Document:

ex10_2.htm

    
      EXHIBIT
10.2

       

    

    NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF
THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

     

    
      
        	
                Original
      Issue Date:  ______________, 2010

              	
                Original
      Principal
Amount:  $____________

              

      

    

     

    CDEX
INC.

    10%
SENIOR CONVERTIBLE NOTE

    

    THIS NOTE
is one of a series of duly authorized and validly issued 10% Senior Convertible
Notes of CDEX Inc., a Nevada corporation (the “Company”), having its
principal place of business at 4555 South Palo Verde Road, Suite 123, Tucson, AZ
85714, designated as its 10% Senior Convertible Notes (this Note, the “Note” and,
collectively with the other Notes of such series, the “Notes”).

    

    FOR VALUE
RECEIVED, the Company promises to pay to the order of __________________________
or its registered assigns (the “Holder”), or shall
have paid pursuant to the terms hereunder, the principal sum of
US$_______________ on February 1, 2012 (subject to acceleration as set forth
herein, the “Maturity
Date”) or such earlier date as this Note is required or permitted to be
repaid as provided hereunder, and to pay accrued and unpaid interest to the
Holder on the aggregate unconverted and then outstanding principal amount of
this Note in accordance with the provisions hereof.

    

    The
Company’s obligations under this Note and the other Transaction Documents shall
be, effective as of the Security Effective Date (if it occurs), secured by the
Collateral (as defined in the Security Agreement, including without limitation
all of the Company’s Intellectual Property) pursuant to the terms of the
Security Documents.

    

    This Note
is subject to the following additional provisions:

    

    Section
1.           
  Definitions.  For
the purposes hereof, in addition to the terms defined elsewhere in this Note (a)
initially capitalized terms not otherwise defined herein shall have the meanings
set forth in the Purchase Agreement (including without limitation those
incorporated therein by reference) and (b) the following terms shall have the
following meanings:

    

    “Alternate
Consideration” shall have the meaning set forth in Section
5(e).

    

    “Buy-In” shall have
the meaning set forth in Section 4(d)(v).

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “Cash Flow Positive”
means that, for a fiscal period, the Company’s cash flows from operating
activities is positive (i.e., net cash is provided by operating activities as
opposed to net cash being used by operating activities) for such period, as
determined in accordance with generally accepted accounting principles
consistently applied.

    

    “Common Stock
Equivalents” mean Convertible Securities and/or Options.

    

    “Conversion Date”
shall have the meaning set forth in Section 4(a).

    

    “Conversion Price”
shall have the meaning set forth in Section 4(b).

    

    “Conversion Shares”
means, collectively, the shares of Common Stock issued or issuable upon
conversion or redemption of this Note in accordance with the terms hereof,
including without limitation shares of Common Stock issued or issuable as
interest hereunder or as damages under the Transaction Documents.

    

    “Note Register” shall
have the meaning set forth in Section 2(c).

    

    “Event of Default”
shall have the meaning set forth in Section 8.

    

    “Forced Conversion”
shall have the meaning set forth in Section 6(b).

    

    “Forced Conversion
Amount” shall have the meaning set forth in Section 6(b).

    

    “Forced Conversion
Date” shall have the meaning set forth in Section 6(b).

    

    “Forced Conversion
Notice” shall have the meaning set forth in Section 6(b).

    

    “Forced Conversion Notice
Date” shall have the meaning set forth in Section 6(b).

    

    “Late Fees” shall have
the meaning set forth in Section 2(c).

    

    “Mandatory Default
Amount”  means the sum of (i) the greater of (A) 130% of the
outstanding principal amount of this Note, plus 100% of accrued and unpaid
interest hereon, or (B) the outstanding principal amount of this Note, plus all
accrued and unpaid interest hereon, divided by the Conversion Price on the date
the Mandatory Default Amount is either (a) demanded (if demand or notice is
required to create an Event of Default) or otherwise due or (b) paid in full,
whichever has a lower price, multiplied by the VWAP on the date the Mandatory
Default Amount is either (x) demanded or otherwise due or (y) paid in full,
whichever has a higher VWAP, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of this Note.

     

    “New York Courts”
shall have the meaning set forth in Section 9(d).

    

    “Notice of Conversion”
shall have the meaning set forth in Section 4(a).

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “Original Issue Date”
means the date of the issuance of this Note, regardless of any transfers of any
Note and regardless of the number of instruments which may be issued to evidence
this Note.

    

    “Permitted
Indebtedness” means (a) the indebtedness evidenced by the Notes, (b) the
Indebtedness existing on the first Closing Date, provided that the terms of any
such Indebtedness have not been changed from the terms existing on the first
Closing Date, (c) lease obligations and purchase money indebtedness of up to
$100,000, in the aggregate, incurred in connection with the acquisition of
capital assets and lease obligations with respect to newly acquired or leased
assets, (d)
Indebtedness that (i) is expressly subordinate to the Notes pursuant to a
written subordination agreement with the Purchasers that is acceptable to the
Requisite Purchasers in their sole and absolute discretion and (ii) matures at a
date later than the Maturity Date, and (iii) is approved in advance in writing
by Requisite Purchasers (which approval may be denied in the Purchasers’ sole
discretion) and (e) up to the Permitted Principal Amount of unsecured
Indebtedness which is pari
passu with the Notes, provided such Indebtedness (1) is issued on or
prior to August 1, 2010, (2) is on terms not in any material way more favorable
to the lender thereof than the terms to the holders of Notes under the Notes and
Transaction Documents, and (3) contains a longer maturity term than the Notes
for all payments thereunder and a conversion price of no less than $0.10 per
share, where the “Permitted Principal Amount” means $4 million less the amount
of Notes issued prior to April 1, 2010 (whether for cash or exchange of existing
notes or debt or otherwise).

    

    “Permitted Lien” means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or
asset subject to such Lien; and (c) Liens created pursuant to the Security
Documents entered into in connection with the issuance of the
Notes.

     

    “Purchase Agreement”
means the Securities Purchase Agreement pursuant to which this Note was issued,
dated on or about the date hereof, among the Company and the original purchasers
of Notes, as amended, modified or supplemented from time to time in accordance
with its terms.

    

    “Registration
Statement” means an effective registration statement under the Securities
Act that registers the resale of all Conversion Shares of the Holder, names the
Holder as a “selling stockholder” therein, and contains a current prospectus not
subject to any blackout, suspension or stop order.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Share Delivery Date”
shall have the meaning set forth in Section 4(d).

    

    “Threshold Period”
shall have the meaning set forth in Section 6(b).

     

    
      Section
2.          
       Maturity Date; Interest;
Late Fees.

      

      a)         
      Maturity
Date.  The Maturity Date shall be the date set forth on the
first page hereof as the Maturity Date, provided that if the Company is not Cash
Flow Positive:

      

      
        	
                 
      

              	
                i.

              	
                for
      at least one fiscal quarter ending on or prior to January 31, 2011, in
      each case as disclosed in the Company’s Quarterly Report for such quarter
      (“Milestone
      1”); or

              

      

      

      
        	
                 
      

              	
                ii.

              	
                for
      3 out of the 4 consecutive fiscal quarters ending October 31, 2011, as
      disclosed in the Company’s Annual Report covering such quarters (or as
      disclosed in the Company’s earlier Quarterly Reports for such quarters if
      the Company should have two fiscal quarters which are not Cash Flow
      Positive during such period) (“Milestone
      2”);

              

      

       

    

    
      	
               
      

            	
              then,
      at the Holder’s option, the Holder may elect to accelerate the Maturity
      Date such that this Note shall become immediately due and
      payable.  The Company shall disclose the Company’s cash flow
      position to all the Holders of Notes at the same time, provided that
      nothing contained herein shall limit the Company’s restrictions in the
      Transaction Documents with respect to the disclosure of material
      non-public information.  The Holder may elect such acceleration
      as soon as it is able to reasonably determine that any such Milestone
      cannot be satisfied.

            

    

    

    b)         
     Interest.  Interest
shall accrue daily on the outstanding principal amount of this Note at a rate
per annum equal to 10%.  On the Maturity Date, the Company shall pay
to the Holder all accrued but unpaid interest hereunder.  Interest
shall be calculated on the basis of a 365-day year and actual days elapsed and
shall accrue daily commencing on the Original Issue Date until payment in full
of the outstanding principal, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has been
made.  Interest hereunder will be paid to the Person in whose name
this Note is registered on the records of the Company regarding registration and
transfers of this Note (the “Note
Register”).

    

    c)          
     Late
Fees.  All overdue accrued and unpaid amounts to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser of 24%
per annum or the maximum rate permitted by applicable law (“Late Fees”) which
shall accrue daily from the date such amount is due hereunder through and
including the date of actual payment in full.

    

    Section
3.            
     Registration of Transfers
and Exchanges.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    a)        
    Different
Denominations. This Note is exchangeable for an equal aggregate principal
amount of Notes of different authorized denominations, as requested by the
Holder surrendering the same.  No service charge will be payable for
such exchange.

     

    b)             Investment
Representations.  This Note has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement and applicable federal and state securities laws and
regulations.

    

    c)             Reliance on Note
Register.  Prior to due presentment for transfer to the Company
of this Note, the Company and any agent of the Company may treat the Person in
whose name this Note is duly registered on the Note Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other
purposes, whether or not this Note is overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.

    

    Section
4.        
      Conversion.

     

    a)             Voluntary Conversion.
At any time after the Original Issue Date until this Note is no longer
outstanding, this Note shall be convertible, in whole or in part, into shares of
Common Stock at the option of the Holder, at any time and from time to time
(subject to the conversion limitations set forth in Section 4(c)
hereof).  The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A (a “Notice of
Conversion”), specifying therein the principal amount of this Note to be
converted and the date on which such conversion shall be effected (such date,
the “Conversion
Date”).  If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder.  To effect conversions hereunder, the
Holder shall not be required to physically surrender this Note to the Company
unless the entire principal amount of this Note, plus all accrued and unpaid
interest thereon, has been so converted. Conversions hereunder shall have the
effect of lowering the outstanding principal amount of this Note in an amount
equal to the applicable conversion.  The Holder and the Company shall
maintain records showing the principal amount(s) converted and the date of such
conversion(s).  In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative in the absence of
manifest error. The Holder, and any assignee by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Note, the unpaid and unconverted
principal amount of this Note may be less than the amount stated on the face
hereof.

     

    b)             Conversion
Price.  The conversion price shall be equal to [$0.08,]
[[$0.05, provided that after the first $800,000 in principal amount hereunder
has been converted, the conversion price hereunder shall be increased to equal
$0.08,]1 subject
in each case to adjustment herein (the “Conversion
Price”).

    

      

    

    
      
        1 The
Conversion Price is $0.08, except $800,000 of principal under the Note issued to
Gemini Master Fund, Ltd. is convertible at $0.05.

         

      

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    c)             Conversion Limitation –
Holder’s Restriction on Conversion. Notwithstanding anything to the
contrary contained herein, the Company shall not effect any conversion of this
Note, and the Holder shall not have the right to convert any portion of this
Note (or otherwise acquire Conversion Shares with respect to this Note), to the
extent that after giving effect to the issuance of Common Stock upon such
conversion (or other issuance), the Holder Group would beneficially own in
excess of the Maximum Ownership Percentage of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock upon such conversion (including for such purpose the shares of
Common Stock issuable upon such conversion or issuance) (“Beneficial Ownership
Limitation”).  For purposes of calculating the Beneficial
Ownership Limitation, the number of shares of Common Stock beneficially owned by
the Holder Group shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder (including
without limitation Regulation 13D-G), provided, however, that such
beneficial ownership shall exclude any shares of Common Stock issuable upon
conversion, exchange or exercise of (or purchase of Common Stock under) any
Convertible Securities or Options outstanding at the time of determination and
beneficially owned by the Holder Group which contain a limitation on conversion,
exchange, exercise or purchase analogous to the Beneficial Ownership Limitation
contained herein.  To the extent that the Beneficial Ownership
Limitation contained herein applies, the determination of whether and to what
extent this Note is convertible (vis-à-vis other Convertible Securities or
Options, including without limitation other Notes, beneficially owned by the
Holder Group) shall be on the basis of first submission to the Company for
conversion, exchange, exercise or purchase, as the case may be, or as otherwise
determined in the sole discretion of the Holder, and the submission of a Notice
of Conversion shall be deemed to be the Holder’s determination of whether and to
what extent this Note is convertible (vis-à-vis such other Convertible
Securities or Options), in each case subject to the Beneficial Ownership
Limitation.  In determining the number of outstanding shares of Common
Stock for purposes of calculating the Beneficial Ownership Limitation, the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (i) the Company’s most recent Periodic Report containing such information,
(ii) a more recent public announcement by the Company, or (iii) any other notice
or disclosure by the Company or the Company’s Transfer Agent setting forth the
number of shares of Common Stock outstanding, and the Holder may rely on
knowledge it may have concerning any shares of Common Stock issued which are not
reflected in the preceding clauses (i) through (iii) (e.g., issuances to the Holder
upon a prior Note conversion since the date as of which such number of
outstanding shares of Common Stock was reported).  Upon the written or
oral request of the Holder, the Company shall within two (2) Business Days
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding.  Each delivery of a Notice of Conversion by the
Holder will constitute a representation by the Holder that it has evaluated the
limitation set forth in this Section 4(c) and determined, based on this Section
4(c), that the issuance of the full number of Conversion Shares requested in
such Notice of Conversion is permitted under this Section 4(c), and the Company
shall have no obligation to verify or confirm such determination.  No
conversion of this Note in violation of this Section 4(c) but otherwise in
accordance with this Note shall affect the status of the Conversion Shares as
validly issued, fully-paid and nonassessable.  By written notice to
the Company, the Holder may at any time and from time to time increase or
decrease the Maximum Ownership Percentage to any other percentage specified in
such notice (or specify that the Beneficial Ownership Limitation shall no longer
be applicable), provided,
however, that (A) any such increase (or inapplicability) shall not be
effective until the sixty-first (61st) day after such notice is delivered to the
Company, (B) any such increase or decrease shall apply only to the Holder and
not to any other holder of Notes, and (C) the Maximum Ownership Percentage shall
not be less than 4.9%.  The provisions of this Section 4(c) shall be
construed and implemented in a manner otherwise than in strict conformity with
the terms of this Section 4(c) to correct this provision (or any portion hereof)
which may be defective or inconsistent with the intended Beneficial Ownership
Limitation contained herein or to make changes or supplements necessary or
desirable to properly give effect to such limitation.  The Beneficial
Ownership Limitation contained in this Section shall apply to a successor Holder
of this Note.  If at any time the Beneficial Ownership Limitation
makes this Note unconvertible in whole or in part, the Company shall not by
reason thereof be relieved of its obligation to issue shares of Common Stock at
any time or from time to time thereafter upon conversion of this Note as and
when shares of Common Stock may be issued in compliance with such
limitation.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    
      d)             Mechanics of
Conversion.

    

     

    i.           Conversion Shares Issuable
Upon Conversion of Principal Amount.  The number of Conversion
Shares issuable upon a conversion hereunder shall be determined by the quotient
obtained by dividing (x) the outstanding principal amount of this Note to be
converted plus any accrued but unpaid interest thereon, by (y) the Conversion
Price.

    

    ii.          Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each Conversion Date
(the “Share Delivery
Date”), the Company shall deliver, or cause to be delivered, to the
Holder a certificate or certificates representing the Conversion Shares which,
on or after the Legend Removal Date, shall be free of restrictive legends and
trading restrictions (other than those which may then be required by the
Purchase Agreement) representing the number of Conversion Shares being acquired
upon the conversion of this Note.  On or after the date which is six
months following the Original Issue Date on which this Note is issued, the
Company shall use its best efforts to deliver any certificate(s) or shares
required to be delivered by the Company under this Section 4 electronically
through the Depository Trust Company or another established clearing corporation
performing similar functions.

     

    iii.         Failure to Deliver
Certificates.  If in the case of any Notice of Conversion such
certificate(s) or shares are not delivered to or as directed by the applicable
Holder by the third Trading Day after the Conversion Date, the Holder shall be
entitled to elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original Note
delivered to the Company and the Holder shall promptly return to the Company the
Common Stock certificates representing the principal amount of this Note
unsuccessfully tendered for conversion to the Company.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    iv.        Obligation Absolute; Partial
Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Note in accordance with
the terms hereof are absolute and unconditional, irrespective of any action or
inaction by the Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment, limitation
or termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged violation of
law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.  In the event the Holder of this
Note shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder
or anyone associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from a
court, on notice to the Holder, restraining and or enjoining conversion of all
or part of this Note shall have been sought and obtained, and the Company posts
a surety bond for the benefit of the Holder in the amount of 150% of the
outstanding principal amount of this Note, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the underlying dispute and the proceeds of which shall be payable to the
Holder to the extent it obtains judgment.  In the absence of such
injunction, the Company shall issue Conversion Shares or, if applicable, cash,
upon a properly noticed conversion.  If the Company fails for any
reason to deliver to the Holder such certificate(s) or shares pursuant to
Section 4(d)(ii) by the second Trading Day after the Share Delivery Date, the
Company shall pay to the Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day on the fifth Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such second
Trading Day after the Share Delivery Date until such certificates are
delivered.  Nothing herein shall limit a Holder’s right to pursue
actual damages or declare an Event of Default pursuant to Section 8 hereof for
the Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.  The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    v.         Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion. In addition to
any other rights available to the Holder, if the Company fails for any reason to
deliver to the Holder such certificate(s) or shares by the Share Delivery Date
pursuant to Section 4(d)(ii), and if after such Share Delivery Date the Holder
is required by its brokerage firm to purchase (in an open market transaction or
otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common
Stock to deliver in satisfaction of a sale by the Holder of the Conversion
Shares which the Holder was entitled to receive upon the conversion relating to
such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including any brokerage commissions) for the Common Stock
so purchased exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that the Holder was entitled to receive from the conversion at
issue multiplied by (2) the actual sale price at which the sell order giving
rise to such purchase obligation was executed (including any brokerage
commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Note in a principal amount equal to the principal amount of
the attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued if the Company had timely complied with its
delivery requirements under Section 4(d)(ii).  For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of this Note with respect to
which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000.  The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect
of the Buy-In and, upon request of the Company, evidence of the amount of such
loss.  Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.

     

    vi.        Reservation of Shares
Issuable Upon Conversion. The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock for the sole purpose of issuance upon conversion of this Note and payment
of interest on this Note, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of Persons other than the Holder
(and the other holders of the Notes), not less than such aggregate number of
shares of the Common Stock as shall (subject to the terms and conditions set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments of Section 5) upon the conversion of the outstanding principal
amount of this Note and payment of interest hereunder.  The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly authorized, validly issued, fully paid and nonassessable and, if
the Registration Statement is then effective under the Securities Act, shall be
registered for public sale in accordance with such Registration
Statement.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    vii.       Fractional Shares. No
fractional shares or scrip representing fractional shares shall be issued upon
the conversion of this Note.  As to any fraction of a share which the
Holder would otherwise be entitled to purchase upon such conversion, the Company
shall at its election, either pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Conversion Price
or round up to the next whole share.

    

    viii.      Transfer
Taxes.  The issuance of certificates for shares of the Common
Stock on conversion of this Note shall be made without charge to the Holder
hereof for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificates, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder of this Note and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

    

    Section
5.          
    Certain
Adjustments.

     

    a)             Stock Dividends and Stock
Splits.  If the Company, at any time while this Note is
outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any
Common Stock Equivalents (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon conversion of, or payment of
interest on, the Notes); (B) subdivides outstanding shares of Common Stock into
a larger number of shares; (C) combines (including by way of a reverse stock
split) outstanding shares of Common Stock into a smaller number of shares; or
(D) issues, in the event of a reclassification of shares of the Common Stock,
any shares of capital stock of the Company, then the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding any treasury shares of the Company) outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such
event.  Any adjustment made pursuant to this Section shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

     

    b)             Subsequent Equity
Sales.  The Conversion Price is subject to Full Ratchet
Anti-Dilution Adjustment.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    c)             Subsequent Rights
Offerings.  If the Company, at any time while the Note is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share that is lower than the VWAP on the record date
referenced below, then the Conversion Price shall be multiplied by a fraction of
which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares
issued (assuming delivery to the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at such
VWAP.  Such adjustment shall be made whenever such rights or warrants
are issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.

     

    d)             Pro Rata
Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Common Stock (and not to the Holders
in their capacity as holders of Notes) evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe for or
purchase any security (other than the Common Stock, which shall be subject to
Section 5(b)), then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the VWAP determined as of the
record date mentioned above, and of which the numerator shall be such VWAP on
such record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
1 outstanding share of the Common Stock as determined by the Board of Directors
of the Company in good faith.  In either case the adjustments shall be
described in a statement delivered to the Holder describing the portion of
assets or evidences of indebtedness so distributed or such subscription rights
applicable to 1 share of Common Stock.  Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date mentioned above.

     

    e)             Fundamental
Transaction. If, at any time while this Note is outstanding, the Company
effects or there otherwise occurs a Fundamental Transaction, then, upon any
subsequent conversion of this Note, the Holder shall have the right to receive,
for each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled
to receive upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of 1 share of
Common Stock (the “Alternate
Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of 1 share of Common Stock in such Fundamental Transaction,
and the Company shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration.  If holders of
Common Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of this
Note following such Fundamental Transaction.  To the extent necessary
to effectuate the foregoing provisions, any successor to the Company or
surviving entity in such Fundamental Transaction shall issue to the Holder a new
Note consistent with the foregoing provisions and evidencing the Holder’s right
to convert such Note into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this Section 5(e) and insuring that this Note (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    f)             Calculations.  All
calculations under this Section 5 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.  For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding any treasury shares of the Company) issued and
outstanding.

    

    g)             Notice to the
Holder.

    

    i.          Adjustment to Conversion
Price.  Whenever the Conversion Price is adjusted pursuant to
any provision of this Section 5, the Company shall promptly deliver to each
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment.

     

    ii.         Notice to Allow Conversion
by Holder.  If (A) the Company shall declare a dividend (or any
other distribution in whatever form) on the Common Stock, (B) the Company shall
declare a special nonrecurring cash dividend on or a redemption of the Common
Stock, (C) the Company shall authorize the granting to all holders of the Common
Stock of rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights, (D) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property or (E) the Company
shall authorize the voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Company, then, in each case, the Company shall cause to
be filed at each office or agency maintained for the purpose of conversion of
this Note, and shall cause to be delivered
to the Holder at its last address as it shall appear upon the Note Register, at
least 20 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, redemption, rights
or warrants, or if a record is not to be taken, the date as of which the holders
of the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to
exchange their shares of the Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange, provided that the failure to deliver such notice or any defect
therein or in the delivery thereof shall not affect the validity of the
corporate action required to be specified in such notice.  The Holder
is entitled to convert this Note during the 20-day period commencing on the date
of such notice through the effective date of the event triggering such
notice.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    Section
6.       
       Redemption and Forced
Conversion.

    

    a)             No
Prepayment/Redemption.  The
Company may not prepay or redeem this Note in whole or in part without the prior
written consent of the Holder, and to the extent the Company agrees with any
other holder of Notes to prepay or redeem such holder’s Notes in whole or in
part, the Company shall offer such prepayment or redemption of this Note on a
pro rata basis on the same terms and conditions as agreed upon for such other
Notes.

    

    b)             Forced Conversion.
Notwithstanding anything contained herein to the contrary, if after the date which is six months following the
Original Issue Date (i) the Daily VWAP for any 20 out of 30 consecutive Trading
Days (such 30 Trading Day period being the “Threshold Period”)
exceeds $0.15 (“Threshold Price”),
and (ii) the average number of shares of Common Stock traded per day on the
Principal Market during such Threshold Period exceeds 250,000 (“Threshold Volume”)
(such Threshold Price and Threshold Volume subject to appropriate and equitable
adjustment for reverse and forward stock splits, stock dividends, stock
combinations and other similar transactions of the Common Stock that occur after
the date of the Purchase Agreement),  then the Company may, within 1
Trading Day after the end of any such Threshold Period, deliver a written notice
to the Holder (a “Forced Conversion
Notice” and the date such notice is delivered to the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert all or part of the then outstanding
principal amount of this Note as specified in such Forced Conversion Notice
(“Forced Conversion
Amount”) at the Conversion Price then in effect (“Forced Conversion”)
on or prior to the twentieth (20th)
Trading Day following the Holder’s receipt of such Forced Conversion Notice
(such date, the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not be
effective, unless all Equity Conditions are met (unless waived in writing by the
Holder) on each Trading Day occurring during the applicable Threshold Period
through and including the later of the Forced Conversion Date and the Trading
Day after the date such Conversion Shares pursuant to such conversion are
delivered to the Holder.  Any Forced Conversion shall be applied
ratably to all Holders based on their original principal amount of Notes,
provided that any voluntary conversions by a Holder shall be applied against the
Holder’s pro rata allocation, thereby decreasing the aggregate amount forcibly
converted hereunder if only a portion of this Note is forcibly
converted.  For purposes of clarification, a Forced Conversion shall
be subject to all of the provisions of Section 4, including without limitation
the provision requiring payment of liquidated damages and limitations on
conversions.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    Section
7.       
       Negative Covenants.
As long as any portion of this Note remains outstanding, unless the holders of
at least 67% in principal amount of the then outstanding Notes shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on any Closing Date)
to, directly or indirectly:

    

    a)             other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;

     

    b)             other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned
or hereafter acquired or any interest therein or any income or profits
therefrom;

    

    c)             amend its charter documents, including, without
limitation, its certificate of incorporation and bylaws, in any manner that
materially and adversely affects any rights of the Holder;

    

    d)             repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its Common Stock or Common Stock Equivalents other than as to the
Conversion Shares as permitted or required under the Transaction Documents
(except to the extent provided for in the Purchase Agreement);

    

    e)             repay, repurchase or offer to repay, repurchase or
otherwise acquire any Indebtedness, other than regularly scheduled principal and
interest payments as such terms are in effect as of the Closing Date (and
except for the Notes in accordance with the terms
of the Notes and except to the extent provided for in the Purchase
Agreement);

    

    f)         
    repay, repurchase or offer
to repay, repurchase or otherwise acquire any indebtedness to any current or
former employees, officers or directors of the Company (except to the
extent provided for in the Purchase Agreement);

    

    g)             pay cash dividends or distributions on any equity
securities of the Company;

    

    h)            enter
into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or

    

    i)            
enter into any agreement with respect to any of the foregoing.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    Section
8.        
      Events of
Default.

    

    a)             “Event of Default”
means, wherever used herein, any of the following events (whatever the reason
for such event and whether such event shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):

    

    i.         
  any default in the payment of (A) the principal amount of any Note
or (B) interest, liquidated damages and other amounts owing to a Holder on any
Note, as and when the same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise) which default, solely
in the case of an interest payment or other default under clause (B) above, is
not cured within 3 Trading Days;

     

    ii.           the
Company shall fail to observe or perform any other covenant or agreement
contained in the Notes (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion, which breach is
addressed in clause (xiii) below) which failure is not cured, if possible to
cure, within 5 Trading Days after notice of such failure sent by the
Holder or by any other Holder;

    

    iii.          a
default or event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) in any material respect shall
occur under (A) any of the Transaction Documents or (B) any other material
agreement, lease, document or instrument to which the Company or any Subsidiary
is obligated (and not covered by clause (vi) below);

    

    iv.          any representation
or warranty made in this Note, any other Transaction Document, any written
statement pursuant hereto or thereto or any other report, financial statement or
certificate made or delivered to the Holder or any other Holder shall be untrue or incorrect in any material respect as
of the date when made or deemed made;

    

    v.           the
Company or any Subsidiary shall be subject to a Bankruptcy Event;

     

    vi.          the
Company or any Subsidiary shall default on any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an
obligation greater than $100,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    vii.         if
at any time the Common Stock shall not be eligible for listing or quotation for
trading on an Eligible Market and shall not be eligible to resume listing or
quotation for trading thereon within five (5) Trading Days;

    

    viii.        the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction) (except to the
extent provided for in the Purchase Agreement);

    

    ix.           if at any time after three months following the Closing
Date the Company is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act or has failed to file all reports required to be
filed thereunder during the then preceding 12 months (or such shorter period
that the Company was required to file such reports);

    

    x.           any material adverse change in the condition, value or
operation of a material portion of the Intellectual
Property;

    

    xi.          the
Company shall fail for any reason to deliver certificates to a Holder prior to
the fifth Trading Day after a Conversion Date or any Forced Conversion Date
pursuant to Section 4(d) or the Company shall provide at any time notice to the
Holder, including by way of public announcement, of the Company’s intention to
not honor requests for conversions of any Notes in accordance with the terms
hereof; or

    

    xii.         any
monetary judgment, writ or similar final judicial or arbitration process shall
be entered or filed against the Company, any subsidiary or any of their
respective property or other assets for more than $100,000, and such judgment,
writ or similar final process shall remain unvacated, unbonded or unstayed for a
period of 45 calendar days.

    

    b)             Remedies Upon Event of
Default. If any Event of Default occurs, the outstanding principal amount
of this Note, plus accrued but unpaid interest, liquidated damages and other
amounts owing in respect thereof through the date of acceleration, shall become,
at the Holder’s election, immediately due and payable in cash at the Mandatory
Default Amount.  After the occurrence and during the continuance of
any Event of Default, the interest rate on this Note shall accrue at an interest
rate equal to the lesser of 24% per annum or the maximum rate permitted under
applicable law.  Upon the payment in full of the Mandatory Default
Amount, the Holder shall promptly surrender this Note to or as directed by the
Company.  In connection with such acceleration described herein, the
Holder need not provide, and the Company hereby waives, any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable
law.  Such acceleration may be rescinded and annulled by Holder at any
time prior to payment hereunder and the Holder shall have all rights as a holder
of the Note until such time, if any, as the Holder receives full payment
pursuant to this Section 8(b).  No such rescission or annulment shall
affect any subsequent Event of Default or impair any right consequent
thereon.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    Section
9.       
       Miscellaneous.

     

    a)             Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion, shall
be in writing and delivered personally, by facsimile, by email, or sent by a
nationally recognized overnight courier service, addressed to the Company, at
the address set forth above, or such other facsimile number, email address or
mailing address as the Company may specify for such purpose by notice to the
Holder delivered in accordance with this Section 9.  Any and all
notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, by email
or sent by a nationally recognized overnight courier service addressed to each
Holder at the facsimile number or address of the Holder appearing on the books
of the Company, or if no such facsimile number or address appears, at the
principal place of business of the Holder.  Except as may otherwise be
provided herein, any notice or other communication or deliveries hereunder shall
be deemed given and effective on the earliest of (i) the date of transmission,
if such notice or communication is delivered via facsimile or by email prior to
5:30 p.m. (New York City time) on a Trading Day, with
electronic confirmation of such delivery, (ii) the first Trading Day immediately
following the date of transmission, if such notice or communication is delivered
via facsimile or by email not on a Trading Day or between 5:30 p.m. (New York
City time) and  11:59 p.m. (New York City time) on any date, with
electronic confirmation of such delivery, (iii) the second Business Day
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.  The address, facsimile and email address for
such notices and communications shall be as set forth on the signature pages
attached to the Purchase Agreement.

     

    b)             Absolute Obligation.
Except as expressly provided herein, no provision of this Note shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, liquidated damages and accrued interest, as applicable, on
this Note at the time, place, and rate, and in the coin or currency, herein
prescribed.  This Note is a direct debt obligation of the
Company.  This Note ranks pari passu with all other
Notes now or hereafter issued under the terms set forth herein.

     

    c)             Lost or Mutilated
Note.  If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Note, or in lieu of or in substitution
for a lost, stolen or destroyed Note, a new Note for the principal amount of
this Note so mutilated, lost, stolen or destroyed, but only upon receipt of
evidence of such loss, theft or destruction of such Note, and of the ownership
hereof, reasonably satisfactory to the Company.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    d)             Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York,
without regard to the principles of conflict of laws thereof.  Each
party agrees that all legal proceedings concerning the interpretation,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the “New York
Courts”).  Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of any of
the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such New York Courts, or such New York Courts are
improper or inconvenient venue for such proceeding.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Note and
agrees that such service shall constitute good and sufficient service of process
and notice thereof.  Nothing contained herein shall be deemed to limit
in any way any right to serve process in any other manner permitted by
applicable law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Note or the transactions
contemplated hereby. If either party shall commence an action or proceeding to
enforce any provisions of this Note, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its reasonable attorney’s
fees and other reasonable costs and expenses reasonably incurred in the
investigation, preparation and prosecution of such action or
proceeding.

     

    e)             Waiver.  Any
waiver by the Company or the Holder of a breach of any provision of this Note
shall not operate as or be construed to be a waiver of any other breach of such
provision or of any breach of any other provision of this Note.  The
failure of the Company or the Holder to insist upon strict adherence to any term
of this Note on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Note.  Any waiver by the Company
or the Holder must be in writing.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    f)             Severability.  If
any provision of this Note is invalid, illegal or unenforceable, the balance of
this Note shall remain in effect, and if any provision is inapplicable to any
Person or circumstance, it shall nevertheless remain applicable to all other
Persons and circumstances.  If it shall be found that any interest or
other amount deemed interest due hereunder violates the applicable law governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable law.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been
enacted.

     

    g)             Next Business
Day.  Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.

    

    h)             Headings.  The
headings contained herein are for convenience only, do not constitute a part of
this Note and shall not be deemed to limit or affect any of the provisions
hereof.

    

    i)             Assumption.  Any
successor to the Company or any surviving entity in a Fundamental Transaction
shall (i) assume, prior to such Fundamental Transaction, all of the obligations
of the Company under this Note and the other Transaction Documents pursuant to
written agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) and (ii) issue to the
Holder a new Note of such successor entity evidenced by a written instrument
substantially similar in form and substance to this Note, including, without
limitation, having a principal amount and interest rate equal to the principal
amount and the interest rate of this Note and having similar ranking to this
Note, which shall be satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed).  The provisions of this Section 9(i)
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations of this Note.

    

    j)        Usury.  This
Note shall be subject to the anti-usury limitations contained in the Purchase
Agreement.

    

    *********************

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly
authorized officer as of the date first above indicated.

     

     

    
      
        	 
      	
                CDEX
      INC.

                 

                 

              
	 
      	
                By:

              	 	 
      
	 
      	 
      	
                Name:  Stephen
      McCommon

              
	 
      	 
      	
                Title:    CFO

              

      

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ANNEX
A

    

    NOTICE
OF CONVERSION

    

    

    The
undersigned hereby elects to convert principal under the 10% Senior Convertible
Note due _______________________ of CDEX Inc., a Nevada corporation (the Company”), into
shares of common stock (the “Common Stock”), of
the Company according to the conditions hereof, as of the date written
below.  If shares of Common Stock are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

    

    By the delivery of this Notice of
Conversion the undersigned represents and warrants to the Company that its
ownership of the Common Stock does not exceed the amounts specified under
Section 4 of this Note, as determined in accordance with Section 13(d) of the
Exchange Act.

    

    The undersigned agrees to comply with
the prospectus delivery requirements under the applicable securities laws in
connection with any transfer of the aforesaid shares of Common Stock pursuant to
any prospectus.

     

     

    
      
        	
                Conversion
      calculations:

              	 
      
	 
      	
                Date
      to Effect Conversion:                                                                                             
                   

              
	 
      	 
      
	 
      	
                Principal
      Amount of Note to be Converted:                                                          
                   
            

              
	 
      	 
      
	 
      	
                Interest
      Accrued on Account

              
	 
      	
                of
      Conversion at Issue:                                                                                                                 

              
	 
      	 
      
	 
      	
                Number
      of shares of Common Stock to be issued:                                                      
                 
      

              
	 
      	
                

                                                                                                                                              
              
                         
      

                

              
	 
      	 
      
	 
      	
                Signature:                                                              
                                                                             

              
	 
      	 
      
	 
      	
                Name:                                                                                         
                         
                                     
      

              
	 
      	 
      
	 
      	
                Address
      for Delivery of Common Stock Certificates:                                                      
             

              
	 
      	
                

                                                                                                                                              
              
                         
      

                

              
	 
      	
                

                                                                                                                                              
              
                         
      

                

              
	 
      	 
      
	 
      	
                Or

              
	 
      	 
      
	 
      	
                DWAC
      Instructions:

              
	 
      	 
      
	 
      	
                Broker
      No:                     
                    
                             
      

              
	 
      	
                Account
      No:ex10_3.htm

    
      EXHIBIT
10.3

    

     

    
      
        SECURITY
AGREEMENT

        

        This SECURITY AGREEMENT, dated as of February 12, 2010
(this “Agreement”), is among CDEX Inc., a Nevada corporation
(the “Company” or “Debtor”), in favor of GEMINI MASTER FUND, LTD. and each of the
other holders of the Company’s 10% Senior
Convertible Notes issued or to be issued (the “Notes”) pursuant to the Purchase Agreement (as defined below)
(collectively, together with their endorsees, transferees and assigns, the
“Secured
Parties”, and each individually, a
“Secured
Party”).

        

        W
I T N E S S E T H:

        

        WHEREAS,
pursuant to that certain Securities Purchase Agreement dated on or about the
date hereof between the Debtor and the Secured Parties (the “Purchase Agreement”),
the Secured Parties have severally agreed to extend the loans to the Debtor
evidenced by the Notes;

        

        WHEREAS,
in order to induce the Secured Parties to extend the loans evidenced by the
Notes, the Debtor has agreed to execute and deliver to the Secured Parties this
Agreement and, effective on the Security Effective Date (as defined below), to
grant the Secured Parties a security interest in certain property of such Debtor
to secure the prompt payment, performance and discharge in full of all of the
Company’s obligations under the Notes and other Transaction Documents;
and

        

        WHEREAS,
the rights of each Secured Party hereunder shall be pari passu with each other
Secured Party and enforced through the agent for the Secured Parties appointed
pursuant to Section 18 hereunder;

        

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

        

        

        1.     
      Certain Definitions. As used
in this Agreement, the following terms shall have the meanings set forth in this
Section 1.  Terms used but not otherwise defined in this Agreement
that are defined in Article 9 of the UCC (such as “account”, “chattel paper”,
“commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”,
“general intangibles”, “goods”, “instruments”, “inventory”, “investment
property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”)
shall have the respective meanings given such terms in Article 9 of the
UCC.

        

        (a)           “Collateral” means the
collateral in which the Secured Parties are granted a security interest by this
Agreement and which shall include the following personal property of the Debtor,
whether presently owned or existing or hereafter acquired or coming into
existence, wherever situated, and all additions and accessions thereto and all
substitutions and replacements thereof, and all proceeds, products and accounts
thereof, including without limitation all proceeds from the sale or transfer of
the Collateral and of insurance covering the same and of any tort claims in
connection therewith, and all dividends, interest, cash, notes, securities,
equity interest or other property at any time and from time to time acquired,
receivable or otherwise distributed in respect of, or in exchange for, any or
all of the Pledged Securities (as defined below):

         

        
          
            
            

          

          
            1

            
              

            

          

          
            
            

          

        

         

        (i)         All
goods, including without limitation (A) all machinery, equipment, computers,
motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and
general tools, fixtures, test and quality control devices and other equipment of
every kind and nature and wherever situated, together with all documents of
title and documents representing the same, all additions and accessions thereto,
replacements therefor, all parts therefor, and all substitutes for any of the
foregoing and all other items used and useful in connection with the Debtor’s
businesses and all improvements thereto; and (B) all inventory;

        

        (ii)         All
contract rights and other general intangibles, including without limitation, all
Intellectual Property, partnership interests, membership interests, stock or
other securities, rights under any of the
Organizational Documents, agreements related to the Pledged Securities,
licenses, distribution and other agreements, computer software (whether
“off-the-shelf”, licensed from any third party or developed by the Debtor),
computer software development rights, leases, franchises, customer lists,
quality control procedures, grants and rights, goodwill, trademarks, service
marks, trade styles, trade names, patents, patent applications, copyrights, and
income tax refunds;

        

        (iii)       
All accounts, together with all instruments, all
documents of title representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which any of the same
may represent, and all right, title, security and guaranties with respect to
each account, including any right of stoppage in transit;

        

        (iv)        All
documents, letter-of-credit rights, instruments and chattel paper;

        

        (v)         All
commercial tort claims;

        

        (vi)        All
deposit accounts and all cash (whether or not deposited in such deposit
accounts);

        

        (vii)       All
investment property;

        

        (viii)      All
supporting obligations; and

         

        
          
            
            

          

          
            2

            
              

            

          

          
            
            

          

        

         

        (ix)         All files, records, books of account, business papers,
and computer programs, including without limitation and all files, records, books, ledger cards, correspondence,
computer programs, tapes, disks, digital storage  media and related
data processing software that at any time evidence or contain information
relating to any of the Collateral set forth in clauses (i)-(viii) above or are
otherwise necessary or helpful in the collection thereof or realization
thereupon;

        

        (x)         the
products, profits and proceeds of all of the foregoing Collateral set forth in
clauses (i)-(ix) above, and all payments under insurance (whether or not the
Secured Party is the loss payee thereof) or under any indemnity, warranty or
guaranty, payable by reason or loss or damage to, or otherwise with respect to,
any of the foregoing Collateral set forth in clauses (i)-(ix)
above.

        

        Without
limiting the generality of the foregoing, the “Collateral” shall
include all investment property and general intangibles respecting ownership
and/or other equity interests in each Subsidiary, including, without limitation,
the shares of capital stock and the other equity interests listed on Schedule H hereto (as
the same may be modified from time to time pursuant to the terms hereof), and
any other shares of capital stock and/or other equity interests of any other
direct or indirect subsidiary of the Debtor obtained in the future, and, in each
case, all certificates representing such shares and/or equity interests and, in
each case, all rights, options, warrants, stock, other securities and/or equity
interests that may hereafter be received, receivable or distributed in respect
of, or exchanged for, any of the foregoing and all rights arising under or in
connection with the Pledged Securities, including, but not limited to, all
dividends, interest and cash.

         

        Notwithstanding
the foregoing, nothing herein shall be deemed to constitute an assignment of any
asset which, in the event of an assignment, becomes void by operation of
applicable law or the assignment of which is otherwise prohibited by applicable
law (in each case to the extent that such applicable law is not overridden by
Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law);
provided, however, that to the
extent permitted by applicable law, this Agreement shall create a valid security
interest in such asset and, to the extent permitted by applicable law, this
Agreement shall create a valid security interest in the proceeds of such
asset.

         

        
          
            
            

          

          
            3

            
              

            

          

          
            
            

          

        

         

        (b)           “Intellectual
Property” means the collective reference to all rights, priorities and
privileges relating to intellectual property, whether arising under United
States, multinational or foreign laws or otherwise, including without limitation
(i) all copyrights arising under the laws of the United States, any other
country or any political subdivision thereof, whether registered or unregistered
and whether published or unpublished, all registrations and recordings thereof,
and all applications in connection therewith, including without limitation all
registrations, recordings and applications in the United States Copyright
Office, (ii) all letters patent of the United States, any other country or any
political subdivision thereof, all reissues and extensions thereof, and all
applications for letters patent of the United States or any other country and
all divisions, continuations and continuations-in-part thereof, (iii) all
trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade dress, service marks, logos, domain names and
other source or business identifiers, and all goodwill associated therewith, now
existing or hereafter adopted or acquired, all registrations and recordings
thereof, and all applications in connection therewith, whether 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, or otherwise, and all common law rights related thereto,
(iv) all trade secrets arising under the laws of the United States, any other
country or any political subdivision thereof, (v) all rights to obtain any
reissues, renewals or extensions of the foregoing, (vi) all licenses for any of
the foregoing, and (vii) all causes of action for infringement of the
foregoing.

        

        (c)           “Majority in Interest”
means, at any time of determination, at least 67% in interest (based on
then-outstanding principal amounts of Notes at the time of such determination)
of the Secured Parties.

        

        (d)           “Necessary
Endorsement” means undated stock powers endorsed in blank or other proper
instruments of assignment duly executed and such other instruments or documents
as the Agent (as that term is defined below) may reasonably
request.

        

        (e)           “Obligations” means all of the liabilities and obligations
(primary, secondary, direct, contingent, sole, joint or several) due or to
become due, or that are now or may be hereafter contracted or acquired, or owing
to, of the Debtor to the Secured Parties either (i) under this Agreement, the Notes, any guarantee of the
Notes, the other Transaction Documents and any other instruments, agreements or
other documents executed and/or delivered in connection herewith or therewith,
or (ii) related to any other liabilities or obligations associated with any
indebtedness for borrowed money from any Secured Party to the Debtor, in each
case, whether now or hereafter existing, voluntary or involuntary, direct or
indirect, absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time decreased or
extinguished and later increased, created or incurred, and all or any portion of
such obligations or liabilities that are paid, to the extent all or any part of
such payment is avoided or recovered directly or indirectly from any of the
Secured Parties as a preference, fraudulent transfer or otherwise as such
obligations may be amended, supplemented, converted, extended or modified from
time to time.  Without limiting the generality of the foregoing, the
term “Obligations” shall include, without limitation: (i) principal of and
interest on the Notes and the loans extended pursuant thereto; (ii) any and all
other fees, indemnities, costs, obligations and liabilities of the Debtor from
time to time under or in connection with this Agreement, the Notes, any
guarantee of the Notes, the other Transaction Documents and any other
instruments, agreements or other documents executed and/or delivered in
connection herewith or therewith; and (iii) all amounts (including but not
limited to post-petition interest) in respect of the foregoing that would be
payable but for the fact that the obligations to pay such amounts are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Debtor.

         

        
          
            
            

          

          
            4

            
              

            

          

          
            
            

          

        

         

        (f)           “Organizational
Documents” means with respect to the Debtor, the documents by which such
Debtor was organized (such as a certificate of incorporation, certificate of
limited partnership or articles of organization, and including without
limitation any certificates of designation for preferred stock or other forms of
preferred equity) and which relate to the internal governance of such Debtor
(such as bylaws, a partnership agreement or an operating, limited liability or
members agreement).

        

        (g)           “Pledged Securities”
shall have the meaning ascribed to such term in Section 4(i).

        

        (h)           “Security Effective
Date” shall mean the date on which it is determined that the Company has
failed to satisfy either Milestone 1 or Milestone 2 under the Notes (as such
terms are defined in the Notes).

        

        (i)           “Transaction
Documents” shall have the meaning ascribed to such term in the Purchase
Agreement.

        

        (j)           “UCC” means the
Uniform Commercial Code of the State of New York and/or any other applicable law
of any state or states which has jurisdiction with respect to all, or any
portion of, the Collateral or this Agreement from time to time.  It is
the intent of the parties that defined terms in the UCC should be construed in
their broadest sense so that the term “Collateral” will be construed in its
broadest sense.  Accordingly if there are, from time to time, changes
to defined terms in the UCC that broaden the definitions, they are incorporated
herein and if existing definitions in the UCC are broader than the amended
definitions, the existing ones shall be controlling.

        

        2.      
     Grant of Security Interest in
Collateral. As an inducement for the Secured Parties to extend the loans
as evidenced by the Notes and to secure the complete and timely payment,
performance and discharge in full, as the case may be, of all of the
Obligations, effective as of the Security Effective Date the Debtor hereby
unconditionally and irrevocably pledges, grants and hypothecates to the Secured
Parties a first priority security interest in and to, a lien upon and a right of
set-off against all of their respective right, title and interest of whatsoever
kind and nature in and to, the Collateral (a “Security Interest”
and, collectively, the “Security
Interests”).

         

        
          
            
            

          

          
            5

            
              

            

          

          
            
            

          

        

         

        3.       
    Delivery of Certain
Collateral.  On the Security Effective Date, the Debtor shall
deliver or cause to be delivered to the Agent (a) any and all certificates and
other instruments representing or evidencing the Pledged Securities, together
with all Necessary Endorsements, and (b) any and all certificates and other
instruments or documents representing any of the other Collateral, in each case,
together with all Necessary Endorsements.  The Debtor shall, on the
Security Effective Date, deliver to the Agent, or have previously delivered to
the Agent, a true and correct copy of each Organizational Document governing any
of the Pledged Securities.

        

        4.        
   Representations, Warranties,
Covenants and Agreements of the Debtor. Effective as of the Security
Effective Date Except, the Debtor represents and warrants to, and covenants and
agrees with, the Secured Parties as follows:

        

        (a)           The
Debtor shall complete and deliver to the Secured Parties, on or prior to the
Security Effective Date, each of the Schedules required by the terms hereof,
which shall be accurate and completed in all material respects.

        

        (b)           The
Debtor has no place of business or offices where its books of account and
records are kept (other than temporarily at the offices of its attorneys or
accountants) or places where Collateral is stored or located, except as set
forth on Schedule
A attached hereto.  Debtor, nor any subsidiary of Debtor, owns
any real property.  Except as disclosed on Schedule A, none of
such Collateral is in the possession of any consignee, bailee, warehouseman,
agent or processor.

        

        (c)           Except
for Permitted Liens (as defined in the Notes) and except as set forth on Schedule B attached
hereto, the Debtor is the sole owner of the Collateral, free and clear of any
liens, security interests, encumbrances, rights or claims, and are fully
authorized to grant the Security Interests.  Except as set forth on
Schedule B
attached hereto, there is not on file in any governmental or regulatory
authority, agency or recording office an effective financing statement, security
agreement, license or transfer or any notice of any of the foregoing (other than
those that will be filed in favor of the Secured Parties pursuant to this
Agreement) covering or affecting any of the Collateral.  Except as set
forth on Schedule
B attached hereto and except pursuant to this Agreement, as long as this
Agreement shall be in effect, the Debtor shall not execute and shall not
knowingly permit to be on file in any such office or agency any other financing
statement or other document or instrument (except to the extent filed or
recorded in favor of the Secured Parties pursuant to the terms of this
Agreement).

        

        (d)           No
written claim has been received that any Collateral or Debtor's use of any
Collateral violates the rights of any third party. There has been no adverse
decision to the Debtor's claim of ownership rights in or exclusive rights to use
the Collateral in any jurisdiction or to the Debtor's right to keep and maintain
such Collateral in full force and effect, and there is no proceeding involving
said rights pending or, to the best knowledge of the Debtor, threatened before
any court, judicial body, administrative or regulatory agency, arbitrator or
other governmental authority.

         

        
          
            
            

          

          
            6

            
              

            

          

          
            
            

          

        

         

        (e)           The
Debtor shall at all times maintain its books of account and records relating to
the Collateral at its principal place of business and its Collateral at the
locations set forth on Schedule A attached
hereto and may not relocate such books of account and records or tangible
Collateral unless it delivers to the Secured Parties at least 30 days prior to
such relocation (i) written notice of such relocation and the new location
thereof (which must be within the United States) and (ii) evidence that
appropriate financing statements under the UCC and other necessary documents
have been filed and recorded and other steps have been taken to perfect the
Security Interests to create in favor of the Secured Parties a valid, perfected
and continuing first priority lien in all the Collateral.

        

        (f)           This
Agreement creates in favor of the Secured Parties a valid security interest in
the Collateral, subject only to Permitted Liens (as defined in the Notes)
securing the payment and performance of the Obligations.  Upon making
the filings described in the immediately following paragraph, all security
interests created hereunder in any Collateral which may be perfected by filing
Uniform Commercial Code financing statements shall have been duly
perfected.  Except for the filing of the Uniform Commercial Code
financing statements referred to in the immediately following paragraph, the
recordation of the Intellectual Property Security Agreement (as defined below)
with the United States Copyright Office or the United States Patent and
Trademark Office with respect to copyrights, patents and trademarks (and
applications relating each of the foregoing) as described in paragraph 4(mm),
the execution and delivery of deposit account control agreements satisfying the
requirements of Section 9-104(a)(2) of the UCC with respect to each deposit
account of the Debtor, and the delivery of the certificates and other
instruments provided in Section 3, no further action is necessary to create,
perfect or protect the security interests created hereunder.  Without
limiting the generality of the foregoing, except for the execution and delivery
of this Agreement by all (100%) of the Secured Parties, the filing of said
financing statements, the recordation of said Intellectual Property Security
Agreement, and the execution and delivery of said deposit account control
agreements, no consent of any third parties and no authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required for (i) the execution, delivery and performance of
this Agreement, (ii) the creation or perfection of the Security Interests
created hereunder in the Collateral, or (iii) the enforcement of the rights of
the Agent and the Secured Parties hereunder.

        

        (g)           The
Debtor hereby authorizes the Agent to file one or more financing statements
under the UCC, with respect to the Security Interests, with the proper filing
and recording agencies in any jurisdiction deemed proper by it.

         

        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

         

        (h)           The
execution, delivery and performance of this Agreement by the Debtor does not (i)
violate any of the provisions of any Organizational Documents of the Debtor or
any judgment, decree, order or award of any court, governmental body or
arbitrator or any applicable law, rule or regulation applicable to the Debtor or
(ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing the Debtor's debt or otherwise) or other understanding to
which the Debtor is a party or by which any property or asset of the Debtor is
bound or affected.  All required consents (including without
limitation from stockholders or creditors of the Debtor) necessary for the
Debtor to enter into and perform its obligations hereunder have been
obtained.

        

        (i)           The
capital stock and other equity interests listed on Schedule H hereto
(the “Pledged
Securities”) represent all of the capital stock and other equity
interests of the Subsidiaries, and represent all capital stock and other equity
interests owned, directly or indirectly, by the Company.  All of the
Pledged Securities are validly issued, fully paid and nonassessable, and the
Company is the legal and beneficial owner of the Pledged Securities, free and
clear of any lien, security interest or other encumbrance except for the
security interests created by this Agreement and other Permitted Liens (as
defined in the Notes).

        

        (j)           The
ownership and other equity interests in partnerships and limited liability
companies (if any) included in the Collateral (the “Pledged Interests”)
by their express terms do not provide that they are securities governed by
Article 8 of the UCC and are not held in a securities account or by any
financial intermediary.

        

        (k)           Except
for Permitted Liens (as defined in the Notes), until this Agreement and the
Security Interest hereunder shall be terminated pursuant to Section 11 hereof,
the Debtor shall at all times maintain in favor of the Secured Parties the liens
and Security Interests provided for hereunder as valid and perfected first
priority liens and security interests in all the Collateral.  The
Debtor hereby agrees to defend the same against the claims of any and all
persons and entities.  The Debtor shall safeguard and protect all
Collateral for the account of the Secured Parties.  At the request of
the Agent, the Debtor will sign and deliver to the Agent on behalf of the
Secured Parties at any time or from time to time one or more financing
statements pursuant to the UCC in form reasonably satisfactory to the Agent and
will pay the cost of filing the same in all public offices wherever filing is,
or is deemed by the Agent to be, necessary or desirable to effect the rights and
obligations provided for herein.  Without limiting the generality of
the foregoing, the Debtor shall pay all fees, taxes and other amounts necessary
to maintain the Collateral and the Security Interests hereunder, and the Debtor
shall obtain and furnish to the Agent from time to time, upon demand, such
releases and/or subordinations of claims and liens which may be required to
maintain the priority of the Security Interests hereunder.

         

        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

         

        (l)           Except
as listed on Schedule
I, the Debtor will not transfer, pledge, hypothecate, encumber, license,
sell or otherwise dispose of any of the Collateral (except for licenses granted
by a Debtor in its ordinary course of business and sales of inventory and other
unused or outdated assets by a Debtor in its ordinary course of business)
without the prior written consent of all the Secured Parties.

        

        (m)           The
Debtor shall keep and preserve its equipment, inventory and other tangible
Collateral in good condition, repair and order and shall not operate or locate
any such Collateral (or cause to be operated or located) in any area excluded
from insurance coverage.

        

        (n)           The
Debtor shall maintain with financially sound and reputable insurers, insurance
with respect to the Collateral, including Collateral hereafter acquired, against
loss or damage of the kinds and in the amounts customarily insured against by
entities of established reputation having similar properties similarly situated
and in such amounts as are customarily carried under similar circumstances by
other such entities and otherwise as is prudent for entities engaged in similar
businesses but in any event sufficient to cover the full replacement cost
thereof.  The Debtor shall cause each insurance policy issued in
connection herewith to provide, and the insurer issuing such policy to certify
to the Agent, that (a) the Agent will be named as lender loss payee and
additional insured under each such insurance policy; (b) if such insurance be
proposed to be cancelled or materially changed for any reason whatsoever, such
insurer will promptly notify the Agent and such cancellation or change shall not
be effective as to the Agent for at least thirty (30) days after receipt by the
Agent of such notice, unless the effect of such change is to extend or increase
coverage under the policy; and (c) the Agent will have the right (but no
obligation) at its election to remedy any default in the payment of premiums
within thirty (30) days of notice from the insurer of such
default.  If no Event of Default (as defined in the Notes) exists and
if the proceeds arising out of any claim or series of related claims do not
exceed $100,000, loss payments in each instance will be applied by the
applicable Debtor to the repair and/or replacement of property with respect to
which the loss was incurred to the extent reasonably feasible, and any loss
payments or the balance thereof remaining, to the extent not so applied, shall
be payable to the applicable Debtor; provided, however, that
payments received by the Debtor after an Event of Default occurs and is
continuing or in excess of $100,000 for any occurrence or series of related
occurrences shall be paid to the Agent on behalf of the Secured Parties and, if
received by such Debtor, shall be held in trust for the Secured Parties and
immediately paid over to the Agent unless otherwise directed in writing by the
Agent.   Copies of such policies or the related certificates, in
each case, naming the Agent as lender loss payee and additional insured shall be
delivered to the Agent at least annually and at the time any new policy of
insurance is issued.

         

        
          
            
            

          

          
            9

            
              

            

          

          
            
            

          

        

         

        (o)           The
Debtor shall promptly, but no later than ten (10) days after obtaining knowledge
thereof, advise the Secured Parties, through the Agent, in sufficient detail of
any change in the Collateral and of the occurrence of any event which would have
a material adverse effect on the value of the Collateral or on the Secured
Parties’ security interest therein.

        

        (p)           The
Debtor shall promptly execute and deliver to the Agent such further deeds,
mortgages, assignments, security agreements, financing statements or other
instruments, documents, certificates and assurances and take such further action
as the Agent may from time to time request and may in its sole discretion deem
necessary to perfect, protect or enforce the Secured Parties’ security interest
in the Collateral including without limitation, if applicable, the execution and
delivery of a separate security agreement with respect to the Debtor’s
Intellectual Property (“Intellectual Property
Security Agreement”) in which the Secured Parties have been granted a
security interest hereunder, substantially in a form reasonably acceptable to
the Agent, which Intellectual Property Security Agreement, other than as stated
therein, shall be subject to all of the terms and conditions
hereof.

        

        (q)           The
Debtor shall permit the Agent and its representatives and agents to inspect the
Collateral during normal business hours and upon reasonable prior notice, and to
make copies of records pertaining to the Collateral as may be reasonably
requested by the Agent from time to time.

        

        (r)         
  The Debtor shall take all steps reasonably necessary to diligently
pursue and seek to preserve, enforce and collect any rights, claims, causes of
action and accounts receivable in respect of the Collateral.

        
 

        (s)           The
Debtor shall promptly notify the Secured Parties in sufficient detail upon
becoming aware of any attachment, garnishment, execution or other legal process
levied against any Collateral and of any other information received by such
Debtor that may materially affect the value of the Collateral, the Security
Interests or the rights and remedies of the Secured Parties
hereunder.

        

        (t)           All
information heretofore, herein or hereafter supplied to the Secured Parties by
or on behalf of the Debtor with respect to the Collateral is and will be
accurate and complete in all material respects as of the date
furnished.

        

        (u)           The
Debtor shall at all times preserve and keep in full force and effect its valid
existence and good standing and any rights and franchises material to its
business.

        

        (v)           The
Debtor will not change its name, type of organization, jurisdiction of
organization, organizational identification number (if it has one), legal or
corporate structure, or identity, or add any new fictitious name unless it
provides at least 30 days prior written notice to the Secured Parties of such
change and, at the time of such written notification, such Debtor provides any
financing statements or fixture filings necessary to perfect and continue the
perfection of the Security Interests granted and evidenced by this
Agreement.

         

        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

        
 

        (w)          Except
in the ordinary course of business, the Debtor may not consign any of its
inventory or sell any of its inventory on bill and hold, sale or return, sale on
approval, or other conditional terms of sale without the consent of the Agent
which shall not be unreasonably withheld.

        

        (x)           The
Debtor may not relocate its chief executive office to a new location without
providing 30 days prior written notification thereof to the Secured Parties and
so long as, at the time of such written notification, such Debtor provides any
financing statements or fixture filings necessary to perfect and continue the
perfection of the Security Interests granted and evidenced by this
Agreement.

        

        (y)           The
Debtor was organized and remains organized solely under the laws of the state
set forth next to such Debtor’s name in Schedule D attached
hereto, which Schedule
D sets forth the Debtor’s organizational identification number or, if the
Debtor does not have one, states that one does not exist.

        

        (z)           (i)
The actual name of the Debtor is the name set forth in Schedule D attached
hereto; (ii) the Debtor has no trade names except as set forth on Schedule E attached
hereto; (iii) the Debtor has not used any name other than that stated in the
preamble hereto or as set forth on Schedule E for the
preceding five years; and (iv) no entity has merged into the Debtor or been
acquired by the Debtor within the past five years except as set forth on Schedule
E.

        

        (aa)         At
any time and from time to time that any Collateral consists of instruments,
certificated securities or other items that require or permit possession by the
secured party to perfect the Security Interest created hereby, the applicable
Debtor shall deliver such Collateral to the Agent.

        

        (bb)         The
Debtor, in its capacity as issuer, hereby agrees to comply with any and all
orders and instructions of the Agent regarding the Pledged Interests consistent
with the terms of this Agreement without the further consent of the Debtor as
contemplated by Section 8-106 (or any successor section) of the
UCC.  Further, the Debtor agrees that it shall not enter into a
similar agreement (or one that would confer “control” within the meaning of
Article 8 of the UCC) with any other person or entity.

         

        (cc)         The
Debtor shall cause all tangible chattel paper constituting Collateral to be
delivered to the Agent, or, if such delivery is not possible, then to cause such
tangible chattel paper to contain a legend noting that it is subject to the
security interest created by this Agreement.  To the extent that any
Collateral consists of electronic chattel paper, the applicable Debtor shall
cause the underlying chattel paper to be “marked” within the meaning of Section
9-105 of the UCC (or successor section thereto).

         

        
          
            
            

          

          
            11

            
              

            

          

          
            
            

          

        

         

        (dd)         If
there is any investment property or deposit account included as Collateral that
can be perfected by “control” through an account control agreement, the
applicable Debtor shall, promptly upon written request of the Agent following
the occurrence of an Event of Default, cause such an account control agreement,
in form and substance in each case satisfactory to the Agent, to be entered into
and delivered to the Agent for the benefit of the Secured Parties.

        

        (ee)         To
the extent that any Collateral consists of letter-of-credit rights, the
applicable Debtor shall, promptly upon written request of the Agent following
the occurrence of an Event of Default, cause the issuer of each underlying
letter of credit to consent to an assignment of the proceeds thereof to the
Secured Parties.

        
 

        (ff)        
 To the extent that any Collateral is in the possession of any third party,
the applicable Debtor shall join with the Agent in notifying such third party of
the Secured Parties’ security interest in such Collateral and shall use its best
efforts to obtain an acknowledgement and agreement from such third party with
respect to the Collateral, in form and substance reasonably satisfactory to the
Agent.

        

        (gg)         If
the Debtor shall at any time hold or acquire a commercial tort claim, such
Debtor shall promptly notify the Secured Parties in a writing signed by such
Debtor of the particulars thereof and grant to the Secured Parties in such
writing a security interest therein and in the proceeds thereof, all upon the
terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to the Agent.

        

        (hh)         The
Debtor shall immediately provide written notice to the Secured Parties of any
and all accounts which arise out of contracts with any governmental authority
and, to the extent necessary to perfect or continue the perfected status of the
Security Interests in such accounts and proceeds thereof, shall execute and
deliver to the Agent an assignment of claims for such accounts and cooperate
with the Agent in taking any other steps required, in its judgment, under the
Federal Assignment of Claims Act or any similar federal, state or local statute
or rule to perfect or continue the perfected status of the Security Interests in
such accounts and proceeds thereof.

        

        (ii)           The
Debtor shall cause each subsidiary of such Debtor to immediately become a party
hereto (an “Additional
Debtor”), by executing and delivering an Additional Debtor Joinder in
substantially the form of Annex A attached
hereto and comply with the provisions hereof applicable to the
Debtor.  Concurrent therewith, the Additional Debtor shall deliver
replacement schedules for, or supplements to all other Schedules to (or referred
to in) this Agreement, as applicable, which replacement schedules shall
supersede, or supplements shall modify, the Schedules then in
effect.  The Additional Debtor shall also deliver such opinions of
counsel, authorizing resolutions, good standing certificates, incumbency
certificates, organizational documents, financing statements and other
information and documentation as the Agent may reasonably
request.  Upon delivery of the foregoing to the Agent, the Additional
Debtor shall be and become a party to this Agreement with the same rights and
obligations as the Debtor, for all purposes hereof as fully and to the same
extent as if it were an original signatory hereto and shall be deemed to have
made the representations, warranties and covenants set forth herein as of the
date of execution and delivery of such Additional Debtor Joinder, and all
references herein to the “Debtor” shall be deemed to include each Additional
Debtor.

         

        
          
            
            

          

          
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        (jj)           The
Debtor shall vote the Pledged Securities to comply with the covenants and
agreements set forth herein and in the Notes.

        

        (kk)          The
Debtor shall register the pledge of the applicable Pledged Securities on the
books of such Debtor.  The Debtor shall notify each issuer of Pledged
Securities to register the pledge of the applicable Pledged Securities in the
name of the Secured Parties on the books of such issuer.  Further,
except with respect to certificated securities delivered to the Agent, the
applicable Debtor shall deliver to the Agent an acknowledgement of pledge
(which, where appropriate, shall comply with the requirements of the relevant
UCC with respect to perfection by registration) signed by the issuer of the
applicable Pledged Securities, which acknowledgement shall confirm that: (a) it
has registered the pledge on its books and records; and (b) at any time directed
by the Agent during the continuation of an Event of Default, such issuer will
transfer the record ownership of such Pledged Securities into the name of any
designee of the Agent, will take such steps as may be necessary to effect the
transfer, and will comply with all other instructions of the Agent regarding
such Pledged Securities without the further consent of the applicable
Debtor.

        

        (ll)          
In the event that, upon an occurrence of an Event of Default, the Agent shall
sell all or any of the Pledged Securities to another party or parties (herein
called the “Transferee”) or shall
purchase or retain all or any of the Pledged Securities, the Debtor shall, to
the extent applicable: (i) deliver to the Agent or the Transferee, as the case
may be, the articles of incorporation, bylaws, minute books, stock certificate
books, corporate seals, deeds, leases, indentures, agreements, evidences of
indebtedness, books of account, financial records and all other Organizational
Documents and records of the Debtor and its direct and indirect subsidiaries;
(ii) use its best efforts to obtain resignations of the persons then serving as
officers and directors of the Debtor and its direct and indirect subsidiaries,
if so requested; and (iii) use its best efforts to obtain any approvals that are
required by any governmental or regulatory body in order to permit the sale of
the Pledged Securities to the Transferee or the purchase or retention of the
Pledged Securities by the Agent and allow the Transferee or the Agent to
continue the business of the Debtor and its direct and indirect
subsidiaries.

         

        
          
            
            

          

          
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        (mm)       Without
limiting the generality of the other obligations of the Debtor hereunder, Debtor
shall promptly (i) cause to be registered at the United States Copyright Office
all of its material copyrights, (ii) cause the security interest contemplated
hereby with respect to all Intellectual Property registered at the United States
Copyright Office or United States Patent and Trademark Office to be duly
recorded at the applicable office, and (iii) give the Agent notice whenever it
acquires (whether absolutely or by license) or creates any additional material
Intellectual Property.

        

        (nn)        Debtor
will from time to time, at the joint and several expense of the Debtor, promptly
execute and deliver all such further instruments and documents, and take all
such further action as may be necessary or desirable, or as the Agent may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Secured Parties to
exercise and enforce their rights and remedies hereunder and with respect to any
Collateral or to otherwise carry out the purposes of this
Agreement.

        

        (oo)         Schedule F attached
hereto lists all of the patents, patent applications, trademarks, trademark
applications, registered copyrights, and domain names owned by any of the Debtor
as of the date hereof.  Schedule F lists all
material licenses in favor of the Debtor for the use of any patents, trademarks,
copyrights and domain names as of the date hereof.  All material
patents and trademarks of the Debtor have been duly recorded at the United
States Patent and Trademark Office and all material copyrights of the Debtor
have been duly recorded at the United States Copyright Office.

        

        (pp)        Except
as set forth on Schedule G attached
hereto, none of the account debtors or other persons or entities obligated on
any of the Collateral is a governmental authority covered by the Federal
Assignment of Claims Act or any similar federal, state or local statute or rule
in respect of such Collateral.

        

        5.     
      Effect of Pledge on Certain
Rights. If
any of the Collateral subject to this Agreement consists of nonvoting equity or
ownership interests (regardless of class, designation, preference or rights)
that may be converted into voting equity or ownership interests upon the
occurrence of certain events (including without limitation upon the transfer of
all or any of the other stock or assets of the issuer), it is agreed that the
pledge of such equity or ownership interests pursuant to this Agreement or the
enforcement of any of the Agent’s rights hereunder shall not be deemed to be the
type of event which would trigger such conversion rights notwithstanding any
provisions in the Organizational Documents or agreements to which the Debtor is
subject or to which the Debtor is party.

        

        6.       
    Defaults. After the Security
Effective Date, the following events shall be “Events of
Default”:

         

        
          
            
            

          

          
            14

            
              

            

          

          
            
            

          

        

         

        (a)           The
occurrence of an Event of Default (as defined in the Notes) under the
Notes;

        

        (b)           Any
representation or warranty of the Debtor in this Agreement shall prove to have
been incorrect in any material respect when made;

        

        (c)           The
failure by the Debtor to observe or perform any of its obligations hereunder for
five (5) business days after delivery to such Debtor of notice of such failure
by or on behalf of a Secured Party unless such default is capable of cure but
cannot be cured within such time frame and such Debtor is using best efforts to
cure same in a timely fashion; or

        

        (d)           If
any provision of this Agreement shall at any time for any reason be declared to
be null and void, or the validity or enforceability thereof shall be contested
by the Debtor, or a proceeding shall be commenced by the Debtor, or by any
governmental authority having jurisdiction over the Debtor, seeking to establish
the invalidity or unenforceability thereof, or the Debtor shall deny that the
Debtor has any liability or obligation purported to be created under this
Agreement.

        

        7.       
    Duty to
Hold in Trust.

        

        (a)           Upon
the occurrence of any Event of Default and at any time thereafter, the Debtor
shall, upon receipt of any revenue, income, dividend, interest or other sums
subject to the Security Interests, whether payable pursuant to the Notes or
otherwise, or of any check, draft, note, trade acceptance or other instrument
evidencing an obligation to pay any such sum, hold the same in trust for the
Secured Parties and shall forthwith endorse and transfer any such sums or
instruments, or both, to the Secured Parties, pro-rata in proportion to their
respective then-currently outstanding principal amount of Notes for application
to the satisfaction of the Obligations.

        

        (b)           If
the Debtor shall become entitled to receive or shall receive any securities or
other property (including without limitation shares of Pledged Securities or
instruments representing Pledged Securities acquired after the date hereof, or
any options, warrants, rights or other similar property or certificates
representing a dividend, or any distribution in connection with any
recapitalization, reclassification or increase or reduction of capital, or
issued in connection with any reorganization of such Debtor or any of its direct
or indirect subsidiaries) in respect of the Pledged Securities (whether as an
addition to, in substitution of, or in exchange for, such Pledged Securities or
otherwise), such Debtor agrees to (i) accept the same as the agent of the
Secured Parties; (ii) hold the same in trust on behalf of and for the benefit of
the Secured Parties; and (iii) deliver any and all certificates or instruments
evidencing the same to the Agent on or before the close of business on the fifth
business day following the receipt thereof by such Debtor, in the exact form
received together with the Necessary Endorsements, to be held by the Agent
subject to the terms of this Agreement as Collateral.

         

        
          
            
            

          

          
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        8.     
      Rights and Remedies Upon
Default.

        

        (a)           Upon
the occurrence of any Event of Default and at any time thereafter, the Secured
Parties, acting through the Agent, shall have the right to exercise all of the
remedies conferred hereunder and under the Notes and other Transaction
Documents, and the Secured Parties, acting through the Agent, shall have all the
rights and remedies of a secured party under the UCC.  Without
limitation, the Agent, for the benefit of the Secured Parties, shall have the
following rights and powers:

        

        (i)         The
Agent shall have the right to take possession of the Collateral and, for that
purpose, enter, with the aid and assistance of any person, any premises where
the Collateral, or any part thereof, is or may be placed and remove the same,
and the Debtor shall assemble the Collateral and make it available to the Agent
at places which the Agent shall reasonably select, whether at such Debtor's
premises or elsewhere, and make available to the Agent, without rent, all of
such Debtor’s respective premises and facilities for the purpose of the Agent
taking possession of, removing or putting the Collateral in saleable or
disposable form.

        

        (ii)         Upon
notice to the Debtor by the Agent, all rights of the Debtor to exercise the
voting and other consensual rights which it would otherwise be entitled to
exercise and all rights of the Debtor to receive the dividends and interest
which it would otherwise be authorized to receive and retain, shall
cease.  Upon such notice, the Agent shall have the right to receive,
for the benefit of the Secured Parties, any interest, cash dividends or other
payments on the Collateral and, at the option of the Agent, to exercise in such
Agent’s discretion all voting rights pertaining thereto.  Without
limiting the generality of the foregoing, the Agent shall have the right (but
not the obligation) to exercise all rights with respect to the Collateral as it
were the sole and absolute owner thereof, including without limitation to vote
and/or to exchange, at its sole discretion, any or all of the Collateral in
connection with a merger, reorganization, consolidation, recapitalization or
other readjustment concerning or involving the Collateral or the Debtor or any
of its direct or indirect subsidiaries.

         

        
          
            
            

          

          
            16

            
              

            

          

          
            
            

          

        

         

        (iii)        The
Agent shall have the right to operate the business of the Debtor using the
Collateral and shall have the right to assign, sell, lease or otherwise dispose
of and deliver all or any part of the Collateral, at public or private sale or
otherwise, either with or without special conditions or stipulations, for cash
or on credit or for future delivery, in such parcel or parcels and at such time
or times and at such place or places, and upon such terms and conditions as the
Agent may deem commercially reasonable, all without (except as shall be required
by applicable statute and cannot be waived) advertisement or demand upon or
notice to the Debtor or right of redemption of a Debtor, which are hereby
expressly waived.  Upon each such sale, lease, assignment or other
transfer of Collateral, the Agent, for the benefit of the Secured Parties, may,
unless prohibited by applicable law which cannot be waived, purchase all or any
part of the Collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities of the Debtor, which are hereby waived
and released.

        

        (iv)        The
Agent shall have the right (but not the obligation) to notify any account
debtors and any obligors under instruments or accounts to make payments directly
to the Agent, on behalf of the Secured Parties, and to enforce the Debtor’s
rights against such account debtors and obligors.

        

        (v)         The
Agent, for the benefit of the Secured Parties, may (but is not obligated to)
direct any financial intermediary or any other person or entity holding any
investment property to transfer the same to the Agent, on behalf of the Secured
Parties, or its designee.

        

        (vi)        The
Agent may (but is not obligated to) transfer any or all Intellectual Property
registered in the name of the Debtor at the United States Patent and Trademark
Office and/or Copyright Office into the name of the Secured Parties or any
designee or any purchaser of any Collateral.

        

        (b)           The
Agent shall comply with any applicable law in connection with a disposition of
Collateral and such compliance will not be considered adversely to affect the
commercial reasonableness of any sale of the Collateral.  The Agent
may sell the Collateral without giving any warranties and may specifically
disclaim such warranties.  If the Agent sells any of the Collateral on
credit, the Debtor will only be credited with payments actually made by the
purchaser.  In addition, the Debtor waives any and all rights that it
may have to a judicial hearing in advance of the enforcement of any of the
Agent’s rights and remedies hereunder, including without limitation the Agent’s
right following an Event of Default to take immediate possession of the
Collateral and to exercise its rights and remedies with respect
thereto.

         

        (c)           For
the purpose of enabling the Agent to further exercise rights and remedies under
this Section 8 or elsewhere provided by agreement or applicable law, the Debtor
hereby grants to the Agent, for the benefit of the Agent and the Secured
Parties, an irrevocable, nonexclusive license (exercisable without payment of
royalty or other compensation to such Debtor) to use, license or sublicense
following an Event of Default, any Intellectual Property now owned or hereafter
acquired by such Debtor, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be
recorded or stored and to all computer software and programs used for the
compilation or printout thereof.

         

        
          
            
            

          

          
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        9.     
      Inter Secured Party Rights;
Transaction/Applications of Proceeds.

        

        (a)           All Obligations owed to the Secured Parties shall rank
in the order of priority pari passu and pro-rata in proportion to each Secured Party’s outstanding
principal amount of Notes at any given time that a determination needs to be
made of pro-rata holdings. If
an Event of Default occurs and any party hereto collects proceeds pursuant to
its rights under any Obligations, the Agent shall be immediately notified and
such payment shall be shared with all of the other Secured Parties as set forth
above.
Notwithstanding anything to the contrary contained in the Purchase
Agreement or any document executed in connection with the Obligations and
irrespective of: (i) the time, order or method of attachment or perfection of
the security interests created in favor of Secured Parties; (ii) the time or
order of filing or recording of financing statements or other documents filed or
recorded to perfect security interests in any Collateral; (iii) anything
contained in any filing or agreement to which any Secured Party now or hereafter
may be a party; and (iv) the rules for determining perfection or priority under
the Uniform Commercial Code or any other law governing the relative priorities
of secured creditors, each of the Secured Parties acknowledges that (x) all
other Secured Parties have a valid security interest in the Collateral and (y)
the security interests of the Secured Parties in any Collateral pursuant to any
outstanding Obligations shall be pari passu with each other
and enforced pursuant to the terms of this Agreement through the Agent. 
Each Secured Party, severally and not jointly with the other Secured Parties,
shall indemnify, defend, and hold harmless the other Secured Parties against and
in respect of any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries, and deficiencies, including interest,
penalties, and reasonable professional and attorneys’ fees, including those
arising from settlement negotiations, that the other Secured Parties shall incur
or suffer, which arise, result from, or relate to a breach of, or failure by
such Secured Party to perform under this Agreement.

        

        (b)           The
proceeds of any such sale, lease or other disposition of the Collateral
hereunder or from payments made on account of any insurance policy insuring any
portion of the Collateral shall be applied first, to the expenses of retaking,
holding, storing, processing and preparing for sale, selling, and the like
(including without limitation any taxes, fees and other costs incurred in
connection therewith) of the Collateral, then to the reasonable attorneys’ fees
and expenses incurred by the Agent in enforcing the Secured Parties’ rights
hereunder and in connection with collecting, storing and disposing of the
Collateral, then to satisfaction of the Obligations pro rata among the Secured
Parties (based on then-outstanding principal amounts of Notes at the time of any
such determination), and then to the payment of any other amounts required by
applicable law.  If, upon the sale, license or other disposition of
the Collateral, the proceeds thereof are insufficient to pay all amounts to
which the Secured Parties are legally entitled, the Debtor will be liable for
the deficiency, together with interest thereon, at the rate of 24% per annum or
the lesser amount permitted by applicable law (the “Default Rate”), and the
reasonable fees of any attorneys employed by the Secured Parties to collect such
deficiency.  To the extent permitted by applicable law, the Debtor
waives all claims, damages and demands against the Secured Parties arising out
of the repossession, removal, retention or sale of the Collateral, unless due
solely to the gross negligence or willful misconduct of the Secured Parties as
determined by a final judgment (not subject to further appeal) of a court of
competent jurisdiction.

         

        
          
            
            

          

          
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        10.           Securities Law
Provision.  The Debtor recognizes that the Agent may be limited
in its ability to effect a sale to the public of all or part of the Pledged
Securities by reason of certain prohibitions in the Securities Act of 1933, as
amended, or other federal or state securities laws (collectively, the “Securities Laws”),
and may be compelled to resort to one or more sales to a restricted group of
purchasers who may be required to agree to acquire the Pledged Securities for
their own account, for investment and not with a view to the distribution or
resale thereof.  The Debtor agrees that sales so made may be at prices
and on terms less favorable than if the Pledged Securities were sold to the
public and that the Agent has no obligation to delay the sale of any Pledged
Securities for the period of time necessary to register the Pledged Securities
for sale to the public under the Securities Laws.  The Debtor shall
cooperate with the Agent in its attempt to satisfy any requirements under the
Securities Laws (including without limitation registration thereunder if
requested by the Agent) applicable to the sale of the Pledged Securities by the
Agent.

         

        11.           Costs and Expenses. The Debtor
agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in
connection with any filing required hereunder, including without limitation any
financing statements pursuant to the UCC, continuation statements, partial
releases and/or termination statements related thereto or any expenses of any
searches reasonably required by the Agent.  The Debtor shall also pay
all other claims and charges which in the reasonable opinion of the Agent are
reasonably likely to prejudice, imperil or otherwise affect the Collateral or
the Security Interests therein.  The Debtor will also, upon demand,
pay to the Agent the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents, which
the Agent, for the benefit of the Secured Parties, may incur in connection with
(i) the enforcement of this Agreement, (ii) the custody or preservation of, or
the sale of, collection from, or other realization upon, any of the Collateral,
or (iii) the exercise or enforcement of any of the rights of the Secured Parties
under the Notes.  Until so paid, any fees payable hereunder shall be
added to the principal amount of the Notes and shall bear interest at the
Default Rate.

         

        
          
            
            

          

          
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        12.           Responsibility for Collateral.
The Debtor assumes all liabilities and responsibility in connection with all
Collateral, and the Obligations shall in no way be affected or diminished by
reason of the loss, destruction, damage or theft of any of the Collateral or its
unavailability for any reason.  Without limiting the generality of the
foregoing, (a) neither the Agent nor any Secured Party (i) has any duty (either
before or after an Event of Default) to collect any amounts in respect of the
Collateral or to preserve any rights relating to the Collateral, or (ii) has any
obligation to clean-up or otherwise prepare the Collateral for sale, and (b) the
Debtor shall remain obligated and liable under each contract or agreement
included in the Collateral to be observed or performed by such Debtor
thereunder.  Neither the Agent nor any Secured Party shall have any
obligation or liability under any such contract or agreement by reason of or
arising out of this Agreement or the receipt by the Agent or any Secured Party
of any payment relating to any of the Collateral, nor shall the Agent or any
Secured Party be obligated in any manner to perform any of the obligations of
the Debtor under or pursuant to any such contract or agreement, to make inquiry
as to the nature or sufficiency of any payment received by the Agent or any
Secured Party in respect of the Collateral or as to the sufficiency of any
performance by any party under any such contract or agreement, to present or
file any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to the Agent or to which the
Agent or any Secured Party may be entitled at any time or times.

        

        13.           Security Interests Absolute.
All rights of the Secured Parties and all obligations of the Debtor hereunder,
shall be absolute and unconditional, irrespective of: (a) any lack of validity
or enforceability of this Agreement, the Notes, any other Transaction Documents
or any agreement entered into in connection with the foregoing, or any portion
hereof or thereof; (b) any change in the time, manner or place of payment or
performance of, or in any other term of, all or any of the Obligations, or any
other amendment or waiver of or any consent to any departure from the Notes, any
other Transaction Documents or any other agreement entered into in connection
with the foregoing; (c) any exchange, release or nonperfection of any of the
Collateral, or any release or amendment or waiver of or consent to departure
from any other collateral for, or any guarantee, or any other security, for all
or any of the Obligations; (d) any action by the Secured Parties to obtain,
adjust, settle and cancel in its sole discretion any insurance claims or matters
made or arising in connection with the Collateral; or (e) any other circumstance
which might otherwise constitute any legal or equitable defense available to a
Debtor, or a discharge of all or any part of the Security Interests granted
hereby.  Until the Obligations shall have been paid and performed in
full, the rights of the Secured Parties shall continue even if the Obligations
are barred for any reason, including without limitation the running of the
statute of limitations or bankruptcy.  The Debtor expressly waives
presentment, protest, notice of protest, demand, notice of nonpayment and demand
for performance.  In the event that at any time any transfer of any
Collateral or any payment received by the Secured Parties hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Parties, then, in any such event, the Debtor’s
obligations hereunder shall survive cancellation of this Agreement, and shall
not be discharged or satisfied by any prior payment thereof and/or cancellation
of this Agreement, but shall remain a valid and binding obligation enforceable
in accordance with the terms and provisions hereof.  The Debtor waives
all right to require the Secured Parties to proceed against any other person or
entity or to apply any Collateral which the Secured Parties may hold at any
time, or to marshal assets, or to pursue any other remedy.  The Debtor
waives any defense arising by reason of the application of the statute of
limitations to any obligation secured hereby.

         

        
          
            
            

          

          
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        14.           Term of Agreement. This
Agreement and the Security Interests shall terminate, automatically and without
any action on the part of the Agent or Secured Parties, on the date on which all
payments under the Notes have been indefeasibly paid in full and all other
Obligations have been paid or discharged; provided, however, that all
indemnities of the parties hereto contained in this Agreement shall survive and
remain operative and in full force and effect regardless of the termination of
this Agreement.  The Agent and Secured Parties shall, at Debtor’s
request and expense, take any and all action required to discharge any and all
security interests and release to Debtor any and all Collateral in the Agent’s
or Secured Parties’ possession or control.  The Secured Parties hereby
agree that the Debtor shall have the right, and the Debtor is hereby authorized,
to take all necessary action to cause the termination and release of all
security interests granted hereunder upon termination of this Agreement,
including the filing of one or more UCC termination statements or amendments
relating to the Collateral.

        

        15.           Power of Attorney; Further
Assurances.

        

        (a)           The
Debtor authorizes the Agent, and does hereby make, constitute and appoint the
Agent and its officers, agents, successors or assigns with full power of
substitution, as such Debtor’s true and lawful attorney-in-fact, with power, in
the name of the Agent or such Debtor, to, after the occurrence and during the
continuance of an Event of Default, (i) endorse any note, checks, drafts, money
orders or other instruments of payment (including payments payable under or in
respect of any policy of insurance) in respect of the Collateral that may come
into possession of the Agent; (ii) sign and endorse any financing statement
pursuant to the UCC or any invoice, freight or express bill, bill of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with accounts, and other documents
relating to the Collateral; (iii) pay or discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or threatened
against the Collateral; (iv) demand, collect, receive, compromise, settle and
sue for monies due in respect of the Collateral; (v) transfer any Intellectual
Property or provide licenses respecting any Intellectual Property; and (vi)
generally, at the option of the Agent, and at the expense of the Debtor, at any
time, or from time to time, execute and deliver any and all documents and
instruments and do all acts and things which the Agent deems necessary to
protect, preserve and realize upon the Collateral and the Security Interests
granted therein in order to effect the intent of this Agreement, the Notes and
other Transaction Documents all as fully and effectually as the Debtor might or
could do; and the Debtor hereby ratifies all that said attorney shall lawfully
do or cause to be done by virtue hereof.  This power of attorney is
coupled with an interest and shall be irrevocable for the term of this Agreement
and thereafter as long as any of the Obligations shall be
outstanding.  The designation set forth herein shall be deemed to
amend and supersede any inconsistent provision in the Organizational Documents
or other documents or agreements to which the Debtor is subject or to which the
Debtor is a party.  Without limiting the generality of the foregoing,
after the occurrence and during the continuance of an Event of Default, each
Secured Party is specifically authorized to execute and file any applications
for or instruments of transfer and assignment of any patents, trademarks,
copyrights or other Intellectual Property with the United States Patent and
Trademark Office and the United States Copyright Office.

         

        
          
            
            

          

          
            21

            
              

            

          

          
            
            

          

        

         

        (b)           On
a continuing basis, the Debtor will make, execute, acknowledge, deliver, file
and record, as the case may be, with the proper filing and recording agencies in
any jurisdiction, including without limitation the jurisdictions indicated on
Schedule C
attached hereto, all such instruments, and take all such action as may
reasonably be deemed necessary or advisable, or as reasonably requested by the
Agent, to perfect the Security Interests granted hereunder and otherwise to
carry out the intent and purposes of this Agreement, or for assuring and
confirming to the Agent the grant or perfection of a perfected security interest
in all the Collateral under the UCC.

        

        (c)           The
Debtor hereby irrevocably appoints the Agent as such Debtor’s attorney-in-fact,
with full authority in the place and instead of such Debtor and in the name of
such Debtor, from time to time in the Agent’s discretion, to take any action and
to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including the filing, in its sole
discretion, of one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of such Debtor
where permitted by law, which financing statements may (but need not) describe
the Collateral as “all assets” or “all personal property” or words of like
import, and ratifies all such actions taken by the Agent.  This power
of attorney is coupled with an interest and shall be irrevocable for the term of
this Agreement.

        

        16.           Notices. All notices,
requests, demands and other communications hereunder shall be subject to the
notice provision of the Purchase Agreement.

        

        17.           Other Security. To the extent
that the Obligations are now or hereafter secured by property other than the
Collateral or by the guarantee, endorsement or property of any other person,
firm, corporation or other entity, then the Agent shall have the right, in its
sole discretion, to pursue, relinquish, subordinate, modify or take any other
action with respect thereto, without in any way modifying or affecting any of
the Secured Parties’ rights and remedies hereunder.

        

        18.           Appointment of
Agent.  A Majority in Interest of the Secured Parties may
appoint an Person to act as their agent (“Agent”) for purposes
of exercising any and all rights and remedies of the Secured Parties hereunder.
Such appointment shall continue until revoked in writing by a Majority in
Interest, at which time a Majority in Interest shall appoint a new
Agent.

         

        
          
            
            

          

          
            22

            
              

            

          

          
            
            

          

        

         

        19.           Miscellaneous.

        

        (a)           No
course of dealing between the Debtor and the Secured Parties, nor any failure to
exercise, nor any delay in exercising, on the part of the Secured Parties, any
right, power or privilege hereunder or under the Notes shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege.

        

        (b)           All
of the rights and remedies of the Secured Parties with respect to the
Collateral, whether established hereby or by the Notes or by any other
agreements, instruments or documents or by law, shall be cumulative and may be
exercised singly or concurrently.

        

        (c)           This Agreement, together with the exhibits and
schedules hereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into this Agreement and the exhibits and schedules
hereto.  No provision of this
Agreement may be waived, modified, supplemented or amended except in a written
instrument signed, in the case of an amendment, by the Debtor and a Majority in
Interest or, in the case of a waiver, by the party against whom enforcement of
any such waived provision is sought.

        

        (d)           If
any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the parties hereto shall use their commercially
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.

        

        (e)           No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such
right.

         

        
          
            
            

          

          
            23

            
              

            

          

          
            
            

          

        

         

        (f)           This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns.  The Company and the
Subsidiaries may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each Secured Party (other than by
merger).  Any Secured Party may assign any or all of its rights under
this Agreement to any Person to whom such Secured Party assigns or transfers any
Securities, provided such transferee agrees in writing to be bound, with respect
to the transferred Securities, by the provisions of this Agreement that apply to
the “Secured Parties.”

        

        (g)           Each
party shall take such further action and execute and deliver such further
documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement.

        

        (h)           All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof.  The Debtor agrees that all
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and the Notes (whether brought
against a party hereto or its respective affiliates, directors, officers,
shareholders, partners, members, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New York,
Borough of Manhattan. The Debtor hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
Borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court or that such proceeding is improper.  Each party hereto
hereby irrevocably waives personal service of process and consents to process
being served in any such proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law.  Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of
or relating to this Agreement or the transactions contemplated
hereby.  If any party shall commence a proceeding to enforce any
provisions of this Agreement, then the prevailing party in such proceeding shall
be reimbursed by the other party for its reasonable attorney’s fees and other
costs and expenses incurred with the investigation, preparation and prosecution
of such proceeding.

         

        
          
            
            

          

          
            24

            
              

            

          

          
            
            

          

        

         

        (i)           This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same
Agreement.  In the event that any signature is delivered by facsimile
transmission or e-mail transmission, such signature shall create a valid
binding obligation of the party executing the same (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile
signature were the original thereof.

         

        (j)           The
Debtor (including without limitation any Additional Debtor joined hereto) shall
be jointly and severally be liable for the obligations of the Debtor to the
Secured Parties hereunder.

        

        (k)           The
Debtor shall indemnify, reimburse and hold harmless the Agent and the Secured
Parties and their respective partners, members, shareholders, officers,
directors, employees and agents (and any other persons with other titles that
have similar functions) (collectively, “Indemnitees”) from
and against any and all losses, claims, liabilities, damages, penalties, suits,
costs and expenses, of any kind or nature, (including fees relating to the cost
of investigating and defending any of the foregoing) imposed on, incurred by or
asserted against such Indemnitee in any way related to or arising from or
alleged to arise from this Agreement or the Collateral, except any such losses,
claims, liabilities, damages, penalties, suits, costs and expenses which result
from any violation of the terms or provisions of this Agreement or the
agreements underlying the Obligations or the negligence or willful misconduct of
the Indemnitee.  This indemnification provision is in addition to, and
not in limitation of, any other indemnification provision in the Notes, the
Purchase Agreement or any other agreement, instrument or other document executed
or delivered in connection herewith or therewith.

        

        (l)           Nothing
in this Agreement shall be construed to subject the Agent or any Secured Party
to liability as a partner or member in or of the Debtor or any of its direct or
indirect subsidiaries, nor shall the Agent or any Secured Party be deemed to
have assumed any obligations under any partnership agreement or limited
liability company agreement, as applicable, of any such Debtor or any of its
direct or indirect subsidiaries or otherwise, unless and until any such Secured
Party exercises its right to be substituted for such Debtor as a partner or
member, as applicable, pursuant hereto.

        

        (m)           To
the extent that the grant of the security interest in the Collateral and the
enforcement of the terms hereof require the consent, approval or action of any
partner or member, as applicable, of the Debtor or any direct or indirect
subsidiary of the Debtor or compliance with any provisions of any of the
Organizational Documents, the Debtor hereby grants such consent and approval and
waives any such noncompliance with the terms of said documents.

         

        
          
            
            

          

          
            25

            
              

            

          

          
            
            

          

        

         

        (n)           The
Debtor has the requisite corporate or other power and authority to enter into
this Agreement and otherwise to carry out its obligations
hereunder.  The execution, delivery and performance by the Debtor of
this Agreement and the filings contemplated therein have been duly authorized by
all necessary action on the part of such Debtor and no further action is
required by such Debtor.  This Agreement has been duly executed by the
Debtor.  This Agreement constitutes the legal, valid and binding
obligation of the Debtor, enforceable against the Debtor in accordance with its
terms

        

        [SIGNATURE
PAGES FOLLOW]

         

         

         

        
          
            
            

          

          
            26

            
              

            

          

          
            
            

          

        

         

        IN
WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed on the day and year first above written.

        

        

        
          	
                  CDEX
      INC.

                   

                
	 
      
	
                  By: 
      

                	 
      
	 
      	
                  Name:

                
	 
      	
                  Title:

                

        

        

        

         

        
          
            
            

          

          
            27

            
              

            

          

          
            
            

          

        

         

        SCHEDULE
A

        Principal Place of Business
of Debtor / Locations Where Collateral is Located or Stored:

        

        4555 S
Palo Verde Road, Suites 123 and 125

        Tucson,
AZ 85714

        

        SCHEDULE
B

        Exceptions

        

        None

        

        SCHEDULE
C

        Recording
Jurisdictions

        

        Pima
County, Arizona

        

        SCHEDULE
D

        Legal Names, Organizational
Jurisdictions and Identification Numbers

        

        CDEX
INC

        A Nevada
Corporation

        EIN
52-2336836

        

        SCHEDULE
E

        Names; Mergers and
Acquisitions

        

        None

        

        SCHEDULE
F

        Intellectual
Property

        

        (as
defined in the referenced Patent Applications)

        

        
          	
                   
      

                	
                  A.

                	
                  86581-0001
      “System And Method For Adapting A Software Control In An Operating
      Environment”

                

        

        
          	
                   
      

                	
                  1.

                	
                  Pat.
      Appln. No. 7,106,826

                

        

        
          	
                   
      

                	
                  2.

                	
                  Appln.
      No. 60/344,787

                

        

        
          	
                   
      

                	
                  3.

                	
                  EP
      Appln. No. EP 03701227.5

                

        

        
          	
                   
      

                	
                  4.

                	
                  HK
      Appln. No. HK 05101050.0

                

        

        
          	
                   
      

                	
                  5.

                	
                  CON
      Appln.No. US 11/451,509

                

        

        
          	
                   
      

                	
                  6.

                	
                  CON2
      Appln No. US 11/882,401

                

        

        
          	
                   
      

                	
                  7.

                	
                  PCT
      Appln. No. PCT/US03/00259

                

        

        
          	
                   
      

                	
                  B.

                	
                  86581-003
      “Methods And Apparatus For Molecular Species Detection, Inspection, And
      Classification Using Ultraviolet
Fluorescence”

                

        

        
          	
                   
      

                	
                  1.

                	
                  Appln.
      No. 60/427,935

                

        

         

        
          
            
            

          

          
            28

            
              

            

          

          
            
            

          

        

         

        
          	
                   
      

                	
                  2.

                	
                  Appln.
      No. US 10/717,921

                

        

        
          	
                   
      

                	
                  3.

                	
                  EP
      Appln. No. EP 03786978.1

                

        

        
          	
                   
      

                	
                  4.

                	
                  JP
      Appln. No. JP 2004-555552

                

        

        
          	
                   
      

                	
                  5.

                	
                  PCT
      Appln No. PCT/US03/37292

                

        

        
          	
                   
      

                	
                  C.

                	
                  86581-0004
      “Systems And Methods For Detection And Identification Of Chemical
      Substances”

                

        

        
          	
                   
      

                	
                  1.

                	
                  CA
      Appln. No. CA 2,520,261

                

        

        
          	
                   
      

                	
                  2.

                	
                  EP
      Appln. No. EP 04775795.0

                

        

        
          	
                   
      

                	
                  3.

                	
                  HK
      Appln.No. HK 06106543.3

                

        

        
          	
                   
      

                	
                  D.

                	
                  86581-0005
      “ System And Method For Detection and Identification Of A Plurality Of
      Chemical Substances”

                

        

        
          	
                   
      

                	
                  1.

                	
                  Appln
      No. 60/449,834

                

        

        
          	
                   
      

                	
                  E.

                	
                  86581-0009
      “ Cuvette And Cuvette Cap”

                

        

        
          	
                   
      

                	
                  1.

                	
                  Appln.
      No. 60/650,525

                

        

        
          	
                   
      

                	
                  2.

                	
                  PCT
      Appln.No. PCT/US06/004170

                

        

        
          	
                   
      

                	
                  F.

                	
                  86581-0012
      “Methods And Apparatus For Molecular Species Detection, Inspection, And
      Classification Using Ultraviolet To Visible Light-Induced
      Photoemission”

                

        

        
          	
                   
      

                	
                  1.

                	
                  Appln.
      No. PCT/US07/015132

                

        

         

        

        

        SCHEDULE
G

        Government Account
Debtors

        

        State of
Florida, unemployment taxes about $200.00

        

        SCHEDULE
H

        Pledged
Securities

        

        None

        

        SCHEDULE
I

        Permitted Licenses and
Dispositions

        

        None

         

         

        29

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