Document:

CONVERTIBLE
PROMISSORY NOTE

    

    April
8, 2010

    

    
      	
              $100,000.00

            

    

    

    FOR VALUE RECEIVED, the
undersigned corporation (the “Company”), promises
to pay to Charter Capital
Resources, Inc., a
Delaware limited liability company (the “Lender”) the
principal sum of One Hundred Thousand Dollars and Zero Cents ($100,000.00) and interest at
the annual rate of ten percent (10%) on the unpaid balance pursuant to the
following terms:

     

    1.           Principal
and Interest.  For value
received, the Company hereby promises to pay to the order of the Lender in
lawful money of the United States of America and in immediately available funds
the principal sum of One Hundred Thousand Dollars and Zero Cents ($100,000.00), together with
interest on the unpaid principal of this note at the rate of ten percent (10%)
per year (computed on the basis of a 365-day year and the actual days elapsed)
from the date of this Promissory Note (the “Note”) until
paid.

     

    2.           Principal
and Interest Payments.  All principal and
accrued interest shall be due and payable two (2) calendar years from the date
of this Note, in cash; provided, however, in the event that the Company receives
any financing from any other source all proceeds received in connection with any
such financing shall be paid to the Lender until such time that all outstanding
principal and accrued interest has been paid to the Lender. All payment amounts
shall be first applied to interest, if any, and then to the balance to
principal.

     

    3.           Right of
Prepayment.  Notwithstanding the payments pursuant to Section
2, the Company at its option shall have the right to prepay a portion or all
outstanding principal of the Note.  There shall be no prepayment fee
or penalty.

     

    4.           Conversion.

     

    (a)           At
any time on or prior to the Maturity Date, any amount of the unpaid Principal
Amount (the “Conversion Amount”) may be converted into free-trading
and unrestricted shares of Common Stock of the Company equal to the result of
(i) the Conversion Amount, divided by (ii) the Variable Conversion Price (as
defined below):

    

    (A)           The
“Variable Conversion
Price” shall mean the Applicable Percentage (as defined herein)
multiplied by the Market Price (as defined herein); provided,
however, the
Variable
Conversion Price shall not be less than
$0.25 cents per share..  “Market Price” means the
average of the lowest three (3) Trading Prices (as defined below) for the Common
Stock during the five (5) Trading Day period ending one Trading Day prior to the
date the Conversion Notice is sent by the Holder to the Lender via facsimile
(the “Conversion Date”).
“Trading Price” means,
for any security as of any date, the intraday trading price on the Pink Sheets
(the “PINKSHEETS”) as
reported by a reliable reporting service mutually acceptable to and hereafter
designated by Holders of a majority in interest of the Notes and the Lender or,
if the PINKSHEETS is not the principal trading market for such security, the
intraday trading price of such security on the principal securities exchange or
trading market where such security is listed or traded or, if no intraday
trading price of such security is available in any of the foregoing manners, the
average of the intraday trading prices of any market makers for such security
that are listed in the “pink sheets” by the National Quotation Bureau, Inc.
“Applicable Percentage”
shall mean 50%.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    (b)           In
the event that the Principal Amount on this Note is converted into Common Stock
in accordance with the terms of this Section 3, the Company shall within three
(3) business days of receipt of a Notice of Conversion (attached hereto as Exhibit
A) from the Noteholder, instruct the transfer agent to issue to the
Noteholder a certificate representing the shares of Common Stock into which the
obligations of the Company under this Note have been converted, which
certificate shall be free of any legends restricting the transfer of such
certificate or the shares of Common stock represented thereby, unless otherwise
contemplated.  If the Company fails to instruct the transfer agent to
issue a certificate within three (3) business days of receipt of the Notice of
Conversion, the Company shall pay the Noteholder a penalty of $1,000 per day for
each day the instructions are not delivered to the transfer agent.

    

    (c)           No
certificates representing fractional shares of Common Stock shall be issued to
Noteholder upon conversion of principal due hereunder into Common Stock, no
dividend or distribution of the Company shall relate to fractional share
interests and such fractional share interests will not entitle the Noteholder to
vote or to any rights as a stockholder of the Company.  The Noteholder
shall pay to Company cash in lieu of any fractional shares of Common Stock
resulting from conversion of any principal due hereunder, concurrently with the
issuance to Noteholder of the Common Stock to which such fractional shares
relate.

    

    5.           Waiver
and Consent.  To the fullest extent permitted by law and except
as otherwise provided herein, the Company waives demand, presentment, protest,
notice of dishonor, suit against or joinder of any other person, and all other
requirements necessary to charge or hold the Company liable with respect to this
Note.

     

    6.           Costs,
Indemnities and Expenses.  In the event of default as described
herein, the Company agrees to pay all reasonable fees and costs incurred by the
Lender in collecting or securing or attempting to collect or secure this Note,
including reasonable attorneys’ fees and expenses, whether or not involving
litigation, collecting upon any judgments and/or appellate or bankruptcy
proceedings.  The Company agrees to pay any documentary stamp taxes,
intangible taxes or other taxes which may now or hereafter apply to this Note or
any payment made in respect of this Note, and the Company agrees to indemnify
and hold the Lender harmless from and against any liability, costs, attorneys’
fees, penalties, interest or expenses relating to any such taxes, as and when
the same may be incurred.

     

    7.           Intentionally
Omitted.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    8.           Event of
Default.  An “Event of Default”
shall be deemed to have occurred upon the occurrence of any of the following:
(i) the Company should fail for any reason or for no reason to make any payment
of the principal, interest, costs, indemnities, or expenses pursuant to this
Note within ten (10) days of the date due as prescribed herein; (ii) any
default, whether in whole or in part, in the due observance or performance of
any obligations or other covenants, terms or provisions to be performed by the
Lender under this Note or any other related agreements hereunder between the
Company and the Lender of even date herewith which is not cured by the Company
by any applicable cure period therein, or (iii) the Company
shall:  (1) make a general assignment for the benefit of its
creditors; (2) fail to file an S-1 registration statement and have it declared
effective by the SEC on or before February 23, 2011; (3) apply for or
consent to the appointment of a receiver, trustee, assignee, custodian,
sequestrator, liquidator or similar official for itself or any of its assets and
properties; (4) commence a voluntary case for relief as a debtor under the
United States Bankruptcy Code; (5) file with or otherwise submit to any
governmental authority any petition, answer or other document
seeking:  (A) reorganization, (B) an arrangement with
creditors or (C) to take advantage of any other present or future
applicable law respecting bankruptcy, reorganization, insolvency, readjustment
of debts, relief of debtors, dissolution or liquidation; (6) file or
otherwise submit any answer or other document admitting or failing to contest
the material allegations of a petition or other document filed or otherwise
submitted against it in any proceeding under any such applicable law, or
(7) be adjudicated a bankrupt or insolvent by a court of competent
jurisdiction.  Upon an Event of Default (as defined above), the entire
principal balance and accrued interest outstanding under this Note, and all
other obligations of the Company under this Note, shall be immediately due and
payable without any action on the part of the Lender, interest shall accrue on
the unpaid principal balance at twenty-four percent (24%) per year or the
highest rate permitted by applicable law, if lower, and the Lender shall be
entitled to seek and institute any and all remedies available to
it.

     

    9.           Maximum
Interest Rate.  In no event shall any agreed to or actual
interest charged, reserved or taken by the Lender as consideration for this Note
exceed the limits imposed by Delaware law.  In the event that the
interest provisions of this Note shall result at any time or for any reason in
an effective rate of interest that exceeds the maximum interest rate permitted
by applicable law, then without further agreement or notice the obligation to be
fulfilled shall be automatically reduced to such limit and all sums received by
the Lender in excess of those lawfully collectible as interest shall be applied
against the principal of this Note immediately upon the Lender’s receipt
thereof, with the same force and effect as though the Company had specifically
designated such extra sums to be so applied to principal and the Lender had
agreed to accept such extra payment(s) as a premium-free prepayment or
prepayments.

     

    10.           Issuance
of Capital Stock.  So long as any portion of this Note is
outstanding, the Company shall not, without the prior written consent of the
Lender, (i) issue or sell shares of common stock or preferred stock without
consideration or for a consideration per share less than the bid price of the
common stock determined immediately prior to its issuance, (ii) issue any
warrant, option, right, contract, call, or other security instrument granting
the holder thereof, the right to acquire common stock without consideration or
for a consideration less than such common stock’s bid price value determined
immediately prior to it’s issuance, (iii) enter into any security instrument
granting the holder a security interest in any and all assets of the Company, or
(iv) file any registration statement on Form S-8.

     

    11.           Cancellation
of Note. Upon the repayment by the Company of all of its obligations
hereunder to the Lender, including, without limitation, the principal amount of
this Note, plus accrued but unpaid interest, the indebtedness evidenced hereby
shall be deemed canceled and paid in full.  Except as otherwise
required by law or by the provisions of this Note, payments received by the
Lender hereunder shall be applied first against expenses and indemnities, next
against interest accrued on this Note, and next in reduction of the outstanding
principal balance of this Note.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    12.           Severability.  If any provision
of this Note is, for any reason, invalid or unenforceable, the remaining
provisions of this Note will nevertheless be valid and enforceable and will
remain in full force and effect.  Any provision of this Note that is
held invalid or unenforceable by a court of competent jurisdiction will be
deemed modified to the extent necessary to make it valid and enforceable and as
so modified will remain in full force and effect.

     

    13.           Amendment
and Waiver.  This Note may be
amended, or any provision of this Note may be waived, provided that any such
amendment or waiver will be binding on a party hereto only if such amendment or
waiver is set forth in a writing executed by the parties hereto.  The
waiver by any such party hereto of a breach of any provision of this Note shall
not operate or be construed as a waiver of any other breach.

     

    14.           Successors.  Except as
otherwise provided herein, this Note shall bind and inure to the benefit of and
be enforceable by the parties hereto and their permitted successors and
assigns.

     

    15.           Assignment.  This Note shall
not be directly or indirectly assignable or delegable by the
Company.  The Lender may assign this Note as long as such assignment
complies with the Securities Act of 1933, as amended.

     

    16.           No Strict
Construction.  The language used
in this Note will be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction will be applied
against any party.

     

    17.           Further
Assurances.  Each party hereto
will execute all documents and take such other actions as the other party may
reasonably request in order to consummate the transactions provided for herein
and to accomplish the purposes of this Note.

     

    18.           Notices,
Consents, etc.  Any notices, consents, waivers or other
communications required or permitted to be given under the terms hereof must be
in writing and will be deemed to have been delivered:  (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one (1) trading day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same.  The
addresses and facsimile numbers for such communications shall be:

     

    If to
Company:                   Address
listed on the S-1 filings

    

    If to the
Lender:

    Beryl
Zyskind

    925
East 24th
Street

    Brooklyn,
NY 11210

    (347)
992-5513

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    or at
such other address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice given to each
other party three (3) trading days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

     

    19.           Remedies,
Other Obligations, Breaches and Injunctive Relief.  The Lender’s
remedies provided in this Note shall be cumulative and in addition to all other
remedies available to the Lender under this Note, at law or in equity (including
a decree of specific performance and/or other injunctive relief), no remedy of
the Lender contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit the
Lender’s right to pursue actual damages for any failure by the Company to comply
with the terms of this Note.  No remedy conferred under this Note upon
the Lender is intended to be exclusive of any other remedy available to the
Lender, pursuant to the terms of this Note or otherwise.  No single or
partial exercise by the Lender of any right, power or remedy hereunder shall
preclude any other or further exercise thereof.  The failure of the
Lender to exercise any right or remedy under this Note or otherwise, or delay in
exercising such right or remedy, shall not operate as a waiver
thereof.  Every right and remedy of the Lender under any document
executed in connection with this transaction may be exercised from time to time
and as often as may be deemed expedient by the Lender.  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Lender and that the remedy at law for any such breach
may be inadequate.  The Company therefore agrees that, in the event of
any such breach or threatened breach, the Lender shall be entitled, in addition
to all other available remedies, to an injunction restraining any breach, and
specific performance without the necessity of showing economic loss and without
any bond or other security being required.

     

    20.           Governing
Law; Jurisdiction.
THIS NOTE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICT OF LAWS.  THE LENDER HEREBY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NY WITH
RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH
PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE
THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED
IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT
A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT
OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN
ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND
EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN
CONNECTION WITH SUCH DISPUTE.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    21.           No
Inconsistent Agreements.  None of the
parties hereto will hereafter enter into any agreement, which is inconsistent
with the rights granted to the parties in this Note.

     

    22.           Third
Parties.  Nothing herein
expressed or implied is intended or shall be construed to confer upon or give to
any person or entity, other than the parties to this Note and their respective
permitted successor and assigns, any rights or remedies under or by reason of
this Note.

     

    23.           Waiver of Jury
Trial.  AS A MATERIAL INDUCEMENT FOR THE LENDER TO LOAN TO THE
COMPANY THE MONIES HEREUNDER, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND
ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.

     

    24.           Entire
Agreement.  This Note (including any recitals hereto) set forth
the entire understanding of the parties with respect to the subject matter
hereof, and shall not be modified or affected by any offer, proposal, statement
or representation, oral or written, made by or for any party in connection with
the negotiation of the terms hereof, and may be modified only by instruments
signed by all of the parties hereto.

     

    25.           Counterparts,
Facsimile Signatures.  This Note may be executed in any number
of counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument. The exchange of copies of
this Note or amendments thereto and of signature pages by facsimile transmission
or by email transmission in portable digital format, or similar format, shall
constitute effective execution and delivery of such instrument(s) as to the
Parties and may be used in lieu of the original Note or amendment for all
purposes. Signatures of the Parties transmitted by facsimile or by email
transmission in portable digital format, or similar format, shall be deemed to
be their original signatures for all purposes.

    

    [REMAINDER
OF PAGE INTENTIONALY LEFT BLANK]

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    IN WITNESS WHEREOF, this
Promissory Note is executed by the undersigned as of the date
hereof.

     

    
      
        
          	
                  Baeta
      Corp.

                	 
      
	 
      	 
      
	
                  /s/
      Leonid Pushkantser

                	 
      
	 
      	 
      
	
                  By:

                	 
      	 
      
	 
      	
                  Mr.
      Leonid Pushkantser

                	 
      
	 
      	
                  Chief
      Executive Officer

                	 
      

        

      

    

    

    Acknowledged
and Agreed to:

    

    NOTE
HOLDER:

    

    Charter
Capital Resources, Inc.

    

    
      
        	
                /s/ Beryl
      Zyskind

              	 
      
	 
      	 
      
	
                By:

              	 
      	 
      
	 
      	
                Beryl
      Zyskind

              	 
      
	 
      	
                Member

              	 
      

      

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    EXHIBIT
A

    

    NOTICE OF
HOLDER CONVERSION – $100,000 April 8, 2010 Convertible Note

    (To be
Executed by the Registered Holder in order to Convert the Note)

    

    The
undersigned hereby elects to convert the attached $100,000 April 8, 2010
Convertible Note into free
trading shares of common stock (the “Common Stock”), of Baeta
Corp. (the “Company”) according to the conditions hereof, as of the date
written below. No fee will be charged to the holder for any conversion, except
for such transfer taxes, if any.

    

    
      
        
          
            
              
                
                  	
                          Conversion
      request:

                        	 
      
	 
      	 
      
	 
      	 
      
	
                          Date
      to Effect Conversion

                        	 
      
	 
      	 
      
	 
      	 
      
	
                          Number
      of FREE-trading
      shares of Common Stock to be Issued

                        
	 
      	 
      
	 
      	 
      
	
                          Principal
      Amount Converted

                        	 
      
	 
      	 
      
	 
      	 
      
	
                          Applicable
      Conversion Price

                        	 
      

                

              

            

          

        

      

    

    

    WE
HEREIN CERTIFY that Charter
Capital Resources, Inc. does not and will not own more than ten percent (10%) or more of
the Company’s Common Stock after the above conversion.

    

    Charter
Capital Resources, Inc.

    

    
      
        	
                By:

              	 
      	 
      
	 
      	
                Beryl
      Zyskind

              	 
      
	 
      	
                Member

              	 
      

      

    

    

    Mailing Address for Stock
Certificate:

    Beryl
Zyskind

    925
East 24th
Street

    Brooklyn,
NY 11210

    (347)
992-5513Exhibit
10.1

    

    LOAN
AND SECURITY AGREEMENT

    

    Dated
as of May 3, 2010

    

    between

    

    OCULUS
INNOVATIVE SCIENCES, INC.,

    a
Delaware corporation,

    

    as
“Borrower”,

    

    and

    

    VENTURE
LENDING & LEASING V, INC.,

    a
Maryland corporation,

    

    as
“Lender”

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    LOAN
AND SECURITY AGREEMENT

    

    The Borrower and Lender identified on
the cover page of this document have entered or anticipate entering into one or
more transactions pursuant to which Lender agrees to make available to Borrower
a loan facility governed by the terms and conditions set forth in this document
and one or more Supplements executed by Borrower and Lender which incorporate
this document by reference.  Each Supplement constitutes a supplement
to and forms part of this document, and will be read and construed as one with
this document, so that this document and the Supplement constitute a single
agreement between the parties (collectively referred to as this
“Agreement”).

    

    Accordingly, the parties agree as
follows:

    

    ARTICLE
1 - INTERPRETATION

    

    1.1     
Definitions.  The
terms defined in Article 10 and in the Supplement will have the meanings therein
specified for purposes of this Agreement.

    

    1.2     
Inconsistency.  In
the event of any inconsistency between the provisions of any Supplement and this
document, the provisions of the Supplement will be controlling for the purpose
of all relevant transactions.

    

    ARTICLE
2 - THE COMMITMENT AND LOANS

    

    2.1     
The
Commitment.  Subject to the terms and conditions of this
Agreement, Lender agrees to make term loans to Borrower from time to time from
the Closing Date and to, but not including, the Termination Date in an aggregate
principal amount not exceeding the Commitment.  The Commitment is not
a revolving credit commitment, and Borrower does not have the right to repay and
reborrow hereunder.  Each Loan requested by Borrower to be made on a
single Business Day shall be for a minimum principal amount set forth in the
Supplement, except to the extent the remaining Commitment is a lesser
amount.

    

    2.2     
Notes Evidencing Loans;
Repayment.  Each Loan shall be evidenced by a separate Note
payable to the order of Lender, in the total principal amount of the
Loan.  Principal and interest of each Loan shall be payable at the
times and in the manner set forth in the Note and regularly scheduled payments
thereof and each Final Payment shall be effected by automatic debit of the
appropriate funds from Borrower’s Primary Operating Account as specified in the
Supplement hereto.

    

    2.3     
Procedures for
Borrowing.

    

    (a)     
Borrower shall give Lender, at least five (5) Business Days’ prior to a
proposed Borrowing Date, written notice of any request for borrowing hereunder
(a “Borrowing Request”).  Each Borrowing Request shall be in
substantially the form of Exhibit “B” to the
Supplement, shall be executed by a responsible executive or financial officer of
Borrower, and shall state how much is requested, and shall be accompanied by
such other information and documentation as Lender may reasonably request,
including the original executed Note(s) for the Loan(s) covered by the Borrowing
Request.

    

    (b)     
No later than 1:00 p.m. Pacific Standard Time on the Borrowing Date, if
Borrower has satisfied the conditions precedent in Article 4, Lender shall make
the Loan available to Borrower in immediately available funds.

    

    2.4     
Interest.  Except as
otherwise specified in the applicable Note, Basic Interest on the outstanding
principal balance of each Loan shall accrue daily at the Designated Rate from
the Borrowing Date until the Maturity Date.  If the outstanding
principal balance of such Loan is not paid on the Maturity Date, interest shall
accrue at the Default Rate until paid in full, as further set forth
herein.

    

    2.5     
Final
Payment.  Except as otherwise provided in the Supplement,
Borrower shall pay the Final Payment with respect to each Loan on the Maturity
Date of such Loan.

    

    2.6     
Interest Rate
Calculation.  Basic Interest, along with charges and fees under
this Agreement and any Loan Document, shall be calculated for actual days
elapsed on the basis of a 360-day year, which results in higher interest, charge
or fee payments than if a 365-day year were used.  In no event shall
Borrower be obligated to pay Lender interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in
effect.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    2.7     
Default
Interest.  Any unpaid payments of principal or interest or the
Final Payment with respect to any Loan shall bear interest from their respective
maturities, whether scheduled or accelerated, Default Rate.  Borrower
shall pay such interest on demand.

    

    2.8     
Late Charges. If
Borrower is late in making any payment of principal or interest or Final Payment
under this Agreement by more than five (5) Business Days, Borrower agrees to pay
a late charge of five percent (5%) of the installment due, but not less than
fifty dollars ($50.00) for any one such delinquent payment. This late charge may
be charged by Lender for the purpose of defraying the expenses incidental to the
handling of such delinquent amounts.  Borrower acknowledges that such
late charge represents a reasonable sum considering all of the circumstances
existing on the date of this Agreement and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of
Borrower to make timely payments.  Borrower further agrees that proof
of actual damages would be costly and inconvenient.  Such late charge
shall be paid without prejudice to the right of Lender to collect any other
amounts provided to be paid or to declare a default under this Agreement or any
of the other Loan Documents or from exercising any other rights and remedies of
Lender.

    

    2.9     
Lender’s
Records.  Principal, Basic Interest, Final Payments and all
other sums owed under any Loan Document shall be evidenced by entries in records
maintained by Lender for such purpose.  Each payment on and any other
credits with respect to principal, Basic Interest, Final Payments and all other
sums outstanding under any Loan Document shall be evidenced by entries in such
records.  Absent manifest error, Lender’s records shall be conclusive
evidence thereof.

    

    2.10     
Grant of Security
Interests; Filing of Financing Statements.

    

    (a)     
To secure the timely payment and performance of all of Borrower’s
Obligations to Lender, Borrower hereby grants to Lender continuing security
interests in all of the Collateral.  In connection with the foregoing,
Borrower authorizes Lender to prepare and file any financing statements
describing the Collateral without otherwise obtaining the Borrower’s signature
or consent with respect to the filing of such financing statements.

    

    (b)     
In furtherance of the Borrower’s grant of the security interests in the
Collateral pursuant to Section 2.10(a) above, Borrower hereby pledges and grants
to the Lender a security interest in all the Shares, together with all proceeds
and substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing,
as security for the performance of the Obligations.  On the Closing
Date or at any time thereafter following Lender’s request, the certificate or
certificates for the Shares will be delivered to Lender, accompanied by an
instrument of assignment duly executed in blank by Borrower, unless such Shares
have not been certificated.  To the extent required by the terms and
conditions governing the Shares, Borrower shall cause the books of each entity
whose Shares are part of the Collateral and any transfer agent to reflect the
pledge of the Shares.  Upon the occurrence and during the continuance
of an Event of Default hereunder, Lender may effect the transfer of any
securities included in the Collateral (including but not limited to the Shares)
into the name of Lender and cause new certificates representing such securities
to be issued in the name of Lender or its transferee(s).  Borrower
will execute and deliver such documents, and take or cause to be taken such
actions, as Lender may reasonably request to perfect or continue the perfection
of Lender’s security interest in the Shares.  Unless an Event of
Default shall have occurred and be continuing, Borrower shall be entitled to
exercise any voting rights with respect to the Shares and to give consents,
waivers and ratifications in respect thereof, provided that no vote shall be
cast or consent, waiver or ratification given or action taken which would be
inconsistent with any of the terms of this Agreement or which would constitute
or create any violation of any of such terms.  All such rights to vote
and give consents, waivers and ratifications shall terminate upon the occurrence
and continuance of an Event of Default.

    

    (c)     
Borrower is and shall remain absolutely and unconditionally liable for
the performance of its obligations under the Loan Documents, including, without
limitation, any deficiency by reason of the failure of the Collateral to satisfy
all amounts due Lender under any of the Loan Documents.

    

    (d)     
All Collateral pledged by Borrower under this Agreement and any
Supplement shall secure the timely payment and performance of all Obligations
under this Agreement, the Notes and the other Loan Documents.  Except
as expressly provided in this Agreement, no Collateral pledged under this
Agreement or any Supplement shall be released until such time as all Obligations
under this Agreement and the other Loan Documents have been satisfied and paid
in full.

    
      
         

      

      
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    ARTICLE
3 - REPRESENTATIONS AND WARRANTIES

    

    Borrower represents and warrants that,
except as set forth in the Supplement or the Schedule of Exceptions hereto, if
any, as of the Closing Date and each Borrowing Date:

    

    3.1     
Due
Organization.  Borrower is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of its
incorporation, and is duly qualified to conduct business and is in good standing
in each other jurisdiction in which its business is conducted or its properties
are located, except where the failure to be so qualified would not reasonably be
expected to have a Material Adverse Effect.

    

    3.2     
Authorization, Validity
and Enforceability.  The execution, delivery and performance of
all Loan Documents executed by Borrower are within Borrower’s powers, have been
duly authorized, and are not in conflict with Borrower’s articles or certificate
of incorporation or by-laws, or the terms of any charter or other organizational
document of Borrower, as amended from time to time; and all such Loan Documents
constitute valid and binding obligations of Borrower, enforceable in accordance
with their terms (except as may be limited by bankruptcy, insolvency and similar
laws affecting the enforcement of creditors’ rights in general, and subject to
general principles of equity).

    

    3.3     
Compliance with
Applicable Laws.  Borrower has complied with all licensing,
permit and fictitious name requirements necessary to lawfully conduct the
business in which it is engaged, and to any sales, leases or the furnishing of
services by Borrower, including without limitation those requiring consumer or
other disclosures, the noncompliance with which would have a Material Adverse
Effect.

    

    3.4     
No
Conflict.  The execution, delivery, and performance by Borrower
of all Loan Documents are not in conflict with any law, rule, regulation, order
or directive, or any indenture, agreement, or undertaking to which Borrower is a
party or by which Borrower may be bound or affected.  Without limiting
the generality of the foregoing, the issuance of the Warrant to Lender (or its
designee) and the grant of registration rights in connection therewith do not
violate any agreement or instrument by which Borrower is bound or require the
consent of any holders of Borrower’s securities other than consents which have
been obtained prior to the Closing Date.

    

    3.5     
No Litigation, Claims or
Proceedings.  There is no litigation, tax claim, proceeding or
dispute pending, or, to the knowledge of Borrower, threatened against or
affecting Borrower, its property or the conduct of its business.

    

    3.6     
Correctness of Financial
Statements.  Borrower’s financial statements which have been
delivered to Lender fairly and accurately reflect Borrower’s financial condition
in accordance with GAAP as of the latest date of such financial statements; and,
since that date there has been no Material Adverse Change.

    

    3.7     
No
Subsidiaries.  Borrower is not a majority owner of or in a
control relationship with any other business entity.

    

    3.8     
Environmental
Matters.  To its knowledge after reasonable inquiry, Borrower
has concluded that Borrower is in compliance with Environmental Laws, except to
the extent a failure to be in such compliance could not reasonably be expected
to have a Material Adverse Effect.

    

    3.9     
No Event of
Default.  No Default or Event of Default has occurred and is
continuing.

    

    3.10     
Full
Disclosure.  None of the representations or warranties made by
Borrower in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of Borrower
in connection with the Loan Documents (including disclosure materials delivered
by or on behalf of Borrower to Lender prior to the Closing Date or pursuant to
Section 5.2 hereof), contains any untrue statement of a material fact or omits
any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they are
made, not misleading as of the time when made or delivered.

    

    3.11     
Specific Representations
Regarding Collateral.

    

    (a)     
Title.  Except for
the security interests created by this Agreement and Permitted Liens, (i)
Borrower is and will be the unconditional legal and beneficial owner of the
Collateral, and (ii) the Collateral is genuine and subject to no Liens, rights
or defenses of others.  There exist no prior assignments or
encumbrances of record with the U.S. Patent and Trademark Office or U.S.
Copyright Office affecting any Collateral in favor of any third party other than
Lender.

    
      
         

      

      
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    (b)     
Rights to
Payment.  The names of the obligors, amount owing to Borrower,
due dates and all other information with respect to the Rights to Payment are
and will be correctly stated in all material respects in all Records relating to
the Rights to Payment.  Borrower further represents and warrants, to
its knowledge, that each Person appearing to be obligated on a Right to Payment
has authority and capacity to contract and is bound as it appears to
be.

    

    (c)     
Location of
Collateral.  Borrower’s chief executive office, Inventory,
Records, Equipment, and any other offices or places of business are located at
the address(es) shown on the Supplement.

    

    (d)     
Business
Names.  Other than its full corporate name, Borrower has not
conducted business using any trade names or fictitious business names except as
shown on the Supplement.

    

    3.12     
Copyrights, Patents, Trademarks and Licenses.

    

    (a)     
Borrower owns or is licensed or otherwise has the right to use all of the
patents, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other similar rights that are reasonably
necessary for the operation of its business, without, to the best of Borrower’s
knowledge, conflict with the rights of any other Person.

    

    (b)     
To Borrower’s knowledge, no slogan or other advertising device, product,
process, method, substance, part or other material now employed, or now
contemplated to be employed, by Borrower infringes upon any rights held by any
other Person.

    

    (c)     
No claim or litigation regarding any of the foregoing is pending or, to
Borrower’s knowledge, threatened, and no patent, invention, device, application,
principle or any statute, law, rule, regulation, standard or code is pending or
proposed which, in either case, could reasonably be expected to have a Material
Adverse Effect.

    

    3.13     
Regulatory Compliance.
Borrower has met the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA.  No event has occurred
resulting from Borrower’s failure to comply with ERISA that is reasonably likely
to result in Borrower’s
incurring any liability that could have a Material Adverse
Effect.  Borrower is not an “investment company” or a company
“controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940.  Borrower is not engaged principally, or as one
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulations T and
U of the Board of Governors of the Federal Reserve System).  Borrower
has complied with all the provisions of the Federal Fair Labor Standards
Act.

    

    3.14     
Shares.  Borrower
has full power and authority to create a first priority Lien on the Shares and
no disability or contractual obligation exists that would prohibit Borrower from
pledging the Shares pursuant to this Agreement.  To Borrower’s
knowledge, there are no subscriptions, warrants, rights of first refusal or
other restrictions on transfer relative to, or options exercisable with respect
to the Shares.  The Shares have been and will be duly authorized and
validly issued, and are fully paid and non-assessable.  To Borrower’s
knowledge, the Shares are not the subject of any present or threatened suit,
action, arbitration, administrative or other proceeding, and Borrower knows of
no reasonable grounds for the institution of any such proceedings.

    

    3.15 Survival. The
representations and warranties of Borrower as set forth in this Agreement
survive the execution and delivery of this Agreement.

    

    ARTICLE
4 - CONDITIONS PRECEDENT

    

    4.1     
Conditions to First
Loan.  The obligation of Lender to make its first Loan
hereunder is, in addition to the conditions precedent specified in Section 4.2
and in any Supplement, subject to the fulfillment of the following conditions
and to the receipt by Lender of the documents described below, duly executed and
in form and substance satisfactory to Lender and its counsel:

    

    (a)     
Resolutions.  A
certified copy of the resolutions of the Board of Directors of Borrower
authorizing the execution, delivery and performance by Borrower of the Loan
Documents.

    

    (b)     
Incumbency and
Signatures.  A certificate of the secretary of Borrower
certifying the names of the officer or officers of Borrower authorized to sign
the Loan Documents, together with a sample of the true signature of each such
officer.

    
      
         

      

      
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    (c)     
Legal
Opinion.  The opinion of legal counsel for Borrower in the form
of Exhibit “E”
attached to the Supplement.

    

    (d)     
Articles and
By-Laws.  Certified copies of the Articles or Certificate of
Incorporation and By-Laws of Borrower, as amended through the Closing
Date.

    

    (e)     
This
Agreement.  Original counterparts of this Agreement and an
initial Supplement, with all schedules completed and attached thereto, and
disclosing such information as is acceptable to Lender.

    

    (f)     
Financing
Statements.  Filing copies (or other evidence of filing
satisfactory to Lender and its counsel) of such UCC financing statements,
collateral assignments, account control agreements, and termination statements,
with respect to the Collateral as Lender shall request.

    

    (g)     
Consent and
Waiver. A
written consent and waiver executed by V & M Industries, Inc., permitting
Lender to perfect and maintain a Lien on Borrower’s Intellectual Property in
accordance with the terms of this Agreement, and waiving its rights under
Section 5.3 of the Revenue Sharing Distribution Agreement dated September 15,
2009.

    

    (h)     
Lien Searches.
UCC lien, judgment, bankruptcy and tax lien searches of Borrower from such
jurisdictions or offices as Lender may reasonably request, all as of a date
reasonably satisfactory to Lender and its counsel.

    

    (i)     
Good Standing
Certificate.  A Certificate of status or good standing of
Borrower as of a date acceptable to Lender from the jurisdiction of Borrower’s
organization and any foreign jurisdictions where Borrower is qualified to do
business.

    

    (j)     
Warrant(s). An
original warrant issued by Borrower to Lender (or its designee) exercisable for
such number, type and class of shares of Borrower’s capital stock, and for an
initial exercise price as is specified in the Supplement.

    

    (k)     
Insurance
Certificates. Insurance certificates showing Lender as loss payee or
additional insured.

    

    (l)     
Other Documents.
Such other documents and instruments as Lender may reasonably request to
effectuate the intents and purposes of this Agreement.

    

    4.2     
Conditions to All
Loans.  The obligation of Lender to make its initial Loan and
each subsequent Loan is subject to the following further conditions precedent
that:

    

    (a)     
No
Default.  No Default or Event of Default has occurred and is
continuing or will result from the making of any such Loan, and the
representations and warranties of Borrower contained in Article 3 of this
Agreement and Part 3 of the Supplement are true and correct as of the Borrowing
Date of such Loan.

    

    (b)     
No Material Adverse
Effect.  No event has occurred  that has had or could
reasonably be expected to have a Material Adverse Effect.

    

    (c)     
Borrowing
Request.  Borrower shall have delivered to Lender a Borrowing
Request for such Loan.

    

    (d)     
Note.  Borrower
shall have delivered an original executed Note evidencing such Loan,
substantially in the form of Exhibit “A” attached
to the Supplement.

    

    (e)     
Supplemental Lien
Filings.  Borrower shall have executed and delivered such
amendments or supplements to this Agreement and additional Security
Documents,  financing statements and third party waivers as Lender may
reasonably request in connection with the proposed Loan, in order to create,
protect or perfect or to maintain the perfection of Lender’s Liens on the
Collateral.

    

    (f)      
 Intentionally
omitted.

    

    (g)   
  Financial
Projections.  Borrower shall have delivered to Lender
Borrower’s business plan and/or financial projections or forecasts as most
recently approved by Borrower’s Board of Directors.

    

    ARTICLE
5 - AFFIRMATIVE COVENANTS

    

    During the term of this Agreement and
until its performance of all Obligations, Borrower will:

    

    5.1     
Notice to
Lender.  Promptly give written notice to Lender
of:

    

    (a)     
Any litigation or administrative or regulatory proceeding affecting
Borrower where the amount claimed against Borrower is at the Threshold Amount or
more, or where the granting of the relief requested could have a Material
Adverse Effect; or of the acquisition by Borrower of any commercial tort claim,
including brief details of such claim and such other information as Lender may
reasonably request to enable Lender to better perfect its Lien in such
commercial tort claim as Collateral.

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    

    (b)     
Any substantial dispute which may exist between Borrower and any
governmental or regulatory authority.

    

    (c)     
The occurrence of any Default or any Event of Default.

    

    (d)     
Any change in the location of any of Borrower’s places of business or
Collateral at least thirty (30) days in advance of such change, or of the
establishment of any new, or the discontinuance of any existing, place of
business.

    

    (e)     
Any dispute or default by Borrower or any other party under any joint
venture, partnering, distribution, cross-licensing, strategic alliance,
collaborative research or manufacturing, license or similar agreement which
could reasonably be expected to have a Material Adverse Effect.

    

    (f)     
Any other matter which has resulted or might reasonably result in a
Material Adverse Change.

    

    5.2     
Financial
Statements.  Make available to Lender via EDGAR at www.sec.gov,
in form and detail satisfactory to Lender the following financial and other
information, which Borrower warrants shall be accurate and complete in all
material respects:

    

    (a)     
Quarterly Financial
Statements.  As soon as available but no later than forty-five
(45) days after the end of each month, unless a valid extension is filed with
the Securities and Exchange Commission (“SEC”) in which case the date of the
last day of the deadline, Borrower’s balance sheet as of the end of such period,
and Borrower’s income statement for such period and for that portion of
Borrower’s financial reporting year ending with such period, prepared in
accordance with GAAP and attested by a responsible financial officer of Borrower
as being complete and correct and fairly presenting Borrower’s financial
condition and the results of Borrower’s operations.

    

    (b)     
Year-End Financial
Statements.  As soon as available but no later than the date of
delivery to the SEC as of the end of each financial reporting year, a complete
copy of Borrower’s audit report, which shall include balance sheet, income
statement, statement of changes in equity and statement of cash flows for such
year, prepared in accordance with GAAP and certified by an independent certified
public accountant selected by Borrower (the “Accountant”).

    

    (c)     
Compliance
Certificates.  Within three (3) business days following the
filing of each set of financial statements referred to in paragraphs (a) and (b)
above, a certificate of the chief financial officer of Borrower (or other
executive officer) substantially in the form of Exhibit “C” to
the Supplement (i) setting forth in reasonable detail any calculations required
to establish whether Borrower is in compliance with any financial covenants or
tests set forth in the Supplement, and (ii) stating whether any Default or Event
of Default exists on the date of such certificate, and if so, setting forth the
details thereof and the action which Borrower is taking or proposes to take with
respect thereto.

    

    (d)     
Other
Information.  Such other statements, lists of property and
accounts, budgets (as updated), capitalization tables (as updated) or other
information as Lender may from time to time reasonably request.

    

    5.3 Intentionally
Omitted.

    

    5.4     
Existence.  Maintain
and preserve Borrower’s existence, present form of business, and all rights and
privileges necessary or desirable in the normal course of its business; and keep
all Borrower’s property in good working order and condition, ordinary wear and
tear excepted.

    

    5.5     
Insurance.  Obtain
and keep in force insurance in such amounts and types as is usual in the type of
business conducted by Borrower.  Such insurance policies must be in
form and substance satisfactory to Lender, and shall list Lender as an
additional insured or loss payee, as applicable, on endorsement(s) in form
reasonably acceptable to Lender.  Borrower shall furnish to Lender
such endorsements, and upon Lender’s request, copies of any or all such
policies.

    

    5.6     
Accounting
Records.  Maintain adequate books, accounts and records, and
prepare all financial statements in accordance with GAAP, and in compliance with
the regulations of any governmental or regulatory authority having jurisdiction
over Borrower or Borrower’s business; and permit employees or agents of Lender
at such reasonable times as Lender may request, at Borrower’s expense, to
inspect Borrower’s properties, and to examine, and make copies and memoranda of
Borrower’s books, accounts and records.

    
      
         

      

      
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    5.7     
Compliance With
Laws.  Comply with all laws (including Environmental Laws),
rules, regulations applicable to, and all orders and directives of any
governmental or regulatory authority having jurisdiction over, Borrower or
Borrower’s business, and with all material agreements to which Borrower is a
party, except where the failure to so comply would not have a Material Adverse
Effect.

    

    5.8     
Taxes and Other
Liabilities.  Pay all Borrower’s Indebtedness when due; pay all
taxes and other governmental or regulatory assessments before delinquency or
before any penalty attaches thereto, except as may be contested in good faith by
the appropriate procedures and for which Borrower shall maintain appropriate
reserves; and timely file all required tax returns.

    

    5.9     
Special Collateral
Covenants.

    

    (a)     
Maintenance of
Collateral; Inspection.  Do all things reasonably necessary to
maintain, preserve, protect and keep all Collateral in good working order and
salable condition, ordinary wear and tear excepted, deal with the Collateral in
all ways as are considered good practice by owners of like property, and use the
Collateral lawfully and, to the extent applicable, only as permitted by
Borrower’s insurance policies.  Maintain, or cause to be maintained,
complete and accurate Records relating to the Collateral.  Upon
reasonable prior notice at reasonable times during normal business hours,
Borrower hereby authorizes Lender’s officers, employees, representatives and
agents to inspect the Collateral and to discuss the Collateral and the Records
relating thereto with Borrower’s officers and employees, and, in the case of any
Right to Payment, with any Person which is or may be obligated
thereon.

    

    (b)     
Financing Statements and Other Actions.  Execute and deliver to
Lender all financing statements, notices and other documents (including, without
limitation, any filings with the United States Patent and Trademark Office and
the United States Copyright Office and equivalents in other jurisdictions) from
time to time reasonably requested by Lender to maintain a first perfected
security interest in the Collateral in favor of Lender; perform such other acts,
and execute and deliver to Lender such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection with
the administration and enforcement of this Agreement or Lender’s rights, powers
and remedies hereunder.

    

    (c)     
Liens.  Not create, incur, assume or permit to exist any Lien
or grant any other Person a negative pledge on any Collateral, except Permitted
Liens.

    

    (d)     
Documents of Title.  Not sign or authorize the signing of any
financing statement or other document naming Borrower as debtor or obligor, or
acquiesce or cooperate in the issuance of any bill of lading, warehouse receipt
or other document or instrument of title with respect to any Collateral, except
those negotiated to Lender, or those naming Lender as secured party, or if
solely to create, perfect or maintain a Permitted Lien.

    

    (e)     
Change in Location or Name.  Without at least 30 days’ prior
written notice to Lender:  (a) not relocate any Collateral or Records,
its chief executive office, or establish a place of business at a location other
than as specified in the Supplement; and (b) not change its name, mailing
address, location of Collateral, jurisdiction of incorporation or its legal
structure.  Notwithstanding the foregoing, Borrower shall not relocate
any Collateral in excess of $75,000 to a jurisdiction outside the United States
without obtaining the prior written consent of Lender which may be withheld in
its sole discretion.  Schedule 5.9(e) sets forth a list of Collateral
in excess of $75,000, and the location(s) at which such Collateral is
maintained, as of the Closing Date.  Borrower shall provide Lender
with an updated list of Collateral in excess of $75,000 and the location(s) at
which such Collateral is maintained on a quarterly basis.

    

    (f)     
Decals, Markings.  At the request of Lender, firmly affix a
decal, stencil or other marking to designated items of Equipment, indicating
thereon the security interest of Lender.

    

    (g)     
Agreement With Persons in Possession of Collateral.  Obtain and
maintain such acknowledgments, consents, waivers and agreements (each a “Waiver”) from the
owner, operator, lienholder, mortgagee, landlord or any Person in possession of
tangible Collateral in excess of $150,000 per location as Lender may require,
all in form and substance satisfactory to Lender.  Notwithstanding the
foregoing, Lender hereby waives the requirements of this Section 5.9(g) for each
location at which Collateral is maintained as of the Closing Date.

    

    (h)     
Certain Agreements on Rights to Payment.  Other than in the
ordinary course of business, not make any material discount, credit, rebate or
other reduction in the original amount owing on a Right to Payment or accept in
satisfaction of a Right to Payment less than the original amount
thereof.

    
      
         

      

      
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    5.10     
Authorization for Automated Clearinghouse Funds Transfer.  (i)
Authorize Lender to initiate debit entries to Borrower’s Primary Operating
Account, specified in the Supplement hereto, through Automated Clearinghouse
(“ACH”) transfers, in order to satisfy the regularly scheduled payments of
principal, interest and Final Payments (if any); (ii) provide Lender at least
thirty (30) days notice of any change in Borrower’s Primary Operating Account;
and (iii) grant Lender any additional authorizations necessary to begin ACH
debits from a new account which becomes the Primary Operating
Account.

    

    ARTICLE
6 - NEGATIVE COVENANTS

    

    During the term of this Agreement and
until the performance of all Obligations, Borrower will not, (without Lender’s
prior written consent):

    

    6.1     
Indebtedness.  Be
indebted for borrowed money, the deferred purchase price of property, or leases
which would be capitalized in accordance with GAAP; or become liable as a
surety, guarantor, accommodation party or otherwise for or upon the obligation
of any other Person, except:

    

    (a)     
Indebtedness incurred for the acquisition of supplies or inventory on
normal trade credit;

    

    (b)     
Indebtedness of Borrower under this Agreement;

    

    (c)     
Subordinated Debt in excess of $150,000; and

    

    (d)     
Any Indebtedness approved by Lender prior to the Closing Date as shown on
Schedule 6.1.

    

    6.2     
Liens.  Create,
incur, assume or permit to exist any Lien, or grant any other Person a negative
pledge, on any of Borrower’s property, except Permitted
Liens.  Borrower and Lender agree that this covenant is not intended
to constitute a lien, deed of trust, equitable mortgage, or security interest of
any kind on any of Borrower’s real property, and this Agreement shall not be
recorded or recordable.  Notwithstanding the foregoing, however,
violation of this covenant by Borrower shall constitute an Event of
Default.  Without limiting the generality of the foregoing, and as a
material inducement to the Lender’s making of the Commitment and entering into
the Loan Documents, Borrower agrees that (i) it shall not assign, mortgage,
pledge, grant a security interest in, or encumber any of Borrower’s Intellectual
Property, and (ii) it shall not permit the inclusion into any agreement,
document, instrument or other arrangement with any Person (except with or in
favor of Lender) which directly or indirectly prohibits or has the effect of
prohibiting Borrower from assigning, mortgaging, pledging, granting a security
interest in or upon, or encumbering any of Borrower’s Intellectual Property,
except as is otherwise permitted in Section 6.5(i) of this Agreement, or would
otherwise be a “Permitted Lien” hereunder.

    

    6.3     
Dividends.  Pay any
dividends or purchase, redeem or otherwise acquire or make any other
distribution with respect to any of Borrower’s capital stock, except (a)
dividends or other distributions solely of capital stock of Borrower, and (b) so
long as no Event of Default has occurred and is continuing, (i) repurchases of
stock from employees upon termination of employment under reverse vesting or
similar repurchase plans not to exceed $100,000 in any calendar
year.

    

    6.4     
Liquidation/Dissolution.
Liquidate or dissolve.

    

    6.5     
Sales of Assets.
Sell, transfer, lease, license or otherwise dispose of (a “Transfer”) any of
Borrower’s assets except (i) non-exclusive licenses of Intellectual Property in
the ordinary course of business consistent with industry practice, provided that
such licenses of Intellectual Property neither result in a legal transfer of
title of the licensed Intellectual Property nor have the same effect as a sale
of such Intellectual Property and have been approved by Borrower’s Board of
Directors; (ii) Transfers of worn-out, obsolete or surplus property (each as
determined by the Borrower in its reasonable judgment); (iii) Transfers of
Inventory in the ordinary course of business; (iv) Transfers constituting
Permitted Liens; (v) Transfers permitted in Section 6.6 hereunder; and (vi)
Transfers of Collateral (other than Intellectual Property) for fair
consideration and in the ordinary course of its business.

    

    6.6     
Loans/Investments.  Make
or suffer to exist any loans, guaranties, advances, or investments,
except:

    

    (a)     
Accounts receivable in the ordinary course of Borrower’s
business;

    
      
         

      

      
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    (b)     
Investments in domestic certificates of deposit issued by, and other
domestic investments with, financial institutions organized under the laws of
the United States or a state thereof, having at least One Hundred Million
Dollars ($100,000,000) in capital and a rating of at least “investment grade” or
“A” by Moody’s, Standard & Poor’s or any successor rating
agency;

    

    (c)     
Investments in marketable obligations of the United States of America and
in open market commercial paper given the highest credit rating by a national
credit agency and maturing not more than one year from the creation
thereof;

    

    (d)     
Temporary advances to cover incidental expenses to be incurred in the
ordinary course of business;

    

    (e)     
Investments in joint ventures, strategic alliances, licensing and similar
arrangements customary in Borrower’s industry and which do not require Borrower
to assume or otherwise become liable for the obligations of any third party not
directly related to or arising out of such arrangement or, without the prior
written consent of Lender, require Borrower to transfer ownership of non-cash
assets to such joint venture or other entity; and

    

    (f)     
Investments in wholly-owned subsidiaries of the Borrower.

    

    6.7     
Transactions With Related Persons.  Directly or indirectly
enter into any transaction with or for the benefit of a Related Person on terms
more favorable to the Related Person than would have been obtainable in an
“arms’ length” dealing.

    

    6.8     
Other
Business.  Engage in any material line of business other than
the business Borrower conducts as of the Closing Date.

    

    6.9     
Intentionally omitted.

    

    6.10     
Compliance.  Become
an “investment company” or controlled by an “investment company,” within the
meaning of the Investment Company Act of 1940, or become principally engaged in,
or undertake as one of its important activities, the business of extending
credit for the purpose of purchasing or carrying margin stock, or use the
proceeds of any Loan for such purpose.  Fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair
Labor Standards Act or violate any law or regulation, which violation could have
a Material Adverse Effect or a material adverse effect on the Collateral or the
priority of Lender’s Lien on the Collateral, or permit any of its subsidiaries
to do any of the foregoing.

    

    6.11     
Other Deposit and Securities Accounts.  Maintain any deposit
accounts or accounts holding securities owned by Borrower except (i) Deposit
Accounts and investment/securities accounts as set forth in the Supplement, and
(ii) other Deposit Accounts and securities/investment accounts, in each case,
with respect to which Borrower and Lender shall have taken such action as Lender
reasonably deems necessary to obtain a perfected first priority security
interest therein.  The provisions of the previous sentence shall not
apply to Deposit Accounts exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of Borrower’s
employees.

    

    6.12     
Prepayment of
Indebtedness. Prepay, redeem or otherwise satisfy in any manner prior to
the scheduled repayment thereof any Indebtedness (other than the
Loans).  Notwithstanding the foregoing, Lender agrees that the
conversion or exchange into Borrower’s equity securities of any Indebtedness
(other than the Loans) shall not be prohibited by this Section
6.12.

    

    6.13     
Repayment of
Subordinated Debt. Repay, prepay, redeem or otherwise satisfy in any
manner any Subordinated Debt, except in accordance with the terms of any
subordination agreement among Borrower, Lender and the holder(s) of such
Subordinated Debt.  Notwithstanding the foregoing, Lender agrees that
the conversion or exchange into Borrower’s equity securities of any Subordinated
Debt and the payment of cash in lieu of fractional shares shall not be
prohibited by this Section 6.13.

    

    6.14     
Subsidiaries.

    

    (a)     
Sell, transfer, encumber or otherwise dispose of Borrower’s ownership
interest in any Subsidiary other than Permitted Liens.

    

    (b)     
Cause or permit a Subsidiary to do any of the following:  (a)
grant Liens on such Subsidiary’s assets, except for Liens that would constitute
Permitted Liens if incurred by Borrower and Liens on any property held or
acquired by such Subsidiary in the ordinary course of its business securing
Indebtedness incurred or assumed for the purpose of financing all or any part of
the cost of acquiring such property; provided, that such
Lien attaches solely to the property acquired with such Indebtedness and that
the principal amount of such Indebtedness does not exceed one hundred percent
(100%) of the cost of such property; and (b) issue any additional
Shares.

    
      
         

      

      
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    ARTICLE
7 - EVENTS OF DEFAULT

    

    7.1     
Events of Default;
Acceleration.  Upon the occurrence and during the continuation
of any Default, the obligation of Lender to make any additional Loan shall be
suspended.  The occurrence of any of the following (each, an “Event of
Default”) shall terminate any obligation of Lender to make any additional Loan;
and shall, at the option of Lender (1) make all sums of Basic Interest and
principal, all Final Payments, and any Obligations and other amounts owing under
any Loan Documents immediately due and payable without notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor
or any other notices or demands, and (2) give Lender the right to exercise any
other right or remedy provided by contract or applicable law:

    

    (a)     
Borrower shall fail to pay any principal, interest or Final Payment under
this Agreement or any Note, or fail to pay any fees or other charges when due
under any Loan Document, and such failure continues for five (5) Business Days
or more after the same first becomes due; or an Event of Default as defined in
any other Loan Document shall have occurred.

    

    (b)     
Any representation or warranty made, or financial statement, certificate
or other document provided, by Borrower under any Loan Document shall prove to
have been false or misleading in any respect, such that a Material Adverse
Effect occurs or is reasonably likely to occur when made or deemed made
herein.

    

    (c)     
(i) Borrower shall fail to pay its debts generally as they become due and
such failure continues for five (5) Business Days or (ii) shall commence any
Insolvency Proceeding with respect to itself; an involuntary Insolvency
Proceeding shall be filed against Borrower, or a custodian, receiver, trustee,
assignee for the benefit of creditors, or other similar official, shall be
appointed to take possession, custody or control of the properties of Borrower,
and such involuntary Insolvency Proceeding, petition or appointment is
acquiesced to by Borrower or is not dismissed within sixty (60) days; or the
dissolution, winding up, or termination of the business or cessation of
operations of Borrower; or Borrower shall take any corporate action for the
purpose of effecting, approving, or consenting to any of the
foregoing.

    

    (d)     
Borrower shall be in default beyond any applicable period of grace or
cure under any other agreement involving the borrowing of money, the purchase of
property, the advance of credit or any other monetary liability of any kind to
Lender or to any Person which results in the acceleration of payment of such
obligation in an amount in excess of the Threshold Amount.

    

    (e)     
Any governmental or regulatory authority shall take any judicial or
administrative action, or any defined benefit pension plan maintained by
Borrower shall have any unfunded liabilities, any of which, in the reasonable
judgment of Lender, might have a Material Adverse Effect.

    

    (f)     
Subject to Section 6.5 hereof, any sale, transfer or other disposition of
all or a substantial or material part of the assets of Borrower, including
without limitation to any trust or similar entity, shall occur.

    

    (g)     
Any judgment(s) singly or in the aggregate in excess of the Threshold
Amount shall be entered against Borrower which remain unsatisfied, unvacated or
unstayed pending appeal for ten (10) or more days after entry
thereof.

    

    (h)     
Borrower shall fail to perform or observe any covenant contained in
Article 6 of this Agreement.

    

    (i)     
Borrower shall fail to perform or observe any covenant contained in
Section 5.9 of this Agreement, and such failure continues for five (5) Business
Days.

    

    (j)     
Borrower shall fail to perform or observe any covenant contained in
Article 5 or elsewhere in this Agreement or any other Loan Document (other than
a covenant which is dealt with specifically elsewhere in this Article 7) and, if
capable of being cured, the breach of such covenant is not cured within 30 days
after the sooner to occur of Borrower’s receipt of notice of such breach from
Lender or the date on which such breach first becomes known to any officer of
Borrower; provided, however that if such
breach is not capable of being cured within such 30-day period and Borrower
timely notifies Lender of such fact and Borrower diligently pursues such cure,
then the cure period shall be extended to the date requested in Borrower’s
notice but in no event more than 90 days from the initial breach; provided, further, that such
additional 60-day opportunity to cure shall not apply in the case of any failure
to perform or observe any covenant which has been the subject of a prior failure
within the preceding 180 days or which is a willful and knowing breach by
Borrower.

    
      
         

      

      
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    7.2     
Remedies Upon
Default.  Upon the occurrence and during the continuance of an
Event of Default, Lender shall be entitled to, at its option, exercise any or
all of the rights and remedies available to a secured party under the UCC or any
other applicable law, and exercise any or all of its rights and remedies
provided for in this Agreement and in any other Loan Document.  The
obligations of Borrower under this Agreement shall continue to be effective or
be reinstated, as the case may be, if at any time any payment of any Obligations
is rescinded or must otherwise be returned by Lender upon, on account of, or in
connection with, the insolvency, bankruptcy or reorganization of Borrower or
otherwise, all as though such payment had not been made.

    

    7.3     
Sale of
Collateral.  Upon the occurrence and during the continuance of
an Event of Default, Lender may, subject to the provisions contained in the
Supplement, the UCC and other applicable law, rules or regulations, sell all or
any part of the Collateral, at public or private sales, to itself, a wholesaler,
retailer or investor, for cash, upon credit or for future delivery, and at such
price or prices as Lender may deem commercially reasonable.  To the
extent permitted by law, Borrower hereby specifically waives all rights of
redemption and any rights of stay or appraisal which it has or may have under
any applicable law in effect from time to time.  Any such public or
private sales shall be held at such times and at such place(s) as Lender may
determine.  In case of the sale of all or any part of the Collateral
on credit or for future delivery, the Collateral so sold may be retained by
Lender until the selling price is paid by the purchaser, but Lender shall not
incur any liability in case of the failure of such purchaser to pay for the
Collateral and, in case of any such failure, such Collateral may be
resold.  Lender may, instead of exercising its power of sale, proceed
to enforce its security interest in the Collateral by seeking a judgment or
decree of a court of competent jurisdiction.  Without limiting the
generality of the foregoing, if an Event of Default is in effect,

    

    (1)     
Subject to the rights of any third parties, Lender may license, or
sublicense, whether general, special or otherwise, and whether on an exclusive
or non-exclusive basis, any Copyrights, Patents or Trademarks included in the
Collateral throughout the world for such term or terms, on such conditions and
in such manner as Lender shall in its sole discretion determine;

    

    (2)     
Lender may (without assuming any obligations or liability thereunder), at
any time and from time to time, enforce (and shall have the exclusive right to
enforce) against any licensee or sublicensee all rights and remedies of Borrower
in, to and under any Copyright Licenses, Patent Licenses or Trademark Licenses
and take or refrain from taking any action under any thereof, and Borrower
hereby releases Lender from, and agrees to hold Lender free and harmless from
and against any claims arising out of, any lawful action so taken or omitted to
be taken with respect thereto other than claims arising out of Lender’s gross
negligence or willful misconduct; and

    

    (3)     
Upon request by Lender, Borrower will execute and deliver to Lender a
power of attorney, in form and substance reasonably satisfactory to Lender for
the implementation of any lease, assignment, license, sublicense, grant of
option, sale or other disposition of a Copyright, Patent or
Trademark.  In the event of any such disposition pursuant to this
clause 3,
Borrower shall supply its know-how and expertise relating to the products or
services made or rendered in connection with Patents, the manufacture and sale
of the products bearing Trademarks, and its customer lists and other records
relating to such Copyrights, Patents or Trademarks and to the distribution of
said products, to Lender.

    

    (4)     
If, at any time when Lender shall determine to exercise its right to sell
the whole or any part of the Shares hereunder, such Shares or the part thereof
to be sold shall not, for any reason whatsoever, be effectively registered under
the Securities Act (or any similar statute), then Lender may, in its discretion
(subject only to applicable requirements of law), sell such Shares or part
thereof by private sale in such manner and under such circumstances as Lender
may deem necessary or advisable, but subject to the other requirements of this
Article 7, and shall not be required to effect such registration or to cause the
same to be effected.  Without limiting the generality of the
foregoing, in any such event, Lender in its discretion may (i) in accordance
with applicable securities laws proceed to make such private sale
notwithstanding that a registration statement for the purpose of registering
such Shares or part thereof could be or shall have been filed under the
Securities Act (or similar statute), (ii) approach and negotiate with a single
possible purchaser to effect such sale, and (iii) restrict such sale to a
purchaser who is an accredited investor under the Securities Act and who will
represent and agree that such purchaser is purchasing for its own account, for
investment and not with a view to the distribution or sale of such Shares or any
part thereof.  In addition to a private sale as provided above in this
Article 7, if any of the Shares shall not be freely distributable to the public
without registration under the Securities Act (or similar statute) at the time
of any proposed sale pursuant to this Article 7, then Lender shall not be
required to effect such registration or cause the same to be effected but, in
its discretion (subject only to applicable requirements of law), may require
that any sale hereunder (including a sale at auction) be conducted subject to
restrictions:

    
      
         

      

      
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      (A)     
as to the
financial sophistication and ability of any Person permitted to bid or purchase
at any such sale;

    

    

    
      (B)     
as to the
content of legends to be placed upon any certificates representing the Shares
sold in such sale, including restrictions on future transfer
thereof;

    

    

    
      (C)     
as to the
representations required to be made by each Person bidding or purchasing at such
sale relating to such Person’s access to financial information about Borrower or
any of its Subsidiaries and such Person’s intentions as to the holding of the
Shares so sold for investment for its own account and not with a view to the
distribution thereof; and

    

    

    
      (D)     
as to
such other matters as Lender may, in its discretion, deem necessary or
appropriate in order that such sale (notwithstanding any failure so to register)
may be effected in compliance with the Bankruptcy Code and other laws affecting
the enforcement of creditors’ rights and the Securities Act and all applicable
state securities laws.

    

    

    (5)     
Borrower recognizes that Lender may be unable to effect a public sale of
any or all the Shares and may be compelled to resort to one or more private
sales thereof in accordance with clause (4) above.  Borrower also
acknowledges that any such private sale may result in prices and other terms
less favorable to the seller than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not
be deemed to have been made in a commercially unreasonable manner solely by
virtue of such sale being private.  Lender shall be under no
obligation to delay a sale of any of the Shares for the period of time necessary
to permit the applicable Subsidiary to register such securities for public sale
under the Securities Act, or under applicable state securities laws, even if
Borrower and/or the Subsidiary would agree to do so.

    

    7.4     
Borrower’s Obligations
Upon Default.  Upon the request of Lender after the occurrence
and during the continuance of an Event of Default, Borrower will:

    

    (a)     
Assemble and make available to Lender the Collateral at such place(s) as
Lender shall reasonably designate, segregating all Collateral so that each item
is capable of identification; and

    

    (b)     
Subject to the rights of any lessor, permit Lender, by Lender’s officers,
employees, agents and representatives, to enter any premises where any
Collateral is located, to take possession of the Collateral, to complete the
processing, manufacture or repair of any Collateral, and to remove the
Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of
Borrower’s premises.

    

    ARTICLE
8 - SPECIAL COLLATERAL PROVISIONS

    

    8.1     
Compromise and
Collection.  Borrower and Lender recognize that setoffs,
counterclaims, defenses and other claims may be asserted by obligors with
respect to certain of the Rights to Payment; that certain of the Rights to
Payment may be or become uncollectible in whole or in part; and that the expense
and probability of success of litigating a disputed Right to Payment may exceed
the amount that reasonably may be expected to be recovered with respect to such
Right to Payment.  Borrower hereby authorizes Lender, after and during
the continuance of an Event of Default, to compromise with the obligor, accept
in full payment of any Right to Payment such amount as Lender shall negotiate
with the obligor, or abandon any Right to Payment.  Any such action by
Lender shall be considered commercially reasonable so long as Lender acts in
good faith based on information known to it at the time it takes any such
action.

    

    8.2     
Performance of
Borrower’s Obligations.  Without having any obligation to do
so, upon reasonable prior notice to Borrower, Lender may perform or pay any
obligation which Borrower has agreed to perform or pay under this Agreement,
including, without limitation, the payment or discharge of taxes or Liens levied
or placed on or threatened against the Collateral.  In so performing
or paying, Lender shall determine the action to be taken and the amount
necessary to discharge such obligations.  Borrower shall reimburse
Lender on demand for any amounts paid by Lender pursuant to this Section, which
amounts shall constitute Obligations secured by the Collateral and shall bear
interest from the date of demand at the Default Rate.

    
      
         

      

      
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    8.3     
Power of
Attorney.  For the purpose of protecting and preserving the
Collateral and Lender’s rights under this Agreement, Borrower hereby irrevocably
appoints Lender, with full power of substitution, as its attorney-in-fact with
full power and authority, after the occurrence and during the continuance of an
Event of Default, to do any act which Borrower is obligated to do hereunder; to
exercise such rights with respect to the Collateral as Borrower might exercise;
to use such Inventory, Equipment, Fixtures or other property as Borrower might
use; to enter Borrower’s premises; to give notice of Lender’s security interest
in, and to collect the Collateral; and before or after Default, to execute and
file in Borrower’s name any financing statements, amendments and continuation
statements, account control agreements or other Security Documents necessary or
desirable to create, maintain, perfect or continue the perfection of Lender’s
security interests in the Collateral.  Borrower hereby ratifies all
that Lender shall lawfully do or cause to be done by virtue of this
appointment.

    

    8.4     
Authorization for Lender
to Take Certain Action.  The power of attorney created in
Section 8.3 is a power coupled with an interest and shall be
irrevocable.  The powers conferred on Lender hereunder are solely to
protect its interests in the Collateral and shall not impose any duty upon
Lender to exercise such powers.  Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers and
in no event shall Lender or any of its directors, officers, employees, agents or
representatives be responsible to Borrower for any act or failure to act, except
for gross negligence or willful misconduct.  After the occurrence and
during the continuance of an Event of Default, Lender may exercise this power of
attorney without notice to or assent of Borrower, in the name of Borrower, or in
Lender’s own name, from time to time in Lender’s sole discretion and at
Borrower’s expense.  To further carry out the terms of this Agreement,
after the occurrence and during the continuance of an Event of Default, Lender
may:

    

    (a)     
Execute any statements or documents or take possession of, and endorse
and collect and receive delivery or payment of, any checks, drafts, notes,
acceptances or other instruments and documents constituting Collateral, or
constituting the payment of amounts due and to become due or any performance to
be rendered with respect to the Collateral.

    

    (b)     
Sign and endorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts; drafts, certificates and statements under any
commercial or standby letter of credit relating to Collateral; assignments,
verifications and notices in connection with Accounts; or any other documents
relating to the Collateral, including without limitation the
Records.

    

    (c)     
Use or operate Collateral or any other property of Borrower for the
purpose of preserving or liquidating Collateral.

    

    (d)     
File any claim or take any other action or proceeding in any court of law
or equity or as otherwise deemed appropriate by Lender for the purpose of
collecting any and all monies due or securing any performance to be rendered
with respect to the Collateral.

    

    (e)     
Commence, prosecute or defend any suits, actions or proceedings or as
otherwise deemed appropriate by Lender for the purpose of protecting or
collecting the Collateral.  In furtherance of this right, upon the
occurrence and during the continuance of an Event of Default, Lender may apply
for the appointment of a receiver or similar official to operate Borrower’s
business.

    

    (f)     
Prepare, adjust, execute, deliver and receive payment under insurance
claims, and collect and receive payment of and endorse any instrument in payment
of loss or returned premiums or any other insurance refund or return, and apply
such amounts at Lender’s sole discretion, toward repayment of the Obligations or
replacement of the Collateral.

    

    8.5     
Application of
Proceeds.  Any Proceeds and other monies or property received
by Lender pursuant to the terms of this Agreement or any Loan Document may be
applied by Lender first to the payment of expenses of collection, including
without limitation reasonable attorneys’ fees, and then to the payment of the
Obligations in such order of application as Lender may elect.

    

    8.6     
Deficiency.  If the
Proceeds of any disposition of the Collateral are insufficient to cover all
costs and expenses of such sale and the payment in full of all the Obligations,
plus all other sums required to be expended or distributed by Lender, then
Borrower shall be liable for any such deficiency.

    
      
         

      

      
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    8.7     
Lender
Transfer.  Upon the transfer of all or any part of the
Obligations, Lender may transfer all or part of the Collateral and shall be
fully discharged thereafter from all liability and responsibility with respect
to such Collateral so transferred, and the transferee shall be vested with all
the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender shall
retain all rights and powers hereby given.

    

    8.8     
Lender’s Duties.

    

    (a)     
Lender shall use reasonable care in the custody and preservation of any
Collateral in its possession.  Without limitation on other conduct
which may be considered the exercise of reasonable care, Lender shall be deemed
to have exercised reasonable care in the custody and preservation of such
Collateral if such Collateral is accorded treatment substantially equal to that
which Lender accords its own property, it being understood that Lender shall not
have any responsibility for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, declining value, tenders or other matters
relative to any Collateral, regardless of whether Lender has or is deemed to
have knowledge of such matters; or taking any necessary steps to preserve any
rights against any Person with respect to any Collateral.  Under no
circumstances shall Lender be responsible for any injury or loss to the
Collateral, or any part thereof, arising from any cause beyond the reasonable
control of Lender.

    

    (b)     
Lender may at any time deliver the Collateral or any part thereof to
Borrower and the receipt of Borrower shall be a complete and full acquittance
for the Collateral so delivered, and Lender shall thereafter be discharged from
any liability or responsibility therefor.

    

    (c)     
Neither Lender, nor any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing Lender shall be
liable for any claims, demands, losses or damages, of any kind whatsoever, made,
claimed, incurred or suffered by Borrower or any other party through the
ordinary negligence of Lender, or any of its directors, officers, employees,
agents, attorneys or any other person affiliated with or representing
Lender.

    

    8.9     
Termination of Security
Interests.   Upon the payment in full of the Obligations
and satisfaction of all Borrower’s obligations under this Agreement and the
other Loan Documents, and if Lender has no further obligations under its
Commitment, the security interest granted hereby shall terminate and all rights
to the Collateral shall revert to Borrower.  Upon any such
termination, the Lender shall, at Borrower’s expense, execute and deliver to
Borrower such documents as Borrower shall reasonably request to evidence such
termination.

    

    ARTICLE
9 - GENERAL PROVISIONS

    

    9.1     
Notices.  Any notice
given by any party under any Loan Document shall be in writing and personally
delivered, sent by overnight courier, or United States mail, postage prepaid, or
sent by facsimile, or other authenticated messenger, charges prepaid, to the
other party’s or parties’ addresses shown on the Supplement.  Each
party may change the address or facsimile number to which notices, requests and
other communications are to be sent by giving written notice of such change to
each other party.  Notice given by hand delivery shall be deemed
received on the date delivered; if sent by overnight courier, on the next
Business Day after delivery to the courier service; if by first class mail, on
the third Business Day after deposit in the U.S. Mail; and if by facsimile, on
the date of transmission.

    

    9.2     
Binding
Effect.  The Loan Documents shall be binding upon and inure to
the benefit of Borrower and Lender and their respective successors and assigns;
provided, however, that Borrower may not assign or transfer Borrower’s rights or
obligations under any Loan Document.  Lender reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any part of,
or any interest in, Lender’s rights and obligations under the Loan
Documents.  In connection with any of the foregoing, Lender may
disclose all documents and information which Lender now or hereafter may have
relating to the Loans, Borrower, or its business; provided that any person who
receives such information shall have agreed in writing in advance to maintain
the confidentiality of such information on terms reasonably acceptable to
Borrower.

    
      
         

      

      
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    9.3     
No
Waiver.  Any waiver, consent or approval by Lender of any Event
of Default or breach of any provision, condition, or covenant of any Loan
Document must be in writing and shall be effective only to the extent set forth
in writing.  No waiver of any breach or default shall be deemed a
waiver of any later breach or default of the same or any other provision of any
Loan Document.  No failure or delay on the part of Lender in
exercising any power, right, or privilege under any Loan Document shall operate
as a waiver thereof, and no single or partial exercise of any such power, right,
or privilege shall preclude any further exercise thereof or the exercise of any
other power, right or privilege.  Lender has the right at its sole
option to continue to accept interest and/or principal payments due under the
Loan Documents after default, and such acceptance shall not constitute a waiver
of said default or an extension of the Maturity Date unless Lender agrees
otherwise in writing.

    

    9.4     
Rights
Cumulative.  All rights and remedies existing under the Loan
Documents are cumulative to, and not exclusive of, any other rights or remedies
available under contract or applicable law.

    

    9.5     
Unenforceable
Provisions.  Any provision of any Loan Document executed by
Borrower which is prohibited or unenforceable in any jurisdiction, shall be so
only as to such jurisdiction and only to the extent of such prohibition or
unenforceability, but all the remaining provisions of any such Loan Document
shall remain valid and enforceable.

    

    9.6     
Accounting
Terms.  Except as otherwise provided in this Agreement,
accounting terms and financial covenants and information shall be determined and
prepared in accordance with GAAP.

    

    9.7     
Indemnification;
Exculpation.  Borrower shall pay and protect, defend and
indemnify Lender and Lender’s employees, officers, directors, shareholders,
affiliates, correspondents, agents and representatives (other than Lender,
collectively “Agents”) against, and hold Lender and each such Agent harmless
from, all claims, actions, proceedings, liabilities, damages, losses, expenses
(including, without limitation, attorneys’ fees and costs) and other amounts
incurred by Lender and each such Agent, arising from (i) the matters
contemplated by this Agreement or any other Loan Documents, (ii) any dispute
between Borrower and a third party,  or (iii) any contention that
Borrower has failed to comply with any law, rule, regulation, order or directive
applicable to Borrower’s business; provided, however, that this
indemnification shall not apply to any of the foregoing incurred solely as the
result of Lender’s or any Agent’s gross negligence or willful
misconduct.  This indemnification shall survive the payment and
satisfaction of all of Borrower’s Obligations to Lender.

    

    9.8     
Reimbursement.  Borrower
shall reimburse Lender for all actual costs and expenses, including without
limitation reasonable attorneys’ fees and disbursements expended or incurred by
Lender in any arbitration, mediation, judicial reference, legal action or
otherwise in connection with (a) the preparation and negotiation of the Loan
Documents, (b) the amendment and enforcement of the Loan Documents, including
without limitation during any workout, attempted workout, and/or in connection
with the rendering of legal advice as to Lender’s rights, remedies and
obligations under the Loan Documents, (c) collecting any sum which becomes due
Lender under any Loan Document, (d) any proceeding for declaratory relief, any
counterclaim to any proceeding, or any appeal, or (e) the protection,
preservation or enforcement of any rights of Lender.  For the purposes
of this section, attorneys’ fees shall include, without limitation, fees
incurred in connection with the following:  (1) contempt proceedings;
(2) discovery; (3) any motion, proceeding or other activity of any kind in
connection with an Insolvency Proceeding; (4) garnishment, levy, and debtor and
third party examinations; and (5)  postjudgment motions and
proceedings of any kind, including without limitation any activity taken to
collect or enforce any judgment.  All of the foregoing costs and
expenses shall be payable upon demand by Lender, and if not paid within
forty-five (45) days of presentation of invoices shall bear interest at the
Default Rate.

    

    9.9     
Execution in
Counterparts.  This Agreement may be executed in any number of
counterparts which, when taken together, shall constitute but one
agreement.

    

    9.10     
Entire
Agreement.  The Loan Documents are intended by the parties as
the final expression of their agreement and therefore contain the entire
agreement between the parties and supersede all prior understandings or
agreements concerning the subject matter hereof.  This Agreement may
be amended only in a writing signed by Borrower and Lender.

    

    9.11     
Governing Law and
Jurisdiction.

    

    (a)     
THIS AGREEMENT AND THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

    

    
      
         

      

      
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    (b)     
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR
OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF BORROWER AND LENDER CONSENTS, FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE
COURTS. EACH OF BORROWER AND LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO.  BORROWER AND LENDER EACH WAIVE PERSONAL SERVICE OF
ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS
PERMITTED BY CALIFORNIA LAW.

    

    9.12     
Waiver of Jury
Trial.  TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW,
BORROWER AND LENDER EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY
ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE,
WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR
OTHERWISE.  BORROWER AND LENDER EACH AGREES THAT ANY SUCH CLAIM OR
CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A
JURY.  WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT
THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION
AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEMS, IN WHOLE OR IN
PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER
LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.  THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

    

    ARTICLE
10 - DEFINITIONS

    

    The definitions appearing in this
Agreement or any Supplement shall be applicable to both the singular and plural
forms of the defined terms:

    

    “Account” means any “account,”
as such term is defined in the UCC, now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest and, in any
event, shall include, without limitation, all accounts receivable, book debts
and other forms of obligations (other than forms of obligations evidenced by
Chattel Paper, Documents or Instruments) now owned or hereafter received or
acquired by or belonging or owing to Borrower (including, without limitation,
under any trade name, style or division thereof) whether arising out of goods
sold or services rendered by Borrower or from any other transaction, whether or
not the same involves the sale of goods or services by Borrower (including,
without limitation, any such obligation that may be characterized as an account
or contract right under the UCC) and all of Borrower’s rights in, to and under
all purchase orders or receipts now owned or hereafter acquired by it for goods
or services, and all of Borrower’s rights to any goods represented by any of the
foregoing (including, without limitation, unpaid seller’s rights of rescission,
replevin, reclamation and stoppage in transit and rights to returned, reclaimed
or repossessed goods), and all monies due or to become due to Borrower under all
purchase orders and contracts for the sale of goods or the performance of
services or both by Borrower or in connection with any other transaction
(whether or not yet earned by performance on the part of Borrower), now in
existence or hereafter occurring, including, without limitation, the right to
receive the proceeds of said purchase orders and contracts, and all collateral
security and guarantees of any kind given by any Person with respect to any of
the foregoing.

    

    “Affiliate” means any Person
which directly or indirectly controls, is controlled by, or is under common
control with Borrower.  “Control,” “controlled by” and “under common
control with” mean direct or indirect possession of the power to direct or cause
the direction of management or policies (whether through ownership of voting
securities, by contract or otherwise); provided, that control shall be
conclusively presumed when any Person or affiliated group directly or indirectly
owns five percent (5%) or more of the securities having ordinary voting power
for the election of directors of a corporation.

    
      
         

      

      
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    “Agreement” means this Loan
and Security Agreement and each Supplement thereto, as each may be amended or
supplemented from time to time.

    

    “Bankruptcy Code” means the
Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101, et seq.), as
amended.

    

    “Basic Interest” means the
fixed rate of interest payable on the outstanding balance of each Loan at the
applicable Designated Rate.

    

    “Borrowing Date” means the
Business Day on which the proceeds of a Loan are disbursed by
Lender.

    

    “Borrowing Request” means a
written request from Borrower in substantially the form of Exhibit “B” to the
Supplement, requesting the funding of one or more Loans on a particular
Borrowing Date.

    

    “Business Day” means any day
other than a Saturday, Sunday or other day on which commercial banks in New York
City or San Francisco are authorized or required by law to close.

    

    “Chattel Paper” means any
“chattel paper,” as such term is defined in the UCC, now owned or hereafter
acquired by Borrower or in which Borrower now holds or hereafter acquires any
interest.

    

    “Closing Date” means the date
of this Agreement.

    

    “Collateral” means all of
Borrower’s right, title and interest in and to the following property, whether
now owned or hereafter acquired and wherever located: (a) all Receivables; (b)
all Equipment; (c) all Fixtures; (d) all General Intangibles; (e) all Inventory;
(f) all Investment Property; (g) all Deposit Accounts; (h) all Shares;
(i) all other Goods and personal property of Borrower, whether tangible or
intangible and whether now or hereafter owned or existing, leased, consigned by
or to, or acquired by, Borrower and wherever located; (j) all Records; and (k)
all Proceeds of each of the foregoing and all accessions to, substitutions and
replacements for, and rents, profits and products of each of the
foregoing.

    

    “Commitment” means the
obligation of Lender to make Loans to Borrower up to the aggregate principal
amount set forth in the Supplement.

    

    “Copyright License” means any
written agreement granting any right to use any Copyright or Copyright
registration now owned or hereafter acquired by Borrower or in which Borrower
now holds or hereafter acquires any interest.

    

    “Copyrights” means all of the
following now owned or hereafter acquired by Borrower or in which Borrower now
holds or hereafter acquires any interest:  (i) all copyrights, whether
registered or unregistered, held pursuant to the laws of the United States, any
State thereof or of any other country; (ii) all registrations, applications and
recordings in the United States Copyright Office or in any similar office or
agency of the United States, any State thereof or any other country; (iii) all
continuations, renewals or extensions thereof; and (iv) any registrations to be
issued under any pending applications.

    

    “Default” means an event which
with the giving of notice, passage of time, or both would constitute an Event of
Default.

    

    “Default Rate” means eighteen
percent (18%) per annum.

    

    “Deposit Accounts” means any
“deposit accounts,” as such term is defined in the UCC, now owned or hereafter
acquired by Borrower or in which Borrower now holds or hereafter acquires any
interest.

    

    “Designated Rate” means the
rate of interest per annum described in the Supplement as being applicable to an
outstanding Loan from time to time.

    

    “Documents” means any
“documents,” as such term is defined in the UCC, now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any
interest.

    

    “Environmental Laws” means all
federal, state or local laws, statutes, common law duties, rules, regulations,
ordinances and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements with, any
governmental authorities, in each case relating to environmental, health, or
safety matters.

    

    “Equipment” means any
“equipment,” as such term is defined in the UCC, now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any interest
and any and all additions, substitutions and replacements of any of the
foregoing, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto.

    
      
         

      

      
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    “Event of Default” means any
event described in Section 7.1.

    

    “Final Payment” means, with
respect to a Loan, an amount payable on the Maturity Date of such Loan in an
amount equal to that percentage of the original principal amount of such Loan
specified in the Supplement.

    

    “Fixtures” means any
“fixtures,” as such term is defined in the UCC, now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any
interest.

    

    “GAAP” means generally
accepted accounting principles and practices consistent with those principles
and practices promulgated or adopted by the Financial Accounting Standards Board
and the Board of the American Institute of Certified Public Accountants, their
respective predecessors and successors.  Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative GAAP.  Each accounting term used but not otherwise
expressly defined herein shall have the meaning given it by GAAP.

    

    “General Intangibles” means
any “general intangibles,” as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest and, in any event, shall include, without limitation, all
right, title and interest that Borrower may now or hereafter have in or under
any contract, all customer lists, Copyrights, Trademarks, Patents, websites,
domain names, and all applications therefor and reissues, extensions, or
renewals thereof, other rights to Intellectual Property, interests in
partnerships, joint ventures and other business associations, Licenses, permits,
trade secrets, proprietary or confidential information, inventions (whether or
not patented or patentable), technical information, procedures, designs,
knowledge, know-how, software, data bases, data, skill, expertise, recipes,
experience, processes, models, drawings, materials and records, goodwill
(including, without limitation, the goodwill associated with any Trademark,
Trademark registration or Trademark licensed under any Trademark License),
claims in or under insurance policies, including unearned premiums,
uncertificated securities, money, cash or cash equivalents, deposit, checking
and other bank accounts, rights to sue for past, present and future infringement
of Copyrights, Trademarks and Patents, rights to receive tax refunds and other
payments and rights of indemnification.

    

    “Goods” means any “goods,” as
such term is defined in the UCC, now owned or hereafter acquired by Borrower or
in which Borrower now holds or hereafter acquires any interest.

    

    “Indebtedness” of any Person
means at any date, without duplication and without regard to whether matured or
unmatured, absolute or contingent:  (i) all obligations of such Person
for borrowed money; (ii) all obligations of such Person evidenced by bonds,
debentures, notes, or other similar instruments; (iii) all obligations of such
Person to pay the deferred purchase price of property or services, except trade
accounts payable arising in the ordinary course of business; (iv) all
obligations of such Person as lessee under capital leases; (v) all obligations
of such Person to reimburse or prepay any bank or other Person in respect of
amounts paid under a letter of credit, banker’s acceptance, or similar
instrument, whether drawn or undrawn; (vi) all obligations of such Person
to purchase securities which arise out of or in connection with the sale of the
same or substantially similar securities; (vii) all obligations of such Person
to purchase, redeem, exchange, convert or otherwise acquire for value any
capital stock of such Person or any warrants, rights or options to acquire such
capital stock, now or hereafter outstanding, except to the extent that such
obligations remain performable solely at the option of such Person; (viii) all
obligations to repurchase assets previously sold (including any obligation to
repurchase any accounts or chattel paper under any factoring, receivables
purchase, or similar arrangement); (ix) obligations of such Person under
interest rate swap, cap, collar or similar hedging arrangements; and
(x) all obligations of others of any type described in clause (i) through
clause (ix) above guaranteed by such Person.

    

    “Insolvency Proceeding” means
(a) any case, action or proceeding before any court or other governmental
authority relating to bankruptcy, reorganization, insolvency, liquidation,
receivership, dissolution, winding-up or relief of debtors, or (b) any general
assignment for the benefit of creditors, composition, marshalling of assets for
creditors, or other, similar arrangement in respect of its creditors generally
or any substantial portion of its creditors, undertaken under U.S. Federal,
state or foreign law, including the Bankruptcy Code.

    

    “Instruments” means any
“instrument,” as such term is defined in the UCC, now owned or hereafter
acquired by Borrower or in which Borrower now holds or hereafter acquires any
interest.

    
      
         

      

      
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    “Intellectual Property” means
all Copyrights, Trademarks, Patents, Licenses, trade secrets, source codes,
customer lists, proprietary or confidential information, inventions (whether or
not patented or patentable), technical information, procedures, designs,
knowledge, know-how, software, data bases, skill, expertise, experience,
processes, models, drawings, materials, records and goodwill associated with the
foregoing.

    

    “Intellectual Property Security
Agreement” means
any Intellectual Property Security Agreement executed and delivered by Borrower
in favor of Lender, as the same may be amended, supplemented, or restated from
time to time.

    

    “Inventory” means any
“inventory,” as such term is defined in the UCC, wherever located, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest, and, in any event, shall include, without limitation, all
inventory, goods and other personal property that are held by or on behalf of
Borrower for sale or lease or are furnished or are to be furnished under a
contract of service or that constitute raw materials, work in process or
materials used or consumed or to be used or consumed in Borrower’s business, or
the processing, packaging, promotion, delivery or shipping of the same, and all
finished goods, whether or not the same is in transit or in the constructive,
actual or exclusive possession of Borrower or is held by others for Borrower’s
account, including, without limitation, all goods covered by purchase orders and
contracts with suppliers and all goods billed and held by suppliers and all such
property that may be in the possession or custody of any carriers, forwarding
agents, truckers, warehousemen, vendors, selling agents or other
Persons.

    

    “Investment Property” means
any “investment property,” as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest.

    

    “Letter of Credit Rights”
means any “letter of credit rights,” as such term is defined in the UCC, now
owned or hereafter acquired by Borrower or in which Borrower now holds or
hereafter acquires any interest, including any right to payment under any letter
of credit.

    

    “License” means any Copyright
License, Patent License, Trademark License or other license of rights or
interests now held or hereafter acquired by Borrower or in which Borrower now
holds or hereafter acquires any interest and any renewals or extensions
thereof.

    

    “Lien” means any mortgage,
deed of trust, pledge, hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any kind, whether voluntarily
incurred or arising by operation of law or otherwise, against any property, any
conditional sale or other title retention agreement, any lease in the nature of
a security interest, and the filing of any financing statement (other than a
precautionary financing statement with respect to a lease that is not in the
nature of a security interest) under the UCC or comparable law of any
jurisdiction.

    

    “Loan” means an extension of
credit by Lender under this Agreement.

    

    “Loan Documents” means,
individually and collectively, this Loan and Security Agreement, each
Supplement, each Note, the Intellectual Property Security Agreement, and any
other security or pledge agreement(s), any Warrants issued by Borrower to Lender
(or its designee) in connection with this Agreement, and all other contracts,
instruments, addenda and documents executed in connection with this Agreement or
the extensions of credit which are the subject of this Agreement.

    

    “Material Adverse Effect” or
“Material Adverse
Change” means (a) a material adverse change in, or a material adverse
effect upon, the operations, business, properties, or condition (financial or
otherwise) of Borrower; (b) a material impairment of the ability of Borrower to
perform under any Loan Document; or (c) a material adverse effect upon the
legality, validity, binding effect or enforceability against Borrower of any
Loan Document.

    

    “Maturity Date” means, with
regard to a Loan, the earlier of (i) its maturity by reason of acceleration, or
(ii) its stated maturity date; and is the date on which payment of all
outstanding principal, accrued interest, and the Final Payment with respect to
such Loan is due.

    

    “Note” means a promissory note
substantially in the form attached to the Supplement as Exhibit “A”, executed
by Borrower evidencing each Loan.

    
      
         

      

      
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    “Obligations” means all debts,
obligations and liabilities of Borrower to Lender currently existing or now or
hereafter made, incurred or created under, pursuant to or in connection with
this Agreement or any other Loan Document, whether voluntary or involuntary and
however arising or evidenced, whether direct or acquired by Lender by assignment
or succession, whether due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined, and whether Borrower may be liable
individually or jointly, or whether recovery upon such debt may be or become
barred by any statute of limitations or otherwise unenforceable; and all
renewals, extensions and modifications thereof; and all attorneys’ fees and
costs incurred by Lender in connection with the collection and enforcement
thereof as provided for in any Loan Document.

    

    “Patent License” means any
written agreement granting any right with respect to any invention on which a
Patent is in existence now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest.

    

    “Patents” means all of the
following property now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest: (a) all letters patent
of, or rights corresponding thereto in, the United States or any other country,
all registrations and recordings thereof, and all applications for letters
patent of, or rights corresponding thereto in, the United States or any other
country, including, without limitation, registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country;
(b) all reissues, continuations, continuations-in-part or extensions
thereof; (c) all petty patents, divisionals, and patents of addition; and (d)
all patents to be issued under any such applications.

    

    “Permitted Lien”
means

    

    (a)     
Involuntary Liens which, in the aggregate, would not have a Material
Adverse Effect and which in any event would not exceed, in the aggregate, the
Threshold Amount;

    

    (b)     
Liens for current taxes or other governmental or regulatory assessments
which are not delinquent, or which are contested in good faith by the
appropriate procedures and for which appropriate reserves are
maintained;

    

    (c)     
security interests on any property held or acquired by Borrower in the
ordinary course of business securing Indebtedness incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such property;
provided, that
such Lien attaches solely to the property acquired with such Indebtedness and
that the principal amount of such Indebtedness does not exceed one hundred
percent (100%) of the cost of such property;

    

    (d)     
Liens in favor of Lender;

    

    (e)     
bankers’ liens, rights of setoff and similar Liens incurred on deposits
made in the ordinary course of business;

    

    (f)     
materialmen’s, mechanics’, repairmen’s, employees’ or other like Liens
arising in the ordinary course of business and which are not delinquent for more
than 45 days or are being contested in good faith by appropriate
proceedings;

    

    (g)     
any judgment, attachment or similar Lien, unless the judgment it secures
has not been discharged or execution thereof effectively stayed and bonded
against pending appeal within 30 days of the entry thereof;

    

    (h)     
licenses or sublicenses of Intellectual Property  in accordance
with the terms of Section 6.5 hereof;

    

    (i)      
Liens securing Subordinated Debt; and

    

    (j)     
Liens which have been approved by Lender in writing prior to the Closing
Date, as shown on the Schedule of Exceptions hereto.

    

    “Person” means any individual,
sole proprietorship, partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, other entity or government (whether federal, state,
county, city, municipal, local, foreign, or otherwise, including any
instrumentality, division, agency, body or department thereof).

    
      
         

      

      
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    “Proceeds” means “proceeds,”
as such term is defined in the UCC and, in any event, shall include, without
limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other
forms of money or currency or other proceeds payable to Borrower from time to
time in respect of the Collateral, (b) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Borrower from time to time with
respect to any of the Collateral, (c) any and all payments (in any form
whatsoever) made or due and payable to Borrower from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of all
or any part of the Collateral by any governmental authority (or any Person
acting under color of governmental authority), (d) any claim of Borrower against
third parties (i) for past, present or future infringement of any
Copyright, Patent or Patent License or (ii) for past, present or future
infringement or dilution of any Trademark or Trademark License or for injury to
the goodwill associated with any Trademark, Trademark registration or Trademark
licensed under any Trademark License and (e) any and all other amounts from time
to time paid or payable under or in connection with any of the
Collateral.

    

    “Receivables” means all of
Borrower’s Accounts, Instruments, Documents, Chattel Paper, Supporting
Obligations, and letters of credit and Letter of Credit Rights.

    

    “Records” means all Borrower’s
computer programs, software, hardware, source codes and data processing
information, all written documents, books, invoices, ledger sheets, financial
information and statements, and all other writings concerning Borrower’s
business.

    

    “Related Person” means any
Affiliate of Borrower, or any officer, employee, director or equity security
holder of Borrower or any Affiliate.

    

    “Rights to Payment” means all
Borrower’s accounts, instruments, contract rights, documents, chattel paper and
all other rights to payment, including, without limitation, the Accounts, all
negotiable certificates of deposit and all rights to payment under any Patent
License, any Trademark License, or any commercial or standby letter of
credit.

    

    “Security Documents” means
this Loan and Security Agreement, the Supplement hereto, the Intellectual
Property Security Agreement, and any and all account control agreements,
collateral assignments, chattel mortgages, financing statements, amendments to
any of the foregoing and other documents from time to time executed or filed to
create, perfect or maintain the perfection of Lender’s Liens on the
Collateral.

    

    “Shares” means: (a) one
hundred percent (100%) of the issued and outstanding capital stock, membership
units or other securities owned or held of record by Borrower in any domestic
Subsidiary, and (b) 65% of the issued and outstanding capital stock, membership
units or other securities entitled to vote owned or held of record by Borrower
in any Subsidiary that is a controlled foreign corporation (as defined in the
Internal Revenue Code).

    

    “Subordinated Debt” means
Indebtedness (i) approved by Lender; and (ii) where the holder’s right to
payment of such Indebtedness, the priority of any Lien securing the same, and
the rights of the holder thereof to enforce remedies against Borrower following
default have been made subordinate to the Liens of Lender and to the prior
payment to Lender of the Obligations, pursuant to a written subordination
agreement approved by Lender in its sole but reasonable discretion.

    

    “Subsidiary” means any Person
a majority of the equity ownership or voting stock of which is at the time owned
by Borrower.

    

    “Supplement” means that
certain supplement to the Loan and Security Agreement, as the same may be
amended or restated from time to time, and any other supplements entered into
between Borrower and Lender, as the same may be amended or restated from time to
time.

    

    “Supporting Obligations” means
any “supporting obligations,” as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest.

    

    “Termination Date” has the
meaning specified in the Supplement.

    

    “Threshold Amount” has the
meaning specified in the Supplement.

    

    “Trademark License” means any
written agreement granting any right to use any Trademark or Trademark
registration now owned or hereafter acquired by Borrower or in which Borrower
now holds or hereafter acquires any interest.

    

    “Trademarks” means all of the
following property now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest: (a) all trademarks,
tradenames, corporate names, business names, trade styles, service marks, logos,
other source or business identifiers, prints and labels on which any of the
foregoing have appeared or appear, designs and general intangibles of like
nature, now existing or hereafter adopted or acquired, all registrations and
recordings thereof, and any applications in connection therewith, including,
without limitation, registrations, recordings and applications in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof and (b) reissues, extensions or renewals
thereof.

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    

    “UCC” means the Uniform
Commercial Code as the same may, from time to time, be in effect in the State of
California; provided, that in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, Lender’s
Lien on any Collateral is governed by the Uniform Commercial Code as enacted and
in effect in a jurisdiction other than the State of California, the term “UCC”
shall mean the Uniform Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes of the provisions thereof relating to such
attachment, perfection, priority or remedies and for purposes of definitions
related to such provisions.  Unless otherwise defined herein, terms
that are defined in the UCC and used herein shall have the meanings given to
them in the UCC.

    

    [Signature
page follows]

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

    [Signature page to Loan and Security
Agreement]

    

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

    
      

      BORROWER:

      

      OCULUS
INNOVATIVE SCIENCES, INC.

      

      
        
          	
                  By:

                	
                  /s/ Robert E. Miller

                
	
                  Name:

                	
                  Robert E. Miller

                
	
                  Title:

                	
                  Chief Financial
  Officer

                

        

      

      

      LENDER:

      

      VENTURE
LENDING & LEASING V, INC.

      

      
        
          
            
              
                	
                        By:

                      	
                        /s/
      Maurice Werdegar

                      
	
                        Name:

                      	
                        Maurice
      Werdegar

                      
	
                        Title:

                      	
                        President
      and
CEO

                      

              

            

          

        

      

    

    

     

    
      
         

      

      
        23

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