Document:

newex407.htm

    

       

      
        	 	343
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

     

    Exhibit 4.7    Aviva Executive Share Option
plan

     

     

     

    
       

    

     

     

    AVIVA plc

     

     

     

     

     

     

     

     

    
       

      
RULES
OF THE AVIVA EXECUTIVE SHARE OPTION PLAN 2005

       

    

     

     

    
      	
            
	
              
Shareholders’
      Approval: 

            	
              26
      April 2005

            
	 	 
	
              Directors’
      Adoption

              (subject
      to shareholders’ approval):

            	
              1
      March 2005 (Main rules)

            
	 	 
	
              Expiry
      Date:

            	
              25
      April 2010

            
	 
	
              Showing
      amendments to February 2010

            

    

     

     

     

     

    
 
 
 

    
One
Silk Street

    London
EC2Y 8HQ
 

    
Telephone

(44-20) 7456 2000
 

    
Facsimile

(44-20) 7456 2222
 
 
 

    
Ref
J Cooper/N Keuning-Price
 

    
    

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      

         

        
          	344	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

    
 

    Table
of Contents

     

    

     

    
      	Contents	 	Page
	
              1

            	
              Granting
      Options

            	
              345

            
	
              2

            	
              Terms
      of Options

            	
              346

            
	
              3

            	
              Option
      Price

            	
              346

            
	
              4

            	
              Individual
      limits

            	
              347

            
	
              5

            	
              Exercise
      and lapse - general rules

            	
              347

            
	
              6

            	
              Exercise
      and lapse - exceptions to the general rules

            	
              347

            
	
              7

            	
              Variations
      in share capital, demergers and special distributions

            	
              348

            
	
              8

            	
              Takeovers
      and restructurings

            	
              349

            
	
              9

            	
              Exchange
      of Options

            	
              350

            
	
              10

            	
              Exercise
      of Options

            	
              351

            
	
              11

            	
              General

            	
              352

            
	
              12

            	
              Changing
      the Plan and termination

            	
              354

            
	
              13

            	
              Definitions

            	
              355

            
	
              Schedule
      1 United Kingdom - Approved Options

            	
              356

            
	
              Schedule
      2 Executive Approved Options

            	
              359

            

    

     

    

     

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      

         

        
          	 	345
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

    
 

    Rules
of the Aviva Executive Share Option Plan 2005

     

    
      
        
          	
                  1

                	
                  Granting
      Options

                

        

      

    

     

    
      
        	
                1.1

              	
                Grantor

              

      

    

     

    The
Grantor of an Option must be:

     

    
      
        	
              	
                1.1.1

              	
                the
    Company;

              

      

    

     

    
      
        	
              	
                1.1.2

              	
                a Subsidiary;
      or

              

      

    

     

    
      
        	
              	
                1.1.3

              	
                a trustee of any trust
      set up for the benefit of the employees of the Company and/or any
      Subsidiary.

              

      

    

     

    Any
Options granted under the Plan must be approved in advance by the
Directors.

     

    
      
        	
                1.2

              	
                Eligibility

              

      

    

     

    The
Grantor may grant an Option to any employee (including an executive director who
devotes substantially the whole of his working time to his duties) of the
Company or any Subsidiary. However, unless the Directors consider that special
circumstances exist, an Option may not be granted to an employee who on the Date
of Grant:

     

    
      
        	
              	
                1.2.1

              	
                has given or received
      notice of termination of employment, whether or not such termination is
      lawful; or

              

      

    

     

    
      
        	
              	
                1.2.2

              	
                if this is lawful, is
      within six months of his anticipated retirement date1.

              

      

    

     

    
      
        
          	
                  1.3

                	
                  Timing
      of Option

                

        

      

    

     

    Options
may not be granted at any time after the Expiry Date and Options may only be
granted within 42 days starting on any of the following:

     

    
      
        	
              	
                1.3.1

              	
                the date of shareholder
      approval;

              

      

    

     

    
      
        	
              	
                1.3.2

              	
                the day after the
      announcement of the Company’s results through a regulatory information
      service for any period;

              

      

    

     

    
      
        	
              	
                1.3.3

              	
                any day on which the
      Directors resolve that exceptional circumstances exist which justify the
      grant of Options;

              

      

    

     

    
      
        	
              	
                1.3.4

              	
                any day on which changes
      to the legislation or regulations affecting share plans are announced,
      effected or made; or

              

      

    

     

    
      
        	
              	
                1.3.5

              	
                the lifting of Dealing
      Restrictions which prevented the granting of Options during any period
      specified above.

              

      

    

     

    
      
        	
                1.4

              	
                Performance
      Conditions

              

      

    

     

    When
granting an Option, the Grantor must make its exercise conditional on the
satisfaction of one or more conditions linked to the performance of the Company.
A Performance Condition must be objective and specified at the Date of Grant and
may provide that an Option will lapse if a Performance Condition is not
satisfied. The Grantor, with the consent of the Directors, may waive or change a
Performance Condition in accordance with its terms or if anything happens which
causes the Grantor reasonably to consider it appropriate.

     

    
      	
              1.5

            	
              Other
      conditions

            

    

     

    The
Grantor may impose other conditions when granting an Option. Any condition must
be objective, specified at the Date of Grant and may provide that an Option will
lapse if it is not satisfied. The Grantor, with the consent of the Directors,
may waive or change a condition in accordance with its terms or in any way they
see fit. Notwithstanding anything else in the Plan, an Option will only be
exercisable to the extent that any condition is satisfied or
waived.

     

    
      
        	
                1.6

              	
                Option
      certificates

              

      

    

     

    Each
Participant will receive a certificate setting out the terms of the Option as
soon as practicable after the Date of Grant. The certificate may be the deed
referred to in rule 2.1 (Terms of Options) or any other document, including a
statement, and may be sent electronically. If any certificate is lost or damaged
the Company may replace it on such terms as it decides.

     

    
      
        	
                1.7

              	
                No
      payment

              

      

    

     

    A
Participant is not required to pay for the grant of any Option.

     

    

      

    

     

      
        	
                1

              	
                This
      rule 1.2.2 is void under the Employment Equality (Age) Regulations 2006
      and will not be applied.

              

      

       

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	346	 
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

     

    
      
        	
                1.8

              	
                Disclaimer
      of Option

              

      

    

     

    Any
Participant may disclaim all or part of his Option within 30 days after the Date
of Grant by notice in writing to any person nominated by the Grantor. If this
happens, the Option will be deemed never to have been granted under the Plan. A
Participant is not required to pay for the disclaimer. No cash consideration
would be paid by the Company is this event.

     

    
      
        	
                1.9

              	
                Administrative
      errors

              

      

    

     

    If
the Grantor tries to grant an Option which is inconsistent with rule 4
(Individual limits) or rule 11.1 (Plan limits) the Directors have discretion to
decide whether the Option will be limited and will take effect from the Date of
Grant on a basis consistent with those rules.

     

    
      
        
          	
                  2

                	
                  Terms
      of Options

                

        

      

    

     

    
      
        
          	
                  2.1

                	
                  Terms

                

        

      

    

     

    Options
are subject to the rules of the Plan, any Performance Condition and any other
condition imposed under rule 1.5 (Other conditions) and must be granted by deed.
The terms of the Option, as determined by the Grantor, and approved by the
Directors, must be specified in the deed and must include:

     

    
      
        	
              	
                2.1.1

              	
                the number or value of
      Shares subject to the Option;

              

      

    

     

    
      
        	
              	
                2.1.2

              	
                the Option
      Price;

              

      

    

     

    
      
        	
              	
                2.1.3

              	
                any Performance
      Condition;

              

      

    

     

    
      
        
          	
                	
                  2.1.4

                	
                  any other condition
      specified under rule 1.5 (Other
conditions);

                

        

      

    

     

    
      
        	
              	
                2.1.5

              	
                the period for exercise
      of the Option, unless specified in a Performance
  Condition;

              

      

    

     

    
      
        	
              	
                2.1.6

              	
                whether the Participant
      is entitled to receive any cash or shares under rule 2.3 (Dividend
      equivalent); and

              

      

    

     

    
      
        	
              	
                2.1.7

              	
                the Date of
      Grant.

              

      

    

     

    
      
        	
                2.2

              	
                Rights

              

      

    

     

    Subject
to rule 2.3 (Dividend equivalent), a Participant shall not be entitled to vote,
to receive dividends or to have any other rights of a shareholder in respect of
Shares subject to an Option until the Shares are issued or transferred to the
Participant except as set out in rule 10.6 (Rights attaching to
Shares).

     

    
      
        	
                2.3

              	
                Dividend equivalent

              

      

    

     

    Options
will not include any rights in respect of dividends on the Shares comprised in
the Option before Vesting, unless the Grantor, in its discretion, decides
otherwise at the Option Date. The Grantor may, when granting an Option,
determine that the Option will include the right to receive cash or Shares in
respect of dividends, on such basis as the Grantor may, in its discretion,
determine.

     

    
      
        	
                2.4

              	
                Transfer

              

      

    

     

    A
Participant may not transfer, assign or otherwise dispose of an Option or any
rights in respect of it, if he does, whether voluntarily or involuntarily, then
it will immediately lapse. This rule 2.4 does not apply to:

     

    
      
        	
              	
                2.4.1

              	
                the transmission of an
      Option on the death of a Participant to his personal representatives;
      or

              

      

    

     

    
      
        	
              	
                2.4.2

              	
                the assignment of an
      Option, with the prior consent of the Directors, subject to any terms and
      conditions the Directors
impose.

              

      

    

     

    
      
        	
                3

              	
                Option
      Price

              

      

    

     

    
      	
            	
              3.1

            	
              Setting
      the Option Price

            

    

     

    The
Grantor, with the consent of the Directors, will set the Option Price and state
it on the Date of Grant.

     

    The
Option Price will be:

     

    
      
        	
              	
                3.1.1

              	
                not less than the Market
      Value of a Share on the Date of Grant;
and

              

      

    

     

    
      
        	
              	
                3.1.2

              	
                if the Shares are to be
      subscribed, not less than the nominal value of a
  Share.

              

      

    

     

    
      
        	
                3.2

              	
                Market
      Value

              

      

    

     

    “Market Value” on any
particular day means:

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	 	347
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

    
      
        	
              	
                3.2.1

              	
                where Shares of the same
      class are admitted to the Official List of the UK Listing Authority and
      traded on the London Stock
Exchange:

              

      

    

     

    
      
        	
              	
                (i)

              	
                their
      middle market quotation on the immediately preceding Business Day;
      or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                if
      the Directors so decide, the average of the middle market quotation on the
      3 immediately preceding Business
Days.

              

      

    

     

    The
middle market quotation is taken from the Daily Official List of the London
Stock Exchange;

     

    
      
        	
              	
                3.2.2

              	
                where Shares of the same
      class are not admitted to the Official List of the UK Listing Authority,
      the market value of a Share calculated as described in Part VIII of the
      Taxation of Chargeable Gains Act
1992.

              

      

    

     

    
      
        	
                4

              	
                Individual
      limits

              

      

    

     

    
      
        	
                4.1

              	
                Salary
    limit

              

      

    

     

    An
Option must not be granted to an employee if it would cause the total amount
payable on exercise of Options granted to him in the same financial year under
the Plan to exceed the following limit.

     

    The
limit is 200% of the annual rate of his total basic salary at a date determined
by the Directors from Members of the Group. “Basic salary” means gross salary
before adjustment to take account of any flexible benefits and excludes bonuses
and benefits in kind.

     

    
      
        	
                4.2

              	
                Currency
      conversion

              

      

    

     

    Remuneration
payable in a currency other than Sterling will be converted into Sterling in
such manner as the Directors decide.

     

    
      	
              5

            	
              Exercise
      and lapse - general rules

            

    

     

    
      	
              5.1

            	
              Exercise

            

    

     

    Subject
to rule 5.2 (Lapse), rule 6 (Exercise and lapse - exceptions to the general
rules) and rule 8 (Takeovers and restructurings) an Option can only be
exercised:

     

    
      
        	
              	
                5.1.1

              	
                on or after the third
      anniversary of its Date of Grant or such other date as the Directors may
      specify on the Date of Grant;

              

      

    

     

    
      
        	
              	
                5.1.2

              	
                to the extent allowed by
      the Performance Condition or any other condition;
  and

              

      

    

     

    
      
        	
              	
                5.1.3

              	
                if not prohibited by any
      Dealing Restriction.

              

      

    

     

    
      
        	
                5.2

              	
                Lapse

              

      

    

     

    
      
        	
              	
                5.2.1

              	
                Unless rule 6 (Exercise
      and lapse - exceptions to the general rules) applies, an Option will lapse
      on the earliest of:

              

      

    

     

    
      
        	
              	
                (i)

              	
                the
      date the Participant ceases to be an employee or director of a Member of
      the Group;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                any
      date specified in the Performance Condition;
or

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      expiry of the Option Period, unless rule 6.1.1(iv)(Death)
      applies.

              

      

    

     

    
      
        	
              	
                5.2.2

              	
                For the purposes of this
      rule 5.2 and rule 6 (Exercise and lapse – exceptions to the general
      rules), a Participant will not be treated as ceasing to be an employee or
      director of a Member of the Group until he ceases to be an employee or
      director of all Members of the Group or if he recommences employment with
      or becomes a director of a Member of the Group within 14 days and on such
      basis as the Directors, in their discretion,
  approve.

              

      

    

     

    
      
        	
              	
                5.2.3

              	
                If a Participant ceases
      to be an employee or director of any Member of the Group for reasons
      involving misconduct, all his Options (whether vested or unvested) will
      lapse on such cessation.

              

      

    

     

    
      
        	
              	
                5.2.4

              	
                In the event of any
      conflict, the provisions of these rules (including any schedules) which
      results in the Option ceasing to be exercisable or lapsing earliest will
      take precedence.

              

      

    

     

    
      
        	
                6

              	
                Exercise
      and lapse - exceptions to the general
rules

              

      

    

     

    
      
        	
                6.1

              	
                Cessation
      of employment

              

      

    

     

    
      
        	
              	
                6.1.1

              	
                If a Participant ceases
      to be an employee or director of any Member of the Group for any of the
      reasons set out below, then his Options will not lapse and may be
      exercised as described in rule 6.2 (Vested Options) and rule 6.3 (Unvested
      Options) and lapse as to the balance. The reasons
  are:

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      

         

        
          	348	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

     

    
      
        	
              	
                (i)

              	
                retirement
      with the agreement of the
Company;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                ill-health,
      injury or disability, as established to the satisfaction of the
      Company;

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      Participant’s employing company ceasing to be under the Control of the
      Company;

              

      

    

     

    
      
        	
              	
                (iv)

              	
                a
      transfer of the undertaking, or the part of the undertaking, in which the
      Participant works to a person which is neither under the Control of the
      Company nor a Member of the
Group;

              

      

    

     

    
      
        	
              	
                (v)

              	
                redundancy,
      only in circumstances which give rise to a redundancy
    payment;

              

      

    

     

    
      
        	
              	
                (vi)

              	
                death;

              

      

    

     

    
      
        	
              	
                (vii)

              	
                any
      other reason, if the Directors so decide in any particular
      case.

              

      

    

     

    
      
        
          	
                	
                  6.1.2

                	
                  The Directors must
      exercise any discretion provided for in rule 6.1.1 within 30 days after
      cessation of the relevant Participant’s employment or office and the
      Option will lapse or become exercisable (as appropriate) on the earlier of
      the date on which the discretion is exercised and the end of the 30 day
      period.

                

        

      

    

     

    
      
        	
                6.2

              	
                Vested
      Options

              

      

    

     

    
      
        	
              	
                6.2.1

              	
                This rule 6.2 applies
      where, as at the date the Participant ceases to be an employee or
      director, the Option was exercisable in accordance with rule 5 (Exercise
      and lapse - general rules).

              

      

    

     

    
      
        	
              	
                6.2.2

              	
                The Participant may
      exercise the Option within 6 months after such cessation (12 months if
      rule 6.1.1(iv) (Death) applies), but not after the expiry of the Option
      Period unless rule 6.1.1(iv) (Death) applies. The Option may be exercised
      to the same extent as it was exercisable immediately before cessation of
      the Participant’s employment.

              

      

    

     

    
      
        	
                6.3

              	
                Unvested
      Options

              

      

    

     

    
      
        	
              	
                6.3.1

              	
                This rule 6.3 applies
      where, as at the date the Participant ceases to be an employee or
      director, the Option was not exercisable in accordance with rule 5
      (Exercise and lapse - general
rules).

              

      

    

     

    
      
        	
              	
                6.3.2

              	
                The Option may be
      exercised within 6 months (12 months if rule 6.1.1(iv) (Death) applies)
      after the date it would have become exercisable had there been no
      cessation of employment, but not after the expiry of the Option Period
      unless rule 6.1.1(iv) (Death)
applies.

              

      

    

     

    
      
        	
              	
                6.3.3

              	
                Unless the Directors
      decide otherwise, the number of Shares in respect of which the Option may
      be exercised will be reduced pro rata to reflect the number of days from
      the start of the Performance Period until the cessation of the
      Participant’s office or employment as a proportion of the number of days
      of the Performance Period.

              

      

    

     

    
      
        	
                6.4

              	
                Lapse

              

      

    

     

    
      To
the
extent that any Option exercisable under this rule 6 is not exercised
within the applicable period, it will lapse at the end of that
period.

    

     

    
      
        	
                7

              	
                Variations
      in share capital, demergers and special
  distributions

              

      

    

     

    
      
        	
                7.1

              	
                Adjustment
      of Options

              

      

    

     

    If
there is:

     

    
      
        	
              	
                7.1.1

              	
                a variation in the
      equity share capital of the Company, including a capitalisation or rights
      issue, sub-division, consolidation or reduction of share capital;
      or

              

      

    

     

    
      
        	
              	
                7.1.2

              	
                a demerger (in whatever
      form) or exempt distribution by virtue of Section 213 of the Income and
      Corporation Taxes Act 1988;
or

              

      

    

     

    
      
        	
              	
                7.1.3

              	
                a special dividend or
      distribution;

              

      

    

     

    
      
        	
              	
                (i)

              	
                the
      number of Shares comprised in each Option;
or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                the
      Option Price; or

              

      

    

     

    
      
        	
              	
                (iii)

              	
                both,

              

      

    

     

    may
be adjusted in any way (including retrospective adjustments) which the Directors
consider appropriate.

     

    
      
        
          	
                  7.2

                	
                  Nominal
      value

                

        

      

    

     

    
      
        	
              	
                7.2.1

              	
                The Option Price of an
      Option to acquire existing Shares may be adjusted to a price less than
      nominal value. However, where Shares are to be subscribed, rule 7.2.2 must
      be followed.

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	 	349
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

     

    
      
        	
              	
                7.2.2

              	
                The Option Price of an
      Option to subscribe for Shares may be adjusted to a price less than
      nominal value only if the Directors resolve to capitalise the reserves of
      the Company, subject to any necessary conditions. This capitalisation will
      be of an amount equal to the difference between the adjusted Option Price
      payable for the Shares to be issued on exercise, and the nominal value of
      such Shares on the date of allotment of the Shares. If, at the time of
      exercise, the Directors do not resolve to capitalise the reserves of the
      Company for this purpose then the adjustment under this rule 7.2 will be
      deemed not to have taken
place.

              

      

    

     

    
      
        	
                7.3

              	
                Notice

              

      

    

     

    
      The
Company
may notify Participants of any adjustment made under this
rule7.

    

     

    
      	
              8

            	
              Takeovers
      and restructurings

            

    

     

    
      	
              8.1

            	
              Takeover

            

    

     

    
      
        	
              	
                8.1.1

              	
                Where a person (or a
      group of persons acting in concert) obtains Control of the Company as a
      result of making an offer to acquire Shares, Options will be exchanged
      under rule 9 (Exchange of Options)
if:

              

      

    

     

    
      
        	
              	
                (i)

              	
                an
      offer to exchange Options is made and accepted by a Participant;
      or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                the
      Directors, with the consent of the Acquiring Company, decide before a
      person obtains Control that the Options will be automatically
      exchanged.

              

      

    

     

    
      
        	
              	
                8.1.2

              	
                To the extent that an
      Option is not exchanged under rule 9 (Exchange of Options), it may be
      exercised as set out in rule 8.1.4, but only to the extent determined
      under rule 8.1.3, and it lapses as to the
  balance.

              

      

    

     

    
      
        	
              	
                8.1.3

              	
                Where rule 8.1.2
      applies, an Option may be exercised to the following
    extent:

              

      

    

     

    
      
        	
              	
                (i)

              	
                that
      the Performance Condition has been satisfied (as determined by the
      Directors in the manner specified in the Performance Condition or in such
      manner as they consider reasonable) over the period from the start of the
      Performance Period until the date the person obtains Control;
      and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                reduced
      pro rata to reflect the number of days from the start of the Performance
      Period until the date the person obtains Control as a proportion of the
      number of days of the Performance
Period.

              

      

    

     

    
      
        
          	
                  8.1.4

                	
                  Where an Option becomes
      exercisable under rule 8.1.2, it may be exercised from the date the person
      making the offer to acquire Shares has obtained Control until the earlier
      of:

                

        

      

    

     

    
      
        	
              	
                (i)

              	
                the
      date 3 months after the date on which the person has obtained Control;
      and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                6
      weeks after the date on which a notice to acquire Shares under Section 981
      of the Companies Act 2006 or any other equivalent local legislation is
      first served.

              

      

    

     

    The
Option will lapse at the end of that period.

     

    
      
        
          	
                  8.2

                	
                  Schemeof
      arrangement

                

        

      

    

     

    
      
        	
              	
                8.2.1

              	
                When under Section 899
      of the Companies Act 2006 a court sanctions a compromise or arrangement in
      connection with the acquisition of Shares, Options will be exchanged under
      rule 9 (Exchange of Options)
if:

              

      

    

     

    
      
        	
              	
                (i)

              	
                an
      offer to exchange Options is made and accepted by a Participant;
      or

              

      

    

     

    
      
        	
              	
                      
                  (ii)

                

              	
                the
      Directors, with the consent of the Acquiring Company, decide before court
      sanction that the Options will be automatically
  exchanged.

              

      

    

     

    
      
        
          	
                	
                  8.2.2

                	
                  To the extent an Option
      is not exchanged under rule 9 (Exchange of Options), it may be exercised
      as set out in rule 8.2.4, but only to the extent determined under rule
      8.2.3 and lapses as to the balance.

                

        

      

    

     

    
      
        	
              	
                8.2.3

              	
                Where rule 8.2.2
      applies, an Option may be exercised to the following
    extent:

              

      

    

     

    
      
        	
              	
                (i)

              	
                that
      the Performance Condition has been satisfied (as determined by the
      Directors in the manner specified in the Performance Condition or in such
      manner as they consider reasonable) over the period from the start of the
      Performance Period until the date of court sanction;
  and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                reduced
      pro rata to reflect the number of days from the start of the Performance
      Period until the date of court sanction as a proportion of the number of
      days of the Performance
Period.

              

      

    

     

    
      
        	
              	
                8.2.4

              	
                Where an Option becomes
      exercisable under rule 8.2.2, it may be exercised within 6 months after
      the date of the court sanction. Any Option not so exercised will lapse at
      the end of that period.

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

      

         

        
          	350	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

     

    
      
        	
              	
                8.2.5

              	
                This rule also applies
      where there is an equivalent procedure to Section 899 of the Companies Act
      2006 under local legislation.

              

      

    

     

    
      
        	
                8.3

              	
                Demerger
      or other corporate event

              

      

    

     

    
      
        	
              	
                8.3.1

              	
                If the Directors become
      aware that the Company is or is expected to be affected by any demerger,
      distribution (other than an ordinary dividend) or other transaction not
      falling within rule 8.1 (Takeover), or rule 8.2 (Scheme of arrangement)
      which, in the opinion of the Directors would affect the current or future
      value of any Option, the Directors may allow an Option to be exercised for
      such period as they determine but only to the extent determined under rule
      8.3.2 and subject to any other conditions the Directors may decide to
      impose. The Option lapses as to the
balance.

              

      

    

     

    
      
        	
              	
                8.3.2

              	
                Where an Option becomes
      exercisable under rule 8.3.1, it may be exercised to the following
      extent:

              

      

    

     

    
      
        	
              	
                (i)

              	
                that
      the Performance Condition has been satisfied (as determined by the
      Directors in the manner specified in the Performance Condition or in such
      manner as they consider reasonable) over the period from the start of the
      Performance Period until the date determined by the Directors;
      and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                reduced
      pro rata to reflect the number of days from the start of the Performance
      Period until the date determined by the Directors as a proportion of the
      number of days of the Performance
Period.

              

      

    

     

    
      
        	
              	
                8.3.3

              	
                The Company will notify
      any Participant who is affected by the Directors exercising their
      discretion under this rule.

              

      

    

     

    
      
        	
                8.4

              	
                Directors

              

      

    

     

    In
this rule, “Directors” means those people who were members of the remuneration
committee of the Company immediately before the change of Control.

     

    
      
        	
                8.5

              	
                Overseas
      transfer

              

      

    

     

    If
a Participant is transferred to work in another country and, as a result of that
transfer he would:

     

    
      
        	
              	
                8.5.1

              	
                suffer a tax
      disadvantage in relation to his Options (this being shown to the
      satisfaction of the Directors);
or

              

      

    

     

    
      
        	
              	
                8.5.2

              	
                become subject to
      restrictions on his ability to exercise his Options or to hold or deal in
      the Shares or the proceeds of the sale of the Shares acquired on exercise
      because of the security laws or exchange control laws of the country to
      which he is transferred;

              

      

    

     

    then
if the Participant continues to hold an office or employment with a Member of
the Group, the Directors may decide that the Options will become exercisable, to
the extent they permit, on a date they choose before or after the transfer takes
effect. The Directors will decide whether any balance of the Option will
lapse.

     

    
      
        	
                9

              	
                Exchange
      of Options

              

      

    

     

    
      
        	
                9.1

              	
                Exchange

              

      

    

     

    Where
an Option is to be exchanged under rule 8 (Takeovers and restructurings), the
exchange will take place as soon as practicable after the relevant
event.

     

    
      
        
          	
                  9.2

                	
                  Exchange
      terms

                

        

      

    

     

    Where
a Participant is granted a new option in exchange for an existing Option, the
new option:

     

    
      
        	
              	
                9.2.1

              	
                must confer a right to
      acquire shares in the Acquiring Company or another body corporate
      determined by the Acquiring
Company;

              

      

    

     

    
      
        	
              	
                9.2.2

              	
                must be equivalent to
      the existing Option, subject to rule
9.2.4;

              

      

    

     

    
      
        	
              	
                9.2.3

              	
                is treated as having
      been acquired at the same time as the existing Option and, subject to rule
      9.2.4, is exercisable in the same manner and at the same
    time;

              

      

    

     

    
      
        	
              	
                9.2.4

              	
                must
    either:

              

      

    

     

    
      
        	
              	
                (i)

              	
                be
      subject to a performance condition which is, so far as possible,
      equivalent to any Performance Condition applying to the existing Option;
      or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                not
      be subject to any performance condition but be in respect of the number of
      shares which is equivalent to the number of Shares determined in
      accordance with rule 8.1.3 or rule 8.2.3 (as relevant), in which case the
      existing Option lapses as to the
balance;

              

      

    

     

    
      	
            	
              9.2.5

            	
              is governed by the Plan
      as if references to Shares were references to the shares over which the
      new option is granted and references to the Company were references to the
      Acquiring Company or the body corporate determined under rule
      9.2.1.

            

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	 	351
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

     

    
      
        	
                10

              	
                Exercise
      of Options

              

      

    

     

    
      
        	
                10.1

              	
                Exercise

              

      

    

     

    A
Participant can exercise his Option validly only in the way described in, and
subject to, this rule 10.

     

    
      
        	
                10.2

              	
                Part
      exercise

              

      

    

     

    
      
        	
              	
                10.2.1

              	
                Subject to any other
      restriction in the rules, an Option may be exercised in respect of all the
      Shares under the Option or only some of those
  Shares.

              

      

    

     

    
      
        	
              	
                10.2.2

              	
                If an Option is
      exercised in part, and the balance remains exercisable, the Directors must
      on the surrender of the relevant certificate issue a balance
      certificate.

              

      

    

     

    
      
        	
                10.3

              	
                Manner
      of exercise

              

      

    

     

    Options
must be exercised by notice in a form specified by the Company and delivered to
the Company or other duly appointed agent or by telephone, email or other
electronic means approved by the Company. The notice of exercise of the Option
must be completed, signed (in manuscript or in any other form that may be
specified by the Company) by the Participant or by his appointed agent, and must
be accompanied by:

     

    
      
        	
              	
                10.3.1

              	
                the relevant option
      certificate (if required by the Company);
and

              

      

    

     

    
      
        	
              	
                10.3.2

              	
                correct payment in full
      of the Option Price for the number of Shares being acquired or details of
      arrangements agreed between the Participant and the Company made for the
      payment of the Option Price for the number of Shares being
      acquired.

              

      

    

     

    
      
        	
                10.4

              	
                Option
      Exercise Date

              

      

    

     

    In
this rule 10, the “Option Exercise Date” will be the date of receipt by the
Company, or other duly appointed agent, of the documents and, if appropriate,
the payment referred to in rule 10.3.2. 

     

    However:

     

    
      
        	
              	
                10.4.1

              	
                if an option exercise
      notice is delivered before it has been ascertained whether the Performance
      Condition has been satisfied, the Option Exercise Date will be the date on
      which the satisfaction of the Performance Condition is ascertained, or the
      date on which the Performance Condition is waived;
  and

              

      

    

     

    
      
        	
              	
                10.4.2

              	
                if any Dealing
      Restriction, prohibits the exercise of Options, the date when the
      Participant is permitted to exercise an
Option.

              

      

    

     

    
      
        	
                10.5

              	
                Issue
      or transfer

              

      

    

     

    Subject
to rule 11.10 (Consents):

     

    
      
        	
              	
                10.5.1

              	
                Shares to be issued
      following the exercise of an Option will be issued within 30 days of the
      Option Exercise Date.

              

      

    

     

    
      
        	
              	
                10.5.2

              	
                If Shares are to be
      transferred, including transferred out of treasury, following the exercise
      of an Option, the Directors will procure this transfer within 30 days of
      the Option Exercise Date.

              

      

    

     

    
      
        	
                10.6

              	
                Rights
      attaching to Shares

              

      

    

     

    
      
        	
              	
                10.6.1

              	
                Shares issued on the
      exercise of an Option will rank equally in all respect with the Shares in
      issue on the date of allotment. They will not rank for any rights
      attaching to Shares by reference to a record date preceding the date of
      allotment.

              

      

    

     

    
      
        	
              	
                10.6.2

              	
                Where Shares are to be
      transferred, on the exercise of an Option, including transferred out of
      treasury, Participants will be entitled to all rights attaching to the
      Shares by reference to a record date on or after the transfer date. They
      will not be entitled to rights before that
date.

              

      

    

     

    
      
        	
                10.7

              	
                Alternative
      ways to satisfy Options

              

      

    

     

    The
Directors may at any time determine not to procure the transfer or issue of
Shares to a Participant who exercises his Option, but instead to pay to him
(subject to the withholding provisions in rule 11.8) a cash amount. This cash
amount must be equal to the amount by which the market value of the Shares in
respect of which the Option is exercised exceeds the Option Price.
Alternatively, the Directors may transfer or issue Shares to the value of that
cash amount. If the Directors so determine, the Participant need not pay the
Option Price or, if he has paid it, the Company will repay the Option Price to
him.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

      

         

        
          	352	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

     

    For
the purposes of this rule, “market value” means:

     

    
      
        	
              	
                10.7.1

              	
                the middle market
      quotation of a Share as derived from the Daily Official List of the London
      Stock Exchange on the Option Exercise Date (or the next Business Day if
      the Option Exercise Date is not a Business Day);
  or

              

      

    

     

    
      
        	
              	
                10.7.2

              	
                such other value as the
      Directors may, in their discretion,
determine.

              

      

    

     

    
      
        	
                11

              	
                General

              

      

    

     

    
      
        	
                11.1

              	
                Plan
      limits

              

      

    

     

    
      
        	
              	
                11.1.1

              	
                Meaning of
      allocate

              

      

    

     

    For
the purposes of this rule 11 shares are “allocated” if they have been issued or
may be issued for the purposes of satisfying an Option or other right to acquire
Shares.

     

    
      
        	
              	
                11.1.2

              	
                10% in 10 years
      limit

              

      

    

     

    The
number of Shares which may be allocated under the Plan on any day must not
exceed 10 per cent of the ordinary share capital of the Company in issue
immediately before that day, when added to the total number of Shares which have
been allocated in the previous 10 years under the Plan and any other employee
share plan operated by the Company.

     

    
      
        	
              	
                11.1.3

              	
                5% in 10 year
      limit

              

      

    

     

    The
number of Shares which may be allocated under the Plan on any day must not
exceed 5 per cent of the ordinary share capital of the Company in issue
immediately before that day, when added to the total number of Shares which have
been allocated in the previous 10 years under the Plan and any other
discretionary employee share plan operated by the Company.

     

    
      
        	
              	
                11.1.4

              	
                Exclusions

              

      

    

     

    Where
the right to acquire Shares is surrendered or lapses, the Shares concerned are
ignored when calculating the limits in this rule 11.

     

    
      
        	
                11.2

              	
                Directors’
      decisions final and binding

              

      

    

     

    The
decision of the Directors on the interpretation of the Plan or in any dispute
relating to an Option or matter relating to the Plan will be final and
conclusive.

     

    
      
        
          	
                  11.3

                	
                  Documents
      sent to shareholders

                

        

      

    

     

    The
Company may, at its discretion, send to Participants copies of any documents or
notices normally sent to the holders of its Shares at or around the same time as
issuing them to the holders of its Shares.

     

    
      
        	
                11.4

              	
                Costs

              

      

    

     

    The
Company may ask a Participant’s employer to bear the costs in respect of an
Option to that Participant.

     

    
      
        	
                11.5

              	
                Regulations

              

      

    

     

    The
Directors have the power from time to time to make or vary regulations for the
administration and operation of the Plan but these must be consistent with its
rules.

     

    
      
        	
                11.6

              	
                Terms
      of employment

              

      

    

     

    
      
        	
              	
                11.6.1

              	
                For the purposes of this
      rule, “Employee”
      means any person who is or will be eligible to be a Participant or any
      other person.

              

      

    

     

    
      
        	
              	
                11.6.2

              	
                This rule
      applies:

              

      

    

     

    
      
        	
              	
                (i)

              	
                whether
      the Company has full discretion in the operation of the Plan, or whether
      the Company could be regarded as being subject to any obligations in the
      operation of the Plan;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                during
      an Employee’s employment or employment relationship;
  and

              

      

    

     

    
      
        	
              	
                (iii)

              	
                after
      the termination of an Employee’s employment or employment relationship,
      whether the termination is lawful or
unlawful.

              

      

    

     

    
      
        	
              	
                11.6.3

              	
                Nothing in the rules or
      the operation of the Plan forms part of the contract of employment or
      employment relationship of an Employee. The rights and obligations arising
      from the employment relationship between the Employee and the Company are
      separate from, and are not affected by, the Plan. Participation in the
      Plan does not create any right to, or expectation of, continued employment
      or a continued employment
relationship.

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	 	353
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

    
      
        	
              	
                11.6.4

              	
                The grant of Options on
      a particular basis in any year does not create any right to or expectation
      of the grant of Options on the same basis, or at all, in any future
      year.

              

      

    

     

    
      
        	
              	
                11.6.5

              	
                No Employee is entitled
      to participate in the Plan, or be considered for participation in it, at a
      particular level or at all. Participation in one operation of the Plan
      does not imply any right to participate, or to be considered for
      participation in any later operation of the
  Plan.

              

      

    

     

    
      
        	
              	
                11.6.6

              	
                Without prejudice to an
      Employee’s right in respect of an Option subject to and in accordance with
      the express terms of the Plan and the Performance Condition, no Employee
      has any rights in respect of the exercise or omission to exercise any
      discretion, or the making or omission to make any decision, relating to
      the Option. Any and all discretions, decisions or omissions relating to
      the Option may operate to the disadvantage of the Employee, even if this
      could be regarded as capricious or unreasonable, or could be regarded as
      in breach of any implied term between the Employee and his employer,
      including any implied duty of trust and confidence. Any such implied term
      is excluded and overridden by this
rule.

              

      

    

     

    
      
        	
              	
                11.6.7

              	
                No Employee has any
      right to compensation for any loss in relation to the Plan,
      including:

              

      

    

     

    
      
        	
              	
                (i)

              	
                any
      loss or reduction of any rights or expectations under the Plan in any
      circumstances or for any reason (including lawful or unlawful termination
      of employment or the employment
relationship);

              

      

    

     

    
      
        	
              	
                (ii)

              	
                any
      exercise of a discretion or a decision taken in relation to an Option or
      to the Plan, or any failure to exercise a discretion or take a
      decision;

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      operation, suspension, termination or amendment of the
    Plan.

              

      

    

     

    
      
        	
              	
                11.6.8

              	
                Participation in the
      Plan is permitted only on the basis that the Participant accepts all the
      provisions of its rules, including in particular this rule. By
      participating in the Plan, an Employee waives all rights under the Plan,
      other than the right to acquire shares subject to and in accordance with
      the express terms of the Plan and the Performance Condition, in
      consideration for, and as a condition of, the grant of an Option under the
      Plan.

              

      

    

     

    
      
        	
              	
                11.6.9

              	
                Nothing in this Plan
      confers any benefit, right or expectation on a person who is not an
      Employee. No such third party has any rights under the Contracts (Rights
      of Third Parties) Act 1999 to enforce any term of this Plan. This does not
      affect any other right or remedy of a third party which may
      exist.

              

      

    

     

    
      
        	
              	
                11.6.10

              	
                Each of the provisions
      of this rule is entirely separate and independent from each of the other
      provisions. If any provision is found to be invalid then it will be deemed
      never to have been part of these rules and to the extent that it is
      possible to do so, this will not affect the validity or enforceability of
      any of the remaining
provisions.

              

      

    

     

    
      
        
          	
                  11.7

                	
                  Employee
      trust

                

        

      

    

     

    The
Company and any Subsidiary of the Company may provide money to the trustee of
any trust or any other person to enable them or him to acquire shares to be held
for the purposes of the Plan, or enter into any guarantee or indemnity for those
purposes, to the extent permitted by Section 682 of the Companies Act
2006.

     

    
      
        	
                11.8

              	
                Withholding

              

      

    

     

    The
Company, Grantor, any employing company or trustee of any employee benefit trust
may withhold such amount and make such arrangements as it considers necessary to
meet any liability to taxation or social security contributions in respect of
Options. These arrangements may include the sale or reduction in number of any
Shares on behalf of a Participant. 

     

    
      
        	
                11.9

              	
                Data
      protection

              

      

    

     

    By
participating in the Plan the Participant consents to the holding and processing
of personal data provided by the Participant to any Member of the Group, trustee
or third party service provider for all purposes relating to the operation of
the Plan. These include, but are not limited to:

     

    
      
        	
              	
                11.9.1

              	
                administering and
      maintaining Participant
records;

              

      

    

     

    
      
        	
              	
                11.9.2

              	
                providing information to
      Members of the Group, trustees of any employee benefit trust, registrars,
      brokers or third party administrators of the
  Plan;

              

      

    

     

    
      
        	
              	
                11.9.3

              	
                providing information to
      future purchasers of the company or the business in which the Participant
      works;

              

      

    

     

    
      
        	
              	
                11.9.4

              	
                transferring information
      about the Participant to a country or territory outside the European
      Economic Area that may not provide the same statutory protection for the
      information as the Participant’s home
country.

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	354	 
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

    
      
        	
                11.10

              	
                Consents

              

      

    

     

    All
allotments, issues and transfers of Shares will be subject to any necessary
consents under any relevant enactments or regulations for the time being in
force in the United Kingdom or elsewhere. The Participant will be responsible
for complying with any requirements he needs to fulfil in order to obtain or
avoid the necessity for any such consent.

     

    
      
        	
                11.11

              	
                Articles
      of association

              

      

    

     

    Any
Shares acquired under the Plan are subject to the articles of association of the
Company from time to time in force.

     

    
      	
              11.12

            	
              Listing

            

    

     

    If
and so long as the Shares are listed and traded on the Official List of the UK
Listing Authority and trades on the London Stock Exchange, the Company will
apply for listing of any Shares issued under the Plan as soon as possible.

     

    
      
        	
                11.13

              	
                Notices

              

      

    

     

    
      
        
          	
                	
                  11.13.1

                	
                  Any notice or other
      document which has to be given to a person who is or will be eligible to
      be a Participant under or in connection with the Plan may
    be:

                

        

      

    

     

    
      
        	
              	
                (i)

              	
                delivered
      or sent by post to him at his home address according to the records of his
      employing company; or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                sent
      by e-mail or fax to any e-mail address or fax number which according to
      the records of his employing company is used by
  him;

              

      

    

     

    or
in either case such other address which the Company considers
appropriate.

     

    
      
        	
              	
                11.13.2

              	
                Any notice or other
      document which has to be given to the Company or other duly appointed
      agent under or in connection with the Plan may be delivered or sent by
      post to it at its registered office (or such other place as the Directors
      or duly appointed agent may from time to time decide and notify to
      Participants) or sent by e-mail or fax to any e-mail address or fax number
      notified to the Participant.

              

      

    

     

    
      
        	
              	
                11.13.3

              	
                Notices sent by post
      will be deemed to have been given on the second day after the date of
      posting. However, notices sent by or to a Participant who is working
      overseas will be deemed to have been given on the seventh day after the
      date of posting. Notices sent by e-mail or fax, in the absence of evidence
      to the contrary, will be deemed to have been received on the day after
      sending.

              

      

    

     

    
      
        	
                12

              	
                Changing
      the Plan and termination

              

      

    

     

    
      
        	
                12.1

              	
                Directors’
      powers

              

      

    

     

    Except
as described in the rest of this rule 12, the Directors may at any time change
the Plan in any way.

     

    
      
        	
                12.2

              	
                Shareholder
      approval

              

      

    

     

    
      
        	
              	
                12.2.1

              	
                Except as described in
      rule 12.2.2, the Company in general meeting must approve in advance by
      ordinary resolution any proposed change to the Plan to the advantage of
      present or future Participants, which relates to the
      following;

              

      

    

     

    
      
        	
              	
                (i)

              	
                the
      persons to or for whom Shares may be provided under the
    Plan;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                the
      limitations on the number of Shares which may be issued under the
      Plan;

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      individual limit for each Participant under the
  Plan;

              

      

    

     

    
      
        	
              	
                (iv)

              	
                the
      determination of the Option
Price;

              

      

    

     

    
      
        	
              	
                (v)

              	
                any
      rights attaching to the Options and the
Shares;

              

      

    

     

    
      
        	
              	
                (vi)

              	
                the
      rights of a Participant in the event of a capitalisation issue, rights
      issue, sub-division or consolidation of shares or reduction or any other
      variation of capital of the
Company;

              

      

    

     

    
      
        	
              	
                (vii)

              	
                the
      terms of this rule 12.2.1.

              

      

    

     

    
      
        	
              	
                12.2.2

              	
                The Directors can change
      the Plan and need not obtain the approval of the Company in general
      meeting for any minor
changes:

              

      

    

     

    
      
        	
              	
                (i)

              	
                to
      benefit the administration of the
Plan;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                to
      comply with or take account of the provisions of any proposed or existing
      legislation;

              

      

    

     

    
      
        	
              	
                (iii)

              	
                to
      take account of any changes to legislation;
or

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      

         

        
          	 	355
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

     

    
      
        	
              	
                (iv)

              	
                to
      obtain or maintain favourable tax, exchange control or regulatory
      treatment of the Company, any Subsidiary or any present or future
      Participant.

              

      

    

     

    
      
        	
                12.3

              	
                Notice

              

      

    

     

    The
Directors may give written notice of any changes made to any Participant
affected.

     

    
      
        	
                12.4

              	
                Governing
      law and jurisdiction

              

      

    

     

    English
law governs the Plan and all Options and their construction. The English Courts
have non-exclusive jurisdiction in respect of disputes arising under or in
connection with the Plan or any Option.

     

    
      
        	
                13

              	
                Definitions

              

      

    

     

    
      
        	
                13.1

              	
                Meaning
      of words used

              

      

    

     

    In
these rules:

     

    “Acquiring Company” means a
person who obtains Control of the Company;

     

    “Approved Option” means an
Option granted under Schedule 1; 

     

    “Business Day” means a day on
which the London Stock Exchange (or, if relevant and if the Directors determine,
any stock exchange nominated by the Directors on which the Shares are traded) is
open for the transaction of business;

     

    “Company” means Aviva
plc;

     

    “Control” has the meaning given
to it by Section 995 of the Income Tax Act 2007;

     

    “Date of Grant” means the date
which the Directors set for the grant of an Option;

     

    “Dealing Restrictions” means
restrictions imposed by statute, order, regulation or Governmental directive or
by the Model Code, or any code adopted by the Company to comply with share
dealing regulations;

     

    “Directors” means, subject to
rule 8.4 (Directors), the board of directors of the Company or a duly authorised
committee;

     

    “Executive Approved Options”
means an Approved Option granted under Schedule 2; 

     

    “Expiry Date” means the 5th
anniversary of shareholder approval of the Plan;

     

    “Grantor” means the entity
which is granting Options under the Plan;

     

    “London Stock Exchange” means
London Stock Exchange plc;

     

    “Member of the Group”
means:

     

    
      
        	
              	
                (i)

              	
                the
      Company;

              

      

    

     

    
      
        	
              	
                (ii)

              	
                its
      Subsidiaries from time to time;
and

              

      

    

     

    
      
        	
              	
                (iii)

              	
                any
      other company which is associated with the Company and is so designated by
      the Directors;

              

      

    

     

    “Option” means a right to
acquire Shares granted under the Plan;

     

    “Option Period” means a period
starting on the Date of Grant and ending at the end of the day before the 10th
anniversary of the Date of Grant, or such shorter period as may be specified on
the grant of an Option;

     

    “Participant” means a person
holding an Option or his personal representatives;

     

    “Performance Condition” means
any performance condition imposed under rule 1.4 (Performance
Conditions);

     

    “Performance Period” means the
period in respect of which a Performance Condition is to be
satisfied;

     

    “Plan” means these rules known
as “the Aviva Executive Share Option Plan 2005” as changed from time to
time;

     

    “Shares” means fully paid
ordinary shares in the capital of the Company; and

     

    “Subsidiary” means a
company which is a subsidiary of the Company within the meaning of Section 1159
of the Companies Act 2006.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

      
        

           

          
            	356	 
	
                    Aviva plc

                    Annual Report on Form 20-F 2009

                  	Exhibits
continued

          

           

        

      

       

    

    Schedule
1

    United
Kingdom – Approved Options

     

    An
Option may be granted as an Approved Option. If the Grantor decides to grant
Approved Options, the main rules will apply to the Approved Options, subject to
this Schedule 1.

     

    The
terms of Approved Options have been approved by HMRC under Schedule 4 of ITEPA
under reference number X105430.

     

    
      
        	
                1

              	
                Eligibility
      to be granted Approved
Options

              

      

    

     

    Approved
Options cannot be granted to anybody who is:

     

    
      
        	
              	
                (i)

              	
                excluded
      from participation because of paragraph 9 of ITEPA  (material
      interest provisions); or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                a
      director who is required to work less than 25 hours a week (excluding meal
      breaks) for the Company.

              

      

    

     

    
      
        	
                2

              	
                Shares
      subject to an Approved Option

              

      

    

     

    The
Shares subject to an Approved Option must satisfy paragraphs 16 to 20 of ITEPA.
If the Shares cease to satisfy paragraphs 16 to 20 of ITEPA and the Directors
notify HMRC that they wish Schedule 1 to be disapproved, the definition of the
Option will continue in effect but the Option will cease to be an Approved
Option and will be treated, for the purposes of the rules, as an Option granted
under the main rules. 

     

    
      
        	
                3

              	
                Performance
      Condition

              

      

    

     

    The
words “if appropriate” in rule 1.4 are deleted and replaced with “that a changed
Performance Condition would be fairer and would be no more difficult to
satisfy”.

     

    
      
        	
                4

              	
                Other
      conditions

              

      

    

     

    The
words “or in any way they see fit” in rule 1.5 are deleted for the purpose of
this Schedule 1. 

     

    
      
        	
                5

              	
                HMRC
      limit

              

      

    

     

    The
Grantor must not grant an Approved Option to an individual which would cause the
aggregate market value of: 

     

    
      
        	
              	
                (i)

              	
                the
      Shares subject to that Approved Option;
and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                the
      Shares which he may acquire on exercising other Approved Options;
      and

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      shares which he may acquire on exercising his options under any other HMRC
      approved discretionary share plan established by the Company or by any of
      its associated companies (as defined in paragraph 35 of
      ITEPA),

              

      

    

     

    to
exceed the amount permitted under paragraph 6(1) of ITEPA (currently
£30,000).  For the purposes of this paragraph, market value is
calculated as at the date of grant of the options as described in the relevant
plan rules.

     

    If
the Grantor tries to grant an Approved Option which is inconsistent with this
paragraph 3, the Approved Option will be limited and will take effect from the
Date of Grant on a basis consistent with the provisions of this paragraph
3.

     

    
      
        	
                6

              	
                Dividend
      Equivalents

              

      

    

     

    Rules
2.1.6 and 2.3 shall not apply to Approved Options.

     

    
      
        	
                7

              	
                Transferring
      Approved Options

              

      

    

     

    
      
        	
                7.1

              	
                An Approved Option
      cannot be transferred, assigned or otherwise disposed of, except on the
      transmission of the Approved Option on the death of a Participant to his
      personal representatives.

              

      

    

     

    
      
        	
                7.2

              	
                Rule 2.4.2 does not
      apply in relation to Approved
Options.

              

      

    

     

    
      
        	
                8

              	
                Market
      value

              

      

    

     

    Rule
3.2.2 shall be amended by adding “and agreed in advance with HMRC and Assets
Valuation”.

     

    
      
        	
                9

              	
                Variations
      in share capital, demergers and special
  distributions

              

      

    

     

    
      
        	
                9.1

              	
                Adjustments may not be
      made to Approved Options under rule 7 where there is a demerger (in
      whatever form), an exempt distribution by virtue of Section 213 of the
      Income and Corporation Taxes Act 1988 or a special dividend or
      distribution.

              

      

      
         

        
          	
                  9.2

                	
                  No adjustment of
      Approved Options may be made under rule 7 without the prior approval of
      HMRC.

                

        

      

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

    

    

       

      
        	 	357
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

     

    
      
        	
                10

              	
                Restrictions
      on exercise of an Approved
Option

              

      

    

     

    A
Participant may not exercise an Approved Option while he is excluded from being
granted an Approved Option under paragraph 9 of ITEPA (material interest
provisions).

     

    
      
        	
                11

              	
                Cessation
      of employment

              

      

    

     

    
      
        	
                11.1

              	
                Specified
      Age and redundancy

              

      

    

     

    For
the purposes of paragraph 35A of ITEPA, the specified age is 55 and redundancy,
for the purposes of rule 6.1.1(v), has the meaning given to that term by the
Employment Rights Act 1996.

     

    
      
        	
                11.2

              	
                Retirement

              

      

    

     

    Rule
6.1.1(i) is replaced with “retirement at normal retirement age or early
retirement with the agreement of the Company.”

     

    
      
        	
                11.3

              	
                Death

              

      

    

     

    If
the Participant dies, the Approved Option may be exercised by his personal
representatives within 12 months after his death, after which it will
lapse.

     

    
      
        	
                12

              	
                Discretion
      on exercise and lapse of Approved
Options

              

      

    

     

    If
the Directors exercise any discretion under rule 5, 6 or 8 in relation to an
Approved Option, they must do so fairly and reasonably.

     

    
      
        	
                13

              	
                Exchange
      of Approved Options

              

      

    

     

    Where
rule 8.1.1 or 8.2.1 applies to the exchange of an Approved Option, the
Participant will be deemed to have agreed to the exchange.

     

    
      
        	
                14

              	
                Demerger
      or other corporate event

              

      

    

     

    In
rule 8.3.1 the words “and subject to any other condition the Directors may
decide to impose” are disapplied in relation to Approved Options.

     

    
      
        	
                15

              	
                Exchange
      of Approved Options

              

      

    

     

    
      
        	
                15.1

              	
                If HMRC approval of the
      terms of Approved Options is to be maintained, Approved Options can only
      be exchanged, as described in rule 9, if the Acquiring
      Company:

              

      

    

     

    
      
        	
              	
                15.1.1

              	
                obtains Control of the
      Company as a result of making a general offer to
  acquire:

              

      

    

     

    
      
        	
              	
                (i)

              	
                the
      whole of the issued ordinary share capital of the Company (other than that
      which is already owned by it and its subsidiary or holding company) made
      on a condition such that, if satisfied, the Acquiring Company will have
      Control of the Company; or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                all
      the Shares (or all those Shares not already owned by the Acquiring Company
      or its subsidiary or holding company);
or

              

      

    

     

    
      
        	
              	
                15.1.2

              	
                obtains Control of the
      Company under a compromise or arrangement sanctioned by the court under
      Section 899 of the Companies Act 2006 or other local sanction procedure
      which HMRC agrees is equivalent;
or

              

      

    

     

    
      
        	
              	
                15.1.3

              	
                becomes bound or
      entitled to acquire Shares under Sections 979 to 982 of the Companies Act
      2006 or other local legislation which HMRC agrees is
      equivalent.

              

      

    

     

    
      
        	
                15.2

              	
                Approved Options must be
      exchanged within the period referred to in paragraph 26(2) of ITEPA and
      with the agreement of the company offering the
  exchange.

              

      

    

     

    
      
        	
                15.3

              	
                The new option will be
      in respect of shares which satisfy the conditions of paragraph 27(4) of
      ITEPA, in a body corporate falling within paragraph 16(b) or (c) of
      ITEPA).

              

      

    

     

    
      
        	
                16

              	
                Alternative
      ways to satisfy Options

              

      

    

     

    Rule
10.7 does not apply to Approved Options.

    
       

      
        
          	
                  17

                	
                  Withholding

                

        

      

       

      In
rule 11.8, the last sentence “These arrangements may include the sale or
reduction in number of any Shares on behalf of a Participant.” is deleted and
replaced with “These arrangements may include the sale of any Shares acquired on
exercise, unless the Participant discharges any liability that may arise
himself”.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      

         

        
          	358	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

      
 

    

    
      
        	
                18

              	
                Changing
      the terms of Approved Options

              

      

    

     

    
      
        	
                18.1

              	
                The Directors need not
      obtain the approval of the Company in general meeting for any minor
      changes which are necessary or desirable in order to obtain or maintain
      HMRC approval for the terms of Approved Options under ITEPA any other
      enactment.

              

      

    

     

    
      
        	
                18.2

              	
                If HMRC approval of
      Schedule 1 is to be maintained, any change to a key feature of Approved
      Options after the Plan (as constituted under this Schedule 1) has been
      approved under ITEPA will only have effect when it is approved by HMRC. A
      “key feature” is any provision necessary to meet the requirements of
      ITEPA.

              

      

    

     

    
      
        	
                19

              	
                Definitions

              

      

    

     

    “ITEPA” means Schedule 4 to the
Income Tax (Earnings and Pensions) Act 2003;

     

    “Subsidiary” must be under the
Control of the Company.

     

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      

         

        
          	 	359
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

      

    

     

    Schedule
2
Executive
Approved Options

     

    An
Option may be granted as an Executive Approved Option. If the Grantor decides to
grant Executive Approved Options, the main rules will apply to the Executive
Approved Options, subject to this Schedule 2.

     

    The
terms of Executive Approved Options have been approved by HMRC under Schedule 4
of ITEPA under reference number X105541.

     

    
      	
              1

            	
              Eligibility
      to be granted Executive Approved
Options

            

    

     

    Executive
Approved Options cannot be granted to anybody who is:

     

    
      
        	
              	
                (i)

              	
                excluded
      from participation because of paragraph 9 of ITEPA  (material
      interest provisions); or

              

      

    

     

    
      
        	
              	
                (ii)

              	
                a
      director who is required to work less than 25 hours a week (excluding meal
      breaks) for the Company.

              

      

    

     

    
      
        
          	
                  2

                	
                  Grant
      of Executive Approved 
Options

                

        

      

    

     

    On
the grant of an Executive Approved Option, the Directors will determine that an
Executive Approved Option will be subject to a condition set by the Directors
under rule 1.5 (the ‘Condition’) and which will be
applicable to Executive Approved Options only.

     

    
      
        	
                3

              	
                Shares
      subject to an Executive Approved
Option

              

      

    

     

    The
Shares subject to an Executive Approved Option must satisfy paragraphs 16 to 20
of ITEPA. If the Shares cease to satisfy paragraphs 16 to 20 of ITEPA and the
Directors notify HMRC that they wish Schedule 2 to be disapproved, the
definition of the Option will continue in effect but the Option will cease to be
an Executive Approved Option and will be treated, for the purposes of the rules,
as an Option granted under the main rules. 

     

    
      
        
          	
                  4

                	
                  Performance
      Condition

                

        

      

    

     

    The
words “if appropriate” in rule 1.4 are deleted and replaced with “that a changed
Performance Condition would be fairer and would be no more difficult to
satisfy”.

     

    
      
        	
                5

              	
                Other
      conditions

              

      

    

     

    The
words “or in any way they see fit” in rule 1.5 are deleted for the purpose of
this Schedule 2. 

     

    
      
        	
                6

              	
                HMRC
      limit

              

      

    

     

    The
Grantor must not grant an Executive Approved Option to an individual which would
cause the aggregate market value of: 

     

    
      
        	
              	
                (ii)

              	
                the
      Shares subject to that Executive Approved Option;
  and

              

      

    

     

    
      
        	
              	
                (ii)

              	
                the
      Shares which he may acquire on exercising other Executive Approved
      Options; and

              

      

    

     

    
      
        	
              	
                (iii)

              	
                the
      shares which he may acquire on exercising his options under any other HMRC
      approved discretionary share plan established by the Company or by any of
      its associated companies (as defined in paragraph 35 of
      ITEPA),

              

      

    

     

    to
exceed the amount permitted under paragraph 6(1) of ITEPA (currently
£30,000).  For the purposes of this paragraph, market value is
calculated as at the date of grant of the options as described in the relevant
plan rules.

     

    If
the Grantor tries to grant an Executive Approved Option which is inconsistent
with this paragraph 6, the Executive Approved Option will be limited and will
take effect from the Date of Grant on a basis consistent with the provisions of
this paragraph 6.

     

    
      
        	
                7

              	
                Dividend
      Equivalents

              

      

    

     

    Rules
2.1.6 and 2.3 of the Plan shall not apply to Executive Approved
Options.

     

    
      
        	
                8

              	
                Transferring
      Executive Approved Options

              

      

    

     

    
      
        	
                8.1

              	
                An Executive Approved
      Option cannot be transferred, assigned or otherwise disposed of, except on
      the transmission of the Executive Approved Option on the death of a
      Participant to his personal
representatives.

              

      

    

     

    
      
        	
                8.2

              	
                Rule 2.4.2 does not
      apply in relation to Executive Approved
Options.

              

      

    

     

    
      	
              9

            	
              Market
      value

            

    

     

    Rule
3.2.2 shall be amended by adding “and agreed in advance with HMRC Shares and
Assets Valuation”.

     
 

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    

    
      

         

        
          	360	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

    

    
      
        	
                10

              	
                Variations
      in share capital, demergers and special
  distributions

              

      

    

     

    
      
        	
                10.1

              	
                Adjustments may not be
      made to Executive Approved Options under rule 7 where there is a demerger
      (in whatever form), an exempt distribution by virtue of Section 213 of the
      Income and Corporation Taxes Act 1988 or a special dividend or
      distribution.

              

      

    

     

    
      
        	
                10.2

              	
                No adjustment of
      Executive Approved Options may be made under rule 7 without the prior
      approval of HMRC.

              

      

    

     

    
      
        	
                11

              	
                Restrictions
      on exercise of an Executive Approved
Option

              

      

    

     

    A
Participant may not exercise an Executive Approved Option while he is excluded
from being granted an Executive Approved Option under paragraph 9 of ITEPA
(material interest provisions).

     

    
      
        	
                12

              	
                Cessation
      of employment

              

      

    

     

    
      
        	
                12.1

              	
                Good
      leavers

              

      

    

     

    If
the Option Holder ceases to be an employee or director of any Member of the
Group in circumstances in which rule 6.1.1 applies, the Executive Approved
Option will neither become exercisable nor lapse as described in rule 6 but will
continue in effect until it becomes exercisable in accordance with this Schedule
2 or lapses. For the avoidance of doubt, the Condition will continue to
apply.

     

    
      
        	
                12.2

              	
                Specified
      Age and redundancy

              

      

    

     

    For
the purposes of paragraph 35A of ITEPA, the specified age is 55 and redundancy,
for the purposes of rule 6.1.1(v), has the meaning given to that term by the
Employment Rights Act 1996.

     

    
      
        	
                12.3

              	
                Retirement

              

      

    

     

    Rule
6.1.1(i) is replaced with “retirement at normal retirement age or early
retirement with the agreement of the Company.”

     

    
      
        	
                12.4

              	
                Death

              

      

    

     

    If
the Participant dies, the Executive Approved Option may be exercised by his
personal representatives within 12 months after his death, after which it will
lapse.

     

    
      
        	
                13

              	
                Exercise
      of Executive Approved Options

              

      

    

     

    
      
        	
                13.1

              	
                The Executive Approved
      Option will only be exercisable in the circumstances and to the extent
      described in this Schedule 2 and the
Condition.

              

      

    

     

    
      
        	
                13.2

              	
                The “Executive Approved Option Exercise Date”
      is the latest of:

              

      

    

     

    
      
        	
              	
                13.2.1

              	
                the date on which the
      Directors determine whether and to what extent the Condition has been
      satisfied (which the Directors will do as soon as reasonably practicable
      after the end of the period over which the Condition is
      tested);

              

      

    

     

    
      
        	
              	
                13.2.2

              	
                the third anniversary of
      the Date of Grant; and

              

      

    

     

    
      
        	
              	
                13.2.3

              	
                if relevant, a date
      determined by the Directors which is as soon as reasonably practicable
      after the first date on which exercise of the Executive Approved Option is
      not prohibited by any Dealing
Restriction.

              

      

    

     

    
      
        	
                13.3

              	
                Subject to paragraphs
      13.4 and 13.6, the Executive Approved Option will be exercised to the
      extent described in the Condition with effect from the Executive Approved
      Option Exercise Date. 

              

      

    

     

    
      
        	
                13.4

              	
                Unless the Participant
      notifies the Company in writing before the Executive Approved Option
      Exercise Date that he wishes to fund the Option Price himself, the
      following will apply:

              

      

    

     

    
      
        	
              	
                13.4.1

              	
                The Participant promises
      to pay the Option Price payable to exercise the Executive Approved Option
      to the relevant extent.

              

      

    

     

    
      
        	
              	
                13.4.2

              	
                The Participant
      authorises the Company or any other grantor of the Option to sell, on
      exercise, as many of the Shares in respect of which he is entitled to
      exercise the Executive Approved Option as may be necessary to raise
      proceeds equal to the Option Price and any applicable share dealing costs
      or other costs of sale.

              

      

    

     

    
      
        	
              	
                13.4.3

              	
                The Participant
      authorises those proceeds to be retained by or paid to the Company or
      other grantor in satisfaction of the Option Price and share dealing costs
      and other costs of sale.

              

      

    

     

    
      	
            	
              13.4.4

            	
              The Executive Approved
      Option will be exercised automatically without any further action by the
      Option Holder. However, if it is not possible to arrange for the sale of
      Shares as set out in paragraph 13.4.2 because the anticipated proceeds of
      sale would not be sufficient to fund the Option Price, the Executive
      Approved Option will not be
  exercised.  

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

       

      
        	 	361
	
                Aviva plc

                Annual Report on Form 20-F 2009

              	Exhibits
continued

      

       

    

    

     

    
      
        	
                13.5

              	
                If the Participant
      notifies that he wishes to fund the Option Price himself as described in
      paragraph 13.4, his Executive Approved Option will only be exercised
      if:

              

      

    

     

    
      
        	
              	
                13.5.1

              	
                he pays the Option Price
      to the Company or other grantor in cleared funds by no later than the
      Business Day immediately preceding the Executive Approved Option Exercise
      Date; and

              

      

    

     

    
      
        	
              	
                13.5.2

              	
                the Market Value of a
      Share on the Executive Approved Option Exercise Date is more than the
      Option Price.

              

      

    

     

    
      
        	
                13.6

              	
                Unless the Participant
      directs otherwise, an Executive Approved Option will not be exercised if a
      liability to income tax for the Option Holder would arise on the
      exercise.

              

      

    

     

    
      
        
          	
                  14

                	
                  Lapse
      of Executive Approved
Option

                

        

      

    

     

    To
the extent it has not been exercised or lapsed earlier under any other provision
of the rules, the Executive Approved Option will lapse on the Business Day
following the Executive Approved Option Exercise Date or on any earlier date set
out in the Condition.

     

    
      
        	
                15

              	
                Discretion
      on exercise and lapse of Executive Approved
  Options

              

      

    

     

    If
the Directors exercise any discretion under rule 5, 6 or 8 in relation to an
Executive Approved Option, they must do so fairly and reasonably.

     

    
      
        	
                16

              	
                Takeovers
      and restructurings

              

      

    

     

    
      
        	
                16.1

              	
                If an Executive Approved
      Option becomes exercisable by virtue of rules 8.1, 8.2, 8.3 or 8.5 and
      

              

      

    

     

    
      
        	
              	
                16.1.1

              	
                the date on which the
      Executive Approved Option becomes exercisable is on or after the third
      anniversary of the Date of Grant;
or

              

      

    

     

    
      
        	
              	
                16.1.2

              	
                no liability to income
      tax would arise on exercise of the Option on that date by virtue of
      section 524 of ITEPA (which allows for exercise of options within six
      months of ceasing to be an employee by virtue of injury, disability,
      redundancy, retirement at or after the Specified
  Age);

              

      

    

     

    paragraph
13 will apply as if that date were the Executive Approved Option Exercise Date.
For the avoidance of doubt, the Condition will continue to apply.

     

    
      
        	
                16.2

              	
                If an Executive Approved
      Option would become exercisable by virtue of the rules mentioned in
      paragraph 16.1 but the other conditions specified above in paragraphs
      16.1.1 and 16.1.2 are not met, the Executive Approved Option will lapse on
      the date on which it would otherwise have become exercisable (except to
      the extent it is exchanged under rule
9).

              

      

    

     

    
      
        	
                16.3

              	
                If an Executive Approved
      Option is exchanged under rule 9, the Condition will apply to the new
      option.

              

      

    

     

    
      
        	
                17

              	
                Demerger
      or other corporate event

              

      

    

     

    In
rule 8.3.1 the words “and subject to any other condition the Directors may
decide to impose” are disapplied in relation to Executive Approved
Options.

     

    
      
        	
                18

              	
                Exchange
      of Executive Approved Options

              

      

    

     

    
      
        	
                18.1

              	
                Where rule 8.1.1 or
      8.2.1 applies to the exchange of an Executive Approved Option, the
      Participant will be deemed to have agreed to the
  exchange.

              

      

    

     

    
      
        
          	
                  18.2

                	
                   If HMRC approval
      of the terms of Executive Approved Options is to be maintained, Executive
      Approved Options can only be exchanged, as described in rule 9, if the
      Acquiring Company:

                

        

      

    

    
       

      
        
          	
                	
                  18.2.1

                	
                  obtains Control of the
      Company as a result of making a general offer to
  acquire:

                

        

      

       

      
        
          	
                	
                  (i)

                	
                  the
      whole of the issued ordinary share capital of the Company (other than that
      which is already owned by it and its subsidiary or holding company) made
      on a condition such that, if satisfied, the Acquiring Company will have
      Control of the Company; or

                

        

      

       

      
        
          	
                	
                  (ii)

                	
                  all
      the Shares (or all those Shares not already owned by the Acquiring Company
      or its subsidiary or holding company);
or

                

        

      

       

      
        
          	
                	
                  18.2.2

                	
                  obtains Control of the
      Company under a compromise or arrangement sanctioned by the court under
      Section 899 of the Companies Act 2006 or other local sanction procedure
      which HMRC agrees is equivalent;
or

                

        

      

       

      
        
          	
                	
                  18.2.3

                	
                  becomes bound or
      entitled to acquire Shares under Sections 979 to 982 of the Companies Act
      2006 or other local legislation which HMRC agrees is
      equivalent.

                

        

      

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      

         

        
          	362	 
	
                  Aviva plc

                  Annual Report on Form 20-F 2009

                	Exhibits
continued

        

         

      

    

    

     

    
      
        	
                18.3

              	
                Executive Approved
      Options must be exchanged within the period referred to in paragraph 26(2)
      of ITEPA and with the agreement of the company offering the
      exchange.

              

      

    

     

    
      
        	
                18.4

              	
                The new option will be
      in respect of shares which satisfy the conditions of paragraph 27(4) of
      ITEPA, in a body corporate falling within paragraph 16(b) or (c) of
      ITEPA).

              

      

    

     

    
      
        	
                19

              	
                Alternative
      ways to satisfy Options

              

      

    

     

    Rule
10.7 does not apply to Executive Approved Options.

     

    
      
        	
                20

              	
                Withholding

              

      

    

     

    In
rule 11.8, the last sentence “These arrangements may include the sale or
reduction in number of any Shares on behalf of a Participant.” is deleted and
replaced with “These arrangements may include the sale of any Shares acquired on
exercise, unless the Participant discharges any liability that may arise
himself”.

     

    
      
        	
                21

              	
                Changing
      the terms of Executive Approved
Options

              

      

    

     

    
      
        	
                21.1

              	
                The Directors need not
      obtain the approval of the Company in general meeting for any minor
      changes which are necessary or desirable in order to obtain or maintain
      HMRC approval for the terms of Executive Approved Options under ITEPA any
      other enactment.

              

      

    

     

    
      
        	
                21.2

              	
                If HMRC approval of
      Schedule 2 is to be maintained, any change to a key feature of Executive
      Approved Options after the Plan (as constituted under this Schedule 2) has
      been approved under ITEPA will only have effect when it is approved by
      HMRC. A “key feature” is any provision necessary to meet the requirements
      of ITEPA.

              

      

    

     

    
      
        	
                22

              	
                Definitions

              

      

    

     

    “ITEPA” means Schedule 4 to the
Income Tax (Earnings and Pensions) Act 2003;

     

    “Subsidiary” must be under the
Control of the Company.reeds_10k-ex1028.htm

    
      
        

      
EXHIBIT 10.28

    

     

    

    

    

    LOAN
AND SECURITY AGREEMENT

    

    by
and between

    

    GEMCAP
LENDING I, LLC,

    

    as
Lender,

    

    and

    

    REED’S,
INC.,

    

    as
Borrower

    

    

    

    

    Dated:
November 18, 2009

     

     

     

    

    
      
        
           

        

         

      

      
         

        
          

        

      

      
         

      

    

    

    LOAN AND SECURITY
AGREEMENT

    

    

    LOAN AND SECURITY AGREEMENT,
dated as of November 18, 2009, by and between REED’S, INC., a Delaware
corporation, with its principal place of business located at 13000 South Spring
Street, Los Angeles, California 90061 (“Borrower”), and GEMCAP LENDING I, LLC, a
Delaware limited liability company with offices at 1401 Ocean Avenue, Suite 305,
Santa Monica, California 90401. (together with its successors and assigns, the
“Lender”).

    

    

    R E C I T A L
S:

    

    WHEREAS, Borrower desires to
enter into an accounts receivable-based and inventory-based revolving loan
credit facility with Lender; and

    

    WHEREAS, Lender is willing to
provide such loans on the terms and conditions hereinafter set
forth;

    

    NOW, THEREFORE, in
consideration of the foregoing, the mutual covenants and agreements herein
contained and other good and valuable consideration, Lender and Borrower
mutually covenant, warrant and agree as follows:

    

    
      SECTION
1.  DEFINITIONS AND RULES OF INTERPRETATION AND
CONSTRUCTION

    

    

    Specific Terms
Defined.  The following terms (including both the singular and
plurals thereof) shall have the following meanings unless the context indicates
otherwise:

    

    1.1           “Account Debtor” or “account debtor”
shall
have the meaning ascribed to such term in the UCC.

     

    1.2           “Accounts” or “accounts” shall
mean “accounts” as defined in the UCC, and, in addition, any and all obligations
of any kind at any time due and/or owing to Borrower, whether now existing or
hereafter arising, and all rights of Borrower to receive payment or any other
consideration including, without limitation, invoices, contract rights, accounts
receivable, general intangibles, choses-in-action, notes, drafts, acceptances,
instruments and all other debts, obligations and liabilities in whatever form
owing to Borrower from any Person, Governmental Authority or any other entity,
all security therefor, and all of Borrower’s rights to receive payments for
goods sold (whether delivered, undelivered, in transit or returned), which may
be represented thereby, or with respect thereto, including, but not limited to,
all rights as an unpaid vendor (including stoppage in transit, replevin or
reclamation), and all additional amounts due from any Account Debtor, together
with all Proceeds and products of any and all of the foregoing.

    

      1.3          
  “ACH”
shall
have the meaning set forth in Section 2.2(k) hereof.

       

      1.4           
 “Advance” shall
have the meaning as set forth in Section 2.2(b)
hereof.

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    1.5         
   “Affiliate”
shall
mean, with respect to any Person, (a) any other Person that, directly or
indirectly, controls, is controlled by, or is under common control with such
Person or (b) any other Person who is a director or officer (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in clause
(a) above.  For the purposes of this definition, control of a Person
shall mean the power (direct or indirect) to direct or cause the direction of
the management or the policies of such Person, whether through the ownership of
any class of stock or equity of such person or by contract or
otherwise.

     

    1.6          
  “Agreement”
shall
mean this Loan and Security Agreement (including all Exhibits annexed hereto and
the Borrower’s Disclosure Schedule) as originally executed or, if amended,
modified, supplemented, renewed or extended from time to time, as so amended,
modified, supplemented, renewed or extended.

     

    1.7         
   “Availability” shall
mean the lesser of (i) the Borrowing Base, and (ii) $3,000,000.

     

    1.8            
“Balance Sheet” means the
Borrower’s balance sheet dated as of September 30, 2009.

     

    1.9        
    “Borrower” shall
have the meaning set forth in the introductory paragraph hereof.

     

    1.10           “Borrower’s Disclosure
Schedule” means the
disclosure schedule prepared by Borrower that is being delivered to Lender
concurrently herewith.

     

    1.11           “Borrowing Base” shall be
calculated at any time as the sum of (A) the product obtained by multiplying the
outstanding amount of Eligible Accounts, net of all taxes, discounts, allowances
and credits given or claimed, and net of all Reserves, by eighty percent (80%),
plus (B) the lesser of (1) the product obtained by multiplying the outstanding
amount of Eligible Inventory by fifty percent (50%) of the actual manufactured
cost or invoiced cost thereof, as applicable, or (2) $1,500,000, net of all
Reserves.

    

      1.12           “Borrowing Certificate”
shall
have the meaning as set forth in Section 2.2(f) hereof.

       

      1.13           “Business” shall
mean the manufacture, sale and distribution of non-alcoholic and New Age
beverages, candies and ice creams. “New Age” beverages include natural soda,
fruit juices and fruit drinks, ready-to-drink teas, sports drinks and
water..

       

      1.14           “Business Day” shall
mean any day other than a Saturday, Sunday or any other day on which banks
located in the State of California are authorized or required to close under
applicable banking laws.

       

      1.15           “Capital Assets” shall
mean, in accordance with GAAP, fixed assets, both tangible (such as land,
buildings, fixtures, machinery and equipment) and intangible (such as patents,
copyrights, trademarks, franchises and goodwill).

       

      1.16           “Change of Control”
shall
have the meaning as set forth in Section 10.1 hereof.

       

      1.17           “Chattel Paper” shall
have the meaning ascribed to such term in the UCC.

    

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    1.18           “Closing
Date”  shall
mean the date of this Agreement.

     

    1.19           “Collateral” shall
have the meaning as set forth in Section 5.1 hereof.

     

    1.20           “Collection Account”
has the
meaning set forth in Section 2.2 hereof.

     

    1.21           “Collection
Days” shall
mean a period equal to the greater of (i) two (2) Business Days after the
deposit of Collections into the Collection Account, or (ii) such longer period
as may be required by the financial institution with whom the Collection Account
is maintained, in either event for which interest may be charged on the
aggregate amount of such deposits at the Interest Rate or, if applicable, the
Default Interest Rate.

    1.22           “Collections” means
with respect to any Account, all cash collections on such Account.

     

    1.23           “Commercial Tort
Claims” shall
have the meaning ascribed to such term in the UCC.

     

    1.24           “Default Interest Rate”
shall
have the meaning set forth in Section 3.1 hereof.

     

    1.25           “Deposit Accounts” shall
have the meaning ascribed to such term in the UCC.

     

    1.26           “Document” or “document” shall
have the meaning ascribed to such term in the UCC.

     

    1.27           “Eligible Accounts”
are
Accounts created by Borrower which satisfy the following criteria:

     

    (1)           such
Accounts are created from, or arise in connection with, the sale of Inventory in
the ordinary course of Borrower’s Business;

     

    (2)           such
Accounts are good and valid Accounts representing undisputed bona fide
indebtedness incurred by the Account Debtor therein named, for a fixed sum as
set forth in the invoice relating thereto with respect to an unconditional sale
and delivery upon the stated terms of goods sold by the Borrower, and
collectible in accordance with their terms;

     

    (3)           the
amounts of the Accounts reported to Lender are absolutely owing to Borrower and
do not arise from sales on consignment, guaranteed sales or other terms under
which payment by the Account Debtors may be conditional or
contingent;

     

    (4)           the
Account Debtor’s chief executive office or principal place of business is
located in the United States;

     

    (5)           such
Accounts do not arise from progress billings, retainages or bill and hold
sales;

     

    (6)           there
are no contra relationships, setoffs, counterclaims or disputes existing with
respect thereto;

     

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    (7)        
    the Inventory giving rise thereto are not subject to any
Liens except for the Liens of Lender;

     

    (8)       
     such Accounts are free and clear of all Liens
except for the Liens of Lender;

    (9)       
    such Accounts are not Accounts with respect to which the
Account Debtor or any officer or employee thereof is an officer, employee or
agent of or is affiliated with Borrower, directly or indirectly, whether by
virtue of family membership, ownership, control, management or
otherwise;

     

    (10)           such
Accounts are not Accounts with respect to which the Account Debtor is the United
States or any state or political subdivision thereof or any department, agency
or instrumentality of the United States, any state or political
subdivision;

     

    (11)           Borrower
has delivered to Lender or Lender’s representative such documents as Lender may
have requested in connection with such Accounts and Lender shall have received a
verification of such Accounts, satisfactory to it, if sent to the Account Debtor
or any other obligor or any bailee;

     

    (12)           there
are no facts existing or threatened which might result in any material adverse
change in the Account Debtor’s financial condition;

     

    (13)           Accounts
owed by a single Account Debtor or its Affiliates which are no greater than
twenty (20%) of all Eligible Accounts;

     

    (14)           such
Accounts are not owed by an Account Debtor with respect to which more than 25%
of such Account Debtor’s Accounts have remained unpaid for more than forty (40)
days after the invoice date thereof;

     

    (15)           such
Accounts have not remained unpaid for more than ninety (90)  days
after the invoice date thereof;

     

    (16)           such
Accounts continue to be in full conformity with the representations and
warranties made by Borrower to Lender with respect thereto;

     

    (17)           Lender
is, and continues to be, reasonably satisfied with the credit standing of the
Account Debtor in relation to the amount of credit extended;

     

    (18)           such
Accounts are not evidenced by chattel paper or an instrument of any kind with
respect to or in payment of the Account unless such instrument is duly endorsed
to and in possession of Lender or represents a check in payment of an
account;

     

    (19)           such
Accounts are net of any returns, discounts, claims, credits and
allowances;

     

    (20)           Borrower
is able to bring suit and enforce its remedies against the Account Debtor
through judicial process;

     

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

    (21)           such
Accounts do not represent interest payments, late or finance charges owing to
Borrower; and

     

    (22)           such
Accounts are otherwise satisfactory to Lender in its sole
discretion.

    1.28           “Eligible Inventory”
shall
mean finished goods and processed Inventory owned by Borrower consisting of
beverages, candies and ice creams, and raw materials for the manufacture
thereof, based on reports furnished to Lender by Borrower that are acceptable to
Lender in its sole discretion, excluding any
Inventory having any of the following characteristics:

    

    (1)          
  In-transit Inventory;

     

    (2)          
  Inventory that is located at any warehouse or other premises other
than Borrower’s premises at 12930 or 13000 South Spring Street, Los Angeles,
California 90061, or any other warehouse expressly approved by Lender in
writing;

     

    (3)           
 Inventory as to which Lender has not received a waiver in form and
substance acceptable to Lender from the applicable landlord, warehouseman,
filler, processor or packer in respect thereof;

     

    (4)           
 Inventory not subject to a duly perfected first priority security interest
in Lender's favor;

     

    (5)          
  Inventory that is subject to any Lien in favor of any Person other
than Lender that is not subordinate to Lender's first priority security interest
on terms satisfactory to Lender in its sole discretion;

     

    (6)          
  Inventory on consignment from any Person, on consignment to any
Person or subject to any bailment;

     

    (7)          
  Inventory that is damaged, defective, tainted, slow-moving or not
currently saleable in the normal course of the Borrower's operations, or the
amount of such Inventory that has been reduced by shrinkage;

     

    (8)         
   Inventory that the Borrower has returned, has attempted to
return, is in the process of returning or intends to return to the vendor
thereof;

     

    (9)         
   Inventory manufactured or produced by the Borrower pursuant to
a license unless the applicable licensor has agreed in writing to permit the
Lender to exercise its rights and remedies against such Inventory;

     

    (10)           Inventory
not covered by a casualty insurance policy reasonably acceptable to Lender and
under which Lender has been named as a loss payee and additional
insured;

     

    (11)           Inventory
consisting of (i) packaging (except bottle inventory approved by Lender in its
sole discretion), (ii) work-in-process, (iii) replacement parts, (iv) cleaning
supplies, (v) office supplies, (vi) Inventory held at locations carrying less
than an aggregate of $20,000 of Inventory at actual manufactured cost or
invoiced cost, as applicable, (vii) raw materials in opened or partial
containers, and (viii) any raw materials or finished goods which are past or
near the expiration date thereof;

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    (12)           Inventory
with any contra relationships, setoffs, counterclaims or disputes existing with
respect thereto;

     

    (13)           Inventory
located at any warehouse or other storage facility as to which amounts payable
by Borrower to such warehouse or storage facility are past due; and

     

    (14)           Inventory
otherwise deemed ineligible by Lender in its sole discretion.

     

    1.29           “Environment” means all
air, surface water, groundwater or land, including, without limitation, land
surface or subsurface, including, without limitation, all fish, wildlife, biota
and all other natural resources.

    

    1.30           “Environmental Law” or “Environmental Laws”
shall
mean all federal, state and local laws, statutes, ordinances and regulations now
or hereafter in effect, and in each case as amended or supplemented from time to
time, and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment relating to the
regulation and protection of human health, safety, the environment and natural
resources (including ambient air, surface water, groundwater, wetlands, land
surface or subsurface strata, wildlife, aquatic species and
vegetation).

    

    1.31           “Environmental Liabilities and Costs”
shall
mean, as to any Person, all liabilities, obligations, responsibilities, remedial
actions, losses, damages, punitive damages, consequential damages, treble
damages, costs and expenses (including all fees, disbursements and expenses of
counsel, experts and consultants and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
claim or demand by any other Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, including any
Environmental Law, permit, order or agreement with any Governmental Authority or
other Person, and which arise from any environmental, health or safety
conditions, or a Release or conditions that are reasonably likely to result in a
Release, and result from the past, present or future operations of such Person
or any of its Affiliates.

     

    1.32           “Environmental Lien”
shall
mean any Lien in favor of any Governmental Authority for Environmental
Liabilities and Costs.

     

    1.33           “ERISA” shall
mean the Employee Retirement Income Security Act of 1974, as the same now exists
or may from time to time hereafter be amended, modified, recodified or
supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.

     

    1.34           “Equipment” shall
mean “equipment”, as such term is defined in the UCC, now owned or hereafter
acquired by Borrower, wherever located, and shall include, without
limitation,
the machinery and equipment set forth on Exhibit
1.34 annexed
hereto, and all other equipment, machinery, furniture, Fixtures, computer
equipment, telephone equipment, molds, tools, dies, partitions, tooling,
transportation equipment, all other tangible assets used in connection with the
manufacture, sale or lease of goods or rendition of services, and Borrower’s
interests in any leased equipment, and all repairs, modifications, alterations,
additions, controls and operating accessories thereof or thereto, and all
substitutions and replacements therefor.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    1.35           “Equity Interests” shall
mean, with respect to any Person, any and all shares, rights to purchase,
options, warrants, general, limited or limited liability partnership interests,
membership interests, units, participations or other equivalents of or interest
in (regardless of how designated) equity of such Person, whether voting or
nonvoting, including common stock, preferred stock, convertible securities or
any other “equity security” (as such term is defined in Rule 3a11-1 of the
General Rules and Regulations promulgated by the SEC (or any successor thereto)
under the 1934 Act).

     

    1.36           “Event of Default”
shall
mean the occurrence or existence of any event or condition described in Section
11 of this Agreement.

     

    1.37           “Financial Statements”
shall
have the meaning as set forth in Section 8.9 hereof.

     

    1.38           “Financing Statements”
shall
mean the Uniform Commercial Code UCC-1 Financing Statements to be filed with
applicable Governmental Authorities of each State or Commonwealth or political
subdivisions thereof pursuant to which Lender shall perfect its security
interest in the Collateral.

     

    1.39           “Fiscal Year” shall
mean that twelve (12) month period commencing on  January 1 and ending
on December 31.

     

    1.40           “Fixtures” shall
have the meaning ascribed to such term in the UCC.

     

    1.41           “GAAP” means
generally accepted accounting principles in effect in the United States of
America at the time of any determination, and which are applied on a consistent
basis.  All accounting terms used in this Agreement which are not
expressly defined in this Agreement shall have the meanings given to those terms
by GAAP, unless the context of this Agreement otherwise
requires.

    1.42           “General Intangibles”
shall
have the meaning ascribed to such term in the UCC.

     

    1.43           “Goods” shall
have the meaning ascribed to such term in the UCC.

     

    1.44           “Governmental Authority” or
“Governmental Authorities”
shall
mean any federal, state, county or municipal governmental agency, board,
commission, officer, official or entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.

     

    1.45           “Guarantor” shall
mean Christopher Reed.

     

    1.46           “Indebtedness” shall
mean, with respect to any Person, all of the obligations of such Person which,
in accordance with GAAP, should be classified upon such Person’s balance sheet
as liabilities, or to which reference should be made by footnotes thereto,
including without limitation, with respect to Borrower, in any event and whether
or not so classified:

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    (a)           all
debt and similar monetary obligations of Borrower, whether direct or
indirect;

    

    (b)           all
obligations of Borrower arising or incurred under or in respect of any
guaranties (whether direct or indirect) by Borrower of the indebtedness,
obligations or liabilities of any other Person; and

    

    (c)           all
obligations of Borrower arising or incurred under or in respect of any Lien upon
or in any property owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations.

    

    1.47           “Intellectual Property”
shall
mean all of the following intellectual property used in the conduct of the
business of Borrower: (a) inventions, processes, techniques, discoveries,
developments and related improvements, whether or not patentable; (b) United
States patents, patent applications, divisionals, continuations, reissues,
renewals, registrations, confirmations, re-examinations, extensions and any
provisional applications, of any such patents or patent applications, and any
foreign or international equivalent of any of the foregoing; (c) United States
registered or pending trademarks, trade dress, service marks, service names,
trade names, brand names, logos, domain names, or business symbols and any
foreign or international equivalent of any of the foregoing and all goodwill
associated therewith; (d) work specifications, software (including object and
source code listing) and artwork; (e) technical, scientific and other know-how
and information, trade secrets, methods, processes, practices, formulas,
designs, assembly procedures, specifications owned or used by Borrower; (f)
copyrights; (g) work for hire; (h) customer and mailing lists; and (i) any and
all rights of the Seller to the name “Reed’s” or any derivation thereof, and
Borrower’s entire customer list and database and all assets used or useful by
Borrower in the conduct of its business over the internet or in any electronic
medium, including any websites or domain names owned by
Borrower.

    1.48           [RESERVED]

     

    1.49           “Interest Rate” shall
have the meaning set forth in Section 3.1 hereof.

     

    1.50           “Instruments” shall
have the meaning ascribed to such term in the UCC

     

    1.51           “Inventory” shall
mean “inventory,” as such term is defined in the UCC, now owned or hereafter
acquired by Borrower, wherever located, and, in any event, shall include,
without limitation, all raw materials, work-in-process, finished and
semi-finished Inventory including, without limitation, all materials, parts,
components and supplies relating to the manufacture or assembly thereof,
packaging and shipping supplies relating thereto, and all other inventory,
merchandise, goods and other personal property now or hereafter owned by
Borrower, which are held for sale, exchange or lease or are furnished or are to
be furnished under a contract of service or an exchange arrangement or which
constitute raw materials, work-in-process or materials used or consumed or to be
used or consumed in Borrower’s business, or the processing, packaging, delivery
or shipping of the same, and all finished goods and the products of the
foregoing, whatever form and wherever located; and all names or marks affixed to
or to be affixed thereto for purposes of selling same by the seller,
manufacturer, lessor or licensor thereof and all right, title and interest of
Borrower therein and thereto.

     

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    1.52           “Investment Property”
shall
have the meaning ascribed to such term in the UCC.

     

    1.53           “Landlord Waiver(s)”
shall
mean the Landlord Waiver(s) executed by 525 South Douglas Street, LLC (“Landlord”) in the form of
Exhibit
1.53 annexed hereto.

     

    1.54           “Lender” shall
have the meaning set forth in the introductory paragraph
hereof.

    1.55           “Letter-of-Credit Rights”
means
“letter-of-credit rights” as such term is defined in the UCC, including rights
to payment or performance under a letter of credit, whether or not the
beneficiary thereof has demanded or is entitled to demand payment or
performance.

     

    1.56           “Lien” or “lien” shall
mean any mortgage, deed of trust, pledge, security interest, hypothecation,
assignment, lien (statutory or other, including, without limitation, liens
imposed by any Governmental Authority), charge or other encumbrance of any kind
or nature whatsoever (including, without limitation, pursuant to any conditional
sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the UCC or comparable law of any jurisdiction
to evidence any of the foregoing) on personal or real property or
fixtures.

     

    1.57           “Loan Documents” shall
mean this Agreement and any and all other agreements, notes, documents,
mortgages, financing statements, guaranties, certificates and instruments
executed and/or delivered by Borrower or any other Person to Lender pursuant to
and in connection with the Loan and this Agreement, including, without
limitation, the Revolving Loan Note, the Validity Guaranty, the Landlord
Waiver(s), the Patent and Trademark Security Agreement, the Warehouse Agreements
and all other documents entered into by the parties in connection with the
transactions contemplated hereby.

     

    1.58            “Material Adverse Effect”
means a
material adverse effect on (a) the Business, assets, liabilities, financial
condition, results of operations or business prospects of Borrower, (b) the
ability of Borrower to perform its obligations under any Loan Document to which
it is a party, (c) the value of the Collateral or the rights of Lender
therein, (d) the validity or enforceability of any of the Loan Documents,
(e) the rights and remedies of Lender under any of such Loan Documents, or
(f) the timely payment of the principal of or interest on the Loan or other
amounts payable in connection therewith. All determinations of materiality shall
be made by the Lender in its reasonable judgment.

     

    1.59           “Material Contract”
means any
contract or other arrangement (other than Loan Documents), whether written or
oral, to which Borrower is a party as to which the breach, nonperformance,
cancellation or failure to renew by any party thereto could have a Material
Adverse Effect.

     

    1.60           “Maturity Date” shall
mean November 18, 2011, or such earlier date by which the maturity of the
Obligations shall have been accelerated pursuant to the terms
hereof.

     

    1.61           “1934
Act” shall
mean the Securities Exchange Act of 1934, as amended.

    1.62           “Note”
shall
mean the Revolving Loan Note.

     

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    1.63           “Obligations” shall
mean all obligations, liabilities and indebtedness of every kind, nature and
description owing by Borrower to Lender pursuant to the Loan Documents,
including, without limitation, principal, interest, repurchase obligations,
charges, fees, costs and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether now existing or hereafter
arising, whether arising before, during or after the Term or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts which would accrue and become due but for
the commencement of such case), whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured.

     

    1.64           “Overadvance” shall
have the meaning as set forth in Section 2.2(d) hereof.

     

    1.65           “Patent
and Trademark Security Agreement” shall
mean the Patent and Trademark Security Agreement in the form of Exhibit
1.65 annexed hereto.

     

    1.66           “Payment Intangibles”
shall
have the meaning ascribed to such term in the UCC.

     

    1.67           “Permitted Encumbrances”
shall
mean the following:  (a) Liens granted to Lender or its Affiliates;
(b) purchase money security interests in favor of equipment vendors upon
any Capital Assets hereafter acquired (including, without limitation,
capitalized or finance leases); provided, that, (i) no such
purchase money security interest or other Lien (or capitalized or finance lease,
as the case may be) with respect to specific future Capital Assets shall extend
to or cover any other property, other than the specific Capital Assets so
acquired, and the proceeds thereof, (ii) such mortgage, Lien or security
interest secures only the cost or obligation to pay the purchase price of such
specific Capital Assets only (or the obligations under the capitalized or
finance lease), (iii) the principal amount secured thereby shall not exceed one
hundred (100%) percent of the lesser of the cost or the fair market value (at
the time of the acquisition of the Capital Assets) of the Capital Assets so
acquired, and (iv) such purchase money security interest is permitted under
Section 10.5 hereof; (c) Liens of carriers, warehousemen, artisans, bailees,
mechanics and materialmen incurred in the ordinary course of business securing
sums not overdue; (d) Liens incurred in the ordinary course of business in
connection with worker’s compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of Borrower in
conformity with GAAP; (e) Liens for taxes (i) not yet due or (ii) being
diligently contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of Borrower
in conformity with GAAP, and which have no effect on the priority of Liens in
favor of Lender or the value of the assets in which Lender has a Lien; and (f)
such other Liens as are set forth on Exhibit  1.67
annexed hereto and made a part hereof.

    1.68           “Person” or “person” shall
mean, as applicable, any individual, sole proprietorship, partnership,
corporation, limited liability company, limited liability partnership, business
trust, unincorporated association, joint stock corporation, trust, joint venture
or other entity or any government or any agency or instrumentality or political
subdivision thereof.

     

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    1.69           “Proceeds” shall
have the meaning ascribed to such term in the UCC and shall also include, but
not be limited to, (a) any and all proceeds of any and all insurance policies
(including, without limitation, life insurance, casualty insurance, business
interruption insurance and credit insurance), indemnity, warranty or guaranty
payable to Borrower from time to time with respect to any of the Collateral or
otherwise, (b) any and all payments (in any form whatsoever) made or due and
payable to Borrower from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental body, authority, bureau or agency or any other
Person (whether or not acting under color of Governmental Authority) and (c) any
and all other amounts from time to time paid or payable under or in connection
with any of the Collateral.

     

    1.70           “Promissory Note” shall
have the meaning ascribed to such term in the UCC.

     

    1.71           [RESERVED]

     

    1.72           “Release” means any
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping, or disposing of a Hazardous Substance into the
Environment.

     

    1.73           “Reserves” shall
mean, as of any date of determination, such amounts as Lender  may
from time to time establish and revise in good faith reducing the amount of the
Availability (a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may adversely affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, (ii) the assets, Business or prospects of Borrower, (iii) the security
interests and other rights of Lender in the Collateral (including the
enforceability, perfection and priority thereof), or (iv) Borrower’s ability to
perform its Obligations under the Loan Documents; or (b) in respect of any state
of facts which Lender determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of
Default.

    1.74           “Responsible Officer”
shall
mean the Chief Executive Officer, the Chief Operating Officer or the Chief
Financial Officer of Borrower.

     

    1.75           “Revolving
Loan Commitment” shall
mean the difference between (i) Availability and (ii) the sum of the Reserves
plus matured and unpaid Obligations.

     

    1.76           “Revolving
Loan Note” shall
have the meaning as set forth in Section 2.2(b) hereof.

     

    1.77           “Revolving Loan Prepayment Fee”
shall
have the meaning set forth in Section 4.2 hereof.

     

    1.78           “Revolving Loans” shall
have the meaning as set forth in Section 2.2(a) hereof.

     

    1.79           “SEC”
shall
mean the United States Securities and Exchange Commission.

     

    1.80           “SEC Reports” shall
mean the Borrower’s periodic and other reports filed by the Borrower with the
SEC pursuant to the 1934 Act, in each case as filed with the SEC and including
the information and documents (other than exhibits) incorporated therein by
reference.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    1.81           “Securities” shall
have the meaning ascribed to such term in the UCC.

     

    1.82           “Software” shall
have the meaning ascribed to such term in the UCC.

    1.83           “Subsidiary” shall
mean, as to any Person, a corporation, limited liability company or other entity
with respect to which more than fifty (50%) percent of the outstanding Equity
Interests of each class having voting power is at the time owned by such Person
or by one or more Subsidiaries of such Person or by such Person.

     

    1.84            “Tangible Chattel Paper”
shall
have the meaning ascribed to such term in the UCC.

     

    1.85           “Term” shall
have the meaning set forth in Section 4.1.

     

    1.86           “UCC” shall
mean the Uniform Commercial Code as presently enacted in California (or any
successor legislation thereto), and as the same may be amended from time to
time, and the state counterparts thereof as may be enacted in such states or
jurisdictions where any of the Collateral is located or held.

     

    1.87           “Validity Guaranty”shall mean
that certain guaranty made by Guarantor in favor of Lender, in the form of Exhibit
1.87 annexed hereto.

     

    1.88           “Warehouse Agreements”
shall
mean the agreements, of even date herewith, among Lender, Borrower and each of
United States Cold Storage, Valley Distributing & Storage, Advanced
Packaging & Distribution Specialists, La Grou, Castle & Cooke Cold
Storage, Gress Refrigerated Services and United Warehouses, in the form of Exhibit
1.88 annexed
hereto.

     

    1.89           Rules of Interpretation and
Construction. In this
Agreement unless the context otherwise requires:

     

    (a)           All
terms used herein which are defined in the UCC  shall have the
meanings given therein unless otherwise defined in this Agreement;

     

    (b)           Sections
mentioned by number only are the respective Sections of this Agreement as so
numbered;

    (c)           Words
importing a particular gender shall mean and include the other gender and words
importing the singular number mean and include the plural number and vice
versa;

     

    (d)           Words
importing persons shall mean and include firms, associations, partnerships
(including limited partnerships), societies, trusts, corporations, limited
liability companies or other legal entities, including public or governmental
bodies, as well as natural persons;

     

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    (e)           Each
reference in this Agreement to a particular person shall be deemed to include a
reference to such person's successors and permitted assigns;

     

    (f)           Any
headings preceding the texts of any Section of this Agreement, and any table of
contents or marginal notes appended to copies hereof are intended, solely for
convenience of reference and shall not constitute a part of this Agreement, nor
shall they affect its meaning, construction or effect;

     

    (g)           If
any clause, provision or section of this Agreement shall be ruled invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any of the remaining provisions
thereof;

     

    (h)           The
terms “herein”, “hereunder”, “hereby”, “hereto”, and any similar terms as used
in this Agreement refer to this Agreement; the term “heretofore” means before
the date of execution of this Agreement; and the term “hereafter” shall mean
after the date of execution of this Agreement;

     

    (i)      
     If any clause, provision or section of this
Agreement shall be determined to be apparently contrary to or conflicting with
any other clause, provision or section of this Agreement, then the clause,
provision or section containing the more specific provisions shall control and
govern with respect to such apparent conflict;

     

    (j)          
 Unless otherwise specified, (i) all accounting terms used herein or in any
Loan Document shall be interpreted in accordance with GAAP, (ii) all accounting
determinations and computations hereunder or thereunder shall be made in
accordance with GAAP and (iii) all financial statements required to be delivered
hereunder or thereunder shall be prepared in accordance with GAAP;

     

    (k)           An
Event of Default that occurs shall exist or continue or be continuing unless
such Event of Default is waived by Lender in accordance with the terms of this
Agreement; and

     

    (l)           The
word “and” when used from time to time herein shall mean “or” or “and/or” if
such meaning is expansive of the rights or interests of Lender in the given
context.

     

     

    SECTION
2.  LOANS

    

    
      2.1           [RESERVED]

    

     

    2.2           Revolving Loans.

     

    (a)           Lender
may, subject to the terms and conditions contained herein and the satisfaction
of the closing and funding conditions set forth herein, make revolving loans to
Borrower (“Revolving
Loans”) prior to the Maturity Date in amounts requested by Borrower from
time to time, but not more than 15 times each month, provided that the requested
Revolving Loan would not cause the outstanding Revolving Loans to exceed the
Revolving Loan Commitment existing immediately prior to the making of the
requested Revolving Loan.  Subject to the terms and conditions hereof,
Borrower may borrow, repay and reborrow Revolving Loans, as set forth in this
Agreement.

     

    (b)           Revolving
Loans may be drawn in tranches of not less than Five Thousand Dollars ($5,000)
(each drawing, an “Advance” and collectively, the
“Advances”). The
obligation of Borrower to repay the Revolving Loans shall be evidenced by a note
(the “Revolving Loan
Note”) in the form of
Exhibit
2.2(b) hereto and dated the
date hereof.

     

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    (c)           Subject
to mandatory payment of Revolving Loans as set forth in Section 2.2(d)
below,  the principal amount of the Revolving Loans shall be payable
on the Maturity Date.

     

    (d)           Notwithstanding
any provision herein to the contrary, Borrower shall repay the Revolving Loans
immediately at any time and from time to time in an amount by which the
outstanding balance of the Revolving Loans exceeds the Revolving Loan
Commitment, as determined by Lender (an “Overadvance”).

     

    (e)           Borrower
may prepay the entire unpaid principal sum of the Revolving Loans without
premium or penalty, except as set forth in Section 4.2 hereof.

    

    (f)           Whenever
Borrower desires an Advance, Borrower will notify Lender by delivery of a
borrowing certificate certified by a Responsible Officer (“Borrowing Certificate”) no
later than one (1) Business Day prior to the date of the proposed Advance,
setting forth in reasonable detail, as of the date set forth on the Borrowing
Certificate, (i) a schedule of all Accounts; (ii) a schedule of Eligible
Accounts and the calculation of the Advance requested in connection therewith,
(iii) a schedule of all Inventory, and (iv) a schedule of Eligible Inventory
setting forth the calculation of Eligible Inventory on which such Advance is
based and the calculation of the Advance requested in connection therewith,
which Borrowing Certificate shall in all respects be subject to Lender’s review
and approval. In addition, Borrower shall furnish Lender with a Borrowing
Certificate weekly on each Tuesday during the Term setting forth such
information, irrespective of whether Borrower has then requested an Advance.
Lender shall be entitled to rely on any facsimile or electronic transmission of
a Borrowing Certificate given by a person who Lender reasonably believes to be a
Responsible Officer, and Borrower shall indemnify and hold Lender harmless for
any damages or loss suffered by Lender as a result of such reliance. The funding
of each Advance shall be made in accordance with the applicable Borrowing
Certificate as approved by Lender.

    (g)           Remittances
from Account Debtors and all other proceeds of Accounts and other Collateral
shall be directed to Lender and deposited in an account at a financial
institution selected by Lender (the “Collection
Account”).  Borrower shall cause all Collections with respect
to all Accounts to be sent directly to Lender’s address set forth in this
Agreement or in accordance with wire instructions as provided by Lender pursuant
to a written instruction approved by Lender and delivered to all Account
Debtors, which instruction may not be modified or terminated without Lender’s
prior written consent in each case. Once instituted, such payment system shall
remain in effect unless Lender directs otherwise.  Borrower shall bear
all risk of loss of any funds deposited into such account except to the extent
such loss is caused by the gross negligence or the willful misconduct of
Lender.  In connection therewith, Borrower shall execute such lockbox
and/or bank account agreements as Lender shall specify from time to
time.  Any collections or other Collateral proceeds received by
Borrower from any source whatsoever shall be held in trust for the benefit of
Lender and immediately remitted to Lender in kind.

     

    (h)           In
the event that Borrower receives any Collections that should have been sent to
the Collection Account, Borrower shall, promptly upon receipt and in any event
within one Business Day of receipt, forward such Collections directly to Lender,
in the form received, and promptly notify Lender of such event.  Until
so forwarded, such Collections shall be held in trust for the benefit of
Lender.

     

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    (i)           Subject
to charges for Collections Days, all amounts deposited into the Collection
Account will, for the purposes of calculating the Borrowing Base and interest,
be credited to the aggregate outstanding amount of the Revolving Loans on the
date of deposit in the Collection Account.  No checks, drafts or other
instruments received by Lender shall constitute final payment to Lender unless
and until such instruments have actually been collected.

     

    (j)           All
payments of principal, interest, fees, costs, expenses and other charges
provided for in this Agreement or any other Loan Document that have not been
paid to Lender on the due dates thereof, and any chargeback on an Eligible
Account against which an Advance was made, shall be added to the principal
amount of the Revolving Loans, and shall bear interest at the Default Interest
Rate.

     

    (k)           Application
of Collections and Proceeds of Collateral:

     

    1.           So
long as no Event of Default shall have occurred and remain outstanding, Lender
agrees to apply all Collections as follows: first, to Overadvances; second, to
all fees, costs and expenses; third, to accrued and unpaid interest; fourth, to
matured and unpaid Obligations; and fifth, the principal amount of the Revolving
Loans.

     

    2.           If
an Event of Default shall have occurred and be continuing, Lender may apply
Collections, any other proceeds of Collateral and all other payments received by
Lender to the payment of the Obligations in such manner and in such order as
Lender may elect in its sole discretion.

    3.           In
addition to the foregoing application of Collections, in order to satisfy
Borrower’s payment of amounts due under the Revolving Loans and all fees,
expenses and charges with respect thereto that are due and payable under this
Agreement or any other Loan Document, Borrower hereby irrevocably authorizes the
Lender to initiate manual and automatic electronic (debit and credit) entries
through the Automated Clearing House or other appropriate electronic payment
system (“ACH”) to all
deposit accounts maintained by Borrower, wherever located. At the request of the
Lender, Borrower shall complete, execute and deliver to the institution set
forth below (with a copy to the Lender) any ACH agreement, voided check,
information and/or direction letter reasonably necessary to so instruct
Borrower’s depository institution.  Borrower (i) shall maintain
in all respects this ACH arrangement; (ii) shall not change depository
institutions without Lender’s prior written consent, and if consent is received,
shall immediately execute similar ACH instruction(s), and (iii) waive any
and all claims for loss or damage arising out of debits or credits to/from the
depository institution, whether made properly or in error.  Borrower
has communicated and instructed the institutions set forth below:

     

    
      	
              Bank
      Name:

            	
              City
      National Bank

            
	
              Address:

            	
              3424
      Carson Street,

            
	 
      	
              Torrance,
      CA 90503

            
	
              ABA
      #:

            	
              122016066

            
	
              Account
      #:

            	
              017236482

            
	
              Phone:

            	
              310-264-2919

            
	
              Fax:

            	
              310-264-2906

            
	
              Reference:

            	
              Reed’s

            
	
              Contact
      Person:

            	
              Jackie
      Saidian

            

    

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    
      2.3          
Maximum Credit. 
The
aggregate principal amount of the Revolving Loans shall not exceed
$3,000,000.

    

    

    
      2.4          
Reserves. Without
limiting any other rights and remedies of Lender hereunder or under the other
Loan Documents, the Availability shall be subject to Lender's continuing right,
in its sole discretion in good faith, from time to time, to withhold a Reserve
from Availability.

    

    

    
      2.5          
Use
of Proceeds. Borrower
shall use the proceeds of the Revolving Loans solely for (i) payment in full of
any existing senior debt secured by the Collateral; or (ii) ordinary course
working capital purposes in its Business, including without limitation, the
payment of any fees hereunder.

    

    

    
      2.6          
Repayment. Borrower
shall repay the Revolving Loans and other Obligations in accordance with the
Revolving Loan Note and this Agreement

    

     

     

    SECTION
3.  INTEREST, FEES AND CHARGES

    

    3.1           Interest.

     

    (a)             Interest
on the unpaid principal balance of Revolving Loans, including interest charges
for Collection Days,  shall be computed on the basis of the actual
number of days elapsed and a year of 360 days and shall accrue at the rate of
Eighteen Percent (18%) per annum (the “Interest Rate”). All
accrued interest on the Revolving Loans, including interest charges for
Collection Days, shall be due and payable in arrears monthly on the first
Business Day of each month.

     

    (b)             Following
and during the continuation of an Event of Default, interest on the unpaid
principal balance of the Revolving Loans shall accrue at a rate equal to
Twenty-Four Percent (24%) per annum (the “Default Interest
Rate”).

    

    3.2           Fees. Borrower
shall pay Lender, or Lender’s designee, the fees set forth in Exhibit 3.2. Such fees, other
than the audit fees referenced therein, shall be deemed fully earned on the date
hereof, shall be paid from Loan proceeds, and not be subject to rebate or
proration for any reason.

    

    3.3           Fees and Expenses.
Borrower
shall pay, on Lender's demand, all costs, expenses, filing fees and taxes
payable in connection with the preparation, execution, delivery, recording,
administration, collection, liquidation, defense and enforcement of the Loan
Documents, Lender's rights in the Collateral, and all other existing and future
agreements or documents contemplated herein or related hereto, including any
amendments, waivers, supplements or consents which may now or hereafter be made
or entered into in respect hereof, or in any way involving claims or defenses
asserted by Lender or claims or defenses against Lender asserted by Borrower or
any third party directly or indirectly arising out of or related to the
relationship between Borrower and Lender, including, but not limited to the
following, whether incurred before, during or after the Term or after the
commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar or successor statute: (a) all costs and expenses
of filing or recording (including UCC Financing Statement and mortgage filing
fees); (b) all title insurance and other insurance premiums, appraisal fees,
fees incurred in connection with any environmental report and audit, survey and
search fees and charges; (c) all fees relating to the collection and wire
transfer of loan proceeds, including lockbox charges, and other funds and fees
for returned checks; and (d) all costs, fees and disbursements of counsel to
Lender. If any fees, costs or charges payable to Lender hereunder are not paid
when due, such amounts shall be added to the principal amount of the Revolving
Loans and accrue interest at the Default Interest Rate until paid.

     

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    3.4           Savings Clause. It is
intended that the Interest Rate and the Default Interest Rate shall never exceed
the maximum rate, if any, which may be legally charged in the State of
California for loans made to corporations (the “Maximum Rate”).  If
the provisions for interest contained in the Revolving Loan Note would result in
a rate higher than the Maximum Rate, the interest shall nevertheless be limited
to the Maximum Rate and any amounts which may be paid toward interest in excess
of the Maximum Rate shall be applied to the reduction of principal, or, at the
option of Lender, returned to the Borrower.

     

    SECTION
4.  TERM.

    

    4.1           Term. This
Agreement shall continue until all Obligations shall have been indefeasibly paid
in full (the “Term”).

     

    4.2           Early
Termination; Loan Prepayment Fees.

    

    (a)           Lender
shall have the right to terminate this Agreement at any time upon or after the
occurrence of an Event of Default.

    

    (b)           Except
as set forth in Sections 4.2(c) hereof, the Revolving Loans shall be prepayable
by Borrower without premium or penalty.

    

    (c)           Borrower
may prepay the entire unpaid principal sum of the Revolving Loans without
premium or penalty, provided, however, that, (i) such
prepayment is no less than the amount of the remaining outstanding principal sum
of all outstanding Revolving Loans, (ii) as part of such prepayment, Borrower
shall pay Lender all other amounts due to Lender pursuant to the Revolving Loan
Note, this Agreement and other Loan Documents, and  (iii) in addition,
in the event Borrower makes such prepayment during the first nine (9) months of
the Term, then Borrower shall pay to Lender an amount equal to $60,000
(representing two percent (2%) of the maximum Revolving Loan Commitment of
$3,000,000) (the “Revolving
Loan Prepayment Fee”).  The Revolving Loan Prepayment Fee is
intended to compensate Lender for committing and deploying funds for Borrower’s
Revolving Loans pursuant to the Agreement and for Lender’s loss of investment of
such funds in connection with such early termination, and is not intended as a
penalty.

    

    (d)           The
Revolving Loan Prepayment Fee also shall be due and payable by Borrower to
Lender if Lender accelerates the payment of the Obligations during the first
nine (9) months of the Term due to the occurrence of an Event of
Default.

    

     

    SECTION
5.  COLLATERAL.

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    5.1           Security Interests in Borrower’s
Assets. As
collateral security for the payment and performance of the Obligations, Borrower
hereby grants and conveys to Lender a first priority continuing security
interest in and Lien upon all now owned and hereafter acquired property and
assets of Borrower and the Proceeds and products thereof (which property, assets
and Proceeds, together with all other collateral security for the Obligations
now or hereafter granted to or otherwise acquired by Lender, are referred to
herein collectively as the “Collateral”), including,
without limitation, all property of Borrower now or hereafter held or possessed
by Lender, and including the following:

     

    
      
        	 
      	
                (a)

              	
                Accounts;

              
	 
      	 
      	 
      
	 
      	
                (b)

              	
                Chattel
      Paper;

              
	 
      	 
      	 
      
	 
      	
                (c)

              	
                Commercial
      Tort Claims;

              
	 
      	 
      	 
      
	 
      	
                (d)

              	
                Deposit
      Accounts;

              
	 
      	 
      	 
      
	 
      	
                (e)

              	
                Documents;

              
	 
      	 
      	 
      
	 
      	
                (f)

              	
                Electronic
      Chattel Paper;

              
	 
      	 
      	 
      
	 
      	
                (g)

              	
                Equipment;

              
	 
      	 
      	 
      
	 
      	
                (h)

              	
                Fixtures;

              
	 
      	 
      	 
      
	 
      	
                (i)

              	
                General
      Intangibles;

              
	 
      	 
      	 
      
	 
      	
                (j)

              	
                Goods;

              
	 
      	 
      	 
      
	 
      	
                (k)

              	
                Instruments;

              
	 
      	 
      	 
      
	 
      	
                (l)

              	
                Inventory;

              
	 
      	 
      	 
      
	 
      	
                (m)

              	
                Investment
      Property;

              
	 
      	 
      	 
      
	 
      	
                (n)

              	
                Letter-of-Credit
      Rights;

              
	 
      	 
      	 
      
	 
      	
                (o)

              	
                Payment
      Intangibles;

              
	 
      	 
      	 
      
	 
      	
                (p)

              	
                Promissory
      Notes;

              
	 
      	 
      	 
      
	 
      	
                (q)

              	
                Software;

              
	 
      	 
      	 
      
	 
      	
                (r)

              	
                Tangible
      Chattel Paper;

              
	 
      	 
      	 
      
	 
      	
                (s)

              	
                Securities
      (whether certificated or uncertificated);

              
	 
      	 
      	 
      
	 
      	
                (t)

              	
                Warehouse
      receipts;

              

      

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    (u)           Cash
monies;

     

    (v)           Tax
and duty refunds;

     

    (w)           Intellectual
Property;

    (x)           All
present and future books and records relating to any of the above including,
without limitation, all present and future books of account of every kind or
nature, purchase and sale agreements, invoices, ledger cards, bills of lading
and other shipping evidence, statements, correspondence, memoranda, credit files
and other data relating to the Collateral or any Account Debtor, together with
the tapes, disks, diskettes and other data and software storage media and
devices, file cabinets or containers in or on which the foregoing are stored
(including any rights of Borrower with respect to any of the foregoing
maintained with or by any other Person);

     

    (y)           All
of Borrower’s real property as well as any and all fixtures and improvements
thereto, and any and all interests therein, wherever located; and

     

    (z)           Any
and all products and Proceeds of the foregoing in any form including, without
limitation, all insurance claims, warranty claims and proceeds and claims
against third parties for loss or destruction of or damage to any or the
foregoing.

     

    5.2           Financing Statements.
Borrower
hereby authorizes Lender to file Financing Statements with respect to the
Collateral in form acceptable to Lender and its counsel, and hereby ratifies any
actions taken by Lender prior to the date hereof to file such Financing
Statements.  Borrower shall, at all times, do, make, execute, deliver
and record, register or file all Financing Statements and other instruments,
acts, pledges, leasehold or other mortgages, amendments, modifications,
assignments and transfers (or cause the same to be done), and will deliver to
Lender such instruments and/or documentation evidencing items of Collateral, as
may be requested by Lender to better secure or perfect Lender's security
interest in the Collateral or any Lien with respect thereto. Borrower acknowledges
that it is not authorized to file any Financing Statement or amendment or
termination statement with respect to any Financing Statement without the prior
written consent of Lender and agrees that it will not do so without the prior
written consent of Lender.

     

    5.3           License
Grant. Borrower
hereby grants to Lender an irrevocable, non-exclusive, worldwide license without
payment of royalty or other compensation to Borrower, upon the occurrence and
during the continuance of an Event of Default, to use or otherwise exploit in
any manner as to which authorization of the holder of such Intellectual Property
would be required, and to license or sublicense such rights in to and under, any
Intellectual Property now or hereafter owned by or licensed to Borrower, and
wherever the same may be located, including in such license access to all media
in which any of such Intellectual Property may be recorded or stored and to all
software and hardware used for the compilation or printout thereof, and
represents, promises and agrees that any such license or sublicense is not and
will not be in conflict with the contractual or commercial rights of any third
Person and subject, in the case of trademarks and service marks, to sufficient
rights to quality control and inspection in favor of Borrower to avoid the risk
of invalidation of said trademarks and service marks.  The foregoing
license will terminate on the indefeasible payment in full of all Obligations;
provided, however, that any
license, sublicense, or other rights granted by Lender pursuant to such license
during its term shall remain in effect in accordance with its
terms.

     

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

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

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

     

    (b)           It
shall not encumber, mortgage, pledge, assign or grant any Lien upon any
Collateral or any other assets to anyone other than the Lender and except for
Permitted Encumbrances.

     

    (c)           The
Liens granted pursuant to this Agreement, upon the filing of Financing
Statements in respect of Borrower in favor of the Lender in the applicable
filing office of the state of organization of Borrower, the recording of the
Liens in favor of the Lender in the U.S. Patent and Trademark Office and the
U.S. Copyright Office, as applicable, and the taking of any actions required
under the laws of jurisdictions outside the United States with respect to
Intellectual Property included in the Collateral which is created under such
laws, constitute valid perfected first priority security interests in all of the
Collateral in favor of the Lender, as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof.

     

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

     

    (e)           It
shall not dispose of any of the Collateral whether by sale, lease or otherwise
except for (i) the sale of Inventory in the ordinary course of business and (ii)
the disposition or transfer in the ordinary course of business of Equipment only
to the extent that the proceeds of any such disposition are used to acquire
replacement Equipment which is subject to the Lender’s security interest or are
used to repay the Obligations.

     

    (f)           It
shall defend the right, title and interest of the Lender in and to the
Collateral against the claims and demands of all Persons whomsoever, and take
such actions, including (i) all actions necessary to grant the Lender “control”
of any Investment Property, Deposit Accounts, Letter-of-Credit Rights or
Electronic Chattel Paper owned by it, with any agreements establishing control
to be in form and substance satisfactory to the Lender, (ii) the prompt (but in
no event later than three (3) Business Days following the Lender’s request
therefor) delivery to the Lender of all original Instruments, Chattel Paper,
negotiable Documents and certificated Securities owned by it (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification to third parties of the Lender’s interest in
Collateral at the Lender’s request, and (iv) the institution of litigation
against third parties as shall be prudent in order to protect and preserve its
and/or the Lender’s interests in the Collateral.

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    (g)           It
shall promptly, and in any event within three (3) Business Days after the same
is acquired by it, notify the Lender of any Commercial Tort Claim acquired by it
and, unless otherwise consented to by the Lender, it shall enter into a
supplement to this Agreement granting to the Lender a Lien in such Commercial
Tort Claim for the benefit of Lender.

     

    (h)           It
shall perform in a reasonable time all other steps requested by the Lender to
create and maintain in the Lender’s favor a valid perfected first Lien in all
Collateral subject only to Permitted Encumbrances.

     

    (i)            
[RESERVED]

     

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

     

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

     

    (l)           
It shall maintain and keep all of its books and records concerning the
Collateral at its executive offices listed in Section 5.4(n) of the
Borrower’s Disclosure Schedule.

     

    (m)          
Section 5.4(m)
of the Borrower’s Disclosure Schedule lists all banks and other financial
institutions at which it maintains deposits and/or other accounts, and such
Schedule correctly identifies the name, address and telephone number of each
such depository, the name in which the account is held, a description of the
purpose of the account, and the complete account number.  It shall not
establish any depository or other bank account with any financial institution
(other than the accounts set forth on Section 5.4(m) of the
Borrower’s Disclosure Schedule) without providing Lender with written
notification thereof and providing similar information related
thereto.

     

    (n)           On
the date hereof, its exact legal name (as indicated in the public record of its
jurisdiction of organization), jurisdiction of organization, organizational
identification number, if any, from the jurisdiction of organization, and the
location of its chief executive office and all other offices or locations out of
which it conducts business or operations, are specified on Section 5.4(n) of the
Borrower’s Disclosure Schedule.  It has furnished to the Lender a
certified charter, certificate of incorporation or other organization document
and long-form good standing certificate as of a date which is within thirty (30)
days of the date hereof.  It is organized solely under the law of the
jurisdiction so specified and has not filed any certificates of domestication,
transfer or continuance in any other jurisdiction.  Except as
otherwise indicated on Section 5.4(n) of the
Borrower’s Disclosure Schedule, the jurisdiction of its organization of
formation is required to maintain a public record showing it to have been
organized or formed.  Except as specified on Section 5.4(n) of the
Borrower’s Disclosure Schedule, it has not changed its name, jurisdiction of
organization, chief executive office or sole place of business or its corporate
structure in any way (e.g., by merger, consolidation, change in corporate form
or otherwise) within the last five years and has not within the last five years
become bound (whether as a result of merger or otherwise) as a grantor under a
security agreement entered into by another Person, which has not heretofore been
terminated.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

    (o)           It
will not, except upon thirty (30) days’ prior written notice to the Lender and
delivery to the Lender of all additional financing statements and other
documents reasonably requested by the Lender to maintain the validity,
perfection and priority of the security interests provided for
herein:  (i) change its jurisdiction of organization or the location
of its chief executive office from that referred to in Section 5.4(n) of the
Borrower’s Disclosure Schedule; or (ii) change its name, identity or
organizational structure.

    

    (p)           None
of the Collateral is subject to any prohibition against encumbering, pledging,
hypothecating or assigning the same or requires notice or consent to Borrower’s
doing of the same.

     

    

    SECTION
6.  CONDITIONS TO INITIAL LOANS.

    

    The
obligation of Lender to make the initial Revolving Loans shall be subject to the
satisfaction or waiver by Lender, prior thereto or concurrently therewith, of
each of the following conditions precedent:

    

    6.1           Loan Documents. Each of
the Loan Documents shall have been duly and properly authorized, executed and
delivered by Borrower and the other parties thereto and shall be in full force
and effect as of the date hereof.

    

    6.2           Representations and
Warranties. Each of
the representations and warranties made by or on behalf of Borrower to Lender in
this Agreement and in other Loan Documents shall be true and correct in all
material respects as of the date hereof, provided that any such representation
or warranty that is qualified by materiality shall be true and correct in all
respects as of the date hereof.

    

    6.3           Certified Copies of Corporate
Documents. Lender
shall have received from Borrower, certified by a duly authorized officer to be
true and complete on and as of a date which is not more than ten (10) Business
Days prior to the date hereof, a copy of each of (a) the certificate of
incorporation or such other formation documents of Borrower in effect on such
date of certification, and (b) the by-laws of Borrower in effect on such
date.

    

    6.4           Proof of Corporate Action.
Lender
shall have received from Borrower a copy, certified by a duly authorized officer
to be true and complete on and as of the date which is not more than ten (10)
Business Days prior to the date hereof, of the records of all corporate action
taken by Borrower to authorize (a) its execution and delivery of each of the
Loan Documents to which it is or is to become a party as contemplated or
required by this Agreement, (b) its performance of all of its agreements and
obligations under each of such documents, and (c) the incurring of the
Obligations contemplated by this Agreement.

    

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    6.5           Legal Opinion. Lender
shall have received a written legal opinion, addressed to Lender, dated the date
hereof, from counsel for Borrower.  Such legal opinion shall be
acceptable to Lender and its counsel.

    

    6.6           Collateral. Lender
shall have obtained a first, perfected security interest in the Collateral of
Borrower, subject only to the Permitted Encumbrances.

    

    6.7           Insurance. Lender
shall have received evidence of insurance, additional insured and loss payee
endorsements required hereunder and under the other Loan Documents, in form and
substance satisfactory to Lender, and certificates of insurance policies and/or
endorsements naming Lender as additional insured and loss payee.

    

    6.8           Validity of Collateral
Representation. Lender
shall have received a statement by the appropriate officers of the Borrower
which shall represent and certify the validity of the Collateral.

    

    6.9           ACH Agreement. Lender
shall have received from Borrower an agreement executed by Borrower which
irrevocably authorizes Lender to initiate manual and automatic electronic (debit
and credit) entries through the Automated Clearing House or other appropriate
electronic payment system to all deposit accounts maintained by Borrower,
wherever located.

    

    6.10         IRS Form 4506. Lender
shall have received from Borrower an executed Form 4506 to be submitted to the
Internal Revenue Service which shall grant Lender access to Borrower’s tax
returns.

    

    6.11         IRS
Form W-9. Lender
shall have received from Borrower an executed Form W-9 to be submitted to the
Internal Revenue Service which shall allow Lender to verify Borrower’s tax
identification number(s).

    

    6.12         Pay Proceeds Letter.
Borrower
shall have delivered to Lender a pay proceeds letter with respect to the
disbursement of the proceeds of the initial Revolving Loans in form and
substance satisfactory to Lender, which letter shall provide for, among other
things, the payment or reimbursement of all costs and expenses incurred by
Lender in connection with this Agreement and the other Loan
Documents.

     

    SECTION
7.  CONDITIONS TO MAKING ALL LOANS.

    

    The
obligations of Lender to make all Revolving Loans hereunder shall be subject to
the satisfaction or waiver by Lender, prior thereto or concurrently therewith,
of each of the following conditions precedent:

     

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    7.1           Applications and Compliance.
The
application for such Revolving Loans shall have been made by Borrower to Lender
in accordance with the applicable provisions of this Agreement and in compliance
with all provisions of this Agreement.

    

    7.2           Representations and
Warranties. Each of
the representations and warranties made by or on behalf of Borrower to Lender in
this Agreement or in other Loan Documents shall have been true and correct in
all material respects when made (provided that any such representation or
warranty that is qualified as to materiality shall be true and correct in all
respects), shall, for all purposes of this Agreement, be deemed to be repeated
on and as of the date of each Revolving Loan by Lender hereunder and shall be
true and correct in all respects on and as of each such date, except to the
extent that any of such representations and warranties relate, by the express
terms thereof, solely  to a date prior to the date of each Revolving
Loan by Lender hereunder, and Lender shall have received a certification from a
Responsible Officer with respect to the foregoing  in form and
substance satisfactory to Lender.

    

    7.3           Performance, etc. Borrower
shall have duly and properly performed, complied with and observed each of its
covenants, agreements and obligations contained in this Agreement and in any
other Loan Documents on the date of each Revolving Loan by Lender hereunder, and
Lender shall have received a certification from a Responsible Officer with
respect to the foregoing in form and substance satisfactory to
Lender.  No event shall have occurred on or prior to the date of each
Revolving Loan by Lender hereunder and be continuing on the date of each
Revolving Loan by Lender hereunder, and no condition shall exist on the date of
each Revolving Loan by Lender hereunder, which constitutes an Event of Default
or which would, with notice or the lapse of time, or both, constitute an Event
of Default under this Agreement or any other Loan Document, and Lender shall
have received a certification from a Responsible Officer with respect to the
foregoing  in form and substance satisfactory to Lender.

     

     

    SECTION
8.  REPRESENTATIONS AND WARRANTIES.

    

    Borrower
hereby represents and warrants to Lender, knowing and intending that Lender
shall rely thereon in making the Revolving Loan contemplated hereby (each of
which representations and warranties shall be continuing unless expressly made
in relation only to a specific date), that:

    

    8.1           Corporate
Existence:  Good Standing.

    

    (a)           Borrower
(i) is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (ii) is in good standing in
all other jurisdictions in which it is required to be qualified to do business
as a foreign corporation, and (iii) has all requisite corporate power and
authority and full legal right to own or to hold under lease its properties and
to carry on the business as presently engaged.

     

    (b)           Borrower
has corporate power and authority and has full legal rights to enter into each
of the Loan Documents to which it is a party, and to perform, observe and comply
with all of its agreements and obligations under each of such
documents.

     

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    8.2           No
Violation, etc. The
execution and delivery by Borrower of the Loan Documents to which Borrower is a
party, the performance by Borrower of all of its agreements and obligations
under each of such documents, and the incurring by Borrower of all of the
Obligations contemplated by this Agreement, have been duly authorized by all
necessary corporate actions on the part of Borrower and, if required, its
shareholders, and do not and will not (a) contravene any provision of Borrower’s
charter, bylaws or other governing documents or this Agreement (each as from
time to time in effect), (b) conflict with, or result in a breach of the terms,
conditions, or provisions of, or constitute a default under, or result in the
creation of any Lien upon any of the property of Borrower under, any agreement,
mortgage or other instrument to which Borrower is or may become a party, (c)
violate or contravene any provision of any law, regulation, order, ruling or
interpretation thereunder or any decree, order or judgment or any court or
governmental or regulatory authority, bureau, agency or official (all as from
time to time in effect and applicable to such entity), (d) other than waivers
required from Borrower’s landlords, require any waivers, consents or approvals
by any of third party, including any creditors or trustees for creditors of
Borrower, or (e) require any approval, consent, order, authorization, or license
by, or giving notice to, or taking any other action with respect to, any
Governmental Authority.

    

    8.3           Binding
Effect of Documents, etc. Borrower
has duly executed and delivered each of the Loan Documents to which Borrower is
a party, and each of the Loan Documents is valid, binding and in full force and
effect. The agreements and obligations of Borrower as contained in each of the
Loan Documents constitute, or upon execution and delivery thereof will
constitute, legal, valid and binding obligations of Borrower, enforceable
against Borrower in accordance with their respective terms, subject, as to the
enforcement of remedies only, to limitations imposed by federal and state laws
regarding bankruptcy, insolvency, reorganization, moratorium and other laws
affecting creditors' rights and remedies generally, and by general principles of
law and equity.

    8.4           No Events of
Default.

    

    (a)           No
Event of Default has occurred and is continuing and no event has occurred and is
continuing and no condition exists that would, with notice or the lapse of time,
or both, constitute an Event of Default.

     

    (b)           Borrower
is not in default under any material contract, agreement or instrument to which
Borrower is a party or by which Borrower or any property of Borrower is
bound.

     

    (c)           Borrower’s
execution, delivery and performance of and compliance with this Agreement and
the other Loan Documents  will not, with or without the passage of
time or giving of notice, result in any material violation of law, or be in
conflict with or constitute a default under any term or provision, or result in
the creation of any Lien upon any of Borrower’s  properties or assets
or the suspension, revocation, impairment, forfeiture or nonrenewal, of any
permit, license, authorization or approval applicable to Borrower, or any of its
businesses or operations or any of its assets or properties.

     

    8.5           No Governmental Consent
Necessary. No
consent or approval of, giving of notice to, registration with or taking of any
other action in respect of, any Governmental Authority is required with respect
to the execution, delivery and performance by Borrower of this Agreement and the
other Loan Documents to which it is a party.

     

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    8.6           No Proceedings. There are
no actions, suits, or proceedings pending or, to the best of Borrower’s
knowledge, threatened against or affecting Borrower in any court or before any
Governmental Authority which, if adversely determined, would have an adverse
effect on the ability of Borrower to perform its obligations under this
Agreement or the other Loan Documents to which it is a party.

    

    8.7           No Violations of Laws.
Borrower
has conducted, and is conducting, its business, so as to comply in all material
respects with all applicable federal, state, county and municipal statutes and
regulations.  Neither Borrower nor any officer, director or
shareholder of Borrower is charged with, or so far as is known by Borrower, is
under investigation with respect to, any violation of any such statutes,
regulations or orders, which could have a Material Adverse Effect.

    

    8.8           Use of Proceeds of the Loan.
Proceeds
from the Revolving Loan shall be used only for those purposes set forth in this
Agreement.  No
part of the proceeds of the Loan shall be used, directly or indirectly, for the
purpose of purchasing or carrying any margin stock or for the purpose of
purchasing or carrying or trading in any stock under such circumstances as to
involve Borrower in a violation of any statute or regulation.  In
particular, without limitation of the foregoing, no part of the proceeds from
the Revolving Loans are intended to be used to acquire any publicly-held stock
of any kind.

    8.9         
   Financial
Statements; Indebtedness.

    

    (a)           The
audited and unaudited financial statements contained in the SEC Reports
(collectively, the “Financial
Statements”) (x) fairly present as of the respective dates thereof the
financial position of the Borrower and the results of its operations, cash flows
and stockholders’ equity for each of the periods then ended in all material
aspects; and (y) except for the fact that the unaudited financial statements
omit notes to such statements and year-end adjustments thereto, have been
prepared in accordance with GAAP in conformity with the rules and regulations of
the SEC.

    

    (b)           Except
as shown on the most recent Financial Statements, (i) Borrower has  no
other Indebtedness as of the date hereof which would adversely affect the
financial condition of Borrower or the Collateral, and (ii) Borrower has no
liabilities, contingent or otherwise, except those which, individually or in the
aggregate, are not material to the financial condition or
operating  results of Borrower.

    

    8.10           Changes in Financial
Condition. Since
September 30, 2009, there has been no material adverse change and no material
adverse development in the business, properties, operations, condition
(financial or otherwise), results of operations or prospects of the
Borrower.  Since September 30, 2009, Borrower has not (i) declared or
paid any dividends, (ii) sold any assets, individually or in the aggregate,
outside of the ordinary course of business, (iii) had capital expenditures
outside of the ordinary course of business, (iv) engaged in any transaction with
any Affiliate or (v) engaged in any other transaction outside of the ordinary
course of business.

    

    8.11           Equipment. Borrower
shall keep its Equipment in good order and repair, and in running and marketable
condition, ordinary wear and tear excepted.

     

     

    
      
         

      

      
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    8.12           Taxes and
Assessments.

    

    (a)           Borrower
has paid and discharged when due all taxes, assessments and other governmental
charges which may lawfully be levied or assessed upon its income and profits, or
upon all or any portion of any property belonging to it, whether real, personal
or mixed, to the extent that such taxes, assessment and other charges have
become due.  Borrower has filed all tax returns, federal, state and
local, and all related information, required to be filed by it.

    

    (b)           Borrower
shall make all payments to be made by it hereunder without any Tax Deduction (as
defined below), unless a Tax Deduction is required by law. If Borrower is aware
that it must make a Tax Deduction (or
that there is a change in the rate or the basis of a Tax Deduction), it shall
promptly notify Lender.  If a Tax Deduction is required by law to be
made by Borrower, the amount of the payment due from Borrower shall be increased
to an amount which (after making the Tax Deduction) leaves an amount equal to
the payment which would have been due if no Tax Deduction had been required. If
Borrower is required to make a Tax Deduction, Borrower shall make the minimum
Tax Deduction allowed by law and shall make any payment required in connection
with that Tax Deduction within the time allowed by law. Within thirty (30) days
of making either a Tax Deduction or a payment required in connection with a Tax
Deduction, Borrower shall deliver to Lender evidence satisfactory to Lender that
the Tax Deduction has been made or (as applicable) the appropriate payment has
been paid to the relevant taxing authority.

    (c)           “Tax Deduction” means a
deduction or withholding for or on account of Tax from a payment under a Loan
Document. “Tax” means
any tax, levy, impost, duty or other charge or withholding of a similar nature,
including any income, franchise, stamp, documentary, excise or property tax,
charge or levy (in each case, including any related penalty or
interest).

    

    8.13           ERISA. Borrower
is in compliance in all material respects with the applicable provisions of
ERISA and all regulations issued thereunder by the United States Treasury
Department, the Department of Labor and the Pension Benefit Guaranty
Corporation.

    

    8.14           Environmental
Matters.

    

    (a)           To
the best of its knowledge, Borrower has duly complied with, and its facilities,
business assets, property, leaseholds and equipment are in compliance in all
respects with, the provisions of all Environmental Laws.

    

    (b)           To
the best of its knowledge, Borrower has been issued all required federal, state
and local licenses, certificates or permits relating to the operation of its
business; and each Borrower and its facilities, business, assets, property and
equipment are in compliance in all material respects with all Environmental
Laws.

    

    8.15           United
States Anti-Terrorism Laws; Holding Company Status.

    

    (a)           In
this Section 8.15:

     

     

    
      
         

      

      
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    “Anti-Terrorism Law” means each
of:  (i) Executive Order No. 13224 of September 23,
2001  Blocking Property and Prohibiting Transactions With Persons Who
Commit, Threaten To Commit, or Support Terrorism (the “Executive Order”); (ii) the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (commonly known
as the USA Patriot Act); (iii) the Money Laundering Control Act of 1986, Public
Law 99-570; and (iv) any similar law enacted in the United States of America
subsequent to December 31, 2004.

    

    “holding company” has the
meaning given to it in the United States Public Utility Holding Company Act of
1935, and any successor legislation and rules and regulations promulgated
thereunder.

    

    “investment company” has the
meaning given to it in the United States Investment Company Act of
1940.

    

    “public utility” has the
meaning given to it in the United States Federal Power Act of
1920.

    “Restricted Party” means any
person listed: (i) in the Annex to the Executive Order; (ii) on the Specially
Designated Nationals and Blocked Persons list maintained by the Office of
Foreign Assets Control of the United States Department of the Treasury; or (iii)
in any successor list to either of the foregoing.

    

    (b)           Borrower
is not (i) a holding company or subject to regulation under the United States
Public Utility Holding Company Act of 1935; (ii) a public utility or subject to
regulation under the United States Federal Power Act of 1920; (iii) required to
be registered as an investment company or subject to regulation under the United
States Investment Company Act of 1940; or (iv) subject to regulation under any
United States Federal or State law or regulation that limits its ability to
incur or guarantee indebtedness.

    

    (c)           To
the best of Borrower’s knowledge, Borrower (i) is not, and is not controlled by,
a Restricted Party; (ii) has not received funds or other property from a
Restricted Party; and (iii) is not in breach of and is not the subject of any
action or investigation under any Anti-Terrorism Law.

    

    (d)           Borrower
has taken reasonable measures to ensure compliance with the Anti-Terrorism
Laws.

    

    8.16           Customers
and Vendors.
There are
no disputes with any customers, suppliers, manufacturers, vendors and
independent contractors of Borrower in excess of $15,000 in the aggregate with
any such party.

    

    8.17           Representations, Warranties and
Covenants Concerning the Collateral. The
representations and warranties of Borrower set forth in Section 5.4 hereof are
incorporated in this Section 8.17 by reference.

     

     

    
      
         

      

      
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    8.18           Books and Records.
Borrower
maintains its chief executive office and its books and records related to its
Accounts, Inventory and all other Collateral at its address set forth in Section 5.4(n) of
Borrower’s Disclosure Schedule.

    

    8.19            SEC Reports. The SEC
Reports do not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.

    

    8.20           Internal Accounting
Controls.  Borrower maintains disclosure controls and
procedures (as such term is defined in Rule 13a-15 under the 1934 Act) to ensure
that information required to be disclosed by the Borrower in the reports that it
files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC,
including, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Borrower in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Borrower’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure.  The result of management’s
evaluation of internal controls are described in Borrower’s SEC Reports under
“Controls and Procedures”.

    8.21           Changes. Since the
date of the Balance Sheet, except as disclosed in Section 8.21 of Borrower’s
Disclosure Schedule, with respect to Borrower, there has not been:

     

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

     

    (b)           any
resignation or termination of any of its officers, key employees or groups of
employees;

     

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

     

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

     

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

     

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

     

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

     

    (h)           any
declaration or payment of any dividend or other distribution of its
assets;

     

    (i)           any
labor organization activity related to it;

     

     

    
      
         

      

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

     

    (k)           any
sale, assignment, transfer, abandonment or other disposition of any Collateral
other than Inventory in the ordinary course of business;

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

     

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

     

    (n)           any
arrangement or commitment by it to do any of the acts described in subsection
(a) through (m) of this Section 8.21.

     

    8.22           Intellectual
Property.

     

    (a)           Except
for Permitted Encumbrances, (1) Borrower holds all Intellectual Property that it
owns free and clear of all Liens and restrictions on use or transfer, whether or
not recorded, and has sole title to and ownership of or has the full, exclusive
(subject to the rights of its licensees) right to use in its field of business
such Intellectual Property; and Borrower holds all Intellectual Property that it
uses but does not own under valid licenses or sub-licenses from others; (2) the
use of the Intellectual Property by Borrower does not, to the knowledge of
Borrower, violate or infringe on the rights of any other Person; (3) Borrower
has  not received any notice of any conflict between the asserted
rights of others and Borrower with respect to any Intellectual Property; (4)
Borrower has used its commercially reasonable best efforts to protect its rights
in and to all Intellectual Property; (5) Borrower is in compliance with all
material terms and conditions of its agreements relating to the Intellectual
Property; (6) Borrower is not, and since January 1, 2009 has not been, a
defendant in any action, suit, investigation or proceeding relating to
infringement or misappropriation by Borrower of any Intellectual Property nor
has Borrower been notified of any alleged claim of infringement or
misappropriation by Borrower of any Intellectual Property; (7) to the knowledge
of Borrower, none of the products or services Borrower is researching,
developing, proposes to research and develop, make, have made, use, or sell,
infringes or misappropriates any Intellectual Property right of any third party;
(8) none of the trademarks and service marks used by Borrower, to the knowledge
of Borrower, infringes the trademark or service mark rights of any third party;
and (9) to Borrower’s knowledge, none of the material processes and formulae,
research and development results and other know-how relating to Borrower's
business, the value of which to Borrower is contingent upon maintenance of the
confidentiality thereof, has been disclosed to any Person other than Persons
bound by written confidentiality agreements.

    

    (b)           Section 8.22 of
Borrower’s Disclosure Schedule sets forth a true and complete list of (i) all
registrations and applications for Intellectual Property owned by Borrower filed
or issued by any Intellectual Property registry, (ii) all Intellectual Property
licenses which are either material to the business of Borrower or relate to any
material portion of Borrower’s Inventory, including licenses for standard
software having a replacement value of more than $10,000 and (iii) all domain
names owned by or registered in the name of Borrower.  None of such
Intellectual Property licenses are reasonably likely to be construed as an
assignment of the licensed Intellectual Property to
Borrower.  Borrower shall update this list throughout the Term
immediately upon the filing or issuance of any registrations or applications for
Intellectual Property owned by Borrower, the licensing by Borrower of any third
party Intellectual Property material to Borrower’s business or the acquisition
or registration by Borrower of any domain names, in each case made after the
effective date of this Agreement.

    

    
      
         

      

      
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    8.23           Employees. Borrower
has no collective bargaining agreements with any of its
employees.  There is no labor union organizing activity pending or, to
Borrower’s knowledge, threatened with respect to Borrower.  Borrower
is not a party to or bound by any currently effective deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan, retirement
agreement or other employee compensation plan or agreement.  To
Borrower’s knowledge, no employee of Borrower, nor any consultant with whom
Borrower has contracted, is in violation of any material term of any employment
contract or any other contract relating to the right of any such individual to
be employed by, or to contract with, Borrower or to receive any benefits; and,
to  Borrower’s knowledge, the continued employment by Borrower of its
present employees, and the performance of Borrower’s contracts with its
independent contractors, will not result in any such
violation.  Except for employees who have a current effective
employment agreement with Borrower, as set forth in Section 8.23 of
Borrower’s Disclosure Schedule, no employee of Borrower has been granted the
right to continued employment by Borrower or to any material compensation
following termination of employment with Borrower.  Borrower is not
aware that any officer, director, manager, partner, key employee or group of
employees intends to terminate his, her or their employment with Borrower, nor
does Borrower have a present intention to terminate any of the
same.

    

    8.24           Tax Status.
Borrower
(i) has made or filed all federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
shown or determined to be due on such returns, reports and declarations, except
those being contested in good faith and for which it has set aside on its books
a provision in the amount of such taxes being contested in good faith and (iii)
has set aside on its books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations apply.  There are no unpaid taxes claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Borrower know
of no basis for any such claim.

    

    8.25           Sarbanes-Oxley
Act.  To Borrower’s knowledge, Borrower is in compliance with
any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are
effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

    

    8.26           Fees;
Brokers; Finders. Except as
set forth in Section
8.26 of the Borrower’s Disclosure Schedule, there are no fees,
commissions or other compensation due to any third party acting on behalf of or
at the direction of Borrower in connection with the Loan Documents.  Except
as set forth in Section  8.26
of the Borrower’s Disclosure Schedule, all negotiations relative to the
Loan Documents, and the transactions contemplated thereby, have been carried on
by the Borrower with the Lender without the intervention of any other person or
entity acting on behalf of the Borrower, and in such manner as not to give rise
to any claim against the Borrower or the Lender for any finder's fee, brokerage
commission or like payment due to any third party acting on behalf of or at the
direction of Borrower, and if any such fee, commission or payment is payable, it
shall be the sole responsibility of the Borrower and the Borrower shall pay, and
indemnify the Lender for, the same.

    

    
      
         

      

      
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    8.27           Representations
and Warranties: True, Accurate and Complete. None of
the representations, certificates, reports, warranties or statements now or
hereafter made or delivered to Lender pursuant hereto or in connection with this
Agreement or any other Loan Document or the transactions contemplated hereby
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances in which they are
made, not misleading.

    

    

    SECTION
9.  AFFIRMATIVE COVENANTS.

    

    Until the
indefeasible payment and satisfaction in full of all Obligations, Borrower
hereby covenants and agrees as follows:

    

    9.1           Notify Lender. Borrower
shall promptly, and in any event within three (3) Business Days after obtaining
knowledge thereof,  inform Lender (a) if any one or more of the
representations and warranties made by Borrower in this Agreement or in any
document related hereto shall no longer be entirely true, accurate and complete
in any respect, (b) of any event or circumstance that, to its knowledge, would
cause Lender to consider any then existing Inventory as no longer constituting
Eligible Inventory or to consider any then existing Receivable as no longer
constituting an Eligible Receivable, (c) of any material delay in its
performance of any of its obligations to any Account Debtor, (d) of any
assertion by any Account Debtor of any material claims, offsets or
counterclaims; (e) of any allowances, credits and/or monies granted by it to any
Account Debtor; (f) of all material adverse information relating to the
financial condition of Borrower or any Account Debtor; (g) of any material
return of Goods; and (h) of any loss, damage or destruction of any of the
Collateral.

    

    9.2           Change in Directors or Officers.
Borrower
shall promptly notify Lender of any changes in Borrower’s Directors or
Officers.

    

    9.3           Pay Taxes and Liabilities; Comply
with Agreement. Borrower
shall promptly pay, when due, or otherwise discharge, all indebtedness, sums and
liabilities of any kind now or hereafter owing by Borrower to its employees as
wages or salaries or to Lender and Governmental Authorities however created,
incurred, evidenced, acquired, arising or payable, including, without
limitation, the Obligations, income taxes, excise taxes, sales and use taxes,
license fees, and all other taxes with respect to any of the Collateral, or any
wages or salaries paid by Borrower or otherwise, unless the validity of which
are being contested in good faith by Borrower by appropriate proceedings,
provided that Borrower shall have maintained reasonably adequate reserves and
accrued the estimated liability on Borrower’s balance sheet for the payment of
same.

    

    
      
         

      

      
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    9.4           Observe Covenants, etc.
Borrower
shall observe, perform and comply with the covenants, terms and conditions of
this Agreement and the other Loan Documents.

    

    9.5           Maintain Corporate Existence and
Qualifications. Borrower
shall maintain and preserve in full force and effect, its corporate existence
and rights, franchises, licenses and qualifications necessary to continue its
business, and comply with all applicable statutes, rules and regulations
pertaining to the operation, conduct and maintenance of its existence and
business including, without limitation, all federal, state and local laws
relating to benefit plans, environmental safety, or health matters, and
hazardous or liquid waste or chemicals or other liquids (including use, sale,
transport and disposal thereof).

    

    9.6           Financial Reports and other
Information and Documents to be Furnished to Lender. Borrower
shall deliver or cause to be delivered to Lender, unless such information has
been filed with the SEC:

    

    (a)           Annual Financial Statements.
Annual
financial statements of the Borrower, certified by the Chief Financial Officer
of Borrower and audited by an outside accounting firm acceptable to Lender,
including Weinberg & Company, P.A., as soon as available, but in any event
within ninety (90) days after the end of Borrower’s Fiscal Year during the
Term.  Such financial statements shall (x) fairly present the
financial position of the Borrower as of the dates thereof and the results of
its operations, cash flows and stockholders’ equity for each of the periods then
ended in all material aspects; and (y) be prepared in accordance with
GAAP.

     

    (b)           Quarterly Financial
Statements. As soon
as available but in any event no later than the last day of the SEC filing
periods of (i) forty-five (45) days from the close of each calendar quarter for
the first three quarters of each calendar year, and (ii) ninety (90) days from
the last day of each calendar year, quarterly financial statements of the
Borrower, the unaudited balance sheet and the related statement of income of the
Borrower, prepared in accordance with GAAP, subject to year-end audit
adjustments, together with such other information with respect to the business
of Borrower as Lender may request.

     

    (c)           Monthly Financial Statements.
Not later
than thirty (30) days after the end of each calendar month, the unaudited
balance sheet and the related statement of income of the Borrower, certified by
the Chief Financial Officer of Borrower, subject to year-end audit adjustments,
with an aging schedule for all accounts receivable and accounts payable,
together with such other information with respect to the business of Borrower as
Lender may request.

    (d)           Borrowing Certificates.
Weekly, a
Borrowing Certificate in accordance with Section 2.2(f) hereof.

    

    (e)           Notice of Judgments, Environmental,
Health or Safety Complaints.

     

    (i)             
 Within three (3) Business Days thereafter, written notice to Lender of the
entry of any judgment or the institution of any lawsuit or of other legal or
equitable proceedings or the assertion of any crossclaim or counterclaim seeking
monetary damages from Borrower in an amount exceeding $25,000; and

     

     

    
      
         

      

      
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    (ii)              Within
three (3) Business Days thereafter, notice or copies if written of all claims,
complaints, orders, citations or notices, whether formal or informal, written or
oral, from a governmental body or private person or entity, relating to air
emissions, water discharge, noise emission, solid or liquid waste disposal,
hazardous waste or materials, or any other environmental, health or safety
matter, which adversely effect Borrower.  Such notices shall include,
among other information, the name of the party who filed the claim, the
potential amount of the claim, and the nature of the claim.

    

    (f)           Other Information.
Upon
demand,

     

    (i)             
  Certificates of insurance for all policies of insurance to be maintained
by Borrower pursuant hereto;

    

    (ii)            
  An estoppel certificate executed by an authorized officer of
Borrower indicating that there then exists no Event of Default and no event
which, with the giving of notice or lapse of time, or both, would constitute an
Event of Default;

    

    (iii)              All
information received by Borrower affecting the financial status or condition of
any Account Debtor or the payment of any Account, including but not limited to,
invoices, original orders, shipping and delivery receipts;

    

    (iv)              Assignments,
in form acceptable to Lender, of all Accounts, and of the monies due or to
become due on specific contracts relating to the same; and

    

    (v)            
  At Borrower’s expense, annual appraisals of Inventory by an
appraiser acceptable to Lender.

    

    (g)           Additional Information.
From time
to time, such other information as Lender may reasonably request, including
financial projections and cash flow analysis.

    9.7           Comply with Laws. Borrower
shall comply with the requirements of all applicable laws, rules, regulations
and orders of any Governmental Authority, compliance with which is necessary to
maintain its corporate existence or the conduct of its business or
non-compliance with which would adversely affect in any respect its ability to
perform its obligations or any security given to secure its
obligations.

    

    9.8           Insurance
Required.

    

    (a)           Borrower
shall cause to be maintained, in full force and effect on all property of
Borrower including, without limitation, all Inventory and Equipment, insurance
in such amounts against such risks as is reasonably satisfactory to Lender,
including, but without limitation, business interruption, fire, boiler, theft,
burglary, pilferage, vandalism, malicious mischief, loss in transit, director’s
and officer’s insurance in an amount no less than the maximum Revolving Loan
Commitment of $3,000,000, hazard insurance and, if as of  the date
hereof, any of the real property of Borrower is in an area that has been
identified by the Secretary of Housing and Urban Development as having special
flood or mudslide hazards, and on which the sale of flood insurance has been
made available under the National Flood Insurance Act of 1968, then Borrower
shall maintain flood insurance.  Said policy or policies
shall:

     

     

    
      
         

      

      
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    (i)             
 Be in a form and with insurers which are satisfactory to
Lender;

    

    (ii)           
 Be for such risks, and for such insured values as Lender or its assigns
may reasonably require in order to replace the property in the event of actual
or constructive total loss;

    

    (iii)          
 Designate Lender as additional insured and loss payee as Lender’s interest
may from time to time appear;

    

    (iv)          
 Contain a clause whereby the Lender and any assignee of Lender has the
right to receive loss payment even if the Lender or its assignee has started
foreclosure or similar action on property covered by the insurance;

    

    (v)          
  Contain a clause whereby if the insurer denies a claim by Borrower
because of Borrower’s acts or because Borrower failed to comply with any of the
terms of the insurance coverage, the Lender and any assignee of Lender will
nonetheless have the right to receive loss payment if the Lender or its
assignee:

    

    (A) Pays
any premium due under the insurance at the insurer’s request if Borrower has
failed to do so; and

     

    (B)
Submits a signed, sworn proof of loss within 60 days after receiving notice from
the insurer of Borrower’s failure to do so.

    (vi)          
  Contain a “breach of warranty clause” whereby the insurer agrees
that a breach of the insuring conditions or any negligence by Borrower or any
other person shall not invalidate the insurance as to Lender and its
assignee;

    

    (vii)          
 Provide that they may not be canceled or altered without thirty (30) days
prior written notice to Lender; and

    

    (viii)           Upon
demand, be delivered to Lender.

    

    (b)           Borrower
shall obtain such additional insurance as Lender may reasonably
require.

     

    (c)           Borrower
shall, in the event of loss or damage, forthwith notify Lender and file proofs
of loss with the appropriate insurer.  Borrower hereby authorizes
Lender to endorse any checks or drafts constituting insurance
proceeds.

     

    (d)           Borrower
shall forthwith upon receipt of insurance proceeds endorse and deliver the same
to Lender.

     

     

    
      
         

      

      
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    (e)           In
no event shall Lender be required either to (i) ascertain the existence of or
examine any insurance policy or (iii) advise Borrower in the event such
insurance coverage shall not comply with the requirements of this
Agreement.

     

    9.9            
Condition of Collateral; No
Liens. Borrower
shall maintain all Collateral in good condition and repair at all times, and
preserve it against any loss, damage, or destruction of any nature whatsoever
relating to said Collateral or its use, and keep said Collateral free and clear
of any Liens, except for the Permitted Encumbrances, and shall not permit
Collateral to become a fixture to real estate or accessions to other personal
property.

    

    9.10           Payment of Proceeds.
Borrower
shall forthwith upon receipt of all proceeds of Collateral, pay such proceeds
(insurance or otherwise) up to the amount of the then-outstanding Obligations
over to Lender for application against the Obligations in such order and manner
as Lender may elect.

    

    9.11           Records. Borrower
shall at all times keep accurate and complete records of its operations, of the
Collateral and the status of each Account, which records shall be maintained at
its executive offices as set forth on Section 5.4(n) of
Borrower’s Disclosure Schedule

    

    9.12           Delivery of Documents.
If any
proceeds of Accounts shall include, or any of the Accounts shall be evidenced
by, notes, trade acceptances or instruments or documents, or if any Inventory is
covered by documents of title or chattel paper, whether or not negotiable, then
Borrower waives protest regardless of the form of the endorsement.  If
Borrower fails to endorse any instrument or document, Lender is authorized to
endorse it on Borrower’s behalf.

    9.13           United States Contracts.
If any of
the Accounts arise out of contracts with the United States or any of its
departments, agencies or instrumentalities, Borrower will notify Lender and, if
requested by Lender, execute any necessary instruments in order that all monies
due or to become due under such contract shall be assigned to Lender and proper
notice of the assignment given under the Federal Assignment of Claims
Act.

    

    9.14           Other Names; Location
Changes.

     

    (a)           Borrower
shall promptly notify Lender if Borrower is known by or conducting business
under any names other than those set forth in this Agreement.

    

    (b)           Borrower
shall deliver not less than thirty (30) Business Days prior written notice to
Lender if Borrower intends to conduct any of its business or operations at or
out of offices or locations other than those set forth in this Agreement, or if
it changes the location of its chief executive office or the address at which it
maintains its books and records.

    

    9.15           SEC Reporting
Status.  Borrower shall timely file all reports required to be
filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and
the  Borrower shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination.

     

     

    
      
         

      

      
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    9.16           Further Assurances.
Borrower
shall at any time or from time to time upon request of Lender take such steps
and execute and deliver such Financing Statements and other documents all in the
form of substance satisfactory to Lender relating to the creation, validity or
perfection of the security interests provided for herein, under the UCC or which
are reasonably necessary to effectuate the purposes and provisions of this
Agreement. Borrower  shall defend the right, title and interest of
Lender in and to the Collateral against the claims and demands of all Persons
whomsoever, and take such actions, including (i) all actions necessary to grant
Lender “control” of any Investment Property, Deposit Accounts, Letter-of-Credit
Rights or Electronic Chattel Paper owned by it, with any agreements establishing
control to be in form and substance satisfactory to Lender, (ii) the prompt (but
in no event later than three (3) Business Days following Lender’s request
therefor) delivery to Lender of all original Instruments, Chattel Paper,
negotiable Documents and certificated Securities owned by it (in each case,
accompanied by stock powers, allonges or other instruments of transfer executed
in blank), (iii) notification of Lender’s interest in Collateral at Lender’s
request, and (iv) the institution of litigation against third parties as shall
be prudent in order to protect and preserve Borrower’s and/or Lender’s
respective and several interests in the Collateral.

    9.17           Indemnification. Borrower
shall indemnify, protect, defend and save harmless Lender, as well as Lender's
directors, officers, trustees, employees, agents, attorneys, members and
shareholders (hereinafter referred to collectively as the “Indemnified Parties” and
individually as an “Indemnified
Party”) from and against (a) any and all losses, damages, expenses or
liabilities of any kind or nature and from any suits, claims or demands, by
third parties (including, without limitation, claims of brokers and finders),
including reasonable counsel fees incurred in investigating or defending such
claim, suffered by any of them and caused by, relating to, arising out of,
resulting from, or in any way connected with the Revolving Loans, the
transactions contemplated herein and the Loan Documents, and (b) any and all
losses, damages, expenses or liabilities sustained by Lender in connection with
any Environmental Liabilities and Costs. In case any action shall be brought
against an Indemnified Party based upon any of the above and in respect to which
indemnity may be sought against Borrower, the Indemnified Party against whom
such action was brought shall promptly notify Borrower in writing, and Borrower
shall assume the defense thereof, including the employment of counsel selected
by Borrower and reasonably satisfactory to the Indemnified Party, the payment of
all costs and expenses and the right to negotiate and consent to
settlement.  Upon reasonable determination made by the Indemnified
Party, the Indemnified Party shall have the right to employ separate counsel in
any such action and to participate in the defense thereof; provided, however,
that the Indemnified Party shall pay the costs and expenses incurred in
connection with the employment of separate counsel.  Borrower shall
not be liable for any settlement of any such action effected without their
consent, but if settled with Borrower’s consent, or if there be a final judgment
for the claimant in any such action, Borrower agrees to indemnify and save
harmless said Indemnified Party against whom such action was brought from and
against any loss or liability by reason of such settlement or judgment, except
as otherwise provided above. The provisions of this Section shall survive the
termination of this Agreement and the final repayment of the
Obligations.

     

    

    SECTION
10.  NEGATIVE COVENANTS.

     

    Until
payment and satisfaction in full of all Obligations and the termination of this
Agreement, Borrower hereby covenants and agrees as follows:

     

     

    
      
         

      

      
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    10.1           Change of Control; No Creation of
Subsidiaries. Borrower
will not consolidate with, merge with, or acquire the stock or a material
portion of the assets of any person, firm, joint venture, partnership,
corporation, or other entity, whether by merger, consolidation, purchase of
stock or otherwise if any such action results in a Change of Control (as defined
below). Borrower will not create or permit to exist any Subsidiary unless such
new Subsidiary is a wholly-owned Subsidiary and is designated by Lender as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Lender, including, without
limitation, to grant to Lender a first priority perfected security interest in
substantially all of such Subsidiary’s assets to secure the
Obligations.  In addition, Borrower will not acquire a material
portion of the assets of any entity in a manner that is not addressed by the
foregoing provisions of this Section 10.1 if such action would impair Lender’s
rights hereunder or in the Collateral.

    A “Change of Control” shall be
deemed to have occurred if:

    

    (i)              any
“Person,” which shall mean a “person” as such term is used in Sections 13(d) and
14(d) of the 1934 Act, or group of Persons is or becomes the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
securities of Borrower representing 50% or more of the combined voting power of
Borrower’s then outstanding voting securities;

     
 

    (ii)             individuals,
who at the Closing Date constitute the Board of Directors  of
Borrower, and any new director whose election by the Board of Directors of
Borrower, or whose nomination for election by Borrower’s stockholders, was
approved by a vote of at least one-half (1/2) of the directors then in office
(other than in connection with a contested election), cease for any reason to
constitute at least a majority of the Board of Directors of
Borrower;

    

    (iii)            the
stockholders or members of Borrower approve (I) a plan of complete liquidation
of Borrower or (II) the sale or other disposition by Borrower of all or
substantially all of Borrower’s assets; or

    

    (iv)            a
merger or consolidation of Borrower with any other entity is consummated, other
than:

    

    (A)              a
merger or consolidation which results in the voting securities of Borrower
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the surviving
entity's outstanding voting securities immediately after such merger or
consolidation; or

    

    (B)              a
merger or consolidation which would result in the directors or managers of
Borrower (who were directors or managers immediately prior thereto) continuing
to constitute more than 50% of all directors or managers of the surviving entity
immediately after such merger or consolidation.

     

     

    
      
         

      

      
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    In this
paragraph (iv), “surviving entity” shall mean only an entity in which all of
Borrower’s stockholders immediately before such merger or consolidation
(determined without taking into account any stockholders or members properly
exercising appraisal or similar rights) become stockholders by the terms of such
merger or consolidation, and the phrase “directors of Borrower (who were
directors immediately prior thereto)” shall include only individuals who were
directors of Borrower at the Closing Date.

    

    10.2           Disposition of Assets or
Collateral. Borrower
will not sell, lease, transfer, convey, or otherwise dispose of any or all of
its assets or Collateral, other than the disposition or transfer in the ordinary
course of business, of obsolete and worn-out Equipment only to the extent that
the proceeds of any such disposition are used to acquire replacement Equipment
which is subject to Lender’s first priority security interest or are used to
repay the Revolving Loans.

    10.3           Other Liens. Borrower
will not incur, create or permit to exist any Lien on any of its property or
assets, whether now owned or hereafter acquired, except (a) those Liens in
favor of Lender created by this Agreement and the other Loan Documents; and (b)
for the Permitted Encumbrances.

    

    10.4           Other Liabilities.
Borrower
will not incur, create, assume, or permit to exist, any Indebtedness or
liability on account of either borrowed money or the deferred purchase price of
property, except (i) Obligations to Lender, or (ii) Indebtedness incurred in
connection with any of the Permitted Encumbrances.

    

    10.5           Financing of Capital
Assets.

    

    (a)           Notwithstanding
the provisions of Section 10.4, Borrower shall be permitted to incur
Indebtedness to acquire a Capital Asset secured by a purchase money security
interest that qualifies as a Permitted Encumbrance, provided that (i) the total
of all such Indebtedness does not exceed $25,000 in the aggregate, without the
prior written approval of Lender, and (ii) Borrower is otherwise then in
compliance with the terms of this Agreement.

    

    (b)           Borrower
hereby grants to the Lender a right of first refusal to provide any Capital
Asset Financing (as defined below) to be issued by Borrower, subject to the
following terms and conditions. In the event that Borrower desires to incur
indebtedness for the purpose of acquiring a Capital Asset whose total purchase
cost is greater than $25,000, including all accessories and attachments thereto
(a “Capital Asset
Financing”), Borrower shall notify Lender in writing of such proposed
Capital Asset Financing.  In connection therewith, Borrower shall
submit to Lender all information requested by Lender regarding the Capital Asset
proposed to be acquired pursuant to the Capital Asset Financing (the “Capital Asset Financing
Notice”).  Lender shall have the right of first refusal,
exercisable with  ten (10) Business Days of Lender’s receipt of the
Capital Asset Financing Notice, to provide the Capital Asset Financing in
accordance with the terms hereof, whereby sums advanced to acquire the subject
Capital Asset shall be added to the principal amount of the Revolving Loan
hereunder and bear interest in accordance with the terms hereof. If Lender
declines to exercise its right to provide such Capital Asset Financing, or fails
to respond to the Capital Asset Financing Notice within the ten-Business Day
period set forth above, then Borrower shall be entitled to obtain Capital Asset
Financing for such Capital Asset from a third party within thirty (30) days of
the last day of such notice period, provided that any lien securing the
financing thereof constitutes a Permitted Encumbrance hereunder. If such third
party Capital Asset Financing is not consummated within such thirty (30) day
period, than Borrower’s right to obtain such third party Capital Asset Financing
shall terminate, and any such financing shall once again become subject to
Lender’s first refusal right to provide such financing pursuant to the
provisions of this Section 10.5(b).

    

    (c)          
Borrower will not make any capital expenditures for equipment other than out of
proceeds of future equity financings without the prior written approval of
Lender.

    

    
      
         

      

      
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    10.6        
    Loans. Borrower
will not make any loans to any Person, other than advances to employees of
Borrower in the ordinary course of business, with outstanding advances to any
employee not to exceed $1,000 at any time.

    

    10.7        
    Guaranties. Borrower
will not assume, guaranty, endorse, contingently agree to purchase or otherwise
become liable upon the obligation of any Person, except by the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business.

    

    10.8       
     Transfers of Notes or
Accounts. Borrower
will not sell, assign, transfer, discount or otherwise dispose of any Accounts
or any promissory note payable to Borrower, with or without
recourse.

    

    10.9             Dividends. Borrower
will not declare or pay any cash dividend, make any distribution on, redeem,
retire or otherwise acquire directly or indirectly, any shares of its stock or
other Equity Interests (collectively, “Equity Distributions”) without
the prior written consent of Lender, provided, however, that so long
as no Event of Default has occurred and is continuing, Borrower may make Equity
Distributions during the first and second years of the Term not to exceed an
aggregate of Fifty Thousand Dollars ($50,000) during each such
year.

    

    10.10           Payments to Affiliates.
Except as
set forth in Section
10.10 of the Borrower’s Disclosure Schedule,  or as otherwise
approved by Lender in writing in advance, Borrower shall not make any payments
of cash or other property to any Affiliate.

    

    10.11           Modification of Documents.
Borrower
will not change, alter or modify, or permit any change, alteration or
modification of its certificate of incorporation, by-laws or other governing
documents in any manner that might adversely affect Lender’s rights hereunder as
a secured  lender or its Collateral without Lender's prior written
consent.

    

    10.12           Change of Business or Name.
Borrower
will not change or alter the nature of its business, or change its name as it
appears in the official filings of its state of organization.

    

    10.13           Settlements. Other
than in the ordinary course of its business, Borrower will not comprise, settle
or adjust any claims in any amount relating to any of the Collateral, without
the prior written consent of Lender.

    
      
         

      

      
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    SECTION
11.  EVENTS OF DEFAULT.

    

    The
occurrence of any of the following shall constitute an event of default
(hereinafter referred to as an “Event of
Default”):

    

    11.1         
   Failure to
Pay. The
failure by Borrower to pay, when due, (a) any payment of principal, interest or
other charges due and owing to Lender pursuant to any obligations of Borrower to
Lender including, without limitation, those Obligations arising pursuant to this
Agreement or any Loan Document, or under any other agreement for the payment of
monies then due and payable to Lender, or (b) any taxes due to any Governmental
Authority.

    

    11.2       
    Failure
of Insurance. Failure
of one or more of the insurance policies required hereunder to remain in full
force and effect; failure on the part of Borrower to pay or cause to be paid all
premiums when due on the insurance policies pursuant to this Agreement; failure
on the part of Borrower to take such other action as may be requested by Lender
in order to keep said policies of insurance in full force and effect until all
Obligations have been indefeasibly paid in full; and failure on the part of
Borrower to execute any and all documentation required by the insurance
companies issuing said policies to effectuate said assignments.

    

    11.3        
    Failure
to Perform. Borrower’s
failure to perform or observe any covenant, term or condition of this Agreement
or in any other Loan Document.

    

    11.4      
      Cross Default. Borrower’s
default under any covenant, representation, term or warranty contained in (i)
any agreement or contract with a third party which default would result in
liability to the Borrower in excess of $100,000, and which default is not cured
or waived within five (5) Business Days, or (ii) any other Loan
Document.

    

    11.5        
    False
Representation or Warranty. Borrower
shall have made any statement, representation or warranty in this Agreement or
in any other Loan Document to which Borrower is a party or in a certificate
executed by Borrower incident to this Agreement, which is at any time found to
have been false in any material respect at the time such representation or
warranty was made.

    

    11.6         
   Liquidation,
Voluntary Bankruptcy, Dissolution, Assignment to Creditors. Any
resolution shall be passed or any action (including a meeting of creditors)
shall be taken by Borrower for the termination, winding up, liquidation or
dissolution of Borrower, or Borrower shall make an assignment for the benefit of
creditors, or Borrower shall file a petition in voluntary liquidation or
bankruptcy, or Borrower shall file a petition or answer or consent seeking, or
consenting to, the reorganization of Borrower or the readjustment of any of the
indebtedness of Borrower under any applicable insolvency or bankruptcy laws now
or hereafter existing (including the United States Bankruptcy Code), or Borrower
shall consent to, or be the subject of a court order for, the appointment of any
receiver, administrator, liquidator, custodian or trustee of all or any part of
the property or assets of Borrower or any corporate action shall be taken by
Borrower for the purposes of effecting any of the foregoing.

    

    11.7          
  Involuntary
Petition Against Borrower. Any
petition or application for any relief is filed against Borrower under
applicable insolvency or bankruptcy laws now or hereafter existing (including
the United States Bankruptcy Code) or under any insolvency, reorganization,
receivership, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (whether at law or in equity), and
is not discharged or stayed within thirty (30) days of the filing
thereof.

    

      
        
           

        

        
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    11.8          
  Judgments;
Levies. Any
judgments or attachments aggregating in excess of $100,000 at any given time is
obtained against Borrower which remains unstayed for a period of ten (10) days
or is enforced.

    

    11.9            
Change in Condition.
There
occurs any event or a change in the condition or affairs, financial or
otherwise, of Borrower which, in the reasonable opinion of Lender, impairs
Lender's security or ability of Borrower to discharge its obligations hereunder
or any other Loan Document or which impairs the rights of Lender in Borrower’s
Collateral.

    

    11.10           Environmental Claims.
Lender
determines that any Environmental Liabilities and Costs or Environmental Lien
with respect to Borrower will have a potentially adverse effect on the financial
condition of Borrower or on the Collateral.

    

    11.11           Failure to Notify.
If at any
time Borrower fails to provide Lender with notice or copies, if written, of all
material complaints, orders, citations or notices with respect to environmental,
health or safety complaints within five (5) days of Borrower’s receipt
thereof.

    

    11.12           Failure to Deliver
Documentation. Borrower
shall fail to obtain and deliver to Lender any other documentation required to
be signed or obtained as part of this Agreement, or shall have failed to take
any reasonable action requested by Lender to perfect, protect, preserve and
maintain the security interests and Lien on the Collateral provided for
herein.

    11.13           Change of Control.
Borrower
undergoes a Change of Control.

    

    11.14           Reduction in Equity Ownership
Interests. Guarantor
ceases to own of record and beneficially not less than Twenty Percent (20%) of
the issued and outstanding voting ownership interests of Borrower.

    

    11.15           Dissolution; Maintenance of
Existence. Borrower
is dissolved, or Borrower fails to maintain its corporate existence in good
standing, or the usual business of Borrower ceases or is suspended in any
respect.

    

    11.16           Indictment. The
indictment of Borrower or any director or Responsible Officer of Borrower under
any criminal statute, or commencement of criminal or civil proceedings against
Borrower, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of any portion of the property of
Borrower.

    

    11.17           Tax Liens. The
filing of a Lien for any unpaid taxes filed by any Governmental Authority
against Borrower or any of its assets.

     

     

    
      
         

      

      
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    11.18           Challenge to Validity of Loan
Documents. Borrower
attempts to terminate, or challenges the validity of, or its liability under,
this Agreement or any other Loan Document, or any proceeding shall be brought to
challenge the validity, binding effect of Loan Document, or any Loan Document
ceases to be a valid, binding and enforceable obligation of
Borrower.

    

    11.19           
Trading of Common Stock.  The Common Stock ceases to be traded on a
national securities exchange or electronic quotation system.

     

    

    SECTION
12.  REMEDIES.

    

    12.1        
    Acceleration; Other Remedies.
Upon the
occurrence and during the continuation of an Event of Default:

    (a)           Lender
shall have all rights and remedies provided in this Agreement, any of the other
Loan Documents, the UCC or other applicable law, all of which rights and
remedies may be exercised without notice to Borrower, all such notices being
hereby waived, except such notice as is expressly provided for hereunder or is
not waivable under applicable law.  All rights and remedies of Lender
are cumulative and not exclusive and are enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions and in
any order Lender may determine.  Without limiting the foregoing,
Lender may (i) accelerate the payment of all Obligations and demand immediate
payment thereof to Lender, (ii) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require Borrower, at Borrower’s expense, to assemble and make
available to Lender any part or all of the Collateral at any place and time
designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (v) notify Account Debtors or other
obligors to make payment directly to Lender, or notify bailees as to the
disposition of Collateral, (vi) extend the time of payment of, compromise or
settle for cash, credit, return of merchandise, and upon any terms or
conditions, any and all Accounts or other Collateral which includes a monetary
obligation and discharge or release the Account Debtor or other obligor, without
affecting any of the Obligations, and (vii) sell, lease, transfer, assign,
deliver or otherwise dispose of any and all Collateral (including, without
limitation, entering into contracts with respect thereto, by public or private
sales at any exchange, broker's board, any office of Lender or elsewhere) at
such prices or terms as Lender may deem reasonable, for cash, upon credit or for
future delivery, with Lender having the right to purchase the whole or any part
of the Collateral at any such public sale, all of the foregoing being free from
any right or equity of redemption of Borrower, which right or equity of
redemption is hereby expressly waived and released by Borrower.  If
any of the Collateral or other security for the Obligations is sold or leased by
Lender upon credit terms or for future delivery, the Obligations shall not be
reduced as a result thereof until payment therefor is finally collected by
Lender. If notice of disposition of Collateral is required by law, ten (10) days
prior notice by Lender to Borrower designating the time and place of any public
sale or the time after which any private sale or other intended disposition of
Collateral is to be made, shall be deemed to be reasonable notice thereof and
Borrower waives any other notice.  In the event Lender institutes an
action to recover any Collateral or seeks recovery of any Collateral by way of
prejudgment remedy, Borrower waives the posting of any bond which might
otherwise be required.

     

     

    
      
         

      

      
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    (b)           Lender
may apply the proceeds of Collateral actually received by Lender from any sale,
lease, foreclosure or other disposition of the Collateral to payment of any of
the Obligations, in whole or in part (including attorneys' fees and legal
expenses incurred by Lender with respect thereto or otherwise chargeable to
Borrower) and in such order as Lender may elect, whether or not then
due.  Borrower shall remain liable to Lender for the payment on demand
of any deficiency together with interest at the Default Interest Rate and all
costs and expenses of collection or enforcement, including reasonable attorneys'
fees and legal expenses.

     

    (c)           Lender
may, at its option, cure any default by Borrower under any agreement with a
third party or pay or bond on appeal any judgment entered against Borrower,
discharge taxes and Liens at any time levied on or existing with respect to the
Collateral, and pay any amount, incur any expense or perform any act which, in
Lender's sole judgment, is necessary or appropriate to preserve, protect,
insure, maintain, or realize upon the Collateral.  Such amounts paid
by Lender shall be repayable by Borrower on demand and added to the Obligations,
with interest payable thereon at the Default Interest Rate. Lender shall be
under no obligation to effect such cure, payment, bonding or discharge, and
shall not, by doing so, be deemed to have assumed any obligation or liability of
Borrower.

    (d)           Lender
and Lender’s agents shall have the right to utilize any of Borrower’s customer
lists, registered names, trade names or trademarks to publicly advertise the
sell, lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral and Borrower will be deemed to have waived and voided any
confidentiality agreements by and between Borrower and Lender.

     

    12.2           Set-off. Lender
shall have the right, immediately and without notice of other action, to set-off
against any of Borrower’s liabilities to Lender any money or other liability
owed by Lender or any Affiliate of Lender (and such Affiliate of Lender is
hereby authorized to effect such set-off) in any capacity to Borrower, whether
or not due, and Lender or such Affiliate shall be deemed to have exercised such
right of set-off and to have made a charge against any such money or other
liability immediately upon the occurrence of such Event of Default even though
the actual book entries may be made at a time subsequent thereto.  The
right of set-off granted hereunder shall be effective irrespective of whether
Lender shall have made demand under or in connection with the
Loan.  None of the rights of Lender described in this Section are
intended to diminish or limit in any way Lender's or Affiliates of Lender's
common-law set-off rights.

    

    12.3           Costs and Expenses.
Borrower
shall be liable for all costs, charges and expenses, including attorney's fees
and disbursements, incurred by Lender by reason of the occurrence of any Event
of Default or the exercise of Lender's remedies with respect thereto, each of
which shall be repayable by Borrower on demand with interest at the Default
Interest Rate, and added to the Obligations.

    

    12.4           No Marshalling. Lender
shall be under no obligation whatsoever to proceed first against any of the
Collateral or other property which is security for the Obligations before
proceeding against any other of the Collateral.  It is expressly
understood and agreed that all of the Collateral or other property which is
security for the Obligations stands as equal security for all Obligations, and
that Lender shall have the right to proceed against any or all of the Collateral
or other property which is security for the Obligations in any order, or
simultaneously, as in its sole and absolute discretion it shall
determine.  It is further understood and agreed that Lender shall have
the right, subject to the notice provisions in Section 12.1 of this Agreement,
as it in its sole and absolute discretion shall determine, to sell any or all of
the Collateral or other property which is security for the Obligations in any
order or simultaneously, as Lender shall determine in its sole and absolute
discretion.

     

     

    
      
         

      

      
        45

        
          

        

      

      
         

      

    

     

    12.5           No Implied Waivers; Rights
Cumulative. No delay
on the part of Lender in exercising any right, remedy, power or privilege
hereunder or under any other Loan Document or provided by statute or at law or
in equity or otherwise shall impair, prejudice or constitute a waiver of any
such right, remedy, power or privilege or be construed as a waiver of any Event
of Default or as an acquiescence therein.  No right, remedy, power or
privilege conferred on or reserved to Lender hereunder or under any other Loan
Document or otherwise is intended to be exclusive of any other right, remedy,
power or privilege.  Each and every right, remedy, power or privilege
conferred on or reserved to Lender under this Agreement or under any of the
other Loan Documents or otherwise shall be cumulative and in addition to each
and every other right, remedy, power or privilege so conferred on or reserved to
Lender and may be exercised by Lender at such time or times and in such order
and manner as Lender shall (in its sole and complete discretion) deem
expedient.

     

     

    SECTION
13.  OTHER RIGHTS OF LENDER.

    

    13.1           Collections. Borrower
hereby authorizes Lender to, and Lender shall make such arrangements as it shall
deem necessary or appropriate to, collect the Accounts and any other monetary
obligations included in, or proceeds of, the Collateral at any time whether or
not an Event of Default has occurred.  Borrower shall, at Borrower’s
expense and in the manner requested by Lender from time to time, direct that
remittances and all other proceeds of accounts and other Collateral up to the
amount of the then-current Obligations shall be (a) remitted in kind to
Lender,  (b) sent to a post office box designated by and/or in the
name of Lender, or in the name of Borrower, but as to which access is limited to
Lender and/or (c) deposited into a bank account maintained in the name of
Lender and/or a blocked bank account under arrangements with the depository bank
under which all funds deposited to such blocked bank account are required to be
transferred solely to Lender.  In connection therewith, Borrower shall
execute such post office box and/or blocked bank account agreements as Lender
shall specify.

    

    13.2           Repayment of Obligations.
All
Obligations shall be payable at Lender's office set forth below or at a bank or
such other place as Lender may expressly designate from time to time for
purposes of this Section.  Lender shall apply all proceeds of Accounts
or other Collateral received by Lender and all other payments in respect of the
Obligations to the Revolving Loans whether or not then due or to any other
Obligations then due, in whatever order or manner Lender shall
determine.

    

    13.3           Lender Appointed
Attorney-in-Fact.

     

    (a)           Borrower
hereby irrevocably constitutes and appoints Lender, with full power of
substitution, as its true and lawful attorney-in-fact, with full irrevocable
power and authority in its place and stead and in its name or otherwise, from
time to time in Lender's discretion, at Borrower’s sole cost and expense, to
take any and all appropriate action and to execute and deliver any and all
documents and instruments which Lender may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement, including, without
limiting the generality of the foregoing, (i) at any time any of the Obligations
are outstanding, (A) to transmit to Account Debtors, other obligors or any
bailees notice of the interest of Lender in the Collateral or request from
Account Debtors or such other obligors or bailees at any time, in the name of
Borrower or Lender or any designee of Lender, information concerning the
Collateral and any amounts owing with respect thereto; (B) to execute in the
name of Borrower and file against Borrower in favor of Lender Financing
Statements or amendments with respect to the Collateral, or record a copy or an
excerpt hereof in the United States Copyright Office or the United States Patent
and Trademark Office and to take all other steps as are necessary in the
reasonable opinion of Lender under applicable law to perfect the security
interests granted herein; and (C) to pay or discharge taxes, Liens, security
interests or other encumbrances levied or placed on or threatened against the
Collateral; (ii) after and during the continuation of an Event of Default, (A)
to receive, take, endorse, assign, deliver, accept and deposit, in the name of
Lender or Borrower, any and all cash, checks, commercial paper, drafts,
remittances and other instruments and documents relating to the Collateral or
the proceeds thereof, (B) to notify Account Debtors or other obligors to make
payment directly to Lender, or notify bailees as to the disposition of
Collateral, (C) to change the address for delivery of mail to Borrower and to
receive and open mail addressed to Borrower, (D) take or bring, in the name of
Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender
necessary or desirable to effect collection of or other realization upon the
Collateral; (E) to obtain and adjust insurance required pursuant to this
Agreement and to pay all or any part of the premiums therefor and the costs
thereof, and (F) to extend the time of payment of, compromise or settle for
cash, credit, return of merchandise, and upon any terms or conditions, any and
all accounts or other Collateral which includes a monetary obligation and
discharge or release the Account Debtor or other obligor, without affecting any
of the Obligations.

    
      
         

      

      
        46

        
          

        

      

      
         

      

    

    (b)           Borrower
hereby ratifies, to the extent permitted by law, all that Lender shall lawfully
and in good faith do or cause to be done by virtue of and in compliance with
this Agreement.  The powers of attorney granted pursuant to this
Agreement are each a power coupled with an interest and shall be irrevocable
until the Obligations are paid indefeasibly in full.

    

    13.4           Release of Lender.
Borrower
hereby releases and exculpates Lender, its officers, partners, members,
directors, employees, agents, representatives and designees, from any liability
arising from any acts under this Agreement or in furtherance thereof, whether as
attorney-in-fact or otherwise, whether of omission or commission, and whether
based upon any error of judgment or mistake of law or fact, except for gross
negligence or willful misconduct as determined by a final and non-appealable
order from a court of competent jurisdiction.  In no event will Lender
have any liability to Borrower for lost profits or other special or
consequential damages.

    

    13.5           Uniform Commercial Code.
At all
times prior and subsequent to an Event of Default hereinafter, Lender shall be
entitled to all the rights and remedies of a secured party under the UCC with
respect to all Collateral.

    

    13.6           Preservation of Collateral.
At all
times prior and subsequent to an Event of Default hereinafter, Lender may (but
without any obligation to do so) take any and all action which in its sole and
absolute discretion is necessary and proper to preserve its interest in the
Collateral consisting of Accounts, including without limitation the payment of
debts of Borrower which might, in Lender's sole and absolute discretion, impair
the Collateral or Lender's security interest therein, and the sums so expended
by Lender shall be secured by the Collateral, shall be added to the amount of
the Obligations due Lender and shall be payable on demand with interest at the
rate set forth in Section 3.1 hereof from the date expended by Lender until
repaid by Borrower.  After written notice by Lender to Borrower and
automatically, without notice, after an Event of Default, Borrower shall not,
without the prior written consent of Lender in each instance, (a) grant any
extension of time of payment of any Accounts, (b) compromise or settle any
Accounts for less than the full amount thereof, (c) release in whole or in part
any account debtor or other person liable for the payment of any of the Accounts
or any such other Collateral, or (d) grant any credits, discounts,
allowances, deductions, return authorizations or the like with respect to any of
the Accounts.

    

    
      
         

      

      
        47

        
          

        

      

      
         

      

    

    13.7           Lender's Right to Cure.
In the
event Borrower shall fail to perform any of its Obligations hereunder or under
any other Loan Document, then Lender, in addition to all of its rights and
remedies hereunder, may perform the same, but shall not be obligated to do so,
at the cost and expense of Borrower. Such costs and expenses shall be added to
the amount of the Obligations due Lender, and Borrower shall promptly reimburse
Lender for such amounts together with interest at the Default Interest Rate from
the date such sums are expended until repaid by Borrower.

    

    13.8           Inspection of Collateral.
From time
to time as requested by Lender, Lender or its designee shall have access, (a)
prior to an Event of Default, during reasonable business hours to all
of  the premises where Collateral is located for the purpose of
inspecting the Collateral and to all of Borrower’s Collateral, inclusive of
books and records, and Borrower shall permit Lender or Lender’s designees to
make copies of such books and records or extracts therefrom as Lender may
request, and (b) on or after an Event of Default that remains uncured, at the
sole expense of Borrower, at any time, to all of the premises where Collateral
is located for the purposes of inspecting, disposing and realizing upon the
Collateral, and all Borrower’s books and records, and Borrower shall permit
Lender or its designee to make such copies of such books and records or extracts
therefrom as Lender may request.  Without expense to Lender, Lender
may use such of Borrower’s personnel, equipment, including computer equipment,
programs, printed output and computer readable media, supplies and premises for
the collection of Accounts and realization on other Collateral as Lender, in its
sole discretion, deems appropriate.  Borrower hereby irrevocably
authorize all accountants and third parties to disclose and deliver to Lender at
Borrower’s expense all financial information, books and records, work papers,
management reports and other information in its possession regarding
Borrower.

    

    

    SECTION
14.                         PROVISIONS
OF GENERAL APPLICATION.

    

    14.1           Waivers. Borrower
waives demand, presentment, notice of dishonor  protest and notice of
protest of any instrument of Borrower or others which may be included in the
Collateral.

    

    14.2           Survival. All
covenants, agreements, representations and warranties made by Borrower herein or
in any other Loan Document or in any certificate, report or instrument
contemplated hereby shall survive any independent investigation made by Lender
and the execution and delivery of this Agreement, and such certificates, reports
or instruments and shall continue so long as any Obligations are outstanding and
unsatisfied, applicable statutes of limitations to the contrary
notwithstanding.

    

    
      
         

      

      
        48

        
          

        

      

      
         

      

    

    
 

    14.3           Notices. All
notices, requests and demands to or upon the respective parties hereto shall be
in writing and either (a) delivered by hand or (b) delivered by national
overnight courier service, and shall be deemed to have been duly given or made
upon receipt by the receiving party.  All notices, requests and
demands are to be given or made to the respective parties at the following
addresses (or to such other addresses as either party may designate by notice in
accordance with the provisions of this paragraph):

    

    
      
        	
                If
      to Borrower:

              	
                Reed’s
      Inc.

              
	 
      	
                1300
      South Spring Street

              
	 
      	
                Los
      Angeles, CA 90061

              
	 
      	
                Attention:
      Christopher Reed, Chief Executive Officer

              
	 
      	 
      
	
                If
      to Lender:

              	
                GemCap
      Lending I, LLC

              
	 
      	
                1401
      Ocean Avenue,

              
	 
      	
                Suite
      305

              
	 
      	
                Santa
      Monica, California 90401

              
	 
      	
                Attention:
      David Ellis

              

      

    
      
        	 
      	
                With
      a copy to:

              	
                Cohen
      Tauber Spievack & Wagner P.C.

              
	 
      	 
      	
                420
      Lexington Avenue, Suite 2400

              
	 
      	 
      	
                New
      York, New York 10170

              
	 
      	 
      	
                Attention:  Robert
      A. Boghosian, Esq.

              

                                        

    

    14.4           Amendments; Waiver of
Defaults. The terms
of this Agreement shall not be amended, waived, altered, modified, supplemented
or terminated in any manner whatsoever except by a written instrument signed by
Lender and Borrower.  Any default or Event of Default by Borrower may
only be waived by a written instrument specifically describing such default or
Event of Default and signed by the Lender.

    

    14.5           Binding on
Successors.

     

    (a)           This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided, however, that Borrower
may not assign any of its rights or obligations under this Agreement or the
other Loan Documents to any Person without the prior written consent of
Lender.

    

    (b)           Lender
may assign any or all of the Obligations together with any or all of the
security therefor to any Person and any such assignee shall succeed to all of
Lender’s rights with respect thereto.  Lender shall notify Borrower of
any such assignment. Upon such assignment, Lender shall have no further
obligations under the Loan Documents.  Lender may from time to time
sell or otherwise grant participations in any of the Obligations and the holder
of any such participation shall, subject to the terms of any agreement between
Lender and such holder, be entitled to the same benefits as Lender with respect
to any security for the Obligations in which such holder is a
participant.

    

      
        
           

        

        
          49

          
            

          

        

        
           

        

      

    

     

    14.6           Invalidity. Any
provision of this Agreement which may be determined by competent authority to be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

    

    14.7           Publicity.
Borrower
hereby authorizes Lender to make appropriate announcements of the financial
arrangement entered into by and between Borrower and Lender, including, without
limitation, announcements which are commonly known as tombstones, in such
publications and to such selected parties as Lender shall in its sole and
absolute discretion deem appropriate, or as required by applicable
law.  Lender authorizes Borrower to make appropriate disclosures of
the financial arrangement entered into by and between Borrower and Lender in
Borrower’s SEC Reports, including in a Current Report on Form 8-K and as
required by applicable law.

    

    14.8           Section or Paragraph Headings.
Section
and paragraph headings are for convenience only and shall not be construed as
part of this Agreement.

    

    14.9           APPLICABLE LAW:

     

    THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA, THE LAWS OF WHICH THE BORROWER HEREBY
EXPRESSLY ELECTS TO APPLY TO THIS AGREEMENT, WITHOUT GIVING EFFECT TO PROVISIONS
FOR CHOICE OF LAW THEREUNDER.  THE BORROWER AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS AGREEMENT SHALL BE
COMMENCED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.

     

    14.10           WAIVER OF
JURY TRIAL.

     

    BORROWER
HEREBY WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE
LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE TO A TRIAL BY JURY OF ANY AND
ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING
BETWEEN BORROWER, LENDER OR ITS SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY
CONNECTED WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR
THE COLLATERAL.  IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY
AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS
BETWEEN BORROWER AND LENDER.  BORROWER WAIVES ALL RIGHTS TO INTERPOSE
ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND, NATURE OR
DESCRIPTION IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO
THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR ANY
MATTER ARISING THEREFROM OR RELATING THERETO, EXCEPT COMPULSORY
COUNTERCLAIMS.

     

    14.11           CONSENT TO
JURISDICTION.

     

    BORROWER
HEREBY (a) IRREVOCABLY SUBMITS AND CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE
STATE AND FEDERAL COURTS LOCATED IN THE STATE OF CALIFONIA, LOS ANGELES COUNTY
WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR THE COLLATERAL OR ANY MATTER
ARISING THEREFROM OR RELATING THERETO, AND (b) WAIVES ANY OBJECTION WHICH IT MAY
NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS WITH
RESPECT THERETO.  IN ANY SUCH ACTION OR PROCEEDING, BORROWER WAIVES
PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT OR OTHER PROCESS AND PAPERS
THEREIN AND AGREES THAT THE SERVICE THEREOF MAY BE MADE BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, DIRECTED TO BORROWER AT ITS OFFICES SET FORTH HEREIN
OR OTHER ADDRESS THEREOF OF WHICH LENDER HAS RECEIVED NOTICE AS PROVIDED IN THIS
AGREEMENT.  NOTWITHSTANDING THE FOREGOING, BORROWER CONSENTS TO THE
COMMENCEMENT BY LENDER OF ANY ACTION OR PROCEEDING IN ANY OTHER JURISDICTION TO
ENFORCE ITS RIGHTS IN AND TO THE COLLATERAL AND BORROWER WAIVES ANY OBJECTIONS
WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY
SUCH ACTION OR PROCEEDING.

     

     

    
      
         

      

      
        50

        
          

        

      

      
         

      

    

     

    14.12           Entire Agreement. This
Agreement, the other Loan Documents, any supplements or amendments hereto or
thereto, and any instruments or documents delivered or to be delivered in
connection herewith or therewith represents the entire agreement and
understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral or written.  In the event of any inconsistency between the terms
of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.

    14.13           Counterparts. This
Agreement may be executed in counterparts and by facsimile or other electronic
signatures, each of which when so executed, shall be deemed an original, but all
of which shall constitute but one and the same instrument.

    

    

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

     

     

     

     

     

     

    
      
         

      

      
        51

        
          

        

      

      
         

      

    

    

    IN WITNESS WHEREOF, this Loan
and Security Agreement has been duly executed as of the day and year first above
written.

    

    

     

    
      
        	 	
                BORROWER:

              	 
	 	 	 
	 	
                REED’S,
      INC.

              	 
	 	 	 	 
	 	
                By:
      

              	/s/ 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

      

    
       

      
        
          	 	
                  
                    LENDER:

                  

                	 
	 	 	 
	 	
                  
                    GEMCAP
      LENDING I, LLC

                  

                	 
	 	 	 	 
	 	
                  By:
      

                	/s/ 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

        

    

     

    

    

    [signature
page of loan and security agreement]

    
      
         

      

      
        52

        
          

        

      

      
         

      

    

     
 

    Exhibit
1.34

    to

    Loan
and Security Agreement

    

    Machinery and
Equipment

    

    

    

    Summary:

     

    
      	 
      	 	
              September
      30,

              2009

            	 
	
                  Vehicles

            	 	 	320,000	 
	
              Machinery
      and equipment

            	 	 	1,056,000	 
	
              Office
      equipment

            	 	 	389,000	 

    

    

    Detail:

    

    
      	 	 	 
      	 	
              09/30/09

            	 	 	
              Leased

            	 
	 	16200	 	
                  Furniture
      & Fixtures

            	 	 	19,643.86	 	 	 	 
	 	16300	 	
                  Office  Equipment

            	 	 	49,675.58	 	 	 	 
	 	16400	 	
                  Automobiles

            	 	 	320,073.61	 	 	 	 
	 	16700	 	
                  Mach
      & Equip after 06-15-09

            	 	 	175,165.64	 	 	 	 
	 	16710	 	
                  Brewery
      Equipment

            	 	 	556,387.83	 	 	 	556,387.83	 
	 	16720	 	
                  Leased
      Equip after 06-30-09

            	 	 	163,156.24	 	 	 	163,156.24	 
	 	16730	 	
                  Pasteurizer

            	 	 	-	 	 	 	 	 
	 	16740	 	
                  Candy
      Room

            	 	 	12,630.46	 	 	 	 	 
	 	16750	 	
                  Vending/Display
      Materials

            	 	 	149,054.56	 	 	 	 	 
	 	16800	 	
                  Computer
      – Hardware

            	 	 	86,551.36	 	 	 	 	 
	 	16900	 	
                  Computer
      – Software

            	 	 	68,565.60	 	 	 	 	 
	 	16902	 	
                  Computer
      – Navision

            	 	 	133,344.37	 	 	 	 	 
	 	16904	 	
                  CRM
      Hardware server

            	 	 	31,358.71	 	 	 	 	 

    

    

    
      
         

      

      
        53

        
          

        

      

      
         

      

    

     

    Exhibit
1.53

    to

    Loan
and Security Agreement

    

    Form of Landlord
Waiver

     

    
      LANDLORD
WAIVER AND ACCESS AGREEMENT

       

      THIS AGREEMENT effective the
13th day of November 2009,

       

      BETWEEN:

       

      525 SOUTH DOUGLAS STREET, LLC
(the “Landlord”)

       

      - and
-

       

      GEMCAP LENDING I, LLC (“Lender”)

       

      WHEREAS:

       

      
        	
                A.  

              	
                Lender
      is about to enter into a loan agreement (the “Loan Agreement”) with
      Reed’s, Inc. (“Borrower”) and in
      connection therewith Lender has been or will be granted a security
      interest in all of the personal property and the assets of Borrower,
      including, without limitation, all of Borrower’s inventory (as defined in
      the Uniform Commercial Code, or state counterpart thereof, in effect from
      time to time in California) and books and records, in any form whatsoever
      (such inventory, books and records, collectively, the “Assets”);

              

      

       

      
        	
                B.  

              	
                the
      Assets are or may be kept at either of the following locations: 12930
      South Spring Street, Los Angeles, California  90061, or 13000
      South Spring Street, Los Angeles, California 90061 (collectively, and each
      individually, as the context may require, the “Premises”);

              

      

       

      
        	
                C.  

              	
                the
      Landlord is the owner of the
Premises;

              

      

       

      
        	
                D.  

              	
                the
      Landlord has by an Industrial Lease by and between Landlord and Borrower
      (the “Lease”) dated May 7, 2009, leased the Premises to Borrower for a
      term expiring on June 15, 2024; and

              

      

       

      
        	
                E.  

              	
                a
      condition of Lender making the loans described in the Loan Agreement (the
      “Loans”) is the execution of this Agreement by the
    Landlord;

              

      

       

      NOW THEREFORE, in
consideration of the granting of the Loans by Lender to Borrower and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Landlord, the Landlord represents, covenants and agrees with
Lender as follows:

       

      
        	
                1.  

              	
                The
      Landlord hereby waives and releases in favor of Lender and his
      assignee:

              

      

       

      
        
          	
                	
                  (a) 

                	
                  any
      contractual lien, security interest, charge or interest and any other
      landlord’s lien which it may be entitled to at law or in equity against
      the Assets;

                

        

      

       

      
        
          	
                	
                  (b) 

                	
                  any
      and all rights granted by or under any present or future laws to levy or
      distrain for rent or any other charges which may be due to the Landlord
      against the Assets; and

                

        

      

       

      
        
          	
                	
                  (c) 

                	
                  any
      and all other claims, liens and demands of every kind which the Landlord
      has or may hereafter have against the
Assets.

                

        

      

       

      
        	
                2.  

              	
                The
      Landlord specifically waives its right to distrain against the Assets in
      favor of any rights which Lender may now or hereafter have with respect to
      the Assets and agrees to release all such Assets to Lender or his assignee
      in the event of default by Borrower pursuant to the terms of any lease of
      the Premises by Borrower prior to the repayment by Borrower of the
      Loans.

              

      

       

      
        	
                3.  

              	
                The
      Landlord hereby disclaims any interest in the Assets and agrees to assert
      no claim to the Assets while Borrower is indebted to Lender or Lender’s
      assignee.

              

      

       

      
        
          
          

        

        
          54

          
            

          

        

        
          
          

        

      

       

      
        	
                4.  

              	
                The
      Landlord agrees that Lender, its assignee or any of its representatives,
      may enter and remain upon the Premises for a commercially reasonable
      period of time at any time during the term of the Lease and thereafter (in
      accordance with Section 8, below) to inspect or, in addition to its other
      rights herein provided, take possession of, remove and / or dispose of the
      Assets without interference by the
Landlord.

              

      

       

      
        	
                5.  

              	
                To
      the extent necessary, the Landlord consents to Lender’s security in the
      Assets and agrees that should Lender or his assignee exercise any rights
      under its security, the Landlord will not interfere with enforcement of
      the rights thereunder.

              

      

       

      
        	
                6.  

              	
                The
      Landlord agrees that Lender may assign its security interest in the Assets
      and this Agreement without the consent of the
  Landlord.

              

      

       

      
        	
                7.  

              	
                The
      Landlord shall give Lender, as applicable, (i) two weeks’ prior written
      notice of the expiration or termination of the Lease and/or the removal of
      the Assets to Lender and (ii) prompt written notice of default by Borrower
      under the Lease and/or the abandonment of the Premises by Borrower (any
      notice described in clauses (i) or (ii), the “Notice”).  Without
      limitation of any other provision hereof, Lender or its assignee shall
      have, for a period of up to three months commencing immediately upon
      expiration or termination of the Lease (the “Period”), the right, and
      a license, to enter upon and use the Premises  (including any
      personal property of the Landlord licensed or leased to Borrower prior to
      the exercise by the Landlord of its rights and remedies) to enjoy all the
      rights and benefits of Borrower under the Lease (but without becoming
      tenant thereunder or otherwise assuming any obligations of Borrower
      thereunder or any obligation to cure any defaults thereunder) to assemble,
      appraise, display, operate, sever, remove, maintain, prepare for sale,
      lease, process or repair the Assets or lease, transfer and/or sell (by
      private sale or public auction from the Premises) the Assets, or any part
      thereof; subject, however, only to the obligation of Lender to pay to
      Landlord the Base Rent and Additional Rent (each as defined in the Lease)
      on a per diem basis for the number of days during the Period or any
      extension thereof in which Lender has exercised such right, and all
      utility costs for utilities used by Lender during such days, such rent and
      utilities to be payable monthly.

              

      

       

      
        	
                8.

              	
                Under
      no circumstances shall Lender have any obligation to remove any of the
      Assets from the Premises. Lender shall not be responsible for any costs or
      expenses arising from acts or omissions of Borrower with respect to the
      Premises or the Lease, including, without limitation, damage to the
      Premises, failure to pay rent, or failure to clean or otherwise leave the
      Premises in an appropriate
condition.

              

      

      

      
        	
                9.

              	
                [RESERVED]

              

      

      

      
        	
                10.  

              	
                The
      terms and provisions of this Agreement shall inure to the benefit of and
      be binding upon the successors and assigns of the Landlord (including,
      without limitation, any successor owner or encumbrancers of the Premises)
      and Lender.  Specifically, the Landlord acknowledges and agrees
      that, in connection with any refinancing of any loans to Borrower or its
      affiliates (including, without limitation, an increase in the aggregate
      principal amount of indebtedness thereunder), Lender may assign this
      Agreement to a new lender or lenders extending such financing (which
      lender or lenders may include Lender) (the “New Lenders”), in which
      event this Agreement shall, without further action by any party, be
      enforceable by the New Lenders.  Notwithstanding that the
      provisions of this paragraph are self-executing, the Landlord agrees, upon
      request by the New Lenders, to execute and deliver a written
      acknowledgment confirming the provisions of this paragraph in form
      satisfactory to the New Lenders.

              

      

       

      
        	
                11.  

              	
                To
      the extent necessary, the Landlord consents to the recording or
      registration by Lender in any appropriate registry of any notice or
      document as Lender in its sole discretion may deem desirable, appropriate
      or necessary, evidencing this Agreement, the Lease or Lender’s security in
      any property which is or may in the future become a fixture or is or may
      in the future otherwise become attached to the
  Premises.

              

      

       

      
        
          
          

        

        
          55

          
            

          

        

        
          
          

        

      

       

      
        	
                12.  

              	
                All
      notices including any notice of assignment, to any party hereto under this
      Agreement shall be in writing and sent to such party at its respective
      address set forth hereinafter by registered mail or by
      courier.  For purposes hereof, the Landlord’s address is 525 S.
      Douglas Street, Suite 200, El Segundo, CA 90245 and Lender’s address is
      1401 Ocean Avenue, Suite 305, Santa Monica, CA
  90401.

              

      

       

      
        	
                13.  

              	
                The
      provisions of this Agreement shall continue in effect until the
      undersigned shall have received Lender’s or the New Lenders’, as the case
      may be, written certification that all loans and indebtedness of Borrower
      have been paid in full.

              

      

       

      
        	
                14.  

              	
                The
      interpretation, validity and enforcement of this Agreement shall be
      governed by and construed under the laws of the State of California,
      without giving effect to the conflicts of laws principles
      thereof.

              

      

       

      
        	
                15.  

              	
                The
      parties irrevocably and unconditionally submit to the jurisdiction of any
      court located in Los Angeles County, California, and all courts competent
      to hear appeals therefrom.

              

      

       

      
        	
                16.  

              	
                Borrower
      has executed this Agreement for the purpose of acknowledging and agreeing
      to the terms of the Agreement and waiving and releasing any claims it may
      have against Landlord for Landlord agreeing to the matters set forth
      herein (including, but not limited to, allowing the Lender and its
      assignees to enter the Premises to remove the
  Assets.

              

      

       

      
        	
                17.  

              	
                The
      Landlord agrees to execute, acknowledge, deliver and do and perform such
      further instruments and things as Lender may request to give effect to the
      terms hereof.

              

      

       

      

       

      

       

      [SIGNATURE
PAGE FOLLOWS]

       

       

      
        
          
          

        

        
          56

          
            

          

        

        
          
          

        

      

       

      IN WITNESS WHEREOF, the
parties hereto have duly executed this Agreement as of the day and year first
written above.

       

      

      525
SOUTH DOUGLAS STREET, LLC

      

      By:
____________________

      

      Name:
__________________

      

      Title:
___________________

      

       

      ____________________________

      Witness
as to signature of

      ___________________

      

       

      GEMCAP
LENDING I, LLC

      

      

      
        By:
____________________

        

        Name:
__________________

        

        Title:
___________________

      

      

      BORROWER
acknowledges and agrees to the foregoing:

       

      Dated
this ____ day of November 2009.

       

      REED’S,
INC.

      

      

      By:      /s/
Christopher
Reed                                      

      

      Name:    Christopher
Reed

      

      Title:      Chief
Executive Officer

      

      
 

      

      
        [SIGNATURE
PAGE TO LANDLORD WAIVER AND ACCESS AGREEMENT]

      

       

      
        
          
          

        

        
          57

          
            

          

        

        
          
          

        

      

    

    
       

      Exhibit
1.65

    

    to

    Loan
and Security Agreement

    

    Form of Patent and Trademark
Security Agreement

    

    
      PATENT
AND TRADEMARK SECURITY AGREEMENT

      

      PATENT AND TRADEMARK SECURITY
AGREEMENT, dated as of November 12, 2009, (this “Agreement”), made by
REED’S, INC., a Delaware
corporation, with its principal place of business located at 13000 South Spring
Street, Los Angeles, California 90061 (“Grantor”), in favor of GEMCAP LENDING I, LLC, a
Delaware limited liability company with offices at 1401 Ocean Avenue, Suite 305,
Santa Monica, CA 90401 (“Lender”).

      

      

      W
I T N E S S E T H:

      

      WHEREAS, the Grantor is the
borrower under, and has entered into, a loan agreement with Lender, of even date
herewith, pursuant to which Lender is making revolving loans to Borrower (the
“Loan Agreement”);

       

      WHEREAS, the Grantor has, or
may in the future acquire, certain right, title and interest in and to certain
patents, patent applications and trademarks and related property;

       

      WHEREAS, the Grantor has
agreed to grant to the Lender a security interest in its right, title and
interest in and to all of its owned and after-acquired patents, patent
applications, trademarks and related rights to secure the payment and
performance of obligations of the Grantor under the Loan Agreement and the other
Loan Documents (as defined in the Loan Agreement);

       

      WHEREAS, it is a condition
precedent to the Lender’s entry into the Loan Agreement that the Grantor shall
have executed and delivered this Agreement to the Lender;

       

      NOW, THEREFORE, in
consideration of the mutual agreements and covenants contained herein and in the
other Loan Documents, and for other good and valuable consideration the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby as
follows:

       

      1.           Certain
Definitions.

       

      (a)           All
the agreements or instruments herein defined shall mean such agreements or
instruments as the same may from time to time be supplemented or amended or the
terms thereof waived or modified to the extent permitted by, and in accordance
with, the terms thereof and of this Agreement.

       

      (b)           Capitalized
terms used herein without definition shall have the respective meanings assigned
to such terms in the Loan Agreement.

       

      
        
          
          

        

        
          58

          
            

          

        

        
          
          

        

      

       

      (c)           The
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms
defined):

       

      “Contract”
means any contract, agreement, arrangement, license, lease, commitment or other
instrument or understanding of any kind, whether written or oral, express or
implied.

       

      “Patent
and Trademark Collateral” means all of the Grantor’s right, title and interest
in and to each of the following, whether now owned or at any time hereafter
acquired by the Grantor or in which the Grantor now has or at any time in the
future may acquire any right, title or interest:

       

      (1)           all
Patents;

       

      (2)           all
Patent Licenses;

       

      (3)           all
Trademarks;

       

      (4)           all
Trademark Licenses;

       

      (5)           all
Contracts, Documents and General Intangibles developed or acquired by the
Grantor relating to any and all of the foregoing;

       

      (6)           all
insurance policies to the extent they relate to the preceding items (1) through
(5); and

       

      (7)           to
the extent not otherwise included in the preceding items (1) through (6), all
Proceeds, products, rents, issues, profits and returns of and arising from any
and all of the foregoing.

       

      “Patent(s)”
means all patents, patent applications and patent disclosures which are
presently, or in the future may be, owned, issued, acquired or used (whether
pursuant to a license or otherwise) anywhere in the world by the Grantor, in
whole or in part, and all of the Grantor’s right, title and interest in and to
all patentable inventions and to file applications for patents under patent laws
of the United States or of any other jurisdiction, including any and all
extensions, reissues, substitutes, continuations, continuations-in-part,
divisionals, patents of addition, re-examinations and renewals thereof, and
patents issuing therefrom, and any other proprietary rights related to any of
the foregoing (including, without limitation, remedies against infringements
thereof and rights of protection of an interest therein under the laws of all
jurisdictions) and any and all foreign counterparts of any of the foregoing,
including those listed on Exhibit A to this Agreement,
as it may be amended, supplemented or otherwise modified from time to
time.

       

      “Patent
Licenses” means each license agreement identified in Exhibit A to this Agreement as
it may be amended, supplemented or otherwise modified from time to time, and
each license agreement relating to Patents hereafter granted to, used or
acquired by the Grantor, in each case together with the right to use and rely
upon the inventions and other intellectual property conveyed
thereunder.

       

      
        
          
          

        

        
          59

          
            

          

        

        
          
          

        

      

       

      “PTO”
means the United States Patent and Trademark Office.

       

      “Security
Interest” means the security interest and collateral assignment granted in the
Patent and Trademark Collateral pursuant to this Agreement.

       

      “Trademark
License” means each license agreement identified in Exhibit B hereto as it may be
amended, supplemented or otherwise modified from time to time, and each license
agreement relating to Trademarks hereafter used, adopted or acquired by the
Grantor.

       

      “Trademarks”
means (a) all trademarks, trade names, corporate names, company names, business
names, fictitious business names, trade styles, service marks, logos and other
source or business identifiers of the Grantor adopted for its use anywhere in
the world or hereinafter adopted or acquired, whether currently in use or not,
and the goodwill associated therewith, all registrations and recordings thereof,
and all applications in connection therewith, including those identified in
Exhibit B to this
Agreement, and (b) all renewals thereof by the Grantor.

       

      2.           Grant of Security
Interest.  As collateral security for the prompt and complete
payment and performance when due of the Obligations and for the other purposes
provided in this Agreement, the Grantor hereby grants, assigns and conveys to
the Lender all of the Grantor’s right, title and interest in and to the Patent
and Trademark Collateral as collateral security and hereby grants the Lender a
continuing first priority security interest therein. Such grant includes,
without limitation, a grant of the security interest to secure the payment and
performance of the Obligations.  Notwithstanding the foregoing
assignment, unless and until there shall have occurred and be continuing an
Event of Default, the Grantor shall retain and the Lender hereby grants to the
Grantor the exclusive, non-transferable, revocable right and license to use the
Patent and Trademark Collateral on and in connection with making, having made,
using and selling products sold by the Grantor, for the Grantor’s own benefit
and account and for none other (except as provided in the Patent Licenses
identified on Exhibit A
and the Trademark Licenses identified on Exhibit B).  The
Grantor agrees not to sell or assign its interest in, or grant any sublicense
under, the foregoing license granted to the Grantor without the prior written
consent of the Lender, which may be withheld in the Lender’s sole and absolute
discretion.

       

      3.           Representations and
Warranties.  The Grantor hereby represents and warrants to
Lender that:

       

      (a)           Description of Patent and Trademark
Collateral.  True and complete schedules setting forth all
Patents, Patent Licenses, Trademarks and Trademark Licenses owned, held,
controlled or used by the Grantor or to which the Grantor is a party on the date
of this Agreement, together with a summary description and full information in
respect of the filing, registration, issuance and expiration dates thereof, as
applicable, are set forth on Exhibit A with respect to
Patents and Patent Licenses and on Exhibit B with respect to
Trademarks and Trademark Licenses, respectively, to this Agreement.

       

      (b)           Title; No Other Liens. The
Patent and Trademark Collateral is held by Grantor free and clear of any and all
Liens or claims of others.  None of the Grantor’s Affiliates has any
right, title or interest in or to any of the Patent and Trademark
Collateral.  No security agreement, financing statement or other
public notice with respect to all or any part of the Patent and Trademark
Collateral is on file or of record in any public office, except such as may have
been filed in favor of the Lender pursuant to the Loan Documents.

       

      
        
          
          

        

        
          60

          
            

          

        

        
          
          

        

      

       

      (c)           Perfected
Liens.  The Liens granted pursuant to this Agreement will
constitute, upon the completion of all the filings or notices listed in Exhibit C to this Agreement,
which Exhibit includes all UCC-1 financing statements to be filed pursuant to
the Loan Documents and all requisite filings to be made with the PTO in the
forms substantially similar to that of Exhibit D and Exhibit E to this Agreement,
as applicable, valid and perfected Liens on all Patent and Trademark Collateral
in favor of the Lender, which are prior to all other Liens on such Patent and
Trademark Collateral and which are enforceable as such against all
Persons.

       

      (d)           Consents under
Contracts.  No consent (other than consents that have been
obtained) of any party (other than the Grantor) to any Contract that constitutes
part of the Patent and Trademark Collateral is required, or purports to be
required, in connection with the execution, delivery and performance of this
Agreement or the exercise of the Lender’s rights and remedies provided herein or
at law.

       

      (e)           Chief Executive
Office.  The Grantor’s chief executive office and chief place
of business is located at 13000 South Spring Street, Los Angeles, California
90061.

       

      (f)           Authority.  The
Grantor has full power, authority and legal right to grant the Lender the Lien
on the Patent and Trademark Collateral pursuant to this Agreement.

       

      (g)           Approvals, Filings,
Etc.  No authorization, approval or consent of, or filing,
registration, recording or other action with, any United States or foreign
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market, the shareholders of the Grantor or any other Person,
including, without limitation, the PTO, is required to be obtained or made by
the Grantor or any Subsidiary (1) for the grant by the Grantor of the Lien on
the Patent and Trademark Collateral pursuant to this Agreement, (2) the
collateral assignment of the Patent and Trademark Collateral to the Lender
pursuant to this Agreement or (3) to perfect the Lien purported to be created by
this Agreement, in each case except as has been obtained or made or (4) for the
exercise of the Lender’s rights and remedies provided herein or at
law.

       

      (h)           No Claims.  Each of
the Patents and Trademarks existing on the date hereof is valid and enforceable,
and the Grantor is not presently aware of any past, present or prospective claim
by any third party that any of such Patents or Trademarks are invalid or
unenforceable, or that the use of any Patents does or may violate the rights of
any third person, or of any basis for any such claims.

       

      (i)           Statutory
Notice.  The Grantor has used and will continue to use proper
statutory notice in connection with its use of the Patents.

       

      
        
          
          

        

        
          61

          
            

          

        

        
          
          

        

      

       

      (j)           Certain Patent
Matters.  To its knowledge, the Grantor does not lack any
material rights or licenses to use the Patents or to make, have made, use, sell,
or offer for sale the claimed subject matter of the Patents.  To the
knowledge of the Grantor, there are no facts which would form a basis for a
finding that any of the claims of the Patents is unpatentable, unenforceable or
invalid.  To the knowledge of the Grantor, there are no pending U.S.
or foreign patent applications which, if issued, would limit or prohibit the
ability of the Grantor or the Lender to make, have made, use, sell, or offer for
sale the claimed subject matter of the Patents.

       

      (k)           Custom License
Matters.  Each Patent License or Trademark License is the
legal, valid and binding obligation of the Grantor and the respective licensor
thereunder; the Grantor is not, and, to the best knowledge of the Grantor, each
licensor is not, in default of any of its obligations under any Patent License
or Trademark License; no event has occurred and no circumstance exists that with
the giving of notice or the passage of time, or both, would constitute such a
default by the Grantor; and, to the best knowledge of the Grantor, no such event
has occurred or circumstance exists that would constitute a default by the
licensor under any Patent License or Trademark License.

       

      4.           Covenants.  The
Grantor covenants and agrees with the Lender that from and after the date of
this Agreement until the payment and performance in full by the Grantor of all
of the Obligations:

       

      (a)           Further
Documentation.  At any time and from time to time, upon the
written request of the Lender, and at the sole expense of the Grantor, the
Grantor will promptly and duly execute and deliver such further instruments and
documents and take such further actions as the Lender may 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, any
applicable filing with the PTO and the filing of any financing or continuation
statements under the UCC or similar laws in effect in any such jurisdiction with
respect to the Liens created hereby.  The Grantor also hereby
authorizes the Lender to file any such financing or continuation statement
without the signature of the Grantor to the extent permitted by applicable
law.  A photographic or other reproduction of this Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.

       

      (b)           Maintenance of Records. The
Grantor will keep and maintain at its own cost and expense satisfactory and
complete records of the Patent and Trademark Collateral.  For the
further security of the Lender, the Grantor hereby grants to the Lender a
security interest in all of the Grantor’s books and records pertaining to the
Patent and Trademark Collateral, and the Grantor shall turn over any such books
and records for inspection at the office of the Grantor to the Lender or to its
representatives during normal business hours at the request of the
Lender.

       

      (c)           Limitation on Liens on Patent and
Trademark Collateral.  The Grantor (x) will not create, incur
or permit to exist, will defend the Patent and Trademark Collateral against, and
will take such other action as is necessary to remove, any Lien or claim on or
to the Patent and Trademark Collateral, other than the Liens created hereby and
by the other Loan Documents, and (y) will defend the right, title and interest
of the Lender in and to any of the Patent and Trademark Collateral against the
claims and demands of all Persons.

       

      
        
          
          

        

        
          62

          
            

          

        

        
          
          

        

         

      

      (d)           Limitations on Dispositions of Patent
and Trademark Collateral.  The Grantor will not sell, transfer,
assign, grant any participation in, sublicense or otherwise dispose of any of
the Patent and Trademark Collateral to any Persons, including, without
limitation, any Subsidiary or Affiliate, or attempt, offer or contract to do
so.

       

      (e)           Limitations on Modifications,
Waivers, Extensions of Patent Licenses and Trademark
Licenses.  The Grantor will not (i) amend, modify, terminate or
waive any provision of any Patent License with respect to any Patent or
Trademark License with respect to any Trademark in any manner which could
reasonably be expected to materially adversely affect the value of such Patent
License or Trademark License as Patent and Trademark Collateral, or (ii) fail to
exercise promptly and diligently each and every material right and perform each
material obligation which it may have under each Patent License and Trademark
License with respect to any Trademarks.  Within three (3) days of
receipt thereof, the Grantor will deliver to the Lender a copy of each material
demand, notice or document received by it relating in any way to each Patent
License and Trademark License.

       

      (f)           Further Identification of Patent and
Trademark Collateral.  The Grantor shall furnish to the Lender
from time to time, upon the request of the Lender, statements and schedules
further identifying and describing the Patent and Trademark Collateral and such
other reports in connection with the Patent and Trademark Collateral as the
Lender may reasonably request, all in reasonable detail.

       

      (g)           Notices.  The
Grantor shall advise the Lender promptly, but in no event later than three (3)
days after the occurrence thereof, in reasonable detail, at its address
specified in accordance with Section 15 hereof, (i) of any Lien on, or claim
asserted against, any of the Patent and Trademark Collateral, other than as
created hereby or as permitted hereby, (ii) of any Event of Default hereunder or
any event which, with the giving of notice or the passage of time, or both,
would become an Event of Default hereunder and (iii) of the occurrence of any
other event which could reasonably be expected to have a material adverse effect
on the Liens created hereunder or the rights of the Lender
hereunder.

       

      (h)           Patents.

      

      (1)           The
Grantor will notify the Lender immediately if it knows, or has reason to know,
that any application relating to any Patent may become abandoned or of any
adverse determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding in
the PTO or any court or tribunal in any country) regarding the Grantor’s
ownership of or license rights or other rights with respect to any
Patent.

       

      (2)           The
Grantor will, with respect to any Patent that the Grantor obtains after the
Closing Date or any Patent License that the Grantor acquires after the Closing
Date, promptly, but in no event later than three (3) days thereafter, (i) take
all actions necessary so that the Lender shall obtain a perfected security
interest in such Patent or Patent License and (ii) provide to the Lender a
revised Exhibit A,
listing all Patents and all Patent Licenses in which the Grantor has an
interest.

       

      
        
          
          

        

        
          63

          
            

          

        

        
          
          

        

      

       

      (3)           Upon
request of the Lender, the Grantor shall execute and deliver any and all
agreements, instruments, documents, and papers as the Lender may request to
evidence the Lender’s security interest in such Patents or Patent Licenses, and
the Grantor hereby constitutes the Lender its attorney-in-fact to execute and
file all such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed; such power being coupled with an interest
is irrevocable until the Grantor shall have paid and performed in full all of
its obligations under this Agreement and the other Loan Documents.

       

      (4)           The
Grantor will take all reasonable and necessary steps, including, without
limitation, in any proceeding before the PTO to maintain and pursue each Patent
including, without limitation, payment of maintenance fees.

       

      (5)           In
the event that any Patent included in the Patent and Trademark Collateral is
infringed by a third party, the Grantor shall promptly notify the Lender after
the Grantor learns thereof and shall, if appropriate, sue for infringement,
seeking injunctive relief where appropriate and to recover any and all damages
for such infringement, or take such other actions as the Grantor shall
reasonably deem appropriate under the circumstances to protect such
Patent.

       

      (6)           The
Grantor hereby grants to the Lender and Lender’s employees and agents the right,
upon prior written notice, to visit the Grantor’s plants and facilities, and the
Grantor shall use its best efforts to arrange for the Lender and its employees
and agents to have access to such plants and facilities of third parties which
manufacture or supply goods or services, for or under contract with the
Grantor.

       

      (i)           Trademarks.

       

      (1)           The
Grantor (either itself or through licensees) will, with respect to each
Trademark identified in Exhibit
B, as Exhibit B
may be amended, supplemented or otherwise modified from time to time, (i)
continue to use or have used such Trademark to the extent necessary to maintain
such Trademark in full force free from any claim of abandonment for non-use,
(ii) maintain as in the past the quality of products and services offered under
such Trademark, (iii) employ such Trademark with the appropriate notice of
registration, (iv) not adopt or use any mark which is confusingly similar or a
colorable imitation of such Trademark unless the Lender shall obtain a first
priority perfected security interest in the Grantor’s interest in such mark
pursuant to this Agreement, and (v) not (and not permit any licensee or
sublicensee thereof to) do any act or knowingly omit to do any act whereby any
such Trademark may become invalidated.

       

      (2)           The
Grantor will promptly notify the Lender if any application or registration
relating to any Trademark may become abandoned, canceled or denied, or of any
adverse determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding in
the PTO or any court or tribunal in any country) regarding the Grantor’s
ownership interest in such Trademark or its right to register the same or to
keep and maintain the same.

       

      
        
          
          

        

        
          64

          
            

          

        

        
          
          

        

      

       

      (3)           The
Grantor will, with respect to any Trademark that the Grantor registers after the
Closing Date or any Trademark License that the Grantor acquires after the
Closing Date, promptly (i) take all actions necessary so that the Lender shall
obtain a perfected security interest in such Trademark or Trademark License and
(ii) provide to the Lender a revised Exhibit B listing all
registered Trademarks and all Trademark Licenses in which the Grantor has an
interest.

       

      (4)           Upon
request of the Lender, the Grantor shall execute and deliver any and all
agreements, instruments, documents, and papers as the Lender may request to
evidence the Lender’s security interest in any Trademark and the goodwill and
general intangibles of the Grantor relating thereto or represented thereby, and
the Grantor hereby constitutes the Lender its attorney-in-fact to execute and
file all such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed; such power being coupled with an interest
is irrevocable until the Grantor shall have paid and performed in full all of
its obligations under the Loan Documents.

       

      (5)           The
Grantor will take all reasonable and necessary steps, including, without
limitation, in any proceeding before the PTO, to maintain and pursue each
application (and to obtain the relevant registration) and to maintain the
registration of the Trademarks, including, without limitation, filing of
applications for renewal, affidavits of use and affidavits of
incontestability.

       

      (6)           In
the event that any Trademark included in the Patent and Trademark Collateral is
infringed, misappropriated or diluted by a third party, the Grantor shall notify
the Lender and shall, if appropriate, sue for infringement, misappropriation or
dilution, seeking injunctive relief where appropriate and to recover any and all
damages for such infringement, misappropriation or dilution, or take such other
action as the Grantor reasonably deems appropriate under the circumstances to
protect such Trademark.

      

      (j)           Further
Actions.  Without limiting the foregoing provisions of this
Section 4, the Grantor further agrees for itself and its successors and assigns
to execute upon request any other lawful documents and likewise to perform any
other lawful acts which may be necessary or desirable to secure fully for the
Lender, all right, title and interest in and to the Patent and Trademark
Collateral, including, but not limited to, the execution of substitution,
reissue, divisional or continuation patent applications, and preliminary or
other statement of the giving of testimony in any interference or other
proceeding in which the Patent and Trademark Collateral or any application,
Patent or Trademark directed thereto or derived therefrom may be
involved.

       

      (k)           License
Agreements.  The Grantor shall comply with its obligations
under each of its Patent Licenses and Trademark Licenses.

       

      
        
          
          

        

        
          65

          
            

          

        

        
          
          

        

      

       

      (l)           Changes in Locations, Name,
Etc.   The Grantor will not (i) change the location of its
chief executive office/chief place of business from that specified in Section
3(e) or (ii) change its name, identity or corporate structure except as may be
permitted under the Loan Agreement and, prior to such action or event, shall
have taken appropriate action satisfactory to the Lender to preserve and protect
the Lender’s collateral assignment and the Security Interest under this
Agreement.

       

      (m)           Subsidiaries.  This
Agreement is entered into on behalf of and for the benefit of the
Grantor.  The Grantor will not permit any of its Subsidiaries or
Affiliates to have any ownership or other rights in or to exercise any control
over any of the Patent and Trademark Collateral.

       

      (n)           Indemnification.  The
Grantor shall indemnify, protect, defend and hold harmless the Lender and its
officers, trustees, employees, attorneys, managers, members, directors,
Affiliates, agents, shareholders and representatives (each, an “Indemnified
Person”) from and against any and all claims, demands, losses, judgments,
damages, expenses or liabilities (including liabilities for penalties) of
whatsoever kind or nature, and to reimburse the Lender for all costs and
expenses, including, without limitation, reasonable attorneys’ fees and
expenses, caused by, relating to, arising out of, resulting from, or in any way
connected with this Agreement or the transactions contemplated herein,
including, without limitation, any breach hereof or Event of Default, or the
exercise by the Lender of any right or remedy granted to it hereunder or under
the other Loan Documents or under applicable law.  In no event shall
any Indemnified Person other than the Lender have any liability or obligation to
the Grantor under this Agreement or applicable law (liability under which the
Grantor hereby waives) for any matter or thing in connection with this
Agreement, and in no event shall the Lender be liable, in the absence of a
determination of gross negligence or willful misconduct on its part by final
judgment (not subject to further appeal) of a court of competent jurisdiction,
for any matter or thing in connection with this Agreement other than to account
for moneys actually received by it in accordance with the terms
hereof.  If and to the extent that the obligations of the Grantor
under this Section 4(n) are unenforceable for any reason, the Grantor hereby
agrees to make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.

       

      5.           Lender’s Powers.

       

      (a)           Powers.  The Grantor
hereby irrevocably constitutes and appoints the Lender 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 the Grantor
and in the name of the Grantor or in its own name, from time to time in the
Lender’s discretion, during any period in which an Event of Default is
continuing, 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. The Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof.  This power of
attorney is a power coupled with an interest and shall be irrevocable until the
Grantor shall have paid and performed in full all of the
Obligations.

       

      
        
          
          

        

        
          66

          
            

          

        

        
          
          

        

      

       

      (b)           Filing and
Recordation.  In addition to the filings the Grantor is
required to make as specified in Exhibit C, this Agreement or
an instrument referring hereto may be filed and recorded in such public offices
and with such governmental authorities, including the PTO, as the Lender may
determine from time to time.  The Lender may so file and record this
Agreement as a “security interest”, “collateral assignment”, “assignment” or
similar designation as the Lender may determine (so long as such designation is
consistent with the terms of this Agreement) and the Lender may from time to
time rerecord and refile or take other action to change the designation under
which this Agreement is filed or recorded (so long as such designation is
consistent with the terms of this Agreement).

       

      (c)           Other Powers.  The
Grantor also authorizes the Lender, at any time and from time to time, to
execute, in connection with the sale provided for herein, any endorsements,
assignments or other instruments of conveyance or transfer with respect to the
Patent and Trademark Collateral.

       

      (d)           No Duty on Lender’s
Part.  The powers conferred on the Lender hereunder are solely
to protect the Lender’s interests in the Patent and Trademark Collateral and
shall not impose any duty upon the Lender to exercise any such
powers.  The Lender 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, partners, managers, employees or agents shall be
responsible to the Grantor for any act or failure to act hereunder, except for
their own gross negligence or willful misconduct.

       

      (e)           Grantor Remains Liable under
Contracts.  Anything herein to the contrary notwithstanding,
the Grantor shall remain liable under each of the Contracts that constitute part
of the Patent and Trademark Collateral to observe and perform all the conditions
and obligations to be observed and performed by it thereunder, all in accordance
with and pursuant to the terms and provisions of each such
Contract.  The Lender shall not have any obligation or liability under
any Contract that constitutes part of the Patent and Trademark Collateral by
reason of or arising out of this Agreement or the receipt by the Lender of any
payment relating to such Contract pursuant hereto, nor shall the Lender be
obligated in any manner to perform any of the obligations of the Grantor under
or pursuant to any such Contract, to make any payment, to make any inquiry as to
the nature or the sufficiency of any payment received by it or as to the
sufficiency of any performance by any party under any such Contract, to present
or file any claim, to take any action to enforce any performance or to collect
the payment of any amounts which may have been assigned to it or to which it may
be entitled at any time or times.

       

      6.           Performance by Lender of Grantor’s
Obligations.  If the Grantor fails to perform or comply with
any of its agreements contained herein, the Lender, following notice to the
Grantor to the extent required under the Loan Documents, may itself perform or
comply, or otherwise cause performance or compliance, with such agreement, and
the expenses of the Lender incurred in connection with such performance or
compliance shall be payable by the Grantor to the Lender on demand and shall
constitute Obligations secured hereby in accordance with the provisions of the
Loan Agreement.

       

      
        
          
          

        

        
          67

          
            

          

        

        
          
          

        

      

       

      7.           Remedies.  If an
Event of Default has occurred and is continuing, the Lender 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 and all
other rights and remedies granted to it under the Loan Agreement.

       

      8.           Limitation on Duties Regarding
Preservation of Patent and Trademark Collateral.  The Lender’s
sole duty with respect to the custody, safekeeping and physical preservation of
the Patent and Trademark Collateral in its possession, under the UCC or
otherwise, shall be to deal with it in the same manner as the Lender deals with
similar property for its own account.  Neither the Lender nor any of
its Affiliates, directors, managers, members, officers, employees,
representatives or agents shall be liable for failure to demand, collect or
realize upon all or any part of the Patent and Trademark Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Patent and Trademark Collateral upon the request of the Grantor or
otherwise.

       

      9.           Powers Coupled with an
Interest.  All authorizations and agencies herein contained
with respect to the Patent and Trademark Collateral are irrevocable and powers
coupled with an interest until the Grantor has paid and performed in full all of
the Obligations.

       

      10.           Severability.  Any
provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

       

      11.           Paragraph Headings, Captions,
Etc.  The paragraph headings, the captions and the footers,
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.

       

      12.           No Waiver; Cumulative
Remedies.  The Lender shall not by any act, delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Event of Default or in any breach of any of the terms
and conditions hereof.  No failure to exercise, nor any delay in
exercising, on the part of the Lender, 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 Lender of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
the Lender would otherwise have on any future occasion.  The rights
and remedies herein and in the other Loan Documents provided are cumulative, may
be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law or in equity or by statute.

       

      
        
          
          

        

        
          68

          
            

          

        

        
          
          

        

      

       

      13.           Waivers and Amendments; Successors
and Assigns.  None of the terms or provisions of this Agreement
may be waived, amended, supplemented or otherwise modified except by a written
instrument executed by the party to be charged with enforcement.  This
Agreement shall be binding upon the successors and assigns of the Grantor and
shall inure to the benefit of the Lender and its successors and
assigns.  The Grantor may not assign its rights or obligations under
this Agreement without the prior written consent of the Lender, which may be
withheld by the Lender in its sole and absolute discretion.

       

      14.           Termination of Security Interest;
Release of Patent and Trademark Collateral.

       

      (a)    Upon the
indefeasible payment and performance in full by the Grantor of the Obligations,
all right, title and interest of the Lender in and to the Patent and Trademark
Collateral, including the Security Interest, pursuant to this Agreement shall
terminate and all rights to the Patent and Trademark Collateral shall revert to
the Grantor.

       

      (b)           Upon
any such termination of the Security Interest, the Lender will, at the expense
of the Grantor, execute and deliver to the Grantor such documents and take such
other actions as the Grantor shall reasonably request to evidence the
reassignment of the Patent and Trademark Collateral to the Grantor and the
termination of the Security Interest.  The Lender shall deliver to the
Grantor all Patent and Trademark Collateral so released then in the Lender’s
possession.

       

      15.           Notices.

       

      All
notices, requests and demands to or upon the respective parties hereto shall be
given in writing and either (a) delivered by hand or (b) delivered by national
overnight courier service with next business day delivery, and shall be deemed
to have been duly given or made on the date of delivery if delivered by hand,
and on the next business day if delivered by national overnight courier
service.    All notices, requests and demands are to be
given or made to the respective parties at the following addresses (or to such
other addresses as either party may designate by notice in accordance with the
provisions of this paragraph):

      

      
        	
              	
                If
      to Grantor:

              	
                Reed’s,
      Inc.

                13000
      South Spring Street,

                Los
      Angeles, California 90061

                Attn:
      Christopher Reed, Chief Executive
Officer

              

      

       

       

      
 

      
        
          
          

        

        
          69

          
            

          

        

        
          
          

        

      

       

      
        

        
          	
                	
                  If
      to Lender:

                	
                  GemCap
      Lending I, LLC

                  1401
      Ocean Avenue

                  Suite
      305

                  Santa
      Monica, California 90401

                  Attn:
      David Ellis

                

        

         

      

      
        
          

          
            	
                  	
                    With
      a copy to: 

                  	
                    Cohen
      Tauber Spievack & Wagner P.C.

                    420
      Lexington Avenue, Suite 2400

                    New
      York, New York 10170

                    Attention:  Robert
      A. Boghosian,
Esq.

                  

          

        

      

       

      16.           Fees and
Expenses.  The Grantor agrees to pay the fees of the Lender in
performing its services under this Agreement and all reasonable expenses
(including but not limited to attorneys’ fees and costs for legal services,
costs of insurance and payments of taxes or other charges) of, or incidental to,
the custody, care, sale or realization on any of the Patent and Trademark
Collateral or in any way relating to the performance of the obligations or the
enforcement or protection of the rights of the Lender hereunder.

       

      17.           Survival.  All
representations, warranties, covenants and agreements of the Grantor and of the
Lender contained herein will survive the execution and delivery hereof and the
release of any Patent and Trademark Collateral pursuant hereto and shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Lender or the Grantor or any person who controls the Lender
or the Grantor.

       

      18.           Grantor’s Obligations Absolute, Etc.
The obligations of the Grantor under this Agreement shall be absolute and
unconditional and shall remain in full force and effect without regard to, and
shall not be released, suspended, discharged, terminated or otherwise affected
by, any circumstance or occurrence whatsoever, including, without
limitation:  (a) any renewal, extension, amendment or modification of
or addition or supplement to or deletion from any of the other Loan Documents or
any other agreement or instrument referred to therein, or any assignment or
transfer of any thereof; (b) any waiver, consent, extension, indulgence or other
action or inaction under or in respect of any such Loan Document or other
agreement or instrument; (c) any furnishing of any additional security to the
Lender or its assignees or any acceptance thereof or any release of any security
by the Lender or its assignees; (d) any limitation on any party’s liability or
obligations under any such Loan Document or other agreement or instrument or any
invalidity or unenforceability, in whole or in part, of any such Loan Document
or other agreement or instrument or any term thereof; or (e) any bankruptcy,
insolvency, reorganization, composition, adjustment, dissolution, liquidation or
other like proceeding relating to the Grantor, or any action taken with respect
to this Agreement by any trustee or receiver, or by any court, in any such
proceeding, whether or not the Grantor shall have notice or knowledge of any of
the foregoing.

       

      19.           Integration.  This
Agreement, together with the other agreements referenced herein, represents the
entire agreement of the Grantor and the Lender with respect to the subject
matter hereof, and there are no promises, undertakings, representations or
warranties by the Lender relative to the subject matter hereof not expressly set
forth or referred to herein.

       

      
        
          
          

        

        
          70

          
            

          

        

        
          
          

        

      

       

      20.           Counterparts;
Execution.  This Agreement may be executed in any number of
counterparts and all the counterparts taken together shall be deemed to
constitute one and the same instrument.  This Agreement, once executed
by a party, may be delivered to the other party hereto by electronic
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.

       

      21.           APPLICABLE LAW.  THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA, THE LAWS OF WHICH THE GRANTOR HEREBY
EXPRESSLY ELECTS TO APPLY TO THIS AGREEMENT, WITHOUT GIVING EFFECT TO PROVISIONS
FOR CHOICE OF LAW THEREUNDER.  THE GRANTOR AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS AGREEMENT SHALL BE
COMMENCED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.

       

      22.           WAIVER OF JURY
TRIAL.  GRANTOR HEREBY WAIVES ANY AND ALL RIGHTS THAT IT MAY
NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY
STATE TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR
INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN GRANTOR AND LENDER OR THEIR
SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR THE COLLATERAL.  IT IS
INTENDED THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR
COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS BETWEEN GRANTOR AND
LENDER.  GRANTOR WAIVES ALL RIGHTS TO INTERPOSE ANY CLAIMS,
DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND, NATURE OR DESCRIPTION IN ANY
ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR ANY MATTER ARISING
THEREFROM OR RELATING THERETO, EXCEPT COMPULSORY COUNTERCLAIMS.

       

      23.           CONSENT TO
JURISDICTION.  GRANTOR HEREBY (a) IRREVOCABLY SUBMITS AND
CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN THE STATE OF CALIFORNIA, LOS ANGELES COUNTY, WITH RESPECT TO ANY ACTION OR
PROCEEDING ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS AND/OR THE COLLATERAL OR ANY MATTER ARISING THEREFROM OR RELATING
THERETO, AND (b) WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE BASED
ON VENUE OR FORUM NON
CONVENIENS WITH RESPECT THERETO.  IN ANY SUCH ACTION OR
PROCEEDING, GRANTOR WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT OR
OTHER PROCESS AND PAPERS THEREIN AND AGREES THAT THE SERVICE THEREOF MAY BE MADE
BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO GRANTOR AT ITS OFFICES
SET FORTH HEREIN OR OTHER ADDRESS THEREOF OF WHICH LENDER HAS RECEIVED NOTICE AS
PROVIDED IN THIS AGREEMENT.    NOTWITHSTANDING THE
FOREGOING, GRANTOR CONSENTS TO THE COMMENCEMENT BY LENDER OF ANY ACTION OR
PROCEEDING IN ANY OTHER JURISDICTION TO ENFORCE ITS RIGHTS IN AND TO THE
COLLATERAL AND GRANTOR WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE
BASED ON VENUE AND/OR FORUM NON CONVENIENS
OF ANY SUCH ACTION OR PROCEEDING.

       

       

      [SIGNATURE PAGE
FOLLOWS]

      

      
        
          
          

        

        
          71

          
            

          

        

        
          
          

        

      

       

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

      

      IN WITNESS WHEREOF, the
Grantor and the Lender have caused this Patent and Trademark Security Agreement
to be duly executed and delivered by their respective officers or other
representatives thereunto duly authorized as of the date first above
written.

       

      
        	 	
                REED’S,
      INC.

                

                

                By:
      _________________________

                Name:

                Title:

              
	 	 
	 	 
	 	
                GEMCAP LENDING I,
      LLC

                 

                 

                
                  By:
      _________________________

                  Name:

                  Title:

                

              

      

       

      

       

      

      

      

      

      [SIGNATURE PAGE – PATENT AND TRADEMARK
SECURITY AGREEMENT]

       

      
        
          
          

        

        
          72

          
            

          

        

        
          
          

        

      

       

      STATE
OF                )ss.

      COUNTY
OF           
)

      

      On
_______________, 2009, before me, ______________________, a Notary Public,
personally appeared  _____________________________, who proved to me on the
basis of satisfactory evidence to be the person ( s ) whose name ( s ) is / are
subscribed to the within instrument and acknowledged to me that he / she / they
executed the same in his / her / their authorized capacity ( ies ) on behalf of
Reed’s, Inc., as Grantor, and that by his / her / their signature ( s ) on the
instrument, Reed’s, Inc. executed the instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the State of ___________ that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

      

       

      STATE
OF                )ss.

      COUNTY
OF           
)

      

      On
_______________, 2009, before me, ________________________, a Notary Public,
personally appeared  ___________________________, who proved to me on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity on behalf of GemCap Lending I, LLC, as Lender, and that by
his signature on the instrument, GemCap Lending I, LLC executed the
instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the state of California that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

       

      
        
          
          

        

        
          73

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
A

       

      Patents,
Patent Licenses and Patent Applications

      

      None

      
 

      ISSUED
PATENTS

      None

      
 

      PATENT  LICENSES

      

      None

      
 

      PATENT
APPLICATIONS

       

      None

      

       

       

       

       

      
        
          
          

        

        
          74

          
            

          

        

        
          
          

        

      

      
EXHIBIT
B

      

      Trademarks
and Trademark Licenses

      TRADEMARKS

      

      

      
        	
                Serial
      App. No.

              	
                Item

              	
                Status

              	
                Filing
      Date

              	
                Date
      Published,  Allowed, or Registered

              
	 
      	 
      	 
      	 
      	
                 
      

                 

              
	
                78014426

              	
                Reed’s

              	
                [                    ]

              	
                [                    ]

              	
                [                          ]

                 

              
	
                78867175

              	
                Virgil’s

              	
                Live

              	
                April
      21, 2006

              	
                February
      27, 2007

                 

              
	 
      	
                Sonoma
      Sparkler

              	
                Abandoned

              	 
      	
                 

                 
      

              
	
                73720012

              	
                China
      Cola

              	
                Live

              	
                January
      9, 2009

              	
                Not
      yet registered

                 

              
	 
      	 
      	 
      	 
      	
                 
      

                 

              

      

      

      

      TRADEMARK
LICENSES

      

      

      
        	
                Trademark
      License

              	
                Parties

              	
                Date

                 

              
	
                None.

              	 
      	
                 
      

                 

              
	 
      	 
      	
                 

                 
      

              
	 
      	 
      	
                 

                 
      

              
	 
      	 
      	
                 

                 
      

              

      

       

       

       

       

      
        
          
          

        

        
          75

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
C

       

      Filings
Required for Collateral Assignment

      and
to Perfect Security Interest

       

      

      
        	
                1. 

              	
                Filing
      of Trademark Collateral Assignment and Security Agreement with the United
      States Patent and Trademark Office

              

      

      

      
        	
                2. 

              	
                Filing
      of Patent Collateral Assignment and Security Agreement with the United
      States Patent and Trademark Office, as
  applicable

              

      

      

      
        	
                3. 

              	
                Filing
      of notice of security interest with the State of
  Delaware.

              

      

       

       

       

       

       

       

       

       

       

      
        
          
          

        

        
          76

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
D

      

      FORM
OF PATENT COLLATERAL ASSIGNMENT

      AND
SECURITY AGREEMENT

      

      This
PATENT SECURITY
AGREEMENT, dated as of November __, 2009, (this “Agreement”), made by
REED’S, INC., a Delaware corporation with its principal place of business
located at 13000 South Spring Street, Los Angeles, California
90061  (“Grantor”), in favor of GEMCAP LENDING I, LLC, a
Delaware limited liability company with offices at 1401 Ocean Avenue, Suite 305,
Santa Monica, CA 90401 (“Lender”).

       

      Capitalized
terms not otherwise defined herein have the meaning set forth in the Patent and
Trademark Security Agreement, of even date herewith, between Grantor and Lender
(the “Patent and Trademark Security Agreement”).

       

      W
I T N E S S E T H:

      

      WHEREAS, the Grantor has
acquired certain right, title and interest in certain United States patents and
patent applications identified in Exhibit 1 hereto (the
“Patents”);

      

      WHEREAS, the Grantor and the
Lender are parties to that certain Loan and Security Agreement, dated as of
November _, 2009 (as from time to time amended or supplemented, the “Loan
Agreement”);

       

      WHEREAS, it is a condition
precedent to the Lender’s entry into the Loan Agreement that the Grantor shall
have executed and delivered the Patent and Trademark Security Agreement to the
Lender;

       

      WHEREAS, the Grantor wishes to
grant to the Lender a security interest in certain of its property and assets to
secure the performance of its obligations under the Loan Agreement and the other
Loan Documents; and

       

      WHEREAS, the Grantor and Lender
by this instrument seek to confirm and make a record of the collateral
assignment of and grant of a security interest in the Patents;

       

      NOW, THEREFORE, for good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Grantor does hereby acknowledge and confirm that it has made a
collateral assignment to the Lender of, and has granted to the Lender a security
interest in, all of the Grantor’s right, title and interest in, to, and under
the Patents.  The Grantor also acknowledges and confirms that the
rights and remedies of the Lender with respect to the collateral assignment of
and security interests in the Patents acknowledged and confirmed hereby are more
fully set forth in the Patent and Trademark Security Agreement and the Loan
Documents, the terms and provisions of which are incorporated herein by
reference.

       

       

      [SIGNATURE
PAGE FOLLOWS]

       

      
        
          
          

        

        
          77

          
            

          

        

        
          
          

        

      

       

      
         

        
          	 	
                  REED’S,
      INC.

                  

                  

                  By:
      _________________________

                  Name:

                  Title:

                
	 	 
	 	 
	 	
                  GEMCAP LENDING I,
      LLC

                   

                   

                  
                    By:
      _________________________

                    Name:

                    Title:

                  

                

        

         

      

       

      

      

      [SIGNATURE
PAGE - PATENT COLLATERAL ASSIGNMENTAND SECURITY AGREEMENT]

       

      
        
          
          

        

        
          78

          
            

          

        

        
          
          

        

      

       

      STATE
OF                )ss.

      COUNTY
OF           
)

      

      On
_____________, 2009, before me, ______________________, a Notary Public,
personally appeared  _________________________________, who proved to me on
the basis of satisfactory evidence to be the person whose name is subscribed to
the within instrument and acknowledged to me that he executed the same in his
authorized capacity on behalf of Reed’s, Inc., as Grantor, and that by his
signature on the instrument, Reed’s, Inc. executed the instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the State of ___________ that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

      

      

      STATE
OF               )ss.

      COUNTY
OF           )

      

      On
______________, 2009, before me, _________________________, a Notary Public,
personally appeared  ______________________________, who proved to me on
the basis of satisfactory evidence to be the person whose name is subscribed to
the within instrument and acknowledged to me that he executed the same in his
authorized capacity on behalf of GemCap Lending I, LLC, as Lender, and that by
his signature on the instrument, GemCap Lending I, LLC executed the
instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the State of California that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

      

       

      
        
          
          

        

        
          79

          
            

          

        

        
          
          

        

      

      
EXHIBIT
1

      

      Patents and Patent
Applications

       

       

       

       

       

      
        
          
          

        

        
          80

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
E

       

      FORM
OF TRADEMARK COLLATERAL ASSIGNMENT

      AND
SECURITY AGREEMENT

      

      This
TRADEMARK SECURITY
AGREEMENT, dated as of November 13, 2009, made by REED’S, INC., a Delaware
corporation, with its principal place of business located at 13000 South Spring
Street, Los Angeles, California 90061  (“Grantor”), in favor of GEMCAP LENDING I, LLC, a
Delaware limited liability company with offices at 1401 Ocean Avenue, Suite 305,
Santa Monica, CA 90401 (“Lender”).

       

      Capitalized
terms not otherwise defined herein have the meaning set forth in the Patent and
Trademark Security Agreement, of even date herewith, between Grantor and Lender
(the “Patent and Trademark Security Agreement”).

      

      W
I T N E S S E T H:

      

      WHEREAS, the Grantor has
acquired an interest in certain trademarks identified in Exhibit 1 hereto (the
“Trademarks”);

      

      WHEREAS, the Grantor and the
Lender are parties to that certain Loan and Security Agreement, dated as of
November 13, 2009 (as from time to time amended or supplemented, the “Loan
Agreement”);

       

      WHEREAS, it is a condition
precedent to the Lender’s entry into the Loan Agreement that the Grantor shall
have executed and deliver the Patent and Trademark Security Agreement to the
Lender;

       

      WHEREAS, the Grantor wishes to
grant to Lender a security interest in certain of its property and assets to
secure the performance of its obligations under the Loan Agreement and the other
Loan Documents;

       

      WHEREAS, the Grantor and the
Lender by this instrument seek to confirm and make a record of the collateral
assignment of and grant of a security interest in the Trademarks.

       

      NOW, THEREFORE, for good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Grantor does hereby acknowledge and confirm that it has made a
collateral assignment to the Lender of, and has granted to the Lender a security
interest in, all of the Grantor’s right, title and interest in, to, and under
the Trademarks.  The Grantor also acknowledges and confirms that the
rights and remedies of Lender with respect to the collateral assignment of and
security interests in the Trademarks acknowledged and confirmed hereby are more
fully set forth in the Patent and Trademark Security Agreement and the Loan
Documents, the terms and provisions of which are incorporated herein by
reference.

      

       

      [SIGNATURE
PAGE FOLLOWS]

       

      
        
          
          

        

        
          81

          
            

          

        

        
          
          

        

      

       

      
         

        
          	 	
                  REED’S,
      INC.

                  

                  

                  By:
      _________________________

                  Name:

                  Title:

                
	 	 
	 	 
	 	
                  GEMCAP LENDING I,
      LLC

                   

                   

                  
                    By:
      _________________________

                    Name:

                    Title:

                  

                

        

         

      

      

       

      

      
 

      [SIGNATURE
PAGE - TRADEMARK COLLATERAL ASSIGNMENTAND SECURITY AGREEMENT]

       

       

      
        
          
          

        

        
          82

          
            

          

        

        
          
          

        

      

       

      STATE
OF                )ss.

      COUNTY
OF           
)

      

      On
_______________, 2009, before me, ________________________, a Notary Public,
personally appeared  ____________________________, who proved to me on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity on behalf of Reed’s, Inc., as Grantor, and that by his
signature on the instrument, Reed’s, Inc. executed the instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the State of ___________ that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

      

      

      STATE
OF               
)ss.

      COUNTY
OF           
)

      

      On
________________, 2009, before me, __________________________, a Notary Public,
personally appeared  _________________________, who proved to me on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity on behalf of GemCap Lending I, LLC, as Lender, and that by
his signature on the instrument, GemCap Lending I, LLC executed the
instrument.

      

      I certify
under PENALTY OF PERJURY under the laws of the State of California that the
foregoing paragraph is true and correct.

      

      WITNESS
my hand and official seal.

      

      

      ____________________________________________

                                                                     
, Notary Public

      My
Commission Expires ___________________

       

      
        
          
          

        

        
          83

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
1

      

      Trademarks

      

      
        	
                Serial
      App. No.

              	
                Item

                 

              
	 
      	
                 
      

                 

              
	
                78014426

              	
                Reed’s

                 

              
	
                78867175

              	
                Virgil’s

                 

              
	 
      	
                Sonoma
      Sparkler

                 

              
	
                73720012

              	
                China
      Cola

                 

              

      

       

       

      
        
          
          

        

        
          84

          
            

          

        

        
          
          

        

      

    

    
Exhibit
1.67

    to

    Loan
and Security Agreement

    

    Permitted
Encumbrances

    

    Landlord’s
interest in the following equipment (and in similar equipment used for the
brewing of beverages hereafter acquired by Borrower and located at 12930 South
Spring Street, Los Angeles, California  90061, or 13000 South Spring
Street, Los Angeles, California 90061):

    

    
      	
              Machinery &
Equipment

            
	
              Ursell
      Dicer Cutter &Slicer

            
	
              Cooling
      Tower

            
	
              Air
      Compressor

            
	
              Keg
      Machine

            
	
              Floor
      Grinder

            
	
              Forklift
      Overhaul

            
	
              20
      Ton Glycol Chiller Refrigerator system

            
	
              Storage
      containers (4)x 40 foot

            
	
              5,000#
      lift truck

            
	
              Air
      Compressor

            
	 
      
	
              Brewery  Equipment

            
	
              Bottling
      Line from Palm Springs Brewing

            
	
              included
      1997 GAI Rinser/Filler/Crowner, Kosme labeler and conveyers and two jacked
      50 BBl pressure vessels

            
	
              Case
      Packer

            
	
              Conveyer

            
	
              Fristam
      Sanitary pump

            
	
              Electrical
      panel

            
	
              pasteurizer
      from AGAR Tank & Equipment

            
	
              Cirque
      Brewery

            
	
              includes
      600 sq ft cold box 3 kettle 30 BBl brewhouse 6x 60 BBl pressure vessels
      misc pumps etc

            
	
              tank
      insulation upgrade

            
	
              IDD
      flash pasteurizer

            
	
              Filter
      Culligan Carbon bed

            
	
              5
      gallon kegs x 500

            
	
              Marq
      case erector

            
	
              Pearson
      6 pak erector

            
	
              Pearson
      stuffer

            
	
              Conveyor
      for marq and pearson

            
	 
      
	
              Boiler Equipment

            
	
              Smith
      Boiler from SAI, Inc

            
	
              Boiler
      System add-ons

            
	 
      
	
              Other Equipment

            
	
              Equipment
      described as collateral in the UCC Financing Statements filed by Landlord
      on November 12, 2009, with initial filing numbers 2009 3643183, 2009
      3643191, 2009 3643209, and 2009 3643217.

            
	 
      
	 
      

    

    

    
      
         

      

      
        85

        
          

        

      

      
         

      

    

    Exhibit
1.87

    to

    Loan
and Security Agreement

    

    Form of Validity
Agreement

    

    
      VALIDITY
GUARANTY

      
         

        This
Validity Guaranty, dated as of November 12,2009 ("Guaranty"), is by Christopher
Reed ("Guarantor") in favor
of GemCap Lending I, LLC, a Delaware limited liability company ("Lender").

      

      
        

        RECITALS

      

      
        

         

        A.           Capitalized
terms not otherwise defined herein have the meaning set forth in that
certain
Loan and Security Agreement, of even date herewith (the "Loan Agreement"), by
and among Lender
and Reed's, Inc., a Delaware corporation ("Borrower"). "Guarantor
Obligations" means Guarantor's
guarantee of the full and prompt payment, satisfaction and performance of the
Obligations
in accordance with the terms and subject to the limitations set forth
herein.

         

        B.           Guarantor
desires that Lender establish a revolving loan credit facility for Borrower
in the
principal amount of up to Three Million Dollars ($3,000,000) pursuant to the
Loan agreement (such
facility, as may be modified or replaced from time to time, the "Facility").

      

      
         

        C.           Lender
has conditioned its willingness to establish the Facility upon the fulfillment
of certain
conditions, among them that Guarantor enters into this
Guaranty.

      

      
         

        D.           Guarantor
acknowledges and agrees that Guarantor will derive a substantial and
direct
benefit and advantage from the Facility and other agreements and financial
accommodations of Lender to
Borrower under the Loan Documents.

      

      
         

        Accordingly,
in consideration of the foregoing and the mutual covenants and agreements
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by Guarantor, the parties
hereby agree as follows:

      

      
         

        Section
1. Guaranty.
Subject to Section
2. Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Lender the full and prompt payment, satisfaction and performance
of any and all Obligations as and when due, whether at stated maturity, by
acceleration or otherwise, and including any and all interest, fees, expenses,
damages, and penalties that may be paid or incurred by Lender in the collection
of all or any portion of the Obligations or the exercise or enforcement of any
one or more of the other rights, powers, privileges, remedies and interests of
Lender relating thereto, irrespective of the manner or success of any such
collection, exercise or enforcement.

      

      
         

        Section
2. Limitation.
Notwithstanding any other provision of this Guaranty to the contrary, Lender
shall not enforce this Guaranty except to the extent of any loss, damage, cost,
expense, liability, claim or other obligation incurred by Lender (including
attorneys' fees and costs reasonably incurred) arising out of or in connection
with one or more of the following (each of the following clauses (a) through (e)
being independent and Lender may enforce this Guaranty separately under any or
all of them):

      

      
         

        (a)  any fraud or
misrepresentation by Borrower or Guarantor in connection with the Loan Documents
or the transactions contemplated thereby;

         

        
          
            
            

          

          
            86

            
              

            

          

          
            
            

          

        

         

        (b)      the
gross negligence or willful misconduct of Borrower or Guarantor;

         

        (c)  the
removal or disposal of any portion of the Collateral after an Event of
Default;

      

      
         

        (d)  any
tortious interference by Guarantor with the Loan Documents or the transactions
contemplated thereby; or

      

      
         

        (e)  any
misappropriation of any Loan proceeds by Borrower or Guarantor, or any other
negligent or intentional misconduct by Borrower or Guarantor that impairs the
Collateral.

      

      
         

        Section
3. Continuing
Guaranty. Guarantor covenants and agrees that: (a) this is a continuing
guarantee of payment, satisfaction and performance, and not collectibility only,
whether the Obligations are now or hereafter existing, acquired or created, and
irrespective of the fact that, from time to time, monies may be advanced, repaid
and readvanced, and the outstanding balance of the Facility may be zero; (b) mis
Guaranty may not be revoked or terminated until such time as the Obligations and
Guarantor Obligations shall have been fully paid and satisfied and Lender
acknowledges the same in writing to Guarantor; (c) the Obligations shall not be
deemed to have been otherwise fully paid and satisfied so long as any Loan
Document (other than this Guaranty) shall have any continuing force or effect;
and (d) the Obligations will be paid and satisfied in full in accordance with
the terms and provisions of the Loan Documents without regard to any applicable
law now or hereafter in effect in any jurisdiction, or the legality, validity,
binding effect or enforceability of any term of any Loan Document, including,
without limitation, any applicable law that might in any manner affect any of
those terms and provisions, or any of the rights, powers, privileges, remedies
and interests of Lender with respect thereto, or that might cause or permit to
be invoked any alteration in the time, amount, or manner of payment of any of
the Obligations by Borrower or any other person or entity (other than
Lender).

      

      
         

        Section
4. Agreement
Absolute. Survival of Representations. Etc. Each of the representations,
warranties, covenants and other obligations and agreements contained in this
Guaranty and the Loan Documents: (a) shall be absolute and unconditional,
irrespective of the legality, validity, binding effect or enforceability of any
Obligations or Guarantor Obligations or of any Loan Document; (b) shall survive
the execution and delivery of this Guaranty and the Loan Documents, and any and
all advances, repayments and readvances thereunder, and shall remain and
continue in full force and effect until Lender's lending commitment (if any)
under the Facility has terminated and all Obligations and Guarantor Obligations
have been fully paid and/or satisfied, without regard (i) to any waiver,
modification, extension, renewal, consolidation, division, amendment or
restatement of any term or provision of any Loan Document, (ii) to any full,
partial, delayed, discontinued or non-exercise of any of Lender's rights,
powers, privileges, remedies and interests under any Loan Document or applicable
law, against any person or entity, which exercise or enforcement may be delayed,
discontinued or otherwise not pursued or exhausted for any or no reason
whatsoever, or which may be waived, omitted or otherwise not exercised or
enforced (whether intentionally or otherwise), (iii) to any surrender,
repossession, sequestration, foreclosure, conveyance or assignment (by deed in
lieu of foreclosure, or otherwise), sale, lease or other realization, dealing or
disposition respecting any Collateral, (iv) to any release, subordination or
impairment of all or any part of any Obligations or Collateral, or any security
interest therein (whether intentionally or otherwise), (v) to any extension,
stay, moratorium or statute of limitations or similar time constraint under any
applicable law, (vi) to any investigation, analysis or evaluation by Lender or
its designees or representatives of the assets, business, operations, properties
or condition (financial or otherwise) of Borrower or Guarantor (vii) to any act
or omission on the part of Lender,
Borrower, or any other person or entity, (viii) to any inducement to Guarantor
to enter into this Guaranty, or (ix) to any other event that otherwise might
constitute a legal or equitable counterclaim, defense or discharge of Borrower
or Guarantor; (c) shall not be subject to any defense, counterclaim, setoff,
right of recoupment, abatement, reduction or other claim or determination that
Guarantor may have against Lender, Borrower, or any other person or entity; and
(d) shall not be diminished or qualified by the death, disability, dissolution,
reorganization, insolvency, bankruptcy, custodianship or receivership of
Guarantor, Borrower, or any other person or entity, or the inability of any of
them to pay debts or perform or otherwise satisfy obligations as they become due
for any reason whatsoever.

      

      
         

        
          
            
            

          

          
            87

            
              

            

          

          
            
            

          

        

         

        Section
5. Guaranty
Not Affected. Without limiting the generality of the foregoing sections
or any other term or provision of this Guaranty, Guarantor covenants, agrees and
consents that, at any time, and from time to time, in accordance with the Loan
Documents: (a) loans may be advanced, repaid and readvanced from time to time,
or the amount of loans, the rate of interest thereon, any other Obligation or
the credit availability under the Facility or any Loan Document may be increased
or otherwise changed; (b) the time, manner, place and other terms and provisions
of payment or performance of any one or more of the Obligations may be amended,
extended or otherwise changed; (c) any partial or late payment, or any payment
during the continuance of any default, under any Loan Document may be accepted
in whole or in part or rejected; (d) any Collateral may be surrendered,
repossessed, sequestered, judicially or nonjudicially foreclosed, conveyed or
assigned (by deed in lieu of foreclosure or otherwise), sold, leased or
otherwise realized upon, dealt with or disposed of, in whole or in part, whether
to Lender, its designees or representatives or otherwise; (e) any mortgage or
other security interest in any such Collateral may be held without recordation
or other filing or notice or perfection (whether intentionally or otherwise),
may be recorded or otherwise perfected, or may be assigned, released,
subordinated or otherwise impaired, dealt with or disposed of in whole or in
part; (f) any one or more payments, distributions and proceeds received from or
in respect of Borrower, Guarantor or any other person or entity, or any
Collateral may be applied in the sole and absolute discretion of Lender to the
Obligations or to any other indebtedness or obligations (including interest),
the payment to or reimbursement of Lender for any fees and expenses for which it
is entitled to be paid or reimbursed pursuant to any of the provisions of this
Guaranty or the other Loan Documents, or the establishment and maintenance of
any Collateral (all payments made by Guarantor, Borrower, or any other person or
entity shall be made free and clear of, and without any reduction for, any and
all present or future taxes, levies, imposts, deductions, charges or
withholdings, and any and all liabilities with respect thereto); (g) the
liability of Borrower, Guarantor or any other person or entity to pay any and
all of the Obligations may be settled, compromised, adjusted, forgiven, released
or affected by any other accommodation, in whole or in part, and payment of any
and all of the Obligations may be subordinated to the prior payment of any other
debts or claims of any other person; (h) any representation, warranty, covenant
or other term or provision of any Loan Document, in whole or in part, may be the
subject of one or more waivers of applicability or consents to nonperformance,
noncompliance or nonobservance, whether or not constituting defaults, or may be
otherwise not exercised or enforced (whether intentionally or otherwise); (i)
any Loan Document, or any term or provision thereof, in whole or in part, may be
amended, extended, renewed or otherwise changed in any respect by the respective
parties thereto in the manner provided therein; (j) any one or more of this
Guaranty or the other Loan Documents, or any one or more of the rights, powers,
privileges, remedies and interests of Lender herein or therein, may be sold,
conveyed, assigned or otherwise transferred in whole or part (including
participations or other undivided interests) to any other person or entity; (k)
any other right, power, privilege, remedy or interest of Lender under this
Guaranty, any other Loan Document or applicable law may be exercised or enforced
by Lender or its designees or representatives, which exercise
or enforcement may be delayed, discontinued or otherwise not pursued or
exhausted for any or no reason whatsoever, or any such right, power, privilege,
remedy or interest may be waived, omitted or otherwise not exercised or enforced
(whether intentionally or otherwise); all in such manner and order, upon such
terms and provisions and subject to such conditions as Lender may, subject to
the terms of the Loan Documents, deem necessary or desirable in its sole and
absolute discretion, all without notice to or consent from Guarantor; or (1) the
death, incapacity, imprisonment or indictment and/or conviction of any criminal
offense of Guarantor; and all of the above clauses
(a^ through
(1) without affecting this Guaranty or any other Loan Document or any of
the Guarantor Obligations, which obligations shall continue in full force and
effect until such time as all Obligations and all Guarantor Obligations have
been fully paid and satisfied.

      

      
         

        
          
            
            

          

          
            88

            
              

            

          

          
            
            

          

        

         

        Section
6. Certain
Representations and Warranties. Guarantor represents and warrants to
Lender as to each of the matters set forth below: (a) Guarantor is an individual
residing at the address set forth herein; (b) Guarantor has the full legal
capacity and unconditional right to execute and deliver this Guaranty and each
of the other Loan Documents to which Guarantor is or will be a party, and to
perform all of Guarantor's obligations hereunder and thereunder; (c) the
execution and delivery by Guarantor of this Guaranty and each of the other Loan
Documents to which Guarantor is or will be a party, and the performance by
Guarantor of all of Guarantor's obligations hereunder and thereunder will not
violate or be in conflict with any term or provision of (i) any law, rule
statute, ordinance, regulation, code, (including, without limitation, any
applicable usury or similar law), (ii) any judgments, orders, writs, injunction,
or decrees or (ii) any mortgages, indentures, leases, licenses, agreements,
understandings, instruments, contracts, proposed transactions or other
obligation of Guarantor or to which Guarantor is a party or by which Guarantor,
or any material part of Guarantor's assets and properties, may be bound or
subject, and will not result in the creation or imposition of any Lien upon any
of Guarantor's assets or properties; (d) Guarantor shall not take any action or
inaction that may impair any material part of Guarantor's assets and properties;
(e) no licenses, permits, franchises, approvals, consents, waivers, notices,
authorizations, qualifications, concessions, or the like, or registration,
declaration or filing are required (1) in connection with the due and valid
execution, delivery and performance by Guarantor of this Guaranty or any other
Loan Document to which Guarantor is or will be a party, or (2) to effect the
legality, validity, binding effect or enforceability of this Guaranty or any of
the Loan Documents; (f) this Guaranty is, and the other Loan Documents to which
Guarantor is or will be a party, when executed and delivered, will be, legal,
valid and binding obligations of Guarantor, enforceable against Guarantor in
accordance with their respective terms and provisions; and (g) Guarantor is
solvent (i.e., the aggregate fair value of Guarantor's assets exceeds the sum of
Guarantor's actual and contingent liabilities) and, both before and after taking
into account the Guarantor Obligations, Guarantor has adequate capital and is
able to pay his debts as they mature.

      

      
         

        Section
7. Certain
Covenants of the Guarantor. Guarantor covenants and agrees that, from the
date hereof and until the Obligations and Guarantor Obligations have each been
fully paid and satisfied, Guarantor shall give, or cause to be given, immediate
written notice to Lender of (i) any change in the domicile of Guarantor, (ii)
the institution or threat of, or any adverse change in, any action, suit,
investigation or proceeding at law, in equity, in arbitration or otherwise,
involving or affecting Guarantor or any Guarantor Obligation, or (iii) any
change in location or material loss in the assets, properties and/or liabilities
of Guarantor or a material decline in the value or the validity
thereof.

      

      
         

        Section
8. Certain
Acknowledgments and Waivers of Guarantor. Guarantor acknowledges and
agrees that the rights, powers, privileges, remedies and interests granted to or
conferred
upon Lender by this Guaranty, the other Loan Documents and applicable law are
purely discretionary and shall not, and shall not be deemed or construed to,
impose upon Lender any duty or other obligation, including, without limitation,
any obligation (a) to sell, foreclose or otherwise realize upon any Collateral,
(b) to protect or preserve any Collateral, (c) to perform or satisfy any
obligation under or respecting any Collateral or Guarantor, (d) to mitigate or
otherwise reduce any expense, fees, penalties, damage or other loss, or (e) to
otherwise exercise or enforce any such right, power, privilege, remedy or
interest. Any sale, foreclosure or other realization upon any Collateral, or any
other exercise or enforcement of any such right, power, privilege, remedy or
interest, if undertaken by Lender in its discretion, may be delayed,
discontinued or otherwise not pursued or exhausted for any reason whatsoever
(whether intentionally or otherwise). Without limiting the generality of the
foregoing, to the extent waiver is not limited under applicable law, Guarantor
hereby expressly waives each and every claim or defense, and agrees that
Guarantor will not assert or pursue (by action, suit, counterclaim or otherwise)
any claim or defense, respecting (i) any settlement or compromise with any
obligor or other third party under any account receivable, note, instrument,
agreement, document or general intangible included in the Collateral,
irrespective of any reduction in the potential proceeds therefrom, (ii) the
selection or order of disposition of any Collateral (which may be at random or
in any order Lender may select in its sole and absolute discretion, and may be
without regard to any holding period or tax basis that any person or entity may
have therein or any tax or other consequences arising from such disposition),
(iii) the private sale of any Collateral, whether or not any public market
exists, (iv) the choice or timing of any sale date as to any Collateral (which
Lender may select in its sole and absolute discretion), irrespective of whether
greater sale proceeds would be realizable on a different sale date, (v) the
adequacy of the sale price of any Collateral, (vi) any insufficiency of any such
proceeds to fully satisfy the Obligations and Guarantor Obligations, (vii) any
sale of any Collateral to the first person or entity to receive an offer or make
a bid, (viii) the selection of any purchaser of any Collateral, or (ix) any
default by any purchaser of any Collateral. Guarantor hereby expressly waives
the applicability of any and all applicable laws that are or may be in conflict
with the terms and provisions of this Guaranty or the other Loan Documents now
or at any time in the future to the extent waiver is not limited under
applicable law, including (without limitation) those pertaining to notice (other
than notices required by this Guaranty or any other Loan Document), protest,
appraisal, valuation, stay, extension, moratorium, marshaling of assets,
exemption and equity of redemption. Neither Lender nor any of its designees or
representatives shall incur any liability in connection with any sale of or
other action taken respecting any Collateral in accordance with the provisions
of this Guaranty or any other Loan Document or applicable
law.

      

      
         

        
          
            
            

          

          
            89

            
              

            

          

          
            
            

          

        

         

        Section
9. Waivers
of Notice. Etc. Guarantor hereby expressly waives: (a) notice of
acceptance of this Guaranty; (b) notice of any action taken or omitted in
reliance hereon; (c) presentment; (d) demand for payment; (e) protest or notice
of protest; (f) notice of any nonpayment or the occurrence or continuance of any
other default, or any other event that (with the giving of notice or the passage
of time or both) could constitute a default, under any Loan Document; (g) notice
of any material or adverse effect, whether individually or in the aggregate,
upon the assets, business, operations, properties or condition (financial or
otherwise) of Borrower, Guarantor or any other person or entity, or upon any
part of any Collateral; (h) any statute of limitations or similar time
constraint under any applicable law, whether with respect to the Obligations or
Guarantor Obligations or otherwise; or (i) any other proof, notice or demand of
any kind whatsoever or the making or promptness in making any claim or demand
under this Guaranty or any other Loan Document. No act or omission of any kind
in connection with any of the foregoing shall in any way impair or otherwise
affect the legality, validity, binding effect or enforceability of any term or
provision of this Guaranty or any of the Guarantor
Obligations.

      

       

      
        Section
10. Bankruptcy:
Reinstatement. In the event Lender is not permitted or is otherwise
unable (because of the pendency of any bankruptcy, insolvency, receivership or
other proceeding) to demand or accelerate the Obligations, but otherwise would
have been permitted to do so at such time pursuant to any Loan Document, Lender
may demand payment in full, and may exercise and enforce any and all of its
other rights, powers, privileges, remedies and interests under this Guaranty or
the other Loan Documents to which Guarantor is a party or by which Guarantor may
be bound or subject, in each case as if the Obligations had been duly demanded
or accelerated, and Guarantor will not raise, and hereby expressly waives and
releases, any claim or defense with respect to such deemed demand or
acceleration. In the event any payment of or any application of any amount,
asset or property to any of the Obligations or Guarantor Obligations, or any
part thereof, at any time is rescinded or must otherwise be restored or returned
by Lender upon the insolvency, bankruptcy or reorganization of Borrower,
Guarantor, or any other person or entity, whether by order of any court, by any
settlement approved by any court, or otherwise, then the terms and provisions of
this Guaranty and the other Loan Documents shall continue to apply, or shall be
reinstated if not then in effect, as the case may be, with respect to the
Obligations or Guarantor Obligations so rescinded, restored or returned, all as
though such payment or application had never been made.

      

      
         

        Section
11. Enforcement.
Lender, in its sole discretion, may proceed to exercise or enforce any right,
power, privilege, remedy or interest that Lender may have under this Guaranty,
any other Loan Document or applicable law at law, in equity, in rem or in any
other forum available under applicable law, severally and cumulatively. Lender
may institute one or more proceedings (which may be separate proceedings) with
respect to this Guaranty and each of the other Loan Documents in such order and
at such times as Lender may elect in its sole and absolute discretion. This
Guaranty and the other Loan Documents may be enforced without possession of any
underlying promissory note, security agreement or pledge, or its production in
any action, suit or proceeding, and without the presence or participation of
Borrower or Guarantor, whether through lack of jurisdiction, venue or service or
otherwise; and Guarantor will not raise, and each hereby waives, any objection
or defense respecting the need for any such production, presence or
participation.

      

      
         

        
          
            
            

          

          
            90

            
              

            

          

          
            
            

          

        

         

        Section
12. Exculpation.
Lender and its participants, affiliates, custodians and designees,
representatives, and its officers, employees, attorneys and agents, shall not
incur any liability for any acts or omissions (and Guarantor hereby expressly
waives any and all related claims and actions against each such person or
entity) arising out of or related directly or indirectly to this Guaranty,
except to the extent occasioned by the respective person's or entity's gross
negligence or willful misconduct as finally determined pursuant to applicable
law by a governmental authority or court having
jurisdiction.

         

      

      
        Section
13. Subrogation.
No payment by Guarantor shall entitle Guarantor, by subrogation to the rights of
Lender, rights of reimbursement, restitution or contribution from Borrower, or
otherwise, to any payment by Borrower (or out of any assets of Borrower), except
after the final and irrevocable payment (in cash) and satisfaction of any and
all Obligations and Guarantor Obligations.

      

      
         

        Section
14. Expenses.
Etc. Guarantor shall pay or reimburse, on demand, any and all costs and
expenses incurred by Lender, whether directly or indirectly, in connection with
the enforcement and adjudication of this Guaranty and any other Loan Documents,
including (without limitation) the disbursements, expenses and reasonable fees
of counsel.

      

      
         

      

      
        Section
15. Further
Assurances. Guarantor agrees to do such further acts and things and to
execute and deliver such statements, assignments, agreements, instruments and
other documents as Lender from time to time may request in connection with this
Guaranty and in order to (a) evidence, confirm, perfect and protect any lien
granted by Guarantor, (b) give Lender or its designees or representatives
confirmation and further assurance of its rights, powers, privileges, remedies
and interests under this Guaranty, the other Loan Documents and applicable law,
(c) better enable Lender or its designees or representatives to exercise any
such right, power, privilege, remedy or interest, and (d) otherwise effectuate
the purpose and the terms and provisions of this Guaranty or the other Loan
Documents, each in such form and substance as may be acceptable to
Lender.

      

      
         

        Section
16. Relationship
of Guarantor and Lender. Etc. Guarantor represents, warrants,
acknowledges and agrees that: (a) Lender is acting solely in the capacity of
Lender with respect to this Guaranty, the other Loan Documents and the
Collateral; (b) Guarantor's sole relationship with Lender is that of debtor and
creditor, respectively, and no term or provision of this Guaranty or any other
Loan Document is intended to create, nor shall any such term or provision be
deemed or construed to have created, any joint venture, partnership, trust,
agency or other fiduciary or advisory relationship with Guarantor; and (c)
Guarantor has independently and fully reviewed and evaluated this Guaranty, the
other Loan Documents, and the transactions contemplated hereunder and thereunder
and the potential effects of such transactions on the assets, business,
operations, properties and condition (financial or otherwise) of Guarantor and
Borrowers (if any), which review and evaluation was made (i) together with
counsel and (to the extent deemed prudent by Guarantor) financial and other
advisors to Guarantor, and (ii) without any reliance upon any oral or written
advice, analysis or assurance of any kind whatsoever from
Lender.

      

      
         

        Section
17. Notices.
All notices, requests and demands to or upon the respective parties hereto shall
be given in writing and shall be deemed to have been duly given or made upon
receipt by the receiving party. All notices, requests and demands are to be
given or made to the respective parties at the following addresses (or to such
other addresses as either party may designate by notice in accordance with the
provisions of this Paragraph):

      

      
         

        
          
            
            

          

          
            91

            
              

            

          

          
            
            

          

        

         

        If
to Guarantor:

      

      
         

        Christopher
Reed 

        7706
Dunbarton Ave 

        Los
Angeles, CA 90045

      

      
         

        If
to Lender:

         

      

      
        GemCap
Lending I, LLC 

        1401
Ocean Avenue, Suite 305 

        Santa
Monica, California 90401 

        Attn:
David Ellis

      

      
         

        With
a copy to:

      

      
         

        Cohen
Tauber Spievack & Wagner P.C. 

        420
Lexington Avenue, Suite 2400 

        New
York, New York 10170 

        Attention:
Robert A. Boghosian, Esq.

         

      

      
        Section
18. APPLICABLE
LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, THE LAWS OF WHICH GUARANTOR
HEREBY EXPRESSLY ELECTS TO APPLY TO THIS GUARANTY, WITHOUT GIVING EFFECT TO
PROVISIONS FOR CHOICE OF LAW THEREUNDER. GUARANTOR AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS GUARANTY SHALL BE COMMENCED
IN ACCORDANCE WITH THE PROVISIONS OF THIS GUARANTY.

      

      
         

        Section
19. WAIVER OF JURY
TRIAL. TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, GUARANTOR HEREBY
WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF
THE UNITED STATES OF AMERICA OR ANY STATE TO A TRIAL BY JURY OF ANY AND ALL
ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN
GUARANTOR AND LENDER OR THEIR SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY
CONNECTED WITH THIS GUARANTY, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR
THE COLLATERAL. IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY AND ALL
DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS BETWEEN
GUARANTOR AND LENDER. GUARANTOR WAIVES ALL RIGHTS TO INTERPOSE ANY CLAIMS,
DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND, NATURE OR DESCRIPTION IN ANY
ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO THIS GUARANTY, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR ANY MATTER ARISING
THEREFROM OR RELATING THERETO, EXCEPT COMPULSORY
COUNTERCLAIMS.

      

      
        

        
          
            
            

          

          
            92

            
              

            

          

          
            
            

          

        

         

        Section
20. CONSENT TO
JURISDICTION. GUARANTOR HEREBY (a) IRREVOCABLY SUBMITS AND CONSENTS TO
THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE
OF CALIFORNIA, LOS ANGELES COUNTY, WITH RESPECT TO ANY ACTION OR PROCEEDING
ARISING OUT OF THIS GUARANTY, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR
THE COLLATERAL OR ANY MATTER ARISING THEREFROM OR RELATING THERETO, AND (b)
WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE OR FORUM NON CONVENIENS WITH
RESPECT THERETO. IN ANY SUCH ACTION OR PROCEEDING, GUARANTOR WAIVES PERSONAL
SERVICE OF THE SUMMONS AND COMPLAINT OR OTHER PROCESS AND PAPERS THEREIN AND
AGREES THAT THE SERVICE THEREOF MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO GUARANTOR AT ITS OFFICES SET FORTH HEREIN OR OTHER
ADDRESS THEREOF OF WHICH LENDER HAS RECEIVED NOTICE AS PROVIDED IN
THIS GUARANTY. NOTWITHSTANDING THE FOREGOING, GUARANTOR CONSENTS
TO THE COMMENCEMENT BY LENDER OF ANY ACTION OR PROCEEDING IN ANY OTHER
JURISDICTION TO ENFORCE ITS RIGHTS IN AND TO THE COLLATERAL AND GUARANTOR WAIVES
ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS
OF ANY SUCH ACTION OR PROCEEDING.

      

      
         

        Section
21. Construction. No
provision of this Guaranty shall be construed against or interpreted to the
disadvantage of any party hereto by reason of such party or his or its counsel
having, or being deemed to have, structured or drafted such
provision.

      

      
         

        Section
22. Headings.
Amendments. Waiver. Etc. Section and paragraph headings are for
convenience only and shall not be construed as part of this Guaranty. Any
modification and amendment shall be in writing and signed by the parties, and
any waiver of, or consent to any departure from, any representation, warranty,
covenant or other term or provision shall be in writing and signed by each
affected party hereto or thereto, as applicable.

      

      
         

        Section
23. Entire
Agreement. This Guaranty represents the entire agreement and
understanding concerning the subject matter hereof and thereof between the
parties, and supersedes all other prior agreements and understandings concerning
the subject matter hereof, whether oral or written.

      

      
         

        Section
24. Survival.
All covenants, agreements, representations and warranties made by Guarantor
herein or in any of the Loan Documents or in any certificate, report or
instrument contemplated hereby shall survive any independent investigation made
by Lender and the execution and delivery of this Guaranty, the Loan Documents
and such certificates, reports or instruments and shall continue so long as any
Obligations are outstanding and unsatisfied, applicable statutes of limitations
to the contrary notwithstanding.

      

      
         

        Section
25. Severability. Every
provision of this Guaranty is intended to be severable. If, in any jurisdiction,
any term or provision hereof is determined to be invalid or unenforceable, (a)
the remaining terms and provisions hereof shall be unimpaired, (b) any such
invalidity or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such term or provision in any other jurisdiction, and (c)
the invalid or unenforceable term or provision shall, for purposes of such
jurisdiction, be deemed replaced by a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision. If a court of competent jurisdiction determines
that any covenant or restriction, by the length of time or any other
restriction, or portion thereof, set forth in this Guaranty is unreasonable or
unenforceable, the court shall reduce or modify such covenants or restrictions
to those which it deems reasonable and enforceable under the circumstances and,
as so reduced or modified, the parties hereto agree that such covenants and
restrictions shall remain in full force and effect as so modified. In the event
a court of competent jurisdiction determines that any provision of this Guaranty
is invalid or against public policy and cannot be so reduced or modified so as
to be made enforceable, the remaining provisions of this Guaranty shall not be
affected thereby, and shall remain in full force and effect.

      

      
         

        
          
            
            

          

          
            93

            
              

            

          

          
            
            

          

        

         

        Section
26. No Waiver bv
Action. Cumulative Rights. Etc. A waiver of a breach of any term,
covenant or condition of this Guaranty shall not operate or be construed as a
continuing waiver of such term, covenant or condition, or breach, or of any
other term, covenant or condition, or breach by such party. No failure to
exercise and no delay in exercising any right, remedy, or power hereunder
shall
preclude any other or further exercise of any other right, remedy or power
provided herein or by law or in equity. Lender is entitled to exercise all
rights and remedies available to it at law or in equity in connection with this
Guaranty. The rights and remedies of Lender hereunder are several and cumulative
at Lender's discretion and may be exercised at Lender's
discretion.

      

      
         

        Section
27. Successors and
Assigns. All covenants, promises and agreements by or on behalf of the
parties contained in this Guaranty shall be binding upon and shall inure to the
benefit of the parties and their respective estates, representatives, successors
and assigns, as applicable; provided, however, that nothing
in this Guaranty, express or implied, shall confer on Guarantor the right to
assign any of his rights or obligations hereunder at any
time.

      

      
         

        Section
28. Counterparts. This
Guaranty may be executed in one or more counterparts, and by facsimile or
electronic signature, each of which when so executed, shall be deemed an
original, but all of which shall constitute but one and the same
instrument.

      

      
         

        IN
WITNESS WHEREOF, the undersigned has executed and delivered this Validity
Guaranty as of the date first written above.

      

      
        

         

        GUARANTOR:

      

      
        

        AGREED TO
AND ACCEPTED BY LENDER: 

         

        GEMCAP LENDING I,
LLC

      

      
        

        By:
_______________________________

        Name:

        Title:

      

      

      
        

         

         [SIGNATURE
PAGE TO VALIDITY GUARANTY]

      

    

     

     

    
      
        
        

      

      
        94

        
          

        

      

      
        
        

      

    

     

    Exhibit
1.88

    to

    Loan
and Security Agreement

    

    Form of Warehouse
Agreement

     

    
      GemCap
Lending I, LLC

      1401
Ocean Avenue, Suite 305

      Santa
Monica, California 90401

      

      November
12, 2009

      

      [WAREHOUSE
]

      [ADDRESS        ]

      [                           ]

      [ATTN:              ]

      

      
        	
                 
      

              	
                Re:

              	
                Reed’s,
      Inc.

              

      

      

      Dear
[                     ]:

      

      As part
of our financing arrangement with Reed’s, Inc., a Delaware corporation
(“Borrower”), Borrower has pledged and granted to GemCap Lending I, LLC
(“GemCap”, “us” or “we”) a first priority continuing security interest in and
lien upon all property and assets now owned and hereafter acquired by Borrower
and the proceeds and products thereof (the “Collateral”).  The
Collateral includes, among other things, merchandise, inventory and goods of the
Borrower located in your facility at [_______________________] (the “Premises”) and which
may be shipped to and stored with you from time to time in the future (any and
all such merchandise, inventory and goods, collectively, the “Inventory”).

      

      By your
acknowledgement below, you certify as follows:

       

      1.   There is
storage or warehouse agreement in place between you and Borrower with respect to
your storage of the Inventory (the “Warehouse
Agreement”).  You agree that, to the extent any of the terms of
this letter agreement conflict with any of the terms of the Warehouse Agreement,
the terms of this letter agreement will govern and control. You further agree
that the Warehouse Agreement may not be amended, supplemented or otherwise
modified without our prior written consent.

       

      2.   (a)
 The Warehouse Agreement is in full force and effect and has not been
amended, supplemented or otherwise modified, (b) there is no defense, offset,
claim or counterclaim by or in favor of you against Borrower under the Warehouse
Agreement, and (c) no notice of default has been given under or in connection
with the Warehouse Agreement in connection with a default that has not been
cured, and you have no knowledge of the occurrence of any default under or in
connection with the Warehouse Agreement.

       

      3.   This
letter agreement is binding upon you and shall constitute notice to you that we
have a security interest in the Inventory. You certify that you have not
previously been advised that any person or entity, other than Borrower and
GemCap, has any existing right, title or interest in any of the
Inventory.

       

      4.   Until you
have received written notification to the contrary from us, you may release
Inventory from the Premises in accordance with Borrower’s instructions. Upon
delivery of any such written notification, you will handle the Inventory only in
accordance with GemCap’s instructions, notwithstanding any instruction of the
Borrower to the contrary.

       

      5.   You are
holding and will hold all Inventory for GemCap’s account in accordance with this
letter agreement and you will release same to us upon demand, provided that you
receive payment of any accrued charges for the storage of the Inventory being
released.  You agree that you will not hinder or delay GemCap in
enforcing its rights in and to the Inventory.

       

      
        
          
          

        

        
          95

          
            

          

        

        
          
          

        

      

       

      6.   To assist
us in keeping accurate records relating to the Inventory, you will provide us
with a finished goods inventory report (“Inventory Report”)
regarding the Inventory upon request.  The Inventory Report shall set
forth the quantity of Inventory held by you, and such other matters as we shall
reasonably request, including information regarding delivery and shipment of the
Inventory and statements of charges rendered to the Borrower.  In
addition, you will confirm balances of the Inventory to us when an inventory is
taken by you or the Borrower, and make copies of any such inventory available to
us upon request.

       

      7.   You
hereby warrant and represent that you do not deal in the type of goods stored by
the Borrower and you do not buy or sell such goods in the ordinary course of
your business.

       

      8.   Your
costs and expenses of storing the Inventory shall be paid by Borrower. You agree
to advise us in the event that any charges or expenses due from the Borrower to
you become past due, and if not paid by Borrower, then we shall be afforded the
option to pay such amounts. However, we shall not be directly or indirectly
liable or responsible for any of said charges whether due or to become
due.

       

      9.   The
arrangement and instructions outlined herein shall continue without any change
or modification until we have given written notification to the contrary to you,
which notification need only be signed by us.  Upon delivery of any
such notification, you will handle the Inventory in accordance with our
instructions.

       

      10.   You
hereby grant to the authorized representatives of GemCap a license to enter the
Premises to do any or all of the following with respect to the Inventory:
inspect, have appraised, remove, maintain, prepare for sale, transfer, or sell
(at public or private sale) the Inventory at any time, with reasonable prior
notice.  We shall not have any duty or obligation to remove or dispose
of any Inventory, or any other property left on the Premises by
Borrower.

       

      11.   (a) You
will not assert contractual, statutory or possessory liens, claims or demands of
any kind which you have or may have in respect of the Inventory and (b) any
rights you may have in or to the Inventory, no matter how arising (to the extent
not effectively waived pursuant to clause (a) of this
paragraph), shall be subordinate in all respects to the rights of GemCap in
respect thereof.  It is specifically acknowledged that GemCap’s
security interest is senior to and will take priority over any warehouseman’s
lien now existing or hereafter arising under applicable law in your favor on
account of unpaid warehouse charges in connection with the
Inventory.

       

      12.   You will
immediately notify us of any physical loss, damage, theft, or destruction of any
portion of the Inventory.

       

      13.   All
notices, requests and demands to or upon the respective parties hereto shall be
in writing and either (a) delivered by hand or (b) delivered by national
overnight courier service, and shall be deemed to have been duly given or made
upon receipt by the receiving party.  All notices, requests and
demands are to be given or made to the respective parties at the following
addresses (or to such other addresses as either party may designate by notice in
accordance with the provisions of this paragraph):

      

      
        	
              	
                If
      to GemCap

              	
                GemCap
      Lending I, LLC

                1401
      Ocean Avenue

                Suite
      305

                Santa
      Monica, California 90401

                Attn:
      David Ellis

              

      

      
        

        
          	
                	
                  If
      to you

                	
                  [                                       ]

                

        

         

        
          	
                	
                  If
      to Borrower

                	
                  Reed’s,
      Inc.

                  13000
      South Spring Street

                  Los
      Angeles, California 90061

                  Attn:
      Christopher Reed,

                            
      Chief Executive Officer

                

        

        
          

          
            
              
              

            

            
              96

              
                

              

            

            
              
              

            

          

        

      

       

      This
letter agreement shall be governed by, and construed in accordance with, the
laws of the State of California.  This letter agreement may be
executed in counterparts and by facsimile or other electronic signature, each of
which shall be an original, and all of which, when taken together, shall
constitute one agreement.

       

      
        	 	
                Very
      truly yours,

                

                GEMCAP
      LENDING I, LLC

                

                By:
      _________________________

                Name/Title:

              

      

       

      
ACKNOWLEDGED
AND AGREED TO BY:

      

      [                                                       ]

      

      By:
_________________________

      Name/Title:

      

      

      REED’S,
INC.

      

      By: /s/ James
Linesch                          

      James
Linesch

      Chief
Financial Officer

      Reed’s
Inc.

      

        
          
             

          

          
            97

            
              

            

          

          
             

          

        

Exhibit
2.2(b)

    

    to

    Loan
and Security Agreement

    

    Form of Revolving Loan
Note

    

    
      SECURED
LOAN NOTE

      

      

      Up to
$3,000,000

      

      Dated:  November
18, 2009

      

      FOR VALUE
RECEIVED, Reed’s, Inc. ("Borrower"), promises to pay
to the order of GEMCAP LENDING
I, LLC, a Delaware limited liability company with offices at 1401 Ocean
Avenue, Suite 305, Santa Monica, California 90401 and its successors and assigns
(“Lender”), on or before
November 18, 2011, the principal sum of up to Three Million Dollars ($3,000,000)
in accordance with the Loan and Security Agreement, of even date herewith,
entered into by and between Borrower and Lender (as amended from time to time,
the “Agreement”).  Capitalized
terms used herein and not defined herein shall have their respective meanings as
set forth in the Agreement.

      

      INTEREST; AMORTIZATION; DUE
DATE:  Interest on the outstanding principal balance hereof
shall be computed on the basis of the actual number of days elapsed and a year
of 360 days. Interest shall accrue at a rate per annum equal to Eighteen Percent
(18%), and shall be payable by Borrower in arrears (x) prior to the Maturity
Date, on the first Business Day of each calendar month, commencing December 1,
2009, (y) in full on the Maturity Date and (z) on demand after the Maturity
Date. Following and during the continuation of an Event of Default, interest on
the Loan, including principal and interest, shall accrue at a rate per annum
equal to Twenty-Four Percent (24%).

      

      Subject
to the prepayment provisions hereof, Borrower may borrow, repay and reborrow
Loans, as set forth in the Agreement.

      

      The entire principal
balance of this Note then outstanding, plus any accrued and unpaid interest
thereon, together with all penalties and late payment fees, if any, shall be due
and payable on the Maturity Date pursuant to the terms of the Agreement.
Borrower may prepay the entire unpaid principal sum of the Revolving
Loans without premium or penalty, provided, however, that, (i) such
prepayment is no less than the amount of the remaining outstanding principal sum
of all outstanding Revolving Loans, (ii) as part of such prepayment, Borrower
shall pay Lender all other amounts due to Lender pursuant to this Note, the
Agreement and other Loan Documents, and (iii) in addition, in the event Borrower
makes such prepayment during the first nine (9) months of the Term, then
Borrower shall pay to Lender an amount equal to $60,000 (representing two
percent (2%) of the maximum Revolving Loan Commitment of $3,000,000) (the
“Revolving
Loan Prepayment Fee”).  The
Revolving Loan Prepayment Fee is intended to compensate Lender for committing
and deploying funds for Borrower’s Revolving Loans pursuant to the Agreement and
for Lender’s loss of investment of such funds in connection with such early
termination, and is not intended as a penalty.  The Revolving
Loan Prepayment Fee also shall be due and payable by Borrower to Lender if
Lender accelerates the payment of the Obligations during the first nine (9)
months of the Term due to the occurrence of an Event of
Default.

       

       

      
        
           

        

        
          98

          
            

          

        

        
           

        

      

       

      PAYMENT AND
COLLECTION:  In order to satisfy Borrower’s payment of amounts
due under the Revolving Loans and all fees, expenses and charges with respect
thereto that are due and payable under this Note, the Agreement or any other
Loan Document, Borrower hereby irrevocably authorizes Lender to initiate manual
and automatic electronic (debit and credit) entries through the Automated
Clearing House or other appropriate electronic payment system (“ACH”) to all
deposit accounts maintained by Borrower, wherever located. At the request of
Lender,  Borrower shall complete, execute and deliver to the
institution set forth below (with a copy to the Lender) an ACH agreement, voided
check, information and/or direction letter reasonably necessary to so instruct
Borrower’s depository institution.  Borrower (i) shall maintain
in all respects this ACH arrangement; (ii) shall not change depository
institutions without Lender’s prior written consent, and if consent is received,
shall immediately execute similar ACH instruction(s), and (iii) waive any
and all claims for loss or damage arising out of debits or credits to/from the
depository institution, whether made properly or in error.  Borrower
has communicated with and instructed the institution set forth
below:

       

      
        
          	
                  Bank
      Name:

                	
                  City
      National Bank

                
	
                  Address:

                	
                  3424
      Carson Street,

                
	 
      	
                  Torrance,
      CA 90503

                
	
                  ABA
      #:

                	
                  122016066

                
	
                  Account
      #:

                	
                  017236482

                
	
                  Phone:

                	
                  310-264-2919

                
	
                  Fax:

                	
                  310-264-2906

                
	
                  Reference:

                	
                  Reed’s

                
	
                  Contact
      Person: Jackie Saidian

                	 
      

        

      

       

      MAXIMUM RATE OF
INTEREST:  It is intended that the rates of interest herein
shall never exceed the maximum rate, if any, which may be legally charged on the
Revolving Loans evidenced by this Note (the “Maximum Rate”), and if the
provisions for interest contained in this Note would result in a rate higher
than the Maximum Rate, interest shall nevertheless be limited to the Maximum
Rate and any amounts which may be paid toward interest in excess of the Maximum
Rate shall be applied to the reduction of principal, or, at the option of
Lender, returned to Borrower.

      

      PLACE OF
PAYMENT:  All payments hereon shall be made, and all notices to
the Lender required or authorized hereby shall be given, at the office of Lender
at the address designated in the Agreement, or to such other place as Lender may
from time to time direct by written notice to Borrower.

      

      APPLICATION OF
PAYMENTS:  All payments received hereunder shall be applied in
accordance with the provisions of the Agreement.

      

      PAYMENT AND
COLLECTION:  All amounts payable hereunder are payable by check
or wire transfer in immediately available funds to the account number specified
by Lender, in lawful money of the United States.  At Lender’s option,
Lender may charge the Borrower’s account for the interest accrued hereunder.
Borrower agrees to perform and comply with each of the covenants, conditions,
provisions and agreements contained in every instrument now evidencing or
securing the indebtedness evidenced hereby.

       

       

      
        
           

        

        
          99

          
            

          

        

        
           

        

      

      
 

      SECURITY:  This
Note is issued pursuant to the Agreement and is secured by a pledge of the
Collateral as described in the Loan Documents.  Notwithstanding the
pledge of the Collateral described above, Borrower hereby acknowledges, admits
and agrees that Borrower’s obligations under this Note are recourse obligations
of Borrower to which Borrower pledges its full faith and credit.

      

      DEFAULTS;
REMEDIES:  Upon the happening of an Event of Default, the Lender
shall have all of the rights and remedies set forth in the
Agreement.

      

      The
failure to exercise any of the rights and remedies set forth in the Agreement
shall not constitute a waiver of the right to exercise the same or any other
option at any subsequent time in respect of the same event or any other
event.  The acceptance by Lender of any payment which is less than
payment in full of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the foregoing rights and
remedies at that time or at any subsequent time or nullify any prior exercise of
any such rights and remedies without the express consent of Lender, except as
and to the extent otherwise provided by law.

      

      WAIVERS:  Borrower
waives diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayment of this Note.

      

      TERMINOLOGY:  Any
reference herein to Lender shall be deemed to include and apply to every
subsequent holder of this Note.

      

      AGREEMENT:  Reference
is made to the Agreement for provisions as to the Revolving Loans, rates of
interest, Collateral, acceleration and release matters.  If there is
any conflict between the terms of this Note and the terms of the Agreement, the
terms of the Agreement shall control.

      

      APPLICABLE LAW:

       

      THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA, THE LAWS OF WHICH BORROWER HEREBY EXPRESSLY
ELECTS TO APPLY TO THIS NOTE, WITHOUT GIVING EFFECT TO PROVISIONS FOR CHOICE OF
LAW THEREUNDER.  BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT
TO ENFORCE OR ARISING OUT OF THIS NOTE SHALL BE COMMENCED IN ACCORDANCE WITH THE
PROVISIONS OF THIS NOTE.

       

      WAIVER OF
JURY TRIAL.  TO THE EXTENT PERMITTED BY APPLICABLE
LAW,

       

      BORROWER
HEREBY WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE
LAWS OF THE UNITED STATES OF AMERICA OR ANY STATE TO A TRIAL BY JURY OF ANY AND
ALL ISSUES ARISING EITHER DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING
BETWEEN BORROWER AND LENDER OR THEIR SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY
WAY CONNECTED WITH THIS NOTE, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR
THE COLLATERAL.  IT IS INTENDED THAT SAID WAIVER SHALL APPLY TO ANY
AND ALL DEFENSES, RIGHTS, AND/OR COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS
BETWEEN BORROWER AND LENDER.  BORROWER WAIVES ALL RIGHTS TO INTERPOSE
ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS OF ANY KIND, NATURE OR
DESCRIPTION IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER WITH RESPECT TO
THIS NOTE, THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR ANY
MATTER ARISING THEREFROM OR RELATING THERETO, EXCEPT COMPULSORY
COUNTERCLAIMS.

       

      
        
           

        

        
          100

          
            

          

        

        
           

        

      

      

       

      CONSENT TO
JURISDICTION.

       

      BORROWER
HEREBY (a) IRREVOCABLY SUBMITS AND CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE
STATE AND FEDERAL COURTS LOCATED IN THE STATE OF CALIFORNIA, LOS ANGELES COUNTY,
WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF THIS NOTE, THE OTHER
LOAN DOCUMENTS, THE OBLIGATIONS AND/OR THE COLLATERAL OR ANY MATTER ARISING
THEREFROM OR RELATING THERETO, AND (b) WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS WITH
RESPECT THERETO.  IN ANY SUCH ACTION OR
PROCEEDING,  BORROWER WAIVES PERSONAL SERVICE OF THE SUMMONS AND
COMPLAINT OR OTHER PROCESS AND PAPERS THEREIN AND AGREES THAT THE SERVICE
THEREOF MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO
BORROWER AT ITS OFFICES SET FORTH IN THE AGREEMENT OR OTHER ADDRESS THEREOF OF
WHICH LENDER HAS RECEIVED NOTICE AS PROVIDED IN THE
AGREEMENT.  NOTWITHSTANDING THE FOREGOING,  BORROWER
CONSENTS TO THE COMMENCEMENT BY LENDER OF ANY ACTION OR PROCEEDING IN ANY OTHER
JURISDICTION TO ENFORCE ITS RIGHTS IN AND TO THE COLLATERAL AND WAIVES ANY
OBJECTION WHICH BORROWER MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY
SUCH ACTION OR PROCEEDING.

      IN WITNESS WHEREOF, this
Secured Revolving Loan Note has been duly executed and delivered by the
undersigned as of the day and year first above written.

       

      
        
          	 	
                  BORROWER:

                	 
	 	 	 
	 	
                  REED’S,
      INC.

                	 
	 	 	 	 
	 	
                  By:
      

                	/s/ 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

        

      
        
           

        

        
          101

          
            

          

        

        
           

        

      

Exhibit
3.2

    to

    Loan
and Security Agreement

    

    Fees

    

    Borrower
shall pay to Lender the following fees:

    

    Annual Line
Fee:

    

    A
non-refundable fee of Thirty Thousand Dollars ($30,000) per year (representing
one percent (1%) per annum, computed on the basis of a 360 day year and the
actual number of days elapsed, of the maximum Revolving Loan Commitment of
$3,000,000) shall be due and payable on (i) the Closing Date and (ii) each
subsequent anniversary of the Closing Date during the Term.

    

    Unused Revolver Line
Fee:

    

    A monthly
fee at the rate of one-half percent (0.5%) per annum (computed on the basis of a
360 day year and the actual number of days elapsed) on the average daily unused
maximum Revolving Loan Commitment of $3,000,000 during such month, payable
monthly in arrears on the first day of each month during the Term.

    

    Loan Administration Fee and
Funding Fee:

    

    $500.00
per month, payable in arrears on the first day of each month during the
Term.

    

    Audit
Fees:

    

    $700 per
person, per day, plus out-of-pocket expenses, for not more than two (2) audits
during each 12-month period of the Term; provided, that no such limitation shall
apply following the occurrence of an Event of Default.

     

     

    
      
        
        

      

      
        102

        
          

        

      

      
        
        

      

    

     

    
      Schedule
5.4(m)

      To

      Loan
and Security Agreement

      Banks
and Financial Institutions

      

      Wells
Fargo Bank

      FBO
Reed’s Inc

      Dept
8184

      1200 West
7th
Street, Suite T2-210

      Los
Angeles, Ca  90017-2349

      Account
No. 4121722698

      Representative

      DENISE
SUDENGA

      612-573-9539

      denise.j.sudenga@wellsfargo

      

      City
National Bank

      ACCT
017-236482     General

      ACCT 
017-236481     Credit Card

      Attn:    
Jackie Saidian

      310-264-2919

      3424
Carson Street, Torrance, CA  90503

      

      

      First
Capital

      ACCT 
4121722698

      Attn:    
John Neher

      213.412.1566

      700 South
Flower Street, Suite 2325 | Los Angeles, California 90017

       

      
        
          
          

        

        
          103

          
            

          

        

        
          
          

        

      

      
Schedule
5.4(n)

      To

      Loan
and Security Agreement

      

      
        
          	
                  ●

                	
                  Borrower’s
      Legal Name: Reed’s, Inc.

                

        

      

      

      
        
          	
                  ●

                	
                  Borrower’s
      Jurisdiction of Organization:
Delaware

                

        

      

      

      
        
          	
                  ●

                	
                  Borrower’s
      Chief Executive Office and Other
Offices:

                

        

      

      

      Chief Executive
Office:

       

      13000 S.
Spring Street

      Los
Angeles, CA 90061

       

      Other
Offices:

       

      12930 S.
Spring Street

      Los
Angeles, CA 90061

      
 

      
        
          	
                  ●

                	
                  Describe
      any changes in name, jurisdiction of organization, chief office location
      or corporate structure undertaken by Borrower within the last five years:
      None.

                

        

      

      

      
        
          	
                  ●

                	
                  List
      any security agreements entered into by third parties which currently bind
      Borrower as a grantor thereunder:
None.

                

        

      

       

       

       

      
        
          
          

        

        
          104

          
            

          

        

        
          
          

        

      

      
Schedule
8.21

      To

      Loan
and Security Agreement

      Changes
since Balance Sheet Date of September 30, 2009

      

      On
October 1, 2009, 60,000 warrants were issued in connection with long-term
financing obligation at exercise price of $1.20 for approximately five
years.

      

      On
October 19, 2009, the Company executed an Asset Purchase Agreement with Sonoma
Cider Mill, Inc., to acquire certain assets of the Sonoma Sparkler
brand.  Since June 1, 2009, based on a non-binding letter of intent,
the Company has been packing and selling the six Sonoma Sparkler brand products
in anticipation of completion of this acquisition.  The assets
purchased in this transaction include the intellectual property known as the
Sonoma Sparkler label and formulas for six flavors currently on the market,
customer lists and vendor contact information, assignable licenses and permits
and existing inventory.  The aggregate purchase price under the
Agreement is $252,000. Initial payments of $45,000 were made prior to the
Agreement and the balance of $207,000 is payable in installments of $9,000 over
23 remaining months, continuing on the first of every month.

      

      On
October 8, 2009, the Company sold an aggregate of 364,189 units (“Units”)
consisting of one share of our common stock (“Share”) and warrants to purchase
shares of our common stock (“Warrants”)at a price of $1.80 per Unit pursuant to
a public shelf registration on Form S-3.  The Warrants consist
of  (i) Series A Warrants, for the purchase of a number of shares of
common stock equal to 40% of a purchaser’s Shares, which have an initial
exercise price of $2.25 per share and are exercisable for a period of five years
commencing 183 days from the date of issuance, (ii) Series B Warrants, for the
purchase of a number of shares of common stock equal to 50% of a purchaser’s
Shares, which have an exercise price equal to $1.80 and are exercisable for 60
trading days commencing immediately, and (iii) Series C Warrants, for the
purchase of a number of a shares of common stock equal to 20% of a purchaser’s
Shares, which have an exercise price of $2.25 and are exercisable for five years
commencing 183 days from the date of issuance.  The Series B Warrants
and Series C Warrants were only issued to purchasers who purchase Units for an
aggregate purchase price of at least $125,000.   The Company paid
an 8% placement agent fee. The net proceeds to the Company from the shelf-take
down, after deducting placement agent fees and estimated offering expenses, were
approximately $563,000. At the closing, the Company issued 364,189 shares of
common stock, Series A Warrants to purchase 145,676 shares of common stock,
Series B Warrants to purchase 69,445 shares of common stock, and Series C
Warrants to purchase 27,778 shares of common stock.

       

      

       

      
 

      
        
          
          

        

        
          105

          
            

          

        

        
          
          

        

      

      

      
Schedule 8.22

      To

      Loan
and Security Agreement

      Intellectual
Property

      

      Proprietary
Rights

       

      We own
trademarks that we consider material to our business. Three of our trademarks
are registered trademarks in the U.S. Patent and Trademark Office: Virgil’s ®,
Reed’s Original Ginger Brew All-Natural Jamaican Style Ginger Ale ® and Tianfu
China Natural Soda ®. Registrations for trademarks in the United States will
last indefinitely as long as we continue to use and police the trademarks and
renew filings with the applicable governmental offices. We have not been
challenged in our right to use any of our material trademarks in the United
States.

      

      We have
one pending trademark registration application, including application[s] for
registration of the China Cola mark, serial application number
77646445.

      

      We
utilize the following other unregistered marks in the conduct of our business:
Sonoma
Sparkler

      

      In
addition, we consider our finished product and concentrate formulae, which are
not the subject of any patents, to be trade secrets.  Our brewing
process is a trade secret.  This process can be used to brew flavors
of beverages other than ginger ale and ginger beer, such as root beer, cream
soda, cola, and other spice and fruit beverages.  We have not sought
any patents on our brewing processes because we would be required to disclose
our brewing process in patent applications.

      

      We have
registered, or have rights to utilize in the conduct of our business, the
reedsinc.com and reedsgingerbrew.com domain names.

      

      We
generally use non-disclosure agreements with employees and distributors to
protect our proprietary rights.

       

      Government
Regulation

       

      The
production, distribution and sale in the United States of many of our Company’s
products are subject to the Federal Food, Drug, and Cosmetic Act, the Federal
Trade Commission Act, the Lanham Act, state consumer protection laws, federal,
state and local workplace health and safety laws, various federal, state and
local environmental protection laws and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. Outside the
United States, the distribution and sale of our many products and related
operations are also subject to numerous similar and other statutes and
regulations.

        

      All of
our facilities and other operations in the United States are subject to various
environmental protection statutes and regulations, including those relating to
the use of water resources and the discharge of wastewater. Our policy is to
comply with all such legal requirements.

       

      
        
          
          

        

        
          106

          
            

          

        

        
          
          

        

      

      
Schedule
8.23

      To

      Loan
and Security Agreement

      Employee
Matters

      

      We have
37 full-time employees, as follows: three in general management, nine in sales
and marketing support, six in admin and operations and 19 in production. We
employ additional people on a part-time basis as needed.  We have
never participated in a collective bargaining agreement. We believe that the
relationship with our employees is good.

      

      There are
no written employment agreements with any of our officers or key employees In
the event of a sale of Reed’s, Inc., should Mr. James Linesch’s employment
terminate during the first 12 months after the sale, he will be entitled to
three months severance.

       

       

       

       

       

      
 

      
        
          
          

        

        
          107

          
            

          

        

        
          
          

        

      

       

      Schedule
8.23

      To

      Loan
and Security Agreement

      Employee
Matters

      

      We have
32 full-time employees, as follows: three in general management, ten in sales
and marketing support, five in admin and operations and 16 in production. We
employ additional people on a part-time basis as needed.  We have
never participated in a collective bargaining agreement. We believe that the
relationship with our employees is good.

       

      

      

      

      

    

     

     

    
      
        
        

      

      
        108

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