Document:

Exhibit 4.2

 

THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS.  THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD
KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

SECURED NON-CONVERTIBLE TERM NOTE

 

FOR VALUE
RECEIVED, each of SMALL WORLD KIDS, INC., a Nevada corporation (the “Parent”), and the other companies listed on Exhibit A
attached hereto (such other companies together with the Parent, each a “Company” and collectively, the “Companies”),
jointly and severally, promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of Two Million Dollars ($2,000,000), together with any
accrued and unpaid interest hereon, on February 28, 2008 (the “Maturity Date”) if not sooner paid.

 

Capitalized terms
used herein without definition shall have the meanings ascribed to such terms
in the Security Agreement among the Companies and the Holder dated as of the
date hereof (as amended, modified and/or supplemented from time to time, the “Security Agreement”).

 

The
following terms shall apply to this Secured Non-Convertible Term Note (this “Note”):

 

ARTICLE I

CONTRACT RATE

 

1.1           Contract Rate.  Subject to Sections 4.2 and 5.10, interest
payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum equal to
the “prime rate” published in The Wall Street Journal from time to time
(the “Prime Rate”), plus three percent (3.0%)
(the “Contract Rate”).  The Contract Rate shall be increased or
decreased as the case may be for each increase or decrease in the Prime Rate in
an amount equal to such increase or decrease in the Prime Rate; each change to
be effective as of the day of the change in the Prime Rate.  The Contract Rate shall not at any time be
less than nine percent (9.0%).   Interest
shall be (i) calculated on the basis of a 360 day year, and (ii) payable monthly,
in arrears, commencing on March 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date
and on the Maturity Date, whether by acceleration or otherwise.

 

1.2           Contract Rate
Payments.  The Contract Rate shall be
calculated on the last business day of each calendar month hereafter (other
than for increases or decreases in the Prime

 

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Rate which shall
be calculated and become effective in accordance with the terms of Section 1.1)
until the Maturity Date (each a “Determination Date”).

 

1.3           Principal
Payments.  Amortizing payments of the
aggregate principal amount outstanding under this Note at any time (the “Principal Amount”) shall be made by the Company on April 1,
2006 and on the first business day of each succeeding month thereafter through
and including the Maturity Date (each, an “Amortization Date”).  Commencing on the first Amortization Date,
the Company shall make monthly payments to the Holder on each Amortization
Date, each such payment in the amount of $33,333 together with any accrued and
unpaid interest on such portion of the Principal Amount plus any and all other
unpaid amounts which are then owing under this Note, the Security Agreement
and/or any other Ancillary Agreement (collectively, the “Monthly
Amount”).  Any outstanding
Principal Amount together with any accrued and unpaid interest and any and all
other unpaid amounts which are then owing by the Company to the Holder under
this Note, the Security Agreement and/or any other Ancillary Agreement shall be
due and payable on the Maturity Date.

 

ARTICLE II

LOANS; PAYMENTS UNDER THIS NOTE

 

2.1           Loans.  All Loans evidenced by this Note shall be
made in accordance with the terms and provisions of the Security Agreement.

 

2.2           [Intentionally
Omitted].

 

2.3           Optional
Redemption in Cash.  The Companies
will have the option of prepaying this Note (“Optional
Redemption”) by paying to the Holder a sum of money equal to (i) to
the extent such prepayment occurs prior to the first anniversary of the Closing
Date, one hundred twenty-five percent (125%) and (ii) to the extent such
prepayment occurs on or after the first anniversary of the Closing Date but
prior to the Maturity Date, one hundred twenty percent (120%), in each case, of
the principal amount of this Note together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder
arising under this Note, the Security Agreement, or any other Ancillary
Agreement (the “Redemption Amount”) outstanding on
the Redemption Payment Date (as defined below). 
The Company shall deliver to the Holder a written notice of redemption
(the “Notice of Redemption”) specifying the
date for such Optional Redemption (the “Redemption Payment Date”),
which date shall be no later than ten (10) days after the date of the Notice of
Redemption (the “Redemption Period”).  On the Redemption Payment Date, the
Redemption Amount (plus any additional interest and fees accruing on the Notes
during the Redemption Period) must be irrevocably paid in full in immediately
available funds to the Holder.  In the
event the Companies fail to pay the Redemption Amount on the Redemption Payment
Date, then such Redemption Notice shall be null and void.

 

ARTICLE III

[INTENTIONALLY OMITTED]

 

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ARTICLE IV

EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

 

4.1           Events of Default.  The occurrence of an Event of Default under
the Security Agreement shall constitute an event of default (“Event of Default”) hereunder.

 

4.2           Default Interest.  Following the occurrence and during the
continuance of an Event of Default, the Companies shall, jointly and severally,
pay additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived.

 

4.3           Default Payment.  Following the occurrence and during the
continuance of an Event of Default, the Holder, at its option, may elect, in
addition to all rights and remedies of the Holder under the Security Agreement
and the other Ancillary Agreements and all obligations and liabilities of each
Company under the Security Agreement and the other Ancillary Agreements, to
require the Companies, jointly and severally, to make a Default Payment (“Default Payment”). 
The Default Payment shall be one hundred ten percent (110%) of the
outstanding principal amount of the Note, plus accrued but unpaid interest, all
other fees then remaining unpaid, and all other amounts payable hereunder.  The Default Payment shall be applied first to
any fees due and payable to the Holder pursuant to the Notes, the Security
Agreement and/or the Ancillary Agreements, then to accrued and unpaid interest
due on the Notes, the Security Agreement and then to the outstanding principal
balance of the Notes.  The Default
Payment shall be due and payable immediately on the date that the Holder has
exercised its rights pursuant to this Section 4.3.

 

ARTICLE V

MISCELLANEOUS

 

5.1           Issuance of New
Note.  Upon any partial payment of
this Note, a new Note containing the same date and provisions of this Note
shall, at the request of the Holder, be issued by the Companies to the Holder
for the principal balance of this Note and interest which shall not have been
paid.

 

5.2           Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

 

5.3           Failure or
Indulgence Not Waiver.  No failure or
delay on the part of the Holder hereof in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

5.4           Notices.    Any notice herein required or permitted to
be given shall be in writing and shall be deemed effective: (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile
if sent during normal business hours of the recipient, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail,

 

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return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt.  All
communications shall be sent to the respective Company at the address provided
for such Company in the Security Agreement executed in connection herewith, and
to the Holder at the address provided in the Security Agreement for such
Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York,
New York 10022, facsimile number (212) 541-4434, or at such other address as
the respective Company or the Holder may designate by ten days advance written
notice to the other parties hereto.

 

5.5           Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

 

5.6           Assignability.  This Note shall be binding upon each Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.  No Company may assign any of its obligations
under this Note without the prior written consent of the Holder, any such
purported assignment without such consent being null and void.

 

5.7           Cost of
Collection.  In case of any Event of
Default under this Note, the Companies shall, jointly and severally, pay the
Holder’s reasonable costs of collection, including reasonable attorneys’ fees.

 

5.8           Governing Law,
Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

 

(b)           EACH COMPANY HEREBY CONSENTS AND
AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE
OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE,
THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS; PROVIDED,
THAT EACH COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER  PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE
DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER
LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE
ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE HOLDER.  EACH

 

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COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.

 

(c)           EACH COMPANY DESIRES THAT ITS
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH COMPANY HERETO
WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT
TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
THE HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.

 

5.9           Severability.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision of this Note.

 

5.10         Maximum Payments.  Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.

 

5.11         Security Interest.  The Holder has been granted a security
interest (i) in certain assets of the Companies as more fully described in the
Security Agreement and (ii) pursuant to the Stock Pledge Agreement dated as of
the date hereof.

 

5.12         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.

 

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5.13         Registered
Obligation.  This Note is intended to
be a registered obligation within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i) and the Companies (or their agent) shall register this Note
(and thereafter shall maintain such registration) as to both principal and any
stated interest.  Notwithstanding any
document, instrument or agreement relating to this Note to the contrary,
transfer of this Note (or the right to any payments of principal or stated
interest thereunder) may only be effected by (i) surrender of this Note and
either the reissuance by the Companies of this Note to the new holder or the
issuance by the Company of a new instrument to the new holder, or (ii) transfer
through a book entry system maintained by the Company (or its agent), within
the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).

 

[Balance of page
intentionally left blank; signature page follows]

 

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IN WITNESS WHEREOF, each Company has caused
this Secured Non-Convertible Term Note to be signed in its name effective as of
this 28 day of February 2006.

 

	
  WITNESS:

  	
  SMALL WORLD KIDS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
  WITNESS:

  	
  SMALL WORLD TOYS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

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EXHIBIT A

 

OTHER COMPANIES

 

Small World Toys,
a California corporation

 

8Exhibit 4.3

 

SECURITY AGREEMENT

 

This Security Agreement is made as of February 28,
2006 by and among LAURUS MASTER FUND, LTD., a Cayman Islands company (“Laurus”),
SMALL WORLD KIDS, INC., a Nevada corporation (“the Parent”), and each
party listed on Exhibit A attached hereto (each an “Eligible
Subsidiary” and collectively, the “Eligible Subsidiaries”) the
Parent and each Eligible Subsidiary, each a “Company” and collectively, the “Companies”).

 

BACKGROUND

 

The Companies have requested that Laurus make advances
available to the Companies; and

 

Laurus has agreed to make such advances on the terms
and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual
covenants and undertakings and the terms and conditions contained herein, the
parties hereto agree as follows:

 

1.             General
Definitions and Terms; Rules of Construction.

 

(a)           General
Definitions.  Capitalized terms used
in this Agreement shall have the meanings assigned to them in Annex A.

 

(b)           Accounting
Terms.  Any accounting terms used in
this Agreement that are not specifically defined shall have the meanings
customarily given them in accordance with GAAP and all financial computations
shall be computed, unless specifically provided herein, in accordance with GAAP
consistently applied.

 

(c)           Other
Terms.  All other terms used in this
Agreement and defined in the UCC, shall have the meaning given therein unless
otherwise defined herein.

 

(d)           Rules of
Construction.  All Schedules,
Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement
are incorporated herein by reference and taken together with this Agreement
constitute but a single agreement.  The
words “herein”, “hereof” and “hereunder” or other words of similar import refer
to this Agreement as a whole, including the Exhibits, Addenda, Annexes and
Schedules thereto, as the same may be from time to time amended, modified,
restated or supplemented, and not to any particular section, subsection or
clause contained in this Agreement. 
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter. 
The term “or” is not exclusive. 
The term “including” (or any form thereof) shall not be limiting or
exclusive.  All references to statutes
and related regulations shall include any amendments of same and any successor
statutes and regulations.  All references
in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this
Agreement to sections,

 

 

schedules, disclosure schedules, exhibits, and attachments shall refer
to the corresponding sections, schedules, disclosure schedules, exhibits, and attachments
of or to this Agreement.  All references
to any instruments or agreements, including references to any of this Agreement
or the Ancillary Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.

 

2.             Loan
Facility.

 

(a)           Revolving
Loans.

 

(i)            Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make revolving loans (the “Revolving Loans”) to the Companies
from time to time during the Term which, in the aggregate at any time
outstanding, will not exceed the lesser of (x) (I) the Capital
Availability Amount minus (II) such reserves as Laurus may reasonably in its
good faith judgment deem proper and necessary from time to time (the “Reserves”)
and (y) an amount equal to (I) the Accounts Availability plus (II) the
Inventory Availability, minus (III) the Reserves. The amount derived at any
time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus
2(a)(i)(y) (III) shall be referred to as the “Formula Amount.” The
Companies shall, jointly and severally, execute and deliver to Laurus on the
Closing Date the Secured Non-Convertible Revolving Note and the Secured
Non-Convertible Term Note. The Companies hereby each acknowledge and agree that
Laurus’ obligation to purchase the Secured Non-Convertible Revolving Note and
the Secured Non-Convertible Term Note from the Companies on the Closing Date
shall be contingent upon the satisfaction (or waiver by Laurus in its sole
discretion) of the items and matters set forth in the closing checklist
provided by Laurus to the Companies on or prior to the Closing Date.

 

(ii)           Notwithstanding
the limitations set forth above, if requested by any Company, Laurus retains
the right to lend to such Company from time to time such amounts in excess of
such limitations as Laurus may determine in its sole discretion.

 

(iii)          The
Companies acknowledge that the exercise of Laurus’ discretionary rights
hereunder may result during the Term in one or more increases or decreases in
the advance percentages used in determining Accounts Availability and/or
Inventory Availability and each of the Companies hereby consent to any such
increases or decreases which may limit or restrict advances requested by the
Companies.

 

(iv)          If any
interest, fees, costs or charges payable to Laurus hereunder are not paid when
due, each of the Companies shall thereby be deemed to have requested, and
Laurus is hereby authorized at its discretion to make and charge to the
Companies’ account, a Loan as of such date in an amount equal to such unpaid
interest, fees, costs or charges.

 

(v)           If any
Company at any time fails to perform or observe any of the covenants contained
in this Agreement or any Ancillary Agreement, Laurus may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of such
Company (or, at Laurus’ option, in Laurus’ name) and may, but need not, take
any and all other actions which Laurus may deem necessary to cure or correct
such failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors

 

2

 

or other obligors, the procurement and maintenance of insurance, the
execution of assignments, security agreements and financing statements, and the
endorsement of instruments).  The amount
of all monies expended and all costs and expenses (including attorneys’ fees
and legal expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to the Companies’ account as a Revolving Loan and added
to the Obligations.  To facilitate Laurus’
performance or observance of such covenants by each Company, each Company
hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as such
Company’s attorney in fact (which appointment is coupled with an interest) with
the right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file in the name and on behalf of such Company any
and all instruments, documents, assignments, security agreements, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by such Company.

 

(vi)          Laurus will
account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such
account rendered by Laurus shall be deemed final, binding and conclusive unless
Laurus is notified by Company Agent in writing to the contrary within thirty
(30) days of the date each account was rendered specifying the item or items to
which objection is made.

 

(vii)         During
the Term, the Companies may borrow and prepay Loans in accordance with the
terms and conditions hereof.

 

(viii)        If
any Eligible Account is not paid by the Account Debtor within ninety (90) days
after the date that such Eligible Account was originally due or if any Account
Debtor asserts a deduction, dispute, contingency, set-off, or counterclaim with
respect to any Eligible Account, (a “Delinquent Account”), the Companies
shall jointly and severally (i) reimburse Laurus for the amount of the
Loans made with respect to such Delinquent Account plus an adjustment fee in an
amount equal to one-half of one percent (0.50%) of the gross face amount of
such Eligible Account or (ii) immediately replace such Delinquent Account
with an otherwise Eligible Account.

 

(b)           Receivables
Purchase.  Following the occurrence
and during the continuance of an Event of Default, Laurus may, at its option,
elect to convert the credit facility contemplated hereby to an accounts
receivable purchase facility.  Upon such
election by Laurus (subsequent notice of which Laurus shall provide to Company
Agent), the Companies shall be deemed to hereby have sold, assigned,
transferred, conveyed and delivered to Laurus, and Laurus shall be deemed to
have purchased and received from the Companies, all right, title and interest
of the Companies in and to all Accounts which shall at any time constitute
Eligible Accounts (the “Receivables Purchase”).  All outstanding Loans hereunder shall be
deemed obligations under such accounts receivable purchase facility.  The conversion to an accounts receivable
purchase facility in accordance with the terms hereof shall not be deemed an
exercise by Laurus of its secured creditor rights under Article 9 of the
UCC.  Immediately following Laurus’
request, the Companies shall execute all such further documentation as may be
required by Laurus to more fully set forth the accounts receivable purchase
facility herein contemplated, including, without limitation, Laurus’ standard
form of accounts receivable purchase agreement and account debtor

 

3

 

notification letters, but any Company’s failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any manner
whatsoever.

 

(c)           Term Loan.  Subject to the terms and
conditions set forth herein and in the Ancillary Agreements, Laurus shall make
a term loan (the “Term Loan”) to Company Agent (for the benefit of Companies)
in an aggregate amount equal to $2,000,000. 
The Term Loan shall be advanced on the Closing Date and shall be, with
respect to principal, payable in consecutive monthly installments of principal
commencing on April 1, 2006 and on the first day of each month thereafter,
subject to acceleration upon the occurrence of an Event of Default or
termination of this Agreement. The Term Loan shall be evidenced by the Secured
Non-Convertible Term Note.

 

3.             Repayment of the Loans.  The Companies (a) may prepay the Obligations
from time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this
Agreement); (b) shall repay on the Maturity Date (as defined in the Secured
Non-Convertible Term Note) (i) the then aggregate outstanding principal balance
of the Term Loan together with accrued and unpaid interest, fees and charges
and: (ii) all other amounts owed Laurus under the Secured Non-Convertible Term
Note; (c) shall repay on the expiration of the Term (i) the then aggregate
outstanding principal balance of the Revolving Loans together with accrued and
unpaid interest, fees and charges and; (ii) all other amounts owed Laurus under
this Agreement and the Ancillary Agreements; and (c) subject to Section
2(a)(ii), shall repay on any day on which the then aggregate outstanding
principal balance of the Loans are in excess of the Formula Amount at such
time, Loans in an amount equal to such excess. Any payments of principal,
interest, fees or any other amounts payable hereunder or under any Ancillary
Agreement shall be made prior to 12:00 noon (New York time) on the due date
thereof in immediately available funds.

 

4.             Procedure for Revolving Loans.  Company Agent may by written notice request a
borrowing of Revolving Loans prior to 12:00 noon (New York time) on the
Business Day of its request to incur, on the next Business Day, a Revolving
Loan.  Together with each request for a
Revolving Loan (or at such other intervals as Laurus may request), Company
Agent shall deliver to Laurus a Borrowing Base Certificate in the form of
Exhibit B attached hereto, which shall be certified as true and correct by the
Chief Executive Officer or Chief Financial Officer of Company Agent together
with all supporting documentation relating thereto.  All Revolving Loans shall be disbursed from
whichever office or other place Laurus may designate from time to time and
shall be charged to the Companies’ account on Laurus’ books.  The proceeds of each Revolving Loan made by
Laurus shall be made available to Company Agent on the Business Day following
the Business Day so requested in accordance with the terms of this Section 4 by
way of credit to the applicable Company’s operating account maintained with
such bank as Company Agent designated to Laurus.  Any and all Obligations due and owing
hereunder may be charged to the Companies’ account and shall constitute
Revolving Loans.

 

4

 

5.             Interest
and Payments.

 

(a)           Interest.

 

(i)            Except as
modified by Section 5(a)(iii) below, the Companies shall jointly and
severally pay interest at the Contract Rate on the unpaid principal balance of
each Loan until such time as such Loan is collected in full in good funds in
dollars of the United States of America.

 

(ii)           Interest
and payments shall be computed on the basis of actual days elapsed in a year of
360 days.  At Laurus’ option, Laurus may
charge the Companies’ account for said interest.

 

(iii)          Effective
upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Contract Rate shall automatically be increased
as set forth in the Notes (such increased rate, the “Default Rate”), and
all outstanding Obligations, including unpaid interest, shall continue to
accrue interest from the date of such Event of Default at the Default Rate
applicable to such Obligations.

 

(iv)          In no event
shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time to
time (the “Maximum Legal Rate”), and if any provision of this Agreement
or any Ancillary Agreement is in contravention of any such law or regulation,
interest payable under this Agreement and each Ancillary Agreement shall be
computed on the basis of the Maximum Legal Rate (so that such interest will not
exceed the Maximum Legal Rate).

 

(v)           The Companies
shall jointly and severally pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including any deduction for any set-off or counterclaim.

 

(b)           Payments;
Certain Closing Conditions.

 

(i)            Closing/Annual
Payments.  Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and one-half percent (3.50%) of the Total Investment Amount.  Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any
reason.

 

(ii)           Overadvance
Payment.  Without affecting Laurus’
rights hereunder in the event the Loans exceed the Formula Amount (each such
event, an “Overadvance”), all such Overadvances shall bear additional
interest at a rate equal to two percent (2%) per month of the amount of such
Overadvances for all times such amounts shall be in excess of the Formula
Amount.  All amounts that are incurred
pursuant to this Section 5(b)(ii) shall be due and payable by the
Companies monthly, in arrears, on the first business day of each calendar month
and upon expiration of the Term.

 

(iii)          Financial
Information Default.  Without
affecting Laurus’ other rights and remedies, in the event any Company fails to
deliver the financial information required

 

5

 

by Section 11 on or before the date required by this Agreement,
the Companies shall jointly and severally pay Laurus an aggregate fee in the
amount of $500.00 per week (or portion thereof) for each such failure until
such failure is cured to Laurus’ satisfaction or waived in writing by
Laurus.  All amounts that are incurred
pursuant to this Section 5(b)(iii) shall be due and payable by the
Companies monthly, in arrears, on the first business of each calendar month and
upon expiration of the Term.

 

(iv)          Expenses.  The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus’ due diligence review of each Company and its Subsidiaries and all
related matters.  Amounts required to be
paid under this Section 5(b)(iv) will be paid on the Closing Date and
shall be $60,000 for such expenses referred to in this Section 5(b)(iv) plus
the cost of any required third-party appraisals and/or extraordinary diligence,
subject to the Parent’s prior approval, as well as fees and expenses of outside
counsel to the extent the retention of same is deemed prudent by Laurus.

 

6.             Security
Interest.

 

(a)           To secure
the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon
all of the Collateral.  All of each
Company’s Books and Records relating to the Collateral shall, until delivered
to or removed by Laurus, be kept by such Company in trust for Laurus until all
Obligations have been paid in full.  Each
confirmatory assignment schedule or other form of assignment hereafter
executed by each Company shall be deemed to include the foregoing grant, whether
or not the same appears therein.

 

(b)           Each
Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements or amendments thereto that (x) indicate the Collateral (1) as
all assets and personal property of such Company or words of similar effect,
regardless of whether any particular asset comprised in the Collateral falls
within the scope of Article 9 of the UCC of such jurisdiction, or (2) as
being of an equal or lesser scope or with greater detail, and (y) contain any other
information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its authorization
for Laurus to have filed any initial financial statements, or amendments
thereto if filed prior to the date hereof. 
Each Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written consent of Laurus, subject to such
Company’s rights under Section 9-509(d)(2) of the UCC.

 

(c)           Each
Company hereby grants to Laurus an irrevocable, non-exclusive license (exercisable
upon the termination of this Agreement due to an occurrence and during the
continuance of an Event of Default without payment of royalty or other
compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded

 

6

 

or stored and to all computer and automatic machinery software and
programs used for the compilation or printout thereof, and represents, promises
and agrees that any such license or sublicense is not and will not be in
conflict with the contractual or commercial rights of any third Person;
provided, that such license will terminate on the termination of this Agreement
and the payment in full of all Obligations.

 

7.             Representations, Warranties and
Covenants Concerning the Collateral. 
Each Company represents, warrants (each of which such representations
and warranties shall be deemed repeated upon the making of each request for a
Revolving Loan and made as of the time of each and every Revolving Loan
hereunder) and covenants as follows:

 

(a)           all of the
Collateral (i) is owned by it free and clear of all Liens (including any
claims of infringement) except those in Laurus’ favor and Permitted Liens and (ii) is
not subject to any agreement prohibiting the granting of a Lien or requiring
notice of or consent to the granting of a Lien.

 

(b)           it shall
not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or
any other assets to anyone other than Laurus and except for Permitted Liens.

 

(c)           the Liens
granted pursuant to this Agreement, upon completion of the filings and other
actions listed on Schedule 7(c) (which, in the case of all
filings and other documents referred to in said Schedule, have been delivered
to Laurus in duly executed form) constitute valid perfected security interests
in all of the Collateral in favor of Laurus as security for the prompt and
complete payment and performance of the Obligations, enforceable in accordance
with the terms hereof against any and all of its creditors and purchasers and
such security interest is prior to all other Liens in existence on the date
hereof.

 

(d)           no
effective security agreement, mortgage, deed of trust, financing statement,
equivalent security or Lien instrument or continuation statement covering all
or any part of the Collateral is or will be on file or of record in any public
office, except those relating to Permitted Liens.

 

(e)           it shall
not dispose of any of the Collateral whether by sale, lease or otherwise except
for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value
of not more than $25,000 and only to the extent that (i) the proceeds of
any such disposition are used to acquire replacement Equipment which is subject
to Laurus’ first priority security interest or are used to repay Loans or to
pay general corporate expenses, or (ii) following the occurrence of an
Event of Default which continues to exist the proceeds of which are remitted to
Laurus to be held as cash collateral for the Obligations.

 

(f)            it shall
defend the right, title and interest of Laurus in and to the Collateral against
the claims and demands of all Persons whomsoever, and take such actions,
including (i) all actions necessary to grant Laurus “control” of any
Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by it, with any agreements establishing control to be in
form and substance satisfactory to Laurus, (ii) the prompt (but in no
event later

 

7

 

than five (5) Business Days following Laurus’ request therefor)
delivery to Laurus of all original Instruments, Chattel Paper, negotiable
Documents and certificated Stock owned by it (in each case, accompanied by
stock powers, allonges or other instruments of transfer executed in blank), (iii) notification
of Laurus’ interest in Collateral at Laurus’ request, and (iv) the
institution of litigation against third parties as shall be prudent in order to
protect and preserve its and/or Laurus’ respective and several interests in the
Collateral.

 

(g)           it shall
promptly, and in any event within five (5) Business Days after the same is
acquired by it, notify Laurus of any commercial tort claim (as defined in the
UCC) acquired by it and unless otherwise consented by Laurus, it shall enter
into a supplement to this Agreement granting to Laurus a Lien in such
commercial tort claim.

 

(h)           it shall
place notations upon its Books and Records and any of its financial statements
to disclose Laurus’ Lien in the Collateral.

 

(i)            if it
retains possession of any Chattel Paper or Instrument with Laurus’ consent,
upon Laurus’ request such Chattel Paper and Instruments shall be marked with
the following legend:  “This writing and
obligations evidenced or secured hereby are subject to the security interest of
Laurus Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable
request of Laurus, such Chattel Paper and Instruments shall be delivered to
Laurus.

 

(j)            it shall
perform in a reasonable time all other steps requested by Laurus to create and
maintain in Laurus’ favor a valid perfected first Lien in all Collateral
subject only to Permitted Liens.

 

(k)           it shall
notify Laurus promptly and in any event within seven (7) days after
obtaining knowledge thereof (i) of any event or circumstance that, to its
knowledge, would cause Laurus to consider any then existing Account and/or
Inventory as no longer constituting an Eligible Account or Eligible Inventory,
as the case may be; (ii) of any material delay in its performance of any
of its obligations to any Account Debtor; (iii) of any assertion by any
Account Debtor of any material claims, offsets or counterclaims; (iv) of
any allowances, credits and/or monies granted by it to any Account Debtor; (v) of
all material adverse information relating to the financial condition of an
Account Debtor; (vi) of any material return of goods; and (vii) of
any loss, damage or destruction of any of the Collateral.

 

(l)            all
Eligible Accounts (i) represent complete bona fide transactions which
require no further act under any circumstances on its part to make such
Accounts payable by the Account Debtors, (ii) are not subject to any
present, future contingent offsets or counterclaims, and (iii) do not
represent bill and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of such Company.  It has not
made, nor will it make, any agreement with any Account Debtor for any extension
of time for the payment of any Account, any compromise or settlement for less
than the full amount thereof, any release of any Account Debtor from liability
therefor, or any deduction therefrom except a discount or allowance for prompt
or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in
writing.

 

8

 

(m)          it shall
keep and maintain its Equipment in good operating condition, except for
ordinary wear and tear, and shall make all necessary repairs and replacements
thereof so that the value and operating efficiency shall at all times be
maintained and preserved.  It shall not
permit any such items to become a Fixture to real estate or accessions to other
personal property.

 

(n)           it shall
maintain and keep all of its Books and Records concerning the Collateral at its
executive offices listed in Schedule 12(aa).

 

(o)           it shall
maintain and keep the tangible Collateral at the addresses listed in Schedule 12(aa),
provided, that it may change such locations or open a new location, provided
that it provides Laurus at least thirty (30) days prior written notice of such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $100,000 will be located,
it executes and delivers to Laurus such agreements deemed reasonably necessary
or prudent by Laurus, including landlord agreements, mortgagee agreements and
warehouse agreements, each in form and substance satisfactory to Laurus, to
adequately protect and maintain Laurus’ security interest in such Collateral.

 

(p)           Schedule 7(p)
lists all banks and other financial institutions at which it maintains deposits
and/or other accounts, and such Schedule correctly identifies the name,
address and telephone number of each such depository, the name in which the
account is held, a description of the purpose of the account, and the complete
account number.  It shall not establish
any depository or other bank account with any financial institution (other than
the accounts set forth on Schedule 7(p)) without Laurus’ prior
written consent.

 

(q)           All
Inventory manufactured by it in the United States of America shall be produced
in accordance with the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto or
promulgated thereunder.

 

(r)            New
Trademarks and Patents.

 

(i)            If,
before the Obligations shall have been irrevocably paid in full, a Company
shall obtain rights to any new Trademarks or Patents or become entitled to the
benefit of any trademark or patent application or trademark or patent for any
reissue, division, continuation, renewal, extension, or continuation in part of
any Trademark or Patent or any improvement on any Trademark or Patent, the
provisions of Section 6 shall automatically apply thereto and such Company
shall give Laurus prompt written notice thereof.

 

(ii)           Each
Company grants Laurus a power-of-attorney, irrevocable so long as this
Agreement is in existence, to modify this Agreement by amending (1) Schedules
C and D-1to include any future trademarks and patents, including trademark
and patent registrations or applications appurtenant thereto covered by this
Agreement and (2) Schedule D-2 to include any future ITU
Marks.

 

(iii)          Notwithstanding
anything to the contrary set forth in paragraph 7(r)(ii) above, the terms
of this Agreement shall automatically apply without any further action on the
part of any Company or Laurus (including, without limitation, the grant of a

 

9

 

security interest by any Company to Laurus in any such ITU Marks which
become registered with the United States Patent and Trademark Office) to an ITU
Mark upon the earlier to occur of the filing in the United States Patent and
Trademark Office by the relevant Company of (1) an Amendment to Allege Use
or (2) a Statement of Use with respect to such ITU Mark and all references
to Trademarks hereunder shall thereafter be deemed to include such ITU Mark.

 

8.             Payment
of Accounts.

 

(a)           Each
Company will irrevocably direct all of its present and future Account Debtors
and other Persons obligated to make payments constituting Collateral to make
such payments directly to the lockboxes maintained by such Company (the “Lockboxes”)
with [North Fork Bank] or such other financial institution accepted by Laurus
in writing as may be selected by such Company (the “Lockbox Bank”)
pursuant to the terms of the certain agreements among one or more Companies,
Laurus and/or the Lockbox Bank dated as of February     ,
2006.  On or prior to the Closing Date,
each Company shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Laurus pursuant to which, among other things, the
Lockbox Bank agrees to:  (a) sweep
the Lockbox on a daily basis and deposit all checks received therein to an
account designated by Laurus in writing and (b) comply only with the
instructions or other directions of Laurus concerning the Lockbox.  All of each Company’s invoices, account
statements and other written or oral communications directing, instructing,
demanding or requesting payment of any Account of any Company or any other
amount constituting Collateral shall conspicuously direct that all payments be
made to the Lockbox or such other address as Laurus may direct in writing.  If, notwithstanding the instructions to
Account Debtors, any Company receives any payments, such Company shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements.  Until so
remitted, such Company shall hold all such payments in trust for and as the
property of Laurus and shall not commingle such payments with any of its other
funds or property.

 

(b)           At Laurus’
election, following the occurrence of an Event of Default which is continuing,
Laurus may notify each Company’s Account Debtors of Laurus’ security interest
in the Accounts, collect them directly and charge the collection costs and
expenses thereof to Company’s and the Eligible Subsidiaries joint and several
account.

 

9.             Collection
and Maintenance of Collateral.

 

(a)           Laurus may
verify each Company’s Accounts from time to time, but not more often than once
every three (3) months, unless an Event of Default has occurred and is
continuing or Laurus believes that such verification is necessary to preserve
or protect the Collateral, utilizing an audit control company or any other
agent of Laurus.

 

(b)           Proceeds
of Accounts received by Laurus will be deemed received on the Business Day
after Laurus’ receipt of such proceeds in good funds in dollars of the United
States of America to an account designated by Laurus.  Any amount received by Laurus after 12:00 noon
(New York time) on any Business Day shall be deemed received on the next
Business Day.

 

10

 

(c)           As Laurus
receives the proceeds of Accounts of any Company, it shall (i) apply such
proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
all such remaining proceeds (net of interest, fees and other amounts then due
and owing to Laurus hereunder) to Company Agent (for the benefit of the
applicable Companies) upon request (but no more often than twice a week).  Notwithstanding the foregoing, following the
occurrence and during the continuance of an Event of Default, Laurus, at its
option, may (a) apply such proceeds to the Obligations in such order as
Laurus shall elect, (b) hold all such proceeds as cash collateral for the
Obligations and each Company hereby grants to Laurus a security interest in
such cash collateral amounts as security for the Obligations and/or (c) do
any combination of the foregoing.

 

10.           Inspections and Appraisals.  At all times during normal business hours,
Laurus, and/or any agent of Laurus shall have the right to (a) have access to,
visit, inspect, review, evaluate and make physical verification and appraisals
of each Company’s properties and the Collateral, (b) inspect, audit and copy
(or take originals if necessary) and make extracts from each Company’s Books
and Records, including management letters prepared by the Accountants, and (c)
discuss with each Company’s directors, principal officers, and independent accountants,
each Company’s business, assets, liabilities, financial condition, results of
operations and business prospects.  Each
Company will deliver to Laurus any instrument necessary for Laurus to obtain
records from any service bureau maintaining records for such Company.  If any internally prepared financial
information, including that required under this Section is unsatisfactory in
any manner to Laurus, Laurus may request that the Accountants review the same.

 

11.           Financial Reporting.  Company Agent will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:

 

(a)           As soon as
available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”),
which annual financial statements shall be without qualification and shall
include each Company’s balance sheet as at the end of such fiscal year and the
related statements of each Company’s income, retained earnings and cash flows
for the fiscal year then ended, prepared, if Laurus so requests, on a
consolidating and consolidated basis to include all Subsidiaries and Affiliates
of each Company, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Parent’s
President, Chief Executive Officer or Chief Financial Officer stating that such
financial statements have been prepared in accordance with GAAP and whether or
not such officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;

 

(b)           As soon as
available and in any event within forty five (45) days after the end of each
quarter, an unaudited/internal balance sheet and statements of income, retained
earnings and cash flows of each Company as at the end of and for such quarter
and for the year to date period then ended, prepared, if Laurus so requests, on
a consolidating and consolidated basis to include all Subsidiaries and
Affiliates of each Company, in reasonable detail and stating

 

11

 

in comparative form the figures for the corresponding date and periods
in the previous year, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Parent’s President, Chief
Executive Officer or Chief Financial Officer, stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail the
facts with respect thereto;

 

(c)           Within
fifteen (15) days after the end of each month (or more frequently if Laurus so
requests), agings of each Company’s Accounts, unaudited trial balances and
their accounts payable and a calculation of each Company’s Accounts, Eligible
Accounts, Inventory and/or Eligible Inventory, provided, however, that if
Laurus shall request the foregoing information more often than as set forth in
the immediately preceding clause, each Company shall have fifteen (15) days
from each such request to comply with Laurus’ demand; and

 

(d)           Promptly
after (i) the filing thereof, copies of the Parent’s most recent
registration statements and annual, quarterly, monthly or other regular reports
which the Parent files with the Securities and Exchange Commission (the “SEC”),
and (ii) the issuance thereof, copies of such financial statements,
reports and proxy statements as the Parent shall send to its stockholders.

 

12.           Additional Representations and
Warranties.  Each Company hereby
represents and warrants to Laurus as follows:

 

(a)           Organization,
Good Standing and Qualification.  It
and each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization.  It and each of its Subsidiaries has the
corporate, limited liability company or partnership, as the case may be, power
and authority to own and operate its properties and assets and, insofar as it
is or shall be a party thereto, to (i) execute and deliver this Agreement
and the Ancillary Agreements, (ii) to issue and sell the Notes, (iii) to
issue and sale the Warrants and the shares of Common Stock issuable upon
exercise of the Warrants (the “Warrant Shares”) and to (iv) carry
out the provisions of this Agreement and the Ancillary Agreements and to carry
on its business as presently conducted. 
It and each of its Subsidiaries is duly qualified and is authorized to
do business and is in good standing as a foreign corporation, partnership or
limited liability company, as the case may be, in all jurisdictions in which
the nature or location of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions in
which failure to do so has not had, or could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect.

 

(b)           Subsidiaries.  Each of its direct and indirect Subsidiaries,
the direct owner of each such Subsidiary and its percentage ownership thereof,
is set forth on Schedule 12(b).

 

(c)           Capitalization;
Voting Rights.

 

(i)            The
authorized capital stock of the Parent, as of the date hereof consists of
105,000,000 shares, of which 100,000,000 are shares of Common Stock, par value

 

12

 

$0.001 per share, 5,410,575 shares of which are issued and outstanding,
and 5,000,000 are shares of preferred stock, par value $0.01 per share of which
2,500,000 shares of 10% Class A convertible preferred stock are issued and
outstanding.  The authorized, issued and
outstanding capital stock of each Subsidiary of each Company is set forth on Schedule 12(c).

 

(ii)           Except as
disclosed on Schedule 12(c), other than:  (i) the shares reserved for issuance
under the Parent’s stock option plans; and (ii) shares which may be issued
pursuant to this Agreement and the Ancillary Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal), proxy or stockholder agreements, or
arrangements or agreements of any kind for the purchase or acquisition from the
Parent of any of its securities.  Except
as disclosed on Schedule 12(c), neither the offer, issuance or sale
of any of the Notes or the Warrants or the issuance of any of the Warrant
Shares, nor the consummation of any transaction contemplated hereby will result
in a change in the price or number of any securities of the Parent outstanding,
under anti-dilution or other similar provisions contained in or affecting any
such securities.

 

(iii)          All
issued and outstanding shares of the Parent’s Common Stock:  (i) have been duly authorized and
validly issued and are fully paid and non-assessable; and (ii) were issued
in compliance with all applicable state and federal laws concerning the
issuance of securities.

 

(iv)          The rights,
preferences, privileges and restrictions of the shares of the Common Stock are
as stated in the Parent’s Certificate of Incorporation (the “Charter”).  The Warrant Shares have been duly and validly
reserved for issuance.  When issued in compliance
with the provisions of this Agreement and the Parent’s Charter, the Securities
will be validly issued, fully paid and nonassessable, and will be free of any
liens or encumbrances; provided, however, that the Securities may
be subject to restrictions on transfer under state and/or federal securities
laws as set forth herein or as otherwise required by such laws at the time a
transfer is proposed.

 

(d)           Authorization;
Binding Obligations.  All corporate,
partnership or limited liability company, as the case may be, action on its and
its Subsidiaries’ part (including their respective officers and directors)
necessary for the authorization of this Agreement and the Ancillary Agreements,
the performance of all of its and its Subsidiaries’ obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization,
issuance and delivery of the Notes and the Warrant has been taken or will be
taken prior to the Closing Date.  This
Agreement and the Ancillary Agreements, when executed and delivered and to the
extent it is a party thereto, will be its and its Subsidiaries’ valid and
binding obligations enforceable against each such Person in accordance with
their terms, except:

 

(i)            as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

 

(ii)           general
principles of equity that restrict the availability of equitable or legal
remedies.

 

13

 

The issuance of the Notes is not and will not be
subject to any preemptive rights or rights of first refusal that have not been
properly waived or complied with.  The
issuance of the Warrants and the subsequent exercise of the Warrants for
Warrant Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied with.

 

(e)           Liabilities.  Neither it nor any of its Subsidiaries has
any liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.

 

(f)            Agreements;
Action.  Except as set forth on Schedule 12(f) or
as disclosed in any Exchange Act Filings:

 

(i)            There are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries is a
party or to its knowledge by which it is bound which may involve:  (i) obligations (contingent or
otherwise) of, or payments to, it or any of its Subsidiaries in excess of
$50,000 (other than obligations of, or payments to, it or any of its
Subsidiaries arising from purchase or sale agreements entered into in the
ordinary course of business); or (ii) the transfer or license of any
patent, copyright, trade secret or other proprietary right to or from it (other
than licenses arising from the purchase of “off the shelf” or other standard
products); or (iii) provisions restricting the development, manufacture or
distribution of its or any of its Subsidiaries’ products or services; or (iv) indemnification
by it or any of its Subsidiaries with respect to infringements of proprietary
rights.

 

(ii)           Since September 30,
2005 (the “Balance Sheet Date”) neither it nor any of its Subsidiaries
has:  (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock; (ii) incurred any indebtedness for
money borrowed or any other liabilities (other than ordinary course
obligations) individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any Person not in excess,
individually or in the aggregate, of $100,000, other than ordinary advances for
travel expenses; or (iv) sold, exchanged or otherwise disposed of any of
its assets or rights, other than the sale of its Inventory in the ordinary
course of business.

 

(iii)          For
the purposes of subsections (i) and (ii) of this Section 12(f),
all indebtedness, liabilities, agreements, understandings, instruments,
contracts and proposed transactions involving the same Person (including
Persons it or any of its applicable Subsidiaries has reason to believe are
affiliated therewith or with any Subsidiary thereof) shall be aggregated for
the purpose of meeting the individual minimum dollar amounts of such
subsections.

 

(iv)          the Parent
maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Parent in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the rules and
forms of the SEC.

 

(v)           The Parent
makes and keeps books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of its
assets.  It

 

14

 

maintains internal control over financial reporting (“Financial
Reporting Controls”) designed by, or under the supervision of, its
principal executive and principal financial officers, and effected by its board
of directors, management, and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, including
that:

 

(1)           transactions
are executed in accordance with management’s general or specific authorization;

 

(2)           unauthorized
acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely detected;

 

(3)           transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made
only in accordance with authorizations of the Parent’s management and board of
directors;

 

(4)           transactions
are recorded as necessary to maintain accountability for assets; and

 

(5)           the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.

 

(vi)          There is no
weakness in any of its Disclosure Controls or Financial Reporting Controls that
is required to be disclosed in any of the Exchange Act Filings, except as so
disclosed.

 

(g)           Obligations
to Related Parties.  Except as set
forth on Schedule 12(g), neither it nor any of its Subsidiaries has
any obligations to their respective officers, directors, stockholders or
employees other than:

 

(i)            for
payment of salary for services rendered and for bonus payments;

 

(ii)           reimbursement
for reasonable expenses incurred on its or its Subsidiaries’ behalf;

 

(iii)          for
other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan
approved by its and its Subsidiaries’ Board of Directors, as applicable); and

 

(iv)          obligations
listed in its and each of its Subsidiary’s financial statements or disclosed in
any of the Parent’s Exchange Act Filings.

 

Except as described above or set forth on Schedule 12(g),
none of its officers, directors or, to the best of its knowledge, key employees
or stockholders, any of its Subsidiaries or any members of

 

15

 

their immediate families, are indebted to it or any of
its Subsidiaries, individually or in the aggregate, in excess of $50,000 or
have any direct or indirect ownership interest in any Person with which it or
any of its Subsidiaries is affiliated or with which it or any of its
Subsidiaries has a business relationship, or any Person which competes with it
or any of its Subsidiaries, other than passive investments in publicly traded
companies (representing less than one percent (1%) of such company) which may
compete with it or any of its Subsidiaries. Except as described above, none of
its officers, directors or stockholders, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
it or any of its Subsidiaries and no agreements, understandings or proposed
transactions are contemplated between it or any of its Subsidiaries and any
such Person.  Except as set forth on Schedule 12(g),
neither it nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other Person.

 

(h)           Changes.  Since the Balance Sheet Date, except as
disclosed in any Exchange Act Filing or in any Schedule to this Agreement
or to any of the Ancillary Agreements, there has not been:

 

(i)            any
change in its or any of its Subsidiaries’ business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;

 

(ii)           any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees;

 

(iii)          any
material change, except in the ordinary course of business, in its or any of
its Subsidiaries’ contingent obligations by way of guaranty, endorsement,
indemnity, warranty or otherwise;

 

(iv)          any damage,
destruction or loss, whether or not covered by insurance, which has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

 

(v)           any waiver
by it or any of its Subsidiaries of a valuable right or of a material debt owed
to it;

 

(vi)          any direct
or indirect material loans made by it or any of its Subsidiaries to any of its
or any of its Subsidiaries’ stockholders, employees, officers or directors,
other than advances made in the ordinary course of business;

 

(vii)         any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;

 

(viii)        any
declaration or payment of any dividend or other distribution of its or any of
its Subsidiaries’ assets;

 

(ix)           any labor
organization activity related to it or any of its Subsidiaries;

 

16

 

(x)            any debt,
obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;

 

(xi)           any sale,
assignment or transfer of any Intellectual Property or other intangible assets;

 

(xii)          any
change in any material agreement to which it or any of its Subsidiaries is a
party or by which either it or any of its Subsidiaries is bound which, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;

 

(xiii)         any
other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; or

 

(xiv)        any
arrangement or commitment by it or any of its Subsidiaries to do any of the
acts described in subsection (i) through (xiii) of this Section 12(h).

 

(i)            Title
to Properties and Assets; Liens, Etc. 
Except as set forth on Schedule 12(i), it and each of its
Subsidiaries has good and marketable title to their respective properties and
assets, and good title to its leasehold interests, in each case subject to no
Lien, other than Permitted Liens.

 

All facilities, Equipment, Fixtures, vehicles and other properties
owned, leased or used by it or any of its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used.  Except as set
forth on Schedule 12(i), it and each of its Subsidiaries is in
compliance with all material terms of each lease to which it is a party or is
otherwise bound.

 

(j)            Intellectual
Property.

 

(i)            It and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now
conducted and, to its knowledge as presently proposed to be conducted, without
any known infringement of the rights of others. 
There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary’s Intellectual Property, nor is it or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
Person other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.

 

(ii)           Neither it
nor any of its Subsidiaries has received any communications alleging that it or
any of its Subsidiaries has violated any of the Intellectual Property or other
proprietary rights of any other Person, nor is it or any of its Subsidiaries
aware of any basis therefor.

 

(iii)          Neither
it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its

 

17

 

employees made prior to their employment by it or any of its
Subsidiaries, except for inventions, trade secrets or proprietary information
that have been rightfully assigned to it or any of its Subsidiaries.

 

(k)           Compliance
with Other Instruments.  Neither it
nor any of its Subsidiaries is in violation or default of (x) any term of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage, indenture,
contract, agreement or instrument to which it is party or by which it is bound
or of any judgment, decree, order or writ, which violation or default, in the
case of this clause (y), has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.  The execution, delivery and performance of
and compliance with this Agreement and the Ancillary Agreements to which it is
a party, and the issuance of the Notes and the other Securities each pursuant hereto
and thereto, will not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with or constitute a
default under any such term or provision, or result in the creation of any Lien
upon any of its or any of its Subsidiary’s properties or assets or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to it or any of its Subsidiaries,
their businesses or operations or any of their assets or properties.

 

(l)            Litigation.  Except as set forth on Schedule 12(l),
there is no action, suit, proceeding or investigation pending or, to its
knowledge, currently threatened against it or any of its Subsidiaries that
prevents it or any of its Subsidiaries from entering into this Agreement or the
Ancillary Agreements, or from consummating the transactions contemplated hereby
or thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing.  Neither it nor any of its Subsidiaries is a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or
investigation by it or any of its Subsidiaries currently pending or which it or
any of its Subsidiaries intends to initiate.

 

(m)          Tax
Returns and Payments.  It and each of
its Subsidiaries has timely filed all tax returns (federal, state and local)
required to be filed by it.  All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by it and each of its Subsidiaries on or before the
Closing Date, have been paid or will be paid prior to the time they become
delinquent.  Except as set forth on Schedule 12(m),
neither it nor any of its Subsidiaries has been advised:

 

(i)            that any
of its returns, federal, state or other, have been or are being audited as of
the date hereof; or

 

(ii)           of any
adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.

 

Neither it nor any of its Subsidiaries has any
knowledge of any liability of any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.

 

18

 

(n)           Employees.  Except as set forth on Schedule 12(n),
neither it nor any of its Subsidiaries has any collective bargaining agreements
with any of its employees.  There is no
labor union organizing activity pending or, to its knowledge, threatened with
respect to it or any of its Subsidiaries. 
Except as disclosed in the Exchange Act Filings or on Schedule 12(n),
neither it nor any of its Subsidiaries is a party to or bound by any currently
effective employment contract, deferred compensation arrangement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement.  To its
knowledge, none of its or any of its Subsidiaries’ employees, nor any
consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual
to be employed by, or to contract with, it or any of its Subsidiaries because
of the nature of the business to be conducted by it or any of its Subsidiaries;
and to its knowledge the continued employment by it and its Subsidiaries of
their present employees, and the performance of its and its Subsidiaries
contracts with its independent contractors, will not result in any such
violation.  Neither it nor any of its
Subsidiaries is aware that any of its or any of its Subsidiaries’ employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency that would interfere with their duties to it
or any of its Subsidiaries.  Neither it
nor any of its Subsidiaries has received any notice alleging that any such
violation has occurred.  Except for
employees who have a current effective employment agreement with it or any of
its Subsidiaries, none of its or any of its Subsidiaries’ employees has been
granted the right to continued employment by it or any of its Subsidiaries or
to any material compensation following termination of employment with it or any
of its Subsidiaries.  Except as set forth
on Schedule 12(n), neither it nor any of its Subsidiaries is aware
that any officer, key employee or group of employees intends to terminate his,
her or their employment with it or any of its Subsidiaries, as applicable, nor
does it or any of its Subsidiaries have a present intention to terminate the
employment of any officer, key employee or group of employees.

 

(o)           Registration
Rights and Voting Rights.  Except as
set forth on Schedule 12(o) and except as disclosed in Exchange Act
Filings, neither it nor any of its Subsidiaries is presently under any
obligation, and neither it nor any of its Subsidiaries has granted any rights,
to register any of its or any of its Subsidiaries’ presently outstanding
securities or any of its securities that may hereafter be issued.  Except as set forth on Schedule 12(o)
and except as disclosed in Exchange Act Filings, to its knowledge, none of its
or any of its Subsidiaries’ stockholders has entered into any agreement with
respect to its or any of its Subsidiaries’ voting of equity securities.

 

(p)           Compliance
with Laws; Permits.  Neither it nor
any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or
any SEC related regulation or rule or any rule of the Principal
Market promulgated thereunder or any other applicable statute, rule,
regulation, order or restriction of any domestic or foreign government or any
instrumentality or agency thereof in respect of the conduct of its business or
the ownership of its properties which has had, or could reasonably be expected
to have, either individually or in the aggregate, a Material Adverse
Effect.  No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection
with the execution and delivery of this Agreement or any Ancillary Agreement
and the issuance of any of the Securities, except such as have been duly and
validly obtained or filed, or with

 

19

 

respect to any filings that must be made after the Closing Date, as
will be filed in a timely manner.  It and
each of its Subsidiaries has all material franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

 

(q)           Environmental
and Safety Laws.  Neither it nor any
of its Subsidiaries is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and
to its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.  Except as set forth on Schedule 12(q),
no Hazardous Materials (as defined below) are used or have been used, stored,
or disposed of by it or any of its Subsidiaries or, to its knowledge, by any
other Person on any property owned, leased or used by it or any of its
Subsidiaries.  For the purposes of the
preceding sentence, “Hazardous Materials” shall mean:

 

(i)            materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or
other activities involving hazardous substances, including building materials;
and

 

(ii)           any
petroleum products or nuclear materials.

 

(r)            Valid
Offering.  Assuming the accuracy of
the representations and warranties of Laurus contained in this Agreement, the
offer and issuance of the Securities will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.

 

(s)           Full
Disclosure.  It and each of its
Subsidiaries has provided Laurus with all information requested by Laurus in
connection with Laurus’ decision to enter into this Agreement, including all
information each Company and its Subsidiaries believe is reasonably necessary
to make such investment decision. 
Neither this Agreement, the Ancillary Agreements nor the exhibits and
schedules hereto and thereto nor any other document delivered by it or any of
its Subsidiaries to Laurus or its attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact nor omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.  Any financial projections and other estimates
provided to Laurus by it or any of its Subsidiaries were based on its and its
Subsidiaries’ experience in the industry and on assumptions of fact and opinion
as to future events which it or any of its Subsidiaries, at the date of the
issuance of such projections or estimates, believed to be reasonable.

 

(t)            Insurance.  It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to
it and its Subsidiaries in the same or similar business.

 

20

 

(u)           SEC
Reports and Financial Statements. 
Except as set forth on Schedule 12(u), it and each of its
Subsidiaries has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act.  The Parent has furnished Laurus with copies
of:  (i) its Annual Report on Form 10-KSB
for its fiscal year ended December 31, 2004; and (ii) its Quarterly
Reports on Form 10-QSB for its fiscal quarters ended March 31, 2005, june 30,
2005 and September 30, 2005, and the Form 8-K filings which it has
made during its fiscal year 2005 and 2006 to date (collectively, the “SEC
Reports”).  Except as set forth on Schedule 12(u),
each SEC Report was, at the time of its filing, in substantial compliance with
the requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. 
Such financial statements have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto or
(ii) in the case of unaudited interim statements, to the extent they may
not include footnotes or may be condensed) and fairly present in all material
respects the financial condition, the results of operations and cash flows of
the Parent and its Subsidiaries, on a consolidated basis, as of, and for, the
periods presented in each such SEC Report.

 

(v)           Listing.  The Parent’s Common Stock is listed or
quoted, as applicable, on the Principal Market and satisfies all requirements
for the continuation of such listing or quotation, as applicable, and the
Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable.  The Parent has
not received any notice that its Common Stock will be delisted from, or no
longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.

 

(w)          No
Integrated Offering.  Neither it, nor
any of its Subsidiaries nor any of its Affiliates, nor any Person acting on its
or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement or any
Ancillary Agreement to be integrated with prior offerings by it for purposes of
the Securities Act which would prevent it from issuing the Securities pursuant
to Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the Securities
to be integrated with other offerings.

 

(x)            Stop
Transfer.  The Securities are
restricted securities as of the date of this Agreement.  Neither it nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by
state and federal securities laws.

 

(y)           Dilution.  It specifically acknowledges that the Parent’s
obligation to issue the shares of Common Stock upon exercise of the Warrants is
binding upon the Parent and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Parent.

 

21

 

(z)            Patriot
Act.  It certifies that, to the best
of its knowledge, neither it nor any of its Subsidiaries has been designated,
nor is or shall be owned or controlled, by a “suspected terrorist” as defined
in Executive Order 13224.  It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. 
In furtherance of those efforts, it hereby represents, warrants and
covenants that:  (i) none of the
cash or property that it or any of its Subsidiaries will pay or will contribute
to Laurus has been or shall be derived from, or related to, any activity that
is deemed criminal under United States law; and (ii) no contribution or
payment by it or any of its Subsidiaries to Laurus, to the extent that they are
within its or any such Subsidiary’s control shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001.  It shall promptly notify Laurus if any of
these representations, warranties and covenants ceases to be true and accurate
regarding it or any of its Subsidiaries. 
It shall provide Laurus with any additional information regarding it and
each Subsidiary thereof that Laurus deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities.  It understands and agrees
that if at any time it is discovered that any of the foregoing representations,
warranties and covenants are incorrect, or if otherwise required by applicable
law or regulation related to money laundering or similar activities, Laurus may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of
Laurus’ investment in it.  It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the
best interests of Laurus in light of relevant rules and regulations under
the laws set forth in subsection (ii) above.

 

(aa)         Company
Name; Locations of Offices, Records and Collateral.  Schedule 12(aa) sets forth each
Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations
where records with respect to Collateral are kept (including in each case the
county of such locations) and, except as set forth in such Schedule 12(aa),
such locations have not changed during the preceding twelve months.  As of the Closing Date, during the prior five
years, except as set forth in Schedule 12(aa), no Company has been
known as or conducted business in any other name (including trade names).  Each Company has only one state of
organization.

 

(bb)         ERISA.  Based upon the Employee Retirement Income
Security Act of 1974 (“ERISA”), and the regulations and published
interpretations thereunder:  (i) neither
it nor any of its Subsidiaries has engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it
and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
it nor any of its Subsidiaries has any knowledge of any event or occurrence
which would cause the Pension Benefit Guaranty Corporation to institute
proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) neither
it nor any of its Subsidiaries has any fiduciary responsibility for investments
with respect to any plan existing for the benefit of persons other than its or
such Subsidiary’s employees; and (v) neither it nor any of its

 

22

 

Subsidiaries has withdrawn, completely or partially, from any
multi-employer pension plan so as to incur liability under the Multiemployer
Pension Plan Amendments Act of 1980.

 

13.           Covenants.  Each Company, as applicable, covenants and
agrees with Laurus as follows:

 

(a)           Stop-Orders.  It shall advise Laurus, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Parent, or of the suspension
of the qualification of the Common Stock of the Parent for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.

 

(b)           Listing.  It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon exercise
of the Warrants on the Principal Market upon which shares of Common Stock are
listed or quoted, as applicable, (subject to official notice of issuance) and
shall maintain such listing or quotation, as applicable, so long as any other
shares of Common Stock shall be so listed or quoted, as applicable.  The Parent shall maintain the listing or
quotation, as applicable, of its Common Stock on the NASDAQ OTC Bulletin Board
or other Principal Market approved in writing by Laurus, and will comply in all
material respects with the Parent’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities
Dealers (“NASD”) and such exchanges, as applicable.

 

(c)           Market
Regulations.  It shall notify the
SEC, NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to Laurus and promptly provide copies thereof to
Laurus.

 

(d)           Reporting
Requirements.  It shall timely file
with the SEC all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or
regulations thereunder would permit such termination.

 

(e)           Use of
Funds.  It shall use the proceeds of
the Loans (i) to repay in full the Existing Indebtedness and (ii) for
general working capital purposes only.

 

(f)            Access
to Facilities.  It shall, and shall
cause each of its Subsidiaries to, permit any representatives designated by
Laurus (or any successor of Laurus), upon reasonable notice and during normal
business hours, at Company’s expense and accompanied by a representative of
Company Agent (provided that no such prior notice shall be required to be given
and no such representative shall be required to accompany Laurus in the event
Laurus believes such access is necessary to preserve or protect the Collateral
or following the occurrence and during the continuance of an Event of Default),
to:

 

(i)            visit and
inspect any of its or any such Subsidiary’s properties;

 

23

 

(ii)           examine
its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract) and
make copies thereof or extracts therefrom; and

 

(iii)          discuss
its or any such Subsidiary’s affairs, finances and accounts with its or any
such Subsidiary’s directors, officers and Accountants.

 

Notwithstanding the foregoing, neither it nor any of
its Subsidiaries shall provide any material, non-public information to Laurus
unless Laurus signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.

 

(g)           Taxes.  It shall, and shall cause each of its
Subsidiaries to, promptly pay and discharge, or cause to be paid and discharged,
when due and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon it and its Subsidiaries’ income, profits, property or
business, as the case may be; provided, however, that any such tax, assessment,
charge or levy need not be paid currently if (i) the validity thereof
shall currently and diligently be contested in good faith by appropriate
proceedings, (ii) such tax, assessment, charge or levy shall have no
effect on the Lien priority of Laurus in the Collateral, and (iii) if it
and/or such Subsidiary, as applicable, shall have set aside on its and/or such
Subsidiary’s books adequate reserves with respect thereto in accordance with
GAAP; and provided, further, that it shall, and shall cause each of its
Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith
upon the commencement of proceedings to foreclose any lien which may have
attached as security therefor.

 

(h)           Insurance.  It shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral.  It and each of its Subsidiaries shall keep
its assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as it and its Subsidiaries; and it and its Subsidiaries shall maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which it and/or such Subsidiary thereof reasonably believes is customary for
companies in similar business similarly situated as it and its Subsidiaries and
to the extent available on commercially reasonable terms.  It and each of its Subsidiaries will jointly
and severally bear the full risk of loss from any loss of any nature whatsoever
with respect to the assets pledged to Laurus as security for its obligations
hereunder and under the Ancillary Agreements. 
At its own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, it and each of its Subsidiaries shall (i) keep all
their insurable properties and properties in which they have an interest
insured against the hazards of fire, flood, sprinkler leakage, those hazards
covered by extended coverage insurance and such other hazards, and for such
amounts, as is customary in the case of companies engaged in businesses similar
to it or the respective Subsidiary’s including business interruption insurance;
(ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to it and its Subsidiaries’ insuring
against larceny, embezzlement or other criminal misappropriation of insured’s
officers and employees who may either singly or jointly with others at any time
have access to its or any of its Subsidiaries assets or funds either directly
or through governmental authority to draw upon such funds or to direct
generally the disposition of such assets; (iii) maintain public and
product liability insurance against claims for

 

24

 

personal injury, death or property damage suffered by others; (iv) maintain
all such worker’s compensation or similar insurance as may be required under
the laws of any state or jurisdiction in which it or any of its Subsidiaries is
engaged in business; and (v) furnish Laurus with (x) copies of all
policies and evidence of the maintenance of such policies at least thirty (30)
days before any expiration date, (y) excepting its and its Subsidiaries’
workers’ compensation policy, endorsements to such policies naming Laurus as “co-insured”
or “additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to Laurus, naming Laurus as lenders loss payee, and (z)
evidence that as to Laurus the insurance coverage shall not be impaired or
invalidated by any act or neglect of any Company or any of its Subsidiaries and
the insurer will provide Laurus with at least thirty (30) days notice prior to
cancellation.  It shall instruct the
insurance carriers that in the event of any loss thereunder, the carriers shall
make payment for such loss to Laurus and not to any Company or any of its Subsidiaries
and Laurus jointly.  If any insurance
losses are paid by check, draft or other instrument payable to any Company
and/or any of its Subsidiaries and Laurus jointly, Laurus may endorse, as
applicable, such Company’s and/or any of its Subsidiaries’ name thereon and do
such other things as Laurus may deem advisable to reduce the same to cash.  Laurus is hereby authorized to adjust and
compromise claims.  All loss recoveries
received by Laurus upon any such insurance may be applied to the Obligations,
in such order as Laurus in its sole discretion shall determine or shall
otherwise be delivered to Company Agent for the benefit of the applicable
Company and/or its Subsidiaries.  Any
surplus shall be paid by Laurus to Company Agent for the benefit of the
applicable Company and/or its Subsidiaries, or applied as may be otherwise
required by law.  Any deficiency thereon
shall be paid, as applicable, by Companies and their Subsidiaries to Laurus, on
demand.

 

(i)            Intellectual
Property.  It shall, and shall cause
each of its Subsidiaries to, maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.

 

(j)            Properties.  It shall, and shall cause each of its
Subsidiaries to, keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and it shall, and shall cause each of its Subsidiaries to, at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.

 

(k)           Confidentiality.  It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. 
Notwithstanding the foregoing, each Company and its Subsidiaries may
disclose Laurus’ identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.

 

(l)            Required
Approvals.  It shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
Laurus, (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than each Company’s
indebtedness to Laurus and as set forth on Schedule 13(l)(i) attached
hereto and

 

25

 

made a part hereof; (ii) cancel any debt owing to it in excess of
$50,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of
its Stock or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any of its or its Subsidiaries’ Stock
outstanding on the date hereof, or issue any preferred stock; (v) purchase
or hold beneficially any Stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or joint venture, except (x) travel advances, (y) loans to its and its
Subsidiaries’ officers and employees not exceeding at any one time an aggregate
of $10,000, and (z) loans to its existing Subsidiaries so long as such
Subsidiaries are designated as either a co-borrower hereunder or has entered
into such guaranty and security documentation required by Laurus, including,
without limitation, to grant to Laurus a first priority perfected security
interest in substantially all of such Subsidiary’s assets to secure the
Obligations; (vi) create or permit to exist any Subsidiary, other than any
Subsidiary in existence on the date hereof and listed in Schedule 12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary’s assets to secure the Obligations; (vii) directly
or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise
acquire any indebtedness (other than to Laurus and in the ordinary course of
business) except to make scheduled payments of principal and interest thereof; (viii) enter
into any merger, consolidation or other reorganization with or into any other
Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no
Event of Default shall exist immediately prior to and after giving effect to
such merger or consolidation, (3) such Company shall have provided Laurus
copies of all documentation relating to such merger or consolidation and (4) such
Company shall have provided Laurus with at least thirty (30) days’ prior
written notice of such merger or consolidation; (ix) materially change the
nature of the business in which it is presently engaged; (x) become subject to
(including, without limitation, by way of amendment to or modification of) any
agreement or instrument which by its terms would (under any circumstances)
restrict its or any of its Subsidiaries’ right to perform the provisions of
this Agreement or any of the Ancillary Agreements; (xi) change its fiscal year
or make any changes in accounting treatment and reporting practices without
prior written notice to Laurus except as required by GAAP or in the tax
reporting treatment or except as required by law; (xii) enter into any
transaction with any employee, director or Affiliate, except in the ordinary
course on arms-length terms; (xiii) bill Accounts under any name except the
present name of such Company; or (xiv) sell, lease, transfer or otherwise
dispose of any of its properties or assets, or any of the properties or assets
of its Subsidiaries, except for (1) the sale of Inventory in the ordinary
course of business and (2) the disposition or transfer in the ordinary
course of business during any fiscal year of obsolete and worn-out Equipment
and only to the extent that (x) the proceeds of any such disposition are used
to acquire replacement Equipment which is subject to Laurus’ first priority
security interest or are used to repay Loans or to pay general

 

26

 

corporate expenses, or (y) following the occurrence of an Event of
Default which continues to exist, the proceeds of which are remitted to Laurus
to be held as cash collateral for the Obligations.

 

(m)          Reissuance
of Securities.  The Parent shall
reissue certificates representing the Securities without the legends set forth
in Section 39 below at such time as:

 

(i)            the
holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)
under the Securities Act; or

 

(ii)           upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.

 

The Parent agrees to cooperate with Laurus in
connection with all resales pursuant to Rule 144(d) and Rule 144(k)
and provide legal opinions necessary to allow such resales provided the Parent
and its counsel receive reasonably requested representations from Laurus and
broker, if any.

 

(n)           Opinion.  On the Closing Date, it shall deliver to
Laurus an opinion acceptable to Laurus from each Company’s legal counsel.  Each Company will provide, at the Companies’
joint and several expense, such other legal opinions in the future as are
reasonably necessary for the exercise of the Warrants.

 

(o)           Legal
Name, etc.  It shall not, without
providing Laurus with 30 days prior written notice, change (i) its name as
it appears in the official filings in the state of its organization, (ii) the
type of legal entity it is, (iii) its organization identification number,
if any, issued by its state of organization, (iv) its state of
organization or (v) amend its certificate of incorporation, by-laws or
other organizational document.

 

(p)           Compliance
with Laws.  The operation of each of
its and each of its Subsidiaries’ business is and shall continue to be in
compliance in all material respects with all applicable federal, state and
local laws, rules and ordinances, including to all laws, rules,
regulations and orders relating to taxes, payment and withholding of payroll
taxes, employer and employee contributions and similar items, securities,
employee retirement and welfare benefits, employee health and safety and
environmental matters.

 

(q)           Notices.  It and each of its Subsidiaries shall
promptly inform Laurus in writing of:  (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any event which could reasonably be expected to have singly or
in the aggregate, a Material Adverse Effect; (ii) any change which has
had, or could reasonably be expected to have, a Material Adverse Effect; (iii) any
Event of Default or Default; and (iv) any default or any event which with
the passage of time or giving of notice or both would constitute a default
under any agreement for the payment of money to which it or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries or any of its
or any such Subsidiary’s properties may be bound the breach of which would have
a Material Adverse Effect.

 

27

 

(r)            Margin
Stock.  It shall not permit any of
the proceeds of the Loans made hereunder to be used directly or indirectly to “purchase”
or “carry” “margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

(s)           Offering
Restrictions.  Except as previously
disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock
options granted to its employees or directors, neither it nor any of its Subsidiaries
shall, prior to the full repayment of the Secured Non-Convertible Term
Note(together with all accrued and unpaid interest and fees related thereto),
(x) enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a
variable/floating conversion and/or pricing feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement).

 

(t)            Authorization
and Reservation of Shares.  The
Parent shall at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the Warrants.

 

(u)           Financing
Right of Participation.

 

(i)            It hereby
grants to Laurus a right of participation to provide all or part of any
Additional Financing (as defined below) to be issued by any Company and/or any
of its Subsidiaries (the “Additional Financing Parties”), subject to the
following terms and conditions.  From and
after the date hereof, prior to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests of the Additional Financing
Parties (an “Additional Financing”), Company Agent shall notify Laurus
of such Additional Financing.  In
connection therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed Term Sheet”) to Laurus setting forth the terms, conditions and
pricing of any such Additional Financing (such financing to be negotiated on “arm’s
length” terms and the terms thereof to be negotiated in good faith) proposed to
be entered into by the Additional Financing Parties.  Laurus shall have the right, but not the
obligation, to elect to participate (the “Election”)in all or a portion
of such Additional Financing on the terms and conditions as set forth in such
Proposed Term Sheet.  To the extent
Laurus desires to participate in such Additional Financing, Laurus shall
deliver to Company Agent its Election within ten Business Days of receipt of
each such Proposed Term Sheet.  Each such
Election shall state the portion of such Additional Financing in which Laurus
wishes to participate.

 

(ii)           It shall
not, and shall not permit its Subsidiaries to, agree, directly or indirectly,
to any restriction with any Person which limits the ability of Laurus to
consummate an Additional Financing with it or any of its Subsidiaries.

 

28

 

(v)                           Prohibition
of Amendments to Subordinated Debt Documentation.  It shall not, without the prior written consent
of Laurus, amend, modify or in any way alter the terms of any of the
Subordinated Debt Documentation, provided however that solely with respect to
the potential conversion of the Subordinated Debt to Equity such consent shall
not be unreasonably withheld.

 

(w)          Prohibition
of Grant of Collateral for Subordinated Debt Documentation.  It shall not, without the prior written
consent of Laurus, grant or permit any of its Subsidiaries to grant to any
Person any Collateral of such Company or any collateral of any of its
Subsidiaries as security for any obligation arising under the Subordinated Debt
Documentation.

 

(x)                            Prohibitions
of Payment Under Subordinated Debt Documentation.  Neither it nor any of its Subsidiaries shall,
without the prior written consent of Laurus, make any payments in respect of
the indebtedness evidenced by the Subordinated Debt Documentation, other than
as expressly permitted by the terms thereof.

 

14.           Further Assurances.  At any time and from time to time, upon the
written request of Laurus and at the sole expense of Companies, each Company
shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further action as Laurus may request
(a) to obtain the full benefits of this Agreement and the Ancillary Agreements,
(b) to protect, preserve and maintain Laurus’ rights in the Collateral and
under this Agreement or any Ancillary Agreement, and/or (c) to enable Laurus to
exercise all or any of the rights and powers herein granted or any Ancillary
Agreement.

 

15.           Representations, Warranties and
Covenants of Laurus.  Laurus hereby
represents, warrants and covenants to each Company as follows:

 

(a)           Requisite
Power and Authority.  Laurus has all
necessary power and authority under all applicable provisions of law to execute
and deliver this Agreement and the Ancillary Agreements and to carry out their
provisions.  All corporate action on
Laurus’ part required for the lawful execution and delivery of this Agreement
and the Ancillary Agreements have been or will be effectively taken prior to
the Closing Date.  Upon their execution
and delivery, this Agreement and the Ancillary Agreements shall be valid and
binding obligations of Laurus, enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights, and (b) as limited by general principles
of equity that restrict the availability of equitable and legal remedies.

 

(b)           Investment
Representations.  Laurus understands
that the Securities are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon Laurus’
representations contained in this Agreement, including, without limitation,
that Laurus is an “accredited investor” within the meaning of Regulation D
under the Securities Act.  Laurus has
received or has had full access to all the information it considers necessary
or appropriate to make an informed investment decision with respect to the
Notes to be issued to it under this Agreement and the Securities acquired by it
upon the exercise of the Warrants.

 

29

 

(c)           Laurus
Bears Economic Risk.  Laurus has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Parent so that it is capable of
evaluating the merits and risks of its investment in the Parent and has the
capacity to protect its own interests. 
Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement
under the Securities Act, or (ii) an exemption from registration is
available.

 

(d)           Investment
for Own Account.  The Securities are
being issued to Laurus for its own account for investment only, and not as a
nominee or agent and not with a view towards or for resale in connection with
their distribution.

 

(e)           Laurus
Can Protect Its Interest.  Laurus
represents that by reason of its, or of its management’s, business and
financial experience, Laurus has the capacity to evaluate the merits and risks
of its investment in the Notes, and the Securities and to protect its own
interests in connection with the transactions contemplated in this Agreement,
and the Ancillary Agreements.  Further,
Laurus is aware of no publication of any advertisement in connection with the
transactions contemplated in the Agreement or the Ancillary Agreements.

 

(f)            Accredited
Investor.  Laurus represents that it
is an accredited investor within the meaning of Regulation D under the
Securities Act.

 

(g)           Shorting.  Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to directly engage in “short
sales” of the Parent’s Common Stock as long as any Note shall be outstanding.

 

(h)           Patriot
Act.  Laurus certifies that, to the
best of Laurus’ knowledge, Laurus has not been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order
13224.  Laurus seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, Laurus
hereby represents, warrants and covenants that: 
(i) none of the cash or property that Laurus will use to make the
Loans has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no disbursement by
Laurus to any Company to the extent within Laurus’ control, shall cause Laurus
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001.  Laurus shall promptly notify the
Company Agent if any of these representations ceases to be true and accurate
regarding Laurus.  Laurus agrees to
provide the Company any additional information regarding Laurus that the
Company deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities.  Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus’ investment in the Parent.  Laurus further understands that the Parent
may release information about Laurus and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant rules and
regulations under the laws set forth in subsection (ii) above.

 

30

 

(i)            Limitation
on Acquisition of Common Stock. 
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, or any document, instrument or agreement entered into
in connection with any other transaction entered into by and between Laurus and
any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other
rights shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by any
Company to Laurus not to qualify as portfolio interest, within the meaning of Section 881(c)(2) of
the Internal Revenue Code of 1986, as amended (the “Code”) by reason of Section 881(c)(3) of
the Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) of
the Code (the “Stock Acquisition Limitation”).  The Stock Acquisition Limitation shall
automatically become null and void without any notice to any Company upon the
earlier to occur of either (a) the Parent’s delivery to Laurus of a Notice
of Redemption (as defined in the Notes) or (b) the existence of an Event
of Default at a time when the average closing price of the Common Stock as
reported by Bloomberg, L.P. on the Principal Market for the immediately
preceding five trading days is greater than or equal to 150% of the Exercise
Price (as defined in the Warrant).

 

16.           Power of Attorney.  Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company’s attorney, with power
to:  (i) endorse such Company’s name on
any checks, notes, acceptances, money orders, drafts or other forms of payment
or security that may come into Laurus’ possession; (ii) sign such Company’s
name on any invoice or bill of lading relating to any Accounts, drafts against
Account Debtors, schedules and assignments of Accounts, notices of assignment,
financing statements and other public records, verifications of Account and
notices to or from Account Debtors; (iii) verify the validity, amount or any
other matter relating to any Account by mail, telephone, telegraph or otherwise
with Account Debtors; (iv) do all things necessary to carry out this Agreement,
any Ancillary Agreement and all related documents; and (v) on or after the
occurrence and during the continuation of an Event of Default, notify the post
office authorities to change the address for delivery of such Company’s mail to
an address designated by Laurus, and to receive, open and dispose of all mail
addressed to such Company.  Each Company
hereby ratifies and approves all acts of the attorney.  Neither Laurus, nor the attorney will be
liable for any acts or omissions or for any error of judgment or mistake of
fact or law, except for gross negligence or willful misconduct.  This power, being coupled with an interest,
is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.

 

17.           Term of Agreement.  Laurus’ agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term.  At
Laurus’ election following the occurrence of an Event of Default, Laurus may
terminate this Agreement.  The
termination of the Agreement shall not affect any of Laurus’ rights hereunder
or any Ancillary Agreement and the provisions hereof and thereof shall continue
to be fully operative until all transactions entered into, rights or interests
created and the Obligations have been irrevocably disposed of, concluded or
liquidated.  Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable

 

31

 

payment to it of all Obligations if each Company shall have (i)
provided Laurus with an executed release of any and all claims which such
Company may have or thereafter have under this Agreement and all Ancillary
Agreements and (ii) paid to Laurus an early payment fee in an amount equal to
(1) four percent (4%) of the Total Investment Amount if such payment occurs
prior to the first anniversary of the Closing Date and (2) three percent (3%)
of the Total Investment Amount if such termination occurs thereafter during the
Term; such fee being intended to compensate Laurus for its costs and expenses
incurred in initially approving this Agreement or extending same. Such early
payment fee shall be due and payable jointly and severally by the Companies to
Laurus upon termination by acceleration of this Agreement by Laurus due to the
occurrence and continuance of an Event of Default.

 

18.           Termination
of Lien.  The Liens and rights
granted to Laurus hereunder and any Ancillary Agreements and the financing
statements filed in connection herewith or therewith shall continue in full
force and effect, notwithstanding the termination of this Agreement or the fact
that any Company’s account may from time to time be temporarily in a zero or
credit position, until all of the Obligations have been indefeasibly paid or performed
in full after the termination of this Agreement.  Laurus shall not be required to send
termination statements to any Company, or to file them with any filing office,
unless and until this Agreement and the Ancillary Agreements shall have been
terminated in accordance with their terms and all Obligations indefeasibly paid
in full in immediately available funds.

 

19.           Events
of Default.  The occurrence of any of
the following shall constitute an “Event of Default”:

 

(a)           failure to
make payment of any of the Obligations when required hereunder, and, in any
such case, such failure shall continue for a period of three (3) days
following the date upon which any such payment was due;

 

(b)           failure by
any Company or any of its Subsidiaries to pay any taxes when due unless such
taxes are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been provided on such Company’s and/or
such Subsidiary’s books;

 

(c)           failure to
perform under, and/or committing any breach of, in any material respect, this
Agreement or any covenant contained herein, which failure or breach shall
continue without remedy for a period of fifteen (15) days after the occurrence
thereof;

 

(d)           any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should prove to be false or misleading
in any material respect on the date as of which made or deemed made;

 

(e)           the
occurrence of any default (or similar term) in the observance or performance of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries (including, without
limitation, the indebtedness evidenced by the Subordinated Debt Documentation)
beyond the period of grace (if

 

32

 

any), the effect of which default is to cause, or permit the holder or
holders of such indebtedness or beneficiary or beneficiaries of such contingent
obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;

 

(f)            attachments
or levies in excess of $100,000 in the aggregate are made upon any Company’s
assets or a judgment is rendered against any Company’s property involving a
liability of more than $100,000 which shall not have been vacated, discharged,
stayed or bonded within thirty (30) days from the entry thereof;

 

(g)           any change
in any Company’s or any of its Subsidiary’s condition or affairs (financial or
otherwise) which in Laurus’ reasonable, good faith opinion, could reasonably be
expected to have a Material Adverse Effect;

 

(h)           any Lien
created hereunder or under any Ancillary Agreement for any reason ceases to be
or is not a valid and perfected Lien having a first priority interest;

 

(i)            any
Company or any of its Subsidiaries shall (i) apply for, consent to or suffer
to exist the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now
or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
a petition seeking to take advantage of any other law providing for the relief
of debtors, (vi) acquiesce to without challenge within ten (10) days
of the filing thereof, or failure to have dismissed within thirty (30) days,
any petition filed against it in any involuntary case under such bankruptcy
laws, or (vii) take any action for the purpose of effecting any of the
foregoing;

 

(j)            any
Company or any of its Subsidiaries shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;

 

(k)           any
Company or any of its Subsidiaries directly or indirectly sells, assigns,
transfers, conveys, or suffers or permits to occur any sale, assignment,
transfer or conveyance of any assets of such Company or any interest therein,
except as permitted herein;

 

(l)            any “Person”
or “group” (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof), other than Laurus, is or
becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5
under the Exchange Act), directly or indirectly, of 35% or more on a fully
diluted basis of the then outstanding voting equity interest of any
Company,  (ii) the Board of
Directors of the Parent shall cease to consist of a majority of the Board of
Directors of the Parent on the date hereof (or directors appointed by a
majority of the board of directors in effect immediately prior to such
appointment) or (iii) the Parent or any of its Subsidiaries merges or
consolidates with, or sells all or substantially all of its assets to, any
other person or entity;

 

(m)          the
indictment or threatened indictment of any Company or any of its Subsidiaries
or any executive officer of any Company or any of its Subsidiaries under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceeding against any Company or any of its Subsidiaries or any
executive officer of any Company or any

 

33

 

of its Subsidiaries pursuant to which statute or proceeding penalties
or remedies sought or available include forfeiture of any of the property of
any Company or any of its Subsidiaries;

 

(n)           an Event
of Default (or similar term) shall occur under and as defined in any Note or in
any other Ancillary Agreement;

 

(o)           any
Company or any of its Subsidiaries shall breach any term or provision of any
Ancillary Agreement to which it is a party, in any material respect which
breach is not cured within any applicable cure or grace period provided in
respect thereof (if any);

 

(p)           any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under this Agreement or any Ancillary Agreement,
or any proceeding shall be brought to challenge the validity, binding effect of
any Ancillary Agreement or any Ancillary Agreement ceases to be a valid,
binding and enforceable obligation of such Company or any of its Subsidiaries
(to the extent such Persons are a party thereto);

 

(q)           an SEC
stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive days or five (5) days
during a period of ten (10) consecutive days, excluding in all cases a
suspension of all trading on a Principal Market, provided that the Parent shall
not have been able to cure such trading suspension within thirty (30) days of
the notice thereof or list the Common Stock on another Principal Market within
sixty (60) days of such notice; or

 

(r)            The
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days or any Company is
required to issue a replacement Note to Laurus and such Company shall fail to
deliver such replacement Note within seven (7) Business Days.

 

[(s)          any
Company, or any of its Subsidiaries shall take or participate in any action
which would be prohibited under the provisions of any of the Subordinated Debt
Documentation or make any payment on the indebtedness evidenced by the
Subordinated Debt Documentation to a Person that was not entitled to receive
such payments under the subordination provisions of applicable Subordinated
Debt Documentation.]

 

20.           Remedies. 
Following the occurrence of an Event of Default, Laurus shall have the
right to demand repayment in full of all Obligations, whether or not otherwise
due.  Until all Obligations have been
fully and indefeasibly satisfied, Laurus shall retain its Lien in all
Collateral.  Laurus shall have, in
addition to all other rights provided herein and in each Ancillary Agreement,
the rights and remedies of a secured party under the UCC, and under other
applicable law, all other legal and equitable rights to which Laurus may be
entitled, including the right to take immediate possession of the Collateral,
to require each Company to assemble the Collateral, at Companies’ joint and
several expense, and to make it available to Laurus at a place designated by
Laurus which is reasonably convenient to both parties and to enter any of the
premises of any Company or wherever the Collateral shall be located, with or
without force or process of law, and to keep and store the same on said
premises until sold (and if said premises be the property of any Company, such
Company agrees not to charge Laurus for storage thereof),

 

34

 

and the right to apply
for the appointment of a receiver for such Company’s property.  Further, Laurus may, at any time or times
after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Laurus, in Laurus’ sole discretion,
deems advisable or Laurus may otherwise recover upon the Collateral in any
commercially reasonable manner as Laurus, in its sole discretion, deems
advisable.  The requirement of reasonable
notice shall be met if such notice is mailed postage prepaid to Company Agent
at Company Agent’s address as shown in Laurus’ records, at least ten (10) days
before the time of the event of which notice is being given.  Laurus may be the purchaser at any sale, if
it is public.  In connection with the
exercise of the foregoing remedies, Laurus is granted permission to use all of
each Company’s Intellectual Property. 
The proceeds of sale shall be applied first to all costs and expenses of
sale, including attorneys’ fees, and second to the payment (in whatever order
Laurus elects) of all Obligations.  After
the indefeasible payment and satisfaction in full of all of the Obligations,
and after the payment by Laurus of any other amount required by any provision
of law, including Section 9-608(a)(1) of the UCC (but only after
Laurus has received what Laurus considers reasonable proof of a subordinate
party’s security interest), the surplus, if any, shall be paid to Company Agent
(for the benefit of the applicable Companies) or its representatives or to
whosoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct.  The
Companies shall remain jointly and severally liable to Laurus for any
deficiency.  In addition, the Companies
shall jointly and severally pay Laurus a liquidation fee (“Liquidation Fee”)
in the amount of five percent (5%) of the actual amount collected in respect of
each Account outstanding at any time during a Liquidation Period”.  For purposes hereof, “Liquidation Period”
means a period:  (i) beginning on
the earliest date of (x) an event referred to in Section 19(i) or
19(j), or (y) the cessation of any Company’s business; and (ii) ending on
the date on which Laurus has actually received all Obligations due and owing it
under this Agreement and the Ancillary Agreements.  The Liquidation Fee shall be paid on the date
on which Laurus collects the applicable Account by deduction from the proceeds
thereof.  Each Company and Laurus acknowledge
that the actual damages that would be incurred by Laurus after the occurrence
of an Event of Default would be difficult to quantify and that such Company and
Laurus have agreed that the fees and obligations set forth in this Section and
in this Agreement would constitute fair and appropriate liquidated damages in
the event of any such termination.  The
parties hereto each hereby agree that the exercise by any party hereto of any
right granted to it or the exercise by any party hereto of any remedy available
to it (including, without limitation, the issuance of a notice of redemption, a
borrowing request and/or a notice of default), in each case, hereunder or under
any Ancillary Agreement which has been publicly filed with the SEC shall not
constitute confidential information and no party shall have any duty to the
other party to maintain such information as confidential, except for the
portions of such publicly filed documents that are subject to confidential
treatment request made by the Companies to the SEC.

 

21.           Waivers.  To
the full extent permitted by applicable law, each Company hereby waives (a) presentment,
demand and protest, and notice of presentment, dishonor, intent to accelerate,
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all of this Agreement and the
Ancillary Agreements or any other notes, commercial paper, Accounts, contracts,
Documents, Instruments, Chattel Paper and guaranties at any time held by Laurus
on which such Company may in any way be liable, and hereby ratifies and
confirms whatever Laurus may do in this regard; (b) all rights to notice

 

35

 

and a hearing prior to
Laurus’ taking possession or control of, or to Laurus’ replevy, attachment or
levy upon, any Collateral or any bond or security that might be required by any
court prior to allowing Laurus to exercise any of its remedies; and (c) the
benefit of all valuation, appraisal and exemption laws.  Each Company acknowledges that it has been
advised by counsel of its choices and decisions with respect to this Agreement,
the Ancillary Agreements and the transactions evidenced hereby and thereby.

 

22.           Expenses.  The
Companies shall jointly and severally pay all of Laurus’ out-of-pocket costs
and expenses, including reasonable fees and disbursements of in-house or
outside counsel and appraisers, in connection with the preparation, execution
and delivery of this Agreement and the Ancillary Agreements, and in connection
with the prosecution or defense of any action, contest, dispute, suit or proceeding
concerning any matter in any way arising out of, related to or connected with
this Agreement or any Ancillary Agreement. 
The Companies shall also jointly and severally pay all of Laurus’
reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the
preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions contemplated
by this Agreement or the Ancillary Agreements, (b) Laurus’ obtaining
performance of the Obligations under this Agreement and any Ancillary
Agreements, including, but not limited to, the enforcement or defense of Laurus’
security interests, assignments of rights and Liens hereunder as valid
perfected security interests, (c) any attempt to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any Collateral, (d) any
appraisals or re-appraisals of any property (real or personal) pledged to
Laurus by any Company or any of its Subsidiaries as Collateral for, or any
other Person as security for, the Obligations hereunder and (e) any
consultations in connection with any of the foregoing.  The Companies shall also jointly and
severally pay Laurus’ customary bank charges for all bank services (including
wire transfers) performed or caused to be performed by Laurus for any Company
or any of its Subsidiaries at any Company’s or such Subsidiary’s request or in
connection with any Company’s loan account with Laurus.  All such costs and expenses together with all
filing, recording and search fees, taxes and interest payable by the Companies
to Laurus shall be payable on demand and shall be secured by the Collateral.  If any tax by any Governmental Authority is
or may be imposed on or as a result of any transaction between any Company
and/or any Subsidiary thereof, on the one hand, and Laurus on the other hand,
which Laurus is or may be required to withhold or pay, the Companies hereby
jointly and severally indemnifies and holds Laurus harmless in respect of such
taxes, and the Companies will repay to Laurus the amount of any such taxes
which shall be charged to the Companies’ account; and until the Companies shall
furnish Laurus with indemnity therefor (or supply Laurus with evidence
satisfactory to it that due provision for the payment thereof has been made),
Laurus may hold without interest any balance standing to each Company’s credit
and Laurus shall retain its Liens in any and all Collateral.

 

23.           Assignment
By Laurus.  Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of any Company and any such transferee shall succeed
to all of Laurus’ rights with respect thereto. 
Upon such transfer, Laurus shall be released from all responsibility for
the Collateral to the extent same is assigned to any transferee.  Laurus may from time to time sell or
otherwise grant participations in any of the Obligations and the holder of any
such participation shall, subject to the terms of any agreement between Laurus
and such holder, be entitled to the same benefits as

 

36

 

Laurus with respect to
any security for the Obligations in which such holder is a participant.  Each Company agrees that each such holder may
exercise any and all rights of banker’s lien, set-off and counterclaim with
respect to its participation in the Obligations as fully as though such Company
were directly indebted to such holder in the amount of such participation.

 

24.           No
Waiver; Cumulative Remedies.  Failure by Laurus to exercise any right,
remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between or among any Company
and Laurus or delay by Laurus in exercising the same, will not operate as a
waiver; no waiver by Laurus will be effective unless it is in writing and then
only to the extent specifically stated. 
Laurus’ rights and remedies under this Agreement and the Ancillary
Agreements will be cumulative and not exclusive of any other right or remedy
which Laurus may have.

 

25.           Application
of Payments.  Each Company irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Laurus from or on such Company’s behalf and each Company hereby
irrevocably agrees that Laurus shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus’ books and records.

 

26.           Indemnity. 
Each Company hereby jointly and severally indemnifies and holds Laurus,
and its respective affiliates, employees, attorneys and agents (each, an “Indemnified
Person”), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys’ fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which
may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated under
this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary
Agreements or any other documents or transactions contemplated by or referred
to herein or therein and any actions or failures to act with respect to any of
the foregoing, except to the extent that any such indemnified liability is
finally determined by a court of competent jurisdiction to have resulted solely
from such Indemnified Person’s gross negligence or willful misconduct. NO
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY
OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY
OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A
RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS
AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION
CONTEMPLATED HEREUNDER OR THEREUNDER.

 

27.           Revival.  The
Companies further agree that to the extent any Company makes a payment or
payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under
any bankruptcy act, state or federal law,

 

37

 

common law or equitable
cause, then, to the extent of such payment or repayment, the obligation or part
thereof intended to be satisfied shall be revived and continued in full force
and effect as if said payment had not been made.

 

28.           Borrowing
Agency Provisions.

 

(a)           Each Company
hereby irrevocably designates Company Agent to be its attorney and agent and in
such capacity to borrow, sign and endorse notes, and execute and deliver all
instruments, documents, writings and further assurances now or hereafter
required hereunder, on behalf of such Company, and hereby authorizes Laurus to
pay over or credit all loan proceeds hereunder in accordance with the request
of Company Agent.

 

(b)           The
handling of this credit facility as a co-borrowing facility with a borrowing
agent in the manner set forth in this Agreement is solely as an accommodation
to the Companies and at their request. 
Laurus shall not incur any liability to any Company as a result
thereof.  To induce Laurus to do so and
in consideration thereof, each Company hereby indemnifies Laurus and holds
Laurus harmless from and against any and all liabilities, expenses, losses,
damages and claims of damage or injury asserted against Laurus by any Person
arising from or incurred by reason of the handling of the financing arrangements
of the Companies as provided herein, reliance by Laurus on any request or
instruction from Company Agent or any other action taken by Laurus with respect
to this Paragraph 28.

 

(c)           All
Obligations shall be joint and several, and the Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of the Companies shall in no way be
affected by any extensions, renewals and forbearance granted by Laurus to any
Company, failure of Laurus to give any Company notice of borrowing or any other
notice, any failure of Laurus to pursue to preserve its rights against any
Company, the release by Laurus of any Collateral now or thereafter acquired
from any Company, and such agreement by any Company to pay upon any notice
issued pursuant thereto is unconditional and unaffected by prior recourse by
Laurus to any Company or any Collateral for such Company’s Obligations or the
lack thereof.

 

(d)           Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company may
now or hereafter have against the other or other Person directly or
contingently liable for the Obligations, or against or with respect to any other’s
property (including, without limitation, any property which is Collateral for
the Obligations), arising from the existence or performance of this Agreement,
until all Obligations have been indefeasibly paid in full and this Agreement
has been irrevocably terminated.

 

(e)           Each
Company represents and warrants to Laurus that (i) Companies have one or
more common shareholders, directors and officers, (ii) the businesses and
corporate activities of Companies are closely related to, and substantially
benefit, the business and corporate activities of Companies, (iii) the
financial and other operations of Companies are performed on a combined basis
as if Companies constituted a consolidated corporate group, (iv) Companies
will receive a substantial economic benefit from entering into this Agreement
and will receive a substantial economic benefit from the application of each
Loan hereunder, in each

 

38

 

case, whether or not such amount is used directly by any Company and (v) all
requests for Loans hereunder by the Company Agent are for the exclusive and
indivisible benefit of the Companies as though, for purposes of this Agreement,
the Companies constituted a single entity.

 

29.           Notices.  Any
notice or request hereunder may be given to any Company, Company Agent or
Laurus at the respective addresses set forth below or as may hereafter be
specified in a notice designated as a change of address under this
Section.  Any notice or request hereunder
shall be given by registered or certified mail, return receipt requested, hand
delivery, overnight mail or telecopy (confirmed by mail).  Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after the date
when deposited in the mail or with the overnight mail carrier, and, in the case
of a telecopy, when confirmed.

 

Notices shall be provided as follows:

 

	
  If to Laurus:

  	
  Laurus Master Fund,
  Ltd.

  
	
   

  	
  c/o Laurus Capital
  Management, LLC

  
	
   

  	
  825 Third Avenue, 14th
  Fl.

  
	
   

  	
  New York, New York
  10022

  
	
   

  	
  Attention:

  	
  John E.
  Tucker, Esq.

  
	
   

  	
  Telephone:

  	
  (212) 541-4434

  
	
   

  	
  Telecopier:

  	
  (212) 541-5800

  
	
   

  	
   

  
	
  If to any Company,

  	
   

  
	
  or Company Agent:

  	
  Small World
  Kids, Inc.

  
	
   

  	
  5711 Buckingham Parkway

  
	
   

  	
  Culver City, CA 90230

  
	
   

  	
  Attention:

  	
  Bob Rankin-CFO

  	
   

  
	
   

  	
  Telephone:

  	
  310-645-9680

  	
   

  
	
   

  	
  Facsimile:

  	
  310-410-9606

  	
   

  
	
   

  	
   

  
	
  With a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Attention:

  	
   

  	
   

  
	
   

  	
  Telephone:

  	
   

  	
   

  
	
   

  	
  Facsimile:

  	
   

  	
   

  
					

 

or such other address as may be designated in writing
hereafter in accordance with this Section 29 by such Person.

 

30.           Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND

 

39

 

PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.

 

(b)           EACH COMPANY
HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR
AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND
LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY
OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY
ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
LAURUS.  EACH COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO
COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL
RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

 

(c)           THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE
LAWS.  THEREFORE, TO ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT,
OR OTHERWISE BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.

 

31.           Limitation
of Liability.  Each Company acknowledges and understands
that in order to assure repayment of the Obligations hereunder Laurus may be
required to exercise any and all of Laurus’ rights and remedies hereunder and
agrees that, except as limited by applicable law, neither Laurus nor any of
Laurus’ agents shall be liable for acts taken or omissions made in connection
herewith or therewith except for actual bad faith.

 

40

 

32.           Entire
Understanding; Maximum Interest.  This Agreement and the Ancillary Agreements
contain the entire understanding among each Company and Laurus as to the
subject matter hereof and thereof and any promises, representations, warranties
or guarantees not herein contained shall have no force and effect unless in
writing, signed by each Company’s and Laurus’ respective officers.  Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. 
Nothing contained in this Agreement, any Ancillary Agreement or in any
document referred to herein or delivered in connection herewith shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum rate permitted by applicable law.  In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Companies to Laurus and thus refunded to
the Companies.

 

33.           Severability. 
Wherever possible each provision of this Agreement or the Ancillary
Agreements shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement or the Ancillary
Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions thereof.

 

34.           Survival.  The representations, warranties, covenants
and agreements made herein shall survive any investigation made by Laurus and
the closing of the transactions contemplated hereby to the extent provided
therein.  All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Companies pursuant hereto in connection with the transactions
contemplated herebly shall be deemed to be representations and warranties by
the Companies hereunder solely as of the date of such certificate or
instrument.  All indemnities set forth
herein shall survive the execution, delivery and termination of this Agreement
and the Ancillary Agreements and the making and repaying of the Obligations.

 

35.           Captions.  All
captions are and shall be without substantive meaning or content of any kind
whatsoever.

 

36.           Counterparts;
Telecopier Signatures.  This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same agreement.  Any signature delivered by a party via
telecopier transmission shall be deemed to be any original signature hereto.

 

37.           Construction.  The
parties acknowledge that each party and its counsel have reviewed this
Agreement and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement or any amendments, schedules or
exhibits thereto.

 

38.           Publicity. 
Each Company hereby authorizes Laurus to make appropriate announcements
of the financial arrangement entered into by and among each Company and

 

41

 

Laurus, including,
without limitation, announcements which are commonly known as tombstones, in
such publications and to such selected parties as Laurus shall in its sole and
absolute discretion deem appropriate, or as required by applicable law.

 

39.           Joinder.  It
is understood and agreed that any Person that desires to become a Company
hereunder, or is required to execute a counterpart of this Agreement after the
date hereof pursuant to the requirements of this Agreement or any Ancillary
Agreement, shall become a Company hereunder by (a) executing a Joinder
Agreement in form and substance satisfactory to Laurus, (b) delivering
supplements to such exhibits and annexes to this Agreement and the Ancillary
Agreements as Laurus shall reasonably request and (c) taking all actions
as specified in this Agreement as would have been taken by such Company had it
been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.

 

40.           Legends.  The
Securities shall bear legends as follows;

 

(a)           The Notes
shall bear substantially the following legend:

 

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES
LAWS.  THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(b)           Any shares
of Common Stock issued pursuant to exercise of the Warrants, shall bear a
legend which shall be in substantially the following form until such shares are
covered by an effective registration statement filed with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS.  THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

42

 

(c)           The
Warrants shall bear substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.  THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

[Balance of page intentionally left blank;
signature page follows.]

 

43

 

IN WITNESS WHEREOF, the parties have executed this
Security Agreement as of the date first written above.

 

 

	
   

  	
  SMALL WORLD KIDS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

 

	
   

  	
  SMALL WORLD TOYS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

 

	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

44

 

Annex A - Definitions

 

“Account Debtor” means any Person who is or may
be obligated with respect to, or on account of, an Account.

 

“Accountants” has the meaning given to such
term in Section 11(a).

 

“Accounts” means all “accounts”, as such term
is defined in the UCC, now owned or hereafter acquired by any Person,
including:  (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper or Instruments) (including
any such obligations that may be characterized as an account or contract right
under the UCC); (b) all of such Person’s rights in, to and under all
purchase orders or receipts for goods or services; (c) all of such Person’s
rights to any goods represented by any of the foregoing (including unpaid
sellers’ rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (d) all
rights to payment due to such Person for Goods or other property sold, leased,
licensed, assigned or otherwise disposed of, for a policy of insurance issued
or to be issued, for a secondary obligation incurred or to be incurred, for
energy provided or to be provided, for the use or hire of a vessel under a
charter or other contract, arising out of the use of a credit card or charge
card, or for services rendered or to be rendered by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person); and (e) all collateral security of any kind
given by any Account Debtor or any other Person with respect to any of the
foregoing.

 

“Accounts Availability” means up to ninety percent
(90%) of the net face amount of Eligible Accounts.

 

“Affiliate” means, with respect to any Person, (a) any
other Person (other than a Subsidiary) which, directly or indirectly, is in
control of, is controlled by, or is under common control with such Person or (b) any
other Person who is a director or officer (i) of such Person, (ii) of
any Subsidiary of such Person or (iii) of any Person described in clause (a) above.  For the purposes of this definition, control
of a Person shall mean the power (direct or indirect) to direct or cause the
direction of the management and policies of such Person whether by contract or
otherwise.

 

“Ancillary Agreements” means the Notes, the
Warrants, the Options, the Registration Rights Agreements, the Subordination
Agreements, each Security Document and all other agreements, instruments,
documents, mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, trust agreements and guarantees
whether heretofore, concurrently, or hereafter executed by or on behalf of any
Company, any of its Subsidiaries or any other Person or delivered to Laurus,
relating to this Agreement or to the transactions contemplated by this
Agreement or otherwise relating to the relationship between or among any
Company and Laurus, as each of the same may be amended, supplemented, restated
or otherwise modified from time to time.

 

“Balance Sheet Date” has the meaning given such
term in Section 12(f)(ii).

 

 

“Books and Records” means all books, records,
board minutes, contracts, licenses, insurance policies, environmental audits,
business plans, files, computer files, computer discs and other data and
software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and
any and all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.

 

“Business Day” means a day on which Laurus is
open for business and that is not a Saturday, a Sunday or other day on which
banks are required or permitted to be closed in the State of New York.

 

“Capital Availability Amount” means
$16,500,000.

 

“Charter” has the meaning given such term in Section 12(c)(iv).

 

“Chattel Paper” means all “chattel paper,” as
such term is defined in the UCC, including electronic chattel paper, now owned
or hereafter acquired by any Person.

 

“Closing Date” means the date on which any
Company shall first receive proceeds of the initial Loans or the date hereof,
if no Loan is made under the facility on the date hereof.

 

“Code” has the meaning given such term in Section 15(i).

 

“Collateral” means all of each Company’s
property and assets, whether real or personal, tangible or intangible, and
whether now owned or hereafter acquired, or in which it now has or at any time
in the future may acquire any right, title or interests including all of the
following property in which it now has or at any time in the future may acquire
any right, title or interest:

 

(a)           all
Inventory;

 

(b)           all
Equipment;

 

(c)           all
Fixtures;

 

(d)           all
Goods;

 

(e)           all
General Intangibles;

 

(f)            all
Accounts;

 

(g)           all
Deposit Accounts, other bank accounts and all funds on deposit therein;

 

(h)           all
Investment Property;

 

(i)            all
Stock;

 

(j)            all
Chattel Paper;

 

2

 

(k)           all
Letter-of-Credit Rights;

 

(l)            all
Instruments;

 

(m)          all
commercial tort claims set forth on Schedule 1(A);

 

(n)           all
Books and Records;

 

(o)           all
Intellectual Property (including, without limitation, all Patents and
Trademarks);

 

(p)           all
Supporting Obligations including letters of credit and guarantees issued in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;

 

(q)           (i) all
money, cash and cash equivalents and (ii) all cash held as cash collateral
to the extent not otherwise constituting Collateral, all other cash or property
at any time on deposit with or held by Laurus for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and

 

(r)            all
products and Proceeds of all or any of the foregoing, tort claims and all
claims and other rights to payment including (i) insurance claims against
third parties for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under leases, rentals
and hires of any or all of the foregoing and Proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.

 

“Common Stock” means the shares of stock
representing the Parent’s common equity interests.

 

“Company Agent” means Small World Kids, Inc.,
a Nevada corporation.

 

“Consigned Inventory” shall mean Inventory of a
Company that is in the possession of another Person on a consignment, sale or
return, or other basis that does not constitute a final sale and acceptance of
such Inventory.

 

“Contract Rate” has the meaning given such term
in the respective Note. “Default” means any act or event that, with the
giving of notice or passage of time or both, would constitute an Event of
Default.

 

“Deposit Accounts” means all “deposit accounts”
as such term is defined in the UCC, now or hereafter held in the name of any
Person, including, without limitation, the Lockboxes.

 

“Disclosure Controls” has the meaning given
such term in Section 12(f)(iv).

 

“Documents” means all “documents”, as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all bills of lading, dock warrants, dock receipts, warehouse
receipts, and other documents of title, whether negotiable or non-negotiable.

 

3

 

“Eligible
Accounts” means and includes with respect to each Company, each Account of
such Company arising in the Ordinary Course of Business and which Laurus, in
its sole judgment, shall deem to be an Eligible Account, based on such
considerations as Laurus may from time to time deem appropriate.  An Account shall not be deemed eligible unless
such Account is subject to Laurus’ first priority perfected security interest
and no other Lien (other than Permitted Liens), and is evidenced by an invoice
or other documentary evidence satisfactory to Laurus.  In addition, no Account shall be an Eligible
Account if: (a)   it arises out of a sale made by such
Company to an Affiliate of such Company or to a Person controlled by an
Affiliate of such Company; (b)  it
is due or unpaid more than sixty (60) days after the original due date or more
than 360 days after the original invoice date; (c)  twenty-five percent (25%) or more of the Account from the
respective Account Debtor are not deemed Eligible Accounts hereunder (such
percentage may, in Laurus’ good faith business judgment, be increased or
decreased from time to time); (d)   any covenant, representation or
warranty contained in this Agreement with respect to such Account has been
breached; (e)  the
respective Account Debtor shall (i) apply for, suffer, or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or call
a meeting of its creditors, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business, (iii) make a general assignment for the benefit of
creditors, (iv) commence a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a
bankrupt or insolvent, (vi) file a petition seeking to take advantage of
any other law providing for the relief of debtors, (vii) acquiesce to, or
fail to have dismissed, any petition which is filed against it in any
involuntary case under such bankruptcy laws, or (viii) take any action for
the purpose of effecting any of the foregoing; (f)   the sale is to an Account
Debtor outside the continental United States of America, Alaska, or Hawaii,
unless the sale is on letter of credit, guaranty or acceptance terms, in each
case acceptable to Laurus in its sole discretion; (g)  the sale to the Account Debtor is on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment
or any other repurchase or return basis or is evidenced by chattel paper;  (h)  Laurus believes, in its sole judgment, that collection of such
Account is insecure or that such Account may not be paid by reason of the
Account Debtor’s financial inability to pay; (i)  the Account Debtor is the United States of America, any state or
any department, agency or instrumentality of any of them, unless such Company
assigns its right to payment of such Account to Laurus pursuant to the
Assignment of Claims Act of 1940, as amended (31 U.S.C. subsection 3727 et
seq. and 41 U.S.C. subsection 15 et seq.) or has otherwise complied with
other applicable statutes or ordinances; 
(j)  the goods giving rise to such Account
have not been delivered to and accepted by the Account Debtor or the services
giving rise to such Account have not been performed by such Company and
accepted by the Account Debtor or the Account otherwise does not represent a
final sale; (k)  the Accounts of the Account Debtor
exceed a credit limit determined by Laurus, in its good faith business
judgment, to the extent such Account exceeds such limit; (l)  the
Account is subject to any offset, deduction, defense, dispute, or counterclaim,
the Account Debtor is also a creditor or supplier of such Company or the
Account is contingent in any respect or for any reason; (m)  such
Company has made any agreement with any Account Debtor for any deduction
therefrom, except for discounts or allowances made in the Ordinary Course of
Business for prompt payment, all of which discounts or allowances are reflected
in the calculation of the face value of each respective invoice related
thereto; (n)  any return, rejection or repossession
of the merchandise has occurred or the rendition of services has been disputed;
(o) 
such Account is not payable to such Company;

 

4

 

or (p)  such
Account is not otherwise satisfactory to Laurus as determined by Laurusin its
good faith business judgment.

 

In addition to the
foregoing, to the extent (i) Accounts with standard terms (N30, N60 and
N90) owing from an Account Debtor exceed 15% of total Accounts, and (ii) Accounts
with nonstandard terms (other than N30, N60 and N90) owing from an Account Debtor
exceed 10% of total Accounts (the limits in “i” and “ii” are collectively
referred to as the “Concentration Limits”); such excesses of the Accounts shall
not be deemed Eligible Accounts. The Concentration Limits may be increased or
decreased by Laurus at any time and from time to time in the exercise of its
good faith business judgment.  In the
event any Company requests that Laurus include within Eligible Accounts certain
Accounts of one or more of such Company’s acquisition targets, Laurus shall at
the time of such request consider such inclusion, but any such inclusion shall
be at the sole option of Laurus and shall at all times be subject to the
execution and delivery to Laurus of all such documentation (including, without
limitation, guaranty and security documentation) as Laurus may require in its
sole discretion.

 

“Eligible Inventory” means and includes
finished goods Inventory (excluding raw materials and work in process) valued
at the lower of cost or market value, determined on a weighted-average basis,
which is not, in Laurus’ opinion, obsolete, slow moving or unmerchantable and
which Laurus, in its sole discretion, shall not deem ineligible Inventory,
based on such considerations as Laurus may from time to time deem appropriate
including whether the Inventory is subject to a perfected, first priority
security interest in favor of Laurus and no other Lien (other than a Permitted
Liens).  In addition, Inventory shall not
be Eligible Inventory if it (i) does not conform to all standards imposed
by any Governmental Authority which has regulatory authority over such goods or
the use or sale thereof, (ii) is in transit, except as otherwise specified
below, (iii) is located outside the continental United States or at a
location that is not otherwise in compliance with this Agreement, except as
otherwise specified below with respect to certain in-transit Inventory, (iv) constitutes
Consigned Inventory, (v) is the subject of an Intellectual Property Claim;
(vi) is subject to a License Agreement or other agreement that limits,
conditions or restricts a Company’s or Laurus’ right to sell or otherwise
dispose of such Inventory, unless Laurus is a party to a Licensor/Laurus
Agreement with the Licensor under such License Agreement; or (vii) or is
situated at a location not owned by a Company unless the owner or occupier of
such location has executed in favor of Laurus a Lien Waiver Agreement.  Eligible Inventory shall include Inventory
in-transit to a Company for which title has passed to such Company, which is
insured to the full value thereof, for which Laurus shall have in its
possession (a) all negotiable bills of lading properly endorsed and (b) all
non-negotiable bills of lading issued in Laurus’ name, and for which all steps
shall have been taken to perfect and protect Laurus’ interest therein.  Eligible Inventory shall not include
Inventory drop-shipped to a Company’s customers.  Without limiting the generality of the
foregoing, Eligible Inventory shall not include consigned Inventory (as to
which a Company is consignor or consignee) or Restricted Licensed Inventory,
and not more than 5% of Eligible Inventory shall be Inventory located at Parent’s
location at 5711 Buckingham Parkway, Culver City, California 90230.

 

“Eligible Subsidiary” means each Subsidiary of
the Parent set forth on Exhibit A hereto, as the same may be
updated from time to time with Laurus’ written consent.

 

5

 

“Equipment” means all “equipment” as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including any and all machinery, apparatus, equipment, fittings,
furniture, Fixtures, motor vehicles and other tangible personal property (other
than Inventory) of every kind and description that may be now or hereafter used
in such Person’s operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions thereto
and substitute ons and replacements therefor.

 

“ERISA” has the meaning given such term in Section 12(bb).

 

“Event of Default” means the occurrence of any
of the events set forth in Section 19.

 

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

 

“Exchange Act Filings” means the Parent’s
filings under the Exchange Act made prior to the date of this Agreement.

 

“Existing Indebtedness” means all “Obligations”
under, and as defined in, the Revolving Credit and Security Agreement, dated as
of December 15, 2004 between PNC Bank, National Association (as Lender and
Agent) and Small World Toys, a California corporation (as amended, modified or
supplemented from time to time, the “PNC Credit Agreement”), and the “Other
Documents” as defined in the PNC Credit Agreement.

 

“Financial Reporting Controls” has the meaning
given such term in Section 12(f)(v).

 

“Fixtures” means all “fixtures” as such term is
defined in the UCC, now owned or hereafter acquired by any Person.

 

“Formula Amount” has the meaning given such
term in Section 2(a)(i).

 

“GAAP” means generally accepted accounting
principles, practices and procedures in effect from time to time in the United
States of America.

 

“General Intangibles” means all “general
intangibles” as such term is defined in the UCC, now owned or hereafter
acquired by any Person including all right, title and interest that such Person
may now or hereafter have in or under any contract, all Payment Intangibles,
customer lists, Licenses, Intellectual Property, interests in partnerships,
joint ventures and other business associations, permits, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, Software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials, Books and Records, Goodwill (including the Goodwill associated with
any Intellectual Property), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss, and casualty, whether
covering personal property, real property, tangible rights or intangible
rights, all liability, life, key-person, and business interruption insurance,
and all unearned premiums), uncertificated securities, choses in action, deposit
accounts, rights to receive tax refunds and other payments, rights to received
dividends, distributions, cash,

 

6

 

Instruments and other
property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.

 

“Goods” means all “goods”, as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including embedded software to the extent included in “goods” as
defined in the UCC, manufactured homes, standing timber that is cut and removed
for sale and unborn young of animals.

 

“Goodwill” means all goodwill, trade secrets,
proprietary or confidential information, technical information, procedures,
formulae, quality control standards, designs, operating and training manuals,
customer lists, and distribution agreements now owned or hereafter acquired by
any Person.

 

“Governmental Authority” means any nation or
government, any state or other political subdivision thereof, and any agency,
department or other entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

 

“Instruments” means all “instruments”, as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located, including all certificated securities and all promissory
notes and other evidences of indebtedness, other than instruments that
constitute, or are a part of a group of writings that constitute, Chattel
Paper.

 

“Intellectual Property” means any and all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
Licenses, information and other proprietary rights and processes.

 

“Intellectual Property Claim” shall mean the assertion by any Person of a claim (whether asserted in writing, by action, suit or proceeding or otherwise) that a Company’s ownership, use, marketing, sale or distribution of any Inventory, Equipment, Intellectual Property or other property or asset is violative of any ownership of or right to use any Intellectual Property of such Person.
 

“Inventory” means all “inventory”, as such term
is defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all inventory, merchandise, goods and other personal property
that are held by or on behalf of such Person for sale or lease or are furnished
or are to be furnished under a contract of service or that constitute raw
materials, work in process, finished goods, returned goods, or materials or
supplies of any kind, nature or description used or consumed or to be used or
consumed in such Person’s business or in the processing, production, packaging,
promotion, delivery or shipping of the same, including all supplies and
embedded software.

 

“Inventory Availability” means up to the lesser of (a) 60% of the value of the Companies’ Eligible Inventory (calculated on the basis of the lower of cost or market, on a first-in first-out basis), (b) 85% of the appraised net orderly liquidation value of Companies’ Eligible Inventory (as evidenced by an Inventory appraisal satisfactory to Laurus in its good faith business judgment) or (c) $6,500,000 (provided that not more than $2,500,000 of said amount may be based upon the foregoing percentages of Eligible Inventory that is in-transit) in the aggregate at any one time.

 

7

 

“Investment Property” means all “investment
property”, as such term is defined in the UCC, now owned or hereafter acquired
by any Person, wherever located.

 

“ITU Marks” shall mean all pending trademark
applications shown in the attached Exhibit D-2 which were filed by
a Company or any of its Subsidiaries in the United States Patent and Trademark
Office based on its intent to use the corresponding mark, and any applications
which are hereafter filed by a Company or any of its Subsidiaries based on its
intent to use the corresponding mark.

 

“Letter-of-Credit Rights” means “letter-of-credit
rights” as such term is defined in the UCC, now owned or hereafter acquired by
any Person, including rights to payment or performance under a letter of
credit, whether or not such Person, as beneficiary, has demanded or is entitled
to demand payment or performance.

 

“License” means any rights under any written
agreement now or hereafter acquired by any Person to use any trademark,
trademark registration, copyright, copyright registration or invention for
which a patent is in existence or other license of rights or interests now held
or hereafter acquired by any Person.

 

“License Agreement” shall mean any agreement between a Company and a Licensor pursuant to which a Company is authorized to use any Intellectual Property in connection with the manufacturing, marketing, sale or other distribution of any Inventory of a Company or otherwise in connection with a Company’s business operations.
 
“Licensor” shall mean any Person from whom a Company obtains the right to use (whether on an exclusive or non-exclusive basis) any Intellectual Property in connection with a Company’s manufacture, marketing, sale or other distribution of any Inventory or otherwise in connection with a Company’s business operations.
 
“Licensor/Laurus Agreement” shall mean an agreement between Laurus and a Licensor, in form and content satisfactory to Laurus, by which Laurus is given the unqualified right, vis-a-vis such Licensor, to enforce laurus’ Liens with respect to and to dispose of any Company’s Inventory with the benefit of any Intellectual Property applicable thereto, irrespective of any Company’s default under any License Agreement with such Licensor.
 

“Lien” means any mortgage, security deed, deed
of trust, pledge, hypothecation, assignment, security interest, lien (whether
statutory or otherwise), charge, claim or encumbrance, or preference, priority
or other security agreement or preferential arrangement held or asserted in
respect of any asset of any kind or nature whatsoever including any conditional
sale or other title retention agreement, any lease having substantially the
same economic effect as any of the foregoing, and the filing of, or agreement
to give, any financing statement under the UCC or comparable law of any
jurisdiction.

 

“Lien Waiver Agreement” shall mean an agreement which is executed in favor of Laurus by a Person who owns or occupies premises at which any Collateral may be located from time to time and by which such Person shall waive any Lien that such Person may ever have with respect to any of the Collateral and shall authorize Laurus from time to time to enter upon the

 

8

 

premises to inspect or remove the Collateral from such premises or to use such premises to store or dispose of such Inventory.
 

“Loans” means the Revolving Loans and the Term
Loan and all other extensions of credit hereunder and under any Ancillary
Agreement.

 

“Lockboxes” has the meaning given such term in Section 8(a).

 

“Material Adverse Effect” means a material
adverse effect on (a) the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of any Company or
any of its Subsidiaries (taken individually and as a whole), (b) any
Company’s or any of its Subsidiary’s ability to pay or perform the Obligations
in accordance with the terms hereof or any Ancillary Agreement, (c) the
value of the Collateral, the Liens on the Collateral or the priority of any
such Lien or (d) the practical realization of the benefits of Laurus’
rights and remedies under this Agreement and the Ancillary Agreements.

 

 “NASD”
has the meaning given such term in Section 13(b).

 

“Notes” means the Secured Non-Convertible
Revolving Note and the Secured Non-Convertible Term Note made by Companies in
favor of Laurus in connection with the transactions contemplated hereby, as
each of the same may be amended, supplemented, restated and/or otherwise
modified from time to time.

 

“Obligations” means all Loans, all advances,
debts, liabilities, obligations, covenants and duties owing by each Company and
each of its Subsidiaries to Laurus (or any corporation that directly or indirectly
controls or is controlled by or is under common control with Laurus) of every
kind and description (whether or not evidenced by any note or other instrument
and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether
existing by operation of law or otherwise now existing or hereafter arising
including any debt, liability or obligation owing from any Company and/or each
of its Subsidiaries to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at
the then applicable rate provided in this Agreement after the maturity of the
Loans and interest accruing at the then applicable rate provided in this
Agreement after the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding, whether or not a claim
for post-filing or post-petition interest is allowed or allowable in such
proceeding), charges or any other payments each Company and each of its
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement, the Ancillary Agreements or otherwise, together with
all reasonable expenses and reasonable attorneys’ fees chargeable to the
Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in
connection therewith.

 

“Ordinary Course of Business” shall mean the ordinary course of the Companies’ collective business as conducted on the Closing Date.
 

“Patents” shall mean the registered patents and
pending applications shown in the attached Exhibit C, and those
patents which are hereafter adopted or acquired by a Company or any of its
Subsidiaries, and all right, title and interest therein and thereto, and all
registrations,

 

9

 

applications, and
recordings thereof, including, without limitation, applications, registrations
and recordings in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof, or any
foreign country, all whether now owned or hereafter acquired by a Company or
its Subsidiaries.

 

“Payment Intangibles” means all “payment
intangibles” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including, a General Intangible under which the Account
Debtor’s principal obligation is a monetary obligation.

 

“Permitted Liens” means (a) Liens of
carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred
in the ordinary course of business securing sums not overdue; (b) Liens
incurred in the ordinary course of business in connection with worker’s
compensation, unemployment insurance or other forms of governmental insurance
or benefits, relating to employees, securing sums (i) not overdue or (ii) being
diligently contested in good faith provided that adequate reserves with respect
thereto are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; (c) Liens in favor of Laurus; (d) Liens
for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; and which have no effect on the priority
of Liens in favor of Laurus or the value of the assets in which Laurus has a
Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the
extent permitted in this Agreement and (f) Liens specified on Schedule 2
hereto.

 

“Person” means any individual, sole
proprietorship, partnership, limited liability partnership, joint venture, trust,
unincorporated organization, association, corporation, limited liability
company, institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof), and shall
include such Person’s successors and assigns.

 

“Principal Market” means the NASD Over The
Counter Bulletin Board, NASDAQ Capital Market, NASDAQ National Market System,
American Stock Exchange or New York Stock Exchange (whichever of the foregoing
is at the time the principal trading exchange or market for the Common Stock).

 

“Proceeds” means “proceeds”, as such term is
defined in the UCC and, in any event, shall include:  (a) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to any Company or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to any Company from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of any Collateral by any governmental body, governmental
authority, bureau or agency (or any person acting under color of governmental
authority); (c) any claim of any Company against third parties (i) for
past, present or future infringement of any Intellectual Property or (ii) for
past, present or future infringement or dilution of any trademark or trademark
license or for injury to the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark License; (d) any
recoveries by any Company against third parties with respect to any litigation
or dispute concerning any Collateral, including claims arising out of the loss
or nonconformity of, interference with the use of, defects in, or infringement
of rights in,

 

10

 

or damage to, Collateral;
(e) all amounts collected on, or distributed on account of, other
Collateral, including dividends, interest, distributions and Instruments with
respect to Investment Property and pledged Stock; and (f) any and all
other amounts, rights to payment or other property acquired upon the sale,
lease, license, exchange or other disposition of Collateral and all rights
arising out of Collateral.

 

“Purchase Money Indebtedness” means (a) any
indebtedness incurred for the payment of all or any part of the purchase price
of any fixed asset, including indebtedness under capitalized leases, (b) any
indebtedness incurred for the sole purpose of financing or refinancing all or
any part of the purchase price of any fixed asset, and (c) any renewals,
extensions or refinancings thereof (but not any increases in the principal
amounts thereof outstanding at that time).

 

“Purchase Money Lien” means any Lien upon any
fixed assets that secures the Purchase Money Indebtedness related thereto but
only if such Lien shall at all times be confined solely to the asset the
purchase price of which was financed or refinanced through the incurrence of
the Purchase Money Indebtedness secured by such Lien and only if such Lien
secures only such Purchase Money Indebtedness.

 

“Registration Rights Agreements” means that
certain Registration Rights Agreement dated as of the Closing Date by and
between the Parent and Laurus and each other registration rights agreement by
and between the Parent and Laurus, as each of the same may be amended, modified
and supplemented from time to time.

 

“Restricted Licensed Inventory” shall mean Inventory that is subject to a license agreement or other arrangement or limitation that restricts the manner in which such Inventory may be sold, including, without limitation, any such agreement, arrangement, or limitation that by its terms would restrict Laurus’ ability to sell such Inventory pursuant to any enforcement of Laurus’ security interest.
 

“Revolving Loans” shall have the meaning given
such term in Section 2(a)(i).

 

 “SEC”
means the Securities and Exchange Commission.

 

“SEC Reports” has the meaning given such term
in Section 12(u).

 

“Secured Non-Convertible Revolving Note” means
that certain Secured Non-Convertible Revolving Note dated as of the Closing
Date made by the Companies in favor of Laurus in the original face amount of
Sixteen Million Five Hundred Thousand Dollars ($16,500,000), as the same may be
amended, supplemented, restated and/or otherwise modified from time to time.

 

“Secured Non-Convertible Term Note” means that
certain Secured Non-Convertible Term Note dated as of the Closing Date made by
the Companies in favor of Laurus in the original face amount of Two Million
Dollars ($2,000,000), as the same may be amended, supplemented, restated and/or
otherwise modified from time to time.

 

11

 

“Securities” means the Notes, the Warrants and
the shares of Common Stock which may be issued pursuant to exercise of such
Warrants.

 

“Securities Act” has the meaning given such
term in Section 12(r).

 

“Security Documents” means all security
agreements, mortgages, cash collateral deposit letters, pledges and other
agreements which are executed by any Company or any of its Subsidiaries in
favor of Laurus.

 

“Software” means all “software” as such term is
defined in the UCC, now owned or hereafter acquired by any Person, including
all computer programs and all supporting information provided in connection
with a transaction related to any program.

 

“Stock” means all certificated and
uncertificated shares, options, warrants, membership interests, general or
limited partnership interests, participation or other equivalents (regardless
of how designated) of or in a corporation, partnership, limited liability
company or equivalent entity whether voting or nonvoting, including common
stock, preferred stock, or any other “equity security” (as such term is defined
in Rule 3a11-1 of the General Rules and Regulations promulgated by
the SEC under the Securities Exchange Act of 1934).

 

“Subordinated Debt Documentation” shall mean
[insert details of documentation evidencing Subordinated Indebtedness].

 

“Subordination Agreements” shall mean each of (i)                                                          ,
(ii) and                                          (iii)                                         .

 

“Subsidiary” means, with respect to any Person,
(i) any other Person whose shares of stock or other ownership interests
having ordinary voting power (other than stock or other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the directors or other governing body of such other Person, are
owned, directly or indirectly, by such Person or (ii) any other Person in
which such Person owns, directly or indirectly, more than 50% of the equity
interests at such time.

 

“Supporting Obligations” means all “supporting
obligations” as such term is defined in the UCC.

 

“Term” means the Closing Date through the close
of business on the day immediately preceding the third anniversary of the
Closing Date, subject to acceleration at the option of Laurus upon the occurrence
of an Event of Default hereunder or other termination hereunder.

 

“Term Loan” has the meaning given such term in Section 2(a)(c).

 

“Total Investment Amount” means Eighteen
Million Dollars ($18,000,000).

 

“Trademarks” shall mean the registered trademarks and
pending applications shown in the attached Exhibit D-1, and those
trademarks which are hereafter adopted or acquired by a Company or any of its
Subsidiaries, and all right, title and interest therein and thereto, and

 

12

 

all registrations,
applications, and recordings thereof, including, without limitation,
applications, registrations and recordings in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof, or any foreign country, all whether now owned or hereafter
acquired by a Company or its Subsidiaries.

 

“UCC” means the Uniform Commercial Code as the
same may, from time to time be in effect in the State of New York; provided,
that in the event that, by reason of mandatory provisions of law, any or all of
the attachment, perfection or priority of, or remedies with respect to, Laurus’
Lien on any Collateral is governed by the Uniform Commercial Code as in effect
in a jurisdiction other than the State of New York, the term “UCC” shall mean
the Uniform Commercial Code as in effect in such other jurisdiction for
purposes of the provisions of this Agreement relating to such attachment,
perfection, priority or remedies and for purposes of definitions related to
such provisions; provided further, that to the extent that UCC is used to
define any term herein or in any Ancillary Agreement and such term is defined
differently in different Articles or Divisions of the UCC, the definition of
such term contained in Article or Division 9 shall govern.

 

“Warrant Shares” has the meaning given such
term in Section 12(a).

 

“Warrants” means that certain Common Stock
Purchase Warrant dated as of the Closing Date made by the Parent in favor of
Laurus and each other warrant made by the Parent in favor Laurus, as each of
the same may be amended, restated, modified and/or supplemented from time to
time.

 

13

 

Exhibit A

 

Eligible Subsidiaries

 

Small World Toys, a California corporation

 

 

Exhibit B

 

Borrowing Base Certificate

 

[To be inserted]

 

 

Exhibit C

 

Registered and Pending Patents

 

16

 

Exhibit D-1

 

Registered and Pending Trademarks

 

17

 

Exhibit D-2

 

Intent to Use Trademarks

 

18

 

SECURITY AND
PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

SMALL WORLD KIDS, INC.

SMALL WORLD TOYS

Dated: February 28, 2006

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1.

  	
   

  	
  General Definitions and Terms; Rules of
  Construction.

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Loan Facility

  	
   

  	
  2

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Repayment of the Loans

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Procedure for Loans

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Interest and Payments.

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  Security Interest.

  	
   

  	
  6

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  Representations, Warranties and Covenants Concerning
  the Collateral

  	
   

  	
  7

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  Payment of Accounts.

  	
   

  	
  10

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  Collection and Maintenance of Collateral.

  	
   

  	
  10

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  Inspections and Appraisals

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  Financial Reporting

  	
   

  	
  11

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
   

  	
  Additional Representations and Warranties

  	
   

  	
  12

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  13.

  	
   

  	
  Covenants

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  14.

  	
   

  	
  Further Assurances

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15.

  	
   

  	
  Representations, Warranties and Covenants of Laurus.

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.

  	
   

  	
  Power of Attorney

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  17.

  	
   

  	
  Term of Agreement

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  18.

  	
   

  	
  Termination of Lien

  	
   

  	
  32

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.

  	
   

  	
  Events of Default

  	
   

  	
  32

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  20.

  	
   

  	
  Remedies

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  21.

  	
   

  	
  Waivers

  	
   

  	
  35

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  22.

  	
   

  	
  Expenses

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  23.

  	
   

  	
  Assignment By Laurus

  	
   

  	
  36

  

 

i

 

	
   

  	
   

  	
   

  	
   

  	
  Page(s)

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  24.

  	
   

  	
  No Waiver; Cumulative Remedies

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  25.

  	
   

  	
  Application of Payments

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  26.

  	
   

  	
  Indemnity

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  27.

  	
   

  	
  Revival

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  28.

  	
   

  	
  Borrowing Agency Provisions

  	
   

  	
  38

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  29.

  	
   

  	
  Notices

  	
   

  	
  39

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  30.

  	
   

  	
  Governing Law, Jurisdiction and Waiver of Jury Trial

  	
   

  	
  39

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  31.

  	
   

  	
  Limitation of Liability

  	
   

  	
  40

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  32.

  	
   

  	
  Entire Understanding

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  33.

  	
   

  	
  Severability

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  34.

  	
   

  	
  Captions

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  35.

  	
   

  	
  Counterparts; Telecopier Signatures

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  36.

  	
   

  	
  Construction

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  37.

  	
   

  	
  Publicity

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  38.

  	
   

  	
  Joinder

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  39.

  	
   

  	
  Legends

  	
   

  	
  42

  

 

ii

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