Document:

exv10w6

Exhibit 10.6

Energy Recovery, Inc.

2008 Equity Incentive Plan

(As Adopted March 25, 2008)

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page	 
	 
	 	 	 	 	 	 
	ARTICLE 1.
	 	INTRODUCTION	 	 	1	 
	 
	 	 	 	 	 	 
	ARTICLE 2.
	 	ADMINISTRATION	 	 	1	 
	2.1
	 	Committee Composition	 	 	1	 
	2.2
	 	Committee Responsibilities	 	 	1	 
	2.3
	 	Delegation of Authority	 	 	2	 
	 
	 	 	 	 	 	 
	ARTICLE 3.
	 	SHARES AVAILABLE FOR GRANTS	 	 	2	 
	3.1
	 	Basic Limitation	 	 	2	 
	3.2
	 	Annual Increase in Shares	 	 	2	 
	3.3
	 	Shares Returned to Reserve	 	 	3	 
	3.4
	 	Code Section 162(m) Limitations on Awards	 	 	3	 
	 
	 	 	 	 	 	 
	ARTICLE 4.
	 	ELIGIBILITY	 	 	3	 
	4.1
	 	Incentive Stock Options	 	 	3	 
	4.2
	 	Other Grants	 	 	3	 
	4.3
	 	Non-U.S. Participants	 	 	3	 
	 
	 	 	 	 	 	 
	ARTICLE 5.
	 	OPTIONS	 	 	4	 
	5.1
	 	Stock Option Agreement	 	 	4	 
	5.2
	 	Number of Shares	 	 	4	 
	5.3
	 	Exercise Price	 	 	4	 
	5.4
	 	Exercisability and Term	 	 	4	 
	5.5
	 	Modification or Assumption of Options	 	 	4	 
	5.6
	 	Buyout Provisions	 	 	5	 
	 
	 	 	 	 	 	 
	ARTICLE 6.
	 	PAYMENT FOR OPTION SHARES	 	 	5	 
	6.1
	 	General Rule	 	 	5	 
	6.2
	 	Surrender of Stock	 	 	5	 
	6.3
	 	Exercise/Sale	 	 	5	 
	6.4
	 	Other Forms of Payment	 	 	5	 
	 
	 	 	 	 	 	 
	ARTICLE 7.
	 	STOCK APPRECIATION RIGHTS	 	 	5	 
	7.1
	 	SAR Agreement	 	 	5	 
	7.2
	 	Number of Shares	 	 	5	 
	7.3
	 	Exercise Price	 	 	5	 
	7.4
	 	Exercisability and Term	 	 	6	 
	7.5
	 	Exercise of SARs	 	 	6	 
	7.6
	 	Modification or Assumption of SARs	 	 	6	 
	 
	 	 	 	 	 	 
	ARTICLE 8.
	 	RESTRICTED SHARES	 	 	6	 
	8.1
	 	Restricted Stock Agreement	 	 	6	 
	8.2
	 	Payment for Awards	 	 	6	 
	8.3
	 	Vesting Conditions	 	 	6	 

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	 	 	 	 	Page	 
	 
	 	 	 	 	 	 
	8.4
	 	Voting and Dividend Rights	 	 	7	 
	 
	 	 	 	 	 	 
	ARTICLE 9.
	 	STOCK UNITS	 	 	7	 
	9.1
	 	Stock Unit Agreement	 	 	7	 
	9.2
	 	Payment for Awards	 	 	7	 
	9.3
	 	Vesting Conditions	 	 	7	 
	9.4
	 	Voting and Dividend Rights	 	 	7	 
	9.5
	 	Form and Time of Settlement of Stock Units	 	 	8	 
	9.6
	 	Creditors’ Rights	 	 	8	 
	 
	 	 	 	 	 	 
	ARTICLE 10.
	 	PROTECTION AGAINST DILUTION	 	 	8	 
	10.1
	 	Adjustments	 	 	8	 
	10.2
	 	Dissolution or Liquidation	 	 	9	 
	10.3
	 	Reorganizations	 	 	9	 
	10.4
	 	Acceleration	 	 	10	 
	 
	 	 	 	 	 	 
	ARTICLE 11.
	 	LIMITATION ON RIGHTS	 	 	10	 
	11.1
	 	Retention Rights	 	 	10	 
	11.2
	 	Stockholders’ Rights	 	 	10	 
	11.3
	 	Regulatory Requirements	 	 	11	 
	11.4
	 	Section 409A	 	 	11	 
	11.5
	 	No Representations or Covenants with Respect to Tax Qualification	 	 	11	 
	11.6
	 	Transferability of Awards	 	 	11	 
	 
	 	 	 	 	 	 
	ARTICLE 12.
	 	WITHHOLDING TAXES	 	 	12	 
	12.1
	 	General	 	 	12	 
	12.2
	 	Share Withholding	 	 	12	 
	 
	 	 	 	 	 	 
	ARTICLE 13.
	 	FUTURE OF THE PLAN	 	 	12	 
	13.1
	 	Term of the Plan	 	 	12	 
	13.2
	 	Amendment or Termination	 	 	12	 
	13.3
	 	Stockholder Approval	 	 	12	 
	 
	 	 	 	 	 	 
	ARTICLE 14.
	 	DEFINITIONS	 	 	13	 

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Energy Recovery, Inc.

2008 Equity Incentive Plan

     ARTICLE 1. INTRODUCTION.

          The Plan was adopted by the Board to be effective immediately prior to the effectiveness of
the IPO, subject to the approval of the Company’s stockholders. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options
(which may constitute ISOs or NSOs) or stock appreciation rights.

          The Plan shall be governed by, and construed in accordance with, the laws of the State of
California (except its choice-of-law provisions).

     ARTICLE 2. ADMINISTRATION.

          2.1 Committee Composition. The Committee shall administer the Plan. The Committee shall consist exclusively of two or
more directors of the Company, who shall be appointed by the Board. In addition, each member of
the Committee shall meet the following requirements:

          (a) Any listing standards prescribed by the principal securities market on
which the Company’s equity securities are traded;

          (b) Such requirements as the Internal Revenue Service may establish for outside
directors acting under plans intended to qualify for exemption under section
162(m)(4)(C) of the Code;

          (c) Such requirements as the Securities and Exchange Commission may establish
for administrators acting under plans intended to qualify for exemption under Rule
16b-3 (or its successor) under the Exchange Act; and

          (d) Any other requirements imposed by applicable law, regulations or rules.

          2.2 Committee Responsibilities. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to
receive Awards under the Plan, (b) determine the type, number, vesting requirements and other
features and conditions of such Awards, (c) interpret the Plan, (d) make all other decisions
relating to the operation of the Plan and (e) carry out any other duties delegated to it by the
Board. The Committee may adopt such

 

 

rules or guidelines as it deems appropriate to implement the Plan, including rules and
procedures relating to the operation and administration of the Plan in order to accommodate the
specific requirements of local laws and procedures, as further set forth under Section 4.3 below.
The Committee’s determinations under the Plan shall be final and binding on all persons.

          2.3 Delegation of Authority. The Board may also appoint a secondary committee of the Board, which shall be composed of
the entire Board or of one or more directors of the Company who need not satisfy the requirements
of Section 2.1. Such secondary committee may administer the Plan with respect to Employees and
Consultants who are not Outside Directors and are not considered executive officers of the Company
under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and
Consultants and may determine all features and conditions of such Awards. Within the limitations
of this Section 2.3, any reference in the Plan to the Committee shall include such secondary
committee. Further, to the extent permitted by applicable law, the Board may from time to time
delegate to one or more officers of the Company the authority to grant or amend Awards to Employees
and Consultants who are not Outside Directors and are not considered executive officers of the
Company under section 16 of the Exchange Act. For the avoidance of doubt, provided it meets the
limitation in the preceding sentence, this delegation shall include the right to modify Awards as
necessary to accommodate changes in the laws or regulations, including in jurisdictions outside the
United States. Any delegation hereunder shall be subject to the restrictions and limits that the
Board specifies at the time of such delegation, and the Board may at any time rescind the authority
so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section
2.3 shall serve in such capacity at the pleasure of the Board.

     ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

          3.1 Basic Limitation. Common Stock issued pursuant to the Plan may be authorized but unissued shares or treasury
shares. The aggregate number of shares of Common Stock authorized for issuance or transfer under
the Plan is 1,000,000 shares of Common Stock, plus the additional Common Stock described in
Sections 3.2 and 3.3. The number of shares of Common Stock that are subject to Awards outstanding
at any time under the Plan shall not exceed the number of shares of Common Stock that then remain
available for issuance under the Plan. All Common Stock available under the Plan may be issued
upon the exercise of ISOs. The limitations of this Section 3.1 and Section 3.2 shall be subject to
adjustment pursuant to Article 10.

          3.2 Annual Increase in Shares. As of the first day of each fiscal year of the Company, commencing on January 1, 2009, the
aggregate number of shares of Common Stock that may be issued or transferred under the Plan shall
automatically increase by a number equal to the lowest of (a) 5% of the total number of shares of
Common Stock then outstanding on a non-diluted basis, (b) 2,500,000 shares of Common Stock or (c)
the number determined by the Board. Anything to the contrary herein notwithstanding, the maximum
aggregate number of shares of Common Stock that may be issued or transferred pursuant to Awards
under the Plan during the term of the Plan shall not exceed 10,000,000 shares of Common Stock,
subject to Article 10.

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          3.3 Shares Returned to Reserve. If Options, SARs or Stock Units under this Plan are forfeited or terminate for any other
reason before being exercised or settled, then the Common Stock subject to such Options, SARs or
Stock Units shall again become available for issuance under this Plan. If Restricted Shares or
Common Stock issued upon the exercise of Options under this Plan are reacquired by the Company
pursuant to a forfeiture provision or for any other reason, then such Common Stock shall again
become available for issuance under this Plan. If SARs are exercised, then only the number of
shares of Common Stock (if any) actually issued in settlement of such SARs shall reduce the number
available under Section 3.1 and the balance shall again become available for issuance under the
Plan. If Stock Units are settled, then only the number of shares of Common Stock (if any) actually
issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and
the balance shall again become available for issuance under the Plan.

          3.4 Code Section 162(m) Limitations on Awards. Subject to adjustment pursuant to Article 10, where it is intended to comply with Section
162(m) of the Code, no Employee shall be eligible to be granted in a single calendar year one or
more Awards which in the aggregate cover more than 500,000 shares of Common Stock, except
that in the calendar year in which an individual’s Service as an Employee first commences, such
Employee shall be eligible to be granted one or more Awards which in the aggregate cover up to
800,000 shares of Common Stock. To the extent required by Section 162(m) of the Code, in applying
the foregoing limitation with respect to a Participant, if any Option, SAR, grant of Restricted
Shares or Stock Units is canceled, the canceled Award shall continue to count against the maximum
number of shares of Common Stock with respect to which an Award may be granted to an Employee.

     ARTICLE 4. ELIGIBILITY.

          4.1 Incentive Stock Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall
be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any of its Parents or
Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in
section 422(c)(5) of the Code are satisfied.

          4.2 Other Grants. Only Employees, Outside Directors and Consultants shall be eligible for the grant of
Restricted Shares, Stock Units, NSOs or SARs.

          4.3 Non-U.S. Participants. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws
in countries outside the United States in which the Company and its Subsidiaries or Affiliates
operate or have eligible Employees, Outside Directors or Consultants, the Committee, in its sole
discretion, shall have the power and authority to: (i) determine which Subsidiaries and Affiliates
shall be covered by the Plan; (ii) determine which eligible Employees, Outside Directors or
Consultants outside the United States are eligible to participate in the Plan; (iii) modify the
terms and conditions of any Award granted to eligible Employees, Outside Directors or Consultants
outside the United States to comply with applicable laws of jurisdictions outside of the United
States; (iv) establish subplans and modify exercise procedures and other terms and procedures and
rules, to the extent such actions may be necessary

3

 

or advisable, including adoption of rules, procedures or subplans applicable to particular
Subsidiaries or Affiliates or Participants residing in particular locations; provided, however,
that no such subplans and/or modifications shall increase the share limitations contained in
Sections 3.1 and 3.2 hereof; and (v) take any action, before or after an Award is made, that it
deems advisable to obtain approval or comply with any necessary local governmental regulatory
exemptions or approvals. Without limiting the generality of the foregoing, the Committee is
specifically authorized to adopt rules, procedures and subplans with provisions that limit or
modify rights on death, disability or on termination of employment, available methods of exercise
or settlement of an Award, payment of income, social insurance contributions and payroll taxes, the
shifting of employer tax liability to the Participant, the withholding procedures, the conversion
of local currency and handling of any stock certificates or other indicia of ownership which may
vary with local requirements. Notwithstanding the foregoing, the Committee may not take any
actions hereunder, and no Awards shall be granted, that would violate the Exchange Act, the Code,
any securities law or governing statute or any other applicable law.

     ARTICLE 5. OPTIONS.

          5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement
between the Optionee and the Company. Such Option shall be subject to all applicable terms of the
Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock
Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the
various Stock Option Agreements entered into under the Plan need not be identical.

          5.2 Number of Shares. Each Stock Option Agreement shall specify the number of shares of Common Stock subject to
the Option and shall provide for the adjustment of such number in accordance with Article 10.

          5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise
Price shall in no event be less than 100% of the Fair Market Value of a share of Common Stock on
the date of grant.

          5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of
the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed ten years from the date of grant.
A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee’s
death, disability or other events and may provide for expiration prior to the end of its term in
the event of the termination of the Optionee’s Service.

          5.5 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, reprice, extend or assume
outstanding options or may accept the cancellation of outstanding options (whether granted by the
Company or by another issuer) in return for the grant of new options for the same or a different
number of shares and at the same or a different exercise price. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee, alter or impair his or her
rights or obligations under such

4

 

Option, unless such modification is necessary or desirable to comply with applicable law, as
determined by the Board.

          5.6 Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash
equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an
Option previously granted, in either case at such time and based upon such terms and conditions as
the Committee shall establish.

     ARTICLE 6. PAYMENT FOR OPTION SHARES.

          6.1 General Rule. The entire Exercise Price of Common Stock issued upon exercise of Options shall be payable
in cash or cash equivalents at the time when such Common Stock is purchased, except that the
Committee at its sole discretion may accept payment of the Exercise Price in any other form(s)
described in this Article 6. However, if the Optionee is an Outside Director or executive officer
of the Company, he or she may pay the Exercise Price in a form other than cash or cash equivalents
only to the extent permitted by section 13(k) of the Exchange Act.

          6.2 Surrender of Stock. With the Committee’s consent, all or any part of the Exercise Price may be paid by
surrendering, or attesting to the ownership of, Common Stock that is already owned by the Optionee.
Such Common Stock shall be valued at its Fair Market Value on the date when the new Common Stock
is purchased under the Plan.

          6.3 Exercise/Sale. With the Committee’s consent, all or any part of the Exercise Price and any withholding
taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common Stock being purchased
under the Plan and to deliver all or part of the sales proceeds to the Company.

          6.4 Other Forms of Payment. With the Committee’s consent, all or any part of the Exercise Price and any withholding
taxes may be paid in any other form that is consistent with applicable laws, regulations and rules.

     ARTICLE 7. STOCK APPRECIATION RIGHTS.

          7.1 SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by an SAR Agreement between the
Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical.

          7.2 Number of Shares. Each SAR Agreement shall specify the number of shares of Common Stock to which the SAR
pertains and shall provide for the adjustment of such number in accordance with Article 10.

          7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price; provided that the Exercise Price shall
in no event be less than 100% of the Fair Market Value of a share of Common Stock on the date of
grant.

5

 

          7.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to
become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may
provide for accelerated exercisability in the event of the Optionee’s death, disability or other
events and may provide for expiration prior to the end of its term in the event of the termination
of the Optionee’s Service.

          7.5 Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR
after his or her death) shall receive from the Company consideration in the form of (a) Common
Stock, (b) cash or (c) a combination of Common Stock and cash, as the Committee shall determine.
Each SAR Agreement shall specify the amount and/or Fair Market Value of the consideration that the
Optionee will receive upon exercising the SAR; provided that the aggregate consideration shall not
exceed the amount by which the Fair Market Value (on the date of exercise) of the Common Stock
subject to the SAR exceeds the Exercise Price of the SAR. A SAR Agreement may also provide for an
automatic exercise of the SAR subject to any applicable requirements.

          7.6 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, reprice, extend or assume
outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company
or by another issuer) in return for the grant of new SARs for the same or a different number of
shares and at the same or a different exercise price. The foregoing notwithstanding, no
modification of a SAR shall, without the consent of the Optionee, alter or impair his or her rights
or obligations under such SAR, unless such modification is necessary or desirable to comply with
applicable law, as determined by the Board.

     ARTICLE 8. RESTRICTED SHARES.

          8.1 Restricted Stock Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock
Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not inconsistent with
the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan
need not be identical.

          8.2 Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents and property. If
the Participant is an Outside Director or executive officer of the Company, he or she may pay for
Restricted Shares with a promissory note only to the extent permitted by section 13(k) of the
Exchange Act. Within the limitations of the Plan, the Committee may accept the cancellation of
outstanding options in return for the grant of Restricted Shares.

          8.3 Vesting Conditions. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur,
in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock
Agreement. The Committee may include among such conditions the requirement that the performance of
the Company or a business unit of the Company for a specified period of one or more fiscal years
equal or exceed a target determined in advance by the Committee. The Committee shall determine
such performance. Such target

6

 

shall be based on one or more of the criteria set forth in Appendix A or, for Awards not
intended to comply with Section 162(m) of the Code, such other performance criteria determined by
the Board. The Committee shall identify such target not later than the 90th day of such period or
prior to the expiry of 25% of the period, whichever date occurs earlier. A Restricted Stock
Agreement may provide for accelerated vesting in the event of the Participant’s death, disability
or other events.

          8.4 Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting,
dividend and other rights as the Company’s other stockholders. A Restricted Stock Agreement,
however, may require that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject to the same
conditions and restrictions as the Award with respect to which the dividends were paid.

     ARTICLE 9. STOCK UNITS.

          9.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms
of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Unit Agreements entered into under the Plan need not be identical.

          9.2 Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration
shall be required of the Award recipients.

          9.3 Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in
full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement.
The Committee may include among such conditions the requirement that the performance of the
Company or a business unit of the Company for a specified period of one or more fiscal years equal
or exceed a target determined in advance by the Committee. The Committee shall determine such
performance. Such target shall be based on one or more of the criteria set forth in Appendix A or,
for Awards not intended to comply with Section 162(m) of the Code, such other performance criteria
determined by the Board. The Committee shall identify such target not later than the
90th day of such period or prior to the expiry of 25% of the period, whichever date
occurs earlier. A Stock Unit Agreement may provide for accelerated vesting in the event of the
Participant’s death, disability or other events.

          9.4 Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture,
any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with an amount equal to all
cash dividends paid on one share of Common Stock while the Stock Unit is outstanding. Dividend
equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may
be made in the form of cash, in the form of Common Stock, or in a combination of both. Prior to
distribution, any dividend equivalents that are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.

7

 

          9.5 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Stock or
(c) any combination of both, as determined by the Committee. The actual number of Stock Units
eligible for settlement may be larger or smaller than the number included in the original Award,
based on predetermined performance factors. Methods of converting Stock Units into cash may
include (without limitation) a method based on the average Fair Market Value of Common Stock over a
series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the Stock Units have
been satisfied or have lapsed, or it may be deferred to any later date. Until an Award of Stock
Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article
10.

          9.6 Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the
Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Stock Unit Agreement.

     ARTICLE
10. PROTECTION AGAINST DILUTION.

          10.1 Adjustments. In the event of a subdivision of the outstanding Common Stock, a declaration of a dividend
payable in Common Stock or a combination or consolidation of the outstanding Common Stock (by reclassification or otherwise) into a lesser number of shares of Common Stock, corresponding
adjustments shall automatically be made in each of the following:

          (a) The number of Options, SARs, Restricted Shares and Stock Units available
for future Awards under Article 3, including the 1,000,000 share limitation set
forth in Section 3.1 and the 10,000,000 share limitation set forth in Section 3.2;

          (b) The limitations set forth in Sections 5.2, 7.2, 8.3 and 9.3;

          (c) The number of shares of Common Stock covered by each outstanding Option and
SAR;

          (d) The Exercise Price under each outstanding Option and SAR; or

          (e) The number of Stock Units included in any prior Award that has not yet been
settled.

In the event of a declaration of an extraordinary dividend payable in a form other than Common
Stock in an amount that has a material effect on the price of Common Stock, a recapitalization, a
spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole
discretion, deems appropriate in one or more of the foregoing. Except as provided in this Article
10, a Participant shall have no rights by reason of any issuance by the Company of stock of any
class or securities convertible into stock of any class, any subdivision or consolidation of shares

8

 

of stock of any class, the payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class.

          10.2 Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall
terminate immediately prior to the dissolution or liquidation of the Company.

          10.3 Reorganizations. In the event that the Company is a party to a merger or consolidation, all outstanding
Awards shall be subject to the agreement of merger or consolidation approved by the Board of
Directors, provided that such agreement shall provide for one or more of the following:

          (a) The continuation of such outstanding Awards by the Company (if the Company
is the surviving corporation).

          (b) The assumption of such outstanding Awards by the surviving corporation or
its parent, provided that the assumption of Options or SARs shall comply with
Section 424(a) of the Code (whether or not the Options are ISOs).

          (c) The substitution by the surviving corporation or its parent of new awards
for such outstanding Awards, provided that the substitution of Options or SARs shall
comply with Section 424(a) of the Code (whether or not the Options are ISOs).

          (d) The acceleration of the exercisability of 100% of the then unexercisable
portion of such Options and SARs and acceleration of vesting of 100% of the then
unvested portion of the Common Stock subject to such Options and SARs. The
acceleration of exercisability of such Options and SARs and vesting of such Common
Stock may be contingent on the closing of such merger or consolidation. The
Optionee shall be able to exercise such Options and SARs during a period of not less
than five full business days preceding the closing date of such merger or
consolidation, unless (i) a shorter period is required to permit a timely closing of
such merger or consolidation and (ii) such shorter period still offers the Optionees
a reasonable opportunity to exercise such Options and SARs. Any exercise of such
Options and SARs during such period may be contingent on the closing of such merger
or consolidation.

          (e) The cancellation of outstanding Options and SARs and a payment to the
Optionees equal to the excess of (i) the Fair Market Value of the Common Stock
subject to such Options and SARs (whether or not such Options and SARs are then
exercisable or such Common Stock are then vested) as of the closing date of such
merger or consolidation over (ii) their Exercise Price. Such payment shall be made
in the form of cash, cash equivalents, or securities of the surviving corporation or
its parent with a Fair Market Value equal to the required amount. Such payment may
be made in installments and may be deferred until the date or dates when such
Options and SARs would have become exercisable or

9

 

such Common Stock would have vested. Such payment may be subject to vesting
based on the Optionee’s continuing Service, provided that the vesting schedule shall
not be less favorable to the Optionee than the schedule under which such Options and
SARs would have become exercisable or such Common Stock would have vested. If the
Exercise Price of the Common Stock subject to such Options and SARs exceeds the Fair
Market Value of such Common Stock, then such Options and SARs may be cancelled
without making a payment to the Optionees. For purposes of this Subsection (e), the
Fair Market Value of any security shall be determined without regard to any vesting
conditions that may apply to such security.

          (f) The cancellation of outstanding Stock Units and a payment to the
Participants equal to the Fair Market Value of the Common Stock subject to such
Stock Units (whether or not such Stock Units are then vested) as of the closing date
of such merger or consolidation. Such payment shall be made in the form of cash,
cash equivalents, or securities of the surviving corporation or its parent with a
Fair Market Value equal to the required amount. Such payment may be made in
installments and may be deferred until the date or dates when such Stock Units would
have vested. Such payment may be subject to vesting based on the Participant’s
continuing Service, provided that the vesting schedule shall not be less favorable
to the Participant than the schedule under which such Stock Units would have vested.
For purposes of this Subsection (f), the Fair Market Value of any security shall be
determined without regard to any vesting conditions that may apply to such security.

          10.4 Acceleration. The Committee shall have the discretion, exercisable either at the time the Award is
granted or at any time while the Award remains outstanding, to provide for the automatic
acceleration of vesting upon the occurrence of a Change in Control, whether or not the Award is to
be assumed or replaced in the Change in Control, or in connection with a termination of a
Participant’s Service following a Change in Control.

     ARTICLE 11.LIMITATION ON RIGHTS.

          11.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any
individual a right to remain an Employee, Outside Director or Consultant. The Company and its
Parents, Subsidiaries and Affiliates reserve the right to terminate the Service of any Employee,
Outside Director or Consultant at any time, with or without cause, subject to applicable laws, the
Company’s certificate of incorporation and by-laws and a written employment agreement (if any).

          11.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder
with respect to any Common Stock covered by his or her Award prior to the time when a stock
certificate for such Common Stock is issued or, if applicable, the time when he or she becomes
entitled to receive such Common Stock by filing any required notice of exercise and paying any
required Exercise Price. No adjustment shall be made for cash dividends or other rights for which
the record date is prior to such time, except as expressly provided in the Plan.

10

 

          11.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue
Common Stock under the Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the right to restrict, in
whole or in part, the delivery of Common Stock pursuant to any Award prior to the satisfaction of
all legal requirements relating to the issuance of such Common Stock, to its registration,
qualification or listing or to an exemption from registration, qualification or listing (including
any Non-U.S. requirements).

          11.4 Section 409A. Except as provided in Section 11.5 hereof, to the extent that the Committee determines that any
Award granted under the Plan is subject to Section 409A of the Code, the agreement evidencing such
Award shall incorporate the terms and conditions required by Section 409A of the Code. To the
extent applicable, the Plan and Award agreements shall be interpreted in accordance with Section
409A of the Code and Department of Treasury regulations and other interpretive guidance issued
thereunder, including without limitation any such regulations or other guidance that may be issued
after the Plan effective date. Notwithstanding any provision of the Plan to the contrary, in the
event that, following the Plan effective date, the Committee determines that any Award may be
subject to Section 409A of the Code and related Department of Treasury guidance (including such
Department of Treasury guidance as may be issued after the Plan effective date), the Committee may
adopt such amendments to the Plan and the applicable Award agreement or adopt other policies and
procedures (including amendments, policies and procedures with retroactive effect), or take any
other actions, that the Committee determines are necessary or appropriate to (a) exempt the Award
from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided
with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and
related Department of Treasury guidance and thereby avoid the application of any penalty taxes
under such Section.

          11.5 No Representations or Covenants with Respect to Tax Qualification. Although the Company may endeavor to (1) qualify an Award for favorable tax treatment under
the laws of the United States or jurisdictions outside of the United States (e.g., incentive stock
options under Section 422 of the Code or French-qualified stock options) or (2) avoid adverse tax
treatment (e.g., under Section 409A of the Code), the Company makes no representation to that
effect and expressly disavows any covenant to maintain favorable or avoid unfavorable tax
treatment, anything to the contrary in this Plan, including Section 11.4 hereof, notwithstanding.
The Company shall be unconstrained in its corporate activities without regard to the potential
negative tax impact on holders of Awards under the Plan.

          11.6 Transferability of Awards. No right or interest of a Participant in any Award may be pledged, encumbered, or
hypothecated to or in favor of any party other than the Company, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the Company or a Parent,
Subsidiary or Affiliate. Except as otherwise provided by the Committee, no Award shall be
assigned, transferred, or otherwise disposed of by a Participant other than by will or the laws of
descent and distribution or pursuant to beneficiary designation procedures approved from time to
time by the Committee. The Committee, by express provision in the Award Agreement or an amendment
thereto may permit an Award (other than an Incentive Stock Option) to be transferred to, exercised
by and paid to certain persons or entities related to the Participant, including, but not limited
to, members of the

11

 

Participant’s family, charitable institutions, or trusts or other entities whose beneficiaries
or beneficial owners are members of the Participant’s family and/or charitable institutions, or to
such other persons or entities as may be expressly approved by the Committee, pursuant to such
conditions and procedures as the Committee may establish. Any permitted transfer shall be subject
to the condition that the Committee receive evidence satisfactory to it that the transfer is being
made for estate and/or tax planning purposes (or to a “blind trust” in connection with the
Participant’s termination of employment or service with the Company or a Subsidiary to assume a
position with a governmental, charitable, educational or similar non-profit institution) and on a
basis consistent with the Company’s lawful issue of securities.

     ARTICLE 12.WITHHOLDING TAXES.

          12.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or
his or her successor shall make arrangements satisfactory to the Company for the satisfaction of
any withholding tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Stock or make any cash payment under the Plan until such obligations
are satisfied.

          12.2 Share Withholding. To the extent that applicable law subjects a Participant to tax withholding obligations,
the Company shall have the right to satisfy all or part of such obligations by withholding all or a
portion of any Common Stock that otherwise would be issued to the Participant. In addition, the
Committee may permit such Participant to satisfy all or any part of such obligations by
surrendering all or a portion of any Common Stock that he or she previously acquired. Such Common
Stock shall be valued at its Fair Market Value on the date when it is withheld or surrendered.

     ARTICLE 13. FUTURE OF THE PLAN.

          13.1 Term of the Plan. The Plan, as set forth herein, shall become effective immediately prior to the effective
date of the IPO. The Plan shall remain in effect until the earlier of (a) the date when the Plan
is terminated under Section 13.2 or (b) the seventh anniversary of the date when the Board adopted
the Plan.

          13.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. No Awards
shall be granted under the Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan. Notwithstanding
anything in the foregoing, the Board shall have the right to unilaterally amend, modify or
discontinue the Plan, or any provision of the Plan or any provision of an Award agreement and, in
each case, without the consent of any Participant, provided such amendment, modification or
discontinuance is necessary or desirable to comply with applicable law, as determined by the Board.

          13.3 Stockholder Approval. An amendment of the Plan shall be subject to the approval of the Company’s stockholders
only to the extent required by applicable laws, regulations or rules. However, section 162(m) of the Code may require that the Company’s stockholders approve:

12

 

          (a) The Plan not later than the first regular meeting of stockholders that
occurs in the fourth calendar year following the calendar year in which the
Company’s IPO occurred; and

          (b) The performance criteria set forth in Appendix A not later than the first
meeting of stockholders that occurs in the fifth year following the year in which
the Company’s stockholders previously approved such criteria.

     ARTICLE 14. DEFINITIONS.

          14.1 “Affiliate” means any entity other than a Subsidiary, if the Company and/or one or more
Subsidiaries own not less than 50% of such entity.

          14.2 “Award” means any award of an Option, a SAR, a Restricted Share or a Stock Unit under the
Plan.

          14.3 “Board” means the Company’s Board of Directors, as constituted from time to time.

          14.4 “Change in Control” means:

          (a) The consummation of a merger or consolidation of the Company with or into
another entity or any other corporate reorganization, if persons who were not
stockholders of the Company immediately prior to such merger, consolidation or other
reorganization own immediately after such merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding securities of each
of (i) the continuing or surviving entity and (ii) any direct or indirect parent
corporation of such continuing or surviving entity;

          (b) The sale, transfer or other disposition of all or substantially all of the
Company’s assets;

          (c) A change in the composition of the Board, as a result of which fewer than
50% of the incumbent directors are directors who either:

          (i) Had been directors of the Company on the date 24 months
prior to the date of such change in the composition of the Board
(the “Original Directors”); or

          (ii) Were appointed to the Board, or nominated for election to
the Board, with the affirmative votes of at least a majority of the
aggregate of (A) the Original Directors who were in office at the
time of their appointment or nomination and (B) the directors whose
appointment or nomination was previously approved in a manner
consistent with this Paragraph (ii); or

          (d) Any transaction as a result of which any person is the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or

13

 

indirectly, of securities of the Company representing at least 50% of the total
voting power represented by the Company’s then outstanding voting securities. For
purposes of this Subsection (d), the term “person” shall have the same meaning as
when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a
trustee or other fiduciary holding securities under an employee benefit plan of the
Company or of a Parent or Subsidiary and (ii) a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same proportions
as their ownership of the common stock of the Company.

A transaction shall not constitute a Change in Control if its sole purpose is to change the state
of the Company’s incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company’s securities immediately before such
transaction.

          14.5 “Code” means the Internal Revenue Code of 1986, as amended.

          14.6 “Committee” means a committee of the Board, as described in Article 2.

          14.7 “Common Stock” means one share of the common stock of the Company.

          14.8 “Company” means Energy Recovery, Inc., a Delaware corporation.

          14.9 “Consultant” means a consultant or adviser who provides bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate as an independent contractor.

          14.10 “Employee” means a common-law employee of the Company, a Parent, a Subsidiary or an
Affiliate.

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

          14.12 “Exercise Price,” in the case of an Option, means the amount for which one share of
Common Stock may be purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement. “Exercise Price,” in the case of a SAR, means an amount, as specified in the
applicable SAR Agreement, which is subtracted from the Fair Market Value of one share of Common
Stock in determining the amount payable upon exercise of such SAR.

          14.13 “Fair Market Value” means, (a) if the Common Stock is traded on any established stock
exchange, the closing price of a share as quoted on the principal exchange on which the Common
Stock is listed, as reported in the Wall Street Journal (or such other source as the Company may
deem reliable for such purposes) for such date, or if no sale occurred on such date, the first
trading date immediately prior to such date during which a sale occurred; or (b) if the Common
Stock is not traded on an exchange but are regularly quoted on a national market or other quotation
system, the closing sales price on such date as quoted on such market or system, or if no sales
occurred on such date, then on the date immediately prior to such date on which sales prices are
reported; or (c) in the absence of an established market for the Common Stock of the type described
in (a) or (b) of this Section 14.13, the fair market value established by the Committee acting in
good faith. Such determination shall be conclusive and binding on all persons.

14

 

          14.14 “IPO” means the initial public offering of the Company’s Common Stock.

          14.15 “ISO” means an incentive stock option described in section 422(b) of the Code.

          14.16 “NSO” means a stock option not described in sections 422 or 423 of the Code.

          14.17 “Option” means an ISO or NSO granted under the Plan and entitling the holder to purchase
Common Stock.

          14.18 “Optionee” means an individual or estate who holds an Option or SAR.

          14.19 “Outside Director” means a member of the Board who is not an Employee.

          14.20 “Parent” means any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, if each of the corporations other than the Company owns stock
possessing 50% or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status of a Parent on a date
after the adoption of the Plan shall be considered a Parent commencing as of such date.

          14.21 “Participant” means an individual or estate who holds an Award.

          14.22 “Plan” means this Energy Recovery, Inc. 2008 Equity Incentive Plan, as amended from time
to time.

          14.23 “Restricted Share” means a share of Common Stock awarded under the Plan.

          14.24 “Restricted Stock Agreement” means the agreement between the Company and the recipient
of a Restricted Share that contains the terms, conditions and restrictions pertaining to such
Restricted Share.

          14.25 “SAR” means a stock appreciation right granted under the Plan.

          14.26 “SAR Agreement” means the agreement between the Company and an Optionee that contains
the terms, conditions and restrictions pertaining to his or her SAR.

          14.27 “Service” means service as an Employee, Outside Director or Consultant.

          14.28 “Stock Option Agreement” means the agreement between the Company and an Optionee that
contains the terms, conditions and restrictions pertaining to his or her Option.

          14.29 “Stock Unit” means a bookkeeping entry representing the equivalent of one share of
Common Stock, as awarded under the Plan.

15

 

          14.30 “Stock Unit Agreement” means the agreement between the Company and the recipient of a
Stock Unit that contains the terms, conditions and restrictions pertaining to such Stock Unit.

          14.31 “Subsidiary” means any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a
Subsidiary commencing as of such date.

16

 

Appendix A

Performance Criteria for Restricted Shares and Stock Units

The performance goals that may be used by the Committee for such awards shall consist of: operating
profits (including EBITDA), net profits, earnings per share, profit returns and margins, revenues,
stockholder return and/or value, stock price and working capital. Performance goals may be
measured solely on a corporate, Subsidiary or business unit basis, or a combination thereof.
Further, performance criteria may reflect absolute entity performance or a relative comparison of
entity performance to the performance of a peer group of entities or other external measure of the
selected performance criteria. Profit, earnings and revenues used for any performance goal
measurement shall exclude: gains or losses on operating asset sales or dispositions; asset
write-downs; litigation or claim judgments or settlements; accruals for historic environmental
obligations; effect of changes in tax law or rate on deferred tax liabilities; accruals for
reorganization and restructuring programs; uninsured catastrophic property losses; the cumulative
effect of changes in accounting principles; and any extraordinary non-recurring items as described
in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of
financial performance appearing in the Company’s annual report to stockholders for the applicable
year.

 

ENERGY RECOVERY, INC.

2008
EQUITY INCENTIVE PLAN

STOCK OPTION GRANT NOTICE AND

STOCK OPTION AGREEMENT

You (the “Optionee”) have been granted the following option (the “Option”) to purchase shares of
the Common Stock of Energy Recovery, Inc. (the “Company”):

	 	 	 	 	 
	 

	 	Name of Optionee:	 	 
	 
	 	 	 	 
	 

	 	Total Number of shares of Common Stock:	 	 
	 
	 	 	 	 
	 

	 	Type of Option:	 	 
	 
	 	 	 	 
	 

	 	Exercise Price per Share:	 	 
	 
	 	 	 	 
	 

	 	Date of Grant:	 	 
	 
	 	 	 	 
	 

	 	Vesting Commencement Date:	 	 
	 
	 	 	 	 
	 

	 	Vesting Schedule:
	 	[This Option becomes exercisable with respect to the first 25% of the
shares subject to this Option when you complete 12 months of continuous Service from
the Vesting Commencement Date. Thereafter, this Option becomes exercisable with
respect to an additional 1/48th of the shares subject to this Option when you complete
each month of Service.]
	 
	 	 	 	 
	 

	 	Expiration Date:
	 	«ExpDate». This Option expires earlier if your Service terminates
earlier, as described in the Stock Option Agreement.

This Option is granted under and governed by the terms and conditions of the Stock Option
Agreement, which is attached to and made a part of this document, and the 2008 Equity Incentive
Plan (the “Plan”). Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Grant Notice and the Stock Option Agreement.

By your signature, you agree to be bound by the terms and conditions of the Plan, the Stock Option
Agreement and this Grant Notice. You have reviewed the Stock Option Agreement, the Plan and this
Grant Notice in their entirety, have had an opportunity to obtain the advice of counsel prior to
executing this Grant Notice and fully understand all provisions of this Grant Notice, the Stock
Option Agreement and the Plan. You hereby agree to accept as binding, conclusive and final all
decisions or interpretations of the Committee upon any questions arising under the Plan or relating
to the Option.

	 	 	 	 	 
	OPTIONEE: 	
ENERGY RECOVERY, INC. 

 	 
	____________________________________ 	By:  	 	 
	 	 	Title:  	 	 	 

 

 

	 	 	 	 	 

STOCK OPTION AGREEMENT

     1. Grant of Option. Pursuant to the Stock Option Grant Notice (the “Grant Notice”) to
which this Stock Option Agreement (this “Agreement”) is attached, Energy Recovery, Inc., a Delaware
corporation (the “Company”), has granted to the Optionee an Option under the Company’s 2008 Equity
Incentive Plan (the “Plan”) to purchase the number of shares of Common Stock indicated in the Grant
Notice at the exercise price per share set forth in the Grant Notice (the “Exercise Price”), and
subject to the terms and conditions of the Plan, which is incorporated herein by reference. In the
event of a conflict between the terms and conditions of the Plan and this Agreement, the terms and
conditions of the Plan shall prevail.

     If designated in the Grant Notice as an Incentive Stock Option (“ISO”), this Option is
intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.
Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option
shall be treated as a Nonstatutory Stock Option (“NSO”). Further, if for any reason this Option
(or portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification,
such Option (or portion thereof) shall be regarded as a NSO granted under the Plan. In no event
shall the Committee, the Company or any Parent, Subsidiary or Affiliate or any of their respective
employees or directors have any liability to the Optionee (or any other person) due to the failure
of the Option to qualify for any reason as an ISO.

     2. Exercise of Option.

     a. Right to Exercise. This Option shall be exercisable during its term in accordance
with the Vesting Schedule set out in the Grant Notice and with the applicable provisions of the
Plan and this Agreement.

     b. Method of Exercise. This vested portion of the Option shall be exercisable by
delivery of a notice of exercise in such form as may be designated by the Committee from time to
time, which shall state the election to exercise the Option, the number of shares of Common Stock
with respect to which the Option is being exercised, and such other representations and agreements
as may be required by the Company. The notice of exercise shall be accompanied by payment of the
aggregate Exercise Price as to all of the shares of Common Stock subject to the exercised Option.
To the extent permitted by applicable law, payment may be made in one (or a combination of two or
more) of the following forms:

	 	i.	 	Personal check, a cashier’s check or a money order.
	 
	 	ii.	 	Certificates for shares of Common Stock of the Company already owned by the
Optionee, along with any forms needed to effect a transfer of those shares to the
Company. The Fair Market Value of the shares of Common Stock, determined as of the
effective date of the Option exercise, will be applied to the Exercise Price. Instead
of surrendering shares of Common Stock, the Optionee may attest to the ownership of
those shares on a form provided by the Company and have the same number of shares of
Common Stock subtracted from the Common Stock issued to the Optionee.
	 
	 	iii.	 	Irrevocable directions to a securities broker approved by the Company to sell
all or a portion of the shares of Common Stock subject to the exercised Option and to
deliver to the Company from the sale proceeds an amount sufficient to pay the

 

 

	 	 	 	Exercise Price and any withholding taxes. (The balance of the sale proceeds, if
any, will be delivered to the Optionee.)

     No Common Stock shall be issued pursuant to the exercise of an Option unless such issuance and
such exercise comply with applicable laws. Assuming such compliance, for income tax purposes the
shares of Common Stock shall be considered transferred to the Optionee on the date on which the
Option is exercised with respect to such shares.

     c. Restrictions on Exercise. This Option may not be exercised until such time as the
Plan has been approved by the stockholders of the Company, or if the issuance of such Common Stock
upon such exercise or the method of payment of consideration for such Common Stock would constitute
a violation of any applicable law.

     d. Responsibility for Exercise. The Optionee is responsible for taking any
and all actions as may be required to exercise this Option in a timely manner and for properly
executing any such documents as may be required for exercise in accordance with such rules and
procedures as may be established from time to time. The Company and/or any Parent, Subsidiary or
Affiliate shall have no duty or obligation to notify the Optionee of the Expiration Date of this
Option.

     3. Termination of Service. 

     a. General Rule. Except as provided below in Sections 3(b) and 3(c), and subject to
the Plan, to the extent vested on the Optionee’s date of termination of Service, this Option may be
exercised for three (3) months after termination of the Optionee’s Service with the Company or a
Parent, Subsidiary or Affiliate of the Company. In no event shall this Option be exercised later
than the Expiration Date set forth in the Grant Notice.

     b. Death; Disability. Upon the termination of the Optionee’s Service with the Company
or a Parent, Subsidiary or Affiliate of the Company by reason of his or her total and permanent
disability or death, the vesting of the Option shall be accelerated effective upon the date of the
Optionee’s termination of Service and the Option may be exercised for twelve (12) months
thereafter, provided that in no event shall this Option be exercised later than the Expiration Date
set forth in the Grant Notice. For all purposes under this Agreement, “total and permanent
disability” means that the Optionee is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be expected to result
in death or which has lasted, or can be expected to last, for a continuous period of not less than
one year.

     c. Cause. Upon the termination of the Optionee’s Service by the Company or a Parent,
Subsidiary or Affiliate of the Company for cause (as determined by the Committee), the Option shall
expire on the date of the Optionee’s termination from Service.

     d. Leave of Absence and Part-Time Work. For purposes of this Option, the Optionee’s
Service does not terminate when the Optionee goes on a military leave, a sick leave or another bona
fide leave of absence, if the leave was approved by the Company in writing. However, the
Optionee’s Service terminates when the approved leave ends, unless the Optionee immediately return
to active work. If the Optionee goes on a leave of absence, then the vesting schedule specified in
the Grant Notice may be adjusted in accordance with the Company’s leave of absence policy or the
terms of the Optionee’s leave. If the Optionee commences working on a part-time basis, then the
vesting schedule specified in the Grant Notice may be adjusted in accordance with

 

 

the Company’s part-time work policy or the terms of an agreement between the Optionee and the
Company pertaining to the Optionee’s part-time schedule.

     4. Non-Transferability of Option. This Option may not be transferred in any manner
otherwise than by will or by the laws of descent or distribution and may be exercised during the
lifetime of the Optionee only by the Optionee. The terms of the Plan and this Agreement shall be
binding upon the executors, heirs, successors and assigns of the Optionee. Regardless of any
marital property settlement agreement, the Company is not obligated to honor a notice of exercise
from the Optionee’s former spouse, nor is the Company obligated to recognize the Optionee’s former
spouse’s interest in the Option in any other way.

     5. Term of Option. This Option may be exercised only within the term set out in the
Grant Notice, and may be exercised during such term only in accordance with the Plan and the terms
of this Option.

     6. Tax Obligations.

     a. Tax Withholding. The Optionee will not be permitted to exercise the Option unless
the Optionee makes appropriate arrangements with the Company (or the Parent, Subsidiary or
Affiliate employing or retaining the Optionee) for the satisfaction of all Federal, state, local
and foreign income and employment tax withholding requirements applicable to the Option exercise.
With the Company’s consent, these arrangements may include withholding shares from the Common Stock
that otherwise would be issued to the Optionee upon exercise of the Option. The value of this
Common Stock, determined as of the effective date of the Option exercise, will be applied to the
withholding taxes. The Optionee acknowledges and agrees that the Company may refuse to honor the
exercise and refuse to deliver the Common Stock if such withholding amounts are not delivered at
the time of exercise.

     b. Notice of Disqualifying Disposition of ISO Shares. If the Option granted to the
Optionee herein is an ISO, and if the Optionee sells or otherwise disposes of any of the Common
Stock acquired pursuant to the ISO on or before the later of (i) the date two (2) years after the
Date of Grant, or (ii) the date one (1) year after the date of exercise, the Optionee shall
immediately notify the Company in writing of such disposition. The Optionee agrees that the
Optionee may be subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

     7. Restrictions on Resale. The Optionee agrees not to sell any Common Stock at a time
when applicable laws, Company policies or an agreement between the Company and its underwriters
prohibit a sale. This restriction will apply as long as the Optionee’s Service continues and for
such period of time after the termination of the Optionee’s Service as the Company may specify.

     8. Retention Rights. The Optionee acknowledges and agrees that the vesting of the
Option pursuant to the Vesting Schedule hereof is earned only by continuing Service at the will of
the Company (or the Parent, Subsidiary or Affiliate employing or retaining the Optionee) and not
through the act of being hired, being granted this Option or acquiring shares of Common Stock
hereunder. The Optionee further acknowledges and agrees that this Agreement, the transactions
contemplated hereunder and the Vesting Schedule set forth herein do not constitute an express or
implied promise of continued engagement by the Company or a Parent, Subsidiary or Affiliate of the
Company in any capacity for the vesting period or for any period, or at all, and shall not
interfere in any way with the Optionee’s right or the right of the Company (or the Parent,

 

 

Subsidiary or Affiliate employing or retaining the Optionee) to terminate the Optionee’s
Service at any time, with or without cause.

     9. Stockholder Rights. The Optionee, or the Optionee’s estate or heirs, have no
rights as a stockholder of the Company until shares of Common Stock have been issued to the
Optionee upon exercise of the Option. No adjustments are made for dividends or other rights if the
applicable record date occurs before the date that such shares of Common Stock are issued, except
as described in the Plan.

     10. Adjustments. In the event of a stock split, a stock dividend or a similar change
in the Company’s Common Stock, the number of shares of Common Stock covered by this Option and the
Exercise Price per share will be adjusted pursuant to the Plan.

     11. Limitations Applicable to Section 16 Persons. Notwithstanding any other provision
of the Plan or this Agreement, if the Optionee is subject to Section 16 of the Exchange Act, the
Plan, the Option and this Agreement shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule
16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To
the extent permitted by applicable law, this Agreement shall be deemed amended to the extent
necessary to conform to such applicable exemptive rule.

     12. Entire Agreement; Governing Law. The Plan, the Grant Notice and this Agreement
constitute the entire agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the Company and the Optionee
with respect to the subject matter hereof. This Agreement may be amended only by another written
agreement between the parties. This Agreement will be interpreted and enforced under the laws of
the State of California (without regard to its choice-of-law provisions). For purposes of
litigating any dispute that arises directly or indirectly from the relationship of the parties
evidenced by this grant or the Agreement, the parties hereby submit to and consent to the exclusive
jurisdiction of the State of California and agree that such litigation shall be conducted only in
the courts of Alameda county, California, or the federal courts for the United States for the
Northern District of California, and no other courts, where this grant is made and/or to be
performed.

     13. Section 409A. Notwithstanding any other provision of the Plan, this Agreement or
the Grant Notice, the Plan, this Agreement and the Grant Notice shall be interpreted in accordance
with, and incorporate the terms and conditions required by, Section 409A of the U.S. Internal
Revenue Code of 1986, as amended (together with any Department of Treasury regulations and other
interpretive guidance issued thereunder, including without limitation any such regulations or other
guidance that may be issued after the date hereof, “Section 409A”). The Company reserves the
right, to the extent the Company deems necessary or advisable in its sole discretion, to
unilaterally amend or modify the Plan, this Agreement or the Grant Notice or adopt other policies
and procedures (including amendments, policies and procedures with retroactive effect), or take any
other actions, as the Committee determines are necessary or appropriate to ensure that this Option
qualifies for exemption from, or complies with the requirements of, Section 409A; provided,
however, that the Company makes no representation that the Option will be exempt from, or will
comply with, Section 409A, and makes no undertakings to preclude Section 409A of the Code from
applying to the Option or to ensure that it complies with Section 409A.exv10w16

Exhibit 10.16

LOAN AND SECURITY AGREEMENT

(ACCOUNTS AND INVENTORY)

	 	 	 	 	 
	 

	 	 	 	AGREEMENT DATE
	OBLIGOR #

	 	NOTE #
	 	March 27, 2008
	 
	 	 	 	 
	CREDIT LIMIT

	 	INTEREST RATE
	 	OFFICER NO./INITIALS
	$9,000,000

	 	Base Rate or LlBOR plus 2.75%	 	 

     THIS AGREEMENT is entered into on March 27, 2008, between COMERICA BANK (“Bank”) as secured
party, whose Western Division headquarters office is 333 West Santa Clara Street, San Jose,
California and the undersigned (“Borrower”), whose sole place of business (if it has only one),
chief executive office (if it has more than one place of business) or residence (if an individual)
is located at the address set forth below its name on the signature page to this Agreement. The
parties agree as follows:

1. DEFINITIONS.

     1.1 “Accounts” shall mean and includes all presently existing and hereafter arising accounts,
including without limitation all accounts receivable, contract rights and other forms of right to
payment for monetary obligations or receivables for property sold or to be sold, leased, licensed,
assigned or otherwise disposed of, or for services rendered or to be rendered (including without
limitation all health-care-insurance receivables) owing to Borrower, and any supporting
obligations, credit insurance, guaranties or security therefor, irrespective of whether earned by
performance.

     1.2 “Adjusted Quick Ratio” shall mean, as of an applicable date of determination, a ratio of
Cash plus Eligible Accounts to Current Liabilities (excluding Subordinated Debt) plus (to the
extent not already included therein) all Indebtedness to Bank including Letter of Credit
Obligations.

     1.2 “Agreement” shall mean and includes this Loan and Security Agreement (Accounts and
Inventory), any concurrent or subsequent rider to this Loan and Security Agreement (Accounts and
Inventory) and any extensions, supplements, amendments or modifications to this Loan and Security
Agreement (Accounts and Inventory) and/or to any such rider.

     1.3 “Bank Expenses” shall mean and includes: all costs or expenses required to be paid by
Borrower under this Agreement which are paid or advanced by Bank; taxes and insurance premiums of
every nature and kind of Borrower paid by Bank; filing, recording, publication and search fees,
appraiser fees, auditor fees and costs, and title insurance premiums paid or incurred by Bank in
connection with Bank’s transactions with Borrower; costs and expenses incurred by Bank in
collecting the Accounts (with or without suit) to correct any default or enforce any provision of
this Agreement, or in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, disposing of, preparing for sale and/or advertising to sell the Collateral, whether or not
a sale is consummated; costs and expenses of suit incurred by Bank in enforcing or defending this
Agreement or any portion hereof, including, but not limited to, expenses incurred by Bank in
attempting to obtain relief from any stay, restraining order, injunction or similar process which
prohibits Bank from exercising any of its rights or remedies; and reasonable attorneys’ fees and
expenses incurred by Bank in advising, structuring, drafting, reviewing, amending, terminating,
enforcing, defending or concerning this Agreement, or any portion hereof or any agreement related
hereto, whether or not suit is brought. Bank Expenses shall include Bank’s in-house legal charges
at reasonable rates.

     1.4 “Base Rate” shall mean that variable rate of interest so announced by Bank at its
headquarters office in San Jose, California as its “Base Rate” from time to time and which serves
as the basis upon which effective rates of interest are calculated for those loans making reference
thereto.

     1.5 “Borrower’s Books” shall mean and includes all of Borrower’s books and records including
but not limited to minute books; ledgers; records indicating, summarizing or evidencing Borrower’s
assets, (including, without limitation, the Accounts) liabilities, business operations or financial
condition, and all information relating thereto, computer programs; computer disk or tape files;
computer printouts; computer runs; and other computer prepared information and equipment of any
kind.

     1.6 “Cash” means unrestricted cash and cash equivalents.

     1.7 “Collateral” shall mean and includes all personal property of Borrower, including without
limitation each and all of the following: the Accounts; the Inventory; the General Intangibles; the
Negotiable Collateral; Borrower’s Books; all Borrower’s deposit accounts; all Borrower’s investment
property (including without limitation securities and securities entitlements); all goods,
instruments documents, policies and certificates of insurance, deposits, money or other personal
property of Borrower in which Bank receives a security interest and which now or later come into
the possession, custody or control of Bank; all Borrower’s equipment and fixtures; all additions,
accessions, attachments, parts, replacements, substitutions, renewals, interest, dividends,
distributions or rights of any kind for or with respect to any of the foregoing (including without
limitation any stock splits, stock rights, voting rights and preferential rights) any supporting
obligations for any of the foregoing; and the products and proceeds of any of the foregoing,
including, but not limited to proceeds of insurance covering the Collateral, and any and all
Accounts, General Intangibles, Negotiable Collateral, Inventory, equipment, money, deposit
accounts, investment property, equipment, fixtures or other tangible and intangible property of
Borrower

 

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

resulting from the sale or other disposition of the Collateral and the proceeds thereof and any
supporting obligations or security therefor and any right to payment thereunder, and including,
without limitation, cash or other property which were proceeds and are recovered by a bankruptcy
trustee or otherwise as a preferential transfer by Borrower. Notwithstanding anything to the
contrary contained herein, Collateral shall not include any waste or other materials which have
been or may be designated as toxic or hazardous by Bank. Notwithstanding the foregoing, the
Collateral shall not include any Copyrights, Patents, Trademarks, servicemarks and applications
therefor, now owned or hereafter acquired, or any claims for damages by way of any past, present
and future infringement of any of the foregoing; provided, however, that the Collateral shall
include all accounts and general intangibles that consist of rights to payment from the sale,
licensing or disposition of all or any part of, or rights in, the Intellectual Property (the
“Rights to Payment”). Notwithstanding the foregoing, if and only if a judicial authority (including
a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is
necessary to have a security interest in the Rights to Payment, then the Collateral shall
automatically, and effective as of December 1, 2005, include the Intellectual Property but only to
the extent necessary to permit perfection Bank’s security interest in the Rights to Payment and
Bank shall have no right, title and interest in the Intellectual Property other than to perfect its
security interest in the Rights to Payment.

     1.7 “Copyrights” shall mean any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative work thereof, whether
published or unpublished and whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held.

     1.8 “Credit” shall mean all Indebtedness, except that Indebtedness arising pursuant to any
other separate contract, instrument, note or other separate agreement which, by its terms, provides
for a specified interest rate and term.

     1.9 “Credit Limit” shall mean Nine Million Dollars ($9,000,000).

     1.10 “Current Liabilities” shall mean, in respect of a Person and as of any applicable date of
determination, all liabilities of such Person that should be classified as current in accordance
with GAAP.

     1.11 “Daily Balance” shall mean the amount determined by taking the amount of the Credit owed
at the beginning of a given day, adding any new Credit advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid and are applied by Bank in
reduction of the Credit on that date under the provisions of this Agreement.

     1.11 “Debt” shall mean, as of any applicable date of determination, all items of indebtedness,
obligation or liability of a Person, whether matured or unmatured, liquidated or unliquidated,
direct or indirect, absolute or contingent, joint or several, that should be classified as
liabilities in accordance with GAAP. In the case of Borrower, the term “Debt” shall include,
without limitation, the Indebtedness.

     1.12 “Eligible Accounts” shall mean and includes those Accounts of Borrower which are due and
payable within ninety (90) days, or less, from the date of invoice, have been validly assigned to
Bank and strictly comply with all of Borrower’s warranties and representations to Bank.

     1 .13 “Event of Default” shall mean one or more of those events described in Section 7
contained herein below.

     1.13 “GAAP” shall mean, as of any applicable period, generally accepted accounting principles
in effect during such period.

     1.14 “General Intangibles” shall mean and includes all of Borrower’s present and future
general intangibles and other personal property (including without limitation all payment
intangibles, electronic chattel paper, contract rights, rights arising under common law, statutes,
or regulations, choses or things in action, goodwill, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, plans, diagrams, schematics, purchase orders,
customer lists, monies due or recoverable from pension funds, route lists, rights to payment
(including without limitation, rights to payment evidenced by chattel paper, documents or
instruments) and other rights under any royalty or licensing agreements, infringement claims,
software (including without limitation any computer program that is embedded in goods that consist
solely of the medium in which the program is embedded), information contained on computer disks or
tapes, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, Inventory, Negotiable Collateral, and Borrowers Books.

     1.15 “Indebtedness” shall mean and includes any and all loans, advances, Letter of Credit
Obligations, overdrafts, debts, liabilities (including, without limitation, any and all amounts
charged to Borrower’s loan account pursuant to any agreement authorizing Bank to charge Borrower’s
loan account), obligations, lease payments, guaranties, covenants and duties owing by Borrower to
Bank of any kind and description whether advanced pursuant to or evidenced by this Agreement; by
any note or other Instrument; or by any other agreement between Bank and Borrower and whether or
not for the payment of money, whether direct or indirect, absolute or contingent, due or to become
due now existing or hereafter arising, including, without limitation, any interest, fees, expenses,
costs and other amounts owed to Bank that but for the provisions of the United States Bankruptcy
Code would have accrued after the commencement of any Insolvency Proceeding, and including, without
limitation, any debt, liability, or obligations owing from Borrower to others which Bank may have
obtained by assignment, participation, purchase or otherwise, and further including, without
limitation, all

2

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

interest not paid when due and all Bank Expenses which Borrower is required to pay or reimburse by
this Agreement, by law, (ILLEGIBLE) otherwise.

     1.16 “Insolvency Proceeding” shall mean and includes any proceeding or case commenced by or
against Borrower, or any guarantor of Borrower’s Indebtedness, or any of Borrower’s account
debtors, under any provisions of the United States Bankruptcy Code, as amended, or any other
bankruptcy or insolvency law, including, but not limited to assignments for the benefit of
creditors, formal or informal moratoriums, composition or extensions with some or all creditors,
any proceeding seeking a reorganization, arrangement or any other relief under the United States
Bankruptcy Code, as amended, or any other bankruptcy or insolvency law.

     1 .17 “Intellectual Property means all of Borrower’s right, title, and interest in and to the
following:

          a. Copyrights, Trademarks and Patents;

          b. Any and all trade secrets, and any and all intellectual property rights in computer
software and computer software products now or hereafter existing, created, acquired or held;

          c. Any and all design rights which may be available to Borrower now or hereafter existing,
created, acquired or held;

          d. Any and all claims for damages by way of past, present and future infringement of any of
the rights included above, with the right, but not the obligation, to sue for and collect such
damages for said use or infringement of the intellectual property rights identified above;

          e. All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all
license fees and royalties arising from such use to the extent permitted by such license or rights;

          f. All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents;
and

          g. All proceeds and products of the foregoing, including without limitation all payments
under insurance or any indemnity or warranty payable in respect of any of the foregoing.

     1.18 “Inventory” shall mean and includes all present and future inventory in which Borrower
has any interest, including, but not limited to, goods held by Borrower for sale or lease or to be
furnished under a contract of service and all of Borrower’s present and future raw materials, work
in process, finished goods (including without limitation any computer program embedded in any of
the foregoing goods and any supporting information provided in connection therewith that (i) is
associated with the goods in such a manner that the program customarily is considered part of the
goods or that (ii) by becoming the owner of the goods, a person acquires a right to use the program
in connection with the goods), together with any advertising materials and packing and shipping
materials, wherever located and any documents of title representing any of the above, and any
equipment, fixtures or other property used in the storing, moving, preserving, identifying,
accounting for and shipping or preparing for the shipping of inventory, and any and all other items
hereafter acquired by Borrower by way of substitution, replacement, return, repossession or
otherwise, and all additions and accessions thereto, and the resulting product or mass, and any
documents of title respecting any of the above.

     1.19 “Judicial Officer or Assignee” shall mean and includes any trustee, receiver, controller,
custodian, assignee for the benefit of creditors or any other person or entity having powers or
duties like or similar to the powers and duties of trustee, receiver, controller, custodian or
assignee for the benefit of creditors.

     1.20 “Letter of Credit” or “Letters of Credit” shall mean any standby letters of credit,
documentary letters of credit OR Warranty Letters of Credit hereafter issued by Bank at the request
of Borrower pursuant to this Agreement.

     1.21 “Letter of Credit Agreement” means in respect of each standby letter of credit and
Warranty Letter of Credit issued pursuant to this Agreement, the application of Borrower requesting
Bank to issue such Letter of Credit (including the terms and conditions on the reverse side thereof
or otherwise provided therein and including any separate indemnity agreement delivered in
connection therewith), in the form and substance acceptable to Bank.

     1.22 “Letter of Credit Fees” shall mean the fees payable to Bank in connection with letters of
credit issued by it pursuant to Article 2.

     1.23 “Letter of Credit Obligations” shall mean, as of any applicable date of determination,
the sum of the undrawn amount of any letter(s) of credit issued by Bank upon the application of
and/or for the account of Borrower, plus any unpaid reimbursement obligations owing by Borrower to
Bank in respect of any such letter(s) of credit.

3

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     1.24 “Net Income” shall mean the net income (or loss) of a person for any period of
determination, determined in accordance with GAAP but excluding in any event:

     a. any gains or losses on the sale or other disposition, not in the ordinary course of
business, of investments or fixed or capital assets, and any taxes on the excluded gains and
any tax deductions or credits on account on any excluded losses; and

     b. in the case of Borrower, net earnings of any Person in which Borrower has an ownership
interest, unless such net earnings shall have actually been received by Borrower in the form of
cash distributions.

     1.25 “Negotiable Collateral” shall mean and include all of Borrower’s present and future
letters of credit, advises of credit, letter-of-credit rights, certificates of deposit, notes,
drafts, money, documents (including without limitation all negotiable documents), instruments
(including without limitation all promissory notes), tangible chattel paper or any other similar
property.

     1.26 “Patents” means all patents, patent applications and like protections including without
limitation improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.

     1.27 “Permitted Liens” means the following:

          a. Any Liens existing on the date of closing and disclosed in the Schedule (excluding
Liens to be satisfied with the proceeds of the Advances) or arising under this Agreement or the
other Loan Documents;

          b. Liens for taxes, fees, assessments or other governmental charges or levies, either not
delinquent or being contested in good faith by appropriate proceedings and for which Borrower
maintains adequate reserves, provided the same have no priority over any of Bank’s security
interests;

          c. Liens (i) upon or in any equipment acquired or held by Borrower or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for
the purpose of financing the acquisition or lease of such equipment, or (ii) existing on such
equipment at the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such equipment; and

          d. Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided
that any extension, renewal or replacement Lien shall be limited to the property encumbered by
the existing Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.

     1.28 “Person” or “person” shall mean and includes any individual, corporation, partnership,
joint venture, firm, association, trust, unincorporated association, joint stock company,
government, municipality, political subdivision or agency or other entity.

     1.29 “Quick Assets” shall mean, as of any applicable date of determination, unrestricted cash,
certificates of deposit or marketable securities and net accounts receivable arising from the sale
of goods and services, and United States government securities and/or claims against the United
States government of Borrower and its subsidiaries.

     1.30 “Subordinated Debt” shall mean indebtedness of the Borrower to any Person which has been
subordinated to the Indebtedness pursuant to a Subordination Agreement in form and content
satisfactory to Bank.

     1.31 “Subordination Agreement” shall mean any subordination agreement, which is in form and
substance satisfactory to Bank, and which makes any or all present and future indebtedness of
Borrower to any Person subordinate to the Indebtedness.

     1.32 “Tangible Effective Net Worth” shall mean, with respect to any Person and as of any
applicable date of determination, Tangible Net Worth plus Subordinated Debt.

     1.33 “Tangible Net Worth” shall mean, with respect to any Person and as of any applicable date
of determination, the excess of:

     a. the net book value of all assets of such Person (excluding affiliate receivables,
patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, goodwill,
and all other intangible assets of such Person) after all appropriate deductions in accordance
with GAAP (including, without limitation, reserves for doubtful receivables, obsolescence,
depreciation and amortization), less

     b. all Debt of such Person at such time.

4

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     1.34 “Trademarks” means any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and the entire
goodwill of the business of Borrower connected with and symbolized by such trademarks.

     1.35 “Warranty” shall mean Borrower’s guarantee that the finished goods or services which are
intended for export from the United States will function as intended during the warranty period.

     1.36 “Warranty Letter of Credit” shall mean standby letter of credit which is issued or caused
to be issued by Bank to support the obligations of Borrower with respect to a Warranty or a standby
letter of credit which by its terms becomes a Warranty Letter of Credit, which Warranty Letter of
Credit shall be secured by cash collateral in an amount not less than such Letter of Credit
Obligation.

Any and all terms used in the foregoing definitions and elsewhere in this Agreement shall be
construed and defined in accordance with the meaning and definition of such terms under and
pursuant to the California Uniform Commercial Code (hereinafter referred to as the “Uniform
Commercial Code”) as amended, revised or replaced from time to time. Notwithstanding the foregoing,
the parties intend that the terms used herein which are defined in the Uniform Commercial Code
have, at all times, the broadest and most inclusive meanings possible. Accordingly, if the Uniform
Commercial Code shall in the future be amended or held by a court to define any term used herein
more broadly or inclusively than the Uniform Commercial Code in effect on the date of this
Agreement, then such term, as used herein, shall be given such broadened meaning. If the Uniform
Commercial Code shall in the future be amended or held by a court to define any term used herein
more narrowly, or less inclusively, than the Uniform Commercial Code in effect on the date of this
Agreement, such amendment or holding shall be disregarded in defining terms used in this Agreement.

2. LOAN AND TERMS OF PAYMENT.

For value received, Borrower promises to pay to the order of Bank such amount, as provided for
below, together with interest, as provided for below.

     2.1 Upon the request of Borrower, made at any time and from time to time during the term
hereof, and so long as no Event of Default has occurred, Bank shall lend to Borrower an amount
equal to the Credit Limit minus all Letter of Credit Obligations. If at any time for any
reason, the amount of Indebtedness owed by Borrower to Bank pursuant to this Section 2.1 and
Section 2.3 of this Agreement is greater than the aggregate amount available to be drawn under this
Section 2.1, Borrower shall immediately pay to Bank, in cash, the amount of such excess.

     2.2 Except as hereinbelow provided, the Credit shall bear interest, on the Daily Balance
owing, at a fluctuating rate of interest equal to SEE LlBOR ADDENDUM ATTACHED.

All interest chargeable under this Agreement that is based upon a per annum calculation shall be
computed on the basis of a three hundred sixty (360) day year for actual days elapsed. The Base
Rate as of the date of this Agreement is five and one quarter percent (5.25%) per annum. In the
event that the Base Rate announced is, from time to time hereafter, changed, adjustment in the Base
Rate shall be made and based on the Base Rate in effect on the date of such change. The Base Rate,
as adjusted, shall apply to the Credit until the Base Rate is adjusted again.

All interest payable by Borrower under the Credit shall be due and payable on the first day of each
calendar month during the term of this Agreement. A late payment charge equal to five percent (5%)
of each late payment may be charged on any payment not received by Bank within ten (10) calendar
days after the payment due date, but acceptance of payment of this charge shall not waive any Event
of Default under this Agreement. Upon the occurrence of an Event of Default hereunder, and without
constituting a waiver of any such Event of Default, then during the continuation thereof, at Bank’s
option, the Credit shall bear interest, on the Daily Balance owing, at a rate equal to three
percent (3%) per year in excess of the rate applicable immediately prior to the occurrence of the
Event of Default, and such rate of interest shall fluctuate thereafter from time to time at the
same time and in the same amount as any fluctuation in the date of interest applicable immediately
prior to any such occurrence.

     2.3 Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be
issued Letters of Credit for the account of Borrower during the term of this Agreement in the
aggregate outstanding face amount not to exceed (i) the Credit Limit, minus (ii) the then
outstanding Daily Balance. Each Letter of Credit shall have an initial expiration date not later
than twelve (12) months from its date of issuance (subject to renewals), unless such Letter of
Credit is a Warranty Letter of Credit, then an expiration date not later than thirty six (36)
months from its date of issuance (subject to renewals). All Letters of Credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank’s form of standard Letter of Credit Application and Agreement. The obligation of
Borrower to immediately reimburse Bank for drawings made under letters of credit shall be absolute,
unconditional and irrevocable in accordance with the terms of this Agreement and the Letter of
Credit Application and Agreement with respect to each such letter of credit. Borrower shall
indemnify, defend, protect and hold Bank harmless from any loss, cost, expense, or liability,
including, without limitation, reasonable attorney’s fees incurred by Bank, whether in-house or
outside counsel is used, arising out of or in connection with any letters of credit.

5

 

	 	 	 
	 

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	 	(ACCOUNTS AND INVENTORY)
	 

          a. No Letter of Credit shall be issued pursuant to Section 2.3 hereof unless, as of the
requested date for issuance:

          (1) the stated amount of the letter of credit requested, plus the stated amounts of all
other outstanding letters of credit, plus the amount of all unreimbursed drawings and payments
made on letters of credit, plus all advances outstanding under the Credit shall not exceed the
Credit Limit; and all undrawn amounts under all such Letters of Credit shall be deemed to
constitute advances for the purpose of calculating availability under the Credit;

          (2) the execution of the Letter of Credit Agreement with respect to the letter of credit
requested will not violate the terms and conditions of any contract, agreement or other
borrowing of Borrower;

          (3) all Letters of Credit shall be, in form and substance, acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank’s form of standard Letter
of Credit Application and Agreement;

          (4) no order, judgment or decree of any court, arbitrator or governmental authority shall
purport by its terms to enjoin or restrain Bank from issuing the letter of credit, and no law,
rule, regulation, request or directive (whether or not having the force of law) of or from any
governmental authority shall prohibit or request that Bank refrain from issuing, the letter of
credit requested or letters of credit generally;

          (5) Bank shall have received the issuance fee required in connection with the issuance of
such letter of credit; and

          (6) all of the conditions set forth in Section 5 are satisfied as of the date of such
request and shall be satisfied as of the date requested for issuance of such Letter of Credit.

     b. Letter of Credit Commission. Borrower shall pay to Bank a letter of credit
commission upon the date of issuance of each standby letter of credit in the amount equal to
one and one quarter percent (1.25%) per annum on the average outstanding amount of such standby
letter of credit. Such commissions (for so long as such letters of credit shall be outstanding)
shall be paid quarterly in arrears on the last banking day of each March, June, September and
December of each calendar year, and shall be fully earned and non-refundable on the date of
payment thereof.

     c. Standard Fees. In connection with the letters of credit, Borrower will pay
Bank, letter of credit issuance fees and standard administration, payment and cancellation
charges assessed by Bank, at the times, in the amounts customarily charged by Bank at such time
with respect to its letters of credit generally.

     d. Draws Under Letters of Credit.

     (1) Upon receipt of any draw against a letter of credit, Bank shall promptly notify
Borrower of the amount of such draw and the date for payment of such draw. Borrower hereby
agrees to deposit with Bank, on the first Business Day subsequent to such notice, funds
sufficient to pay all Letter of Credit Obligations with respect to such draws, which may be
the proceeds of an advance, if made by Bank in its sole discretion.

     (2) In the event that Borrower fails to deposit funds sufficient to pay Letter of
Credit Obligations with respect to any draw (whether through an advance or otherwise) on a
timely basis, from the date of Bank’s payment on such draw until such Letter of Credit
Obligations resulting from such draw shall have been paid, Borrower shall not be entitled
to request or receive any advance or to request or receive any other Credits or the
issuance of letters of credit hereunder and the amount of the related Letter of Credit
Obligation shall bear interest at the Default Rate for Loans bearing interest at the Base
Rate, which interest shall be payable on demand.

     e. Obligations Irrevocable. The obligations of Borrower to make payments with
respect to Letter of Credit Obligations shall be irrevocable and not subject to any
qualification or exception whatsoever, including:

     (1) invalidity or unenforceability of this Agreement or any of the other Related Loan
Documents or any of their provisions;

     (2) the existence of any claim, set-off, defense or other right which Borrower may
have against a beneficiary named in a letter of credit, or any other Person;

     (3) any draft, certificate or any other document presented in connection with a Letter
of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect, except to the extent resulting
from the willful misconduct or gross negligence on the part of Bank;

6

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     (4) the occurrence of any Default or Event of Default;

     (5) payment by Bank under any Letter of Credit against presentation of a draft or
accompanying certificate which does not strictly comply with the terms of the Letter of
Credit;

     (6) any failure, omission, delay or lack on the part of Bank or any party to this
Agreement or any of the Related Documents to enforce, assert or exercise any right, power
or remedy conferred upon Bank or any such party under this Agreement or any Documents, or
any other acts or omissions on the part of Bank or any such party;

     (7) the voluntary or involuntary liquidation, dissolution, sale or other disposition
of all or substantially all the assets of Borrower; the receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, reorganization, arrangements,
composition with creditors or readjustment or other similar proceedings affecting Borrower,
or any of its assets, or any allegation or contest of the validity of this Agreement or any
of the Related Documents, in any such proceedings; and

     (8) any other circumstance or happening whatsoever, whether or not similar to any of
the foregoing, and any other event or action that would, in the absence of this clause and
other than as a result of the misconduct or gross negligence of Bank, result in the release
or discharge by operation of law of Borrower from the performance or observance of any
obligation, covenant or agreement contained in this Agreement or any of the Related
Documents.

     f. Indemnification. Borrower agrees indemnify, defend and hold Bank harmless from
and against any and all claims, damages, losses, liabilities, costs or expenses whatsoever
which Bank may incur (or which may be claimed against Bank by any Person) by reason of or in
connection with the execution and delivery or transfer of, or payment or failure to pay under,
any Letter of Credit; provided, however, that Borrower shall not be required to indemnify Bank
pursuant to this Section 2.3(f) for claims, damages, losses, liabilities, costs or expenses to
the extent, but only to the extent, caused by the willful and wrongful failure or willful and
wrongful misconduct or gross negligence of Bank. Nothing in this Section is intended nor shall
be deemed to limit, reduce or otherwise affect in any manner whatsoever the reimbursement
obligations of Borrower contained in this Agreement.

     2.5 Borrower shall pay to Bank, on the effective date of this Agreement a commitment fee of
$9,000, which fee shall be deemed fully earned upon such effective date and shall not be refundable
under any circumstance.

3. TERM.

     3.1 This Agreement shall remain in full force and effect until September 30, 2008, unless
earlier terminated by notice by Borrower. Notice of such termination by Borrower shall be
effectuated by mailing of a registered or certified letter not less than thirty (30) days prior to
the effective date of such termination, addressed to Bank at the address set forth herein and the
termination shall be effective as of the date so fixed in such notice.

     3.2 Notwithstanding the foregoing, should Borrower be in default of one or more of the
provisions of this Agreement, Bank may terminate this Agreement at any time without notice.
Notwithstanding the foregoing, should either Bank or Borrower become insolvent or unable to meet
its debts as they mature, or fail, suspend, or go out of business, the other party shall have the
right to terminate this Agreement at any time without notice. On the date of termination all
Indebtedness shall become immediately due and payable without notice or demand; no notice of
termination by Borrower shall be effective until Borrower shall have paid all Indebtedness to Bank
in full. Notwithstanding termination, until all Indebtedness has been fully satisfied, Bank shall
retain its security interest in all existing Collateral and Collateral arising thereafter, and
Borrower shall continue to perform all of its obligations.

     3.3 After termination and when Bank has received payment in full of Borrower’s Indebtedness to
Bank, Bank shall reassign to Borrower all Collateral held by Bank, and shall execute a termination
of all security agreements and security interests given by Borrower to Bank.

4. CREATION OF SECURITY INTEREST.

     4.1 Borrower hereby grants to Bank a continuing security interest in all presently existing
and hereafter arising Collateral in order to secure prompt repayment of any and all Indebtedness
owed by Borrower to Bank and in order to secure prompt performance by Borrower of each and all of
its covenants and obligations under this Agreement and otherwise created. Bank’s security interest
in the Collateral shall attach to all Collateral without further act on the part of Bank or
Borrower. In the event that any Collateral, including proceeds, is evidenced by or consists of
Negotiable Collateral, Borrower, immediately upon the request of Bank, shall (a) endorse or assign
such Negotiable Collateral to Bank, (b) deliver actual physical possession of such Negotiable
Collateral to Bank, and (c) mark conspicuously all of its records pertaining to such Negotiable
Collateral with a legend, in form and substance satisfactory to Bank (and in the case of Negotiable
Collateral consisting of tangible chattel paper, immediately mark all such tangible chattel paper
with a conspicuous legend in form and substance satisfactory to Bank), indicating that the
Negotiable Collateral is subject to the security interest granted to Bank hereunder.

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     4.2 Bank’s security interest in the Accounts shall attach to all Accounts without further act
on the part of Bank or Borrower. Upon request from Bank, Borrower shall provide Bank with schedules
describing all Accounts created or acquired by Borrower (including without limitation agings
listing the names and addresses of, and amounts owing by date by account debtors), and shall
execute and deliver written assignments of all Accounts to Bank all in a form acceptable to Bank;
provided, however, Borrower’s failure to execute and deliver such schedules and/or
assignments shall not affect or limit Bank’s security interest and other rights in and to the
Accounts. Together with each schedule, Borrower shall furnish Bank with copies of Borrower’s
customers’ invoices or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and Borrower warrants the genuineness thereof. Upon the occurrence of an Event of
Default, Bank or Bank’s designee may notify customers or account debtors of Bank’s security
interest in the Collateral and direct such customers or account debtors to make payments directly
to Bank, but unless and until Bank does so or gives Borrower other written instructions, Borrower
shall collect all Accounts for Bank, receive in trust all payments thereon as Bank’s trustee, and,
if so requested to do so from Bank, Borrower shall immediately deliver said payments to Bank in
their original form as received from the account debtor and all letters of credit, advices of
credit, instruments, documents, chattel paper or any similar property evidencing or constituting
Collateral. Notwithstanding anything to the contrary contained herein, if sales of inventory are
made for cash, Borrower shall immediately deliver to Bank, in identical form, all such cash,
checks, or other forms of payment which Borrower receives. The receipt of any check or other item
of payment by Bank shall not be considered a payment on account until such check or other item of
payment is honored when presented for payment, in which event, said check or other item of payment
shall be deemed to have been paid to Bank two (2) calendar days after the date Bank actually
receives such check or other item of payment.

     4.3 Bank’s security interest in inventory shall attach to all inventory without further act on
the part of Bank or Borrower. Borrower will at Borrower’s expense pledge, assemble and deliver such
inventory to Bank or to a third party as Bank’s bailee; or hold the same in trust for Bank’s
account or store the same in a warehouse in Bank’s name; or deliver to Bank documents of title
representing said Inventory; or evidence of Bank’s security interest in some other manner
acceptable to Bank. Until a default by Borrower under this Agreement or any other Agreement between
Borrower and Bank, Borrower may, subject to the provisions hereof and consistent herewith, sell the
Inventory, but only in the ordinary course of Borrower’s business. A sale of inventory in
Borrower’s ordinary course of business does not include an exchange or a transfer in partial or
total satisfaction of a debt owing by Borrower.

     4.4 Concurrently with Borrower’s execution of this Agreement, and at any time or times
hereafter at the request of Bank, Borrower shall (a) execute and deliver to Bank security
agreements, mortgages, assignments, certificates of title, affidavits, reports, notices, schedules
of accounts, letters of authority and all other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and maintain perfected Bank’s security interest in the Collateral
and in order to fully consummate all of the transactions contemplated under this Agreement, (b)
cooperate with Bank in obtaining a control agreement in form and substance satisfactory to Bank
with respect to all deposit accounts, electronic chattel paper, investment property, and
letter-of-credit rights, and (c) in the event that any Collateral is in the possession of a third
party, Borrower shall join with Bank in notifying such third party of Bank’s security interest and
obtaining an acknowledgment from such third party that it is holding such Collateral for the
benefit of Bank. By authenticating or becoming bound by this Agreement, Borrower authorizes the
filing of initial financing statement(s), and any amendment(s) covering the Collateral to perfect
and maintain perfected Bank’s security interest in the Collateral. Upon the occurrence of an Event
of Default, Borrower hereby irrevocably makes, constitutes and appoints Bank (and any of Bank’s
officers, employees or agents designated by Bank) as Borrower’s true and lawful attorney-in-fact
with power to sign the name of Borrower on any security agreement, mortgage, assignment,
certificate of title, affidavit, letter of authority, notice of other similar documents which must
be executed and/or filed in order to perfect or continue perfected Bank’s security interest in the
Collateral, and to take such actions in its own name or in Borrower’s name as Bank, in its sole
discretion, deems necessary or appropriate to establish exclusive possession or control (as defined
in the Uniform Commercial Code) over any Collateral of such nature that perfection of Bank’s
security interest may be accomplished by possession or control.

     4.5 Borrower shall make appropriate entries in Borrower’s Books disclosing Bank’s security
interest in the Accounts. Bank (through any of its officers, employees or agents) shall have the
right at any time or times hereafter, provided that reasonable notice is provided, during
Borrower’s usual business hours, or during the usual business hours of any third party having
control over the records of Borrower, to inspect and verify Borrower’s Books in order to verify the
amount or condition of, or any other matter, relating to, said Collateral and Borrower’s financial
condition.

     4.6 Borrower appoints Bank or any other person whom Bank may designate as Borrower’s
attorney-in-fact, with power, effective only upon the occurrence of an Event of Default: to endorse
Borrower’s name on any checks, notes, acceptances, money order, drafts or other forms of payment or
security that may come into Bank’s possession; to sign Borrower’s name on any invoice or bill of
lading relating to any Accounts, on drafts against account debtors, on schedules and assignments of
Accounts, on verifications of Accounts and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the address for delivery of
Borrower’s mail addressed to Borrower to an address designated by Bank, to receive and open all
mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other
mail to Borrower; to send, whether in writing or by telephone, requests for verification of
Accounts; and to do all things necessary to carry out this Agreement. Borrower ratifies and
approves all acts of the attorney-in-fact. Neither Bank nor its attorney-in-fact will be liable for
any acts or omissions or for any error of judgment or mistake of fact or law. This power being
coupled with an
interest, is irrevocable so long as any Accounts in which Bank has a security interest remain
unpaid and until the Indebtedness has been fully satisfied.

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     4.7 In order to protect or perfect any security interest which Bank is granted hereunder, Bank
may, in its sole discretion, discharge any lien or encumbrance or bond the same, pay any insurance,
maintain guards, warehousemen, or any personnel to protect the Collateral, pay any service bureau,
or, obtain any records, and all costs for the same shall be added to the Indebtedness and shall be
payable on demand.

     4.8 Borrower agrees that Bank may provide information relating to this Agreement or relating
to Borrower to Bank’s parent, affiliates, subsidiaries and service providers.

     4.9 Borrower, for itself and its Subsidiaries, agrees that it will not and that it will not
permit its Subsidiaries to pledge or otherwise grant a security interest in the Intellectual
Property to any Person, other than the Bank, or enter into or be subject to any agreement with any
other Person pursuant to which Borrower agrees for the benefit of such other Person that Borrower
will not pledge or grant a security interest in the Intellectual Property, all without the Bank’s
prior written consent.

     4.10 All Warranty Letters of Credit shall be secured by cash collateral in the aggregate face
amount of all issued and outstanding Warranty Letters of Credit, which cash collateral shall be
held and retained by Bank as cash collateral for the repayment of such Letter of Credit Obligation,
together with any and all other Indebtedness of Borrower to Bank remaining unpaid, and Borrower
pledges to Bank and grants to Bank a continuing first priority security interest in such cash
collateral so delivered to Bank.

5. CONDITIONS PRECEDENT.

     5.1 As conditions precedent to the making of the loans and the extension of the financial
accommodations hereunder, Borrower shall execute, or cause to be executed, and deliver to Bank, in
form and substance satisfactory to Bank and its counsel, the following:

     a. This Agreement and other documents, instruments and agreements required by Bank;

     b. If Borrower is a corporation, limited liability company, limited partnership or other
such entity, certified copies of all actions taken by Borrower, any grantor of a security
interest to Bank to secure the Indebtedness, and any guarantor of the Indebtedness, authorizing
the execution, delivery and performance of this Agreement and any other documents, instruments
or agreements entered into in connection herewith, and authorizing specific officers to execute
and deliver any such documents, instruments and agreements;

     c. If Borrower is a corporation, limited liability company, limited partnership or other
such entity, then a certificate of good standing showing that Borrower is in good standing
under the laws of the state of its incorporation or formation and certificates indicating that
Borrower is qualified to transact business and is in good standing in any other state in which
it conducts business;

     d. If Borrower is a partnership, then a copy of Borrower’s partnership agreement certified
by each general partner of Borrower;

     e. UCC searches and financing statements, tax lien and litigation searches, fictitious
business statement filings, insurance certificates, notices or other similar documents which
Bank may require and in such form as Bank may require, in order to reflect, perfect or protect
Bank’s first priority security interest in the Collateral and in order to fully consummate all
of the transactions contemplated under this Agreement;

     f. Evidence that Borrower has obtained insurance and acceptable endorsements;

     g. Such control agreements from each Person as Bank may require;

     h. Duly executed certificates of title with respect to that portion of the Collateral that
is subject to certificates of title:

     i. Such collateral access agreements from each lesser, warehouseman, bailee, and other
Person as Bank may require, duly executed by each such Person; and

     j. Warranties and representations of officers.

6. WARRANTIES, REPRESENTATIONS AND COVENANTS.

     6.1 If so requested by Bank, Borrower shall, at such intervals designated by Bank, during the
term hereof execute and deliver a Report of Accounts Receivable or similar report, in form
customarily used by Bank.

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     6.2 Bank shall retain its security interest in all Accounts, until all Indebtedness has been
fully paid and satisfied. Returns and allowances, if any, as between Borrower and its customers,
will be on the same basis and in accordance with the usual customary practices of Borrower, as they
exist at this time. Any merchandise which is returned by an account debtor or otherwise recovered
shall be set aside, marked with Bank’s name, and Bank shall retain a security interest therein.
Borrower shall promptly notify Bank of all disputes and claims and settle or adjust them on terms
approved by Bank. After default by Borrower hereunder, no discount, credit on allowance shall be
granted to any account debtor by Borrower and no return of merchandise shall be accepted by
Borrower without Bank’s consent. Bank may, after default by Borrower, settle or adjust disputes and
claims directly with account debtors for amounts and upon terms which Bank considers advisable, and
in such cases Bank will credit Borrower’s loan account with only the net amounts received by Bank
in payment of the Accounts, after deducting all Bank Expenses in connection therewith.

     6.3 Borrower warrants, represents, covenants and agrees that:

     a. Borrower has good and marketable title to the Collateral. Bank has and shall continue
to have a first priority perfected security interest in and to the Collateral, subject to
Permitted Liens. The Collateral shall at all times remain free and clear of all liens,
encumbrances and security interests, except for Permitted Liens;

     b. All Accounts are and will, at all times pertinent hereto, be bona fide existing
obligations created by the sale and delivery of merchandise or the rendition of services to
account debtors in the ordinary course of business, free of liens claims, encumbrances and
security interests, except for Permitted Liens, and are unconditionally owed to Borrower
without defenses, disputes, offsets counterclaims, rights of return or cancellation, and
Borrower shall have received no notice of actual or imminent bankruptcy or insolvency of any
account debtor at the time an Account due from such account debtor is assigned to Bank; and

     c. At the time each Account is assigned to Bank, all property giving rise to such Account
shall have been delivered to the account debtor or to the agent for the account debtor for
immediate shipment to, and unconditional acceptance by, the account debtor. Borrower shall
deliver to Bank, as Bank may from time to time require, delivery receipts customer’s purchase
orders, shipping instructions, bills of lading and any other evidence of shipping arrangements.
(ILLEGIBLE) such a request by Bank, copies of all such documentation shall be held by Borrower
as custodian for Bank.

     6.4 Borrower shall keep the Inventory only at the following locations: 1908 Doolittle Drive,
San Leandro, California (ILLEGIBLE) and the owner or mortgagees of such location is 2101 Williams
Associates, LLC.

     a. Borrower, immediately upon demand by Bank therefor, shall now and from time to time
hereafter, at such intervals as are reasonably requested by Bank, deliver to Bank, designations
of Inventory specifying Borrower’s cost (ILLEGIBLE) Inventory, the wholesale market value
thereof and such other matters and information relating to the Inventory as Bank may request;

     b. Borrower’s Inventory, valued at the lower of Borrower’s cost or the wholesale market
value thereof, at all times pertinent hereto shall not be less than N/A Dollars ($ N/A) of
which no less than N/A Dollars ($ N/A shall be in raw materials and finished goods;

     c. All of the Inventory is and shall remain free from all purchase money or other security
interests, liens (ILLEGIBLE) encumbrances, except for Permitted Liens;

     d. Borrower does now keep and hereafter at all times shall keep correct and accurate
records itemizing and describing the kind, type, quality and quantity of the Inventory, its
cost therefor and selling price thereof, and the daily withdrawals therefrom and additions
thereto, all of which records shall be available upon demand to any of Bank’s officers agents
and employees for inspection and copying;

     e. All Inventory, now and hereafter at all times, shall be new Inventory of good and
merchantable quality free from material defects;

     f. Inventory is not now and shall not at any time or times hereafter be located or stored
with a (ILLEGIBLE) warehouseman or other third party without Bank’s prior written consent, and,
in such event, Borrower will concurrently therewith cause any such bailee, warehouseman or
other third party to issue and deliver to Bank, warehouse receipts (ILLEGIBLE) Bank’s name
evidencing the storage of Inventory and/or an acknowledgment by such bailee of Bank’s prior
rights in the Inventory, in each case in form and substance acceptable to Bank. In any event,
Borrower shall instruct any third party to hold all such Inventory for Bank’s account subject
to Bank’s security interests and its instructions; and

     g. Bank shall have the right upon demand now and/or at all times hereafter, during
Borrower’s usual business hours, after reasonable notice, to inspect and examine the Inventory
and to check and test the same as to quality, quantity value and condition and Borrower agrees
to reimburse Bank for Bank’s reasonable costs and expenses in so doing.

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     6.6 Borrower represents, warrants and covenants with Bank that Borrower will not, without
Bank’s prior written consent:

     a. Grant a security interest in or permit a lien, claim or encumbrance upon any of the
Collateral (including the Intellectual Property) to any person, association, firm,
corporation, entity or governmental agency or instrumentality, except Borrower may pledge a
temporary license or other rights to use any of the Copyrights, Patents or Trademarks to any
of its customers so long as Borrower provides prior written notice to Bank of the material
terms of any such license agreements with a description of its likely impact on Borrower’s
business or financial condition;

     b. Permit any levy, attachment or restraint to be made affecting any of Borrower’s
assets;

     c. Permit any Judicial Officer or Assignee to be appointed or to take possession of any
or all of Borrower’s assets;

     d. Other than sales of Inventory in the ordinary course of Borrower’s business, to sell,
lease, or otherwise dispose of, move, or transfer, whether by sale or otherwise, any of
Borrower’s assets;

     e. Change its name, the location of its sole place of business, chief executive office or
residence, business structure, corporate identity or structure, form of organization or the
state in which it has been formed or organized; add any new fictitious names, dissolve,
liquidate, merge or consolidate with or into any other corporation, entity, or other business
organization, or permit another corporation, entity or other business organization to merge
into it;

     f. Move or relocate any Collateral;

     g. Acquire any other business organization;

     h. Enter into any transaction not in the usual course of Borrower’s business;

     i. Make any change in Borrower’s financial structure or in any of its business
objectives, purposes or operations which would materially adversely affect the ability of
Borrower to repay Borrower’s Indebtedness;

     j. Incur any debts outside the ordinary course of Borrower’s business except renewals or
extensions of existing debts and interest thereon;

     k. Make loans, advances or extensions of credit to any Person, except in the ordinary
course of business;

     l. Guarantee or otherwise, directly or indirectly, in any way be or become responsible
for obligations of any other Person, whether by agreement to purchase the indebtedness of any
other Person, agreement for the furnishing of funds to any other Person through the furnishing
of goods, supplies or services, by way of stock purchase, capital contribution, advance or
loan, for the purpose of paying or discharging (or causing the payment or discharge of) the
indebtedness of any other Person, or otherwise, except for the endorsement of negotiable
instruments by Borrower in the ordinary course of business for deposit or collection;

     m. Make any payment on account of any Subordinated Debt except for regularly scheduled
payments of interest and principal in accordance with the provisions of any Subordination
Agreement executed by Bank and the subordinated debt holder, or amend any provision contained
in any documentation relating to any such Subordinated Debt without Bank’s prior written
consent;

     n. Sell, lease, transfer or otherwise dispose of properties and assets having an
aggregate book value of more than Fifty Thousand Dollars ($50,000) (whether in one transaction
or in a series of transactions) except as to the sale of inventory in the ordinary course of
business; (b) change its name, consolidate with or merge into any other corporation, permit
another corporation to merge into it, acquire all or substantially all the properties or
assets of any other Person, enter into any reorganization or recapitalization or reclassify
its capital stock, or (c) enter into any sale-leaseback transaction;

     o. Purchase or hold beneficially any stock or other securities of, or make any investment
or acquire any securities or other interest whatsoever in, any other Person, except for the
common stock of the Subsidiaries owned by Borrower on the date of this Agreement and except
for certificates of deposit with maturities of one year or less of United States commercial
banks with capital, surplus and undivided profits in excess of One Hundred Million Dollars
($100,000,000.00) and the securities or other direct obligations of the United States
Government maturing within one year from the date of acquisition thereof;

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     p. Allow any fact, condition or event to occur or exist with respect to any employee
pension or profit sharing plans established or maintained by it which might constitute grounds
for termination of any such plan or for the court appointment of a trustee to administer any
such plan;

     q. Use any loan or other extension of credit under this Agreement or any other document,
instrument or agreement entered into by Borrower with or in favor of Bank in connection with
this Agreement for any purpose other than to provide working capital for its operations, for
the issuance of Letters of Credit and for other general business purposes. In no event shall
the funds from any such loan or other extension of credit be used directly or indirectly by
any Person for personal, family, household or agricultural purposes or for the purpose,
whether immediate, incidental or ultimate, of purchasing, acquiring or carrying any “margin
stock” or any “margin securities” (as such terms are defined respectively in Regulation U and
Regulation G promulgated by the Board of Governors of the Federal Reserve System) or to extend
credit to others directly or indirectly for the purpose of purchasing or carrying any such
margin stock or margin securities. Borrower hereby represents and warrants that Borrower is
not engaged principally, or as one of Borrower’s important activities, in the business of
extending credit to others for the purpose of purchasing or carrying such margin stock or
margin securities; and

     r. Borrower shall not without Bank’s prior written consent acquire or expend for or
commit itself to acquire or expend for fixed assets by lease, purchase or otherwise in an
aggregate amount that exceeds Fifty Thousand Dollars ($50,000) in any fiscal year.

     6.7 Borrower shall permit representatives of Bank to conduct audits of Borrower’s Books
relating to the Accounts and other Collateral and make extracts therefrom, with results
satisfactory to Bank, provided that Bank shall use its best efforts to not interfere with the
conduct of Borrower’s business, and to the extent possible to arrange for verification of the
Accounts directly with the account debtors obligated thereon or otherwise, all under reasonable
procedures acceptable to Bank and at Borrower’s sole expense; provided, however,
that, prior to an Event of Default, Borrower shall not be responsible for more than one (1) such
audit in each calendar year.

     6.8 Borrower represents, warrants, covenants and agrees that:

     a. Borrower’s true and correct legal name is that set forth on the signature page to this
Agreement. Except as disclosed in writing to Bank on or before the date of this Agreement,
Borrower has not done business under any name other than that set forth on the signature page
to this Agreement;

     b. If Borrower is an individual, the location (as determined pursuant to the Uniform
Commercial Code) of Borrower’s principal residence is that set forth following Borrower’s name
on the signature page to this Agreement;

     c. If Borrower is a registered organization that is organized under the laws of any one
of the states comprising the United States (e.g. corporation, limited partnership, registered
limited liability partnership or limited liability company), and is located (as determined
pursuant to the Uniform Commercial Code) in the state under the laws of which it was
organized, Borrower’s form of organization and the state in which it has been organized are
those set forth immediately following Borrower’s name on the signature page to this Agreement;

     d. If Borrower is a registered organization organized under the laws of the United
States, and Borrower is located in the state that United States law designates as its location
or, if United States law authorizes Borrower to designate the state for its location, the
state designated by Borrower, or if neither of the foregoing are applicable, at the District
of Columbia (in each case as determined in accordance with the Uniform Commercial Code),
Borrower’s form of organization and the state or district in which it is located are those set
forth immediately following Borrower’s name on the signature page to this Agreement;

     e. If Borrower is a domestic organization that is not a registered organization under the
laws of the United States or any state thereof (e.g. general partnership, joint venture,
trust, estate or association), and Borrower is located (as determined pursuant to the Uniform
Commercial Code) at its sole place of business or, if it has more than one place of business,
at its chief executive office, Borrower’s form of organization and the address of that
location are those set forth on the signature page to this Agreement; and

     f. If Borrower is a foreign individual or foreign organization or a branch or agency of a
bank that is not organized under the laws of the United States or a state thereof, Borrower is
located (as determined pursuant to the Uniform Commercial Code) at the address set forth
following Borrower’s name on the signature page to this Agreement.

     6.9 If Borrower is a corporation, Borrower represents, warrants and covenants as follows:

     a. Borrower will not make any distribution or declare or pay any dividend (in stock or in
cash) to any shareholder or on any of its capital stock, of any class, whether now or
hereafter outstanding, or purchase, acquire,

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repurchase, or redeem or retire any such capital stock other than distributions or dividends
made at such times when no Default or Event of Default is existing or would arise after giving
effect thereto;

     b. Borrower is and shall at all times hereafter be a corporation duly organized and
existing in good standing under the laws of the state of its incorporation and qualified and
licensed to do business in California or any other state in which it conducts its business;

     c. Borrower has the right and power and is duly authorized to enter into this Agreement;
and

     d. The execution by Borrower of this Agreement shall not constitute a breach of any
provision contained in Borrower’s articles of incorporation or by-laws.

     6.10 The execution of and performance by Borrower of all of the terms and provisions contained
in this Agreement shall not result in a breach of or constitute an event of default under any
agreement to which Borrower is now or hereafter becomes a party.

     6.11 Borrower shall promptly notify Bank in writing of its acquisition by purchase, lease or
otherwise of any after acquired property of the type included in the Collateral, with the exception
of purchases of Inventory in the ordinary course of business.

     6.12 All assessments and taxes, whether real, personal or otherwise, due or payable by, or
imposed, levied or assessed against, Borrower or any of its property have been paid, and shall
hereafter be paid in full, before delinquency. Borrower shall make due and timely payment or
deposit of all federal, state and local taxes, assessments or contributions required of it by law,
and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment
or deposit thereof. Borrower will make timely payment or deposit of all F.I.C.A. payments and
withholding taxes required of it by applicable laws, and will upon request furnish Bank with proof
satisfactory to it that Borrower has made such payments or deposit. If Borrower fails to pay any
such assessment, tax, contribution, or make such deposit, or furnish the required proof, Bank may,
in its sole and absolute discretion and without notice to Borrower, (i) make payment of the same or
any part thereof, or (ii) set up such reserves in Borrower’s loan account as Bank deems necessary
to satisfy the liability therefor, or both. Bank may conclusively rely on the usual statements of
the amount owing or other official statements issued by the appropriate governmental agency. Each
amount so paid or deposited by Bank shall constitute a Bank Expense and an additional advance to
Borrower.

     6.13 There are no actions or proceedings pending by or against Borrower or any guarantor of
Borrower before any court or administrative agency and Borrower has no knowledge of any pending,
threatened or imminent litigation, governmental investigations or claims, complaints, actions or
prosecutions involving Borrower or any guarantor of Borrower, except as heretofore specifically
disclosed in writing to Bank. If any of the foregoing arise during the term of the Agreement,
Borrower shall immediately notify Bank in writing.

     6.14 Insurance.

     a. Borrower, at its expense, shall keep and maintain its assets insured against loss or
damage by fire, theft, explosion, sprinklers and all other hazards and risks ordinarily
insured against by other owners who use such properties in similar businesses for the full
insurable value thereof. Borrower shall also keep and maintain business interruption insurance
and public liability and property damage insurance relating to Borrower’s ownership and use of
the Collateral and its other assets. All such policies of insurance shall be in such form,
with such companies, and in such amounts as may be satisfactory to Bank. Borrower shall
deliver to Bank certified copies of such policies of insurance and evidence of the payments of
all premiums therefor. All such policies of insurance (except those of public liability and
property damage) shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties satisfactory to Bank, and all proceeds payable
thereunder shall be payable to Bank and, upon receipt by Bank, shall be applied on account of
the Indebtedness owing to Bank. To secure the payment of the Indebtedness, Borrower grants
Bank a security interest in and to all such policies of insurance (except those of public
liability and property damage) and the proceeds thereof, and Borrower shall direct all
insurers under such policies of insurance to pay all proceeds thereof directly to Bank.

     b. Borrower hereby irrevocably appoints Bank (and any of Bank’s officers, employees or
agents designated by Bank) as Borrower’s attorney for the purpose of making, selling and
adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft,
instrument or other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of insurance. Borrower
will not cancel any of such policies without Bank’s prior written consent. Each such insurer
shall agree by endorsement upon the policy or policies of insurance issued by it to Borrower
as required above, or by independent instruments furnished to Bank, that it will give Bank at
least ten (10) days written notice before any such policy or policies of insurance shall be
altered or canceled, and that no act or default of Borrower, or any other person, shall affect
the right of Bank to recover under such policy or policies

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of insurance required above or to pay any premium in whole or in part relating thereto. Bank,
without waiving or releasing any Indebtedness or any Event of Default, may, but shall have no
obligation to do so, obtain and maintain such policies of insurance and pay such premiums and
take any other action with respect to such policies which Bank deems advisable. All sums so
disbursed by Bank, as well as reasonable attorneys’ fees incurred by Bank, whether in-house or
outside counsel is used, court costs, expenses and other charges relating thereto, shall
constitute Bank Expenses and are payable on demand.

     6.15 All financial statements and information relating to Borrower which have been or may
hereafter be delivered by Borrower to Bank are true and correct and have been prepared in
accordance with GAAP consistently applied and there has been no material adverse change in the
financial condition of Borrower since the submission of such financial information to Bank.

     6.16 Financial Reporting.

     a. Borrower at all times hereafter shall maintain a standard and modern system of
accounting in accordance with GAAP consistently applied with ledger and account cards and/or
computer tapes and computer disks, computer printouts and computer records pertaining to the
Collateral which contain information as may from time to time be requested by Bank, not modify
or change its method of accounting or enter into, modify or terminate any agreement presently
existing, or at any time hereafter entered into with any third party accounting firm and/or
service bureau for the preparation and/or storage of Borrower’s accounting records without the
written consent of Bank first obtained and without said accounting firm and/or service bureau
agreeing to provide information regarding the Accounts and Inventory and Borrower’s financial
condition to Bank; permit Bank and any of its employees, officers or agents, upon demand,
during Borrower’s usual business hours, or the usual business hours of third persons having
control thereof, to have access to and examine all of Borrower’s Books relating to the
Collateral, Borrower’s Indebtedness to Bank, Borrower’s financial condition and the results of
Borrower’s operations and in connection therewith, permit Bank or any of its agents, employees
or officers to copy and make extracts therefrom.

     b. Borrower shall deliver to Bank within thirty (30) days after the end of each month,
company prepared balance sheets, statements of cash flow, and profit and loss statements
covering Borrower’s operations; deliver to Bank as soon as available and in any event no later
than 30 days before the beginning of the next fiscal year of Borrower, a annual financial
projections of the Borrower that includes balance sheets, income statements, cash flow
statements, a statement of underlying assumptions for the upcoming fiscal year, which
projections shall be in form and content approved by Borrower’s board of directors; deliver to
Bank within one hundred eighty (180) days after the end of each of Borrower’s fiscal years
annual statements of the financial condition of Borrower for each such fiscal year, including
but not limited to, a balance sheet, statements of cash flow, and profit and loss statement
audited by independent certified public accountants acceptable to Bank in accordance with
generally accepted accounting principles consistently applied (which such statements shall not
be qualified as to the scope of review or as to the status of Borrower as a going concern, and
shall state that such financial statements fairly present, in all material respects, the
financial position of Borrower as at the dates indicated and the results of its operations and
its cash flows for the periods indicated); and together with each delivery of the annual and
monthly financial statements required by this Section 6.16 b., furnish to Bank a certificate
of its chief executive officer or financial officer setting forth Borrower’s compliance with
the financial covenants set forth in Section 6.17 of this Agreement; and any other report
requested by Bank relating to the Collateral and the financial condition of Borrower, and a
certificate signed by an authorized employee of Borrower to the effect that all reports,
statements, computer disk or tape files, computer printouts, computer runs, or other computer
prepared information of any kind or nature relating to the foregoing or documents delivered or
caused to be delivered to Bank under this subparagraph are complete, correct and thoroughly
present the financial condition of Borrower and that there exists on the date of delivery to
Bank no condition or event which constitutes a breach or Event of Default under this
Agreement.

     c. In addition to the financial statements requested above, Borrower agrees to provide
Bank within fifteen (15) days after the end of each month, unless otherwise provided below (in
form and content satisfactory to Bank) the following schedules:

     (1) Accounts Receivable Agings

     (2) Accounts Payable Agings

     (3) Inventory Reports

     6.17 Borrower shall maintain the following financial ratios and covenants on a consolidated
and non-consolidated basis, which shall be monitored on a monthly basis, except as noted below:

     a. an Adjusted Quick Ratio of not less than .85 to 1.00

     b. a Debt-to-Tangible Effective Net Worth of not more than 1.25 to 1.00.

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     c. a minimum quarterly Net Income before taxes as determined for the four fiscal quarters
then ended of at least:

     i. $5,000,000 for the quarters ending March 31, 2008, June 30, 2008 and September
30, 2008, and

     ii. $7,000,000 for the quarter ending December 31, 2008 and at all times
thereafter.

All financial covenants shall be computed in accordance with GAAP consistently applied except as
otherwise specifically set forth in this Agreement. All monies due from affiliates (including
officers, directors and shareholders) shall be excluded from Borrower’s assets for all purposes
hereunder.

     6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply Bank) with such
other information (including tax returns) concerning its financial affairs (or that of any
guarantor) as Bank may request from time to time hereafter, and shall promptly notify Bank of any
material adverse change in Borrower’s financial condition and of any condition or event which
constitutes a breach of or an event which constitutes an Event of Default under this Agreement.

     6.19 Borrower is now and shall be at all times hereafter solvent and able to pay its debts
(including trade debts) as they mature.

     6.20 Borrower shall immediately and without demand reimburse Bank for all sums expended by
Bank in connection with any action brought by Bank to correct any default or enforce any provision
of this Agreement, including all Bank Expenses; Borrower authorizes and approves all advances and
payments by Bank for items described in this Agreement as Bank Expenses.

     6.21 Each warranty, representation and agreement contained in this Agreement shall
automatically be deemed repeated with each advance and shall conclusively be presumed to have been
relied on by Bank regardless of any investigation made or information possessed by Bank. The
warranties, representations and agreements set forth herein shall be cumulative and in addition to
any and all other warranties, representations and agreements which Borrower shall give, or cause to
be given, to Bank, either now or hereafter.

     6.22 Borrower shall keep all of its principal bank accounts with Bank and shall notify Bank
immediately in writing of the existence of any other bank account, deposit account, or any other
account into which money can be deposited.

     6.23 Borrower shall furnish to Bank: (a) as soon as possible, but in no event later than
thirty (30) days after Borrower knows or has reason to know that any reportable event with respect
to any deferred compensation plan has occurred, a statement of the chief financial officer of
Borrower setting forth the details concerning such reportable event and the action which Borrower
proposes to take with respect thereto, together with a copy of the notice of such reportable event
given to the Pension Benefit Guaranty Corporation, if a copy of such notice is available to
Borrower; (b) promptly after the filing thereof with the United States Secretary of Labor or the
Pension Benefit Guaranty Corporation, copies of each annual report with respect to each deferred
compensation plan; (c) promptly after receipt thereof, a copy of any notice Borrower may receive
from the Pension Benefit Guaranty Corporation or the Internal Revenue Service with respect to any
deferred compensation plan; provided, however, this subparagraph shall not apply to notice of
general application issued by the Pension Benefit Guaranty Corporation or the Internal Revenue
Service; and (d) when the same is made available to participants in the deferred compensation plan,
all notices and other forms of information from time to time disseminated to the participants by
the administrator of the deferred compensation plan.

     6.24 Borrower is now and shall at all times hereafter remain in compliance with all federal,
state and municipal laws, regulations and ordinances relating to the handling, treatment and
disposal of toxic substances, wastes and hazardous material and shall maintain all necessary
authorizations and permits.

7. EVENTS OF DEFAULT.

     Any one or more of the following events shall constitute an Event of Default by Borrower under
this Agreement:

     a. If Borrower fails or neglects to perform, keep or observe any term, provision,
condition, covenant, agreement, warranty or representation contained in this Agreement, or any
other present or future document, instrument or agreement between Borrower and Bank:

     b. If any representation, statement, report or certificate made or delivered by Borrower,
or any of its officers, employees or agents to Bank is not true and correct;

     c. If Borrower fails to pay when due and payable or declared due and payable, all or any
portion of Borrower’s Indebtedness (whether of principal, interest, taxes, reimbursement of
Bank Expenses, or otherwise);

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     d. If there is a material impairment of the prospect of repayment of all or any portion
of Borrower’s Indebtedness or a material impairment of the value or priority of Bank’s
security interest in the Collateral;

     e. If all or any of Borrower’s assets are attached, seized, subject to a writ or distress
warrant, or are levied upon, or come into the possession of any Judicial Officer or Assignee
and the same are not released, discharged or bonded against within ten (10) days thereafter;

     f. If any Insolvency Proceeding is filed or commenced by or against Borrower without
being dismissed within ten (10) days thereafter;

     g. If any proceeding is filed or commenced by or against Borrower for its dissolution or
liquidation;

     h. If Borrower is enjoined, restrained or in any way prevented by court order from
continuing to conduct all (ILLEGIBLE) any material part of its business affairs;

     i. If a notice of lien, levy or assessment is filed of record with respect to any or all
of Borrower’s assets by the United States Government, or any department, agency or
instrumentality thereof, or by any state, county, municipal or other government agency, or if
any taxes or debts owing at any time hereafter to any one or more of such entities becomes a
lien whether inchoate or otherwise, upon any or all of Borrower’s assets and the same is not
paid on the payment date thereof;

     j. If a judgment or other claim becomes a lien or encumbrance upon any or all of
Borrower’s assets and the same is not satisfied, dismissed or bonded against within ten (10)
days thereafter;

     k. If Borrower’s records are prepared and kept by an outside computer service bureau at
the time this Agreement is entered into or during the term of this Agreement such an agreement
with an outside service bureau is entered into, and at any time thereafter, without first
obtaining the written consent of Bank, Borrower terminates, modifies, amends (ILLEGIBLE)
changes its contractual relationship with said computer service bureau or said computer
service bureau fails to provide Bank with any requested information or financial data
pertaining to Bank’s Collateral, Borrower’s financial condition or the results (ILLEGIBLE)
Borrower’s operations;

     l. If Borrower permits a default in any material agreement to which Borrower is a party
with third parties so as to result in an acceleration of the maturity of Borrower’s
indebtedness to others, whether under any indenture, agreement (ILLEGIBLE) otherwise;

     m. If Borrower makes any payment on account of indebtedness which has been subordinated
to Borrower’s Indebtedness to Bank except as otherwise permitted under the terms of this
Agreement;

     n. If any misrepresentation exists now or thereafter in any warranty or representation
made to Bank by any officer or director of Borrower, or if any such warranty or representation
is withdrawn by any officer or director;

     o. If any party subordinating its claims to that of Bank’s or any guarantor of Borrower’s
Indebtedness dies, terminates its subordination or guaranty, violates the terms of the
subordination or guaranty, becomes insolvent, or an Insolvency Proceeding is commenced by or
against any such subordinating party or guarantor;

     p. If Borrower is an individual and Borrower dies;

     q. If there is a change of ownership or control of twenty percent (20%) or more of the
issued and outstanding stock of Borrower; or

     r. If any reportable event, which Bank determines constitutes grounds for the termination
of any deferred compensation plan by the Pension Benefit Guaranty Corporation or for the
appointment by the appropriate United States District Court of a trustee to administer any
such plan, shall have occurred and be continuing thirty (30) days after written notice of such
determination shall have been given to Borrower by Bank, or any such Plan shall be terminated
within the meaning of Title IV of the Employment Retirement Income Security Act (“ERISA”), or
a trustee shall be appointed by the appropriate United States District
Court to administer any such plan, or the Pension Benefit Guaranty Corporation shall
institute proceedings to terminate any plan and in case of any event described in this Section
7, the aggregate amount of Borrower’s liability to the Pension Benefit Guaranty Corporation under Sections 4062,4063 or 4064 of ERISA shall exceed five percent (5%) of Borrower’s
Tangible Effective Net Worth.

Notwithstanding anything contained in Section 7 to the contrary, Bank shall refrain from
exercising its rights and remedies and Event of Default shall thereafter not be deemed to have
occurred by reason of the occurrence of any of the events set forth in Sections 7.e, 7.f or
7.j of this Agreement if, within ten (10) days from the date thereof, the same is released,
discharged,

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dismissed, bonded against or satisfied; provided, however, if the event is the institution of
Insolvency Proceedings against Borrower, Bank shall not be obligated to make advances to
Borrower during such cure period.

8. BANK’S RIGHTS AND REMEDIES.

     8.1 Upon the occurrence of an Event of Default by Borrower under this Agreement, Bank may, at
its election, without notice of its election and without demand, do any one or more of the
following, all of which are authorized by Borrower:

     a. Declare Borrower’s Indebtedness, whether evidenced by this Agreement, installment
notes, demand notes or otherwise, immediately due and payable to Bank;

     b. Cease advancing money or extending credit to or for the benefit of Borrower under this
Agreement, or any other agreement between Borrower and Bank;

     c. Terminate this Agreement as to any future liability or obligation of Bank, but without
affecting Bank’s rights and security interests in the Collateral, and the Indebtedness of
Borrower to Bank;

     d. Without notice to or demand upon Borrower or any guarantor, make such payments and do
such acts as Bank considers necessary or reasonable to protect its security interest in the
Collateral. Borrower agrees to assemble the Collateral if Bank so requires and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, take and maintain possession of the Collateral and
the premises (at no charge to Bank), or any part thereof, and to pay, purchase, contest or
compromise any encumbrance, charge or lien which in the opinion of Bank appears to be prior or
superior to its security interest and to pay all expenses incurred in connection therewith;

     e. Intentionally Omitted;

     f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sales and sell (in the manner provided for herein) the Inventory;

     g. Sell or dispose the Collateral at either a public or private sale, or both, by way of
one or more contracts or transactions, for cash or on terms, in such manner and at such places
(including Borrower’s premises) as is commercially reasonable in the opinion of Bank. It is
not necessary that the Collateral be present at any such sale. At any sale or other
disposition of the Collateral pursuant to this Section, Bank disclaims all warranties which
would otherwise be given under the Uniform Commercial Code, including without limitation a
disclaimer of any warranty relating to title, possession, quiet enjoyment or the like, and
Bank may communicate these disclaimers to a purchaser at such disposition. This disclaimer of
warranties will not render the sale commercially unreasonable;

     h. Bank shall give notice of the disposition of the Collateral as follows:

     (1) Bank shall give Borrower and each holder of a security interest in the
Collateral who has filed with Bank a written request for notice, a notice in writing of
the time and place of public sale, or, if the sale is a private sale or some disposition
other than a public sale is to be made of the Collateral, the time on or after which the
private sale or other disposition is to be made;

     (2) The notice shall be personally delivered or mailed, postage prepaid, to
Borrower’s address appearing in this Agreement, at least ten (10) calendar days before
the date fixed for the sale, or at least ten (10) calendar days before the date on or
after which the private sale or other disposition is to be made, unless the Collateral
is perishable or threatens to decline speedily in value. Notice to persons other than
Borrower claiming an interest in the Collateral shall be sent to such addresses as have
been furnished to Bank or as otherwise determined in accordance with Section 961 1 of
the Uniform Commercial Code; and

     (3) If the sale is to be a public sale, Bank shall also give notice of the time and
place by publishing a notice one time at least ten (10) calendar days before the date of
the sale in a newspaper of general circulation in the county in which the sale is to be
held; and

     (4) Bank may credit bid and purchase at any public sale.

     i. Borrower shall pay all Bank Expenses incurred in connection with Bank’s enforcement
and exercise of any of its rights and remedies as herein provided, whether or not suit is
commenced by Bank;

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     j. Any deficiency which exists after disposition of the Collateral as provided above will
be paid immediately by Borrower. Any excess will be returned, without interest and subject to
the rights of third parties, to Borrower by Bank, or, in Bank’s discretion, to any party who
Bank believes, in good faith, is entitled to the excess;

     k. Without constituting a retention of Collateral in satisfaction of an obligation within
the meaning of 9620 of the Uniform Commercial Code or an action under California Code of Civil
Procedure 726, apply any and all amounts maintained by Borrower as deposit accounts (as that
term is defined under 9102 of the Uniform Commercial Code) or other accounts that Borrower
maintains with Bank against the Indebtedness;

     l. The proceeds of any sale or other disposition of Collateral authorized by this
Agreement shall be applied by Bank first upon all expenses authorized by the Uniform
Commercial Code and all reasonable attorney fees and legal expenses incurred by Bank, whether
in-house or outside counsel is used, the balance of the proceeds of the sale or other
disposition shall be applied in the payment of the Indebtedness, first to interest, then to
principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to
Borrower or to such other person(s) as may be entitled to it under applicable law. Borrower
shall remain liable for any deficiency, which it shall pay to Bank immediately upon demand.
Borrower agrees that Bank shall be under no obligation to accept any noncash proceeds in
connection with any sale or disposition of Collateral unless failure to do so would be
commercially unreasonable. If Bank agrees in its sole discretion to accept noncash proceeds
(unless the failure to do so would be commercially unreasonable), Bank may ascribe any
commercially reasonable value to such proceeds. Without limiting the foregoing, Bank may apply
any discount factor in determining the present value of proceeds to be received in the future
or may elect to apply proceeds to be received in the future only as and when such proceeds are
actually received in cash by Bank; and

     m. The following shall be the basis for any finder of fact’s determination of the value
of any Collateral which is the subject matter of a disposition giving rise to a calculation of
any surplus or deficiency under Section 9615(f) of the Uniform Commercial Code: (i)The
Collateral which is the subject matter of the disposition shall be valued in an “as is”
condition as of the date of the disposition, without any assumption or expectation that such
Collateral will be repaired or improved in any manner; (ii) the valuation shall be based upon
an assumption that the transferee of such Collateral desires a resale of the Collateral for
cash promptly (but no later than 30 days) following the disposition; (iii) all reasonable
closing costs customarily borne by the seller in commercial sales transactions relating to
property similar to such Collateral shall be deducted including, without limitation, brokerage
commissions, tax prorations, attorney’s fees, whether in-house or outside counsel is used, and
marketing costs; (iv) the value of the Collateral which is the subject matter of the
disposition shall be further discounted to account for any estimated holding costs associated
with maintaining such Collateral pending sale (to the extent not accounted for in (iii)
above), and other maintenance, operational and ownership expenses; and (v) any expert opinion
testimony given or considered in connection with a determination of the value of such
Collateral must be given by persons having at least 5 years experience in appraising property
similar to the Collateral and who have conducted and prepared a complete written appraisal of
such Collateral taking into consideration the factors set forth above. The “value” of any such
Collateral shall be a factor in determining the amount of proceeds which would have been
realized in a disposition to a transferee other than a secured party, a person related to a
secured party or a secondary obligor under Section 9615(f) of the Uniform Commercial Code.

     8.2 In addition to any and all other rights and remedies available to Bank under or pursuant
to this Agreement or any other documents, instrument or agreement contemplated hereby, Borrower
acknowledges and agrees that (i) at any time following the occurrence and during the continuance of
any Event of Default, and/or (ii) termination of Bank’s commitment or obligation to make loans or
advances or otherwise extent credit to or in favor of Borrower hereunder, in the event that and to
the extent that there are any Letter of Credit Obligations outstanding at such time, upon demand of
Bank, Borrower shall deliver to Bank, or cause to be delivered to Bank, cash collateral in an
amount not less than such Letter of Credit Obligations, which cash collateral shall be held and
retained by Bank as cash collateral for the repayment of such Letter of Credit Obligations,
together with any and all other Indebtedness of Borrower to Bank remaining unpaid, and Borrower
pledges to Bank and grants to Bank a continuing first priority security interest in such cash
collateral so delivered to Bank. Alternatively, Borrower shall cause to be delivered to Bank an
irrevocable standby letter of credit issued in favor of Bank by a bank acceptable to Bank, in its
sole discretion, in an amount not less than such Letter of Credit Obligations, and upon terms
acceptable to Bank, in its sole discretion.

     8.3 Bank’s rights and remedies under this Agreement and all other agreements shall be
cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided by
law or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no
waiver by Bank of any default on Borrower’s part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election or acquiescence by Bank.

9. TAXES AND EXPENSES REGARDING BORROWER’S PROPERTY. If Borrower fails to pay promptly when
due to another person or entity, monies which Borrower is required to pay by reason of any
provision in this Agreement, Bank may, but need not, pay the same and charge Borrower’s loan
account therefor, and Borrower shall promptly reimburse Bank. All such sums shall become additional
Indebtedness owing to Bank, shall bear interest at the rate hereinabove provided, and shall be
secured by all Collateral. Any payments made by Bank shall not constitute (i) an agreement by it to
make similar payments in the future, or (ii) a waiver by Bank of any default under this Agreement.
Bank need not inquire as to, or contest the validity of, any such expense, tax, security interest,

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encumbrance or lien and the receipt of the usual official notice of the payment thereof shall be
conclusive evidence that the same was validly due and owing. Such payments shall constitute Bank
Expenses and additional advances to Borrower.

10. WAIVERS.

     10.1 Borrower agrees that checks and other instruments received by Bank in payment or on
account of Borrower’s Indebtedness constitute only conditional payment until such items are
actually paid to Bank and Borrower waives the right to direct the application of any and all
payments at any time or times hereafter received by Bank on account of Borrower’s indebtedness and
Borrower agrees that Bank shall have the continuing exclusive right to apply and reapply such
payments in any manner as Bank may deem advisable, notwithstanding any entry by Bank upon its
books.

     10.2 Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable.

     10.3 Bank shall not in any way or manner be liable or responsible for (a) the safekeeping of
the Inventory; (b) any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency or other person whomsoever. All risk of loss, damage or
destruction of Inventory shall be borne by Borrower.

     10.4 Borrower waives the right and the right to assert a confidential relationship, if any, it
may have with any accountant, accounting firm and/or service bureau or consultant in connection
with any information requested by Bank pursuant to or in accordance with this Agreement, and agrees
that a Bank may contact directly any such accountants, accounting firm and/or service bureau or
consultant in order to obtain such information.

     10.5 Co-Borrowers. Each Borrower agrees as follows:

     a. Each Borrower agrees that it is jointly and severally, directly, and primarily liable
to Bank for payment in full of the indebtedness and that such liability is independent of the
duties, obligations and liabilities of the other Borrower. The Agreement and each other
document, instrument and agreement entered into by any one or more of the Borrowers in
connection therewith (collectively, hereinafter, the “Loan Documents”) are a primary and
original obligation of each Borrower, are not the creation of a surety relationship, and are
an absolute, unconditional, and continuing promise of payment and performance which shall
remain in full force and effect without respect to future changes in conditions, including any
change of law or any invalidity or irregularity with respect to the Loan Documents. Each
Borrower acknowledges that the obligations of such Borrower undertaken herein might be
construed to consist, at least in part, of the guaranty of obligations of persons or entities
other than such Borrower (including any other Borrower party hereto) and, in full recognition
of that fact, each Borrower consents and agrees that Bank may, at any time and from time to
time, without notice or demand, whether before or after any actual or purported termination,
repudiation, or revocation of the Agreement and the other Loan Documents by any one or more
Borrowers, and without affecting the enforceability or continuing effectiveness hereof as to
each Borrower: (a) supplement, restate, modify, amend, increase, decrease, extend, renew,
accelerate, or otherwise change the time for payment or the terms of the indebtedness or any
part thereof, including any increase or decrease of the rate(s) of interest thereon; (b)
supplement, restate, modify, amend, increase, decrease or waive, or enter into or give any
agreement, approval, or consent with respect to, the indebtedness or any part thereof, or any
of the Loan Documents or any additional security or guaranties, or any condition, covenant,
default, remedy, right, representation or term thereof or thereunder; (c) accept new or
additional instruments, documents or agreements in exchange for or relative to any of the Loan
Documents or the indebtedness or any part thereof; (d) accept partial payments on the
Indebtedness; (e) receive and hold additional security or guaranties for the indebtedness or
any part thereof; (f) release, reconvey, terminate, waive, abandon, fail to perfect,
subordinate, exchange, substitute, transfer, or enforce any security or guaranties, and apply
any security and direct the order or manner of sale thereof as Bank in its sole and absolute
discretion may determine; (g) release any Person from any personal liability with respect to
the indebtedness or any part thereof; (h) settle, release on terms satisfactory to Bank or by
operation of applicable laws, or otherwise liquidate or enforce any indebtedness and any security therefor or guaranty thereof in any manner, consent to the
transfer of any security and bid and purchase at any sale; or (i) consent to the merger,
change, or any other restructuring or termination of the corporate or partnership existence of
any Borrower or any other Person, and correspondingly restructure the Indebtedness, and any
such merger, change, restructuring, or termination shall not affect the liability of any
Borrower or the continuing effectiveness hereof, or the enforceability hereof with respect to
all or any part of the Indebtedness.

     b. Upon the occurrence and during the continuance of any Event of Default, Bank may
enforce the Agreement and the other Loan Documents independently as to each Borrower and
independently of any other remedy or security Bank at any time may have or hold in connection
with the Indebtedness, and it shall not be necessary for Bank to marshal assets in favor of
any Borrower or any other Person or to proceed upon or against or exhaust any security or
remedy before proceeding to enforce the Agreement and the other Loan Documents. Each Borrower
expressly waives any right to require Bank to marshal assets in favor of any Borrower or any
other Person or to proceed against any other Borrower or any Collateral

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	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

provided by any Person, and agrees that Bank may proceed against Borrowers or any Collateral
in such order as it (ILLEGIBLE) determine in its sole and absolute discretion.

     c. Bank may file a separate action or actions against any Borrower, whether action is
brought or prosecuted with respect to any security or against any other person, or whether any
other person is joined in any such action or actions Each Borrower agrees that Bank and any
Borrower and any affiliate of any Borrower may deal with each other in connection with the
indebtedness or otherwise, or alter any contracts or agreements now or hereafter existing
between any of them, (ILLEGIBLE) any manner whatsoever, all without in any way altering or
affecting the continuing efficacy of the Agreement or the other Loan Documents.

     d. Bank’s rights under the Loan Documents shall be reinstated and revived, and the
enforceability of the Agreement and the other Loan Documents shall continue, with respect to
any amount at any time paid on account of the indebtedness which thereafter shall be required
to be restored or returned by Bank, all as though such amount had not been paid. The rights of
Bank created or granted herein and the enforceability of the Agreement and the other Loan
Documents (ILLEGIBLE) all times shall remain effective to cover the full amount of all the
indebtedness even though the Indebtedness, including any part thereof or any other security or
guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable
(ILLEGIBLE) against any Borrower and whether or not any other Borrower shall have any personal
liability with respect thereto.

     e. To the maximum extent permitted by applicable law and to the extent that a Borrower is
deemed guarantor, each Borrower expressly waives any and all defenses now or hereafter arising
or asserted by reason of (a) an! disability or other defense of any other Borrower with
respect to the Indebtedness, (b) the unenforceability or invalidity of any security or
guaranty for the indebtedness or lack of perfection or continuing perfection or failure of
priority of any security for the Indebtedness, (c) the cessation for any cause whatsoever of
the liability of any other Borrower (other than by reason of the full payment and performance
of all Indebtedness), (d) any failure of the Bank to marshal assets in favor of Bank or an]
Borrower or any other person, (e) any failure of Bank to give notice of sale or other
disposition of collateral to any Borrower (ILLEGIBLE) any other Person or any defect in any
notice that may be given in connection with any sale or disposition of collateral, (f) any
failure of Bank to comply with applicable law in connection with the sale or other disposition
of any collateral or other security for any Obligation, including any failure of Bank to
conduct a commercially reasonable sale or other disposition of any collateral or other
security for any Obligation, (g) any act or omission of Bank or others that directly or
indirectly results in (ILLEGIBLE) aids the discharge or release of any Borrower or the
indebtedness or any security or guaranty therefor by operation of law (ILLEGIBLE) otherwise,
(h) any law which provides that the obligation of a surety or guarantor must neither be larger
in amount nor in (ILLEGIBLE) respects more burdensome than that of the principal or which
reduces a surety’s or guarantor’s obligation in proportion to the principal obligation, (i)
any failure of Bank to file or enforce a claim in any bankruptcy or other proceeding with
respect to any Person, (j) the election by Bank of the application or non-application of
Section 1111(b)(2) of the United States Bankruptcy Code, (k) any extension of credit or the
grant of any lien under Section 364 of the United States Bankruptcy Code, (1) any use of cash
collateral under Section 363 of the United States Bankruptcy Code, (m) any agreement or
stipulation with respect to the provision of adequate protection in any bankruptcy proceeding
of any Person, (n) the avoidance of any lien in favor (ILLEGIBLE) Bank for any reason, or (o)
any action taken by Bank that is authorized by the Agreement or any other provision of any
Loan Document. Until such time as all of the indebtedness have been fully, finally, and
indefeasibly paid in full in cash: (i) each Borrower hereby waives and postpones any right of
subrogation it has or may have as against any other Borrower respect to the Indebtedness; and
(ii) in addition, each Borrower also hereby waives and postpones any right to proceed or to
seek recourse against or with respect to any property or asset of any other Borrower. Each
Borrower expressly waives all (ILLEGIBLE) and counterclaims and all presentments, demands for
payment or performance, notices of nonpayment or nonperformance protests, notices of protest,
notices of dishonor and all other notices or demands of any kind or nature whatsoever with
respect to the Indebtedness, and all notices of acceptance of the Agreement or the other Loan
Documents or of the existence, creation or incurring of new or additional Indebtedness.

     f. In the event that all or any part of the Indebtedness at any time are secured by any
one or more deeds (ILLEGIBLE) trust or mortgages or other instruments creating or granting
liens on any interests in real property, each Borrower authorizes Bank, upon the occurrence of and during the
continuance of any Event of Default, at its sole option, without notice or demand and without
affecting the obligations of any Borrower, the enforceability of the Agreement and the other
Loan Documents, (ILLEGIBLE) the validity or enforceability of any liens of Bank, to foreclose
any or all of such deeds of trust or mortgages or other instruments by judicial or nonjudicial
sale.

     g. Without limiting the generality of any other waiver or other provision set forth in
this Agreement, each Borrower waives all rights and defenses that such Borrower may have
because the Indebtedness is secured by real property This means, among other things:

     (1) Bank may collect from any Borrower without first foreclosing on any real or
personal property pledged as Collateral by any other Borrower to secure the
Indebtedness.

     (2) If Bank forecloses on any real property pledged as Collateral by any Borrower:

20

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     (a) the amount of the debt may be reduced only by the price for which that
Collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price.

     (b) Bank may collect from any Borrower even if Bank, by foreclosing on the
real property pledged as Collateral, has destroyed any right that Borrower may have
to collect from any other Borrower.

This is an unconditional and irrevocable waiver of any rights and defenses each
Borrower may have because the Indebtedness is secured by Real Property. These
rights and defenses include, but are not limited to, any rights or defenses based
upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

     h. To the fullest extent permitted by applicable law, to the extent that a Borrower is
deemed a guarantor, each Borrower expressly waives any defenses to the enforcement of the
Agreement and the other Loan Documents or any rights of Bank created or granted hereby or to
the recovery by Bank against any Borrower or any other Person liable therefor of any
deficiency after a judicial or nonjudicial foreclosure or sale, even though such a foreclosure
or sale may impair the subrogation rights of Borrowers and may preclude Borrowers from
obtaining reimbursement or contribution from other Borrowers. To the fullest extent permitted
by applicable law, each Borrower expressly waives any suretyship defenses or benefits that it
otherwise might or would have under applicable law. WITHOUT LIMITING THE GENERALITY OF ANY
OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, EACH BORROWER WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF
REMEDIES BY BANK, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDIClAL FORECLOSURE
WITH RESPECT TO SECURITY FOR THE INDEBTEDNESS, HAS DESTROYED SUCH BORROWER’S RIGHTS OF
SUBROGATION AND REIMBURSEMENT AGAINST THE OTHER BORROWERS BY OPERATION OF LAW, INCLUDING BUT
NOT LIMITED TO SECTION 580d OF THE CALIFORNIA CODE OF CIVIL PROCEDURE, OR OTHERWISE.

     10.6 THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT
THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY,
AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WlTH COUNSEL OF ITS, HIS OR HER CHOICE,
KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY
JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THlS AGREEMENT, THE INDEBTEDNESS OR
ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.

     10.7 Reference Provision.

     (a) In the event the Jury Trial Waiver set forth above is not enforceable, the parties
elect to proceed under this Judicial Reference Provision.

     (b) With the exception of the items specified in clause (c), below, any controversy,
dispute or claim (each, a “Claim”) between the parties arising out of or relating to this
Agreement or any other document, instrument or agreement between the undersigned parties
(collectively in this Section, the “Comerica Documents”), will be resolved by a reference
proceeding in California in accordance with the provisions of Sections 638 et seq. of the
California Code of Civil Procedure (“CCP”), or their successor sections, which shall
constitute the exclusive remedy for the resolution of any Claim, including whether the Claim
is subject to the reference proceeding. Except as otherwise provided in the Comerica
Documents, venue for the reference proceeding will be in the state or federal court in the
county or district where the real property involved in the action, if any, is located or in
the state or federal court in the county or district where venue is otherwise appropriate
under applicable law (the “Court”).

     (c) The matters that shall not be subject to a reference are the following: (i)
nonjudicial foreclosure of any security interests in real or personal property, (ii) exercise
of self-help remedies (including, without limitation, set-off), (iii) appointment of a
receiver and (iv) temporary, provisional or ancillary remedies (including, without limitation,
writs of attachment, writs of possession, temporary restraining orders or preliminary injunctions). This reference provision does not limit the right of any party
to exercise or oppose any of the rights and remedies described in clauses (i) and (ii) or to
seek or oppose from a court of competent jurisdiction any of the items described in clauses
(iii) and (iv). The exercise of, or opposition to, any of those items does not waive the right
of any party to a reference pursuant to this reference provision as provided herein.

     (d) The referee shall be a retired judge or justice selected by mutual written agreement
of the parties. If the parties do not agree within ten (10) days of a written request to do so
by any party, then, upon request of any party, the referee shall be selected by the Presiding
Judge of the Court (or his or her representative). A request for appointment of a referee may
be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would
result if ex parte relief is not granted. Pursuant to CCP § 170.6, each party shall have one
peremptory challenge to the referee selected by the Presiding Judge of the Court (or his or
her representative).

21

 

	 	 	 
	 

	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     (e) The parties agree that time is of the essence in conducting the reference
proceedings. Accordingly, the referee shall be requested, subject to change in the time
periods specified herein for good cause shown, to (i) set the matter for a status and
trial-setting conference within fifteen (15) days after the date of selection of the referee,
(ii) if practicable, try all issues of law or fact within one hundred twenty (120) days after
the date of the conference and (iii) report a statement of decision within twenty (20) days
after the matter has been submitted for decision.

     (f) The referee will have power to expand or limit the amount and duration of discovery.
The referee may set or extend discovery deadlines or cutoffs for good cause, including a
party’s failure to provide requested discovery for any reason whatsoever. Unless otherwise
ordered based upon good cause shown, no party shall be entitled to “priority” in conducting
discovery, depositions may be taken by either party upon seven (7) days written notice, and
all other discovery shall be responded to within fifteen (15) days after service. All disputes
relating to discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding.

     (g) Except as expressly set forth herein, the referee shall determine the manner in which
the reference proceeding is conducted including the time and place of hearings, the order of
presentation of evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the referee, except for
trial, shall be conducted without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee, and the referee will
be provided a courtesy copy of the transcript. The party making such a request shall have the
obligation to arrange for and pay the court reporter. Subject to the referee’s power to award
costs to the prevailing party, the parties will equally share the cost of the referee and the
court reporter at trial.

     (h) The referee shall be required to determine all issues in accordance with existing
case law and the statutory laws of the State of California. The rules of evidence applicable
to proceedings at law in the State of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well as legal relief, enter
equitable orders that will be binding on the parties and rule on any motion which would be
authorized in a court proceeding, including without limitation motions for summary judgment or
summary adjudication. The referee shall issue a decision at the close of the reference
proceeding which disposes of all claims of the parties that are the subject of the reference.
Pursuant to CCP § 644, such decision shall be entered by the Court as a judgment or an order
in the same manner as if the action had been tried by the Court and any such decision will be
final, binding and conclusive. The parties reserve the right to appeal from the final judgment
or order or from any appealable decision or order entered by the referee. The parties reserve
the right to findings of fact, conclusions of laws, a written statement of decision, and the
right to move for a new trial or a different judgment, which new trial, if granted, is also to
be a reference proceeding under this provision.

     (i) If the enabling legislation which provides for appointment of a referee is repealed
(and no successor statute is enacted), any dispute between the parties that would otherwise be
determined by reference procedure will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge or justice, in accordance with the California
Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations
with respect to discovery set forth above shall apply to any such arbitration proceeding.

     (j) THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS RESOLVED
UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN
CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES,
AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN
OR AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO, THIS AGREEMENT, THE INDEBTEDNESS OR THE
OTHER COMERICA DOCUMENTS.

     10.8 In the event that Bank elects to waive any rights or remedies hereunder, or compliance
with any of the terms hereof, or delays or fails to pursue or enforce any term, such waiver, delay
or failure to pursue or enforce shall only be effective with respect to that single act and shall not be construed to affect any
subsequent transactions or Bank’s right to later pursue such rights and remedies.

11. ONE CONTINUING LOAN TRANSACTION. All loans and advances heretofore, now or at any time
or times hereafter made by Bank to Borrower under this Agreement or any other agreement between
Bank and Borrower, shall constitute one loan secured by Bank’s security interests in the Collateral
and by all other security interests, liens, encumbrances heretofore, now or from time to time
hereafter granted by Borrower to Bank.

Notwithstanding the above, (i) to the extent that any portion of the Indebtedness is a consumer
loan, that portion shall not be secured by any deed of trust or mortgage on or other security
interest in Borrower’s principal dwelling which is not a purchase money security interest as to
that portion, unless expressly provided to the contrary in another place, or (ii) if Borrower (or
any of them) has (have) given or give(s) Bank a deed of trust or mortgage covering real property,
that deed of trust or mortgage shall not secure the loan and any other Indebtedness of Borrower (or
any of them), unless expressly provided to the contrary in another place.

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	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by either
party on the other relating to this Agreement shall be in writing and sent by regular United States
mail, postage prepaid, properly addressed to Borrower or to Bank at the addresses stated in this
Agreement, or to such other addresses as Borrower or Bank may from time to time specify to the
other in writing. Requests for information made to Borrower by Bank from time to time hereunder may
be made orally or in writing, at Bank’s discretion.

13. AUTHORIZATION TO DISBURSE. Bank is hereby authorized to make loans and advances
hereunder upon telephonic or other instructions received from anyone purporting to be an officer,
employee, or representative of Borrower, or at the discretion of Bank if said loans and advances
are necessary to meet any Indebtedness of Borrower to Bank. Bank shall have no duty to make inquiry
or verify the authority of any such party, and Borrower shall hold Bank harmless from any damage,
claims or liability by reason of Bank’s honor of, or failure to honor, any such instructions.

14. PAYMENTS. Borrower hereby authorizes Bank to deduct the full amount of any interest,
fees, costs, or Bank Expenses due under this Agreement and not paid or collected when due in
accordance with the terms and conditions hereof from any account maintained by Borrower with Bank.
Should there be insufficient funds in any such account to pay all such sums when due, the full
amount of such deficiency shall be immediately due and payable by Borrower; provided, however, that
Bank shall not be obligated to advance funds to cover any such payment.

15. DESTRUCTION OF BORROWER’S DOCUMENTS. Any documents, schedules, invoices or other papers
delivered to Bank, may be destroyed or otherwise disposed of by Bank six (6) months after they are
delivered to or received by Bank, unless Borrower requests, in writing, the return of the said
documents, schedules, invoices or other papers and makes arrangements, at Borrower’s expense, for
their return.

16. CHOICE OF LAW. The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the Collateral, shall be
determined according to the laws of the State of California. The parties agree that all actions or
proceedings arising in connection with this Agreement shall be tried and litigated only in the
state and federal courts in California.

17. GENERAL PROVISIONS.

     17.1 This Agreement shall be binding and deemed effective when executed by Borrower and
accepted and executed by Bank at its headquarters office.

     17.2 This Agreement shall bind and inure to the benefit of the respective successors and
assigns of each of the parties; provided, however, that Borrower may not assign
this Agreement or any rights hereunder without Bank’s prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Bank shall release Borrower or
any guarantor from their obligations to Bank. Bank may assign this Agreement and its rights and
duties hereunder. Bank reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in Bank’s rights and benefits hereunder. In
connection therewith, Bank may disclose all documents and information which Bank now or hereafter
may have relating to Borrower or Borrower’s business.

     17.3 Paragraph headings and paragraph numbers have been set forth herein for convenience only;
unless the contrary is compelled by the context, everything contained in each paragraph applies
equally to this entire Agreement. Unless the context of this Agreement clearly requires otherwise,
references to the plural include the singular, references to the singular include the plural, and
the term “including” is not limiting. The words “hereof”, “herein”, “hereby”, “hereunder”, and
similar terms in this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement.

     17.4 Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or
resolved against Bank or Borrower, whether under any rule of construction or otherwise; on the
contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of all parties hereto.

     17.5 Each provision of this Agreement shall be severable from every other provision of this
Agreement for the purpose of determining the legal enforceability of any specific provision.

     17.6 This Agreement cannot be changed or terminated orally. This Agreement contains the entire
agreement of the parties hereto and supersedes all prior agreements, understandings,
representations, warranties and negotiations, if any, related to the subject matter hereof, and
none of the parties shall be bound by anything not expressed in writing.

     17.7 The parties intend and agree that their respective rights, duties, powers, liabilities,
obligations and discretions shall be performed, carried out, discharged and exercised reasonably
and in good faith.

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	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

     17.8 In addition, if this Agreement is secured by a deed of trust or mortgage covering real
property, then the trustor or mortgagor shall not mortgage or pledge the mortgaged premises as
security for any other indebtedness or obligations. This Agreement, together with all other
indebtedness secured by said deed of trust or mortgage, shall become due and payable immediately,
without notice, at the option of Bank, (a) if said trustor or mortgagor shall mortgage or pledge
the mortgaged premises for any other indebtedness or obligations or shall convey, assign or
transfer the mortgaged premises by deed, installment sale contract (ILLEGIBLE) other instrument;
(b) if the title to the mortgaged premises shall become vested in any other person or party in any
manner whatsoever, or (c) if there is any disposition (through one or more transactions) of legal
or beneficial title to a controlling interest of said trustor (ILLEGIBLE) mortgagor.

     17.9 Each undersigned Borrower hereby agrees that it is jointly and severally, directly, and
primarily liable to Bank for payment and performance in full of all duties, obligations and
liabilities under this Agreement and each other document, instrument and agreement entered into by
Borrower with or in favor of Bank in connection herewith, and that such liability is independent of
the duties, obligations and liabilities of any other Borrower or any other guarantor of the
Indebtedness, as applicable. Each reference herein to Borrower shall mean each and every Borrower
party hereto, individually and collectively, jointly and severally.

     17.10 This Agreement may be executed by the parties hereto in several counterparts, each of
which shall be deemed to be an original and all of which shall constitute together but one and the
same agreement. This Agreement, together with each other document, instrument and agreement entered
into with or in favor of Bank in connection herewith constitute the entire understanding among the
parties hereto with respect to the subject matter hereof and, as applicable amends and restates in
full any other agreement, written or oral, with respect thereto.

     IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security Agreement (Accounts
and Inventory) to be executed as of the date first hereinabove written.

	 	 	 	 	 	 	 	 	 
	 	 	 	 	BORROWER:	 	 
	 	 	 	 	ENERGY RECOVERY, INC.,	 	 
	Accepted and effective as of: March 27, 2008

at Bank’s Western Market Headquarters Office	 	a Delaware corporation	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Tom Willardson
	 	 
	 

	 	 	 	 	 	 	 	 
	COMERICA BANK,	 	 	 	Name: TOM WILLARDSON	 	 
	a Texas banking association	 	 	 	Title: CFO	 	 
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Darren Santos
	 	By:	 	 	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	Name: Darren Santos
	 	 	 	Name: 

	 	 
	 

	 	Title: Corporate Banking Officer — Western Market
	 	 	 	Title: 
	 	 
	Address for Notices:	 	Address for Notices:	 	 
	 
	 	 	 	 	 	 	 	 
	75 East Trimble Road

San Jose, California 95131

Attn: Credit Manager

Fax Number: (408) 556-5097	 	1908 Doolittle Drive

San Leandro, California 94577

Attention: Thomas Willardson, CFO

Fax Number: (510) 483-7371	 	 

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	 	LOAN AND SECURITY AGREEMENT
	 

	 	(ACCOUNTS AND INVENTORY)
	 

SCHEDULE OF PERMITTED LIENS

Attach Delaware and California UCC Lien Search Results

25

 

LIBOR Addendum To Loan and Security Agreement 

     This Addendum to Loan and Security Agreement (this “Addendum”) is entered into as of March 27,
2008, by and between Comerica Bank (the “Bank”) and Energy Recovery, Inc. (the “Borrower”). This
Addendum supplements the terms of the Loan and Security Agreement (Accounts and Inventory) dated
March 27, 2008 (the “Note”).

1. Definitions. As used in this Addendum, the following terms shall have the following
meanings. Initially capitalized terms used and not defined in this Addendum shall have the meanings
ascribed thereto in the Note.

     a. “Advance” means a borrowing requested by Borrower and made by Bank under the Note,
including any refunding of an outstanding Advance as the same type of Advance or the
conversion of any such outstanding Advance to another type of Advance, and shall include a
LIBOR-based Rate Advance and/or a Prime-based Rate Advance.

     b. “Applicable Interest Rate” means the LIBOR-based Rate or the Prime-based Rate, as
selected by Borrower from time to time or as otherwise determined in accordance with the terms
and conditions of the Note.

     c. “Business Day” means any day, other than a Saturday, Sunday or any other day
designated as a holiday under Federal or applicable State statute or regulation, on which Bank
is open for all or substantially all of its domestic and international business (including
dealings in foreign exchange) in Detroit, Michigan and San Jose, California, and, in respect
of notices and determinations relating to LIBOR-based Rate Advances, the LIBOR-based Rate and
LIBOR Periods, also a day on which dealings in dollar deposits are also carried on in the
London interbank market and on which banks are open for business in London, England.

     d. “LIBOR-based Rate” means a per annum interest rate which is equal to the sum of two
and three quarters percent (2.75%), plus the quotient of the following:

          (i) the LIBOR Rate;

          divided by

          (ii) a percentage (expressed as a decimal) equal to 1.00 minus the maximum rate
during such Eurodollar Period at which Bank is required to maintain reserves on
“Euro-currency Liabilities” as defined in and pursuant to Regulation D of the Board of
Governors of the Federal Reserve System or, if such regulation or definition is
modified, and as long as Bank is required to maintain reserves against a category of
liabilities which includes eurodollar deposits or includes a category of assets which
includes eurodollar loans, the rate at which such reserves are required to be maintained
on such category.

     e. “LIBOR Lending Office” means Bank’s office located in the Cayman Islands, British West
Indies, or such other branch of Bank, domestic or foreign, as it may hereafter designate as
its LIBOR Lending Office by notice to Borrower.

     f. “LIBOR Rate” means, with respect to any Indebtedness outstanding under the Note at the
LIBOR-based Rate, the per annum rate of interest determined on the basis of the rate for
deposits in United States Dollars for a period equal to the relevant LIBOR Period for such
Indebtedness, commencing on the first day of such LIBOR Period, appearing on Page BBAM of the
Bloomberg Financial Markets Information Service as of 8:00 a.m. (California time) (or soon
thereafter as practical), two (2) Business Days prior to the first day of such LIBOR Period.
In the event that such rate does not appear on Page BBAM of the Bloomberg Financial Markets
Information Service (or otherwise on such Service), the “LIBOR Rate” shall be determined by
reference to such other publicly available service for displaying eurodollar rates as may be
agreed upon by Bank and Borrower, or, in the absence of such agreement, the “LIBOR Rate”
shall, instead, be the per annum rate equal to the average (rounded upward, if necessary, to
the nearest one-sixteenth of one percent (1/16%)) of the rate at which Bank is offered United
States Dollar deposits at or about 8:00 a.m. (California time) (or soon thereafter as
practical), two (2) Business Days prior to the first day of such LIBOR Period in the
interbank eurodollar market in an amount comparable to the principal amount of the
respective Indebtedness which is to bear interest at such LIBOR Rate and for a period equal to
the relevant LIBOR Period.

     g. “LIBOR Period” means, with respect to a LIBOR-based Rate Advance, a period of one (1)
month, two (2) months, three (3) months, four (4) months, five (5) months, or six (6) months
as selected by Borrower (and which period is acceptable to Bank in its sole discretion), or as
otherwise determined pursuant to and in accordance with the terms of the Note, commencing on
the day a LIBOR-based Rate Advance is made or the day an Advance is converted to a LIBOR-based
Rate Advance or the day an outstanding LIBOR-based Rate Advance is refunded or continued as
another LIBOR-based Rate Advance for an applicable LIBOR Period, provided that any LIBOR
Period which would otherwise end on a day which is not a Business Day shall be extended to the
next succeeding Business Day, except that if the next succeeding Business Day falls in another
calendar month, the LIBOR Period shall end on the next preceding Business Day, and when an
LIBOR Period begins on a day which has no numerically corresponding day in the calendar month
during which such LIBOR Period is to end, it shall end on the last Business Day of such
calendar month. In the event that any LIBOR-based Rate Advance is at any time refunded or
continued as another LIBOR-based Rate Advance for an additional LIBOR Period, such LIBOR
Period shall commence on the last day of the preceding LIBOR Period then ending.

     h. “Prime-based Rate” means a per annum interest rate which is equal to the greater of
(i) the Prime Rate plus zero percent (0%) per annum; or (ii) the rate of interest equal to the
sum of (a) one percent (1%) and (b) the rate of interest equal to the

-1-

 

average of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers (the “Overnight Rates”), as published by the
Federal Reserve Bank of New York, or, if the Overnight Rates are not so published for any day,
the average of the quotations for the Overnight Rates received by Bank from three (3) Federal
funds brokers of recognized standing selected by Bank, as the same may be changed from time to
time.

     i. “Request for Advance” means a Request for Advance issued by Borrower in the form of
Exhibit “A” attached hereto and incorporated herein by this reference.

2. Interest Rate Options. Borrower shall have the following options regarding the interest
rate to be paid by Borrower on Advances under the Note:

     a. A rate equal to two and three quarters percent (2.75%),above the LIBOR-based Rate,
which LIBOR-based Rate shall be in effect during the relevant LIBOR Period; or

     b. A rate equal to zero percent (0%) above the Prime-based Rate as referenced in the Note
and quoted from time to time by Bank as such rate may change from time to time.

3. LIBOR-based Rate Advance. The minimum LIBOR-based Rate Advance will not be less Five Hundred
Thousand and No/100 Dollars ($500,000.00) for any LIBOR-based Rate Advance.

4. Payment of Interest on LIBOR-based Rate Advances. Interest on each LIBOR-based Rate
Advance shall be payable pursuant to the terms of the Note. Interest on such LIBOR-based Rate
Advance shall be computed on the basis of a 360-day year and shall be assessed for the actual
number of days elapsed from the first day of the LIBOR Period applicable thereto but not including
the last day thereof.

5. Bank’s Records Re: LIBOR-based Rate Advances. With respect to each LIBOR-based Rate
Advance, Bank is hereby authorized to note the date, principal amount, interest rate and LIBOR
Period applicable thereto and any payments made thereon on Bank’s books and records (either
manually or by electronic entry) and/or on any schedule attached to the Note, which notations shall
be prima facie evidence of the accuracy of the information noted. For any LIBOR-based Rate Advance,
if Bank shall designate a LIBOR Lending Office which maintains books separate from those of the
rest of Bank, Bank shall have the option of maintaining and carrying such Advance on the books of
such LIBOR Lending Office.

6. Selection/Conversion of Interest Rate Options. Borrower may request an Advance
hereunder, including the refunding of an outstanding Advance as the same type of Advance or the
conversion of an outstanding Advance to another type of Advance, upon the delivery to Bank of a
Request for Advance executed by Borrower, subject to the following: (a) Bank shall not have made
demand for payment hereunder and no Event of Default, or any condition or event which, with the
giving of notice or the running of time, or both, would constitute an Event of Default, shall have
occurred and be continuing or exist under the Note; (b) each such Request for Advance shall set
forth the information required on the Request for Advance form attached hereto as Exhibit A; (c)
each such Request for Advance shall be delivered to Bank by 10:00 a.m. (California time) on the
proposed date of the requested Advance; (d) the principal amount of each LIBOR-based Rate Advance
shall be at least Five Hundred Thousand Dollars ($500,000); (e) the proposed date of any refunding
of any outstanding LIBOR-based Rate Advance as another LIBOR-based Rate Advance or the conversion
of any outstanding LIBOR-based Rate Advance to a Prime-based Rate Advance shall only be on the last
day of the LIBOR Period applicable to such outstanding LIBOR-based Rate Advance; and (f) a Request
for Advance, once delivered to Bank, shall not be revocable by Borrower.

     Advances hereunder may be requested in Borrower’s discretion by telephonic notice to Bank. Any
Advance requested by telephonic notice shall be confirmed by Borrower that same day by submission
to Bank, either by first class mail, facsimile or other means of delivery acceptable to Bank, of
the written Request for Advance aforementioned. Borrower acknowledges that if Bank makes an Advance
based on a telephonic request, it shall be for Borrower’s convenience and all risks involved in the
use of such procedure shall be borne by Borrower, and Borrower expressly agrees to indemnify and
hold Bank harmless therefor. Bank shall have no duty to confirm the authority of anyone requesting
an Advance by telephone.

     If, as to any outstanding LIBOR-based Rate Advance, Bank shall not receive a timely Request
for Advance, or telephonic notice, in accordance with the foregoing requesting the refunding or
continuation of such Advance as another LIBOR-based Rate Advance for a specified LIBOR Period or
the conversion of such Advance to a Prime-
based Rate Advance, effective as of the last day of the LIBOR Period applicable to such
outstanding LIBOR-based Rate Advance, and as of the last day of each succeeding LIBOR Period, the
principal amount of such Advance which is not then repaid shall be automatically refunded or
continued as a LIBOR-based Rate Advance for successive LIBOR Periods of one (1) month each, unless
Borrower is not entitled to request LIBOR-based Rate Advances hereunder or otherwise elect the
LIBOR-based Rate as the Applicable Interest Rate for the principal Indebtedness outstanding
hereunder in accordance with the terms of the Note or the LIBOR-based Rate is not otherwise
available to Borrower as the Applicable Interest Rate hereunder for the principal Indebtedness
outstanding hereunder in accordance with the terms of the Note, in which case, the Prime-based Rate
shall be the Applicable Interest Rate hereunder in respect of such Indebtedness for such period,
subject in all respects to the terms and conditions of the Note. The foregoing shall not in any way
whatsoever limit or otherwise affect Bank’s right to make demand for payment of all or any part of
the Indebtedness hereunder at any time in Bank’s sole and absolute discretion or any of Bank’s
rights or remedies under the Note upon the occurrence of any Event of Default thereunder, or any
condition or event which, with the giving of notice or the running of time, or both, would
constitute an Event of Default.

-2-

 

7. Default Interest Rate. Upon the occurrence of an Event of Default under the Note, the
outstanding principal balance of the Note shall bear interest at the default rate set forth in the
Note.

8. Prepayment. In the event that the LIBOR-based Rate is the Applicable Interest Rate for
all or any part of the outstanding principal balance of the Note, and any payment or prepayment of
any such outstanding principal balance of the Note shall occur on any day other than the last day
of the applicable LIBOR Period (whether voluntarily, by acceleration, required payment, or
otherwise), or if Borrower elects the LIBOR-based Rate as the Applicable Interest Rate for all or
any part of the outstanding principal balance of the Note in accordance with the terms and
conditions hereof, and, subsequent to such election, but prior to the commencement of the
applicable LIBOR Period, Borrower revokes such election for any reason whatsoever, or if the
Applicable Interest Rate in respect of any outstanding principal balance of the Note hereunder
shall be changed, for any reason whatsoever, from the LIBOR-based Rate to the Prime-based Rate
prior to the last day of the applicable LIBOR Period, or if Borrower shall fail to make any payment
of principal or interest hereunder at any time that the LIBOR-based Rate is the Applicable Interest
Rate hereunder in respect of such outstanding principal balance of the Note, Borrower shall
reimburse Bank, on demand, for any resulting loss, cost or expense incurred by Bank as a result
thereof, including, without limitation, any such loss, cost or expense incurred in obtaining,
liquidating, employing or redeploying deposits from third parties. Such amount payable by Borrower
to Bank may include, without limitation, an amount equal to the excess, if any, of (a) the amount
of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or
converted, for the period from the date of such prepayment or of such failure to borrow, refund or
convert, through the last day of the relevant LIBOR Period, at the applicable rate of interest for
such outstanding principal balance of the Note, as provided under the Note, over (b) the amount of
interest (as reasonably determined by Bank) which would have accrued to Bank on such amount by
placing such amount on deposit for a comparable period with leading banks in the interbank LIBOR
market. Calculation of any amounts payable to Bank under this paragraph shall be made as though
Bank shall have actually funded or committed to fund the relevant outstanding principal balance of
the Note hereunder through the purchase of an underlying deposit in an amount equal to the amount
of such outstanding principal balance of the Note and having a maturity comparable to the relevant
LIBOR Period; provided, however, that Bank may fund the outstanding principal balance of the Note
hereunder in any manner it deems fit and the foregoing assumptions shall be utilized only for the
purpose of the calculation of amounts payable under this paragraph. Upon the written request of
Borrower, Bank shall deliver to Borrower a certificate setting forth the basis for determining such
losses, costs and expenses, which certificate shall be conclusively presumed correct, absent
manifest error. Any prepayment hereunder shall also be accompanied by the payment of all accrued
and unpaid interest on the amount so prepaid. Any outstanding principal balance of the Note which
is bearing interest at such time at the Prime-based Rate may be prepaid without premium or penalty.
Borrower hereby acknowledges and agrees that the foregoing shall not, in any way whatsoever, limit,
restrict, or otherwise affect Bank’s right to make demand for payment of all or any part of the
Indebtedness under the Note due on a demand basis in Bank’s sole and absolute discretion, whether
such Indebtedness is bearing interest at the LIBOR-based Rate or the Prime-based Rate at such time.

BY INITIALING BELOW, BORROWER ACKNOWLEDGE(S) AND AGREE(S) THAT: (A) THERE IS NO RIGHT TO PREPAY ANY
LIBOR-BASED RATE ADVANCE, IN WHOLE OR IN PART, WITHOUT PAYING THE PREPAYMENT AMOUNT SET FORTH
HEREIN (“PREPAYMENT AMOUNT’), EXCEPT AS OTHERWISE REQUIRED UNDER APPLICABLE LAW; (B) BORROWER SHALL
BE LIABLE FOR PAYMENT OF THE PREPAYMENT AMOUNT IF BANK EXERCISES ITS RIGHT TO ACCELERATE PAYMENT OF
ANY LIBOR-BASED RATE ADVANCE AS PART OR ALL OF THE OBLIGATIONS OWING UNDER THE NOTE, INCLUDING
WITHOUT LIMITATION, ACCELERATION UNDER A DUE-ON-SALE PROVISION; (C) BORROWER WAIVES ANY RIGHTS
UNDER SECTION 2954.10 OF THE CALIFORNIA CIVIL CODE OR ANY SUCCESSOR STATUTE; AND (D) BANK HAS MADE
EACH LIBOR-BASED RATE ADVANCE PURSUANT TO THE NOTE IN RELIANCE ON THESE AGREEMENTS.

	 	 	 	 	 
	 	 	 
	/s/ TW
 	 
	BORROWER’S INITIALS 	 
	 	 

9. Hold Harmless and Indemnification. Borrower agrees to indemnify Bank and to hold Bank
harmless from, and to reimburse Bank on demand for, all losses and expenses which Bank sustains or
incurs as a result of (i) any payment of a LIBOR-based Rate Advance prior to the last day of the
applicable LIBOR Period for any reason, including,
without limitation, termination of the Note, whether pursuant to this Addendum or the occurrence of
an Event of Default; (ii) any termination of a LIBOR Period prior to the date it would otherwise
end in accordance with this Addendum; or (iii) any failure by Borrower, for any reason, to borrow
any portion of a LIBOR-based Rate Advance.

10. Regulatory Developments or Other Circumstances Relating to LIBOR Rate.

     a. If, with respect to any LIBOR Period, Bank determines that, (a) by reason of circumstances
affecting the foreign exchange and interbank markets generally, deposits in eurodollars in the
applicable amounts or for the relative maturities are not being offered to Bank for such LIBOR
Period, or (b) the LIBOR-based Rate will not accurately or fairly cover or reflect the cost to Bank
of maintaining any of the Indebtedness under the Note at the LIBOR-based Rate for such LIBOR
Period, then Bank shall forthwith give notice thereof to Borrower. Thereafter, until Bank notifies
Borrower that such conditions or circumstances no longer exist, the right of Borrower to request a
LIBOR-based Rate Advance and to convert an Advance to or refund an Advance as a LIBOR-based Rate
Advance shall be suspended.

     b. If, after the date hereof, the introduction of, or any change in, any applicable law, rule
or regulation or in the interpretation or administration thereof by any governmental authority
charged with the interpretation or administration thereof, or compliance by Bank (or its LIBOR
Lending Office) with any request or directive (whether or not having the force of law) of any such
authority, shall make it unlawful or impossible for the Bank (or its LIBOR Lending Office) to make
or maintain any Advance with interest at the LIBOR-based Rate, Bank shall forthwith give notice
thereof to Borrower. Thereafter, (a) until Bank notifies Borrower that such

-3-

 

conditions or circumstances no longer exist, the right of Borrower to request a LIBOR-based Rate
Advance and to convert an Advance to or refund an Advance as a LIBOR-based Rate Advance shall be
suspended, and thereafter, Borrower may select only the Prime-based Rate as the Applicable Interest
Rate hereunder, and (b) if Bank may not lawfully continue to maintain an outstanding Advance to the
end of the then current LIBOR Period applicable thereto, the Prime-based Rate shall be the
Applicable Interest Rate for the remainder of such LIBOR Period with respect to such outstanding
Advance.

     c. If the adoption after the date hereof, or any change after the date hereof in, any
applicable law, rule or regulation (whether domestic or foreign) of any governmental authority,
central bank or comparable agency charged with the interpretation or administration thereof, or
compliance by Bank (or its LIBOR Lending Office) with any request or directive (whether or not
having the force of law) made by any such authority, central bank or comparable agency after the
date hereof: (a) shall subject Bank (or its LIBOR Lending Office) to any tax, duty or other charge
with respect to the Note or any Indebtedness hereunder, or shall change the basis of taxation of
payments to Bank (or its LIBOR Lending Office) of the principal of or interest under the Note or
any other amounts due under the Note in respect thereof (except for changes in the rate of tax on
the overall net income of Bank or its LIBOR Lending Office imposed by the jurisdiction in which
Bank’s principal executive office or LIBOR Lending Office is located); or (b) shall impose, modify
or deem applicable any reserve (including, without limitation, any imposed by the Board of
Governors of the Federal Reserve System), special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by Bank (or its LIBOR Lending Office), or
shall impose on Bank (or its LIBOR Lending Office) or the foreign exchange and interbank markets
any other condition affecting the Note or the Indebtedness hereunder; and the result of any of the
foregoing is to increase the cost to Bank of maintaining any part of the Indebtedness hereunder or
to reduce the amount of any sum received or receivable by Bank under the Note by an amount deemed
by the Bank to be material, then Borrower shall pay to Bank, within fifteen (15) days of Borrower’s
receipt of written notice from Bank demanding such compensation, such additional amount or amounts
as will compensate Bank for such increased cost or reduction. A certificate of Bank, prepared in
good faith and in reasonable detail by Bank and submitted by Bank to Borrower, setting forth the
basis for determining such additional amount or amounts necessary to compensate Bank shall be
conclusive and binding for all purposes, absent manifest error.

     d. In the event that any applicable law, treaty, rule or regulation (whether domestic or
foreign) now or hereafter in effect and whether or not presently applicable to Bank, or any
interpretation or administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by Bank with any guideline, request or
directive of any such authority (whether or not having the force of law), including any risk-based
capital guidelines, affects or would affect the amount of capital required or expected to be
maintained by Bank (or any corporation controlling Bank), and Bank determines that the amount of
such capital is increased by or based upon the existence of any obligations of Bank hereunder or
the maintaining of any Indebtedness hereunder, and such increase has the effect of reducing the
rate of return on Bank’s (or such controlling corporation’s) capital as a consequence of such
obligations or the maintaining of such Indebtedness hereunder to a level below that which Bank (or
such controlling corporation) could have achieved but for such circumstances (taking into
consideration its policies with respect to capital adequacy), then Borrower shall pay to Bank,
within fifteen (15) days of Borrower’s receipt of written notice from Bank demanding such
compensation, additional amounts as are sufficient to compensate Bank (or such controlling
corporation) for any increase in the amount of capital and reduced rate of return which Bank
reasonably determines to be allocable to the existence of any obligations of the Bank hereunder or
to maintaining any Indebtedness hereunder. A certificate of Bank as to the amount of such
compensation, prepared in good faith and in reasonable detail by the Bank and submitted by Bank to
Borrower, shall be conclusive and binding for all purposes absent manifest error.

11. Legal Effect. Except as specifically modified hereby, all of the terms and conditions
of the Note remain in full force and effect.

     IN WITNESS WHEREOF, the parties have agreed to the foregoing as of the date first set forth
above.

	 	 	 	 	 
	COMERICA BANK	 	 
	 
	 	 	 	 
	By:

	 	/s/ Darren Santos
 

	 	 
	Its:

	 	Corporate Banking Officer — Western Market
 

	 	 
	 
	 	 	 	 
	ENERGY RECOVERY, INC.	 	 
	 
	 	 	 	 
	By:

	 	/s/ Tom Willardson
 

	 	 
	Its:

	 	CFO
 

	 	 

-4-

 

EXHIBIT A

REQUEST FOR ADVANCE

     Borrower
hereby requests COMERICA BANK (“Bank”) to make
a            
          
            
           
            
     [LIBOR-based
Rate or Prime-based Rate] Advance to Borrower
on              
             
              , in
the amount of            
              
              
  
Dollars ($            
            
             
   ) under the Loan and Security Agreement
(Accounts and Inventory) dated March 27, 2008, entered into between Borrower and Bank (the “Note”).
Initially capitalized terms used and not defined in this Addendum shall have the meanings ascribed
thereto in the Note. The Eurodollar Period for the requested Advance, if applicable, shall be                                                             .
In the event that any part of the Advance requested hereby
constitutes the refunding or conversion of an outstanding Advance, the amount to be refunded or
converted is           
            
             
      Dollars
($              
   
              
         ), and the last day of the
Eurodollar Period for the amounts being converted or refunded hereunder, if applicable, is
                                         .

     Borrower represents, warrants and certifies that no Event of Default, or any condition or
event which, with the giving of notice or the running of time, or both, would constitute an Event
of Default, has occurred and is continuing under the Note, and none will exist upon the making of
the Advance requested hereunder. Borrower further certifies that upon advancing the sum requested
hereunder the aggregate principal amount outstanding under the Note will not exceed the face amount
thereof. If the amount advanced to Borrower under the Note shall at any time exceed the face amount
thereof, Borrower will immediately pay such excess amount, without any necessity of notice or
demand.

     Borrower hereby authorizes Bank to disburse the proceeds of the Advance being requested by
this Request for Advance by crediting the account of Borrower with Bank separately designated by
Borrower or as Borrower may otherwise direct, unless this Request for Advance is being submitted
for a conversion or refunding of all or any part of any outstanding Advance(s), in which
(ILLEGIBLE) such proceeds shall be deemed to be utilized, to the extent necessary, to refund or
convert that portion stated above of the existing outstandings under such Advance(s).

     Capitalized terms used but not otherwise defined herein shall have the respective meanings
given to them in the Note.

     Dated this                      day of                                         .

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 	Its:  	 	 
	 	 	 	 

-5-

 

	 	 	 	 	 

			
	
	 	EQUIPMENT RIDER

Borrower(s):

Energy Recovery, Inc.

     Borrower has entered into a certain Loan and Security Agreement (Accounts and Inventory)
(hereinafter referred to as “Agreement”), dated March 27, 2008 with Bank (Secured Party). This
EQUIPMENT RIDER (hereinafter referred to as this “Rider”) dated March 27, 2008 is hereby made a
part of and incorporated into that Agreement.

1. Borrower grants to Bank a security interest in the following wherever located (hereinafter
referred to as “Equipment”):

	 	(a)	 	all of Borrower’s present machinery, equipment, fixtures, vehicles, office
equipment, furniture, furnishings, tools, dies, jigs and attachments, wherever located,
(including but not limited to, the items listed and described on the Schedule of
Equipment attached hereto and marked Exhibit “A” and by this reference made a part hereof
as though fully set forth herein);
	 
	 	(b)	 	all of Borrower’s additional equipment, wherever located, of like or unlike nature,
to be acquired hereafter, and all replacements, substitutes, accessions, additions and
improvements to any of the foregoing; and
	 
	 	(c)	 	all of Borrower’s general intangibles, including without limitation, computer
programs, computer disks, computer tapes, literature, reports, catalogs, drawings,
blueprints and other proprietary items.

2. Bank’s security interest in the Equipment as set forth above shall secure each, any and all of
Borrower’s Indebtedness to Bank, as the term “Indebtedness” is defined in the Agreement.

3. Bank may, in its sole discretion, from time to time hereafter, make loans to Borrower. Loans
made by Bank to Borrower pursuant to this Rider shall be included as part of the Indebtedness of
Borrower to Bank and at Bank’s option, may be evidenced by promissory note(s), in form satisfactory
to Bank. Such loans shall bear interest at the rate and be payable in the manner specified in said
promissory note(s) in the event Bank exercises the aforementioned option, and in the event Bank
does not, such loans shall bear interest at the rate and be payable in the manner specified in the
Agreement.

4. Borrower represents and warrants to Bank that:

	 	(a)	 	it has good and indefeasible title to the Equipment;
	 
	 	(b)	 	the Equipment is and will be free and clear of all liens, security interests,
encumbrances and claims, except as held by Bank;
	 
	 	(c)	 	the Equipment shall be kept only at the following locations: 1908 Doolittle Drive,
San Leandro, California 94577;

 

	 
	 	(d)	 	the owners or mortgagees of the respective locations are: 2101 Williams Associates,
LLC; and

 

	 
	 	(e)	 	Bank shall have the right upon demand now and/or at all times hereafter, during
Borrower’s usual business hours to inspect and examine the Equipment and Borrower agrees
to reimburse Bank for its reasonable costs and expenses in so doing.

5. Borrower shall keep and maintain the Equipment in good operating condition and repair, make all
necessary replacements thereto so that the value and operating efficiency thereof shall at all
times be maintained and preserved. Borrower shall not permit any items of Equipment to become a
fixture to real estate or accession to other property, and the Equipment is now and shall at all
times remain and be personal property.

6. Borrower, at its expense, shall keep and maintain: the Equipment insured against loss or damage
by fire, theft, explosion, sprinklers and all other hazards and risks ordinarily insured against by
other owners who use such properties and interest in properties in similar businesses for the full
insurable value thereof; and business interruption insurance and public liability and property
damage insurance relating to Borrower’s ownership and use
of its assets. All such policies of insurance shall be in such form, with such companies and in
such amounts as may be satisfactory to Bank. Borrower shall deliver to Bank certified copies of
such policies of insurance and evidence of the payment of all premiums thereof. All such policies
of insurance (except those of public liability and property damage) shall contain an endorsement in
a form satisfactory to Bank showing loss payable to Bank and all proceeds payable thereunder shall
be payable to Bank and upon receipt by Bank shall be applied on the account of Borrower’s
Indebtedness. To secure the payment of Borrower’s Indebtedness, Borrower grants Bank a security
interest in and to all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof and directs all insurers under such policies of insurance to pay
all proceeds thereof directly to Bank. Borrower hereby irrevocably appoints Bank (and any of Bank’s
officers, employees or agents designated by Bank) as Borrower’s attorney-in-fact for the purpose of
making, settling and adjusting claims under such policies of insurance and for making all
determinations and decisions with respect to such policies of insurance. Each such insurer shall
agree by endorsement upon the policy or policies of insurance issued by it to Borrower as required
above, or by independent instruments furnished to Bank that it will give Bank at least ten (10)
days written notice before any such policy or policies of insurance shall be altered or canceled,
and that no act or default of Borrower, or any other person, shall affect the right of Bank to
recover under such policy or policies of insurance required above or to pay any premium in whole or
in part relating thereto. Bank, without waiving or releasing any obligations or defaults by
Borrower hereunder, may at any time or times hereafter, but shall have no obligation to do so,
obtain and maintain such policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by Bank, including
reasonable attorneys’ fees, court costs, expenses and other charges relating thereto, shall be a
part of Borrower’s Indebtedness and payable on demand.

-1-

 

7. Until default by Borrower under the Agreement or this Rider, Borrower may, subject to the
provisions of the Agreement and this Rider and consistent therewith, remain in possession thereof
and use the Equipment referred to herein in the ordinary course of business at the location or
locations hereinabove designated.

8. All of the terms, conditions, warranties, covenants, agreements and representations of the
Agreement are incorporated herein and reaffirmed.

9. Upon a default by Borrower under the Agreement or this Rider, Borrower upon request of Bank to
do so, agrees to assemble and make the Equipment or any part thereof available to Bank at a place
designated by Bank.

10. Borrower shall upon demand by Bank immediately deliver to Bank and properly endorse, any and
all evidences of ownership, certificates of title or applications for title to any of the aforesaid
items of Equipment.

11. Bank shall not in any way or manner be liable or responsible for (a) the safekeeping of the
Equipment; (b) any loss or damage thereto occurring or arising in any manner or fashion from any
cause; (c) any diminution in the value thereof or (d) any act or default by any person whomsoever.
All risk of loss, damage or destruction of the Equipment shall be borne by Borrower.

	 	 	 	 	 
	Borrower: ENERGY RECOVERY, INC.	 	 
	 
	 	 	 	 
	By:

	 	/s/ Tom Willardson
 

	 	 
	Its:

	 	CFO
 

	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	Its:
	 	 	 	 
	 

	 	 

	 	 

Accepted this 27th day of March, 2008 at Bank’s place of business in Walnut Creek, CA

	 	 	 	 	 
	 	COMERICA BANK

 	 
	 	By:  	/s/
Darren Santos
 	 
	 	Its:  	Corporate Banking Officer-Western Market 	 
	 	 	 	 

-2-

 

	 	 	 	 	 

	 	 	 
	

	 	ENVIRONMENTAL RIDER

	 	 	 
	 

	 	Comerica Bank
	 

	 	 
	 

	 	NAME OF OFFICE
	 
	 	 
	 

	 	333 West Santa Clara Street, San Jose, CA 95113
	 

	 	 
	 

	 	ADDRESS

     This ENVIRONMENTAL RIDER (this “Rider”) dated this 27th day of March, 2008 is hereby made a
part of and incorporated into that certain Loan and Security Agreement (the “Agreement”) dated
March 27, 2008 between Comerica Bank (“Bank”) and Energy Recovery, Inc. (“Debtor”).

     1. Debtor hereby represents, warrants and covenants that none of the collateral or real
property occupied and/or owned by Debtor has ever been used by Debtor or any other previous owner
and/or operator in connection with the disposal of or to refine, generate, manufacture, produce,
store, handle, treat, transfer, release, process or transport any hazardous substance, as defined
in 42 U.S.C. 9601 (14) (“Hazardous Substance”), and Debtor will not at any time use the collateral
or such real property for the disposal of, refining of, generating, manufacturing, producing,
storing, handling, treating, transferring, releasing, processing, or transporting any such
Hazardous Substances and/or any other hazardous waste.

     2. None of the collateral or real property used and/or occupied by Debtor has been designated,
listed or identified in any manner by the United States Environmental Protection Agency (the “EPA”)
or under and pursuant to the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, set forth at 42 U.S.C. 9601 et seq. (“CERCLA”) or the Resource Conservation
and Recovery Act of 1986, as amended, set forth at 42 U.S.C. 9601 et seq. (“RCRA”) or any other
environmental protection statute as a Hazardous Substance, or any other hazardous waste, disposal
or removal site, superfund or cleanup site or candidate for removal of closure pursuant to RCRA,
CERCLA or any other environmental protection statute.

     3. Debtor has not received a summons, citation, notice, directive, letter or other
communication, written or oral, from the EPA or any other federal or state governmental agency or
instrumentality, authorized pursuant to an environmental protection statute, concerning any
intentional or unintentional action or omission by Debtor resulting in the releasing, spilling,
leaking, pumping, pouring, emitting, emptying, dumping or otherwise disposing of a Hazardous
Substance or other hazardous waste into the environment resulting in damage thereto or to the fish,
shellfish, wildlife, biota or other natural resources.

     4. Debtor shall not cause or permit to exist, as a result of an intentional or unintentional
action or omission on its part, or on the part of any third party, on property owned and/or
occupied by Debtor, any disposal, releasing, spilling, leaking, pumping, omitting, pouring,
emptying or dumping of a Hazardous Substance or any other hazardous waste into the environment
where damage may result to the environment, fish, shellfish, wildlife, biota or other natural
resources unless such disposal, release, spill, leak, pumping, emission, pouring, emptying or
dumping is pursuant to and in compliance with the conditions of a permit issued by the appropriate
federal or state governmental authority.

     5. Debtor shall furnish to Bank:

          (a) Promptly and in any event within thirty (30) days after receipt thereof, a copy of any
notice, summons, citation, directive, letter or other communications from the EPA or any other
governmental agency or instrumentality concerning any intentional or unintentional action or
omission on Debtor’s part in connection with the handling, transporting, transferring, disposal or
in the releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of Hazardous
Substances or any other hazardous waste into the environment resulting in damage to the
environment, fish, shellfish, wildlife, biota and any other natural resource;

          (b) Promptly and in any event within thirty (30) days after the receipt thereof, a copy of any
notice of or other communication concerning the filing of a lien upon, against or in connection
with Debtor, the collateral or Debtor’s real property by the EPA or any other governmental agency
or instrumentality authorized to file such a lien pursuant to an environmental protection statute
in connection with a fund to pay for damages and/or cleanup and/or removal costs arising from the
intentional or unintentional action or omission of Debtor resulting from the disposal or in the
releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of Hazardous
Substances or any other hazardous waste into the environment;

          (c) Promptly and in any event within thirty (30) days after the receipt thereof, a copy of any
notice, directive, letter or other communication from the EPA or any other governmental agency or
instrumentality acting under the authority of an environmental protection statute indicating that
all or any portion of the Debtor’s property or assets have been listed and/or borrowers deemed by
such agency to be the owner and operator of the facility that has failed to furnish to the EPA or
other authorized governmental agency or instrumentality, all the information required by the RCRA,
CERCLA or other applicable environmental protection statutes;

          (d) Promptly and in no event more than thirty (30) days after the filing thereof with the EPA
or other governmental agency or instrumentality authorized as such pursuant to an environmental
protection statute, copies of any and all information reports filed with such agency or
instrumentality in connection with Debtor’s compliance with RCRA, CERCLA or other applicable
environmental protection statutes.

 

 

     6. Any one or more of the following events which occur with respect to Debtor shall constitute
an event of default:

          (a) The breach by Debtor of any covenant or condition, representation or warranty contained in
this Rider;

          (b) The failure by Debtor to comply with each, every and all of the requirements of RCRA,
CERCLA or any other environmental protection statute applicable to the collateral or the real
property occupied and/or owned by Debtor;

          (c) The receipt by Debtor of a notice from the EPA or any other governmental agency or
instrumentality acting under the authority of any environmental protection statute, indicating that
a lien has been filed against any of the collateral, or any of Debtor’s other property by the EPA
or any other governmental agency or instrumentality in connection with a fund as a result of damage
arising from an intentional or unintentional action or omission by Debtor resulting from the
disposal, releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of
Hazardous Substances or any other hazardous waste into the environment; and

          (d) Any other event or condition exists which might, in the opinion of Bank, under applicable
environmental protection statutes, have a material adverse effect on the financial or operational
condition of Debtor or the value of all or any material part of the collateral or other property of
Debtor.

     In witness whereof, the Debtor has agreed as of the date first set forth above.

	 	 	 	 	 	 	 
	 	 	ENERGY RECOVERY, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Tom Willardson
 

	 	 
	 

	 	Its:
	 	CFO
 

	 	 
	 

	 	By:	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 

	 	 

2

 

	 	 	 
	

	 	Automatic Loan Payment Authorization
	 

Date: March 27, 2008

Obligor Name (Typed or Printed): Energy Recovery, Inc.

	 	 	 	 	 	 	 
	Obligor Number: 

	 	 	 	Lender’s Cost Center #: 	 	 
	 

	 	 
	 	 	 	 

	 	 	 	 	 	 	 	 	 	 	 
	Address:	 	1908 Doolittle Drive, San Leandro, California 94577
	 	 	 
	 

	 	STREET ADDRESS
	 	CITY
	 	STATE
	 	COUNTRY
	 	ZIP CODE

The undersigned hereby authorizes
Comerica Bank (“Bank”) to charge the account designated below for
the payments due on the loan(s) as designated below and all renewals, extensions, modifications
and/or substitutions thereof. This authorization will remain in effect unless the undersigned
requests a modification that is agreed to by the Bank in writing. The undersigned remains fully
responsible for all amounts outstanding to Bank if the designated account is insufficient for
repayment.

	o	 	Automatic Payment Authorization for all payments on all current
and future borrowings, as and when such payments come due (which
payments include, without limitation, principal, interest, fees,
costs, and expenses).
	 
	 

	o	 	Automatic Payment Authorization for all payments on only the
specific borrowing identified below, as and when such payments
come due (which payments include, without limitation, principal,
interest, fees, costs, and expenses).

Specific Obligation Number:                                                             

 

	o	 	Automatic Payment Authorization for less than
all payments on only the specific borrowing
identified below, as and when such payments
come due.

Specific Obligation Number:                                                             

	 	o	 	Principal and Interest payments only
	 
	 	o	 	Principal payments only
	 
	 	o	 	Interest payments only
	 
	 	o	 	SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS

 

 

 

 

 

 

Payment Due Date: Your loan payments will be charged to your account as indicated above on the
dates such payments become due (or on a date thereafter when there are available funds) unless that
day is a Saturday, Sunday, or Bank holiday in which case such payments will be charged on the
following business day, with interest to accrue during this extension as provided under the loan
documents.

-1-

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Account to be Charged:

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	þ

	 	Checking
	 	1892962802	 	 	 	Comerica Account No.	 	 	 
	 

	 	 	 	 	 
	 	 	 
	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	o

	 	Savings
	 	 	 	 	 	 	Comerica Account No.	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 

Number of lead days to issue billing 15

(Charges to account are withdrawals pursuant to account resolution)

	 	 	 	 	 	 	 	 	 	 	 
	ENERGY RECOVERY, INC.	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Tom Willardson
	 	 	 	Its:
	 	CFO	 	 
	 

	 	 

SIGNATURE OF
	 	 	 	 	 	 

TITLE
	 	 

-2-

 

	 	 	 
	

	 	Borrower’s Authorization
	 

			
	To:	 	Comerica Bank (“Bank”)

			
	Re:	 	Loan from the Bank evidenced by a note/agreement dated as of March 27,
2008 in the current amount of Nine Million Dollars ($9,000,000)
(“Loan”) executed by Energy Recovery, Inc. (“Borrower”)

Borrower hereby authorizes and directs Bank to:

	1.	 	Disburse the proceeds of the Loan as follows:

	 	a.	 	Wire Transfer to                                          the sum of $                    .
	 
	 	b.	 	Deposit to Account No.                      in the name of                      at Bank the sum of
$                    .
	 
	 	c.	 	Credit to Loan No.                      at Bank the sum of $                     effective as of
                     .
	 
	 	d.	 	Pay to Bank the sum of $                     for payment of the Loan Fee.
	 
	 	e.	 	Pay to Bank the sum of $                     for reimbursement of its costs and expenses
for legal fees, appraisal fees, title fees, flood certification, tax service contract,
etc. (Not Applicable for CALREAL product)
	 
	 	f.	 	Other: Obligor #8718005157, Note 59; Obligor #8718015909, Note 59

 

 

	 	 	 	 	 	 	 	 	 	 	 
	ENERGY RECOVERY, INC.	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/ Tom Willardson
	 	 
	 	Its:
	 	CFO
	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	 

	 	SIGNATURE OF
	 	 	 	 	 	TITLE	 	 

 

 

STATEMENT

Date: March 27, 2008

	 	 	 
	Energy Recovery, Inc.
	 	 
	1908 Doolittle Drive
	 	 
	San Leandro, California 94577
	 	 
	Attention: Thomas Willardson, CFO

	 	Comerica Bank
	Fax Number: (510) 483-7371

	 	P.O. Box 49032
	 

	 	San Jose, CA 95161-9032

RE: Fee on $9,000,000 Note, dated March 27, 2008, and maturing September 30, 2008 Officer Darren
Santos.

	 	 	 	 	 
	Commitment Fee
	 	$	9,000.00	 
	 
	 	 	 	 
	TOTAL
	 	$	9,000.00	 

	 	 	 	o Customer Check Attached
	 
	 	 	 	o Charge DDA No.     
                                                                      

	 	 	 	 	 
	Acknowledged by:

	 	/s/ Tom Willardson

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