Document:

exhibit10_19.htm

    
      
Exhibit 10.19

     

    
      Execution
Version

       

       

      
        

      

    

    

     

    SENIOR
SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

     

    AMONG

     

    PHYSICIANS
FORMULA, INC.,

    as the
Borrower,

     

    THE
GUARANTORS PARTY HERETO

     

    AND

     

    MILL ROAD
CAPITAL, L.P.,

    as the
Purchaser, a Holder and the Holder Representative

     

    Dated as
of November 6, 2009

     

     

    
      
        

      

    

    
      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    

    SENIOR SUBORDINATED NOTE
PURCHASE AND SECURITY AGREEMENT

    

    Physicians
Formula, Inc.

    1055 West
8th
Street

    Azusa, CA
91702

    

     

    
      
        	 
      	
                Dated
      as of November 6, 2009

              

      

       

    

    Mill Road
Capital, L.P.,

       as
the Purchaser, a Holder and

       the
Holder Representative,

    Two Sound
View Drive

    Greenwich,
CT 06830

    

    

    Ladies
and Gentlemen:

    

    Physicians
Formula, Inc., a New York corporation (the “Borrower”),
Physicians Formula Holdings, Inc., a Delaware corporation (“Holdings”) and the
direct parent of the Borrower, and the other direct and indirect Subsidiaries of
Holdings from time to time party to this Agreement, as Guarantors, hereby agree
with you as follows:

    

    ARTICLE
I. 

    PURCHASE
AND SALE OF THE SENIOR SUBORDINATED NOTES

    

    1.1      
     The Notes.
The
Borrower has authorized the issuance and sale of its Senior Subordinated Notes
due May 6, 2013 in the aggregate original principal amount of eight million
dollars ($8,000,000) in the form set forth as Exhibit A attached
hereto (referred to herein individually as a “Note” and
collectively as the “Notes”, which terms
shall also include any notes delivered in exchange therefor or replacement
thereof).  Commencing on the date of issuance, the Notes will accrue
interest on the unpaid principal amount thereof at an interest rate per annum
(the “Interest
Rate”) consisting of (i) fifteen percent (15.00%) per annum in cash
interest plus
(ii) four percent (4.00%) per annum to be added automatically to the unpaid
principal amount of the Notes (“PIK Interest”) on
each Interest Payment Date.

    

    (b)           
Interest on the Notes shall be computed based on a 360-day year and actual days
elapsed.  Cash interest on the Notes shall be payable monthly in
arrears on the first day of each calendar month (each, an “Interest Payment
Date”) commencing on December 1, 2009, by wire transfer of immediately
available funds to one or more accounts designated by the relevant
Holders.  All accrued PIK Interest shall be compounded quarterly on
the first day of each calendar quarter.  The records of the Holders
shall, absent manifest error, be conclusive evidence of the outstanding
principal balance of the Notes, including all PIK Interest added to the
principal amount thereof and the compounding thereof, but any failure of any
Holder to record, or any error in so recording, any such amount on such Holder’s
records shall not limit or otherwise affect the obligations of the Borrower
under the Notes to make all payments of principal of and interest thereon when
due.

    

    
      
        
           

        

        
          1

          
            

          

        

        
           

        

      

    

    

    1.2        
   Purchase and Sale of the
Notes.  The
Borrower agrees to issue and sell to the Purchaser, and, subject to and in
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Purchaser agrees to purchase from the Borrower a Note in
the principal amount of eight million dollars ($8,000,000) at a closing (the
“Closing”) to
be held at the offices of Foley Hoag LLP located in Boston, Massachusetts at
10:00 a.m. Boston time, or at such other location and time as agreed to by the
Borrower and the Purchaser, on the date on which this Agreement is executed and
delivered and upon satisfaction or waiver of the conditions described in Article VI hereof
(the “Closing
Date”).  At the Closing, the Borrower will issue and deliver
one Note to the Purchaser, payable to the Purchaser or its registered assigns,
in the principal amount of eight million dollars ($8,000,000), against receipt
of the aggregate face amount of such Note in immediately available funds by wire
transfer to an account of the Borrower or an account of such other third party
as directed by the Borrower on or prior to the date hereof; provided that it is
understood and agreed that the Purchaser may, upon notice to the Borrower,
deduct from such issue price payable by the Purchaser to the Borrower at the
Closing the amount of any fees and expenses due the Purchaser hereunder,
including, without limitation, pursuant to Sections 1.11 and
6.11.

    

    1.3     
      Payments and
Endorsements.

    

    (a)     
      Payments of principal, interest and premium,
if any, on the Notes and other payments under the Operative Documents shall be
made prior to 2:00 p.m. (Greenwich, Connecticut time) on the date due, and shall
be made without set-off or counterclaim, directly by wire transfer of
immediately available funds to the account or accounts designated in writing by
the Holder Representative, without any presentment or notation of payment,
except that prior to any transfer of any Note the Holder thereof shall endorse
on such Note a record of the date to which interest has been paid and all
payments made on account of principal of such Note.  All payments and
prepayments of principal of and interest on the Notes shall be applied (to the
extent thereof) to all of the Notes pro rata based on the principal amount
outstanding and held by each Holder thereof.  The Borrower hereby
authorizes each Holder to endorse on the Notes held by such Holder the PIK
Interest paid thereon, and the Borrower shall, upon the request of any Holder of
one or more Notes and in lieu of endorsement of such PIK Interest, issue to such
Holder one or more additional Notes evidencing the PIK Interest paid on the
Notes held by such Holder, in each case, promptly upon the request of such
Holder, all of which shall be made, issued and otherwise effected in accordance
with the terms of Section
1.8.

    

    (b)        
   Each Holder that is not a United States person (as such term
is defined in Section 7701(a)(30) of the Code) shall submit to the Borrower and
the Holder Representative on or before the Closing Date or, if later, the date
such Person becomes a Holder of one or more Notes hereunder, two duly completed
and signed copies of (i) either Form W-8 BEN (relating to such Holder and
entitling it to a complete exemption from withholding under the Code on all
amounts to be received by such Holder, including fees, pursuant to the Operative
Documents and the Obligations) or Form W-8 ECI (relating to all amounts to be
received by such Holder, including fees, pursuant to the Operative Documents and
the Obligations) of the United States Internal Revenue Service or (ii) solely if
such Holder is claiming exemption from United States withholding tax under
Section 871(h) or 881(c) of the Code with respect to payments of “portfolio
interest”, a Form W-8 BEN, or any successor form prescribed by the Internal
Revenue Service, and a certificate representing that such Holder is not a bank
for purposes of Section 881(c) of the Code, is not a 10-percent shareholder
(within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is
not a controlled foreign corporation related to the Borrower (within the meaning
of Section 864(d)(4) of the Code).  Thereafter and from time to time,
each Holder of one or more Notes shall submit to the Borrower and the Holder
Representative such additional duly completed and signed copies of one or the
other of such Forms (or such successor forms as shall be adopted from time to
time by the relevant United States taxing authorities) and such other
certificates as may be (i) requested by the Borrower in a written notice,
directly or through the Holder Representative, to such Holder and (ii) required
under then-current United States law or regulations to avoid or reduce United
States withholding taxes on payments in respect of all amounts to be received by
such Holder, including fees, pursuant to the Operative Documents or the
Obligations.  Upon the request of the Borrower or the Holder
Representative, each Holder of one or more Notes that is a United States person
(as such term is defined in Section 7701(a)(30) of the Code) shall submit to the
Borrower and the Holder Representative two duly completed and signed copies of
form W-9 (or such successor forms as shall be adopted from time to time by the
relevant United States taxing authorities) or such other certificate, as
requested, to the effect that it is such a United States person.

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    (c)      
     If any Holder of one or more Notes determines, as
a result of any change in applicable law, regulation or treaty, or in any
official application or interpretation thereof, that it is unable to submit to
the Borrower or the Holder Representative any form or certificate that such
Holder is obligated to submit pursuant to subsection (b) of this Section 1.3 or that
such Holder is required to withdraw or cancel any such form or certificate
previously submitted or any such form or certificate otherwise becomes
ineffective or inaccurate, such Holder shall promptly notify the Borrower and
the Holder Representative of such fact and the Holder shall to that extent not
be obligated to provide any such form or certificate and will be entitled to
withdraw or cancel any affected form or certificate, as applicable.

    

    (d)      
     The obligations of the Borrower and the Guarantors
under this Section
1.3 shall survive the payment in full of all amounts due hereunder or
under the Notes and the termination of this Agreement and the other Operative
Documents.

    

    1.4         
  Redemptions; Prepayments;
Repurchases.

    

    (a)        
   Redemptions at
Maturity.  Unless
the maturity of the Notes is accelerated pursuant to Article VIII hereof,
the Notes shall mature and be redeemed by the Borrower in one installment which
shall be paid on May 6, 2013.  On the stated or accelerated maturity
date of the Notes, the Borrower will pay in cash the principal amount of the
Notes then outstanding together with all accrued and unpaid interest thereon,
including, without limitation, all PIK Interest.  No redemption of
less than all of the Notes shall affect the obligation of the Borrower to make
the redemption required by the preceding sentence.

    

    (b)    
       Optional
Prepayments.  The
Borrower may voluntarily prepay the Notes, in whole or in part, at any time
(subject to clause (e) below).  Optional prepayments permitted
pursuant to this clause (b) may only be made upon payment to the Holder
Representative (on behalf of the relevant Holders) of an amount equal to the sum
of the principal amount to be prepaid, together with all accrued and unpaid
interest (including PIK Interest) on the principal amount so prepaid through the
date of prepayment, plus the Prepayment
Premium, if any, indicated in clause (d) below corresponding to the period in
which the prepayment occurs.  Written notice of any prepayment
pursuant to this Section 1.4(b) shall
be given to the Holder Representative at least five (5) Business Days prior to
the date of any such prepayment.

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    

    (c)      
     Repurchase upon a Change of
Control.  Without in any way limiting the Holders’ rights under
Article VIII
hereof with respect to any event described in this clause (c) that also
constitutes an Event of Default, but subject to clause (e) below, if there shall
occur a Change of Control, then the Borrower shall, immediately upon the
occurrence of such Change in Control, offer in writing to repurchase Notes at a
purchase price equal to the entire principal amount of the Notes, together with
all accrued and unpaid interest (including PIK Interest) on the principal amount
through the date of repurchase, plus the Prepayment Premium, if any, indicated
in clause (d) below corresponding to the period in which the repurchase
occurs.  If any Holder shall not have responded to any such offer
within ten Business Days of receipt of same, such Holder shall be deemed to have
rejected such offer.

    

    (d)       
    Prepayment
Premium.  In the event of any prepayment or repurchase of the
Notes prior to the Maturity Date pursuant to clauses (b) or (c) above, the
Borrower shall pay to the Holder Representative (on behalf of the Holders) the
prepayment premium indicated below corresponding to the time period in which
such prepayment or repurchase occurs or is required to occur (the “Prepayment Premium”)
(which prepayment premium shall be paid to the Holder Representative (on behalf
of the Holders) as liquidated damages and compensation for the costs of making
funds available with respect to the loans evidenced by the Notes):

    

    

    
      	
              Period

            	
              Prepayment Premium

              (%
      of the aggregate principal amount of the Notes prepaid or
      repurchased)

            
	 
      	 
      
	
              Closing
      Date through November 5, 2010

            	
              5%

            
	
              November
      6, 2010 through November 5, 2011

            	
              4%

            
	
              November
      6, 2011 through November 5, 2012

            	
              2%

            
	
              November
      6, 2012 through May 5, 2013

            	
              1%

            

    

    

    

    (e)       
    Consent of Senior
Lender.  Notwithstanding
the foregoing provisions of clauses (b) and (c) above, the Borrower shall have
no right to voluntarily prepay the Notes under clause (b) above or obligation to
mandatorily repurchase the Notes under clause (c) above unless the Borrower or
the Senior Lender (if required pursuant to the Intercreditor Agreement) shall
have delivered (or caused to be delivered) to the Holder Representative all
required written consents, if any, of the Senior Lender and any other holders of
the Senior Obligations to such optional prepayment or repurchase in form and
substance reasonably satisfactory to the Required Holders, which delivery shall
be made, in the case of any such voluntary prepayment, at least five (5)
Business Days prior to the date of such voluntary prepayment.

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

    

    (f)         
   Pro
Rata Prepayment.  Except as set forth in Section 11.5, each
prepayment or other repayment of the Notes shall be made as to all of the Notes
and shall be made so that the Notes held by each Holder shall be prepaid or
repaid in a principal amount which shall bear the same ratio to the aggregate
unpaid principal amount being redeemed, prepaid or repaid on all of the Notes as
the unpaid principal amount of the Notes then held by such Holder bears to the
aggregate unpaid principal amount of all of the Notes.

    

    (g)       
    No Other Acquisition of
Notes.  The
Borrower will not purchase, redeem, prepay, tender for or otherwise acquire or
repay, directly or indirectly, any of the outstanding Notes except upon the
redemption, prepayment or repurchase of the Notes in accordance with the other
terms of this Section
1.4.  The Borrower will promptly cancel all Notes acquired by
it pursuant to any purchase, redemption, prepayment or tender for the Notes
pursuant to any provision of this Agreement or otherwise, and no Notes may be
issued in substitution or exchange for any such Notes.

    

    1.5       
    Default Rate of
Interest.  If
an Event of Default has occurred and is continuing, from and after the date such
Event of Default has occurred, the entire outstanding unpaid principal balance
of the Notes and any unpaid interest from time to time in default shall (both
before and after acceleration and entry of judgment) bear interest, payable in
cash on demand, at a rate per annum equal to the Interest Rate payable pursuant
to Section 1.1
hereof plus
three percent (3%) per annum; provided, however, that upon
the cessation or cure of such Event of Default, if no other Event of Default is
then continuing, the Notes shall again bear interest at the Interest Rate as set
forth in Section
1.1 hereof.

    

    1.6      
     Maximum Legal Rate of
Interest.
Notwithstanding any provision to the contrary contained herein, in the Notes or
in any other Operative Document, no such provision shall require the payment or
permit the collection of any amount of interest in excess of the maximum amount
of interest permitted by applicable law (“Excess
Interest”).  If any Excess Interest is provided for, or is
adjudicated to be provided for, herein, in the Notes or in any other Operative
Document, then in such event: (a) the provisions of this Section shall govern
and control; (b) neither the Borrower nor any guarantor or endorser shall be
obligated to pay any Excess Interest; (c) any Excess Interest that the Holders
may have received hereunder shall, at the option of the Required Holders, be (i)
applied as a credit against the then-outstanding principal amount of Obligations
hereunder and accrued and unpaid interest thereon (not to exceed the maximum
amount permitted by applicable law), (ii) refunded to the Borrower, or (iii) any
combination of the foregoing; (d) the interest rate payable hereunder, under the
Notes or under any other Operative Document shall be automatically subject to
reduction to the maximum lawful contract rate allowed under applicable usury
laws (the “Maximum
Rate”), and this Agreement, the Notes and the other Operative Documents
shall be deemed to have been, and shall be, reformed and modified to reflect
such reduction in the relevant interest rate; and (e) neither the Borrower nor
any guarantor or endorser shall have any action against the Holders for any
damages whatsoever arising out of the payment or collection of any Excess
Interest.  Notwithstanding the foregoing, if for any period of time
interest on any of Obligations is calculated at the Maximum Rate rather than the
applicable rate under this Agreement and the Operative Documents, and thereafter
such applicable rate becomes less than the Maximum Rate, the rate of interest
payable on the Obligations shall remain at the Maximum Rate until each Holder
has received the amount of interest which it would have received during such
period on the Obligations had the rate of interest not been limited to the
Maximum Rate during such period.

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    1.7       
    Payment or Delivery on
Non-Business Days.  Whenever
any payment or delivery to be made shall be due on a day which is not a Business
Day, such payment or delivery may be made on the next succeeding Business Day,
and, if a payment, such extension of time shall in such case be included in the
computation of payment of interest due.

    

    1.8        
   Transfer and Exchange of
Notes.  The
Borrower shall keep a register in which it shall provide for the registration of
the Notes and the registration of transfers of Notes.  The Holder of
any Note may, prior to maturity, prepayment or repurchase of such Note,
surrender such Note at the principal office of the Borrower for transfer or
exchange.  Any Holder desiring to transfer or exchange any Note
(including, but not limited to, any assignment of a Note or Notes contemplated
by Section 11.5
hereof) shall first notify the Borrower in writing at least ten (10) Business
Days in advance of such transfer or exchange.  Promptly, but in any
event within ten (10) Business Days after such notice to the Borrower from the
Holder Representative (on behalf of a Holder of one or more Notes)
of  a Holder’s intention to make such an exchange of such Holder’s
Note(s) and without expense (other than transfer taxes, if any) to such Holder,
the Borrower shall issue in exchange therefor another Note or Notes in the same
aggregate principal amount, as of the date of such issuance, as the unpaid
principal amount of the Note so surrendered and having the same maturity and
rate of interest, containing the same provisions and subject to the same terms
and conditions as the Note so surrendered (provided that no
minimum shall apply to a liquidating distribution of Notes to investors in a
Holder and any Notes so distributed may be subsequently transferred by such
investor and its successors in the original denomination thereof without further
restriction).  Each new Note shall be made payable to such Person or
Persons, or assigns, as the Holder of such surrendered Note may designate, and
such transfer or exchange shall be made in such a manner that no gain or loss of
principal or interest shall result therefrom.  The Borrower shall have
no obligation or liability under any Note to any Person other than the
registered Holder of each such Note.  Assignments and transfers of
Notes by the Holders shall be made in compliance with Section 11.5
hereof.

    

    1.9       
    Replacement of
Notes.  Upon
receipt of evidence satisfactory to the Borrower of the loss, theft, destruction
or mutilation of any Note and, if requested in the case of any such loss, theft
or destruction, upon delivery of an indemnity agreement reasonably satisfactory
to the Borrower, or, in the case of any such mutilation, upon surrender and
cancellation of such Note the Borrower will issue a new Note of like tenor and
amount and dated the date to which interest has been paid, in lieu of such lost,
stolen, destroyed or mutilated Note; provided, however, if any Note
of which a Holder, its nominee, or any of its partners is the Holder is lost,
stolen or destroyed, the affidavit of an authorized partner or officer of the
Holder setting forth the circumstances with respect to such loss, theft or
destruction shall be accepted as satisfactory evidence thereof, and no
indemnification shall be required as a condition to the execution and delivery
by the Borrower of a new Note in replacement of such lost, stolen or destroyed
Note other than the Holder’s written agreement to indemnify the
Borrower.

    

    1.10          Ranking.  The
Obligations and the rights and remedies of the Holders under the Operative
Documents relating to the indebtedness evidenced by the Notes shall be senior in
right of payment to all Subordinated Debt (other than any indebtedness which has
priority by operation of law) of Holdings, the Borrower and the other
Subsidiaries.  The Obligations and the rights and remedies of the
Holders under the Operative Documents relating to the indebtedness evidenced by
the Notes shall be subordinate and junior in right of payment to the Senior
Obligations in the manner and to the extent provided in the Intercreditor
Agreement.

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

    

    1.11          Closing Fee;
Expenses. 
At the Closing the Borrower shall pay to the Purchaser or its designee a closing
fee of $160,000 (the “Closing Fee”),
payable in cash, and such fee shall be in addition to the other amounts required
to be paid at the Closing pursuant to Section 6.15
hereof.  At the option of the Purchaser by notice to the Borrower, the
amount of such fee and the other amounts required to be paid pursuant to Section 6.15 hereof
may be paid by the Purchaser by deducting such amounts from the purchase price
of the Notes payable at the Closing.

    

    1.12          Original Issue
Discount. 
The Borrower and the Holders intend, for applicable income tax purposes: (i)
that the Notes are debt for U.S. federal income tax purposes, that the issuance
of the Notes and the Holders’ right to receive warrants constitutes an
“investment unit” as of the date hereof within the meaning of Section 1273 of
the Code, and that the right to receive warrants is not received in exchange for
any debt owned by the Borrower to any Holders as of the date hereof, (ii) that
the Notes issued to the Holder (other than any notes delivered in exchange
therefor or replacement thereof) constitute a single debt instrument for
purposes of Sections 1271 through 1275 of the Code and the Treasury Regulations
thereunder (pursuant to Treasury Regulations Section 1.1275-2(c)), (iii) that
the Notes are issued with original issue discount (“OID”), and (iv) that
the Borrower shall timely calculate and report the amount of OID as required by
applicable law.  The Borrower and the Holders agree to adhere to the
terms of this Note for U.S. federal income tax purposes and not to take any
action or file any tax return, report or declaration inconsistent herewith
(including with respect to the amount of OID on the Notes), except as required
by applicable law.

    

    1.13          Security
Interest. The
Obligations shall be secured by a perfected security interest (subject, in terms
of priority, only to Liens created under the Senior Loan Documents and Permitted
Liens entitled to priority under applicable law) in all of the assets of the
Borrower, Holdings and the other Guarantors, whether now owned or hereafter
acquired, pursuant to and subject to the limitations and the terms and
conditions of Article
II herein, the Guarantor Security Agreement and the other Security
Documents.

    

    1.14          Amendments for Mezzanine
Financing and Warrants.  The
parties agree to amend the Operative Documents to reflect the terms and
conditions set forth in Annex A attached
hereto (the “Mezzanine
Financing”) and to cause Holdings to issue warrants to Purchaser on the
terms and conditions set forth in Annex A; provided that all
such terms and conditions and the issuance of the warrants are approved by the
stockholders of Holdings.  Holdings agrees (i) as soon as reasonably
practicable following the date of this Agreement, Holdings shall prepare in
accordance with the provisions of the Securities Exchange Act of 1934, as
amended, and file with the Commission a proxy statement (the “Proxy Statement”) to
be sent to the stockholders of Holdings in connection with a meeting for the
purpose of approving the issuance of the warrants and the other terms of the
Mezzanine Financing (the “Stockholders
Meeting”); (ii) as soon as reasonably practicable after such filing with
the Commission (if Holdings learns that no review of the Proxy Statement will be
made by the staff of the Commission) or as soon as reasonably practicable after
the completion of any review of the Proxy Statement made by staff of the
Commission, Holdings shall mail, or cause to be mailed, the Proxy Statement in
which Holdings shall make a recommendation that the stockholders of Holdings
approve the issuance of the warrants and the other terms of the Mezzanine
Financing; and (iii) within 60 days of such mailing, Holdings shall hold the
Stockholders Meeting.  Purchaser will cooperate with Holdings in the
preparation of the Proxy Statement.  For the avoidance of doubt, any
amendments to the Operative Documents as a result of the transactions set forth
in Annex A shall not result in any payment of a Prepayment
Premium.  Upon the approval of such terms and conditions by the
stockholders of Holdings, the parties shall execute and deliver documentation to
effect such terms and conditions and to issue the warrants, including without
limitation, an amendment to this Agreement substantially in the form attached
hereto as Annex
A-1, an amended and restated promissory note substantially in the form
attached hereto as Annex A-2, a warrant
substantially in the form attached hereto as Annex A-3 and a
registration rights agreement substantially in the form attached hereto as Annex
A-4.

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

    1.15          Standstill. 
Until
September 30, 2012, MRC and its Affiliates shall not (a) acquire more than 35%
of the common stock of Holdings or (b) seek to elect voting seats on the Board
of Directors of Holdings (except as permitted in Section 7.33 herein), in each
case, without the prior written consent of the Board of Directors of
Holdings. These
restrictions shall be released upon the receipt by the Borrower of any bid
(other than a bid from MRC or its Affiliates) for the acquisition of Holdings
and its Subsidiaries.  The Borrower shall provide MRC with notice of
the receipt of any such bid within three Business Days of receipt by the
Borrower or any of its Affiliates.

    

    

    ARTICLE
II. 

    SECURITY
INTEREST.

    

    2.1           
Grant of Security
Interest.  The
Borrower hereby pledges, collaterally assigns and grants to the Holder
Representative and to the Holders, a Lien and security interest (collectively
referred to as the “Security Interest”)
in the Collateral, as security for the payment and performance of all
Obligations; provided, however,
notwithstanding the foregoing, no Lien is hereby granted on any Excluded
Property, and such Excluded Property shall not be deemed to be “Collateral”;
provided further that if and
when any property shall cease to be Excluded Property, a Lien on and security
interest in such property shall be deemed granted therein and such property
shall be deemed to be “Collateral.”  Following the written request by
the Required Holders, the Borrower shall grant the Holder Representative and the
Holders, a Lien and security interest in all commercial tort claims that it may
have against any Person.

    

    2.2           
Notifying Account
Debtors and Other Obligors; Collection of Collateral.  The
Holder Representative may at any time (whether or not a Default Period then
exists) deliver a Record giving an account debtor or other Person obligated to
pay an Account, a General Intangible, or other amount due, notice that the
Account, General Intangible, or other amount due has been assigned to the Holder
Representative for security and must be paid directly to the Holder
Representative.  The Borrower shall join in giving such notice and
shall Authenticate any Record giving such notice upon the Holder
Representative’s request.  After the Borrower or the Holder
Representative gives such notice, the Holder Representative may, but need not,
in the Holder Representative’s or in the Borrower’s name, demand, sue for,
collect or receive any money or property at any time payable or receivable on
account of, or securing, such Account, General Intangible, or other amount due,
or grant any extension to, make any compromise or settlement with or otherwise
agree to waive, modify, amend or change the obligations (including collateral
obligations) of any account debtor or other obligor.  The Holder
Representative may, in the Holder Representative’s name or in the Borrower’s
name, as the Borrower’s agent and attorney-in-fact, notify the United States
Postal Service to change the address for delivery of the Borrower’s mail to any
address designated by the Holder Representative, otherwise intercept the
Borrower’s mail, and receive, open and dispose of the Borrower’s mail, applying
all Collateral as permitted under this Agreement and holding all other mail for
the Borrower’s account or forwarding such mail to the Borrower’s last known
address.

    

    
      
        
           

        

        
          8

          
            

          

        

        
           

        

      

    

    

    2.3      
     Collateral Assignment of
Insurance.  As
additional security for the Obligations, the Borrower hereby collaterally
assigns to the Holder Representative and to the Holders, all rights of the
Borrower under every policy of insurance covering the Collateral and all
business records and other documents relating to it, and all monies (including,
without limitation, all proceeds and refunds) that may be payable under any
policy, and the Borrower hereby directs the issuer of each policy to pay all
such monies directly to the Holder Representative.  At any time,
whether or not a Default Period then exists, the Holder Representative may (but
need not), in the Holder Representative’s or the Borrower’s name, execute and
deliver proofs of claim, receive payment of proceeds and endorse checks and
other instruments representing payment of the policy of insurance, and adjust,
litigate, compromise or release claims against the issuer of any
policy.  Any monies received under any insurance policy assigned to
the Holder Representative, other than liability insurance policies, or received
as payment of any award or compensation for condemnation or taking by eminent
domain, shall be paid to the Holder Representative and, as determined by the
Holder Representative in its sole discretion, either be applied to prepayment of
the Obligations or disbursed to the Borrower under staged payment terms
reasonably satisfactory to the Holder Representative for application to the cost
of repairs, replacements, or restorations which shall be effected with
reasonable promptness and shall be of a value at least equal to the value of the
items or property destroyed.

    

    2.4       
    Borrower’s
Premises.

    

    (a)    
       Holder Representative’s
Right to Occupy the Borrower’s Premises.  The Borrower hereby
grants to the Holder Representative the right, at any time during a Default
Period and without notice or consent, to take exclusive possession of all
locations where the Borrower conducts its business or has any rights of
possession, including without limitation the locations described on Schedule 2.4 (the
“Premises”),
until the earlier of (i) payment in full and discharge of all Obligations or
(ii) final sale or disposition of all items constituting Collateral and delivery
of those items to purchasers.

    

    (b)     
      Holder Representative’s Use
of the Borrower’s Premises.  During any Default Period, the
Holder Representative may use the Premises to store, process, manufacture, sell,
use, and liquidate or otherwise dispose of items that are Collateral, and for
any other incidental purposes deemed appropriate by the Holder Representative in
good faith.

    

    (c)       
    Borrower’s Obligation to
Reimburse the Holder Representative.  The Holder Representative
shall not be obligated to pay rent or other compensation for the possession or
use of any Premises, but if the Holder Representative elects to pay rent or
other compensation to the owner of any Premises in order to have access to the
Premises, then the Borrower shall promptly reimburse the Holder Representative
all such amounts, as well as all actual out-of-pocket taxes, fees, charges and
other expenses at any time payable by the Holder Representative with respect to
the Premises by reason of the execution, delivery, recordation, performance or
enforcement of any terms of this Agreement.

    

    
      
        
           

        

        
          9

          
            

          

        

        
           

        

      

    

    

    2.5          
 License.  Without
limiting the generality of any other Security Document, the Borrower hereby
grants to the Holder Representative a non-exclusive, worldwide and royalty-free
license during any Default Period to use or otherwise exploit all Intellectual
Property Rights of the Borrower for the purpose of: (a) completing the
manufacture of any in-process materials during any Default Period so that such
materials become saleable Inventory, all in accordance with the same quality
standards previously adopted by the Borrower for its own manufacturing and
subject to the Borrower’s reasonable exercise of quality control; and (b)
selling, leasing or otherwise disposing of any or all Collateral.

    

    2.6       
    Financing
Statements.

    

    (a)     
      Authorization to
File.  The Borrower authorizes the Holder Representative to
file financing statements describing Collateral to perfect the Holder
Representative’s Security Interest in the Collateral, and the Holder
Representative may describe the Collateral as “all personal property” or “all
assets” or describe specific items of Collateral including without limitation
any commercial tort claims.  All financing statements filed before the
date of this Agreement to perfect the Security Interest were authorized by the
Borrower and are hereby re-authorized.  Following the termination of
this Agreement and payment of all Obligations, the Holder Representative shall,
at the Borrower’s expense and within the time periods required under applicable
law, release or terminate any filings or other agreements that perfect the
Security Interest.

    

    (b)      
     Termination.  The
Holder Representative shall, at the Borrower’s expense, release or terminate any
filings or other agreements that perfect the Security Interest, provided that
there are no suits, actions, proceedings or claims pending or threatened against
any Indemnitee under this Agreement with respect to any Indemnified Liabilities,
upon the Holder Representative’s receipt of the following, in form and content
satisfactory to the Holder Representative: (i) cash payment in full of all
payment Obligations and a completed performance by the Borrower with respect to
its other Obligations under this Agreement, (ii) a release of all claims against
the Holder Representative by the Borrower relating to the Holder
Representative’s performance and obligations under the Operative Documents, and
(iii) an agreement by the Borrower and any Guarantor, and any new lender to the
Borrower to indemnify the Holder Representative for any payments received by the
Holder Representative that are applied to the Obligations as a final payoff that
may subsequently be returned or otherwise not paid for any reason.

    

    2.7      
     Setoff.  The
Holder Representative may at any time during a Default Period, in its sole
discretion and without demand or notice to anyone, setoff any liability owed to
the Borrower by the Holder Representative against any Obligations, whether or
not due; provided that in no
event shall Holder Representative offset against the Borrower’s payroll account
number 4121973010 maintained at Senior Lender so long as the funds held in such
payroll account are limited to the amount required to satisfy the Borrower’s
payroll obligations during the following seven day period (as of any date of
determination).

    

    
      
        
           

        

        
          10

          
            

          

        

        
           

        

      

    

    

    2.8      
     Collateral Related
Matters.  This
Agreement does not contemplate a sale of Accounts or chattel paper, and, as
provided by law, the Borrower is entitled to any surplus and shall remain liable
for any deficiency.  The Holder Representative’s duty of care with
respect to Collateral in its possession (as imposed by law) will be deemed
fulfilled if it exercises reasonable care in physically keeping such Collateral,
or in the case of Collateral in the custody or possession of a bailee or other
third Person, exercises reasonable care in the selection of the bailee or third
Person, and the Holder Representative need not otherwise preserve, protect,
insure or care for such Collateral.  The Holder Representative shall
not be obligated to preserve rights the Borrower may have against prior parties,
to liquidate the Collateral at all or in any particular manner or order or apply
the Proceeds of the Collateral in any particular order of
application.  The Holder Representative has no obligation to clean-up
or prepare Collateral for sale.  The Borrower waives any right it may
have to require the Holder Representative to pursue any third Person for any of
the Obligations.

    

    2.9       
    Notices Regarding
Disposition of Collateral.  If
notice to the Borrower of any intended disposition of Collateral or any other
intended action is required by applicable law in a particular situation, such
notice will be deemed commercially reasonable if given in the manner specified
in Section 11.3
at least ten (10) calendar days before the date of intended disposition or other
action.

    

    2.10          Limitation on Security
Interest.  Notwithstanding
anything herein to the contrary, the Security Interest granted hereunder
together with any other security interest granted under the other Security
Documents shall be capped at an amount equal to the lesser of (a) 10% of the
aggregate market value of all assets of the Holdings, the Borrower and its
Subsidiaries and (b) 10% of the aggregate market value of all outstanding
Capital Stock of Holdings, in each case, as determined on the Closing
Date.

    

    2.11          Senior Lender Acting as
Bailee.  With
respect to any provision in this Agreement, the Guarantor Security Agreement or
any other Security Document which requires the Borrower, Holdings or any other
Guarantor to deliver possession or control of any negotiable document,
instrument, certificated securities, promissory notes, deposit accounts,
security accounts, commodity accounts, and letter of credit rights, other
Collateral or other assets that are collateral requiring possession or control
thereof in order to perfect the security interest of the Holder Representative
and the Holders therein under the Uniform Commercial Code, no such delivery or
giving of control to the Holder Representative shall be required to the extent
such Collateral or other assets are required to be delivered to or control is
required to be given to Senior Lender in accordance with the Senior Credit
Agreement, it being understood that the Senior Lender is acting as agent and
bailee for the benefit of the Holder Representative and the Holders pursuant to
the terms of the Intercreditor Agreement.

    

    
      
        
           

        

        
          11

          
            

          

        

        
           

        

      

    

    

    ARTICLE
III. 

    DEFINITIONS;
INTERPRETATION

    

    3.1       
    Definitions.  As
used herein, the following terms shall have the following meanings:

    

    “Accounts” shall have
the meaning given it under the UCC.

    

    “Additional Guarantor
Supplement” means a Guaranty in the form of Exhibit D attached
hereto.

    

    “Adjusted EBITDA”
means, determined on a consolidated basis for the Borrower and its wholly-owned
subsidiaries, the Borrower’s net income, calculated before (in each case, to the
extent included in determining net income) (i) interest expense, (ii) provision
for income taxes, (iii) depreciation and amortization expense, (iv) gains
arising from the write-up of assets, (v) any extraordinary gains, (vi)
stock-based compensation expenses, (vii) changes resulting from the valuation of
goodwill and intangible assets made in accordance with FASB Accounting Standard
142, (viii) changes resulting from foreign exchange adjustments arising from a
revaluation of assets subject to foreign currency revaluation, and (ix)
provisions arising from adjustments to the Borrower’s inventory reserves for
obsolete, excess, or slow-moving inventory.

    

    “Affiliate” or “Affiliates” means, as
to any Person, any other Person controlled by, controlling or under common
control with the first Person.  For purposes of this definition,
“control,” when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or
otherwise.

    

    “Agreement” means this
Senior Subordinated Note Purchase and Security Agreement.

    

    “Approved Fund” means
any Fund that is administered, managed or serviced by (a) a Holder, (b) an
Affiliate of a Holder that is under common control with such Affiliate, or (c)
an entity or an Affiliate of an entity that administers, manages or services a
Holder that is under common control with such Affiliate.

    

    “Authenticated” means
(a) to have signed; or (b) to have executed or to have otherwise adopted a
symbol, or have encrypted or similarly processed a Record in whole or in part,
with the present intent of the authenticating Person to identify the Person and
adopt or accept a Record.

    

    “Book Net Worth” means
the aggregate of the Owners’ equity in the Borrower, determined in accordance
with GAAP, and calculated without regard to any change in the valuation of
goodwill and intangible assets made in accordance with FASB Accounting Standard
142.

    

    “Borrower” shall have
the meaning assigned to that term in the first paragraph of this
Agreement.

    

    
      
        
           

        

        
          12

          
            

          

        

        
           

        

      

    

    

    “Borrower Inventory G/L
Reserve” means the dollar amount carried in the Borrower’s general ledger
reserve for inventory considered to be obsolete, excessive, or otherwise having
a value less than cost.  For clarification purposes, as of September
30, 2009, the Borrower’s general ledger reserve was $5,446,000.

    

    “Business Day” means
any day (other than a Saturday or Sunday) on which banks are not authorized or
required to close in Greenwich, Connecticut, the State of New York or the State
of California.

    

    “Capital Expenditures”
means for a period, any expenditure of money during such period for the lease,
purchase or other acquisition of any capital asset (including fixtures for
in-store displays) and any capitalized costs incurred as a result of the
Borrower’s move from Covina, CA to City of Industry, CA, or for the lease of any
other asset whether payable currently or in the future, but excluding any
prepaid operating expenses.

    

    “Capital Stock” means
any and all shares, interests, participation or other equivalents (however
designated) of capital stock of a corporation, any and all equivalent ownership
interests in a Person (other than a corporation), any and all warrants, options
or rights to purchase or any other securities convertible into any of the
foregoing.

    

    “Capitalized Lease
Obligation” means any obligations for the payment of rent for any real or
personal property under leases or agreements to lease that, in accordance with
GAAP, have been or should be capitalized on the books of the lessee and, for
purposes hereof, the amount of any such obligation shall be the capitalized
amount thereof determined in accordance with GAAP.

    

    “Cash Equivalents”
shall have the meaning assigned to such term in Section 7.6
hereof.

    

    “Change of Control”
means the occurrence of any of the following events:

    

    (a)     
      Any Person or “group” (as such term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) who does not
have an ownership interest in the Borrower on the Closing Date is or becomes the
“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, except that any such Person, entity or group will be
deemed to have “beneficial ownership” of all securities that such Person, entity
or group has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than
twenty-five percent (25%) of the voting power of all classes of ownership of the
Borrower;

    

    (b)      
     During any consecutive two-year period,
individuals who at the beginning of such period constituted the board of
Directors of the Borrower (together with any new Directors whose election to
such board of Directors, or whose nomination for election by the Owners of the
Borrower, was approved by a vote of two thirds of the Directors then still in
office who were either Directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the board of Directors of the Borrower then
in office;

    

    
      
        
           

        

        
          13

          
            

          

        

        
           

        

      

    

    

    (c)     
      Holdings ceases to own, directly or
indirectly, beneficially and of record, 100% of the Borrower; or

    

    (d)     
      Either Ingrid Jackel ceases to be employed
as the Chief Executive Officer of the Borrower or Jeffrey P. Rogers ceases to be
employed as the President of the Borrower, and not replaced by a Person with
substantially comparable experience within 90 days of any such
event.

    

    “Closing” shall have
the meaning assigned to such term in Section 1.2
hereof.

    

    “Closing Date” shall
have the meaning assigned to such term in Section 1.2
hereof.

    

    “Closing Fee” shall
have the meaning given to such term in Section 1.11
hereof.

    

    “Code” means the
Internal Revenue Code of 1986 and the rules and regulations thereunder, as the
same may from time to time be supplemented or amended and remain in
effect.

    

    “Collateral” means all
of the Borrower’s Accounts, chattel paper and electronic chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
Inventory, Investment Property, letter-of-credit rights, letters of credit, all
sums on deposit in any collection account, and any items in any lockbox;
together with (a) all substitutions and replacements for and products of such
property; (b) in the case of all goods, all accessions; (c) all accessories,
attachments, parts, Equipment and repairs now or subsequently attached or
affixed to or used in connection with any goods; (d) all warehouse receipts,
bills of lading and other documents of title that cover such goods now or in the
future; (e) all collateral subject to the Lien of any of the Security Documents;
(f) any money, or other assets of the Borrower that come into the possession,
custody, or control of the Holder Representative now or in the future; (g)
Proceeds of any of the above Collateral; (h) books and records of the Borrower,
including without limitation all mail or e-mail addressed to the Borrower; and
(i) all of the above Collateral, whether now owned or existing or acquired now
or in the future or in which the Borrower has rights now or in the
future.

    

    “Collateral Access
Agreement” means a landlord waiver, bailee letter, or acknowledgement
agreement of any lessor, warehouseman, processor, consignee, or other Person in
possession of, having a Lien upon, or having rights or interests in the
Borrower’s, Holdings’, or a Subsidiary’s books and records, equipment, or
inventory, in each case, in form and substance satisfactory to the Holder
Representative in the Holder Representative’s Permitted Discretion.

    

    “Collateral Pledge
Agreement” means each of those certain Collateral Pledge Agreements of
each of Holdings and the Borrower dated as of November 6, 2009 in the forms
attached hereto as Exhibit
D.

    

    “Commission” means the
United States Securities and Exchange Commission (or any other federal agency at
that time administering the Securities Act).

    

    
      
        
           

        

        
          14

          
            

          

        

        
           

        

      

    

    

    “Compliance
Certificate” shall have the meaning assigned to such term in Section 7.1(a) hereof
and is in the form of Exhibit C attached
hereto or
in such form that is acceptable to the Required Holders in their sole
discretion.

    

    “Constituent
Documents” means with respect to any Person, as applicable, that Person’s
certificate of incorporation, articles of incorporation, by-laws, certificate of
formation, articles of organization, limited liability company agreement,
management agreement, operating agreement, shareholder agreement, partnership
agreement or similar document or agreement governing such Person’s existence,
organization or management or concerning disposition of ownership interests of
such Person or voting rights among such Person’s owners.

    

    “December G/L
Adjustment” means an amount equal to the product of (i) $11,484,000 minus
the Borrower Inventory G/L Reserve as of December 31, 2009, times (ii)
sixty-percent (60%).  The December G/L Adjustment shall reflect the
Borrower’s estimate of the effect of its customers’ annual product line
adjustments.  Any reversals of such December G/L Adjustment in
subsequent months will also increase each of the foregoing minimum required
amounts by the amount of such reversal.

    

    “Default” means any
Event of Default or any event or condition the occurrence of which would, with
the passage of any applicable grace period or the giving of notice, or both,
constitute an Event of Default.

    

    “Default Period” means
any period commencing on the day an Event of Default occurs, through and
including the date identified by the Holder Representative (on behalf of the
Required Holders) in a Record as the date that the Event of Default has been
cured or waived.

    

    “Director” means with
respect to any Person, a director if such Person is a corporation, or a governor
or manager if such Person is a limited liability company.

    

    “Domestic Subsidiary”
shall mean, with respect to any Person, any Subsidiary of such Person which is
incorporated or organized under the laws of any state of the United States or
the District of Columbia.

    

    “Electronic Record”
means a Record that is created, generated, sent, communicated, received, or
stored by electronic means, but does not include any
Record that is sent, communicated, or received by fax.

    

    “Environmental Law”
means any federal, state, local or other governmental statute, regulation, law
or ordinance dealing with the protection of human health and the
environment.

    

    “Equipment” shall have
the meaning given it under the UCC.

    

    “ERISA” means the
Employee Retirement Income Security Act of 1974, as amended from time to
time.

    

    “ERISA Affiliate”
means any trade or business (whether or not incorporated) that is a member of a
group which includes the Borrower and which is treated as a single employer
under Section 414 of the Code.

    

    
      
        
           

        

        
          15

          
            

          

        

        
           

        

      

    

    

    “Event of Default”
means any event or condition identified as such in Section 8.1
hereof.

    

    “Excess Interest”
shall have the meaning assigned to such term in Section 1.6
hereof.

    

    “Excluded Property”
means, collectively, (i) any permit, lease or license or any contractual
obligation entered into by the Borrower (A) that prohibits or requires the
consent of any Person other than the Borrower, Holdings and its Subsidiaries
which has not been obtained as a condition to the creation by the Borrower of a
Lien on any right, title or interest in such permit, lease, license or
contractual obligation or any Capital Stock or equivalent thereof related
thereto or that contains terms stating that the granting of a lien therein would
otherwise result in a material loss by the Borrower of any material rights
therein, (B) to the extent that any law applicable thereto prohibits the
creation of a Lien thereon or (C) to the extent that a Lien thereon would give
any other party a legally enforceable right to terminate such permit, lease,
license or any contractual obligation, but only, with respect to the prohibition
in (A), (B) and (C) to the extent, and for as long as, such prohibition is not
terminated or rendered unenforceable or otherwise deemed ineffective by the UCC
or any other applicable law, (ii) property or assets owned by the Borrower that
is subject to a purchase money Lien or a Capital Lease Obligation permitted
hereunder if the contractual obligation pursuant to which such Lien is granted
(or in the document providing for such Capital Lease Obligation) prohibits or
requires the consent of any Person other than the Borrower, Holdings and its
Subsidiaries which has not been obtained as a condition to the creation of any
other Lien on such property or such assets, (iii) any “intent to use” trademark
applications for which a statement of use has not been filed (but only until
such statement is filed with, and accepted by, the United States Patent and
Trademark Office) (each such trademark, an “Intent To Use
Trademark”), (iv) any Intellectual Property Right owned by the Borrower
if the grant of a security interest in such Intellectual Property Right would
result in the cancellation or voiding of such Intellectual Property Right, and
(iv) shares of capital stock having voting power in excess of 65% of the voting
power of all classes of capital stock of a first tier controlled foreign
corporation (as that term is defined in the Code); provided, however, “Excluded Property”
shall not, except as explicitly stated herein, include any proceeds, products,
substitutions or replacements of Excluded Property (unless such proceeds,
products, substitutions or replacements would otherwise constitute Excluded
Property).

    

    “Foreign Subsidiary”
of any Person, shall mean any Subsidiary of such Person that is not organized or
incorporated in the United States or any State or territory
thereof.

    

    “Fund” means any
Person (other than a natural person) and any other special purpose investment
vehicle, securitization vehicle, money market account, investment account or
other account that is (or will be) engaged in making, purchasing, holding or
otherwise investing in commercial loans, subordinated loans, similar extensions
of credit or any of the foregoing, whether or not in combination with warrants
or other equity securities.

    

    “GAAP” means United
States generally accepted accounting principles, consistently
applied.

    

    “General Intangibles”
shall have the meaning given it under the UCC.

    

    
      
        
           

        

        
          16

          
            

          

        

        
           

        

      

    

    

    “Guarantor” and “Guarantors” means
Holdings and each direct or indirect Domestic Subsidiary of the Borrower or
Holdings (including any Domestic Subsidiary formed or acquired after the Closing
Date) other than the Borrower.

    

    “Guarantor Security
Agreement” means that certain Guarantor Security Agreement dated as of
November 6, 2009 among Holdings, the other Guarantors and the Purchaser in the
form attached hereto as Exhibit
B.

    

    “Guaranty” and “Guaranties” shall
have the meanings assigned to such term in Section 9.1
hereof.

    

    “Hazardous Substances”
means pollutants, contaminants, hazardous substances, hazardous wastes, or
petroleum, and all other chemicals, wastes, substances and materials listed in,
regulated by or identified in any Environmental Law.

    

    “Holder
Representative-Related Persons” means MRC and any successor Holder
Representative pursuant to Section 10.9,
together with their respective affiliates, and the officers, directors,
employees, agents and attorneys-in-fact of such Persons and
affiliates.

    

    “Holder” or “Holders” shall mean
the Purchaser (so long as it holds one or more Notes) and any other holder or
holders from time to time of one or more Notes.

    

    “Holdings” shall have
the meaning assigned to that term in the first paragraph of this
Agreement.

    

    “Indemnitee” shall
have the meaning assigned to such term in Section 11.8
hereof.

    

    “Indemnified
Liability” shall have the meaning assigned to such term in Section 11.8
hereof.

    

    “Information” shall
have the meaning assigned to such term in Section 11.22
hereof.

    

    “Infringement” or
“Infringing”
when used with respect to Intellectual Property Rights means any infringement or
other violation of Intellectual Property Rights.

    

    “Intellectual Property
Rights” means all actual or prospective rights arising in connection with
any intellectual property or other proprietary rights, including without
limitation all rights arising in connection with copyrights, patents, service
marks, trade dress, trade secrets, trademarks, trade names or mask
works.

    

    “Intent to Use
Trademark” is defined in the definition of Excluded
Property.

    

    “Intercreditor
Agreement” means that certain Intercreditor Agreement dated as of the
date hereof among the Senior Lender, the Borrower and the Purchaser, including
(subject to the terms of such agreement) any successor agreement pursuant to a
refinancing of the Senior Obligations.

    

    
      
        
           

        

        
          17

          
            

          

        

        
           

        

      

    

    

    “Interest Payment
Date” shall have the meaning assigned to such term in Section 1.1(b)
hereof.

    

    “Interest Rate” shall
have the meaning assigned to such term in Section 1.1(a)
hereof.

    

    “Inventory” shall have
the meaning given it under the UCC.

    

    “Investment Property”
shall have the meaning given it under the UCC.

    

    “Licensed Intellectual
Property” shall have the meaning assigned to such term in Section 5.8
hereof.

    

    “Lien” means any
security interest, mortgage, deed of trust, pledge, lien, charge, adverse claim,
trust claim, encumbrance, title retention agreement or analogous instrument or
device, including without limitation the interest of each lessor under any
capitalized lease and the interest of any bondsman under any payment or
performance bond, in, of or on any assets or properties of a Person, whether now
owned or subsequently acquired and whether arising by agreement or operation of
law.

    

    “Material Adverse
Effect” means any of the following:

    

    (a)      
     A material adverse effect on the business,
operations, results of operations, assets, liabilities or financial condition of
the Borrower;

    

    (b)     
      A material adverse effect on the ability of
the Borrower to perform its obligations under the Operative Documents, or any
other document or agreement related to this Agreement; or

    

    (c)     
      A material adverse effect on the ability of
the Holder Representative or the Holders to enforce the Obligations or to
realize the intended benefits of the Security Documents, including without
limitation a material adverse effect on the validity or enforceability of any
Operative Document or of any rights against any Guarantor, or on the status,
existence, perfection, priority (subject to Permitted Liens) or enforceability
of any Lien securing payment or performance of the Obligations.

    

    “Maturity Date” shall
be May 6, 2013.

    

    “Maximum Rate” shall
have the meaning assigned to such term in Section 1.6
hereof.

    

    “Mezzanine Financing”
shall have the meaning assigned to such term in Section 1.14
hereof.

    

    “MRC” means Mill Road
Capital, L.P.

    

    “MRC’s Designee” shall
have the meaning assigned to such term in Section 7.33
hereof.

    

    “Multiemployer Plan”
means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which
the Borrower or any ERISA Affiliate contributes or is obligated to
contribute.

    

    
      
        
           

        

        
          18

          
            

          

        

        
           

        

      

    

    

    “Net Cash Proceeds”
means the cash proceeds of any asset sale (including cash proceeds received as
deferred payments pursuant to a note, installment receivable or otherwise, but
only upon actual receipt) net of (a) attorney, accountant, and investment
banking fees, (b) brokerage commissions, (c) amounts required to be applied to
prior Liens or the repayment of debt secured by a Lien not prohibited by this
Agreement on the asset being sold, and (d) taxes paid or reasonably estimated to
be payable as a result of such asset sale.

    

    “Net Income” means
after-tax net income from continuing operations, including extraordinary losses
but excluding extraordinary gains, all as determined in accordance with
GAAP.

    

    “Note” and “Notes” shall have the
meaning assigned to that term in Section 1.1(a)
hereof.

    

    “Obligations” shall
mean all indebtedness, obligations and liabilities of the Borrower and/or the
Guarantors to any of the Holders, individually or collectively, whether existing
on the date of this Agreement or arising thereafter, direct or indirect, joint
or several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, arising or incurred or owing under this Agreement, the Notes or any
of the other Operative Documents or in respect of any of the Notes or other
instruments, agreements or documents at any time evidencing any of the
foregoing, in each case whether on account of principal, interest, premium,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including all interest, fees and other amounts that, but for the filing of a
petition in bankruptcy, would otherwise accrue (whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding), and
including all fees and disbursements of counsel that are required to be paid by
the Borrower or any Guarantor pursuant to any of the Operative Documents), and
including obligations to perform acts and refrain from taking actions as well as
obligations to pay money.

    

    “OFAC” shall have the
meaning assigned to such term in Section 5.12
hereof.

    

    “Officer” means with
respect to any Person, an officer if such Person is a corporation, an officer or
a manager if such Person is a limited liability company, or an officer or a
partner if such Person is a partnership.

    

    “Operative Documents”
means this Agreement, the Notes, the Guaranties, the Security Documents, the
Intercreditor Agreement and each other agreement, instrument or document now or
hereafter executed and pursuant to or in connection with any of the
foregoing.

    

    “Owned Intellectual
Property” shall have the meaning assigned to such term in Section 5.8
hereof.

    

    “Owner” means with
respect to the Borrower, each Person having legal or beneficial title to an
ownership interest in the Borrower or a right to acquire such an
interest.

    

    “Patent and Trademark
Security Agreement” means each Patent and Trademark Security Agreement
entered into between the Borrower or any of the Guarantors and the Holder
Representative in the forms attached hereto as Exhibit
C.

    

    
      
        
           

        

        
          19

          
            

          

        

        
           

        

      

    

    

    “Pension Plan” means a
pension plan (as defined in Section 3(2) of ERISA) maintained for employees of
the Borrower or any ERISA Affiliate and covered by Title IV of
ERISA.

    

    “Permitted Discretion”
means a determination made by the Holder Representative from the perspective of
a secured lender.

    

    “Permitted Lien” and
“Permitted
Liens” shall have the meaning assigned to such term in Section 7.3(a)
hereof.

    

    “Person” means any
individual, corporation, partnership, joint venture, limited liability company,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision of a governmental
entity.

    

    “PIK Interest” shall
have the meaning assigned to that term in Section 1.1(a)
hereof.

    

    “Plan” means an
employee benefit plan (as defined in Section 3(3) of ERISA) maintained for
employees of the Borrower or any ERISA Affiliate.

    

    “Premises” shall have
the meaning assigned to such term in Section 2.4(a)
hereof.

    

    “Proceeds” shall have
the meaning given it under the UCC.

    

    “Prepayment Premium”
shall have the meaning assigned to such term in Section 1.4(d)
hereof.

    

    “Property” means, as
to any Person, all types of real, personal, tangible, intangible or mixed
property owned by such Person, whether or not included in the most recent
balance sheet of such Person and its subsidiaries under GAAP.

    

    “Proxy Statement”
shall have the meaning assigned to such term in Section 1.14
hereof.

    

    “Purchaser” shall mean
MRC and its successors and assigns.

    

    “Record” means
information that is inscribed on a tangible medium or that is stored in an
electronic or other medium and is retrievable in perceivable form, and includes
all information that is required to be reported by the Borrower to Holder
Representative pursuant to Section
7.1.

    

    “Refinancing
Indebtedness” means refinancings, renewals, or extensions of indebtedness
so long as:

    

    (a)       
    the principal amount of such refinancings, renewals, or
extensions of indebtedness does not exceed the principal amount of indebtedness
refinanced, renewed, or extended (plus all accrued interest on the indebtedness
and the amount of all reasonable amounts of fees and expenses reasonably
incurred, including premiums, incurred in connection therewith),

    

    (b)    
       such refinancings, renewals, or
extensions do not result in a shortening of the average weighted maturity
(measured as of the refinancing, renewal, or extension) of the indebtedness so
refinanced, renewed, or extended (excluding the effects of prepayments of such
indebtedness in connection with such refinancing), nor are they on terms or
conditions that, after being compared to the terms or conditions of the existing
indebtedness and taken as a whole, are or could reasonably be expected to be
materially more burdensome or restrictive to the Borrower,

    

    
      
        
           

        

        
          20

          
            

          

        

        
           

        

      

    

    

    (c)   
        if the indebtedness that is
refinanced, renewed, or extended was subordinated in right of payment to the
Obligations, then the terms and conditions of the refinancing, renewal, or
extension must include subordination terms and conditions that are at least as
favorable to the Holders (as determined by Holder Representative in Holder
Representative’s sole discretion) as those that were applicable to the
refinanced, renewed, or extended indebtedness, and

    

    (d)      
     the indebtedness that is refinanced, renewed, or
extended is not recourse to any Person that is liable on account of the
indebtedness other than those Persons which were obligated with respect to the
indebtedness that was refinanced, renewed, or extended.

    

    “Reportable Event”
means a reportable event (as defined in Section 4043 of ERISA), other than an
event for which the 30-day notice requirement under ERISA has been waived in
regulations issued by the Pension Benefit Guaranty Corporation.

    

    “Required Holders”
means, as of the date of determination, for so long as any of the Notes remain
outstanding, Holders holding Notes representing at least a majority of the
aggregate outstanding principal amount of all Notes then outstanding, acting or
voting together as a single class.

    

    “Responsible Officer”
means the chief executive officer, the president, the chief financial officer,
or any vice president responsible for financial affairs of the Borrower,
Holdings or any other Guarantor, as applicable.

    

    “San Gabriel Valley Site
Liabilities” means any and all losses and obligations arising from or
related to any of the following:  (a) any hazardous substances or
other contamination present at, in, on or under, or that originated at or
migrated from, the Borrower’s or any Subsidiary’s leased real property in the
City of Industry, California on or prior to the date hereof, including any
obligations to or asserted by the California Regional Water Quality Control
Board, the United States Environmental Protection Agency or other government
agency; (b) any involvement in, with or at the San Gabriel Valley Superfund Site
and/or the Puente Valley Area or Operable Unit thereof in connection with the
Borrower’s or any Subsidiary’s leased real property in the City of Industry,
California (collectively, the “San Gabriel Valley Superfund Site”); and (c) all
pending and any future asserted personal injury, property or natural resource
damage, toxic tort or other lawsuits or claims related to hazardous substances
or other contaminants within the San Gabriel Valley Superfund Site and/or any
Hazardous Substances or other contamination present at, in, on or under, or that
originated at or migrated from, the Borrower’s or any Subsidiary’s leased real
property in the City of Industry, California on or prior to the date hereof,
including any contamination related claims or lawsuits filed or to be filed by
water suppliers located within the San Gabriel Valley Superfund Site thereof in
connection with the Borrower’s or any Subsidiary’s leased real property in the
City of Industry, California.

    

    
      
        
           

        

        
          21

          
            

          

        

        
           

        

      

    

    

    “San Gabriel Valley Superfund
Site” has the meaning set forth in the definition of “San Gabriel Valley
Site Liabilities.

    

    “Securities Act” shall
mean the Securities Act of 1933, as amended, or any similar successor federal
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time.

    

    “Security Documents”
means this Agreement, the Guarantor Security Agreement, each Collateral Pledge
Agreement, each Patent and Trademark Security Agreement, and any other document
delivered to the Holder Representative from time to time to create and/or
perfect a security interest in Collateral or other assets that are collateral,
directly or indirectly, for the Obligations.

    

    “Security Interest”
shall have the meaning assigned to such term in Section 2.1
hereof.

    

    “Senior Collateral”
means all of the property, rights and interests of Holdings, the Borrower and
any other Subsidiaries that are or are intended to be subject to the security
interests and Liens created by the Senior Credit Agreement and the other Senior
Loan Documents.

    

    “Senior Credit
Agreement” means that certain Wells Fargo Business Credit and Security
Agreement dated as of the date hereof between the Borrower, as borrower and
Senior Lender, as lender, including any successor agreement pursuant to a
refinancing of the Senior Obligations.

    

    “Senior Lender” shall
mean Wells Fargo Bank, National Association acting through its Wells Fargo
Business Credit operating division, as the lender under the Senior Credit
Agreement, and its successors or assigns thereunder.

    

    “Senior Loan
Documents” shall mean the Senior Credit Agreement plus the “Loan
Documents” as such term is defined in the Senior Credit Agreement (or to any
substantially equivalent term or concept in any amended or successor Senior
Credit Agreement).

    

    “Senior Obligations”
shall have the meaning assigned to such term in the Intercreditor Agreement
(with respect to Senior Lender only) and the
term “Indebtedness” in the Senior Credit Agreement (or to any substantially
equivalent term or concept in any amended or successor Senior Credit
Agreement).

    

    “Stockholders Meeting”
shall have the meaning assigned to such term in Section 1.14
hereof.

    

    “Subordinated Debt”
means indebtedness of Holdings, the Borrower or any other Subsidiaries other
than the Senior Obligations, including without limitation all interest on
Subordinated Debt, whether payable in cash or in kind, all on terms and
conditions, and in amounts, satisfactory to the Required Holders in their sole
discretion (as evidenced by their written approval).

    

    “Subordination Agreement” means any
agreement providing for the subordination of any Subordinated Debt on terms and
conditions satisfactory to the Required Holders in their sole discretion (as
evidenced by their written approval).

    

    
      
        
           

        

        
          22

          
            

          

        

        
           

        

      

    

    

    “Subsidiary” means any
Person of which more than 50% of the outstanding ownership interests having
general voting power under ordinary circumstances to elect a majority of the
board of directors or the equivalent of such Person, irrespective of whether or
not at the time ownership interests of any other class or classes shall have or
might have voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Borrower, by the Borrower and one or
more other Subsidiaries, or by one or more other Subsidiaries.

    

    “Uniform Commercial
Code” or “UCC” means the
Uniform Commercial Code as adopted in the State of New York from time to
time.

    

    “U.S. Dollars” and
“$” each means
the lawful currency of the United States of America.

    

    3.2      
     Interpretation.  The
foregoing definitions are equally applicable to both the singular and plural
forms of the terms defined.  The words “hereof”, “herein”, and
“hereunder” and
words of like import when used in this Agreement shall refer to this Agreement
as a whole and not to any particular provision of this Agreement.  The
words “party” or “parties” when used with reference to this Agreement shall
include each party to this Agreement and, by their acceptance of a Note, each
Holder.  The words “include”, “includes” and “including” when used in
this Agreement are not limiting.  All references to time of day herein
are references to Greenwich, Connecticut time unless otherwise specifically
provided.  Except as otherwise specifically provided herein, reference
to any document or agreement shall include such document or agreement as
amended, waived, supplemented or otherwise modified and in effect from time to
time in accordance with its terms and the terms of this
Agreement.  Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any consolidation or
other accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with GAAP except where such principles
are inconsistent with the specific provisions of this Agreement.

    

    3.3       
    Change in Accounting
Principles.  If,
after the date of this Agreement, there shall occur any change in GAAP from
those used in the preparation of the financial statements referred to in Section 7.1 hereof
and such change shall result in a change in the method of calculation of any
financial covenant, standard or term found in this Agreement, either the
Borrower, Holdings or the Required Holders may by notice to the Holder
Representative, the Borrower and Holdings, respectively, require that the Holder
Representative, the Borrower and Holdings negotiate in good faith to amend such
covenants, standards, and terms so as equitably to reflect such change in
accounting principles, with the desired result being that the criteria for
evaluating the financial condition of the Holdings and its Subsidiaries shall be
the same as if such change had not been made.  No delay by the
Borrower, Holdings or the Holder Representative in requiring such negotiation
shall limit their right to so require such a negotiation at any time after such
a change in accounting principles.  Until any such covenant, standard,
or term is amended in accordance with this Section 3.3,
financial covenants shall be computed and determined in accordance with GAAP in
effect prior to such change in accounting principles.  Without
limiting the generality of the foregoing, the Borrower and Holdings shall
neither be deemed to be in compliance with any financial covenant hereunder nor
out of compliance with any financial covenant hereunder if such state of
compliance or noncompliance, as the case may be, would not exist but for the
occurrence of a change in accounting principles after the date
hereof.

    

    
      
        
           

        

        
          23

          
            

          

        

        
           

        

      

    

    

    ARTICLE
IV. 

    REPRESENTATIONS
AND WARRANTIES OF THE PURCHASER

    

    4.1        
   Representations and
Warranties of the Purchaser.  The
Purchaser hereby represents and warrants, which representations and warranties
shall survive the closing, that:

    

    (a)       
    The Purchaser is a limited partnership, duly formed and
validly existing under the laws of the State of Delaware, and has duly
authorized, executed and delivered this Agreement and such of the other
Operative Documents as require execution by it.

    

    (b)     
      It is the present intention of the Purchaser
to acquire its Note for its own account, and not as nominee or
agent.

    

    (c)      
     The Note is being and will be acquired for the
purpose of investment and not with a view to distribution or resale thereof in
violation of the securities laws; subject, nevertheless, to the condition that,
except as otherwise provided herein and subject to compliance with applicable
securities laws, the disposition of the property of the Purchaser shall at all
times be within its control.  The Purchaser was not formed solely for
the purpose of making an investment in the Borrower.  The Purchaser is
an “accredited investor” as that term is defined in Regulation D promulgated
under the Securities Act with such knowledge and experience in financial and
business matters as are necessary in order to evaluate the merits and risks of
an investment in the Notes.  In making its decision to invest in the
Note, the Purchaser has relied upon independent investigations made by the
Purchaser and the Purchaser's representatives, including the Purchaser's own
professional, tax and other advisors.  The Purchaser and its
representatives have been given the opportunity to ask questions of, and to
receive answers from, the Borrower concerning the terms and conditions of the
investment in the Note.  The Purchaser has reviewed, or has had the
opportunity to review, all information it deems necessary and appropriate for
the Purchaser to evaluate the financial risks inherent in an investment in the
Note.  The Purchaser understands that its investment in the Note
involves a high degree of risk and that no governmental authority has passed on
or made any recommendation or endorsement of the Note.

    

    (d)      
     The Purchaser understands that it must bear the
economic risk of its investment for an indefinite period of time because the
Note is not, and will not be, registered under the Securities Act or any
applicable state securities laws and may not be resold unless subsequently
registered under the Securities Act and such other laws or unless an exemption
from such registration is available.  The Purchaser acknowledges that,
in issuing the Note, the Borrower is relying on the representations and
warranties of the Purchaser in this Section
4.1.

    

    (e)     
      No Person has or will have, as a result of
the transactions contemplated by this Agreement, any rights, interest or valid
claim against or upon the Borrower for any commission, fee or other compensation
as a finder or broker because of any act or omission by the Purchaser or any
agent of the Purchaser.

    

    
      
        
           

        

        
          24

          
            

          

        

        
           

        

      

    

    

    ARTICLE
V. 

    REPRESENTATIONS
AND WARRANTIES OF THE BORROWER

    

    Holdings
and the Borrower represent and warrant to the Purchaser as follows:

    

    5.1      
     Existence and Power; Name;
Chief Executive Office; Inventory and Equipment Locations; Federal Employer
Identification Number and Organizational Identification
Number.  The Borrower is a corporation, organized, validly
existing and in good standing under the laws of the State of New York and is
licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary, except to the
extent that the failure to be so licensed or qualified could reasonably be
expected to result in a Material Adverse Effect.  The Borrower has all
requisite power and authority to conduct its business, to own its properties and
to execute and deliver, and to perform all of its obligations under, those
Operative Documents and any other documents or agreements that it has entered
into with the Holder Representative related to this Agreement.  During
the past five (5) years, the Borrower has done business solely under the names
set forth on Schedule
5.1 in addition to its correct legal name.  The Borrower’s
chief executive office and principal place of business is located at the address
set forth on Schedule
5.1, and all of the Borrower’s records relating to its business or the
Collateral are kept at that location.  All Inventory and Equipment is
located at that location or at one of the other locations set forth on Schedule 5.1, other
than Inventory in-transit between such locations in the ordinary course of
business.  The Borrower’s name, Federal Employer Identification Number
and Organization Identification Number are correctly set forth at the end of the
Agreement next to the Borrower’s signature.

    

    5.2        
   Capitalization.  The
Capitalization Chart set forth on Schedule 5.2
constitutes a correct and complete list of all ownership interests of the
Borrower and all rights to acquire ownership interests, including the record
holder, number of interests and percentage interests on a fully diluted basis as
of the date hereof, and the Organizational Chart set forth on Schedule 5.2 shows
the ownership structure of all Subsidiaries of the Borrower.

    

    5.3      
     Authorization of Borrowing;
No Conflict as to Law or Agreements.  The execution, delivery
and performance by the Borrower of the Operative Documents and any other
documents or agreements described in or related to this Agreement, and the
issuance and sale of the Notes have been authorized and do not (i) require the
consent or approval of the Borrower’s Owners; (ii) require the authorization,
consent or approval by, or registration, declaration or filing with, or notice
to, any governmental agency or instrumentality, whether domestic or foreign, or
any other Person, except to the extent obtained, accomplished or given prior to
the date of this Agreement; (iii) violate any provision of any law, rule or
regulation (including Regulation X of the Board of Governors of the Federal
Reserve System) or of any order, writ, injunction or decree presently in effect
having applicability to the Borrower or of the Borrower’s Constituent Documents;
(iv) result in a breach of or constitute a default or event of default under any
indenture or loan or credit agreement or any other material agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; or (v) result in, or require, the creation or imposition
of any Lien (other than the Security Interest and Liens in favor of the Senior
Lender) upon or with respect to any of the properties now owned or subsequently
acquired by the Borrower.

    

    
      
        
           

        

        
          25

          
            

          

        

        
           

        

      

    

    

    5.4     
      Legal
Agreements.  This Agreement, the other Operative Documents, and
any other document or agreement described in or related to this Agreement, will
constitute the legal, valid and binding obligations of the Borrower, enforceable
against the Borrower in accordance with their respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).

    

    5.5      
     Subsidiaries.  Except
as set forth on Schedule 5.5, the
Borrower has no Subsidiaries.

    

    5.6      
     Financial Condition; No
Adverse Change.  The Borrower has furnished to the Holder
Representative its audited financial statements for its fiscal year ended
December 31, 2008 and unaudited financial statements for the fiscal-year-to-date
period ended August 31, 2009 and those statements fairly present in all material
respects the Borrower’s financial condition as of those dates and the results of
the Borrower’s operations and cash flows for the periods then ended and were
prepared in accordance with GAAP.  Since the date of the most recent
financial statements, there has been no Material Adverse Effect.

    

    5.7     
      Litigation.  There
are no actions, suits or proceedings pending or, to the Borrower’s knowledge,
threatened against or affecting the Borrower, Holdings or Subsidiaries or the
properties of the Borrower, Holdings or Subsidiaries before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower, Holdings or
Subsidiaries, would reasonably be expected to have a Material Adverse
Effect.

    

    5.8        
   Intellectual Property
Rights.

    

    (i)        
    Owned Intellectual
Property.  Set forth on Schedule 5.8 is a
complete list of all registered patents, applications for patents, trademarks,
applications to register trademarks, service marks, applications to register
service marks, and registered copyrights and applications to register copyrights
for which the Borrower is the owner of record (the “Owned Intellectual
Property”).  Except as set forth on Schedule 5.8 and
except for such Owned Intellectual Property that is not material to the
Borrower’s business, (A) the Borrower owns the Owned Intellectual Property free
and clear of all restrictions (including without limitation covenants not to sue
any Person), court orders, injunctions, decrees, writs or Liens, whether by
agreement memorialized in a Record Authenticated by the Borrower or otherwise,
(B) no Person other than the Borrower owns or has been granted any right in the
Owned Intellectual Property, (C) all Owned Intellectual Property is valid,
subsisting and enforceable, and (D) the Borrower has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.

    

    (ii)        
   Agreements with Employees
and Contractors.  The Borrower has entered into an agreement
with each Person that is an employee obligating such Person to assign to the
Borrower, without additional compensation, any Intellectual Property Rights
developed by such Person in the course of such Person’s employment with the
Borrower (except to the extent permitted by such agreement or prohibited by
law).

    

    
      
        
           

        

        
          26

          
            

          

        

        
           

        

      

    

    

    (iii)           Intellectual Property Rights
Licensed from Others.  Set forth on Schedule 5.8 is a
complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person (“Licensed Intellectual
Property”) other than readily available, non-negotiated licenses of
computer software and other intellectual property used solely for performing
accounting, word processing and similar administrative tasks (“Off-the-shelf
Software”) and a summary of any ongoing payments the Borrower is
obligated to make with respect to Licensed Intellectual
Property.  Except as set forth on Schedule 5.8, in any
other schedule or exhibit to this Agreement, or in any other Record, copies of
which have been given to the Holder Representative, the Borrower’s licenses to
use the Licensed Intellectual Property are in full force and effect and are free
and clear of all restrictions, Liens, court orders, injunctions, decrees, or
writs, whether agreed to in a Record Authenticated by the Borrower or
otherwise.  Except as disclosed on Schedule 5.8, the
Borrower is not contractually obligated to make royalty payments of a material
nature, or pay fees to any owner of, licensor of, or other claimant to, any
Intellectual Property Rights.

    

    (iv)           Other Intellectual Property
Needed for Business.  Except for Off-the-shelf Software and as
disclosed on Schedule
5.8, the Owned Intellectual Property and the Licensed Intellectual
Property constitute all Intellectual Property Rights used or necessary to
conduct the Borrower’s business as it is presently conducted or as the Borrower
reasonably foresees conducting it and the Borrower owns, possesses or has the
right to use all such Intellectual Property Rights.

    

    (v)     
      Infringement.  Except
as set forth on Schedule 5.8, the
Borrower has no knowledge of, and has not received notice either orally or in a
Record alleging, any Infringement of another Person’s Intellectual Property
Rights (including any claim set forth in a Record that the Borrower must license
or refrain from using the Intellectual Property Rights of any Person) nor, to
the Borrower’s knowledge, is there any threatened claim in writing or any
reasonable basis for any such claim.

    

    5.9      
     Taxes.  The
Borrower, Holdings and Subsidiaries have paid or caused to be paid to the proper
authorities when due all federal, state and local taxes required to be withheld
by each of them.  The Borrower, Holdings and Subsidiaries have filed
all federal, state and local tax returns which to the knowledge of the Officers
of the Borrower, Holdings and Subsidiaries, as the case may be, are required to
be filed, and the Borrower, Holdings and Subsidiaries have paid or caused to be
paid to the respective taxing authorities all taxes as shown on these returns or
on any assessment received by any of them to the extent such taxes have become
due.

    

    5.10          Titles and
Liens.  The Borrower has good and marketable title to all
Collateral free and clear of all Liens other than Permitted Liens.  No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.

    

    5.11          No
Defaults.  The Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could reasonably be expected to have a Material Adverse Effect.

    

    
      
        
           

        

        
          27

          
            

          

        

        
           

        

      

    

    

    5.12          Submissions to the Holder
Representative.  All financial and other information provided
to the Holder Representative by or on behalf of the Borrower in connection with
this Agreement (i) is true, correct and complete in all material respects, (ii)
does not omit any material fact that would cause such information to be
misleading, and (iii) as to projections, budgets, valuations or proforma
financial statements, presents a good faith opinion as to such projections,
budgets, valuations and proforma condition and results as of the date such
projections, budgets, valuations and proforma financial statements were provided
to the Holder Representative.

    

    5.13          Financing
Statements.  The Borrower has previously authorized the filing
of financing statements sufficient when filed to perfect the Security Interest
and other Liens created by the Security Documents.  When the financing
statements are filed, the Holder Representative will have a valid and perfected
security interest in all Collateral capable of being perfected by the filing of
financing statements.  None of the Collateral is or will become a
fixture on real estate, unless a sufficient fixture filing has been filed with
respect to such Collateral.

    

    5.14          Rights to
Payment.  Except to the extent that the Holder Representative
has been notified in an Authenticate Record, each right to payment and each
instrument, document, chattel paper and other agreement constituting or
evidencing Collateral is (or, in the case of all future Collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim of the account debtor or other
obligor named in that instrument.

    

    5.15          Employee Benefit
Plans.

    

    (i)       
     Maintenance and
Contributions to Plans.  Except as set forth on Schedule 5.15,
neither the Borrower nor any ERISA Affiliate (A) maintains or has maintained any
Pension Plan, (B) contributes or has contributed to any Multiemployer Plan, or
(C) provides or has provided post-retirement medical or insurance benefits to
employees or former employees (other than benefits required under Section 601 of
ERISA, Section 4980B of the Code, or applicable state law).

    

    (ii)       
    Knowledge of Plan
Noncompliance with Applicable Law.  Except as set forth on
Schedule 5.15,
neither the Borrower nor any ERISA Affiliate has (A) knowledge that the Borrower
or the ERISA Affiliate is not in full compliance with the requirements of ERISA,
the Code, or applicable state law with respect to any Plan, (B) knowledge that a
Reportable Event occurred or continues to exist in connection with any Pension
Plan, or (C) sponsored a Plan that it intends to maintain as qualified under the
Code that is not so qualified, and no fact or circumstance exists which may have
an adverse effect on such Plan’s tax qualified status.

    

    (iii)           Funding Deficiencies and
Other Liabilities.  Neither the Borrower nor any ERISA
Affiliate has liability for any (A) accumulated funding deficiency (as defined
in Section 302 of ERISA and Section 412 of the Code) under any Plan, whether or
not waived, (B) withdrawal, partial withdrawal, reorganization or other event
under any Multiemployer Plan under Section 4201 or 4243 of ERISA or (C) event or
circumstance which could result in financial obligation to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than routine claims for
benefits under the Plan).

    

    
      
        
           

        

        
          28

          
            

          

        

        
           

        

      

    

    

    (iv)           No Controlled Group
Liabilities.  The Borrower has not incurred nor reasonably
expects to incur any liability under Title IV of ERISA from any ERISA
Affiliate.

    

    5.16          Environmental
Matters.

    

    (i)    
        Hazardous Substances on
Premises.  Except as set forth on Schedule 5.16 and
except for the existence of the San Gabriel Valley Site Liabilities, there are
not present in, on or under the Premises any Hazardous Substances in such form
or quantity as to create any material liability or obligation for either the
Borrower or the Holder Representative or the Holders under the common law of any
jurisdiction or under any Environmental Law, and no Hazardous Substances have
ever been stored, buried, spilled, leaked, discharged, emitted or released in,
on or under the Premises in such a way as to create a material
liability.

    

    (ii)    
       Disposal of Hazardous
Substances.  Except as set forth on Schedule 5.16, the
Borrower has not disposed of Hazardous Substances, in such a manner as to create
any material liability under any Environmental Law.

    

    (iii)           Claims and Proceedings with
Respect to Environmental Law Compliance.  Except as set forth
on Schedule
5.16 and except for the existence of the San Gabriel Valley Site
Liabilities, there have not existed in the past, nor are there any threatened or
impending requests, claims, notices, investigations, demands, administrative
proceedings, hearings or litigation relating in any way to the Premises or the
Borrower, alleging material liability under, violation of, or noncompliance with
any Environmental Law or any license, permit or other authorization issued
pursuant to such an Environmental Law.

    

    (iv)           Compliance with
Environmental Law; Permits and Authorizations.  Except as set
forth on Schedule
5.16, the Borrower (A) conducts its business at all times in compliance
with applicable Environmental Law, (B) possesses valid licenses, permits and
other authorizations required under applicable Environmental Law for the lawful
and efficient operation of its business, none of which are scheduled to expire,
or are subject to withdrawal, or material limitation within the next 12
months and
(C) has not been denied insurance on grounds related to potential environmental
liability.

    

    (v)     
      Status of
Premises.  Except as set forth on Schedule 5.16 and
except for the existence of the San Gabriel Valley Site Liabilities, the
Premises are not and never have been listed on the National Priorities List, the
Comprehensive Environmental Response, Compensation and Liability Information
System or any similar federal, state or local list, schedule, log, inventory or
database.

    

    (vi)           Environmental Audits,
Reports, Permits and Licenses.  The Borrower has delivered to
the Holder Representative all environmental assessments, audits, reports,
permits, licenses and other documents describing or relating in any way to the
Premises or the Borrower’s businesses.

    

    
      
        
           

        

        
          29

          
            

          

        

        
           

        

      

    

    

    5.17          Commercial Tort
Claims.  Neither
Holdings, the Borrower, nor any Subsidiaries has any known commercial tort
claims as of the Closing Date.

    

    5.18          Margin
Rules.  Neither
Holdings, nor the Borrower nor any other Subsidiary owns or has any present
intention of purchasing or carrying, and no portion of the proceeds of the loans
evidenced by the Note shall be used for purchasing or carrying, any “margin
security” or “margin stock” as such terms are used in Regulations T, U or X of
the Board of Governors of the Federal Reserve System.

    

    5.19          Representation by
Counsel.  The
Borrower and Holdings each acknowledge that it has been advised by counsel in
connection with the negotiation, execution and delivery of each Operative
Document.

    

    5.20          Relationship of Parties,
etc.  The
Borrower and Holdings acknowledge and agree that neither the Purchaser nor any
other Holder has any fiduciary relationship with or duty to Holdings, the
Borrower or any of their Subsidiaries or Affiliates arising out of or in
connection with this Agreement or any of the other Operative
Documents.  Borrower and Holdings further acknowledge and agree that
no joint venture exists between the Borrower, Holdings and/or any of their
Subsidiaries or Affiliates, on the one hand, and the Purchaser or any other
Holder, on the other hand.

    

    5.21          Brokers.  Except as
otherwise disclosed in writing to the Purchaser prior to the date hereof, no
broker, finder or other intermediary has brought about the obtaining, making or
closing of the transactions contemplated by the Operative Documents, and neither
Holdings, nor the Borrower nor any other Subsidiary has or will have any
obligation to any person in respect of any finder’s or brokerage fees in
connection herewith or therewith.

    

    5.22          Foreign Assets Control
Regulations and Anti-Money Laundering.

    

    (a)        Neither
Holdings, nor the Borrower nor any other Subsidiary (i) is a Person whose
property or interest in property is blocked or subject to blocking pursuant to
Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and
Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support
Terrorism (66 Fed. Reg. 49079 (2001)), (ii) engages in any dealings or
transactions prohibited by Section 2 of such executive order or (iii) is a
person on the list of Specially Designated Nationals and Blocked Persons or
subject to the limitations or prohibitions under any other U.S. Department of
Treasury’s Office of Foreign Assets Control regulation or executive
order.

    

    (b)           
Holdings, the Borrower and each other Subsidiary are, to the extent required by
law, in compliance, in all material respects, with the Patriot
Act.  No part of the proceeds of the loans evidenced by the Notes will
be used, directly or indirectly, for any payments to any governmental official
or employee, political party, official of a political party, candidate for
political office, or anyone else acting in an official capacity, in order to
obtain, retain or direct business or obtain any improper advantage, in violation
of the United States Foreign Corrupt Practices Act of 1977, as
amended.

    

    5.23          Securities
Act.  Neither
Holdings, nor the Borrower, nor any other Subsidiary, nor anyone acting on the
behalf of any such Person has offered or will offer to sell Notes or other
securities to, or has solicited or will solicit offers with respect thereto
from, or has entered into or will enter into any preliminary conversations or
negotiations relating thereto with, any Person, so as to bring the issuance and
sale of the Notes under the registration provisions of the Securities Act or the
registration provisions of any securities or Blue Sky laws of any applicable
jurisdiction.  Assuming the accuracy of the representations and
warranties of the Purchaser set forth herein, the issuance of the Notes is not
required to be registered under the Securities Act or any applicable state
securities laws, and such issuances shall be in compliance with all applicable
federal and state securities laws.

    

    
      
        
           

        

        
          30

          
            

          

        

        
           

        

      

    

    

    5.24         
Delivery of and Senior
Loan Documents.  Holder
Representative has received complete copies of the Senior Loan Documents
(including all exhibits, schedules and disclosure letters referred to therein or
delivered pursuant thereto, if any) and all amendments thereto, waivers relating
thereto and other side letters or agreements affecting the terms
thereof.  None of such documents and agreements has been amended or
supplemented, nor have any of the provisions thereof been waived, except
pursuant to a written agreement or instrument which has heretofore been
delivered to Holder Representative.

    

    

    ARTICLE
VI. 

    CONDITIONS
PRECEDENT

    

    The
obligation of the Purchaser to purchase its Note at the Closing is subject to
the satisfaction (or waiver by the Purchaser, in its sole discretion) of the
following conditions precedent:

    

    6.1          
 Representations
and Warranties.  Each of
the representations and warranties of the Borrower and Holdings set forth herein
and in the other Operative Documents shall be true and correct in all respects
as of the Closing Date, except to the extent any of the same expressly relates
to an earlier date.

    

    6.2       
    No
Default.  No
Default or Event of Default shall have occurred and be continuing or would occur
as a result of the purchase and sale of the Purchaser’s Note and the use of the
proceeds thereof by the Borrower and its Subsidiaries.

    

    6.3        
   No
Violation of Order or Judgment.  The
purchase and sale of the Purchaser’s Note shall not violate any order, judgment
or decree of any court or other authority or any provision of law or regulation
applicable to the Purchaser as then in effect.

    

    6.4        
   Documentation at
Closing.  The
Purchaser shall have received each of the following agreements, instruments,
documents, certificates and opinions in form and substance reasonably
satisfactory to the Purchaser and its counsel and duly executed and delivered by
the parties thereto:

    

    (a)     
      this Agreement;

    

    (b)     
      the Purchaser’s Note;

    

    
      
        
           

        

        
          31

          
            

          

        

        
           

        

      

    

    

    (c)     
      the Guarantor Security
Agreement;

    

    (d)      
     each Patent and Trademark Security
Agreement;

    

    (e)        
   each Collateral Pledge Agreement;

    

    (f)           
 the Intercreditor Agreement;

    

    (g)           
certificates of insurance or insurance binders evidencing compliance with Section 7.15
hereof;

    

    (h)          
 Reserved;

    

    (i)            
copies of Holdings’, the Borrower’s and each other Subsidiary’s charter and
bylaws (or other comparable organizational documents), and all amendments
thereto, certified in each instance by an Officer of such Person to be true,
correct and complete on the Closing Date and, in the case of charter or other
comparable organizational documents, by the Secretary of State of its
jurisdiction of formation, incorporation or other organization, as the case may
be;

    

    (j)            
copies of resolutions of Holdings, the Borrower’s and each other Subsidiary’s
Board of Directors (or comparable governing body) and shareholders or members
(if required) authorizing the execution, delivery and performance of this
Agreement and the other Operative Documents to which it is a party and the
consummation of the transactions contemplated hereby and thereby, together with
specimen signatures of the persons authorized to execute the Operative Documents
on Holdings, the Borrower’s and each other Subsidiary’s behalf, all certified in
each instance by an Officer of such Person;

    

    (k)           
certificates of good standing for Holdings, the Borrower and each other
Subsidiary from the office of the Secretary of State of the jurisdiction of its
formation, incorporation or other organization and, in the case of the Borrower,
in all jurisdictions where the character of the property owned or leased or the
nature of the business transacted by the Borrower makes such licensing or
qualification necessary;

    

    (l)            
the Holder Representative shall have received for the Purchaser the favorable
written opinion of Kirkland & Ellis LLP, counsel to the Borrower and the
Guarantors, in form and substance reasonably satisfactory to the
Purchaser;

    

    (m)           a
certificate of a Responsible Officer of each of the Borrower and Holdings as to
the accuracy of the Borrower’s and Holdings’ representations and warranties and
as to such other matters as the Purchaser may request;

    

    (n)           
the results of UCC searches of each of the Borrower, Holder and its Subsidiaries
in form and substance reasonably satisfactory to the Purchaser and evidence in
form and substance reasonably satisfactory to the Purchaser that all Liens
encumbering the assets of Holdings and its Subsidiaries (other than Liens in
favor of the Senior Lender or MRC or Permitted Liens or Liens to be released on
the Closing Date) have been released;

    

    
      
        
           

        

        
          32

          
            

          

        

        
           

        

      

    

    

    (o)    
       each document (including any Uniform
Commercial Code financing statement) required by this Agreement or the other
Operative Documents, any related agreement or under law or reasonably requested
by Purchaser to be filed, registered or recorded in order to create, in favor of
Purchaser, a perfected security interest in or lien upon the Collateral and any
other assets that are collateral under any of the Security Documents shall have
been properly filed, registered or recorded in each jurisdiction in which the
filing, registration or recordation thereof is so required or requested, and
Purchaser shall have received an acknowledgment copy, or other evidence
satisfactory to it, of each such filing, registration or recordation and
satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;

    

    (p)     
      copies of the Senior Credit Agreement and
the other principal Senior Loan Documents with terms, conditions and amounts
reasonably satisfactory to the Purchaser, each certified by a Responsible
Officer of the Borrower as true, correct and complete, and evidence reasonably
satisfactory to the Purchaser that all conditions precedent to the loans to be
made thereunder to Borrower at the closing thereunder have been made or will be
made simultaneously with the Closing; and

    

    (q)        
   such other documents, instruments and certificates, and
completion of such other matters, as the Purchaser may reasonably deem
reasonably necessary or appropriate.

    

    6.5       
    Financial
Information.  The
Purchaser shall have received such financial statements, evaluations,
certifications and other financial information as it may require (including, but
not limited to, the latest month and year-to-date internally prepared financings
statements of the Borrower, Holdings and its Subsidiaries) in order to satisfy
itself as to the financial condition of Holdings, the Borrower and the other
Subsidiaries, and the lack of material contingent liabilities of Holdings, the
Borrower and the other Subsidiaries.

    

    6.6       
    Litigation.  No
litigation, arbitration, proceeding or investigation shall be pending or
threatened that questions the validity or legality of the transactions
contemplated by any Operative Document or seeks a restraining order, injunction
or damages in connection therewith or that, in the judgment of the Purchaser,
might adversely affect the transactions contemplated hereby or might have a
Material Adverse Effect.

    

    6.7         
  Material
Adverse Effect.  No
Material Adverse Effect shall have occurred with respect to the Borrower or
Holdings since the date of the Purchaser’s latest examination of the Borrower
and Holdings.

    

    6.8     
      Necessary
Consents.  Purchaser
shall have received, in form and substance reasonably satisfactory to the
Purchaser, all consents, waivers, acknowledgments and other agreements from
third persons that Purchaser may deem reasonably necessary or desirable in order
to effectuate the provisions or purposes of this Agreement and the other
Operative Documents (other than those contemplated by Section 1.14
hereof).

    

    6.9       
    Material
Agreements.  There
shall not have occurred any default of any material contract or agreement of
Borrower or Holdings which would reasonably be expected to have a Material
Adverse Effect.

    

    
      
        
           

        

        
          33

          
            

          

        

        
           

        

      

    

    

    6.10          Due
Diligence.  The
Purchaser shall be satisfied with the results of its due diligence investigation
of Holdings, the Borrower and the other Subsidiaries, including, but not limited
to, with respect to business, accounting, legal, customer, supplier and
environmental matters, and the Purchaser shall have received such information as
it may require (including in order to satisfy itself as to the financial
condition of Holdings, the Borrower and the other Subsidiaries.

    

    6.11          Fees.  The
Purchaser shall have received the Closing Fee as provided for in Section 1.11 hereof
and payment of all costs, expenses and other amounts described in Section 11.4(a)(i) as
to which the Purchaser gives the Borrower notice prior to or at the Closing,
including attorneys’ fees payable by Borrower in accordance
herewith.

    

    ARTICLE
VII. 

    COVENANTS

    

    So long
as any Note or any other Obligation remains unpaid, the Borrower, Holdings, and
to the extent set forth herein, each other Subsidiary of Holdings shall comply
with each of the following covenants, unless the Holder Representative shall
consent otherwise in an Authenticated Record delivered to the
Borrower.

    

    7.1           
Reporting
Requirements.  The
Borrower shall deliver to the Holder Representative the following information,
compiled where applicable using GAAP consistently applied, in form and content
acceptable to the Holder Representative:

    

    (a)
           Annual Financial
Statements.  As soon as available and in any event within 90
days after the Borrower’s fiscal year end, the Borrower’s audited financial
statements prepared by an independent certified public accountant acceptable to
the Holder Representative (it being understood that Deloitte & Touche is
acceptable), which shall include the Borrower’s balance sheet, income statement,
and statement of retained earnings and cash flows prepared, if requested by the
Holder Representative, on a consolidated and consolidating basis to include
Holdings and Subsidiaries.  The annual financial statements shall be
accompanied by the unqualified opinion of such accountant (provided, that a
qualification or exception may be included in any such audit report or opinion
for any period ending within the 12-month period preceding the Maturity Date to
the extent such qualification is a result of the line of credit under the Senior
Credit Agreement or the Obligations being reported as short term indebtedness)
and a certificate (the “Compliance
Certificate”) in the form of Exhibit E that is
signed by a Responsible Officer of the Borrower.  Each Compliance
Certificate that accompanies an annual financial statement shall also be
accompanied by (i) copies of all management letters prepared by the Borrower’s
accountants; and (ii) a detailed statement, including computations, signed by
the accountant demonstrating whether or not the Borrower is in compliance with
the financial covenants of this Agreement.  In addition, the Borrower
shall use commercially reasonable efforts to obtain and deliver to the Holder
Representative with the Compliance Certificate a report signed by the accountant
stating that in making the investigations necessary to render the accountant’s
opinion, the accountant obtained no knowledge, except as specifically stated, of
any other Event of Default under the Agreement.

    

    
      
        
           

        

        
          34

          
            

          

        

        
           

        

      

    

    

    (b)        
   Monthly Financial
Statements.  As soon as available and in any event within 30
days after the end of each month, the Borrower prepared balance sheet, income
statement, and statement of cash flows prepared for that month and for the
year–to-date period then ended, prepared, if requested by the Holder
Representative, on a consolidated and consolidating basis to include Holdings
and Subsidiaries, and stating in comparative form the figures for the
corresponding date and periods in the prior fiscal year and the final budget
delivered to and accepted by the Holder Representative, subject to quarter-end
and year-end adjustments and the absence of footnotes.  The financial
statements shall be accompanied by a Compliance Certificate in the form of Exhibit E that is
signed by a Responsible Officer of the Borrower.

    

    (c)       
    10-Q Financial
Reports.  As soon as available and in any event within
forty-five (45) days after the end of each fiscal quarter of the Borrower, the
Borrower’s 10-Q financial reports filed with the Commission.  This
requirement may be satisfied by the Borrower by posting a link to the filing on
the Borrower’s publicly-accessible website.

    

    (d)      
     Collateral
Reports.  Simultaneously with delivery to the Senior Lender, a
calculation of the Borrower’s Eligible Accounts and Eligible Inventory (each as
defined in the Senior Credit Agreement).

    

    (e)      
     Projections.  No
later than 15 days after the beginning of each fiscal year, the Borrower’s
projected balance sheet and income statement and statement of cash flows for
each month of such fiscal year, certified by a Responsible Officer of the
Borrower to the effect that (a) such projections were prepared in good faith by
the Borrower, (ii) the Borrower has a reasonable basis for the assumptions
contained in such projections when made and (iii) such projections have been
prepared in accordance with such assumptions.

    

    (f)      
      Reserved.

    

    (g)     
      Customer
Lists.  On January 1 and July 1 of each calendar year, an
updated customer listing (with contact names and addresses).

    

    (h)      
     Litigation.  No
later than five days after a Responsible Officer obtains actual knowledge
thereof, a Record notifying the Holder Representative of any litigation or other
proceeding before any court or governmental agency which seeks a monetary
recovery against the Borrower in excess of $100,000.

    

    (i)         
   Intellectual
Property.  (i) No later than 30 days after the end of each
fiscal quarter, a Record notifying the Holder Representative of any Intellectual
Property Rights of the Borrower acquired during such fiscal quarter, together
with copies of all registrations and filings with respect to same; (ii) except
as permitted under Section 7.18 and
except for Permitted Liens, no later than five (5) Business Days before it
disposes of material Intellectual Property Rights, a Record notifying the Holder
Representative of the Borrower’s intention to dispose of such rights, along with
copies of all proposed documents and written agreements concerning the disposal
of such rights as reasonably requested by the Holder Representative; and (iii)
promptly after a Responsible Officer obtains actual knowledge thereof (and in
any event, within five Business Days), a Record notifying the Holder
Representative of (A) any Infringement by any Person of  material
Intellectual Property Rights owned by the Borrower, (B) any written material
claims that the Borrower is Infringing another Person’s Intellectual Property
Rights and (C) except as permitted under Section 7.18, any
threatened cancellation, termination or material limitation of the material
Owned Intellectual Property or Licensed Intellectual Property.

    

    
      
        
           

        

        
          35

          
            

          

        

        
           

        

      

    

    

    (j)         
   Defaults.  No
later than three days after learning of the probable occurrence of any Event of
Default, a Record notifying the Holder Representative of the Event of Default
and the steps being taken by the Borrower to cure the Event of
Default.

    

    (k)         
  Reserved.

    

    (l)            
Changes in Officers
and Directors.  Promptly following occurrence, a Record
notifying the Holder Representative of any change in the persons constituting
the Borrower’s Officers and Directors.

    

    (m)           Collateral.  Promptly
after a Responsible Officer obtains actual knowledge thereof (and in any event
within five Business Days), a Record notifying the Holder Representative of any
loss of or material damage to any Collateral or of any substantial adverse
change in any Collateral or the prospect of its payment.

    

    (n)           
Commercial Tort
Claims.  Promptly after a Responsible Officer obtains actual
knowledge thereof (and in any event within five Business Days), a Record
notifying the Holder Representative of any commercial tort claims brought by the
Borrower against any Person, including the name and address of each defendant, a
summary of the facts, an estimate of the Borrower’s damages, copies of any
complaint or demand letter submitted by the Borrower, and such other information
as the Holder Representative may reasonably request.

    

    (o)           
Reports to
Owners.  Promptly upon distribution (and in any event within
five Business Days), copies of all financial statements, reports and proxy
statements which the Borrower shall have sent to its Owners.

    

    (p)           
Tax Returns of the
Borrower.  No later than five days after they are required to
be filed, copies of the Borrower’s signed and dated state and federal income tax
returns and all related schedules, and copies of any extension
requests.

    

    (q)           
Tax Returns and
Financial Statements of Guarantors.  No later than May 15 of
each year or thirty days after they are required to be filed, whichever is
later, the current financial statement and signed and dated state and federal
income tax returns and related schedules of each Guarantor, and copies of any
extension requests.

    

    (r)            
Violations of
Law.  No later than three days after discovery of any
violation, a Record notifying the Holder Representative of the Borrower’s
violation of any law, rule or regulation, the non-compliance with which could
have a Material Adverse Effect on the Borrower.

    

    (s)           
Pension
Plans.  (i) Promptly upon discovery, and in any event within 30
days after the Borrower knows that any Reportable Event with respect to any
Pension Plan has occurred, a Record authenticated by a Responsible Officer of
the Borrower notifying the Holder Representative of the Reportable Event in
detail and the actions which the Borrower proposes to take to correct the
deficiency, together with a copy of any related notice sent to the Pension
Benefit Guaranty Corporation; (ii) promptly upon discovery, and in any event
within 10 days after the Borrower fails to make a required quarterly Pension
Plan contribution under Section 412(m) of the Code, a Record authenticated by a
Responsible Officer of the Borrower notifying the Holder Representative of the
failure in detail and the actions that the Borrower will take to cure the
failure, together with a copy of any related notice sent to the Pension Benefit
Guaranty Corporation; and (iii) promptly upon discovery, and in any event within
10 days after the Borrower knows that it may be liable or may be reasonably
expected to have liability for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan under Sections 4201
or 4243 of ERISA, a Record authenticated by a Responsible Officer of the
Borrower notifying the Holder Representative of the details of the event and the
actions that the Borrower proposes to take in response.

    

    
      
        
           

        

        
          36

          
            

          

        

        
           

        

      

    

    

    (t)       
     Other
Reports.  From time to time, with reasonable promptness, all
customer lists, receivables schedules, inventory reports, collection reports,
deposit records, invoices to account debtors, shipment documents and delivery
receipts for goods sold, and such other materials, reports, records or
information as the Holder Representative may request.

    

    7.2        
   Financial
Covenants.  The
Borrower agrees to comply with the financial covenants described below, which
shall be calculated using GAAP consistently applied, except as they may be
otherwise modified by the following capitalized definitions:

    

    (a)   
        Minimum Book Net
Worth.  The Borrower shall maintain its Book Net Worth during
each period set forth below in an amount not less than the amount set forth
below:

    

    
      	
              Month Ending

            	
              Minimum Book Net Worth

            
	 
      	 
      
	
              November
      30, 2009

            	
              $39,400,000

            
	
              December
      31, 2009

            	
              $37,400,000

            
	
              January
      31, 2010

            	
              $37,600,000

            
	
              February
      28, 2010

            	
              $38,000,000

            
	
              March
      31, 2010

            	
              $38,400,000

            
	
              April
      30, 2010

            	
              $38,800,000

            
	
              May
      31, 2010

            	
              $39,000,000

            
	
              June
      30, 2010

            	
              $39,000,000

            
	
              July
      31, 2010

            	
              $38,600,000

            
	
              August
      31, 2010

            	
              $38,200,000

            
	
              September
      30, 2010

            	
              $37,800,000

            
	
              October
      31, 2010

            	
              $37,800,000

            
	
              November
      30, 2010

            	
              $37,400,000

            
	
              December
      31, 2010

            	
              $37,200,000

            
	
              January
      31, 2011

            	
              $37,200,000

            
	
              February
      28, 2011

            	
              $37,200,000

            

    

    

    
      
        
           

        

        
          37

          
            

          

        

        
           

        

      

    

    

    provided however,
that each of foregoing minimum required amounts (other than the minimum amount
required for the November 30, 2009 test date) shall be increased by an amount
equal to the greater of (i) the December G/L Adjustment, or (ii) zero
(-0-).

    

    (b)      
     Minimum Adjusted
EBITDA.  Starting with the fiscal quarter ending March 31, 2011
and thereafter, the Borrower shall achieve Adjusted EBITDA each fiscal quarter,
for the twelve-month period then ended, of not less than the amounts set forth
in the Senior Credit Agreement for each respective period as adjusted to provide
for a 20% cushion.

    

    (c)        
   Capital
Expenditures.  The Borrower shall not incur or contract to
incur Capital Expenditures of more than the following:  (i) fiscal
year ending December 31, 2009, $7,200,000; and (ii) fiscal year ending December
31, 2010 $6,600,000; provided, however, in
the event the Borrower does not expend the entire $7,200,000 during the fiscal
year ending December 31, 2009, the Borrower may carry forward to the fiscal year
ending December 31, 2010 (but not to subsequent fiscal years) up to $720,000 of
such unutilized portion.  All Capital Expenditures during fiscal year
2010 shall be applied first to reduce the $6,600,000 limit for fiscal year 2010,
and then to reduce the carry-forward from fiscal year 2009, if any.

    

    (d)         
  Future
Financial Covenants.  With respect to future periods not
covered by the foregoing Sections 7.2(a), (b), and (c), the Borrower and the
Holder Representative agree to negotiate in good faith to establish, no later
than April 30, 2009, minimum Book Net Worth, minimum Adjusted EBITDA, and
maximum Capital Expenditures requirements for such future periods through the
Maturity Date; provided that such
requirements will reflect a 20% cushion from those agreed to with the Senior
Lender for such future periods.

    

    7.3          
 Other Liens and
Permitted Liens.

    

    (a) 
          Other Liens; Permitted
Liens.  The Borrower shall not create, incur or suffer to exist
any Lien upon any of its assets, now owned or later acquired, as security for
any indebtedness, with the exception of the following (each a “Permitted Lien”;
collectively, “Permitted
Liens”):  (i) in the case of real property, covenants,
restrictions, rights, easements and irregularities in title which do not
materially interfere with the Borrower or any Guarantor’s business or
operations; (ii) Liens in existence on the date of this Agreement that are
described on Schedule
7.3; (iii) the Security Interest and Liens created by the Security
Documents; (iv) purchase money Liens relating to the acquisition of Equipment
not exceeding the lesser of cost or fair market value, not exceeding $550,000 in
the aggregate during any fiscal year, and so long as no Default Period is then
in existence and none would exist immediately after giving effect to such
acquisition; (v) Liens for taxes not yet delinquent or which are being contested
in good faith by appropriate proceedings; provided, that
adequate reserves with respect thereto are maintained by the Borrower or the
applicable Guarantor and such Liens do not have a priority over the Lien of the
Holder Representative and the Holders in the Collateral; (vi) Liens created by
operation of law or contract not securing the payment of indebtedness for money
borrowed or guaranteed, including landlords’, carriers’, warehousemen’s,
mechanics’, materialmen’s, repairmen’s or other like Liens arising in the
ordinary course of business which are not overdue for a period of more than 60
days and, if overdue, for which adequate reserves have been made; (vii) any
interest or title of a lessor or sublessor under any lease permitted by this
Agreement; (viii) licenses (ranged on a non-exclusive basis), sublicenses,
leases or subleases granted to third parties in the ordinary course of business
and not interfering with the business of the Borrower or the Guarantors; (ix)
pledges or deposits in connection with workers’ compensation, unemployment
insurance and other social security legislation and deposits securing liability
to insurance carriers under insurance or self-insurance arrangements; (x)
deposits to secure the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (xi) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Borrower or the
Guarantors in the ordinary course of business; (xii) Liens in favor of customs
and revenue authorities arising as a matter of law which secure payment of
customs duties in connection with the importation of Inventory in the ordinary
course of business; (xiii) customary rights of setoff and bankers’ liens
existing in the ordinary course of business upon deposits of the Borrower and
the Guarantors; (xiv) precautionary Liens filed by equipment lessors pursuant to
operating leases of the Borrower and the Guarantors; provided that no such
Lien covers any property other than the property subject to such lease; (xiv)
Liens arising from any judgment against the Borrower or any Guarantor not
constituting an Event of Default so long such Liens do not have a priority over
the Lien of the Holder Representative and the Holders in the Collateral; (xvi)
Liens securing Indebtedness permitted by Section 7.4(f) and
(g).

    

    
      
        
           

        

        
          38

          
            

          

        

        
           

        

      

    

    

    (b)     
      Financing
Statements.  The Borrower shall not authorize the filing of any
financing statement by any Person as Secured Party with respect to any of the
Borrower’s assets, other than by (i) the Holder Representative or (ii) a Person
holding a Permitted Lien (provided such filing shall only cover the assets of
the Borrower in which such Person is allowed to have a Permitted Lien in
accordance with this Section
7.3).  The Borrower shall not amend any financing statement
filed by the Holder Representative as Secured Party except as permitted by
law.

    

    7.4       
    Indebtedness.  The
Borrower shall not incur, create, assume or permit to exist any indebtedness or
liability on account of deposits or letters of credit issued on the Borrower’s
behalf, or advances or any indebtedness for borrowed money of any kind, whether
or not evidenced by an instrument, except: (a) the Obligations; (b) indebtedness
of the Borrower described on Schedule 7.4, and any Refinancing Indebtedness in
respect of such indebtedness (provided that if the amount of the Refinancing
Indebtedness exceeds $550,000, the Borrower shall provide the Holder
Representative with 10 days prior notice of the Borrower’s intent to incur the
Refinancing Indebtedness and a description of the material terms of such
Refinancing Indebtedness); (c) indebtedness secured by Permitted Liens; (d)
indebtedness evidenced by performance bonds issued in the ordinary course of
business or reimbursement obligations in respect thereof in an aggregate amount
at any time not exceeding $550,000; (e) Capitalized Lease Obligations in a
principal amount not exceeding $550,000 outstanding at anytime; (f) indebtedness
incurred by the Borrower to one or more of its insurance companies, incurred in
the ordinary course of business to finance payment of its insurance premiums,
not to exceed in the aggregate $1,650,000 outstanding at any time; (g)(i)
indebtedness owed to Senior Lender so long as such indebtedness remains subject
to the Intercreditor Agreement and (ii) any Subordinated Debt so long as such
Subordinated Debt remains subject to a Subordination Agreement; (h) unsecured
interest rate hedge agreements or currency hedge agreements entered into in the
ordinary course of the Borrower’s business for bona fide hedging purposes and
not for speculation; and (i) other unsecured Indebtedness not referred to in any
other clause of this Section 7.4 in an aggregate principal amount not exceeding
$110,000 at any time.  With respect to any such Subordinated Debt, the
Borrower shall only make payments of such Subordinated Debt to the extent
permitted under the terms of the applicable Subordination
Agreement.

    

    
      
        
           

        

        
          39

          
            

          

        

        
           

        

      

    

    

    7.5       
    Guaranties.  The
Borrower shall not assume, guarantee, endorse or otherwise become directly or
contingently liable for the obligations of any Person (collectively, “Contingent
Obligations”), except: (a) the endorsement of negotiable instruments by the
Borrower for deposit or collection or similar transactions in the ordinary
course of business; (b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in existence on
the date of this Agreement and described on Schedule 7.5, including extensions
and renewals thereof which do not increase the amount of such obligations as of
the date of such extension or renewal; (c) Contingent Obligations incurred in
the ordinary course of business with respect to surety and appeal bonds,
performance bonds and other similar obligations; (d) Contingent Obligations
consisting of customary indemnity obligations under real property leases entered
into in the ordinary course of business; and (e) other Contingent Obligations
not exceed $110,000 in the aggregate at any time outstanding.

    

    7.6       
    Investments and
Subsidiaries.  The
Borrower shall not make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any Person, including without
limitation any partnership or joint venture, nor purchase or hold beneficially
any stock or other securities or evidence of indebtedness of any Person,
except:

    

    (a)        
   investments in direct obligations of the United States of
America or any of its political subdivisions whose obligations constitute the
full faith and credit obligations of the United States of America and have a
maturity of one year or less, commercial paper issued by U.S. corporations rated
“A 1” or “A 2” by Standard & Poor’s Ratings Services or “P 1” or “P 2” by
Moody’s Investors Service or certificates of deposit or bankers’ acceptances
having a maturity of one year or less issued by members of the Federal Reserve
System having deposits in excess of $110,000,000 (which certificates of deposit
or bankers’ acceptances are fully insured by the Federal Deposit Insurance
Corporation) (“Cash
Equivalents”);

    

    (b)       
    travel advances or loans to the Borrower’s Officers and
employees not exceeding at any one time an aggregate outstanding balance of
$55,000;

    

    (c)       
    prepaid rent not exceeding one month or security
deposits;

    

    (d)      
     current investments in the Subsidiaries in
existence on the date of this Agreement which are identified on Schedule
5.5;

    

    (e)      
     extensions of trade credit in the ordinary course
of business;

    

    (f)        
    subject to the limitations set forth in Section 5.23,
investments received in connection with bankruptcy or reorganization of, or
settlement of delinquent Accounts and disputes with, customers and
suppliers;

    

    (g)      
     investments outstanding on the Closing Date and
set forth on Schedule
7.6;

    

    
      
        
           

        

        
          40

          
            

          

        

        
           

        

      

    

    

    (h)        
   deposits made in the ordinary course of business securing
contractual obligations of the Borrower to the extent constituting a Permitted
Lien; provided
that if any such deposit exceeds $55,000, the Borrower shall promptly notify the
Holder Representative of the material terms of such deposit;

    

    (i)       
     Contingent Obligations expressly permitted
hereunder;

    

    (j)     
       deposit accounts maintained in the
ordinary course of business; and

    

    (k)            loans
and advances that otherwise would be permitted to be made as a distribution in
accordance with Section 5.7;
and

    

    (l)        
    other investments, loans and advances not listed above
not to exceed $275,000 in the aggregate at any time outstanding.

    

    7.7         
  Dividends
and Distributions.  Except
as set forth in this Agreement, the Borrower shall not declare or pay any
dividends (other than dividends payable solely in stock of the Borrower) on any
class of its stock, or make any payment on account of the purchase, redemption
or retirement of any shares of its stock, or other securities or evidence of its
indebtedness (other than scheduled payments with respect to indebtedness
permitted under this Agreement, to the extent not prohibited by any
intercreditor or subordination agreement to which the Holder Representative is a
party (including the Intercreditor Agreement)) or make any distribution
regarding its stock, either directly or indirectly; provided that (i) the
Borrower may make distributions to Holdings, in amount not to exceed $110,000
per fiscal year, solely to permit Holdings to pay, as and when due and payable,
obligations incurred in the ordinary course of business relating solely to
holding company activities, and (ii) the Borrower may make distributions to
Holdings to the extent that Holdings pays, on behalf of the Borrower, any taxes
owing by the Borrower.

    

    7.8      
     Salaries.  [Intentionally
Omitted.

    

    7.9       
    Key Person Life
Insurance.  [Intentionally Omitted.]

    

    7.10          Books and Records;
Collateral Examination; Inspection and Appraisals.

    

    (a)      
     Books and Records;
Inspection.  The Borrower shall keep complete and accurate
books and records with respect to the Collateral and the Borrower’s business and
financial condition and any other matters that the Holder Representative may
request, in accordance with GAAP consistently applied.  The Borrower
shall permit any employee, attorney, accountant or other agent of the Holder
Representative to audit, review, make extracts from and copy any of its books
and records at any time during ordinary business hours, and to discuss the
Borrower’s affairs with any of its Directors, Officers, employees, Owners or
agents.

    

    (b)      
     Authorization to the
Borrower’s Agents to Make Disclosures to the Holder
Representative.  The Borrower authorizes all accountants and
other Persons acting as its agent to disclose and deliver to the Holder
Representative’s employees, accountants, attorneys and other Persons acting as
its agent, at the Borrower’s expense, all financial information, books and
records, work papers, management reports and other information in their
possession regarding the Borrower; provided that legal counsel for the Borrower
shall not be required to disclose information to the Holder Representative that
consists of attorney-client privileged communications between the Borrower and
such counsel.

    

    
      
        
           

        

        
          41

          
            

          

        

        
           

        

      

    

    

    (c)         
  Collateral
Exams, Audits, and Inspections.  The Borrower shall permit the
Holder Representative’s employees, accountants, attorneys or other Persons
acting as its agent, to examine, audit, and inspect any Collateral or any other
property of the Borrower at any time during ordinary business
hours.

    

    (d)        
   Collateral
Appraisals.  The Holder Representative may also obtain, from
time to time, but no more than once every 120 days during the period commencing
on the date of this Agreement and ending on the first anniversary thereafter and
then two times each one-year period thereafter, at the Borrower’s expense, an
appraisal of the Borrower’s inventory and other Collateral by an appraiser
acceptable to the Holder Representative in its sole discretion; provided that
during a Default Period, the Holder Representative may obtain at any time (and
from time to time) in the Holder Representative’s sole discretion such
appraisals of the Borrower’s inventory and other Collateral at the Borrower’s
expense.

    

    7.11          Account Verification;
Payment of Permitted Liens.

    

    (a)      
     Account
Verification.  The Holder Representative or its agents may (i)
contact account debtors and other obligors at any time to verify the Borrower’s
Accounts; and (ii) require the Borrower to send requests for verification of
Accounts or send notices of assignment of Accounts to account debtors and other
obligors.

    

    (b)      
     Covenant to Pay Permitted
Liens.  The Borrower shall pay when due each account payable
due to any Person holding a Permitted Lien (as a result of such payable) on any
Collateral, except as expressly provided in Section
7.3(a).

    

    7.12          Compliance with
Laws.

    

    (a)       
    General Compliance with
Applicable Law; Use of Collateral.  The Borrower shall (i)
comply, and cause each Subsidiary to comply, with the requirements of applicable
laws and regulations, the non compliance with which would have a Material
Adverse Effect on its business or its financial condition; and (ii) use and keep
the Collateral, and require that others use and keep the Collateral, only for
lawful purposes, without violation of any material federal, state or local law,
statute or ordinance.

    

    (b)     
      Compliance with Federal
Regulatory Laws.  The Borrower shall (i)  prohibit
and cause each Subsidiary to prohibit, any Person that is an Owner or Officer
from being listed on the Specially Designated Nationals and Blocked Person List
or other similar lists maintained by the Office of Foreign Assets Control
(“OFAC”), the
Department of the Treasury or included in any Executive Orders, (ii) not permit
the proceeds of the sale and purchase of the Notes or any other financial
accommodation extended by the Holders in any way that violates any foreign asset
control regulations of OFAC or other applicable law, (iii) comply, and cause
each Subsidiary to comply, with all applicable Bank Secrecy Act laws and
regulations, as amended from time to time, and (iv) otherwise comply with the
U.S.A. Patriot Act.

    

    
      
        
           

        

        
          42

          
            

          

        

        
           

        

      

    

    

    (c)     
      Compliance with
Environmental Laws.  The Borrower shall (i) comply, and cause
each Subsidiary to comply, with the requirements of applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
required by them, and (ii) not generate, use, transport, treat, store or dispose
of any Hazardous Substances in such a manner as to create any material liability
or obligation under the common law of any jurisdiction or any Environmental
Law.

    

    7.13          Payment of Taxes and Other
Claims.  The
Borrower shall pay or discharge, when due, and cause each Subsidiary to pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including without limitation the Collateral) or upon or against the
creation, perfection or continuance of the Security Interest, prior to the date
on which penalties attach, (b) all federal, state, provincial and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a Lien upon any properties of
the Borrower, although the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.

    

    7.14          Maintenance of Collateral
and Properties.

    

    (a) 
          The Borrower shall
keep and maintain the Collateral and all of its other properties necessary or
useful in its business in good condition, repair and working order (ordinary
wear and tear excepted) and will from time to time replace or repair any worn,
defective or broken parts, although the Borrower may discontinue the operation
and maintenance of any properties if the Borrower believes that such
discontinuance is desirable to the conduct of its business and not
disadvantageous in any material respect to the Holder Representative and the
Holders.  The Borrower shall take all commercially reasonable steps
necessary to protect and maintain its Intellectual Property Rights.

    

    (b) 
          The Borrower shall
defend the Collateral against all Liens, claims and demands of all third Persons
claiming any interest in the Collateral.  The Borrower shall keep all
Collateral free and clear of all Liens except Permitted Liens.  The
Borrower shall take all commercially reasonable steps necessary to prosecute any
Person Infringing its Intellectual Property Rights and to defend itself against
any Person accusing it of Infringing any Person’s Intellectual Property
Rights.

    

    7.15          Insurance.  The
Borrower shall at all times maintain insurance with insurers acceptable to the
Holder Representative, in such amounts and on such terms (including deductibles)
as the Holder Representative in its sole discretion may require and including,
as applicable and without limitation, business interruption insurance (including
force majeure coverage), hazard coverage on an “all risks” basis for all
tangible Collateral, and theft and physical damage coverage for Collateral
consisting of motor vehicles.  All insurance policies must contain an
appropriate lender’s interest endorsement or clause, and name the Holder
Representative as an additional insured.

    

    
      
        
           

        

        
          43

          
            

          

        

        
           

        

      

    

    

    7.16          Preservation of
Existence.  The
Borrower shall preserve and maintain its existence and all of its rights,
privileges and franchises necessary or desirable in the ordinary conduct of its
business and shall conduct its business in an orderly, efficient and regular
manner.

    

    7.17          Delivery of Instruments,
etc.  Upon
written request by the Holder Representative, the Borrower shall promptly
deliver to the Holder Representative in pledge all instruments, documents and
chattel paper constituting Collateral in an amount in excess of $50,000
(individually or in the aggregate), endorsed or assigned by the
Borrower.

    

    7.18          Sale or Transfer of Assets;
Suspension of Business Operations.  The
Borrower shall not sell, lease, assign, transfer or otherwise dispose of (a) the
stock of any Subsidiary, (b) all or a substantial part of its assets, or (c) any
Collateral or any interest in Collateral (whether in one transaction or in a
series of transactions) to any other Person other than (i) the sale of Inventory
in the ordinary course of business; (ii) the use of cash and Cash Equivalents in
the ordinary course of business; (iii) the sale of obsolete, surplus,
uneconomical, or worn-out assets; (iv) leases or subleases granted to third
parties in the ordinary course of business and in each case not interfering with
the business of the Borrower; (v) subject to Section 7.23, write-offs or grants
of discounts or forgiveness of Accounts, without recourse, which are at least 90
days past due in connection with the compromise or collection thereof in the
ordinary course of business which do not interfere in any material respect of
the Borrower; and (vi) transfers arising from investments, loans and advances to
the extent permitted under Section 7.6.  The Borrower shall not
liquidate, dissolve or suspend business operations.  The Borrower
shall not transfer any part of its ownership interest in any Intellectual
Property Rights and shall not permit its rights as licensee of Licensed
Intellectual Property to lapse, except that the Borrower may transfer such
rights or permit them to lapse if it has reasonably determined that such
Intellectual Property Rights are no longer useful in its business.  If
the Borrower transfers (other than by license) any Intellectual Property Rights
for value, the Borrower shall pay the Proceeds to the Holder Representative for
application to the Obligations.  The Borrower shall not license any
other Person to use any of the Borrower’s Intellectual Property Rights, except
that the Borrower may grant licenses in the ordinary course of its business in
connection with sales of Inventory or the provision of services to its
customers.

    

    7.19          Consolidation and Merger;
Asset Acquisitions.  The
Borrower shall not consolidate with or merge into any other entity, or permit
any other entity to merge into it, or acquire (in a transaction analogous in
purpose or effect to a consolidation or merger) all or substantially all of the
assets of any other entity, except for (i) any merger or consolidation of a
Subsidiary into the Borrower, with the Borrower being the survivor thereof and
(ii) any merger or consolidation of a Subsidiary into another
Subsidiary.  The Borrower shall not form or acquire any additional
Subsidiary after the date of this Agreement.

    

    7.20          Sale and
Leaseback.  The
Borrower shall not enter into any arrangement, directly or indirectly, with any
other Person pursuant to which the Borrower shall sell or transfer any real or
personal property, whether owned now or acquired in the future, and then rent or
lease all or part of such property or any other property which the Borrower
intends to use for substantially the same purpose or purposes as the property
being sold or transferred.

    

    
      
        
           

        

        
          44

          
            

          

        

        
           

        

      

    

    

    7.21          Restrictions on Nature of
Business.  The
Borrower will not engage in any line of business materially different from that
presently engaged in by the Borrower, and will not purchase, lease or otherwise
acquire assets not related to its business.

    

    7.22          Accounting.  The
Borrower will not adopt any material change in accounting principles except as
required by GAAP, consistently applied.  The Borrower will not change
its fiscal year.

    

    7.23          Discounts,
etc.  After
notice from the Holder Representative during a Default Period, (i) the Borrower
will not grant any discount, credit or allowance to any customer of the Borrower
or accept any return of goods sold and (ii) the Borrower will not at any time
modify, amend, subordinate, cancel or terminate any Account.

    

    7.24          Pension
Plans.  Except
as disclosed to the Holder Representative in a Record prior to the date of this
Agreement, neither the Borrower nor any ERISA Affiliate will (a) adopt, create,
assume or become party to any Pension Plan, (b) become obligated to contribute
to any Multiemployer Plan, (c) incur any obligation to provide post-retirement
medical or insurance benefits with respect to employees or former employees
(other than benefits required by law), or (d) amend any Plan in a manner that
would materially increase its funding obligations.

    

    7.25          Place of Business;
Name.  The
Borrower will not transfer its chief executive office or principal place of
business, or move, relocate, close or sell any business Premises, unless (i) the
Holder Representative has received 30 days advance notice thereof, (ii) the
Holder Representative continuously maintains a perfected Lien on the Collateral
with the priority contemplated by this Agreement, and (iii) the Borrower
exercises commercially reasonable efforts to provide the Holder Representative
with a Collateral Access Agreement no later than the date that such transfer,
move, or relocation occurs.  The Borrower will not permit any tangible
Collateral or any records relating to the Collateral to be located in any state
or area in which, in the event of such location, a financing statement covering
such Collateral would be required to be, but has not in fact been, filed in
order to perfect the Security Interest.  The Borrower will not change
its name or jurisdiction of organization.

    

    7.26          Constituent
Documents.  The
Borrower will not amend its Constituent Documents.

    

    7.27          Reserved.

    

    7.28          Performance by the Holder
Representative.  If
the Borrower fails to perform or observe any of its obligations under this
Agreement at any time, the Holder Representative may, but need not, perform or
observe them on behalf of the Borrower and may, but need not, take any other
actions which the Holder Representative may reasonably deem necessary to cure or
correct this failure; and the Borrower shall pay the Holder Representative upon
written demand the amount of all costs and expenses (including reasonable
attorneys’ fees and legal expenses) incurred by the Holder Representative in
performing these obligations, together with interest on these amounts at the
Default Rate.

    

    
      
        
           

        

        
          45

          
            

          

        

        
           

        

      

    

    

    7.29          Holder Representative
Appointed as the Borrower’s Attorney in Fact.  To
facilitate the Holder Representative’s performance or observance of the
Borrower’s obligations under this Agreement, the Borrower hereby irrevocably
appoints the Holder Representative and the Holder Representative’s agents, as
the Borrower’s attorney in fact (which appointment is coupled with an interest)
with the right (but not the duty) to create, prepare, complete, execute,
deliver, endorse or file on behalf of the Borrower any instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and any other agreements or any Record required to be obtained,
executed, delivered or endorsed by the Borrower in accordance with the terms of
this Agreement.

    

    7.30          Use of
Proceeds.

    

    (a)        
   The Borrower and
Holdings will use the proceeds of the loans evidenced by the Notes (a) to repay
existing indebtedness of the Borrower and Holdings to MRC in full, (b) to repay
existing indebtedness of Holdings and the Borrower to Union Bank, N.A., (c) for
the working capital of Holdings, the Borrower and the other Subsidiaries and (d)
to finance future growth initiatives.

    

    (b)    
       No portion of the proceeds of the
loans evidenced by the Notes shall be used for the “purpose of purchasing or
carrying” any “margin stock” or “margin security” as such terms are used in
Regulations T, U and X of the Board of Governors of the Federal Reserve System,
or otherwise in violation of such regulations.

    

    7.31          Further
Assurances.

    

    (a)     
      Holdings shall, unless the Required Holders
otherwise consent, cause each Domestic Subsidiary formed or acquired after the
date of this Agreement to become a Guarantor by timely complying with the
requirements of Article IX
hereof.  Upon execution and delivery of an Additional Guarantor
Supplement or other Guaranty in compliance with such requirements, each such
Person shall become a Guarantor of the Obligations and shall have all of the
rights, benefits, duties, and obligations in such capacity under the Operative
Documents.

    

    (b)       
    At any time and from time to time Holdings shall, and
shall cause each of its Domestic Subsidiaries to, execute and deliver such
further documents and take such further action as may reasonably be requested by
the Holder Representative to effect the purposes of the Operative
Documents.

    

    7.32          Reports to other
Creditors.  Promptly
after filing the same, the Borrower and Holdings shall furnish to the Holder
Representative copies of any compliance certificate and other material
information furnished, to the Senior Lender or any other holders of the Senior
Obligations, or to the holders of any Subordinated Debt pursuant to the terms of
any indenture, loan or credit or similar agreement and not otherwise required to
be furnished to the Holder Representative pursuant to any other provision of
this Agreement.

    

    
      
        
           

        

        
          46

          
            

          

        

        
           

        

      

    

    

    7.33          Board
Seat.

    

    (a) 
          Upon the earlier to
occur of (x) Holdings’ proxy statement (for the election of directions) for the
annual meeting of stockholders to be held in calendar year 2010 or (y) June 30,
2010 (the “Designee
Date”), and for as long as the Notes are outstanding, MRC shall have the
right to nominate one individual to serve as a member of Holdings’ Board of
Directors (“MRC’s
Designee”), and Holdings agrees (i) to increase the size of Holdings’
Board of Directors and appoint MRC’s Designee to Holdings’ Board of Directors as
promptly as practicable after the Designee Date, or, at Holdings’ option, to
nominate MRC’s Designee and recommend to Holdings’ stockholders that MRC’s
Designee be elected to Holdings’ Board of Directors at the annual meeting of
stockholders of Holdings in 2010, and (ii) to recommend to Holdings’
stockholders that MRC’s Designee be elected to Holdings’ Board of Directors at
annual meetings of stockholders occurring after the Designee Date and thereafter
for as long as the Notes are outstanding.

    

    (b)  
         In connection with any
election of directors at an annual meeting of stockholders to which this Section
7.33 applies, MRC agrees to provide advance notice of MRC’s Designee to Holdings
within the time periods set forth in Holdings’ Amended and Restated
Bylaws.  MRC agrees to provide notice of the initial MRC Designee to
Holdings no later than April 30, 2010.  In connection with MRC’s
nomination of any MRC Designee, the MRC Designee shall deliver a completed and
signed questionnaire regarding the background and qualifications of such person
to serve as a director, a copy of which may be obtained upon request to the
secretary of Holdings, a signed consent to be named in Holdings’ proxy statement
as a nominee for election as a director, such additional information that
Holdings may reasonably request to determine the eligibility or qualifications
of such person to serve as a director of Holdings, or that could be material to
a reasonable stockholder’s understanding of the qualifications and/or
independence, or lack thereof, of such nominee as a director and all other
documents reasonably requested by Holdings, including certifications as to
compliance with Holdings’ insider trading policy and code of
conduct.

    

    7.34          Other
Agreements.  Enter
into any material amendment, waiver or modification of the Senior Loan Documents
or any related agreements, other than as permitted by the Intercreditor
Agreement.

    

    

    ARTICLE
VIII. 

    EVENTS
OF DEFAULT AND REMEDIES

    

    8.1           
Events of
Default.  If
any one or more of the following events or conditions (each, an “Event of Default”) shall occur or
exist:

    

    (a)     
      The Borrower fails to pay any amount of any
Note on the date that it becomes due and payable;

    

    (b)      
     The Borrower fails to observe or perform (i) any
covenant or agreement of the Borrower set forth in Sections 7.1 (o), and
(p) and such failure to observe or perform shall continue unremedied for
a period of 10 days after such failure, (ii) any covenant or agreement of the
Borrower set forth in Section 7.12 and such
failure shall not be cured within 30 days after the occurrence of such failure,
(iii) any covenant or agreement of the Borrower set forth in Section 7.13;
provided that if such a breach of Section 7.13 relates
to a tax, assessment or charge that is less than $55,000, the Borrower shall
have up to 30 days to cure such breach before it shall be deemed to be an Event
of Default, or (iv) any other covenant or agreement of the Borrower in this
Agreement (not described in clauses (i), (ii), and (iii) of this paragraph (b)),
or in any of the Operative Documents;

    

    
      
        
           

        

        
          47

          
            

          

        

        
           

        

      

    

    

    (c)   
        Any covenant in Section 7.2 becomes
inapplicable due to the lapse of time, and the Borrower shall fail to agree to
amend the covenant to apply to future periods (it being understood that the new
covenant levels shall provide for at least a 20% cushion from those provided in
the Senior Credit Agreement with respect to such period for this Section 8.1(c)
to apply);

    

    (d)    
       Reserved.

    

    (e)      
     Reserved.

    

    (f)        
   A Change of Control shall occur;

    

    (g)        
   (i) The Borrower or any Guarantor becomes insolvent or admits
in a Record an inability to pay debts as they mature, or the Borrower or any
Guarantor makes an assignment for the benefit of creditors; or the Borrower or
any Guarantor applies for or consents to the appointment of any receiver,
trustee, or similar officer for the benefit of the Borrower or any Guarantor, or
for any of their properties; or (ii) any receiver, trustee or similar officer is
appointed without the application or consent of the Borrower or such Guarantor;
or any judgment, writ, warrant of attachment or execution or similar process is
issued or levied against a substantial part of the property of the Borrower or
any Guarantor which remains undismissed, undischarged, unstayed, or unbonded for
a period of 60 days or longer;

    

    (h)         
  (i) The Borrower or any Guarantor files a petition under any chapter
of the United States Bankruptcy Code or under the laws of any other jurisdiction
naming the Borrower or such Guarantor as debtor; (ii) any such petition is
instituted against the Borrower or any such Guarantor which remains undismissed
or undischarged for a period of 60 days or longer; (iii) the Borrower or any
Guarantor institutes (by petition, application, answer, consent or otherwise)
any bankruptcy, insolvency, reorganization, debt arrangement, dissolution,
liquidation or similar proceeding under the laws of any jurisdiction; or (iv)
any such proceeding is instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor which remains undismissed or
undischarged for a period of 60 days or longer.

    

    (i)            
Reserved.

    

    (j)            
Any representation or warranty made by the Borrower or any Guarantor in this
Agreement or in any Guaranty, or by the Borrower (or any Responsible Officer of
the Borrower) or any Guarantor in any agreement, certificate, instrument or
financial statement or other statement delivered to the Holder Representative in
connection with this Agreement or pursuant to such Guaranty is untrue or
misleading in any material respect when delivered to the Holder
Representative;

    

    
      
        
           

        

        
          48

          
            

          

        

        
           

        

      

    

    

    (k)   
        A final, non-appealable
arbitration award, judgment, or decree or order for the payment of money in an
amount in excess of $550,000 (to the extent not insured or subject to
indemnity), is entered against the Borrower which is not stayed or appealed
within 60 days from the entry thereof;

    

    (l)      
      The Borrower is in default beyond any
applicable grace period with respect to (i) any bond, debenture, note or other
evidence of indebtedness issued by the Borrower that is held by any third Person
other than the Holder Representative, or under any instrument under which any
such evidence of indebtedness has been issued or by which it is governed, or
(ii) any lease or other contract, which in each case under clauses (i) or (ii)
of this paragraph relates to an amount owing in excess of $550,000 individually
or in the aggregate, in each case, except for obligations owed to the Senior
Lender under the Senior Loan Documents;

    

    (m)           The
Borrower liquidates, dissolves, terminates or suspends its business operations
or otherwise fails to operate its business in the ordinary course, or merges
with another Person; or sells or attempts to sell all or substantially all of
its assets;

    

    (n)      
     The Borrower fails to pay any indebtedness or
obligation owed to the Holder Representative or any Holder which is unrelated to
this Agreement as it becomes due and payable;

    

    (o)       
    Any Guarantor repudiates or purports to revoke such
Guarantor’s Guaranty, or fails to perform any obligation under such Guaranty, or
any individual Guarantor dies or becomes incapacitated, or any other Guarantor
ceases to exist for any reason (except as expressly permitted under this
Agreement);

    

    (p)        
   The Borrower engages in any act prohibited by the
Intercreditor Agreement or any Subordination Agreement, or makes any payment on
Junior Obligations (as defined in the Intercreditor Agreement) that a Junior
Obligations Secured Party (as defined in the Intercreditor Agreement) was not
contractually entitled to receive, including pursuant to or restricted by the
Junior Obligations Security Documents (as defined in the Intercreditor
Agreement) or the Intercreditor Agreement;

    

    (q)         
  A Material Adverse Effect shall occur, as determined by the Holder
Representative in the Holder Representative’s Permitted Discretion;

    

    (r)            
(i) The Borrower hires an Officer or appoints a Director who has been convicted
of any felony offence under state or federal law, or (ii) any Director or
Responsible Officer of the Borrower is indicted for a felony offence under state
or federal law if, with respect to this clause (ii), (x) such indictment has not
been dismissed within 15 days of the indictment of such Director or Responsible
Officer, or (y) such Director or Responsible Officer of the Borrower has not
been relieved of his or her duties as a Director or Officer, as applicable,
within 15 days of such indictment.

    

    (s)           
Any Director, Officer, Guarantor, or Owner of at least 20% of the issued and
outstanding capital stock of the Borrower is indicted for a felony offence under
state or federal law, or the Borrower hires an Officer or appoints a Director
who has been convicted of any such felony offense, or a Person becomes an Owner
of at least 20% of the issued and outstanding capital stock of the Borrower who
has been convicted of any such felony offense;

    

    
      
        
           

        

        
          49

          
            

          

        

        
           

        

      

    

    

    (t)      
      (i) Any Reportable Event, which constitutes
sufficient grounds for termination of any Pension Plan or for the appointment of
a trustee to administer any Pension Plan, has occurred and is continuing 30 days
after the Borrower gives the Holder Representative a Record notifying it of the
Reportable Event; or a trustee is appointed by an appropriate court to
administer any Pension Plan; or the Pension Benefit Guaranty Corporation
institutes proceedings to terminate or appoint a trustee to administer any
Pension Plan; (ii) the Borrower or any ERISA Affiliate files for a distress
termination of any Pension Plan under Title IV of ERISA; (iii) the Borrower or
any ERISA Affiliate fails to make any quarterly Pension Plan contribution
required under Section 412(m) of the Code, which may, either by itself or in
combination with other failures, result in the imposition of a Lien on the
Borrower’s assets in favor of the Pension Plan; or (iv) any withdrawal, partial
withdrawal, reorganization or other event occurs with respect to a Multiemployer
Plan which could reasonably be expected to result in a material liability by the
Borrower to the Multiemployer Plan under Title IV of ERISA; and/or

    

    (u)      
     An event of default has occurred under the Senior
Loan Documents or the Intercreditor Agreement, which default shall not have been
cured or waived within any applicable grace period and for which the Senior
Obligations shall be accelerated or declared to be due and payable prior to
their stated maturity,

    

    then, and
in any such event described in clauses (a) through (u) above in this Section
8.1,

    

    (1)   
        the Required Holders may, by
notice to the Borrower, declare the entire unpaid principal amount of the
Notes, plus all interest
accrued and unpaid thereon (including all PIK Interest) and all other amounts
payable under this Agreement, the Notes and the other Operative Documents to be
forthwith due and payable, whereupon the Notes, all such accrued interest and
all such amounts shall become and be forthwith due and payable (unless there
shall have occurred an Event of Default under clause (g) or (h) of this Section 8.1, in which
case all such amounts shall automatically become due and payable), without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Borrower, and

    

    (2)    
       the Holder Representative may, and at
the request of the Required Holders, shall exercise any and all rights and
remedies under this Agreement, the Notes and the other Operative Documents and
proceed to protect and enforce such rights by suit in equity, action at law
and/or other appropriate proceeding either for specific performance of any
covenant, provision or condition contained or incorporated by reference in this
Agreement, the Notes or the other Operative Documents or in aid of the exercise
of any power granted in this Agreement, the Notes or the other Operative
Documents, and proceed to enforce the payment of Obligations hereunder or any
other legal or equitable right.  No remedy herein conferred upon any
Holder is intended to be exclusive of any other remedy and each and every remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or any
other provision of law.

    

    
      
        
           

        

        
          50

          
            

          

        

        
           

        

      

    

    

    8.2        
   Distribution of
Proceeds.  In
the event that following the occurrence or during the continuance of any Default
or Event of Default, any Holder receives any monies with
respect to the amounts due hereunder or under the Notes, such monies shall be
distributed for application as follows:

    

    (a)   
        First, to the payment of, or (as
the case may be) the reimbursement of the Holders for or in respect of, all
costs, expenses, disbursements and losses which shall have been incurred or
sustained by the Holders in connection with the collection of such monies by the
Holders, for the exercise, protection or enforcement by the Holders of all or
any of the rights, remedies, powers and privileges of the Holders under this
Agreement or any of the other Operative Documents, pro rata based on the
relative amount so incurred or sustained;

    

    (b)    
       Second, to all other Obligations in
such order or preference as the Required Holders may
determine; provided, however, that
distributions shall be made among the Holders pro rata in accordance with the
Obligations owing to them; and

    

    (c)      
     Third, the excess, if any, shall be returned to
the Borrower or to such other Persons as are entitled thereto.

    

    8.3    
       Annulment of
Defaults.  Section 8.1 is
subject to the condition that, if at any time after the principal of any of the
Notes shall have become due and payable, and before any judgment or decree for
the payment of the moneys so due, or any portion thereof, shall have been
entered, then and in every such case the Holders of a majority (or if a higher
percentage would be required under Section 11.2 to waive
the underlying Event of Default, then such higher percentage) in principal
amount of all Notes then outstanding, voting together as a single class, may, by
written instrument filed with the Borrower, rescind and annul such declaration
and its consequences; but no such rescission or annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right consequent
thereon.

    

    ARTICLE
IX. 

    THE
GUARANTIES

    

    9.1    
       The
Guaranties.  The
payment and performance of the Obligations shall at all times be guaranteed by
each Guarantor pursuant to this Article IX or
pursuant to one or more guaranty agreements in form and substance reasonably
acceptable to the Required Holders, as the same may be amended, modified or
supplemented from time to time (individually a “Guaranty” and
collectively the “Guaranties”).

    

    To induce
the Holders to purchase the Notes and in consideration of benefits expected to
accrue to the Borrower and each Guarantor by reason thereof and for other good
and valuable consideration, receipt of which is hereby acknowledged, each
Guarantor (including any Domestic Subsidiary formed or acquired after the
Closing Date executing an Additional Guarantor Supplement or such other form of
Guaranty as is reasonably acceptable to the Required Holders) hereby
unconditionally and irrevocably guarantees jointly and severally to the Holders,
the due and punctual payment of all present and future Obligations, including,
but not limited to, the due and punctual payment of principal of and interest on
the Notes and the due and punctual payment of all other Obligations now or
hereafter owed by the Borrower under the Operative Documents, in each case as
and when the same shall become due and payable, whether at stated maturity, by
acceleration or otherwise, according to the terms hereof and thereof (including
interest, fees and other amounts which, but for the filing of a petition in
bankruptcy, would otherwise accrue on any such indebtedness, obligation, or
liability).  In case of failure by the Borrower or any other obligor
punctually to pay any Obligations guaranteed hereby, each Guarantor hereby
unconditionally agrees to make such payment or to cause such payment to be made
punctually as and when the same shall become due and payable, whether at stated
maturity, by acceleration, or otherwise, and as if such payment were made by the
Borrower or such obligor.  Each Guarantor agrees that its guaranty set
forth in this Article
IX is a guaranty of payment when due and not of collection, and each
Guarantor waives (to the extent permitted by law) any right to require that any
resort be made by the Holder Representative or any Holder to any collateral for
the Obligations.

    

    
      
        
           

        

        
          51

          
            

          

        

        
           

        

      

    

    

    9.2       
    Guaranty
Unconditional.  The
obligations of each Guarantor under this Article IX shall be
unconditional and absolute and, without limiting the generality of the
foregoing, shall not be released, discharged, or otherwise affected
by:

    

    (a)       
    any extension, renewal, settlement, compromise, waiver,
or release in respect of any obligation of the Borrower, any Guarantor or any
other obligor under this Agreement or any other Operative Document or by
operation of law or otherwise;

    

    (b)       
    any modification or amendment of or supplement to this
Agreement or any other Operative Document;

    

    (c)      
     any change in the corporate existence, structure,
or ownership of, or any insolvency, bankruptcy, reorganization, or other similar
proceeding affecting, the Borrower, any Guarantor or any other obligor, or any
of their respective assets, or any resulting release or discharge of any
obligation of the Borrower, any Guarantor or other obligor contained in any
Operative Document or otherwise;

    

    (d)      
     the existence of any claim, set-off, or other
rights which the Borrower, any Guarantor or any other obligor may have at any
time against any Holder, or any other Person, whether or not arising in
connection herewith;

    

    (e)     
      any failure to assert, or any assertion of,
any claim or demand or any exercise of, or failure to exercise, any rights or
remedies against the Borrower, any Guarantor or any other obligor or any other
Person or Property;

    

    (f)        
    any application of any sums by whomsoever paid or
howsoever realized to any obligation of the Borrower, any Guarantor or any other
obligor, regardless of what obligations of the Borrower, any Guarantor or any
other obligor remain unpaid;

    

    (g)      
     any invalidity or unenforceability, for any
reason, relating to or against the Borrower, any Guarantor or any other obligor
of this Agreement or of any other Operative Document, or any provision of
applicable law or regulation purporting to prohibit the payment by the Borrower,
any Guarantor or any other obligor of the principal of or interest on any Note
or any other amount payable under the Operative Documents; or

    

    
      
        
           

        

        
          52

          
            

          

        

        
           

        

      

    

    

    (h)        
   any other act or omission to act or delay of any kind by any
Holder or any other Person or any other circumstance whatsoever that might, but
for the provisions of this paragraph, constitute a legal or equitable discharge
of the obligations of any Guarantor under this Article
IX.

    

    9.3       
    Discharge Only upon Payment
in Full; Reinstatement in Certain Circumstances.  Each
Guarantor’s obligations under this Article IX shall
remain in full force and effect until the Obligations and all other amounts
payable by the Borrower and the Guarantors under this Agreement and all other
Operative Documents shall have been paid in full (other than contingent
indemnification obligations for which no claim has been asserted).  If
at any time any payment of the principal of or interest on any Note or any other
amount payable by the Borrower, any Guarantor or any other obligor under the
Operative Documents is rescinded or must be otherwise restored or returned upon
the insolvency, bankruptcy, or reorganization of the Borrower, any Guarantor or
any other obligor, or otherwise, each Guarantor’s obligations under this Article IX with
respect to such payment shall be reinstated at such time as though such payment
had become due but had not been made at such time.

    

    9.4       
    Subrogation.  Each
Guarantor agrees it will not exercise any rights which it may acquire by way of
subrogation by any payment made hereunder, or otherwise, until all the
Obligations shall have been paid in full (other than contingent indemnification
obligations for which no claim has been asserted).  If any amount
shall be paid to a Guarantor on account of such subrogation rights at any time
prior to the payment in full of the Obligations and all other amounts payable by
the Borrower hereunder and the other Operative Documents, such amount shall be
held in trust for the benefit of the Holders (and their respective affiliates)
and shall forthwith be paid to the Holders (and their respective affiliates) or
be credited and applied to the Obligations, whether matured or unmatured, in
each case accordance with the terms of this Agreement and the other Operative
Documents, subject to the Intercreditor Agreement.

    

    9.5     
      Waivers.  Each
Guarantor irrevocably waives, to the extent permitted by law, acceptance hereof,
presentment, demand, protest, and any notice not provided for herein, as well as
any requirement that at any time any action be taken by the Holders or any other
Person against the Borrower or other obligor, another guarantor, or any other
Person.

    

    9.6      
     Limit on
Recovery.  Notwithstanding
any other provision hereof, the right of recovery against each Guarantor under
this Article IX
shall not exceed the amount that is $1.00 less than the lowest amount that would
render such Guarantor’s obligations under this Article IX void or
voidable under applicable law, including, without limitation, applicable
fraudulent conveyance, fraudulent transfer or similar laws.

    

    9.7        
   Stay
of Acceleration.  If
acceleration of the time for payment of any amount payable by the Borrower, any
Guarantor or any other obligor under this Agreement or any other Operative
Document is stayed upon the insolvency, bankruptcy or reorganization of the
Borrower, such Guarantor or such obligor, all such amounts otherwise subject to
acceleration under the terms of this Agreement or the other Operative Documents
shall nonetheless be payable by the Guarantors hereunder forthwith on demand by
the Required Holders, subject to applicable law.

    

    
      
        
           

        

        
          53

          
            

          

        

        
           

        

      

    

    

    9.8    
       Benefit to
Guarantors.  The
Borrower and the Guarantors are engaged in related businesses and integrated to
such an extent that the financial strength and flexibility of the Borrower has a
direct impact on the success of each Guarantor.  Each Guarantor will
derive substantial direct and indirect benefit from the extensions of credit
hereunder.

    

    9.9       
    Guarantor
Covenants.  Each
Guarantor shall take such action as the Borrower is required by this Agreement
to cause such Guarantor to take, and shall refrain from taking such action as
the Borrower is required by this Agreement to prohibit such Guarantor from
taking.

    

    9.10          Further
Assurances.  In the
event the Borrower, Holdings or any other Guarantor forms or acquires any other
Subsidiary after the date hereof, the Borrower and the Guarantors shall promptly
upon (and in any event within five (5) Business Days after) such formation or
acquisition cause such newly formed or acquired Domestic Subsidiary to execute
an Additional Guarantor Supplement or such other Guaranty as the Required
Holders may then require, and the Borrower and the Guarantors shall also deliver
to the Holder Representative, or cause such Subsidiary to deliver to the Holder
Representative, at the Borrower’s cost and expense, such other instruments,
documents, certificates and opinions reasonably required by the Required Holders
in connection therewith.

    

    

    ARTICLE
X. 

    HOLDER
REPRESENTATIVE

    

    10.1          Appointment and
Authorization.  Each
Holder, by acceptance of any Note(s) held by it, hereby irrevocably appoints,
designates and authorizes the Purchaser to take such action on its behalf under
the provisions of this Agreement and each other Operative Document and to
exercise such powers and perform such duties as are expressly delegated to it by
the terms of this Agreement or any other Operative Document, together with such
powers as are reasonably incidental thereto, including without limitation the
authority to negotiate and execute subordination and intercreditor agreements on
behalf of the Holders related to any Subordinated Debt, and each Holder
expressly agrees that the terms of all such subordination and intercreditor
agreements shall inure to the benefit of, and be binding upon, each
Holder.  Notwithstanding any provision to the contrary contained
elsewhere in this Agreement or in any other Operative Document, the Holder
Representative shall not have any duties or responsibilities, except those
expressly set forth herein, nor shall the Holder Representative have or be
deemed to have any fiduciary relationship with any Holder, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Operative Document or otherwise exist
against the Holder Representative.

    

    10.2          Delegation of
Duties.  The
Holder Representative may execute any of its duties under this Agreement or any
other Operative Document by or through agents, employees or attorneys-in-fact
and shall be entitled to advice of counsel concerning all matters pertaining to
such duties.  The Holder Representative shall not be responsible to
the Holders for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.

    

    10.3          Liability of Holder
Representative.  None of
the Holder Representative-Related Persons shall (i) be liable to the Holders for
any action taken or omitted to be taken by any of them under or in connection
with this Agreement or any other Operative Document (except for its own gross
negligence or willful misconduct), or (ii) be responsible in any manner to any
of the Holders for any recital, statement, representation or warranty made by
Holdings, the Borrower, any other Subsidiary or Affiliate of Holdings or the
Borrower, or any officer thereof, contained in this Agreement or in any other
Operative Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Holder Representative under
or in connection with, this Agreement or any other Operative Document, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Operative Document, or for any failure of the Borrower,
Holdings, any other Guarantor or any other party to any Operative Document to
perform its obligations hereunder or thereunder.  No Holder
Representative-Related Person shall be under any obligation to any Holder to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Operative
Document, or to inspect any Property, books or records of Holdings, the
Borrower, any other Subsidiary or Affiliate of Holdings.

    

    
      
        
           

        

        
          54

          
            

          

        

        
           

        

      

    

    

    10.4          Reliance.

    

    (a)           The
Holder Representative shall be entitled to rely, and shall be fully protected in
relying, upon any writing, resolution, notice, consent, certificate, affidavit,
letter, telegram, facsimile, telex or telephone message, statement or other
document or conversation believed by it to be genuine and to have been signed,
sent or made by the proper Person or Persons, and upon advice and statements of
legal counsel (including counsel to the Borrower, Holdings or any other
Guarantor), independent accountants and other experts selected by the Holder
Representative.  The Holder Representative shall be fully justified in
failing or refusing to take any action under this Agreement or any other
Operative Document unless it shall first receive such advice or concurrence of
the Holders as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Holders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action.  The Holder Representative shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement or
any other Operative Document in accordance with a request or consent of the
Holders, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all of the Holders.

    

    (b)           The
Borrower and Holdings shall be entitled to rely, and shall be fully protected in
relying (without investigation or inquiry), upon the Holder Representative in
any instance where the Holder Representative purports to be acting on behalf of
a Holder, Holders, or Required Holders; and the Holders shall indemnify, defend,
and hold Borrower and Holdings harmless with respect to such
reliance.

    

    10.5          Notice of
Default.  The
Holder Representative shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default, unless the Holder Representative
shall have received written notice from a Holder or the Borrower referring to
this Agreement, describing such Default or Event of Default and stating that
such notice is a “notice of default”.  In the event that the Holder
Representative receives such a notice, the Holder Representative shall give
notice thereof to the Holders.  The Holder Representative may (but
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Default or Event of Default as it shall deem advisable or
in the best interest of the Holders.

    

    
      
        
           

        

        
          55

          
            

          

        

        
           

        

      

    

    

    10.6          Credit
Decision.  Each
Holder, by acceptance of any Note(s) held by it, expressly acknowledges that
none of the Holder Representative-Related Persons has made any representation or
warranty to it and that no act by the Holder Representative hereinafter taken,
including any review of the affairs Holdings and its Subsidiaries, shall be
deemed to constitute any representation or warranty by the Holder Representative
to any Holder.  Each Holder, by acceptance of any Note(s) held by it,
represents to the Holder Representative that it has, independently and without
reliance upon the Holder Representative and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of Holdings, the Borrower and the other
Subsidiaries, and all applicable laws relating to the transactions contemplated
thereby, and made its own decision to enter into this Agreement and extend
credit to the Borrower hereunder.  Each Holder also represents that it
will, independently and without reliance upon the Holder Representative and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Operative
Documents, and to make such investigations as it deems necessary to inform
itself as to the business, prospects, operations, property, financial and other
condition and creditworthiness of Holdings, the Borrower and the other
Subsidiaries.  Except for notices, reports and other documents
expressly herein required to be furnished to Holdings or the Borrower by the
Holder Representative, the Holder Representative shall not have any duty or
responsibility to provide any Holder with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of Holdings and its Subsidiaries which may come
into the possession of the Holder Representative.

    

    10.7          Indemnification.  Whether
or not the transactions contemplated hereby shall be consummated, the Holders,
by acceptance of any Note(s) held by them, agree that, upon demand therefor they
shall indemnify the Holder Representative (to the extent not reimbursed by or on
behalf of the Borrower and without limiting the obligation of the Borrower to do
so), ratably from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and disbursements
of any kind whatsoever which may at any time (including at any time following
the repayment of the Notes and at any time following the termination or
resignation of the Holder Representative) be imposed on, incurred by or asserted
against the Holder Representative (in its capacity as the Holder Representative
and not as a Holder) in any way relating to or arising out of this Agreement,
any other Operative Document or any other document contemplated by or referred
to herein or the transactions contemplated hereby or thereby or any action taken
or omitted by the Holder Representative under or in connection with any of the
foregoing; provided, however, that no Holder shall be liable for the payment to
the Holder Representative of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting solely from the Holder Representative’s gross negligence
or willful misconduct.  In addition, each Holder shall reimburse the
Holder Representative upon demand for its ratable share of any costs or
out-of-pocket expenses (including attorneys’ fees and expenses) incurred by the
Holder Representative in its capacity as the Holder Representative and not as a
Holder in connection with the administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Operative Document, or any document contemplated by or referred to
herein to the extent that the Holder Representative is not reimbursed for such
expenses by or on behalf of the Borrower.  The obligation of the
Holders in this Section 10.7 shall
survive the payment of all Obligations.

    

    
      
        
           

        

        
          56

          
            

          

        

        
           

        

      

    

    

    10.8          Holder Representative in
Individual Capacity.  The
Purchaser and its affiliates may purchase Notes made by, make loans to, acquire
equity interests in, make other investments in, and generally engage in any kind
of lending, financial advisory or other business with Holdings, the Borrower and
their Subsidiaries and Affiliates as though the Purchaser were not the Holder
Representative hereunder and without notice to or consent of the Holders,
including, without limitation with respect to the purchase of its Note at the
Closing, and the Holders specifically acknowledge the Purchaser can take all
actions with respect to its Note as it deems appropriate without reference to
any agency created hereunder or any duty to the Holders created thereby or at
common law.  With respect to its Note, the Purchaser shall have the
same rights and powers under this Agreement and the other Operative Documents as
any other Holder and may exercise the same as though it were not the Holder
Representative, and the terms “Holder” and “Holders” (and the
plural forms thereof) shall include the Purchaser in its individual
capacity.

    

    10.9          Successor Holder
Representative.  The
Holder Representative may resign as Holder Representative upon thirty (30) days’
prior notice to the Holders.  If the Holder Representative shall
resign as Holder Representative under this Agreement, the Holders shall appoint
from among the Holders a successor agent for the Holders, which successor shall
be acceptable to the Borrower (with the Borrower’s consent not to be
unreasonably withheld).  If no successor agent is appointed prior to
the effective date of the resignation of the Holder Representative, the Holder
Representative may thereupon appoint a successor agent from among the Holders,
which successor shall be acceptable to the Borrower (with the Borrower’s consent
not to be unreasonably withheld).  Upon the acceptance of its
appointment as successor agent hereunder, such successor agent shall succeed to
all the rights, powers and duties of the retiring Holder Representative and the
term “Holder
Representative” shall mean such successor agent and the retiring Holder
Representative’s appointment, powers and duties as Holder Representative shall
be terminated.  After any retiring Holder
Representative’s  resignation hereunder as Holder Representative, the
provisions of this Article X and Sections 11.4 and
11.7 shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Holder Representative under this
Agreement.  If no successor agent has accepted appointment as Holder
Representative by the date which is thirty (30) days following a retiring Holder
Representative’s notice of resignation (or, if later, ten (10) days after the
date upon which the Holder Representative designates a successor agent), the
retiring Holder Representative’s resignation shall nevertheless thereupon become
effective and the Holders shall perform all of the duties of the Holder
Representative hereunder until such time, if any, as the Holder Representative
appoint a successor agent as provided for above.

    

    ARTICLE
XI. 

    MISCELLANEOUS

    

    11.1          No Waiver; Cumulative
Remedies.  No
failure or delay on the part of the Holder Representative or any Holder in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy hereunder.  The remedies herein provided
are cumulative and not exclusive of any rights or remedies provided by
law.

    

    
      
        
           

        

        
          57

          
            

          

        

        
           

        

      

    

    

    11.2          Amendments, Waivers and
Consents.  Any
provision in this Agreement, the Notes or the other Operative Documents to the
contrary notwithstanding, changes in or additions to this Agreement and the
other Operative Documents may be made, and compliance with any covenant or
provision set forth herein or therein may be omitted or waived, if the Borrower
shall obtain consent thereto in writing from the Required Holders, and shall, in
any case, deliver copies of such consent in writing to all other Holders of
Notes; provided that (i) without the consent of all Holders of Notes, no such
consent or waiver shall be effective to reduce the amount of, to postpone the
date fixed for the payment of, the principal of (including any required
redemption) or interest or Prepayment Premium payable on any Note, to decrease
the Interest Rate or the Prepayment Premium, to decrease or postpone any
prepayments or redemptions, to increase the proportion of interest payable as
PIK Interest rather than as cash interest, to alter, amend or waive compliance
with Section
8.1(a), to alter or amend the consent mechanism provided for under Section 8.3 or this
Section 11.2,
or to release any material Guarantor from its guaranty hereunder or any
Guaranty, and (ii) without the consent of the Holder Representative, no such
consent or waiver shall be effective to alter the rights or obligations of the
Holder Representative.  If the Required Holders vote to alter, amend
or waive compliance with the Intercreditor Agreement or any subordination or
intercreditor agreement relating to any Subordinated Debt, then all Holders
shall be bound by such vote and agree to sign such consent or other document as
may be necessary to effectuate such alteration, amendment or
waiver.  Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which
given.  Written notice of any waiver or consent effected under this
subsection shall promptly be delivered by the Borrower to any Holders who did
not execute the same.

    

    11.3          Addresses for Notices,
Etc.  All
notices, requests, demands and other communications provided for hereunder shall
be in writing and mailed (by first class registered or certified mail, postage
prepaid), sent by express overnight courier service or electronic facsimile
transmission with a copy by mail, sent as an Electronic Record and delivered by
encrypted e-mail, or delivered to the applicable party at the addresses
indicated below:

    

    If to the
Borrower or any Guarantor:

    

    Physicians
Formula, Inc.

    1055 West
8th
Street

    Azusa, CA
91702

    Attention:  Jeff
Berry, Chief Financial Officer

    Telephone:
626-334-3395

    Fax:
626-812-9462

    Email:
jeff.berry@physiciansformula.com

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Kirkland
& Ellis LLP

    300 N.
LaSalle Street, Suite 3200

    

    
      
        
           

        

        
          58

          
            

          

        

        
           

        

      

    

    

    Chicago,
IL 60654

    Attention:
Louis R. Hernandez, Esq.

    Telephone:
312-862-2000

    Fax:
312-862-2200

    Email:
lhernandez@kirkland.com

    

    

    If to the
Purchaser or the initial Holder Representative:

    

    Mill Road
Capital, L.P.

    Two Sound
View Drive

    Greenwich,
CT 06830

    Attention:
Thomas Lynch, Managing Director

    Telephone:
203-987-3501

    Fax:
203-621-3280

    Email:
tlynch@millroadcapital.com

    

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Foley
Hoag LLP

    155
Seaport Boulevard

    Boston,
MA  02210

    Attention:  Peter
M. Rosenblum, Esq.

    Telephone:
617-832-1000

    Fax:
617-832-7000

    Email:
prosenblum@foleyhoag.com

    

    If to any
other Holder or any successor Holder Representative, at such Holder’s or
successor Holder Representative’s address for notices as set forth in the
transfer records of the Borrower or, as to each of the foregoing, at such other
address as shall be designated by such Person in a written notice to the other
party complying as to delivery with the terms of this Section.

    

    All such
notices, requests, demands and other communications shall, when mailed or sent,
respectively, be effective (i) three (3) Business Days after being deposited in
the mails, (ii) one Business Day after being deposited with the express
overnight courier service or (iii) the Business Day when sent when sent by
electronic facsimile transmission (with receipt confirmed) or sent as an
Electronic Record by electronic mail or similar secure electronic channel to
which the parties have agreed, respectively, addressed as
aforesaid.

    

    11.4          Costs, Expenses and
Taxes. 

    

    (a)      
     The Borrower agrees to pay on demand (i) all
reasonable costs and expenses of the Purchaser in connection with the
preparation, negotiation, approval, execution and delivery of this Agreement,
the Notes, the other Operative Documents and all other instruments and documents
to be delivered hereunder and thereunder, and in connection with the
consummation of the transactions contemplated hereby and thereby; (ii) all
reasonable costs and expenses of the Holders and the Holder Representative in
connection with the interpretation, administration, amendment or waiver (whether
or not such amendment or waiver becomes effective) of any of this Agreement, the
Notes, the other Operative Documents and all other instruments and documents to
be delivered hereunder and thereunder; (iii) all costs and expenses (including
court costs) of the Holders and the Holder Representative in connection with any
Event of Default hereunder or the enforcement of any of this Agreement, the
Notes, the other Operative Documents and all other instruments and documents to
be delivered hereunder and thereunder and the exercise of the rights and
remedies of any of the Holders hereunder or thereunder; provided, that the (A)
Holder Representative and the (B) Holders collectively shall each be limited to
a single counsel in each relevant jurisdiction.  Notwithstanding the
preceding sentence, and in addition to the provisions of such sentence, the
Borrower agrees to pay on demand all reasonable fees and out of pocket expenses
of Foley Hoag LLP, counsel to the Purchaser, and any counsel to the Holders
(which other designated counsel shall, at any time, be limited to a single
counsel in each relevant jurisdiction) selected by the Required Holders, in each
case in connection with the transactions contemplated by the Operative
Documents, including without limitation any interpretation, amendment, waiver
(whether or not such amendment or waiver becomes effective) or enforcement of
this Agreement, the Notes, the other Operative Documents and all other
instruments and documents to be delivered hereunder and thereunder or the
exercise of the rights and remedies of the Holders hereunder and
thereunder.  In addition, the Borrower agrees to pay the expenses of
preparing Notes from time to time in connection with exchanges and transfers of
Notes and the expenses of delivering copies of Operative Documents to Holders,
and the Borrower agrees to indemnify, pay and hold each Holder harmless from and
against any and all liabilities with respect to or resulting from any delay in
paying or omission to pay taxes (other than transfer taxes) and filing fees with
respect to such transfer.

    

    
      
        
           

        

        
          59

          
            

          

        

        
           

        

      

    

    

    (b)   
        The Borrower and
Holdings, jointly and severally, agree to pay any and all stamp, documentary and
other similar taxes payable or determined to be payable in connection with the
execution and delivery of this Agreement, the Notes, the other Operative
Documents and the other instruments and documents to be delivered hereunder or
thereunder, including interest and penalties, in the event any such taxes are
assessed, irrespective of when such assessment is made and whether or not any
credit is then in use or available hereunder, except in each case, in the case
of an assignment of any of the Notes.  A
certificate of the Holder Representative or any Holder requiring payment or
reimbursement by the Borrower or Holdings pursuant to this Section 11.4(b) shall be conclusive if reasonably determined and set
forth with reasonable detail absent manifest error, it being understood,
however, that (i) the Borrower and Holdings shall only be required to pay or
reimburse the Person making such claim for that portion of such tax reasonably
attributable to its purchase of one or more Notes and extensions of credit under
this Agreement and the other Operative Documents, and not for any portion of
such tax attributable to other activities or transactions of such Person, (ii)
no Person shall be required to make its tax returns, books or records available
to Holdings, the Borrower or any other Subsidiary to verify its compliance with
the provisions of this Section and (iii) for the avoidance of doubt, in no event
shall the Borrower or Holdings be responsible for the income or franchise taxes
of any Holder.

    

    
      
        
           

        

        
          60

          
            

          

        

        
           

        

      

    

    

    (c)      
     The provisions of this Section 11.4 shall
survive the payment in full of all amounts due under this Agreement, the Notes
and the other Operative Documents and the termination of this Agreement and the
other Operative Documents.

    

    11.5          Assignability, Binding
Agreement.  This
Agreement may not be assigned by the Borrower or any Guarantor without the prior
written consent of each Holder.  Any Holder of one or more Notes may
assign this Agreement and its Notes, in the minimum aggregate amount of $500,000
plus multiples of $100,000 in excess thereof (except in the case of an
assignment by a Holder of the entire aggregate balance of its Notes, and except
in the case of an assignment to a Holder or an Affiliate under common control of
such Holder or an Approved Fund of a Holder), (i) freely without consent to
another Holder or to an Affiliate under common control of such Holder of the
assigning Holder or to an Approved Fund with respect to the assigning Holder,
and (ii) with the prior consent of the Holder Representative and (so long as no
Event of Default then exists) the Borrower (which consent of the Borrower shall
not be unreasonably withheld or delayed) to any commercial bank, financial
institution, Fund, or other investment fund or investor.  This
Agreement shall be binding upon and enforceable by, and shall inure to the
benefit of, the parties hereto, the Holders from time to time and their
respective successors and permitted assigns.  Notwithstanding the
foregoing, nothing in this Agreement is intended to give any Person not named
herein the benefit of any legal or equitable right, remedy or claim under this
Agreement.  The parties hereto and, whether or not a signatory hereto,
each Holder (by its acceptance of any Note(s) held by it) hereby acknowledge and
agree that the Intercreditor Agreement entered into by the Purchaser as Holder
Representative, and any subordination or intercreditor agreements entered into
by the Holder Representative on behalf of the Holders relating to any
Subordinated Debt, shall inure to the benefit of, and be binding upon each
Holder as if it were a party thereto, and each Holder agrees to execute and
deliver such further instruments or documents as the Senior Lender (with respect
to the Intercreditor Agreement) or the Holder Representative or the Purchaser
(with respect to any such subordination or intercreditor agreements relating to
any Subordinated Debt) shall reasonably require to give effect to the
foregoing.

    

    11.6          Payments in Respect of
Notes.  Except as
set forth in Section 11.5, the Holders of the Notes, by their acceptance
thereof, agree that, with respect to all sums received by them applicable to the
payment of principal of or interest on the Notes, equitable adjustment will be
made among them so that, in effect, all such sums shall be shared ratably by all
of the Holders of the Notes whether received by voluntary payment, by
realization upon security or guaranties, by the exercise of the right of
set-off, by counterclaim or cross-action or by the enforcement of any or all of
the Notes.  Except as set forth in Section 11.5, if any Holder of one
or more Notes receives any payment on its Notes in excess of its pro rata
portion, then such Holder receiving such excess payment shall purchase for cash
from the other Holders of the Notes an interest in their Notes in such amounts
as shall result in a ratable participation by all of the Holders of the Notes in
the aggregate unpaid amount of Notes then outstanding.

    

    11.7          Reserved.

    

    11.8          Indemnification.  In
addition to the payment of expenses pursuant to Section 11.4, whether
or not the transactions contemplated hereby shall be consummated, the Borrower
agrees, to indemnify, pay and hold the Holder Representative and each Holder and
the partners, members, officers, directors, employees and agents of such Person
(collectively, the “Indemnitees”)
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, litigation and
court costs, settlement costs and the reasonable fees and disbursements of
counsel for such Indemnitees) in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitees shall be
designated a party thereto), or otherwise, which may be imposed on, incurred by,
or asserted against such Indemnitee, in any manner relating to or arising out of
(i) this Agreement, the Notes and the other Operative Documents and all other
matters related thereto or in connection therewith, (ii) the Holders’ agreement
to purchase the Notes, or the use or intended use of the proceeds of the Notes
hereunder, (iii) the violation of any securities law by the Borrower or Holdings
in connection with or otherwise affecting the transactions contemplated by the
Operative Documents, (iv) the failure of any of the parties (other than the
Holder Representative and the Holders) to the Operative Documents to comply with
any law, rule or regulation applicable to the transactions contemplated thereby
or (v) any Environmental Law or any Hazardous Substances (A) present on or under
the Premises (B) released from or onto the Premises, or (C) generated by
Holdings and/or any Subsidiary (all of the foregoing, collectively, the “Indemnified
Liabilities”); provided that the Borrower shall have no obligation to an
Indemnitee hereunder with respect to Indemnified Liabilities which are
determined by a final court decision or arbitral award to have resulted from the
gross negligence or willful misconduct of that Indemnitee or any employee,
partner, member, officer, director or agent of that Indemnitee.  To
the extent that the undertaking to indemnify, pay and hold harmless set forth in
the preceding sentence may be unenforceable because it violates any law or
public policy, the Borrower and Holdings shall contribute the maximum portion
which it is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all Indemnified Liabilities incurred or suffered by the
Indemnitees or any of them.  This indemnification shall survive the
payment and satisfaction of all Obligations and the termination of this
Agreement and the other Operative Documents, and shall remain in force beyond
the expiration of any applicable statute of limitations and payment or
satisfaction in full of any single claim under this
indemnification.

    

    
      
        
           

        

        
          61

          
            

          

        

        
           

        

      

    

    

    11.9          Set-Off.  In
addition to any rights now or hereafter granted under applicable law and not by
way of limitation of any such rights, upon the occurrence and during the
continuation of any Event of Default, each Holder and its affiliates are hereby
authorized by the Borrower and each Guarantor at any time or from time to time,
without notice to the Borrower or such Guarantor or to any other Person, any
such notice being hereby expressly waived, to set off and to appropriate and to
apply any and all deposits (general or special, including, but not limited to,
indebtedness evidenced by certificates of deposit, whether matured or unmatured,
but not including trust accounts, and in whatever currency denominated) and any
other indebtedness at any time held or owing by such Holder or such an affiliate
to or for the credit or the account of the Borrower or such Guarantor, whether
or not matured, against and on account of the Obligations of the Borrower or
such Guarantor to the Holders under the Operative Documents, including, but not
limited to, all claims of any nature or description arising out of or connected
with the Operative Documents, irrespective of whether or not (a) such Holder
shall have made any demand hereunder or (b) the principal of or the interest on
the loans or Notes and other amounts due under this Agreement of the other
Operative Documents shall have become due and payable pursuant to Section 8.1 and
although said obligations and liabilities, or any of them, may be contingent or
unmatured; provided that in no
event shall any Holder offset against the Borrower’s payroll account number
4121973010 maintained at Senior Lender so long as the funds held in such payroll
account are limited to the amount required to satisfy the Borrower’s payroll
obligations during the following seven day period (as of any date of
determination).  Such Holder shall promptly notify the Borrower after
any such set-off and application made by such Holder; provided, however, that the failure to give
such notice shall not affect the validity of such set-off and
application.

    

    
      
        
           

        

        
          62

          
            

          

        

        
           

        

      

    

    

    11.10        Marshaling; Payments Set
Aside.  No Holder
shall be under any obligation to marshal any assets in favor of the Borrower,
any Guarantor or any other Person or against or in payment of any or all of the
Obligations.  To the extent that the Borrower or any Guarantor makes a
payment or payments to the Holders, or the Holders exercise their rights of
setoff, and such payment or payments or the proceeds of such setoff or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required (including pursuant to any settlement entered into by the
Holders in their discretion) to be repaid to a trustee, receiver or any other
party in connection with any bankruptcy, insolvency or similar proceeding, or
otherwise, then to the extent of such recovery the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such setoff had not
occurred.

    

    11.11        Survival of Representations
and Warranties.  All
representations and warranties made to any party to this Agreement, the Notes,
the other Operative Documents or any other instrument or document delivered in
connection herewith or therewith, shall survive the execution and delivery
hereof and thereof, regardless of any investigation made by the Holders or on
behalf of the Holders.

    

    11.12        Entire
Agreement.  This
Agreement, together with the other Operative Documents, embodies the entire
agreement and understanding between the Borrower, the Guarantors, the Holder
Representative and the Holders, and supersedes all prior agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.

    

    11.13        Severability.  The
invalidity or unenforceability of any provision hereof shall in no way afflict
the validity or enforceability of any other provision.

    

    11.14        Waiver of Jury Trial; Waiver
of Certain Damages.  EACH OF
THE BORROWER, EACH GUARANTOR, THE PURCHASER, THE HOLDER REPRESENTATIVE AND (BY
ACCEPTANCE OF ANY NOTE(S) HELD BY IT) EACH HOLDER HEREBY WAIVES ITS RIGHT TO
JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN
CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER OPERATIVE
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE
OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING ,
WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR
ACTIONS OF THE PURCHASER RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THE
NOTES AND THE OTHER OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL NOT SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW, EACH PARTY
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION
REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES.  EACH OF THE PARTIES (a) CERTIFIES THAT NO REPRESENTATIVE,
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVERS, AND (b) ACKNOWLEDGES THAT EACH OF THE OTHER PARTIES HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS TO WHICH
IT IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS
CONTAINED HEREIN.

    

    
      
        
           

        

        
          63

          
            

          

        

        
           

        

      

    

    

    11.15        Governing Law; Jurisdiction;
Venue; Place of Performance.  THIS
AGREEMENT AND EACH OF THE OTHER OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS
OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO
CONFLICTS OR CHOICE OF LAW).  THE BORROWER AND EACH GUARANTOR CONSENT
TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN NEW YORK COUNTY
IN THE STATE OF NEW YORK IN CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF
ANY HOLDERS UNDER THIS AGREEMENT OR ANY OF THE OTHER OPERATIVE DOCUMENTS AND
CONSENT TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER OR
ANY SUCH GUARANTOR, AS THE CASE MAY BE, BY MAIL AT THE BORROWER’S OR SUCH
GUARANTOR’S ADDRESS SET FORTH HEREIN.  THE BORROWER AND EACH GUARANTOR
IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS REFERRED TO IN THIS
SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH
ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE BORROWER OR ANY
GUARANTOR AGAINST THE PURCHASER, ANY OTHER HOLDER OR THE HOLDER REPRESENTATIVE
OR ANY OF THEIR AFFILIATES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY OPERATIVE DOCUMENT OR ANY
OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS SHALL BE BROUGHT
ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW
YORK.

    

    11.16        No
Limitation.  Nothing
in Section
11.15 shall affect the right of any Holder to serve process in any manner
permitted by law, or limit any right that any Holder may have to bring
proceedings against the Borrower or any Guarantor in the courts of any
jurisdiction or to enforce in any lawful manner a judgment obtained in one
jurisdiction in any other jurisdiction.

    

    11.17        Section Headings;
Construction.  The
descriptive headings in this Agreement have been inserted for convenience only
and shall not be deemed to limit or otherwise affect the construction of any
provision thereof or hereof.  The parties have participated jointly in
the negotiation and drafting of this Agreement and the other agreements,
documents and instruments executed and delivered in connection herewith with
counsel sophisticated in investment transactions.  In the event an
ambiguity or question of intent or interpretation arises, this Agreement and the
agreements, documents and instruments executed and delivered in connection
herewith shall be construed as if drafted jointly by the parties and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement and the agreements,
documents and instruments executed and delivered in connection
herewith.

    

    
      
        
           

        

        
          64

          
            

          

        

        
           

        

      

    

    

    11.18        Counterparts.  This
Agreement may be executed simultaneously in any number of counterparts, each of
which when so executed and delivered shall be taken to be an original; but such
counterparts shall together constitute but one and the same
document.  Any counterpart may be executed by the delivery of a
facsimile signature thereon by telecopier or by electronic mail, each of which
shall be of the same legal effect, validity and enforceability as an original
manually executed signature page.

    

    11.19        Further
Assurances.  From and
after the date of this Agreement, upon the reasonable request of the Holder
Representative or the Holders, the Borrower and each Guarantor shall execute and
deliver, and shall cause their respective Subsidiaries to execute and deliver,
such instruments, documents and other writings as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of the Operative Documents.

    

    11.20        Specific
Performance.  Upon
breach by the Borrower or any Guarantor or the occurrence and continuance of any
Event of Default with respect to any obligation hereunder under the Notes or
under any other Operative Document, each Holder shall be entitled to protect and
enforce its rights at law, or in equity or by other appropriate proceedings for
specific performance of such obligation, or for an injunction against such
breach or default, or in aid of the exercise of any power or remedy granted
hereby or thereby or by law.

    

    11.21        Actions by
Holders.  Except as
provided in Section
11.2, wherever in this Agreement action is required or permitted to be
taken by, or consent is required of, or a matter requires the satisfaction of,
the Holders, such action may be taken by, and/or such consent may be obtained
from, and/or such satisfaction may be expressed by, the Required
Holders.

    

    11.22        Confidential
Information.  Each of
the Holders (by the acceptance of any Note(s) held by it) and the Holder
Representative agree to maintain the confidentiality of the Information (as
defined below), except that Information may be disclosed (a) to its and its
Affiliates’ directors, officers, employees and agents, including accountants,
legal counsel and other advisors to the extent any such Person has a need to
know such Information (it being understood that the Persons to whom such
disclosure is made will first be informed of the confidential nature of such
Information and instructed to keep such Information confidential), (b) to the
extent requested by any regulatory authority (including any self-regulatory
authority), (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party hereto, the Holder
Representative or any other Holder, (e) in connection with the exercise of any
remedies hereunder or under any other Operative Document or any suit, action or
proceeding relating to this Agreement or any other Operative Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to (A)
any assignee of or participant in, or any prospective assignee of or participant
in, any of its rights or obligations under this Agreement, any Note(s) or (B)
any actual or prospective counterparty (or its advisors) to any swap or
derivative transaction relating to Holdings, the Borrower or any other
Subsidiary and their obligations, (g) with the prior written consent of the
Borrower or Holdings, (h) to the extent such Information (A) becomes publicly
available other than as a result of a breach of this Section or (B) becomes
available to the Holders or the Holder Representative on a non-confidential
basis from a source other than Holdings, the Borrower or any other Subsidiary or
any of their directors, officers, employees or agents, including accountants,
legal counsel and other advisors, (i) to rating agencies if requested or
required by such agencies in connection with a rating relating to the Notes or
Obligations, (j) to entities which compile and publish information about the
subordinated debt market, provided that only basic information about the amount,
pricing and structure of the transaction evidenced hereby may be disclosed
pursuant to this subsection (j), or (k) in any press release, “tombstone”
advertisement or other similar publicity announcement, provided that only basic
information about the identity or the Borrower and the amount and structure of
the transaction evidenced hereby (and in no event any proprietary or
confidential business information about the Borrower or any Guarantor) may be
disclosed pursuant to this subsection (k).

    

    
      
        
           

        

        
          65

          
            

          

        

        
           

        

      

    

    

    For
purposes of this Section, “Information” means
all information received from Holdings or any of its Subsidiaries relating to
Holdings, the Borrower or any other Subsidiaries or any of their respective
businesses, other than any such information that is available to the Holders on
a nonconfidential basis prior to disclosure by Holdings, the Borrower or any
other Subsidiaries.

    

    The
provisions of this Section 11.22 shall survive termination of this
Agreement.

    

    11.23        Material Nonpublic
Information.  MRC shall
reserve the right to elect not to receive any information required to be
disclosed under the terms of any Operative Document, to the extent such
information would be considered to be material nonpublic information as defined
under any applicable federal or state securities laws.

    

    11.24        Publicity.  Except as
may be required by applicable law, and except for disclosures on a confidential
basis to any investors in, senior lenders to, or legal counsel and other
professional advisers to the Borrower or any Guarantor, and except for
disclosures in the ordinary course of business in credit applications or
government filings, without the prior written consent of the Purchaser neither
the Borrower nor any Guarantor shall, and the Borrower and the Guarantors shall
not permit any of their Affiliates to, (i) disclose to any Person the interest
rates, fees or pricing terms, or any other financial or other material terms and
conditions, provided in this Agreement and the other Operative Documents or (ii)
issue a publicity release or announcement or otherwise make any other public
disclosure concerning this Agreement or the transactions contemplated hereby
intended primarily for publicity purposes and having no independent business
purpose other than publicity.  If any announcement is required by law
to be made by the Borrower, any Guarantor or any of their Affiliates, prior to
making such announcement the Borrower will, if possible in compliance with such
law, deliver a draft of such announcement to the Purchaser and shall give the
Purchaser a reasonable opportunity to comment thereon.

    

    
      
        
           

        

        
          66

          
            

          

        

        
           

        

      

    

    

    11.25        Limitation of
Liability.  No party
shall have any liability to any other party (whether sounding in tort, contract,
or otherwise) for consequential damages suffered by any other party in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by the Operative Documents, or any act, omission or
event occurring in connection therewith, or for any special exemplary or
punitive damages, and each party hereby waives, to the maximum extent not
prohibited by law, any right it may have to claim or recover any of the
foregoing.

    

    11.26        USA Patriot
Act.  Each
Holder that is subject to the requirements of the Patriot Act hereby notifies
the Borrower and each Guarantor that, pursuant to the requirements of the
Patriot Act, it may be required to obtain, verify, and record information that
identifies the Borrower or such Guarantor, which information includes the name
and address of the Borrower and such Guarantor and other information that will
allow such Holder to identify the Borrower and such Guarantor in accordance with
the Patriot Act.

    

    11.27        Arbitration.
Arbitration.  The
Purchaser, the Holder Representative, each Holder (by acceptance of any Note(s)
held by it) and the Borrower agree, upon demand by either party, to submit to
binding arbitration all claims, disputes and controversies between or among them
(and their respective employees, officers, directors, attorneys, and other
agents), whether in tort, contract or otherwise, in any way arising out of or
relating to (a) any credit subject to this Agreement, or any of the Operative
Documents, and their negotiation, execution, collateralization, administration,
repayment, modification, extension, substitution, formation, inducement,
enforcement, default or termination; or (b) requests for additional
credit.

    

    (b)  
         Governing Rules.  Any arbitration proceeding will (a) proceed
in a location in New York, New York selected by the American Arbitration
Association (“AAA”); (b) be governed by the Federal Arbitration Act
(Title 9 of the United States Code), notwithstanding any conflicting choice of
law provision in any of the documents between the parties; and (c) be conducted
by the AAA, or such other administrator as the parties shall mutually agree
upon, in accordance with the AAA’s commercial dispute resolution procedures,
unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed
interest, arbitration fees and costs in which case the arbitration shall be
conducted in accordance with the AAA’s optional procedures for large, complex
commercial disputes (the commercial dispute resolution procedures or the
optional procedures for large, complex commercial disputes to be referred to in
this Agreement, as applicable, as the “Rules”).  If there is any inconsistency between the
terms of this Agreement and the Rules, the terms and procedures set forth in
this Agreement shall control.  Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute.  Nothing contained in this Agreement shall be deemed to be a
waiver by any party that is a bank of the protections afforded to it under 12
U.S.C. §91 or any similar applicable state law.

    

    (c)    
       No Waiver of Provisional
Remedies, Self-Help and Foreclosure.  The arbitration
requirement does not limit the right of any party to (a) foreclose against real
or personal property collateral; (b) exercise self-help remedies relating to
collateral or proceeds of collateral such as setoff or repossession; or (c)
obtain provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before during or after the pendency
of any arbitration proceeding.  This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference under this Agreement, including without limitation
those arising from the exercise of the actions detailed in clauses (a), (b) and
(c) of this Section
11.27(c).

    

    
      
        
           

        

        
          67

          
            

          

        

        
           

        

      

    

    

    (d)     
      Arbitrator Qualifications
and Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of New York or a neutral retired judge
of the state or federal judiciary of New York, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator will determine whether
or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator’s discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of New York and may grant any remedy or relief that a
court of such state could order or grant within the scope of this Agreement and
such ancillary relief as is necessary to make effective any
award.  The arbitrator shall also have the power to award recovery of
all costs and fees, to impose sanctions and to take such other action as the
arbitrator deems necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the New York Rules of Civil Procedure or other
applicable law.  Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.

    

    (e)       
    Discovery.  In
any arbitration proceeding, discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than 20
days before the hearing date.  Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party’s presentation and that no alternative means for
obtaining information is available.

    

    (f)          
  Class
Proceedings and Consolidations.  No party to this Agreement
shall be entitled to join or consolidate disputes by or against others in any
arbitration, except parties who have executed any Operative Document, or to
include in any arbitration any dispute as a representative or member of a class,
or to act in any arbitration in the interest of the general public or in a
private attorney general capacity.

    

    (g)          
 Payment of
Arbitration Costs and Fees.  The arbitrator shall award all
costs and expenses of the arbitration proceeding.

    

    
      
        
           

        

        
          68

          
            

          

        

        
           

        

      

    

    

    (h)    
       Miscellaneous.  To
the maximum extent practicable, the AAA, the arbitrators and the parties shall
take all action required to conclude any arbitration proceeding within 180 days
of the filing of the dispute with the AAA.  No arbitrator or other
party to an arbitration proceeding may disclose the existence, content or
results of the proceeding, except for disclosures of information by a party
required in the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between
the parties potentially applies to a dispute, the arbitration provision most
directly related to the Operative Documents or the subject matter of the dispute
shall control.  This arbitration provision shall survive termination,
amendment or expiration of any of the Operative Documents or any relationship
between the parties.

    

    11.28        INTERCREDITOR
AGREEMENT.  THE TERMS
AND CONDITIONS OF THIS AGREEMENT INCLUDING WITHOUT LIMITATION ARTICLES II AND
VIII AND THE OTHER OPERATIVE DOCUMENTS ARE SUBJECT TO THE TERMS OF THE
INTERCREDITOR AGREEMENT.

     

     

    [The
remainder of this page has been left blank intentionally.]

    

    
      
        
           

        

        
          69

          
            

          

        

        
           

        

      

    

    

    IN WITNESS WHEREOF, the
parties hereto have duly authorized and executed this Senior Subordinated Note
Purchase and Security Agreement under seal as of the date first above
written.

    

    
      	 
      	
              BORROWER:

            
	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA, INC.,

            
	 
      	
              a
      New York Corporation

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ Ingrid Jackel

            
	 
      	 
      	
              Name:
      Ingrid Jackel

            
	 
      	 
      	
              Title:
      Chief Executive Officer

            
	 
      	 
      	 
      
	 
      	
              Federal
      Employer Identification No. 13-3015258

            
	 
      	
              Organizational
      Identification No.  N/A

            
	 
      	 
      	 
      
	 
      	
              GUARANTORS:

            
	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA HOLDINGS, INC.,

            
	 
      	
              a
      Delaware Corporation

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ Ingrid Jackel

            
	 
      	 
      	
              Name:
      Ingrid Jackel

            
	 
      	 
      	
              Title:
      Chief Executive Officer

            
	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA COSMETICS, INC.,

            
	 
      	
              a
      Delaware Corporation

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ Ingrid Jackel

            
	 
      	 
      	
              Name:
      Ingrid Jackel

            
	 
      	 
      	
              Title:
      Chief Executive Officer

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA DRTV, LLC,

            
	 
      	
              a
      Delaware Limited Liability Company

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ Ingrid Jackel

            
	 
      	 
      	
              Name:
      Ingrid Jackel

            
	 
      	 
      	
              Title:
      Chief Executive Officer

            

    

     

     

    Signature Page
to Senior Subordinated Note Purchase Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              ACCEPTED
      AND AGREED:

            
	 
      	 
      	 
      
	 
      	
              PURCHASER AND INITIAL

            
	 
      	
              HOLDER
      REPRESENTATIVE:

            
	 
      	 
      	 
      
	 
      	
              MILL
      ROAD CAPITAL, L.P.,

            
	 
      	
              a
      Delaware Limited Partnership

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/ Charles Goldman

            
	 
      	 
      	
              Name:
      Charles Goldman

            
	 
      	 
      	
              Title:
      Managing Director

            

    

     

     

    
      Signature Page
to Senior Subordinated Note Purchase Agreement

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    TABLE
OF CONTENTS

    

    

    
      	
              ARTICLE I. PURCHASE AND SALE OF THE SENIOR SUBORDINATED
      NOTES

            	
              1

            
	 
      	
              1.1

            	
              The Notes.

            	
              1

            
	 
      	
              1.2

            	
              Purchase and Sale of the
    Notes

            	
              2

            
	 
      	
              1.3

            	
              Payments and Endorsements.

            	
              2

            
	 
      	
              1.4

            	
              Redemptions; Prepayments;
      Repurchases.

            	
              3

            
	 
      	
              1.5

            	
              Default Rate of Interest

            	
              5

            
	 
      	
              1.6

            	
              Maximum Legal Rate of
    Interest

            	
              5

            
	 
      	
              1.7

            	
              Payment or Delivery on Non-Business
      Days

            	
              6

            
	 
      	
              1.8

            	
              Transfer and Exchange of
    Notes

            	
              6

            
	 
      	
              1.9

            	
              Replacement of Notes

            	
              6

            
	 
      	
              1.10

            	
              Ranking

            	
              6

            
	 
      	
              1.11

            	
              Closing Fee; Expenses

            	
              7

            
	 
      	
              1.12

            	
              Original Issue Discount.

            	
              7

            
	 
      	
              1.13

            	
              Security Interest.

            	
              7

            
	 
      	
              1.14

            	
              Amendments for Mezzanine Financing and
      Warrants.

            	
              7

            
	 
      	
              1.15

            	
              Standstill.

            	
              8

            
	 
      	 
      	 
      	 
      
	
              ARTICLE II. SECURITY INTEREST.

            	
              8

            
	 
      	
              2.1

            	
              Grant of Security Interest

            	
              8

            
	 
      	
              2.2

            	
              Notifying Account Debtors and Other Obligors;
      Collection of Collateral

            	
              8

            
	 
      	
              2.3

            	
              Collateral Assignment of
      Insurance

            	
              9

            
	 
      	
              2.4

            	
              Borrower’s Premises.

            	
              9

            
	 
      	
              2.5

            	
              License

            	
              10

            
	 
      	
              2.6

            	
              Financing Statements.

            	
              10

            
	 
      	
              2.7

            	
              Setoff

            	
              10

            
	 
      	
              2.8

            	
              Collateral Related Matters

            	
              11

            
	 
      	
              2.9

            	
              Notices Regarding Disposition of
      Collateral

            	
              11

            
	 
      	
              2.10

            	
              Limitation on Security
    Interest

            	
              11

            
	 
      	
              2.11

            	
              Senior Lender Acting as
    Bailee

            	
              11

            
	 
      	 
      	 
      	 
      
	
              ARTICLE III. DEFINITIONS; INTERPRETATION

            	
              12

            
	 
      	
              3.1

            	
              Definitions.

            	
              12

            
	 
      	
              3.2

            	
              Interpretation

            	
              23

            
	 
      	
              3.3

            	
              Change in Accounting
    Principles

            	
              23

            
	 
      	 
      	 
      	 
      
	
              ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE
      PURCHASER

            	
              24

            
	 
      	
              4.1

            	
              Representations and Warranties of the
      Purchaser

            	
              24

            
	 
      	 
      	 
      	 
      
	
              ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE
      BORROWER

            	
              25

            
	 
      	
              5.1

            	
              Existence and Power; Name; Chief Executive Office;
      Inventory and Equipment Locations; Federal Employer Identification Number
      and Organizational Identification Number..

            	
              25

            
	 
      	
              5.2

            	
              Capitalization.

            	
              25

            
	 
      	
              5.3

            	
              Authorization of Borrowing; No Conflict as to Law
      or Agreements.

            	
              25

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              5.4

            	
              Legal Agreements.

            	
              26

            
	 
      	
              5.5

            	
              Subsidiaries..

            	
              26

            
	 
      	
              5.6

            	
              Financial Condition; No Adverse
      Change

            	
              26

            
	 
      	
              5.7

            	
              Litigation.

            	
              26

            
	 
      	
              5.8

            	
              Intellectual Property
    Rights.

            	
              26

            
	 
      	
              5.9

            	
              Taxes.

            	
              27

            
	 
      	
              5.10

            	
              Titles and Liens.

            	
              27

            
	 
      	
              5.11

            	
              No Defaults.

            	
              27

            
	 
      	
              5.12

            	
              Submissions to the Holder
      Representative.

            	
              28

            
	 
      	
              5.13

            	
              Financing Statements.

            	
              28

            
	 
      	
              5.14

            	
              Rights to Payment.

            	
              28

            
	 
      	
              5.15

            	
              Employee Benefit Plans.

            	
              28

            
	 
      	
              5.16

            	
              Environmental Matters.

            	
              29

            
	 
      	
              5.17

            	
              Commercial Tort Claims.

            	
              30

            
	 
      	
              5.18

            	
              Margin Rules.

            	
              30

            
	 
      	
              5.19

            	
              Representation by Counsel.

            	
              30

            
	 
      	
              5.20

            	
              Relationship of Parties,
    etc.

            	
              30

            
	 
      	
              5.21

            	
              Brokers.

            	
              30

            
	 
      	
              5.22

            	
              Foreign Assets Control Regulations and Anti-Money
      Laundering.

            	
              30

            
	 
      	
              5.23

            	
              Securities Act.

            	
              30

            
	 
      	
              5.24

            	
              Delivery of and Senior Loan
      Documents.

            	
              31

            
	 
      	 
      	 
      	 
      
	
              ARTICLE VI. CONDITIONS PRECEDENT

            	
              31

            
	 
      	
              6.1

            	
              Representations and
    Warranties.

            	
              31

            
	 
      	
              6.2

            	
              No Default.

            	
              31

            
	 
      	
              6.3

            	
              No Violation of Order or
      Judgment.

            	
              31

            
	 
      	
              6.4

            	
              Documentation at Closing.

            	
              31

            
	 
      	
              6.5

            	
              Financial Information.

            	
              33

            
	 
      	
              6.6

            	
              Litigation.

            	
              33

            
	 
      	
              6.7

            	
              Material Adverse Effect.

            	
              33

            
	 
      	
              6.8

            	
              Necessary Consents.

            	
              33

            
	 
      	
              6.9

            	
              Material Agreements.

            	
              33

            
	 
      	
              6.10

            	
              Due Diligence.

            	
              34

            
	 
      	
              6.11

            	
              Fees.

            	
              34

            
	 
      	 
      	 
      	 
      
	
              ARTICLE
      VII. COVENANTS

            	
              34

            
	 
      	
              7.1

            	
              Reporting Requirements.

            	
              34

            
	 
      	
              7.2

            	
              Financial Covenants.

            	
              37

            
	 
      	
              7.3

            	
              Other Liens and Permitted
      Liens.

            	
              38

            
	 
      	
              7.4

            	
              Indebtedness

            	
              39

            
	 
      	
              7.5

            	
              Guaranties

            	
              40

            
	 
      	
              7.6

            	
              Investments and
Subsidiaries

            	
              40

            
	 
      	
              7.7

            	
              Dividends and Distributions

            	
              41

            
	 
      	
              7.8

            	
              Salaries.  [Intentionally
      Omitted.

            	
              41

            
	 
      	
              7.9

            	
              Key Person Life
      Insurance.  [Intentionally Omitted.]

            	
              41

            
	 
      	
              7.10

            	
              Books and Records; Collateral Examination;
      Inspection and Appraisals.

            	
              41

            
	 
      	
              7.11

            	
              Account Verification; Payment of Permitted
      Liens.

            	
              42

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              7.12

            	
              Compliance with Laws.

            	
              42

            
	 
      	
              7.13

            	
              Payment of Taxes and Other
      Claims

            	
              43

            
	 
      	
              7.14

            	
              Maintenance of Collateral and
      Properties.

            	
              43

            
	 
      	
              7.15

            	
              Insurance

            	
              43

            
	 
      	
              7.16

            	
              Preservation of Existence

            	
              44

            
	 
      	
              7.17

            	
              Delivery of Instruments,
etc

            	
              44

            
	 
      	
              7.18

            	
              Sale or Transfer of Assets; Suspension of Business
      Operations

            	
              44

            
	 
      	
              7.19

            	
              Consolidation and Merger; Asset
      Acquisitions

            	
              44

            
	 
      	
              7.20

            	
              Sale and Leaseback

            	
              44

            
	 
      	
              7.21

            	
              Restrictions on Nature of
      Business

            	
              45

            
	 
      	
              7.22

            	
              Accounting

            	
              45

            
	 
      	
              7.23

            	
              Discounts, etc

            	
              45

            
	 
      	
              7.24

            	
              Pension Plans

            	
              45

            
	 
      	
              7.25

            	
              Place of Business; Name

            	
              45

            
	 
      	
              7.26

            	
              Constituent Documents

            	
              45

            
	 
      	
              7.27

            	
              Reserved.

            	
              45

            
	 
      	
              7.28

            	
              Performance by the Holder
      Representative

            	
              45

            
	 
      	
              7.29

            	
              Holder Representative Appointed as the Borrower’s
      Attorney in Fact

            	
              46

            
	 
      	
              7.30

            	
              Use of Proceeds.

            	
              46

            
	 
      	
              7.31

            	
              Further Assurances.

            	
              46

            
	 
      	
              7.32

            	
              Reports to other Creditors

            	
              46

            
	 
      	
              7.33

            	
              Board Seat.

            	
              47

            
	 
      	
              7.34

            	
              Other Agreements

            	
              47

            
	 
      	 
      	 
      	 
      
	
              ARTICLE VIII. EVENTS OF DEFAULT AND
    REMEDIES

            	
              47

            
	 
      	
              8.1

            	
              Events of Default

            	
              47

            
	 
      	
              8.2

            	
              Distribution of Proceeds

            	
              51

            
	 
      	
              8.3

            	
              Annulment of Defaults

            	
              51

            
	 
      	 
      	 
      	 
      
	
              ARTICLE IX. THE GUARANTIES

            	
              51

            
	 
      	
              9.1

            	
              The Guaranties.

            	
              51

            
	 
      	
              9.2

            	
              Guaranty Unconditional.

            	
              52

            
	 
      	
              9.3

            	
              Discharge Only upon Payment in Full; Reinstatement
      in Certain Circumstances.

            	
              53

            
	 
      	
              9.4

            	
              Subrogation.

            	
              53

            
	 
      	
              9.5

            	
              Waivers.

            	
              53

            
	 
      	
              9.6

            	
              Limit on Recovery.

            	
              53

            
	 
      	
              9.7

            	
              Stay of Acceleration.

            	
              53

            
	 
      	
              9.8

            	
              Benefit to Guarantors.

            	
              54

            
	 
      	
              9.9

            	
              Guarantor Covenants.

            	
              54

            
	 
      	
              9.10

            	
              Further Assurances.

            	
              54

            
	 
      	 
      	 
      	 
      
	
              ARTICLE X. HOLDER REPRESENTATIVE

            	
              54

            
	 
      	
              10.1

            	
              Appointment and
    Authorization.

            	
              54

            
	 
      	
              10.2

            	
              Delegation of Duties.

            	
              54

            
	 
      	
              10.3

            	
              Liability of Holder
      Representative.

            	
              54

            
	 
      	
              10.4

            	
              Reliance.

            	
              55

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              10.5

            	
              Notice of Default.

            	
              55

            
	 
      	
              10.6

            	
              Credit Decision.

            	
              56

            
	 
      	
              10.7

            	
              Indemnification.

            	
              56

            
	 
      	
              10.8

            	
              Holder Representative in Individual
      Capacity.

            	
              57

            
	 
      	
              10.9

            	
              Successor Holder
      Representative.

            	
              57

            
	 
      	 
      	 
      	 
      
	
              ARTICLE XI. MISCELLANEOUS

            	
              57

            
	 
      	
              11.1

            	
              No Waiver; Cumulative
    Remedies.

            	
              57

            
	 
      	
              11.2

            	
              Amendments, Waivers and
      Consents.

            	
              58

            
	 
      	
              11.3

            	
              Addresses for Notices, Etc.

            	
              58

            
	 
      	
              11.4

            	
              Costs, Expenses and Taxes.

            	
              59

            
	 
      	
              11.5

            	
              Assignability, Binding
      Agreement.

            	
              61

            
	 
      	
              11.6

            	
              Payments in Respect of
    Notes.

            	
              61

            
	 
      	
              11.7

            	
              Reserved.

            	
              61

            
	 
      	
              11.8

            	
              Indemnification.

            	
              61

            
	 
      	
              11.9

            	
              Set-Off.

            	
              62

            
	 
      	
              11.10

            	
              Marshaling; Payments Set
    Aside.

            	
              63

            
	 
      	
              11.11

            	
              Survival of Representations and
      Warranties.

            	
              63

            
	 
      	
              11.12

            	
              Entire Agreement.

            	
              63

            
	 
      	
              11.13

            	
              Severability.

            	
              63

            
	 
      	
              11.14

            	
              Waiver of Jury Trial; Waiver of Certain
      Damages.

            	
              63

            
	 
      	
              11.15

            	
              Governing Law; Jurisdiction; Venue; Place of
      Performance.

            	
              64

            
	 
      	
              11.16

            	
              No Limitation.

            	
              64

            
	 
      	
              11.17

            	
              Section Headings;
    Construction.

            	
              64

            
	 
      	
              11.18

            	
              Counterparts.

            	
              65

            
	 
      	
              11.19

            	
              Further Assurances.

            	
              65

            
	 
      	
              11.20

            	
              Specific Performance.

            	
              65

            
	 
      	
              11.21

            	
              Actions by Holders.

            	
              65

            
	 
      	
              11.22

            	
              Confidential Information.

            	
              65

            
	 
      	
              11.23

            	
              Material Nonpublic
    Information.

            	
              66

            
	 
      	
              11.24

            	
              Publicity.

            	
              66

            
	 
      	
              11.25

            	
              Limitation of Liability.

            	
              67

            
	 
      	
              11.26

            	
              USA Patriot Act.

            	
              67

            
	 
      	
              11.27

            	
              Arbitration.

            	
              67

            
	 
      	
              11.28

            	
              INTERCREDITOR AGREEMENT.

            	
              69

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    SCHEDULES, EXHIBITS AND
ANNEXES

     

    
      
        	
                 
      

              	
                Exhibit
      A

              	
                —

              	
                Form
      of Senior Subordinated Note

              

      

      
        	
                 
      

              	
                Exhibit
      B

              	
                —

              	
                Form
      of Guarantor Security Agreement

              

      

      
        	
                 
      

              	
                Exhibit
      C

              	
                —

              	
                Form
      of Patent and Trademark Security
Agreement

              

      

      
        	
                 
      

              	
                Exhibit
      D

              	
                —

              	
                Form
      of Collateral Pledge Agreement

              

      

      
        	
                 
      

              	
                Exhibit
      E

              	
                —

              	
                Compliance
      Certificate

              

      

      
        	
                 
      

              	
                Exhibit
      F

              	
                —

              	
                Additional
      Guarantor Supplement

              

      

      

      
        	
                 
      

              	
                Schedule
      2.4

              	
                —

              	
                Premises

              

      

      
        	
                 
      

              	
                Schedule
      5.1

              	
                —

              	
                Names,
      Address, Locations

              

      

      
        	
                 
      

              	
                Schedule
      5.2

              	
                —

              	
                Capitalization

              

      

      
        	
                 
      

              	
                Schedule
      5.5

              	
                —

              	
                Subsidiaries

              

      

      
        	
                 
      

              	
                Schedule
      5.8

              	
                —

              	
                Intellectual
      Property

              

      

      
        	
                 
      

              	
                Schedule
      5.15

              	
                —

              	
                Employee
      Benefit Plans

              

      

      
        	
                 
      

              	
                Schedule
      5.16

              	
                —

              	
                Environmental
      Matters

              

      

      
        	
                 
      

              	
                Schedule
      7.3

              	
                —

              	
                Liens

              

      

      
        	
                 
      

              	
                Schedule
      7.4

              	
                —

              	
                Indebtedness

              

      

      
        	
                 
      

              	
                Schedule
      7.5

              	
                —

              	
                Guaranties

              

      

      
        	
                 
      

              	
                Schedule
      7.6

              	
                —

              	
                Investments

              

      

      

      
        	
                 
      

              	
                Annex
      A

              	
                —

              	
                Amended
      Terms and Conditions of Senior Subordinated Notes and Issuance of
      Warrants

              

      

      
        	
                 
      

              	
                Annex
      A-1

              	
                —

              	
                Form
      of Amendment to Purchase and Security
Agreement

              

      

      
        	
                 
      

              	
                Annex
      A-2

              	
                —

              	
                Form
      of Amended Senior Subordinated Note

              

      

      
        	
                 
      

              	
                Annex
      A-3

              	
                —

              	
                Form
      of Warrant

              

      

      
        	
                 
      

              	
                Annex
      A-4

              	
                —

              	
                Form
      of Registration Rights
Agreement

              

      

    

     

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
A

    Form of
Senior Subordinated Note

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    THIS
INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN
THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.; AND
EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO
BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

    

    THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM.

    

    THIS
NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX
PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT
OF OID, ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION
REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS
FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT
ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

    

    PHYSICIANS
FORMULA, INC.

    FORM
OF SENIOR SUBORDINATED NOTE

    

    
      	
              $8,000,000.00

            	
              November
      6, 2009

            

    

    

    FOR VALUE RECEIVED, Physicians
Formula, Inc., a New York corporation (the “Maker”), hereby
promises to pay to the order of Mill Road Capital, L.P., a Delaware limited
partnership (“MRC”), or its
registered assigns and transferees (collectively, the “Payee”) the principal
sum of Eight Million Dollars ($8,000,000.00), plus the aggregate amount of
accrued interest from time to time capitalized thereon, less the aggregate
amount of principal prepaid or repaid from time to time, in each case, pursuant
to the terms and conditions of and at the times provided in the Purchase
Agreement (as defined below).

    

    1.         
    Notes.  This
Senior Subordinated Note (this “Note”) is issued
pursuant to, and is subject to the terms and entitled to the benefits of, the
Senior Subordinated Note Purchase and Security Agreement of even date herewith
among the Maker, MRC and the Guarantors (as defined therein), as amended,
restated, supplemented or otherwise modified from time to time in accordance
with its terms (the “Purchase
Agreement”).  The Payee is entitled to enjoy the benefits of
and to enforce the provisions of the Purchase Agreement as a Holder and is
subject to the obligations thereunder of Holder.  Terms used herein
and not otherwise defined herein shall have the meanings ascribed thereto in the
Purchase Agreement.

    

    2.            
 Interest.  Commencing
on the date of issuance, this Note will accrue interest on the unpaid principal
amount thereof at the Interest Rate specified in, and subject to adjustment as
provided in, the Purchase Agreement.  Interest on this Note shall be
computed based on a 360-day year and actual days elapsed, and all PIK Interest
on this Note shall be compounded quarterly on the first day of each calendar
quarter.  Cash interest on this Note shall be payable monthly in
arrears on each Interest Payment Date commencing on December 1, 2009 by wire
transfer of immediately available funds to one or more accounts designated by
the Payee.  The records of the Payee shall, absent manifest error, be
conclusive evidence of the outstanding principal balance of this Note, including
all PIK Interest added to the principal amount thereof and the compounding
thereof, but any failure of the Payee to record, or any error in so recording,
any such amount on the Payee’s records shall not limit or otherwise affect the
obligations of the Maker under this Note to make all payments of principal of
and interest thereon when due.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    If an
Event of Default has occurred and is continuing, from and after the date such
Event of Default has occurred the entire outstanding unpaid principal balance of
this Note and any unpaid interest from time to time in default shall (both
before and after acceleration and entry of judgment) bear interest, payable in
cash on demand, at a rate per annum equal to the Interest Rate payable pursuant
to Section 1.1
of the Purchase Agreement plus three percent
(3%); provided,
however, that
upon the cessation or cure of such Event of Default, if no other Event of
Default is then continuing, this Note shall again bear interest at the
applicable Interest Rate as set forth in Section 1.1 of the
Purchase Agreement.

    

    The
obligations of the Maker to pay interest under this Note are subject in all
events to the provisions of Section 1.6 of the
Purchase Agreement relating to Excess Interest and the Maximum
Rate.

    

    3.  
           Maturity; Required
Redemption.  Unless the maturity of this Note is accelerated
pursuant to Article
VIII of the Purchase Agreement, this Note shall mature and be redeemed by
the Maker in one installment which shall be paid on May 6, 2013.  On
the stated or accelerated maturity date of the Notes, the Maker will pay in cash
the principal amount of the Notes then outstanding together with all accrued and
unpaid interest thereon, including, without limitation, all PIK
interest.

    

    4.     
        Optional
Prepayments.  The Maker may voluntarily prepay this Note, in
whole or in part, at any time.  Optional prepayments permitted
pursuant to the Purchase Agreement may only be made upon payment to the Payee of
an amount equal to the sum of the principal amount to be prepaid, together with
all accrued and unpaid interest (including PIK Interest) on the amount so
prepaid through the date of prepayment, plus the Prepayment
Premium, if any, as provided in the Purchase Agreement.

    

    5.        
     Repurchase upon a Change of
Control.  The Maker is obligated upon the occurrence of a
Change of Control to repurchase this Note in whole on the terms and conditions
set forth in Section
1.4(c) of the Purchase Agreement.

    

    6.           
  Prepayment
Premium.  In the event of any prepayment of this Note prior to
the Maturity Date pursuant to Sections 1.4(b) and
(c) of the Purchase Agreement, the Maker shall pay to the Payee the
Prepayment Premium indicated in the Purchase Agreement corresponding to the time
period in which such prepayment occurs or is required to occur.

    

    7.             
Guaranty and
Security.  The payment and performance of this Note is and
shall at all times be guaranteed (the “Guaranty”) by each
Guarantor pursuant to Article IX of the
Purchase Agreement.  This Note is secured pursuant to the terms of (a)
the security interest granted by the Borrower under Article II of the
Purchase Agreement, (b) the Guarantor Security Agreement dated as of the date
hereof among the Guarantors and the Payee and (c) the other Security
Documents.  The Payee is entitled to the benefits of the Guaranty, the
Guarantor Security Agreement, the other Security Documents and the other
Operative Documents, and may enforce the agreements of the Maker contained
therein, and the Payee may exercise the remedies provided for thereby or
otherwise available in respect thereof, all in accordance with the terms
thereof.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    8.       
      Remedies on Default.
Etc.  Reference is made to the Purchase Agreement for the
remedies available to the Payee upon the occurrence of an Event of Default as
described in the Purchase Agreement.  The Maker hereby agrees to pay
on demand all reasonable costs and expenses, including without limitation
attorneys’ fees and costs of collection, incurred or paid by the holder of this
Note in enforcing this Note in accordance with the Purchase
Agreement.

    

    9.          
   No
Impairment.  No provision of the Purchase Agreement or this
Note shall alter or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal and interest on this Note at the times,
places and rates, and in the currency, provided.

    

    10.         
  Waivers;
Amendments.  The Maker and each endorser and guarantor hereby
waives presentment, demand, protest and notice of any kind.  No
failure or delay on the part of the Maker or the Payee or holder hereof in
exercising any right, power, privilege or remedy hereunder or under the Purchase
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power, privilege or remedy preclude any other or
further exercise thereof or the exercise of any other right, power, privilege or
remedy.  The remedies provided for herein and in the Purchase
Agreement are cumulative and are not exclusive of any remedies that may be
available to the Maker or the Payee at law or in equity or
otherwise.  This Note may not be amended and the provisions hereof may
not be waived, except in accordance with the terms of the Purchase
Agreement.

    

    11.          
 Lost Notes,
etc.  If this Note is mutilated, destroyed, lost or stolen,
upon receipt of evidence satisfactory to the Maker of such loss, theft,
destruction or mutilation of this Note and, if requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Maker shall issue a new Note of
like tenor and amount and dated the date to which interest has been paid, in
lieu of this Note; provided, however, if Payee,
its nominee, or any of its partners or members is the holder of this Note and
this Note is lost, stolen or destroyed, the affidavit of an authorized partner,
member or officer of such holder setting forth the circumstances with respect to
such loss, theft or destruction shall be accepted as satisfactory evidence
thereof, and no indemnification shall be required as a condition to the
execution and delivery by the Maker of a new Note in replacement of this Note
other than the holder’s written agreement to indemnify the Maker.

    

    12.           
Waiver of Jury
Trial.  EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY
WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT
OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE OR ANY OF
THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER
OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL
NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW,
EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE
ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH
GUARANTOR AND THE PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER OF SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT  SUCH PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT EACH OTHER SUCH PERSON
HAS BEEN INDUCED TO ENTER INTO THE PURCHASE AGREEMENT AND THE OTHER OPERATIVE
DOCUMENTS TO WHICH IT IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED THEREIN.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    13.      
     Governing Law; Jurisdiction;
Venue.  THIS NOTE AND EACH OF THE OTHER OPERATIVE DOCUMENTS ARE
CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING
THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).  THE MAKER AND
EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS
LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN CONNECTION WITH ANY SUIT
TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR ANY OF THE OTHER OPERATIVE
DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE, BY MAIL AT THE MAKER’S OR SUCH
GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE AGREEMENT.  THE MAKER
AND EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS
REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR
CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE MAKER OR ANY GUARANTOR
AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY
ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR ANY OTHER OPERATIVE
DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS
SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK COUNTY IN
THE STATE OF NEW YORK.

    

    
      [The remainder of this page has been
left blank intentionally.]

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the Maker has caused this Senior Subordinated Note to be duly
executed under seal on the date set forth above by a duly authorized
representative of the Maker.

    

    

    
      	 
      	
              PHYSICIANS
      FORMULA, INC.

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	 
      
	 
      	 
      	
              Name:

            
	 
      	 
      	
              Title:

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
B

    Form of
Guarantor Security Agreement

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    THE
RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBORDINATED IN THE MANNER AND
TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE”INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA,
INC.

    

    FORM
OF GUARANTOR SECURITY AGREEMENT

    

    THIS
GUARANTOR SECURITY AGREEMENT (“Agreement”), dated as
of November 6, 2009, is made by and among PHYSICIANS FORMULA HOLDINGS, INC., a
Delaware corporation, PHYSICIANS FORMULA COSMETICS, INC., a Delaware
corporation, PHYSICIANS FORMULA DRTV, LLC, a Delaware limited liability company
(each a “Grantor” and,
collectively, the “Grantors”), and MILL
ROAD CAPITAL, L.P., a Delaware limited partnership (the “Holder
Representative”).

    

    The
Holder Representative has entered into that certain Senior Subordinated Note
Purchase and Security Agreement of even date herewith (as the same may be
amended, supplemented or restated from time to time, the “Purchase Agreement”)
with PHYSICIANS FORMULA, INC., a New York corporation (the “Borrower”) and the
other Grantors, pursuant to which the Holder Representative has agreed to
purchase Borrower’s Senior Subordinated Notes due May 6, 2013 (individually a
“Note” and collectively, the “Notes”).

    

    It is a
condition precedent to the purchase of the Notes by the Holder Representative
under the Purchase Agreement that each Grantor shall have executed and delivered
this Agreement.

    

    ACCORDINGLY,
in consideration of the mutual covenants contained in the Purchase Agreement and
herein, the parties hereby agree as follows:

    

    1.             Definitions.  All
terms defined in the recitals hereto and the Purchase Agreement that are not
otherwise defined herein shall have the meanings given them in the recitals and
the Purchase Agreement. All terms defined in the UCC and not otherwise defined
herein have the meanings assigned to them in the UCC.  In addition,
the following terms have the meanings set forth below or in the referenced
Section of this Agreement:

    

    “Accounts” shall have
the meaning given it under the UCC.

    

    “Collateral” means all
of the Grantors’ Accounts, chattel paper and electronic chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
Inventory, Investment Property, letter-of-credit rights, letters of credit, all
sums on deposit in any collection account, and any items in any lockbox;
together with (i) all substitutions and replacements for and products of such
property; (ii) in the case of all goods, all accessions; (iii) all accessories,
attachments, parts, Equipment and repairs now or subsequently attached or
affixed to or used in connection with any goods; (iv) all warehouse receipts,
bills of lading and other documents of title that cover such goods now or in the
future; (v) all collateral subject to the Lien of any of the Security Documents;
(vi) any money, or other assets of the Grantors that come into the possession,
custody, or control of the Holder Representative now or in the future; (vii)
Proceeds of any of the above Collateral; (viii) books and records of the
Grantors, including without limitation all mail or e-mail addressed to the
Grantors; and (ix) all of the above Collateral, whether now owned or existing or
acquired now or in the future or in which the Grantors have rights now or in the
future.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “Equipment” shall have
the meaning given it under the UCC.

    

    “Event of Default” has
the meaning given it in Section
6.

    

    “Excluded Property”
means, collectively, (i) any permit, lease or license or any contractual
obligation entered into by the Grantors (A) that prohibits or requires the
consent of any Person other than the Grantors and their Subsidiaries which has
not been obtained as a condition to the creation by the Grantors of a Lien on
any right, title or interest in such permit, lease, license or contractual
obligation or any Capital Stock or equivalent thereof related thereto or that
contains terms stating that the granting of a lien therein would otherwise
result in a material loss by the Grantors of any material rights therein, (B) to
the extent that any law applicable thereto prohibits the creation of a Lien
thereon or (C) to the extent that a Lien thereon would give any other party a
legally enforceable right to terminate such permit, lease, license or any
contractual obligation, but only, with respect to the prohibition in (A), (B)
and (C) to the extent, and for as long as, such prohibition is not terminated or
rendered unenforceable or otherwise deemed ineffective by the UCC or any other
applicable law, (ii) property or assets owned by the Grantors that is subject to
a purchase money Lien or a Capital Lease Obligation if the contractual
obligation pursuant to which such Lien is granted (or in the document providing
for such Capital Lease Obligation) prohibits or requires the consent of any
Person other than the Grantors and their Subsidiaries which has not been
obtained as a condition to the creation of any other Lien on such property or
such assets, (iii) any “intent to use” trademark applications for which a
statement of use has not been filed (but only until such statement is filed
with, and accepted by, the United States Patent and Trademark Office) (each such
trademark, an “Intent
To Use Trademark”) and (iv) shares of capital stock having voting power
in excess of 65% of the voting power of all classes of capital stock of a first
tier controlled foreign corporation (as that term is described in the IRC);
provided, however, “Excluded Property”
shall not include any proceeds, products, substitutions or replacements of
Excluded Property (unless such proceeds, products, substitutions or replacements
would otherwise constitute Excluded Property).

    

    “General Intangibles”
shall have the meaning given it under the UCC.

    

    “Inventory” shall have
the meaning given it under the UCC.

    

    “Investment Property”
shall have the meaning given it under the UCC.

    

    “Permitted Liens”
means (i) the Security Interest, (ii) covenants, restrictions, rights, easements
and minor irregularities in title which do not materially interfere with any
Grantor’s business or operations as presently conducted, (iii) licenses (ranged
on a non-exclusive basis), sublicenses, leases or subleases granted to third
parties in the ordinary course of business and not interfereing with the
business of any Grantor, and (iv) Liens in existence on the date hereof and as
described on Exhibit
C hereto.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “Security
Interest” has the meaning given in Section
2.

    

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

    

    2.         
    Security
Interest.  The Grantors hereby pledge, collaterally assign and
grant to the Holder Representative and the Holders a Lien and security interest
(collectively referred to as the “Security Interest”)
in the Collateral as security for the payment and performance of all
Obligations; provided, however,
notwithstanding the foregoing, no Lien is hereby granted on any Excluded
Property, and such Excluded Property shall not be deemed to be “Collateral”;
provided further, that if and
when any property shall cease to be Excluded Property, a Lien on and security
interest in such property shall be deemed granted therein and such property
shall be deemed to be “Collateral.”

    

    3.            
 Representations,
Warranties and Agreements.  Each Grantor hereby represents,
warrants and agrees as follows:

    

    (a)
           Title.  The Grantor
(i) has good and marketable title to each item of Collateral in existence on the
date hereof, free and clear of all Liens except the Permitted Liens, (ii) will
have, at the time the Grantor acquires any rights in Collateral hereafter
arising, good and marketable title to each such item of Collateral free and
clear of all Liens except Permitted Liens, (iii) will keep all Collateral free
and clear of all Liens except Permitted Liens, and (iv) will defend the
Collateral against all claims or demands of all Persons other than the Holder
Representative and the holders of Permitted Liens.  The Grantor will
not sell or otherwise dispose of the Collateral or any interest therein outside
the ordinary course of business, without the prior written consent of the Holder
Representative, except for: (i) the use of cash and Cash Equivalents in the
ordinary course of business; (ii) the sale of obsolete, surplus, uneconomical,
or worn-out assets; (iii) leases or subleases granted to third parties in the
ordinary course of business in each case not interfering with the business of
the Grantor; (iv) licenses of Intellectual Property Rights granted to third
parties in the ordinary course of business in each case not interfering with the
business of the Grantor; and (v) subject to Section 7.23 of the Purchase
Agreement, write-offs or grants of discounts or forgiveness of Accounts, without
recourse, which are at least 90 days past due in connection with the compromise
or collection thereof in the ordinary course of business which do not interfere
in any material respect of Grantor.

    

    (b) 
          Chief Executive Office;
Identification Number.  The Grantor’s chief executive office
and principal place of business is located at the address set forth under its
signature below.  The Grantor’s federal employer identification number
and organization identification number is correctly set forth under its
signature below.

    

    (c)   
        Location of
Collateral.  As of the date hereof, the tangible Collateral is
located at the locations identified on Exhibit A attached
hereto, other than tangible Collateral in transit between such locations in the
ordinary course of business.  The Grantor will not permit any tangible
Collateral to be located in any state (and, if a county filing is required, in
any county) in which a financing statement covering such Collateral is required
to be, but has not in fact been, filed in order to perfect the Security
Interest.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (d)   
        Changes in Name, Constituent
Documents, Location.  The Grantor will not change its name,
Constituent Documents, or jurisdiction of organization, without the prior
written consent of the Holder Representative.  The Grantor will not
change its business address, without thirty (30) days prior written notice to
the Holder Representative.

    

    (e)     
      Fixtures.  The
Grantor will not permit any tangible Collateral (other than in-store displays)
to become part of or to be affixed to any real property without first assuring
to the reasonable satisfaction of the Holder Representative that the Security
Interest will be prior and senior to any Lien then held or thereafter acquired
by any mortgagee of such real property or the owner or purchaser of any interest
therein.  If any part or all of the tangible Collateral (other than
in-store displays) is now or will become so related to particular real estate as
to be a fixture, the real estate concerned is accurately set forth in Exhibit B
hereto.

    

    (f)       
     Rights
to Payment.  Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral is (or will be when arising, issued or assigned to the Holder
Representative) the valid, genuine and legally enforceable obligation, subject
to no defense, setoff or counterclaim (other than those arising in the ordinary
course of business), of the account debtor or other obligor named therein or in
the Grantor’s records pertaining thereto as being obligated to pay such
obligation.  The Grantor will neither agree to any material
modification or amendment nor agree to any forbearance, release or cancellation
of any such obligation, and will not subordinate any such right to payment to
claims of other creditors of such account debtor or other obligor.

    

    (g)       
    Commercial Tort
Claims.  Promptly after a Responsible Officer obtains actual
knowledge thereof (and in any event, within five Business Days), the Grantor
will deliver to the Holder Representative notice of any commercial tort claims
brought against any Person, including the name and address of each defendant, a
summary of the facts, an estimate of the Grantor’s damages, copies of any
complaint or demand letter submitted by the Grantor, and such other information
as the Holder Representative may reasonably request.  Upon written
request by the Holder Representative, the Grantor will grant the Holder
Representative a security interest in all commercial tort claims it may have
against any such Person.

    

    (h)         
  Miscellaneous
Covenants.  The Grantor will:

    

    (i) 
           keep all
tangible Collateral in good repair, working order and condition, ordinary wear
and tear excepted, and will, from time to time, replace any worn, broken or
defective parts thereof, although Grantor may discontinue the
operation  and maintenance of any properties if Grantor believes that
such discontinuance is desirable to the conduct of its business and not
disadvantageous in any material respect to the Holder
Representative;

    

    (ii) 
          pay or discharge
when due all taxes and other governmental charges levied or assessed upon or
against any Collateral or upon or against the creation, perfection or
continuance of the Security Interest, although Grantor shall not be required to
pay any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made;

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (iii)           at
any time during ordinary business hours, permit the Holder Representative or its
representatives to examine or inspect any Collateral, wherever located, and to
examine, inspect and copy the Grantor’s books and records pertaining to the
Collateral and its business and financial condition and to send and discuss with
account debtors and other obligors requests for verifications of amounts owed to
the Grantor;

    

    (iv)           keep
accurate and complete records pertaining to the Collateral and pertaining to the
Grantor’s business and financial condition in accordance with GAAP consistently
applied and cause the Company to submit such periodic reports regarding the
Collateral and its business and financial condition as in accordance with the
Purchase Agreement;

    

    (v)   
        promptly, after a Responsible
Officer obtains actual knowledge thereof (and in any event within five Business
Days), notify the Holder Representative of any loss of or material damage to any
Collateral or of any substantial adverse change in any Collateral or the
prospect of its payment;

    

    (vi)           if
the Holder Representative at any time so requests in writing (after the
occurrence and during the continuance of an Event of Default), promptly deliver
to the Holder Representative any instrument, document or chattel paper
constituting Collateral in an amount in excess of $50,000, duly endorsed or
assigned by the Grantor;

    

    (vii)          at
all times keep all tangible Collateral insured with insurers acceptable to the
Holder Representative, in such amounts and on such terms (including deductibles)
as the Holder Representative in its sole discretion may require and including,
as applicable and without limitation, business interruption insurance (including
force majeure coverage), hazard coverage on an “all risks” basis for all
tangible Collateral, and theft and physical damage coverage for Collateral
consisting of motor vehicles, with all insurance policies containing an
appropriate lender’s interest endorsement or clause, and name the Holder
Representative as an additional insured;

    

    (viii)         from
time to time authorize or execute such financing statements as the Holder
Representative may reasonably require in order to perfect the Security Interest
and, if any Collateral consists of a motor vehicle, execute such documents as
may be required to have the Security Interest properly noted on a certificate of
title;

    

    (ix)     
      pay when due or reimburse the Holder
Representative on demand for all costs of collection of any of the Obligations
and all expenses (including in each case all reasonable attorneys’ fees)
incurred by the Holder Representative in connection with the creation,
perfection, satisfaction, protection, defense or enforcement of the Security
Interest or the creation, continuance, protection, defense or enforcement of
this Agreement or any or all of the Obligations, including expenses incurred in
any litigation or bankruptcy or insolvency proceedings: provided that such
incurrence is not a product of the Holder Representative’s gross negligence, bad
faith or will misconduct;

    

    (x)            authorize,
execute, deliver or endorse any and all instruments, documents, assignments,
security agreements and other agreements and writings which the Holder
Representative may at any time reasonably request in order to secure, protect,
perfect or enforce the Security Interest and the Holder Representative’s rights
under this Agreement; and

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (xi)      
     not use or keep any Collateral, or permit it to be
used or kept by any Subsidiary, for any unlawful purpose or in violation of any
federal, state or local law, statute or ordinance.

    

    (i)    
        Holder Representative’s Right to Take
Action.  Each Grantor authorizes the Holder Representative to
file from time to time where permitted by law, such financing statements against
collateral described as “all personal property” or “all assets” as the Holder
Representative deems reasonably necessary or useful to perfect the Security
Interest.  Each Grantor will not amend any financing statements in
favor of the Holder Representative except as permitted by
law.  Further, if any Grantor at any time fails to perform or observe
any agreement contained in Section 3(h), and if
such failure continues for a period of ten (10) days after the Holder
Representative gives such Grantor written notice thereof (or, in the case of the
agreements contained in clauses (vii) and (viii) of Section 3(h),
immediately upon the occurrence of such failure, without notice or lapse of
time), the Holder Representative may (but need not) perform or observe such
agreement on behalf and in the name, place and stead of such Grantor (or, at the
Holder Representative’s option, in the Holder Representative’s own name) and may
(but need not) take any and all other actions which the Holder Representative
may reasonably deem necessary to cure or correct such failure (including,
without limitation, the payment of taxes, the satisfaction of security
interests, liens, or encumbrances, the performance of obligations under
contracts or agreements with account debtors or other obligors, the procurement
and maintenance of insurance, the execution of financing statements, the
endorsement of instruments, the qualification and licensing of such Grantor to
do business in any jurisdiction, and the procurement of repairs or
transportation); and, except to the extent that the effect of such payment would
be to render any loan or forbearance of money usurious or otherwise illegal
under any applicable law, such Grantor shall thereupon pay the Holder
Representative on demand the amount of all moneys expended and all costs and
expenses (including reasonable attorneys’ fees) incurred by the Holder
Representative in connection with or as a result of the Holder Representative’s
performing or observing such agreements or taking such actions, together with
interest thereon from the date expended or incurred by the Holder Representative
at the highest rate then applicable to any of the Obligations.  To
facilitate the performance or observance by the Holder Representative of such
agreements of the Grantors, each Grantor hereby irrevocably appoints (which
appointment is coupled with an interest) the Holder Representative, or its
delegate, as the attorney-in-fact of such Grantor with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file, in the name and on behalf of such Grantor, any and all instruments,
documents, financing statements, applications for insurance and other agreements
and writings required to be obtained, executed, delivered or endorsed by such
Grantor under this Section 3 and Section 4
below.

    

    (j)             Senior Lender as
Bailee.  With respect to any provision in this Agreement which
requires any Grantor to deliver possession or control of any negotiable
document, instrument, certificated securities, promissory notes, deposit
accounts, security accounts, commodity accounts, and letter of credit rights or
other Collateral requiring possession or control thereof in order to perfect the
security interest of the Holder Representative and the Holders therein under the
UCC, no such delivery or giving of control to the Holder Representative shall be
required to the extent such Collateral is required to be delivered to or control
is required to be given to the Senior Lender in accordance with the Senior
Credit Agreement, it being understood that the Senior Lender is acting as agent
and bailee for the benefit of the Holder Representative and the Holders pursuant
to the terms of the Intercreditor Agreement.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (k)      
     Future
Grantors.  The Borrower, Holdings and each Guarantor are
required to cause each of their Domestic Subsidiaries formed or acquired after
the Closing Date to execute and deliver to the Holder Representative,
concurrently with the formation or acquisition thereof, a joinder to this
Agreement substantially in the form of Exhibit D hereto and the Additional
Guarantor Supplement substantially in the form of Exhibit F attached to the
Purchase Agreement.

    

    4.       
      Rights of the Holder
Representative.  At any time and from time to time, whether
before or after an Event of Default, the Holder Representative may take any or
all of the following actions:

    

    (a)     
      Account
Verification.  The Holder Representative may at any time and
from time to time send or require the Grantors to send requests for verification
of accounts or notices of assignment to account debtors and other
obligors.  The Holder Representative may also at any time and from
time to time telephone account debtors and other obligors to verify
accounts.

    

    (b)       
    Collection
Account.  The Holder Representative may establish a collateral
account for the deposit of checks, drafts and cash payments made by the
Grantors’ account debtors. If a collateral account is so established, each
Grantor shall promptly deliver to the Holder Representative, for deposit into
said collateral account, all payments on Accounts and chattel paper received by
it.  All such payments shall be delivered to the Holder Representative
in the form received (except for any Grantor’s endorsement where
necessary).  Until so deposited, all payments on Accounts and chattel
paper received by any Grantor shall be held in trust by such Grantor for and as
the property of the Holder Representative and shall not be commingled with any
funds or property of such Grantor.  All deposits in said collateral
account shall constitute proceeds of Collateral and shall not constitute payment
of any Obligation.  Unless otherwise agreed in writing, no Grantor
shall have any right to withdraw amounts on deposit in any collateral
account.

    

    (c)        
   Lockbox.  The Holder
Representative may, by notice to the Grantors, require each Grantor to direct
each of its account debtors to make payment directly to a special lockbox to be
under the control of the Holder Representative. Each Grantor hereby authorizes
and directs the Holder Representative to deposit all checks, drafts and cash
payments received in said lockbox into the collateral account established as set
forth above.

    

    (d)       
    Direct
Collection.  The Holder Representative may notify any account
debtor, or any other Person obligated to pay any amount due, that such chattel
paper, Account, or other right to payment has been assigned or transferred to
the Holder Representative for security and shall be paid directly to the Holder
Representative.  At any time after the Holder Representative or any
Grantor gives such notice to an account debtor or other obligor, the Holder
Representative may (but need not), in its own name or in such Grantor’s name,
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such chattel paper, Account, or other
right to payment, or grant any reasonable to, make any compromise or settlement
with or otherwise agree to waive, modify, amend or change the obligations
(including collateral obligations) of any such account debtor or other
obligor.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    5.      
       Assignment of
Insurance.  Each Grantor hereby collaterally assigns to the
Holder Representative, as additional security for the payment of the
Obligations, any and all moneys (including but not limited to proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of such Grantor under or with respect to, any and all policies of
insurance covering the Collateral, each Grantor hereby directs the issuer of any
such policy to pay any such moneys directly to the Holder
Representative.  After the occurrence and during the continuance of an
Event of Default, the Holder Representative may (but need not), in its own name
or in any Grantor’s name, execute and deliver proofs of claim, receive all such
moneys, endorse checks and other instruments representing payment of such
moneys, and adjust, litigate, compromise or release any claim against the issuer
of any such policy.

    

    6.         
    Events of
Default.  Each of the following occurrences shall constitute an
event of default under this Agreement (herein called “Event of
Default”):  (i) an Event of Default shall occur under the
Purchase Agreement; (ii) any Grantor shall fail to pay any or all of the
Obligations when due or (if payable on demand) on demand; or (iii) any Grantor
shall fail to observe or perform any covenant or agreement herein binding on
it.

    

    7.            
 Remedies upon
Event of Default.  Upon the occurrence and during the
continuance of an Event of Default, the Holder Representative may exercise any
one or more of the following rights and remedies: (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand; (ii)
exercise and enforce any or all rights and remedies available upon default to a
secured party under the UCC, including but not limited to the right to take
possession of any Collateral, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which each Grantor hereby
expressly waives), and the right to sell, lease or otherwise dispose of any or
all of the Collateral, and in connection therewith, the Holder Representative
may require the Grantors to make the Collateral available to the Holder
Representative at a place to be designated by the Holder Representative which is
reasonably convenient to both parties, and if notice to the Grantors of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 9) at least
ten (10) days prior to the date of intended disposition or other action; (iii)
exercise or enforce any or all other rights or remedies available to the Holder
Representative by law or agreement against the Collateral, against any Grantor
or against any other Person or property.  Upon the occurrence and
during the continuance of an Event of Default, the Holder Representative is
hereby granted a nonexclusive, worldwide and royalty-free license to use or
otherwise exploit all Intellectual Property Rights owned by or licensed to any
Grantor that the Holder Representative deems reasonably necessary or appropriate
to the disposition of any Collateral.

    

    8.             
Other Personal
Property.  Unless at the time the Holder Representative takes
possession of any tangible Collateral, or within seven (7) days thereafter, any
Grantor gives written notice to the Holder Representative of the existence of
any goods, papers or other property of such Grantor, not affixed to or
constituting a part of such Collateral, but which are located or found upon or
within such Collateral, describing such property, the Holder Representative
shall not be responsible or liable to such Grantor for any action taken or
omitted by or on behalf of the Holder Representative with respect to such
property.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    9.         
    Notices; Requests for
Accounting.  All notices, requests, demands and other
communications provided for hereunder shall be in writing and mailed (by first
class registered or certified mail, postage prepaid), sent by express overnight
courier service or electronic facsimile transmission with a copy by mail, sent
as an Electronic Record and delivered by encrypted e-mail, or delivered to the
applicable party at the addresses indicated below:

    

    If to the
Borrower or any Guarantor:

    

    Physicians
Formula, Inc.

    1055 West
8th
Street

    Azusa, CA
91702

    Attention:  Jeff
Berry, Chief Financial Officer

    Telephone:
626-334-3395

    Fax:
626-812-9462

    Email:
jeff.berry@physiciansformula.com

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Kirkland
& Ellis LLP

    300 N.
LaSalle Street

    Chicago,
IL 60654

    Attention:
Louis R. Hernandez, Esq.

    Telephone:
312-862-2000

    Fax:
312-862-2200

    Email:
lhernandez@kirkland.com

    

    If to the
Purchaser or the initial Holder Representative:

    

    Mill Road
Capital, L.P.

    Two Sound
View Drive

    Greenwich,
CT 06830

    Attention:
Thomas Lynch, Managing Director

    Telephone:
203-987-3501

    Fax:
203-621-3280

    Email:
tlynch@millroadcapital.com

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Foley
Hoag LLP

    155
Seaport Boulevard

    Boston,
MA  02210

    Attention:  Peter
M. Rosenblum, Esq.

    Telephone:
617-832-1000

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Fax:
617-832-7000

    Email:
prosenblum@foleyhoag.com

    

    If to any
other Holder or any successor Holder Representative, at such Holder’s or
successor Holder Representative’s address for notices as set forth in the
transfer records of the Borrower or, as to each of the foregoing, at such other
address as shall be designated by such Person in a written notice to the other
party complying as to delivery with the terms of this Section.

    

    All such
notices, requests, demands and other communications shall, when mailed or sent,
respectively, be effective (i) three (3) Business Days after being deposited in
the mails, (ii) one Business Day after being deposited with the express
overnight courier service or (iii) the Business Day when sent when sent by
electronic facsimile transmission (with receipt confirmed) or sent as an
Electronic Record by electronic mail or similar secure electronic channel to
which the parties have agreed, respectively, addressed as
aforesaid.  All requests under Section 9-210 of the UCC (1) shall be
made in a writing signed by an authorized Person, (2) shall be personally
delivered, sent by registered or certified mail, return receipt requested, or by
overnight courier of national reputation (3) shall be deemed to be sent when
received by the Holder Representative and (4) shall otherwise comply with the
requirements of Section 9-210.  Each Grantor requests that the Holder
Representative respond to all such requests which on their face appear to come
from an authorized individual and releases the Holder Representative from any
liability for so responding.  Each Grantor shall pay the Holder
Representative the maximum amount allowed by law for responding to such
requests.

    

    10.    
       Miscellaneous.  This
Agreement has been duly and validly authorized by all necessary corporate (or
equivalent company) action. This Agreement does not contemplate a sale of
accounts, or chattel paper. This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by the Holder Representative, and, in the case of
amendment or modification, in a writing signed by the Grantors.  A
waiver signed by the Holder Representative shall be effective only in the
specific instance and for the specific purpose given.  Mere delay or
failure to act shall not preclude the exercise or enforcement of any of the
Holder Representative’s rights or remedies.  All rights and remedies
of the Holder Representative shall be cumulative and may be exercised singularly
or concurrently, at the Holder Representative’s option, and the exercise or
enforcement of any one such right or remedy shall neither be a condition to nor
bar the exercise or enforcement of any other.  The Holder
Representative’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if the Holder Representative exercises
reasonable care in physically safekeeping such Collateral or, in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Holder Representative need not otherwise preserve, protect, insure or
care for any Collateral.  The Holder Representative shall not be
obligated to preserve any rights the Grantors may have against prior parties, to
realize on the Collateral at all or in any particular manner or order, or apply
any cash proceeds of Collateral in any particular order unless otherwise
provided in the Purchase Agreement.  This Agreement shall be binding
upon and inure to the benefit of the Grantors and the Holder Representative and
their respective successors and assigns and shall take effect when signed by the
Grantor and the Holder Representative and delivered to the Holder
Representative, and each Grantor waives notice of the Holder Representative’s
acceptance hereof.  A carbon, photographic or other reproduction of
this Agreement or of any financing statement signed by any Grantor shall have
the same force and effect as the original for all purposes of a financing
statement.  This Agreement shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State of
New York.  If any provision or application of this Agreement is held
unlawful or unenforceable in any respect, such illegality or unenforceability
shall not affect other provisions or applications which can be given effect and
this Agreement shall be construed as if the unlawful or unenforceable provision
or application had never been contained herein or prescribed hereby. All
representations and warranties contained in this Agreement shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations.  The parties hereto hereby (i) consent to
the personal jurisdiction of the state and federal courts located in the State
of New York in connection with any controversy related to this Agreement; (ii)
waive any argument that venue in any such forum is not convenient, (iii) agree
that any litigation initiated by the Holder Representative or the Grantor in
connection with this Agreement or the other Operative Documents may be venued in
either the state or federal courts located in New York County, New York; and
(iv) agree that a final judgment in any such suit, action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    11.       
    Arbitration.  The
Holder Representative and each Grantor agree, upon demand by either party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise, in any way arising out of
or relating to this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination.

    

    (a)     
      Governing
Rules.  Any arbitration proceeding will (i) proceed in a
location in New York, New York selected by the American Arbitration Association
(“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to herein, as
applicable, as the “Rules”).  If there is any inconsistency between
the terms hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration
following a demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any dispute.  Nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. §91 or any similar applicable
state law.

    

    (b)     
      No Waiver of Provisional Remedies,
Self-Help and Foreclosure.  The arbitration requirement does
not limit the right of any party to (i) foreclose against real or personal
property collateral; (ii) exercise self-help remedies relating to collateral or
proceeds of collateral such as setoff or repossession; or (iii) obtain
provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before, during or after the
pendency of any arbitration proceeding.  This exclusion does not
constitute a waiver of the right or obligation of any party to submit any
dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this
paragraph.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (c)      
     Arbitrator Qualifications and
Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of New York or a neutral retired judge
of the state or federal judiciary of New York, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator will determine whether
or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of New York and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award.  The
arbitrator shall also have the power to award recovery of all costs and fees, to
impose sanctions and to take such other action as the arbitrator deems necessary
to the same extent a judge could pursuant to the Federal Rules of Civil
Procedure, the New York Code of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.

    

    (d)      
     Discovery.  In any
arbitration proceeding, discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than
twenty (20) days before the hearing date.  Any requests for an
extension of the discovery periods, or any discovery disputes, will be subject
to final determination by the arbitrator upon a showing that the request for
discovery is essential for the party's presentation and that no alternative
means for obtaining information is available.

    

    (e)     
      Class Proceedings and
Consolidations.  No party hereto shall be entitled to join or
consolidate disputes by or against others in any arbitration, except parties who
have executed this Agreement or any other contract, instrument or document
relating to any Obligations, or to include in any arbitration any dispute as a
representative or member of a class, or to act in any arbitration in the
interest of the general public or in a private attorney general
capacity.

    

    (f)     
       Payment of Arbitration Costs and
Fees.  The arbitrator shall award all costs and expenses of the
arbitration proceeding.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (g)      
     Miscellaneous.  To
the maximum extent practicable, the AAA, the arbitrators and the parties shall
take all action required to conclude any arbitration proceeding within 180 days
of the filing of the dispute with the AAA.  No arbitrator or other
party to an arbitration proceeding may disclose the existence, content or
results thereof, except for disclosures of information by a party required in
the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between
the parties potentially applies to a dispute, the arbitration provision most
directly related to the documents between the parties or the subject matter of
the dispute shall control.  This arbitration provision shall survive
termination, amendment or expiration of any of the documents or any relationship
between the parties.

    

    [Signatures
on next page]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    

    
      	 
      	
              GRANTORS:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA HOLDINGS, INC.

            	 
      
	 
      	
              a
      Delaware Corporation

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Print
      Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              Address:

            	
              1055
      West 8th Street

            	 
      
	 
      	 
      	
              Azusa,
      CA 91702

            	 
      
	 
      	 
      	
              Attn:
      Jeff Berry

            	 
      
	 
      	 
      	
              Fax:
      626-812-9462

            	 
      
	 
      	 
      	
              Email:

            	 
      
	 
      	 
      	
              jeff.berry@physiciansformula.com

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              FID:

            	 
      	 
      
	 
      	
              OID:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA COSMETICS, INC.

            	 
      
	 
      	
              a
      Delaware Corporation

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Print
      Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              Address:

            	
              1055
      West 8th Street

            	 
      
	 
      	 
      	
              Azusa,
      CA 91702

            	 
      
	 
      	 
      	
              Attn:
      Jeff Berry

            	 
      
	 
      	 
      	
              Fax:
      626-812-9462

            	 
      
	 
      	 
      	
              Email:

            	 
      
	 
      	 
      	
              jeff.berry@physiciansformula.com

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              FID:

            	 
      	 
      
	 
      	
              OID:

            	 
      	 
      

    

     

    [Signature
Page to Guarantor Security Agreement]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              PHYSICIANS
      FORMULA DRTV, LLC

            	 
      
	 
      	
              a
      Delaware Limited Liability Company

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Print
      Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              Address:

            	
              1055
      West 8th Street

            	 
      
	 
      	 
      	
              Azusa,
      CA 91702

            	 
      
	 
      	 
      	
              Attn:
      Jeff Berry

            	 
      
	 
      	 
      	
              Fax:
      626-812-9462

            	 
      
	 
      	 
      	
              Email:

            	 
      
	 
      	 
      	
              jeff.berry@physiciansformula.com

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              FID:

            	 
      	 
      
	 
      	
              OID:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              HOLDER
      REPRESENTATIVE:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              MILL
      ROAD CAPITAL, L.P.

            	 
      
	 
      	
              a
      Delaware Limited Partnership

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Print
      Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              Address:

            	
              Two
      Sound View Drive

            	 
      
	 
      	 
      	
              Greenwich,
      CT 06830

            	 
      
	 
      	 
      	
              Attn:
      Thomas Lynch, Managing Director

            	 
      
	 
      	 
      	
              Fax:
      203-987-3501

            	 
      
	 
      	 
      	
              Email:
      tlynch@millroadcapital.com

            	 
      

    

     

    [Signature
Page to Guarantor Security Agreement]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
A

    

    LOCATION OF
COLLATERAL

    

    
      	
              Location

            	 
	
              1055 W. 8th Street

              Azusa, CA 91702

            	 
	 
      	 
	
              1425 Max Brose Drive #8

              London, Ontario   N6N
      0A2

              Canada

            	 
	 
      	 
	
              435 Park Court

              Lino Lakes, MN 55014

            	 
	
              230 South Ninth Avenue

              City of Industry, CA 91746

            	 
	
              250 South Ninth Avenue

              City of Industry, CA 91746

            	 
	
              753-755 Arrow Grand Circle Way

              Covina, CA 91722

            	 
	
              2169 Wright Ave.

              La Verne, CA 91750

            	 

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
B

    

    FIXTURES

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
C

    

    PERMITTED
LIENS

    

    

    
      	
              Creditor

            	
              Collateral

            	
              Jurisdiction

            	
              Filing Date

            	
              Filing No.

            
	
              U.S.
      District Court, California Central District*

            	 
      	
              CA

            	
              02/04/2009

            	
              2:09-CV-0866-ABC-FMO

            
	
              Liens
      in favor of the Senior Lender

            	 
      	 
      	 
      	 
      

    

    * This
judgment lien has been discharged.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
D

    

    JOINDER

    

    AGREEMENT
TO BE BOUND BY GUARANTOR SECURITY AGREEMENT

    

    This
Agreement to be bound by the Guarantor Security Agreement (this “Agreement”) is
executed as of the ___ day of ______________, ___, by ______________, a
_____________ (the “New
Subsidiary”).

    

    RECITALS

    

    A.    
        Pursuant to that certain Senior
Subordinated Note Purchase and Security Agreement dated as of November 6, 2009
among Physicians Formula, Inc., a New York corporation (the “Borrower”), the
Guarantors party thereto and Mill Road Capital, L.P. (the “Holder
Representative”) (as it may be amended, restated, supplemented or
otherwise modified from time to time, the “Purchase Agreement”;
capitalized terms used herein without definition shall have the meanings
assigned to them in the Purchase Agreement), the Holder Representative purchased
certain Notes from the Borrower.

    

    B.       
     As a condition subsequent to the execution of the
Purchase Agreement by the Lender, each Domestic Subsidiary of the Borrower
existing as of the Closing Date entered into a guaranty and executed the
Guarantor Security Agreement dated as of November 6, 2009 (as it may be amended,
restated, supplemented or otherwise modified from time to time, the “Security Agreement”),
each in favor of the Holder Representative.

    

    C.           
 The Purchase Agreement provides that when the Borrower, Holdings or any
Guarantor acquires or forms a new Domestic Subsidiary, such Person will cause
such Domestic Subsidiary to provide a Guaranty and to become a party to the
Security Agreement.

    

    D.            
On [Insert Date], the New Subsidiary [Describe
acquisition/formation of New Subsidiary]. The New Subsidiary anticipates
that it will benefit from the funds available to the Borrower under the Purchase
Agreement, and in recognition of this benefit and in order to comply with the
Purchase Agreement, the New Subsidiary is willing to enter into this
Agreement.

    

    AGREEMENT

    

    NOW,
THEREFORE, the New Subsidiary agrees as follows:

    

    SECTION
1.           Representations and
Warranties. On and as
of the date of this Agreement (the “Effective Date”) and
for the benefit of the Lender, the New Subsidiary hereby makes, as to itself,
each of the representations and warranties contained in the Security
Agreement.

    

    SECTION
2.           Agreement to be
Bound. The
New Subsidiary agrees that, on and as of the Effective Date, it shall become a
Grantor under the Security Agreement, and shall be bound by all the provisions
of the Security Agreement in the same manner as if the New Subsidiary had
executed the Security Agreement on the Closing Date.  Notwithstanding
the foregoing, (i) references in the Security Agreement to information regarding
any Grantor being set forth on the signature page for such such Grantor, shall,
in the case of the New Subsidiary, refer to its signature page hereto and (ii)
references to Exhibits A-C in the Security Agreement shall refer, with respect
to the New Subsidiary, to Exhibits A-C hereto.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    SECTION
3.           Waiver. Without
limiting the generality of the waivers in the Security Agreement, the New
Subsidiary specifically agrees to be bound by the Security Agreement, and waives
any right to notice of acceptance of its execution of this Agreement and of its
agreement to be bound by the Security Agreement.

    

    SECTION
4.           Governing
Law. This
Agreement shall be governed by, and construed and interpreted in accordance
with, the laws of the State of New York (without reference to its choice of law
rules).

    

    IN
WITNESS WHEREOF, the New Subsidiary has caused this Agreement to be bound by the
Security Agreement to be executed by its duly authorized officer as of this __
day of ___________, ___.

    

    
      	 
      	
              ________________,
      a _____________

            	 
	 
      	 
      	 
      	 
	 
      	 
      	 
      	 
	 
      	
              By:

            	 
      	 
	 
      	
              Name:

            	 
      	 
	 
      	
              Title:

            	 
      	 

    

    

    

    [Attach
Exhibits A-C of the Guarantor Security Agreement]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
C

    Form of
Patent and Trademark Security Agreement

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    FORM
OF PATENT AND TRADEMARK SECURITY AGREEMENT

    

    This
Patent and Trademark Security Agreement (this “Agreement”), dated as
of November 6, 2009, is made by and between [_________], a
[________]  having a business location at the address set forth below
next to its signature (the “Debtor”), and Mill
Road Capital, L.P., a Delaware Limited Partnership (the “Secured Party”),
having a business location at the address set forth below next to its
signature.

    

    Recitals

    

    Physicians
Formula, Inc. (the “Company”), an
Affiliate of the Debtor, the Debtor, the other Guarantors party thereto and the
Secured Party are parties to that certain Senior Subordinated Note Purchase and
Security Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the “Purchase Agreement”)
setting forth the terms on which the Secured Party shall purchase notes from the
Company.

    

    As a
condition to the Secured Party’s obligation to purchase notes, the Secured Party
has required the execution and delivery of this Agreement by the
Debtor.

    

    ACCORDINGLY,
in consideration of the mutual covenants contained in the Operative Documents
and herein, the parties hereby agree as follows:

    

    1.        
     Definitions. All
terms defined in the Recitals hereto or in the Purchase Agreement that are not
otherwise defined herein shall have the meanings given to them therein. In
addition, the following terms have the meanings set forth below:

    

    “Patents” means all of
the Debtor’s right, title and interest in and to patents or applications for
patents, fees or royalties with respect thereto, and including without
limitation the right to sue for past, present and future infringement and
damages therefor, all as presently existing or hereafter arising or acquired,
including without limitation the patents listed on Exhibit
A.

    

    “Security Interest”
has the meaning given in Section 2
below.

    

    “Trademarks” means all
of the Debtor’s right, title and interest in and to: (i) trademarks, service
marks, registrations and applications for registration therefor, and the
respective goodwill associated therewith, (ii) fees or royalties with respect
thereto, and (iii) the right to sue for past, present and future infringement,
dilution and damages therefor, all as presently existing or hereafter arising or
acquired, including, without limitation, the marks listed on Exhibit
B.

    

    2.             
Security
Interest. The Debtor hereby pledges, collaterally assigns and grants to
the Secured Party a Lien and security interest (collectively referred to as the
“Security
Interest”) in the Patents and in the Trademarks, as security for the
payment and performance of all Obligations; provided, however,
notwithstanding the foregoing, no Lien is hereby granted on any Excluded
Property, and such Excluded Property shall not be deemed to be “Collateral”;
provided further, that if and
when any property shall cease to be Excluded Property, a Lien on and security
interest in such property shall be deemed granted therein and such property
shall be deemed to be “Collateral.”  As set forth in the Purchase
Agreement, the Security Interest is coupled with a security interest in
substantially all of the personal property of the Debtor.  This
Agreement grants only the Security Interest herein described, is not intended to
and does not affect any present transfer of title of any Trademarks owned by the
Debtor and makes no assignment and grants no right to assign or perform any
other action with respect to any intent to use Trademark applications owned by
the Debtor, unless such action is permitted under 15 U.S.C. § 1060.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    3.          
  Representations, Warranties
and Agreements.  The Debtor represents, warrants and agrees as
follows:

    

    (a) 
          Existence;
Authority.  The Debtor is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation, and this Agreement has been duly and validly authorized
by all necessary corporate action on the part of the Debtor.

    

    (b)  
         Patents.Exhibit A accurately
lists all Patents owned or controlled by the Debtor as of the date hereof, or to
which the Debtor has a right as of the date hereof to have assigned to it, and
accurately reflects the existence and status of applications and letters patent
pertaining to the Patents as of the date hereof.  If after the date
hereof, the Debtor owns, controls or has a right to have assigned to it any
Patents not listed on Exhibit A, or if
Exhibit A
ceases to accurately reflect the existence and status of applications and
letters patent pertaining to the Patents, then the Debtor shall provide written
notice to the Secured Party with a replacement Exhibit A in
accordance with Section 7.1(i) of the Purchase Agreement, which upon acceptance
by the Secured Party shall become part of this Agreement.

    

    (c)    
       Trademarks.Exhibit B accurately
lists all Trademarks (excluding “intent-to-use” Trademark applications as
described in the definition of “Collateral” in the Purchase Agreement”) owned or
controlled by the Debtor as of the date hereof and accurately reflects the
existence and status of Trademarks and all applications and registrations
pertaining thereto as of the date hereof; provided, however, that Exhibit B need not
list common law marks (i.e., Trademarks for which there are no applications or
registrations) which are not material to the Debtor’s or any Affiliate’s
business(es).  If after the date hereof, the Debtor owns or controls
any Trademarks (excluding “intent-to-use” Trademark applications as described in
the definition of “Collateral” in the Purchase Agreement”) not listed on Exhibit B (other than
common law marks which are not material to the Debtor’s or any Affiliate’s
business(es)), or if Exhibit B ceases to
accurately reflect the existence and status of applications and registrations
pertaining to the Trademarks, then the Debtor shall provide written notice to
the Secured Party with a replacement  Exhibit B in
accordance with Section 7.1(i) of the Purchase Agreement, which upon acceptance
by the Secured Party shall become part of this Agreement.

    

    (d)     
      Third Parties.  As
of the date hereof, (i) neither Physicians Formula Holdings, Inc., nor any of
its Subsidiaries (other than Physicians Formula, Inc.) owns, controls, or has a
right to have assigned to it any items that would, if such item were owned by
the Debtor, constitute Patents or Trademarks and (ii) no other third party owns,
controls, or has a right to have assigned to it any items that would constitute
Patents or Trademarks used by the Company or the Debtor in its business
operations other than licenses of Patents and Trademarks granted to third
parties in the ordinary course of business, copies of which have been provided
to Secured Party.  If after the date hereof any such party owns,
controls, or has a right to have assigned to it any such items, then the Company
and the Debtor shall promptly either: (x) cause such third party to assign all
of its rights in such item(s) to the Company or the Debtor as applicable; or (y)
notify the Secured Party of such item(s) and cause such third party to execute
and deliver to the Secured Party a patent and trademark security agreement
substantially in the form of this Agreement.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (e)    
       Title.  The Debtor has good and
marketable title to each Patent and each Trademark listed on Exhibit A and Exhibit B, free and
clear of all Liens except Permitted Liens.  The Debtor (i) will have,
at the time the Debtor acquires any Patents or Trademarks hereafter arising,
good and marketable title to each such Patent or Trademark free and clear of all
Liens except Permitted Liens, and (ii) will keep all Patents and Trademarks free
and clear of all Liens except Permitted Liens.

    

    (f)       
     No Sale.  Except as
permitted in the Purchase Agreement, the Debtor will not assign, transfer,
encumber or otherwise dispose of the Patents or Trademarks, or any interest
therein, without the Secured Party’s prior written consent.

    

    (g)       
    Defense.  The Debtor
will at its own expense and using commercially reasonable efforts, protect and
defend the Patents and Trademarks against all claims or demands of all Persons
other than those holding Permitted Liens.

    

    (h)        
   Maintenance.  The
Debtor will at its own expense maintain the Patents and the Trademarks to the
extent legally permissible and to the extent reasonably advisable in its
business including, but not limited to, filing all applications to obtain
letters patent or trademark registrations and all affidavits, maintenance fees,
annuities, and renewals possible with respect to letters patent, trademark
registrations and applications therefor.  The Debtor covenants that it
will not abandon nor fail to pay any maintenance fee or annuity due and payable
on any Patent or Trademark, nor fail to file any required affidavit or renewal
in support thereof, without first providing the Secured Party: (i) sufficient
written notice, of at least thirty (30) days, to allow the Secured Party to
timely pay any such maintenance fees or annuities which may become due on any
Patents or Trademarks, or to file any affidavit or renewal with respect thereto,
and (ii) a separate written power of attorney or other authorization to pay such
maintenance fees or annuities, or to file such affidavit or renewal, should such
be necessary or desirable.

    

    (i)            
Secured Party’s Right to Take
Action .  If the Debtor fails to perform or observe any of its
covenants or agreements set forth in this Section 3, and if such failure
continues for a period of ten (10) calendar days after the Secured Party gives
the Debtor written notice thereof (or, in the case of the agreements contained
in subsection (h), immediately upon the occurrence of such failure, without
notice or lapse of time), or if the Debtor notifies the Secured Party that it
intends to abandon a Patent or Trademark, the Secured Party may (but need not)
perform or observe such covenant or agreement or take steps to prevent such
intended abandonment on behalf and in the name, place and stead of the Debtor
(or, at the Secured Party’s option, in the Secured Party’s own name) and may
(but need not) take any and all other actions which the Secured Party may
reasonably deem necessary to cure or correct such failure or prevent such
intended abandonment.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (j)     
       Costs and
Expenses.  Except to the extent that the effect of such payment
would be to render any loan or forbearance of money usurious or otherwise
illegal under any applicable law, the Debtor shall pay the Secured Party on
demand the amount of all moneys expended and all costs and expenses (including
reasonable attorneys’ fees and disbursements) incurred by the Secured Party in
connection with or as a result of the Secured Party’s taking action under
subsection (i) or exercising its rights under Section 5, together
with interest thereon from the date expended or incurred by the Secured Party at
the Default Rate.

    

    (k)     
      Power of Attorney. To facilitate the
Secured Party’s taking action under subsection (i) and exercising its rights
under Section
5, the Debtor hereby irrevocably appoints (which appointment is coupled
with an interest) the Secured Party, or its delegate, as the attorney-in-fact of
the Debtor with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file, in the name and on behalf
of the Debtor, any and all instruments, documents, applications, financing
statements, and other agreements and writings required to be obtained, executed,
delivered or endorsed by the Debtor under this Section 3, or, necessary for
the Secured Party, upon the occurrence and during the continuation of an Event
of Default, to enforce or use the Patents or Trademarks or to grant or issue any
exclusive or non-exclusive license under the Patents or Trademarks to any third
party, or to sell, assign, transfer, pledge, encumber or otherwise transfer
title in or dispose of the Patents or Trademarks to any third party. The Debtor
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. The power of attorney granted herein shall terminate upon the
termination of the Purchase Agreement as provided therein and the payment and
performance of all Obligations.

    

    4.      
       Events of
Default.  Each of the following occurrences shall constitute an
event of default under this Agreement (herein called “Event of
Default”):  (a) an Event of Default, as defined in the Purchase
Agreement, shall occur; or (b) the Debtor shall fail promptly to observe or
perform any covenant or agreement herein binding on it; or (c) any of the
representations or warranties contained in Section 3 shall prove
to have been incorrect in any material respect when made except if made as of an
earlier date, in which case, on such date.

    

    5.         
    Remedies.  Upon
the occurrence and continuance of an Event of Default and at any time
thereafter, the Secured Party may, at its option, take any or all of the
following actions:

    

    (a) 
          The Secured Party
may exercise any or all remedies available under the Purchase
Agreement.

    

    (b)  
         The Secured Party may
sell, assign, transfer, pledge, encumber or otherwise dispose of the Patents and
Trademarks in accordance with this Agreement.

    

    (c)    
       The Secured Party may enforce the
Patents and Trademarks and any licenses thereunder, and if Secured Party shall
commence any suit for such enforcement, the Debtor shall, at the request of
Secured Party, do any and all lawful acts and execute any and all proper
documents required by Secured Party in aid of such enforcement.

    

    6.             
Purchase
Agreement.  The Debtor hereby acknowledges and affirms that the
rights and remedies with respect to the Patents and Trademarks are more fully
set forth in the Purchase Agreement, the terms and provisions of which are
hereby incorporated by reference as if fully set forth herein.  In the
event of any conflict between the terms of this Agreement and the terms of the
Purchase Agreement, the terms of the Purchase Agreement shall
govern.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    7.      
       Termination.  This
Agreement and the Security Interest granted hereby shall terminate in full as
set forth in Section
2.6 of the Purchase Agreement.  In connection with any
termination or release pursuant to Section 2.6 of the
Purchase Agreement, the Secured Party shall promptly execute and deliver to the
Debtor all documents that the Debtor shall reasonably request to evidence such
termination or release.

    

    8.       
      Miscellaneous.  This
Agreement can be waived, modified, amended, terminated or discharged, and the
Security Interest can be released, only explicitly in a writing signed by the
Secured Party.  A waiver signed by the Secured Party shall be
effective only in the specific instance and for the specific purpose given. Mere
delay or failure to act shall not preclude the exercise or enforcement of any of
the Secured Party’s rights or remedies. All rights and remedies of the Secured
Party shall be cumulative and may be exercised singularly or concurrently, at
the Secured Party’s option, and the exercise or enforcement of any one such
right or remedy shall neither be a condition to nor bar the exercise or
enforcement of any other. All notices to be given to the Debtor under this
Agreement shall be given in the manner and with the effect provided in the
Purchase Agreement.  The Secured Party shall not be obligated to
preserve any rights the Debtor may have against prior parties, to realize on the
Patents and Trademarks at all or in any particular manner or order, or to apply
any cash proceeds of Patents and Trademarks in any particular order of
application.  This Agreement shall be binding upon and inure to the
benefit of the Debtor and the Secured Party and their respective participants,
successors and assigns and shall take effect when signed by the Debtor and
delivered to the Secured Party, and the Debtor waives notice of the Secured
Party’s acceptance hereof.  The Secured Party may execute this
Agreement if appropriate for the purpose of filing, but the failure of the
Secured Party to execute this Agreement shall not affect or impair the validity
or effectiveness of this Agreement.  A carbon, photographic or other
reproduction of this Agreement or of any financing statement signed by the
Debtor shall have the same force and effect as the original for all purposes of
a financing statement.  This Agreement shall be governed by and
construed in accordance with the substantive laws (other than conflict laws)of
the State of New York.  Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining terms of this
Agreement.  All representations and warranties contained in this
Agreement shall survive the execution, delivery and performance of this
Agreement and the creation and payment of the Obligations.

    

    9.       
      Arbitration.  The
parties hereto agree, upon demand by any party, to submit to binding arbitration
all claims, disputes and controversies between or among them (and their
respective employees, officers, directors, attorneys, and other agents), whether
in tort, contract or otherwise arising out of or relating to in any way this
Agreement and its negotiation, execution, collateralization, administration,
repayment, modification, extension, substitution, formation, inducement,
enforcement, default or termination.

    

    (a)      
     Governing
Rules.  Any arbitration proceeding will (i) proceed in a
location in New York, New York selected by the American Arbitration Association
(“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the documents between the parties; and (iii) be conducted by the AAA, or such
other administrator as the parties shall mutually agree upon, in accordance with
the AAA’s commercial dispute resolution procedures, unless the claim or
counterclaim is at least $1,000,000.00 exclusive of claimed interest,
arbitration fees and costs in which case the arbitration shall be conducted in
accordance with the AAA’s optional procedures for large, complex commercial
disputes (the commercial dispute resolution procedures or the optional
procedures for large, complex commercial disputes to be referred to, as
applicable, as the “Rules”).  If there is any inconsistency between
the terms hereof and the Rules, the terms and procedures set forth herein shall
control.  Any party who fails or refuses to submit to arbitration
following a demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any dispute.  Nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. §91 or any similar applicable
state law.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (b)    
       No Waiver of Provisional
Remedies; Self-Help and Foreclosure.  The arbitration
requirement does not limit the right of any party (if not otherwise restricted
by the terms and conditions of this Agreement) to (i) foreclose against real or
personal property collateral; (ii) exercise self-help remedies relating to
collateral or proceeds of collateral such as setoff or repossession; or (iii)
obtain provisional or ancillary remedies such as replevin, injunctive relief,
attachment or the appointment of a receiver, before during or after the pendency
of any arbitration proceeding.  This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in sections (i), (ii) and (iii) of this
paragraph.

    

    (c)        
   Arbitrator Qualifications
and Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of New York or a neutral retired judge
of the state or federal judiciary of New York, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator will determine whether
or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of New York and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award.  The
arbitrator shall also have the power to award recovery of all costs and fees, to
impose sanctions and to take such other action as the arbitrator deems necessary
to the same extent a judge could pursuant to the Federal Rules of Civil
Procedure, the New York Rules of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (d)    
       Discovery.  In
any arbitration proceeding discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than 20
days before the hearing date and within 180 days of the filing of the dispute
with the AAA.  Any requests for an extension of the discovery periods,
or any discovery disputes, will be subject to final determination by the
arbitrator upon a showing that the request for discovery is essential for the
party's presentation and that no alternative means for obtaining information is
available.

    

    (e)     
      Class Proceedings and
Consolidations.  The resolution of any dispute arising pursuant
to the terms of this Agreement shall be determined by a separate arbitration
proceeding and such dispute shall not be consolidated with other disputes or
included in any class proceeding.

    

    (f)      
      Payment of Arbitration Costs
and Fees.  The arbitrator shall award all costs and expenses of
the arbitration proceeding.

    

    (g)      
     Miscellaneous.  To
the maximum extent practicable, the AAA, the arbitrators and the parties shall
take all action required to conclude any arbitration proceeding within 180 days
of the filing of the dispute with the AAA.  No arbitrator or other
party to an arbitration proceeding may disclose the existence, content or
results thereof, except for disclosures of information by a party required in
the ordinary course of its business or by applicable law or
regulation.  If more than one agreement for arbitration by or between
the parties potentially applies to a dispute, the arbitration provision most
directly related to the Operative Documents or the subject matter of the dispute
shall control.  This arbitration provision shall survive termination,
amendment or expiration of any of the Operative Documents or any relationship
between the parties.

    

    [Signatures
on next page]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

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

    

    
      	
              [______________________]

            	
              [___________________________]

            
	
              1055
      West 8th Street

            	 
      	 
      
	
              Azusa,
      California 91702

            	
              By:

            	 
      
	
              Attention:
      Jeff Berry

            	
              Name:

            	 
      
	 
      	
              Title:

            	 
      
	 
      	 
      	 
      
	
              Mill
      Road Capital, L.P.

            	
              MILL
      ROAD CAPITAL, L.P.

            
	
              Two
      Sound View Drive

            	
              By:

            	 
      
	
              Greenwich,
      CT 06830

            	
              Name:

            	 
      
	
              Fax:  203-621-3280

            	
              Title:

            	 
      
	
              Attention:  Thomas
      Lynch, Managing Director

            	 
      	 
      

    

     

    [Signature
Page to Patent and Trademark Security Agreement]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    
      	
              STATE
      OF

            	
              )

            

    

    )

    
      	
              COUNTY
      OF

            	
              )

            

    

    

    

    On this
____ day of November 2009, before me, _______________________, 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, and that by his signature on the instrument, the person, or
the entity on behalf of which the person acted, executed this instrument. I
certify under penalty of perjury under the laws of the State of
_________________ that the foregoing is true and correct.

    

    
      	 
      	
              Witness
      my hand and official seal

            
	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    
      	
              STATE
      OF

            	
              )

            

    

    )

    
      	
              COUNTY
      OF

            	
              )

            

    

    

    

    On this
____ day of _______________ 2009, before me, _______________________, 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, and that by his signature on the instrument, the person, or
the entity on behalf of which the person acted, executed this instrument. I
certify under penalty of perjury under the laws of the State of
__________________ that the foregoing is true and correct.

    

    
      	 
      	
              Witness
      my hand and official seal

            
	 
      	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
A

    

    UNITED STATES PATENT
APPLICATIONS

    

    [______________]

    

    UNITED STATES ISSUED
PATENTS

    

    [______________]

    

    FOREIGN PATENTS
OWNED

    

    [______________]

    

    UNITED STATES PATENT
APPLICATIONS

    

    [______________]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
B

    UNITED STATES TRADEMARKS AND
SERVICE MARKS

    

    REGISTRATIONS

    

    [______________]

    

    APPLICATIONS

    

    [______________]

    

    FOREIGN TRADEMARKS
PENDING

    

    [______________]

    

    FOREIGN TRADEMARKS
REGISTERED

    

    [______________]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
D

    Form of
Collateral Pledge Agreement

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    THE
RIGHTS OF THE BENEFICIARY OF THIS INSTRUMENT ARE SUBORDINATE IN THE MANNER AND
TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT (THE
“INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS FARGO
BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA,
INC.

    

    FORM
OF COLLATERAL PLEDGE AGREEMENT

    

    Date:  November
6, 2009

    

    
      	
              DEBTOR:

            	
              [_________________]

            

    

    1055 West
8th Street

    Azusa,
California 91702

    Attn:
Jeff Berry, CFO

    

    
      	
              SECURED
      PARTY:

            	
              Mill
      Road Capital, L.P. (the “Secured
      Party”)

            

    

    Two Sound
View Drive

    Greenwich,
CT 06830

    Attn:
Thomas Lynch, Managing Director

    

    1.        
     Security Interest and
Collateral.  To secure the payment and performance of the
Obligations (defined below) which the Debtor may now or at any time hereafter
owe to the Secured Party pursuant to that certain Senior Subordinated Note
Purchase and Security Agreement dated as of even date herewith by and among the
Debtor, the Guarantors party thereto and the Secured Party, (the “Purchase
Agreement”), the Debtor hereby grants the Secured Party a security interest
(herein called the “Security Interest”) in the following property (collectively,
the “Collateral”):  the issued and outstanding capital stock, equity
securities, membership interests or units, and ownership interests, and rights
issued or granted in connection with the foregoing, of each Person (including,
but not limited to, [_____________], a [_________] as set forth on Schedule 1)
that are now or hereafter owned or held of record or beneficially by Debtor, and
the certificates representing such shares, securities and/or interests; (ii) all
other capital stock, equity securities, warrants, options, membership interests
and units, and ownership interests, and rights issued or granted in connection
with the foregoing, issued by such Person now or hereafter owned or held of
record or beneficially by Debtor at any time (and the certificates or other
documents or instruments representing such shares, securities and/or other
interests); (iii) all rights associated with anything of the foregoing
(including any rights under any shareholders agreements, investor rights
agreements, registration rights agreements, and similar agreements); and (iv)
any and all replacements, products and proceeds of, and dividends, distributions
in property or securities, returns of capital or other distributions made on or
with respect to, any of the foregoing; provided, however, the “Collateral” shall
not include shares of capital stock having voting power in excess of 65% of the
voting power of all classes of capital stock of a first tier controlled foreign
corporation (as that term is defined in the IRC).  Capitalized terms
used but not otherwise defined herein shall have the meanings accorded them in
the Purchase Agreement.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “Obligations” shall
mean all indebtedness, obligations and liabilities of the Borrower and/or the
Guarantors to any of the Holders, individually or collectively, whether existing
on the date of the Purchase Agreement or arising thereafter, direct or indirect,
joint or several, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, arising or incurred or owing under the Purchase Agreement, the Notes
or any of the other Operative Documents or in respect of any of the Notes or
other instruments, agreements or documents at any time evidencing any of the
foregoing, in each case whether on account of principal, interest, premium,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including all interest, fees and other amounts that, but for the filing of a
petition in bankruptcy, would otherwise accrue (whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding), and
including all fees and disbursements of counsel that are required to be paid by
the Borrower or any Guarantor pursuant to any of the Operative Documents), and
including obligations to perform acts and refrain from taking actions as well as
obligations to pay money.

    

    2.          
   Representations, Warranties
and Covenants.  The Debtor represents, warrants and covenants
that:

    

    2.1      
     The Debtor will duly endorse, in blank, each and
every instrument constituting Collateral by signing on said instrument or by
signing a separate document of assignment or transfer, if reasonably required by
the Secured Party.

    

    2.2       
    The Debtor is the owner of the Collateral free and clear
of all liens, encumbrances and security interests, except the Security Interest
and any restrictive legend appearing on any instrument constituting Collateral
and except for Permitted Liens.

    

    2.3        
   The Debtor will keep the Collateral free and clear of all
liens, encumbrances and security interests, except the Security Interest and any
restrictive legend appearing on any instrument constituting Collateral and
except for Permitted Liens.

    

    2.4         
  The Debtor will pay, when due, all taxes and other governmental
charges levied or assessed upon or against any Collateral in the same manner as
required under Section 7.13 of the Purchase Agreement.

    

    2.5          
 At any time, upon the reasonable request by the Secured Party, the Debtor
will deliver to the Secured Party all notices, financial statements, reports or
other communications received by the Debtor as an owner or holder of the
Collateral.

    

    2.6           
The Debtor will promptly upon receipt deliver (and in any event, within five (5)
Business Days thereof) to the Secured Party in pledge as additional Collateral
all securities distributed on account of the Collateral such as stock dividends
and securities resulting from stock splits, reorganizations and
recapitalizations.

    

    With
respect to any provision in this Agreement which requires the Debtor to deliver
possession or control of any negotiable document, instrument, certificated
securities, promissory notes, deposit accounts, security accounts, commodity
accounts, and letter of credit rights or other Collateral requiring possession
or control thereof in order to perfect the security interest of the Secured
Party therein under the UCC, no such delivery or giving of control to the
Secured Party shall be required to the extent such Collateral is required to be
delivered to or control is required to be given to the Senior Lender in
accordance with the Senior Credit Agreement, it being understood that the Senior
Lender is acting as agent and bailee for the benefit of the Secured Party
pursuant to the terms of the Intercreditor Agreement.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    3.     
        Rights of the Secured
Party.  The Debtor agrees that the Secured Party may at any
time, upon the occurrence and during the continuance of an Event of Default and
without notice or demand of any kind, (i) notify the obligor on or issuer of any
Collateral to make payment to the Secured Party of any amounts due or
distributable thereon; (ii) in the Debtor’s name or the Secured Party’s name,
enforce collection of any Collateral by suit or otherwise, or surrender, release
or exchange all or any part of it, or compromise, extend or renew for any period
any obligation evidenced by the Collateral; (iii) receive all proceeds of the
Collateral; and (iv) hold any increase or profits received from the Collateral
as additional security for the Obligations, except that any money received from
the Collateral shall, at the Secured Party’s option, be applied in reduction of
the Indebtedness, in such order of application as the Secured Party may
determine, unless otherwise provided in the Purchase Agreement, or be remitted
to the Debtor.

    

    4.        
     Events of
Default.  Each of the following occurrences shall constitute an
event of default under this Agreement (herein called “Event of
Default”):  (i) the Debtor shall fail to pay any or all of the
Obligations when due or (if payable on demand) on demand, or the Debtor shall
fail to observe or perform any covenant or agreement herein; (ii) any “Event of
Default” shall occur under the Purchase Agreement; (iii) any representation or
warranty made, or deemed made, by the Debtor shall prove false or misleading in
any material respect; or (iv) an Event of Default, as defined in any credit
agreement or other instrument or agreement evidencing or governing any or all of
the Obligations, shall occur and be continuing.

    

    5.           
  Remedies
upon Event of Default.  Upon the occurrence and during the
continuance of an Event of Default, the Secured Party may exercise any one or
more of the following rights or remedies:  (i) declare all unmatured
Obligations to be immediately due and payable, and the same shall thereupon be
immediately due and payable, without presentment or other notice or demand;
(ii)  exercise all voting and other rights as a holder of the
Collateral; (iii) exercise and enforce any or all rights and remedies available
upon default to a secured party under the Uniform Commercial Code as in effect
from time to time in the State of New York, including the right to offer and
sell the Collateral privately to purchasers who will agree to take the
Collateral for investment and not with a view to distribution and who will agree
to the imposition of restrictive legends on the certificates representing the
Collateral, and the right to arrange for a sale which would otherwise qualify as
exempt from registration under the Securities Act of 1933; and if notice to the
Debtor of any intended disposition of the Collateral or any other intended
action is required by law in a particular instance, such notice shall be deemed
commercially reasonable if given at least 10 calendar days prior to the date of
intended disposition or other action; and/or (iv) exercise or enforce any or all
other rights or remedies available to the Secured Party by law or agreement,
including against the Collateral or against the Debtor.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    6.         
    Miscellaneous.  Any
disposition of the Collateral in the manner provided in Section 0 shall be
deemed commercially reasonable.  This Agreement can be waived,
modified, amended, terminated or discharged, and the Security Interest can be
released, only explicitly in a writing signed by the Secured Party or upon the
payment in full of the Obligations other than contingent indemnification
obligations for which no claim has been asserted.  A waiver signed by
the Secured Party shall be effective only in the specific instance and for the
specific purpose given.  Mere delay or failure to act shall not
preclude the exercise or enforcement of any of the Secured Party’s rights or
remedies.  All rights and remedies of the Secured Party shall be
cumulative and may be exercised singularly or concurrently, at the Secured
Party’s option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other.  All notices to be given to the Debtor shall be deemed
sufficiently given if delivered or mailed by registered or certified mail,
postage prepaid, or by telecopier to the Debtor at its address or telecopier
number, as the case may be, set forth above or at the most recent address or
telecopier number shown on the Secured Party’s records.  All requests
under Section 9-210 of the Uniform Commercial Code (i) shall be made in a
writing signed by a person duly authorized by Debtor, (ii) shall be personally
delivered, sent by registered or certified mail, return receipt requested, or by
overnight courier of national reputation, (iii) shall be deemed to be sent when
received by the Secured Party, and (iv) shall otherwise comply with the
requirements of Section 9-210.  The Debtor requests that the Secured
Party respond to all such requests which on their face appear to come from an
authorized individual and releases the Secured Party from any liability for so
responding.  The Debtor shall pay Secured Party the maximum amount
allowed by law for responding to such requests.  The Secured Party’s
duty of care with respect to Collateral in its possession (as imposed by law)
shall be deemed fulfilled if the Secured Party exercises reasonable care in
physically safekeeping such Collateral or, in the case of Collateral in the
custody or possession of a bailee or other third person, exercises reasonable
care in the selection of the bailee or other third person, and the Secured Party
need not otherwise preserve, protect, insure or care for any
Collateral.  The Secured Party shall not be obligated to preserve any
rights the Debtor may have against prior parties, to exercise at all or in any
particular manner any voting rights which may be available with respect to any
Collateral, to realize on the Collateral at all or in any particular manner or
order, or to apply any cash proceeds of Collateral in any particular order of
application.  The Debtor will reimburse the Secured Party for all
expenses (including reasonable attorneys’ fees and legal expenses) incurred by
the Secured Party in the protection, defense or enforcement of the Security
Interest, including expenses incurred in any litigation or bankruptcy or
insolvency proceedings.  This Agreement shall be binding upon and
inure to the benefit of the Debtor and the Secured Party and their respective
heirs, representatives, successors and assigns and shall take effect when signed
by the Debtor and delivered to the Secured Party, and the Debtor waives notice
of the Secured Party’s acceptance hereof.  If any provision or
application of this Agreement is held unlawful or unenforceable in any respect,
such illegality or unenforceability shall not affect other provisions or
applications which can be given effect, and this Agreement shall be construed as
if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby.  All representations and
warranties contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the
Obligations.  This Agreement shall be governed by the internal laws
(other than conflict laws) of the State of New York and, unless the context
otherwise requires, all terms used herein which are defined in Articles 1 and 9
of the Uniform Commercial Code, as in effect in New York, shall have the
meanings therein stated.  Each party consents to the personal
jurisdiction of the state and federal courts located in the State of New York in
connection with any controversy related to this Agreement, waives any argument
that venue in any such forum is not convenient, and agrees that any litigation
initiated by any of them in connection with this Agreement may be venued in
either the state and federal courts located in New York County, New
York.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    7.         
    Arbitration.

    

    7.1   
        Arbitration.  The
parties hereto agree, upon demand by any party (or by Secured Party, who shall
be considered a “party” for purposes of this Section 7), to submit
to binding arbitration all claims, disputes and controversies between or among
them (and their respective employees, officers, directors, attorneys, and other
agents), whether in tort, contract or otherwise arising out of or relating to in
any way the Indebtedness which are the subject of this Agreement and its
negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, enforcement,
default or termination.

    

    7.2    
       Governing Rules.  Any
arbitration proceeding will (i) proceed in a location in New York, New York
selected by the American Arbitration Association (“AAA”); (ii) be
governed by the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the documents
between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA’s commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA’s optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the “Rules”).  If
there is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control.  Any party who fails or
refuses to submit to arbitration following a demand by any other party shall
bear all costs and expenses incurred by such other party in compelling
arbitration of any dispute.  Nothing contained herein shall be deemed
to be a waiver by any party that is a bank of the protections afforded to it
under 12 U.S.C. §91 or any similar applicable state law.

    

    7.3     
      No Waiver of Provisional Remedies, Self-Help
and Foreclosure.  The arbitration requirement does not limit
the right of any party (if not otherwise restricted by the terms and conditions
of this Agreement) to (i) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to collateral or proceeds
of collateral such as setoff or repossession; or (iii) obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment or the
appointment of a receiver, before, during or after the pendency of any
arbitration proceeding.  This exclusion does not constitute a waiver
of the right or obligation of any party to submit any dispute to arbitration or
reference hereunder, including those arising from the exercise of the actions
detailed in sections (i), (ii) and (iii) of this paragraph.

    

    7.4      
     Arbitrator Qualifications and
Powers.  Any arbitration proceeding in which the amount in
controversy is $5,000,000.00 or less will be decided by a single arbitrator
selected according to the Rules, and who shall not render an award of greater
than $5,000,000.00.  Any dispute in which the amount in controversy
exceeds $5,000,000.00 shall be decided by majority vote of a panel of three
arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.  The arbitrator will be
a neutral attorney licensed in the State of New York or a neutral retired judge
of the state or federal judiciary of New York, in either case with a minimum of
ten years experience in the substantive law applicable to the subject matter of
the dispute to be arbitrated.  The arbitrator will determine whether
or not an issue is arbitratable and will give effect to the statutes of
limitation in determining any claim.  In any arbitration proceeding
the arbitrator will decide (by documents only or with a hearing at the
arbitrator's discretion) any pre-hearing motions which are similar to motions to
dismiss for failure to state a claim or motions for summary
adjudication.  The arbitrator shall resolve all disputes in accordance
with the substantive law of New York and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award.  The
arbitrator shall also have the power to award recovery of all costs and fees, to
impose sanctions and to take such other action as the arbitrator deems necessary
to the same extent a judge could pursuant to the Federal Rules of Civil
Procedure, the New York Rules of Civil Procedure or other applicable
law.  Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.  The institution and
maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration if
any other party contests such action for judicial relief.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    7.5      
     Discovery.  In any arbitration
proceeding discovery will be permitted in accordance with the
Rules.  All discovery shall be expressly limited to matters directly
relevant to the dispute being arbitrated and must be completed no later than 20
days before the hearing date and within 180 days of the filing of the dispute
with the AAA.  Any requests for an extension of the discovery periods,
or any discovery disputes, will be subject to final determination by the
arbitrator upon a showing that the request for discovery is essential for the
party's presentation and that no alternative means for obtaining information is
available.

    

    7.6       
    Class Proceedings and
Consolidations.  The resolution of any dispute arising pursuant
to the terms of this Agreement shall be determined by a separate arbitration
proceeding and such dispute shall not be consolidated with other disputes or
included in any class proceeding.

    

    7.7        
   Payment Of Arbitration Costs And Fees.  The
arbitrator shall award all costs and expenses of the arbitration
proceeding.

    

    7.8         
  Real Property Collateral; Judicial
Reference.  Notwithstanding anything herein to the contrary, no
dispute shall be submitted to arbitration if the dispute concerns indebtedness
secured directly or indirectly, in whole or in part, by any real property unless
the holder of the mortgage, lien or security interest specifically elects in
writing to proceed with the arbitration.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    7.9          
 Miscellaneous.  To the maximum extent practicable, the
AAA, the arbitrators and the parties shall take all action required to conclude
any arbitration proceeding within 180 days of the filing of the dispute with the
AAA.  No arbitrator or other party to an arbitration proceeding may
disclose the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business or by
applicable law or regulation.  If more than one agreement for
arbitration by or between the parties potentially applies to a dispute, the
arbitration provision most directly related to the Operative Documents or the
subject matter of the dispute shall control.  This arbitration
provision shall survive termination, amendment or expiration of any of the
Operative Documents or any relationship between the parties.

    

    [signature
on next page]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the undersigned has executed this Collateral Pledge Agreement
as of the date and year first above written.

    

    
      	 
      	
              [____________________]

            
	 
      	 
      	 
      
	 
      	
              By:

            	 
      
	 
      	
              Print Name: 
      

            	 
      
	 
      	
              Title:

            	 
      

    

     

    [Signature
Page to Collateral Pledge Agreement]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    SCHEDULE
1

    

    

    PLEDGED
INTERESTS

    

    

    
      	
              Pledged Interest

            	 	
              Certificate No.

            	 	
              No. of Shares

            	 	
              Percentage
      Interest in Issuer

            	 	
              Other
      Classes of Shares

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
E

    Compliance
Certificate

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
E

    

    COMPLIANCE
CERTIFICATE

     

    
      
        	
                To:

              	
                Mill
      Road Capital, L.P.

              

      

      
        	
                Date:

              	
                [__________________,
      200_]

              

      

      
        	
                Subject:

              	
                Financial
      Statements

              

      

       

    

    In
accordance with our Senior Subordinated Note Purchase and Security Agreement
dated November 6, 2009 (as amended from time to time, the “Purchase Agreement”),
attached are the financial statements of Physicians Formula, Inc. (the
“Borrower”) dated [______________], 200_ (the “Reporting Date”) and
the year-to-date period then ended (the “Current
Financials”).  All terms used in this certificate have the
meanings given in the Purchase Agreement.

    

    A.      
     Preparation and Accuracy of Financial
Statements.  I certify, on behalf of the Borrower and not in
any individual capacity, that the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments and the absence of
footnotes, and fairly present all material respects Borrower’s financial
condition as of the Reporting Date.

    

    B.         
   Name of
Borrower; Merger and Consolidation.  I certify, on behalf of
the Borrower and not in any individual capacity, that:

    

    (Check
one)

    

    
      	
               
      

            	
               ̈

            	
              Borrower
      has not, since the date of the Purchase Agreement, changed its name or
      jurisdiction of organization, nor has it consolidated or merged with
      another Person.

            

    

    

    
      	
               
      

            	
               ̈

            	
              Borrower
      has, since the date of the Purchase Agreement, either changed its name or
      jurisdiction of organization, or both, or has consolidated or merged with
      another Person, which change, consolidation or merger was consented to in
      advance by the Holder Representative in an Authenticated Record or
      otherwise permitted under the Purchase Agreement, and/or is more fully
      described in the statement of facts attached to this
      Certificate.

            

    

    

    C.           
 Events of
Default.  I certify, on behalf of the Borrower and not in any
individual capacity, that:

    

    (Check
one)

    

    
      	
               
      

            	
               ̈

            	
              I
      have no knowledge of the occurrence of an Event of Default under the
      Purchase Agreement, except as previously reported to the Holder
      Representative in a Record.

            

    

    

    
      	
               
      

            	
               ̈

            	
              I
      have knowledge of an Event of Default under the Purchase Agreement not
      previously reported to the Holder Representative in a Record, as more
      fully described in the statement of facts attached to this Certificate,
      and further, I acknowledge that the Holder Representative may under the
      terms of the Purchase Agreement impose the Default Rate at any time during
      the resulting Default Period.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    D.      
      Litigation
Matters.  I certify, on behalf of the Borrower and not in any
individual capacity, that:

    

    (Check
one)

    

    
      	
               
      

            	
               ̈

            	
              I
      have no knowledge of any litigation required to be reported under Section
      7.1(g) of the Purchase Agreement.

            

    

    

    
      	
               
      

            	
               ̈

            	
              I
      have knowledge of litigation required to be reported under Section 7.1(g)
      of the Purchase Agreement and not previously disclosed to the Holder
      Representative, as more fully described in the statement of facts attached
      to this Certificate.

            

    

    

    
      	
               
      

            	
              E.           Deposits.  I
      certify, on behalf of the Borrower and not in any individual capacity,
      that:

            

    

    

    
      	
               
      

            	
               ̈

            	
              Borrower
      has not made any deposits exceeding $50,000 of the type described in
      Section 7.6(h).

            

    

    

    
      	
               
      

            	
               ̈

            	
              Borrower
      has made one or more deposits exceeding $50,000, the terms of which are
      described in the statement of facts attached to this
      Certificate

            

    

    

    F.     
       Financial
Covenants.  I further certify, on behalf of the Borrower and
not in any individual capacity, that:

    

    (Check
and complete each of the following)

    

    1.        
    Minimum
Book Net Worth.  Pursuant to Section  7.2(a)
of the Purchase Agreement, as of the Reporting Date, Borrower’s Book Net Worth
was $[___________], which  ̈ satisfies  ̈ does not satisfy the
requirement that such amount be not less than the applicable amount set forth in
Section 7.2(a).

    

    2.          
  Minimum
EBITDA.  Pursuant to Section 7.2(b) of the
Purchase Agreement, as of the Reporting Date, Borrower’s EBITDA was
$[___________], which  ̈ satisfies  ̈ does not satisfy the
requirement that EBITDA be not less than the amount set forth in Section
7.2(b).

    

    3.            
Capital
Expenditures.  Pursuant to Section 7.2(c) of the
Purchase Agreement, for the year-to-date period ending on the Reporting Date,
Borrower has expended or contracted to expend during the fiscal year ended
[______________], 200_ for Capital Expenditures, $__________________, which
 ̈ satisfies  ̈ does not satisfy the
requirement that such expenditures not exceed the amount set forth in Section
7.2(c).

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Attached
are statements of all relevant facts and computations in reasonable detail
sufficient to evidence Borrower’s compliance with the financial covenants
referred to above, which computations were made in accordance with GAAP
consistently applied.

    

    
      	 
      	
              PHYSICIANS
      FORMULA, INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	 
      
	 
      	 
      	
              Its:

            	
              Responsible
      Officer

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA HOLDINGS, INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	
              By:

            	 
      
	 
      	 
      	
              Its:

            	
              Responsible
      Officer

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
F

    Additional
Guarantor Supplement

    

    See
Attached

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Exhibit
F

    

    Additional
Guarantor Supplement

    

    ______________,
20___

    

    To the
Holders under

    the
Agreement

    described
below

    

    Ladies
and Gentlemen:

    

    Reference
is made to the Senior Subordinated Note Purchase and Security Agreement dated as
of November 6, 2009 by and among Physicians Formula, Inc., as Borrower, the
Guarantors referred to therein and Mill Road Capital, L.P. (the “Agreement”).  Terms
not defined herein which are defined in the Agreement shall have for the
purposes hereof the meaning provided therein.

    

    The
undersigned, [name of
Guarantor], a
[jurisdiction of incorporation
or organization] hereby elects to be a “Guarantor” for all
purposes of the Agreement, effective from the date hereof.  The
undersigned confirms that the representations and warranties set forth in Section 5 of the
Agreement are true and correct as to the undersigned as of the date hereof and
the undersigned shall comply with each of the covenants set forth in Section 7 of the
Agreement applicable to it.

    

    Without
limiting the generality of the foregoing, the undersigned hereby agrees to
perform all the obligations of a Guarantor under, and to be bound in all
respects by the terms of, the Agreement, including without limitation Article IX thereof,
to the same extent and with the same force and effect as if the undersigned were
a signatory party thereto.

    

    The
undersigned acknowledges that this Agreement shall be effective upon its
execution and delivery by the undersigned to the Holders, and it shall not be
necessary for the Holders, or any of their affiliates entitled to the benefits
hereof, to execute this Agreement or any other acceptance
hereof.  This Agreement shall be construed in accordance with and
governed by the internal laws of the State of New York.

    

    
      	 
      	
              Very
      truly yours,

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              [Name
      of Guarantor]

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By

            	 
      	 
      
	 
      	 
      	Name 
      	
               

            	 
      
	 
      	 
      	Title	
               

            	 
      

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
2.4

    Premises

    

    

    1055 West
8th Street Azusa

    Azusa,
California 91702

    

    

    
      	
              Location

            	 
      
	
              1055 W. 8th Street

              Azusa, CA 91702

            	 
      
	 
      	 
      
	
              1425 Max Brose Drive #8

              London, Ontario   N6N
      0A2

              Canada

            	 
      
	 
      	 
      
	
              435 Park Court

              Lino Lakes, MN 55014

            	 
      
	
              230 South Ninth Avenue

              City of Industry, CA 91746

            	 
      
	
              250 South Ninth Avenue

              City of Industry, CA 91746

            	 
      
	
              753-755 Arrow Grand Circle Way

              Covina, CA 91722

            	 
      
	
              2169 Wright Ave.

              La Verne, CA 91750

            	 
      

    

    

    PREMISES

    

    The
Premises referred to in the Senior Subordinated Note Purchase
and  Security Agreement have an address of 1753 Arrow Grand Circle Way
Covina, CA 91722, and are legally described as follows:

    

    Tract
No:  41841

    

    Abbreviated
Description:  TR=41841 LOTS 28 THRU 30 AND E 60 FT OF LOT 27 AND E
104-22 FT OF LOT 31

    

    City/Muni/Twp:  REGION/CLUSTER:  27/27609

    

    The
Premises referred to in the Senior Subordinated Note Purchase
and  Security Agreement have an address of 230 South Ninth Avenue,
City of Industry, CA 91746, and are legally described as follows:

    

    The
southwesterly 132 feet of the northeasterly 396 feet of Lot 5 in Block 2 of
Tract No. 1343, in the City of Industry, in the County of Los Angeles, State of
California, as per map recorded in Book 20 Pages 10 and 11 on Maps, in the
office of the County Recorder of said County.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    EXCEPT
therefrom the precious ores and metals thereof, as excepted in the partition
between William Workman and John Rowland, Sr., in the partition deed recorded in
Book 10 Page 39 of Deeds.

    

    ALSO
EXCEPTING and reserving all the oil and mineral rights of said land with the
right to enter thereon for the purposes of extracting the same, subject to any
damage to said purchaser resulting from such entry upon said land, as excepted
and reserved by Cross Land Company, a corporation, be deed recorded January 29,
1920 in Book 7028 Pages 286, of Deeds.

    

    By an
instrument dated August 12, 1966, recorded August 29, 1966 said Cedars of
Lebanon Hospital relinquished all rights to enter upon the surface of said
land.

    

    The
Premises referred to in the Senior Subordinated Note Purchase
and  Security Agreement have an address of 250 South Ninth Avenue,
City of Industry, CA 91746, and are legally described as follows:

    

    The
northeast 132 feet of the southwest 264 feet of Lot 5 in Block 2 of Tract No.
1343, in the City if Industry, County of Los Angeles, State of California, as
per map recorded in Book 20 pages 10 and 11 of Maps, in the office of the county
recorder of said county.

    

    Except
all the oil and mineral rights of said land with the right to enter thereon for
the purpose of extracting the same, subject to any damage in said purchaser
resulting from such entry upon said land, as excepted and reserved by Cross Land
Company, a corporation, by deed recorded January 24, 1920 in Book 7028 page 286
of deeds.

    

    All
right, title and interest in and to the surface of said land for the purpose of
exploring for and extracting any minerals, oil, gas and other hydrocarbons was
quitclaimed to the record owners by deed recorded November 4, 1964, in Book
D-2686 page 628, Official Records.

    

    The
Premises referred to in the Senior Subordinated Note Purchase
and  Security Agreement have an address of 1055 W. Eighth Street,
Azusa, CA 91702 and are legally described as follows:

    

    The
southerly approximately 82,800 square feet of a free standing
industrial/warehouse/distribution building located at 1055 W. Eighth St. Azusa
California as further shown on Annex I attached hereto.

    

    In the
event of any conflict between the address and the legal description, the legal
description shall control.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.1

    Names,
Address and Locations

    

    Chief Executive
Office/Principal Place of Business:

    

    1055 West
8th Street Azusa

    Azusa,
California 91702

    

    Other Inventory and
Equipment Locations:

    

    
      	
              Location

            	 
      
	
              1055 W. 8th Street

              Azusa, CA 91702

            	 
      
	 
      	 
      
	
              1425 Max Brose Drive #8

              London, Ontario   N6N
      0A2

              Canada

            	 
      
	 
      	 
      
	
              435 Park Court

              Lino Lakes, MN 55014

            	 
      
	
              230 South Ninth Avenue

              City of Industry, CA 91746

            	 
      
	
              250 South Ninth Avenue

              City of Industry, CA 91746

            	 
      
	
              753-755 Arrow Grand Circle Way

              Covina, CA 91722

            	 
      
	
              2169 Wright Ave.

              La Verne, CA 91750

            	 
      

    

    

    

    Physicians
Formula, Inc.

    FEIN:
13-3015258

    Org ID:
N/A for New York entities

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.2

    Capitalization

    

    

    
      	
              Capitalization Chart

            
	
              Holder

            	
              Type of Rights/Stock

            	
              No. of Shares (after exercise of all rights to
      acquire shares)

            	
              % Interest (on a fully diluted
      basis)

            
	
              Physicians Formula Holdings,
      Inc.

            	
              Holder of Common Stock in Physicians Formula,
      Inc.

            	
              100

            	
              100%

            
	
              Physicians Formula, Inc.

            	
              Holder of Common Stock in Physicians Formula
      Cosmetics, Inc.

            	
              1,000

            	
              100%

            
	
              Physicians Formula, Inc.

            	
              Holder of Common Units in Physicians Formula DRTV,
      LLC

            	
              1,000

            	
              100%

            

    

    

    

    Organizational
Chart

    

    

    SEE
ANNEX A

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    10/23/2009

    

    Physicians
Formula Corporate Structure

     

     

    

    
 

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.5

    Subsidiaries

    

    Physicians
Formula Cosmetics, Inc.

    Physicians
Formula DRTV, LLC

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.8

    Intellectual
Property

    

    

    Physicians Formula, Inc. -
Intellectual Property

    

    Owned
Intellectual Property

    

    
      	
              U.S. Trademarks Registered

            	
              Registration No.

            
	
              Actiplump

            	
              3,496,856

            
	
              Artist's
      Eraser

            	
              3,262,868

            
	
              Baked
      Berries

            	
              3,169,240

            
	
              Baked
      Berry

            	
              3,127,457

            
	
              Baked
      Butter

            	
              3,189,776

            
	
              Baked
      Cocoa

            	
              3,146,080

            
	
              Baked
      Ginger

            	
              3,146,079

            
	
              Baked
      Gingersnap

            	
              3,112,495

            
	
              Baked
      Oatmeal

            	
              3,189,775

            
	
              Baked
      Pyramid

            	
              3,382,889

            
	
              Baked
      Sands

            	
              3,189,777

            
	
              Baked
      Smokes

            	
              3,169,239

            
	
              Baked
      Spices

            	
              3,189,774

            
	
              Baked
      Sugar

            	
              3,197,148

            
	
              Baked
      Sweets

            	
              3,107,413

            
	
              Baked
      to Perfection

            	
              3,235,191

            
	
              Blemish
      Rx

            	
              3,402,746

            
	
              Bronze
      Gems

            	
              3,332,539

            
	
              Brow-Tweez

            	
              3,446,275

            
	
              Circle
      RX & Design

            	
              3,419,413

            
	
              Cliniclear
      Technology

            	
              3,586,902

            
	
              Conceal
      RX & Mortar & Pestle Design

            	
              3,325,455

            
	
              Cover
      2 Go

            	
              3,235,257

            
	
              Covertoxten50

            	
              3,277,212

            
	
              Derm@Home

            	
              3,170,157

            
	
              Durascreen

            	
              1,695,175

            
	
              Eco-Olive

            	
              3,446,345

            
	
              Ecoblend

            	
              3,423,809

            
	
              Eurobuffer

            	
              3,295,301

            
	
              Exerc’Eyes

            	
              3,064,200

            
	
              Face
      Aid

            	
              3,202,539

            
	
              F.L.A.T.

            	
              3,346,200

            
	
              How
      Green is Your Makeup?

            	
              3,544,638

            
	
              Illuminating
      Veil

            	
              3,402,750

            
	
              Line
      Erase RX & Design

            	
              3,641,110

            
	
              Magic
      Mosaic

            	
              3,098,670

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	
              Mineral
      Bronzebrightener

            	
              3,644,714

            
	
              Mineral
      Wear

            	
              3,104,495

            
	
              Mineral
      Wear

            	
              3,164,117

            
	
              Mineral
      Wear

            	
              3,373,540

            
	
              Mineral
      Wear

            	
              3,595,401

            
	
              Mineral
      Wear

            	
              3,554,909

            
	
              My
      Secret Formula

            	
              3,577,246

            
	
              Organic
      Wear

            	
              3,454,574

            
	
              Organisoy

            	
              3,423,808

            
	
              Painter's
      Palette

            	
              3,331,759

            
	
              Painter's
      Tube

            	
              3,320,750

            
	
              PF

            	
              3,277,282

            
	
              PF
      & Palette Design

            	
              3,294,477

            
	
              Physicians
      Formula & Design (Line)

            	
              3,494,604

            
	
              Plump
      Potion

            	
              3,341,830

            
	
              Plump
      Potion

            	
              3,455,125

            
	
              Pro-Cover

            	
              3,276,953

            
	
              Revined

            	
              3,074,104

            
	
              Silipcone

            	
              3,419,412

            
	
              The
      Once-A-Day, All Day Sunscreen

            	
              2,021,117

            
	
              Wanderful
      Brow Wand

            	
              3,407,243

            

    

    

    
      	
              California Trademarks
      Registered

            	
              Registration No.

            
	
              Physicians
      Formula

            	
              112615

            
	
              Physicians
      Formula & Line Design

            	
              112616

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	
              Trademarks Pending

            	
              Application No.

            
	
              Bamboo
      Wear

            	
              77/677,128

            
	
              Bambuki

            	
              77/773,439

            
	
              Bronze
      Booster & Sun Design

            	
              77/569,242

            
	
              Brow
      Designer

            	
              77/136,836

            
	
              Mineral
      Cheekbrightener

            	
              77/677,070

            
	
              DHA+
      Infusion

            	
              77/555,910

            
	
              Eco-Aroma
      Therapy

            	
              77/617,381

            
	
              Eye-Tech

            	
              77/639,786

            
	
              Happy
      Wear

            	
              77/814,994

            
	
              Healthy
      Wear

            	
              77/691,778

            
	
              How
      Green is Your Makeup Remover?

            	
              77/663,154

            
	
              How
      Green is Your Skincare?

            	
              77/663,162

            
	
              Line
      Erase Rx & Design

            	
              77/569,244

            
	
              Organiblend

            	
              77/276,037

            
	
              Mineral
      Cheekbrightener

            	
              77/677,070

            
	
              Mineral
      Shimmer Gem

            	
              77/726,090

            
	
              Organic
      Glow

            	
              77/087,977

            
	
              Time
      Proof

            	
              77/136,799

            
	
              True
      Organic

            	
              77/087,988

            
	
              Your
      Beauty. Our Passion. We promise.

            	
              77/594,530

            

    

    

    Intellectual Property Rights
Licensed from Others.

    None.

    

    Infringement.

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.15

    Employee
Benefits

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
5.16

    Environmental
Matters

    

    (a)     
      Hazardous Substances on
Premises.

    

    None.

    

    

    (b)           
Disposal of Hazardous Substances.

    

    Company
was named in the late 1990s as a de minimis PRP for the cleanup of the Operating
Industries, Inc. Superfund site (landfill) in Monterey Park, California for
generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by
paying a de minimis settlement sum.

    

    

    (c)           
Claims and Proceedings
with Respect to Environmental Law Compliance.

    

    Company
was named in the late 1990s as a de minimis PRP for the cleanup of the Operating
Industries, Inc. Superfund site (landfill) in Monterey Park, California for
generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by
paying a de minimis settlement sum.

    

    Company
has been the subject of numerous alleged Occupational Safety and Health
Administration (“OSHA”) violations, all of which have been fully
abated.

    

    In 1999
Company, along with dozens of other manufacturers and distributors of dandruff
shampoos, was named a defendant in a Proposition 65 lawsuit, Gottesfeld v. Alva-Amco, Inc., et
al., for manufacturing and distributing without a Proposition 65 warning
a dandruff shampoo containing coal tar.  Company settled the lawsuit
in 1999 for a de minimis sum.

    

    Company
recalled 16,300 bottles of eye makeup remover lotion distributed between March
14 and May 28, 2001 due to alleged contamination with
bacteria.  Company does not expect to incur any additional liabilities
as a result of this matter.

    

    

    (d)           
Compliance with Environmental Law; Permits and Authorizations.

    

    Company
was named in the late 1990s as a de minimis PRP for the cleanup of the Operating
Industries, Inc. Superfund site (landfill) in Monterey Park, California for
generating a small volume of non-hazardous wastes disposed at the
landfill.  Company, one of hundreds of PRPs, settled the matter by
paying a de minimis settlement sum.

    

    Company
has been the subject of numerous alleged Occupational Safety and Health
Administration (“OSHA”) violations, all of which have been fully
abated.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    In 1999
Company, along with dozens of other manufacturers and distributors of dandruff
shampoos, was named a defendant in a Proposition 65 lawsuit, Gottesfeld v.
Alva-Amco, Inc., et al., for manufacturing and distributing without a
Proposition 65 warning a dandruff shampoo containing coal
tar.  Company settled the lawsuit in 1999 for a de minimis
sum.

    

    Company
recalled 16,300 bottles of eye makeup remover lotion distributed between March
14 and May 28, 2001 due to alleged contamination with
bacteria.  Company does not expect to incur any additional liabilities
as a result of this matter.

    

    

    (e)     
      Status of Premises.

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
7.3

    Permitted
Liens

    

    

    
      	
              Creditor

            	
              Collateral

            	
              Jurisdiction

            	
              Filing Date

            	
              Filing No.

            
	
              U.S. District Court, California Central
      District*

            	 
      	
              CA

            	
              02/04/2009

            	
              2:09-CV-0866-ABC-FMO

            
	
              Liens in favor of the Senior
      Lender

            	 
      	 
      	 
      	 
      

    

    * This
judgment lien has been discharged.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
7.4

    

    Indebtedness

    

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Schedule
7.5

    Guaranties

    

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Annex
A-1

     

    Schedule
7.6

    

    Investments

    

    None.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    ANNEX
A

    

    MEZZANINE
FINANCING

    

    If
Holdings Stockholder approval is obtained, then the terms of the Operative
Documents shall be modified as follows and Holdings shall issue warrants to MRC
under the terms set forth below.  The parties will execute and deliver
documentation to effect the below changes.

    

    SENIOR
SUBORDINATED NOTES MODIFICATIONS

    

    
      	
              Maturity:

            	
              5
      years from the Closing Date of the existing Senior Subordinated Notes
      Purchase and Security Agreement.

            
	 
      	 
      
	
              Coupon:

            	
              10.0%
      per annum payable in cash and 4.0% per annum payable-in-kind

               

              Cash
      interest payable monthly by automatic bank draft in arrears on a 360 day
      basis and actual days elapsed; PIK accrued annually and added to the
      principal balance of the Senior Subordinated Notes

            
	 
      	 
      
	
              Fees:

            	
              No
      additional fees; provided, that, whether closing occurs or not, all
      reasonable out-of-pocket expenses, including legal expenses, will be
      reimbursed.

            
	 
      	 
      
	
              Security:

            	
              The
      same as set forth in the existing Senior Subordinated Notes Purchase and
      Security Agreement and the other Operative Documents, except that there
      shall be no cap on MRC’s lien.

            
	 
      	 
      
	
              Optional
      Redemption:

            	
              The
      Senior Subordinated Notes will be redeemable at the option of the Company,
      in whole or in part, at any time prior to maturity, at the following
      redemption prices (expressed as a percentage of principal amount),
      together, in each case, with accrued and unpaid interest, if any, to the
      date of redemption:

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	 
      	
              Percentage

            
	 
      	
              5
      years prior to Maturity Date

            	
              105%

            
	 
      	
              4
      years prior to Maturity Date

            	
              104%

            
	 
      	
              3
      years prior to Maturity Date

            	
              102%

            
	 
      	
              2
      years prior to Maturity Date

            	
              101%

            
	 
      	
              1
      year prior to Maturity Date

            	
              100%

            

    

    

    

    
      	
              Closing
      Conditions:

            	
              As
      set forth for the initial closing of the existing Senior Subordinated
      Notes Purchase and Security Agreement plus the
  following:

            
	 
      	 
      	 
      
	 
      	
              ·

            	
              Approval
      by the Issuer’s shareholders of the transaction as set forth in this Term
      Sheet, all in accordance with Section 203 of the Delaware General
      Corporation Law and the Nasdaq
Rules.

            

    

    

    WARRANTS

    

    
      	
              Issuer:

            	
              Physicians
      Formula Holdings, Inc. (“Holdings”)

            
	 	 
	
              Amount:

            	
              700,000
      warrants assuming share price at closing is $2.028

            
	 	 
	
              Formula:

            	
              Formula
      for number of warrants is function of 30-day average closing
      price

            
	 
      	
              ·

            	
              Share
      price ratchet formula: ($2.028 / 30-day average closing price) * 700,000 =
      number of warrants

            
	 
      	 
      
	
              Strike
      Price:

            	
              $0.25

            
	 
      	 
      
	
              Maturity:

            	
              Seven
      (7) Years

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	
              Registration
      Rights:

            	
              Holdings
      agrees, at its expense,  (1) to file a registration statement on
      Form S-3 (or on Form S-1 if the filing has not been made on or prior to
      April 30, 2010) providing for the resale of the shares of Common Stock
      underlying the warrants within 30 days of the closing date of the
      mezzanine financing (i.e. the closing date of the amendment of the Senior
      Subordinated Notes) and (2) to use its reasonable efforts to cause the
      registration statement to be declared effective within 120 days of the
      closing date; provided that Holdings shall use reasonable efforts to cause
      the registration statement to be declared effective promptly, but in any
      event, within five days after the SEC reaches a no comment position with
      respect to the registration statement.  Holdings shall pay
      liquidated damages in the amount of 0.5% of the invested amount per month
      for up to 6 months and 1.0% for the following 6 months if it fails to file
      on time or fails to cause the registration statement to become effective
      on time.  In addition, MRC will have piggyback rights to
      participate in any underwritten offerings by Holdings, subject to
      customary underwriter cut backs. The agreement covering MRC’s registration
      rights shall cover additional terms usual and customary in transactions
      such as this, including required periods of effectiveness and penalties
      for lapse.

               

              In
      the event Holdings is not currently S-3 eligible, Holdings may delay the
      initial filing of the registration statement until April 30, 2010 without
      penalty.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Annex
A-1

     

    FIRST
AMENDMENT TO

    

    SENIOR
SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT

     

    
      
        

      

       

    

    THIS
FIRST AMENDMENT TO SENIOR SUBORDINATED NOTE PURCHASE AND SECURITY AGREEMENT
dated as of ________, 20__ (the “Amendment”) amends
the Senior Subordinated Note Purchase and Security Agreement dated as of
November 6, 2009 (the “Original Agreement”),
by and among Mill Road Capital, L.P., a Delaware limited partnership (the “Holder”), Physicians
Formula, Inc., a New York corporation (the “Borrower”),
Physicians Formula Holdings, Inc., a Delaware corporation (“Holdings”) and the
Guarantors party to the Original Agreement.

    

    WHEREAS,
the Holder, the Borrower, Holdings and the Guarantors desire to amend the
Original Agreement to change the terms of the Notes sold under the Original
Agreement and to permit the issuance and sale by Holdings of warrants to the
Holder; and

    

    WHEREAS,
the Holder holds Notes representing at least a majority of the aggregate
principal amount of the Notes outstanding on the date hereof;

    

    NOW,
THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment hereby agree as
follows:

    

    
      1.        
    Defined
Terms

    

    

     Capitalized
terms used herein, unless specified otherwise, shall have the same meanings
and/or references as contained in the Original Agreement.

    

    
      2.          
  Original Agreement
Modifications

    

    

    (a)          
 Section 1.1(a) of the Original Agreement is hereby amended and
restated in its entirety as follows:

    

    “(a)          The
Borrower has authorized the issuance and sale of its amended and restated Senior
Subordinated Notes due November 6, 2014 in the aggregate original principal
amount of eight million dollars ($8,000,000) in the form set forth as Exhibit A attached
hereto (referred to herein individually as a “Note” and
collectively as the “Notes”, which terms
shall also include any notes delivered in exchange therefor or replacement
thereof).  Commencing on the First Amendment Effective Date, the Notes
will accrue interest on the unpaid principal amount thereof at an interest rate
per annum (the “Interest Rate”)
consisting of (i) ten percent (10.00%) per annum in cash interest plus (ii) four
percent (4.00%) per annum to be added automatically to the unpaid principal
amount of the Notes (“PIK Interest”) on
each Interest Payment Date.”

    

    (b)           
The third sentence of Section 1.1(b) of the
Original Agreement is hereby amended by amending and restating such sentence in
its entirety as follows:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “All
accrued PIK Interest shall be compounded annually on the first day of each
calendar year.”

    

    (c)        
   Section 1.4(a) of the Original Agreement is hereby
amended by deleting the reference to “May 6, 2013” in the first sentence of such
section and replacing it with “November 6, 2014”.

    

    (d)         
  Section 1.4(d) of the
Original Agreement is amended and restated in its entirety as
follows:

    

    “(d)          Prepayment
Premium.  In the event of any prepayment or repurchase of the
Notes prior to the Maturity Date pursuant to clauses (b) or (c) above, the
Borrower shall pay to the Holder Representative (on behalf of the Holders) the
prepayment premium indicated below corresponding to the time period in which
such prepayment or repurchase occurs or is required to occur (the “Prepayment Premium”)
(which prepayment premium shall be paid to the Holder Representative (on behalf
of the Holders) as liquidated damages and compensation for the costs of making
funds available with respect to the loans evidenced by the Notes):

    

    
      	
              Period

            	
              Prepayment Premium

              (%
      of the aggregate principal amount of the Notes prepaid or
      repurchased)

            
	 
      	 
      
	
              Closing
      Date through November 5, 2010

            	
              5%

            
	
              November
      6, 2010 through November 5, 2011

            	
              4%

            
	
              November
      6, 2011 through November 5, 2012

            	
              2%

            
	
              November
      6, 2012 through November 5, 2013

            	
              1%

            
	
              November
      6, 2013 and thereafter

            	
              0%

            

    

    ”

    

    (e)        
   Section 1.8 of the
Original Agreement is amended and restated in its entirety as
follows:

    

    “1.8          Transfer and Exchange of
Notes and Warrants.  The Borrower shall keep a register in
which it shall provide for the registration of the Notes and the Warrants and
the registration of transfers of Notes and the Warrants.  The Holder
of any Note or Warrant may, prior to maturity, prepayment or repurchase of such
Note or the expiration of such Warrant, surrender such Note or Warrant at the
principal office of the Borrower for transfer or exchange.  Any Holder
desiring to transfer or exchange any Note or Warrant (including, but not limited
to, any assignment of a Note or Notes or a Warrant or Warrants contemplated by
Section 11.5
hereof) shall first notify the Borrower in writing at least ten (10) Business
Days in advance of such transfer or exchange.  Promptly, but in any
event within ten (10) Business Days after such notice to the Borrower from the
Holder Representative (on behalf of a Holder of one or more Notes)
of  a Holder’s intention to make such an exchange of such Holder’s
Note(s) and without expense (other than transfer taxes, if any) to such Holder,
the Borrower shall issue in exchange therefor another Note or Notes in the same
aggregate principal amount, as of the date of such issuance, as the unpaid
principal amount of the Note so surrendered and having the same maturity and
rate of interest, containing the same provisions and subject to the same terms
and conditions as the Note so surrendered (provided that no
minimum shall apply to a liquidating distribution of Notes to investors in a
Holder and any Notes so distributed may be subsequently transferred by such
investor and its successors in the original denomination thereof without further
restriction).  Each new Note shall be made payable to such Person or
Persons, or assigns, as the Holder of such surrendered Note may designate, and
such transfer or exchange shall be made in such a manner that no gain or loss of
principal or interest shall result therefrom.  The Borrower shall have
no obligation or liability under any Note to any Person other than the
registered Holder of each such Note.  Assignments and transfers of
Notes by the Holders shall be made in compliance with Section 11.5
hereof.  Assignments, transfers and exchanges of Warrants shall be
made in compliance with the terms set forth in the Warrants.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (f)        
    Section 2.10 of the
Original Agreement is hereby deleted in its entirety.

    

    (g)        
   The Original Agreement is hereby amended by inserting
the following new Article IIA as
follows:

    

    ARTICLE
IIA

    ISSUANCE
OF THE WARRANTS

    

    2A.1         The
Warrants.  Holdings has authorized the issuance and sale of
warrants for the
purchase of up to an aggregate of [_______]1 shares of Common
Stock, on a fully diluted basis (the “Warrant Shares”)
(subject to adjustment as provided therein) in the form set forth as Exhibit G attached
hereto (referred to herein individually as a “Warrant” and
collectively as the “Warrants”, which
terms shall also include any warrants delivered in exchange therefor or
replacement thereof).  The Warrants shall be exercisable at a purchase
price equal to $0.25 per Warrant Share (subject to adjustment as provided in the
Warrants).

    

    2A.2        Purchase and Sale of the
Warrants.  For no additional consideration, Holdings agrees to
issue to the Purchaser on the First Amendment Effective Date, the
Warrant.

    

    2A.3        Registration
Rights.  The Purchaser and its successors and assigns shall
have the registration rights with respect to the Common Stock purchasable under
the Warrants as set forth in the Registration Rights Agreement.

    

    2A.4        Representations and
Warranties of the Purchaser regarding the Warrants.

    

    The
Purchaser hereby represents and warrants, which representations and warranties
shall survive the First Amendment Effective Date, that:

     

    __________________________ 

      1 The
formula to calculate the number of shares is a function of the 30-day average
closing price.  The formula is ($2.028 / 30-day average closing price)
* 700,000.  The 30-day average closing price is calculated as of the
close of business on November 5, 2009 (the “First Calculation Date”); provided,
however, that, if Holder would receive a greater number of shares calculating
the 30-day average closing price as of the closing date of the First Amendment
to the Senior Subordinated Note Purchase and Security Agreement (the “Second
Calculation Date”), then the Holder shall be entitled to such number of
additional shares that is equal to the difference between the calculations on
the First Calculation Date and the Second Calculation Date.

       

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (a)    
       It is the present intention of the
Purchaser to acquire its Warrant and the Warrant Shares for its own account, and
not as nominee or agent.

    

    (b)     
      The Warrants and the Warrant Shares are
being and will be acquired for the purpose of investment and not with a view to
distribution or resale thereof in violation of the securities laws; subject,
nevertheless, to the condition that, except as otherwise provided herein and
subject to compliance with applicable securities laws, the disposition of the
property of the Purchaser shall at all times be within its
control.  The Purchaser was not formed solely for the purpose of
making an investment in the Borrower.  The Purchaser is an “accredited
investor” as that term is defined in Regulation D promulgated under the
Securities Act with such knowledge and experience in financial and business
matters as are necessary in order to evaluate the merits and risks of an
investment in the Warrants and Warrant Shares.  In making its decision
to acquire the Warrant, the Purchaser has relied upon independent investigations
made by the Purchaser and the Purchaser’s representatives, including the
Purchaser’s own professional, tax and other advisors.  The Purchaser
and its representatives have been given the opportunity to ask questions of, and
to receive answers from, the Borrower concerning the terms and conditions of the
acquisition of the Warrant.  The Purchaser has reviewed, or has had
the opportunity to review, all information it deems necessary and appropriate
for the Purchaser to evaluate the financial risks inherent in the acquisition of
the Warrant.  The Purchaser understands that its acquisition of the
Warrant involves a high degree of risk and that no governmental authority has
passed on or made any recommendation or endorsement of the Warrant.

    

    (c)       
    The Purchaser understands that it must bear the economic
risk of its investment for an indefinite period of time because the Warrants and
the Warrant Shares are not, and will not be, registered under the Securities Act
or any applicable state securities laws and may not be resold unless
subsequently registered under the Securities Act and such other laws or unless
an exemption from such registration is available.  The Purchaser
acknowledges that, in issuing the Purchaser’s Warrant and the Warrant Shares,
the Borrower is relying on the representations and warranties of the Purchaser
in this Section 2A.4.

    

    (d)        
   The Purchaser hereby acknowledges that its Warrant and each
certificate, if any, representing Warrant Shares (unless
no longer required in the written opinion of counsel delivered to the Borrower,
which opinion and counsel shall be reasonably satisfactory to the Borrower and
its legal counsel, it being agreed that Foley Hoag LLP shall be satisfactory
counsel) shall bear a legend substantially in the following form (in addition to
any other legend required by the Operative Documents):

    

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS
AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH THE
REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

    

    The
acquisition by the Purchaser of the its Warrant Shares shall
constitute a confirmation by it of the foregoing representations.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    2A.5        Representations and
Warranties of Holdings regarding the Warrants.

    

    Holdings
hereby represents and warrants, which representations and warranties shall
survive the First Amendment Effective Date, that:

    

    (a) 
          Authority; No
Conflicts.

    

    (i)     
       The execution, delivery and
performance of the Operative Documents and the transactions contemplated thereby
by Holdings (including the issuance of the Warrants and the issuance of the
Warrant Shares upon exercise of the Warrants) are within the power and authority
of Holdings and have been authorized by all corporate or other organizational
proceedings of Holdings and its stockholders and do not and will not (i)
contravene any provision of the certificate of incorporation or bylaws or any
other organizational documents of Holdings or any law, rule or regulation
applicable to Holdings, (ii) contravene any provision of, or constitute an event
of default or event that, but for the requirement that time elapse or notice be
given, or both, would constitute an event of default under, any order,
agreement, lease, mortgage, note, bond, indenture, license, or other instrument
or undertaking to which Holdings is a party or by which any of its properties
are bound, or (iii) result in or require the imposition of any Lien on any of
the properties, assets or rights of Holdings, except in favor of the
Holders.

    

    (ii)  
         The Warrants being
purchased hereunder and the Warrant Shares issuable upon exercise of the
Warrants, when issued, delivered and paid for in the manner set forth in this
Agreement or, in the case of the Warrant Shares, when issued, delivered and paid
for in the manner set forth in the Warrant, will be duly authorized and validly
issued and outstanding.  No preemptive rights or other rights of any
Person to subscribe for or purchase, and no anti-dilution adjustment or similar
rights of any Person, exist or will be triggered with respect to the issuance
and sale of the Warrants or the issuance of the Warrant Shares upon the exercise
of the Warrants.  Holdings will at all times hereafter keep available,
solely for issuance and delivery upon exercise of the Warrants, such number of
shares of Common Stock as from time to time shall be issuable upon exercise of
the Warrants.

    

    (b)           
Securities
Act.  Neither Holdings, nor anyone acting on its behalf has
offered or will offer to sell Warrants, Common Stock or other securities to, or
has solicited or will solicit offers with respect thereto from, or has entered
into or will enter into any preliminary conversations or negotiations relating
thereto with, any Person, so as to bring the issuance and sale of the Warrants,
or the issuance of the Warrant Shares issuable upon exercise of the Warrants,
under the registration provisions of the Securities Act or the registration
provisions of any securities or Blue Sky laws of any applicable
jurisdiction.  Assuming the accuracy of the representations and
warranties of the Purchaser set forth herein, neither the issuance of the
Warrants, nor the issuance of the Warrant Shares upon exercise of the Warrants,
is required to be registered under the Securities Act or any applicable state
securities laws, and such issuances shall be in compliance with all applicable
federal and state securities laws.

    

    (h)           
Section
3.1 of the Original Agreement is hereby amended by amending and restating
the following definitions therein:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “Holder” or “Holders” shall mean
the Purchaser (so long as it holds one or more Notes or one or more Warrants, as
the context requires) and any other holder or holders from time to time of one
or more Notes and/or one or more Warrants, as the context requires.

    

    “Maturity Date” shall
be November 6, 2014.

    

    “Operative Documents”
means this Agreement, the Notes, the Guaranties, the Security Documents, the
Intercreditor Agreement, the Warrants, the Registration Rights Agreement and
each other agreement, instrument or document now or hereafter executed and
pursuant to or in connection with any of the foregoing.

    

    (i)    
        Section 3.1 of the
Original Agreement is hereby further amended by inserting the following
definitions therein in appropriate alphabetical order:

    

    “Common Stock” is the
common stock, par value $0.01 per share, of Holdings.

    

    “First Amendment Effective
Date” is ________, 20__.

    

    “Registration Rights
Agreement” means that certain Registration Rights Agreement dated as of
the First Amendment Effective Date among Purchaser, Holdings and the other
Persons party thereto in the form attached hereto as Exhibit
H.

    

    “Warrant” or “Warrants” shall have
the meaning given to such term in Section 2A.1
hereof.

    

    “Warrant Shares” shall
have the meaning given to such term in Section 2A.1
hereof.

    

    (j)      
      The third sentence of Section 3.2 of the
Original Agreement is hereby amended by amending and restating such sentence in
its entirety as follows:

    

    “The
words “party” or “parties” when used with reference to this Agreement shall
include each party to this Agreement and, by their acceptance of a Note or
Warrant, each Holder.”

    

    (k)      
     Section 8.1 of the
Original Agreement is hereby amended by inserting the following new sentence at
the end thereof as follows:

    

    “Without
in any way limiting the rights of the Holders, Holdings hereby agrees that the
Holders of the Warrants or the Warrant Shares would have no adequate remedy at
law, for monetary compensation or otherwise, for the damages that would be
suffered if Holdings or the Borrower were to fail to comply with its obligations
under Article IIA and/or Article VII hereof, and that Holdings therefore agrees
that the Holders of the Warrants and the Warrant Shares shall be entitled to
obtain specific performance of the Holdings’ obligations under Article IIA
and/or Article VII hereof.”

    

    (l)          
  Article X of the
Original Agreement is hereby amended by deleting the references to the clause
“Each Holder, by acceptance of any Note(s) held by it,” throughout such Article
and replacing it with the clause “Each Holder, by acceptance of any Note(s) or
Warrant(s) held by it,”.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (m)           Section 10.8 of the
Original Agreement is hereby amended by deleting the references to the clause
“with respect to its Note” throughout such Section and replacing it with the
clause “with respect to its Note and its Warrant”.

    

    (n)           Section
11.2 of the Original Agreement is hereby amended and restated in its entirety as
follows:

    

    “11.2        Amendments, Waivers and
Consents.  Any provision in this Agreement, the Notes or the
other Operative Documents (other than the Warrants) to the contrary
notwithstanding, changes in or additions to this Agreement and the other
Operative Documents may be made, and compliance with any covenant or provision
set forth herein or therein may be omitted or waived, if the Borrower shall
obtain consent thereto in writing from the Required Holders, and shall, in any
case, deliver copies of such consent in writing to all other Holders of Notes
and/or Warrants; provided that (i) without the consent of all Holders of Notes,
no such consent or waiver shall be effective to reduce the amount of, to
postpone the date fixed for the payment of, the principal of (including any
required redemption) or interest or Prepayment Premium payable on any Note, to
decrease the Interest Rate or the Prepayment Premium, to decrease or postpone
any prepayments or redemptions, to increase the proportion of interest payable
as PIK Interest rather than as cash interest, to alter, amend or waive
compliance with Section 8.1(a), to alter or amend the consent mechanism provided
for under Section 8.3 or this Section 11.2, or to release any material Guarantor
from its guaranty hereunder or any Guaranty, and (ii) without the consent of the
Holder Representative, no such consent or waiver shall be effective to alter the
rights or obligations of the Holder Representative.  The provisions of
the Warrants may be amended or waived in the manner provided, and with the
consent of the Persons required, under Section 12 of the Warrants.  If
the Required Holders vote to alter, amend or waive compliance with the
Intercreditor Agreement or any subordination or intercreditor agreement relating
to any Subordinated Debt, then all Holders shall be bound by such vote and agree
to sign such consent or other document as may be necessary to effectuate such
alteration, amendment or waiver.  Any waiver or consent may be given
subject to satisfaction of conditions stated therein and any waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.  Written notice of any waiver or consent effected
under this subsection shall promptly be delivered by the Borrower to any Holders
who did not execute the same.”

    

    (o)           
The last sentence of Section 11.4(a) of
the Original Agreement is hereby amended by amending and restating such sentence
in its entirety as follows:

    

    “In
addition, the Borrower agrees to pay the expenses of preparing Notes and
Warrants from time to time in connection with exchanges and transfers of Notes
and/or Warrants and the expenses of delivering copies of Operative Documents to
Holders, and the Borrower agrees to indemnify, pay and hold each Holder harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay taxes (other than transfer taxes) and filing
fees with respect to such transfer.”

    

    (p)           
Section
11.4(c) of the Original Agreement is hereby amended and restated in its
entirety as follows:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “(c)          The
provisions of this Section 11.4 shall
survive the payment in full of all amounts due under this Agreement, the Notes
and the other Operative Documents, the exercise in full or termination of the
Warrants, and the termination of this Agreement and the other Operative
Documents.”

    

    (q)           
Section
11.5 of the Original Agreement is hereby amended by inserting the
following new sentence at the end thereof as follows:

    

    “Any
holder of one or more Warrants may assign its Warrants in compliance with the
terms set forth in the Warrants.”

    

    (r)           
Section
11.7 of the Original Agreement is hereby amended and restated in its
entirety as follows:

    

    “11.7        Payments in Respect of
Warrants.  The Holders of the Warrants, by their acceptance
thereof, agree that, with respect to the sale to, or repurchase by, Holdings or
any Person directly or indirectly affiliated with Holdings or any of its
managers, directors, officers, members or other equityholders, of the Warrants,
equitable adjustment will be made among them so that, in effect, all such sums
shall be shared ratably by all of the Holders of the Warrants in proportion to
their respective holdings of Warrants.  If any Holder of one or more
Warrants receives any such sum in respect of its Warrants in excess of its pro
rata portion, then such Holder receiving such excess payment shall purchase for
cash from the other Holders of Warrants an interest in their Warrants in such
amount as shall result in a ratable participation by all of the Holders of the
Warrants in the aggregate of all Warrants then outstanding.”

    

    (s)           
Clause (ii) of Section 11.8 of the
Original Agreement is hereby amended and restated in its entirety as
follows:

    

    “(ii) the
Holders’ agreement to purchase the Notes and Warrants, or the use or intended
use of the proceeds of the Notes and Warrants hereunder,”

    

    (t)            
The last sentence of Section 11.8 of the
Original Agreement is hereby amended by amending and restating such sentence in
its entirety as follows:

    

    “This
indemnification shall survive the payment and satisfaction of all Obligations,
the exercise in full or termination of the Warrants, and the termination of this
Agreement and the other Operative Documents, and shall remain in force beyond
the expiration of any applicable statute of limitations and payment or
satisfaction in full of any single claim under this
indemnification.”

    

    (u)           
The parenthetical in the first sentence of Section 11.14 of the
Original Agreement is hereby amended by amending and restating such
parenthetical in its entirety as follows:

    

    “(BY
ACCEPTANCE OF ANY NOTE(S) OR WARRANT(S) HELD BY IT)”

    

    (v)           
Section
11.20 of the Original Agreement is hereby amended and restated in its
entirety as follows:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    “11.20      Specific
Performance.  Upon breach or default by the Borrower or any
Guarantor with respect to any obligation hereunder under the Notes, the Warrants
(or the Warrant Shares) or under any other Operative Document, each Holder shall
be entitled to protect and enforce its rights at law, or in equity or by other
appropriate proceedings for specific performance of such obligation, or for an
injunction against such breach or default, or in aid of the exercise of any
power or remedy granted hereby or thereby or by law.”

    

    (w)           
The parenthetical in the first sentence of Section 11.22 of the
Original Agreement is hereby amended by amending and restating such
parenthetical in its entirety as follows:

    

    “(by the
acceptance of any Note(s) or Warrant(s) held by it)”

    

    (x)           
Clause (f)(A) of Section 11.22 of the
Original Agreement is hereby amended and restated in its entirety as
follows:

    

    “(A) any
assignee of or participant in, or any prospective assignee of or participant in,
any of its rights or obligations under this Agreement, any Note(s) or any
Warrant(s) or”

    

    
      3.        
    Amendments to
Exhibits

    

    

    The
Exhibits to the Credit Agreement are amended (i) by replacing Exhibit A, with the
form of Amended and Restated Senior Subordinated Note attached hereto as Annex B and (ii) by
adding the following new Exhibit G (Warrant),
attached hereto as Annex C, and Exhibit H
(Registration Rights Agreement), attached hereto as Annex D.

    

    
      4.          
  Amendment to Operative
Documents; Consistent Changes

    

    

    References
to the “Purchase Agreement” or the “Note Purchase Agreement” in the Operative
Documents shall be deemed to be references to the Original Agreement as amended
by this Amendment.  Furthermore, the Operative Documents are hereby
amended wherever necessary to reflect the changes described herein.

    

    
      5.            
Confirmation of
Certain Terms and Other Matters

    

    

    Each of
the Borrower, Holdings, the Guarantors and the Holder hereby ratify and confirm
all terms and provisions of the Operative Documents and all other documents,
instruments, or agreements executed in connection therewith and agree that,
except as expressly amended herein, all of such terms and provisions remain in
full force and effect.  The Borrower , Holdings, the Guarantors and
the Holder hereby confirm and acknowledge that the obligations of the Borrower,
Holdings and the Guarantors under the Original Agreement include all obligations
and liabilities of the Borrower, Holdings and the Guarantors under the Original
Agreement, as amended from time to time including, but not limited to, this
Amendment.  Each of the Borrower, Holdings and the Guarantors also
confirm and acknowledge that this Amendment and the documents, instruments or
agreements executed in connection therewith shall constitute Operative
Documents.  Except as expressly provided herein, this Amendment shall
not be deemed a waiver of any term or condition of any Operative Document and
shall not be deemed to prejudice any right or rights which the Holder may now
have or may have in the future under or in connection with any Operative
Document or any of the instruments or agreements referred to therein, as the
same may be amended from time to time.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    
      6.    
        Collateral
Security

    

    

    Each of
the Borrower, Holdings and the Guarantors further acknowledge and agree that the
Security Documents continue to secure the Borrower’ prompt, punctual and
faithful payment and performance of (i) the Original Agreement, as amended by
this Amendment and any further extensions, renewals, substitutions,
modifications, amendments or replacements thereof; (ii) the Notes and any
further extensions, renewals, substitutions, modifications, amendments or
replacements of any thereof; (iii) any and all liabilities of the Borrower to
the Holders (including, without limitation, those arising under the Operative
Documents and this Amendment); (iv) any and all liabilities, debts and
obligations, whether now existing or hereafter arising, or at any time owing by
the Borrower to the Holders, including without limitation, costs, costs of
collection, attorneys’ reasonable fees and all court and litigation costs and
expenses, and (v) all sums, bearing interest at the rate provided in the
Original Agreement, as modified, advanced to or on behalf of the Borrower by the
Holders for any purposes, whether dependent or independent of this transaction,
all of which shall be equally secured with and have the same priority as the
original advances under the Notes.

    

    
      7.      
      Representations and
Warranties

    

    

    Each of
the Borrower, Holdings and the Guarantors hereby represent and warrant that
except as otherwise disclosed on the list of “Exceptions to Representations”
annexed hereto as Annex A: (a) they
have complied and are now in compliance with, all of the terms and provisions
set forth in the Operative Documents, as amended, on their part to be observed
and performed; (b) no Event of Default specified in Section 8.1 of the Original
Agreement has occurred or is continuing or would occur as a result of the
transactions contemplated by this Amendment (including the issuance of the
Warrants); and (c) the execution, delivery and performance of this Amendment
(including the issuance of the Warrants): (i) has been duly authorized by all
requisite corporation action, including approval by the stockholders of
Holdings, (ii) will not violate either (x) any provision of law applicable to
the Borrower, Holdings or any Guarantor, any governmental regulation, or its
charter documents, or (y) any order of any court or other agency of government
binding on the Borrower, Holdings or any Guarantor or any indenture, agreement,
or other instrument to which the Borrower, Holdings or any Guarantor is a party,
or by which they or any of its property is bound, and (iii) will not be in
conflict with, result in a breach of, or constitute (with due notice and/or
lapse of time) a default under, any such indenture, agreement, or other
instrument.

    

    
      8.        
    Conditions to Holder’s
Obligations

    

    

    The
willingness of the Holder to consent to and enter into this Amendment is subject
to the satisfaction of the following conditions concurrently with the execution
and delivery of this Amendment:

    

    (a)        
   The Holder shall have received approving resolutions of
the Board of Directors (or other appropriate governing body) and the
shareholders or members of each of the Borrower, Holdings and the Guarantors,
certified as of the date hereof by the Secretary of the Borrower, Holdings and
the Guarantors authorizing the execution and delivery by the Borrower, Holdings
and the Guarantors of this Amendment and all documents referenced
herein.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    (b)    
       The Borrower, Holdings and the
Guarantors shall have executed and delivered to the Holder, as applicable, (i)
this Amendment, (ii) the Amended and Restated Senior Subordinated Note attached
hereto as Annex
B, (iii) the Warrant attached hereto as Annex C, and (iv) the
Registration Rights Agreement attached hereto as Annex D.

    

    (c)     
      The Holder shall have received a
certificate of a Responsible Officer of each of the Borrower and Holdings as to
the accuracy of the Borrower’s and Holdings’ representations and warranties in
the Original Note Purchase Agreement in all material respects and in this
Amendment and as to such other matters as the Holder may reasonably
request.

    

    (d)      
     The Holder shall have received the
favorable written opinion of Kirkland & Ellis LLP, counsel to the Borrower
and the Guarantors regarding, among other things, the issuance of the warrants,
in form and substance reasonably satisfactory to the Holder.

    

    (e)       
    This Amendment and all documents referenced
herein or to be delivered in connection herewith shall be on terms reasonably
satisfactory to Holder’s tax counsel.

    

    (f)          
  The Borrower shall have paid to the Holder all outstanding
legal and other out of pocket fees and expenses incurred relative to the
Holder’s relationship with the Borrower and all costs and fees associated with
this Amendment.

    

    (g)          
 The Holder shall have received such other documents, certificates,
instruments, and agreements from the Borrower as the Holder may reasonably
request.

    

    
      9.          
  Miscellaneous

    

    

    (a)           
This Amendment shall be governed by, and construed and enforced in
accordance with, the substantive laws of the State of New York, without regard
to its principles of conflicts of laws.

    

    (b)           
This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

    

    (c)           
Each of the Borrower, Holdings and the Guarantors shall, from time to
time, at its expense, execute and deliver to the Holder all such other and
further instruments, agreements and documents and take or cause to be taken all
such other and future action as the Holder shall reasonably request in order to
effect and confirm or vest more securely all rights contemplated by this
Amendment, the Original Agreement or any Operative Document.

    

    

    <The
remainder of this page is intentionally left blank>

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    IN WITNESS WHEREOF, the
parties hereto have caused this Amendment to be duly executed as of the date
first above written.

    

    

    
      	 
      	
              BORROWER:

            	 
      
	 
      	
              PHYSICIANS
      FORMULA, INC.,

            	 
      
	 
      	
              a
      New York Corporation

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              GUARANTORS:

            	 
      
	 
      	
              PHYSICIANS
      FORMULA HOLDINGS, INC.,

            	 
      
	 
      	
              a
      Delaware Corporation

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA COSMETICS, INC.,

            	 
      
	 
      	
              a
      Delaware Corporation

            	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              PHYSICIANS
      FORMULA DRTV, LLC,

            	 
      
	 
      	
              a
      Delaware Limited Liability Company

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      

    

     

    Signature Page to First Amendment to
Senior Subordinated Note Purchase and Security Agreement

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

     

    
      	 
      	
              HOLDER:

            	 
      
	 
      	 
      	 
      	 
      
	 
      	
              MILL
      ROAD CAPITAL, L.P.,

            	 
      
	 
      	
              a
      Delaware Limited Partnership

            	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	 
      	
              Name:

            	 
      
	 
      	 
      	
              Title:

            	 
      

    

     

    
      Signature Page to First Amendment to
Senior Subordinated Note Purchase and Security Agreement

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Annex
A

    

    

    Exceptions
to Representations

    

    

    [Borrower
to complete]

     

    
      Signature Page to First Amendment to
Senior Subordinated Note Purchase and Security Agreement

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Annex
A-2

    

    

    THIS
INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN
THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.; AND
EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO
BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

    

    THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM.

    

    THIS
NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX
PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT
OF OID, ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION
REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS
FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT
ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

    

    PHYSICIANS
FORMULA, INC.

    AMENDED
AND RESTATED SENIOR SUBORDINATED NOTE

    

    
      	
              $8,000,000.00

            	
              [_________],
  20__

            

    

    

    FOR VALUE RECEIVED, Physicians
Formula, Inc., a New York corporation (the “Maker”), hereby
promises to pay to the order of Mill Road Capital, L.P., a Delaware limited
partnership (“MRC”), or its
registered assigns and transferees (collectively, the “Payee”) the principal
sum of Eight Million Dollars ($8,000,000.00), plus the aggregate amount of
accrued interest from time to time capitalized thereon, less the aggregate
amount of principal prepaid or repaid from time to time, in each case, pursuant
to the terms and conditions of and at the times provided in the Purchase
Agreement (as defined below).

    

    1.       
      Notes.  This
Senior Subordinated Note (this “Note”) is issued
pursuant to, and is subject to the terms and entitled to the benefits of, the
Senior Subordinated Note Purchase and Security Agreement dated as of November 6,
2009 among the Maker, MRC and the Guarantors (as defined therein), as amended,
restated, supplemented or otherwise modified from time to time, including by
that certain First Amendment to Senior Subordinated Note Purchase and Security
Agreement dated as of [______], 20__, in accordance with its terms (the “Purchase
Agreement”).  The Payee is entitled to enjoy the benefits of
and to enforce the provisions of the Purchase Agreement as a Holder and is
subject to the obligations thereunder of Holder.  Terms used herein
and not otherwise defined herein shall have the meanings ascribed thereto in the
Purchase Agreement.

    

    2.          
   Interest.  Commencing
on the date of issuance, this Note will accrue interest on the unpaid principal
amount thereof at the Interest Rate specified in, and subject to adjustment as
provided in, the Purchase Agreement.  Interest on this Note shall be
computed based on a 360-day year and actual days elapsed, and all PIK Interest
on this Note shall be compounded annually on the first day of each calendar
year.  Cash interest on this Note shall be payable monthly in arrears
on each Interest Payment Date commencing on [___________] by wire transfer of
immediately available funds to one or more accounts designated by the
Payee.  The records of the Payee shall, absent manifest error, be
conclusive evidence of the outstanding principal balance of this Note, including
all PIK Interest added to the principal amount thereof and the compounding
thereof, but any failure of the Payee to record, or any error in so recording,
any such amount on the Payee’s records shall not limit or otherwise affect the
obligations of the Maker under this Note to make all payments of principal of
and interest thereon when due.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    If an
Event of Default has occurred and is continuing, from and after the date such
Event of Default has occurred the entire outstanding unpaid principal balance of
this Note and any unpaid interest from time to time in default shall (both
before and after acceleration and entry of judgment) bear interest, payable in
cash on demand, at a rate per annum equal to the Interest Rate payable pursuant
to Section 1.1
of the Purchase Agreement plus three percent
(3%); provided,
however, that
upon the cessation or cure of such Event of Default, if no other Event of
Default is then continuing, this Note shall again bear interest at the
applicable Interest Rate as set forth in Section 1.1 of the
Purchase Agreement.

    

    The
obligations of the Maker to pay interest under this Note are subject in all
events to the provisions of Section 1.6 of the
Purchase Agreement relating to Excess Interest and the Maximum
Rate.

    

    3.     
        Maturity; Required
Redemption.  Unless the maturity of this Note is accelerated
pursuant to Article
VIII of the Purchase Agreement, this Note shall mature and be redeemed by
the Maker in one installment which shall be paid on November 6,
2014.  On the stated or accelerated maturity date of the Notes, the
Maker will pay in cash the principal amount of the Notes then outstanding
together with all accrued and unpaid interest thereon, including, without
limitation, all PIK interest.

    

    4.       
      Optional
Prepayments.  The Maker may voluntarily prepay this Note, in
whole or in part, at any time.  Optional prepayments permitted
pursuant to the Purchase Agreement may only be made upon payment to the Payee of
an amount equal to the sum of the principal amount to be prepaid, together with
all accrued and unpaid interest (including PIK Interest) on the amount so
prepaid through the date of prepayment, plus the Prepayment
Premium, if any, as provided in the Purchase Agreement.

    

    5.      
       Repurchase upon a Change of
Control.  The Maker is obligated upon the occurrence of a
Change of Control to repurchase this Note in whole on the terms and conditions
set forth in Section
1.4(c) of the Purchase Agreement.

    

    6.       
      Prepayment
Premium.  In the event of any prepayment of this Note prior to
the Maturity Date pursuant to Sections 1.4(b) and
(c) of the Purchase Agreement, the Maker shall pay to the Payee the
Prepayment Premium indicated in the Purchase Agreement corresponding to the time
period in which such prepayment occurs or is required to occur.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    7.      
       Guaranty and
Security.  The payment and performance of this Note is and
shall at all times be guaranteed (the “Guaranty”) by each Guarantor pursuant to
Article IX of
the Purchase Agreement.  This Note is secured pursuant to the terms of
(a) the security interest granted by the Borrower under Article II of the
Purchase Agreement, (b) the Guarantor Security Agreement dated as of November 6,
2009 among the Guarantors and the Payee and (c) the other Security
Documents.  The Payee is entitled to the benefits of the Guaranty, the
Guarantor Security Agreement, the other Security Documents and the other
Operative Documents, and may enforce the agreements of the Maker contained
therein, and the Payee may exercise the remedies provided for thereby or
otherwise available in respect thereof, all in accordance with the terms
thereof.

    

    8.         
    Remedies on Default.
Etc.  Reference is made to the Purchase Agreement for the
remedies available to the Payee upon the occurrence of an Event of Default as
described in the Purchase Agreement.  The Maker hereby agrees to pay
on demand all reasonable costs and expenses, including without limitation
attorneys’ fees and costs of collection, incurred or paid by the holder of this
Note in enforcing this Note in accordance with the Purchase
Agreement.

    

    9.        
     No
Impairment.  No provision of the Purchase Agreement or this
Note shall alter or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal and interest on this Note at the times,
places and rates, and in the currency, provided.

    

    10.      
     Waivers;
Amendments.  The Maker and each endorser and guarantor hereby
waives presentment, demand, protest and notice of any kind.  No
failure or delay on the part of the Maker or the Payee or holder hereof in
exercising any right, power, privilege or remedy hereunder or under the Purchase
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power, privilege or remedy preclude any other or
further exercise thereof or the exercise of any other right, power, privilege or
remedy.  The remedies provided for herein and in the Purchase
Agreement are cumulative and are not exclusive of any remedies that may be
available to the Maker or the Payee at law or in equity or
otherwise.  This Note may not be amended and the provisions hereof may
not be waived, except in accordance with the terms of the Purchase
Agreement.

    

    11.       
    Lost Notes,
etc.  If this Note is mutilated, destroyed, lost or stolen,
upon receipt of evidence satisfactory to the Maker of such loss, theft,
destruction or mutilation of this Note and, if requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Maker shall issue a new Note of
like tenor and amount and dated the date to which interest has been paid, in
lieu of this Note; provided, however, if Payee,
its nominee, or any of its partners or members is the holder of this Note and
this Note is lost, stolen or destroyed, the affidavit of an authorized partner,
member or officer of such holder setting forth the circumstances with respect to
such loss, theft or destruction shall be accepted as satisfactory evidence
thereof, and no indemnification shall be required as a condition to the
execution and delivery by the Maker of a new Note in replacement of this Note
other than the holder’s written agreement to indemnify the Maker.

    

    12.      
     Waiver of Jury
Trial.  EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY
WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT
OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE OR ANY OF
THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER
OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL
NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW,
EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE
ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH
GUARANTOR AND THE PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER OF SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT  SUCH PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT EACH OTHER SUCH PERSON
HAS BEEN INDUCED TO ENTER INTO THE PURCHASE AGREEMENT AND THE OTHER OPERATIVE
DOCUMENTS TO WHICH IT IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED THEREIN.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    13.        
   Governing Law; Jurisdiction;
Venue.  THIS NOTE AND EACH OF THE OTHER OPERATIVE DOCUMENTS ARE
CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL FOR ALL PURPOSES BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE (EXCLUDING
THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW).  THE MAKER AND
EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS
LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN CONNECTION WITH ANY SUIT
TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR ANY OF THE OTHER OPERATIVE
DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE, BY MAIL AT THE MAKER’S OR SUCH
GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE AGREEMENT.  THE MAKER
AND EACH GUARANTOR IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS
REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR
CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY THE MAKER OR ANY GUARANTOR
AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY
ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR ANY OTHER OPERATIVE
DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS
SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN NEW YORK COUNTY IN
THE STATE OF NEW YORK.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    14.      
     This Note amends and restates and is substituted
for that certain promissory note dated November 6, 2009 in the original
principal amount of $8,000,000 made by Borrower in favor of Payee (the “Prior Note”) and this
Note is in substitution for (but not in payment of) the Prior Note.

    

    [The remainder of this page has been
left blank intentionally.]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    IN
WITNESS WHEREOF, the Maker has caused this Amended and Restated Senior
Subordinated Note to be duly executed under seal on the date set forth above by
a duly authorized representative of the Maker.

    

    
      	 
      	
              PHYSICIANS
      FORMULA, INC.

            
	 
      	 
      	 
      
	 
      	
              By:

            	 
      
	 
      	 
      	
              Name:

            
	 
      	 
      	
              Title:

            

    

     

    
      Signature Page
to Amended and Restated Senior Subordinated Note

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS AND THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED WITHOUT COMPLIANCE WITH
THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.

    

    
      	
              Warrant
      No. [20__] - #__

               

               

              Void
      After [____, 20___]

            	
              Right
      to Purchase [_______] (subject to the

              qualifications
      and adjustments set forth herein)

              shares
      of  Common Stock of Physicians

              Formula
      Holdings, Inc.

            

    

    

    PHYSICIANS
FORMULA HOLDINGS, INC.

    

    Common
Stock Purchase Warrant

    

    [________,
[20___]

    

    Physicians
Formula Holdings, Inc., a Delaware corporation (the “Company”), hereby
certifies that for good and valuable consideration, MILL ROAD CAPITAL, L.P., and
its successors and assigns (the “Holder”), is entitled
to subscribe for and purchase from the Company an aggregate of __________
(________)2
validly issued, fully paid and nonassessable shares of Common Stock, par value
$0.01 per share, of the Company (“Common Stock”) at a
purchase price per share equal to $0.25 (the “Exercise Price”), all
subject to the terms, conditions and adjustments as hereinafter
provided.  The Exercise Price shall be subject to adjustment from time
to time pursuant to the provisions of Section 6
hereof.

    

    This
Warrant is issued pursuant to, and in accordance with, the Senior Subordinated
Note Purchase and Security Agreement dated as of November 6, 2009 by and among
the Company, Physicians Formula, Inc. (a wholly-owned subsidiary of the
Company), the Guarantors party thereto and Holder, as amended on the date hereof
(the “Purchase
Agreement”) and is subject to the terms thereof.

    

    Section
1.              
Definitions.  Unless
otherwise defined herein, capitalized terms shall have the meaning given to them
in the Purchase Agreement.  As used herein, the following terms shall
have the following meanings, unless the context otherwise requires:

     

    __________________________ 

      2 The formula to calculate
the number of shares is a function of the 30-day average closing
price.  The formula is ($2.028 / 30-day average closing price) *
700,000.  The 30-day average closing price is calculated as of the
close of business on November 5, 2009 (the “First Calculation
Date”); provided, however, that, if Holder would receive a greater number
of shares calculating the 30-day average closing price as of the closing date of
the First Amendment to the Senior Subordinated Note Purchase and Security
Agreement (the “Second
Calculation Date”), then the Holder shall be entitled to such number of
additional shares that is equal to the difference between the calculations on
the First Calculation Date and the Second Calculation Date.

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    (a)    
       “Fair Market Value”
shall mean, as of the date of determination: (i) if the Common Stock is listed
on a national securities exchange, the Fair Market Value shall be the last
reported sale price of the Common Stock on such exchange or market system on the
last Business Day prior to the date of exercise of this Warrant or, if no such
sale is made on such day, the average closing bid and asked price for such day
on such exchange or market system; (ii) if the Common Stock is not listed, the
Fair Market Value shall be the mean of the last reported bid and asked prices
reported by OTC Bulletin Board or other similar over-the-counter quotation
service on the last Business Day prior to the date of exercise of this Warrant
or (iii) if the Common Stock is not so listed and bid and asked prices are not
so reported, the Fair Market Value shall be an amount determined mutually by (x)
a majority of the members of the Board of Directors of the Company, and (y) the
Holder.  If the Board of Directors and the Holder are unable to agree
on the Fair Market Value within five (5) Business Days, the Fair Market Value
shall be determined by an Independent Appraiser (as defined below) selected by
agreement of the Board of Directors and the Holder. If the parties cannot agree
upon an Independent Appraiser within five (5) Business Days, then, within a
further five (5) Business Days, the parties shall each select one Independent
Appraiser and the two Independent Appraisers shall, within a further five (5)
Business Days, select a third Independent Appraiser who shall determine the Fair
Market Value.  “Independent
Appraiser” shall mean any nationally recognized independent auditing firm
or investment banking firm that does not provide services directly to either
party.  Any determination of the Fair Market Value by an Independent
Appraiser shall be based on a valuation of the Company as an entirety without
regard to any discount for minority interests or disparate voting rights among
classes of Capital Stock.

    

    (b)     
      “Warrant Expiration
Date” shall mean 5:00 p.m., Pacific Time, on the seventh anniversary of
the date of this Warrant; provided, that, if such date
is not a Business Day, the next Business Day immediately
thereafter.

    

    Section
2.             
 Transfers;
Negotiability.  This Warrant and the shares of Common Stock
issuable upon exercise of this Warrant may not be transferred or assigned in
whole or in part without compliance with applicable federal and state securities
laws by the transferor and the transferee.  Subject to compliance with
any applicable securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such
transfer.  Upon such surrender and, if required, such payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination or denominations specified in such
instrument of assignment, and this Warrant shall promptly be
cancelled.  Until this Warrant is transferred on the books of the
Company, the Company may treat the registered holder hereof as the absolute
owner hereof for all purposes, notwithstanding any notice to the
contrary.

    

    Section
3.              
Exercise of
Warrant.

    

    3.1           Manner of
Exercise.  Subject to the terms and conditions set forth
herein, this Warrant may be exercised, in whole or in part (but not as to a
fractional share of Common Stock), by the Holder at any time or from time to
time, on any Business Day on or prior to the Warrant Expiration Date by (i) the
delivery of a duly executed exercise form in the form attached as Exhibit A hereto (an
“Exercise
Form”) to the Company at its office at 1055 West 8th
Street, Azusa, California 91702, or at such other office as the Company may
designate by notice in writing, and (ii) the delivery of payment to the Company
by cash, check made payable to the order of the Company, wire transfer of funds
to a bank account designated by the Company or any other means approved by the
Company, an amount equal to the aggregate Exercise Price for all shares of
Common Stock as to which this Warrant is exercised.  In lieu of
payment of the aggregate Exercise Price, the Holder may from time to time
convert this Warrant, in whole or in part, into a number of shares of Common
Stock determined by using the following net issuance formula:

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    X=((P)(A-B))/A

    

    where

    

    
      	
               
      

            	
              X
      =

            	
              the
      number of shares of Common Stock to be issued to the holder for the
      portion of this Warrant being
exercised;

            

    

    
      	
               
      

            	
              P
      =

            	
              the
      number of shares of common stock purchasable under this Warrant or, if
      only a portion of the Warrant is being exercised, the portion of the
      Warrant being exercised, at the date of
  calculation;

            

    

    
      	
               
      

            	
              A
      =

            	
              the
      Fair Market Value of one share of Common Stock as of the exercise date;
      and

            

    

    
      	
               
      

            	
              B
      =

            	
              the
      Exercise Price as in effect on the exercise
  date.

            

    

    

    3.2           Issuance of Common
Stock.

    

    (a)      
     Upon receipt of the documents and payments
described in Section
3.1 hereof, the Company shall, within five (5) Business Days, (x) if a
registration statement relating to the shares of Common Stock issuable upon
exercise of this Warrant is effective, and the Company’s transfer agent for its
Common Stock (the “Transfer Agent”) is
participating in The Depository Trust Company (“DTC”) Fast Automated
Securities Transfer Program, upon the request of the Holder, cause to be
credited such aggregate number of shares of Common Stock to which the Holder is
entitled pursuant to such exercise to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission system, or (y)
issue and deliver to the address as specified in the Exercise Form, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder is entitled pursuant to
such exercise, together with an amount in cash in lieu of any fraction of a
share, as hereinafter provided.  The credit or stock certificate or
certificates so delivered shall be in the denomination specified in the Exercise
Form and shall be registered in the name of the Holder or its permitted designee
(as specified in the Exercise Form).  This Warrant shall be deemed to
have been exercised and a certificate or certificates for shares of Common Stock
shall be deemed to have been issued, and the Holder or its permitted designee
(as specified in the Exercise Form) shall be deemed to have become a holder of
such shares for all purposes as of the close of business on the date on which
the Exercise Form and payments described in Section 3.1 hereof,
are received by the Company as aforesaid.  The Holder of the Warrant
shall tender this Warrant to the Company within a reasonable period of time
after exercise pursuant to Section 3.1, but in
any event within five (5) Business Days.  Upon receipt of the tendered
Warrant, unless this Warrant has expired or all of the purchase rights
represented hereby have been exercised, the Company shall deliver to the Holder
or its permitted designee (as specified in the Exercise Form) a new Warrant
evidencing the rights of such holder to purchase the unpurchased shares of
Common Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.  The tender and exchange of
this Warrant when partially exercised and the delivery by the Company of a
replacement Warrant pursuant to the preceding sentence, shall not be required
for the Holder to exercise this Warrant to purchase any unpurchased shares of
Common Stock called for by this Warrant.  The Company shall pay any
documentary or issue stamp taxes attributable to the issuance of this Warrant, a
replacement Warrant or the shares of Common Stock issuable upon exercise of this
Warrant.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    (b)           Upon
any exercise of this Warrant, the Company may require customary representations
from the Holder that the Holder is an “accredited investor” as defined in 501(a)
under the Securities Act, to assure that the issuance of the Common Stock
hereunder shall not require registration or qualification under the Securities
Act of 1933, as amended (the “Securities Act”), or any state securities
laws.

    

    3.3      
     Fractional
Shares.  No fractional Shares shall be issuable upon exercise
of the Warrant and the number of shares of Common Stock to be issued upon
exercise of the Warrant shall be rounded down to the nearest whole share of
Common Stock.  If a fractional share interest arises upon any exercise
of the Warrant, the Company shall eliminate such fractional share interest by
paying Holder the amount computed by multiplying the fractional interest by the
Fair Market Value of a whole share of Common Stock as of the exercise date over
the Exercise Price for such fractional share.

    

    Section
4.           
   Mutilated or Missing
Warrant.  In case this Warrant shall be mutilated, lost,
stolen, or destroyed, the Company shall issue in exchange and substitution of
and upon cancellation of the mutilated Warrant, or in lieu of and substitution
for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and for
the purchase of a like number of shares of Common Stock, but only upon receipt
of a written statement reasonably satisfactory to the Company of such loss,
theft or destruction of the Warrant, and with respect to a lost, stolen or
destroyed Warrant, indemnity reasonably satisfactory to the Company with respect
thereto.

    

    Section
5.              
Reservation of Common
Stock.  The Company hereby represents and warrants that there
have been reserved, and the Company shall at all applicable times keep reserved
until issued (if necessary) as contemplated by this Section 5, out of the
authorized and unissued shares of Common Stock, 100% of the number of shares
issuable upon exercise of the rights of purchase represented by this
Warrant.  The Company agrees that all shares of Common Stock issued
upon due exercise of the Warrant shall be, at the time of delivery of the
certificates for such shares of Common Stock, duly authorized, validly issued,
fully paid and non-assessable shares of Common Stock of the
Company.

    

    Section
6.              
Adjustments.  Subject
and pursuant to the provisions of this Section 6, the
Exercise Price and number of shares of Common Stock subject to this Warrant
shall be subject to adjustment from time to time as set forth
hereinafter.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    6.1           Dividend, Subdivision or
Combination of Common Stock.  If the Company at any time or
from time to time, after the issuance of this Warrant but prior to the exercise
thereof subdivides (by any stock split, stock dividend, recapitalization or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced and the aggregate number of shares of Common Stock
for which this Warrant is exercisable (the “Warrant Share
Number”) shall be proportionately increased.  If the Company at
any time combines (by reverse stock split, recapitalization or otherwise) its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased and the Warrant Share Number shall be proportionately
decreased.  An adjustment made pursuant to this Section 6.1 shall
become effective retroactively (x) in the case of any such dividend or
distribution, to a date immediately following the close of business on the
record date for the determination of holders of shares of Common Stock entitled
to receive such dividend or distribution or (y) in the case of any such
subdivision, combination or reclassification, to the close of business on the
day upon which such corporate action becomes effective.

    

    6.2           Certain
Distributions.  In case the Company shall at any time or from
time to time, after the issuance of this Warrant but prior to the exercise
hereof, distribute to all holders of shares of Common Stock (including any such
distribution made in connection with a merger or consolidation in which the
Company is the resulting or surviving entity and shares of Common Stock are not
changed or exchanged) cash, evidences of indebtedness of the Company or another
issuer, securities of the Company or another issuer or other assets (excluding
dividends or distributions payable in shares of Common Stock for which
adjustment is made under Section 6.1) or
rights or warrants to subscribe for or purchase any of the foregoing, then, and
in each such case, (i) the Exercise Price then in effect shall be adjusted (and
any other appropriate actions shall be taken by the Company) by being multiplied
by a fraction (x) the numerator of which shall be the Fair Market Value of
Common Stock immediately prior to the date of distribution less the then fair
market value (in the case of distributions other than cash, as determined by a
majority of the members of the Board of Directors of the Company) of the portion
of the cash, evidences of indebtedness, securities, other assets or rights so
distributed or of such rights or warrants applicable to one share of Common
Stock and (y) the denominator of which shall be the Fair Market Value of the
Common Stock immediately prior to the date of distribution (but such fraction
shall not be greater than one) and (ii) the Warrant Share Number shall be
increased by being multiplied by a fraction (x) the numerator of which shall be
the Fair Market Value of one share of Common Stock immediately prior to the
record date for the distribution of such cash, evidences of indebtedness,
securities, other assets or rights or warrants and (y) the denominator of which
shall be the Fair Market Value of one share of Common Stock immediately prior to
such record date less the fair market value (in the case of distributions other
than cash, as determined by a majority of the members of the Board of Directors
of the Company) of the portion of such cash, evidences of indebtedness,
securities, other assets or rights or warrants so distributed.  Such
adjustment shall be made whenever any such distribution is made and shall become
effective retroactively to a date immediately following the close of business on
the record date for the determination of stockholders entitled to receive such
distribution.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    6.3           Consolidation, Merger,
etc.  If any (i) capital reorganization, (ii) reclassification,
(iii) consolidation, merger, tender offer or other business combination of the
Company with another entity that involves a transfer of more than fifty percent
(50%) of the voting power of the Company, (iv) the sale of all or substantially
all of the Company’s assets to another entity, or (v) voluntary sale,
conveyance, exchange or transfer of the voting Capital Stock of the Company that
involves the sale, conveyance, exchange or transfer of more than fifty percent
(50%) of the voting power of the Company (each, an “Extraordinary Event”)
shall be effected, then, prior to the consummation of such Extraordinary Event,
the Company shall make appropriate provision, including providing written notice
of the Extraordinary Event to the Holder at least ten (10) Business Days prior
to effecting such Extraordinary Event, to ensure that the Holder shall
thereafter have the right to purchase and receive, upon exercise hereof and the
payment of the Exercise Price, in lieu of the shares of Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
this Warrant, such shares of stock, securities or property (including cash) as
may be issued or payable with respect to or in exchange for a number of shares
of Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of this Warrant had such Extraordinary Event not
taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the Holder to the end that the provisions
hereof (including, without limitation, provisions for adjustments of the
Exercise Price and of the number of shares purchasable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or property thereafter deliverable upon the exercise
hereof (without duplication with Sections 6.1 and 6.2 hereof).  The
Holder agrees to keep all information it receives regarding the Extraordinary
Event confidential until such time as the Company has disclosed such information
publicly. The foregoing provisions shall similarly apply to successive
Extraordinary Events.

    

    6.4           Other
Changes.  In case the Company at any time or from time to time,
after the issuance of this Warrant but prior to the exercise hereof, shall take
any action affecting its Common Stock similar to or having an effect similar to
any of the actions described in any of Sections 6.1, 6.2 or
6.3 (but not including any action described in any such Section) and it
would be equitable in the circumstances to adjust the Exercise Price and Warrant
Share Number as a result of such action, then, and in each such case, the
Exercise Price and Warrant Share Number shall be adjusted in such manner and at
such time as a majority of the Board of Directors and the Holder in good faith
determine would be equitable in the circumstances.

    

    6.5           No
Impairment.  The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Warrant and in taking all such action as may be necessary or appropriate to
protect Holder’s rights against impairment.

    

    6.6           Certificate as to
Adjustments.  Upon each adjustment of the Exercise Price,
and/or number of shares of Common Stock, the Company shall promptly notify
Holder in writing, and, at the Company’s expense, promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Exercise Price and number of shares of Common Stock in effect upon the
date thereof and the series of adjustments leading to such Exercise Price and
number of shares of Common Stock.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    Section
7.          
    Notices.  Unless
otherwise provided, any notice required or permitted under this Warrant shall be
given in writing and shall be deemed effectively given as hereinafter described
(i) if given by personal delivery, then such notice shall be deemed given upon
such delivery, (ii) if given by telex or facsimile, then such notice shall be
deemed given upon receipt of confirmation of complete transmittal, (iii) if
given by mail, then such notice shall be deemed given upon the earlier of (A)
receipt of such notice by the recipient or (B) five days after such notice is
deposited in first class mail, postage prepaid, and (iv) if given by an
internationally recognized overnight air courier, then such notice shall be
deemed given one day after delivery to such carrier.  All notices to
Holder shall be addressed to the Holder’s address set forth on the signature
page hereto, or at such other address as shall have been furnished to the other
parties hereto in writing, or if to the Company at: 1055 West 8th
Street, Azusa, California 91702.

    

    Section
8.              
Registration
Rights.  The initial holder of this Warrant is entitled to the
benefit of certain registration rights with respect to the shares of Common
Stock issuable upon the exercise of this Warrant as provided in the Registration
Rights Agreement dated as of the date hereof, by and between the Holder and the
Company, and any subsequent holder hereof shall be entitled to such rights to
the extent provided in the Registration Rights Agreement.

    

    Section
9.              
Successors.  All
the covenants and provisions hereof by or for the benefit of the Holder shall
bind and inure to the benefit of its respective successors and assigns
hereunder.

    

    Section
10.            
Governing
Law.  This Warrant shall be governed by, and construed in
accordance with, the internal laws of the State of New York, without regard to
the provisions thereof relating to conflict of laws.

    

    Section
11.            
No Rights as
Shareholder.  Prior to the exercise of this Warrant, the Holder
shall not have or exercise any voting rights or other rights as a shareholder of
the Company by virtue of its ownership of this Warrant.

    

    Section
12.            
Amendments.  This
Warrant shall not be amended without the prior written consent of the Company
and the Holder; provided, that with the written consent of the Holder (which
consent shall not be unreasonably withheld) the Company may amend this Warrant
in a manner not adverse to the Holder to effect any adjustments required to
comply with the Company’s obligations hereunder as described in Section
6.3.

    

    Section
13.            
Section
Headings.  The section headings in this Warrant are for the
convenience of the Company and the Holder and in no way alter, modify, amend,
limit or restrict the provisions hereof.

    

    [remainder
of this page intentionally left blank]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed, as of
the ___ day of [_______, [20___].

    

    
      	 
      	
              PHYSICIANS
      FORMULA HOLDINGS, INC.

            	 
	 
      	 
      	 
      	 
	 
      	 
      	 
      	 
	 
      	
              By:

            	 
      	 
	 
      	
              Name:

            	 
      	 
	 
      	
              Title:

            	 
      	 

    

    

    HOLDER

    

    MILL
ROAD CAPITAL, L.P.

    

    By: Mill
Road Capital GP LLC,

           its
General Partner

    

    

    By:
__________________________

    Name:

    Title:

    
      	
              Address:

            	
              Two
      Sound View Drive, Suite 300

            

    

    Greenwich,
Connecticut 06830

     

    [Signature
Page to Warrant]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-3

        

      

    

    

    APPENDIX
A

    PHYSICIANS
FORMULA HOLDINGS, INC.

    WARRANT
EXERCISE FORM

    

    To:
PHYSICIANS FORMULA HOLDINGS, INC.

    

    The
undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant (“Warrant”) for, and to
purchase thereunder by the payment of the Exercise Price and surrender of the
Warrant, _______________ shares of Common Stock (“Warrant Shares”)
provided for therein, and requests that certificates for the Warrant Shares be
issued as follows:

    

    

    
      	 
      	 
      	 
      
	 
      	
              Name

            	 
      
	 
      	 
      	 
      
	 
      	
              Address

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              Federal
      Tax ID or Social Security No.

            	 
      

    

    

    and
delivered by

    

    
      	
               
      

            	
              q

            	
              certified
      mail to the above address, or

            

    

    
      	
               
      

            	
              q

            	
              electronically
      (provide DWAC
Instructions:___________________),

            

    

    or

    
      	
               
      

            	
              q

            	
              other
      (specify:
  __________________________________________).

            

    

    

    and, if
the number of Warrant Shares shall not be all the Warrant Shares purchasable
upon exercise of the Warrant, that a new Warrant for the balance of the Warrant
Shares purchasable upon exercise of this Warrant be registered in the name of
the undersigned Holder or the undersigned’s Assignee as below indicated and
delivered to the address stated below.

    

    Dated:
___________________, ____

     

    
      	 
      	Signature: 
      	
               

            	 
      
	 
      	 
      	 
      
	 
      	
              Name
      (please print)

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              Address:

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              Assignee:

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      

    

    

    
      
        
           

        

        
          A-1

          
            

          

        

        
           

        

      

    

    

    APPENDIX
B

    PHYSICIANS
FORMULA HOLDINGS, INC.

    NET ISSUE
ELECTION NOTICE

    

    

    To:
PHYSICIANS FORMULA HOLDINGS, INC.

    

    Date:_________________________

    

    

    The
undersigned hereby elects under Section 3.1 of the
Warrant to surrender the right to purchase ____________ shares of Common Stock
pursuant to this Warrant and hereby requests the issuance of _____________
shares of Common Stock.  The certificate(s) for the shares issuable
upon such net issue election shall be issued in the name of the undersigned or
as otherwise indicated below.

    

    
      	 
      	 
      	 
      
	 
      	
              Signature

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              Name
      for Registration

            	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              Mailing
      Address

            	 
      

    

    

    
      
        
           

        

        
          B-1

          
            

          

        

        
           

          Annex
A-4

        

      

    

    

    PHYSICIANS
FORMULA HOLDINGS, INC.

    

    REGISTRATION
RIGHTS AGREEMENT

    

    This
Registration Rights Agreement (the “Agreement”) is made
and entered into as of this ___ day of _________, 20__ by and among (i)
PHYSICIANS FORMULA HOLDINGS, INC., a Delaware corporation (the “Company”), (ii) MILL
ROAD CAPITAL, L.P., a Delaware limited partnership (“MRC”), and (iii) each
person or entity that subsequently becomes a party to this Agreement pursuant
to, and in accordance with, the provisions of Section 7(c)
hereof.

    

    WHEREAS,
the Company has agreed to issue and sell to MRC, and MRC has agreed to purchase
from the Company, a warrant to purchase up to [______] shares (the “Warrant”) of the
Company’s common stock, $0.01 par value per share ( “Common Stock”), upon
the terms and conditions set forth in that certain Senior Subordinated Note
Purchase and Security Agreement, dated November 6, 2009 and as amended on the
date hereof, by and among the Company, Physicians Formula, Inc. (a wholly-owned
subsidiary of the Company), the Guarantors party thereto and MRC (the “Purchase Agreement”);
and

    

    WHEREAS,
the terms of the Purchase Agreement provide for the execution and delivery of
this Agreement by the Company and MRC, if certain conditions, including approval
by the Company’s stockholders of issuance of the Warrants, are met.

    

    NOW,
THEREFORE, in consideration of the premises and mutual covenants contained
herein, the parties hereto hereby agree as follows:

    

    
      
        	
                1) 

              	
                Certain
      Definitions.  Capitalized terms used herein have the
      respective meanings ascribed thereto in the Purchase Agreement unless
      otherwise defined herein.  As used in this Agreement, the
      following terms shall have the following
  meanings:

              

      

    

    

    
      	
               
      

            	
              a)

            	
              “Allowed Delay”
      shall have the meaning ascribed thereto in Section
      2(c).

            

    

    

    
      	
               
      

            	
              b)

            	
              “Availability
      Date” shall have the meaning ascribed thereto in Section
      3(i).

            

    

    

    
      	
               
      

            	
              c)

            	
              “Blue Sky
      Application” shall have the meaning ascribed thereto in Section
      6(a).

            

    

    

    
      	
               
      

            	
              d)

            	
              “Cut Back
      Shares” shall have the meaning ascribed thereto in Section
      2(d).

            

    

    

    
      	
               
      

            	
              e)

            	
              “Effectiveness
      Period” shall have the meaning ascribed thereto in Section
      3(a).

            

    

    

    
      	
               
      

            	
              f)

            	
              “Exchange Act”
      means the Securities Exchange Act of 1934, as amended, and the rules and
      regulations promulgated thereunder.

            

    

    

    
      	
               
      

            	
              g)

            	
              “Filing
      Deadline” shall have the meaning ascribed thereto in Section
      2(a).

            

    

    

    
      	
               
      

            	
              h)

            	
              “Investors”
      means, unless the context otherwise indicates, MRC and any affiliate or
      permitted transferee of MRC who is a subsequent holder of the Registrable
      Securities and who agrees to become bound by the provisions of this
      Agreement in accordance with Section
7(c).

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              i)

            	
              “Liquidated Damages
      Amount” of each Investor shall equal (i) during the first 180-day
      period following the particular Liquidated Damages Measurement Date,
      $40,000 per 30-day period multiplied by the number of Registrable
      Securities held by such Investor on the applicable Liquidated Damages
      Measurement Date, divided by the total initial number of shares of
      Registrable Securities outstanding on the Warrant Closing Date
      (appropriately adjusted, if applicable, for stock splits, stock dividends,
      combinations or similar recapitalizations); and (ii) during the second
      180-day period following the particular Liquidated Damages Measurement
      Date, $80,000 per 30-day period multiplied by the number of Registrable
      Securities held by such Investor on the applicable Liquidated Damages
      Measurement Date, divided by the total initial number of shares of
      Registrable Securities outstanding on the Warrant Closing Date
      (appropriately adjusted, if applicable, for stock splits, stock dividends,
      combinations or similar
recapitalizations).

            

    

    

    
      	
               
      

            	
              j)

            	
              “Liquidated Damages
      Measurement Date” shall have the meaning ascribed thereto in Section
      2(c).

            

    

    

    
      	
               
      

            	
              k)

            	
              “Piggyback
      Registration” shall have the meaning ascribed thereto in Section
      2(e).

            

    

    

    
      	
               
      

            	
              l)

            	
              “Prospectus”
      means the prospectus included in any Registration Statement, as amended or
      supplemented by any prospectus supplement, with respect to the terms of
      the offering of any portion of the Registrable Securities covered by such
      Registration Statement and by all other amendments and supplements to the
      prospectus, including post-effective amendments and all material
      incorporated by reference in such
prospectus.

            

    

    

    
      	
               
      

            	
              m)

            	
              “Register,”
      “registered” and
      “registration”
      refer to a registration made by preparing and filing a Registration
      Statement or similar document in compliance with the Securities Act (as
      defined below), and the declaration or ordering of effectiveness of such
      Registration Statement or document.

            

    

    

    
      	
               
      

            	
              n)

            	
              “Registrable
      Securities” means shares of Common Stock issued or issuable (i)
      upon exercise of the Warrant (as defined in the Purchase Agreement) and
      (ii) any other securities issued or issuable with respect to or in
      exchange for Registrable Securities; provided, that, a
      security shall cease to be a Registrable Security when (a) such securities
      have been sold pursuant to a Registration Statement or Rule 144 under the
      Securities Act; (b) such securities have otherwise by transferred by the
      Investor and new certificates for such securities not bearing a legend
      restricting further transfer shall have been delivered by the Company or
      its transfer agent and subsequent disposition of such securities shall not
      require registration under the Securities Act; or (c) such securities have
      been issued upon exercise of the Warrant and shall have ceased to be
      outstanding.

            

    

    

    
      	
               
      

            	
              o)

            	
              “Registration
      Statement” means the Resale Registration Statement and any
      registration statement of the Company filed under the Securities Act that
      covers the resale of any of the Registrable Securities in a Piggyback
      Registration pursuant to this Agreement, amendments and supplements to
      such Registration Statement, including post-effective amendments, all
      exhibits and all material incorporated by reference in such Registration
      Statement.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              p)

            	
              “Required
      Investors” means the Investors holding a majority of the
      Registrable Securities.

            

    

    

    
      	
               
      

            	
              q)

            	
              “SEC” means the
      U.S. Securities and Exchange
Commission.

            

    

    

    
      	
               
      

            	
              r)

            	
              “SEC
      Restrictions” shall have the meaning ascribed thereto in Section
      2(d).

            

    

    

    
      	
               
      

            	
              s)

            	
              “Securities Act”
      means the Securities Act of 1933, as amended, and the rules and
      regulations promulgated thereunder.

            

    

    

    
      	
               
      

            	
              t)

            	
              “Warrant Closing
      Date” means the date of this
Agreement.

            

    

    

    
      
        	
                2) 

              	
                Registration.

              

      

    

    

    
      	
               
      

            	
              a)

            	
              Resale Registration
      Statements.  The Company agrees to file with the SEC, as
      promptly as practicable following the Warrant Closing Date, but no later
      than 30 days after the Warrant Closing Date (the “Filing
      Deadline”) (i) one or more registration statements on Form S-3 (or,
      if the Company shall not then be eligible to use Form S-3, on such other
      form as the Company shall then be eligible to use) pursuant to Rule 415
      under the Securities Act covering the resale by the Investors of the
      Registrable Securities (the “Resale Registration
      Statement”) or (ii) one or more prospectus supplements or other
      materials under Rule 430B promulgated under the Securities Act to include
      in a prospectus that is part of an effective registration statement such
      information as shall be necessary to identify the Investors as selling
      security holders and to permit the resale by the Investors of the
      Registrable Securities; provided, however, that
      in the event the Company is not S-3 eligible prior to the Filing Deadline,
      the Filing Deadline shall be extended to the earlier of (i) 30 days after
      the Company is S-3 eligible, and (ii) April 30, 2010.  If a
      Resale Registration Statement covering all of the Registrable Securities
      is not filed with the SEC on or prior to Filing Deadline, as extended
      pursuant to the terms of this paragraph,
      then the Company will make payments to each Investor, as liquidated
      damages and not as a penalty, in an amount equal to such Investor’s
      Liquidated Damages Amount for each 30-day period (or pro rata for any
      portion thereof) following the Filing Date until the earlier of (i) the
      date on which the Company files a Resale Registration Statement covering
      all of the Registrable Securities with the SEC, and (ii) the date on which
      Liquidated Damages begin to accrue under Section
      2(c).  Subject to any SEC comments, each Resale
      Registration Statement filed pursuant to this Section 2(a)
      shall include the plan of distribution attached hereto as Exhibit A;
      provided,
      however, that no Investor shall be named as an “underwriter” in a
      Resale Registration Statement without the Investor’s prior written
      consent.  Each Resale Registration Statement shall cover, to the
      extent allowable under the Securities Act and the rules promulgated
      thereunder (including Rule 416), such indeterminate number of additional
      shares of Common Stock resulting from stock splits, stock dividends or
      similar transactions with respect to the Registrable
      Securities.  Any Resale Registration Statement which covers the
      resale of Registrable Securities shall not cover transactions in shares of
      Common Stock or other securities for the account of any holder other than
      the Investors without the prior written consent of the Required
      Investors.  Each Resale Registration Statement (and each
      amendment or supplement thereto, and each request for acceleration of
      effectiveness thereof) shall be provided in accordance with Section 3(c) to
      the Investors and their counsel prior to its filing or other
      submission.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              b)

            	
              Expenses.  The
      Company will pay all expenses associated with each registration, including
      filing and printing fees, the Company’s counsel and accounting fees and
      expenses, costs associated with clearing the Registrable Securities for
      sale under applicable state securities laws, listing fees, fees and
      expenses of one counsel to the Investors (not to exceed $30,000 in the
      aggregate) and the Investors’ reasonable expenses in connection with the
      registration, but excluding discounts, commissions, fees of underwriters,
      selling brokers, dealer managers or similar securities industry
      professionals with respect to the Registrable Securities being
      sold.

            

    

    

    
      	
               
      

            	
              c)

            	
              Effectiveness.

            

    

    

    
      	
               
      

            	
              i)

            	
              The
      Company shall use reasonable efforts to have a Resale Registration
      Statement declared effective as soon as practicable, but, in any event, no
      later than 120 days after the Warrant Closing Date.  The Company
      shall notify the Investors by facsimile or e-mail as promptly as
      practicable, and in any event, within twenty-four (24) hours, after any
      Resale Registration Statement is declared effective and shall
      simultaneously provide the Investors with copies of any related Prospectus
      to be used in connection with the sale or other disposition of the
      securities covered thereby.  If (A) a Resale Registration
      Statement covering all of the Registrable Securities is not declared
      effective by the SEC prior to the earliest of (i) five (5) Business Days
      after the SEC shall have informed the Company that no review of the Resale
      Registration Statement will be made or that the SEC has no further
      comments on the Resale Registration Statement or (ii) the 120 days after
      the Warrant Closing Date (or, if pursuant to Section 2(a) such Resale
      Registration Statement was timely filed later than the 60th
      day after the Warrant Closing Date because the Company was not S-3
      eligible prior to the Filing Deadline, the 60th
      day after the date that such Registration Statement was filed) or (B)
      after a Resale Registration Statement has been declared effective by the
      SEC, sales cannot be made pursuant to such Resale Registration Statement
      for any reason (including without limitation by reason of a stop order, or
      the Company’s failure to update the Resale Registration Statement), but
      excluding any Allowed Delay (as defined below), then the Company will make
      payments to each Investor, as liquidated damages and not as a penalty, in
      an amount equal to such Investor’s Liquidated Damages Amount for each
      30-day period (or pro rata for any portion thereof) following the date by
      which such Resale Registration Statement should have been effective until
      the earlier of the date on which the Resale Registration Statement is
      declared effective and end of the Effectiveness Period.  The
      amounts payable as liquidated damages, pursuant to this paragraph or Section 2(a),
      shall be paid in arrears within three (3) Business Days of the last day of
      each 30-day period following the date of commencement of the accrual of
      Liquidated Damages (each a “Liquidated Damages
      Measurement Date”) and continuing until such time as Liquidated
      Damages cease to accrue, as determined pursuant to this paragraph or Section 2(a),
      as the case may be.  Such payments shall be made to each
      Investor in cash.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              ii)

            	
              For
      not more than thirty (30) consecutive days, and for not more than an
      aggregate of sixty (60) days in any twelve (12) month period, the Company
      may suspend the use of any Prospectus included in any Resale Registration
      Statement contemplated by this Section in the event that the Company
      determines in good faith that such suspension is necessary (A) to delay
      the disclosure of material non-public information concerning the Company,
      the disclosure of which at the time would be, in the good faith opinion of
      the Company, materially detrimental to the Company or (B) to amend or
      supplement the affected Resale Registration Statement or the related
      Prospectus so that such Resale Registration Statement or Prospectus shall
      not include an untrue statement of a material fact or omit to state a
      material fact required to be stated therein or necessary to make the
      statements therein, in the case of the Prospectus in light of the
      circumstances under which they were made, not misleading (an “Allowed
      Delay”); provided, that the
      Company shall promptly (a) notify each Investor in writing of the
      commencement of and the reasons for an Allowed Delay, but shall not
      (without the prior written consent of an Investor) disclose to such
      Investor any material non-public information giving rise to an Allowed
      Delay, (b) advise the Investors in writing to cease all sales under the
      Resale Registration Statement until the end of the Allowed Delay and (c)
      use reasonable efforts to terminate an Allowed Delay as promptly as
      practicable.

            

    

    

    
      	
               
      

            	
              d)

            	
              Rule 415;
      Cutback  If at any time the SEC takes the position that
      the offering of some or all of the Registrable Securities in a Resale
      Registration Statement is not eligible to be made on a delayed or
      continuous basis under the provisions of Rule 415 under the Securities Act
      or requires any Investor to be named as an “underwriter”, the Company
      shall use its reasonable efforts to persuade the SEC that the offering
      contemplated by the Resale Registration Statement is a valid secondary
      offering and not an offering “by or on behalf of the issuer” as defined in
      Rule 415 and that none of the Investors is an
      “underwriter”.  The Investors shall have the right to
      participate or to have their counsel participate in any meetings or
      discussions with the SEC regarding the SEC’s position and to comment or
      have their counsel comment on any written submission made to the SEC with
      respect thereto.  No such written submission shall be made to
      the SEC to which the Investors’ counsel reasonably objects.  In
      the event that, despite the Company’s reasonable efforts and compliance
      with the terms of this Section 2(d),
      the SEC refuses to alter its position, the Company shall (i) remove from
      the Resale Registration Statement such portion of the Registrable
      Securities (the “Cut Back
      Shares”) and/or (ii) agree to such restrictions and limitations on
      the registration and resale of the Registrable Securities as the SEC may
      require to assure the Company’s compliance with the requirements of Rule
      415 (collectively, the “SEC
      Restrictions”); provided, however, that
      the Company shall not agree to name any Investor as an “underwriter” in
      such Resale Registration Statement without the prior written consent of
      such Investor; provided,
      further, that the Company shall not be obligated to register the
      Registrable Securities of any Investor that does not provide such consent
      if the SEC requires such Investor to be named as an “underwriter” and
      after the Company’s best efforts to comply with the terms of Section 2(d)
      (including (i) and (ii) above) hereof the SEC refuses to alter its
      position, and the Investor’s refusal to consent prevents the Company from
      having the Resale Registration Statement declared effective by the
      applicable deadline, and, in such event, the Liquidated Damages Amount
      shall not accrue with respect to Registrable Securities held by an
      Investor that does not consent to be so named.  Any cut-back
      imposed on the Investors pursuant to this Section 2(d)
      shall be allocated among the Investors on a pro rata basis, unless the SEC
      Restrictions otherwise require or provide.  No liquidated
      damages shall accrue as to any Cut Back Shares until such date as the
      Company is able to effect the registration of such Cut Back Shares in
      accordance with any SEC Restrictions (such date, the “Restriction
      Termination Date” of such Cut Back Shares).  For the
      avoidance of doubt, all of the provisions of this Section 2
      (including the liquidated damages provisions) shall be applicable to such
      Cut Back Shares; provided, however, that
      (i) the Filing Deadline for the Resale Registration Statement including
      such Cut Back Shares shall be ten (10) Business Days after the Restriction
      Termination Date, and (ii) the date by which the Company is required to
      obtain effectiveness with respect to such Cut Back Shares under Section 2(c)
      shall be tolled for a period equal to the number of days elapsed from the
      date the Resale Registration Statement initially including such Cut Back
      Shares was first filed with the SEC and the Restriction Termination Date
      applicable to such Cut Back Shares.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              e)

            	
              Right to Piggyback
      Registration.

            

    

    

    
      	
               
      

            	
              i)

            	
              If
      at any time following the date of this Agreement any Registrable
      Securities remain outstanding and the Company proposes for any reason to
      register any shares of Common Stock under the Securities Act (other than
      pursuant to a registration statement on Form S-4 or Form S-8 (or a similar
      or successor form)) with respect to an offering of Common Stock by the
      Company for its own account or for the account of any of its shareholders,
      it shall at each such time promptly give written notice to the holders of
      the Registrable Securities of its intention to do so (but in any event
      within one (1) Business Day after the initial filing date) and, to the
      extent permitted under the provisions of Rule 415 under the Securities
      Act, include in such registration all Registrable Securities with respect
      to which the Company has received written requests for inclusion therein
      within ten (10) Business Days after receipt of the Company’s notice (a
      “Piggyback
      Registration”).  Such notice shall offer the holders of
      the Registrable Securities the opportunity to register such number of
      shares of Registrable Securities as each such holder may request and shall
      indicate the intended method of distribution of such Registrable
      Securities.

            

    

    

    
      	
               
      

            	
              ii)

            	
              Notwithstanding
      the foregoing, (A) if such registration involves an underwritten public
      offering, the Investors must sell their Registrable Securities to, if
      applicable, the underwriter(s) at the same price and subject to the same
      underwriting discounts and commissions that apply to the other securities
      sold in such offering (it being acknowledged that the Company shall be
      responsible for other expenses as set forth in Section 2(b))
      and subject to the Investors entering into customary underwriting
      documentation for selling shareholders in an underwritten public offering,
      and (B) if, at any time after giving written notice of its intention to
      register any Registrable Securities pursuant to Section 2(e)(i)
      and prior to the effective date of the registration statement filed in
      connection with such Piggyback Registration, the Company shall determine
      for any reason not to cause such registration statement to become
      effective under the Securities Act, the Company shall deliver written
      notice to the Investors and, thereupon, shall be relieved of its
      obligation to register any Registrable Securities in connection with such
      registration; provided, however, that nothing contained in this Section
      2(e)(ii) shall limit the Company’s liabilities and/or obligations
      under this Agreement, including, without limitation, the obligation to pay
      liquidated damages under this Section
      2.  If such registration involves an underwritten public
      offering and the underwriters determine that less than all of the
      Registrable Securities requested to be registered can be included in such
      offering, then the Registrable Securities that are included in such
      offering shall be allocated among the Investors in proportion (as nearly
      as practicable) to the number of Registrable Securities owned by each
      Investor or in such other proportions as shall mutually be agreed to by
      all such selling Investors.  Notwithstanding the foregoing, in
      no event shall (i) the number of Registrable Securities included in the
      offering be reduced unless all other securities (other than securities to
      be sold by the Company) are first entirely excluded from the offering, or
      (ii) the number of Registrable Securities included in the offering be
      reduced below twenty percent (20%) of the total number of securities
      included in such offering.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              iii)

            	
              Each
      Investor participating in a Piggyback Registration relating to an
      underwritten public offering agrees, if and to the extent requested by the
      managing underwriter of such underwritten public offering, to enter into a
      customary lock-up agreement with the underwriters, on terms no less
      favorable than the lock-up terms of other participants in the
      offering.

            

    

    

    
      	
              3)

            	
              Company
      Obligations.  The Company will use reasonable efforts to
      effect the registration of the Registrable Securities in accordance with
      the terms hereof, and pursuant thereto the Company will, as expeditiously
      as possible:

            

    

    

    
      	
               
      

            	
              a)

            	
              use
      reasonable efforts to cause such Resale Registration Statement to become
      effective and to remain continuously effective for a period that will
      terminate on the earlier of: (1) the date on which all Registrable
      Securities covered by such Registration Statement as amended from time to
      time have been sold, (2) the date on which no Registrable Securities are
      held by any Investor and (3) the date that is six months after the
      expiration of the Warrant (the “Effectiveness
      Period”) and advise the Investors in writing when the Effectiveness
      Period has expired;

            

    

    

    
      	
               
      

            	
              b)

            	
              prepare
      and file with the SEC such amendments and post-effective amendments to the
      Resale Registration Statement and the Prospectus as may be necessary to
      keep the Resale Registration Statement effective for the Effectiveness
      Period and to comply with the provisions of the Securities Act and the
      Exchange Act with respect to the distribution of all of the Registrable
      Securities covered thereby;

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              c)

            	
              provide
      copies to and permit counsel designated by the Investors a reasonable
      opportunity to review each Registration Statement and all amendments and
      supplements thereto prior to their filing with the SEC and not file any
      document to which such counsel reasonably
  objects;

            

    

    

    
      	
               
      

            	
              d)

            	
              furnish
      to the Investors and their legal counsel (i) promptly after the same is
      prepared and publicly distributed, filed with the SEC, or received by the
      Company (but not later than two (2) Business Days after the filing date,
      receipt date or sending date, as the case may be) one (1) copy of any
      Registration Statement and any amendment thereto, each preliminary
      prospectus and Prospectus and each amendment or supplement thereto, and
      each letter written by or on behalf of the Company to the SEC or the staff
      of the SEC, and each item of correspondence from the SEC or the staff of
      the SEC, in each case relating to such Registration Statement (other than
      any portion of any thereof which contains information for which the
      Company has sought confidential treatment), and (ii) such number of copies
      of a Prospectus, including a preliminary prospectus, and all amendments
      and supplements thereto and such other documents as each Investor may
      reasonably request in order to facilitate the disposition of the
      Registrable Securities owned by such Investor that are covered by the
      related Registration Statement;

            

    

    

    
      	
               
      

            	
              e)

            	
              use
      reasonable efforts to (i) prevent the issuance of any stop order or other
      suspension of effectiveness and, (ii) if such order is issued, obtain the
      withdrawal of any such order at the earliest possible
    moment;

            

    

    

    
      	
               
      

            	
              f)

            	
              prior
      to any public offering of Registrable Securities, use reasonable efforts
      to register or qualify or cooperate with the Investors and their counsel
      in connection with the registration or qualification of such Registrable
      Securities for offer and sale under the securities or blue sky laws of
      such jurisdictions requested by the Investors and do any and all other
      commercially reasonable acts or things necessary or advisable to enable
      the distribution in such jurisdictions of the Registrable Securities
      covered by the Registration Statement; provided, however, that the Company
      shall not be required in connection therewith or as a condition thereto to
      (i) qualify to do business in any jurisdiction where it would not
      otherwise be required to qualify but for this Section 3(f), (ii) subject
      itself to general taxation in any jurisdiction where it would not
      otherwise be so subject but for this Section 3(f), or (iii) file a general
      consent to service of process in any such
  jurisdiction;

            

    

    

    
      	
               
      

            	
              g)

            	
              use
      reasonable efforts to cause all Registrable Securities covered by a
      Registration Statement to be listed on each securities exchange,
      interdealer quotation system or other market on which similar securities
      issued by the Company are then
listed;

            

    

    

    
      	
               
      

            	
              h)

            	
              immediately
      notify the Investors, at any time prior to the end of the Effectiveness
      Period, upon discovery that, or upon the happening of any event as a
      result of which, the Prospectus includes an untrue statement of a material
      fact or omits to state any material fact required to be stated therein or
      necessary to make the statements therein not misleading in light of the
      circumstances then existing, and promptly prepare, file with the SEC and
      furnish to such holder a supplement to or an amendment of such Prospectus
      as may be necessary so that such Prospectus shall not include an untrue
      statement of a material fact or omit to state a material fact required to
      be stated therein or necessary to make the statements therein not
      misleading in light of the circumstances then existing;
  and

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              i)

            	
              otherwise
      use reasonable efforts to comply with all applicable rules and regulations
      of the SEC under the Securities Act and the Exchange Act, including,
      without limitation, Rule 172 under the Securities Act, file any final
      Prospectus, including any supplement or amendment thereof, with the SEC
      pursuant to Rule 424 under the Securities Act, promptly inform the
      Investors in writing if, at any time during the Effectiveness Period, the
      Company does not satisfy the conditions specified in Rule 172 and, as a
      result thereof, the Investors are required to deliver a Prospectus in
      connection with any disposition of Registrable Securities and take such
      other actions as may be reasonably necessary to facilitate the
      registration of the Registrable Securities hereunder; and make available
      to its security holders, at their request, as soon as reasonably
      practicable, but not later than the Availability Date (as defined below),
      an earnings statement covering a period of at least twelve (12) months,
      beginning after the effective date of each Registration Statement, which
      earnings statement shall satisfy the provisions of Section 11(a) of the
      Securities Act, including Rule 158 promulgated thereunder (for the purpose
      of this Section
      3(i), “Availability
      Date” means the 45th day following the end of the fourth fiscal
      quarter after the quarter that includes the effective date of such
      Registration Statement, except that, if such fourth fiscal quarter is the
      last quarter of the Company’s fiscal year, “Availability Date” means the
      90th day after the end of such fourth fiscal
  quarter).

            

    

    

    
      	
               
      

            	
              j)

            	
              With
      a view to making available to the Investors the benefits of Rule 144 (or
      its successor rule) and any other rule or regulation of the SEC that may
      at any time permit the Investors to sell shares of Common Stock to the
      public without registration, the Company covenants and agrees
      to:  (i) make and keep public information available, as those
      terms are understood and defined in Rule 144, until such date as all of
      the Registrable Securities shall have been resold; (ii) file with the SEC
      in a timely manner all reports and other documents required of the Company
      under the Exchange Act; and (iii) furnish to each Investor upon request,
      as long as such Investor owns any Registrable Securities, (A) a written
      statement by the Company that it has complied with the reporting
      requirements of the Exchange Act, (B) a copy of the Company’s most recent
      Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such
      other information as may be reasonably requested in order to avail such
      Investor of any rule or regulation of the SEC that permits the selling of
      any such Registrable Securities without
  registration.

            

    

    

    
      	
              4)

            	
              Due Diligence Review;
      Information.  The Company shall make available, during
      normal business hours, for inspection and review by the Investors,
      advisors to and representatives of the Investors (who may or may not be
      affiliated with the Investors and who are reasonably acceptable to the
      Company), all financial and other records, all filings with the SEC and
      all other corporate documents and properties of the Company as may be
      reasonably necessary for the purpose of such review, and cause the
      Company’s officers, directors and employees, within a reasonable time
      period, to supply all such information reasonably requested by the
      Investors or any such representative, advisor or underwriter in connection
      with such Registration Statement (including, without limitation, in
      response to all questions and other inquiries reasonably made or submitted
      by any of them), prior to and from time to time after the filing and
      effectiveness of the Registration Statement for the sole purpose of
      enabling the Investors and such representatives, advisors and underwriters
      and their respective accountants and attorneys to conduct initial and
      ongoing due diligence with respect to the Company and the accuracy of such
      Registration Statement.  The Company shall not disclose material
      nonpublic information to the Investors, or to advisors to or
      representatives of the Investors, unless prior to disclosure of such
      information the Company identifies such information as being material
      nonpublic information and provides the Investors, such advisors and
      representatives with the opportunity to accept or refuse to accept such
      material nonpublic information for review and any Investor wishing to
      obtain such information enters into an appropriate confidentiality
      agreement with the Company with respect
thereto.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
              5)

            	
              Obligations of the
      Investors.

            

    

    

    
      	
               
      

            	
              a)

            	
              Each
      Investor shall furnish in writing to the Company such information
      regarding itself, the Registrable Securities held by it and the intended
      method of disposition of the Registrable Securities held by it, as shall
      be reasonably required to effect the registration of such Registrable
      Securities and shall execute such documents in connection with such
      registration as the Company may reasonably request.  At least
      five (5) Business Days prior to the first anticipated filing date of any
      Registration Statement, the Company shall notify each Investor of the
      information the Company requires from such Investor in connection with the
      filing of the Registration Statement.  The Company shall be
      obligated to include as a selling stockholder in such Registration
      Statement each Investor that provides such information to the Company at
      least two (2) Business Days prior to the first anticipated filing date of
      such Registration Statement and the Company shall not be obligated to
      register the Registrable Securities of any Investor that does not provide
      such information by such date.

            

    

    

    
      	
               
      

            	
              b)

            	
              Each
      Investor, by its acceptance of the Registrable Securities agrees to
      cooperate with the Company as reasonably requested by the Company in
      connection with the preparation and filing of a Registration Statement
      hereunder, unless such Investor has notified the Company in writing of its
      election to exclude all of its Registrable Securities from such
      Registration Statement.

            

    

    

    
      	
               
      

            	
              c)

            	
              Each
      Investor agrees that, upon receipt of any notice from the Company of
      either (i) the commencement of an Allowed Delay pursuant to Section
      2(c)(ii) or (ii) the happening of an event pursuant to Section 3(h)
      hereof, such Investor will immediately discontinue disposition of
      Registrable Securities pursuant to the Registration Statement covering
      such Registrable Securities, until the Investor is advised by the Company
      that such dispositions may again be
made.

            

    

    

    
      	
              6)

            	
              Indemnification.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              a)

            	
              Indemnification by the
      Company.  The Company will indemnify and hold harmless
      each Investor and its officers, directors, members, employees and agents,
      the successors and assigns of any of the foregoing, and each other person,
      if any, who controls such Investor within the meaning of the Securities
      Act, against any losses, claims, damages, liabilities or expenses
      (including reasonable attorney’s fees), joint or several, to which they
      may become subject under the Securities Act or otherwise, insofar as such
      losses, claims, damages or liabilities or expenses (or actions in respect
      thereof) arise out of or are based upon: (i) any untrue statement or
      alleged untrue statement of any material fact contained in any
      Registration Statement, any preliminary Prospectus or final Prospectus, or
      any amendment or supplement thereof, or the omission or alleged omission
      to state a material fact required to be stated or necessary to make the
      statements therein not misleading; or (ii) any violation by the Company or
      its agents of any rule or regulation promulgated under the Securities Act
      applicable to the Company or its agents and relating to action or inaction
      required of the Company in connection with such registration, and will
      reimburse such Investor, and each such officer, director, member, employee
      and agent, all successors and assigns of any of the foregoing, and each
      such controlling person for any legal or other expenses reasonably
      incurred by them in connection with investigating or defending any such
      loss, claim, damage, liability or action; provided, however, that
      the Company will not be liable in any such case if and to the extent that
      any such loss, claim, damage, liability or expense arises out of or is
      based upon an untrue statement or alleged untrue statement or omission or
      alleged omission so made in conformity with information furnished by such
      Investor or any such controlling person in writing specifically for use in
      such Registration Statement or
Prospectus.

            

    

    

    
      	
               
      

            	
              b)

            	
              Indemnification by the
      Investors.  Each Investor agrees, severally but not
      jointly, to indemnify and hold harmless, the Company, its directors,
      officers, employees and stockholders and each person who controls the
      Company (within the meaning of the Securities Act) against any losses,
      claims, damages, liabilities and expense (including reasonable attorneys’
      fees) resulting from: (i) any untrue statement or alleged untrue statement
      of any material fact in the Registration Statement or Prospectus or
      preliminary Prospectus or amendment or supplement thereto, or the omission
      or alleged omission to state a fact required to be stated or necessary to
      make the statements therein not misleading, to the extent, but only to the
      extent, that any such untrue statement or omission is contained in any
      information furnished in writing by such Investor to the Company
      specifically for inclusion in such Registration Statement or Prospectus or
      amendment or supplement thereto; and (ii) any violation by the Investor or
      its agents of any rule or regulation promulgated under the Securities Act
      applicable to the Investor or its agents and relating to action or
      inaction required of the Investor in connection with such
      registration.  In no event shall the liability of an Investor be
      greater in amount than the dollar amount of the proceeds (net of all
      expense paid by such Investor in connection with any claim relating to
      this Section
      6, and the amount of any damages such Investor has otherwise been
      required to pay by reason of such untrue statement or omission and any
      underwriting discounts and commissions) received by such Investor upon the
      sale of the Registrable Securities included in the Registration Statement
      giving rise to such indemnification
obligation.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              c)

            	
              Conduct of
      Indemnification Proceedings.  Any person entitled to
      indemnification hereunder shall (i) give prompt notice to the indemnifying
      party of any claim with respect to which it seeks indemnification and (ii)
      permit such indemnifying party to assume the defense of such claim with
      counsel reasonably satisfactory to the indemnified party; provided that any
      person entitled to indemnification hereunder shall have the right to
      employ separate counsel and to participate in the defense of such claim,
      but the fees and expenses of such counsel shall be at the expense of such
      person unless (a) the indemnifying party has agreed to pay such fees or
      expenses, or (b) the indemnifying party shall have failed to assume the
      defense of such claim and employ counsel reasonably satisfactory to such
      person or (c) in the reasonable judgment of any such person, based upon
      advice of its counsel, a conflict of interest exists between such person
      and the indemnifying party with respect to such claims (in which case, if
      the person notifies the indemnifying party in writing that such person
      elects to employ separate counsel at the expense of the indemnifying
      party, the indemnifying party shall not have the right to assume the
      defense of such claim on behalf of such person); and provided, further, that
      the failure of any indemnified party to give notice as provided herein
      shall not relieve the indemnifying party of its obligations hereunder,
      except to the extent that such failure to give notice shall materially
      adversely affect the indemnifying party in the defense of any such claim
      or litigation.  It is understood that the indemnifying party
      shall not, in connection with any single proceeding in the same
      jurisdiction, be liable for fees or expenses of more than one separate
      firm of attorneys at any time for all indemnified parties.  No
      indemnifying party will, except with the consent of the indemnified party,
      consent to entry of any judgment or enter into any settlement that does
      not include as an unconditional term thereof the giving by the claimant or
      plaintiff to such indemnified party of a release from all liability in
      respect of such claim or
litigation.

            

    

    

    
      	
               
      

            	
              d)

            	
              Contribution.  If
      for any reason the indemnification provided for in the preceding
      paragraphs (a) and (b) is unavailable to an indemnified party or
      insufficient to hold it harmless, other than as expressly specified
      therein, then the indemnifying party shall contribute to the amount paid
      or payable by the indemnified party as a result of such loss, claim,
      damage, liability or expense in such proportion as is appropriate to
      reflect the relative fault of the indemnified party and the indemnifying
      party, as well as any other relevant equitable
      considerations.  No person guilty of fraudulent
      misrepresentation within the meaning of Section 11(f) of the Securities
      Act shall be entitled to contribution from any person not guilty of such
      fraudulent misrepresentation.  In no event shall the
      contribution obligation of a holder of Registrable Securities be greater
      in amount than the dollar amount of the proceeds (net of all expenses paid
      by such holder in connection with any claim relating to this Section 6, the
      amount of any damages such holder has otherwise been required to pay by
      reason of such untrue or alleged untrue statement or omission or alleged
      omission and any underwriter discounts and commissions) received by it
      upon the sale of the Registrable Securities giving rise to such
      contribution obligation.

            

    

    

    
      	
              7)

            	
              Miscellaneous.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              a)

            	
              Amendments and
      Waivers.  This Agreement may be amended only by a writing
      signed by the Company and the Required Investors.  The Company
      may take any action herein prohibited, or omit to perform any act herein
      required to be performed by it, only if the Company shall have obtained
      the written consent to such amendment, action or omission to act, of the
      Required Investors.

            

    

    

    
      	
               
      

            	
              b)

            	
              Notices.  All
      notices and other communications provided for or permitted hereunder shall
      be made in writing by hand delivery, first-class mail, facsimile
      transmission or air courier which guarantees overnight
      delivery:

            

    

    

    If to the
Company:

    

    Physicians
Formula Holdings, Inc.

    1055 West
8th
Street

    Azusa, CA
91702

    Attention:  Jeff
Berry, Chief Financial Officer

    Telephone:
626-334-3395

    Fax:
626-812-9462

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Kirkland
& Ellis LLP

    300 N.
LaSalle Street, Suite 3200

    Chicago,
IL 60654

    Attention:
James S. Rowe, Esq.

                      
Elisabeth
M. Martin

    Telephone:
312-862-2000

    Fax:
312-862-2200

    

    If to the
initial Investor:

    

    Mill Road
Capital, L.P.

    Two Sound
View Drive

    Greenwich,
CT 06830

    Attention:
Thomas Lynch, Managing Director

    Telephone:
203-987-3501

    Fax:
203-621-3280

    

    With a
copy (delivery of which alone shall not constitute notice) to:

    

    Foley
Hoag LLP

    155
Seaport Boulevard

    Boston,
MA  02210

    Attention:  Peter
M. Rosenblum, Esq.

    Telephone:
617-832-1000

    Fax:
617-832-7000

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    If to any
other Investor, at such Investor’s address as it appears in the records of the
Company (unless otherwise indicated by any such Investor).

    

    All such
notices and communications shall be deemed to have been duly given: at the time
delivered by hand, if personally delivered; three (3) Business Days after being
deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged
by the recipient’s facsimile machine operator, if sent by facsimile transmission
and; on the day delivered, if sent by overnight air courier guaranteeing next
day delivery.

    

    
      	
               
      

            	
              c)

            	
              Assignments and
      Transfers by Investors.  The provisions of this Agreement
      shall be binding upon and inure to the benefit of the Investors and their
      respective successors and assigns.  An Investor may transfer or
      assign, in whole or from time to time in part, to one or more persons its
      rights hereunder in connection with the transfer of Registrable Securities
      by such Investor to such person, provided that (i) such Investor complies
      with all laws applicable thereto and provides written notice of assignment
      to the Company promptly after such assignment is effected, which written
      notice shall state the name and address of such transferee or assignee and
      the number of Registrable Securities with respect to which such
      registration rights are being transferred or assigned, and (ii) the
      transferee or assignee agrees in writing with the Company to be bound by
      all of the provisions contained
herein.

            

    

    

    
      	
               
      

            	
              d)

            	
              Assignments and
      Transfers by the Company.  This Agreement may not be
      assigned by the Company (whether by operation of law or otherwise) without
      the prior written consent of the Required Investors, provided, however,
      that the Company may assign its rights and delegate its duties hereunder
      to any surviving or successor corporation in connection with a merger or
      consolidation of the Company with another corporation, or a sale, transfer
      or other disposition of all or substantially all of the Company’s assets
      to another corporation, without the prior written consent of the Required
      Investors, after notice duly given by the Company to each
      Investor.

            

    

    

    
      	
               
      

            	
              e)

            	
              Benefits of the
      Agreement.  The terms and conditions of this Agreement
      shall inure to the benefit of and be binding upon the respective permitted
      successors and assigns of the parties.  Nothing in this
      Agreement, express or implied, is intended to confer upon any party other
      than the parties hereto or their respective successors and assigns any
      rights, remedies, obligations, or liabilities under or by reason of this
      Agreement, except as expressly provided in this
  Agreement.

            

    

    

    
      	
               
      

            	
              f)

            	
              Counterparts;
      Faxes.  This Agreement may be executed in two or more
      counterparts, each of which shall be deemed an original, but all of which
      together shall constitute one and the same instrument.  This
      Agreement may also be executed via facsimile, which shall be deemed an
      original.

            

    

    

    
      	
               
      

            	
              g)

            	
              Titles and
      Subtitles.  The titles and subtitles used in this
      Agreement are used for convenience only and are not to be considered in
      construing or interpreting this
Agreement.

            

    

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          FH
draft dated November 5, 2009

        

      

    

    

    
      	
               
      

            	
              h)

            	
              Severability.  Any
      provision of this Agreement that 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 but shall be interpreted as if it were written so as to
      be enforceable to the maximum extent permitted by applicable law, and any
      such prohibition or unenforceability in any jurisdiction shall not
      invalidate or render unenforceable such provision in any other
      jurisdiction.  To the extent permitted by applicable law, the
      parties hereby waive any provision of law which renders any provisions
      hereof prohibited or unenforceable in any
  respect.

            

    

    

    
      	
               
      

            	
              i)

            	
              Further
      Assurances.  The parties shall execute and deliver all
      such further instruments and documents and take all such other actions as
      may reasonably be required to carry out the transactions contemplated
      hereby and to evidence the fulfillment of the agreements herein
      contained.

            

    

    

    
      	
               
      

            	
              j)

            	
              Entire
      Agreement.  This Agreement is intended by the parties as
      a final expression of their agreement and intended to be a complete and
      exclusive statement of the agreement and understanding of the parties
      hereto in respect of the subject matter contained herein.  This
      Agreement supersedes all prior agreements and understandings between the
      parties with respect to such subject
matter.

            

    

    

    
      	
               
      

            	
              k)

            	
              Governing Law; Consent
      to Jurisdiction; Waiver of Jury Trial.  THIS AGREEMENT
      SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
      STATE OF NEW YORK WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAWS
      THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION.  MRC AND THE
      COMPANY HEREBY CONSENT TO THE JURISDICTION OF THE COURTS OF THE STATE OF
      NEW YORK AND THE FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK WITH
      RESPECT TO ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE ANY PROVISION
      OF THIS AGREEMENT OR TO DETERMINE THE RIGHTS OF ANY PARTY HERETO. EACH OF
      THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
      LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS
      BEEN CONSULTED SPECIFICALLY AS TO THIS
WAIVER.

            

    

    

    [remainder
of this page intentionally left blank]

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-4

        

      

    

    

    IN
WITNESS WHEREOF, the parties have executed this Registration Rights Agreement or
caused their duly authorized officers to execute this Registration Rights
Agreement as of the date first above written.

    

    

    
      	
              THE
      COMPANY:

            	
              PHYSICIANS
      FORMULA HOLDINGS, INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:
      

            	 
      	 
      
	 
      	
              Title:
      

            	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
              INVESTOR:

            	
              MILL
      ROAD CAPITAL, L.P.

            
	 
      	 
      	 
      	 
      
	 
      	
              By:
      Mill Road Capital GP LLC,

            
	 
      	
                     its
      General Partner

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	 
      	 
      
	 
      	
              Name:

            	 
      	 
      
	 
      	
              Title:

            	 
      	 
      
	 
      	
              Address:

            	
              Two
      Sound View Drive, Suite 300

            	 
      
	 
      	 
      	
              Greenwich,
      Connecticut 06830

            	 
      

    

     

    [Signature
Page to Registration Rights Agreement]

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-4

        

      

    

    

    
      Exhibit
A

    

    

    Plan
of Distribution

    

    The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions.  These dispositions may be at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.

    

    The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:

    

    -
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

    

    - block
trades in which the broker-dealer will attempt to sell the shares as agent, but
may position and resell a portion of the block as principal to facilitate the
transaction;

    

    -
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

    

    - an
exchange or over-the-counter distribution in accordance with the rules of the
applicable exchange or other market;

    

    -
privately negotiated transactions;

    

    - short
sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;

    

    - through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;

    

    -
broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;

    

    - a
combination of any such methods of sale; and

    

    - any
other method permitted by applicable law.

    

    The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.  The selling
stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-4

        

      

    

    

    In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume.  The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities.  The
selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).

    

    The
aggregate proceeds to the selling stockholders from the sale of the common stock
offered by them will be the purchase price of the common stock less discounts or
commissions, if any.  Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents.  We will not receive any of the proceeds from this
offering.

    

    The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.

    

    Any
underwriters, broker-dealers or agents that participate in the sale of the
common stock or interests therein may be "underwriters" within the meaning of
Section 2(11) of the Securities Act.  Any discounts, commissions,
concessions or profit they earn on any resale of the shares may be underwriting
discounts and commissions under the Securities Act.  Selling
stockholders who are "underwriters" within the meaning of Section 2(11) of the
Securities Act will be subject to the prospectus delivery requirements of the
Securities Act.

    

    To the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.

    

    In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers.  In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

          Annex
A-4

        

      

    

    

    The
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares in the market and to the activities of the selling stockholders
and their affiliates.  In addition, to the extent applicable we will
make copies of this prospectus (as it may be supplemented or amended from time
to time) available to the selling stockholders for the purpose of satisfying the
prospectus delivery requirements of the Securities Act.  The selling
stockholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against certain liabilities, including
liabilities arising under the Securities Act.

    

    We have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.

    

    We have
agreed with the selling stockholders to keep the registration statement of which
this prospectus constitutes a part effective the earlier of: (1) such time as
all of the shares covered by this prospectus have been disposed of pursuant to
and in accordance with the registration statement and (2) six months after the
expiration of the Warrant.Unassociated Document

    
      

    

    Exhibit
10.20

     

    
      Execution
Version

    

     

    THIS
INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATE IN
THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT
(THE “INTERCREDITOR AGREEMENT”) DATED AS OF NOVEMBER 6, 2009 BY AND AMONG WELLS
FARGO BANK, NATIONAL ASSOCIATION ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT
OPERATING DIVISION, MILL ROAD CAPITAL, L.P. AND PHYSICIANS FORMULA, INC.; AND
EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, IRREVOCABLY AGREES TO
BE BOUND BY THE PROVISIONS OF THE INTERCREDITOR AGREEMENT.

     

    THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE
FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS
THEREFROM.

     

    THIS
NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX
PURPOSES.  FOR FURTHER INFORMATION REGARDING THE ISSUE PRICE, AMOUNT
OF OID, ISSUE DATE, THE YIELD TO MATURITY OF THIS NOTE AND ANY OTHER INFORMATION
REQUIRED UNDER TREASURY REGULATIONS SECTION 1.275-3(b)(1)(i), THE HOLDER OF THIS
NOTE SHOULD CONTACT THE OFFICE OF THE CHIEF FINANCIAL OFFICER OF PHYSICIANS
FORMULA INC. AT 1055 WEST 8TH STREET, AZUSA, CA 91702, TEL NO. (626) 334-3395 AT
ANY TIME BEGINNING 10 DAYS AFTER THE DATE OF ISSUANCE.

     

    PHYSICIANS
FORMULA, INC.

     

    SENIOR
SUBORDINATED NOTE

     

    
      	
              $8,000,000.00

            	
              November
      6, 2009

            

    

    

    FOR VALUE RECEIVED, Physicians
Formula, Inc., a New York corporation (the “Maker”), hereby
promises to pay to the order of Mill Road Capital, L.P., a Delaware limited
partnership (“MRC”), or its
registered assigns and transferees (collectively, the “Payee”) the principal
sum of Eight Million Dollars ($8,000,000.00), plus the aggregate amount of
accrued interest from time to time capitalized thereon, less the aggregate
amount of principal prepaid or repaid from time to time, in each case, pursuant
to the terms and conditions of and at the times provided in the Purchase
Agreement (as defined below).

     

    1.          Notes.  This
Senior Subordinated Note (this “Note”) is issued
pursuant to, and is subject to the terms and entitled to the benefits of, the
Senior Subordinated Note Purchase and Security Agreement of even date herewith
among the Maker, MRC and the Guarantors (as defined therein), as amended,
restated, supplemented or otherwise modified from time to time in accordance
with its terms (the “Purchase
Agreement”).  The Payee is entitled to enjoy the benefits of
and to enforce the provisions of the Purchase Agreement as a Holder and is
subject to the obligations thereunder of Holder.  Terms used herein
and not otherwise defined herein shall have the meanings ascribed thereto in the
Purchase Agreement.

     

    2.          Interest.  Commencing
on the date of issuance, this Note will accrue interest on the unpaid principal
amount thereof at the Interest Rate specified in, and subject to adjustment as
provided in, the Purchase Agreement.  Interest on this Note shall be
computed based on a 360-day year and actual days elapsed, and all PIK Interest
on this Note shall be compounded quarterly on the first day of each calendar
quarter.  Cash interest on this Note shall be payable monthly in
arrears on each Interest Payment Date commencing on December 1, 2009 by wire
transfer of immediately available funds to one or more accounts designated by
the Payee.  The records of the Payee shall, absent manifest error, be
conclusive evidence of the outstanding principal balance of this Note, including
all PIK Interest added to the principal amount thereof and the compounding
thereof, but any failure of the Payee to record, or any error in so recording,
any such amount on the Payee’s records shall not limit or otherwise affect the
obligations of the Maker under this Note to make all payments of principal of
and interest thereon when due.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    If an
Event of Default has occurred and is continuing, from and after the date such
Event of Default has occurred the entire outstanding unpaid principal balance of
this Note and any unpaid interest from time to time in default shall (both
before and after acceleration and entry of judgment) bear interest, payable in
cash on demand, at a rate per annum equal to the Interest Rate payable pursuant
to Section 1.1
of the Purchase Agreement plus three percent
(3%); provided,
however, that
upon the cessation or cure of such Event of Default, if no other Event of
Default is then continuing, this Note shall again bear interest at the
applicable Interest Rate as set forth in Section 1.1 of the
Purchase Agreement.

     

    The
obligations of the Maker to pay interest under this Note are subject in all
events to the provisions of Section 1.6 of the
Purchase Agreement relating to Excess Interest and the Maximum
Rate.

     

    3.          Maturity; Required
Redemption.  Unless the maturity of this Note is accelerated
pursuant to Article
VIII of the Purchase Agreement, this Note shall mature and be redeemed by
the Maker in one installment which shall be paid on May 6, 2013.  On
the stated or accelerated maturity date of the Notes, the Maker will pay in cash
the principal amount of the Notes then outstanding together with all accrued and
unpaid interest thereon, including, without limitation, all PIK
interest.

     

    4.          Optional
Prepayments.  The Maker may voluntarily prepay this Note, in
whole or in part, at any time.  Optional prepayments permitted
pursuant to the Purchase Agreement may only be made upon payment to the Payee of
an amount equal to the sum of the principal amount to be prepaid, together with
all accrued and unpaid interest (including PIK Interest) on the amount so
prepaid through the date of prepayment, plus the Prepayment
Premium, if any, as provided in the Purchase Agreement.

     

    5.          Repurchase upon a Change of
Control.  The Maker is obligated upon the occurrence of a
Change of Control to repurchase this Note in whole on the terms and conditions
set forth in Section
1.4(c) of the Purchase Agreement.

     

    6.          Prepayment
Premium.  In the event of any prepayment of this Note prior to
the Maturity Date pursuant to Sections 1.4(b) and
(c) of the Purchase Agreement, the Maker shall pay to the Payee the
Prepayment Premium indicated in the Purchase Agreement corresponding to the time
period in which such prepayment occurs or is required to occur.

     

    7.          Guaranty and
Security.  The payment and performance of this Note is and
shall at all times be guaranteed (the “Guaranty”) by each
Guarantor pursuant to Article IX of the
Purchase Agreement.  This Note is secured pursuant to the terms of (a)
the security interest granted by the Borrower under Article II of the
Purchase Agreement, (b) the Guarantor Security Agreement dated as of the date
hereof among the Guarantors and the Payee and (c) the other Security
Documents.  The Payee is entitled to the benefits of the Guaranty, the
Guarantor Security Agreement, the other Security Documents and the other
Operative Documents, and may enforce the agreements of the Maker contained
therein, and the Payee may exercise the remedies provided for thereby or
otherwise available in respect thereof, all in accordance with the terms
thereof.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    8.          Remedies on Default.
Etc.  Reference is made to the Purchase Agreement for the
remedies available to the Payee upon the occurrence of an Event of Default as
described in the Purchase Agreement.  The Maker hereby agrees to pay
on demand all reasonable costs and expenses, including without limitation
attorneys’ fees and costs of collection, incurred or paid by the holder of this
Note in enforcing this Note in accordance with the Purchase
Agreement.

     

    9.          No
Impairment.  No provision of the Purchase Agreement or this
Note shall alter or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal and interest on this Note at the times,
places and rates, and in the currency, provided.

     

    10.        Waivers;
Amendments.  The Maker and each endorser and guarantor hereby
waives presentment, demand, protest and notice of any kind.  No
failure or delay on the part of the Maker or the Payee or holder hereof in
exercising any right, power, privilege or remedy hereunder or under the Purchase
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power, privilege or remedy preclude any other or
further exercise thereof or the exercise of any other right, power, privilege or
remedy.  The remedies provided for herein and in the Purchase
Agreement are cumulative and are not exclusive of any remedies that may be
available to the Maker or the Payee at law or in equity or
otherwise.  This Note may not be amended and the provisions hereof may
not be waived, except in accordance with the terms of the Purchase
Agreement.

     

    11.        Lost Notes,
etc.  If this Note is mutilated, destroyed, lost or stolen,
upon receipt of evidence satisfactory to the Maker of such loss, theft,
destruction or mutilation of this Note and, if requested in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Maker, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Maker shall issue a new Note of
like tenor and amount and dated the date to which interest has been paid, in
lieu of this Note; provided, however, if Payee,
its nominee, or any of its partners or members is the holder of this Note and
this Note is lost, stolen or destroyed, the affidavit of an authorized partner,
member or officer of such holder setting forth the circumstances with respect to
such loss, theft or destruction shall be accepted as satisfactory evidence
thereof, and no indemnification shall be required as a condition to the
execution and delivery by the Maker of a new Note in replacement of this Note
other than the holder’s written agreement to indemnify the Maker.

     

    12.        Waiver of Jury
Trial.  EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY
WAIVES ITS RIGHT TO JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT
OF ANY DISPUTE IN CONNECTION WITH THE PURCHASE AGREEMENT, THIS NOTE OR ANY OF
THE OTHER OPERATIVE DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER
OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY, INCLUDING , WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF
DEALINGS, STATEMENTS OR ACTIONS OF THE PAYEE RELATING TO THE ADMINISTRATION OR
ENFORCEMENT OF THE NOTES AND THE OPERATIVE DOCUMENTS, AND AGREES THAT IT WILL
NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.  EXCEPT AS PROHIBITED BY LAW,
EACH OF THE MAKER, EACH GUARANTOR AND THE PAYEE HEREBY WAIVES ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE
ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES.  EACH OF THE MAKER, EACH
GUARANTOR AND THE PAYEE (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY
OF ANY OTHER OF SUCH PERSONS HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT  SUCH PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT EACH OTHER SUCH PERSON
HAS BEEN INDUCED TO ENTER INTO THE PURCHASE AGREEMENT AND THE OTHER OPERATIVE
DOCUMENTS TO WHICH IT IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED THEREIN.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    13.        Governing
Law; Jurisdiction; Venue.  THIS NOTE AND EACH OF THE OTHER
OPERATIVE DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE STATE OF NEW YORK AND
SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF SAID STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF
LAW).  THE MAKER AND EACH GUARANTOR CONSENT TO THE JURISDICTION OF THE
FEDERAL AND STATE COURTS LOCATED IN NEW YORK COUNTY IN THE STATE OF NEW YORK IN
CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE PAYEE UNDER THIS NOTE OR
ANY OF THE OTHER OPERATIVE DOCUMENTS AND CONSENT TO SERVICE OF PROCESS IN ANY
SUCH SUIT BEING MADE UPON THE MAKER OR ANY SUCH GUARANTOR, AS THE CASE MAY BE,
BY MAIL AT THE MAKER’S OR SUCH GUARANTOR’S ADDRESS SET FORTH IN THE PURCHASE
AGREEMENT.  THE MAKER AND EACH GUARANTOR IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH
ACTION BROUGHT IN THE COURTS REFERRED TO IN THIS SECTION AND IRREVOCABLY WAIVES
AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.  ANY SUIT OR JUDICIAL PROCEEDING BY
THE MAKER OR ANY GUARANTOR AGAINST THE PAYEE INVOLVING, DIRECTLY OR INDIRECTLY,
ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS NOTE OR
ANY OTHER OPERATIVE DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE
OPERATIVE DOCUMENTS SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN
NEW YORK COUNTY IN THE STATE OF NEW YORK.

     

    [The remainder of this page has been
left blank intentionally.]

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, the Maker has
caused this Senior Subordinated Note to be duly executed under seal on the date
set forth above by a duly authorized representative of the Maker.

     

    
      	 
      	
              PHYSICIANS
      FORMULA, INC.

            
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
              By:

            	
               /s/ Ingrid Jackel

            	 
      
	 
      	 
      	
              Name:  Ingrid
      Jackel

            	 
      
	 
      	 
      	
              Title:    Chief
      Executive Officer

            	 
      

    

     

    
      Signature
Page to Senior Subordinated Note

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00165-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00165-of-00352.parquet"}]]