Document:

Exhibit 10.4

 

     

    Exhibit
      10.4 

     

     

    Collateral
      Agreement by and among AFP Imaging Corporation, Dent-x, International Inc.,
      QR
      Imaging USA Inc., Visiplex Instruments Corporation and ComVest Capital
      LLC

     

     

    COLLATERAL
      AGREEMENT, dated as of April 13, 2007, by and among AFP IMAGING CORPORATION,
      a
      New York corporation (the “Borrower”),
      DENT-X
      INTERNATIONAL INC., a New York corporation (“DENT-X”),
      QR
      IMAGING USA, INC., a New York corporation (“QR-USA”),
      VISIPLEX INSTRUMENTS CORPORATION, a New York corporation (“Visiplex”),
      and
      any and all Additional Grantors who may become party to this Agreement (the
      Borrower, Dent-X, QR-USA, Visiplex and such Additional Grantors are hereinafter
      referred to each as a “Grantor”
and
      collectively as the “Grantors”),
      and
COMVEST
      CAPITAL, LLC
      (the
“Secured
      Party”)
      as
      Lender under the Revolving Credit and Term Loan Agreement of even date herewith
      (as same may be amended, modified, supplemented and/or restated from time to
      time, the “Loan
      Agreement”)
      by and
      between the Borrower and the Secured Party.

     

    STATEMENT
      OF PURPOSE

     

    Pursuant
      to the Loan Agreement, the Secured Party is making and may hereafter from time
      to time make Loans to the Borrower in the aggregate principal amount of up
      to
      $8,000,000 at any time outstanding, upon the terms and subject to the conditions
      set forth therein.

     

    Pursuant
      to the terms of a Guaranty Agreement of even date herewith, the Grantors (other
      than the Borrower), which are Subsidiaries of the Borrower, have guaranteed
      the
      payment and performance of the Obligations of the Borrower.

     

    It
      is a
      condition precedent to the obligation of the Secured Party to make the Loans
      to
      the Borrower under the Loan Agreement that the Grantors shall have executed
      and
      delivered this Agreement to the Secured Party.

     

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which are hereby acknowledged by the parties hereto, and to induce the Secured
      Party to enter into the Loan Agreement and make the Loans to the Borrower
      thereunder, each Grantor hereby agrees with the Secured Party, as
      follows:

     

    ARTICLE
      I

     

    DEFINED
      TERMS

     

    Section
      1.1.  Terms
      Defined in the Uniform Commercial Code.
      

     

    (a)  The
      following terms when used in this Agreement shall have the meanings assigned
      to
      them in the UCC (as defined in Section
      1.2
      below) as
      in effect from time to time: “Account”,
      “Account
      Debtor”,
      “Authenticate”,
      “Certificated
      Security”,
      “Chattel
      Paper”;
      “Commercial
      Tort Claim”,
      “Deposit
      Account”,
      “Documents”,
      “Electronic
      Chattel Paper”,
      “Equipment”,
      “Farm
      Products”
      “Fixture”,
      “General
      Intangible”,
      “Instrument”,
      “Inventory”,
      “Investment
      Company Security”,
      “Investment
      Property”,
      “Issuer”,
      “Letter
      of
      Credit Rights”,
      “Proceeds”,
      “Record”,
      “Registered
      Organization”,
      “Security”,
      “Securities
      Entitlement”,
      “Securities
      Intermediary”,
      “Securities
      Account”,
      “Supporting
      Obligation”,
      “Tangible
      Chattel Paper”,
      and
“Uncertificated
      Security”.

     

    
      
         

      

      
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    (b)  Terms
      defined in the UCC and not otherwise defined herein or in the Loan Agreement
      shall have the meaning assigned in the UCC as in effect from time to
      time.

     

    Section
      1.2.  Definitions.
      The
      following terms when used in this Agreement shall have the meanings assigned
      to
      them below:

     

    “Additional
      Grantor”
means
      each Subsidiary of the Borrower which hereafter becomes a Grantor pursuant
      to
Section
      7.15
      hereof
      and Section
      5.11
      of the
      Loan Agreement.

     

    “Agreement”
means
      this Collateral Agreement, as amended, modified, supplemented and/or restated
      from time to time.

     

    “Applicable
      Insolvency Laws”
means
      all Applicable Laws governing bankruptcy, reorganization, arrangement,
      adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent
      transfers or conveyances or other similar laws (including, without limitation,
      11 U.S.C. Sections 547, 548 and 550 and other “avoidance” provisions of
      Title 11 of the United States Code, as amended or supplemented).

     

    “Assignment
      of Claims Act”
means
      the Assignment of Claims Act of 1940 (41 U.S.C. Section 15, 31 U.S.C. Section
      3737, and 31 U.S.C. Section 3727), including all amendments thereto and
      regulations promulgated thereunder.

     

    “Collateral”
has
      the
      meaning assigned thereto in Section
      2.1.

     

    “Collateral
      Account”
means
      any collateral account established by the Secured Party as provided in
Section
      5.2.

     

    “Control”
means
      the manner in which “control” is achieved under the UCC with respect to any
      Collateral for which the UCC specifies a method of achieving
“control”.

     

    “Controlled
      Intermediary”
has
      the
      meaning assigned thereto in Section
      4.6(a).

     

    “Copyrights”
means
      collectively, all of the following of any Grantor: (a) all copyrights,
      rights and interests in copyrights, works protectable by copyright, copyright
      registrations and copyright applications, (b) all reissues, extensions,
      continuations (in whole or in part) and renewals of any of the foregoing,
      (c) all income, royalties, damages and payments now or hereafter due and/or
      payable under any of the foregoing or with respect to any of the foregoing,
      including, without limitation, damages or payments for past or future
      infringements of any of the foregoing, (d) the right to sue for past,
      present and future infringements of any of the foregoing, and (e) all
      rights corresponding to any of the foregoing.

     

    “Copyright
      Licenses”
means
      any written agreement naming any Grantor as licensor or licensee, granting
      any
      right under any Copyright, including, without limitation, the grant of rights
      to
      manufacture, distribute, exploit and sell materials derived from any
      Copyright.

     

    “Effective
      Endorsement and Assignment”
means,
      with respect to any specific type of Collateral, all such endorsements,
      assignments and other instruments of transfer reasonably requested by the
      Secured Party with respect to the Security Interest granted in such Collateral,
      and in each case, in form and substance satisfactory to the Secured
      Party.

     

    “Excess
      Collateral”
has
      the
      meaning assigned thereto in Section 4.6(c).

     

    
      
         

      

      
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    “Government
      Contract”
means
      a
      contract between any Grantor and an agency, department or instrumentality of
      the
      United States or any state, municipal or local Governmental Authority located
      in
      the United States or all obligations of any such Governmental Authority arising
      under any Account now or hereafter owing by any such Governmental Authority,
      as
      account debtor, to any Grantor.

     

    “Grantors”
has
      the
      meaning set forth in the preamble of this Agreement.

     

    “Guarantors”
has
      the
      meaning assigned thereto in the Guaranty Agreement.

     

    “Guaranty
      Agreement”
has
      the
      meaning assigned thereto in the Loan Agreement.

     

    “Intellectual
      Property”
means
      collectively, all of the following of any Grantor: (a)  all systems
      software, applications software and internet rights, including, without
      limitation, screen displays and formats, internet domain names, web sites
      (including web links), program structures, sequence and organization, all
      documentation for such software, including, without limitation, user manuals,
      flowcharts, programmer’s notes, functional specifications, and operations
      manuals, all formulas, processes, ideas and know-how embodied in any of the
      foregoing, and all program materials, flowcharts, notes and outlines created
      in
      connection with any of the foregoing, whether or not patentable or
      copyrightable, (b) concepts, discoveries, improvements and ideas,
      (c) any useful information relating to the items described in clause (a) or
      (b), including know-how, technology, engineering drawings, reports, design
      information, trade secrets, practices, laboratory notebooks, specifications,
      test procedures, maintenance manuals, research, development, manufacturing,
      marketing, merchandising, selling, purchasing and accounting, (d) Patents
      and Patent Licenses, Copyrights and Copyright Licenses, Trademarks and Trademark
      Licenses, and (e) other licenses to use any of the items described in the
      foregoing clauses (a), (b), (c) and (d) or any other similar items of such
      Grantor necessary for the conduct of its business.

     

    “Issuer”
means
      any issuer of any Investment Property or Partnership/LLC Interests (including,
      without limitation, any Issuer as defined in the UCC).

     

    “Loan
      Agreement”
has
      the
      meaning assigned thereto in the preamble of this Agreement.

     

    “Obligations”
means,
      with respect to the Borrower, the meaning assigned to such term in the Loan
      Agreement, and with respect to each Guarantor, the obligations of such Guarantor
      under the Guaranty Agreement, and with respect to all Grantors, all liabilities
      and obligations of the Grantors hereunder.

     

    “Partnership/LLC
      Interests”
means,
      with respect to any Grantor, the entire partnership, membership interest or
      limited liability company interest, as applicable, of such Grantor in each
      partnership, limited partnership or limited liability company owned thereby,
      including, without limitation, such Grantor’s capital account, its interest as a
      partner or member, as applicable, in the net cash flow, net profit and net
      loss,
      and items of income, gain, loss, deduction and credit of any such partnership,
      limited partnership or limited liability company, as applicable, such Grantor’s
      interest in all distributions made or to be made by any such partnership,
      limited partnership or limited liability company, as applicable, to such Grantor
      and all of the other economic rights, titles and interests of such Grantor
      as a
      partner or member, as applicable, of any such partnership, limited partnership
      or limited liability company, as applicable, whether set forth in the
      partnership agreement or membership agreement, as applicable, of such
      partnership, limited partnership or limited liability company, as applicable,
      by
      separate agreement or otherwise.

     

    
      
         

      

      
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    “Patents”
means
      collectively, all of the following of any Grantor: (a) all patents, rights
      and interests in patents, patentable inventions and patent applications,
      (b) all reissues, extensions, continuations (in whole or in part) and
      renewals of any of the foregoing, (c) all income, royalties, damages or
      payments now or hereafter due and/or payable under any of the foregoing or
      with
      respect to any of the foregoing, including, without limitation, damages or
      payments for past or future infringements of any of the foregoing, (d) the
      right to sue for past, present and future infringements of any of the foregoing,
      and (e) all rights corresponding to any of the foregoing.

     

    “Patent
      License”
means
      all agreements now or hereafter in existence, whether written or oral, providing
      for the grant by or to any Grantor of any right to manufacture, use or sell
      any
      invention covered in whole or in part by a Patent.

     

    “Perfection
      Certificate”
means
      the perfection certificate dated as of the date hereof, substantially in the
      form of Exhibit
      A
      attached
      hereto, and otherwise in form and substance satisfactory to the Secured Party,
      and duly certified by an officer, partner or member, as applicable, of each
      Grantor.

     

    “Restricted
      Securities Collateral”
has
      the
      meaning assigned thereto in Section 5.3(a) below.

     

    “Secured
      Party”
has
      the
      meaning assigned thereto in the preamble of this Agreement. 

     

    “Securities
      Act”
means
      the Securities Act of 1933, including all amendments thereto and regulations
      promulgated thereunder.

     

    “Security
      Interests”
means
      the liens and security interests granted pursuant to Article
      II.

     

    “Subsidiary
      Issuer”
means
      any Issuer of Investment Property or any Partnership/LLC Interests, which is
      a
      direct or indirect Subsidiary of any Grantor.

     

    “Trademarks”
means
      collectively, all of the following of any Grantor: (a) all trademarks,
      rights and interests in trademarks, trade names, corporate names, company names,
      business names, fictitious business names, trade styles, service marks, logos,
      other business identifiers, prints and labels on which any of the foregoing
      have
      appeared or appear, all registrations and recordings thereof, and all
      applications in connection therewith, (b) all reissues, extensions,
      continuations (in whole or in part) and renewals of any of the foregoing,
      (c) all income, royalties, damages and payments now or hereafter due and/or
      payable under any of the foregoing or with respect to any of the foregoing,
      including, without limitation, damages or payments for past or future
      infringements of any of the foregoing, (d) the right to sue for past,
      present and future infringements of any of the foregoing, and (e) all
      rights corresponding to any of the foregoing.

     

    “Trademark
      License”
means
      any agreement now or hereafter in existence, whether written or oral, providing
      for the grant by or to any Grantor of any right to use any
      Trademark.

     

    “UCC”
means
      the Uniform Commercial Code as in effect in the State of New York, as amended
      or
      modified from time to time.

     

    “Vehicles”
means
      all cars, trucks, trailers, and other vehicles covered by a certificate of
      title
      under the laws of any state, all tires and all other appurtenances to any of
      the
      foregoing.

     

    Section
      1.3.  Other
      Definitional Provisions.
      Terms
      defined in the Loan Agreement and not otherwise defined herein shall have the
      meanings assigned thereto in the Loan Agreement. The words “hereof,” “herein”,
“hereto” and “hereunder” and words of similar import when used in this Agreement
      shall refer to this Agreement as a whole and not to any particular provision
      of
      this Agreement, and Section and Schedule references are to this Agreement unless
      otherwise specified. The meanings given to terms defined herein shall be equally
      applicable to both the singular and plural forms of such terms. Where the
      context requires, terms relating to the Collateral or any part thereof, when
      used in relation to a Grantor, shall refer to such Grantor’s Collateral or the
      relevant part thereof. The word “including” and words of similar import when
      used in this Agreement shall mean “including, without limitation,” unless
      otherwise specified.

     

    
      
         

      

      
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    ARTICLE
      II

     

    SECURITY
      INTEREST

    Section
      2.1.  Grant
      of Security Interest.

     

    (a) Each
      Grantor hereby grants, pledges and collaterally assigns to the Secured Party
      a
      security interest in all of such Grantor’s right, title and interest in the
      following property now owned or at any time hereafter acquired by such Grantor
      or in which such Grantor now has or at any time in the future may acquire any
      right, title or interest, and wherever located or deemed located (collectively,
      the “Collateral”),
      as
      collateral security for the prompt and complete payment and performance when
      due
      (whether at the stated maturity, by acceleration or otherwise) of the
      Obligations:

     

    (i)  all
      Accounts;

     

    (ii)  all
      cash
      and currency;

     

    (iii)  all
      Chattel Paper;

     

    (iv)  all
      Commercial Tort Claims;

     

    (v)  all
      Deposit Accounts;

     

    (vi)  all
      Documents;

     

    (vii)  all
      Equipment;

     

    (viii)  all
      Fixtures;

     

    (ix)  all
      General Intangibles, including but not limited to all rights of the Borrower
      to
      indemnification under the Acquisition Agreement;

     

    (x)  all
      Instruments;

     

    (xi)  all
      Intellectual Property;

     

    (xii)  all
      Inventory;

     

    (xiii)  all
      Investment Property (provided that, with respect to any Foreign Subsidiary,
      the
      pledge hereunder shall be limited to the lesser of (A) all shares or
      Partnership/LLC Interests held by the Grantors in such Foreign Subsidiary,
      or
      (B) 65% of the outstanding voting shares or Partnership/LLC Interests of such
      Foreign Subsidiary);

     

    
      
         

      

      
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    (xiv)  all
      Letter
      of Credit Rights;

     

    (xv)  all
      Vehicles;

     

    (xvi)  all
      other
      personal property not otherwise described above;

     

    (xvii)  all
      books
      and records pertaining to the Collateral; and

     

    (xviii)  to
      the
      extent not otherwise included, all Proceeds and products of any and all of
      the
      foregoing and all collateral security and Supporting Obligations (as now or
      hereafter defined in the UCC) given by any Person with respect to any of the
      foregoing.

     

    (b)  Notwithstanding
      clause (a) of this Section
      2.1,
      to the
      extent that, at any time, the grant of a security interest in any contract
      rights would, notwithstanding Sections 9-407 and 9-408 of the UCC or other
      applicable law, cause a breach of the subject Contract permitting the
      conterparty thereto to terminate such Contract under applicable law, such
      contract rights shall not at such time be part of the Collateral (but the
      proceeds thereof and any supporting obligations therefor shall be part of the
      Collateral). Each Grantor shall use all commercially reasonable efforts to
      obtain any necessary consents or waivers required in order for such Grantor
      to
      grant the Security Interests in any affected Contract.

     

    Section
      2.2.  Grantors
      Remain Liable.
      Anything
      herein to the contrary notwithstanding:
      (a) each
      Grantor shall remain liable under the contracts and agreements included in
      the
      Collateral to the extent set forth therein to perform all of its duties and
      obligations thereunder to the same extent as if this Agreement had not been
      executed, (b) the exercise by Secured Party of any of the rights hereunder
      shall
      not release any Grantor from any of its duties or obligations under the
      contracts and agreements included in the Collateral, (c) the Secured Party
      shall
      have no obligation or liability under the contracts and agreements included
      in
      the Collateral by reason of this Agreement, nor shall the Secured Party be
      obligated to perform any of the obligations or duties of any Grantor thereunder
      or to take any action to collect or enforce any claim for payment assigned
      hereunder, and (d) the Secured Party shall have no liability in contract or
      tort
      for any Grantor's acts or omissions.

     

    
      
         

      

      
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    ARTICLE
      III

     

    REPRESENTATIONS
      AND WARRANTIES

     

    To
      induce
      the Secured Party to enter into the Loan Agreement and to make the Loans to
      the
      Borrower thereunder, each Grantor hereby represents and warrants to the Secured
      Party that:

     

    Section
      3.1.  Existence.
      Each
      Grantor is duly organized, validly existing and in good standing under the
      laws
      of the jurisdiction of its incorporation or formation, has the requisite power
      and authority to own, lease and operate its properties and to carry on its
      business as now being and hereafter proposed to be conducted and is duly
      qualified and authorized to do business in each jurisdiction in which the
      character of its properties or the nature of its business requires such
      qualification and authorization other than in any such jurisdiction where
      failure to so qualify would not reasonably be expected to have a Material
      Adverse Effect.

     

    Section
      3.2.  Authorization
      of Agreement; No Conflict.
      Each
      Grantor has the right, power and authority and has taken all necessary corporate
      or other organizational action to authorize the execution, delivery and
      performance of, this Agreement. This Agreement has been duly executed and
      delivered by the duly authorized officers of each Grantor, and this Agreement
      constitutes the legal, valid and binding obligation of the Grantors, enforceable
      against the Grantors in accordance with its terms, except as such enforcement
      may be limited by bankruptcy, insolvency, reorganization, moratorium or similar
      state or federal debtor relief laws from time to time in effect which affect
      the
      enforcement of creditors’ rights in general, and general limitations on the
      availability of equitable remedies. The execution, delivery and performance
      by
      the Grantors of this Agreement will not, by the passage of time, the giving
      of
      notice or otherwise, violate any material provision of any Applicable Law or
      any
      Contract material to the business of any Grantor and will not result in the
      creation or imposition of any Lien, other than the Security Interests, upon
      or
      with respect to any property or revenues of any Grantor.

     

    
      
         

      

      
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    Section
      3.3.  Consents.
      No
      approval, consent, exemption, authorization or other action by, or notice to,
      or
      filing with, any Governmental Authority or any other Person is necessary or
      required in connection with the execution, delivery or performance by, or
      enforcement against any Grantor or any Subsidiary Issuer of this Agreement,
      except (i) as may be required by laws affecting the offering and sale of
      securities generally, (ii) filings with the United States Copyright Office
      and/or the United States Patent and Trademark Office, and (iii) filings under
      the UCC and/or the Assignment of Claims Act.

     

    Section
      3.4.  Perfected
      First Priority Liens.
      The
      Security Interests granted pursuant to this Agreement (a) constitute valid
      security interests in all of the Collateral in favor of the Secured Party,
      as
      collateral security for the Obligations, enforceable in accordance with the
      terms hereof against all creditors of such Grantor and any Persons purporting
      to
      purchase any Collateral from such Grantor, and (b) are prior to all other
      Liens on the Collateral in existence on the date hereof except to the extent
      of
      any priority accorded under Applicable Law to any Permitted Liens. Upon the
      filing of financing statements in the jurisdiction of formation of the
      respective Grantors reflected in the Perfection Certificate, and the filing
      of
      appropriate collateral assignments with the United States Copyright Office
      and
      the United States Patent and Trademark Office, the Security Interests will
      be
      perfected first priority security interests in all Collateral in which a
      security interest can be perfected by means of filing; and upon delivery to
      the
      Secured Party of the certificates representing the Collateral consisting of
      Certificated Securities, the Security Interests will be perfected first priority
      security interests in such Collateral. 

     

    Section
      3.5.  Title;
      No Other Liens.
      Except
      for the Security Interests, each Grantor owns each item of the Collateral free
      and clear of any and all Liens or claims other than Permitted Liens. No
      financing statement under the UCC of any state which names a Grantor as debtor
      or other public notice with respect to all or any part of the Collateral is
      on
      file or of record in any public office, except such as have been filed in favor
      of the Secured Party pursuant to this Agreement or in connection with Permitted
      Liens. No Collateral is in the possession or Control of any Person asserting
      any
      claim thereto or security interest therein, except that (a) the Secured Party
      or
      its designee may have possession or Control of Collateral as contemplated
      hereby, (b) a depositary bank may have Control of a Deposit Account owned by
      a
      Grantor at such depositary bank and a Securities Intermediary may have Control
      over a Securities Account owned by a Grantor at such Securities Intermediary,
      in
      each case subject to the terms of any Deposit Account control agreement or
      Securities Account control agreement, as applicable and to the extent required
      by Section
      4,
      in favor
      of the Secured Party, and (c) a bailee, consignee or other Person may have
      possession of Collateral as contemplated by, and so long as, the applicable
      Grantors have complied to the satisfaction of the Secured Party with the
      applicable provisions of Section 4.

     

    
      
         

      

      
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    Section
      3.6.  State
      of Organization; Location of Inventory, Equipment and Fixtures; Other
      Information.
      

     

    (a)  The
      exact
      legal name of each Grantor is as set forth in the Perfection Certificate.

     

    (b)  Each
      Grantor is a Registered Organization organized under the laws of the
      jurisdiction identified for such Grantor in the Perfection Certificate. The
      taxpayer identification number and Registered Organization number of each
      Grantor is as set forth for such Grantor in the Perfection Certificate.

     

    (c)  All
      Collateral consisting of Inventory, Equipment and Fixtures (whether now owned
      or
      hereafter acquired) is (or will be) located at the locations specified in the
      Perfection Certificate.

     

    (d)  The
      mailing address, chief place of business, chief executive office and office
      where each Grantor keeps its books and records relating to the Accounts,
      Documents, General Intangibles, Instruments and Investment Property in which
      it
      has any interest is located at the locations specified for
      such
      Grantor in the Perfection Certificate. No
      Grantor
      has any other places of business. No Grantor does business or has done business
      during the past five years under any trade name or fictitious business name
      except as disclosed for
      such
      Grantor in the Perfection Certificate. Except
      as
      disclosed in the Perfection Certificate, no Grantor has acquired assets from
      any
      Person, other than assets acquired in the ordinary course of such Grantor's
      business, during the past five years.

     

    Section
      3.7.  Accounts.
      Each
      existing Account constitutes, and each hereafter arising Account will
      constitute, the legally valid and binding obligation of the applicable Account
      Debtor. The amount represented by each Grantor to the Secured Party as owing
      by
      each Account Debtor is, or will be, the correct amount actually and
      unconditionally owing, except for normal cash discounts and allowances in the
      ordinary course of business where applicable. No Account Debtor has any defense,
      set-off, claim or counterclaim against any Grantor that can be asserted against
      the Secured Party, whether in any proceeding to enforce Secured Party’s rights
      in the Collateral or otherwise, except defenses, set-offs, claims or
      counterclaims that are not, in the aggregate, material to the value of the
      Accounts. None of the Accounts is, nor will any hereafter arising Account be,
      evidenced by a promissory note or other Instrument, other than a check, that
      has
      not been pledged and delivered to the Secured Party in accordance with the
      terms
      hereof.

     

    Section
      3.8.  Chattel
      Paper.
      As of
      the date hereof, to the Grantors’ knowledge, no Grantor holds any Chattel
      Paper.

     

    Section
      3.9.  Commercial
      Tort Claims

     

    .
      As of
      the date hereof, no Grantor holds any Commercial Tort Claims except as described
      in the Perfection Certificate; and, upon becoming aware at any time and from
      time to time of any further Commercial Tort Claims, the Grantors shall notify
      the Secured Party thereof in accordance with Section
      4.4.

     

    Section
      3.10.  Deposit
      Accounts.
      As of
      the date hereof, all Deposit Accounts (including, without limitation, lockboxes
      and cash management accounts that are Deposit Accounts) owned by any Grantor
      are
      listed in the Perfection Certificate.

     

    Section
      3.11.  Intellectual
      Property.
      None of
      the Intellectual Property owned by any Grantor is the subject of any written
      licensing or franchise agreement pursuant to which such Grantor is the licensor
      or franchisor, except as would not reasonably be expected to have a Material
      Adverse Effect.

     

    Section
      3.12.  Inventory.
      Collateral consisting of Inventory
      is of good and merchantable quality, free from any material defects, and has
      been manufactured in accordance with the requirements of the Fair Labor
      Standards Act and all other Applicable Law. To the knowledge of each Grantor,
      none of such Inventory is subject to any licensing, Patent, Trademark, trade
      name or Copyright with any Person that restricts any Grantor’s ability to
      manufacture and/or sell such Inventory. The completion of the manufacturing
      process of such Inventory by a Person other than the applicable Grantor would
      be
      permitted under any contract to which such Grantor is a party or to which the
      Inventory is subject.

     

    
      
         

      

      
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    Section
      3.13.  Investment
      Property; Partnership/LLC Interests.

     

    (a)  As
      of the
      date hereof, all Investment Property (including, without limitation, Securities
      Accounts and cash management accounts that are Investment Property) and all
      Partnership/LLC Interests owned by any Grantor is listed in the Perfection
      Certificate.

     

    (b)  All
      Investment Property and all Partnership/LLC Interests issued by any Subsidiary
      Issuer to any Grantor (i) have been duly and validly issued and, if applicable,
      are fully paid and nonassessable, (ii) are beneficially owned as of record
      by
      such Grantor, and (iii) constitute all the issued and outstanding shares of
      all
      classes of the capital stock or equity interest of such Subsidiary Issuer issued
      to such Grantor.

     

    (c)  None
      of
      the Partnership/LLC Interests (i) are traded on a securities exchange or in
      securities markets, (ii) by their terms expressly provide that they are
      Securities governed by Article 8 of the UCC, or (iii) are Investment Company
      Securities.

     

    Section
      3.14.  Instruments.
      As of
      the date hereof, no Grantor holds any Instruments or is named a payee of any
      promissory note or other evidence of indebtedness.

     

    
      
         

      

      
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    ARTICLE
      IV

     

    COVENANTS

     

    Until
      the
      Obligations shall have been indefeasibly paid in full and the Revolving Credit
      Commitment has been terminated, unless express written consent has been obtained
      from the Lender, the Grantors covenant and agree that:

     

    Section
      4.1.  Maintenance
      of Perfected Security Interest; Further Information.

     

    (a)  Each
      Grantor shall maintain the Security Interest created by this Agreement as a
      perfected Security Interests having at least the priority described in
Section 3.4
      and shall
      defend such Security Interest against the claims and demands of all Persons
      whomsoever.

     

    (b)  Each
      Grantor will furnish to the Secured Party from time to time statements and
      schedules further identifying and describing the assets and property of such
      Grantor and such other reports in connection therewith as the Secured Party
      may
      reasonably request, all in reasonable detail.

     

    Section
      4.2.  Maintenance
      of Insurance.
      

     

    (a)  Each
      Grantor will maintain, with financially sound and reputable companies, insurance
      policies (i) insuring the Collateral against loss by fire, explosion,
      theft, fraud and such other casualties, including business interruption, as
      may
      be reasonably satisfactory to the Secured Party in amounts and with deductibles
      at least as favorable as those generally maintained by businesses of similar
      size engaged in similar activities, and (ii) insuring such Grantor and the
      Secured Party against liability for hazards, risks and liability to persons
      and
      property relating to the Collateral (including, without limitation, products
      liability coverage), in amounts and with deductibles at least as favorable
      as
      those generally maintained by businesses of similar size engaged in similar
      activities, such policies to be in such form and having such coverage as may
      be
      reasonably satisfactory to the Lender.

     

    (b)  All
      such
      insurance (other than workers’ compensation) shall (i) name the Secured
      Party as loss payee (to the extent covering risk of loss or damage to tangible
      property) and as an additional insured as its interests may appear (to the
      extent covering any other risk), (ii) provide that no cancellation shall be
      effective until at least thirty (30) days after receipt by the Secured Party
      of
      written notice thereof, and (iii) be reasonably satisfactory in all other
      respects to the Secured Party.

     

    (c)  Upon
      the
      request of the Secured Party, each Grantor shall deliver to the Secured Party
      periodic information from a reputable insurance broker with respect to the
      insurance referred to in this Section
      4.2.

     

    Section
      4.3.  Changes
      in Locations; Changes in Name or Structure.
      No
      Grantor will, except upon fifteen (15) days’ prior written notice to the Secured
      Party and delivery to the Secured Party of (a) all additional financing
      statements (executed if necessary for any particular filing jurisdiction) and
      other instruments and documents reasonably requested by the Secured Party to
      maintain the validity, perfection and priority of the Security Interests, and
      (b) if applicable, a written supplement to the Perfection
      Certificate:

     

    (i)  permit
      any
      Deposit Account to be held by or at a depositary bank other than the depositary
      bank that held such Deposit Account as of the date hereof as set forth in the
      Perfection Certificate;

     

    (ii)  permit
      any
      of the Inventory, Equipment or Fixtures to be kept at a location other than
      those listed in the Perfection Certificate, except as otherwise permitted
      hereunder;

     

    (iii)  permit
      any
      Investment Property (other than Certificated Securities delivered to the Secured
      Party pursuant to Section
      4.5)
      to be
      held by a Securities Intermediary;

     

    (iv)  change
      its
      organizational form or structure, jurisdiction of organization or the location
      of its chief executive office from that identified in the Perfection
      Certificate; or

     

    (v)  change
      its
      name or identity to such an extent that any financing statement filed by the
      Secured Party in connection with this Agreement would become
      misleading.

     

    Section
      4.4.  Required
      Notifications.
      Each
      Grantor shall promptly notify the Secured Party, in writing, of: (a) any Lien
      (other than the Security Interests or Permitted Liens) on any of the Collateral,
      (b) the occurrence of any other event which could reasonably be expected to
      have
      a material adverse effect on the aggregate value of the Collateral or on the
      Security Interests, (c) any
      Collateral which, to the knowledge of such Grantor, constitutes a Government
      Contract, and
      (d) the acquisition or ownership by such Grantor of any (i) Commercial Tort
      Claim, (ii) Deposit Account, or (iii) Investment Property after
      the
      date hereof.

     

    Section
      4.5.  Delivery
      Covenants.
      Each
      Grantor will deliver and pledge to the Secured Party all Certificated
      Securities, Partnership/LLC Interests evidenced by a certificate, negotiable
      Documents, Instruments, and Tangible Chattel Paper owned or held by such
      Grantor, in each case, together with an Effective Endorsement and Assignment
      and
      all Supporting Obligations, as applicable, unless such delivery and pledge
      has
      been waived in writing by the Secured Party.

     

    
      
         

      

      
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    Section
      4.6.  Control
      Covenants.

     

    (a)  Each
      Grantor shall instruct (and otherwise use its reasonable efforts) to cause
      (i)
      each depositary bank holding a Deposit Account owned by such Grantor, and (ii)
      each Securities Intermediary holding any Investment Property owned by such
      Grantor, to execute and deliver a control agreement, sufficient to provide
      the
      Secured Party with Control of such Deposit Account or Investment Property,
      and
      otherwise in form and substance satisfactory to the Secured Party (any such
      depositary bank executing and delivering any such control agreement, a
“Controlled
      Depositary”,
      and any
      such Securities Intermediary executing and delivering any such control
      agreement, a “Controlled
      Intermediary”).
      In the
      event any such depositary bank or Securities Intermediary refuses to execute
      and
      deliver such control agreement, the Secured Party, in its sole discretion,
      may
      require the applicable Deposit Account and Investment Property to be transferred
      to the Secured Party or a Controlled Depositary or Controlled Intermediary,
      as
      applicable.

     

    (b)  Each
      Grantor will take such actions and deliver all such agreements as are requested
      by the Secured Party to provide the Secured Party with Control of all Letter
      of
      Credit Rights and Electronic Chattel Paper owned or held by such Grantor,
      including, without limitation, with respect to any such Electronic Chattel
      Paper, by having the Secured Party identified as the assignee of the Record(s)
      pertaining to the single authoritative copy thereof.

     

    (c)  If
      any
      Collateral (other than Collateral specifically subject to the provisions of
      Section
      4.6(a)
      and
Section
      4.6(b))
      exceeding in value $25,000 in the aggregate (such Collateral exceeding such
      amount, the “Excess
      Collateral”)
      is at
      any time in the possession or control of any single consignee, warehouseman,
      bailee (other than a carrier transporting Inventory to a purchaser in the
      ordinary course of business), processor, or any other third party (other than
      a
      full-time employee of such Grantor), or to the extent that the aggregate of
      such
      Collateral in the possession or control of such Persons exceeds in value
      $250,000 in the aggregate, such Grantor shall notify in writing such Person
      of
      the Security Interests created hereby, shall use its reasonable efforts to
      obtain such Person’s written agreement in writing to hold all such Collateral
      for the Secured Party’s account subject to the Secured Party’s instructions, and
      shall cause such Person to issue and deliver to the Secured Party warehouse
      receipts, bills of lading or any similar documents relating to such Collateral
      to the Secured Party’s together with an Effective Endorsement and Assignment;
provided
      that if
      such Grantor is not able to obtain such agreement and cause the delivery of
      such
      items, the Secured Party, in its sole discretion, may require such Excess
      Collateral to be moved to another location specified by the Secured Party.
      Further, each Grantor shall perfect and protect such Grantor’s ownership
      interests in all Inventory stored with a consignee against creditors of the
      consignee by filing and maintaining financing statements against the consignee
      reflecting the consignment arrangement filed in all appropriate filing offices,
      providing any written notices required to notify any prior creditors of the
      consignee of the consignment arrangement, and taking such other actions as
      may
      be appropriate to perfect and protect such Grantor’s interests in such inventory
      under Section 2-326, Section 9-103, Section 9-324 and Section 9-505 of the
      UCC
      or otherwise. All such financing statements filed pursuant to this Section
      4.6(c)
      shall be
      assigned, on the face thereof, to the Secured Party.

     

    Section
      4.7.  Filing
      Covenants.
      Pursuant
      to Section 9-509 of the UCC and any other Applicable Law, each Grantor
      authorizes the Secured Party to file or record financing statements and other
      filing or recording documents or instruments with respect to the Collateral
      without the signature of such Grantor in such form and in such offices as the
      Secured Party determines appropriate to perfect the Security Interests of the
      Secured Party under this Agreement. Such financing statements may describe
      the
      Collateral in the same manner as described herein or may contain an indication
      or description of Collateral that describes such property in any other manner
      as
      the Secured Party may determine, in its sole discretion, is necessary, advisable
      or prudent to ensure the perfection of the Security Interest in the Collateral
      granted herein, including, without limitation, describing such property as
“all
      assets” or “all personal property.” Further, a photographic or other
      reproduction of this Agreement shall be sufficient as a financing statement
      or
      other filing or recording document or instrument for filing or recording in
      any
      jurisdiction. Each Grantor hereby authorizes, ratifies and confirms all
      financing statements and other filing or recording documents or instruments
      filed by Secured Party prior to the date of this Agreement.

     

    
      
         

      

      
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    Section
      4.8.  Accounts.
      

     

    (a)  Other
      than
      in the ordinary course of business consistent with its past practice, no Grantor
      will (i) grant any extension of the time of payment of any Account,
      (ii) compromise or settle any Account for less than the full amount
      thereof, (iii) release, wholly or partially, any Account Debtor,
      (iv) allow any credit or discount whatsoever on any Account, or
      (v) amend, supplement or modify any Account in any manner that could
      adversely affect the value thereof.

     

    (b)  Each
      Grantor will deliver to the Secured Party a copy of each material demand, notice
      or document received by such Grantor that questions or calls into doubt the
      validity or enforceability of any material Account.

     

    (c)  The
      Secured Party shall have the right to make test verifications of the Accounts
      in
      any manner and through any medium that it reasonably considers advisable, and
      each Grantor shall furnish all such assistance and information as the Secured
      Party may require in connection with such test verifications. At any time and
      from time to time, upon the Secured Party’s reasonable request and at the
      expense of the relevant Grantor, such Grantor shall cause independent public
      accountants or others satisfactory to the Secured Party to furnish to the
      Secured Party reports showing reconciliations, aging and test verifications
      of,
      and trial balances for, the Accounts.

     

    (d)  Upon
      request of the Secured Party at any time for good reason, each Grantor shall
      direct is Account Debtors to remit all payments on Accounts owing to such
      Grantor from time to time to a lockbox maintained in the name or under the
      Control of the Secured Party and swept on a regular basis into a Deposit Account
      at a Controlled Depositary or the Collateral Account. 

     

    Section
      4.9.  Intellectual
      Property.
      

     

    (a)  Within
      thirty (30) days after the close of each calendar quarter (or more frequently
      if
      reasonably requested by the Secured Party), each Grantor shall give written
      notice to the Secured Party of the existence of any new registered Intellectual
      Property owned or claimed to be owned by such Grantor, which notice shall set
      forth the particulars thereof (including the name or title of the subject
      Intellectual Property, the filing office in which any filings may have been
      made
      in respect thereof, and the filing date and registration number of each such
      filing); and each such Grantor shall execute and deliver to the Secured Party,
      for filing, any and all such collateral assignments as the Secured Party may
      reasonably request in order to confirm and/or perfect the Security Interests
      in
      such Intellectual Property. 

     

    (b)  If
      deemed
      by the Grantors, in their reasonable business judgment, to be necessary or
      beneficial for use in their business, each Grantor (either itself or through
      licensees) (i) will continue to use each registered Trademark (owned by such
      Grantor) and Trademark for which an application (owned by such Grantor) is
      pending, to the extent reasonably necessary to maintain such Trademark in full
      force free from any claim of abandonment for non-use, (ii) will maintain
      products and services offered under such Trademark at a level substantially
      consistent with the quality of such products and services as of the date hereof,
      (iii) will not (and will not permit any licensee or sublicensee thereof to)
      do any act or knowingly omit to do any act whereby such Trademark could
      reasonably be expected to become invalidated or impaired in any way, (iv) will
      not do any act, or knowingly omit to do any act, whereby any issued Patent
      owned
      by such Grantor would reasonably be expected to become forfeited, abandoned
      or
      dedicated to the public, (v) will not (and will not permit any licensee or
      sublicensee thereof to) do any act or knowingly omit to do any act whereby
      any
      registered Copyright owned by such Grantor or Copyright for which an application
      is pending (owned by such Grantor) could reasonably be expected to become
      invalidated or otherwise impaired, and (vi) will not (either itself or through
      licensees) do any act whereby any material portion of the Copyrights may fall
      into the public domain.

     

    
      
         

      

      
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    (c)  Each
      Grantor will notify the Secured Party promptly if it knows, or has reason to
      know, that any application or registration relating to any material Intellectual
      Property owned by such Grantor may become forfeited, abandoned or dedicated
      to
      the public, or of any adverse determination or development (including, without
      limitation, the institution of, or any such determination or development in,
      any
      proceeding in the United States Patent and Trademark Office, the United States
      Copyright Office or any court or tribunal in any country) regarding such
      Grantor’s ownership of, or the validity of, any material Intellectual Property
      owned by such Grantor or such Grantor’s right to register the same or to own and
      maintain the same.

     

    (d)  Whenever
      such Grantor, either by itself or through any agent, employee, licensee or
      designee, shall file an application for the registration of any Intellectual
      Property with the United States Patent and Trademark Office, the United States
      Copyright Office or any similar office or agency in any other country or any
      political subdivision thereof, such Grantor shall report such filing to the
      Secured Party within five (5) Business Days after the last day of the fiscal
      quarter in which such filing occurs. Upon request of the Secured Party, such
      Grantor shall execute and deliver, and have recorded, any and all agreements,
      instruments, documents, and papers as the Secured Party may reasonably request
      to evidence the Secured Party’s security interest in any material Copyright,
      Patent or Trademark and the goodwill and General Intangibles of such Grantor
      relating thereto or represented thereby.

     

    (e)  Each
      Grantor will, if deemed by the Grantors, in their reasonable business judgment,
      to be necessary or beneficial for use in their business, take all commercially
      reasonable and necessary steps, at such Grantor’s sole cost and expense,
      including, without limitation, in any proceeding before the United States Patent
      and Trademark Office, the United States Copyright Office or any similar office
      or agency in any other country or any political subdivision thereof, to maintain
      and pursue each application (and to obtain the relevant registration) and to
      maintain each registration of the material Intellectual Property, including,
      without limitation, filing of applications for renewal, affidavits of use and
      affidavits of incontestability.

     

    (f)  In
      the
      event that any material Intellectual Property owned by a Grantor is infringed,
      misappropriated or diluted by a third party, the applicable Grantor shall
      (i) at such Grantor’s sole cost and expense, take such actions as such
      Grantor shall reasonably deem appropriate under the circumstances to protect
      such Intellectual Property, and (ii) if such Intellectual Property is of
      material economic value, promptly notify the Secured Party after it learns
      of
      such infringement, misappropriation or dilution.

     

    Section
      4.10.  Investment
      Property; Partnership/LLC Interests.
      

     

    (a)  Without
      the prior written consent of the Lender, no Grantor will (i) vote to
      enable, or take any other action to permit, any Subsidiary Issuer to issue
      any
      Investment Property or Partnership/LLC Interests, except for those additional
      Investment Property or Partnership/LLC Interests that will be subject to the
      Security Interest granted herein in favor of the Secured Party, or
      (ii) enter into any agreement or undertaking restricting the right or
      ability of such Grantor or the Secured Party to sell, assign or transfer any
      Investment Property or Partnership/LLC Interests or Proceeds thereof. The
      Grantors will defend the right, title and interest of the Secured Party in
      and
      to any Investment Property and Partnership/LLC Interests against the claims
      and
      demands of all Persons whomsoever.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    (b)  If
      any
      Grantor shall become entitled to receive or shall receive (i) any Certificated
      Securities (including, without limitation, any certificate representing a stock
      dividend or a distribution in connection with any reclassification, increase
      or
      reduction of capital or any certificate issued in connection with any
      reorganization), option or rights in respect of the ownership interests of
      any
      Issuer, whether in addition to, in substitution of, as a conversion of, or
      in
      exchange for, any Investment Property, or otherwise in respect thereof, or
      (ii)
      any sums paid upon or in respect of any Investment Property upon the liquidation
      or dissolution of any Issuer, such Grantor shall accept the same as the agent
      of
      the Secured Party, hold the same in trust for the Secured Party, segregated
      from
      other funds of such Grantor, and promptly deliver the same to the Secured Party
      in accordance with the terms hereof.

     

    Section
      4.11.  Equipment.
      Each
      Grantor will maintain each item of Equipment in good working order and condition
      (reasonable wear and tear and obsolescence excepted), and in accordance with
      any
      manufacturer’s manual and/or recommendations, and will as quickly as practicable
      provide all maintenance, service and repairs necessary for such purpose and
      will
      promptly furnish to the Secured Party a statement respecting any material loss
      or damage to any of the Equipment.

     

    Section
      4.12.  Vehicles.
      Upon the
      request of the Secured Party at any time and from time to time, any and all
      applications for certificates of title or ownership indicating the Secured
      Party’s first priority Lien on the Vehicle covered by such certificate, and any
      other necessary documentation, shall be filed in each office in each
      jurisdiction which the Secured Party shall deem reasonably advisable to perfect
      its Liens on the Vehicles. Prior thereto, each certificate of title or ownership
      relating to each Vehicle shall be maintained by the applicable Grantor in
      accordance with Applicable Law to reflect the ownership interest of such
      Grantor.

     

    Section
      4.13.  Further
      Assurances.
      Upon the
      request of the Secured Party and at the sole expense of the Grantors, each
      Grantor will promptly and duly execute and deliver, and have recorded, such
      further instruments and documents and take such further actions as the Secured
      Party may reasonably request for the purpose of obtaining or preserving the
      full
      benefits of this Agreement and of the rights and powers herein granted,
      including, without limitation, (a) the collateral assignment of any
      Contract, (b) with respect to Government Contracts, collateral assignment
      agreements and notices of collateral assignment, in form and substance
      satisfactory to the Secured Party, duly executed by the subject Grantor in
      compliance with the Assignment of Claims Act (or analogous state Applicable
      Law), and (c) all applications, certificates, instruments, registration
      statements, and all other documents and papers the Secured Party may reasonably
      request and as may be required by law in connection with the obtaining of any
      consent, approval, registration, qualification, or authorization of any Person
      deemed necessary or appropriate for the effective exercise of any rights under
      this Agreement.

     

    
      
         

      

      
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    ARTICLE
      V

     

    REMEDIAL
      PROVISIONS

    Section
      5.1.  General
      Remedies.
      If an
      Event of Default shall occur and be continuing, the Secured Party may exercise,
      in addition to all other rights and remedies granted to it in this Agreement
      and
      in any other instrument or agreement securing, evidencing or relating to the
      Obligations, all rights and remedies of a secured party under the UCC or any
      other Applicable Law. Without limiting the generality of the foregoing, the
      Secured Party, without demand of performance or other demand, presentment,
      protest, advertisement or notice of any kind (except any notice required by
      law
      referred to below) to or upon any Grantor or any other Person (all and each
      of
      which demands, defenses, advertisements and notices are hereby waived), may
      in
      such circumstances forthwith collect, receive, appropriate and realize upon
      the
      Collateral, or any part thereof, and/or may forthwith sell, lease, assign,
      give
      option or options to purchase, or otherwise dispose of and deliver the
      Collateral or any part thereof (or contract to do any of the foregoing), in
      one
      or more parcels at public or private sale or sales, at any exchange, broker’s
      board or office of the Secured Party or elsewhere upon such terms and conditions
      as it may deem advisable and at such prices as it may deem best, for cash or
      on
      credit or for future delivery without assumption of any credit risk. The Secured
      Party may disclaim any warranties of title, possession and quiet enjoyment.
      The
      Secured Party shall have the right upon any such public sale or sales, and,
      to
      the extent permitted by law, upon any such private sale or sales, to purchase
      the whole or any part of the Collateral so sold, free of any right or equity
      of
      redemption in any Grantor, which right or equity is hereby waived and released.
      Each Grantor further agrees, at the Secured Party’s request, to assemble the
      Collateral and make it available to the Secured Party at places which the
      Secured Party shall reasonably select, whether at such Grantor’s premises or
      elsewhere. To the extent permitted by Applicable Law, each Grantor waives all
      claims, damages and demands it may acquire against the Secured Party arising
      out
      of the exercise by it of any rights hereunder except to the extent any such
      claims, damages, or demands result solely from the gross negligence or willful
      misconduct of the Secured Party. If any notice of a proposed sale or other
      disposition of Collateral shall be required by law, such notice shall be deemed
      reasonable and proper if given at least ten (10) days before such sale or other
      disposition.

     

    Section
      5.2.  Specific
      Remedies.

     

    (a)  The
      Secured Party hereby authorizes each Grantor to collect its Accounts, under
      the
      Secured Party’s direction and control; provided
      that, the
      Secured Party may curtail or terminate such authority at any time after the
      occurrence and during the continuance of an Event of Default.

     

    (b)  Upon
      the
      occurrence and during the continuance of an Event of Default:

     

    (i)  the
      Secured Party may communicate with Account Debtors of any Account subject to
      a
      Security Interest and upon the request of the Secured Party, each Grantor shall
      notify (such notice to be in form and substance satisfactory to the Secured
      Party) its Account Debtors and parties to the Contracts subject to a Security
      Interest that such Accounts and the Contracts have been assigned to the Secured
      Party;

     

    (ii)  each
      Grantor shall forward to the Secured Party, on the last Business Day of each
      week (or more frequently if requested by the Secured Party), deposit slips
      related to all cash, money, checks or any other similar items of payment
      received by the Grantor during such week, and, if requested by the Secured
      Party, copies of such checks or any other similar items of payment, together
      with a statement showing the application of all payments on the Collateral
      during such week and a collection report with regard thereto, in form and
      substance satisfactory to the Secured Party.

     

    (iii)  whenever
      any Grantor shall receive any cash, money, checks or any other similar items
      of
      payment relating to any Collateral (including any Proceeds of any Collateral),
      such Grantor agrees that it will, within one (1) Business Day of such receipt,
      deposit all such items of payment into the Collateral Account or in a Deposit
      Account at a Controlled Depositary; and until such Grantor shall deposit such
      cash, money, checks or any other similar items of payment in the Collateral
      Account or in a Deposit Account at a Controlled Depositary, such Grantor shall
      hold such cash, money, checks or any other similar items of payment in trust
      for
      the Secured Party and as property of the Secured Party, separate from the other
      funds of such Grantor, and the Secured Party shall have the right to transfer
      or
      direct the transfer of the balance of each Deposit Account to the Collateral
      Account. All such Collateral and Proceeds of Collateral received by the Secured
      Party hereunder shall be held by the Secured Party in the Collateral Account
      as
      collateral security for all the Obligations and shall not constitute payment
      thereof until applied as provided in Section 5.4.

     

    
      
         

      

      
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    (iv)  the
      Secured Party shall have the right to receive any and all cash dividends,
      payments or distributions made in respect of any Investment Property or
      Partnership/LLC Interests or other Proceeds paid in respect of any Investment
      Property or Partnership/LLC Interests, and any or all of any Investment Property
      or Partnership/LLC Interests shall be registered in the name of the Secured
      Party or its nominee, and the Secured Party or its nominee may thereafter
      exercise (A) all voting, corporate and other rights pertaining to such
      Investment Property or Partnership/LLC Interests, at any meeting of
      shareholders, partners or members of the relevant Issuers, and (B) any and
      all rights of conversion, exchange and subscription and any other rights,
      privileges or options pertaining to such Investment Property or Partnership/LLC
      Interests as if it were the absolute owner thereof (including, without
      limitation, the right to exchange at its discretion any and all of the
      Investment Property or Partnership/LLC Interests upon the merger, consolidation,
      reorganization, recapitalization or other fundamental change in the corporate,
      partnership or company structure of any Issuer or upon the exercise by any
      Grantor or the Secured Party of any right, privilege or option pertaining to
      such Investment Property or Partnership/LLC Interests, and in connection
      therewith, the right to deposit and deliver any and all of the Investment
      Property or Partnership/LLC Interests with any committee, depositary, transfer
      agent, registrar or other designated agency upon such terms and conditions
      as
      the Secured Party may determine), all without liability except to account for
      property actually received by it; but the Secured Party shall have no duty
      to
      any Grantor to exercise any such right, privilege or option and the Secured
      Party shall not be responsible for any failure to do so or delay in so doing.
      In
      furtherance thereof, each Grantor hereby authorizes and instructs each Issuer
      with respect to any Collateral consisting of Investment Property and
      Partnership/LLC Interests to (i) comply with any instruction received by it
      from the Secured Party in writing that (A) states that an Event of Default
      has
      occurred and is continuing, and (B) is otherwise in accordance with the terms
      of
      this Agreement, without any other or further instructions from such Grantor,
      and
      each Grantor agrees that each Issuer shall be fully protected in so complying,
      and (ii) except as otherwise expressly permitted hereby, pay any dividends,
      distributions or other payments with respect to any Investment Property or
      Partnership/LLC Interests directly to the Secured Party; and

     

    (v)  the
      Secured Party shall be entitled to (but shall not be required to): (A) proceed
      to perform any and all obligations of the applicable Grantor under any Contract
      and exercise all rights of such Grantor thereunder as fully as such Grantor
      itself could, (B) do all other acts which the Secured Party may deem necessary
      or proper to protect its Security Interest granted hereunder, provided such
      acts
      are not inconsistent with or in violation of the terms of the Loan Agreement
      or
      Applicable Law, and (C) sell, assign or otherwise transfer any Contract
      constituting Collateral, subject, however, to the prior approval of each other
      party to such Contract, to the extent required under the Contract.

     

    (c)  Unless
      an
      Event of Default shall have occurred and be continuing and the Secured Party
      shall have given notice to the relevant Grantor of the Secured Party’s intent to
      exercise its corresponding rights pursuant to Section 5.2(b),
      each
      Grantor shall be permitted to receive all cash dividends, payments or other
      distributions made in respect of any Investment Property and Partnership/LLC
      Interests, in each case paid in the normal course of business of the relevant
      Issuer and consistent with past practice, to the extent permitted in the Loan
      Agreement, and to exercise all voting and other corporate, company or
      partnership rights with respect to any Investment Property and Partnership/LLC
      Interests; provided
      that no
      vote shall be cast or other corporate, company or partnership right exercised
      or
      other action taken which, in the Secured Party’s reasonable judgment, would
      impair the Collateral or which would result in a Default or Event of Default
      under any provision of the Loan Agreement, this Agreement or any other Loan
      Document.

     

    
      
         

      

      
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    Section
      5.3.  Private
      Sale.
      

     

    (a)  Each
      Grantor recognizes that the Secured Party may be unable to effect a public
      sale
      of any or all Collateral consisting of Securities which have not been registered
      for resale under the Securities Act (“Restricted
      Securities Collateral”),
      by
      reason of certain prohibitions contained in the Securities Act and applicable
      state securities laws or otherwise, and may be compelled to resort to one or
      more private sales thereof to a restricted group of purchasers which will be
      obliged to agree, among other things, to acquire such securities for their
      own
      account for investment and not with a view to the distribution or resale
      thereof. Each Grantor acknowledges and agrees that any such private sale may
      result in prices and other terms less favorable than if such sale were a public
      sale and, notwithstanding such circumstances, agrees that any such private
      sale
      shall not by reason thereof be deemed not to have been made in a commercially
      reasonable manner. The Secured Party shall be under no obligation to delay
      a
      sale of any of the Restricted Securities Collateral for the period of time
      necessary to permit the Issuer thereof to register such securities for public
      sale under the Securities Act, or under applicable state securities laws, even
      if such Issuer would agree to do so.

     

    (b)  Each
      Grantor agrees to use its best efforts to do or cause to be done all such other
      acts as may be necessary to make such sale or sales of all or any portion of
      the
      Restricted Securities Collateral valid and binding and in compliance with any
      and all other Applicable Laws.

     

    Section
      5.4.  Application
      of Proceeds

     

    .
      At such
      intervals as may be agreed upon by the Borrower and the Secured Party, or,
      if an
      Event of Default shall have occurred and be continuing, at any time at the
      Lender’s election, the Secured Party may apply all or any part of the Collateral
      or any Proceeds of the Collateral in payment in whole or in part of the
      Obligations (after deducting all reasonable costs and expenses of every kind
      incurred in connection therewith or incidental to the care or safekeeping of
      any
      of the Collateral or in any way relating to the Collateral or the rights of
      the
      Secured Party hereunder, including, without limitation, reasonable attorneys’
fees and disbursements) in accordance with Section
      2.06
      of the
      Loan Agreement. Any balance of such Proceeds remaining after payment in full
      of
      the Obligations shall be paid over to the Grantors, or to whomever else may
      be
      lawfully entitled to receive the same. Only after (a) the payment by the Secured
      Party of any other amount required by any provision of law, including, without
      limitation, Section 9-610 and Section 9-615 of the UCC, and (b) the payment
      in
      full of the Obligations, shall the Secured Party account for the surplus, if
      any, to any Grantor, or to whomever else may be lawfully entitled to receive
      the
      same.

     

    Section
      5.5.  Waiver,
      Deficiency

     

    .
      Each
      Grantor hereby waives, to the extent permitted by Applicable Law, all rights
      of
      redemption, appraisement, valuation, stay, extension or moratorium now or
      hereafter in force under any Applicable Law in order to prevent or delay the
      enforcement of this Agreement or the absolute sale of the Collateral or any
      portion thereof. Each Grantor shall remain liable for any deficiency if the
      proceeds of any sale or other disposition of the Collateral are insufficient
      to
      pay its Obligations and the fees and disbursements of any attorneys employed
      by
      the Secured Party to collect such deficiency.

     

    
      
         

      

      
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    ARTICLE
      VI

     

    THE
      SECURED PARTY

     

    Section
      6.1.  Secured
      Party’s Appointment as Attorney-In-Fact.
      

     

    (a)  Each
      Grantor hereby irrevocably constitutes and appoints the Secured Party and any
      officer or agent thereof, with full power of substitution, as its true and
      lawful attorney-in-fact with full irrevocable power and authority in the place
      and stead of such Grantor and in the name of such Grantor or in its own name,
      for the purpose of carrying out the terms of this Agreement, to take any and
      all
      appropriate action and to execute any and all documents and instruments which
      may be necessary or desirable to accomplish the purposes of this Agreement,
      and,
      without limiting the generality of the foregoing, each Grantor hereby gives
      the
      Secured Party the power and right, on behalf of such Grantor, without notice
      to
      or assent by such Grantor, to do any or all of the following upon the occurrence
      and during the continuance of an Event of Default:

     

    (i)  in
      the
      name of such Grantor or its own name, or otherwise, take possession of and
      indorse and collect any checks, drafts, notes, acceptances or other instruments
      for the payment of moneys due under any Account or Contract subject to a
      Security Interest or with respect to any other Collateral and file any claim
      or
      take any other action or proceeding in any court of law or equity or otherwise
      deemed appropriate by the Secured Party for the purpose of collecting any and
      all such moneys due under any Account or Contract subject to a Security Interest
      or with respect to any other Collateral whenever payable;

     

    (ii)  in
      the
      case of any Intellectual Property, execute and deliver, and have recorded,
      any
      and all agreements, instruments, documents and papers as the Secured Party
      may
      request to evidence the Secured Party’s security interest in such Intellectual
      Property and the goodwill and General Intangibles of such Grantor relating
      thereto or represented thereby;

     

    (iii)  pay
      or
      discharge taxes and Liens levied or placed on or threatened against the
      Collateral, effect any repairs or any insurance called for by the terms of
      this
      Agreement and pay all or any part of the premiums therefor and the costs
      thereof,

     

    (iv)  execute,
      in connection with any sale provided for in this Agreement, any endorsements,
      assignments or other instruments of conveyance or transfer with respect to
      the
      Collateral; and

     

    (v)  (A) direct
      any party liable for any payment under any of the Collateral to make payment
      of
      any and all moneys due or to become due thereunder directly to the Secured
      Party
      or as the Secured Party shall direct; (B) ask or demand for, collect, and
      receive payment of and receipt for, any and all moneys, claims and other amounts
      due or to become due at any time in respect of or arising out of any Collateral;
      (C) sign and indorse any invoices, freight or express bills, bills of
      lading, storage or warehouse receipts, drafts against debtors, assignments,
      verifications, notices and other documents in connection with any of the
      Collateral; (D) commence and prosecute any suits, actions or proceedings at
      law or in equity in any court of competent jurisdiction to collect the
      Collateral or any portion thereof and to enforce any other right in respect
      of
      any Collateral; (E) defend any suit, action or proceeding brought against
      such Grantor with respect to any Collateral; (F) settle, compromise or
      adjust any such suit, action or proceeding and, in connection therewith, give
      such discharges or releases as the Secured Party may deem appropriate;
      (G) assign any Copyright, Patent or Trademark (along with the goodwill of
      the business to which any such Copyright, Patent or Trademark pertains), for
      such term or terms, on such conditions, and in such manner, as the Secured
      Party
      shall in its sole discretion determine; and (H) generally, sell, transfer,
      pledge and make any agreement with respect to or otherwise deal with any of
      the
      Collateral as fully and completely as though the Secured Party were the absolute
      owner thereof for all purposes, and do, at the Secured Party’s option and such
      Grantor’s expense, at any time, or from time to time, all acts and things which
      the Secured Party deems necessary to protect, preserve or realize upon the
      Collateral and the Secured Party’s Security Interests therein and to effect the
      intent of this Agreement, all as fully and effectively as such Grantor might
      do.

     

    
      
         

      

      
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    (b)  If
      any
      Grantor fails to perform or comply with any of its agreements contained herein,
      the Secured Party, at its option, but without any obligation so to do, may
      perform or comply, or otherwise cause performance or compliance, with such
      agreement in accordance with the provisions of Section
      6.1(a).

     

    (c)  The
      expenses of the Secured Party incurred in connection with actions taken pursuant
      to the terms of this Agreement shall be deemed to be Advances under the Loan
      Agreement and shall, together with interest thereon at the rate(s) in effect
      from time to time pursuant to the Revolving Credit Note, from the date of
      payment by the Secured Party to the date reimbursed by the Grantors, be payable
      by the Grantors to the Secured Party on demand.

     

    (d)  Each
      Grantor hereby ratifies all that said attorneys shall lawfully do or cause
      to be
      done by virtue hereof in accordance with Section
      6.1(a).
      All
      powers, authorizations and agencies contained in this Agreement are coupled
      with
      an interest and are irrevocable until this Agreement is terminated and the
      Security Interests created hereby are released.

     

    Section
      6.2.  Duty
      of
      Secured Party

     

    .
      The
      Secured Party’s sole duty with respect to the custody, safekeeping and physical
      preservation of the Collateral in its possession, under Section 9-207 of the
      UCC
      or otherwise, shall be to deal with it in the same manner as the Secured Party
      deals with similar property for its own account. Neither the Secured Party
      nor
      any of its officers, directors, employees or agents shall be liable for failure
      to demand, collect or realize upon any of the Collateral or for any delay in
      doing so or shall be under any obligation to sell or otherwise dispose of any
      Collateral upon the request of any Grantor or any other Person or to take any
      other action whatsoever with regard to the Collateral or any part thereof.
      The
      powers conferred on the Secured Party hereunder are solely to protect the
      Secured Party’s interests in the Collateral and shall not impose any duty upon
      the Secured Party to exercise any such powers. The Secured Party shall be
      accountable only for amounts that it actually receives as a result of the
      exercise of such powers, and neither it nor any of its officers, directors,
      employees or agents shall be responsible to any Grantor for any act or failure
      to act hereunder, except for their own gross negligence or willful
      misconduct.

     

    
      
         

      

      
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    ARTICLE
      VII

     

    MISCELLANEOUS

     

    Section
      7.1.  Amendments
      in Writing.
      None of
      the terms or provisions of this Agreement may be waived, amended, supplemented
      or otherwise modified except in accordance with Section
      9.04
      of the
      Loan Agreement.

     

    Section
      7.2.  Notices.
      All
      notices, requests and demands to or upon the Secured Party or any Grantor
      hereunder shall be effected in the manner provided for in Section
      9.06
      of the
      Loan Agreement.

     

    Section
      7.3.  No
      Waiver by Course of Conduct, Cumulative Remedies.
      The
      Secured Party shall not by any act (except by a written instrument pursuant
      to
Section 7.1),
      delay,
      indulgence, omission or otherwise be deemed to have waived any right or remedy
      hereunder or to have acquiesced in any Default or Event of Default. No failure
      to exercise, nor any delay in exercising on the part of the Secured Party,
      any
      right, power or privilege hereunder shall operate as a waiver thereof. No single
      or partial exercise of any right, power or privilege hereunder shall preclude
      any other or further exercise thereof or the exercise of any other right, power
      or privilege. A waiver by the Secured Party of any right or remedy hereunder
      on
      any one occasion shall not be construed as a bar to any right or remedy which
      the Secured Party would otherwise have on any future occasion. The rights and
      remedies herein provided are cumulative, may be exercised singly or concurrently
      and are not exclusive of any other rights or remedies provided by
      law.

     

    Section
      7.4.  Enforcement
      Expenses, Indemnification. (a)  Each
      Grantor agrees to pay or reimburse the Secured Party on demand for all of its
      reasonable costs and expenses incurred in connection with enforcing or
      preserving any rights under this Agreement and the other Loan Documents
      (including, without limitation, in connection with any workout, restructuring,
      bankruptcy or other similar proceeding), including, without limitation, the
      reasonable fees and disbursements of counsel to the Secured Party.

     

    (b)  Each
      Grantor agrees to pay, and to save the Secured Party harmless from, any and
      all
      liabilities with respect to, or resulting from any delay in paying, any and
      all
      stamp, excise, sales or other taxes which may be payable or determined to be
      payable with respect to any of the Collateral or in connection with any of
      the
      transactions contemplated by this Agreement.

     

    (c)  Each
      Grantor agrees to pay, and to save the Secured Party harmless from any and
      all
      liabilities, obligations, losses, damages, penalties, costs and expenses in
      connection with actions, judgments, suits, costs, expenses or disbursements
      of
      any kind or nature whatsoever with respect to the execution, delivery,
      enforcement, performance and administration of this Agreement to the extent
      any
      Grantor would be required to do so pursuant to Section
      9.02
      of the
      Loan Agreement.

     

    (d)  The
      agreements in this Section
      7.4
      shall
      survive repayment of the Obligations and the termination of this Agreement
      and/or any other Loan Documents.

     

    Section
      7.5.  Waiver
      of Jury Trial; Preservation of Remedies.
      

     

    (a)  EACH
      GRANTOR HEREBY IRREVOCABLY WAIVES ITS RIGHTS TO A JURY TRIAL WITH RESPECT TO
      ANY
      ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION
      WITH
      THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER, OR THE PERFORMANCE OF
      SUCH
      RIGHTS AND OBLIGATIONS.

     

    (b)  The
      parties hereto preserve, without diminution, certain remedies that such Persons
      may employ or exercise freely, either alone, in conjunction with or during
      a
      dispute. Each such Person shall have and hereby reserves the right to proceed
      in
      any court of proper jurisdiction or by self-help to exercise or prosecute the
      following remedies, as applicable: (i) all rights to foreclose against any
      real
      or personal property or other security by exercising a power of sale granted
      in
      the Loan Documents or under Applicable Law or by judicial foreclosure and sale,
      including a proceeding to confirm the sale, (ii) all rights of self-help
      including peaceful occupation of property and collection of rents, set-off,
      and
      peaceful possession of property, (iii) obtaining provisional or ancillary
      remedies including injunctive relief, sequestration, garnishment, attachment,
      appointment of receiver and in filing an involuntary bankruptcy proceeding,
      and
      (iv) when applicable, a judgment by confession of judgment. Preservation of
      these remedies does not limit the power of an arbitrator to grant similar
      remedies that may be requested by a party in a dispute.

     

    
      
         

      

      
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    Section
      7.6.  Successors
      and Assigns.
      This
      Agreement shall be binding upon the successors and assigns of each Grantor
      and
      shall inure to the benefit of each Grantor (and shall bind all Persons who
      become bound as a Grantor to this Agreement), the Secured Party and their
      successors and assigns; provided,
      that no
      Grantor may assign, transfer or delegate any of its rights or obligations under
      this Agreement without the prior written consent of all holders of
      Obligations.

     

    Section
      7.7.  Set-Off.
      Each
      Grantor hereby irrevocably authorizes the Secured Party at any time and from
      time to time, without notice to such Grantor, any such notice being expressly
      waived by each Grantor, to set off and appropriate and apply any and all
      deposits (general or special, time or demand, provisional or final), in any
      currency, and any other credits, indebtedness or claims, in any currency, in
      each case whether direct or indirect, absolute or contingent, matured or
      unmatured, at any time held or owing by the Secured Party (or any agent of
      the
      Secured Party) to or for the credit or the account of such Grantor, or any
      part
      thereof in such amounts as the Secured Party may elect, against and on account
      of the obligations and liabilities of such Grantor to the Secured Party
      hereunder and claims of every nature and description of the Secured Party
      against such Grantor, in any currency, whether arising hereunder, under the
      Loan
      Agreement, any other Loan Document or otherwise, as the Secured Party may elect,
      whether or not the Secured Party has made any demand for payment and although
      such obligations, liabilities and claims may be contingent or unmatured. The
      Secured Party shall notify such Grantor promptly of any such set-off and the
      application made by the Secured Party of the proceeds thereof; provided,
      that the
      failure to give such notice shall not affect the validity of such setoff and
      application. The rights of the Secured Party under this Section
      7.7
      are in
      addition to other rights and remedies (including, without limitation, other
      rights of set-off) which the Secured Party may have.

     

    Section
      7.8.  Counterparts.
      This
      Agreement may be executed by one or more of the parties to this Agreement on
      any
      number of separate counterparts (including by telecopy), and all of said
      counterparts taken together shall be deemed to constitute one and the same
      instrument.

     

    Section
      7.9.  Severability.
      Any
      provision of this Agreement which is prohibited or unenforceable in any
      jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
      of such prohibition or unenforceability without invalidating the remainder
      of
      such provision or the remaining provisions hereof or thereof or affecting the
      validity or enforceability of such provision in any other
      jurisdiction.

     

    Section
      7.10.  Section
      Headings

     

    .
      The
      Section headings used in this Agreement are for convenience of reference only
      and are not to affect the construction hereof or be taken into consideration
      in
      the interpretation hereof.

     

    Section
      7.11.  Integration.
      This
      Agreement and the other agreements, instruments and documents referred to herein
      represent the agreement of the Grantors and the Secured Party with respect
      to
      the subject matter hereof and thereof, and there are no promises, undertakings,
      representations or warranties by the Secured Party relative to subject matter
      hereof and thereof not expressly set forth or referred to herein or in the
      other
      agreements, instruments and documents referred to herein.

     

    
      
         

      

      
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    Section
      7.12.  Governing
      Law.
      This
      Agreement shall be governed by, construed, interpreted and enforced in
      accordance with, the laws of the State of New York, without giving effect to
      principles of conflicts of laws.

     

    Section
      7.13.  Consent
      to Jurisdiction.
      Each
      Grantor hereby irrevocably consents to the personal jurisdiction of all state
      and federal courts located in New York, New York, in any action, claim or other
      proceeding arising out of any dispute in connection with this Agreement, the
      Loan Agreement, the Notes and the other Loan Documents, any rights or
      obligations hereunder or thereunder, or the performance of such rights and
      obligations. Each Grantor hereby irrevocably consents to the service of a
      summons and complaint and other process in any action, claim or proceeding
      brought by the Secured Party in connection with this Agreement, the Loan
      Agreement, the Notes or the other Loan Documents, any rights or obligations
      hereunder or thereunder, or the performance of such rights and obligations,
      on
      behalf of itself or its property, by registered or certified mail, return
      receipt requested, in the manner specified in Section
      9.06
      of the
      Loan Agreement. Nothing in this Section
      7.13
      shall
      affect the right of the Secured Party to serve legal process in any other manner
      permitted by Applicable Law or affect the right of the Secured Party to bring
      any action or proceeding against any Grantor or its properties in the courts
      of
      any other jurisdictions.

     

    Section
      7.14.  Acknowledgements.
       

     

    (a)  Each
      Grantor hereby acknowledges that (i) it has been advised by counsel in the
      negotiation, execution and delivery of this Agreement, (ii) the Secured Party
      has no fiduciary relationship with or duty to any Grantor arising out of or
      in
      connection with the Loan Agreement, this Agreement or any of the other Loan
      Documents, and the relationship between the Grantors (on the one hand) and
      the
      Secured Party (on the other hand) in connection herewith or therewith is solely
      that of debtor and creditor, and (iii) no joint venture is created hereby or
      otherwise exists by virtue of the transactions contemplated hereby.

     

    (b)  Each
      Issuer party to this Agreement acknowledges receipt of a copy of this Agreement
      and agrees to be bound thereby and to comply with the terms thereof insofar
      as
      such terms are applicable to it. Each Issuer agrees to provide such notices
      to
      the Secured Party as may be necessary to give full effect to the provisions
      of
      this Agreement.

     

    Section
      7.15.  Additional
      Grantors.
      Each
      Subsidiary of the Borrower that is required to become a party to this Agreement
      pursuant to Section
      5.11
      of the
      Loan Agreement shall become a Grantor for all purposes of this Agreement upon
      execution and delivery by such Subsidiary of a joinder agreement (with a
      Perfection Certificate and/or other appropriate disclosure schedules respecting
      such Additional Grantor) in form and substance satisfactory to the Secured
      Party.

     

    Section
      7.16.  Releases.
      

     

    (a)  At
      such
      time as the Obligations shall have been indefeasibly paid in full and the
      Revolving Credit Commitment has been terminated, the Collateral shall be
      released from the Liens created hereby, and this Agreement and all obligations
      (other than those expressly stated to survive such termination) of the Secured
      Party and each Grantor hereunder shall terminate, all without delivery of any
      instrument or performance of any act by any party, and all rights to the
      Collateral shall revert to the Grantors. At the request and sole expense of
      any
      Grantor following any such termination, the Secured Party shall deliver to
      such
      Grantor any Collateral held by the Secured Party hereunder, and execute and
      deliver to such Grantor such documents as such Grantor shall reasonably request
      to evidence such termination.

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    (b)  If
      any of
      the Collateral shall be sold, transferred or otherwise disposed of by any
      Grantor in a transaction permitted by the Loan Agreement, then the Secured
      Party, at the request and sole expense of such Grantor, shall execute and
      deliver to such Grantor all releases or other documents reasonably necessary
      or
      desirable for the release of the Liens created hereby on such
      Collateral.

     

    [Signature
      Page to Follow]

     

    
      
         

      

      
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    IN
      WITNESS
      WHEREOF, the parties hereto have caused this Collateral Agreement to be executed
      by their duly authorized officers, all as of the day and year first written
      above.

     

    AFP
      IMAGING CORPORATION 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    DENT-X
      INTERNATIONAL INC. 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    QR
      IMAGING
      USA, INC. 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    VISIPLEX
      INSTRUMENTS CORPORATION 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    COMVEST
      CAPITAL, LLC

     

    By:
      /s/
      Larry E. Lenig, Jr.

    Name:
      Larry E. Lenig, Jr.

     

    Title:
      Senior Partner/Portfolio Manager

    

    
      
         

      

      
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    EXHIBIT
      A

    to

    Collateral
      Agreement

     

    Form
      of
      Perfection Certificate

     

    Dated
      as
      of April 13, 2007

     

    This
      Perfection Certificate is being rendered to the Secured Party by the Grantors,
      pursuant to that certain Collateral Agreement dated as of April 13, 2007 by
      and
      among and AFP Imaging Corporation, certain of its Subsidiaries and ComVest
      Capital, LLC (as amended, modified, supplemented and/or restated from time
      to
      time, the “Collateral Agreement”). Capitalized terms used herein and not
      otherwise defined shall have the meanings assigned to them in the Collateral
      Agreement.

     

    Each
      Grantor hereby certifies to the Secured Party that as of the Closing
      Date:

     

    SECTION
      1. Identification
      Information.

     

    (a) The
      jurisdiction of incorporation, organization or formation of each Grantor and
      the
      date of such incorporation, organization or formation is as
      follows:

     

    (b) The
      location of the chief executive office of each Grantor is as
      follows:

     

    (c) The
      exact
      legal name of each Grantor as it appears in its Certificate of Incorporation
      or
      other Organic Document is as follows:

     

    (d) Except
      as
      set forth herein, (i) no Grantor has changed its identity or organizational
      structure in any way within the past five years, and (ii) no Person has merged
      or consolidated with or into any Grantor and no Person has liquidated into
      or
      transferred all or substantially all of its assets to any Grantor in any way
      within the past year.

     

    (e) The
      following is a list of all other names (including trade names or similar
      appellations) used by any Grantor at any time during the past five
      years:

     

    (f) The
      taxpayer identification number of each Grantor is as follows:

     

    (g) The
      registered organization identification number of each Grantor is as
      follows:

     

    SECTION
      2. Current
      Locations.

     

    (a) The
      following are the only locations at which any Grantor maintains any books or
      records relating to any Accounts:

     

    Grantor Mailing
      Address County
      and State

     

    (b) The
      following are all the locations not identified above where the Grantors maintain
      any Inventory or Equipment:

     

    Grantor Mailing
      Address County
      and State

     

    SECTION
      3. Deposit
      Accounts and Securities Accounts.
      The
      Grantors maintain the following Deposit Accounts:

     

    

    
      	
              Grantor

            	
              Financial
                Institution

            	
              Account
                Number

            	
              Address
                of Financial Institution

            	
              Account
                Purpose

            
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 

    

    

    SECTION
      4. Securities
      and Investment Property.
      The
      Grantors hold the following securities and Investment Property (including
      without limitation, capital stock of subsidiaries): 

     

    
      	
              Issuer

            	
              Grantor
                Owner

            	
              Number
                and Type of Securities

            	
              Percentage
                Ownership of Issuer

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

    SECTION
      5. Patents.
      The
      Grantors are the registered owners of the following Patents:

     

    
      	
              Grantor

            	
              Description

            	
              Registration/Application
                No.

            	
              Date

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

     

    SECTION
      6.
Trademarks.
      The
      Grantors are the registered owners of the following Trademarks:

     

    
      	
              Grantor

            	
              Description

            	
              Registration/Application
                No.

            	
              Date

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

    
      
         

      

      
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    SECTION
      7.
Copyrights.
      The
      Grantors are the registered owners of the following Copyrights:

     

    
      	
              Grantor

            	
              Description

            	
              Registration/Application
                No.

            	
              Date

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

     

    SECTION
      8.
Commercial
      Tort Claims.
      On the
      date hereof, the Grantors hold the following Commercial Tort
      Claims:

     

    SECTION
      9.
Unusual
      Transactions.
      Other
      than as set forth below, all Accounts have been originated by the Grantors
      and
      all Inventory and Equipment have been acquired by the Grantors in the ordinary
      course of business from Persons in the business of selling goods of such
      kind.

     

    SECTION
      10. Reliance.
      The
      undersigned acknowledge that the Secured Party is entitled to rely and has,
      in
      fact, relied on the information contained herein, and any successor or assign
      of
      the Secured Party is entitled to rely on the information contained
      herein.

     

    
      
         

      

      
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    IN
      WITNESS
      WHEREOF, each Grantor has executed this Perfection Certificate as of the date
      first above written.

     

    AFP
      IMAGING CORPORATION 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    DENT-X
      INTERNATIONAL INC. 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    QR
      IMAGING
      USA, INC. 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    VISIPLEX
      INSTRUMENTS CORPORATION 

     

    By:
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

     

    28Exhibit 10.5

    Exhibit
      10.5

    Registration
      Rights Agreement by AFP Imaging Corporation,

    

    REGISTRATION
      RIGHTS AGREEMENT

     

    This
      Registration Rights Agreement (this “Agreement”)
      is made
      as of April 13, 2007 by AFP Imaging Corporation, a New York corporation
      (the “Company”),
      for
      the benefit of the Holders (as such term is hereinafter defined). The Company
      hereby confirms that the rights granted under this Agreement constitute a
      material inducement to the Holders to enter into the Loan Agreement (as such
      term is hereinafter defined), make Loans from time to time thereunder, and/or
      acquire or hold Conversion Shares and/or Warrant Shares (as such terms are
      hereinafter defined). Each Holder, by its participation or request to
      participate in any Registration effected pursuant to this Agreement, shall
      be
      deemed to have confirmed such Holder’s agreement to comply with the applicable
      provisions of this Agreement.

     

    NOW,
      THEREFORE, the Company hereby agrees, in favor of the Holders, as
      follows:

     

    1.  Definitions.
      In
      addition to those terms defined elsewhere in this Agreement, the following
      terms
      shall have the following meanings wherever used in this Agreement:

     

    “Act”
shall
      mean the Securities Act of 1933, as amended, and any successor statute from
      time
      to time.

     

    “Affiliate”
shall
      mean, with respect to any person, any other person controlling, controlled
      by or
      under common control with the first person. 

     

    “Board”
shall
      mean the Board of Directors of the Company.

     

    “Common
      Stock”
shall
      mean the authorized common stock of the Company.

     

    “Company”
shall
      mean AFP Imaging Corporation, and shall include any successor
      thereto.

     

    “Conversion
      Shares”
shall
      mean the Common Stock and/or other securities issued and/or issuable from time
      to time upon conversion of the Term Note (in whole or in part), and any
      additional or other Shares issued in respect of any of the foregoing Shares
      by
      reason of any stock split, stock dividend, merger, share exchange,
      recapitalization or other such event.

     

    “Costs
      and Expenses”
shall
      mean all of the costs and expenses relating to any subject Registration
      Statement, including but not limited to registration, filing and qualification
      fees, blue sky expenses, costs of listing any Shares on any exchange or other
      trading media, and printing expenses, fees and disbursements of counsel and
      accountants to the Company, and reasonable fees and disbursements of a single
      counsel to the Holders; provided,
      however,
      that
      underwriting discounts and commissions attributable solely to the securities
      registered for the benefit of Holders, fees and disbursements of any additional
      counsel to Holders, and all other expenses attributable solely to Holders shall
      be borne by each subject Holder.

     

    “Exchange
      Act”
shall
      mean the Securities Exchange Act of 1934, as amended, and any successor statute
      from time to time.

     

    “Holders”
shall
      mean, collectively, all Persons holding Registrable Shares from time to
      time.

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    “Loan
      Agreement”
shall
      mean the Revolving Credit and Term Loan Agreement of even date herewith by
      and
      between ComVest Capital, LLC and the Company, as the same may be amended,
      modified, supplemented and/or restated from time to time in accordance with
      the
      provisions thereof.

     

    “Loans”
shall
      mean the loans extended to the Company from time to time under and pursuant
      to
      the Loan Agreement.

     

    “Person”
shall
      mean any individual, corporation, partnership, limited partnership, limited
      liability company, trust, or other entity of any kind ,and any government or
      department or agency thereof.

     

    “Registrable
      Shares”
shall
      mean all Shares, excluding any Shares which may then be sold by the Holder
      thereof pursuant to Rule 144(k) promulgated under the Act.

     

    “Registration”
shall
      mean any registration of Common Stock pursuant to a registration statement
      filed
      by the Company with the SEC in respect of any class of Common Stock,
other than
      a
      registration statement in respect of employee stock options or other employee
      benefit plans or in respect of any merger, consolidation, acquisition or like
      combination, whether on Form S-4, Form S-8 or any equivalent form of
      registration then in effect.

     

    “Registration
      Period”
shall
      mean, with respect to a Registration Statement, the period of time from the
      effective date of such Registration Statement until such date as is the earlier
      of (a) the date on which all of the Registrable Securities covered by such
      Registration Statement shall have been sold to the public, or (b) the date
      on which the Conversion Shares and the Warrant Shares issued or issuable upon
      cashless exercise of the Warrant in accordance with Section 1.3 of the Warrant
      (in the opinion of counsel to the Company evidenced by a written opinion issued
      to the Holders in form reasonably acceptable to the Holders) may be immediately
      sold without restriction (including, without limitation, as to volume
      restrictions) by each Holder thereof without registration under the
      Act.

     

    “Registration
      Statement”
shall
      mean any registration statement filed or to be filed by the Company in respect
      of any Registration.

     

    “SEC”
shall
      mean the United States Securities and Exchange Commission, or any successor
      agency or agencies performing the functions thereof.

     

    “Shares”
shall
      mean (a) the Conversion Shares issued and/or issuable from time to time, (b)
      the
      Warrant Shares issued and/or issuable from time to time, and (c) any additional
      or other shares of common stock of the Company issued in respect of any of
      the
      foregoing Shares by reason of any stock split, stock dividend, merger, share
      exchange, recapitalization or other such event.

     

    “Term
      Note”
shall
      have the meaning ascribed thereto in the Loan Agreement, and shall include
      any
      replacement promissory note(s) therefor.

     

    “Warrants”
shall
      mean the warrants to purchase Shares, issued by the Company pursuant to the
      Loan
      Agreement, including any and all warrants issued in replacement of the original
      such warrants.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    “Warrant
      Shares”
shall
      mean the Common Stock and/or other securities issued and/or issuable from time
      to time upon exercise of any of the Warrants, and any additional or other Shares
      issued in respect of any of the foregoing Shares by reason of any stock split,
      stock dividend, merger, share exchange, recapitalization or other such
      event.

     

    2.  Shelf
      Registration.

     

    (a)  The
      Company shall prepare and file with the SEC, not later than one hundred fifty
      (150) days after the date of this Agreement, a Registration Statement or
      Registration Statements (as necessary) on a form that is appropriate under
      the
      Act (and, if available, pursuant to Rule 415 promulgated under the Act),
      covering the resale of all of the Registrable Securities, in an amount
      sufficient to cover the resale of all Conversion Shares, Warrant Shares and
      additional shares of Common Stock issuable pursuant to the anti-dilution
      provisions of the Term Note and the Warrants.

     

    (b)  The
      Company shall use its best efforts to cause the Registration Statement(s)
      required by this Section 2 to be declared effective under the Act as promptly
      as
      possible after the filing thereof, but in any event not later than two hundred
      seventy (270) days after the date of this Agreement.

     

    (c)  If
      (i) the Registration Statement required by this Section 2 is not filed
      within one hundred fifty (150) days after the date of this Agreement, or is
      not
      declared effective under the Act within two hundred seventy (270) days after
      the
      date of this Agreement, or (ii) the Registration Statement required by this
      Section 2 shall cease to be available for use by the Holders as selling
      stockholders (A) as provided under Section 2(f) below where such
      unavailability continues for a period in excess of five (5) days beyond the
      allowed time period, or (B) for any other reason including, without
      limitation, by reason of a stop order, a material misstatement or omission
      in
      such Registration Statement or the information contained in such Registration
      Statement having become outdated and continues to be unavailable for a period
      in
      excess of thirty (30) days (which need not be consecutive days) in any twelve
      (12) month period, then the Company shall pay to the Holders, ratably in
      proportion to the number of Registrable Shares held by the respective Holders,
      a
      cash fee equal to the product of $1,000 multiplied by the number of calendar
      days during which any of the events described in clauses (i) or (ii) above
      occurs and is continuing (the “Blackout
      Period”);
      provided,
      however,
      that the
      aggregate of such fees payable under this Section 2(c) shall not exceed
      $500,000; and further provided,
      that the
      Company shall not be liable to pay any fees under this Section 2(c) to the
      extent that the occurrence of the events described in clauses (i) or (ii) above
      arises out of or is based upon any untrue statement or alleged untrue statement
      or omission or alleged omission made in reliance upon and in conformity with
      information furnished to the Company by a Holder for inclusion in the
      Registration Statement. Each such payment shall be due within five (5) days
      after the end of each 30-day period of the Blackout Period until the termination
      of the Blackout Period and within five (5) days after such termination. The
      Blackout Period shall terminate upon the filing or effectiveness (as the case
      may be) of the Registration Statement in the case of clause (i) above and upon
      notice from the Company that the Registration Statement is again available
      in
      the case of clause (ii) above.

     

    (d)  The
      Company shall use its best efforts to keep each Registration Statement under
      this Section 2 effective at all times during the applicable Registration
      Period.

     

    (e)  If
      any
      offering pursuant to a Registration Statement pursuant to this Section 2
      involves an underwritten offering (which may only be with the consent of the
      Company, which shall not be unreasonably withheld or delayed), the Holders
      (acting by a majority in interest) shall have the right to select legal counsel
      and an investment banker or bankers and manager or managers to administer to
      the
      offering, which investment banker or bankers or manager or managers shall be
      reasonably satisfactory to the Company.

     

    (f)  If
      the
      Registrable Securities are registered for resale under an effective Registration
      Statement, the Holders shall cease any distribution of such Shares under such
      Registration Statement:

     

    
      
         

      

      
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    (i)  for
      a
      period of up to six (6) months if (A) such distribution would require the public
      disclosure of material non-public information concerning any transaction or
      negotiations involving the Company or any of its Affiliates that, in the
      reasonable judgment of the Company’s Board of Directors, would materially
      interfere with such transaction or negotiations, or (B) such distribution would
      otherwise require premature disclosure of information that, in the reasonable
      judgment of the Company’s Board of Directors, would adversely affect or
      otherwise be detrimental to the Company; provided
      that the
      Company shall not invoke this clause (i) more than once in any twelve (12)
      month
      period or for more than six (6) months in any such twelve (12) month period;
      

     

    (ii)  not
      more
      than once in any twelve (12) month period, for up to 60 days, upon the request
      of the Company if the Company proposes to file a Registration Statement under
      the Act for the offering and sale of securities for its own account in an
      underwritten offering and the managing underwriter therefor shall advise the
      Company in writing that in its opinion the continued distribution of the
      Registrable Securities would adversely affect the offering of the securities
      proposed to be registered for the account of the Company; and

     

    (iii) for
      a
      period of up to sixty (60) days after the filing of the Company’s annual report
      on Form 10-K or other event that requires the filing of a post-effective
      amendment to any Registration Statement hereunder, so long as the Company has
      filed and is during such period actively pursuing effectiveness of such
      post-effective amendment with the staff of the SEC.

     

    The
      Company shall promptly notify the Holders in writing at such time as (x) such
      transactions or negotiations have been otherwise publicly disclosed or
      terminated, or (y) such non-public information has been publicly disclosed
      or
      counsel to the Company has determined that such disclosure is not required
      due
      to subsequent events.

     

    (g)  The
      Company shall (i) permit the Holders’ counsel to review (A) such
      Registration Statement, and all amendments and supplements thereto, in each
      case
      to the extent of any information with respect to the Holders, their and their
      Affiliates’ beneficial ownership of securities of the Company, and their
      intended method of disposition of Registrable Securities, and (B) all requests
      for acceleration or effectiveness thereof and any correspondence between the
      Company and the SEC relating to the Registration Statement (collectively, the
      “Registration
      Documents”),
      for a
      reasonable period of time prior to their filing with the SEC, (ii) not file
      (or send) any Registration Documents in a form to which such counsel reasonably
      objects, and (iii) not request acceleration of such Registration Statement
      without prior notice to such counsel. The sections of such Registration
      Statement covering information with respect to the Holders, their and their
      Affiliates’ beneficial ownership of securities of the Company, and their
      intended method of disposition of Registrable Securities shall conform to the
      information provided to the Company by the Holders. 

     

    (h)  The
      Registration Statement pursuant to this Section 2 shall not include any
      securities other than Registrable Shares.

     

    (i) The
      Company shall bear all of the Costs and Expenses of the Registration pursuant
      to
      this Section 2.

     

    3.  Piggyback
      Registration.
      In the
      event that the Company shall propose a Registration at any time when a
      Registration Statement is not effective pursuant to Section 2 above, then the
      Company shall give to each Holder written notice (the “Registration
      Notice”)
      of such
      proposed Registration (which notice shall include a statement of the proposed
      filing date thereof, the underwriters and/or managing underwriters of the
      subject offering, and any other known material information relating to the
      proposed Registration) not less than twenty (20) or more than sixty (60) days
      prior to the filing of the subject Registration Statement, and shall, subject
      to
      the limitations provided in this Section 3, include in such Registration
      Statement all or a portion of the Registrable Shares owned by and/or issuable
      to
      each Holder, as and to the extent that such Holder may request same to be so
      included by means of written notice given to the Company within ten (10) days
      after the Company’s giving of the Registration Notice. Each Holder shall be
      permitted to withdraw all or any part of its Registrable Shares from a
      Registration Statement by written notice to the Company given at any time prior
      to the effective date of the Registration Statement. The Company shall bear
      all
      of the Costs and Expenses of any Registration described in this Section 3;
      provided,
      however,
      that
      each Holder shall pay, pro rata
      based
      upon the number of its Registrable Shares included therein, the underwriters’
discounts, commissions and compensation attributable solely to the inclusion
      of
      such Registrable Shares in the overall public offering. Notwithstanding anything
      to the contrary contained herein, the Company’s obligation to include a Holder’s
      Registrable Shares in any such Registration Statement shall be subject, at
      the
      option of the Company, to the following further conditions:

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    (a)  The
      distribution for the account of such Holder shall be underwritten by the same
      underwriters (if any) who are underwriting the distribution of the securities
      for the account of the Company and/or any other persons whose securities are
      covered by such Registration Statement, and shall be made at the same
      underwriter discount or commission applicable to the distribution of the
      securities for the account of the Company and/or any other persons whose
      securities are covered by such Registration Statement; and such Holder shall
      enter into an agreement with such underwriters containing customary
      indemnification and other provisions;

     

    (b)  If
      at any
      time after giving the Registration Notice, and prior to the effective date
      of
      the Registration Statement filed in connection with such Registration Notice,
      the Company shall determine for any reason not to proceed with the subject
      Registration, the Company may, at its election, give written notice of such
      determination to the Holders and, thereupon, shall be relieved of its obligation
      to register any of the Holders’ Registrable Shares in connection with such
      Registration;

     

    (c)  In
      connection with an underwritten public offering pursuant to a Registration
      Statement under this Section 3, if and only if the managing underwriter(s)
      thereof shall advise the Company in writing that, due to adverse market
      conditions or the potential adverse impact on the offering to be made for the
      account of the Company, the securities to be included in such Registration
      will
      not include all of the Registrable Shares requested to be so included by the
      Holders, then the Company will promptly furnish each such Holder with a copy
      of
      such written statement and may require, by written notice to each such Holder
      accompanying such written statement, that the distribution of all or a specified
      portion of such Registrable Shares be excluded from such distribution (with
      any
      such “cutback” to be allocated among the subject Holders (and, if applicable,
      any other holders of Common Stock to be included in such Registration) in
      proportion to the relative number of shares of Common Stock requested by such
      Persons to be included in such Registration); and 

     

    (d)  The
      Company shall not be obligated to effect any registration of Shares incidental
      to the registration of any of its securities in connection with mergers,
      acquisitions, exchange offers, dividend reinvestment plans or stock option
      or
      other employee benefit plans.

     

    4.  Registration
      Procedures.
      In the
      case of each Registration effected by the Company in which Registrable Shares
      are to be sold for the account of any Holder, the Company, at its sole cost
      and
      expense (exclusive of items excluded in the proviso to the definition of “Costs
      and Expenses” above), will use its best efforts to:

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    (a)  prepare
      and file with the SEC such amendments and supplements to such Registration
      Statement and the prospectus included therein as may be necessary to effect
      and
      maintain the effectiveness of such Registration Statement, until the completion
      of the distribution of the Registrable Shares included therein, as may be
      required by the applicable rules and regulations of the SEC and the instructions
      applicable to the form of such Registration Statement, and furnish to the
      Holders of the Registrable Shares covered thereby copies of any such supplement
      or amendment not less than three (3) Business Days prior to the date first
      used
      and/or filed with the SEC; and comply with the provisions of the Act with
      respect to the disposition of all the Shares to be included in such Registration
      Statement;

     

    (b)  provide
      (i) the Holders of the Registrable Shares to be included in such Registration
      Statement, (ii) the underwriters (which term, for purposes of this Agreement,
      shall include a person deemed to be an underwriter within the meaning of Section
      2(11) of the Act, if any, thereof, (iii) the sales or placement agent, if any,
      therefor, (iv) one counsel for such underwriters or agent, and (v) not more
      than
      one counsel for all the Holders of such Registrable Shares, the reasonable
      opportunity review such Registration Statement, each prospectus included therein
      or filed with the SEC, and each amendment or supplement thereto, in each case
      to
      the extent of any disclosures regarding the Holders, their and their Affiliates’
beneficial ownership of securities of the Company, and their intended method
      of
      disposition of the Registrable Shares included in such Registration Statement
      (or any amendment to any such information previously included in such
      Registration Statement (including any amendment or supplement thereto) or any
      prospectus included therein);

     

    (c)  for
      a
      reasonable period prior to the filing of such Registration Statement, and not
      more than once in any calendar quarter throughout the period specified above,
      make available for inspection by the Persons referred to in Section 4(b) above
      such financial and other information and books and records of the Company,
      and
      cause the officers, directors, employees, counsel and independent certified
      public accountants of the Company to respond to such inquiries, as shall be
      reasonably necessary, in the judgment of the respective counsel referred to
      in
      such Section 4(b), to conduct a reasonable investigation within the meaning
      of
      the Act; provided,
      however,
      that
      each such party shall be required to maintain in confidence and not disclose
      to
      any other person or entity any information or records reasonably designated
      by
      the Company in writing as being confidential, until such time as and to the
      extent that (i) such information becomes a matter of public record or generally
      available to the public (whether by virtue of its inclusion in such Registration
      Statement or otherwise, other than by reason of a breach hereof), (ii) such
      party shall be required to disclose such information pursuant to the subpoena
      or
      order of any court or other governmental agency or body having jurisdiction
      over
      the matter, or (iii) such information is required to be set forth in such
      Registration Statement or the prospectus included therein or in an amendment
      to
      such Registration Statement or an amendment or supplement to such prospectus
      in
      order that such Registration Statement, prospectus, amendment or supplement,
      as
      the case may be, does not include an untrue statement of a material fact or
      omit
      to state therein a material fact required to be stated therein or necessary
      to
      make the statements therein not misleading; and
      further provided,
      that the
      Company need not make such information available, nor need it cause any officer,
      director or employee to respond to such inquiry, unless each such Holder of
      Registrable Shares to be included in a Registration Statement hereunder, upon
      the Company’s request, executes and delivers to the Company a specific
      undertaking to substantially the same effect contained in the preceding
      proviso;

     

    (d)  promptly
      notify in writing the Holders of Registrable Shares to be included in a
      Registration Statement hereunder, the sales or placement agent, if any, therefor
      and the managing underwriter of the securities being sold, (i) when such
      Registration Statement or the prospectus included therein or any prospectus
      amendment or supplement or post-effective amendment has been filed, and, with
      respect to such registration statement or any post-effective amendment, when
      the
      same has become effective, (ii) of any comments by the SEC and by the blue
      sky
      or securities commission or regulator of any state with respect thereto or
      any
      request by the SEC for amendments or supplements to such Registration Statement
      or the prospectus or for additional information, (iii) of the issuance by the
      SEC of any stop order suspending the effectiveness of such registration
      statement or the initiation of any proceedings for that purpose, (iv) of the
      receipt by the Company of any notification with respect to the suspension of
      the
      qualification of any Shares for sale in any jurisdiction or the initiation
      or
      threatening of any proceeding for such purpose, or (v) if it shall be the case,
      at any time when a prospectus is required to be delivered under the Act, that
      such Registration Statement, prospectus, or any document incorporated by
      reference in any of the foregoing contains an untrue statement of a material
      fact or omits to state any material fact required to be stated therein or
      necessary to make the statements therein not misleading in light of the
      circumstances then existing;

     

    
      
         

      

      
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    (e)  obtain
      the
      withdrawal of any order suspending the effectiveness of such Registration
      Statement or any post-effective amendment thereto at the earliest practicable
      date;

     

    (f)  if
      requested by any managing underwriter or underwriter, any placement or sales
      agent or any Holder of Registrable Shares to be included in a Registration
      Statement, promptly incorporate in a prospectus, prospectus supplement or
      post-effective amendment such information as is required by the applicable
      rules
      and regulations of the SEC and as such managing underwriter or underwriters,
      such agent or such Holder may reasonably specify should be included therein
      relating to the terms of the sale of the Registrable Shares included thereunder,
      including, without limitation, information with respect to the number of
      Registrable Shares being sold by such Holder or agent or to such underwriters,
      the name and description of such Holder, the offering price of such Registrable
      Shares and any discount, commission or other compensation payable in respect
      thereof, the purchase price being paid therefor by such underwriters and with
      respect to any other terms of the offering of the Registrable Shares to be
      sold
      in such offering; and make all required filings of such prospectus, prospectus
      supplement or post-effective amendment promptly after notification of the
      matters to be incorporated in such prospectus, prospectus supplement or
      post-effective amendment;

     

    (g)  furnish
      to
      each Holder of Registrable Shares to be included in such Registration Statement
      hereunder, each placement or sales agent, if any, therefor, each underwriter,
      if
      any, thereof and the counsel referred to in Section 4(b) an executed copy of
      such Registration Statement, each such amendment and supplement thereto (in
      each
      case excluding all exhibits and documents incorporated by reference) and such
      number of copies of the Registration Statement (excluding exhibits thereto
      and
      documents incorporated by reference therein unless specifically so requested
      by
      such Holder, agent or underwriter, as the case may be) and the prospectus
      included in such Registration Statement (including each preliminary prospectus
      and any summary prospectus), in conformity with the requirements of the Act,
      as
      such Holder, agent, if any, and underwriter, if any, may reasonably request
      in
      order to facilitate the disposition of the Shares owned by such Holder, sold
      by
      such agent or underwritten by such underwriter and to permit such Holder, agent
      and underwriter to satisfy the prospectus delivery requirements of the Act;
      and
      the Company hereby consents to the use of such prospectus and any amendment
      or
      supplement thereto by each such Holder and by any such agent and underwriter,
      in
      each case in the form most recently provided to such person by the Company,
      in
      connection with the offering and sale of the Shares covered by the prospectus
      (including such preliminary and summary prospectus) or any supplement or
      amendment thereto;

     

    (h)  timely
      (i)
      register or qualify (to the extent legally required) the Shares to be included
      in such registration statement under such other securities laws or blue sky
      laws
      of such jurisdictions to be designated by the Holders of a majority of such
      Shares participating in such registration and each placement or sales agent,
      if
      any, therefor and underwriter, if any, thereof, as any Holder and each
      underwriter, if any, of the securities being sold shall reasonably request,
      (ii)
      keep such registrations or qualifications in effect and comply with such laws
      so
      as to permit the continuance of offers, sales and dealings therein in such
      jurisdictions for so long as may be necessary to enable such Holder, agent
      or
      underwriter to complete its distribution of the Registrable Shares pursuant
      to
      such Registration Statement, and (iii) take any and all such actions as may
      be
      reasonably necessary or advisable to enable such Holder, agent, if any, and
      underwriter to consummate the disposition in such jurisdictions of such Shares;
      provided,
      however,
      that the
      Company shall not be required for any such purpose to (A) qualify generally
      to
      do business as a foreign corporation or a broker-dealer in any jurisdiction
      wherein it would not otherwise be required to qualify but for the requirements
      of this Section 4(h), (B) subject itself to taxation in any such jurisdiction,
      or (C) consent to general service of process in any such
      jurisdiction;

     

    
      
         

      

      
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    (i)  cooperate
      with the Holders of the Registrable Shares to be included in a Registration
      Statement hereunder and the managing underwriter(s) to facilitate the timely
      preparation and delivery of certificates representing Registrable Shares to
      be
      sold, which certificates shall be printed, lithographed or engraved, or produced
      by any combination of such methods, in customary form to permit the transfer
      thereof through the Company’s transfer agent; and enable such Registrable Shares
      to be in such denominations and registered in such names as the managing
      underwriter(s) may request at least two (2) business days prior to any sale
      of
      the Registrable Shares;

     

    (j)  provide
      a
      CUSIP number for all Shares, not later than the effective date of the
      Registration Statement;

     

    (k)  in
      the
      event that Registrable Securities included in any Registration Statement are
      to
      be sold to or through any underwriter or placement or sales agent, (i) make
      such
      representations and warranties to the Holders of such Registrable Shares and
      the
      placement or sales agent, if any, therefor and the underwriters, if any, thereof
      in form, substance and scope as are customarily made in connection with any
      offering of equity securities pursuant to any appropriate agreement and/or
      in a
      registration statement filed on the form applicable to such Registration
      Statement; (ii) if so requested by any such underwriter or placement or sales
      agent, obtain an opinion of counsel to the Company in customary form and
      covering such matters, of the type customarily covered by such an opinion,
      as
      the managing underwriters, if any, and/or the placement or sales agent may
      reasonably request, addressed to such Holders and the placement or sales agent,
      if any, therefor and the underwriters, if any, thereof and dated the effective
      date of such Registration Statement (and if such Registration Statement
      contemplates an underwritten offering of a part or of all of the Shares included
      in such Registration Statement, dated the date of the closing under the
      underwriting agreement relating thereto) (it being agreed that the matters
      to be
      covered by such opinion shall include, without limitation, the due organization
      of the Company and its subsidiaries, if any; the qualification of the Company
      and its subsidiaries, if any, to transact business as foreign entities; the
      due
      authorization, execution and delivery of this Agreement and of any underwriting
      agreement; the absence, to such counsel’s knowledge, of pending or threatened
      material legal or governmental proceedings involving the Company or any
      subsidiary; the absence of a known breach by the Company or its subsidiaries
      of,
      or a default under, agreements binding the Company or any subsidiary; the
      absence of governmental approvals required to be obtained in connection with
      the
      Registration Statement, the offering and sale of the Shares, this Agreement
      or
      any underwriting agreement; the compliance as to form of such Registration
      Statement and any documents incorporated by reference therein with the
      requirements of the Act; and the effectiveness of such Registration Statement
      under the Act); (iii) if so requested by any such underwriter or placement
      or
      sales agent, obtain a “cold comfort” letter or letters from the independent
      certified public accountants of the Company addressed to the Holders and the
      placement or sales agent, if any, therefor and the underwriters, if any,
      thereof, dated (A) the effective date of such Registration Statement, and (B)
      the effective date of the most recent (or, if so stated in the request therefor,
      the next) prospectus supplement to the prospectus included in such Registration
      Statement or post-effective amendment to such Registration Statement which
      includes unaudited or audited financial statements as of a date or for a period
      subsequent to that of the latest such statements included in such prospectus
      (and, if such Registration Statement contemplates an underwritten offering
      pursuant to any prospectus supplement to the prospectus included in such
      Registration Statement or post-effective amendment to such Registration
      Statement which includes unaudited or audited financial statements as of a
      date
      or for a period subsequent to that of the latest such statements included in
      such prospectus, dated the date of the closing under the underwriting agreement
      relating thereto), such letter or letters to be in customary form and covering
      such matters of the type customarily covered by letters of such type; (iv)
      deliver such documents and certificates, including officers’ certificates, as
      may be customary and reasonably requested by Holders of at least a majority
      of
      the Registrable Shares being sold and the placement or sales agent, if any,
      therefor and the managing underwriters, if any, thereof to evidence the accuracy
      of the representations and warranties made pursuant to clause (i) above and
      the
      compliance with or satisfaction of any agreements or conditions contained in
      the
      underwriting agreement or other agreement entered into by the Company; and
      (v)
      undertake such obligations relating to expense reimbursement, indemnification
      and contribution as are provided in Sections 2, 3 and 5 hereof;

     

    
      
         

      

      
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    (l)  notify
      in
      writing each Holder of Registrable Shares of any proposal by the Company to
      amend or waive any provision of this Agreement and of any amendment or waiver
      effected pursuant thereto, each of which notices shall contain the text of
      the
      amendment or waiver proposed or effected, as the case may be;

     

    (m)  engage
      to
      act on behalf of the Company, with respect to the Registrable Shares to be
      so
      registered, a registrar and transfer agent having such duties and
      responsibilities (including, without limitation, registration of transfers
      and
      maintenance of stock registers) as are customarily discharged by such an agent,
      and to enter into such agreements and to offer such indemnities as are customary
      in respect thereof; and

     

    (n)  otherwise
      comply with all applicable rules and regulations of the SEC, and make available
      to the Holders, as soon as practicable, but in any event not later than 18
      months after the effective date of such Registration Statement, an earnings
      statement covering a period of at least twelve months which shall satisfy the
      provisions of Section 6(a) of the Act (including, at the option of the Company,
      pursuant to Rule 158 thereunder).

     

    5.  Indemnification
      by the Company.

     

    (a)  The
      Company shall indemnify each Holder and its Affiliates from and against any
      claim, loss, cost, charge or liability of any kind, including amounts paid
      in
      settlement and reasonable attorneys’ fees, which may be incurred by the Holder
      or Affiliate as a result of any breach of any representation or warranty or
      covenant of the Company contained in this Agreement or in any certificate
      delivered on the closing date of any public offering of Shares.

     

    (b)  The
      Company shall indemnify and hold harmless each Holder and its Affiliates, any
      underwriter (as defined in the Act) for any Holder, each officer and director
      of
      a Holder, legal counsel and accountants for a Holder, and each person, if any,
      who controls a Holder or such underwriter within the meaning of the Act, against
      any losses, expenses, claims, damages or liabilities, joint or several, to
      which
      such Holder or any such Affiliate, underwriter, officer, director or controlling
      person becomes subject, under the Act or any rule or regulation thereunder
      or
      otherwise, insofar as such losses, expenses, claims, damages or liabilities
      (or
      actions in respect thereof) (i) are caused by any untrue statement or alleged
      untrue statement of any material fact contained in any preliminary prospectus
      (if used prior to the effective date of the Registration Statement), or
      contained, on the effective date thereof, in any Registration Statement in
      which
      Registrable Shares were included, the prospectus contained therein, any
      amendment or supplement thereto, or any other document related to such
      Registration Statement, or (ii) arise out of or are based upon the omission
      or
      alleged omission to state therein a material fact required to be stated therein
      or necessary to make the statements therein not misleading, or (iii) arise
      out
      of any violation by the Company of the Act or any rule or regulation thereunder
      applicable to the Company and relating to actions or omissions otherwise
      required of the Company in connection with such registration. The Company shall
      reimburse each Holder and any such Affiliate, underwriter, officer, director
      or
      controlling person for any legal or other expenses reasonably incurred by such
      Holder, or any such officer, director, underwriter or controlling person in
      connection with investigating, defending or settling any such loss, claim,
      damage, liability or action; provided,
      however,
      that the
      Company shall not be liable to any such persons in any such case to the extent
      that any such loss, claim, damage, liability or action arises out of or is
      based
      upon any untrue statement or alleged untrue statement or omission or alleged
      omission made in reliance upon and in conformity with information furnished
      to
      the Company in writing by such Person expressly for inclusion in any of the
      foregoing documents. This indemnity shall not apply to amounts paid in
      settlement of any such loss, claim, damage, liability or action if such
      settlement is effected without the consent of the Company, which consent shall
      not be unreasonably withheld or delayed.

     

    6.  Further
      Obligations of Holders.
      The
      obligations of the Company with respect to any particular Holder are subject
      to
      such Holder’s agreement to the following (which such Holder shall specifically
      confirm in writing to the Company upon the Company’s request in connection with
      any Registration Statement):

     

    (a)  Such
      Holder shall furnish in writing to the Company all information concerning such
      Holder and its and its Affiliates’ holdings of securities of the Company and its
      Affiliates, and the intended method of disposition of the Registrable Securities
      included in such Registration Statement, as shall be reasonably required in
      connection with the preparation and filing of any Registration Statement
      covering any of such Holder’s Registrable Shares.

     

    (b)  Such
      Holder shall indemnify and hold harmless the Company, each of its directors,
      each of its officers who has signed a Registration Statement, each person (if
      any) who controls the Company within the meaning of the Act, and any underwriter
      (as defined in the Act) for the Company, against any losses, claims, damages
      or
      liabilities to which the Company or any such director, officer, controlling
      person or underwriter may become subject under the Act or any rule or regulation
      thereunder or otherwise, insofar as such losses, claims, damages or liabilities
      (or actions in respect thereof) (i) are caused by any untrue statement or
      alleged untrue statement of any material fact contained in any preliminary
      prospectus (if used prior to the effective date of the Registration Statement),
      or contained, on the effective date thereof, in any Registration Statement
      in
      which such Holder’s Registrable Shares were included, the prospectus contained
      therein, any amendment or supplement thereto, or any other document related
      to
      such Registration Statement, or (ii) arise out of or are based upon the omission
      or alleged omission to state therein a material fact required to be stated
      therein or necessary to make the statements therein not misleading, in each
      case
      to the extent, but only to the extent, that such untrue statement or alleged
      untrue statement or omission or alleged omission was made in reliance upon
      and
      in conformity with information furnished to the Company by such Holder in
      writing expressly for inclusion in any of the foregoing documents. In no event
      shall any Holder be required to pay indemnification hereunder (or contribution
      under Section 7(d) below) in an aggregate amount in excess of the net proceeds
      received by such Holder in the subject offering. This indemnity shall not apply
      to amounts paid in settlement of any such loss, claim, damage, liability or
      action if such settlement is effected without the consent of the subject Holder,
      which consent shall not be unreasonably withheld or delayed.

     

    
      
         

      

      
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    7.  Additional
      Provisions.

     

    (a)  Each
      Holder and each other Person indemnified pursuant to Section 5 above shall,
      in
      the event that it receives notice of the commencement of any action against
      it
      which is based upon an alleged act or omission which, if proven, would result
      in
      the Company’s having to indemnify it pursuant to Section 5 above, promptly
      notify the Company, in writing, of the commencement of such action and permit
      the Company, if the Company so notifies such Holder within twenty (20) days
      after receipt by the Company of notice of the commencement of the action, to
      participate in and to assume the defense of such action with counsel reasonably
      satisfactory to such Holder; provided,
      however,
      that
      such Holder or other indemnified person shall be entitled to retain its own
      counsel at its own expense (except that the indemnifying party shall bear the
      expense of such separate counsel if representation of both parties by the same
      counsel would be inappropriate due to actual or potential conflicts of
      interest). The failure to notify the Company promptly of the commencement of
      any
      such action shall not relieve the Company of any liability to indemnify such
      Holder or such other indemnified person, as the case may be, under Section
      5
      above, except to the extent that the Company shall be actually prejudiced or
      shall suffer any loss by reason of such failure to give notice, and shall not
      relieve the Company of any other liabilities which it may have under this or
      any
      other agreement.

     

    (b)  The
      Company and each other Person indemnified pursuant to Section 6 above shall,
      in
      the event that it receives notice of the commencement of any action against
      it
      which is based upon an alleged act or omission which, if proven, would result
      in
      any Holder having to indemnify it pursuant to Section 6 above, promptly notify
      such Holder, in writing, of the commencement of such action and permit such
      Holder, if such Holder so notifies the Company within twenty (20) days after
      receipt by such Holder of notice of the commencement of the action, to
      participate in and to assume the defense of such action with counsel reasonably
      satisfactory to the Company; provided,
      however,
      that the
      Company or other indemnified person shall be entitled to retain its own counsel
      at the Company’s expense. The failure to notify any Holder promptly of the
      commencement of any such action shall not relieve such Holder of liability
      to
      indemnify the Company or such other indemnified person, as the case may be,
      under Section 6 above, except to the extent that the subject Holder shall be
      actually prejudiced or shall suffer any loss by reason of such failure to give
      notice, and shall not relieve such Holder of any other liabilities which it
      may
      have under this or any other agreement.

     

    (c)  No
      indemnifying party, in the defense of any such claim or litigation, shall,
      except with the consent of each indemnified person who is party to such claim
      or
      litigation, consent to entry of any judgment or enter into any settlement that
      does not include as an unconditional term thereof the giving by the claimant
      or
      plaintiff to such indemnified person of a release from all liability in respect
      to such claim or litigation. Each such indemnified person shall furnish such
      information regarding itself or the claim in question as an indemnifying party
      may reasonably request in writing and as shall be reasonably required in
      connection with defense of such claim and litigation resulting
      therefrom.

     

    (d)  If
      the
      indemnification provided for in Section 5 and 6 is unavailable or insufficient
      to hold harmless an indemnified party, then, subject to the limits set forth
      in
      Section 6(b) above, each indemnifying party shall contribute to the amount
      paid
      or payable by such indemnified party as a result of the expenses, claims,
      losses, damages or liabilities (or actions or proceedings in respect thereof)
      referred to in Sections 5 and 6, in such proportion as is appropriate to reflect
      the relative fault of the Company on the one hand and the sellers of Shares
      on
      the other hand in connection with statements or omissions which resulted in
      such
      losses, claims, damages or liabilities (or actions or proceedings in respect
      thereof) or expenses, as well as any other relevant equitable considerations.
      The relative fault shall be determined by reference to, among other things,
      whether the untrue or alleged untrue statement of a material fact or the
      omission or alleged omission to state a material fact relates to information
      supplied by the Company or the sellers of Shares and the parties’ relative
      intent, knowledge, access to information and opportunity to correct or prevent
      such untrue statement or omission. The Company and the Holders agree that it
      would not be just and equitable if contributions pursuant to this Section 7(d)
      were to be determined by pro rata allocation (even if all sellers of Shares
      were
      treated as one entity for such purpose) or by another method of allocation
      which
      does not take account of the equitable considerations referred to in the first
      sentence of this Section 7(d). The amount paid by an indemnified person as
      a
      result of the expenses, claims, losses, damages or liabilities (or actions
      or
      proceedings in respect thereof) referred to in the first sentence of this
      Section 7(d) shall be deemed to include any legal or other expenses reasonably
      incurred by such indemnified person in connection with investigating or
      defending any claim, action or proceeding which is the subject of this Section
      7(d). No person guilty of fraudulent misrepresentation (within the meaning
      of
      Section 11(f) of the Act) shall be entitled to contribution from any person
      who
      was not guilty of such fraudulent misrepresentation. The obligations of sellers
      of Shares to contribute pursuant to this Section 7(d) shall be several in
      proportion to the respective amounts of Shares sold by them pursuant to a
      Registration Statement.

     

    
      
         

      

      
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    8.  Rule
      144 Information.
      For so
      long as the Company shall remain a reporting company under the Exchange Act,
      the
      Company will at all times use its best efforts to keep publicly available
      adequate current public information with respect to the Company of the type
      and
      in the manner specified in Rule 144(c) promulgated under the Act.

     

    9.  Limitations
      on Subsequent Registration Rights.

     

      From
      and after the date of this Agreement, the Company shall not, without the prior
      written consent of the Holders of a majority of the Registrable Shares then
      outstanding and/or issuable, enter into any agreement with any holder or
      prospective holder of any securities of the Company which would require the
      Company to include such securities in any Registration filed under Section
      2
      above, or would grant to such holder or prospective holder priority over the
      Holders in the event of any “cutback” described in Section 3(c)
      above.

     

    10.  Notices.
      All
      notices, requests, demands and other communications required or permitted under
      this Agreement shall be in writing and shall be given by personal delivery,
      by
      telecopier (with confirmation of receipt), by recognized overnight courier
      service (with all charges prepaid or billed to the account of the sender),
      or by
      certified or registered mail, return receipt requested, and with postage
      prepaid, addressed (a) if to the Company, at its office at 250 Clearbrook
      Road, Elmsford, New York 10523, Attention: Chief Financial Officer, Telecopier:
      (914) 592-6148, or such other address or telecopier number as shall have been
      specified by the Company to the Holders by written notice, or (b) if to any
      Holder, at his, her or its address or telecopier number as same appears on
      the
      records of the Company. All notices shall be deemed to have been given either
      at
      the time of the delivery or telecopy (with confirmation of receipt) thereof,
      or,
      if sent by overnight courier, on the next business day following delivery
      thereof to the overnight courier service, or, if mailed, at the completion
      of
      the third business day following the time of such mailing. 

     

    11.  Waiver
      and Amendment.
      No
      waiver, amendment or modification of this Agreement or of any provision hereof
      shall be valid unless evidenced by a writing duly executed by the Company and
      Holders holding, in the aggregate, a majority of the Registrable Shares then
      outstanding and/or issuable. No waiver of any default hereunder shall be deemed
      a waiver of any other, prior or subsequent default hereunder.

     

    12.  Governing
      Law.
      This
      Agreement shall (irrespective of the place where it is executed and delivered)
      be governed, construed and controlled by and under the substantive laws of
      the
      State of New York, without regard to conflicts of law principles.

     

    
      
         

      

      
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    13.  Binding
      Effect.
      This
      Agreement shall binding upon and shall inure to benefit of the Company and
      the
      Holders and their respective successors in interest from time to
      time.

     

    14.  Captions.
      The
      captions and Section headings used in this Agreement are for convenience only,
      and shall not affect the construction or interpretation of this Agreement or
      any
      of the provisions hereof.

     

    15.  Gender.
      All
      pronouns used in this Agreement in the masculine, feminine or neuter gender
      shall, as the context may allow, also refer to each other gender. 

     

    16.  Entire
      Agreement.
      This
      Agreement constitutes the sole and entire agreement and understanding between
      the parties hereto as to the subject matter hereof, and supersedes all prior
      discussions, agreements and understandings of every kind and nature between
      them
      as to such subject matter.

     

    17.  Reliance
      and Benefit.
      This
      Agreement is intended to benefit, and may be relied upon by, all Holders from
      time to time, as if such Holders were expressly named herein, party hereto
      and
      signatory hereon.

     

    [The
      remainder of this page is intentionally blank]

    

    
      
         

      

      
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    IN
      WITNESS WHEREOF,
      the
      Company has executed this Agreement as of the date first set forth
      above.

     

    AFP
      IMAGING CORPORATION

     

    By: 
      /s/
      David Vozick

    Name:
      David Vozick

    Title:
      Chairman of the Board

     

    13

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