Document:

Unassociated Document

    NEITHER
      THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”),
      AND,
      ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
      EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
      REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
      SECURITIES LAWS. 

    

    THIS
      NOTE
      DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL
      REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION
      OF
      ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS
      NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET FORTH
      BELOW.

    

    

    6
      % CONVERTIBLE NOTE DUE JUNE 30, 2011

    OF

    PET
      EXPRESS SUPPLY, INC.

     

    
      	
              Note No.: _________

              Issuance
                Date: July ___, 2008   

            	 	
              Original
                Principal Amount: $_________ 

                                                                             
                New York, New York

            

    

     

    This
      Note
      (“Note”)
      is one
      of a duly authorized issue of Notes of PET
      EXPRESS SUPPLY, INC.,
      a
      corporation duly organized and existing under the laws of the State of Nevada
      (the
      “Corporation”),
      issued pursuant to that certain Loan and Security Agreement dated as of July
      25,
      2008, by and among the Corporation and the lenders named therein (the
“Loan
      Agreement”),
      a
      copy of which is on file at the principal office of the Corporation, and
      designated as the Corporation’s 6% Convertible Notes Due June
      30,
      2011 (the “Maturity
      Date”)
      in an
      aggregate principal amount (when taken together with the original principal
      amounts of all other Notes) which does not exceed Five Million U.S. Dollars
      (U.S. $5,000,000).

    

    FOR
      VALUE
      RECEIVED,
      the
      Corporation hereby promises to pay to the order of
      _____________________________________________ or
      its
      registered assigns or successors-in-interest (“Holder”)
      the
      principal sum of ________________________________________  Dollars
      (U.S. $______), together with all accrued but unpaid interest thereon, if any,
      on the Maturity Date, to the extent such principal amount and interest has
      not
      been repaid or converted into the Corporation’s Common Stock, par value $0.001
      per share (the “Common
      Stock”),
      in
      accordance with the terms hereof. 

    

    Interest
      on the unpaid and unconverted principal balance hereof shall accrue at the
      rate
      of 6% per annum from the date of original issuance hereof (the “Issuance
      Date”)
      until
      the same becomes due and payable on the Maturity Date, or such earlier date
      upon
      acceleration or by conversion, redemption or repayment in accordance with the
      terms hereof or of the other Agreements. Interest on this Note shall accrue
      daily commencing on the Issuance Date and shall be computed on the basis of
      a
      360-day year, 30-day months and actual days elapsed and shall be payable in
      accordance with Section 1 hereof. Unless otherwise agreed or required by
      applicable law, payments will be applied first to any unpaid collection costs,
      then to unpaid interest and fees and any remaining amount to
      principal.

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    All
      payments of principal and interest on this Note shall be made, at the
      Corporation’s option (i) in lawful money of the United States of America by wire
      transfer of immediately available funds to such account as the Holder may from
      time to time designate by written notice in accordance with the provisions
      of
      this Note or by company check, or (ii) paid in kind through adjustment of the
      Conversion Price. This Note may not be prepaid in whole or in part except as
      otherwise provided herein or in the Loan Agreement. Whenever any amount
      expressed to be due by the terms of this Note is due on any day which is not
      a
      Business Day (as defined below), the same shall instead be due on the next
      succeeding day which is a Business Day.

    

    Capitalized
      terms used herein and not otherwise defined herein shall have the meanings
      set
      forth in the Loan Agreement. For purposes hereof the following terms shall
      have
      the meanings ascribed to them below:

    

    “Bankruptcy
      Event”
means
      any of the following events: (a) the Corporation or any subsidiary commences
      a
      case or other proceeding under any bankruptcy, reorganization, arrangement,
      adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
      or
      similar law of any jurisdiction relating to the Corporation or any subsidiary
      thereof; (b) there is commenced against the Corporation or any subsidiary any
      such case or proceeding that is not dismissed within 60 days after commencement;
      (c) the Corporation or any subsidiary is adjudicated insolvent or bankrupt
      or
      any order of relief or other order approving any such case or proceeding is
      entered; (d) the Corporation or any subsidiary suffers any appointment of any
      custodian or the like for it or any substantial part of its property that is
      not
      discharged or stayed within 60 days; (e) the Corporation or any subsidiary
      makes
      a general assignment for the benefit of creditors; (f) the Corporation or any
      subsidiary fails to pay, or states that it is unable to pay or is unable to
      pay,
      its debts generally as they become due; (g) the Corporation or any subsidiary
      calls a meeting of its creditors with a view to arranging a composition,
      adjustment or restructuring of its debts; or (h) the Corporation or any
      subsidiary, by any act or failure to act, expressly indicates its consent to,
      approval of or acquiescence in any of the foregoing or takes any corporate
      or
      other action for the purpose of effecting any of the foregoing.

    

    “Business
      Day”
shall
      mean any day other than a Saturday, Sunday or a day on which commercial banks
      in
      the City of New York are authorized or required by law or executive order to
      remain closed.

     

     “Conversion
      Price”
      shall
      equal $4.00.

     

    “Convertible
      Securities”
      means
      any convertible securities, warrants, options or other rights to subscribe
      for
      or to purchase or exchange for, shares of Common Stock.

    

    “Exchange
      Act”
shall
      mean the Securities Exchange Act of 1934, as amended.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    “Interest
      Payment Date”
shall
      mean March 31st,
      June
      30th
      September 30th,
      and
      December 31st
      of each
      year commencing on September 30, 2008, provided that if any such day is not
      a
      Business Day, then such Payment Date shall mean the immediately preceding day
      which is a Business Day.

    

    “Per
      Share Selling Price”
shall
      include the amount actually paid by any Person for each share of Common Stock
      in
      a sale or issuance by the Corporation. In the event a fee is paid by the
      Corporation in connection with such transaction directly or indirectly to such
      Person being sold or issued such securities or its affiliates (other than for
      transaction expenses up to $50,000), any such fee shall be deducted from the
      selling price pro rata to all shares sold in the transaction to arrive at the
      Per Share Selling Price. A sale of shares of Common Stock shall include the
      sale
      or issuance of rights, options, warrants or convertible, exchangeable or
      exercisable securities under which the Corporation is or may become obligated
      to
      issue shares of Common Stock, and in such circumstances the Per Share Selling
      Price of the Common Stock covered thereby shall also include the exercise,
      exchange or conversion price thereof (in addition to the consideration received
      by the Corporation upon such sale or issuance less the fee amount as provided
      above). In case of any such security issued in a Variable Rate Transaction
      or an
      MFN Transaction, the Per Share Selling Price shall be deemed to be the lowest
      conversion or exercise price at which such securities are converted or exercised
      or might have been converted or exercised in the case of a Variable Rate
      Transaction, or the lowest adjustment price in the case of an MFN Transaction,
      over the life of such securities. If shares are issued for a consideration
      other
      than cash, the Per Share Selling Price shall be the fair value of such
      consideration as determined in good faith by independent certified public
      accountants mutually acceptable to the Corporation and the
      Purchaser.

    

    “Principal
      Amount”
shall
      refer to the sum of (i) the original principal amount of this Note, (ii) all
      accrued but unpaid interest hereunder, and (iii) any default payments owing
      under the Agreements but not previously paid or added to the Principal
      Amount.

    

    “Principal
      Market”
      shall
      mean the OTC Bulletin Board or such other principal market or exchange on which
      the Common Stock is then listed for trading.

    

    “Registrable
      Securities”
means
      shares of Common Stock issued by the Corporation upon conversion of this in
      accordance with the terms of this Note and the Loan Agreement. 

    

    “Securities
      Act”
shall
      mean the Securities Act of 1933, as amended.

    

    “Trading
      Day”
      shall
      mean a day on which there is trading on the Principal Market.

    

    “Underlying
      Shares”
      means
      the shares of Common Stock into which the Notes are convertible (including
      interest or principal payments in Common Stock as set forth herein) in
      accordance with the terms hereof and the Loan Agreement.

    

    “Variable
      Rate Transaction”
shall
      mean a transaction in which the Corporation issues or sells, or agrees to issue
      or sell (a) any debt or equity securities that are convertible into,
      exchangeable or exercisable for, or include the right to receive additional
      shares of, Common Stock either (x)
      at a
      conversion, exercise or exchange rate or other price that is based upon and/or
      varies with the trading prices of or quotations for the Common Stock at any
      time
      after the initial issuance of such debt or equity securities, (y) with a fixed
      conversion, exercise or exchange price that is subject to being reset at some
      future date after the initial issuance of such debt or equity security or upon
      the occurrence of specified or contingent events directly or indirectly related
      to the business of the Corporation or the market for the Common Stock (but
      excluding standard stock split anti-dilution provisions), or (z) under a warrant
      exercisable for a number of shares based upon and/or varying with the trading
      prices of or quotations for the Common Stock at any time after the initial
      issuance of such warrant, or (b) any securities of the Corporation pursuant
      to
      an “equity
      line”
      structure whereby the Corporation may sell securities at future determined
      prices.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    “VWAP”
shall
      mean the daily dollar volume-weighted average sale price for the Common Stock
      on
      the Principal Market on any particular Trading Day during the period beginning
      at 9:30 a.m., New York City Time (or such other time as the Principal Market
      publicly announces is the official open of trading), and ending at 4:00 p.m.,
      New York City Time (or such other time as the Principal Market publicly
      announces is the official close of trading), as reported by Bloomberg through
      its “Volume
      at Price”
      functions or, if the foregoing does not apply, the dollar volume-weighted
      average price of such security in the over-the-counter market on the electronic
      bulletin board for such security during the period beginning at 9:30 a.m.,
      New
      York City Time (or such other time as the Principal Market publicly announces
      is
      the official open of trading), and ending at 4:00 p.m., New York City Time
      (or
      such other time as the Principal Market publicly announces is the official
      close
      of trading), as reported by Bloomberg, or, if no dollar volume-weighted average
      price is reported for such security by Bloomberg for such hours, the average
      of
      the highest printed execution price and the lowest printed execution price
      reported in the “pink
      sheets”
      by the
      National Quotation Bureau, Inc. If the VWAP cannot be calculated for such
      security on such date on any of the foregoing bases, the VWAP of such security
      on such date shall be the fair market value as mutually determined by the
      Corporation and the holders of at least a majority of the aggregate Principal
      Amount outstanding under the Notes. All such determinations of VWAP shall to
      be
      appropriately and equitably adjusted in accordance with the provisions set
      forth
      herein for any stock dividend, stock split, stock combination or other similar
      transaction occurring during any period used to determine the Conversion Price
      (or other period utilizing VWAPs).

    

    The
      following terms and conditions shall apply to this Note:

    

    Section
      1.      Interest
      Payments.
      Subject
      to and in accordance with the terms of this Section 1, on each Interest Payment
      Date the Corporation shall pay to the Holder all interest accrued to date on
      the
      entire outstanding principal amount of this Note (“Interest
      Amount”).
      Subject to the terms hereof, the Corporation shall have the right to satisfy
      payment of the Interest Amount in full on each Interest Payment Date either
      in
      cash or in kind at the Corporation’s option. If the Corporation elects or is
      required to pay any Interest Amount in cash on an Interest Payment Date, then
      on
      such Interest Payment Date the Corporation shall pay to the Holder an amount
      equal to such Interest Amount in satisfaction of such obligation. If the
      Corporation elects to pay any Interest Amount in kind, the conversion price
      shall be adjusted as provided in Section 3. All holders of Notes must be treated
      the same with respect to such payment of the Interest Amount in cash or in
      kind. 

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    Section
      2.      Subsequent Debt.
      So long
      as any Principal Amount of Notes is outstanding, the Corporation and its
      subsidiaries shall not directly or indirectly, without the affirmative vote
      of
      the holders of at least 75% of the outstanding Principal Amount of the Notes
      then outstanding, incur or permit to exist additional indebtedness which is
      senior to the Notes, or incur, assume or permit to exist any lien, mortgage,
      security interest or encumbrance (other than statutory liens imposed by law
      incurred in the ordinary course of business for sums not yet delinquent or
      being
      contested in good faith, if such reserve or other appropriate provision, if
      any,
      as shall be required by GAAP shall have been made in respect thereof) on any
      of
      its assets, except for (a) the security interest granted to the holders of
      the
notes
      listed on Schedule 1 attached to the Loan Agreement, issued by the Corporation
      to the holders thereof,
      (b)
      indebtedness and liens currently outstanding pursuant to agreements as currently
      in effect on the Issuance Date, (c) indebtedness and liens pursuant to
      agreements for financing in which the proceeds shall be principally used for
      acquisitions by the Corporation of other businesses, and (d) capital leases,
      financing for equipment and purchase money security interests.

     

    Section
      3.      Conversion.

     

    (a)     
      Voluntary
      Conversion Right.
      Subject
      to the terms hereof and restrictions and limitations contained herein, the
      Holder shall have the right, at such Holder’s option, at any time and from time
      to time to convert the outstanding Principal Amount under this Note in whole
      or
      in part by delivering to the Corporation a fully executed notice of conversion
      in the form of conversion notice attached hereto as Exhibit
      A
      (the
“Conversion
      Notice”),
      which
      may be transmitted by facsimile or electronic transmission.

     

    (b)     
      Common
      Stock Issuance upon Conversion.

     

    (i)      Conversion
      Date Procedures.
      Upon
      conversion of this Note pursuant to Section 3(a) above, the outstanding
      Principal Amount hereunder shall be converted into such number of fully paid,
      validly issued and non-assessable shares of Common Stock, free of any liens,
      claims and encumbrances, as is determined by dividing the outstanding Principal
      Amount being converted by the then applicable Conversion Price. The date of
      any
      Conversion Notice hereunder shall be referred to herein as the “Conversion
      Date”.
      If a
      conversion under this Note cannot be effected in full for any reason, or if
      the
      Holder is converting less than all of the outstanding Principal Amount hereunder
      pursuant to a Conversion Notice, the Corporation shall promptly deliver to
      the
      Holder (but no later than five Trading Days after the Conversion Date) a Note
      for such outstanding Principal Amount as has not been converted if this Note
      has
      been surrendered to the Corporation for partial conversion. The Holder shall
      not
      be required to physically surrender this Note to the Corporation upon any
      conversion hereunder unless the full outstanding Principal Amount represented
      by
      this Note is being converted or repaid. The Holder and the Corporation shall
      maintain records showing the outstanding Principal Amount so converted and
      repaid and the dates of such conversions or repayments or shall use such other
      method, reasonably satisfactory to the Holder and the Corporation, so as not
      to
      require physical surrender of this Note upon each such conversion or
      repayment.

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (ii)      Stock
      Certificates or DWAC.
      The
      Corporation will deliver to the Holder not later than two (2) Trading Days
      after
      the Conversion Date, a certificate or certificates which shall be free of
      restrictive legends and trading restrictions, representing the number of shares
      of Common Stock being acquired upon the conversion of this Note. 

     

    (iii) Conversion
      Limitations. The
      Corporation shall not effect any conversion of this Note, and the Holder shall
      not have the right to convert any portion of this Note, pursuant to Section
      3 or
      otherwise, to the extent that after giving effect to the issuance of Common
      Stock after conversion as set forth on the applicable Conversion Notice, the
      Holder (together with the Holder’s Affiliates, and any other person or entity
      acting as a group together with the Holder or any of the Holder’s Affiliates),
      would beneficially own in excess of the Beneficial Ownership Limitation (as
      defined below). For purposes of the foregoing sentence, the number of shares
      of
      Common Stock beneficially owned by the Holder and its Affiliates shall include
      the number of shares of Common Stock issuable upon conversion of this Note
      with
      respect to which such determination is being made, but shall exclude the number
      of shares of Common Stock which would be issuable upon (A) conversion of the
      remaining, unconverted portion of this Note beneficially owned by the Holder
      or
      any of its Affiliates and (B) exercise or conversion of the unexercised or
      unconverted portion of any other securities of the Corporation (including,
      without limitation, any other Common Stock Equivalents) subject to a limitation
      on conversion or exercise analogous to the limitation contained herein
      beneficially owned by the Holder or any of its affiliates. Except as set forth
      in the preceding sentence, for purposes of this Section 3(b)(iii), beneficial
      ownership shall be calculated in accordance with Section 13(d) of the Securities
      Exchange Act of 1934, as amended (the “Exchange
      Act”)
      and
      the rules and regulations promulgated thereunder, it being acknowledged by
      the
      Holder that the Corporation is not representing to the Holder that such
      calculation is in compliance with Section 13(d) of the Exchange Act and the
      Holder is solely responsible for any schedules required to be filed in
      accordance therewith. To the extent that the limitation contained in this
      Section 3(b)(iii) applies, the determination of whether this Note is convertible
      (in relation to other securities owned by the Holder together with any
      Affiliates) and of which portion of this Note is convertible shall be in the
      sole discretion of the Holder, and the submission of a Conversion Notice shall
      be deemed to be the Holder’s determination of whether this Note is convertible
      (in relation to other securities owned by the Holder together with any
      Affiliates) and of which portion of this Note is convertible, in each case
      subject to the Beneficial Ownership Limitation, and the Corporation shall have
      no obligation to verify or confirm the accuracy of such determination. In
      addition, a determination as to any group status as contemplated above shall
      be
      determined in accordance with Section 13(d) of the Exchange Act and the rules
      and regulations promulgated thereunder. For purposes of this Section 3(b)(iii),
      in determining the number of outstanding shares of Common Stock, a Holder may
      rely on the number of outstanding shares of Common Stock as reflected in (A)
      the
      Corporation’s most recent periodic or annual report, as the case may be, (B) a
      more recent public announcement by the Corporation or (C) any other notice
      by
      the Corporation or the Corporation’s Transfer Agent setting forth the number of
      shares of Common Stock outstanding. Upon the written or oral request of a
      Holder, the Corporation shall within two Trading Days confirm orally and in
      writing to the Holder the number of shares of Common Stock then outstanding.
      In
      any case, the number of outstanding shares of Common Stock shall be determined
      after giving effect to the conversion or exercise of securities of the
      Corporation, including this Note, by the Holder or its Affiliates since the
      date
      as of which such number of outstanding shares of Common Stock was reported.
      The
“Beneficial
      Ownership Limitation”
shall
      be 4.99% of the number of shares of the Common Stock outstanding immediately
      after giving effect to the issuance of shares of Common Stock issuable upon
      conversion of this Note. The Holder, upon not less than 61 days’ prior notice to
      the Corporation, may increase or decrease the Beneficial Ownership Limitation
      provisions of this Section 3(b)(iii), provided that the Beneficial Ownership
      Limitation in no event exceeds 9.99% of the number of shares of the Common
      Stock
      outstanding immediately after giving effect to the issuance of shares of Common
      Stock upon conversion of this Note held by the Holder and the provisions of
      this
      Section 3(b)(iii) shall continue to apply. Any such increase or decrease will
      not be effective until the 61st day after such notice is delivered to the
      Corporation. The provisions of this paragraph shall be construed and implemented
      in a manner otherwise than in strict conformity with the terms of this Section
      3(b)(iii) to correct this paragraph (or any portion hereof) which may be
      defective or inconsistent with the intended Beneficial Ownership Limitation
      herein contained or to make changes or supplements necessary or desirable to
      properly give effect to such limitation. The limitations contained in this
      paragraph shall apply to a successor holder of this Note.

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (c)     
      Conversion
      Price Adjustments.

     

    (i)  Interest
      Paid in Kind. If
      the
      Corporation elects to pay any Interest Amount in kind as provided in Section
      1
      of this Note, the conversion price shall be adjusted to reflect the
      proportionate increase in the number of shares of Common Stock issuable to
      Holder on conversion after payment of the Interest Amount in full on the
      applicable Interest Payment Date. Any adjustment made pursuant to this Section
      3(c)(i) shall become effective immediately after the applicable Interest Payment
      Date.

    

    (ii)      Stock
      Dividends, Splits and Combinations.
      If the
      Corporation or any of its subsidiaries, at any time while the Notes are
      outstanding (A) shall pay a stock dividend or otherwise make a distribution
      or
      distributions on any equity securities (including instruments or securities
      convertible into or exchangeable for such equity securities) in shares of Common
      Stock, (B) subdivide outstanding Common Stock into a larger number of shares,
      or
      (C) combine outstanding Common Stock into a smaller number of shares, then
      the
      Conversion Price shall be multiplied by a fraction, the numerator of which
      shall
      be the number of shares of Common Stock outstanding before such event and the
      denominator of which shall be the number of shares of Common Stock outstanding
      after such event. Any adjustment made pursuant to this Section 3(c)(ii) shall
      become effective immediately after the record date for the determination of
      stockholders entitled to receive such dividend or distribution and shall become
      effective immediately after the effective date in the case of a subdivision
      or
      combination.

     

    (iii)      Distributions.
      If the
      Corporation or any of its subsidiaries, at any time while the Notes are
      outstanding, shall distribute to all holders of Common Stock evidences of its
      indebtedness or assets or cash or rights or warrants to subscribe for or
      purchase any security of the Corporation or any of its subsidiaries (excluding
      those referred to in Section 3(c)(i) above), then concurrently with such
      distributions to holders of Common Stock, the Corporation shall distribute
      to
      holders of the Notes the amount of such indebtedness, assets, cash or rights
      or
      warrants which the holders of Notes would have received had all their Notes
      been
      converted into Common Stock at the Conversion Price.  

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    (iv)      Common
      Stock Issuances.  For
      a period commencing on the date of the Loan Agreement and continuing until
      the
      second anniversary thereof, if the Corporation or any of its subsidiaries (A)
      issues or sells any Common Stock or Convertible Securities, or (B) directly
      or
      indirectly effectively reduces the conversion, exercise or exchange price for
      any Convertible Securities which are currently outstanding (other than pursuant
      to terms existing on the date hereof), at or to an effective Per Share Selling
      Price (the “Lower Per Share Selling Price”) which is less than the then
      applicable Conversion Price, then in each such case, the Conversion Price in
      effect immediately prior to such issue or sale or record date shall be
      automatically reduced effective concurrently with such issue or sale to
the
      Lower
      Per
      Share Selling Price
      (which
      figure shall be appropriately and equitably adjusted as provided herein for
      stock splits, stock dividends, and similar events).

     

    The
      foregoing provisions of this subsection shall not apply to issuances or sales
      of
      (x)
      Common
      Stock upon conversion, exercise or exchange of Convertible Securities
      outstanding on the issuance date hereof in accordance with the terms in effect
      on such issuance date, (y) Common Stock or Convertible Securities under the
      Corporation’s duly adopted stock option and bonus plans for employees and
      directors, or (z) Common Stock or Convertible Securities
      issued
      in a merger/acquisition transaction to which the Corporation is a
      party.
      For the
      purposes of the foregoing adjustments, in the case of the issuance of any
      Convertible Securities, the maximum number of shares of Common Stock issuable
      upon exercise, exchange or conversion of such Convertible Securities shall
      be
      deemed to be outstanding, provided that no further adjustment shall be made
      upon
      the actual issuance of Common Stock upon exercise, exchange or conversion of
      such Convertible Securities. For purposes of this Section 3(c)(iv), if an event
      occurs that triggers more than one of the above adjustment provisions, then
      only
      one adjustment shall be made and the calculation method which yields the
      greatest downward adjustment in the affected Conversion Price shall be
      used.

    

    (v)      Rounding
      of Adjustments.
      All
      calculations under this Section 3 or Section 1 shall be made to 4 decimal places
      for dollar amounts or the nearest 1/100th of a share, as the case may
      be.

     

    (vi)      Notice
      of Adjustments.
      Whenever any affected Conversion Price is adjusted pursuant to Section 3(c)(i),
      (ii) or (iii) above, the Corporation shall promptly deliver to each holder
      of
      the Notes, a notice setting forth the affected Conversion Price after such
      adjustment and setting forth a brief statement of the facts requiring such
      adjustment, provided that any failure to so provide such notice shall not affect
      the automatic adjustment hereunder.

    

    (vii) Notice
      of Certain Events.   If:

     

    
      	
               
                

            	
               
                 
                

            	
              A.
                  

            	
              the
                Corporation shall declare a dividend (or any other distribution)
                on its
                Common Stock; or 

            
	 	 	 	 
	 	 	
              B.
                  

            	
              the
                Corporation shall declare a special nonrecurring cash dividend on
                or a
                redemption of its Common Stock; or 

            

    

     

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    
      	
               
                

            	
               
                

            	
               
                

            	
              C.
                

            	
                

            	
              the
                Corporation shall authorize the granting to all holders of the Common
                Stock rights or warrants to subscribe for or purchase any shares
                of
                capital stock of any class or of any rights;
                or

            

    

    

    
      	
               
                

            	
               
                

            	
               
                

            	
              D.
                

            	
                

            	
              the
                approval of any stockholders of the Corporation shall be required
                in
                connection with any reclassification of the Common Stock of the
                Corporation, any consolidation or merger to which the Corporation
                is a
                party, any sale or transfer of all or substantially all of the assets
                of
                the Corporation, of any compulsory share exchange whereby the Common
                Stock
                is converted into other securities, cash or property, provided that
                such
                approval shall not be require in connection with any transaction
                in which
                the proceeds shall be principally used for acquisitions by the Corporation
                of other businesses; or

            

    

    

    
      	
               
                

            	
               
                

            	
               
                

            	
              E.
                

            	
                

            	
              the
                Corporation shall authorize the voluntary or involuntary dissolution,
                liquidation or winding up of the affairs of the
                Corporation;

            

    

    

    then
      the
      Corporation shall cause to be filed at each office or agency maintained for
      the
      purpose of conversion of this Note, and shall cause to be either (i) emailed
      or
      (ii) mailed to the Holder at its last address as it shall appear upon the books
      of the Corporation, on or prior to the date notice to the Corporation’s
      stockholders generally is given, a notice stating (x)
      the
      date on which a record is to be taken for the purpose of such dividend,
      distribution, redemption, rights or warrants, or if a record is not to be taken,
      the date as of which the holders of Common Stock of record to be entitled to
      such dividend, distributions, redemption, rights or warrants are to be
      determined or (y) the date on which such reclassification, consolidation,
      merger, sale, transfer or share exchange is expected to become effective or
      close, and the date as of which it is expected that holders of Common Stock
      of
      record shall be entitled to exchange their shares of Common Stock for
      securities, cash or other property deliverable upon such reclassification,
      consolidation, merger, sale, transfer or share exchange.

    

    (d)     
      Reservation
      and Issuance of Underlying Securities.
      The
      Corporation covenants that it will at all times reserve and keep available
      out
      of its authorized and unissued Common Stock solely for the purpose of issuance
      upon conversion of this Note (including repayments in stock), free from
      preemptive rights or any other actual contingent purchase rights of persons
      other than the holders of the Notes, not less than such number of shares of
      Common Stock as shall be issuable (taking into account the adjustments under
      this Section 3) upon the conversion of this Note hereunder in Common Stock
      (including repayments in stock). The Corporation covenants that all shares
      of
      Common Stock that shall be so issuable shall, upon issue, be duly authorized,
      validly issued, fully paid, nonassessable and freely tradable.

     

    (e)     
      No
      Fractions.
      Upon a
      conversion hereunder the Corporation shall not be required to issue stock
      certificates representing fractions of shares of Common Stock, but may if
      otherwise permitted, make a cash payment in respect of any final fraction of
      a
      share based on the closing price of a share of Common Stock at such time. If
      the
      Corporation elects not, or is unable, to make such cash payment, the Holder
      shall be entitled to receive, in lieu of the final fraction of a share, one
      whole share of Common Stock.

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (f)     
      Charges,
      Taxes and Expenses.
      Issuance of certificates for shares of Common Stock upon the conversion of
      this
      Note (including repayment in stock) shall be made without charge to the holder
      hereof for any issue or transfer tax or other incidental expense in respect
      of
      the issuance of such certificate, all of which taxes and expenses shall be
      paid
      by the Corporation, and such certificates shall be issued in the name of the
      Holder or in such name or names as may be directed by the Holder; provided,
      however,
      that in
      the event certificates for shares of Common Stock are to be issued in a name
      other than the name of the Holder, this Note when surrendered for conversion
      shall be accompanied by an assignment form; and provided further,
      that
      the Corporation shall not be required to pay any tax or taxes which may be
      payable in respect of any such transfer.

     

    (g)     
      Cancellation.
      After
      all of the Principal Amount (including accrued but unpaid interest and default
      payments at any time owed on this Note) have been paid in full or converted
      into
      Common Stock, this Note shall automatically be deemed canceled and the Holder
      shall promptly surrender the Note to the Corporation at the Corporation’s
      principal executive offices.

     

    (h)     
      Forced
      Conversion.
      Subject
      to the terms hereof, the Corporation shall have the right to compel the Holder
      to convert up to 100% of the principal amount of Notes then held by the Holder
      by delivering a written notice (a “Forced
      Conversion Notice”)
      to the
      Holder; provided that (1) such Forced Conversion Notice must specify the
      principal amount of Notes to be converted, and (2) all Holders of Notes shall
      be
      treated proportionately with respect to the Corporation’s election to force
      conversion of the Notes pursuant to this provision. Such conversion shall be
      effective on the date of such Forced Conversion Notice. Such forced conversion
      shall be subject to and governed by all the provisions relating to voluntary
      conversion of this Note contained herein. Notwithstanding anything contained
      herein, the Corporation shall not be entitled to exercise any forced conversion
      right set forth in this subsection 3(j) unless at the effective date of the
      Forced Conversion (i) the resale of all Underlying Shares is covered by an
      effective registration statement, which registration statement is not subject
      to
      any suspension or stop orders, or any such Underlying Shares may be sold
      pursuant to Rule 144 (or any successor provision) of the Securities Act; (ii)
      the requisite number of shares of Common Stock has been duly authorized and
      reserved for issuance as required by the terms of this Note; (iii) the
VWAP
      on each Trading Day is greater than $7.00;
      (iv)
      none of the Corporation or any direct or indirect subsidiary of the Corporation
      shall be subject to any bankruptcy, insolvency or similar proceeding; and (viii)
      the average
      daily trading volume for the preceding fifteen (15) Trading Days exceeds
      50,000.

    

    Section
      4.  Defaults
      and Remedies.

     

    (a)     
      Events
      of Default.
      An
“Event
      of Default”
is:
      (i)
      a default in payment of any amount due hereunder which default continues for
      more than five (5) Business Days after the due date thereof; (ii) a default
      in
      the timely issuance of Underlying Shares upon and in accordance with terms
      hereof, which default continues for five (5) Business Days after the Corporation
      has received written notice informing the Corporation that it has failed to
      issue shares or deliver stock certificates within the fifth day following the
      Conversion Date; (iii) failure by the Corporation for fifteen (15) days after
      written notice has been received by the Corporation to comply with any material
      provision of any of the Notes, the Loan Agreement, or the Warrants issued
      pursuant to the Loan Agreement (the “Warrants”) (including without limitation
      the failure to issue the requisite number of shares of Common Stock upon
      conversion hereof or of the Warrants; (iv) a material breach by the Corporation
      of its representations or warranties in the Loan Agreement or the Warrants;
      (v)
      any default after any cure period under, or acceleration prior to maturity
      of,
      any mortgage, indenture or instrument under which there may be issued or by
      which there may be secured or evidenced any indebtedness for money borrowed
      by
      the Corporation for in excess of $200,000 or for money borrowed the repayment
      of
      which is guaranteed by the Corporation for in excess of $200,000, whether such
      indebtedness or guarantee now exists or shall be created hereafter; or (vi)
      if
      the Corporation is subject to any Bankruptcy Event.

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (b)     
      Remedies.
      If an
      Event of Default occurs and is continuing with respect to any of the Notes,
      the
      Holder may declare all of the then outstanding Principal Amount of this Note
      and
      all other Notes held by the Holder, including any interest due thereon, to
      be
      due and payable immediately, except that in the case of an Event of Default
      arising from events described in clauses (v) and (vi) of Section 4(a), this
      Note
      shall become due and payable without further action or notice. 

      

    Section
      5.  Notice
      Procedures.
      Any and
      all notices or other communications or deliveries to be provided by the Holder
      hereunder, including, without limitation, any Conversion Notice, shall be in
      writing and either (i) emailed or (ii) delivered personally, by confirmed
      facsimile, or by a nationally recognized overnight courier service to the
      Corporation at the facsimile telephone number or address of the Corporation
      specified in the Loan Agreement. Any and all notices or other communications
      or
      deliveries to be provided by the Corporation hereunder shall be in writing
      and
      either (x)
      emailed
      or (y) delivered personally, by facsimile, or by a nationally recognized
      overnight courier service addressed to the Holder at the facsimile telephone
      number or address of the Holder appearing on the books of the Corporation,
      or if
      no such facsimile telephone number or address appears, at the principal place
      of
      business of the Holder. Any notice or other communication or deliveries
      hereunder shall be deemed delivered (i) upon receipt, when emailed or delivered
      personally, (ii) when sent by facsimile, upon receipt if received on a Business
      Day prior to 5:00 p.m. (Eastern Time), or on the first Business Day following
      such receipt if received on a Business Day after 5:00 p.m. (Eastern Time) or
      (iii) upon receipt, when deposited with a nationally recognized overnight
      courier service.

      

    Section
      8.      General.

     

    (a)     
      Payment
      of Expenses.
      The
      Corporation agrees to pay all reasonable charges and expenses, including
      attorneys’ fees and expenses, which may be incurred by the Holder in
      successfully enforcing this Note and/or collecting any amount due under this
      Note.

     

    (b)     
      Amendment.
      Neither
      this Note nor any term hereof may be amended, waived, discharged or terminated
      other than by a written instrument signed by the Corporation and the
      Holder.

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    (c)     
      Assignment,
      Etc.
      The
      Holder may assign or transfer this Note to any transferee only with the prior
      written consent of the Corporation, which may not be unreasonably withheld
      or
      delayed, provided that (i) the Holder may assign or transfer this Note to any
      of
      such Holder’s affiliates without the consent of the Corporation and
      (ii) upon any Event of Default, the Holder may assign or transfer this Note
      without the consent of the Corporation. The Holder shall notify the Corporation
      of any such assignment or transfer promptly. This Note shall be binding upon
      the
      Corporation and its successors and shall inure to the benefit of the Holder
      and
      its successors and permitted assigns.

     

    (d)     
      No
      Waiver.
      No
      failure on the part of the Holder to exercise, and no delay in exercising any
      right, remedy or power hereunder shall operate as a waiver thereof, nor shall
      any single or partial exercise by the Holder of any right, remedy or power
      hereunder preclude any other or future exercise of any other right, remedy
      or
      power. Each and every right, remedy or power hereby granted to the Holder or
      allowed it by law or other agreement shall be cumulative and not exclusive
      of
      any other, and may be exercised by the Holder from time to time.

     

    (e)     
      Governing
      Law; Jurisdiction.
      THIS
      NOTE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
      OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT
      WOULD DEFER TO THE SUBSTANTIVE LAWS OF ANOTHER JURISDICTION. The Corporation
      irrevocably submits to the exclusive jurisdiction of any State or Federal Court
      sitting in the State of New York, County of New York, over any suit, action,
      or
      proceeding arising out of or relating to this Note. The Corporation irrevocably
      waives, to the fullest extent permitted by law, any objection which it may
      now
      or hereafter have to the laying of the venue of any such suit, action, or
      proceeding brought in such a court and any claim that suit, action, or
      proceeding has been brought in an inconvenient forum. The Corporation agrees
      that the service of process upon it mailed by certified or registered mail
      (and
      service so made shall be deemed complete three days after the same has been
      posted as aforesaid) or by personal service shall be deemed in every respect
      effective service of process upon it in any such suit or proceeding. Nothing
      herein shall affect Holder’s right to serve process in any other manner
      permitted by law. The Corporation agrees that a final non-appealable judgment
      in
      any such suit or proceeding shall be conclusive and may be enforced in other
      jurisdictions by suit on such judgment or in any other lawful
      manner.

    

    (f)     
      Replacement
      Notes.
      This
      Note may be exchanged by Holder at any time and from time to time for a Note
      or
      Notes with different denominations representing an equal aggregate outstanding
      Principal Amount, as reasonably requested by Holder, upon surrendering the
      same.
      No service charge will be made for such registration or exchange. In the event
      that Holder notifies the Corporation that this Note has been lost, stolen or
      destroyed, a replacement Note identical in all respects to the original Note
      (except for registration number and Principal Amount, if different than that
      shown on the original Note), shall be issued to the Holder, provided that the
      Holder executes and delivers to the Corporation an agreement reasonably
      satisfactory to the Corporation to indemnify the Corporation from any loss
      incurred by it in connection with the Note.

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    

    

    

    Signatures
      on the following page.

     

     

    
 

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      the
      Corporation has caused this Note to be duly executed on the day and in the
      year
      first above written.

                                                                                                                                    

    PET
      EXPRESS SUPPLY, INC.

    

    

    
      	 	 	 	 
	By:	 	 	
            
	
              
                

              

              
                Jonathan
                  Bomser

                Chief
                  Executive Officer

              

            	 	 	
            
	 	 	 	 

                                                                                        

    
 

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

    

    FORM
      OF CONVERSION NOTICE

    (To
      be
      executed by the Holder in
      order to convert a Note)

    

    Re:    6%
      Convertible Note (“Note”)
      issued
      by PET EXPRESS SUPPLY, INC. to _____________________ in the original principal
      amount of $    .

    

    The
      undersigned hereby elects to convert the aggregate outstanding Principal Amount
      (as defined in the Note) indicated
      below of this Note into
      shares of Common Stock, par value $0.001 per share (the “Common
      Stock”),
      of PET
      EXPRESS SUPPLY, INC. (the “Corporation”)
      according to the conditions hereof, as of the date written below. If shares
      are
      to be issued in the name of a person other than undersigned, the undersigned
      will pay all transfer taxes payable with respect thereto and is delivering
      herewith such certificates and opinions as reasonably requested by the
      Corporation in accordance therewith. 

    

    No
      fee
      will be charged to the holder for any conversion, except for such transfer
      taxes, if any. The undersigned represents as of the date hereof that, after
      giving effect to the conversion of this Note pursuant
      to this Conversion Notice, the undersigned will not exceed the “Restricted
      Ownership Percentage”
      contained in Section 3(i) of
      this
      Note. Capitalized terms used herein and not otherwise defined shall have the
      meaning ascribed thereto in the Note.

    

    To
      the
      extent the undersigned intends to sell the Underlying Shares issued to the
      undersigned upon conversion of this Note pursuant to a Registration Statement,
      the undersigned agrees to comply with all applicable prospectus delivery
      requirements under the 1933 Act with respect to such sale.

     

    
      
        
          	Conversion information:  	 
	 	
                  
                    
  

                
	 	 
	 	
                  

                  Date
                    to Effect
                    Conversion

                
	 	 
	 	
                  

                  Aggregate
                    Principal Amount 
of
                    Note Being
                    Converted 

                
	 	 
	 	
                  
Number
                  of Shares of Common Stock
                  to be Issued 
	 	 
	 	
                  
Applicable
                  Conversion Price
	 	 
	 	
                  
Signature
	 	
                
	 	
                  
 
	 	 
	 	
                  
Address
	 	 

        

        
           

          
          

           

        

      

    

    
      
        
        

      

      
        15Unassociated Document

    LOAN
      AND SECURITY AGREEMENT

    

    

    THIS
      LOAN AND SECURITY AGREEMENT
      dated
      July 25, 2008 by and among PET
      EXPRESS SUPPLY, INC.,
      a
      corporation organized and in good standing in the State of Nevada (the
“Corporation”),
      whose
      address is 59
      West
      19th
      Street,
      6th
      Floor,
New
      York,
      NY 10011; MKM
      OPPORTUNITY MASTER FUND, LTD.
      (“MKM”);
      and
      those Persons who have executed or shall subsequently execute this Agreement
      under the heading “Additional
      Lenders”.
      MKM
      and
      the
      Additional Lenders are
      sometimes collectively referred to herein as “Lender”
or
      the
“Lenders”.

    

    WHEREAS,
      Lender wishes to lend to the Corporation, and the Corporation wishes to borrow
      from Lender and repay Lender on the terms set forth herein. 

    

    Now,
      therefore, the parties agree as follows: 

    

    1. LOAN
      AND TERMS OF PAYMENT.

     

    (a) The
      Corporation shall borrow from Lenders hereunder an aggregate principal amount
      which does not exceed Five Million U.S. Dollars (U.S. $5,000,000). All loans
      made by Lenders hereunder shall be evidenced by Notes (as hereinafter defined),
      to be executed and delivered by the Corporation to the applicable Lender on
      the
      closing date of such loan. Such loan shall be repaid in accordance with the
      terms of the Note, and will be convertible as provided in the Note.

    

    (b) The
      Corporation promises to pay Lender the unpaid principal amount of all loans
      made
      by any of the Lenders hereunder and interest on the unpaid principal amount
      thereof in accordance with the terms of the Notes.

    

    (c) 
      Loans
      made hereunder accrue interest on the outstanding principal balance thereof
      in
      accordance with the applicable Note at a per annum rate of six percent (6%).
      Interest on the unpaid and unconverted principal balance of each of the Notes
      shall accrue at the rate of 6% per annum from the date of original issuance
      thereof (the “Issuance
      Date”)
      until
      the same becomes due and payable on the Maturity Date, or such earlier date
      upon
      acceleration or by conversion, redemption or repayment in accordance with the
      terms hereof or of the other Agreements. Interest on each of the Notes shall
      accrue daily commencing on the Issuance Date and shall be computed on the basis
      of a 360-day year, 30-day months and actual days elapsed and shall be payable
      in
      accordance with the terms of the applicable Note.

    

    2. WARRANTS.
      The
      Corporation hereby grants to each of the Lenders warrants pursuant to which
      each
      Lender may purchase Common Stock, $0.001 par value per share, of PETX (“Shares”)
      up to a maximum amount of Shares equal to seventy-five (75%) percent of the
      number of Shares into which such Lender’s Note may be converted, at an exercise
      price of $4.50 per Share. The warrants will be in the form attached hereto
      as
      Exhibit B.

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    3. PREPAYMENT.
      The
Corporation
      shall prepay (such payment a “Mandatory
      Prepayment”)
      all or
      part of the Notes then outstanding in the event that Corporation shall complete,
      subsequent to the consummation of the transactions contemplated in this
      Agreement, an offering or offerings of new equity or an instrument convertible
      into equity, and the proceeds of such financing(s) shall exceed $4,000,000,
      in
      which case all of the proceeds of such financing(s) in excess of $4,000,000
      shall be used to prepay the Notes, with
      all
      holders of Notes prepaid proportionately with respect to the Mandatory
      Prepayment pursuant to this provision.
      The
      Corporation shall deliver to each of the Lenders a written notice (a
“Prepayment
      Notice”),
      specifying the principal amount of Notes to be prepaid, and each of the holders
      of Notes shall have the right to voluntarily convert. Such notice must be given
      no less than ten (10) Business Days prior to the effective date of such
      Mandatory Prepayment (the “Prepayment Date”), and each holder of a Note shall
      have the right to voluntarily convert such Note prior to the Prepayment Date.
      

    

    4.
      GRANT OF SECURITY INTEREST 

    

    4.1 GRANT
      OF SECURITY INTEREST. The
      Corporation grants Lender a continuing security interest in all presently
      existing and later acquired Collateral to secure all Obligations and performance
      of each of the Corporation’s duties under the Loan Documents. Except for
      Permitted Liens, such security interest will be a first priority security
      interest in the Collateral. If this Agreement is terminated, Lender’s lien and
      Lender’s security interest in the Collateral will continue until the Corporation
      fully satisfies its Obligations. 

    

    4.2
      AUTHORIZATION TO FILE. The Corporation
      authorizes Lender to file financing statements without notice to Corporation,
      with all appropriate jurisdictions within the United States, as Lender deems
      appropriate, in order to perfect or protect Lender’s interest in the Collateral.
      Lender agrees that it shall, upon the request of the Corporation, following
      the
      termination of the Term Loan and the payment in full of the Obligations (a)
      terminate all such financing statements and (b) take such other action to
      evidence termination of the Lender’s Security Interest as Corporation may
      reasonably request. 

    

    5.
       REPRESENTATIONS
      AND WARRANTIES . The
      Corporation represents and warrants as follows: 

    

    5.1
       DUE
      ORGANIZATION AND AUTHORIZATION. The
      Corporation and each Subsidiary is duly existing and in good standing in its
      state of incorporation and qualified and licensed to do business in, and in
      good
      standing in, any state in which the conduct of its business or its ownership
      of
      property requires that it be qualified, except where the failure to do so would
      not reasonably be expected to cause a Material Adverse Change. The Corporation
      and each Subsidiary’s exact legal name are as set forth on the first page of
      this Agreement. The execution, delivery and performance of the Loan Documents
      have been duly authorized, and do not conflict with the Corporation’s formation
      documents, nor constitute an event of default under any material agreement
      by
      which Corporation is bound. The Corporation is not in default under any
      agreement to which, or by which it is bound, in which the default would
      reasonably be expected to cause a Material Adverse Change. 

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    5.2
       COLLATERAL.
      The
      Corporation has good title to the Collateral, free of Liens except Permitted
      Liens. The Accounts are bona fide, existing obligations, and the service or
      property has been performed or delivered to the account debtor or its agent
      for
      immediate shipment to and unconditional acceptance by the account debtor.
      Corporation has no notice of any actual or imminent Insolvency Proceeding of
      any
      account debtor. All Inventory is in all material respects of good and marketable
      quality, free from material defects 

    

    5.3
       LITIGATION.
      Except
      as
      shown in the Schedule, there are no actions or proceedings pending or, to the
      knowledge of the Corporation’s Responsible Officers, threatened by or against
      the Corporation or any Subsidiary in which a likely adverse decision would
      reasonably be expected to cause a Material Adverse Change. 

    

    5.4
       FINANCIAL
      STATEMENTS. All
      consolidated financial statements for the Corporation, and any Subsidiary,
      delivered to Lender fairly present in all material respects the Corporation’s
      consolidated financial condition and Corporation’s consolidated results of
      operations as of the date and for the period then ended. There has not been
      any
      Material Adverse Change in the Corporation’s consolidated financial condition
      since the date of the most recent consolidated financial statements submitted
      to
      Lender. 

    

    5.5
       REGULATORY
      COMPLIANCE. The
      Corporation is not an “investment
      company”
      or a
      company “controlled”
      by an
“investment
      company”
      under
      the Investment Company Act. Corporation is not engaged as one of its important
      activities in extending credit for margin stock (under Regulations T and U
      of
      the Federal Reserve Board of Governors). To its knowledge, the Corporation
      has
      complied in all material respects with the Federal Fair Labor Standards Act.
      The
      Corporation has not violated any laws, ordinances or rules, the violation of
      which would reasonably be expected to cause a Material Adverse Change. None
      of
      the Corporation’s or any Subsidiary’s properties or assets has been used by
      Corporation or any Subsidiary, in disposing, producing, storing, treating,
      or
      transporting any hazardous substance other than legally. The Corporation and
      each Subsidiary has timely filed all required tax returns and paid, or made
      adequate provision to pay, all material taxes, except those being contested
      in
      good faith with adequate reserves under GAAP. The Corporation and each
      Subsidiary has obtained all consents, approvals and authorizations of, made
      all
      declarations or filings with, and given all notices to, all government
      authorities that are necessary to continue its business as currently conducted,
      except where the failure to do so would not reasonably be expected to cause
      a
      Material Adverse Change. 

    

    5.6
       SUBSIDIARIES.
      The
      Corporation does not own any stock, partnership interest or other equity
      securities except for its investment in its sole subsidiary, C J Vision
      Enterprises, Inc. 

    

    5.7
       FULL
      DISCLOSURE. No
      written representation, warranty or other statement of the Corporation in any
      certificate or written statement given to Lender (taken together with all such
      written certificates and written statements to Lender) contains any untrue
      statement of a material fact or omits to state a material fact necessary to
      make
      the statements contained in the certificates or statements not misleading (it
      being recognized by Lender that the projections and forecasts provided by the
      Corporation in good faith and based upon reasonable assumptions are not viewed
      as facts and that actual results during the period or periods covered by such
      projections and forecasts may differ from the projected and forecasted results).
      

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    6. CONDITION
      OF CLOSING; AFFIRMATIVE COVENANTS.
      The
      Corporation will do all of the following for so long as Lender has an obligation
      to make any Advance, or there are outstanding Obligations: 

    

    6.1 CONDITION
      OF CLOSING.
      The
      obligation of Lenders to enter into this Agreement and to consummate the
      transactions contemplated herein shall be conditioned on (i) the prior
      consummation of the Exchange
      Agreement dated July 25, 2008 by and among the Corporation, C
      J
      Vision Enterprises, Inc.,
      a
      Delaware corporation, and the other parties thereto;
      and
      (ii) the loan of an aggregate principal amount of no less than $800,000 by
      the
      Lenders hereunder.

    

    6.2
      LENDER’S RIGHT TO PARTICIPATE IN FUTURE FINANCING. For
      a
      period commencing on the date hereof and continuing until the second anniversary
      of this Agreement, each of the Lenders shall have the right to participate
      in
      any financing transaction by the Corporation, to the extent required to maintain
      such Lender’s proportionate stake on a fully diluted basis. 

    

    6.3 GOVERNMENT
      COMPLIANCE. The
      Corporation will maintain its and all Subsidiaries legal existence and good
      standing as a Registered Organization in their respective states of
      incorporation and maintain qualification in each jurisdiction in which the
      failure to so qualify would reasonably be expected to cause a material adverse
      effect on the Corporation’s business or operations. The Corporation will comply,
      and have each Subsidiary comply, with all laws, ordinances and regulations
      to
      which it is subject, noncompliance with which would reasonably be expected
      to
      cause a Material Adverse Change. 

    

    6.4
      TAXES. The
      Corporation will make, and cause each Subsidiary to make, timely payment of
      all
      material federal, state, and local taxes or assessments (other than taxes and
      assessments which the Corporation is contesting in good faith, with adequate
      reserves maintained in accordance with GAAP). 

    

    6.5
      INSURANCE. The
      Corporation will keep its business and the Collateral insured for risks and
      in
      amounts as the Board of Directors shall reasonably determine in good faith;
      provided, however, that the risks covered and the amount of coverage shall
      not
      be less than in effect on the date hereof. Insurance policies will be in a
      form
      and with companies as the Board of Directors of the Corporation shall determine
      in good faith consistent with past practice. 

    

    6.6
      FURTHER ASSURANCES. The
      Corporation will execute any further instruments and take further action as
      Lender reasonably requests to perfect or continue Lender’s security interest in
      the Collateral or to effect the purposes of this Agreement. 

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    7. NEGATIVE
      COVENANTS. The
      Corporation will not do any of the following without Lender’s prior written
      consent, for so long as there are any outstanding Obligations: 

    

    7.1
      DISPOSITIONS. Convey,
      sell, lease, transfer or otherwise dispose of (collectively “Transfer”),
      or
      permit any of its Subsidiaries to Transfer, all or any part of the Collateral,
      except for Transfers (a) of Inventory in the ordinary course of business; (b)
      of
      licenses and similar arrangements for the use of the property of the Corporation
      or its Subsidiaries in the ordinary course of business; or (b) of worn-out,
      obsolete or fully depreciated Equipment. 

    

    7.2
       SUBSEQUENT
      DEBT. So
      long
      as any Principal Amount of Notes is outstanding, the Corporation and its
      subsidiaries shall not directly or indirectly, without the affirmative vote
      of
      the holders of at least 75% of the outstanding Principal Amount of the Notes
      then outstanding, incur or permit to exist additional indebtedness which is
      senior to the Notes, or incur, assume or permit to exist any lien, mortgage,
      security interest or encumbrance (other than statutory liens imposed by law
      incurred in the ordinary course of business for sums not yet delinquent or
      being
      contested in good faith, if such reserve or other appropriate provision, if
      any,
      as shall be required by GAAP shall have been made in respect thereof) on any
      of
      its assets, except for Permitted Liens.

    

    8.
      EVENTS OF DEFAULT. Any
      one
      of the following is an Event of Default: 

    

    8.1
      PAYMENT DEFAULT. If
      the
      Corporation fails to pay any of the Obligations within five (5) days after
      their
      due date. 

    

    8.2
      COVENANT DEFAULT. If
      the
      Corporation does not perform any obligation in Section 6 or violates any
      covenant in Section 7 or if the Corporation does not perform or observe any
      other material term, condition or covenant in this Agreement, any Loan
      Documents, or in any agreement between the Corporation and Lender and as to
      any
      failure to perform or observe, violation or default under a term, condition
      or
      covenant that can be cured, has not cured the default within ten (10) days
      after
      it comes to the attention of an officer of the Corporation, or if the failure
      to
      perform or observe, violation or default under a term, condition or covenant
      cannot be cured within ten (10) days or cannot be cured after the Corporation’s
      attempts within such ten (10) day period, and the default may be cured within
      a
      reasonable time, then the Corporation has an additional period (of not more
      than
      thirty (30) days) to attempt to cure the default. During the additional time,
      the failure to cure the default is not an Event of Default. 

    

    8.3
      MATERIAL ADVERSE CHANGE. If
      there
      (i) occurs a material adverse change in the business, operations, or condition
      (financial or otherwise) of the Corporation and its Subsidiaries taken as a
      whole, or (ii) is a material impairment of Corporation’s ability to repay the
      outstanding Obligations in their entirety or (iii) is a material impairment
      of
      the value or priority of Lender’s security interests in the Collateral;

    

    8.4
      ATTACHMENT. If
      any
      material portion of the Corporation’s assets is attached, seized, levied on, or
      comes into possession of a trustee or receiver and the attachment, seizure
      or
      levy is not removed in thirty (30) days, or if the Corporation is enjoined,
      restrained, or prevented by court order from conducting a material part of
      its
      business or if a judgment or other claim becomes a Lien on a material portion
      of
      the Corporation’s assets, or if a notice of lien, levy, or assessment is filed
      against any of Corporation’s assets by any government agency and not paid within
      thirty (30) days after the Corporation receives notice. These are not Events
      of
      Default if stayed or if a bond is posted pending contest by the Corporation;
      

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    8.5
      INSOLVENCY. If
      the
      Corporation becomes insolvent or if the Corporation begins an Insolvency
      Proceeding or an Insolvency Proceeding is begun against the Corporation and
      not
      dismissed or stayed within sixty (60) days; 

    

    8.6
      OTHER AGREEMENTS. If
      there
      is a default in any agreement between the Corporation and a third party that
      gives the third party the right to accelerate any Indebtedness 

    exceeding
      $250,000 or that would cause a Material Adverse Change; 

    

    8.7
      JUDGMENTS. If
      a
      money judgment(s) in the aggregate of at least $250,000 is rendered against
      the
      Corporation and is unsatisfied and unstayed for thirty (30) days; 

    

    8.8
      MISREPRESENTATIONS. If
      the
      Corporation or a Responsible Officer makes any material misrepresentation or
      material misstatement now or later in any warranty or representation in this
      Agreement or in any writing delivered to Lender or to induce Lender to enter
      this Agreement or any Loan Document; 

    

    8.9
       SUBSIDIARIES.
      If
      any
      circumstance described in Sections 8.3, 8.4, 8.5 or 8.7 occurs to any Subsidiary
      of the Corporation which results in a Material Adverse Change to the Corporation
      and its Subsidiaries taken as a whole; 

     

    9.
      LENDER’S RIGHTS AND REMEDIES 

    

    9.1
      RIGHTS AND REMEDIES. When
      an
      Event of Default occurs and continues Lender may, without notice or demand,
      do
      any or all of the following: 

    

    (a)
      Declare all Obligations immediately due and payable (but if an Event of Default
      described in Section 8.5 occurs all Obligations are immediately due and payable
      without any action by Lender); 

    

    (b)
      Settle or adjust disputes and claims directly with account debtors for amounts,
      on terms and in any order that Lender considers advisable; 

    

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

    

    (d)
      Apply
      to the Obligations any amount held by Lender owing to or for the credit or
      the
      account of the Corporation; 

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (e)
      Ship,
      reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
      for sale, and sell the Collateral. Lender is granted a non-exclusive,
      royalty-free license or other right to use, without charge, the Corporation’s
      rights in its labels, patents, copyrights, rights of use of any name, trade
      secrets, trade names, trademarks, service marks, and advertising matter, or
      any
      similar property as it pertains to the Collateral, in completing production
      of,
      advertising for sale, and selling any Collateral and, in connection with
      Lender’s exercise of its rights under this Section, the Corporation’s rights
      under all licenses and all franchise agreements inure to Lender’s benefit;
      provided, however, that (i) Lender shall act in good faith to preserve the
      value
      of any property it shall use pursuant to such license or right in the exercise
      of its remedies hereunder, and (ii) upon the completion of the sale of all
      collateral by Lender and the completion by Lender of its exercise of its
      remedies hereunder, such license shall terminate); 

    

    (f)
      Dispose of the Collateral according to the Code. 

    

    9.2
      ACCOUNTS COLLECTION. When
      an
      Event of Default occurs and continues, Lender may notify any Person owing the
      Corporation money of Lender’s security interest in the funds and verify the
      amount of the Account. Corporation must collect all payments in trust for Lender
      and, if requested by Lender, immediately deliver the payments to Lender in
      the
      form received from the account debtor, with proper endorsements for deposit.
      

    

    9.3
      LENDER’S LIABILITY FOR COLLATERAL. If
      Lender
      complies with reasonable lending practices and the Code, it is not liable for:
      (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
      (c) any diminution in the value of the Collateral; or (d) any act or default
      of
      any carrier, warehouseman, bailee, or other person. The Corporation bears all
      risk of loss, damage or destruction of the Collateral. 

    

    9.4
      REMEDIES CUMULATIVE. Lender’s
      rights and remedies under this Agreement, the Loan Documents, and all other
      agreements are cumulative. Lender has all rights and remedies provided under
      the
      Code, by law, or in equity. Lender’s exercise of one right or remedy is not an
      election, and Lender’s waiver of any Event of Default is not a continuing
      waiver. Lender’s delay is not a waiver, election, or acquiescence. No waiver is
      effective unless signed by Lender and then is only effective for the specific
      instance and purpose for which it was given. 

    

    9.5
      DEMAND WAIVER. The
      Corporation waives demand, notice of default or dishonor, notice of payment
      and
      nonpayment, notice of any default, nonpayment at maturity, release, compromise,
      settlement, extension, or renewal of accounts, documents, instruments, chattel
      paper, and guarantees held by Lender on which the Corporation is liable.

    

    10.
      NOTICES. All
      notices or demands by any party about this Agreement or any other related
      agreement must be in writing and be sent by personal delivery, by a nationally
      recognized overnight delivery service, or by certified mail, postage prepaid,
      return receipt requested, to the address, in the case of the Corporation, set
      forth at the beginning of this Agreement, and in the case of Lenders, to each
      Lender’s addresses on the books of the Corporation, and shall be deemed to have
      been given: (a) if delivered in person, when delivered; (b) if delivered by
      recognized national overnight delivery service, one Business Day after delivery
      to such courier properly addressed; or (c) if by certified U.S. Mail, four
      Business Days after depositing in the United States mail, with postage prepaid
      and properly addressed. A party may change its notice address by giving the
      other party written notice. 

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    11.
      CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.
      New York
      law governs the Loan Documents without regard to principles of conflicts of
      law.
      The Corporation and each of the Lenders each submit to the exclusive
      jurisdiction of the State and Federal courts in the State of New York provided,
      however, that if for any reason the Lender can not avail itself of the courts
      of
      the State of New York, Corporation and Lender each submit to the jurisdiction
      of
      the State and Federal Courts in New York County, New York. 

     

    12.
      GENERAL PROVISIONS 

    

    12.1
      SUCCESSORS AND ASSIGNS. This
      Agreement binds and is for the benefit of the successors and permitted assigns
      of each party. The Corporation may not assign this Agreement or any rights
      under
      it without Lender’s prior written consent which may be granted or withheld in
      Lender’s discretion. Lender has the right, without the consent of or notice to
      the Corporation, to sell, transfer, negotiate, or grant participation in all
      or
      any part of, or any interest in, Lender’s obligations, rights and benefits under
      this Agreement. 

    

    12.2
      INDEMNIFICATION. The
      Corporation will indemnify, defend and hold harmless Lender and its officers,
      employees, and agents against: (a) all obligations, demands, claims, and
      liabilities asserted by any other party in connection with the transactions
      contemplated by the Loan Documents; and (b) all losses or Lender Expenses
      incurred, or paid by Lender from, following, or consequential to transactions
      between Lender and the Corporation (including reasonable attorneys fees and
      expenses), except for losses or Lender Expenses caused by Lender’s gross
      negligence or willful misconduct. 

    

    12.3
      SEVERABILITY OF PROVISION. Each
      provision of this Agreement is severable from every other provision in
      determining the enforceability of any provision. 

    

    12.4
      AMENDMENTS IN WRITING, INTEGRATION. All
      amendments to this Agreement must be in writing and signed by the Corporation
      and Lender. This Agreement represents the entire agreement about this subject
      matter, and supersedes prior negotiations or agreements. All prior agreements,
      understandings, representations, warranties, and negotiations between the
      parties about the subject matter of this Agreement merge into this Agreement
      and
      the Loan Documents. 

    

    12.5
      COUNTERPARTS. This
      Agreement may be executed in any number of counterparts and by different parties
      on separate counterparts, each of which, when executed and delivered, are an
      original, and all taken together, constitute one Agreement. 

    

    12.6
      SURVIVAL. All
      covenants, representations and warranties made in this Agreement continue in
      full force while any Obligations remain outstanding. The obligations
of
      the
      Corporation in Section 12.2 to indemnify Lender will survive until all statutes
      of limitations for actions that may be brought against Lender have run.

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    12.7
      CONFIDENTIALITY. In
      handling any confidential information, Lender will exercise the same degree
      of
      care that it exercises for its own proprietary information, but disclosure
      of information may be made (i) to Lender’s subsidiaries or affiliates in
      connection with their business with the Corporation, (ii) to prospective
      transferees or purchasers of any interest in the loans (provided, however,
      Lender shall use commercially reasonable efforts in obtaining such prospective
      transferee or purchasers agreement of the terms of this provision), (iii) as
      required by law, regulation, subpoena, or other order after notice to the
      Corporation and provided that such disclosure is subject to a protective order,
      if one is available, (iv) as required in connection with Lender’s examination or
      audit and (v) as Lender reasonably considers appropriate exercising remedies
      under this Agreement. Confidential information does not include information
      that
      either: (a) is publicly available or in Lender’s possession when disclosed to
      Lender, or becomes part of the public domain after disclosure to Lender; or
      (b)
      is disclosed to Lender by a third party, unless that third party is permitted
      to
      disclose the information. 

    

    DEFINITIONS

    

    In
      this
      Agreement:

    

    “ACCOUNTS”
      has the
      meaning set forth in the Code and includes all existing and later arising
      accounts, contract rights, and other obligations owed Corporation in connection
      with its sale or lease of goods (including licensing intellectual property
      or
      software and other technology) or provision of services, all credit insurance,
      guaranties, other security and all merchandise returned or reclaimed by the
      Corporation and the Corporation’s Books relating to any of the foregoing.

    

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

    

    “LENDER
      EXPENSES”
      are all
      audit fees and expenses and reasonable costs and expenses (including reasonable
      attorneys’ fees and expenses) for enforcing the Loan Documents (including
      appeals or Insolvency Proceedings); for the avoidance of doubt, attorneys’ fees
      and expenses incurred in connection with the preparation and negotiation of
      the
      Loan Documents shall be deemed not to be Lender Expenses.

    

    “CORPORATION’S
      BOOKS”
      are all
      the Corporation’s books and records including ledgers, records regarding the
      Corporation’s assets or liabilities, the Collateral, business operations or
      financial condition and all computer programs or discs or any equipment
      containing the information. 

    

    “BUSINESS
      DAY”
      is any
      day that is not a Saturday, Sunday or a day on which the national banks are
      generally closed. 

    

    “CLOSING
      DATE”
      is the
      date of this Agreement. 

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    “CODE”
      is the
      Uniform Commercial Code, in effect in the State of New York as in effect from
      time to time. 

    

    “COLLATERAL”
      is
all
      of
      the Corporation’s assets, whether now owned or existing or hereafter acquired or
      arising and wherever located.
      

    

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

    

    “COPYRIGHTS”
      are all
      copyright rights, applications or registrations and like protections in each
      work or authorship or derivative work, whether published or not (whether or
      not
      it is a trade secret) now or later existing, created, acquired or held.

    

    “CREDIT
      EXTENSION”
      is each
      Advance, the Term Loan, or any other extension of credit by Lender for the
      Corporation’s benefit pursuant hereto. 

    

    “EQUIPMENT”
      has the
      meaning set forth in the Code and includes is all present and future machinery,
      equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts
      and
      attachments in which the Corporation has any interest. 

    

    “ERISA”
      is the
      Employment Retirement Income Security Act of 1974, and its regulations.

    

    “EVENT
      OF DEFAULT”
      has the
      meaning set forth in Section 7. 

    

    “GAAP”
      is
      United States generally accepted accounting principles.

    

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

    

    “INSOLVENCY
      PROCEEDING”
      are
      proceedings by or against any Person under the United States Bankruptcy Code,
      or
      any other bankruptcy or insolvency law, including assignments for the benefit
      of
      creditors, compositions, extensions generally with its creditors, or proceedings
      seeking reorganization, arrangement, or other relief. 

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    “INVENTORY”
      has the
      meaning set forth in the Code and includes is present and future inventory
      in
      which the Corporation has any interest, including merchandise, raw materials,
      parts, supplies, packing and shipping materials, work in process and finished
      products intended for sale or lease or to be furnished under a contract of
      service, of every kind and description now or later owned by or in the custody
      or possession, actual or constructive, of the Corporation, including inventory
      temporarily out of its custody or possession or in transit and including returns
      on any accounts or other Proceeds from the sale or disposition of any of the
      foregoing and any documents of title. 

    

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

    

    “LIEN”
      is a
      mortgage, lien, deed of trust, charge, pledge, security interest or other
      encumbrance. 

    

    “LOAN
      DOCUMENTS”
      are,
      collectively, this Agreement, the Notes, any note, or notes or guaranties
      executed by the Corporation, and any other present or future agreement between
      the Corporation and/or for the benefit of Lender in connection with this
      Agreement, all as amended, extended or restated. 

    

    “MATERIAL
      ADVERSE CHANGE”
      has the
      meaning set forth in Section 6.3.

    

    “NOTE”
      means
      each of the 6% Convertible Notes executed by the Corporation in favor of each
      of
      the Lenders hereunder, in the form attached hereto as Exhibit A, together with
      all renewals, amendments, modifications and substitutions therefor.

    

    “OBLIGATIONS”
      are
      loans made hereunder, interest, Lender Expenses and other amounts Corporation
      owes Lender, including cash management services, letters of credit and foreign
      exchange contracts, if any and including interest accruing after Insolvency
      Proceedings begin and debts, liabilities, or obligations of the Corporation
      assigned to Lender. 

    

     “PATENTS”
      are
      patents, patent applications and like protections, including improvements,
      divisions, continuations, renewals, reissues, extensions and
      continuations-in-part of the same. 

    

    “PERMITTED
      INDEBTEDNESS” is:
      

     

    (a)
      The
      Corporation’s indebtedness to Lender under this Agreement or any other Loan
      Document; 

     

    (b)
      Indebtedness existing on the Closing Date and shown on the Schedule 1;

    

    (c)
      Subordinated Debt; 

     

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

    

    (e)
      Indebtedness secured by Permitted Liens. 

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    “PERMITTED
      LIENS”
      are:

    

    (a) The
      security interest granted to the holders of the notes
      listed on Schedule 1 attached to this Agreement, issued by the Corporation
      to
      the holders thereof;
      

    

    (b) Indebtedness
      and liens currently outstanding pursuant to agreements as currently in effect
      on
      the date of this Agreement;

    

    (c) Indebtedness
      and liens pursuant to agreements for financing in which the proceeds shall
      be
      principally used for acquisitions by the Corporation of other
      businesses;

    

    (d) 
      Capital
      leases, financing for equipment and purchase money security
      interests;

     

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

    

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

    

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

    

    “PROCEEDS”
      has the
      meaning described in the Code as in effect from time to time. 

    

    “REGISTERED
      ORGANIZATION”
      means an
      organization organized solely under the law of a single state or the United
      States and as to which the state or the United States must maintain a public
      record showing the organization to have been organized. 

    

    “RESPONSIBLE
      OFFICER”
      is each
      of the Chief Executive Officer, the President, and the Chief Financial Officer
      of the Corporation. 

    

    “SCHEDULE”
      is any
      attached schedule of exceptions.

     

    “SUBORDINATED
      DEBT”
      is debt
      incurred by the Corporation that is subordinated to the Corporation’s
      indebtedness owed to Lender and which is reflected in a written agreement in
      a
      manner and form acceptable to Lender and approved by Lender in writing.

    

    “SUBSIDIARY”
      is for
      any Person, or any other business entity of which more than 50% of the voting
      stock or other equity interests is owned or controlled, directly or indirectly,
      by the Person or one or more Affiliates of the Person. 

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    “SUPPORTING
      OBLIGATION”
      means a
      Letter-of-credit right, secondary obligation or obligation of a secondary
      obligor or that supports the payment or performance of an account, chattel
      paper, a document, a general intangible, an instrument or investment property.
      

    

    “TOTAL
      LIABILITIES”
      is on
      any day, obligations that should, under GAAP, be classified as liabilities
      on
      the Corporation’s consolidated balance sheet, including all Indebtedness, and
      current portion Subordinated Debt allowed to be paid, but excluding all other
      Subordinated Debt. 

    

    “TRADEMARKS”
      are
      trademark and service mark rights, registered or not, applications to register
      and registrations and like protections, and the entire goodwill of the business
      of the Corporation connected with the trademarks. 

    

    

    [Signatures
      appear on the following page]

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the
      Parties have executed this Agreement on the date first above
      written.

     

    
      	CORPORATION: 	 	 	 
	 	 	 	 
	PET EXPRESS SUPPLY,
              INC. 	 	 	 
	 	 	 	 
	 	 	 	 
	By: 	 	 	 
	
              
                

              

              
                Jonathan
                  Bomser

                Chief
                  Executive Officer

              

            	 	 	
            
	 	 	 	 
	 	 	 	 
	LENDERS: 	 	 	 
	 	 	 	 
	MKM OPPORTUNITY MASTER FUND,
              LTD. 	 	 	 
	 	 	 	 
	 	 	 	 
	By: 	 	 	 
	
              
                

              

              Name:
Title:  

            	 	 	 
	 	 	 	 
	ADDITIONAL
              LENDERS 	 	 	 
	 	 	 	 
	
              
  	 	 	 
	 	 	 	 
	 	 	 	 
	By: 	 	 	 
	
              
                

              

              Name:
Title:

            	 	 	 
	 	 	 	 
	 	 	 	 
	
              
  	 	 	 
	 	 	 	 
	By: 	 	 	 
	
              
                

              

              Name:
Title:  

            	 	 	 

    

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    Schedule
      1

    

    Attached
      to the LOAN
      AND
      SECURITY AGREEMENT
      dated
      July 25, 2008

    by
      and
      among PET EXPRESS SUPPLY, INC.and the other parties thereto

    

    Permitted
      Liens

    

    The
      security interest granted by Corporation to the holders of each of the following
      notes prior to the closing of this Agreement is a Permitted Lien.

     

    Promissory
      Note in favor of Peter Newman, principal amount of $297,504.00. Not
      convertible.

    

    Convertible
      Promissory Note in favor of CORPORATE
      COMMUNICATIONS NETWORK, INC., principal
      amount of $75,000.00.

    

    Convertible
      Promissory Note in favor of LYNN
      COLE
      CAPITAL CORP., principal
      amount of $75,000.00.

    

    Convertible
      Promissory Note in favor of CORPORATE
      COMMUNICATIONS NETWORK, INC., principal
      amount of $25,000.00.

    

    Convertible
      Promissory Note in favor of LYNN
      COLE
      CAPITAL CORP., principal
      amount of $25,000.00.

    

    Convertible
      Promissory Note in favor of MKM
      OPPORTUNITY MASTER FUND, LTD.,
      principal
      amount of $150,000.00

     

    
      
        
        

      

      
        15

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00145-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00145-of-00352.parquet"}]]