Document:

EXHIBIT
      4.7

     

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    THE
      REGISTERED HOLDER OF THIS UNIT PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES
      THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS UNIT PURCHASE OPTION EXCEPT
      AS
      HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS UNIT PURCHASE OPTION AGREES
      THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS UNIT
      PURCHASE OPTION FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE
      EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) HOLDER OR AN
      UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A
      BONA FIDE OFFICER OR PARTNER OF HOLDER OR OF ANY SUCH UNDERWRITER OR SELECTED
      DEALER. 

     

     

    THIS
      UNIT
      PURCHASE OPTION IS VOID AFTER 5:00 P.M. EASTERN
      TIME,                        ,
      2011. 

     

     

    UNIT
      PURCHASE OPTION

     

    FOR
      THE
      PURCHASE OF

     

    [_]
      UNITS

     

    OF

     

    ADCARE
      HEALTH SYSTEMS, INC.

     

     

    1.     Unit
      Purchase Option.

     

             THIS
      CERTIFIES THAT, in consideration of $100 duly paid by or on behalf of
      ___________ (each, a “Holder”), as registered owner of this Unit Purchase
      Option, to AdCare Health Systems, Inc. (the “Company”), Holder is entitled, at
      any time or from time to time
      commencing                        ,
      2007 (the “Commencement Date”), and at or before 5:00 p.m., Eastern
      Time,                        ,
      2011 (the “Expiration Date”), but not thereafter, to subscribe for, purchase and
      receive, in whole or in part, up to [_] units (the “Units”) of the Company, each
      Unit consisting of two shares of Company common stock, par value $0.001 per
      share (the “Common Stock”), and two warrants (the “Warrant(s)”) expiring five
      years from the effective date (the “Effective Date”) of the registration
      statement (the “Registration Statement”) pursuant to which Units are offered for
      sale to the public (the “Offering”). Each Warrant is the same as the warrants
      included in the Units being registered for sale to the public (the “Public
      Warrants”) under the Securities Act of 1933, as amended (the “Act”) except that
      the exercise price of the Warrants shall be $[____] per share [or 125% of the
      exercise price of the Public Warrants]. If the Expiration Date is a day on
      which
      banking institutions are authorized by law to close, then this Unit Purchase
      Option may be exercised on the next succeeding day which is not such a day
      in
      accordance with the terms herein. During the period ending on the Expiration
      Date, the Company agrees not to take any action that would terminate the Unit
      Purchase Option. This Unit Purchase Option is initially exercisable at $[___]
      per Unit so purchased [or 125% of the exercise price of the Units in the
      Offering]; provided, however, that upon the occurrence of any of the events
      specified in Section 6 hereof, the rights granted by this Unit Purchase
      Option, including the exercise price per Unit and the number of Units (and
      Common Stock and Warrants underlying such Units) to be received upon such
      exercise, shall be adjusted as therein specified. The term “Exercise Price”
shall mean the initial exercise price or the adjusted exercise price, depending
      on the context. 

     

    2.     Exercise.

     

    (a)   Exercise
      Procedure.
      In
      order to exercise this Unit Purchase Option, the exercise form attached hereto
      must be duly executed and completed and delivered to the Company, together
      with
      this Unit Purchase Option and payment of the Exercise Price for the Units being
      purchased payable in cash or by certified check or official bank check. If
      the
      subscription rights represented hereby shall not be exercised at or before
      5:00 p.m., Eastern time, on the Expiration Date this Unit Purchase Option
      shall become and be void without further force or effect, and all rights
      represented hereby shall cease and expire.

     

    
      
         

      

      
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    (b)   Legend.
      Each
      certificate for the securities purchased under this Unit Purchase Option shall
      bear a legend as follows unless such securities have been registered under
      the
      Securities Act of 1933, as amended (the “Act”): 

     

    “The
      securities represented by this certificate have not been registered under the
      Securities Act of 1933, as amended (the “Act”) or applicable state law. The
      securities may not be offered for sale, sold or otherwise transferred except
      pursuant to an effective registration statement under the Act, or pursuant
      to an
      exemption from registration under the Act and applicable state law.”

     

    (c)   Cashless
      Exercise.
      (i) In lieu of the payment of the Exercise Price multiplied by the number
      of Units for which this Unit Purchase Option is exercisable (and in lieu of
      being entitled to receive Common Stock and Warrants) in the manner required
      by
      Section 2(a), the Holder shall have the right (but not the obligation) to
      convert any exercisable but unexercised portion of this Unit Purchase Option
      into Units (the “Conversion Right”) as follows: upon exercise of the Conversion
      Right, the Company shall deliver to the Holder (without payment by the Holder
      of
      any of the Exercise Price in cash) that number of Common Stock and Warrants
      comprising that number of Units equal to the quotient obtained by dividing
      (x) the “Value” (as defined below) of the portion of the Unit Purchase
      Option being converted by (y) the Current Market Value (as defined below).
      The “Value” of the portion of the Unit Purchase Option being converted shall
      equal the remainder derived from subtracting (a) (i) the Exercise Price
      multiplied by (ii) the number of Units underlying the portion of this Unit
      Purchase Option being converted from (b) the Current Market Value of a Unit
      multiplied by the number of Units underlying the portion of the Unit Purchase
      Option being converted. As used herein, the term “Current Market Value” per Unit
      at any date means the remainder derived from subtracting (x) the exercise
      price of the Warrants multiplied by the number of shares of Common Stock
      issuable upon exercise of the Warrants underlying one Unit from (y) the
      Current Market Price of the Common Stock multiplied by the number of shares
      of
      Common Stock underlying the Warrants and the Common Stock issuable upon exercise
      of one Unit. The “Current Market Price” of an Common Stock shall mean
      (i) if the Common Stock are listed on a national securities exchange or
      quoted on the Nasdaq National Market, Nasdaq SmallCap Market or NASD OTC
      Bulletin Board (or successor such as the Bulletin Board Exchange), the last
      sale
      price of the Common Stock in the principal trading market for the Common Stock
      as reported by the exchange, Nasdaq or the NASD, as the case may be;
      (ii) if the Common Stock are not listed on a national securities exchange
      or quoted on the Nasdaq National Market, Nasdaq SmallCap Market or the NASD
      OTC
      Bulletin Board (or successor such as the Bulletin Board Exchange), but is traded
      in the residual over-the-counter market, the closing bid price for the Common
      Stock on the last trading day preceding the date in question for which such
      quotations are reported by the Pink Sheets, LLC or similar publisher of such
      quotations; and (iii) if the fair market value of the Common Stock cannot
      be determined pursuant
      to clause (i) or (ii) above, such price as the Board of Directors of
      the Company shall determine, in good faith. 

     

    (ii)   The
      Cashless Exercise Right may be exercised by the Holder on any business day
      on or
      after the Commencement Date and not later than the Expiration Date by delivering
      the Unit Purchase Option with the duly executed exercise form attached hereto
      with the cashless exercise section completed to the Company, exercising the
      Cashless Exercise Right and specifying the total number of Units the Holder
      will
      purchase pursuant to such Cashless Exercise Right. 

     

    3.     Transfer.

     

    (a)   Restrictions—General.
      The
      registered Holder of this Unit Purchase Option, by its acceptance hereof, agrees
      that it will not sell, transfer, assign, pledge or hypothecate this Unit
      Purchase Option for a period of one hundred eighty (180) days following the
      Effective Date to anyone other than (i) an underwriter or a selected dealer
      in connection with the Offering, or (ii) a bona fide officer or partner of
      any of the foregoing. On and after the first anniversary of the Effective Date,
      transfers to others may be made subject to compliance with or exemptions from
      applicable securities laws. In order to make any permitted assignment, the
      Holder must deliver to the Company the assignment form attached hereto duly
      executed and completed, together with the Unit Purchase Option. The Company
      shall within three business days transfer this Unit Purchase Option on the
      books
      of the Company and shall execute and deliver a new Unit Purchase Option or
      Unit
      Purchase Options of like tenor to the appropriate assignee(s) expressly
      evidencing the right to purchase the aggregate number of Units purchasable
      hereunder or such portion of such number as shall be contemplated by any such
      assignment. 

     

    
      
         

      

      
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    (b)   Restrictions—Securities.
      The
      securities evidenced by this Unit Purchase Option shall not be transferred
      unless and until (i) the Company has received the opinion of counsel that
      the securities may be transferred pursuant to an exemption from registration
      under the Act and applicable state securities laws, the availability of which
      is
      established to the reasonable satisfaction of the Company, or (ii) a
      registration statement or a post-effective amendment to the Registration
      Statement relating to such securities has been filed by the Company and declared
      effective by the Securities and Exchange Commission (the “Commission”) and
      compliance with applicable state securities law has been established.

     

    4.     New
      Purchase Options to be Issued.

     

    (a)   Partial
      Exercise.
      Subject
      to the restrictions in Section 3 hereof, this Unit Purchase Option may be
      exercised or assigned in whole or in part. In the event of the exercise or
      assignment hereof in part only, upon surrender of this Unit Purchase Option
      for
      cancellation, together with the duly executed exercise or assignment form and
      funds sufficient to pay any Exercise Price and/or transfer tax, the Company
      shall cause to be delivered to the Holder without charge a new Unit Purchase
      Option of like tenor to this Unit Purchase Option in the name of the Holder
      evidencing the right of the Holder to purchase the number of Units purchasable
      hereunder as to which this Unit Purchase Option has not been exercised or
      assigned. 

     

    (b)   Loss,
      Theft, Destruction.
      Upon
      receipt by the Company of evidence satisfactory to it of the loss, theft,
      destruction or mutilation of this Unit Purchase Option and of reasonably
      satisfactory indemnification or the posting of a bond, the Company shall execute
      and deliver a new Unit Purchase Option of like tenor and date. Any such new
      Unit
      Purchase Option executed and delivered
      as a result of such loss, theft, mutilation or destruction shall constitute
      a
      substitute contractual obligation on the part of the Company. 

     

    5.     Registration
      Rights.

     

    (a)   Demand
      Registration.
      

     

    (i)    The
      Company, upon written demand (the “Initial Demand Notice”) of the Holder(s) of
      not less than 50% of the Unit Purchase Options and/or the underlying Units
      and/or the underlying securities (the “Majority Holders”), agrees to register on
      one occasion, all or any portion of the Unit Purchase Options requested by
      the
      Majority Holders in the Initial Demand Notice and all of the securities
      underlying such Unit Purchase Options, including the Units, Common Stock, the
      Warrants, the Common Stock underlying the Warrants (collectively, the
“Registrable Securities”). On such occasion, the Company will file a
      registration statement or a post-effective amendment to the Registration
      Statement covering the Registrable Securities within sixty days after receipt
      of
      the Initial Demand Notice and use its best efforts to have such registration
      statement or post-effective amendment declared effective as soon as possible
      thereafter. The demand for registration may be made at any time during a period
      of three years beginning on the Effective Date. The Company covenants and agrees
      to give written notice of its receipt of any Initial Demand Notice by any
      Holder(s) to all other registered Holders of the Unit Purchase Options and/or
      the Registrable Securities within ten days from the date of the receipt of
      any
      such Initial Demand Notice. 

     

    (ii)   The
      Company shall bear all fees and expenses attendant to registering the
      Registrable Securities, including the expenses of any legal counsel selected
      by
      the Holders to represent them in connection with the sale of the Registrable
      Securities, but the Holders shall pay any and all underwriting commissions.
      The
      Company agrees to use its reasonable best efforts to qualify or register the
      Registrable Securities in such states as are reasonably requested by the
      Majority Holder(s); provided, however, that in no event shall the Company be
      required to register the Registrable Securities in a state in which such
      registration would cause (i) the Company to be obligated to qualify to do
      business in such state, or would subject the Company to taxation as a foreign
      corporation doing business in such jurisdiction or (ii) the principal
      stockholders of the Company to be obligated to escrow their shares of capital
      stock of the Company. The Company shall cause any registration statement or
      post-effective amendment filed pursuant to the demand rights granted under
      Section 5(a)(i) to remain effective for a period of nine consecutive months
      from the effective date of such registration statement or post-effective
      amendment. 

     

    
      
         

      

      
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    (b)   ”Piggy-Back”
      Registration.

     

    (i)    In
      addition to the demand right of registration, the Holders of the Unit Purchase
      Options shall have the right for a period of seven years commencing on the
      Effective Date, to include the Registrable Securities as part of any other
      registration of securities filed by the Company (other than in connection with
      a
      transaction contemplated by Rule 145(a) promulgated under the Act or
      pursuant to Form S-8); provided, however, that if, in the written opinion
      of the Company's managing underwriter or underwriters, if any, for such
      offering, the inclusion of the Registrable Securities, when added to the
      securities being registered by the Company or the selling stockholder(s), will
      exceed the maximum amount of the Company's securities which can be marketed
      (i) at a price reasonably related to their then current market value, and
      (ii) without materially and adversely affecting the entire offering, then
      the Company will still be required to include the Registrable Securities, but
      may require the Holders to agree, in writing, to delay the sale of all or any
      portion of the Registrable Securities for a period of 90 days from the
      effective date of the offering, provided, further, that if the sale of any
      Registrable Securities is so delayed, then the number of securities to be
sold
      by
      all stockholders in such public offering during such 90 day period shall be
      apportioned pro rata among all such selling stockholders, including all holders
      of the Registrable Securities, according to the total amount of securities
      of
      the Company owned by said selling stockholders, including all holders of the
      Registrable Securities. 

     

    (ii)   The
      Company shall bear all fees and expenses attendant to registering the
      Registrable Securities, including the expenses of any legal counsel selected
      by
      the Holders to represent them in connection with the sale of the Registrable
      Securities but the Holders shall pay any and all underwriting commissions
      related to the Registrable Securities. In the event of such a proposed
      registration, the Company shall furnish the then Holders of outstanding
      Registrable Securities with not less than fifteen days written notice prior
      to
      the proposed date of filing of such registration statement. Such notice to
      the
      Holders shall continue to be given for each applicable registration statement
      filed (during the period in which the Unit Purchase Option is exercisable)
      by
      the Company until such time as all of the Registrable Securities have been
      registered and sold. The holders of the Registrable Securities shall exercise
      the “piggy-back” rights provided for herein by giving written notice, within ten
      days of the receipt of the Company's notice of its intention to file a
      registration statement. The Company shall cause any registration statement
      filed
      pursuant to the above “piggyback” rights to remain effective for at least nine
      months from the date that the Holders of the Registrable Securities are first
      given the opportunity to sell all of such securities. 

     

    (c)   Damages.
      Should
      the registration or the effectiveness thereof required by Sections 5(a) and
      5(b)
      hereof be delayed by the Company or the Company otherwise fails to comply with
      such provisions, the Company shall, in addition to any other equitable or other
      relief available to the Holder(s), be liable for any and all incidental, special
      and consequential damages sustained by the Holder(s), including, but not limited
      to, the loss of any profits that might have been received by the Holder upon
      the
      sale of Common Stock or Warrants (and Common Stock underlying the Warrants)
      underlying this Unit Purchase Option. 

     

             (d)   Indemnification.
      

     

    (i)    The
      Company shall indemnify the Holder(s) of the Registrable Securities to be sold
      pursuant to any registration statement hereunder and each person, if any, who
      controls such Holders within the meaning of Section 15 of the Act or
      Section 20(a) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), against all loss, claim, damage, expense or liability
      (including all reasonable attorneys' fees and other expenses reasonably incurred
      in investigating, preparing or defending against litigation, commenced or
      threatened, or any claim whatsoever whether arising out of any action between
      the Underwriter and the Company or between the Underwriter and any third party
      or otherwise) to which any of them may become subject under the Act, the
      Exchange Act or otherwise, arising from such registration statement but only
      to
      the same extent and with the same effect as the provisions pursuant to which
      the
      Company has agreed to indemnify the Underwriters contained in Section 5 of
      the Underwriting Agreement between the Company, Holder and the other
      Underwriters named therein dated the Effective Date. The Holder(s) of the
      Registrable Securities to be sold pursuant to such registration statement,
      and
      their successors and assigns, shall severally, and not jointly, indemnify the
      Company, its officers and directors and each person, if any, who controls the
      Company within the meaning of Section 15 of the Act or Section 20(a)
      of the Exchange Act, against all loss, claim, damage, expense or liability
      (including all reasonable attorneys' fees and other expenses reasonably incurred
      in investigating, preparing or defending against any claim whatsoever) to which
      they may become subject under the Act, the Exchange Act or otherwise, arising
      from information furnished by or on behalf of such Holders, or their successors
      or assigns, in writing, for specific inclusion in such registration statement
      to
      the same extent and with the same effect as the provisions contained
      in Section 5 of the Underwriting Agreement pursuant to which the
      Underwriters have agreed to indemnify the Company. 

     

    
      
         

      

      
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    (ii)   Nothing
      contained in this Unit Purchase Option shall be construed as requiring the
      Holder(s) to exercise their Unit Purchase Options or Warrants underlying such
      Unit Purchase Options prior to or after the initial filing of any registration
      statement or the effectiveness thereof. 

     

    (iii)  The
      Company shall furnish Newbridge
      Securities Corporation,
      as
      representative of the Holders participating in any of the foregoing offerings,
      a
      signed counterpart, addressed to the participating Holders, of (i) an
      opinion of counsel to the Company, dated the effective date of such registration
      statement (and, if such registration includes an underwritten public offering,
      an opinion dated the date of the closing under any underwriting agreement
      related thereto), and (ii) a “cold comfort” letter dated the effective date
      of such registration statement (and, if such registration includes an
      underwritten public offering, a letter dated the date of the closing under
      the
      underwriting agreement) signed by the independent public accountants who have
      issued a report on the Company's financial statements included in such
      registration statement, in each case covering substantially the same matters
      with respect to such registration statement (and the prospectus included
      therein) and, in the case of such accountants' letter, with respect to events
      subsequent to the date of such financial statements, as are customarily covered
      in opinions of issuer's counsel and in accountants' letters delivered to
      underwriters in underwritten public offerings of securities. The Company shall
      also deliver promptly to Newbridge
      Securities Corporation,
      as
      representative of the Holders participating in the offering, the correspondence
      and memoranda described below and copies of all correspondence between the
      Commission and the Company, its counsel or auditors and all memoranda relating
      to discussions with the Commission or its staff with respect to the registration
      statement and permit Newbridge
      Securities Corporation,
      as
      representative of the Holders, to do such investigation, upon reasonable advance
      notice, with respect to information contained in or omitted from the
      registration statement as it deems reasonably necessary to comply with
      applicable securities laws or rules of the National Association of Securities
      Dealers, Inc. (the “NASD”). Such investigation shall include access to
      books, records and properties and opportunities to discuss the business of
      the
      Company with its officers and independent auditors, all to such reasonable
      extent and at such reasonable times and as often as Newbridge
      Securities Corporation,
      as
      representative of the Holders, shall reasonably request. The Company shall
      not
      be required to disclose any confidential information or other records to
Newbridge
      Securities Corporation,
      as
      representative of the Holders, or to any other person, until and unless such
      persons shall have entered into reasonable confidentiality agreements (in form
      and substance reasonably satisfactory to the Company), with the Company with
      respect thereto. 

     

    (iv)  The
      Company shall enter into an underwriting agreement with the managing
      underwriter(s), if any, selected by any Holders whose Registrable Securities
      are
      being registered pursuant to this Section 5, which managing underwriter
      shall be reasonably acceptable to the Company. Such agreement shall be
      reasonably satisfactory in form and substance to the Company, each Holder and
      such managing underwriters, and shall contain such representations, warranties
      and covenants by the Company and such other terms as are customarily contained
      in agreements of that type used by the managing underwriter. The Holders shall
      be parties to any underwriting agreement relating to an underwritten sale of
      their Registrable Securities and may, at their option, require that any or
      all
      the representations, warranties and covenants of the Company to or for the
      benefit of such underwriters shall also be made to and for the benefit of such
      Holders. Such Holders shall not be required to make any representations or
      warranties to or agreements with the Company or the underwriters except as
      they
      may relate to such Holders and their intended methods of distribution.
      Such Holders, however, shall agree to such covenants and indemnification and
      contribution obligations for selling stockholders as are customarily contained
      in agreements of that type used by the managing underwriter. Further, such
      Holders shall execute appropriate custody agreements and otherwise cooperate
      fully in the preparation of the registration statement and other documents
      relating to any offering in which they include securities pursuant to this
      Section 5. Each Holder shall also furnish to the Company such information
      regarding itself, the Registrable Securities held by it, and the intended method
      of disposition of such securities as shall be reasonably required to effect
      the
      registration of the Registrable Securities. 

     

    
      
         

      

      
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    (v)   Notwithstanding
      anything contained in this Section 5 to the contrary, the Company shall
      have no obligation pursuant to Sections 5(a) or 5(b) for the registration of
      Registrable Securities held by any Holder (i) where such Holder would then
      be entitled to sell under Rule 144 within any three-month period (or such
      other period prescribed under Rule 144 as may be provided by amendment
      thereof) all of the Registrable Securities then held by such Holder, and
      (ii) where the number of Registrable Securities held by such Holder is
      within the volume limitations under paragraph (e) of Rule 144
      (calculated as if such Holder were an affiliate within the meaning of
      Rule 144). 

     

    (vi)  Each
      Holder agrees, that upon receipt of any written notice from the Company of
      the
      happening of any event as a result of which the prospectus included in the
      Registration Statement, as then in effect, includes an untrue statement of
      a
      material fact or omits to state a material fact required to be stated therein
      or
      necessary to make the statements therein not misleading in light of the
      circumstances then existing, such Holder will immediately discontinue
      disposition of Registrable Securities pursuant to the Registration Statement
      covering such Registrable Securities until such Holder's receipt of the copies
      of a supplemental or amended prospectus, and, if so desired by the Company,
      such
      Holder shall deliver to the Company (at the expense of the Company) or destroy
      (and deliver to the Company a certificate of such destruction) all copies,
      other
      than permanent file copies then in such Holder's possession, of the prospectus
      covering such Registrable Securities current at the time of receipt of such
      notice. 

     

             6.     Adjustments.

     

    (a)   Exercise
      Price and Number of Securities.
      The
      Exercise Price and the number of Units underlying the Unit Purchase Option
      shall
      be subject to adjustment from time to time as hereinafter set forth:

     

    (i)    If
      after the date hereof, and subject to the provisions of Section 6(c) below,
      the number of outstanding Common Stock is increased by a stock dividend payable
      in Common Stock or by a split-up of Common Stock or other similar event, then,
      on the effective date thereof, the number of Common Stock underlying each of
      the
      Units purchasable hereunder shall be increased in proportion to such increase
      in
      outstanding shares. In such case, the number of Common Stock, and the exercise
      price applicable thereto, underlying the Warrants underlying each of the Units
      purchasable hereunder shall be adjusted in accordance with the terms of the
      Warrants. For example, if the Company declares a two-for-one stock dividend
      and
      at the time of such dividend this Unit Purchase Option is for the purchase
      of
      one Unit at $10.00 per whole Unit (each Warrant underlying the Units is
      exercisable for $7.50 per share), upon effectiveness of the dividend, this
      Unit
      Purchase Option will be adjusted to allow for the purchase of one Unit at $10.00
      per Unit, each Unit entitling the holder to receive four shares of Common Stock
      and four Warrants (each Warrant exercisable for $3.75 per share). 

     

    (ii)   If
      after the date hereof, and subject to the provisions of Section 6(c), the
      number of outstanding Common Stock is decreased by a consolidation, combination
      or reclassification of the Common Stock or other similar event, then, on the
      effective date thereof, the number of Common Stock underlying each of the Units
      purchasable hereunder shall be decreased in proportion to such decrease in
      outstanding shares. In such case, the number of Common Stock, and the exercise
      price applicable thereto, issuable upon exercise of the Warrants included in
      each of the Units purchasable hereunder shall be adjusted in accordance with
      the
      terms of the Warrants. 

     

    (iii)  In
      case of any reclassification or reorganization of the outstanding Common Stock
      other than a change covered by Section 6(a)(i) or 6(a)(ii) hereof
      or that solely affects the par value of such Common Stock, or in the case of
      any
      merger or consolidation of the Company with or into another corporation (other
      than a consolidation or merger in which the Company is the continuing
      corporation and that does not result in any reclassification or reorganization
      of the outstanding Common Stock), or in the case of any sale or conveyance
      to
      another corporation or entity of the property of the Company as an entirety
      or
      substantially as an entirety in connection with which the Company is dissolved,
      the Holder of this Unit Purchase Option shall have the right thereafter (until
      the expiration of the right of exercise of this Unit Purchase Option) to receive
      upon the exercise hereof, for the same aggregate Exercise Price payable
      hereunder immediately prior to such event, the kind and amount of shares of
      stock or other securities or property (including cash) receivable upon such
      reclassification, reorganization, merger or consolidation, or upon a dissolution
      following any such sale or transfer, by a Holder of the number of Common Stock
      of the Company obtainable upon exercise of this Unit Purchase Option and the
      underlying Warrants immediately prior to such event; and if any reclassification
      also results in a change in Common Stock covered by Section 6(a)(i) or
      6(a)(ii), then such adjustment shall be made pursuant to Sections 6(a)(i),
      6(a)(ii) and this Section 6(a)(iii). The provisions of this
      Section 6(a)(iii) shall similarly apply to successive
      reclassifications, reorganizations, mergers or consolidations, sales or other
      transfers. 

     

    
      
         

      

      
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    (iv)  This
      form of Unit Purchase Option need not be changed because of any change pursuant
      to this Section, and Unit Purchase Options issued after such change may state
      the same Exercise Price and the same number of Units as are stated in the Unit
      Purchase Options initially issued pursuant to this Agreement. The acceptance
      by
      any Holder of the issuance of new Unit Purchase Options reflecting a required
      or
      permissive change shall not be deemed to waive any rights to an adjustment
      occurring after the Commencement Date or the computation thereof. 

     

    (b)   Substitute
      Unit Purchase Option.
      In case
      of any consolidation of the Company with, or merger of the Company with, or
      merger of the Company into, another corporation (other than a consolidation
      or
      merger which does not result in any reclassification or change of the
      outstanding Common Stock), the corporation formed by such consolidation or
      merger shall execute and deliver to the Holder a supplemental Unit Purchase
      Option providing that the holder of each Unit Purchase Option then outstanding
      or to be outstanding shall have the right thereafter (until the stated
      expiration of such Unit Purchase Option) to receive, upon exercise of such
      Unit
      Purchase Option, the kind and amount of shares of stock and other securities
      and
      property receivable upon such consolidation or merger, by a holder of the number
      of Common Stock of the Company (including such number of Common Stock underlying
      the Warrants) for which such Unit Purchase Option might have been exercised
      immediately prior to such consolidation, merger, sale or transfer. Such
      supplemental Unit Purchase Option shall provide for adjustments which shall
      be
      identical to the adjustments provided in Section 6. The above provision of
      this Section shall similarly apply to successive consolidations or mergers.
      

     

    (c)   Fractional
      Interests.
      The
      Company shall not be required to issue certificates representing fractions
      of
      Common Stock or Warrants upon the exercise of the Unit Purchase Option, nor
      shall it be required to issue scrip or pay cash in lieu of any fractional
      interests, it being the intent of the parties that all fractional interests
      shall be eliminated by rounding any fraction up to the nearest whole number
      of
      Warrants, Common Stock or other securities, properties or rights.

     

    7.     Reservation
      and Listing.
      The
      Company shall at all times reserve and keep available out of its authorized
      Common Stock, solely for the purpose of issuance upon exercise of the Unit
      Purchase Options or the Warrants underlying the Unit Purchase Option, such
      number of Common Stock or other securities, properties or rights as shall be
      issuable upon the exercise thereof. The Company covenants and agrees that,
      upon
      exercise of the Unit Purchase Options and payment of the Exercise Price
      therefor, all Common Stock and other securities issuable upon such exercise
      shall be duly and validly issued, fully paid and non-assessable and not subject
      to preemptive rights of any stockholder. The Company further covenants and
      agrees that upon exercise of the Warrants underlying the Unit Purchase Options
      and payment of the respective Warrant exercise price therefor, all Common Stock
      and other securities issuable upon such exercise shall be duly and validly
      issued, fully paid and non-assessable and not subject to preemptive rights
      of
      any stockholder. As long as the Unit Purchase Options shall be outstanding,
      the
      Company shall use its best efforts to cause all (i) Units and Common Stock
      issuable upon exercise of the Unit Purchase Options, (iii) Warrants
      issuable upon exercise of the Unit Purchase Options and (iv) Common Stock
      issuable upon exercise of the Warrants included in the Units issuable upon
      exercise of the Unit Purchase Option to be listed (subject to official notice
      of
      issuance) on all securities exchanges (or, if applicable on the Nasdaq National
      Market, SmallCap Market, OTC Bulletin Board or any successor trading market)
      on
      which the Units, the Common Stock or the Public Warrants issued to the public
      in
      connection herewith may then be listed and/or quoted. 

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    8.     Certain
      Notice Requirements.

     

    (a)   Right
      to Notice.
      Nothing
      herein shall be construed as conferring upon the Holders the right to vote
      or
      consent as a stockholder for the election of directors or any other matter,
      or
      as having any rights whatsoever as a stockholder of the Company. If, however,
      at
      any time prior to the expiration of the Unit Purchase Options and their
      exercise, any of the events described in Section 8(b) shall occur, then, in
      one or more of said events, the Company shall give written notice of such event
      at least fifteen days prior to the date fixed as a record date or the date
      of
      closing the transfer books for the determination of the stockholders entitled
      to
      such dividend, distribution, conversion or exchange of securities or
      subscription rights, or entitled to vote on such proposed dissolution,
      liquidation, winding up or sale. Such notice shall specify such record date
      or
      the date of the closing of the transfer books, as the case may be.
      Notwithstanding the foregoing, the Company shall deliver to each Holder a copy
      of each notice given to the other stockholders of the Company at the same time
      and in the same manner that such notice is given to the stockholders.

     

    (b)   Enumerated
      Events.
      The
      Company shall be required to give the notice described in this Section 8
      upon one or more of the following events: (i) if the Company shall take a
      record of the holders of its Common Stock for the purpose of entitling them
      to
      receive a dividend or distribution payable otherwise than in cash, or a cash
      dividend or distribution payable otherwise than out of retained earnings, as
      indicated by the accounting treatment of such dividend or distribution on the
      books of the Company, or (ii) the Company shall offer to all the holders of
      its Common Stock any additional shares of capital stock of the Company or
      securities convertible into or exchangeable for shares of capital stock of
      the
      Company, or any option, right or warrant to subscribe therefor, or (iii) a
      dissolution, liquidation or winding up of the Company (other than in connection
      with a consolidation or merger) or a sale of all or substantially all of its
      property, assets and business shall be proposed. 

     

    (c)   Change
      in Exercise Price.
      The
      Company shall, promptly after an event requiring a change in the Exercise Price
      pursuant to Section 6 hereof, send notice to the Holders of such event and
      change (the “Price Notice”). The Price Notice shall describe the event causing
      the change and the method of calculating same and shall be certified as being
      true and accurate by the Company's President and Chief Financial Officer.

     

    (d)   Notice
      Delivery.
      All
      notices, requests, consents and other communications under this Unit Purchase
      Option shall be in writing and shall be deemed to have been duly made when
      hand
      delivered, or mailed by express mail or private courier service: (i) If to
      the registered Holder of the Unit Purchase Option, to the address of such Holder
      as shown on the books of the Company, or (ii) If to the Company, to the
      following address or to such other address as the Company may designate by
      notice to the Holders: 

     

    AdCare
      Health Systems, Inc.

    5057
      Troy
      Road

    Springfield,
      Ohio 45502-9032

    Attn:
      David A. Tenwick, Chairman

     

    9.     Miscellaneous.

     

    (a)   Amendments.
      The
      Company and Newbridge
      Securities Corporation
      may from
      time to time supplement or amend this Unit Purchase Option without the approval
      of any of the Holders in order to cure any ambiguity, to correct or supplement
      any provision contained herein that may be defective or inconsistent with any
      other provisions herein, or to make any other provisions in regard to matters
      or
      questions arising hereunder that the Company and Newbridge
      Securities Corporation
      may deem
      necessary or desirable and that the Company and Newbridge
      Securities Corporation
      deem
      shall not adversely affect the interest of the Holders. All other modifications
      or amendments shall require the written consent of and be signed by the party
      against whom enforcement of the modification or amendment is sought.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    (b)   Headings.
      The
      headings contained herein are for the sole purpose of convenience of reference,
      and shall not in any way limit or affect the meaning or interpretation of any
      of
      the terms or provisions of this Unit Purchase Option. 

     

    (c)   Entire
      Agreement.
      This
      Unit Purchase Option (together with the other agreements and documents being
      delivered pursuant to or in connection with this Unit Purchase Option)
      constitutes the entire agreement of the parties hereto with respect to the
      subject matter hereof, and supersedes all prior agreements and understandings
      of
      the parties, oral and written, with respect to the subject matter hereof.

     

    (d)   Binding
      Effect.
      This
      Unit Purchase Option shall inure solely to the benefit of, and shall be binding
      upon, the Holder and the Company and their permitted assignees, respective
      successors, legal representative and assigns, and no other person shall have
      or
      be construed to have any legal or equitable right, remedy or claim under or
      in
      respect of or by virtue of this Unit Purchase Option or any provisions herein
      contained. 

     

    (e)
      Governing
      Law.
      This
      Unit Purchase Option shall be governed by and construed and enforced in
      accordance with the laws of the State of New York, without giving effect to
      conflict of laws. The Company hereby agrees that any action, proceeding or
      claim
      against it arising out of, or relating in any way to this Unit Purchase Option
      shall be brought and enforced in the courts of the State of New York or of
      the
      United States of America for the Southern District of New York, and irrevocably
      submits to such jurisdiction, which jurisdiction shall be exclusive. The Company
      hereby waives any objection to such exclusive jurisdiction and that such courts
      represent an inconvenient forum. Any process or summons to be served upon the
      Company may be served by transmitting a copy thereof by registered or certified
      mail, return receipt requested, postage prepaid, addressed to it
      at the
      address set forth in Section 8 hereof. Such mailing shall be deemed
      personal service and shall be legal and binding upon the Company in any action,
      proceeding or claim. The Company and the Holder agree that the prevailing
      party(ies) in any such action shall be entitled to recover from the other
      party(ies) all of its reasonable attorneys' fees and expenses relating to such
      action or proceeding and/or incurred in connection with the preparation
      therefor. 

     

    (f)   Waivers.
      The
      failure of the Company or the Holder to at any time enforce any of the
      provisions of this Unit Purchase Option shall not be deemed or construed to
      be a
      waiver of any such provision, nor to in any way affect the validity of this
      Unit
      Purchase Option or any provision hereof or the right of the Company or any
      Holder to thereafter enforce each and every provision of this Unit Purchase
      Option. No waiver of any breach, non-compliance or non-fulfillment of any of
      the
      provisions of this Unit Purchase Option shall be effective unless set forth
      in a
      written instrument executed by the party or parties against whom or which
      enforcement of such waiver is sought; and no waiver of any such breach,
      non-compliance or non-fulfillment shall be construed or deemed to be a waiver
      of
      any other or subsequent breach, non-compliance or non-fulfillment. 

     

    (g)
       Counterparts.
      This
      Unit Purchase Option may be executed in one or more counterparts, and by the
      different parties hereto in separate counterparts, each of which shall be deemed
      to be an original, but all of which taken together shall constitute one and
      the
      same agreement, and shall become effective when one or more counterparts has
      been signed by each of the parties hereto and delivered to each of the other
      parties hereto. 

     

    (h)   Exchange
      Agreement.
      As a
      condition of the Holder's receipt and acceptance of this Unit Purchase Option,
      Holder agrees that, at any time prior to the complete exercise of this Unit
      Purchase Option by Holder, if the Company and Newbridge
      Securities Corporation
      enter
      into an agreement (the “Exchange Agreement”) pursuant to which they agree that
      all outstanding Unit Purchase Options will be exchanged for securities or cash
      or a combination of both, then Holder shall agree to such exchange and become
      a
      party to the Exchange Agreement. 

     

     

    [Balance
      of page intentionally left blank]

     

     

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, the Company has caused this Unit Purchase Option to be signed
      by its duly authorized officer as of the    day
      of            ,
      2006.

     

     

    ADCARE
      HEALTH SYSTEMS, INC.

     

    

    By: _____________________________

    Name: David
      A.
      Tenwick

    Title: Chairman

     

     

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    Form
      To Be Used To Exercise Unit Purchase Option 

     

    AdCare
      Health Systems, Inc.

    5057
      Troy
      Road

    Springfield,
      Ohio 45502-9032

    Attn:
      David A. Tenwick, Chairman

    

    Date:                        ,
      200  

     

    The
      undersigned hereby elects irrevocably to exercise all or a portion of the within
      Unit Purchase Option and to
      purchase            Units
      of AdCare Health Systems, Inc. and hereby makes payment of
      $                        (at
      the rate of
      $                        per
      Unit) in payment of the Exercise Price pursuant thereto. Please issue the Common
      Stock and Warrants as to which this Unit Purchase Option is exercised in
      accordance with the instructions given below. 

     

    or
      

     

    The
      undersigned hereby elects irrevocably to convert its right to
      purchase                        Units
      purchasable under the within Unit Purchase Option by surrender of the
      unexercised portion of the attached Unit Purchase Option (with a "Value" based
      of
      $            based
      on a "Market Price" of
      $            ).
      Please issue the securities comprising the Units as to which this Unit Purchase
      Option is exercised in accordance with the instructions given below.

     

           

    ____________________________________

    Signature

    

      

      

    ____________________________________

    Signature
      Guaranteed

     

    INSTRUCTIONS
      FOR REGISTRATION OF SECURITIES 

     

    Name: ____________________________________________________________________      

    (Print
      in
      Block Letters)

    

    Address:
      ____________________________________________________________________      

     

    NOTICE:
      THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
      FACE OF THE WITHIN UNIT PURCHASE OPTION IN EVERY PARTICULAR WITHOUT ALTERATION
      OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK,
      OTHER
      THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON
      A
      REGISTERED NATIONAL SECURITIES EXCHANGE. 

     

     

    
 

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    Form
      To Be Used To Assign Unit Purchase Option 

     

    ASSIGNMENT
      

     

    (To
      be
      executed by the registered Holder to effect a transfer of the within Unit
      Purchase Option)

     

             FOR
      VALUE
      RECEIVED,                        does
      hereby sell, assign and transfer
      unto                        the
      right to
      purchase                        Units
      of AdCare Health Systems, Inc. (the "Company") evidenced by the within Unit
      Purchase Option and does hereby authorize the Company to transfer such right
      on
      the books of the Company. 

     

     

    Dated:            ,
      200            

    

    ____________________________________

    Signature

    

      

      

              ___________________________________

    Signature
      Guaranteed

     

     

    NOTICE:
      THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
      FACE OF THE WITHIN UNIT PURCHASE OPTION IN EVERY PARTICULAR WITHOUT ALTERATION
      OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK,
      OTHER
      THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON
      A
      REGISTERED NATIONAL SECURITIES EXCHANGE. 

     

    

    
      
         

      

      
        13Greystone
                Business Credit II
                LLC

            	
               

            

    

     

    Loan
      and Security Agreement

     

    This
      Loan
      and Security Agreement (as it may be amended, this "Agreement")
      is
      entered into on September 7, 2006, between Greystone
      Business Credit II LLC ("Lender"),
      a
      Delaware limited liability company having an address at 152 West 57th Street,
      60th Floor, New York, New York 10019 and Pneutech
      Inc.
      ("Borrower"),
      a
      corporation organized under the laws of Canada whose principal office is located
      at 1475 32nd Avenue, Lachine, Quebec, Canada H8T 3J1 ("Borrower's
      Address"),
      as
      debtor under an insolvency proceeding commenced in the Commercial Division
      of
      the Superior Court of the Province of Quebec, District of Montreal, under the
      Companies' Creditors Arrangement Act R.S.C. 1985, c. C-36. The Schedules to
      this
      Agreement are an integral part of this Agreement and are incorporated herein
      by
      reference. Terms used, but not defined elsewhere, in this Agreement are defined
      in Schedule B.

     

    RECITALS

     

    A.
      On
      September 6, 2006 (the "Filing
      Date"),
      Borrower Affiliates filed an insolvency proceeding (the "CCAA
      Proceeding")
      in the
      Commercial Division of the Superior Court of the Province of Quebec, District
      of
      Montreal (the "Court")
      under
      the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the
      "CCAA"),
      bearing Case No. 500-11-028846-067, and Borrower Affiliates continue to operate
      their businesses and manage their properties pursuant to the provisions of
      the
      CCAA.

    

    B.
      Borrower Affiliates have requested that Lender provide a senior secured,
      super-priority revolving credit facility of up to U.S.$15,000,000 (the
      "Facility")
      to
      fund (i) the repayment in full in cash of all indebtedness owing by Borrower
      Affiliates to Royal Bank of Canada (whether arising before or after the filing
      of the CCAA Proceeding) (the "RBC
      Indebtedness"),
      (ii)
      ongoing working capital and general corporate needs of Borrower during the
      CCAA
      Proceeding; (iii) expenses arising in the CCAA Proceeding, as may be approved
      by
      the Court; and (d) closing costs and expenses in connection with the
      transactions contemplated herein.

    

    C.
      Lender
      is willing to provide such loans and other extensions of credit to Borrower
      Affiliates only upon the terms and conditions set forth herein, including the
      requirement that such loans and other extensions of credit are secured by first
      priority Liens, superior to all other Liens held by any other lienholder, all
      of
      which shall be acceptable to Lender, on all of the assets of Borrower
      Affiliates, except in each instance as otherwise set forth in this
      Agreement;

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

    D.
      Borrower Affiliates are unable to obtain funds or credit on any other terms
      and
      there is no prejudice to the interests of the other lienholders whose Liens
      are
      being subordinated to Lender's senior Liens provided for in this
      Agreement.

    

    E.
      Borrower has agreed to secure all of its Obligations under this Agreement and
      the Other Documents by granting to Lender a security interest in and lien upon
      the Collateral; and

    

    THEREFORE,
      in consideration of the mutual covenants and undertakings herein contained,
      Borrower and Lender hereby covenant and agree as follows:

    

    1. LOANS
      AND CREDIT ACCOMMODATIONS.

     

    1.1 Amount.
      Subject
      to the terms and conditions contained in this Agreement, Lender
      will:

     

    (a) Revolving
      Loans and Credit Accommodations. From
      time
      to time during the Term at Borrower's request, make revolving loans to Borrower
      ("Revolving
      Loans"),
      and
      make letters of credit, bankers acceptances and other credit accommodations
      ("Credit
      Accommodations")
      available to Borrower, in each case to the extent that there is sufficient
      Availability at the time of such request to cover, dollar for dollar, the
      requested Revolving Loan or Credit Accommodation; provided,
      that
      after giving effect to such Revolving Loan or Credit Accommodation, (x) the
      outstanding balance of all monetary Obligations (including
      the
      principal balance of any Term Loan and, solely for the purpose of determining
      compliance with this provision, the Credit Accommodation Balance) will not
      exceed the Maximum Facility Amount set forth in Section 1(a) of
      Schedule A and (y) none of the other Loan Limits set forth in
      Section 1 of Schedule A will be exceeded. For this purpose,
      "Availability"
      means:

     

    (i) the
      aggregate amount of Eligible Accounts (less maximum existing or asserted taxes,
      discounts, credits and allowances) multiplied by the Accounts Advance Rate
      set forth in Section 1(b)(i) of Schedule A but not to exceed the
      Accounts Sublimit set forth in Section 1(c) of
      Schedule A;

     

    plus

     

    (ii) the
      lower
      of cost or market value of Eligible Inventory multiplied by the Inventory
      Advance Rate(s) set forth in Section 1(b)(ii) of Schedule A, but
      not to exceed the Inventory Sublimit(s) set forth in Section 1(d) of
      Schedule A;

     

    minus

     

    (iii) all
      Reserves which Lender has established pursuant to Section 1.2 (including
      those to be established in connection with the requested Revolving Loan or
      Credit Accommodation);

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    
      	
              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    minus

     

    (iv) the
      outstanding balance of all of the monetary Obligations (excluding
      the
      Credit Accommodation Balance and the principal balance of the Term
      Loans).

     

    (b) Term
      Loan A.
      Make (i)
      on the date of this Agreement an advance to Borrower computed with respect
      to
      (A) the value of Borrower's Eligible Equipment owned by Borrower on the date
      of
      this Agreement (the "Equipment
      Advance")
      in the
      principal amount, if any, set forth in Section 2(a)(i) of Schedule A
      and (B) the value of Borrower's Eligible Real Property (the "Real
      Property Advance")
      in the
      principal amount, if any, set forth in Section 2(a)(ii) of Schedule A.
      The Equipment Advance and the Real Property Advance are collectively referred
      to
      as "Term
      Loan A".
      Term
      Loan A will be evidenced by a term note in the form attached hereto as Exhibit
      A
      hereto.

     

    (c) Term
      Loan B.
      Make,
      from time to time, advances to Borrower in the amount set forth in Section
      3(a)(i) of Schedule A at the direction of Lender to pay expenditures approved
      by
      Lender. Term Loan B will be evidenced by a term note in the form attached hereto
      as Exhibit B hereto.

     

    1.2 Reserves.
      Lender
      may from time to time establish and revise such reserves as Lender deems
      appropriate in its sole discretion ("Reserves")
      to
      reflect (i) events, conditions, contingencies or risks which affect or may
      affect (A) the Collateral or its value, or the security interests,
      hypothecs and other rights of Lender in the Collateral or (B) the assets,
      business or prospects of Borrower or any Obligor, (ii) Lender's good faith
      concern that any Collateral report or financial information furnished by or
      on
      behalf of Borrower or any Obligor to Lender is or may have been incomplete,
      inaccurate or misleading in any material respect, (iii) any fact or
      circumstance which Lender determines in good faith constitutes, or could
      constitute, a Default or Event of Default, (iv) federal, provincial and general
      sales tax, potential reclamation claims, crown claims and other claims having
      potential priority over Lender's liens, hypothecs, and security interests,
      (v)
      the amount of the Carve-Out or (vi) any other events or circumstances which
      Lender determines in good faith make the establishment or revision of a Reserve
      prudent. Without limiting the foregoing, Lender shall (x) in the case of
      each Credit Accommodation issued for the purchase of Inventory (a) which meets
      the criteria for Eligible Inventory set forth in clauses (i), (ii), (iii),
      (v)
      and (vi) of the definition of Eligible Inventory, (b) which is or will be in
      transit to one of the locations set forth in Section 10(d) of Schedule A,
      (c) which is fully insured in a manner satisfactory to Lender and (d) with
      respect to which Lender is in possession of all bills of lading and all other
      documentation which Lender has requested, all in form and substance satisfactory
      to Lender in its sole discretion, establish a Reserve equal to the cost of
      such
      Inventory (plus all duties, freight, taxes, insurance, costs and other charges
      and expenses relating to such Credit Accommodation or such Eligible Inventory)
      multiplied by a percentage equal to 50% and (y) in the case of any other
      Credit Accommodation issued for any purpose, establish a Reserve equal to the
      full amount of such Credit Accommodation plus all costs and other charges and
      expenses relating to such Credit Accommodation. In addition, (x) Lender
      shall establish a permanent Reserve in the amount set forth in Section 1(f)
      of Schedule A, and (y) if the outstanding principal balance of the
      Term Loan A advance with respect to Eligible Equipment and the Eligible Real
      Property exceeds the percentage set forth in Section 2(a)(i) or 2(a)(ii) of
      Schedule A of the appraised value of such Eligible Equipment and Eligible
      Real Property, Lender may establish an additional Reserve in the amount of
      such
      excess (and, for this purpose, if payments of principal on Term Loan A advances
      against Eligible Equipment and Real Property are not calculated separately,
      payments of principal of Term Loan A made by Borrower
      shall be deemed to apply to the Term Loan A advance with respect to Eligible
      Equipment and Real Property, respectively, in proportion to the original
      principal amounts of such advances). Lender may, in its discretion, establish
      and revise Reserves by deducting them in determining Availability or by
      reclassifying Eligible Accounts or Eligible Inventory as ineligible. In no
      event
      shall the establishment of a Reserve in respect of a particular actual or
      contingent liability obligate Lender to make advances hereunder to pay such
      liability or otherwise obligate Lender with respect thereto.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    1.3 Other
      Provisions Applicable to Credit Accommodations. Lender
      may, in its sole discretion and on terms and conditions acceptable to Lender,
      make Credit Accommodations available to Borrower either by issuing them, or
      by
      causing other financial institutions to issue them supported by Lender's
      guaranty or indemnification; provided,
      that
      after giving effect to each Credit Accommodation, the Credit Accommodation
      Balance will not exceed the Credit Accommodation Limit set forth in Section
      1(e)
      of Schedule A. Any amounts paid by Lender in respect of a Credit Accommodation
      will be treated for all purposes as a Revolving Loan which shall be secured
      by
      the Collateral and bear interest, and be payable, in the same manner as a
      Revolving Loan. Borrower agrees to execute all documentation required by Lender
      or the issuer of any Credit Accommodation in connection with any such Credit
      Accommodation.

     

    1.4 Repayment.
      Accrued
      interest on all monetary Obligations shall be payable on the first day of each
      month. Principal of the Term Loans shall be repaid as set forth in
      Section 2(b) and Section 3(b) of Schedule A. If at any time any of the
      Loan Limits are exceeded (including, without limitation, as a result of currency
      fluctuations), Borrower will immediately pay to Lender such amounts (or provide
      cash collateral to Lender with respect to the Credit Accommodation Balance
      in
      the manner set forth in Section 7.3), as shall cause Borrower to be in full
      compliance with all of the Loan Limits. Notwithstanding the foregoing, Lender
      may, in its sole discretion, make or permit Revolving Loans, the Term Loan,
      any
      Credit Accommodations or any other monetary Obligations to be in excess of
      any
      of the Loan Limits; provided,
      that
      Borrower shall, upon Lender's demand, pay to Lender such amounts as shall cause
      Borrower to be in full compliance with all of the Loan Limits, unless otherwise
      agreed to in writing by Borrower and Lender. All unpaid monetary Obligations
      shall be payable in full on the Maturity Date (as defined in Section 7.1)
      or, if earlier, the date of any early termination pursuant to
      Section 7.2.

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

    

     

    1.5 Minimum
      Borrowing.
      Subject
      to the terms and conditions of this Agreement, Borrower agrees to
      (i) borrow sufficient amounts to cause the outstanding principal balance of
      the Loans to equal or exceed, at all times prior to the Maturity Date, the
      Minimum Loan Amount set forth in Section 5 of Schedule A and
      (ii) maintain Availability sufficient to enable Borrower to do so. However,
      Lender shall not be obligated to loan Borrower the Minimum Loan Amount other
      than in accordance with all of the terms and conditions of this
      Agreement.

     

    2. INTEREST
      AND FEES.

     

    2.1 Interest.
      All
      Loans and other monetary Obligations shall bear interest at the Interest Rate(s)
      set forth in Section 4 of Schedule A, except where expressly set forth
      to the contrary in this Agreement or another Loan Document; provided,
      that
      after the occurrence of an Event of Default, all Loans and other monetary
      Obligations shall, at Lender's option, bear interest at a rate per annum equal
      to two percent (2%) in excess of the rate otherwise applicable thereto (the
      "Default
      Rate")
      until
      paid in full (notwithstanding the entry of any judgment against Borrower or
      the
      exercise of any other right or remedy by Lender), and all such interest shall
      be
      payable on demand. Changes in the Interest Rate shall be effective as of the
      date of any change in the Prime Rate. Notwithstanding anything to the contrary
      contained in this Agreement, the aggregate of all amounts deemed to be interest
      hereunder and charged or collected by Lender is not intended to exceed the
      highest rate permissible under any applicable law, but if it should, such
      interest shall automatically be reduced to the extent necessary to comply with
      applicable law and Lender will refund to Borrower any such excess interest
      received by Lender. Without limiting the generality of the foregoing in this
      Section 2.1, if any provision of this Agreement or any of the Loan Documents
      would obligate the Borrower or any Obligor to make any payment of interest
      or
      other amount payable to the Lender in an amount or calculated at a rate which
      would be prohibited by law or would result in a receipt by the Lender of
      interest at a criminal rate (as construed under the Criminal
      Code
      (Canada)), then notwithstanding that provision, that amount or rate shall be
      deemed to have been adjusted with retroactive effect to the maximum amount
      or
      rate of interest, as the case may be, as would not be so prohibited by law
      or
      result in a receipt by the Lender of interest at a criminal rate, the adjustment
      to be effected, to the extent necessary, as follows:

     

    (a) firstly,
      by reducing the amount or rate of interest required to be paid to the Lender
      under this Agreement or any other Loan Document; and

     

    (b) thereafter,
      by reducing any fees, commissions, premiums and other amounts required to be
      paid to the Lender which would constitute interest for purposes of Section
      347
      of the Criminal
      Code
      (Canada).

     

    Notwithstanding
      this Section 2.1, and after giving effect to all adjustments contemplated
      thereby, if the Lender shall have received an amount in excess of the maximum
      permitted by the Criminal Code (Canada), then the Borrower or the relevant
      Obligor shall be entitled, by notice in writing to the Lender, to obtain
      reimbursement from the Lender in an amount equal to the excess, and pending
      reimbursement, the amount of the excess shall be deemed to be an amount payable
      by the Lender to the Borrower or the relevant Obligor.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    Any
      amount or rate of interest referred to in this Section 2.1 shall be determined
      in accordance with generally accepted actuarial practices and principles as
      an
      effective annual rate of interest over the Term on the assumption that any
      charges, fees or expenses that fall within the meaning of interest (as defined
      in the Criminal
      Code
      (Canada)) shall, if they relate to a specific period of time, be prorated over
      that period of time and otherwise be prorated over the period from the date
      of
      this Agreement to the Term and, in the event of a dispute, a certificate of
      a
      Fellow of the Canadian Institute of Actuaries appointed by the Lender shall
      be
      conclusive for the purposes of that determination.

     

    2.2 Fees
      and Warrants. Borrower
      shall pay Lender the following fees, which are in addition to all interest
      and
      other sums payable by Borrower to Lender under this Agreement, and are not
      refundable:

     

    (a) Closing
      Fee.
      A
      closing fee (the "Closing
      Fee")
      in the
      amount set forth in Section 7(a) of Schedule A.

     

    (b) Facility
      Fees.
      A
      facility fee for the Initial Term (the "Initial
      Term Facility Fee")
      in the
      amount set forth in Section 7(b)(i) of Schedule A (which shall be
      fully earned as of the date of this Agreement and shall be payable in equal
      installments due, respectively, on each anniversary of the date of this
      Agreement during the Initial Term, other than the Maturity Date), and a facility
      fee for each Renewal Term (the "Renewal
      Term Facility Fee")
      in the
      amount set forth in Section 7(b)(ii) of Schedule A (which shall be
      fully earned as of the first day of such Renewal Term and shall be payable
      in
      equal installments due, respectively, on the first day of such Renewal Term
      and
      on each anniversary thereof during such Renewal Term, other than the Maturity
      Date).

     

    (c) Servicing
      Fee.
      A
      monthly servicing fee (the "Servicing
      Fee")
      in the
      amount set forth in Section 7(c) of Schedule A, in consideration of
      Lender's administration and other services for each month (or part thereof),
      which shall be fully earned as of, and payable in advance on, the date of this
      Agreement and on the first day of each month thereafter so long as any of the
      Obligations are outstanding.

     

    (d) Unused
      Line Fee.
      An
      unused line fee (the "Unused
      Line Fee")
      at a
      rate equal to the percentage per annum set forth in Section 7(d) of
      Schedule A of the amount by which the Maximum Facility Amount exceeds the
      average daily outstanding principal balance of the Loans and the Credit
      Accommodation Balance during the immediately preceding month (or part thereof),
      which fee shall be payable, in arrears, on the first day of each month so long
      as any of the Obligations are outstanding and on the Maturity Date.

     

    (e) Minimum
      Borrowing Fee.
      A
      minimum borrowing fee (the "Minimum
      Borrowing Fee")
      equal
      to the excess, if any, of (i) interest which would have been payable in
      respect of each period set forth in Section 7(e)(i) of Schedule A if,
      at all times during such period, the principal balance of the Loans was equal
      to
      the Minimum Loan Amount over (ii) the actual interest payable in respect of
      such period, which fee shall be fully earned as of the last day of such period
      and payable on the date set forth in Section 7(e)(ii) of Schedule A and on
      the
      Maturity Date, commencing with the immediately following period.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    (f) Intentionally
      Omitted.

     

    (g) Warrants.
      As
      additional consideration for extending the Facility to Borrower, Lender shall
      receive, for no additional consideration, warrants to purchase 1,000,000 shares
      of common stock of Parent, which will have an exercise price of U.S.$.50 per
      share, and will be immediately exercisable and freely transferable by Lender
      separate from the Facility. Within six months following the closing, the shares
      of Parent subject to such warrants will be registered by Parent with the
      Securities and Exchange Commission so that they will be freely tradable and
      shall be listed for trading on the principal market on which Parent's securities
      are then trading. 

     

    (h) Credit
      Accommodation Fees.
      The fees
      relating to Credit Accommodations (or guaranties thereof by Lender) in the
      amount set forth in Section 7(i) of Schedule A (the "Credit
      Accommodation Fees"),
      payable, in arrears, on the first day of each month so long as any of the
      Obligations are outstanding and on the Maturity Date, plus all costs and fees
      charged by the issuer, payable as and when such costs and fees are
      charged.

     

    2.3 Computation
      of Interest and Fees. Except
      as
      otherwise provided herein, all
      interest and fees shall be calculated daily on the closing balances in the
      Loan
      Account based on the actual number of days elapsed in a year of 360 days. For
      purposes of calculating interest and fees, if the outstanding daily principal
      balance of the Revolving Loans is a credit balance, such balance shall be deemed
      to be zero. For the purposes of the Interest
      Act
      (Canada), any amount of interest or fees calculated hereunder using 360, 365
      or
      366 days per year and expressed as an annual rate is equal to the said rate
      of
      interest or fees multiplied by the actual number of days comprised within the
      calendar year, divided by 360, 365 or 366, as the case may be. 

     

    2.4 Loan
      Account; Monthly Accountings. Lender
      shall maintain a loan account for Borrower reflecting all advances, charges,
      expenses and payments made pursuant to this Agreement (the "Loan
      Account"),
      and
      shall provide Borrower with a monthly accounting reflecting the activity in
      the
      Loan Account. Each accounting shall be deemed correct, accurate and binding
      on
      Borrower and an account stated (except for reverses and reapplications of
      payments made and corrections of errors discovered by Lender), unless Borrower
      notifies Lender in writing to the contrary within sixty days after such account
      is rendered, describing the nature of any alleged errors or omissions. However,
      Lender's failure to maintain the Loan Account or to provide any such accounting
      shall not affect the legality or binding nature of any of the Obligations.
      Interest, fees and other monetary Obligations due and owing under this Agreement
      (including fees and other amounts paid by Lender to issuers of Credit
      Accommodations) may, in Lender's discretion, be charged to the Loan Account,
      and
      will thereafter be deemed to be Revolving Loans and will bear interest at the
      same rate as other Revolving Loans.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    2.5 Taxes.
      All
      payments made by Borrower hereunder or under any other Loan Document shall
      be
      made without setoff, compensation, counterclaim, or other defense. To the extent
      permitted by applicable law, all payments hereunder or under the Loan Documents
      (including any payment of principal, interest, or fees) to, or for the benefit,
      of any Person shall be made by Borrower free and clear of and without deduction
      or withholding for, or account of, any taxes now or hereinafter imposed by
      any
      taxing authority.

     

    If
      Borrower makes any payment hereunder or under any other Loan Document in respect
      of which it is required by applicable law to deduct or withhold any taxes,
      Borrower shall increase the payment hereunder or under any such Loan Document
      such that after the reduction for the amount of taxes withheld (and any taxes
      withheld or imposed with respect to the additional payments required under
      this
      Section 2.5), the amount paid to Lender equals the amount that was payable
      hereunder or under any such Loan Document without regard to this
      Section 2.5. To the extent Borrower withholds any taxes on payments
      hereunder or under any Loan Document, Borrower shall pay the full amount
      deducted to the relevant taxing authority within the time allowed for payment
      under applicable law and shall deliver to Lender within 30 days after it has
      made payment to such authority a receipt issued by such authority evidencing
      the
      payment of all amounts so required to be deducted or withheld from such payment.
      Upon submission of proof of payment of any Canadian withholding tax in respect
      of Borrower's payments of interest to Lender under this Agreement, Lender shall
      credit Borrower's account in an amount equal to 50% of the amount of Canadian
      withholding tax so paid. 

     

    Other
      than Lender's income taxes, if Lender is required by law to make any payments
      of
      any taxes on or with respect to any amounts received or receivable hereunder
      or
      under any other Loan Document, or any tax is assessed against Lender with
      respect to amounts received or receivable hereunder or under any other Loan
      Document, Borrower will indemnify Lender against (i) such tax (and any
      reasonable counsel fees and expenses associated with such tax) and (ii) any
      taxes imposed as a result of the receipt of the payment under this
      Section 2.5. A certificate prepared in good faith as to the amount of such
      payment by Lender shall, absent manifest error, be final, conclusive, and
      binding on all parties unless Borrower notifies Lender in writing to the
      contrary within sixty days after such certificate is rendered, describing the
      nature of any alleged errors or omissions.

     

    3. SECURITY
      INTEREST.

     

    3.1 Grant
      of Security Interest. To
      secure
      the full payment and performance of all of the Obligations, and in addition
      to
      any security interests, liens, mortgages and hypothecs granted by Borrower
      to
      Lender under the Canadian Security Documents, Borrower hereby assigns to Lender
      and grants to Lender a continuing security interest in the following property
      of
      Borrower, whether tangible or intangible, now or hereafter owned, existing,
      acquired or arising and wherever now or hereafter located, and whether or not
      eligible for lending purposes: (i) all Accounts (whether or not Eligible
      Accounts) and all Goods whose sale, lease or other disposition by Borrower
      has
      given rise to Accounts and have been returned to, or repossessed or stopped
      in
      transit by, Borrower; (ii) all Chattel Paper, Instruments, Documents and
      General Intangibles (including, without limitation, all patents, patent
      applications, trademarks, trademark applications, tradenames, trade secrets,
      goodwill, copyrights, copyright applications, registrations, licenses, software,
      franchises, customer lists, tax refund claims, claims against carriers and
      shippers, guarantee claims, contracts rights, payment intangibles, security
      interests, security deposits and rights to indemnification); (iii) all
      Inventory (whether or not Eligible Inventory); (iv) all Goods (other than
      Inventory), including, without limitation, Equipment (whether or not Eligible
      Equipment), vehicles and Fixtures; (v) all Investment Property;
      (vi) all Deposit Accounts, bank accounts, deposits and cash; (vii) 
all Letter-of-Credit Rights; (viii) Commercial Tort Claims listed on
      Exhibit C hereto; (ix) all Supporting Obligations; (x) any other property of
      Borrower now or hereafter in the possession, custody or control of Lender or
      any
      agent or mandatary or any parent, Affiliate or Subsidiary of Lender or any
      participant with Lender in the Loans, for any purpose (whether for safekeeping,
      deposit, collection, custody, pledge, transmission or otherwise), (xi) 
all
      proceeds
      arising from claims and causes of action in the CCAA or any subsequent
      insolvency or bankruptcy proceeding, or outside of any such proceeding; and
      (xii) all
      additions and accessions to, substitutions for, and replacements, products
      and
      Proceeds of the foregoing property, including, without limitation, proceeds
      of
      all insurance policies insuring the foregoing property, and all of Borrower's
      books and records relating to any of the foregoing and to Borrower's business.
      The security interest granted in this Section 3.1 shall be in addition to all
      other liens, mortgages, hypothecs and security interests granted by Borrower
      to
      Lender under any other agreements, instruments and documents.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    3.2 Possessory
      Collateral. Immediately
      upon Borrower's receipt of any portion of the Collateral evidenced by an
      agreement, Instrument or Document, including without limitation, any Tangible
      Chattel Paper and any Investment Property consisting of certificated securities,
      Borrower shall deliver the original thereof to Lender together with an
      appropriate endorsement or other specific evidence of assignment thereof to
      Lender (in form and substance acceptable to Lender). If an endorsement or
      assignment of any such items shall not be made for any reason, Lender is hereby
      irrevocably authorized, as Borrower's attorney, agent-in-fact and mandatary
      to
      endorse or assign the same on Borrower's behalf.

     

    3.3 Preservation
      of Collateral and Perfection of Security Interest Therein. Borrower
      shall, at Lender's request, at any time and from time to time, authenticate,
      execute and deliver to Lender such financing statements, documents and other
      agreements and instruments (and pay the cost of filing or recording the same
      in
      all public offices deemed necessary or desirable by Lender) and do such other
      acts and things or cause third parties to do such other acts and things as
      Lender may deem necessary or desirable in its sole discretion in order to
      establish and maintain a valid, attached and perfected security interest in
      the
      Collateral in favor of Lender (free and clear of all other liens, hypothecs,
      claims, prior claims, encumbrances and rights of third parties whatsoever,
      whether voluntarily or involuntarily created, except Permitted Liens) to secure
      payment of the Obligations, and in order to facilitate the collection of the
      Collateral. Borrower authorizes Lender to file, transmit, or communicate, as
      applicable, financing statements and amendments describing the Collateral as
      "all personal property of debtor" or "all assets of debtor" or words of similar
      effect, in order to perfect Agent's security interest in the Collateral without
      Borrower's signature. Borrower also hereby ratifies its authorization for Lender
      to have filed in any jurisdiction any financing statements filed prior to the
      date hereof.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    4. ADMINISTRATION.

     

    4.1 Lock
      Boxes and Blocked Accounts.
      Borrower
      will, at its expense, establish (and revise from time to time as Lender may
      require) collection procedures acceptable to Lender, in Lender's sole
      discretion, for the collection of checks, wire transfers and other proceeds
      of
      Accounts ("Account
      Proceeds"),
      which
      may include (i) directing all Account Debtors to send all such proceeds
      directly to a post office box designated by Lender either in the name of
      Borrower (but as to which Lender has exclusive access) or, at Lender's
      option, in the name of Lender (a "Lock
      Box")
      or
      (ii) depositing all Account Proceeds received by Borrower into one or more
      bank accounts maintained in Lender's name (each, a "Blocked
      Account"),
      under
      an arrangement acceptable to Lender with a depository bank acceptable to Lender,
      pursuant to which all funds deposited into each Blocked Account are to be
      transferred, in United States Dollars, to Lender in such manner, and with such
      frequency, as Lender shall specify or (iii) a combination of the foregoing.
      Borrower agrees to execute, and to cause its depository banks to execute, such
      Lock Box and Blocked Account agreements and other documentation as Lender shall
      require from time to time in connection with the foregoing.

     

    4.2 Remittance
      of Proceeds. Except
      as
      provided in Section 4.1, all Proceeds arising from the sale or other
      disposition of any Collateral shall be delivered, in kind, by Borrower to Lender
      in the original form in which received by Borrower not later than the following
      Business Day after receipt by Borrower. Until so delivered to Lender, Borrower
      shall hold such Proceeds separate and apart from Borrower's other funds and
      property in an express trust for and on behalf of Lender. Nothing in this
      Section 4.2 shall limit the restrictions on disposition of Collateral set
      forth elsewhere in this Agreement.

     

    4.3 Application
      of Payments. Lender
      may, in its sole discretion, apply, reverse and re-apply all cash and non-cash
      Proceeds of Collateral or other payments received with respect to the
      Obligations, in such order and manner as Lender shall determine, whether or
      not
      the Obligations are due, and whether before or after the occurrence of a Default
      or an Event of Default. For purposes of determining Availability, such amounts
      will be credited to the Loan Account and the Collateral balances to which they
      relate upon Lender's receipt of advice from Lender's Bank (set forth in
      Section 12 of Schedule A) that such items have been credited to
      Lender's account at Lender's Bank (or upon Lender's deposit thereof at Lender's
      Bank in the case of payments received by Lender in kind), in each case subject
      to final payment and collection. However, for purposes of computing interest
      on
      the Obligations, such items shall be deemed applied by Lender three Business
      Days after Lender's receipt of advice of deposit thereof at Lender's
      Bank.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    4.4 Notification;
      Verification. Lender
      or
      its designee may, from time to time, whether or not a Default or Event of
      Default has occurred: (i) verify directly with the Account Debtors the
      validity, amount and other matters relating to the Accounts and Chattel Paper,
      by means of mail, telephone or otherwise, either in the name of Borrower or
      Lender or such other name as Lender may choose; (ii) notify Account Debtors
      that Lender has a security interest and hypothec in the Accounts and that
      payment thereof is to be made directly to Lender; and (iii) demand, collect
      or enforce payment of any Accounts and Chattel Paper (but without any duty
      to do
      so).

     

    4.5 Power
      of Attorney. Borrower
      hereby grants to Lender an irrevocable power of attorney and mandate, coupled
      with an interest, authorizing and permitting Lender (acting through any of
      its
      officers, employees, attorneys, mandataries or agents), at any time
      (whether or not a Default or Event of Default has occurred and is continuing,
      except as expressly provided below), at Lender's option, but without obligation,
      with or without notice to Borrower (except that Lender will provide notice
      to
      Borrower so long as no Default or Event of Default has occurred and is
      continuing), and at Borrower's expense, to do any or all of the following,
      in
      Borrower's name or otherwise: (i) execute on behalf of Borrower any
      documents that Lender may, in its sole discretion, deem advisable in order
      to
      perfect and maintain Lender's security interests and hypothecs in the
      Collateral, to exercise a right of Borrower or Lender, or to fully consummate
      all the transactions contemplated by this Agreement and the other Loan Documents
      (including such financing statements and continuation financing statements
      and
      similar instruments or forms necessary in other relevant jurisdictions and
      amendments thereto, as Lender shall deem necessary or appropriate) and to file
      as a financing statement any copy of this Agreement or any financing statement
      signed by Borrower; (ii) upon the occurrence and during the continuance of
      an
      Event of Default, execute on behalf of Borrower any document exercising,
      transferring or assigning any option to purchase, sell or otherwise dispose
      of
      or lease (as lessor or lessee) any real (immovable) or personal (movable)
      property which is part of the Collateral or in which Lender has an interest;
      (iii) execute on behalf of Borrower any invoices relating to any Accounts,
      any draft against any Account Debtor, any proof of claim in bankruptcy, any
      notice of Lien or claim, and any assignment or satisfaction of mechanic's,
      materialman's or other Lien; (iv) execute on behalf of Borrower any notice
      to any Account Debtor; (v) receive and otherwise take control in any manner
      of any cash or non-cash items of payment or Proceeds of Collateral;
      (vi) endorse Borrower's name on all checks and other forms of remittances
      received by Lender; (vii) upon the occurrence and during the continuance of
      an
      Event of Default, pay, contest or settle any Lien, charge, encumbrance, security
      interest, hypothec and adverse claim in or to any of the Collateral, or any
      judgment based thereon, or otherwise take any action to terminate, cancel or
      discharge the same; (viii) after the occurrence of a Default or Event of
      Default, grant extensions of time to pay, compromise claims relating to, and
      settle Accounts, Chattel Paper and General Intangibles for less than face value
      and execute all releases and other documents in connection therewith;
      (ix) pay any sums required on account of Borrower's taxes or to secure the
      release of any Liens therefor; (x) pay any amounts necessary to obtain, or
      maintain in effect, any of the insurance described in Section 5.14; (xi)
      upon the occurrence and during the continuance of an Event of
      Default, settle and adjust, and give releases of, any insurance claim that
      relates to any of the Collateral and obtain payment therefor;
      (xii) instruct any third party having custody or control of any Collateral
      or books or records belonging to, or relating to, Borrower to give Lender the
      same rights of access and other rights with respect thereto as Lender has under
      this Agreement; (xiii) after the occurrence of a Default or Event of
      Default, change the address for delivery of Borrower's mail and receive and
      open
      all mail addressed to Borrower; and (xiv) endorse or assign to Lender on
      Borrower's behalf any portion of Collateral evidenced by an agreement,
      Instrument or Document if an endorsement or assignment of any such items is
      not
      made by Borrower pursuant to Section 3.2. Any and all sums paid, and any and
      all
      costs, expenses, liabilities, obligations and reasonable attorneys' fees
      incurred, by Lender with respect to the foregoing shall be added to and become
      part of the Obligations, shall be payable on demand, and shall bear interest
      at
      a rate equal to the highest interest rate applicable to any of the Obligations.
      Borrower agrees that Lender's rights under the foregoing power of attorney
      and
      mandate or any of Lender's other rights under this Agreement or the other Loan
      Documents shall not be construed to indicate that Lender is in control of the
      business, management or properties of Borrower.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    4.6 Disputes.
      Borrower
      shall promptly notify Lender of all disputes or claims relating to Accounts
      and
      Chattel Paper that exceed U.S.$10,000. Borrower will not, without Lender's
      prior
      written consent, compromise or settle any Account or Chattel Paper for less
      than
      the full amount thereof, grant any extension of time of payment of any Account
      or Chattel Paper, release (in whole or in part) any Account Debtor or other
      person liable for the payment of any Account or Chattel Paper or grant any
      credits, discounts, allowances, deductions, return authorizations or the like
      with respect to any Account or Chattel Paper; except that prior to the
      occurrence of an Event of Default, Borrower may take any of such actions in
      the
      ordinary course of its business without Lender's prior written consent;
provided,
      that
      Borrower promptly reports the same to Lender.

     

    4.7 Invoices.
      At
      Lender's request, Borrower will cause all invoices and statements which it
      sends
      to Account Debtors or other third parties to be marked, in a manner satisfactory
      to Lender, to reflect Lender's security interest and hypothec
      therein.

     

    4.8 Inventory.

     

    (a) Returns.
      Provided
      that no Event of Default has occurred and is continuing, if any Account Debtor
      returns any Inventory to Borrower in the ordinary course of its business,
      Borrower will promptly determine the reason for such return and promptly issue
      a
      credit memorandum to the Account Debtor in the appropriate amount (sending
      a
      copy to Lender for any return that exceeds U.S.$5,000). After the occurrence
      of
      an Event of Default, Borrower will not accept any return without Lender's prior
      written consent. Upon Lender's demand, regardless of whether an Event of Default
      has occurred, Borrower will (i) hold the returned Inventory in trust for
      Lender; (ii) segregate all returned Inventory from all of Borrower's other
      property; (iii) conspicuously label the returned Inventory as Lender's
      property; and (iv) immediately notify Lender of the return of such
      Inventory, specifying the reason for such return, the location and condition
      of
      the returned Inventory and, at Lender's request, deliver such returned Inventory
      to Lender at an address specified by Lender.

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    (b) Other
      Covenants. Borrower
      will not, without Lender's prior written consent, (i) store any Inventory
      with any warehouseman or other third party other than as set forth in Section
      10(d) of Schedule A or (ii) sell any Inventory on a sale-or-return,
      guaranteed sale, consignment, or other contingent basis. All of the Inventory
      has been produced only in accordance with the applicable laws and all rules,
      regulations and orders promulgated thereunder.

     

    4.9 Access
      to Collateral, Books and Records. At
      reasonable times, and on one Business Day's notice, prior to the occurrence
      of a
      Default or an Event of Default, and at any time and with or without notice
      after
      the occurrence of a Default or an Event of Default, Lender or its agents and
      mandataries shall have the right to inspect the Collateral, and the right to
      examine and copy Borrower's books and records. Lender shall take reasonable
      steps to keep confidential all information obtained in any such inspection
      or
      examination, but Lender shall have the right to disclose any such information
      to
      its auditors, regulatory agencies, attorneys and participants, and pursuant
      to
      any subpoena or other legal process. Borrower agrees to give Lender access
      to
      any or all of Borrower's premises to enable Lender to conduct such inspections
      and examinations. Such inspections and examinations shall be at Borrower's
      expense and the charge therefor shall be U.S.$950 per person per day (or such
      higher amount as shall represent Lender's then current standard charge), plus
      reasonable out-of-pocket expenses. Lender may, at Borrower's expense, use
      Borrower's personnel to the extent reasonably available, computer and other
      equipment, programs, printed output and computer readable media, supplies and
      premises for the collection, sale or other disposition of Collateral to the
      extent Lender, in its sole discretion, deems appropriate. Borrower hereby
      irrevocably authorizes all accountants and third parties to disclose and deliver
      to Lender, at Borrower's expense, all financial information, books and records,
      work papers, management reports and other information in their possession
      regarding Borrower. Borrower will not enter into any agreement with any
      accounting firm, service bureau or third party to store Borrower's books or
      records at any location other than Borrower's Address without first obtaining
      Lender's written consent (which consent may be conditioned upon such accounting
      firm, service bureau or other third party agreeing to give Lender the same
      rights with respect to access to books and records and related rights as Lender
      has under this Agreement).

     

    5. REPRESENTATIONS,
      WARRANTIES AND COVENANTS.

     

    To
      induce
      Lender to enter into this Agreement, Borrower represents, warrants and covenants
      as follows (it being understood that (i) each such representation and
      warranty will be deemed remade as of the date on which each Loan is made and
      each Credit Accommodation is provided and shall not be affected by any knowledge
      of, or any investigation by, Lender, and (ii) the accuracy of each such
      representation, warranty and covenant will be a condition to each Loan and
      Credit Accommodation):

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    5.1 Existence
      and Authority.
      Borrower
      is duly incorporated, organized, validly existing and in good standing under
      the
      laws of Canada. Borrower is qualified and licensed to do business in all
      jurisdictions in which any failure to do so would have a material adverse effect
      on Borrower. The Borrower has all necessary corporate power and capacity to
      enter into this Agreement and the other Loan Documents and to hold and operate
      its property and to carry on the business currently carried on by it or which
      it
      proposes to carry on hereafter in each jurisdiction where such business is
      carried on. The execution, delivery and performance by Borrower of this
      Agreement and all of the other Loan Documents have been duly and validly
      authorized, do not violate Borrower's articles or certificate of incorporation
      or amalgamation, by-laws, other organizational documents or any shareholders
      agreement or declaration applicable to it, or any law or any agreement or
      instrument or any court order which is binding upon Borrower or its property,
      do
      not constitute grounds for acceleration of any indebtedness or obligation under
      any agreement or instrument which is binding upon Borrower or its property,
      and
      do not require the consent of any Person. This Agreement and such other Loan
      Documents have been duly executed and delivered by, and are enforceable against,
      Borrower, and all other Obligors who have signed them, in accordance with their
      respective terms. Sections 9(g) and 9(h) of Schedule A set forth the
      ownership of Borrower and the names and ownership of Borrower's Subsidiaries
      as
      of the date of this Agreement.

     

    5.2 Name;
      Trade Names and Styles. The
      name
      of Borrower set forth in the heading to this Agreement is its correct and
      complete legal name as of the date hereof. Listed in Sections 10(a), 10(b)
      and 10(c) of Schedule A are all prior names of Borrower and all of
      Borrower's present and prior trade names. Borrower shall give Lender at least
      thirty days' prior written notice before changing its name or doing business
      under any other name. Borrower has complied with all laws relating to the
      conduct of business under a fictitious business name. Borrower represents and
      warrants that (i) each trade name does not refer to another corporation or
      other legal entity; (ii) all Accounts invoiced under any such trade names
      are owned exclusively by Borrower and are subject to the security interest
      and
      hypothec of Lender and the other terms of this Agreement and (iii) all
      schedules of Accounts, including any sales made or services rendered using
      any
      trade name shall show Borrower's name as assignor.

     

    5.3 Title
      to Collateral; Permitted Liens. Borrower
      has good and marketable title to the Collateral. The Collateral now is and
      will
      remain free and clear of any and all liens, charges, security interests,
      hypothecs, prior claims, encumbrances and adverse claims, except for Permitted
      Liens. Lender now has, and will continue to have, a first-priority perfected
      and
      enforceable security interest and hypothec in all of the Collateral as more
      fully provided in the Order, subject only to the Permitted Liens, and Borrower
      will at all times defend Lender and the Collateral against all claims of others.
      None of the Collateral which is Equipment is or will be affixed to any real
      property in such a manner, or with such intent, as to become a fixture. Except
      for leases or subleases as to which Borrower has delivered to Lender a
      landlord's waiver in form and substance satisfactory to Lender, Borrower is
      not
      a lessee or sublessee under any real (immovable) property lease or sublease
      pursuant to which the lessor or sublessor may obtain any rights in any of the
      Collateral, and no such lease or sublease now prohibits, restrains, impairs
      or
      conditions, or will prohibit, restrain, impair or condition, Borrower's right
      to
      remove any Collateral from the premises. Except for warehouses as to which
      Borrower has delivered to Lender a warehouseman's waiver in form and substance
      satisfactory to Lender, Borrower is not a bailor of any Goods at any warehouse
      under an arrangement pursuant to which the warehouseman may obtain any rights
      in
      any of the Collateral. Prior to causing or permitting any Collateral to be
      located upon premises in which any third party has an interest (whether as
      owner, processor, depositary, mortgagee, beneficiary under a deed of trust,
      lien
      or otherwise), Borrower shall, whenever requested by Lender, cause each such
      third party to execute and deliver to Lender, in form and substance acceptable
      to Lender, such waivers and subordinations as Lender shall specify, so as to
      ensure that Lender's rights in the Collateral are, and will continue to be,
      superior to the rights of any such third party. Borrower will keep in full
      force
      and effect, and will comply with all the terms of, any lease of real (immovable)
      property where any of the Collateral now or in the future may be
      located.

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    5.4 Accounts
      and Chattel Paper. As
      of
      each date reported by Borrower, all Accounts which Borrower has reported to
      Lender as being Eligible Accounts comply in all respects with the criteria
      for
      eligibility established by Lender and in effect at such time. All Accounts
      and
      Chattel Paper are genuine and in all respects what they purport to be, arise
      out
      of a completed, bona fide and unconditional and non-contingent sale and delivery
      of goods or rendition of services by Borrower in the ordinary course of its
      business and in accordance with the terms and conditions of all purchase orders,
      contracts or other documents relating thereto, each Account Debtor thereunder
      had the capacity to contract at the time any contract or other document giving
      rise to such Accounts and Chattel Paper were executed, and the transactions
      giving rise to such Accounts and Chattel Paper comply with all applicable laws

      and governmental rules and regulations.

     

    5.5 Electronic
      Chattel Paper. To
      the
      extent that Borrower obtains or maintains any Electronic Chattel Paper, Borrower
      shall create, store and assign the record or records comprising the Electronic
      Chattel Paper in such a manner that (i) a single authoritative copy of the
      record or records exists which is unique, identifiable and except as otherwise
      provided in clauses (iv), (v) and (vi) below, unalterable, (ii) the
      authoritative copy identifies Lender as the assignee of the record or records,
      (iii) the authoritative copy is communicated to and maintained by the Lender
      or
      its designated custodian, (iv) copies or revisions that add or change an
      identified assignee of the authoritative copy can only be made with the
      participation of Lender, (v) each copy of the authoritative copy and any copy
      of
      a copy is readily identifiable as a copy that is not the authoritative copy
      and
      (vi) any revision of the authoritative copy is readily identifiable as an
      authorized or unauthorized revision.

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    5.6 Investment
      Property.
      Borrower
      will take any and all actions required or requested by Lender, from time to
      time, to (i) cause Lender to obtain exclusive control of any Investment Property
      in a manner acceptable to Lender and (ii) obtain from any issuers of Investment
      Property and such other Persons as Lender shall specify, for the benefit of
      Lender, written confirmation of Lender's exclusive control over such Investment
      Property and take such other actions as Lender may request to perfect Lender's
      security interest in such Investment Property. For purposes of this
      Section 5.6, Lender shall have exclusive control of Investment Property if
      (A) pursuant to Section 3.2, such Investment Property consists of certificated
      securities and Borrower delivers such certificated securities to Lender (with
      appropriate endorsements if such certificated securities are in registered
      form); (B) such Investment Property consists of uncertificated securities and
      either (x) Borrower delivers such uncertificated securities to Lender or (y)
      the
      issuer thereof agrees, pursuant to documentation in form and substance
      satisfactory to Lender, that it will comply with instructions originated by
      Lender without further consent by Borrower, and (C) such Investment Property
      consists of security entitlements and either (x) Lender becomes the entitlement
      holder thereof or (y) the appropriate securities intermediary agrees, pursuant
      to documentation
      in form and substance satisfactory to Lender, that it will comply with
      entitlement orders originated by Lender without further consent by
      Borrower.

     

    5.7 Commercial
      Tort Claims. Borrower
      has no Commercial Tort Claims pending other than those listed on Exhibit C
      hereto, and Borrower
      shall promptly notify Lender in writing upon incurring or otherwise obtaining
      a
      Commercial Tort Claim after the date hereof against any third party. Such notice
      shall constitute Borrower's authorization to amend Exhibit B to add such
      Commercial Tort Claim.

     

    5.8 Jurisdiction
      of Incorporation; Location of Collateral. Borrower's
      Address is Borrower's chief executive office, its domicile and the location
      of
      its books and records. In addition, except as provided in the immediately
      following sentence, Borrower has places of business and Collateral located
      only
      at the locations set forth on Sections 10(d) and 10(e) of Schedule A.
      Borrower will give Lender at least thirty days' prior written notice before
      changing Borrower's jurisdiction of incorporation, opening any additional place
      of business, changing its chief executive office, its domicile or the location
      of its books and records, or moving any of the Collateral to a location other
      than Borrower's Address or one of the locations set forth in Sections 10(d)
      and 10(e) of Schedule A, and will execute and deliver all financing
      statements and other agreements, forms, instruments and documents in all
      jurisdictions which Lender shall require as a result thereof.

     

    5.9 Financial
      Condition, Statements and Reports. All
      financial statements delivered to Lender by or on behalf of Borrower or any
      Obligor have been prepared in conformity with GAAP and completely and fairly
      reflect the financial condition of Borrower, at the times and for the periods
      therein stated. Between the last date covered by any such financial statement
      provided to Lender and the date hereof (or, with respect to the remaking of
      this
      representation in connection with the making of any Loan or the providing of
      any
      Credit Accommodation, the date such Loan is made or such Credit Accommodation
      is
      provided), there has been no material adverse change in the financial condition
      or business of Borrower. All schedules, reports and other information and
      documentation delivered by Borrower to Lender with respect to the Collateral
      are, or will be, when delivered, true, correct and complete as of the date
      delivered or the date specified therein.

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    5.10 Tax
      Returns and Payments; Pension Contributions. Borrower
      has timely filed all tax returns and reports required by applicable law, has
      timely paid all applicable taxes, assessments, deposits and contributions owing
      by Borrower to any taxing, pension or other authority and will timely pay all
      such items in the future as they became due and payable. Borrower may, however,
      defer payment of any contested taxes; provided,
      that
      Borrower (i) in good faith contests Borrower's obligation to pay such taxes
      by appropriate proceedings promptly and diligently instituted and conducted;
      (ii) notifies Lender in writing of the commencement of, and any material
      development in, the proceedings; (iii) posts bonds or any other security or
      takes any other steps required by Lender to keep the contested taxes from
      becoming a Lien upon any of the Collateral and (iv) maintains adequate
      reserves therefor in conformity with GAAP. Borrower is unaware of any claims
      or
      adjustments proposed for any of Borrower's prior tax years that could result
      in
      additional taxes becoming due and payable by Borrower. Borrower has paid, and
      shall continue to pay, all amounts necessary to fund all present and future
      pension, benefit, profit sharing and deferred compensation plans in accordance
      with their terms, and Borrower has not withdrawn from participation in,
      permitted partial or complete termination of, or permitted the occurrence of
      any
      other event with respect to, any such plan which could result in any liability
      of Borrower, including any liability to any governmental agency. Without
      limiting the generality of the foregoing, neither the Borrower nor any of its
      Subsidiaries has any unfunded liabilities with respect to Canadian Plans,
      whether valued on a going concern or a wind-up basis, and all obligations
      (including wages, salaries, commissions and vacation pay) to current employees
      and to former employees have been paid in full and all material fiduciary and
      funding obligations required to be performed in connection with any Canadian
      Plan have been performed. No promises of benefit improvements under Canadian
      Plans have been made except where such improvement could not have a material
      adverse effect. There have been no improper withdrawals or applications of
      the
      assets of the Canadian Plans. Each of the Canadian Plans has been administered
      in accordance in all material respects with the Income
      Tax Act (Canada)
      and the regulations promulgated thereunder and all other applicable laws and
      is
      funded to the extent required by applicable law and there exist no going concern
      unfunded actuarial liabilities or solvency deficiency in respect of such plans,
      except to the extent that the failure to so comply could not reasonably be
      expected to have a material adverse effect.

     

    5.11 Compliance
      with Laws. Borrower
      has complied in all material respects with all provisions of all applicable
      laws
      and regulations, including those relating to Borrower's ownership of real
      (immovable) or personal (movable) property, the conduct and licensing of
      Borrower's business, the payment and withholding of taxes, pension, benefit
      and
      other employee matters, safety and environmental matters.

     

    
      
         

      

      
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                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    5.12 Litigation.
      Section 10(f)
      of Schedule A discloses all claims, proceedings, litigation or
      investigations pending or (to the best of Borrower's knowledge) threatened
      against Borrower. There is no claim, suit, litigation, proceeding or
      investigation pending or (to the best of Borrower's knowledge) threatened
      by or against or affecting Borrower in any court or before any governmental
      agency (or any basis therefor known to Borrower) which may result, either
      separately or in the aggregate, in any material adverse change in the financial
      condition or business of Borrower, or in any material impairment in the ability
      of Borrower to carry on its business in substantially the same manner as it
      is
      now being conducted. Borrower will promptly inform Lender in writing of any
      claim, proceeding, litigation or investigation in the future threatened or
      instituted by or against Borrower. 

     

    5.13 Use
      of Proceeds. All
      proceeds of all Loans will be used (i) to repay the RBC Indebtedness in full,
      (ii) to
      fund
      general corporate and working capital requirements of Borrower, permitted
      payments and other expenses in accordance with Forecast Budgets approved by
      Lender; provided, that Borrower agrees that it shall not disburse such funds
      except in accordance with the Forecast Budget (subject to (i) a five percent
      (5%) total variance for all line items measured weekly on a weekly basis; and
      (ii) the net amount equal to receipts minus disbursements shall be subject
      to a
      five percent (5%) variance measured weekly on a cumulative basis from the Filing
      Date) as such Forecast Budget is updated from time to time and approved by
      Lender,
      and no
      payments may be made other than as expressly set forth in the Forecast Budget,
      including, without limitation, with respect to Professional Fees; and, provided,
      further, that no portion of the Loans or any Collateral shall be used to
      prosecute claims against the Lenders under this Agreement or the validity,
      perfection, priority or enforceability of any of the Liens securing such claims
      or any payment made thereunder. The proceeds of the initial advance to be made
      on the closing date
      shall be
      used, among other things, to repay the RBC Indebtedness in full and to fund
      all
      of Lender's costs and expenses, incurred both prior to and after the filing
      of
      the CCAA Proceeding) associated
      with the transactions contemplated by this Agreement. Lender shall have the
      right to approve all expenditures made by Borrower during the CCAA Proceeding,
      including without limitation payments in respect of prepetition payables. All
      expenditures by Borrower shall require the dual approval of J.P. Patty and
      David
      Marks, or such other officers of Borrower as Lender shall specify, which
      approval may be provided by electronic mail.

     

    5.14 Insurance.
      Borrower
      will at all times carry property, liability and other insurance, with insurers
      acceptable to Lender, in such form and amounts, and with such deductibles and
      other provisions, as Lender shall require, and Borrower will provide evidence
      of
      such insurance to Lender, so that Lender is satisfied that such insurance is,
      at
      all times, in full force and effect. Each property insurance policy shall name
      Lender as loss payee and shall contain a lender's loss payable endorsement
      in
      form acceptable to Lender, each liability insurance policy shall name Lender
      as
      an additional insured, and each business interruption insurance policy shall
      be
      collaterally assigned to Lender, all in form and substance satisfactory to
      Lender. All policies of insurance shall provide that they may not be cancelled
      or changed without at least thirty days' prior written notice to Lender, shall
      contain breach of warranty coverage, and shall otherwise be in form and
      substance satisfactory to Lender. Upon receipt of the proceeds of any such
      insurance, Lender shall apply such proceeds in reduction of the Obligations
      as
      Lender shall determine in its sole discretion. Borrower will promptly deliver
      to
      Lender copies of all reports made to insurance companies.

     

    
      
         

      

      
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                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    5.15 Financial
      and Collateral Reports. Borrower
      has kept and will keep adequate records and books of account with respect to
      its
      business activities and the Collateral in which proper entries are made in
      accordance with GAAP reflecting all its financial transactions, and will cause
      to be prepared and furnished to Lender the following (all to be prepared in
      accordance with GAAP, unless Borrower's certified public accountants concur
      in
      any change therein and such change is disclosed to Lender):

     

    (a) Collateral
      Reports.
      Each
      week, on such days as shall be requested by Lender, a weekly Inventory report,
      and on or before the fifteenth day of each month, (i) an aging of Borrower's
      Accounts, Chattel Paper and notes receivable for the immediately preceding
      month
      and (ii) a monthly Inventory report for the immediately preceding month, all
      in
      such form, and together with such additional certificates, schedules and other
      information with respect to the Collateral or the business of Borrower or any
      Obligor, as Lender shall request; provided,
      that
      Borrower's failure to execute and deliver the same shall not affect or limit
      Lender's security interests, hypothecs and other rights in any of the Accounts,
      nor shall Lender's failure to advance or lend against a specific Account affect
      or limit Lender's security interest, hypothec and other rights therein. Together
      with each such schedule, Borrower shall furnish Lender with copies (or, at
      Lender's request, originals) of all contracts, orders, invoices, and other
      similar documents, and all original shipping instructions, delivery receipts,
      bills of lading, and other evidence of delivery, for any goods the sale or
      disposition of which gave rise to such Accounts, and Borrower warrants the
      genuineness of all of the foregoing. In addition, Borrower shall deliver to
      Lender the originals of all Instruments, Chattel Paper, security agreements,
      hypothecs, guaranties and other documents and property evidencing or securing
      any Accounts, immediately upon receipt thereof and in the same form as received,
      with all necessary endorsements. Lender may destroy or otherwise dispose of
      all
      documents, schedules and other papers delivered to Lender pursuant to this
      Agreement (other than originals of Instruments, Chattel Paper, security
      agreements, guaranties and other documents and property evidencing or securing
      any Accounts) six months after Lender receives them, unless Borrower requests
      their return in writing in advance and arranges for their return to Borrower
      at
      Borrower's expense. 

     

    (b) Annual
      Statements.
      Not
      later than ninety days after the close of each fiscal year of Borrower,
      unqualified (except for a qualification for a change in accounting principles
      with which the accountant concurs) audited financial statements of Borrower
      and
      its Subsidiaries as of the end of such year, on a consolidated and consolidating
      basis, certified by a firm of independent certified public accountants of
      recognized standing selected by Borrower but acceptable to Lender, together
      with
      a copy of any management letter issued in connection therewith and a letter
      from
      such accountants acknowledging that Lender is relying on such financial
      statements;

     

    
      
         

      

      
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                  LLC

              	
                Loan
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                  Agreement

              

      

       

    

    (c) Interim
      Statements.
      Not
      later than twenty-five days after the end of each month hereafter, including
      the
      last month of Borrower's fiscal year, unaudited interim financial statements
      of
      Borrower and its Subsidiaries as of the end of such month and of the portion
      of
      Borrower's fiscal year then elapsed, on a consolidated and consolidating basis,
      certified by the principal financial officer of Borrower as prepared in
      accordance with GAAP and fairly presenting the consolidated financial position
      and results of operations of Borrower and its Subsidiaries for such month and
      period subject only to changes from audit and year-end adjustments and except
      that such statements need not contain notes;

     

    (d) Projections,
      Etc.
      Such
      business projections, Availability projections, business plans, budgets and
      cash
      flow statements for Borrower and its Subsidiaries as Lender shall request from
      time to time;

     

    (e) Shareholder
      Reports, Etc.
      Promptly
      after the sending or filing thereof, as the case may be, copies of any proxy
      statements, financial statements or reports which Borrower has made available
      to
      its shareholders and copies of any regular, periodic and special reports,
      declarations, or registration statements which Borrower files with any
      securities commission or any governmental authority which may be substituted
      therefor, or any national or provincial securities exchange;

     

    (f) Benefit
      Plan Reports.
      Upon
      request by Lender, copies of any annual report to be filed pursuant to the
      requirements of applicable laws in connection with each pension or benefit
      plan
      subject thereto , including any Canadian Plan. Without limiting the generality
      of the foregoing, the Borrower will (i) within three (3) days of receipt of
      a
      written request by Lender, furnish to the Lender a copy of the most recent
      actuarial valuation submitted to the relevant authorities in respect of each
      funded Canadian Plan and (ii) within three (3) days of receipt or dispatch,
      furnish to the Lender any material correspondence from or to the relevant
      authorities or any other person in respect of any Canadian Plan; and

     

    (g) Other
      Information.
      Such
      other data and information (financial and otherwise) as Lender, from time to
      time, may reasonably request, bearing upon or related to the Collateral or
      Borrower's and each of its Subsidiary's financial condition or results of
      operations.

     

    5.16 Litigation
      Cooperation. Should
      any third-party suit or proceeding be instituted by or against Lender with
      respect to any Collateral or in any manner relating to Borrower, Borrower shall,
      without expense to Lender, make available Borrower and its officers, employees,
      agents and mandataries, and Borrower's books and records, without charge, to
      the
      extent that Lender may deem them reasonably necessary in order to prosecute
      or
      defend any such suit or proceeding.

     

    
      
         

      

      
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    5.17 Maintenance
      of Collateral, Etc. Borrower
      will maintain all of its Equipment in good working condition, ordinary wear
      and
      tear excepted, and Borrower will not use the Collateral for any unlawful
      purpose. Borrower will immediately advise Lender in writing of any material
      loss
      or damage to the Collateral and of any investigation, action, suit, proceeding
      or claim relating to the Collateral or which may result in an adverse impact
      upon Borrower's business, assets or financial condition.

     

    5.18 Notification
      of Changes. Borrower
      will promptly notify Lender in writing of any change in its officers or
      directors, the opening of any new bank account or other deposit account, or
      any
      material adverse change in the business or financial affairs of Borrower or
      the
      existence of any circumstance which would make any representation or warranty
      of
      Borrower untrue in any material respect or constitute a material breach of
      any
      covenant of Borrower. 

     

    5.19 Further
      Assurances. Borrower
      agrees, at its expense, to take all actions, and execute or cause to be executed
      and delivered to Lender all promissory notes, security agreements, hypothecs,
      mortgages, debentures, agreements with landlords, mortgagees and processors
      and
      other bailees, subordination and intercreditor agreements and other agreements,
      instruments and documents as Lender may request from time to time, to perfect
      and maintain Lender's security interests and hypothecs in the Collateral and
      to
      fully effectuate the transactions contemplated by this Agreement.

     

    5.20 Negative
      Covenants. Except
      as
      set forth in Section 14 of Schedule A, Borrower will not, without
      Lender's prior written consent, (i) merge, amalgamate or consolidate with
      another Person, form any new Subsidiary or acquire any interest in any Person;
      (ii) acquire any assets except in the ordinary course of business and as
      otherwise permitted by this Agreement and the other Loan Documents;
      (iii) enter into any transaction outside the ordinary course of business;
      (iv) sell or transfer any Collateral or other assets, except that Borrower
      may sell finished goods Inventory in the ordinary course of its business;
      (v) make any loans to, or investments in, any Affiliate or other Person in
      the form of money or other assets, except for intercompany loans to the Borrower
      Affiliates and Parent in amounts approved in advance by Lender; (vi) incur
      any debt outside the ordinary course of business; (vii) guaranty or
      otherwise become liable with respect to the obligations of another party or
      entity; (viii) pay or declare any dividends or other distributions on
      Borrower's stock, if Borrower is a corporation (except for dividends payable
      solely in capital stock of Borrower) or with respect to any equity interests,
      if
      Borrower is not a corporation; (ix) redeem, retire, purchase or otherwise
      acquire, directly or indirectly, any of Borrower's capital stock or other equity
      interests; (x) make any change in Borrower's capital structure;
      (xi) dissolve or elect to dissolve; (xii) pay any principal or
      interest on any indebtedness owing to an Affiliate, (xiii) enter into any
      transaction with an Affiliate other than on arms-length terms disclosed to
      Lender in writing; (xiv) change the jurisdiction of Borrower's incorporation
      or
      enter into any transaction which has the effect of changing Borrower's
      jurisdiction of incorporation except as provided for in Section 5.8; (xv) fail
      to contribute to any Canadian Plan any amount required to be contributed thereto
      in accordance with applicable law or the terms of such Canadian Plan or permit
      or take any action which would result in the aggregate going concern unfunded
      liability or the aggregate solvency deficiency in respect of all the Canadian
      Plans which are funded plans, determined pursuant to the actuarial assumptions
      and methodology utilized in the most recent actuarial valuations therefor,
      to
      exceed U.S.$200,000; or (xvi) agree to do any of the foregoing.

     

    
      
         

      

      
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              Loan
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                Agreement

            

    

     

    5.21 Financial
      Covenants.

     

    (a) Net
      Losses.
      Borrower
      will not permit its cumulative net loss to exceed the amount set forth in
      Section 9(e) of Schedule A. In the event that net losses exceed the
      amount set forth in Section 9(e) of Schedule A, Lender may (i) declare an Event
      of Default, (ii) on ten days' notice to Borrower, reduce the Advance Rates,
      or
      (iii) both (i) and (ii).

     

    (b) Other
      Financial Covenants.
      Borrower
      will comply with any additional financial covenants set forth in
      Section 9(j) of Schedule A.

     

    6. RELEASE
      AND INDEMNITY.

     

    6.1 Release.
      Borrower
      hereby releases Lender and its Affiliates and their respective directors,
      officers, employees, attorneys agents and mandataries and any other Person
      affiliated with or representing Lender (the "Released
      Parties")
      from
      any and all liability arising from acts or omissions under or pursuant to this
      Agreement, whether based on errors of judgment or mistake of law or fact, except
      for those arising from gross negligence or willful misconduct. However, in
      no
      circumstance will any of the Released Parties be liable for lost profits or
      other special, indirect or consequential damages. Such release is made on the
      date hereof and remade upon each request for a Loan or Credit Accommodation
      by
      Borrower. Without limiting the foregoing:

     

    (a) Lender
      shall not be liable for (i) any shortage or discrepancy in, damage to, or
      loss or destruction of, any goods, the sale or other disposition of which gave
      rise to an Account; (ii) any error, act, omission, or delay of any kind
      occurring in the settlement, failure to settle, collection or failure to collect
      any Account; (iii) settling any Account in good faith for less than the
      full amount thereof; or (iv) any of Borrower's obligations under any
      contract or agreement giving rise to an Account; and

     

    (b) In
      connection with Credit Accommodations or any underlying transaction, Lender
      shall not be responsible for the conformity of any goods to the documents
      presented, the validity or genuineness of any documents, delay, default or
      fraud
      by Borrower, shippers and/or any other Person. Borrower agrees that any action
      taken by Lender, if taken in good faith, or any action taken by an issuer of
      any
      Credit Accommodation, under or in connection with any Credit Accommodation,
      shall be binding on Borrower and shall not create any resulting liability to
      Lender. In furtherance thereof, Lender shall have the full right and authority
      to clear and resolve any questions of non-compliance of documents, to give
      any
      instructions as to acceptance or rejection of any documents or goods, to execute
      for Borrower's account any and all applications for steamship or airway
      guaranties, indemnities or delivery orders, to grant any extensions of the
      maturity of, time of payment for, or time of presentation of, any drafts,
      acceptances or documents, and to agree to any amendments, renewals, extensions,
      modifications, changes or cancellations of any of the terms or conditions of
      any
      of the Credit Accommodations or applications and other documentation pertaining
      thereto.

     

    
      
         

      

      
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    6.2 Indemnity.
      Borrower
      hereby agrees to indemnify the Released Parties and hold them harmless from
      and
      against any and all claims, debts, liabilities, demands, obligations, actions,
      causes of action, penalties, costs and expenses (including attorneys' fees),
      of
      every nature, character and description, which the Released Parties may sustain
      or incur based upon or arising out of any of the transactions contemplated
      by
      this Agreement or the other Loan Documents or any of the Obligations, including
      any transactions or occurrences relating to the issuance of any Credit
      Accommodation, the Collateral relating thereto, any drafts thereunder and any
      errors or omissions relating thereto (including any loss or claim due to any
      action or inaction taken by the issuer of any Credit Accommodation) (and
      for this purpose any charges to Lender by any issuer of Credit Accommodations
      shall be conclusive as to their appropriateness and may be charged to the Loan
      Account), or any other matter, cause or thing whatsoever occurred, done, omitted
      or suffered to be done by Lender relating to Borrower or the Obligations (except
      any such amounts sustained or incurred as the result of the gross negligence
      or
      willful misconduct of the Released Parties). Notwithstanding any provision
      in
      this Agreement to the contrary, the indemnity agreement set forth in this
      Section shall survive any termination of this Agreement.

     

    6.3 Currencies.

     

    (a) U.S.
      Dollars.
      All
      advances, charges and fees of Borrower to Lender, all financial and collateral
      reports, including, without limitation, those financial and collateral reports
      listed in Section 5.15, and all borrowing base reports shall be in United States
      dollars and all collections and payments of Borrower to Lender shall be in
      United States dollars.

     

    (b) Currency
      Indemnity.
      If, for
      the purposes of obtaining or enforcing judgment in any court in any jurisdiction
      with respect to this Agreement or any other Loan Document, it becomes necessary
      to convert into the currency of such jurisdiction (the "Judgment
      Currency")
      any
      amount due under this Agreement or under any other Loan Document in any currency
      other than the Judgment Currency (the "Currency
      Due"),
      then,
      to the extent permitted by law, conversion shall be made at the Currency
      Exchange Rate on the Business Day before the day on which judgment is given.
      In
      the event that there is a change in the Currency Exchange Rate between the
      Business Day before the day on which the judgment is given and the date of
      receipt by the Lender of the amount due, Borrower shall to the extent permitted
      by law, on the date of receipt by Lender, pay such additional amounts, if any,
      or be entitled to receive reimbursement of such amount, if any as may be
      necessary to ensure that the amount received by Lender on such date is the
      amount in the Judgment Currency which (when converted at the currency exchange
      rate on the date of receipt by Lender in accordance with normal banking
      procedures in the relevant jurisdiction) is the amount then due under this
      Agreement or such other Loan Document in the Currency Due. If the amount of
      the
      Currency Due which the Lender is so able to purchase is less than the amount
      of
      the Currency Due originally due to it, Borrower shall to the extent permitted
      by
      law indemnify and save Lender harmless from and against loss or damage arising
      as a result of such deficiency. To the extent permitted by law, this indemnity
      shall (i) constitute an obligation separate and independent from the other
      obligations contained in this Agreement and the other Loan Documents,
      (ii) give rise to a separate and independent cause of action,
      (iii) apply irrespective of any indulgence granted by Lender from time to
      time, (iv) survive the payment in full of the Obligations and the
      termination of this Agreement, and (v) continue in full force and effect
      notwithstanding any judgment or order for a liquidated sum in respect of an
      amount due under this Agreement or any other Loan Document or under any judgment
      or order.

     

    
      
         

      

      
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    7. TERM.

     

    7.1 Maturity
      Date.
      Lender's
      obligation to make Loans and to provide Credit Accommodations under this
      Agreement shall initially continue in effect for a term (the "Initial
      Term")
      from
      the date of this Agreement until the Initial Maturity Date set forth in
      Section 8 of Schedule A, provided,
      that
      the Initial Maturity Date shall automatically be extended (the Initial Maturity
      Date, as it may be so extended, being referred to as the "Maturity
      Date")
      for
      successive additional terms of three years each (each a "Renewal
      Term"),
      unless one party gives written notice to the other, not less than sixty days
      prior to the Maturity Date, that such party elects not to extend the Maturity
      Date. Notwithstanding the foregoing, the Facility shall terminate, and
      Borrower's obligations to Lender shall be due and payable in full, prior to
      the
      expiration of the Initial Term upon the earliest to occur of the following:
      (i)
      Lender's demand for payment of the Obligations following the occurrence of
      an
      Event of Default, (ii) the commencement of a liquidation case or other
      insolvency or bankruptcy proceeding with respect to any Borrower Affiliate
      or
      any guarantor, (iii) the conversion of the CCAA Proceeding to a liquidation
      case
      or other insolvency proceeding, (iv) December 5, 2006, unless, on such date
      or
      prior thereto, a plan of arrangement in form and substance acceptable to Lender
      has been filed in the CCAA Proceeding, (v) February 5, 2007, unless, on such
      date or prior thereto, a plan of arrangement has been approved by the required
      creditors and the Court, (vi) the dismissal of the CCAA Proceeding or the end
      of
      the stay of proceedings under the CCAA, unless such dismissal or end of the
      stay
      of proceedings is in connection with the filing and approval of the plan of
      arrangement, (vii) the successful appeal or review of the Order unless the
      plan
      of arrangement and the Order confirm the priority of Lender's security interests
      as set forth herein during the entire Term, (viii) the appointment of a trustee
      or receiver for any Borrower Affiliate or (ix) the occurrence of a post-petition
      judgment liability or event that will, in Lender's judgment, significantly
      impair any Borrower Affiliate's financial condition, operations, or ability
      to
      perform under the Facility or any order of the Court. Notwithstanding any such
      termination of the Facility prior to the expiration of the Initial Term, Lender
      shall be entitled to receive the Early Termination Fee described in Section
      7.2
      below. This Agreement and the other Loan Documents and Lender's security
      interests, hypothecs in and liens upon the Collateral, and all representations,
      warranties and covenants of Borrower contained herein and therein, shall remain
      in full force and effect after the Maturity Date until all of the monetary
      Obligations are indefeasibly paid in full. 

     

    
      
         

      

      
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    7.2 Early
      Termination.
      Lender's
      obligation to make Loans and to provide Credit Accommodations under this
      Agreement may be terminated prior to the Maturity Date as follows: (i) by
      Borrower, effective thirty business days after written notice of termination
      is
      given to Lender or (ii) by Lender at any time after the occurrence of an
      Event of Default, without notice, effective immediately; provided,
      that if
      any Affiliate of Borrower is also a party to a financing arrangement with
      Lender, no such early termination shall be effective unless such Affiliate
      simultaneously terminates its financing arrangement with Lender. If so
      terminated under this Section 7.2, Borrower shall pay to Lender (i) an
      early termination fee (the "Early
      Termination Fee")
      in the
      amount set forth in Section 7(h) of Schedule A plus (ii) any
      earned but unpaid Facility Fee. Such fee shall be due and payable on the
      effective date of termination and thereafter shall bear interest at a rate
      equal
      to the highest rate applicable to any of the Obligations. In addition, if
      Borrower so terminates and repays the Obligations without having provided Lender
      with at least thirty days' prior written notice thereof, an additional amount
      equal to thirty days of interest at the applicable Interest Rate(s), based
      on
      the average outstanding amount of the Obligations for the six month period
      immediately preceding the date of termination.

     

    7.3 Payment
      of Obligations. On
      the
      Maturity Date or on any earlier effective date of termination, Borrower shall
      pay in full all Obligations, whether or not all or any part of such Obligations
      are otherwise then due and payable. Without limiting the generality of the
      foregoing, if, on the Maturity Date or on any earlier effective date of
      termination, there are any outstanding Credit Accommodations, then on such
      date
      Borrower shall provide to Lender cash collateral in an amount equal to 110%
      of
      the Credit Accommodation Balance to secure all of the Obligations (including
      estimated attorneys' fees and other expenses) relating to said Credit
      Accommodations or such greater percentage or amount as Lender reasonably deems
      appropriate, pursuant to a cash pledge agreement in form and substance
      satisfactory to Lender.

     

    7.4 Effect
      of Termination.
      No
      termination shall affect or impair any right or remedy of Lender or relieve
      Borrower of any of the Obligations until all of the monetary Obligations have
      been indefeasibly paid in full. Upon indefeasible payment and performance in
      full of all of the monetary Obligations (and the provision of cash collateral
      with respect to any Credit Accommodation Balance as required by Section 7.3)
      and
      termination of this Agreement, Lender shall promptly deliver to Borrower
      termination statements, requests for reconveyances and such other documents
      as
      may be reasonably required to terminate Lender's security interests and
      hypothecs in the Collateral.

     

    
      
         

      

      
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                  Agreement

              

      

       

    

    8. EVENTS
      OF DEFAULT AND REMEDIES.

     

    8.1 Events
      of Default. The
      occurrence of any of the following events shall constitute an "Event
      of Default"
      under
      this Agreement, and Borrower shall give Lender immediate written notice thereof:
      (i) if any warranty, representation, statement, report or certificate made
      or delivered to Lender by Borrower or any of Borrower's officers, employees
      or
      agents is untrue or misleading; (ii) if Borrower fails to pay when due any
      principal or interest on any Loan or any other monetary Obligation;
      (iii) if Borrower breaches any covenant or obligation contained in this
      Agreement or any other Loan Document or fails to perform any other non-monetary
      Obligation; (iv) if any levy, assessment, attachment, seizure, lien,
      security interest, hypothec, mortgage or encumbrance (other than a Permitted
      Lien) is made or permitted to exist on all or any part of the Collateral;
      (v) if one or more judgments aggregating in excess of U.S.$25,000, or any
      injunction or attachment, is obtained against Borrower or any Obligor which
      remains unstayed for more than ten days
      or
      is enforced; (vi) the occurrence of any default under any financing
      agreement, security agreement, hypothec, mortgage or other agreement, instrument
      or document executed and delivered by (A) Borrower with, or in favor of, any
      Person other than Lender or Laurus Master Fund, Ltd. ("Laurus")
      or
      (B) Borrower or any Affiliate of Borrower with, or in favor of, Lender or
      any Affiliate of Lender; (vii) except in respect of the CCAA Proceeding, the
      dissolution, liquidation, death, termination of existence in good standing,
      insolvency or business failure or suspension or cessation of business as usual
      of Borrower or any Obligor (or of any general partner of Borrower or any Obligor
      if it is a partnership) or the appointment of a receiver, liquidator, trustee,
      monitor, interim receiver, receiver and manager or sequestrator (or similar
      official) or custodian for all or any part of the property of, or an assignment
      for the benefit of creditors by Borrower or any Obligor, or the commencement
      of
      any proceeding by Borrower or any Obligor under any reorganization, bankruptcy,
      insolvency, arrangement, readjustment of debt, dissolution or liquidation law
      or
      statute of any jurisdiction, now or in the future in effect, or if Borrower
      makes or sends a notice of a bulk transfer or calls a meeting of its creditors;
      (viii) the commencement of any proceeding against Borrower or any Obligor
      under any reorganization, bankruptcy, insolvency, arrangement, readjustment
      of
      debt, dissolution or liquidation law or statute of any jurisdiction, now or
      in
      the future in effect, other than pursuant to the CCAA Proceeding; (ix) the
      actual or attempted revocation or termination of, or limitation or denial of
      liability upon, any guaranty of the Obligations, or any security document
      securing the Obligations, by any Obligor; (x) if Borrower makes any payment
      on account of any indebtedness or obligation which has been subordinated to
      the
      Obligations other than as permitted in the applicable subordination agreement,
      or if any Person who has subordinated such indebtedness or obligations attempts
      to limit or terminate its subordination agreement; (xi) if there is any
      actual or threatened indictment of Borrower or any Obligor under any criminal
      statute or commencement or threatened commencement of criminal or civil
      proceedings against Borrower or any Obligor, pursuant to which the potential
      penalties or remedies sought or available include forfeiture of any property
      of
      Borrower or such Obligor; (xii) if there is a change in the record or
      beneficial ownership of an aggregate of more than 20% of the outstanding shares
      of stock of Borrower (or partnership or membership interests if it is a
      partnership or limited liability company), in one or more transactions, compared
      to the ownership of outstanding shares of stock (or partnership or membership
      interests) of Borrower as of the date hereof, without the prior written consent
      of Lender; (xiii) if there is any change in the chief executive officer,
      chief operating officer or chief financial officer of Borrower; (xiv) if an
      Event of Default occurs under any Loan and Security Agreement between Lender
      and
      an Affiliate of Borrower; (xv) if Lender determines in good faith that the
      Collateral is insufficient to fully secure the Obligations or that the prospect
      of payment of performance of the Obligations is impaired; (xvi) the appointment
      of a trustee or Receiver with enlarged powers to operate or manage the financial
      affairs of Borrower; (xvii) the dismissal or conversion of the CCAA Proceeding,
      or granting relief from the automatic stay in favor of third parties except
      as
      contemplated by any Loan Document; (xviii) the entry of a judgment that will,
      in
      Lender's judgment, significantly impair Borrower's financial condition,
      operations, or ability to perform under the this Agreement or any order of
      any
      court; (xix) the granting to a creditor other than Lender, Laurus or Royal
      Bank
      of Canada of the status of an unaffected creditor in the CCAA Proceeding without
      Lender's consent; (xx) any default under the Order or any plan of arrangement
      contemplated in the Order; (xxi) any attempt by Laurus to enforce or exercise
      its rights or remedies with respect to the capital stock of Pneutech
in
      accordance with applicable law or the terms of the Stock Pledge Agreement dated
      February 28, 2005 between Thomas Equipment and Laurus
      or
      (xxii) Lender's determination that the Borrower is not performing in accordance
      with the projections or that there is no reasonable prospect for a successful
      reorganization of the Borrower. 

     

    
      
         

      

      
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    8.2 Remedies.
      Upon the
      occurrence of any Default, and at any time thereafter, Lender, at its option,
      may cease making Loans or otherwise extending credit to Borrower under this
      Agreement or any other Loan Document. Upon the occurrence of an Event of
      Default, Lender may exercise from time to time any rights and remedies available
      to it under the UCC and any other applicable law in addition to, and not in
      lieu
      of, any rights and remedies expressly granted in this Agreement or in any of
      the
      other Loan Documents and all of Lender's rights and remedies shall be cumulative
      and non-exclusive to the extent permitted by law. In particular, but not by
      way
      of limitation of the foregoing, upon the occurrence of any Event of Default,
      and
      at any time thereafter, Lender, at its option, and without notice or demand
      of
      any kind (all of which are hereby expressly waived by Borrower), may do any
      one
      or more of the following: (i) cease making Loans or otherwise extending
      credit to Borrower under this Agreement or any other Loan Document;
      (ii) accelerate and declare all or any part of the Obligations to be
      immediately due, payable and performable, notwithstanding any deferred or
      installment payments allowed by any instrument evidencing or relating to any
      of
      the Obligations (and such acceleration and declaration shall occur immediately
      upon the occurrence of an Event of Default under clause (vii), (viii), (xv)
      or
      (xvi) of Section 8.1); (iii) take possession of any or all of the
      Collateral (in addition to Collateral of which it already has possession)
      wherever it may be found, and for that purpose Borrower hereby authorizes
      Lender, without judicial process, to enter onto any of Borrower's premises
      without interference to search for, take possession of, keep, store, or remove
      any of the Collateral, and (to the extent permitted by applicable law) remain
      (or cause a custodian or similar official to remain) on the premises in
      exclusive control thereof, without charge for so long as Lender deems it
      reasonably necessary in order to complete the enforcement of its rights under
      this Agreement or any other agreement; provided,
      that if
      Lender seeks to take possession of any of the Collateral by court process,
      Borrower hereby irrevocably waives (A) any bond and any surety or security
      relating thereto required by law as an incident to such possession, (B) any
      demand for possession prior to the commencement of any suit or action to recover
      possession thereof and (C) any requirement that Lender retain possession
      of, and not dispose of, any such Collateral until after trial or final judgment;
      (iv) require Borrower to assemble any or all of the Collateral and make it
      available to Lender at one or more places designated by Lender which are
      reasonably convenient to Lender and Borrower, and to remove the Collateral
      to
      such locations as Lender may deem advisable; (v) complete the processing,
      manufacturing or repair of any Collateral prior to a disposition thereof and,
      for such purpose and for the purpose of removal, Lender shall have the right
      to
      use Borrower's premises, vehicles and other Equipment and all other property
      without charge; (vi) sell, lease or otherwise dispose of any of the
      Collateral, in its condition at the time Lender obtains possession of it or
      after further manufacturing, processing or repair, at one or more public or
      private sales, in lots or in bulk, for cash, exchange or other property, or
      on
      credit (a "Sale"),
      and
      to adjourn any such Sale from time to time without notice other than oral
      announcement at the time scheduled for Sale (and, in connection therewith,
      (A) Lender shall have the right to conduct such Sale on Borrower's premises
      without charge, for such times as Lender deems reasonable, on Lender's premises,
      or elsewhere, and the Collateral need not be located at the place of Sale;
      (B) Lender may directly or through any of its Affiliates purchase or lease
      any of the Collateral at any such public disposition, and if permissible under
      applicable law, at any private 

     

    
      
         

      

      
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    disposition
      and (C) any Sale of Collateral shall not relieve Borrower of any liability
      Borrower may have if any Collateral is defective as to title, physical condition
      or otherwise at the time of sale); (vii) demand payment of and collect any
      Accounts, Chattel Paper, Instruments and General Intangibles included in the
      Collateral and, in connection therewith, Borrower irrevocably authorizes Lender
      to endorse or sign Borrower's name on all collections, receipts, Instruments
      and
      other documents, to take possession of and open mail addressed to Borrower
      and
      remove therefrom payments made with respect to any item of Collateral or
      Proceeds thereof and, in Lender's sole discretion, to grant extensions of time
      to pay, compromise claims and settle Accounts, General Intangibles and the
      like
      for less than face value; and (viii) demand and receive possession of any
      of Borrower's federal, provincial and state income tax returns and the books
      and
      records utilized in the preparation thereof or relating thereto. Borrower
      recognizes that if Borrower fails to perform, observe or discharge any of its
      Obligations under this Agreement or any of the Loan Documents, no remedy at
      law
      will provide adequate relief to Lender, and agrees that Lender shall be entitled
      to temporary and permanent injunctive relief in any such case without the
      necessity of proving actual damages. Any notification of intended disposition
      of
      any of the Collateral required by law will be deemed to be a reasonable
      authenticated notification of disposition if given at least ten (10) days prior
      to such disposition and such notice shall (i) describe Lender and Borrower,
      (ii)
      describe the Collateral that is the subject of the intended disposition, (iii)
      state the method of the intended disposition, (iv) state that Borrower is
      entitled to an accounting of the Obligations and state the charge, if any,
      for
      an accounting and (v) state the time and place of any public disposition or
      the
      time after which any private sale is to be made. Lender may disclaim any
      warranties that might arise in connection with the sale, lease or other
      disposition of the Collateral and has no obligation to provide any warranties
      at
      such time. Any Proceeds of any disposition by Lender of any of the Collateral
      may be applied by Lender to the payment of expenses in connection with the
      Collateral, including, without limitation, legal expenses and reasonable
      attorneys' fees, and any balance of such Proceeds may be applied by Lender
      toward the payment of such of the Obligations, and in such order of application,
      as Lender may from time to time elect. In addition to the foregoing remedies,
      upon the occurrence of any Event of Default resulting from a breach of any
      of
      the financial covenants set forth in Section 5.21, Lender may, at its
      option, upon not less than ten days' prior notice to Borrower, reduce any or
      all
      of the Advance Rates set forth in Section 1(b) of Schedule A to the
      extent Lender, in its sole discretion, deems appropriate. Exercise or partial
      exercise by Lender of one or more of its rights or remedies shall not be deemed
      an election or bar Lender from subsequent exercise or partial exercise of any
      other rights or remedies. The failure or delay of Lender to exercise any rights
      or remedies shall not operate as a waiver thereof, but all rights and remedies
      shall continue in full force and effect until all of the Obligations have been
      fully paid and performed. If any Collateral is sold or leased by Lender on
      credit terms or for future delivery, the Obligations shall not be reduced as
      a
      result thereof until payment is collected by Lender.

     

    
      
         

      

      
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              Greystone
                Business Credit II
                LLC

            	
              Loan
                and Security
                Agreement

            

    

     

    8.3 Application
      of Proceeds. Subject
      to any application required by law, all Proceeds realized as the result of
      any
      Sale shall be applied by Lender to the Obligations in such order as Lender
      shall
      determine in its sole discretion. Any surplus shall be paid to Borrower or
      other
      persons legally entitled thereto; but Borrower shall remain liable to Lender
      for
      any deficiency. If Lender, in its sole discretion, directly or indirectly enters
      into a deferred payment or other credit transaction with any purchaser at any
      Sale, Lender shall have the option, exercisable at any time, in its sole
      discretion, of either reducing the Obligations by the principal amount of the
      purchase price or deferring the reduction of the Obligations until the actual
      receipt by Lender of the cash therefor.

     

    9. GENERAL
      PROVISIONS.

     

    9.1 Notices.
      All
      notices to be given under this Agreement shall be in writing and shall be given
      either personally, by reputable private delivery service, by regular first-class
      mail or certified mail return receipt requested, addressed to Lender or Borrower
      at the address shown in the heading to this Agreement, or by facsimile to the
      facsimile number shown in Section 10(i) of Schedule A, or at any other
      address (or to any other facsimile number) designated in writing by one party
      to
      the other party in the manner prescribed in this Section 9.1. All notices
      shall be deemed to have been given when received or when delivery is refused
      by
      the recipient.

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    9.2 Severability.
      If
      any
      provision of this Agreement, or the application thereof to any party or
      circumstance, is held to be void or unenforceable by any court of competent
      jurisdiction, such defect shall not affect the remainder of this Agreement,
      which shall continue in full force and effect.

     

    9.3 Integration.
      This
      Agreement and the other Loan Documents represent the final, entire and complete
      agreement between Borrower and Lender and supersede all prior and
      contemporaneous negotiations, oral representations and agreements, all of which
      are merged and integrated into this Agreement. THERE ARE NO ORAL
      UNDER-STANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES THAT ARE
      NOT
      SET FORTH IN THIS AGREE-MENT OR THE OTHER LOAN DOCUMENTS.

     

    9.4 Waivers.
      The
      failure of Lender at any time or times to require Borrower to strictly comply
      with any of the provisions of this Agreement or any other Loan Documents shall
      not waive or diminish any right of Lender later to demand and receive strict
      compliance therewith. Any waiver of any default shall not waive or affect any
      other default, whether prior or subsequent, and whether or not similar. None
      of
      the provisions of this Agreement or any other Loan Document shall be deemed
      to
      have been waived by any act or knowledge of Lender or its agents, mandataries
      or
      employees, but only by a specific written waiver signed by an authorized officer
      of Lender and delivered to Borrower. Borrower waives demand, protest, notice
      of
      protest and notice of default or dishonor, notice of payment and nonpayment,
      release, compromise, settlement, extension or renewal of any commercial paper,
      Instrument, Account, General Intangible, Document, Chattel Paper, Investment
      Property or guaranty at any time held by Lender on which Borrower is or may
      in
      any way be liable, and notice of any action taken by Lender, unless expressly
      required by this Agreement, and notice of acceptance hereof.

     

    9.5 Amendment.
      This
      Agreement may not be amended or modified except in a writing executed by
      Borrower and a duly authorized officer of Lender.

     

    9.6 Time
      of Essence. Time
      is
      of the essence in the performance by Borrower of each and every obligation
      under
      this Agreement and the other Loan Documents.

     

    9.7 Attorneys'
      Fees and Costs. Borrower
      shall reimburse Lender for all reasonable attorneys' and paralegals' fees
      (including in-house attorneys and paralegals employed by Lender) and all filing,
      recording, search, title insurance, appraisal, audit, and other costs incurred
      by Lender, pursuant to, in connection with, or relating to this Agreement,
      including all reasonable attorneys' fees and costs Lender incurs to prepare
      and
      negotiate this Agreement and the other Loan Documents; to obtain legal advice
      in
      connection with this Agreement and the other Loan Documents or Borrower or
      any
      Obligor; to administer this Agreement and the other Loan Documents (including
      the cost of periodic financing statement, tax lien and other searches conducted
      by Lender); to enforce, or seek to enforce, any of its rights; prosecute actions
      against, or defend actions by, Account Debtors; to commence, intervene in,
      or
      defend any action or proceeding; to enforce and protect, or to seek to enforce
      and protect, any of its rights and interests in any bankruptcy case, insolvency
      matter or any other similar proceedings relating to the relief of debtors
      involving the Borrower, including, without limitation, by initiating and
      prosecuting any motion for relief from the automatic stay and by initiating,
      prosecuting or defending any other contested matter or adversary proceeding
      in
      bankruptcy or insolvency matters; to file or prosecute any probate claim,
      bankruptcy or insolvency claim, third-party claim, or other claim; to examine,
      audit, copy, and inspect any of the Collateral or any of Borrower's books and
      records; to protect, obtain possession of, lease, dispose of, or otherwise
      enforce Lender's security interests in, the Collateral; and to otherwise
      represent Lender in any litigation relating to Borrower or any Obligor. If
      either Lender or Borrower files any lawsuit against the other predicated on
      a
      breach of this Agreement, the prevailing party in such action shall be entitled
      to recover its reasonable costs and attorneys' fees, including reasonable
      attorneys' fees and costs incurred in the enforcement of, execution upon or
      defense of any order, decree, award or judgment. All attorneys' fees and costs
      to which Lender may be entitled pursuant to this Section shall immediately
      become part of the Obligations, shall be due on demand, and shall bear interest
      at a rate equal to the highest interest rate applicable to any of the
      Obligations.

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    9.8 Benefit
      of Agreement; Assignability. The
      provisions of this Agreement shall be binding upon and inure to the benefit
      of
      the respective successors, assigns, heirs, legal representatives, beneficiaries
      and representatives of Borrower and Lender; provided,
      that
      Borrower may not assign or transfer any of its rights under this Agreement
      without the prior written consent of Lender, and any prohibited assignment
      shall
      be void. No consent by Lender to any assignment shall release Borrower from
      its
      liability for any of the Obligations. Lender shall have the right to assign
      all
      or any of its rights and obligations under the Loan Documents, and to sell
      participating interests therein, to one or more other Persons, and Borrower
      agrees to execute all agreements, instruments and documents requested by Lender
      in connection with each such assignment and participation.

     

    9.9 Headings;
      Construction. Section
      and subsection headings are used in this Agreement only for convenience and
      do
      not affect the meanings of the provisions that they precede.

     

    9.10 GOVERNING
      LAW; CONSENT TO FORUM, ETC.
      THIS
      AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED, AND SHALL BE DEEMED
      TO
      HAVE BEEN MADE, IN NEW YORK COUNTY, NEW YORK, AND SHALL BE GOVERNED BY AND
      CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. BORROWER HEREBY
      CONSENTS AND AGREES THAT, AT ANY TIME WHEN THE CCAA PROCEEDING IS NOT PENDING,
      THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK COUNTY, NEW YORK OR THE STATE
      OR JURISDICTION IN WHICH ANY OF THE COLLATERAL IS LOCATED SHALL HAVE
      NON-EXCLUSIVE JURIS-DICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN
      BORROWER AND LENDER PERTAINING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENTS
      OR
      ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE OTHER LOAN
      DOCUMENTS. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
      JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND WAIVES
      ANY
      OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
      IMPROPER VENUE OR FORUM NON CONVENIENS. BORROWER ALSO AGREES THAT, AT ANY TIME
      WHEN THE CCAA PROCEEDING IS NOT PENDING, ANY CLAIM OR DISPUTE BROUGHT BY
      BORROWER AGAINST LENDER PURSUANT TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT
      OR
      ANY MATTER ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE
      BROUGHT EXCLUSIVELY IN THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK COUNTY,
      NEW YORK. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT
      AND
      OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
      SUCH
      SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE IN THE MANNER AND SHALL BE
      DEEMED RECEIVED AS SET FORTH IN SECTION 9.1 FOR NOTICES, TO THE EXTENT PERMITTED
      BY LAW. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE
      RIGHT
      OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO
      PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH
      FORUM OR THE TAKING OF
      ANY
      ACTION UNDER THIS AGREEMENT TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE FORUM
      OR JURISDICTION.

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    9.11 WAIVER
      OF JURY TRIAL, ETC. BORROWER WAIVES
      (i)
      THE
      RIGHT TO TRIAL BY JURY (WHICH LENDER ALSO WAIVES) IN ANY ACTION, SUIT,
      PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF
      THE
      LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL OR ANY CONDUCT, ACTS OR
      OMISSIONS OF LENDER OR BORROWER OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
      EMPLOYEES, ATTORNEYS, AGENTS OR MANDATARIES OR ANY OTHER PERSONS AFFILIATED
      WITH
      LENDER OR BORROWER, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE;
      (ii)
      THE
      RIGHT TO INTERPOSE ANY CLAIMS, DEDUCTIONS, SET-OFFS, COMPENSATION OR
      COUNTERCLAIMS OF ANY KIND IN ANY ACTION OR PROCEEDING INSTITUTED BY LENDER
      WITH
      RESPECT TO THE LOAN DOCUMENTS OR ANY MATTER RELATING THERETO, EXCEPT FOR
      COMPULSORY COUNTERCLAIMS; (iii) NOTICE
      PRIOR TO LENDER'S TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND
      OR
      SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO
      EXERCISE ANY OF LENDER'S REMEDIES AND (iv) THE
      BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS. BORROWER ACKNOWLEDGES
      THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO
      THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS
      FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS
      REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL
      AND
      HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
      CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT
      MAY
      BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    9.12 Conflict
      of Provisions.
      In the
      event of a conflict between any provision herein and any provision in any Loan
      Document, the provision herein shall control.

     

    9.13 Right
      of First Refusal. If,
      prior
      to or in connection with Borrower's exit from the CCAA Proceeding, Borrower
      desires to obtain replacement or other proposed financing ("Proposed
      Financing")
      from
      another lender, Lender shall have a right of first of refusal, exercisable
      within fifteen (15) days after Lender's receipt of written notice from Borrower
      of the terms and conditions of the Proposed Financing, to provide financing
      to
      Borrower on the same terms as offered by such other lender in connection with
      the Proposed Financing. 

    

    9.14
      Broker's Fees.
      All
      brokers' fees owing in respect of the financing provided herein shall be earned
      at closing. Up to half of such fees may be paid at the closing, with the balance
      due at such time as Greystone may determine in its discretion. Borrower
      represents and warrants to Lender that the only such fee is a fee owing to
      Capital Solutions in the amount of one percent (1%) of the Maximum Facility
      Amount.

     

    9.15 Language.
      The
      parties acknowledge that they have required that the present Agreement, as
      well
      as all agreements, documents, notices and legal proceedings entered into, given
      or instituted pursuant hereto or relating directly or indirectly hereto be
      drawn
      up in English. Les parties reconnaissent avoir exigé la rédaction en anglais de
      la présente convention ainsi que de tous documents exécutés, avis donnés et
      procédures judiciaires intentées, directement ou indirectement, relativement ou
à la suite de la présente convention.

    

    [Signature
      page follows]

     

    
      
         

      

      
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                Greystone
                  Business Credit II
                  LLC

              	
                Loan
                  and Security
                  Agreement

              

      

       

    

    IN
      WITNESS WHEREOF, Borrower and Lender have signed this Agreement as of the date
      first set forth above.

     

    
      	
              Borrower:

               

              Pneutech
                Inc.

               

               

              By
                /s/David
                Marks

              Its
                Chairman

            	
              Lender:

               

              GREYSTONE
                BUSINESS CREDIT II LLC

               

               

              By
                /s/Drew
                Neidorf

              Its
                Authorized Signatory

            

    

    
       

    

    
      
        Signature
          page to Pneutech Inc. Loan and Security
          Agreement

      

      
         

        
          

        

      

      
         

      

    

     

    Schedule A

     

    Description
      of Certain Terms

     

    This
      Schedule is an integral part of the Loan and Security Agreement between
Pneutech
      Inc. and
      Greystone
      Business Credit II LLC (the
      "Agreement").

     

    
      	
               

              1. Loan
                Limits for Revolving Loans:

               

            	 
	
              (a) Maximum
                Facility Amount:

               

            	
              U.S.$15,000,000
                for all Borrower Affiliates

               

            
	
              (b) Advance
                Rates:

               

            	 
	
              (i) Accounts
                Advance Rate:

               

            	
              85%; provided,
                that if the Dilution Percentage exceeds 2%, Lender may, at its option
                (A) reduce such advance rate by the number of full or partial
                percentage points of such excess or (B) establish a Reserve on
                account of such excess 

               

            
	
              (ii) Inventory
                Advance Rate(s):

               

            	 
	
              (A) Finished
                goods:

               

            	
              The
                lesser of (i) 50% of the lower of cost or market value of Eligible
                Inventory, and (ii) 85% of the net orderly liquidation value of the
                Eligible Inventory, provided,
                that without further order of the Court, commencing with the first
                day of
                the quarter immediately following the quarter in which the closing
                of the
                Facility occurs, and on the first day of each subsequent quarter,
                Lender
                shall reduce the above 85% Inventory Advance Rate by 1% per quarter
                to
                75%

               

            
	
              (B) Work
                in process:

               

            	
              U.S.$500,000

               

            
	
              (C) In-Transit
                Inventory:

               

            	
              U.S.$300,000
                

               

            
	
              (c) Accounts
                Sublimit:

               

            	
              Not
                applicable

               

            
	
              (d) Inventory
                Sublimit(s):

               

            	 

    

     

    
      
         

      

      
        A-1

        
          

        

      

      
         

      

    

     

    
      	
              (i)
                Overall sublimit on advances against Eligible Inventory

               

            	
              U.S.$5,000,000
                

               

            
	
              (e) Credit
                Accommodation Limit:

               

            	
              U.S.$1,000,000

               

            
	
              (f) Permanent
                Reserve Amount:

               

            	
              U.S.$500,000,
                to be released at such time as Parker-Hannifin Corporation begins
                shipping
                goods to Borrower Affiliates on terms acceptable to
                Lender

            
	
              (g) Overadvance
                Amount:

               

            	
              Not
                applicable

               

            
	
               

              2. Loan
                Limits for Term Loan A:

               

            	 
	
              (a) Principal
                Amount:

               

            	
              U.S.$558,000,
                provided,
                that upon receipt of the Real Property Appraisal or any Updated Real
                Property Appraisal or Updated Equipment Appraisal, Borrower shall
                promptly
                pay to Lender the amount, if any, by which the then-outstanding principal
                balance of Term Loan A exceeds the sum of the values reflected in
                the most
                recent of such appraisals

               

            
	
              (i) Equipment
                Advance

               

            	
              80%
                of the Equipment Appraisal, not to exceed U.S.$208,000

               

            
	
              (ii) Real
                Property Advance:

               

            	
              50%
                of the value of the Real Property Appraisal, not to exceed
                U.S.$350,000

               

            
	
              (iii) Capital
                Expenditure Advances:

               

            	
              Not
                applicable

               

            
	
              (b) Repayment
                Schedule:

               

            	 

    

     

    
      
         

      

      
        A-2

        
          

        

      

      
         

      

       

    

    
      	
              (i) Term
                Loan A Advance:

               

            	
              Term
                Loan A, which is comprised of the Equipment Advance and the Real
                Property
                Advance, shall be repaid in consecutive monthly principal payments
                of
                $10,000 plus accrued interest beginning on October 1, 2006 with a
                final
                payment of the outstanding balance of principal and accrued interest
                payable upon the expiration of the Term

               

            
	
              (ii) Real
                Property Advance:

               

            	
              Not
                applicable

               

            
	
              (iii) Capital
                Expenditure Advances:

               

            	
              Not
                applicable

               

            
	
               

              3. Loan
                Limits for Term Loan B:

               

            	 
	
              (a) Principal
                Amount:

               

            	
              U.S.$600,000

               

            
	
              (i) Equipment
                Advance

               

            	
              Not
                applicable

               

            
	
              (ii) Real
                Property Advance:

               

            	
              Not
                applicable

               

            
	
              (iii) Capital
                Expenditure Advances:

               

            	
              Not
                applicable

               

            
	
              (b) Repayment
                Schedule:

               

            	 

    

     

    
      
         

      

      
        A-3

        
          

        

      

      
         

      

       

    

    
      	
              (i) Term
                Loan B Advance:

               

            	
              Term
                Loan B shall be repaid in consecutive monthly principal payments
                of
                $10,000 plus accrued interest beginning on October 1, 2006 with a
                final
                payment of the outstanding balance of principal and accrued interest
                payable one year from the closing date. Term Loan B may be repaid
                with the
                proceeds of capital, subordinated loans, or subordinated participations
                in
                the Facility on terms acceptable to Lender and, except for payments
                made
                pursuant to this sentence and the monthly installments described
                in the
                immediately preceding sentence, all payments and proceeds of collateral
                in
                respect of the Facility shall be applied to indebtedness other than
                Term
                Loan B before being applied to Term Loan B.

               

            
	
              (ii) Real
                Property Advance:

               

            	
              Not
                applicable

               

            
	
              (iii) Capital
                Expenditure Advances:

               

            	
              Not
                applicable

               

            
	
               

              4. Interest
                Rates:

               

            	 
	
              (a) Revolving
                Loans:

               

            	
              3%
                per annum in excess of the Prime Rate, provided,
                that (a) such interest shall be accrued commencing September 5, 2006
                (the
                date on which Lender ordered up funds for the closing ) and (b) the
                interest rate shall be reduced by .75% after any 12-month rolling
                period
                (and only for that period) for which Borrower Affiliates' Net Profit
                exceeds U.S.$2,000,000. If Borrower Affiliates' Net Profit exceeds
                U.S.$2,000,000 in any 12-month rolling period, but at any time thereafter
                does not exceed U.S.$2,000,000 in any 12-month rolling period, then
                the
                interest rate shall revert to 3% in excess of the Prime Rate

               

            
	
              (b) Term
                Loan:

               

            	
              Not
                applicable

               

            

    

     

    
      
         

      

      
        A-4

        
          

        

      

      
         

      

       

    

    
      	
               

              5. Minimum
                Loan Amount:

               

            	
               

              U.S.$7,500,000
                

               

            
	
               

              6. Maximum
                Days:

               

            	 
	
              (a) Maximum
                days after original invoice
                date
                for Eligible Accounts:

               

            	
              90
                days, provided,
                that the Maximum Days for Eligible Accounts of Camoplast, Inc. shall
                be
                140 days

               

            
	
              (b) Maximum
                days after original invoice due
                date
                for Eligible Accounts:

               

            	
              60
                days, provided,
                that such time period shall not apply to the Eligible Accounts of
                Camoplast, Inc. 

               

            
	
               

              7. Fees:

               

            	 
	
              (a) Closing
                Fee:

               

            	
              U.S.$150,000,
                which shall be fully earned at closing and of which $75,000 shall
                be
                payable at closing, and the balance due at such time as determined
                by
                Greystone in its discretion 

               

            
	
              (b) Facility
                Fee:

               

            	 
	
              (i) Initial
                Term Facility Fee:

               

            	
              .50%
                of the Maximum Facility Amount

               

            
	
              (ii) Renewal
                Term(s) Facility Fee:

               

            	
              .50%
                of the Maximum Facility Amount

               

            
	
              (c) Servicing
                Fee:

               

            	
              .2%
                per month based on the average daily outstanding principal balance
                of the
                Loans and the Credit Accommodation Balance during the immediately
                preceding month (or part thereof)

               

            
	
              (d) Unused
                Line Fee:

               

            	
              .25% per
                annum

               

            
	
              (e) Minimum
                Borrowing Fee:

               

            	 

    

     

    
      
         

      

      
        A-5

        
          

        

      

      
         

      

       

    

    
      	
              (i) Applicable
                period:

               

            	
              Each
                month 

               

            
	
              (ii) Date
                payable:

               

            	
              The
                first day of each month

               

            
	
              (f) Success
                Fee:

               

            	
              Not
                applicable

               

            
	
              (g) Warrants:

               

            	
              Lender
                shall receive warrants to purchase 1,000,000 shares of common stock
                of
                Parent, which will have an exercise price of U.S.$.50 per share,
                and will
                be immediately exercisable and freely transferable by Lender separate
                from
                the Facility. Within six months following the closing, the shares
                of
                Parent subject to such warrants will be registered by Parent with
                the
                Securities and Exchange Commission so that they will be freely tradable
                and shall be listed for trading on the principal market on which
                Parent's
                securities are then trading. 

               

            
	
              (h) Early
                Termination Fee:

               

            	
              2 %
                of the Maximum Facility Amount if terminated during the first year
                of the
                Initial Term or any Renewal Term, 2% of the Maximum Facility Amount
                if
                terminated during the second year of the Initial Term or any Renewal
                Term,
                and 1% of the Maximum Facility Amount if terminated thereafter and
                prior
                to the Maturity Date

               

            
	
              (i) Credit
                Accommodation Fees:

               

            	
              2%
                per annum of the face amount of each open Credit Accommodation for
                the
                first 60-day period, or any part thereof, and 1% of such face amount
                for
                each additional 30-day period, or any part thereof

               

            
	
              (j) Term
                Loan B Fee:

               

            	
              U.S.$100,000,
                which shall be earned on the disbursement of Term Loan B and shall
                be
                payable in two (2) installments of U.S.$50,000 each payable, respectively,
                on the first anniversary and second anniversary of the
                closing

               

            

    

     

    
      
         

      

      
        A-6

        
          

        

      

      
         

      

       

    

    
      	
               

              8. Initial
                Maturity Date:

               

            	
               

              The
                expiration of three (3) years from the closing of the
                Facility

               

            
	
               

              9. Financial
                Covenants:

               

            	 
	
              (a) Capital
                Expenditure Limitation:

               

            	
              Not
                applicable

               

            
	
              (b) Minimum
                Net Worth Requirement:

               

            	
              Not
                applicable

               

            
	
              (c) Minimum
                Tangible Net Worth:

               

            	
              Not
                applicable

               

            
	
              (d) Minimum
                Working Capital:

               

            	
              Not
                applicable

               

            
	
              (e) Maximum
                Cumulative Net Loss:

               

            	
              U.S.$500,000
                for all Borrower Affiliates on a cumulative basis in any fiscal period,
                provided,
                that, this amount shall not exceed U.S.$300,000 in any ninety (90)
                day
                rolling period

               

            
	
              (f) Minimum
                Cumulative Net Income:

               

            	
              Not
                applicable

               

            
	
              (g) Maximum
                Leverage Ratio:

               

            	
              Not
                applicable

               

            
	
              (h) Limitation
                on Purchase Money Security Interests:

               

            	
              Not
                applicable

               

            
	
              (i) Limitation
                on Equipment Leases:

               

            	
              Not
                applicable

               

            
	
              (j) Additional
                Financial Covenants:

               

            	
              Immediately
                after the application of the Loan proceeds, unused Availability shall
                be
                U.S.$1,800,000, which amount shall include Borrower's cash in any
                Deposit
                Account.

               

            
	
               

              10. Borrower
                Information:

               

            	 

    

     

    
      
         

      

      
        A-7

        
          

        

      

      
         

      

       

    

    
      	
              (a) Prior
                Names of Borrower:

               

            	
              Pneutech
                Limitée

              Pneutech
                Ltée

              4274458
                Canada Inc.

              D
                & D Packing & Seals Inc.

              Les
                Joints et Garnitures D D Inc.

              127734
                Canada Inc.

              Robot
                Lab (1984) Limitée

              164275
                Canada Inc.

              173006
                Canada Inc.

              Pneutech
                Hydraulique Ltée

              138428
                Canada Inc.

              171442
                Canada Inc.

              Spiraltec
                Manufacturing Inc.

              Federal
                Industrial Products Co. Ltd.

              Danro
                Tool Company Inc.

               

            
	
              (b) Prior
                Trade Names of Borrower:

               

            	
              Pneutech
                Limitée

              Pneutech
                Ltée

              4274458
                Canada Inc.

              D
                & D Packing & Seals Inc.

              Les
                Joints et Garnitures D D Inc.

              127734
                Canada Inc.

              Robot
                Lab (1984) Limitée

              164275
                Canada Inc.

              173006
                Canada Inc.

              Pneutech
                Hydraulique Ltée

              138428
                Canada Inc.

              171442
                Canada Inc.

              Spiraltec
                Manufacturing Inc.

              Federal
                Industrial Products Co. Ltd.

              Danro
                Tool Company Inc.

               

            
	
              (c) Existing
                Trade Names of Borrower:

               

            	
              Pneutech
                Inc.

               

            

    

     

    
      
         

      

      
        A-8

        
          

        

      

      
         

      

       

    

    
      	
              (d) Inventory
                Locations:

               

            	
              1475,
                32nd Avenue, Lachine, Quebec

              345
                Superior Blvd. Unit #1, Mississauga,  ON

              1200
                Boul. Du Royaume, Chicoutimi, QC

              3306
                Belle Feuille, Trois Rivieres, QC

              205
                Enterprise Avenue, Kitimat, BC

              445
                Des Adirondacks, Beauport, QC

              300
                Baig Blvd., Moncton, NB

              121
                Welham Rd., Barrie, ON

              77
                Bradwick Dr., Concord, ON

            
	
              (e) Other
                Locations:

               

            	
              Not
                applicable

               

            
	
              (f) Litigation:

               

            	
              Dux
                v. Pneutech (in Nevada state court); relates to a claim in excess
                of
                $10,000

               

            
	
              (g) Ownership
                of Borrower:

               

            	
              Pneutech
                is 100% held by Thomas Equipment, Inc., a Delaware
                corporation

               

            
	
              (h) Subsidiaries
                (and ownership thereof):

               

            	
              Rousseau
                Controls Inc.—100%

              Hydramen
                Fluid Power Limited—100%

               

            
	
              (i) Facsimile
                Numbers:

               

            	 
	
              Borrower:

               

            	
              (514)
                635-7010

               

            
	
              Lender:

               

            	
              (212)
                896-9199

               

            
	
              11. Description
                of Real Property:

            	
              445
                Des Adirondacks, Beauport, QC

              1200
                Boul. Du Royaume, Chicoutimi, QC

              205
                Enterprise Avenue, Kitimat, BC

            
	
               

              12. Lender's
                Bank:

               

            	
               

              Bank
                of America

              6000
                Feldwood Road

              College
                Park, GA 30349

              Account
                Number: 003284737253

              ABA
                Number: 026009593

            

    

     

    
      
         

      

      
        A-9

        
          

        

      

      
         

      

    

     

    
      	
               

              13. Other
                Covenants:

               

            	
               

              Not
                earlier than 30 days before each anniversary of the date of the Agreement
                during the Term, and not later than 60 days after each anniversary
                of the
                date of the Agreement during the Term, Borrower will cause to be
                prepared
                and delivered to Lender an updated auction sale value appraisal of
                Borrower's Equipment (the "Updated
                Equipment Appraisal")
                and an updated fair market value appraisal of Borrower's Real Property
                (the "Updated
                Real Property Appraisal")
                each by an independent appraiser acceptable to Lender, each of which
                Updated Equipment Appraisals and Updated Real Property Appraisals
                shall
                include, without limitation, all Equipment and Real Property acquired
                by
                Borrower after the date of the Agreement

               

            
	
               

              14. Exceptions
                to Negative Covenants:

               

            	
               

              Not
                applicable

               

            

    

     

    [Signature
      page follows]

     

    
      
         

      

      
        A-10

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, Borrower and Lender have signed this Schedule A as of the
      date
      set forth in the heading to the Agreement.

     

    
      	
              Borrower:

               

              Pneutech
                Inc.

               

              By
                ____________________________________

              Its
                ________________________________

            	
              Lender:

               

              Greystone
                Business Credit II LLC

               

              By
                ____________________________________

              Its
                ________________________________

            

    

    

    
      
        
          Signature
            page to Schedule A to Pneutech Loan and Security
            Agreement

        

      

      
         

        
          

        

      

      
         

      

    

    

    Schedule B

     

    Definitions

     

    This
      Schedule is an integral part of the Loan and Security Agreement between
Pneutech
      Inc. and
      Greystone
      Business Credit II LLC (the
      "Agreement").

     

    As
      used
      in the Agreement, the following terms have the following meanings:

     

    "Account"
      has the
      meaning set forth in the UCC and, for the purposes of the CCQ, shall include
      "claims" within the meaning of the CCQ.

     

    "Account
      Debtor"
      has the
      meaning set forth in the UCC.

     

    "Account
      Proceeds"
      has the
      meaning set forth in Section 4.1.

     

    "Accounts
      Advance Rate"
      means
      the percentage set forth in Section 1(b)(i) of Schedule A.

     

    "Accounts
      Sublimit"
      means
      the amount set forth in Section 1(c) of Schedule A.

     

    "Advance
      Rates"
      means,
      collectively, the Accounts Advance Rate and the Inventory Advance
      Rate.

     

    "Affiliate"
      means,
      with respect to any Person, a relative, partner, shareholder, member, manager,
      director, officer, or employee of such Person, any parent or subsidiary of
      such
      Person, or any Person controlling, controlled by or under common control with
      such Person or any other Person affiliated, directly or indirectly, by virtue
      of
      family membership, ownership, management or otherwise. Without limiting the
      foregoing, the term Affiliate shall include each of the Borrower Affiliates.
      

     

    "Agreement"
      and
      "this
      Agreement"
      mean
      the Loan and Security Agreement of which this Schedule B is a part and the
      Schedules thereto.

     

    "Availability"
      has the
      meaning set forth in Section 1.1(a)

     

    "Bankruptcy
      Code"
      means
      the United States Bankruptcy Code (11 U.S.C. § 101 et seq.) or the
Bankruptcy
      and Insolvency Act
      (Canada), the Companies
      Creditors Arrangement Act (Canada)
      or the Winding-up
      Act
      (Canada)
      or any other applicable bankruptcy or insolvency law or any rule or regulation
      promulgated thereunder. 

     

    "Blocked
      Account"
      has the
      meaning set forth in Section 4.1.

     

    "Borrower"
      has the
      meaning set forth in the heading to the Agreement.

     

    "Borrower's
      Address"
      has the
      meaning set forth in the heading to the Agreement.

     

    
      
         

      

      
        B-1

        
          

        

      

      
         

      

    

     

    "Borrower
      Affiliates"
      means,
      collectively, (i) Borrower, (ii) Rousseau Controls Inc., a corporation organized
      under the laws of Canada, and (iii) Hydramen Fluid Power Limited, a corporation
      organized under the laws of Ontario.

     

    "Business
      Day"
      means a
      day other than a Saturday or Sunday or any other day on which Lender or banks
      in
      New York, Montreal or Toronto are authorized to close.

     

    "Canadian
      Plans"
      shall
      mean all the employee benefit, fringe benefit, supplemental unemployment
      benefit, bonus, incentive, profit sharing, termination, change of control,
      pension, retirement, stock option, stock purchase, stock appreciation, health,
      welfare, medical, dental, disability, life insurance and similar plans,
      programs, arrangements or practices relating to the current or former employees,
      officers or directors of the Borrower and its Subsidiaries maintained, sponsored
      or funded by any of them, whether written or oral, funded or unfunded, insured
      or self insured, registered or unregistered.

     

    "Canadian
      Security Documents"
      means
      all the security agreements, mortgages, debentures, deeds of hypothec, pledges
      and other security documents executed by the Borrower or any Obligor in relation
      to this Agreement, as amended or replaced from time to time.

     

    "Carve-Out"
      means
(i)
      the
      Monitor's Fees and (ii) the Professional Fees, in an aggregate maximum amount
      not to exceed CND$250,000. So long as no Event of Default shall have occurred
      and be continuing, in accordance with the Forecast Budget, Borrower Affiliates
      shall be permitted to pay Monitor's Fees and Professional Fees as the same
      may
      be due and payable, in amounts allowed by the Court and approved by
      Lender.

     

    "CCAA"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "CCAA
      Proceeding"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "CCQ"
      means
      the Civil Code of Quebec and any successor code thereto together with all
      regulations thereunder in effect from time to time in the Province of Quebec,
      Canada.

     

    "Chattel
      Paper"
      has the
      meaning set forth in the UCC.

     

    "Closing
      Fee"
      has the
      meaning set forth in Section 2.2(a).

     

    "Collateral"
      means
      all property and interests in property in or upon which a security interest,
      hypothec or other Lien is granted pursuant to this Agreement or the other Loan
      Documents or the Order, including, without limitation, all of the property
      of
      Borrower described in Section 3.1.

     

    "Commercial
      Tort Claims"
      has the
      meaning set forth in the UCC.

     

    "Court"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "Credit
      Accommodation"
      has the
      meaning set forth in Section 1.1(a).

     

    
      
         

      

      
        B-2

        
          

        

      

      
         

      

    

     

    "Credit
      Accommodation Balance"
      means
      the sum of (i) the aggregate undrawn face amount of all outstanding Credit
      Accommodations and (ii) all interest, fees and costs due or, in Lender's
      estimation, likely to become due in connection therewith.

     

    "Credit
      Accommodation Fees"
      has the
      meaning set forth in Section 2.2(h).

     

    "Credit
      Accommodation Limit"
      means
      the amount set forth in Section 1(e) of Schedule A.

     

    "Currency
      Exchange Rate"
      means,
      with respect to a currency, the rate quoted by the Reference Bank as the spot
      rate for the purchase by the Reference Bank of such currency with another
      currency at approximately 10:30 a.m. (New York time) on the date two (2)
      Business Days prior to the date as of which the foreign exchange computation
      is
      made.

     

    "Default"
      means
      any event which with notice or passage of time, or both, would constitute an
      Event of Default.

     

    "Default
      Rate"
      has the
      meaning set forth in Section 2.1.

     

    "Deposit
      Account"
      has the
      meaning set forth in the UCC.

     

    "Dilution
      Percentage"
      means
      the gross amount of all returns, allowances, discounts, credits, write-offs
      and
      similar items relating to Borrower's Accounts computed as a percentage of
      Borrower's gross sales, calculated on a twelve (12) month rolling
      average.

     

    "Document"
      has the
      meaning set forth in the UCC.

     

    "Early
      Termination Fee"
      has the
      meaning set forth in Section 7.2.

     

    "Electronic
      Chattel Paper"
      has the
      meaning set forth in the UCC.

     

    
      
         

      

      
        B-3

        
          

        

      

      
         

      

    

     

    "Eligible
      Account"
      means,
      at any time of determination, an Account of Borrower which satisfies the general
      criteria set forth below and which is otherwise acceptable to Lender
      (provided,
      that
      Lender may, in its sole discretion, change the general criteria for
      acceptability of Eligible Accounts upon at least fifteen days' prior notice
      to
      Borrower). An Account shall be deemed to meet the current general criteria
      if
      (i) neither the Account Debtor nor any of its Affiliates is an Affiliate,
      creditor or supplier of Borrower; (ii) it does not remain unpaid more than
      the earlier to occur of (A) the number of days after the original
invoice
      date
      set
      forth in Section 6(a) of Schedule A or (B) the number of days
      after the original invoice
      due date
      set
      forth in Section 6(b) of Schedule A; (iii) the Account Debtor or its
      Affiliates are not past due on other Accounts owing to Borrower comprising
      more
      than 50% of all of the Accounts owing to Borrower by such Account Debtor or
      its
      Affiliates; (iv) all Accounts owing by the Account Debtor or its Affiliates
      do not represent more than 25% (or 30% in the case of Accounts owing by
      Camoplast, Inc. or its Affiliates) of all otherwise Eligible Accounts
      (provided,
      that,
      with respect to such Accounts, (A) Lender may elect to place such Accounts
      on
      direct notification; (B) Lender may require credit insurance on such Accounts
      and (C) Accounts which are deemed to be ineligible solely by reason of this
      clause (iv) shall be considered Eligible Accounts to the extent of the
      amount thereof which does not exceed 25% of
      all
      otherwise Eligible Accounts); (v) no covenant, representation or warranty
      contained in this Agreement with respect to such Account (including any of
      the
      representations set forth in Section 5.4) has been breached; (vi) the
      Account is not subject to any contra relationship, counterclaim, dispute,
      set-off or compensation (provided,
      that
      Accounts which are deemed to be ineligible solely by reason of this
      clause (vi) shall be considered Eligible Accounts to the extent of the
      amount thereof which is not affected by such contra relationships,
      counterclaims, disputes, set-offs or compensation); (vii) the Account
      Debtor's chief executive office or principal place of business is located in
      the
      United States or a province of Canada, unless (A) the sale is fully backed
      by a letter of credit, guaranty or acceptance acceptable to Lender in its sole
      discretion, and if backed by a letter of credit, such letter of credit has
      been
      issued or confirmed by a bank satisfactory to Lender, is sufficient to cover
      such Account, and if required by Lender, the original of such letter of credit
      has been delivered to Lender or Lender's agent (mandatary) and the issuer
      thereof notified of the assignment of the proceeds of such letter of credit
      to
      Lender or (B) such Account is subject to credit insurance, including that
      of the Export Development Corporation payable to Lender issued by an insurer
      and
      on terms and in an amount acceptable to Lender; (viii) it is absolutely
      owing to Borrower and does not arise from a sale on a bill-and-hold, guarantied
      sale, sale-or-return, sale-on-approval, consignment, retainage or any other
      repurchase or return basis or consist of progress billings; (ix) Lender
      shall have verified the Account in a manner satisfactory to Lender; (x) the
      Account Debtor is not the United States of America or Canada or any state or
      political subdivision (or any department, agency or instrumentality thereof),
      unless Borrower has complied with the Assignment of Claims Act of 1940 (31
      U.S.C. §203 et seq.) or other applicable similar law in a manner satisfactory to
      Lender; (xi) the Account Debtor is not the government of Canada or any province
      or territory thereof (or any ministry, department, agency or instrumentality
      thereof), unless Borrower has complied with the Financial
      Administration Act
      (Canada)
      or other applicable similar law in a manner satisfactory to Lender;
      (xii) it is at all times subject to Lender's duly perfected, first priority
      security interest and hypothec and to no other Lien that is not a Permitted
      Lien, and the goods giving rise to such Account (A) were not, at the time
      of sale, subject to any Lien except Permitted Liens and (B) have been
      delivered to and accepted by the Account Debtor, or the services giving rise
      to
      such Account have been performed by Borrower and accepted by the Account Debtor;
      (xiii) the Account is not evidenced by Chattel Paper or an Instrument of
      any kind and has not been reduced to judgment; (xiv) the Account Debtor's
      total indebtedness to Borrower does not exceed the amount of any credit limit
      established by Borrower or Lender and the Account Debtor is otherwise deemed
      to
      be creditworthy by Lender (provided,
      that
      Accounts which are deemed to be ineligible solely by reason of this
      clause (xiii) shall be considered Eligible Accounts to the extent the
      amount of such Accounts does not exceed the lower of such credit limits);
      (xv) there are no facts or circumstances existing, or which could
      reasonably be anticipated to occur, which might result in any adverse change
      in
      the Account Debtor's financial condition or impair or delay the collectibility
      of all or any portion of such Account; (xvi) Lender has been furnished with
      all documents and other information pertaining to such Account which Lender
      has
      requested, or which Borrower is obligated to deliver to Lender, pursuant to
      this
      Agreement; (xvii) Borrower has not made an agreement with the Account
      Debtor to extend the time of payment thereof beyond the time periods set forth
      in clause (ii) above; and (xviii) Borrower has not posted a surety or other
      bond in respect of the contract under which such Account arose. 

     

    
      
         

      

      
        B-4

        
          

        

      

      
         

      

    

     

    "Eligible
      Equipment"
      means,
      at any time of determination, Equipment owned by Borrower which is not subject
      to any Lien (other than the Lien granted to Lender pursuant to the Agreement)
      and which Lender, in its sole discretion, deems to be eligible for borrowing
      purposes. The value of such Eligible Equipment shall be established by an
      appraisal which is in form and substance satisfactory to Lender conducted by
      an
      appraiser acceptable to Lender pursuant to a methodology acceptable to Lender
      (the "Equipment
      Appraisal").
      

     

    "Eligible
      Inventory"
      means,
      at any time of determination, Inventory (other than packaging materials and
      supplies) which satisfies the general criteria set forth below and which is
      otherwise acceptable to Lender (provided,
      that
      Lender may, in its sole discretion, change the general criteria for
      acceptability of Eligible Inventory upon at least fifteen days' prior written
      notice to Borrower). Inventory shall be deemed to meet the current general
      criteria if (i) it consists of raw materials or finished goods, or
      work-in-process that is readily marketable in its current form; (ii) it is
      in good, new and saleable condition; (iii) it is not slow-moving, obsolete,
      unmerchantable, returned or repossessed; (iv) it is not in the possession
      of a processor, consignee or bailee, or located on premises leased or subleased
      to Borrower, or on premises subject to a mortgage or hypothec in favor of a
      Person other than Lender, unless such processor, consignee, bailee or mortgagee
      or hypothec or the lessor or sublessor of such premises, as the case may be,
      has
      executed and delivered all documentation which Lender shall require to evidence
      the subordination or other limitation or extinguishment of such Person's rights
      with respect to such Inventory and Lender's right to gain access thereto;
      (v) it meets all standards imposed by any governmental agency or authority;
      (vi) it conforms in all respects to any covenants, warranties and
      representations set forth in the Agreement; (vii) it is at all times
      subject to Lender's duly perfected, first priority security interest and
      hypothec and no other Lien except a Permitted Lien; and (viii) it is
      situated at an Inventory Location listed in Section 10(d) of
      Schedule A or other location of which Lender has been notified as required
      by Section 5.8. Any valuation of Eligible Inventory shall be established in
      an appraisal which is in form and substance satisfactory to Lender conducted
      by
      an appraiser acceptable to Lender pursuant to a methodology acceptable to
      Lender. 

     

    "Eligible
      Real Property"
      means,
      at any time of determination, Real Property owned by Borrower which Lender,
      in
      its sole discretion, deems to be eligible for borrowing purposes. The value
      of
      such Eligible Real Property shall be established by a fair market value
      appraisal which is in form and substance satisfactory to Lender conducted by
      an
      appraiser acceptable to Lender pursuant to a methodology acceptable to Lender
      (the "Real
      Property Appraisal").

     

    "Equipment"
      has the
      meaning set forth in the UCC.

     

    "Equipment
      Advance"
      has the
      meaning set forth in Section 1.1(b).

     

    "Event
      of Default"
      has the
      meaning set forth in Section 8.1.

     

    "Facility"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "Facility
      Fee"
      means
      the Initial Term Facility Fee.

     

    
      
         

      

      
        B-5

        
          

        

      

      
         

      

    

     

    "Filing
      Date"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "Fixtures"
      has the
      meaning set forth in the UCC.

     

    "Forecast
      Budget"
      shall
      mean each cash flow forecast prepared by Borrower Affiliates, in form and
      substance satisfactory to Lender. 

     

    "GAAP"
      means
      generally accepted accounting principles as in effect from time to time, in
      the
      United States of America, consistently applied.

     

    "General
      Intangibles"
      has the
      meaning set forth in the UCC.

     

    "Goods"
      has the
      meaning set forth in the UCC.

     

    "Initial
      Maturity Date"
      means
      the date set forth in Section 8 of Schedule A.

     

    "Initial
      Term"
      has the
      meaning set forth in Section 7.1.

     

    "Initial
      Term Facility Fee"
      has the
      meaning set forth in Section 2.2(b).

     

    "Instrument"
      has the
      meaning set forth in the UCC.

     

    "Inventory"
      has the
      meaning set forth in the UCC.

     

    "Inventory
      Advance Rate"
      means
      the percentage(s) set forth in Section 1(b)(ii) of Schedule A.

     

    "Inventory
      Sublimit"
      means
      the amount(s) set forth in Section 1(d) of Schedule A.

     

    "Investment
      Property"
      has the
      meaning set forth in the UCC.

     

    "Lender"
      has the
      meaning set forth in the heading to the Agreement.

     

    "Letter-of-Credit
      Right"
      has the
      meaning set forth in the UCC.

     

    "Lien"
      means
      any interest or hypothec in property securing an obligation owed to, or a claim
      by, a Person other than the owner of the property, whether such interest is
      based on common law, civil law, statute or contract, including prior claims,
      rights of sellers under conditional sales contracts or title retention
      agreements and reservations, leasings (credit bail), sales with a right of
      redemption, installment sales, exceptions, encroachments, easements, servitudes,
      rights-of-way, covenants, conditions, restrictions, leases and other title
      exceptions and encumbrances affecting property. For the purpose of this
      Agreement, Borrower shall be deemed to be the owner of any property which it
      has
      acquired or holds subject to a conditional sale agreement or other arrangement
      pursuant to which title to the property has been retained by or vested in some
      other Person for security purposes.

     

    "Loan
      Account"
      has the
      meaning set forth in Section 2.4.

     

    
      
         

      

      
        B-6

        
          

        

      

      
         

      

    

     

    "Loan
      Documents"
      means,
      collectively, the Agreement and all notes, guaranties, security agreements,
      hypothecs, mortgages, debentures, certificates, landlord's agreements, Lock
      Box
      and Blocked Account agreements and all other agreements, documents and
      instruments now or hereafter executed or delivered by Borrower or any Obligor
      in
      connection with, or to evidence the transactions contemplated by, this
      Agreement, including the Canadian Security Documents.

     

    "Loan
      Limits"
      means,
      collectively, the Availability limits and all other limits on the amount of
      Loans and Credit Accommodations set forth in this Agreement.

     

    "Loans"
      means,
      collectively, the Revolving Loans and any Term Loan.

     

    "Lock
      Box"
      has the
      meaning set forth in Section 4.1.

     

    "Maturity
      Date"
      has the
      meaning set forth in Section 7.1.

     

    "Maximum
      Facility Amount"
      means
      the amount set forth in Section 1(a) of Schedule A.

     

    "Minimum
      Borrowing Fee"
      has the
      meaning set forth in Section 2.2(e).

     

    "Minimum
      Loan Amount"
      means
      the amount set forth in Section 5 of Schedule A.

     

    "Monitor's
      Fees"
      means
      all fees payable to the Monitor in the CCAA Proceeding, as approved by the
      Court.

     

    "Net
      Profit"
      means,
      for any given period, the net income for Borrower Affiliates for such period,
      on
      a consolidated basis, after interest, depreciation and the issuance of any
      employee stock options that result in a non-operational, non-charge to the
      applicable company.

     

    "Obligations"
      means
      all present and future Loans, advances, debts, liabilities, obligations,
      guaranties, covenants, duties and indebtedness at any time owing by Borrower
      to
      Lender, whether evidenced by this Agreement, any other Loan Document or
      otherwise whether arising from an extension of credit, opening of a Credit
      Accommodation, guaranty, indemnification or otherwise (including all fees,
      costs
      and other amounts which may be owing to issuers of Credit Accommodations and
      all
      taxes, duties, freight, insurance, costs and other expenses, costs or amounts
      payable in connection with Credit Accommodations or the underlying goods),
      whether direct or indirect (including those acquired by assignment and any
      participation by Lender in Borrower's indebtedness owing to others), whether
      absolute or contingent, whether due or to become due, and whether arising before
      or after the commencement of a proceeding under the Bankruptcy Code or any
      similar statute, including all interest, charges, expenses, fees, attorney's
      fees, expert witness fees, audit fees, letter of credit fees, Closing Fees,
      Facility Fees, Servicing Fees, Unused Line Fees, Minimum Borrowing Fees, Success
      Fees, amounts owing under Warrants, Credit Accommodation Fees and any other
      sums
      chargeable to Borrower under this Agreement or under any other Loan
      Document.

     

    
      
         

      

      
        B-7

        
          

        

      

      
         

      

    

     

    "Obligor"
      means
      any guarantor, endorser, acceptor, surety or other person liable on, or with
      respect to, the Obligations or who is the owner of any property which is
      security for the Obligations, other than Borrower.

     

    "Order"
      shall
      mean the order of the Court entered in the CCAA Proceeding in compliance with
      the provisions of the CCAA, which order shall be satisfactory in form and
      substance to Lender, together with all extensions, modifications and amendments
      thereto, satisfactory to Lender, which, among other matters but not by way
      of
      limitation, authorizes Borrower Affiliates to obtain credit, incur (or guaranty)
      Indebtedness and grant Liens under this Agreement and the Other Documents,
      as
      the case may be, includes customary rulings and findings by the Court binding
      on
      all parties, and provides for the superpriority of Lender's claims.

    

    "Parent"
      means
      Thomas Equipment, Inc., a Delaware corporation.

     

    "Permitted
      Liens"
      means:
      (i) purchase money security interests in specific items of Equipment in an
      aggregate amount not to exceed the limit set forth in Section 9(h) of
      Schedule A; (ii) leases of specific items of Equipment in an aggregate
      amount not to exceed the limit set forth in Section 9(i) of
      Schedule A; (iii) Liens for taxes not yet due and payable;
      (iv) additional Liens which are fully subordinate to the security interests
      of Lender and are consented to in writing by Lender on terms and conditions
      acceptable to Lender and other Liens arising pursuant to the Order;
      (v) security interests being terminated concurrently with the execution of
      this Agreement; (vi) Liens of materialmen, mechanics or carriers (but
      excluding Liens in favor of warehousemen) arising in the ordinary course of
      business and securing obligations which are not delinquent; (vii) Liens
      incurred in connection with the extension, renewal or refinancing of the
      indebtedness secured by Liens of the type described in clause (i) or
      (ii) above; provided,
      that
      any extension, renewal or replacement Lien is limited to the property encumbered
      by the existing Lien and the principal amount of the indebtedness being
      extended, renewed or refinanced does not increase; (viii) Liens in favor of
      customs and revenue authorities which secure payment of customs duties in
      connection with the importation of goods; and (ix) security deposits posted
      in connection with real (immovable) property leases or subleases. Lender will
      have the right to require, as a condition to its consent under clause
      (iv) above, that the holder of the additional Lien sign an intercreditor
      agreement in form and substance satisfactory to Lender, in its sole discretion,
      acknowledging that the Lien is subordinate to the security interests of Lender,
      and agreeing not to take any action to enforce its subordinate Lien so long
      as
      any Obligations remain outstanding, and that Borrower agree that any uncured
      default in any obligation secured by the subordinate Lien shall also constitute
      an Event of Default under this Agreement. 

     

    "Person"
      means
      any individual, sole proprietorship, partnership, joint venture, limited
      liability company, trust, unincorporated organization, association, corporation,
      legal person, government or any agency or political division thereof, or any
      other entity.

     

    "Prime
      Rate"
      means,
      at any given time, the prime rate expressed as an annual rate as quoted in
      The
      Wall Street Journal
      as the
      base rate on corporate loans posted as of such time by at least 75% of the
      30
      largest United States banks (which rate is not necessarily the lowest rate
      offered by such banks).

     

    
      
         

      

      
        B-8

        
          

        

      

      
         

      

    

     

    "Proceeds"
      has the
      meaning set forth in the UCC.

     

    "Professional
      Fees"
      means
      all fees payable to the attorneys and other insolvency professionals engaged
      by
      Borrower Affiliates in the CCAA Proceeding, as approved by the
      Court.

     

    "RBC
      Indebtedness"
      has the
      meaning set forth in the Recitals to this Agreement.

     

    "Real
      Property"
      means
      the real (immovable) property described in Section 11 of
      Schedule A.

     

    "Real
      Property Advance"
      has the
      meaning set forth in Section 1.1(b).

     

    "Reference
      Bank"
      means
      The Bank of Nova Scotia, or such other bank as Lender may from time to time
      designate.

     

    "Released
      Parties"
      has the
      meaning set forth in Section 6.1.

     

    "Renewal
      Term"
      has the
      meaning set forth in Section 1.2.

     

    "Renewal
      Term Facility Fee"
      has the
      meaning set forth in Section 2.2(b).

     

    "Reserves"
      has the
      meaning set forth in Section 1.2.

     

    "Revolving
      Loans"
      has the
      meaning set forth in Section 1.1(a).

     

    "Sale"
      has the
      meaning set forth in Section 8.2.

     

    "Servicing
      Fee"
      has the
      meaning set forth in Section 2.2(c).

     

    "Subsidiary"
      means
      any corporation or other entity of which a Person owns, directly or indirectly,
      through one or more intermediaries, more than 50% of the capital stock or other
      equity interest at the time of determination.

     

    "Success
      Fee"
      has the
      meaning set forth in Section 2.2(f).

     

    "Tangible
      Chattel Paper"
      has the
      meaning set forth in the UCC.

     

    "Term"
      means
      the period commencing on the date of this Agreement and ending on the Maturity
      Date.

     

    "Term
      Loan A"
      has the
      meaning set forth in Section 1.1(b).

     

    "Term
      Loan B"
      has the
      meaning set forth in Section 1.1(c).

     

    
      
         

      

      
        B-9

        
          

        

      

      
         

      

    

     

    "UCC"
      means,
      at any given time, the Uniform Commercial Code as adopted and in effect at
      such
      time in the State of New York.

     

    "Unused
      Line Fee"
      has the
      meaning set forth in Section 2.2(d).

     

    "Updated
      Equipment Appraisal"
      has the
      meaning set forth in Section 13 of Schedule A.

     

    "Updated
      Real Property Appraisal"
      has the
      meaning set forth in Section 13 of Schedule A.

     

    All
      accounting terms used in this Agreement, unless otherwise indicated, shall
      have
      the meanings given to such terms in accordance with GAAP. All other terms
      contained in this Agreement, unless otherwise indicated, shall have the meanings
      provided by the UCC, to the extent such terms are defined therein. The term
      "including,"
      whenever used in this Agreement, shall mean "including but not limited to."
      The
      singular form of any term shall include the plural form, and vice versa, when
      the context so requires. References to Sections, subsections and Schedules
      are
      to Sections and subsections of, and Schedules to, this Agreement. All references
      to agreements and statutes shall include all amendments thereto and successor
      statutes in the case of statutes.

     

    [Signature
      page follows]

    
      
         

      

      
        B-10

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, Borrower and Lender have signed this Schedule B as of the
      date
      set forth in the heading to the Agreement.

    
       

      
        	
                Borrower:

                 

                Pneutech
                  Inc.

                 

                By
                  ____________________________________

                Its
                  ________________________________

              	
                Lender:

                 

                Greystone
                  Business Credit II LLC

                 

                By
                  ____________________________________

                Its
                  ________________________________

              

      

       

      
        
          
            Signature
              page to Schedule B to Pneutech Loan and Security
              Agreement

          

        

        
           

          
            

          

        

        
           

        

      

    

    
      
        	
                Greystone
                  Business Credit II
                  LLC

              	
                 

              

      

Exhibit
      A

     

    
      	U.S.$558,000	
              New
                York, New York

              September
                7,
                2006

            

    

     

    FOR
      VALUE
      RECEIVED, the undersigned, Pneutech Inc., a corporation organized under the
      laws
      of Canada ("Borrower"),
      hereby unconditionally promises to pay to the order of Greystone Business Credit
      II LLC ("Lender"),
      at
      its office at 152 West 57th Street, 60th Floor, New York, New York 10019, or
      at
      such other place as the holder of this Term Note A ("Term
      Note A")
      may
      from time to time designate in writing, in lawful money of the United States
      of
      America and in immediately available funds, the principal sum of Five Hundred
      Fifty-Eight Thousand Dollars and 00/100 Cents (U.S.$558,000). Reference is
      hereby made to the Loan and Security Agreement between Borrower and Lender
      of
      even date herewith (the "Loan
      Agreement")
      for a
      statement of the terms and conditions under which the loan evidenced hereby
      was
      made and is to be repaid. Capitalized terms used herein which are not otherwise
      specifically defined herein shall have the meanings ascribed to such terms
      in
      the Loan Agreement.

     

    The
      outstanding principal balance of this Term Note A shall be payable in full
      on
      the Maturity Date. Prior thereto, this Term Note A shall be repayable as set
      forth in the Loan Agreement.

     

    Borrower
      further promises to pay interest on the outstanding principal amount hereof
      from
      the date hereof until payment in full hereof at the per annum rate equal to
      the
      Prime Rate in effect from time to time plus three percent (3.00%). Following
      the
      occurrence and during the continuance of an Event of Default the entire
      outstanding principal balance of this Term Note A shall, at Lender's option,
      bear interest until paid in full at a per annum rate equal to the interest
      rate
      applicable to Term Loan A from time to time in effect plus two percent (2.00%).
      Until maturity, interest on the outstanding principal amount hereof shall be
      payable in arrears on the first day of each month, commencing October 1, 2006,
      and on the Maturity Date. After maturity, whether by acceleration or otherwise,
      accrued interest shall be payable on demand. Interest as aforesaid shall be
      charged for the actual number of days elapsed over a year consisting of three
      hundred sixty (360) days on the actual daily outstanding balance hereof. For
      the
      purposes of the Interest
      Act
      of
      Canada, any amount of interest or fees calculated hereunder using 360, 365
      or
      366 days per year and expressed as an annual rate is equal to the said rate
      of
      interest or fees multiplied by the actual number of days comprised within the
      calendar year, divided by 360, 365 or 366, as the case may be. Changes in the
      interest rate provided for herein which are due to changes in the Prime Rate
      shall be effective on the date of the change in the Prime Rate.

     

    Notwithstanding
      anything to the contrary contained herein, the aggregate of all interest
      hereunder and charged or collected by Lender is not intended to exceed the
      highest rate permissible under any applicable law, but if it should, such
      interest shall automatically be reduced to the extent necessary to comply with
      applicable law and Lender will refund to Borrower any such excess interest
      received by Lender.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Subject
      to Section
      7.2
      of the
      Loan Agreement, Borrower may prepay the outstanding principal balance hereof
      in
      whole or in part without premium or penalty. Any partial prepayment of Term
      Loan
      A shall be applied to the unpaid installments of Term Loan A in the inverse
      order of their maturities.

     

    Upon
      and
      after the occurrence of an Event of Default, this Term Note A may, at the option
      of Lender, and without demand, notice or legal process of any kind, be declared,
      and immediately shall become, due and payable.

     

    Payments
      received by Lender from Borrower on this Term Note A shall be applied to the
      Obligations as provided in the Loan Agreement.

     

    Presentment,
      demand, protest and notice of presentment, demand, nonpayment and protest are
      hereby waived by Borrower.

     

    THIS
      TERM
      NOTE A SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
      HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. If
      any
      provision of this Term Note A or the application thereof shall be held to be
      void or unenforceable by any court of competent jurisdiction, such defect shall
      not affect the remainder of this Term Note A, which shall continue in full
      force
      and effect. Whenever in this Term Note A reference is made to Lender or
      Borrower, such reference shall be deemed to include, as applicable, a reference
      to their respective successors and assigns. The provisions of this Term Note
      A
      shall be binding upon Borrower and its successors and assigns, and shall inure
      to the benefit of Lender and its successors and assigns.

    
       

      
        	 	
                Pneutech
                  Inc.

                 

                By
                  ____________________________________

                Its
                  ________________________________

              

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    

    
      
        	
                Greystone
                  Business Credit II
                  LLC

              	
                 

              

      

       

    

    Exhibit
      B

     

    TERM
      NOTE
      B

    
       

      
        	U.S.$600,000	
                New
                  York, New York

                September
                  7,
                  2006

              

      

       

    

    FOR
      VALUE
      RECEIVED, the undersigned, Pneutech Inc., a corporation organized under the
      laws
      of Canada ("Borrower"),
      hereby unconditionally promises to pay to the order of Greystone Business Credit
      II LLC ("Lender"),
      at
      its office at 152 West 57th Street, 60th Floor, New York, New York 10019, or
      at
      such other place as the holder of this Term Note B ("Term
      Note B")
      may
      from time to time designate in writing, in lawful money of the United States
      of
      America and in immediately available funds, the principal sum of Six Hundred
      Thousand Dollars and 00/100 Dollars ($600,000). Reference is hereby made to
      the
      Loan and Security Agreement between Borrower and Lender of even date herewith
      (the "Loan
      Agreement")
      for a
      statement of the terms and conditions under which the loan evidenced hereby
      was
      made and is to be repaid. Capitalized terms used herein which are not otherwise
      specifically defined herein shall have the meanings ascribed to such terms
      in
      the Loan Agreement.

     

    The
      outstanding principal balance of this Term Note B shall be payable in full
      on
      September 7, 2007 ("Term
      Note B Maturity Date").
      Prior
      thereto, this Term Note B shall be repayable as set forth in the Loan
      Agreement.

     

    Borrower
      further promises to pay interest on the outstanding principal amount hereof
      from
      the date hereof until payment in full hereof at the per annum rate equal to
      the
      Prime Rate in effect from time to time plus three percent (3.00%). Following
      the
      occurrence and during the continuance of an Event of Default the entire
      outstanding principal balance of this Term Note B shall, at Lender's option,
      bear interest until paid in full at a per annum rate equal to the interest
      rate
      applicable to Term Loan B from time to time in effect plus two percent (2.00%).
      Until maturity, interest on the outstanding principal amount hereof shall be
      payable in arrears on the first day of each month, commencing October 1, 2006,
      and on the Term Note B Maturity Date. After maturity, whether by acceleration
      or
      otherwise, accrued interest shall be payable on demand. Interest as aforesaid
      shall be charged for the actual number of days elapsed over a year consisting
      of
      three hundred sixty (360) days on the actual daily outstanding balance hereof.
      For the purposes of the Interest
      Act
      of
      Canada, any amount of interest or fees calculated hereunder using 360, 365
      or
      366 days per year and expressed as an annual rate is equal to the said rate
      of
      interest or fees multiplied by the actual number of days comprised within the
      calendar year, divided by 360, 365 or 366, as the case may be. Changes in the
      interest rate provided for herein which are due to changes in the Prime Rate
      shall be effective on the date of the change in the Prime Rate.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Notwithstanding
      anything to the contrary contained herein, the aggregate of all interest
      hereunder and charged or collected by Lender is not intended to exceed the
      highest rate permissible under any applicable law, but if it should, such
      interest shall automatically be reduced to the extent necessary to comply with
      applicable law and Lender will refund to Borrower any such excess interest
      received by Lender.

     

    Subject
      to Section
      7.2
      of the
      Loan Agreement, Borrower may prepay the outstanding principal balance hereof
      in
      whole or in part without premium or penalty. Any partial prepayment of Term
      Loan
      B shall be applied to the unpaid installments of Term Loan B in the inverse
      order of their maturities.

     

    Upon
      and
      after the occurrence of an Event of Default, this Term Note B may, at the option
      of Lender, and without demand, notice or legal process of any kind, be declared,
      and immediately shall become, due and payable.

     

    Payments
      received by Lender from Borrower on this Term Note B shall be applied to the
      Obligations as provided in the Loan Agreement.

     

    Presentment,
      demand, protest and notice of presentment, demand, nonpayment and protest are
      hereby waived by Borrower.

     

    THIS
      TERM
      NOTE B SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
      HERETO DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. If
      any
      provision of this Term Note B or the application thereof shall be held to be
      void or unenforceable by any court of competent jurisdiction, such defect shall
      not affect the remainder of this Term Note B, which shall continue in full
      force
      and effect. Whenever in this Term Note B reference is made to Lender or
      Borrower, such reference shall be deemed to include, as applicable, a reference
      to their respective successors and assigns. The provisions of this Term Note
      B
      shall be binding upon Borrower and its successors and assigns, and shall inure
      to the benefit of Lender and its successors and assigns.

    
       

      
        	 	
                Pneutech
                  Inc.

                 

                By
                  ____________________________________

                Its
                  ________________________________

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Exhibit
      C

     

    COMMERCIAL
      TORT CLAIMS

    

    None.

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