffs or Counterclaims. All payments hereunder and
under the other Loan Documents made by or on behalf of Borrower shall be made
without setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.

                9.14.   Location of Collateral, Inventory, and Equipment.
Borrower shall keep the Collateral, including, but not limited to Inventory and
Equipment, only at the Premises and Warehouse (assuming Bailment Agreement(s)
have been signed) in the following state(s) California and New York (the
"Collateral State"); provided, however, that with the prior written consent of
Lender, Borrower may change the locations of the Collateral, including Inventory
and Equipment after sending written notice to Lender not less than thirty (30)
days prior to the date on which the Collateral, including but not limited to
Inventory and Equipment is moved to such new location, (a) so long as such new
location is within the continental United States; and (b) so long as, at the
time of such written notification, Borrower authorizes (1) the filing of or
provides any financing statements or fixture filings necessary to perfect and
continue perfected Lender's security interests in such assets; and (2) also
executes and delivers, or causes to be executed and delivered, to Lender such
agreements, documents, and instruments as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral, including but not
limited to Inventory and Equipment, at such location, in form and substance
satisfactory to Lender.

                9.15.   Control of Collateral. Borrower will cooperate with
Lender in obtaining possession, where Lender chooses to perfect its security
interest by possession in addition to the filing of a financing statement.
Borrower will cooperate with Lender in obtaining control with respect to
Collateral consisting of Deposit Accounts, Financial Assets, including without
limitation, Investment Property, Letter of Credit Rights, and Electronic Chattel
Paper.

                9.16.   Leases. Borrower shall pay when due all rents and other
amounts payable under any leases to which Borrower is a party or by which
Borrower's properties and assets are bound, unless such payments are the subject
of a permitted protest. To the extent that Borrower fails timely to make payment
of such rents and other amounts payable when due under its leases, Lender shall
be entitled, in its discretion, and without the necessity of declaring an Event
of Default, to reserve an amount equal to such unpaid amounts from the loan
available to Borrower.

                9.17.   Change in Name. Borrower shall give Lender written
notice immediately upon forming an intention to change its name or form or
jurisdiction of business organization.

                9.18.   Inspection. Borrower shall permit Lender or any
representatives thereof, during usual business hours, without notice to
Borrower, to periodically: (a) have access to all Premises where any Collateral
is located for the purposes of inspecting (and removing, if after the occurrence
of an Event of Default) any of the Collateral, including Borrower's Books; (b)
permit Lender or its designees to inspect, audit, make copies of, and make
extracts from Borrower's Books as Lender may request. Borrower hereby
irrevocably authorizes all accountants and third parties to disclose and deliver
to Lender at Borrower's expense all financial information, books and records,
work papers, management reports and other information in their possession
relating to Borrower whether verbally, in writing (by record or authenticated
record) or otherwise.

                9.19.   Employee Retirement Income Security Act. Borrower shall
comply with all provisions of the Employee Retirement Income Security Act of
1974, and any successor statute, all as amended from time to time ("ERISA"),
including regulations promulgated thereunder and interpretations published
regarding same.

                9.20.   Environmental Issues. Borrower shall comply with the
affirmative covenants set forth below with respect to environmental issues.

                        9.20.1  Borrower shall furnish to Lender promptly and in
any event within thirty (30) days after receipt thereof, a copy of any notice,
summons, citation, directive, letter or other communications from

                                 Page 18 of 32
<PAGE>

the EPA or any other governmental agency or instrumentality concerning any
intentional or unintentional action or omission on Borrower's part in connection
with the handling, transporting, transferring, disposal or in the releasing,
spilling, leaking, pumping, pouring, emitting, emptying or dumping of Hazardous
Substances or Hazardous Wastes into the environment resulting in damage to the
environment, fish, shellfish, wildlife, biota and any other natural resource;

                        9.20.2  Borrower shall furnish to Lender promptly and in
any event within thirty (30) days after the receipt thereof, a copy of any
notice of or other communication concerning the filing of a lien upon, against
or in connection with Borrower, the Collateral or Borrower's real property by
the EPA or any other governmental agency or instrumentality authorized to file
such a lien pursuant to an environmental protection statute in connection with a
fund to pay for damages and/or cleanup and/or removal costs arising from the
intentional or unintentional action or omission of Borrower resulting from the
disposal or in the releasing, spilling, leaking, pumping, pouring, emitting,
emptying or dumping of Hazardous Substances or Hazardous Wastes into the
environment;

                        9.20.3  Borrower shall furnish to Lender promptly and in
any event within thirty (30) days after the receipt thereof, a copy of any
notice, directive, letter or other communication from the EPA or any other
governmental agency or instrumentality acting under the authority of an
Environmental Law indicating that all or any portion of the Borrower's property
or assets have been listed and/or that Borrower has been deemed by such agency
to be the owner and operator of the facility that has failed to furnish to the
EPA or other authorized governmental agency or instrumentality, all the
information required by the RCRA, CERCLA or other applicable Environmental Laws;
and

                        9.20.4  Borrower shall furnish to Lender promptly and in
no event more than thirty (30) days after the filing thereof with the EPA or
other governmental agency or instrumentality authorized as such pursuant to an
environmental protection statute, copies of any and all information reports
filed with such agency or instrumentality in connection with Borrower's
compliance with RCRA, CERCLA, or other applicable Environmental Laws.

                        9.20.5  Borrower shall require and use its best efforts
to ensure compliance by all operators and occupants of the Premises with all
applicable Environmental Laws.

                        9.20.6  Borrower agrees to defend, indemnify, save, and
hold Lender and its officers, employees, and agents harmless against all
obligations, demands, claims, and liabilities claimed or asserted by any other
Person arising out of or relating to discharges or releases of Hazardous
Substances or Hazardous Wastes into the environment, including ambient air,
surface water, ground water, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous substances or Hazardous Wastes or the clean-up or other
remediation thereof, and all losses (including without limitation attorneys'
fees and legal and other costs from outside counsel or in-house counsel) in any
way suffered, incurred, or paid by Lender as a result of or in any way arising
out of, following, or consequential thereto; provided, however, that no such
indemnification shall apply with respect to any liability directly arising out
of the gross negligence or willful misconduct on the part of Lender or any of
its officers, employees and agents in connection with Hazardous Wastes or
Hazardous Substances.

                9.21.   Reaffirmation and Continuing Nature of Representations,
Warranties, and Covenants. The foregoing representations, warranties, and
covenants shall be of a continuing nature and shall survive the termination of
this Agreement and full payment and performance of the Obligations. They shall
also be deemed to be repeated whenever Borrower makes a request for an Advance.

        10.     Negative Covenants. Borrower covenants and agrees that, so long
as any credit hereunder shall be available and until full and final payment and
performance of the Obligations, Borrower will not do any of the following or
take any of the actions set forth herein, without Lender's prior written
consent.

                10.1.   Returns; Allowances and Credits. Borrower shall not
accept any returns or grant any allowances or credits to Account Debtors without
notifying Lender at the time any credit is issued.

                10.2.   Credit Limit. Borrower shall not borrow any funds from
any third party in an amount in excess of TEN THOUSAND AND 00/100 DOLLARS
($10,000.00) without Lender's prior written consent, which consent shall not be
unreasonably denied.

                10.3.   Indebtedness. Except as permitted by Section 10.2,
Borrower shall not create, incur, assume, permit, guarantee, or otherwise become
or remain, directly or indirectly, liable with respect to any Indebtedness
except Permitted Indebtedness.

                10.4.   Liens. Borrower shall not create, incur, assume, or
permit to exist, directly or indirectly, any lien on or with respect to any of
the Collateral or its property or assets, of any kind, whether now owned or
hereafter acquired, or any income or profits therefrom except for Permitted
Liens (including liens that are replacements of Permitted Liens to the extent
that the original Indebtedness is refinanced and so long as the replacement
liens secure only those assets or property that secured the original
Indebtedness).

                10.5.   Restrictions on Fundamental Changes. Borrower shall not
enter into any acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
assign, lease, license, transfer, or otherwise dispose of, in one transaction or
a series of transactions, all or any substantial part of its business, property,
or assets,

                                 Page 19 of 32
<PAGE>

whether now owned or hereafter acquired, or acquire by purchase or otherwise all
or substantially all of the properties, assets, stock, or other evidence of
beneficial ownership of any Person.

                10.6.   Extraordinary Transactions and Disposal of Assets.
Borrower shall not enter into any transaction not in the ordinary and usual
course of Borrower's business, including the sale, lease, license, or other
disposition of, moving, relocation, or transfer, whether by sale or otherwise,
of any of Borrower's properties or assets (other than sales of Inventory to
buyers in the ordinary course of Borrower's business as currently conducted)
except as permitted by this Agreement or the Loan Documents.

                10.7.   Change Name. Borrower shall not change Borrower's name,
Federal Employer Identification Number, business structure, or identity, or add
any new fictitious name. To that effect, Borrower shall not do business under
any name other than MENDOCINO BREWING COMPANY, INC. and RELETA BREWING COMPANY
LLC, Borrower's correct legal name, unless Borrower has provided to Lender
evidence that it has taken such legal steps required with respect to fictitious
or assumed names under the applicable laws of the jurisdictions in which
Borrower is located and/or does business. Lender has received acceptable
documentation indicating that Borrower will be doing business under the
following additional name(s): LISTED ON SCHEDULE A: LIST OF FICTITIOUS NAMES,
ATTACHED HERETO AND INCORPORATED HEREIN BY REFERENCE.

                10.8.   Guarantee. Borrower shall not guarantee or otherwise
become in any way liable with respect to the obligations of any third Person
except by endorsement of instruments or items of payment for deposit to the
account of Borrower or which are transmitted or turned over to Lender.

                10.9.   Restructure. Borrower shall not make any change in
Borrower's financial structure, the principal nature of Borrower's business
operations, or the date of its fiscal year.

                10.10.  Consignments. Borrower shall not consign any Inventory
or sell any Inventory on bill and hold, sale or return, sale on approval, or
other conditional terms of sale.

                10.11.  Distributions. Borrower shall not make any distribution
or declare or pay any dividends (whether in cash or stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding.

                10.12.  Accounting Methods. Borrower shall not modify or change
its method of accounting or enter into, modify, or terminate any agreement
currently existing, or at any time hereafter entered into with any third party
accounting firm or service bureau for the preparation or storage of Borrower's
accounting records without said accounting firm or service bureau agreeing to
provide Lender information regarding the Collateral or Borrower's financial
condition. Borrower waives the right to assert a confidential relationship, if
any, it may have with any accounting firm or service bureau in connection with
any information requested by Lender pursuant to or in accordance with this
Agreement, and agrees that Lender may contact directly any such accounting firm
or service bureau in order to obtain such information.

                10.13.  Investments. Borrower shall not directly or indirectly
make or acquire any beneficial interest in (including stock, partnership
interest, or other securities of), or make any loan, or capital contribution to,
any Person.

                10.14.  Transactions With Affiliates. Borrower shall not
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 fully
disclosed to Lender, and that are no less favorable to Borrower than would be
obtained in arm's length transaction with a non-Affiliate.

                10.15.  Suspension. Borrower shall not suspend or go out of a
substantial portion of its business.

                10.16.  Use of Proceeds. Borrower shall not use the proceeds of
the Advances made hereunder for any purpose other than to, on the Closing Date,
repay in full the outstanding principal, accrued interest, and accrued fees
and/or expenses owing the Old Lender, and to pay transactional Lender Expenses
incurred in connection with this Agreement. Thereafter, Borrower shall use the
proceeds of the Advances made hereunder for any purpose consistent with the
terms and conditions hereof, for its lawful and permitted business purpose, but
subject to the terms and conditions of this Agreement.

                10.17.  Change in Location of Premises; Collateral and Third
Party Control. Borrower covenants and agrees that it will not, without thirty
(30) days' prior written notification to Lender, relocate its Premises to a new
location. Further, Borrower agrees that at the time of such written
notification, Borrower shall provide Lender any financing statements or fixture
filings necessary to perfect and continue Lender's perfected security interests
in the Collateral and authorize Lender to file same. In addition, Borrower
agrees that it will not at any time store the Collateral with any bailee or
warehouseman or in a third party owned facility without prior execution of an
agreement between Lender and bailee or landlord in form and substance
satisfactory to Lender.

                10.18.  Hazardous Substances or Hazardous Waste. Borrower shall
not permit the Premises to be used to generate, manufacture, refine, transport,
treat, store, handle, dispose, produce, or process Hazardous Substances or
Hazardous Wastes, except in compliance with all applicable Environmental Laws.

                10.19.  Management Borrower shall not, and shall not permit any
Subsidiary to, make any significant change in its management without a minimum
thirty (30) days' prior written notice to Lender

                                 Page 20 of 32
<PAGE>

        11.     Events Of Default. Any one or more of the events set forth below
shall constitute an "Event of Default" under this Agreement and the Loan
Documents.

                11.1.   Failure to Pay. Borrower or any Obligor fails to pay
when due and payable or when declared due and payable, any portion of the
Obligation whether of principal, interest, (including any interest which, but
for the provisions of the Bankruptcy Code, would have accrued on such amounts),
fees and charges due Lender, reimbursement of Lender Expenses, or other amounts
constituting the Obligation.

                11.2.   Failure to Perform. Borrower fails or neglects to
perform, keep, or observe any term, provision, condition, covenant, or agreement
contained in this Agreement, any of the Loan Documents, or in any other present
or future agreement between Borrowerand Lender.

                11.3.   Material Adverse Change. A Material Adverse Change has
occurred.

                11.4.   Writ. Any of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person.

                11.5.   Insolvency Proceeding. An Insolvency Proceeding is
commenced by or against Borrower or any Obligor.

                11.6.   Injunction Against Doing Business. Borrower is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any material part of its business affairs.

                11.7.   Notice of Lien or Levy. (a) A notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's properties or
assets by the government of the United States, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency; or (b) any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a lien, whether choate or otherwise, upon any of
Borrower's properties or assets and the same is not paid on the payment date
thereof.

                11.8.   Judgment Lien. A judgment or other claim becomes a lien
or encumbrance upon any material portion of Borrower's properties or assets.

                11.9.   Default in Third Party Agreements. Borrower defaults in
any material agreement to which Borrower is a party with one or more third
Persons resulting in a right by such third Persons, irrespective of whether
exercised, to accelerate the maturity of Borrower's obligations thereunder.

                11.10.  Prohibited Payment on Subordination Agreement. Borrower
makes any payment on account of Indebtedness that has been subordinated in right
of payment to the payment of the Obligations, except to the extent such payment
is permitted by the terms of the subordination provisions applicable to such
Indebtedness.

                11.11.  Misstatement or Misrepresentation. Any misstatement or
misrepresentation exists now or hereafter in any warranty, representation,
statement, or report made to Lender by Borrower or any officer, employee, agent,
or director of Borrower, or any such warranty or representation is withdrawn.

                11.12.  Limitation or Termination of Guaranties, Validity
Agreements, etc. (a) The obligation of any Guarantor or other third Person under
the Guaranty, Validity Agreement, or any of the other Loan Documents is limited
or terminated by operation of law or by the Guarantor or other third Person
thereunder; (b) any such Guarantor or other third Person becomes the subject of
an Insolvency Proceeding; or (c) the termination, lapse, or ineffectiveness of
any UCC Financing Statement filed in connection with or related to any
collateral pledged in support of the Guaranty.

                11.13.  Prospect of Payment Materially Impaired. Lender shall
believe that the prospect of (a) payment of the Loans; or (b) the performance of
any of Borrower's material Obligations is materially impaired.

                11.14.  Termination, Lapse, or Ineffectiveness of UCC Filing.
The termination, lapse of, or ineffectiveness of any UCC Financing Statement
filed in connection with or related to any Collateral granted pursuant to this
Agreement or any of the other Loan Documents.

                11.15.  Violation of any Environmental Law. (a) the failure by
Borrower to comply with each, every and all of the requirements of RCRA, CERCLA
or any other applicable Environmental Law on Borrower's property; (b) the
receipt by Borrower of a notice from the EPA or any other governmental agency or
instrumentality acting under the authority of any Environmental Law, indicating
that a lien has been filed against any of the Collateral, or any of Borrower's
other property by the EPA or any other governmental agency or instrumentality in
connection with a fund as a result of damage arising from an intentional or
unintentional action or omission by Borrower resulting from the disposal,
releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of
Hazardous Substances or Hazardous Wastes into the environment; and (c) any other
event or condition exists which might, in the opinion of Lender, under
applicable environmental protection statutes, have a material adverse effect on
the financial or operational condition of Borrower or the value of all or any
material part of the Collateral or other property of Borrower.

        12.     Lender's Rights and Remedies. Borrower and Lender have agreed to
the terms set forth below with respect to the rights and remedies of Lender.

                                 Page 21 of 32
<PAGE>

                12.1.   Rights and Remedies. Upon the occurrence, and during the
continuation, of an Event of Default, Lender may, at its election, without
notice of its election and without demand, do any one or more of the actions set
forth below, all of which are authorized by Borrower.

                        12.1.1. Accelerate Obligations. Lender may declare all
Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable, without presentment,
demand, protest, or notice of any kind, all of which are hereby expressly waived
by Borrower.

                        12.1.2. Cease Advancing Money. Lender may cease
advancing money or extending credit to or for the benefit of Borrower under this
Agreement, the Loan Documents, or any other agreement between Borrower and
Lender.

                        12.1.3. Terminate This Agreement. Lender may terminate
this Agreement and any of the other Loan Documents as to any future liability or
obligation of Lender, but without affecting Lender's rights and security
interests in the Collateral and without affecting the Obligations.

                        12.1.4. Settle or Adjust Disputes. Lender may settle or
adjust disputes and claims directly with Account Debtors to the Accounts for
amounts and upon terms which Lender considers advisable, and in such cases,
Lender will credit Borrower's loan account with only the net amounts received by
Lender in payment of such disputed Accounts, after deducting all Lender Expenses
incurred or expended in connection therewith.

                        12.1.5. Returned Inventory. Lender may cause Borrower to
hold all returned Inventory in trust for Lender, segregate all returned
Inventory from all other property of Borrower or in Borrower's possession and
conspicuously label said returned Inventory as being the Collateral of Lender.

                        12.1.6. Make Payment; Do Acts. Lender may, without
notice to or demand upon Borrower, Guarantor, or other guarantor, make such
payments and do such acts as Lender considers necessary or reasonable to protect
its security interests in the Collateral. Borrower agrees to assemble the
Collateral if Lender so requires, and to make the Collateral available to Lender
as Lender may designate. Borrower authorizes Lender to enter the Premises where
the Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien that in Lender's determination appears to conflict with its
security interests and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned Premises, Borrower hereby grants Lender
a license to enter into possession of such Premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Lender's rights or remedies provided herein or in any of the other Loan
Documents, at law, in equity, or otherwise.

                        12.1.7. Setoff. Lender may, without notice to Borrower
(such notice being expressly waived), and without constituting a retention of
any Collateral in satisfaction of an Obligation (within the meaning of Sections
9620 and 9621 of the Code), set off and apply to the Obligations any and all (a)
balances and deposits of Borrower held by Lender (including any amounts received
in the Collateral Account); or (b) the Obligations at any time owing to or for
the credit or the account of Borrower held by Lender.

                        12.1.8. Hold Monies. Lender may hold, as cash
collateral, any and all balances and deposits of Borrower held by Lender, and
any amounts received in the Collateral Account and Collateral Control Account,
to secure the full and final repayment of all of the Obligations.

                        12.1.9. Deal with Collateral. Lender may collect, ship,
reclaim, recover, store, finish, maintain, repair, dispose of, prepare for sale,
advertise for sale, and sell (in the manner provided for herein) the Collateral.
Lender is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's
benefit.

                        12.1.10. Sell Collateral. Lender may sell the Collateral
at either a public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower's Premises) as Lender determines is commercially reasonable. It is not
necessary that the Collateral be present at any such sale.

                        12.1.11. Notice of Disposition of Collateral. Lender
shall give notice of the disposition of the Collateral as follows:

                        (a)     Lender shall give Borrower and each holder of a
security interest in the Collateral who has filed with Lender a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;

                        (b)     the notice shall be personally delivered or
mailed, postage prepaid, to Borrower at the address set forth herein, giving
such notice as may be reasonable under the circumstance of (1) the date fixed
for the sale; or (2) before the date on or after which the private sale or other
disposition is to be made; except that no notice needs to be given prior to the
disposition of any portion of the Collateral that is perishable or threatens to
decline speedily in value or that is of a type customarily sold on a recognized
market. Notice to Persons other than Borrower, Guarantor, or secured creditors
reflected in a UCC search claiming an interest in the Collateral shall be

                                 Page 22 of 32
<PAGE>

sent to such addresses as they have furnished to Lender or as is reflected in
such UCC search as the case may be; and

                        (c)     if the sale is to be a public sale, Lender shall
also give notice of the time and place by publishing a notice one (1) time
giving such notice as may be reasonable under the circumstance before the date
of the sale in a newspaper of general circulation in the county in which the
sale is to be held.

                        12.1.12. Credit Bid. Lender may credit bid and purchase
any and all of the Collateral at any public sale.

                        12.1.13. Deficiency; Excess. Any deficiency that exists
after disposition of the Collateral as provided above will be paid immediately
to Lender by Borrower. Any excess will be returned, without interest and subject
to the rights of third Persons, by Lender to Borrower.

                12.2.   Remedies Cumulative. Lender shall have all rights,
powers and remedies available under each of the Loan Documents, or accorded by
law, including without limitation the right to resort to any or all Collateral
for any credit accommodation from Lender under this Agreement or any other Loan
Document and to exercise any or all of the rights of a beneficiary or secured
party pursuant to applicable law. All rights, powers and remedies of Lender in
connection with each of the Loan Documents or as accorded by Lender, may be
exercised at any time by Lender and from time to time after the occurrence of an
Event of Default, are cumulative and not exclusive, and shall be in addition to
any other rights, powers or remedies provided by law or equity.

        13.     Taxes and Lender Expenses. If Borrower fails to pay any monies
(whether taxes, rents, assessments, insurance premiums, or otherwise) due to
third Persons, or fails to make any deposits or furnish any required proof of
payment or deposit, all as required under the terms of this Agreement, then, to
the extent that Lender determines that such failure by Borrower could have a
Material Adverse Change with respect to Lender's interests in the Collateral, in
its discretion and without prior notice except as provided in the Loan
Documents, Lender may do any or all of the following: set up such reserves in
Borrower's loan account and comply with any condition as Lender deems necessary
to protect Lender from the exposure created by such failure; qualify Borrower in
any state to collect Accounts; or obtain and maintain insurance policies of the
type described herein, and take any action with respect to such policies as
Lender deems prudent. Any such amounts paid by Lender shall be at Borrower's
expense and shall constitute Lender Expenses. Any such payments made by Lender
shall not constitute an agreement by Lender to make similar payments in the
future or a waiver by Lender of any Event of Default under this Agreement.
Lender need not inquire as to, or contest the validity of, any such expense,
tax, security interest, encumbrance, or lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing. Such Lenders' Expenses may be charged to
Borrower's account and if not charged or paid prior to such time, shall be
charged upon termination.

Unless Borrower provides Lender with evidence of the insurance coverage as
required by this Agreement, Lender may purchase such insurance at Borrower's
expense to protect Lender's interest. This insurance may, but need not, also
protect Borrower's interest. If any Collateral becomes damaged, the insurance
coverage that Lender purchases may not pay any claim Borrower makes or any claim
made against Borrower. Borrower may later cancel this coverage after providing
evidence that Borrower has obtained property coverage elsewhere.

Borrower is responsible for the cost of any insurance purchased by Lender, which
shall constitute a Lender Expense. The cost obtaining of this insurance may be
added to Borrower's loan balance. If the cost is added to Borrower's loan
balance, the Rate will apply to this added amount. The effective date of
coverage may be the date on which Borrower's prior coverage lapsed or the date
Borrower failed to provide proof of coverage.

The insurance coverage that Lender purchases may be considerably more expensive
than the insurance coverage that Borrower could obtain and may not satisfy any
need for property damage coverage or any mandatory liability insurance
requirements imposed by applicable law.

        14.     Waivers; Indemnification.

                14.1.   Waivers of Demand, Protest, etc. Borrower waives demand,
protest, notice of protest, 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 at any time held by Lender on which Borrower may in any
way be liable.

                14.2.   No Liability of Lender Re: Collateral. Lender shall not
in any way or manner be liable or responsible for the safekeeping of the
Collateral; any loss or damage thereto occurring or arising in any manner or
fashion from any cause; any diminution in the value thereof; or any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other
Person. All risk of loss, damage, or destruction of the Collateral shall be
borne by Borrower.

                14.3.   Indemnification. Borrower agrees to defend, indemnify,
save, and hold Lender and Lender's officers, employees, shareholders, directors,
attorneys, and agents harmless against all obligations, demands, claims, and
liabilities claimed or asserted by any other Person arising out of or relating
to the transactions contemplated by this Agreement or any of the other Loan
Documents; and all losses (including attorneys' fees and legal and other costs)
in any way suffered, incurred, or paid by Lender as a result of or in any way
arising out of, following, or consequential to the transactions contemplated by
this Agreement or any of the other Loan Documents; provided, however, that no
such indemnification shall apply with respect to any liability directly arising
out of the gross negligence or willful misconduct on the part of Lender or any
of Lender's officers, employees, shareholders, directors, attorneys, and agents.

                                 Page 23 of 32
<PAGE>

                14.4.   No Liability for Failure to Make Advances. Borrower
agrees Lender shall not be liable or responsible for any failure to make
Advances (a) if in Lender's discretion Lender believes Borrower is not entitled
to receive such Advances; (b) due to any accounting or administrative errors
made by Lender so long as such errors are not in bad faith; or (c) due to any
other failure by Lender unless the same arises directly from Lender's gross
negligence or willful misconduct.

                14.5.   Best Efforts by Lender to Give Notice of Default. Lender
agrees to use its best efforts to give Borrower prompt written notice of any
default or Event of Default or alleged default by Borrower.

        15.     Notices. Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or any of the other
Loan Documents shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by overnight mail, registered or
certified mail, postage prepaid, return receipt requested, or by prepaid telex,
TWX, telefacsimile, or telegram (with messenger delivery specified) to Borrower
or to Lender, as the case may be, at its address set forth below:

      IF TO BORROWER MENDOCINO:     MENDOCINO BREWING COMPANY, INC.
                                    1601 AIRPORT ROAD, UKIAH, CALIFORNIA 95482
      Attn:                         YASHPAL SINGH & N. MAHADEVAN
      Telephone No.:                (707) 463-6610
      Facsimile No.:                (707) 463-2465

      IF TO BORROWER RELETA:        RELETA BREWING COMPANY LLC
                                    131 EXCELSIOR AVENUE, SARATOGA SPRINGS,
                                    NEW YORK 12866
      Attn:                         YASHPAL SINGH & N. MAHADEVAN
      Telephone No.:                (707) 463-6610
      Facsimile No.:                (707) 463-2465

      IF TO LENDER:                 BFI BUSINESS FINANCE
                                    1655 THE ALAMEDA, SAN JOSE, CALIFORNIA 95126
      Attn:                         DAVID DROGOS, PRESIDENT
      Telephone No.:                (408) 288-4010
      Facsimile No.:                (408) 288-4018/(408) 283-4867

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other. All
notices or demands sent in accordance with this Section, other than notices by
Lender in connection with Sections 9610, 9611, 9615, 9617, 9618, 9620, 9621,
9624 of the Code, shall be deemed received on the earlier of the date of actual
receipt or three (3) days after the deposit thereof in the mail. Borrower
acknowledges and agrees that notices sent by Lender in connection with the
foregoing Sections of the Code shall be deemed sent when deposited in the mail
or transmitted by telefacsimile or other similar method set forth above.

        16.     Choice of Law. This Agreement and all transactions contemplated
hereunder and/or evidenced hereby shall be governed by, construed under, and
enforced in accordance with the internal laws of the State of California,
without giving effect to conflicts of law principles.

        17.     Venue. The parties agree that all actions or proceedings arising
in connection with this Agreement and/or the Loan Documents shall be tried and
litigated only in the State and Federal courts located in the County of Santa
Clara, State of California or, at the sole option of Lender, in any other court
in which Lender shall initiate legal or equitable proceedings and which has
subject matter jurisdiction over the matter in controversy. Each of Borrower and
Lender waives, to the extent permitted under applicable law, any right each may
have to assert the doctrine of forum non conveniens or to object to venue to the
extent any proceeding is brought in accordance with this section.

        18.     JURY TRIAL WAIVER. BORROWER AND LENDER HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF
DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.

        19.     Destruction of Borrower's Documents. All documents, schedules,
invoices, agings, or other papers delivered to Lender, other than Borrower's
Books or Collateral, may be destroyed or otherwise disposed of by Lender four
(4) months after they are delivered to or received by Lender, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.

        20.     Revocation of Borrower's Right to Sell Inventory Free and Clear
of Lender's Security Interest. Lender may, upon the occurrence of an Event of
Default, revoke Borrower's right to sell Inventory free and clear of Lender's
security interest therein.

                                 Page 24 of 32
<PAGE>

        21.     Disclaimer for Negligence. Lender shall not be liable for any
claims, demands, losses or damages made, claimed or suffered by Borrower, except
such as may arise through or could be caused directly by Lender's gross
negligence or willful misconduct.

        22.     Limitation of Consequential Damages. Lender shall not be
responsible for any lost profits of Borrower arising from any breach of
contract, tort (excluding Lender's gross negligence or willful misconduct), or
any other wrong arising from the establishment, administration, or collection of
the Obligations.

        23.     Multiple Borrowers. If there is more than one Borrower as of the
Closing Date or thereafter, the following provisions shall apply:

                23.1.   Each Borrower hereby waives its rights of subrogation,
reimbursement, indemnification, and contribution and any other rights and
defenses that are or may become available to any Borrower by reason of Sections
2787 to 2855, inclusive of the California Civil Code.

                23.2.   Each Borrower waives all rights and defenses it may have
if any agreement with Lender is secured by real property. This means, among
other things: (a) Lender may collect from any Borrower without first foreclosing
on any real or personal property Collateral pledged by Borrower; and (b) if
Lender forecloses on any Real Property Collateral pledged by any Borrower: (1)
the amount of the debt may be reduced only by the price for which that
Collateral is sold at the foreclosure sale, even if the Collateral is worth more
than the sale price; and (2) Lender may collect from any Borrower even if
Lender, by foreclosing on the Real Property Collateral, has destroyed any right
any Borrower may have to collect from any other Borrower. This is an
unconditional and irrevocable waiver of any rights and defenses any Borrower may
have because Borrower's debt is secured by Real Property Collateral. These
rights and defenses include, but are not limited to, any rights or defenses
based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil
Procedure.

                23.3.   Each Borrower waives all rights and defenses arising out
of an election of remedies by Lender, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed any Borrower's rights of subrogation and reimbursement
against the principal by the operation of Section 580d of the California Code of
Civil Procedure or otherwise, and each Borrower further waives any and all
benefits or defenses, if any, arising directly or indirectly under any one or
more of Sections 3116, 3118, 3119, 3419, 3605, 9610, 9611, 9615, 9617, 9618,
9620, 9621, 9624, 9625, or 9627 of the Code.

                23.4.   Each Borrower hereby agrees that it is jointly and
severally, directly, and primarily liable to Bank for payment and performance in
full of all duties, obligations, and liabilities under this Agreement and each
other document, instrument, and agreement entered into by any Borrower with or
in favor of Lender in connection herewith, and that such liability is
independent of the duties, obligations, and liabilities of any other Borrower or
any Guarantor of the Obligations, as applicable. Each reference herein to
Borrower shall mean each and every Borrower that is a party hereto, individually
and collectively, jointly and severally.

        24.     General Provisions.

                24.1.   Effectiveness. This Agreement shall be binding and
deemed effective when executed by Borrower and Lender, with the acknowledgment
and agreement portion executed by each Guarantor.

                24.2.   Successors and Assigns. This Agreement shall be binding
on and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without the prior
written consent of Lender, any prohibited assignment shall be void ab initio.
Lender reserves the right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in, Lender's rights and
benefits under each of the Loan Documents executed herewith or hereafter. In
connection therewith, Lender may disclose all documents and information which
Lender now has or may hereafter acquire relating to any credit extended by
Lender to Borrower, Borrower or its business, any Obligor or the business of any
Obligor, or any Collateral.

                24.3.   Section Headings. Headings and numbers have been set
forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.

                24.4.   Interpretation. This Agreement and all agreements
relating to the subject matter hereof are the product of negotiation and
preparation by and among each party and its respective attorneys, and shall be
construed accordingly. The parties waive the provisions of California Civil Code
ss.1654.

                24.5.   Severability of Provisions.. In the event any one or
more of the provisions contained in this Agreement is held to be invalid,
illegal or unenforceable in any respect, then such provision shall be
ineffective only to the extent of such prohibition or invalidity, and the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.

                24.6.   Amendments in Writing. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged, or terminated, nor may any
consent to the departure from the terms hereof be given, orally (even if
supported by new consideration), but only by an instrument in writing signed by
all parties to this Agreement. Any waiver or consent so given shall be effective
only in the specific instance and for the specific purpose for which given.

                24.7.   Waiver. No failure to exercise and no delay in
exercising any right, power, or remedy hereunder shall impair any right, power,
or remedy which Lender may have, nor shall any such delay be construed

                                 Page 25 of 32
<PAGE>

to be a waiver of any of such rights, powers, or remedies, or any acquiescence
in any breach or default hereunder; nor shall any waiver by Lender of any breach
or default by Borrower hereunder be deemed a waiver of any default or breach
subsequently occurring. All rights and remedies granted to Lender hereunder
shall remain in full force and effect notwithstanding any single or partial
exercise of, or any discontinuance of action begun to enforce, any such right or
remedy. The rights and remedies specified herein are cumulative and not
exclusive of each other or of any rights or remedies which Lender would
otherwise have. Any waiver, permit, consent or approval by Lender of any breach
or default hereunder must be in writing and shall be effective only to the
extent set forth in such writing and only as to that specific instance.

                24.8.   Survival. All representations, warranties, and
agreements herein contained shall be effective so long as any portion of this
Agreement remains executory.

                24.9.   Continuing Obligations. No termination of this Agreement
or the other Loan Documents shall relieve or discharge Borrower of its
respective duties, obligations and covenants until all Borrower's Obligations
under this Agreement and the other Loan Documents have been fully and finally
discharged and paid, and Lender's continuing security interest in the Collateral
and the rights and remedies of Lender hereunder, under the other Loan Documents
and applicable law and procedures established by Lender in connection with its
lending operations from time to time, whether pursuant to a procedure manual or
otherwise, shall remain in effect until all such Obligations have been fully and
finally discharged and paid.

                24.10.  Counterparts; Telefacsimile Execution. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if all signatures were upon the same instrument.
Delivery of an executed counterpart of the signature page to this Agreement by
telefacsimile shall be effective as delivery of a manually executed counterpart
of this Agreement, and any party delivering such an executed counterpart of the
signature page to this Agreement by telefacsimile to any other party shall
thereafter also promptly deliver a manually executed counterpart of this
Agreement to such other party, provided that the failure to deliver such
manually executed counterpart shall not affect the validity, enforceability, or
binding effect of this Agreement.

                24.11.  Revival and Reinstatement of Obligations. If the
incurrence or payment of the Obligations by Borrower or any Guarantor or the
transfer by either or both of such parties to Lender of any property of either
or both of such parties should for any reason subsequently be declared to be
void or voidable under any state or federal law relating to creditors' rights,
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers of
property (individually or collectively, a "Voidable Transfer"), and if Lender is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Lender is required or elects
to repay or restore, and as to all reasonable costs, expenses, and attorneys'
fees of Lender related thereto, the liability of Borrower or such Guarantor
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.

                24.12.  Supplementary Terms. The terms and conditions of the
Loan Documents shall supplement the terms hereof, except to the extent otherwise
specifically provided herein.

                24.13.  Integration. This Agreement, together with the Loan
Documents, embodies the entire agreement and understanding among and between the
parties hereto, and supersedes all prior or contemporaneous agreements and
understandings between said parties, verbal or written, express or implied,
relating to the subject matter hereof. No promises of any kind have been made by
Lender or any third party to induce Borrower to execute this Agreement. No
course of dealing, course of performance or trade usage, and no parol evidence
of any nature, shall be used to supplement or modify any terms of this
Agreement.

                24.14.  Conflict With Other Agreements. Unless otherwise
expressly stated in any other agreement between Lender and Borrower, if a
conflict exists between the provisions of this Agreement and the provisions of
such other agreement, the provisions of this Agreement shall control.

                24.15.  Term Loan Documents Executed Concurrently Herewith, If
Any. Concurrently with the execution of this Agreement, Borrower may be
executing an Equipment Security Agreement or other applicable security agreement
and a Secured Promissory Note (the "Term Loan") and related documents
(collectively, the "Term Loan Documents").

        25.     Cross-Collateral. Any Collateral pledged to Lender to secure any
obligation of Borrower shall also secure any other obligation of Borrower to
Lender except that any Real Property Collateral pledged to secure any obligation
of Borrower shall only secure any other obligation of Borrower if Lender
specifically so agrees in writing.

        26.     Cross-Payment; Right to Reserve. Lender may, in its discretion,
make Advances under one loan to make any payments due from Borrower to Lender
under any other loan. Lender may also, in its sole discretion, reserve under one
loan for amounts due under any other loan.

                                 Page 26 of 32
<PAGE>

        27.     Cross-Defaults. An Event of Default under this Agreement shall
be an Event of Default under each of the Loan Documents, and vice versa.

This Agreement is subject to the terms and conditions set forth in ADDENDUM A
attached hereto and made a part hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
Agreement (Accounts Receivable & Inventory Line of Credit) to be executed as of
the date first set forth above.

                               MENDOCINO BREWING COMPANY, INC.

                               By:________________________________________
                                      Yashpal Singh
                               Title: President & CEO

                               RELETA BREWING COMPANY LLC.

                               By:________________________________________
                                  MENDOCINO BREWING COMPANY, INC., MEMBER
                                  By: Yashpal Singh,
                                  Its: President & CEO

                               BFI BUSINESS FINANCE

                               By:________________________________________
                                      David Drogos
                               Title: President

                                 Page 27 of 32
<PAGE>

                  ACKNOWLEDGMENT AND AGREEMENT BY GUARANTOR(S)

The Guarantor or Guarantors hereby acknowledge the terms and conditions of the
foregoing Loan and Security Agreement (Accounts Receivable and Inventory Line of
Credit) and agree to the terms thereof, and further agree to be bound by such
terms, including, but not limited to, the terms regarding choice of law and
venue and the waiver of the right to a jury trial.

                              __________________________________________________
                              ----------N/A----------, Guarantor

                                 Page 28 of 32
<PAGE>

                   ADDENDUM A TO LOAN AND SECURITY AGREEMENT

Pursuant to this Addendum A to Loan and Security Agreement (this "Addendum"),
the foregoing Loan and Security Agreement (the "Agreement") by and between BFI
BUSINESS FINANCE ("Lender") and MENDOCINO BREWING COMPANY, INC., A CALIFORNIA
CORPORATION (SOMETIMES, "MENDOCINO") AND RELETA BREWING COMPANY LLC, A DELAWARE
LIMITED LIABILITY COMPANY (SOMETIMES, "RELETA") (Mendocino and Releta are
sometimes hereinafter collectively referred to as "Borrower) is hereby amended
and/or supplemented by the following terms and conditions, which are
incorporated by this reference in the Agreement, as the following additional
sections of the Agreement:

        28. Notwithstanding any other provision of the Agreement, the term
"Borrower" shall not include United Breweries International Limited, UBSN, Ltd.,
or any right title or interest held by either of them.

        29. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that Savings Bank of Mendocino County
("Savings Bank") shall have committed in writing to extending until May 30, 2006
the current obligations owed by Borrower to Savings Bank .

        30. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that Lender shall have received a letter
from United Breweries of America Inc ("UBA") committing to pay on behalf of
Mendocino the next two installment payments due on June 30, 2005 for $300,000.00
and on December 31, 2005 for $200,000.00, respectively to House of Daniels,
Inc., dba Golden Gate Distributing Company ("GGDC") arising from that certain
settlement agreement dated October 27, 2004 between Borrower and GGDC (the "GGDC
Settlement Agreement"). Following each installment payment by UBA, Mendocino may
execute a promissory note in favor of UBA in an original principal amount equal
to such installment payment. Lender hereby consents to the execution of such
promissory notes; provided that such promissory notes shall be subordinate to
Lender pursuant to Subordination Agreement executed by UBA in favor of Lender in
connection with this Agreement.

        31. An event of default under the GGDC Settlement Agreement shall be an
event of default under the Agreement.

        32. Borrower shall timely make all payments required to be made under
the terms of that certain Installment Plan of Redemption (the "Installment
Plan") with the Treasurer-Tax Collector for Ukiah County, California. and shall
provide Lender with evidence of making such payment within five (5) days of the
date thereof.

        33. Borrower represents and warrants that it has paid all sums currently
owing under the Installment Plan .

        34. Borrower represents and warrants that the current balance owing
under the Installment Plan is Four Hundred Thirty Thousand Eight Hundred Seventy
Four and 20/100 Dollars ($ 430,874.20).

        35. Borrower is seeking to refinance that certain real property (the
"Property") commonly known as 1601 Airport Road, Ukiah, California (the
"Property Refinance") and the equipment owned by Releta (the "Equipment
Refinance"), for which consent to refinance is hereby given. A portion of the
proceeds resulting from the Property Refinance or the Equipment Refinance shall
be used to pay all property taxes due and owed to Mendocino County under the
Installment Plan, with evidence of same to be provided to BFI.

        36. Any shortfall on the payoff to The CIT Group/Business Credit, Inc.
("CIT") resulting from the difference between CIT's payoff quote and the funds
available to be advanced on the Funding Date to Borrower by Lender under the
Agreement shall be reflected in a Secured Promissory Note to be executed by
Mendocino and Releta concurrently with the execution of the Agreement.

        37. No payments shall be made or any assets transferred by or from
Mendocino or Releta to any of their respective subsidiaries or affiliates other
than Mendocino or Releta. Mendocino and Releta shall not guarantee nor incur any
liability for the obligations of any of their respective subsidiaries or
affiliates.

        38. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that Lender shall have received Temporary
Trademark License Agreements, each in form and content satisfactory to Lender,
from Mendocino, Releta and Kingfisher Breweries America, Inc.

        39. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that USBN shall have executed and delivered
to Lender an Agreement Regarding Brewing License in form and content
satisfactory to Lender.

        40. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that GGDC shall have executed a
Subordination Agreement in form and content satisfactory to Lender.

        41. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that Savings Bank of Mendocino shall have
executed a Mutual Lien Subordination Agreement in form and content satisfactory
to Lender.

        42. It shall be a condition precedent to Lender's obligation to make the
initial Advance under the Agreement that UBA shall have signed a Subordination
Agreement in form and content satisfactory to Lender. CAlsa

                                 Page 29 of 32
<PAGE>

        43. Within thirty (30) days of the Closing Date, Borrower shall have
executed a Deposit Pledge Agreement in connection with its bank accounts at a
bank or other financial institution acceptable to Lender and such bank or
financial institution shall have executed a Control Agreement in favor of Lender
in connection with such bank accounts.

        44. During the term of the Agreement, at such time as Borrower enters
into any license agreements with third parties to use any trademarks, Borrower
shall so advise Lender and within ten (10) days of the date thereof, such third
party shall sign a Temporary Trademark License Agreement in favor of Lender in
form and content satisfactory to Lender.

        45. Lender hereby acknowledges that it has already received the Loan Fee
in the sum of Twenty Thousand and 00/100 Dollars ($ 20,000.00).

        46. Notwithstanding the provisions of Section 6.3, Lender will waive the
Prepayment Fee after six (6) months from the Closing Date.

        47. Within sixty (60) days from the Closing Date, Hiram Walker & Sons,
Inc. ("Hiram Walker"), Bridgeport Brewing Company and any third parties which
license to Borrower the right to use any trademark shall execute an agreement
acknowledging that in the event of a liquidations by Lender of the assets of
Borrower, Lender shall have the right to use on a temporary basis, the right to
use any trade names that are the subject of an agreement between Borrower and
such third party.

        48. Notwithstanding any provisions to the contrary, the last sentence in
Section 24.2 shall be modified to read as follows: "In connection therewith,
subject to written non-disclosure agreements containing such protections for the
Borrower as are customary and reasonable, Lender may disclose all documents and
information which Lender now has or may hereafter acquire relating to any credit
extended by Lender to Borrower, Borrower or its business, any Obligor or the
business of any Obligor, or any Collateral."

        49. In the event that the Property Refinance shall not have taken place
by one hundred and twenty (120) days of the Closing, and if Lender deems itself
insecure, Lender may require that Borrower grant Lender a deed of trust against
the Property, which deed of trust shall be junior to that of Savings Bank of
Mendocino.

                                 Page 30 of 32
<PAGE>

                                   EXHIBIT A

                               COLLATERAL ACCOUNT

Name:            BFI Business Finance
Bank:            City National Bank
Address:         2001 North Main Street, Suite 200
                 Walnut Creek, California 94596

                           COLLATERAL CONTROL ACCOUNT

Name:            N/A - Collateral Control Account
Bank:            ----------N/A----------
Address:         ----------N/A----------
                 ----------N/A----------

                                 POST OFFICE BOX

Name:            BFI Business Finance
Address:         P.O. Box 225
                 Santa Clara, California 95052-0225

                                 Page 31 of 32
<PAGE>

                                   Schedule A
                            List of Fictitious Names

--------------------------------------------------------------------------------
          Mendocino Brewing Company & Releta Brewing Company LLC DBA's
--------------------------------------------------------------------------------
               NAME                               HOW USED & OWNERSHIP
-------------------------------------- -----------------------------------------
Australian Brewing Company              Mendocino DBA Expired (Feb 1, 2004)
                                        Releta DBA Filed 1/27/1999
-------------------------------------- -----------------------------------------
Brooklyn Brewery                        Registered DBA for Releta

-------------------------------------- -----------------------------------------
CALIFORNIA CIDER CO                     Mendocino DBA Registered through
                                        April 1, 2009

-------------------------------------- -----------------------------------------
CELEBRATED ALES BREWING CO              Mendocino DBA Registered through
                                        October 1, 2004

-------------------------------------- -----------------------------------------
Harlem Brewing Company                  Registered DBA for Releta

-------------------------------------- -----------------------------------------
Kingfisher America                      Registered DBA for Releta

-------------------------------------- -----------------------------------------
Kingfisher Brewing Company              Mendocino DBA Registered through
                                        June 1, 2006
                                        Releta DBA Filed 4/30/2001

-------------------------------------- -----------------------------------------
Mendocino Brewing Company               Registered DBA for Releta

-------------------------------------- -----------------------------------------
New Haven Brewing                       Registered DBA for Releta

-------------------------------------- -----------------------------------------
Olde Richmond Brewing Company           Registered DBA for Releta

-------------------------------------- -----------------------------------------
Olde Saratoga Brewing Company           Registered DBA for Releta

-------------------------------------- -----------------------------------------
Panorama Beer Co.                       Mendocino DBA Registered through
                                        September 1, 2005

-------------------------------------- -----------------------------------------
River Trent Brewing Co.                 Mendocino DBA Registered through August
                                        1, 2005

-------------------------------------- -----------------------------------------
Sacketts Harbor Brewing Company         Registered DBA for Releta Filed
                                        1/27/1999
-------------------------------------- -----------------------------------------
Saratoga Gaming & Racing                Registered DBA for Releta Filed
                                        3/16/2004
-------------------------------------- -----------------------------------------
Shmaltz Brewing Company                 Mendocino DBA Registration through
                                        April 1, 2009, Registered DBA for Releta
                                        Filed 2/27/2003

-------------------------------------- -----------------------------------------
Southampton Bottling                    Registered DBA for Releta Filed
                                        8/10/2004
-------------------------------------- -----------------------------------------
SPANISH PEAKS BREWING CO                Mendocino DBA Registered through
                                        June 16, 2006, Registered DBA for Releta
                                        Filed 2/27/2003

-------------------------------------- -----------------------------------------
Streich's Brewing Company               Registered DBA for Releta Filed
                                        10/16/2000
-------------------------------------- -----------------------------------------
Ten Springs Brewing Company             Registered DBA for Releta

-------------------------------------- -----------------------------------------
Trout Brook BrewHouse                   Releta DBA Filed 11/16/2000
-------------------------------------- -----------------------------------------

                                 Page 32 of 32

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