Document:

Exhibit 10.17

 

SECURITY AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

IWT TESORO CORPORATION

 

and

 

INTERNATIONAL WHOLESALE TILE INC.

 

Dated: August 25, 2005

 

TABLE OF CONTENTS

 

	
  1.

  	
   

  	
  General Definitions and
  Terms; Rules of Construction

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  Loan Facility

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  Repayment of the Loans

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  Procedure for Loans

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  Interest and Payments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  Security Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  Representations,
  Warranties and Covenants Concerning the Collateral

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  Payment of Accounts

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  Collection and
  Maintenance of Collateral

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  Inspections and
  Appraisals

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  Financial Reporting

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
   

  	
  Additional
  Representations and Warranties

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  13.

  	
   

  	
  Covenants

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  14.

  	
   

  	
  Further
  Assurances

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  15.

  	
   

  	
  Representations,
  Warranties and Covenants of Laurus

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  16.

  	
   

  	
  Power
  of Attorney

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  17.

  	
   

  	
  Term of
  Agreement

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  18.

  	
   

  	
  Termination
  of Lien

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  19.

  	
   

  	
  Events
  of Default

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  20.

  	
   

  	
  Remedies

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  21.

  	
   

  	
  Waivers

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  22.

  	
   

  	
  Expenses

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  23.

  	
   

  	
  Assignment
  By Laurus

  	
   

  

 

i

 

	
  24.

  	
   

  	
  No Waiver;
  Cumulative Remedies

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  25.

  	
   

  	
  Application
  of Payments

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  26.

  	
   

  	
  Indemnity

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  27.

  	
   

  	
  Revival

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  28.

  	
   

  	
  Borrowing
  Agency Provisions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  29.

  	
   

  	
  Notices

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  30.

  	
   

  	
  Governing
  Law, Jurisdiction and Waiver of Jury Trial

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  31.

  	
   

  	
  Limitation
  of Liability

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  32.

  	
   

  	
  Entire
  Understanding; Maximum Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  33.

  	
   

  	
  Severability

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  34.

  	
   

  	
  Survival

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  35.

  	
   

  	
  Captions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  36.

  	
   

  	
  Counterparts;
  Telecopier Signatures

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  37.

  	
   

  	
  Construction

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  38.

  	
   

  	
  Publicity

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  39.

  	
   

  	
  Joinder

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  40.

  	
   

  	
  Legends

  	
   

  

 

ii

 

LIST OF EXHIBITS

 

	
  Exhibit A

  	
  Eligible
  Subsidiaries

  

 

LIST OF SCHEDULES

 

	
  Schedule 1(A)
  

  	
  Commercial
  Tort Claims

  
	
  Schedule 2
  

  	
  Liens

  
	
  Schedule 7(c)
  

  	
  Actions
  Regarding Collateral

  
	
  Schedule 7(p)
  

  	
  Accounts

  
	
  Schedule 12(b)

  	
  Subsidiaries

  
	
  Schedule 12(c)

  	
  Capitalization

  
	
  Schedule 12(e)

  	
  Liabilities

  
	
  Schedule 12(f)
  

  	
  Agreements;
  Action

  
	
  Schedule 12(g)

  	
  Obligations
  to Related Parties

  
	
  Schedule 12(i)
  

  	
  Title
  to Properties and Assets, Liens, Etc.

  
	
  Schedule 12(l)
  

  	
  Litigation

  
	
  Schedule 12(m)

  	
  Tax
  Returns; Payments

  
	
  Schedule 12(n)

  	
  Employee
  Bargaining Agreements

  
	
  Schedule 12(o)

  	
  Registration
  Rights and Voting Rights

  
	
  Schedule 12(q)

  	
  Environmental

  
	
  Schedule 12(u)

  	
  SEC
  Reports and Financial Statements

  
	
  Schedule 12(aa)

  	
  Company
  Name; Locations of Offices, Records and Collateral

  
	
  Schedule 13(l)(i)

  	
  Required
  Approvals

  

 

iii

 

SECURITY AGREEMENT

 

This Security Agreement is made as of August 25,
2005 by and among LAURUS MASTER FUND, LTD., a Cayman Islands corporation (“Laurus”),
IWT TESORO CORPORATION, a Nevada corporation (“the Parent”), and each
party listed on Exhibit A attached hereto (each an “Eligible
Subsidiary” and collectively, the “Eligible Subsidiaries”) the
Parent and each Eligible Subsidiary, each a “Company” and collectively, the “Companies”).

 

BACKGROUND

 

The Companies have requested that Laurus make advances
available to the Companies; and

 

Laurus has agreed to make such advances on the terms
and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual
covenants and undertakings and the terms and conditions contained herein, the
parties hereto agree as follows:

 

1.                                       General
Definitions and Terms; Rules of Construction.

 

(a)                                  General
Definitions.  Capitalized terms used
in this Agreement shall have the meanings assigned to them in Annex A.

 

(b)                                 Accounting
Terms.  Any accounting terms used in
this Agreement which are not specifically defined shall have the meanings
customarily given them in accordance with GAAP and all financial computations
shall be computed, unless specifically provided herein, in accordance with GAAP
consistently applied.

 

(c)                                  UCC
Terms.  The following terms have the
meanings given to them in the UCC and terms used in this Agreement without
definition that are defined in the UCC, shall have the meanings given to them in
the UCC: Accounts, Chattel Paper, Commercial Tort Claims, Deposit Accounts,
Documents, Equipment, Farm Products, Fixtures, General Intangibles, Goods,
Health Care Insurance Receivables, Inventory, Investment Property, Instruments,
Letter-of-Credit Rights, Payment Intangibles, Proceeds, Software and Supporting
Obligations.

 

(d)                                 Rules of
Construction.  All Schedules,
Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement
are incorporated herein by reference and taken together with this Agreement
constitute but a single agreement.  The
words “herein”, “hereof” and “hereunder” or other words of similar import refer
to this Agreement as a whole, including the Exhibits, Addenda, Annexes and
Schedules thereto, as the same may be from time to time amended, modified, restated
or supplemented, and not to any particular section, subsection or clause
contained in this Agreement.  Wherever
from the context it appears appropriate, each term stated in either the
singular or plural shall include the singular and the plural, and pronouns
stated in the masculine, feminine or neuter gender shall include the masculine,
the feminine and 

 

 

the neuter.  The term “or” is not exclusive.  The term “including” (or any form thereof)
shall not be limiting or exclusive.  All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations.  All references in this Agreement or in the
Schedules, Addenda, Annexes and Exhibits to this Agreement to sections,
schedules, disclosure schedules, exhibits, and attachments shall refer to the
corresponding sections, schedules, disclosure schedules, exhibits, and
attachments of or to this Agreement.  All
references to any instruments or agreements, including references to any of
this Agreement or the Ancillary Agreements shall include any and all
modifications or amendments thereto and any and all extensions or renewals
thereof.

 

2.                                       Loan
Facility.

 

(a)                                  Loans.

 

(i)                                     Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make loans (the “Loans”) to Companies from time to time
during the Term which, in the aggregate at any time outstanding, will not
exceed the lesser of (x) (I) the Capital Availability Amount minus (II)
such reserves as Laurus may reasonably in its good faith judgment deem proper
and necessary from time to time (the “Reserves”) and (y) an amount equal
to (I) the Borrowing Base minus (II) the Reserves.  The amount derived at any time from Section 2(a)(i)(y)(I)
minus 2(a)(i)(y)(II) shall be referred to as the “Formula Amount.”  The Companies shall, jointly and severally,
execute and deliver to Laurus on the Closing Date the Revolving Note and a
Minimum Borrowing Note evidencing $3,000,000 of the Loans funded on the Closing
Date.  From time to time thereafter, the
Companies shall jointly and severally execute and deliver to Laurus immediately
prior to the final funding of each additional $2,000,000 tranche of Loans
allocated to any Minimum Borrowing Note issued after the date hereof
(calculated on a cumulative basis for each such tranche) an additional Minimum
Borrowing Note evidencing such tranche, substantially in the form of the
Minimum Borrowing Note delivered by the Companies to Laurus on the Closing
Date.  Notwithstanding anything herein to
the contrary, whenever during the Term the outstanding balance on the Minimum
Borrowing Note shall be less than the Minimum Borrowing Amount (such amount
being referred to herein as the “Transferable Amount”) to the extent
that the outstanding balance on the Revolving Note should equal or exceed $2,000,000,
that portion of the balance of the Revolving Note that exceeds $2,000,000, but
does not exceed the Transferable Amount, shall be segregated from the
outstanding balance under the Revolving Note and allocated to and aggregated
with the then existing balance of the next unissued serialized Minimum
Borrowing Note (the “Next Unissued Serialized Note”); provided that such
segregated amount shall remain subject to the terms and conditions of such
Revolving Note until a new serialized Minimum Borrowing Note is issued as set
forth below.  The Next Unissued
Serialized Note shall remain in book entry form until the balance thereunder
shall equal the Minimum Borrowing Amount, at which time a new serialized
Minimum Borrowing Note in the face amount equal to the Minimum Borrowing Amount
will be issued and registered as set forth in the Registration Rights Agreement
(and the outstanding balance under the Revolving Note shall at such time be
correspondingly reduced in the amount equal to the Minimum Borrowing Amount as
a result of the issuance of such new serialized Minimum Borrowing Note).

 

2

 

(ii)                                  Notwithstanding
the limitations set forth above, if requested by any Company, Laurus retains
the right to lend to such Company from time to time such amounts in excess of
such limitations as Laurus may determine in its sole discretion and in the case
of Loans made by Laurus with the actual knowledge that such Loan exceeds such
limitations and which are not protective in nature, on such terms and
conditions mutually agreed to among Laurus and Companies.

 

(iii)                               If any interest, fees,
costs or charges payable to Laurus hereunder are not paid when due, each of the
Companies shall thereby be deemed to have requested, and Laurus is hereby
authorized at its discretion to make and charge to the Companies’ account, a
Loan as of such date in an amount equal to such unpaid interest, fees, costs or
charges.

 

(iv)                              If
any Company at any time fails to perform or observe any of the covenants
contained in this Agreement or any Ancillary Agreement, Laurus may, but need
not, perform or observe such covenant on behalf and in the name, place and
stead of such Company (or, at Laurus’ option, in Laurus’ name) and may, but
need not, take any and all other actions which Laurus may deem necessary to
cure or correct such failure (including the payment of taxes, the satisfaction
of Liens, the performance of obligations owed to Account Debtors, lessors or
other obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments).  The amount of all
monies expended and all costs and expenses (including attorneys’ fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to the Companies’ account as a Loan and added to the
Obligations.  To facilitate Laurus’
performance or observance of such covenants by each Company, each Company
hereby irrevocably appoints Laurus, or Laurus’ delegate, acting alone, as such
Company’s attorney in fact (which appointment is coupled with an interest) with
the right (but not the duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file in the name and on behalf of such Company any
and all instruments, documents, assignments, security agreements, financing
statements, applications for insurance and other agreements and writings
required to be obtained, executed, delivered or endorsed by such Company.

 

(v)                                 Laurus
will account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such
account rendered by Laurus shall be deemed final, binding and conclusive unless
Laurus is notified by Company Agent in writing to the contrary within thirty
(30) days of the date each account was rendered specifying the item or items to
which objection is made.

 

(vi)                              During
the Term, the Companies may borrow and prepay Loans in accordance with the
terms and conditions hereof.

 

(b)                                 Minimum
Borrowing Amount.  After a
registration statement registering the Registrable Securities has been declared
effective by the SEC, conversions of the Minimum Borrowing Amount into the
Common Stock may be initiated as set forth in the respective Minimum Borrowing
Note.  From and after the date upon which
any outstanding principal of the Minimum Borrowing Amount (as evidenced by the
first Minimum Borrowing Note) is converted into Common Stock (the “First
Conversion Date”), (i) corresponding amounts of all outstanding 

 

3

 

Loans (not attributable
to the then outstanding Minimum Borrowing Amount) existing on or made after the
First Conversion Date will be aggregated in accordance with Section 2(a)(i) and
(ii) the Companies will issue a new (serialized) Minimum Borrowing Note to
Laurus in accordance with Section 2(a)(i), and (iii) the Parent shall
prepare and file a subsequent registration statement with the SEC to register
such subsequent Minimum Borrowing Note as set forth in the Registration Rights
Agreement.

 

3.                                       Repayment
of the Loans.  The Companies
(a) may prepay the Obligations from time to time in accordance with the
terms and provisions of the Notes (and Section 17 hereof if such
prepayment is due to a termination of this Agreement); (b) shall repay on
the expiration of the Term (i) the then aggregate outstanding principal
balance of the Loans together with accrued and unpaid interest, fees and
charges and; (ii) all other amounts owed Laurus under this Agreement and
the Ancillary Agreements; and (c) subject to Section 2(a)(ii), shall
repay on any day on which the then aggregate outstanding principal balance of
the Loans are in excess of the Formula Amount at such time, Loans in an amount
equal to such excess. Any payments of principal, interest, fees or any other
amounts payable hereunder or under any Ancillary Agreement shall be made prior
to 12:00 noon (New York time) on the due date thereof in immediately available
funds.

 

4.                                       Procedure
for Loans.  Company Agent may by written notice request a
borrowing of Loans prior to 12:00 noon (New York time) on the Business Day of
its request to incur, on the next Business Day, a Loan.  Together with each request for a Loan (or at
such other intervals as Laurus may request), Company Agent shall deliver to
Laurus a Borrowing Base Certificate which shall be certified as true and
correct by the Chief Executive Officer or Chief Financial Officer of Company
Agent together with all supporting documentation relating thereto.  All Loans shall be disbursed from whichever
office or other place Laurus may designate from time to time and shall be
charged to the Companies’ account on Laurus’ books.  As an accommodation, Laurus may permit
facsimile requests for a Loan or facsimile transmittal of instructions,
authorizations, agreements or reports to Laurus provided that the originals thereof
are delivered to Laurus within one (1) Business Day of any transmission by
facsimile.  If Laurus permits any such
means of communication by any Company, unless Company Agent specifically
directs Laurus in writing not to accept or act upon facsimile communications
from such Company, Laurus shall have no liability to any Company for any loss
or damage suffered by any Company as a result of Laurus honoring of any
requests, execution of any instructions, authorizations or agreements or
reliance on any reports communicated to it by facsimile and purporting to have
been sent to Laurus by any Company, and Laurus shall have no duty to verify the
origin of any such communication or the identity or authority of the Person
sending it.  The proceeds of each Loan
made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this Section 4
by way of credit to the applicable Company’s operating account maintained with
such bank as Company Agent designated to Laurus.  Any and all Obligations due and owing
hereunder may be charged to the Companies’ account and shall constitute Loans.

 

4

 

5.                                       Interest
and Payments.

 

(a)                                  Interest.

 

(i)                                     Except
as modified by Section 5(a)(iii) below, the Companies shall jointly
and severally pay interest at the Contract Rate on the unpaid principal balance
of each Loan until such time as such Loan is collected in full in good funds in
dollars of the United States of America.

 

(ii)                                  Interest
and payments shall be computed on the basis of actual days elapsed in a year of
360 days.  At Laurus’ option, Laurus may
charge the Companies’ account for said interest.

 

(iii)                               Effective upon the
occurrence of any Event of Default and for so long as any Event of Default
shall be continuing, the Contract Rate shall automatically be increased as set
forth in the Notes (such increased rate, the “Default Rate”), and all
outstanding Obligations, including unpaid interest, shall continue to accrue
interest from the date of such Event of Default at the Default Rate applicable
to such Obligations.  The Contract Rate
will not increase to the Default Rate until any applicable grace period has
elapsed with respect to such Event of Default.

 

(iv)                              In
no event shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time to
time (the “Maximum Legal Rate”), and if any provision of this Agreement
or any Ancillary Agreement is in contravention of any such law or regulation,
interest payable under this Agreement and each Ancillary Agreement shall be
computed on the basis of the Maximum Legal Rate (so that such interest will not
exceed the Maximum Legal Rate).

 

(v)                                 The
Companies shall jointly and severally pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off or counterclaim.

 

(b)                                 Payments;
Certain Closing Conditions.

 

(i)                                     Closing/Annual
Payments.  Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
three and nine-tenths percent (3.90%) of the Capital Availability Amount.  Such payment shall be deemed fully earned on
the Closing Date and shall not be subject to rebate or proration for any
reason.

 

(ii)                                  Overadvance
Payment.  Without affecting Laurus’
rights hereunder in the event the Loans exceed the Formula Amount (each such
event, an “Overadvance”), all such Overadvances shall bear additional
interest at a rate equal to five percent (5%) per annum above the Contract Rate
for all times such amounts shall be in excess of the Formula Amount.  All amounts that are incurred pursuant to
this Section 5(b)(iii) shall be due and payable by the Companies
monthly, in arrears, on the first business day of each calendar month and upon
expiration of the Term.

 

5

 

(iii)                               Financial Information
Default.  Without affecting Laurus’
other rights and remedies, in the event any Company fails to deliver the
financial information required by Section 11 on or before the date
required by this Agreement, the Companies shall jointly and severally pay
Laurus an aggregate fee in the amount of $250.00 per week (or portion thereof)
for each such failure until such failure is cured to Laurus’ satisfaction or
waived in writing by Laurus.  All amounts
that are incurred pursuant to this Section 5(b)(iv) shall be due and
payable by the Companies monthly, in arrears, on the first business of each
calendar month and upon expiration of the Term.

 

(iv)                              Expenses.  The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus’ due diligence review of each Company and its Subsidiaries and all
related matters.  Amounts required to be
paid under this Section 5(b)(v) will be paid on the Closing Date.

 

6.                                       Security
Interest.

 

(a)                                  To
secure the prompt payment to Laurus of the Obligations, each Company hereby
assigns, pledges and grants to Laurus a continuing security interest in and
Lien upon all of the Collateral.  All of
each Company’s Books and Records relating to the Collateral shall, until
delivered to or removed by Laurus, be kept by such Company in trust for Laurus
until all Obligations have been paid in full. 
Each confirmatory assignment schedule or other form of assignment
hereafter executed by each Company shall be deemed to include the foregoing
grant, whether or not the same appears therein.

 

(b)                                 Each
Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements or amendments thereto that (x) indicate the Collateral (1) as
all assets and personal property of such Company or words of similar effect,
regardless of whether any particular asset comprised in the Collateral falls
within the scope of Article 9 of the UCC of such jurisdiction, or (2) as
being of an equal or lesser scope or with greater detail, and (y) contain any
other information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its authorization
for Laurus to have filed any initial financial statements, or amendments
thereto if filed prior to the date hereof. 
Each Company acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement without the prior written consent of Laurus and agrees that
it will not do so without the prior written consent of Laurus, subject to such
Company’s rights under Section 9-509(d)(2) of the UCC.

 

(c)                                  Each
Company hereby grants to Laurus an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an occurrence and
during the continuance of an Event of Default without payment of royalty or
other compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, 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 and automatic machinery software and programs used
for the 

 

6

 

compilation or printout
thereof, and represents, promises and agrees that any such license or
sublicense is not and will not be in conflict with the contractual or
commercial rights of any third Person; provided, that such license will terminate
on the termination of this Agreement and the payment in full of all
Obligations.

 

7.                                       Representations,
Warranties and Covenants Concerning the Collateral. 
Each Company represents, warrants (each of which such representations
and warranties shall be deemed repeated upon the making of each request for a
Loan and made as of the time of each and every Loan hereunder) and covenants as
follows:

 

(a)                                  all
of the Collateral (i) is owned by it free and clear of all Liens
(including any claims of infringement) except those in Laurus’ favor and
Permitted Liens and (ii) except for the Working Capital Lender Loan
Agreement, is not subject to any agreement prohibiting the granting of a Lien
or requiring notice of or consent to the granting of a Lien.

 

(b)                                 it
shall not encumber, mortgage, pledge, assign or grant any Lien in any
Collateral or any other assets to anyone other than Laurus and except for
Permitted Liens.

 

(c)                                  the
Liens granted pursuant to this Agreement, upon completion of the filings and
other actions listed on Schedule 7(c) (which, in the case of
all filings and other documents referred to in said Schedule, have been
delivered to Laurus in duly executed form) constitute valid perfected security
interests in all of the Collateral in favor of Laurus as security for the
prompt and complete payment and performance of the Obligations, enforceable in
accordance with the terms hereof against any and all of its creditors and
purchasers and such security interest is prior to all other Liens in existence
on the date hereof except for Liens in favor of the Working Capital Lender.

 

(d)                                 no
effective security agreement, mortgage, deed of trust, financing statement,
equivalent security or Lien instrument or continuation statement covering all
or any part of the Collateral is or will be on file or of record in any public
office, except those relating to Permitted Liens.

 

(e)                                  it
shall not dispose of any of the Collateral whether by sale, lease or otherwise
except for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value
of not more than $25,000 and only to the extent that (i) the proceeds of
any such disposition are used to acquire replacement Equipment which is subject
to Laurus’ security interest in at least the same priority as the Equipment
disposed of or are used to repay Loans or to pay general corporate expenses, or
(ii) following the occurrence of an Event of Default which continues to
exist the proceeds of which are remitted to Laurus to be held as cash
collateral for the Obligations.

 

(f)                                    it
shall defend the right, title and interest of Laurus in and to the Collateral
against the claims and demands of all Persons whomsoever, and take such
actions, including (i) all actions necessary to grant Laurus “control” of
any Investment Property, Deposit Accounts, Letter-of-Credit Rights or
electronic Chattel Paper owned by it, with any agreements establishing control
to be in form and substance satisfactory to Laurus, (ii) subject to the
terms of the 

 

7

 

Intercreditor Agreement
the prompt (but in no event later than five (5) Business Days following
Laurus’ request therefor) delivery to Laurus of all original Instruments,
Chattel Paper, negotiable Documents and certificated Stock owned by it (in each
case, accompanied by stock powers, allonges or other instruments of transfer
executed in blank), (iii) notification of Laurus’ interest in Collateral
at Laurus’ request, and (iv) the institution of litigation against third
parties as shall be prudent in order to protect and preserve its and/or Laurus’
respective and several interests in the Collateral.

 

(g)                                 it
shall promptly, and in any event within five (5) Business Days after the
same is acquired by it, notify Laurus of any commercial tort claim (as defined
in the UCC) acquired by it and unless otherwise consented by Laurus, it shall
enter into a supplement to this Agreement granting to Laurus a Lien in such
commercial tort claim.

 

(h)                                 it
shall place notations upon its Books and Records and any of its financial
statements to disclose Laurus’ Lien in the Collateral.

 

(i)                                     if
it retains possession of any Chattel Paper or Instrument with Laurus’ consent,
upon Laurus’ request such Chattel Paper and Instruments shall be marked with
the following legend:  “This writing and
obligations evidenced or secured hereby are subject to the security interest of
Laurus Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable
request of Laurus and subject to the terms of the Intercreditor Agreement, such
Chattel Paper and Instruments shall be delivered to Laurus.

 

(j)                                     it
shall perform in a reasonable time all other steps requested by Laurus to
create and maintain in Laurus’ favor a valid perfected first Lien in all
Collateral subject only to Permitted Liens.

 

(k)                                  it
shall notify Laurus promptly and in any event within three (3) Business
Days after obtaining knowledge thereof (i) of any event or circumstance
that, to its knowledge, would cause Laurus to consider any then existing
Account and/or Inventory as no longer constituting an Eligible Account,
Eligible Extended Term Account or Eligible Inventory, as the case may be; (ii) of
any material delay in its performance of any of its obligations to any Account
Debtor; (iii) of any assertion by any Account Debtor of any material
claims, offsets or counterclaims; (iv) of any allowances, credits and/or
monies granted by it to any Account Debtor; (v) of all material adverse
information relating to the financial condition of an Account Debtor; (vi) of
any material return of goods; and (vii) of any loss, damage or destruction
of any of the Collateral.

 

(l)                                     all
Eligible Accounts and Eligible Extended Term Accounts (i) represent
complete bona fide transactions which require no further act under any
circumstances on its part to make such Accounts payable by the Account Debtors,
(ii) are not subject to any present, future contingent offsets or
counterclaims, and (iii) do not represent bill and hold sales, consignment
sales, guaranteed sales, sale or return or other similar understandings or
obligations of any Affiliate or Subsidiary of such Company.  It has not made, nor will it make, any agreement
with any Account Debtor for any extension of time for the payment of any
Account, any compromise or settlement for less than the full amount thereof,
any release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance for prompt or early 

 

8

 

payment allowed by it in
the ordinary course of its business consistent with historical practice and as
previously disclosed to Laurus in writing.

 

(m)                               it
shall keep and maintain its Equipment in good operating condition, except for
ordinary wear and tear, and shall make all necessary repairs and replacements
thereof so that the value and operating efficiency shall at all times be
maintained and preserved.  It shall not
permit any such items to become a Fixture to real estate or accessions to other
personal property.

 

(n)                                 it
shall maintain and keep all of its Books and Records concerning the Collateral
at the locations listed in Schedule 12(aa).

 

(o)                                 Except
for Inventory which is in transit in the ordinary course of business, motor
vehicles, sales of Inventory in the ordinary course of business and
dispositions of Equipment permitted by Section 7(e) of this Agreement,
it shall maintain and keep the tangible Collateral at the addresses listed in Schedule 12(aa),
provided, that (i) it may change such locations or open a new location,
provided that it provides Laurus at least ten (10) days prior written
notice of such changes or new location and (ii) prior to such change or opening
of a new location where Collateral having a value of more than $150,000 will be
located, it executes and delivers to Laurus such agreements deemed reasonably
necessary or prudent by Laurus, including landlord agreements, mortgagee
agreements and warehouse agreements, each in form and substance satisfactory to
Laurus, to adequately protect and maintain Laurus’ security interest in such
Collateral.

 

(p)                                 Schedule 7(p)
lists all banks and other financial institutions at which it maintains deposits
and/or other accounts, and such Schedule correctly identifies the name,
address and telephone number of each such depository, the name in which the
account is held, a description of the purpose of the account, and the complete
account number.  It shall not establish
any depository or other bank account with any financial institution (other than
the accounts set forth on Schedule 7(p)) without Laurus’ prior
written consent.

 

(q)                                 All
Inventory manufactured by it in the United States of America shall be produced
in accordance with the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto or
promulgated thereunder.

 

8.                                       Payment
of Accounts.

 

(a)                                  Each
Company will deposit all payments it receives with respect to Accounts and
other Collateral into a blocked account maintained by such Company (the “Blocked
Accounts”) with a bank or such other financial institution accepted by
Laurus in writing as may be selected by such Company (the “Blocked Account Bank”)
pursuant to the terms of the certain agreements among one or more Companies,
Working Capital Lender and the Blocked Account Bank.  Each Company, if requested by Laurus, shall
and shall cause the Blocked Account Bank to enter into all such documentation
acceptable to Laurus pursuant to which, among other things, the Blocked Account
Bank agrees to:  (a) sweep the Blocked
Account on a daily basis to an account designated by Working Capital Lender or
Laurus in writing and (b) comply only with the instructions or other
directions of Working Capital Lender 

 

9

 

or Laurus concerning the Blocked
Account.  Until amounts received by such
Company are remitted as required above, such Company shall hold all such payments
in trust for and as the property of Laurus and shall not commingle such
payments with any of its other funds or property.

 

(b)                                 Subject
to the terms of the Intercreditor Agreement, at Laurus’ election, following the
occurrence of an Event of Default which is continuing, Laurus may notify each
Company’s Account Debtors of Laurus’ security interest in the Accounts, collect
them directly and charge the collection costs and expenses thereof to Company’s
and the Eligible Subsidiaries joint and several account.

 

9.                                       Collection
and Maintenance of Collateral.

 

(a)                                  Laurus
may verify each Company’s Accounts from time to time, but not more often than
once every three (3) months, unless an Event of Default has occurred and
is continuing, utilizing an audit control company or any other agent of Laurus.

 

(b)                                 Proceeds
of Accounts received by Laurus will be deemed received on the Business Day
after Laurus’ receipt of such proceeds in good funds in dollars of the United
States of America to an account designated by Laurus.  Any amount received by Laurus after
12:00 noon (New York time) on any Business Day shall be deemed received on
the next Business Day.

 

(c)                                  As
Laurus receives the proceeds of Accounts of any Company, it shall (i) apply
such proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
all such remaining proceeds (net of interest, fees and other amounts then due
and owing to Laurus hereunder) to Company Agent (for the benefit of the
applicable Companies) upon request (but no more often than twice a week).  Notwithstanding the foregoing, following the
occurrence and during the continuance of an Event of Default, Laurus, at its
option, may (a) apply such proceeds to the Obligations in such order as
Laurus shall elect, (b) hold all such proceeds as cash collateral for the
Obligations and each Company hereby grants to Laurus a security interest in
such cash collateral amounts as security for the Obligations and/or (c) do
any combination of the foregoing.

 

10.                                 Inspections
and Appraisals.  At all times
during normal business hours, Laurus, and/or any agent or representative of
Laurus shall have the right to (a) have access to, visit, inspect, review,
evaluate and make physical verification and appraisals of the properties of
Parent and each of its Subsidiaries and the Collateral, (b) inspect, audit
and copy (or take originals if necessary) and make extracts from the Books and
Records of Parent and each of its Subsidiaries, including management letters
prepared by the Accountants, and (c) discuss with the directors, principal
officers, and independent accountants of Parent and each of its Subsidiaries, such
Person’s business, assets, liabilities, financial condition, results of
operations and business prospects; provided that absent the occurrence of a Default
or an Event of Default, such inspections shall be limited to three times during
each year of term of this Agreement. 
Each Company and each of its Subsidiaries will deliver to Laurus any
instrument necessary for Laurus to obtain records from any service bureau
maintaining records for such Company and its Subsidiaries.  If any internally prepared financial
information, including that required under this Section is unsatisfactory
in any manner to Laurus, Laurus may request that the Accountants 

 

10

 

review the same.  Notwithstanding
the foregoing, no Company nor any of its Subsidiaries shall provide any
material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.

 

11.                                 Financial
Reporting.  Company Agent will deliver, or cause to be
delivered, to Laurus each of the following, which shall be in form and detail
acceptable to Laurus:

 

(a)                                  not
later than one hundred twenty (120) days after the close of each fiscal year of
the Parent, unqualified, audited financial statements of Parent and each of its
Subsidiaries as of the end of such year, on a consolidated and consolidating
basis, certified by a firm of independent certified public accountants of
recognized standing selected by Company but acceptable to Laurus (the “Accountants”)
(except for a qualification for a change in accounting principles with which
the Accountant concurs);

 

(b)                                 not
later than thirty (30) days after the end of each month hereafter, including
the last month of Parent’s fiscal year, unaudited, interim financial statements
of Parent and its Subsidiaries as of the end of such month and of the portion
of the fiscal year then elapsed, on a consolidated and consolidating basis,
certified by the Chief Financial Officer of Parent as prepared in accordance
with GAAP and fairly presenting the consolidated financial position and results
of operations of Parent and its Subsidiaries for such month and period subject
only to changes from audit and year-end adjustments and except that such
statements need not contain footnote disclosures;

 

(c)                                  promptly
upon Laurus’ request, but in any event, on the second full Business Day of each
week, a Borrowing Base Certificate for the previous week, which includes a
weekly report of sales, credits and collections of each Company;

 

(d)                                 not
later twenty (20) days after the end of each month (a) a reconciliation of
Accounts, (b) an aging of accounts receivable, and accounts payable, and (c) inventory
report in form and detail satisfactory to Laurus;

 

(e)                                  promptly
after the sending or filing thereof, as the case may be, copies of any proxy
statements, financial statements or reports which Parent has made available to
its shareholders (or members, in the case of a limited liability company) and
copies of any regular, periodic and special reports or registration statements
which Parent files with the SEC or any Governmental Authority which may be
substituted therefor, or any national securities exchange;

 

(f)                                    promptly
after the filing thereof, copies of any annual report to be filed with ERISA in
connection with each plan subject to ERISA;

 

(g)                                 such
other data and information (financial and otherwise) as Laurus, from time to
time, may reasonably request, bearing upon or related to the Collateral or Parent’s
and each of its Subsidiaries’ financial condition or results of operations; and

 

(h)                                 not
later than fifteen (15) days after the close of each fiscal quarter of Parent,
the policy date review sheets with respect to the life insurance policies taken
as collateral 

 

11

 

by the Laurus, which
policy date review sheets shall contain such information as required by Laurus.

 

Concurrently with the delivery of the financial
statements described in clause (a) of this subsection, Company Agent shall
forward to Laurus a copy of the accountants’ letter to Parent’s management that
is prepared in connection with such financial statements and also shall cause
to be prepared and shall furnish to Laurus a certificate of the Accountants
certifying to Laurus that, based upon their examination of the financial
statements of Parent and its Subsidiaries performed in connection with their
examination of said financial statements, they are not aware of any Default or
Event of Default, or, if they are aware of such Default or Event of Default,
specifying the nature thereof, and acknowledging, in a manner satisfactory to
Laurus, that they are aware that Laurus is relying on such financial statements
in making its decisions with respect to the Loans. Concurrently with the
delivery of the financial statements described in clauses (a) and (b) of
this Section 11, or more frequently if requested by Laurus, Parent shall
cause to be prepared and furnished to Laurus a certificate executed by the President,
Chief Executive Officer or Chief Financial Officer of Parent stating that such
financial statements have been prepared in accordance with GAAP, subject in the
case of interim statements, to year-end audit adjustments and whether or not to
such officer’s knowledge of the occurrence of any Default or Event of Default
hereunder and if so, stating in reasonable detail the facts with respect
thereto.

 

12.                                 Additional
Representations and Warranties.  Each Company
hereby represents and warrants to Laurus as follows:

 

(a)                                  Organization,
Good Standing and Qualification.  It
and each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization.  It and each of its Subsidiaries has the
corporate, limited liability company or partnership, as the   case may be, power and authority to own and
operate its properties and assets and, insofar as it is or shall be a party
thereto, to (i) execute and deliver this Agreement and the Ancillary
Agreements, (ii) to issue the Notes and the shares of Common Stock
issuable upon conversion of the Notes (the “Note Shares”), (iii) to
issue the Warrants and the shares of Common Stock issuable upon conversion of
the Warrants (the “Warrant Shares”), and to (iv) carry out the
provisions of this Agreement and the Ancillary Agreements and to carry on its
business as presently conducted.  It and
each of its Subsidiaries is duly qualified and is authorized to do business and
is in good standing as a foreign corporation, partnership or limited liability
company, as the case may be, in all jurisdictions in which the nature or
location of its activities and of its properties (both owned and leased) makes
such qualification necessary, except for those jurisdictions in which failure
to do so has not had, or could not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect.

 

(b)                                 Subsidiaries.  Each of its direct and indirect Subsidiaries,
the direct owner of each such Subsidiary and its percentage ownership thereof,
is set forth on Schedule 12(b).

 

12

 

(c)                                  Capitalization;
Voting Rights.

 

(i)                                     The
authorized capital stock of the Parent, as of the date hereof consists of (x)
100,000,000 shares of Common Stock, par value $0.001 per share of which the
number of shares set forth on Schedule 12(c) are issued and
outstanding, and (y) 25,000,000 are shares of preferred stock, par value $0.001
per share of which no shares are issued and outstanding.  The authorized, issued and outstanding
capital stock of each Subsidiary of each Company is set forth on Schedule 12(c).

 

(ii)                                  Except
as disclosed on Schedule 12(c), other than:  (i) the shares reserved for issuance
under the Parent’s stock option plans; and (ii) shares which may be issued
pursuant to this Agreement and the Ancillary Agreements, there are no outstanding
options, warrants, rights (including conversion or preemptive rights and rights
of first refusal), proxy or stockholder agreements, or arrangements or
agreements of any kind for the purchase or acquisition from the Parent of any
of its securities.  Except as disclosed
on Schedule 12(c), neither the offer or issuance of any of the
Notes or the Warrants, or the issuance of any of the Note Shares or the Warrant
Shares, nor the consummation of any transaction contemplated hereby will result
in a change in the price or number of any securities of the Parent outstanding,
under anti-dilution or other similar provisions contained in or affecting any
such securities.

 

(iii)                               All issued and
outstanding shares of the Parent’s Common Stock:  (i) have been duly authorized and
validly issued and are fully paid and nonassessable; and (ii) were issued
in compliance with all applicable state and federal laws concerning the
issuance of securities.

 

(iv)                              The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Parent’s Certificate of Incorporation (the “Charter”).  The Note Shares and the Warrant Shares have
been duly and validly reserved for issuance. 
When issued in compliance with the provisions of this Agreement and the
Parent’s Charter, the Securities will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Securities may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.

 

(d)                                 Authorization;
Binding Obligations.  All corporate,
partnership or limited liability company, as the case may be, action on its and
its Subsidiaries’ part (including their respective officers and directors)
necessary for the authorization of this Agreement and the Ancillary Agreements,
the performance of all of its and its Subsidiaries’ obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization,
issuance and delivery of the Notes and the Warrant has been taken or will be
taken prior to the Closing Date.  This
Agreement and the Ancillary Agreements, when executed and delivered and to the
extent it is a party thereto, will be its and its Subsidiaries’ valid and
binding obligations enforceable against each such Person in accordance with
their terms, except:

 

(i)                                     as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

 

13

 

(ii)                                  general
principles of equity that restrict the availability of equitable or legal
remedies.

 

The issuance of the Notes and the subsequent conversion
of the Notes into Note Shares are not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or
complied with.  The issuance of the
Warrants and the subsequent exercise of the Warrants for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with.

 

(e)                                  Liabilities.  Neither it nor any of its Subsidiaries has
any liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings and those
liabilities listed on Schedule 12(e).

 

(f)                                    Agreements;
Action.  Except as set forth on Schedule 12(f) or
as disclosed in any Exchange Act Filings:

 

(i)                                     There
are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which it or any of its
Subsidiaries is a party or to its knowledge by which it is bound which may
involve:  (i) obligations (contingent
or otherwise) of, or payments to, it or any of its Subsidiaries in excess of
$50,000 (other than obligations of, or payments to, it or any of its
Subsidiaries arising from purchase or sale agreements entered into in the
ordinary course of business); or (ii) the transfer or license of any
patent, copyright, trade secret or other proprietary right to or from it (other
than licenses arising from the purchase of “off the shelf” or other standard
products); or (iii) provisions restricting the development, manufacture or
distribution of its or any of its Subsidiaries’ products or services; or (iv) indemnification
by it or any of its Subsidiaries with respect to infringements of proprietary
rights.

 

(ii)                                  Since
June 30, 2005 (the “Balance Sheet Date”) neither it nor any of its
Subsidiaries has:  (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other than ordinary
course obligations) individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any Person
not in excess, individually or in the aggregate, of $100,000, other than
ordinary advances for travel expenses; or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than the sale of its
Inventory in the ordinary course of business.

 

(iii)                               For the purposes of
subsections (i) and (ii) of this Section 12(f), all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons it or
any of its applicable Subsidiaries has reason to believe are affiliated
therewith or with any Subsidiary thereof) shall be aggregated for the purpose
of meeting the individual minimum dollar amounts of such subsections.

 

(iv)                              The
Parent maintains disclosure controls and procedures (“Disclosure Controls”)
as required by the SEC for Companies of the size of the Parent designed to
ensure that information required to be disclosed by the Parent in the reports
that it files or 

 

14

 

submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the rules and forms of the SEC.

 

(v)                                 The
Parent makes and keeps books, records, and accounts, that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of its
assets.  It maintains internal control
over financial reporting (“Financial Reporting Controls”) as required by
the SEC for entities of its size.

 

(vi)                              There
is no weakness in any of its Disclosure Controls or Financial Reporting
Controls that is required to be disclosed in any of the Exchange Act Filings,
except as so disclosed.

 

(g)                                 Obligations
to Related Parties.  Except as set
forth on Schedule 12(g), or as disclosed in any Exchange Act
Filings neither it nor any of its Subsidiaries has any obligations to their
respective officers, directors, stockholders or employees other than:

 

(i)                                     for
payment of salary for services rendered and for bonus payments;

 

(ii)                                  reimbursement
for reasonable expenses incurred on its or its Subsidiaries’ behalf;

 

(iii)                               for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by its and
its Subsidiaries’ Board of Directors, as applicable); and

 

(iv)                              obligations
listed in its and each of its Subsidiary’s financial statements or disclosed in
any of the Parent’s Exchange Act Filings.

 

Except as described above or set forth on Schedule 12(g),
none of its officers, directors or, to the best of its knowledge, key employees
or stockholders, any of its Subsidiaries or any members of their immediate
families, are indebted to it or any of its Subsidiaries, individually or in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any Person with which it or any of its Subsidiaries is affiliated
or with which it or any of its Subsidiaries has a business relationship, or any
Person which competes with it or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with it or any of its Subsidiaries.
Except as described above, none of its officers, directors or stockholders, or
any member of their immediate families, is, directly or indirectly, interested
in any material contract with it or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between it or any of
its Subsidiaries and any such Person. 
Except as set forth on Schedule 12(g), neither it nor any of
its Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person.

 

15

 

(h)                                 Changes.  Since the Balance Sheet Date, except as
disclosed in any Exchange Act Filing or in any Schedule to this Agreement
or to any of the Ancillary Agreements, there has not been:

 

(i)                                     any
change in its or any of its Subsidiaries’ business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;

 

(ii)                                  any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees;

 

(iii)                               any material change,
except in the ordinary course of business, in its or any of its Subsidiaries’
contingent obligations by way of guaranty, endorsement, indemnity, warranty or
otherwise;

 

(iv)                              any
damage, destruction or loss, whether or not covered by insurance, which has
had, or could reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect;

 

(v)                                 any
waiver by it or any of its Subsidiaries of a valuable right or of a material
debt owed to it;

 

(vi)                              any
direct or indirect material loans made by it or any of its Subsidiaries to any
of its or any of its Subsidiaries’ stockholders, employees, officers or
directors, other than advances made in the ordinary course of business;

 

(vii)                           any material change in any
compensation arrangement or agreement with any employee, officer, director or
stockholder;

 

(viii)                        any declaration or payment of
any dividend or other distribution of its or any of its Subsidiaries’ assets;

 

(ix)                                any
labor organization activity related to it or any of its Subsidiaries;

 

(x)                                   any
debt, obligation or liability incurred, assumed or guaranteed by it or any of
its Subsidiaries, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;

 

(xi)                                any
sale, assignment or transfer of any Intellectual Property or other intangible
assets;

 

(xii)                             any change in any material
agreement to which it or any of its Subsidiaries is a party or by which either
it or any of its Subsidiaries is bound which, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect;

 

16

 

(xiii)                          any other event or condition
of any character that, either individually or in the aggregate, has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect; or

 

(xiv)                         any arrangement or commitment
by it or any of its Subsidiaries to do any of the acts described in subsection (i) through
(xiii) of this Section 12(h).

 

(i)                                     Title
to Properties and Assets; Liens, Etc. 
Except as set forth on Schedule 12(i), it and each of its
Subsidiaries has good and marketable title to their respective properties and
assets, and good title to its leasehold interests, in each case subject to no
Lien, other than Permitted Liens.

 

All facilities, Equipment, Fixtures, vehicles and
other properties owned, leased or used by it or any of its Subsidiaries are in
good operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. 
Except as set forth on Schedule 12(i), it and each of its
Subsidiaries is in compliance with all material terms of each lease to which it
is a party or is otherwise bound.

 

(j)                                     Intellectual
Property.

 

(i)                                     It
and each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now
conducted and, to its knowledge as presently proposed to be conducted, without
any known infringement of the rights of others. 
There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary’s Intellectual Property, nor is it or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
Person other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.

 

(ii)                                  Neither
it nor any of its Subsidiaries has received any communications alleging that it
or any of its Subsidiaries has violated any of the Intellectual Property or
other proprietary rights of any other Person, nor is it or any of its
Subsidiaries aware of any basis therefor.

 

(iii)                               Neither it nor any of
its Subsidiaries believes it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to
their employment by it or any of its Subsidiaries, except for inventions, trade
secrets or proprietary information that have been rightfully assigned to it or
any of its Subsidiaries.

 

(k)                                  Compliance
with Other Instruments.  Neither it
nor any of its Subsidiaries is in violation or default of (x) any term of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which
it is bound or of any judgment, decree, order or writ, which violation or
default, in the case of this clause (y), has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.  The execution, delivery and
performance of and compliance with this Agreement and the Ancillary Agreements
to which it is a party, and the issuance of the Notes and the other Securities
each pursuant hereto and thereto, will not, with or 

 

17

 

without the passage of
time or giving of notice, result in any such material violation, or be in
conflict with or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its or any of its Subsidiary’s
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to it
or any of its Subsidiaries, their businesses or operations or any of their
assets or properties.

 

(l)                                     Litigation.  Except as set forth on Schedule 12(l),
there is no action, suit, proceeding or investigation pending or, to its
knowledge, currently threatened against it or any of its Subsidiaries that
prevents it or any of its Subsidiaries from entering into this Agreement or the
Ancillary Agreements, or from consummating the transactions contemplated hereby
or thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing.  Neither it nor any of its Subsidiaries is a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or
investigation by it or any of its Subsidiaries currently pending or which it or
any of its Subsidiaries intends to initiate.

 

(m)                               Tax
Returns and Payments.  It and each of
its Subsidiaries has timely filed all tax returns (federal, state and local)
required to be filed by it.  All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by it and each of its Subsidiaries on or before the
Closing Date, have been paid or will be paid prior to the time they become delinquent
except to the extent they constitute a Permitted Lien.  Except as set forth on Schedule 12(m),
neither it nor any of its Subsidiaries has been advised:

 

(i)                                     that
any of its returns, federal, state or other, have been or are being audited as
of the date hereof; or

 

(ii)                                  of
any adjustment, deficiency, assessment or court decision in respect of its
federal, state or other taxes.

 

Neither it nor any of its Subsidiaries has any
knowledge of any liability of any tax to be imposed upon its properties or assets
as of the date of this Agreement that is not adequately provided for.

 

(n)                                 Employees.  Except as set forth on Schedule 12(n),
neither it nor any of its Subsidiaries has any collective bargaining agreements
with any of its employees.  There is no
labor union organizing activity pending or, to its knowledge, threatened with
respect to it or any of its Subsidiaries. 
Except as disclosed in the Exchange Act Filings or on Schedule 12(n),
neither it nor any of its Subsidiaries is a party to or bound by any currently
effective employment contract, deferred compensation arrangement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement.  To its
knowledge, none of its or any of its Subsidiaries’ employees, nor any
consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual
to be employed by, or to contract with, it or any of its Subsidiaries because
of the nature of the business to be conducted by it or any of its Subsidiaries;
and to its knowledge the continued 

 

18

 

employment by it and its
Subsidiaries of their present employees, and the performance of its and its
Subsidiaries contracts with its independent contractors, will not result in any
such violation.  Neither it nor any of
its Subsidiaries is aware that any of its or any of its Subsidiaries’ employees
is obligated under any contract (including licenses, covenants or commitments
of any nature) or other agreement, or subject to any judgment, decree or order
of any court or administrative agency that would interfere with their duties to
it or any of its Subsidiaries.  Neither
it nor any of its Subsidiaries has received any notice alleging that any such
violation has occurred.  Except for
employees who have a current effective employment agreement with it or any of
its Subsidiaries, none of its or any of its Subsidiaries’ employees has been
granted the right to continued employment by it or any of its Subsidiaries or
to any material compensation following termination of employment with it or any
of its Subsidiaries.  Except as set forth
on Schedule 12(n), neither it nor any of its Subsidiaries is aware
that any officer, key employee or group of employees intends to terminate his,
her or their employment with it or any of its Subsidiaries, as applicable, nor
does it or any of its Subsidiaries have a present intention to terminate the
employment of any officer, key employee or group of employees.

 

(o)                                 Registration
Rights and Voting Rights.  Except as
set forth on Schedule 12(o) and except as disclosed in Exchange Act
Filings, neither it nor any of its Subsidiaries is presently under any
obligation, and neither it nor any of its Subsidiaries has granted any rights,
to register any of its or any of its Subsidiaries’ presently outstanding
securities or any of its securities that may hereafter be issued.  Except as set forth on Schedule 12(o)
and except as disclosed in Exchange Act Filings, to its knowledge, none of its
or any of its Subsidiaries’ stockholders has entered into any agreement with
respect to its or any of its Subsidiaries’ voting of equity securities.

 

(p)                                 Compliance
with Laws; Permits.  Neither it nor
any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or
any SEC related regulation or rule or any rule of the Principal
Market promulgated thereunder or any other applicable statute, rule,
regulation, order or restriction of any domestic or foreign government or any
instrumentality or agency thereof in respect of the conduct of its business or
the ownership of its properties which has had, or could reasonably be expected
to have, either individually or in the aggregate, a Material Adverse
Effect.  No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection
with the execution and delivery of this Agreement or any Ancillary Agreement
and the issuance of any of the Securities, except such as have been duly and
validly obtained or filed, or with respect to any filings that must be made
after the Closing Date, as will be filed in a timely manner.  It and each of its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.

 

(q)                                 Environmental
and Safety Laws.  Neither it nor any
of its Subsidiaries is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and
to its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.  Except as set forth on Schedule 12(q),
no Hazardous Materials (as defined below) are used or have been used, stored,
or disposed of by it or any of its Subsidiaries or, to its knowledge, by any
other Person on 

 

19

 

any property owned,
leased or used by it or any of its Subsidiaries.  For the purposes of the preceding sentence, “Hazardous
Materials” shall mean:

 

(i)                                     materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or
other activities involving hazardous substances, including building materials;
and

 

(ii)                                  any
petroleum products or nuclear materials.

 

(r)                                    Valid
Offering.  Assuming the accuracy of
the representations and warranties of Laurus contained in this Agreement, the
offer and issuance of the Securities will be exempt from the registration
requirements of the Securities Act of 1933, as amended (the “Securities Act”),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.

 

(s)                                  Full
Disclosure.  It and each of its
Subsidiaries has provided Laurus with all information requested by Laurus in
connection with Laurus’ decision to enter into this Agreement, including all
information each Company and its Subsidiaries believe is reasonably necessary
to make such investment decision. 
Neither this Agreement, the Ancillary Agreements nor the exhibits and
schedules hereto and thereto nor any other document delivered by it or any of
its Subsidiaries to Laurus or its attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact nor omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.  Any financial projections and other estimates
provided to Laurus by it or any of its Subsidiaries were based on its and its
Subsidiaries’ experience in the industry and on assumptions of fact and opinion
as to future events which it or any of its Subsidiaries, at the date of the
issuance of such projections or estimates, believed to be reasonable.

 

(t)                                    Insurance.  It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to
it and its Subsidiaries in the same or similar business.

 

(u)                                 SEC
Reports and Financial Statements. 
Except as set forth on Schedule 12(u), it and each of its
Subsidiaries has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act.  The Parent has furnished Laurus with copies
of:  (i) its Annual Report on Form 10-KSB
for its fiscal years ended December 31, 
2004; and (ii) its Quarterly Reports on Form 10-QSB for its
fiscal quarters ended March 31, 2005 and June 30, 2005, and the Form 8-K
filings which it has made during its fiscal year 2004 to date (collectively,
the “SEC Reports”).  Except as set
forth on Schedule 12(u), each SEC Report was, at the time of its
filing, in substantial compliance with the requirements of its respective form
and none of the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing dates,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to 

 

20

 

make the statements
therein, in light of the circumstances under which they were made, not
misleading.  Such financial statements
have been prepared in accordance with GAAP applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its Subsidiaries, on
a consolidated basis, as of, and for, the periods presented in each such SEC
Report.

 

(v)                                 Listing.  The Parent’s Common Stock is listed or
quoted, as applicable, on the Principal Market and satisfies all requirements
for the continuation of such listing or quotation, as applicable, and the
Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable.  The Parent has
not received any notice that its Common Stock will be delisted from, or no
longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.

 

(w)                               No
Integrated Offering.  Neither it, nor
any of its Subsidiaries nor any of its Affiliates, nor any Person acting on its
or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement or any
Ancillary Agreement to be integrated with prior offerings by it for purposes of
the Securities Act which would prevent it from issuing the Securities pursuant
to Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

 

(x)                                   Stop
Transfer.  The Securities are
restricted securities as of the date of this Agreement.  Neither it nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by
state and federal securities laws.

 

(y)                                 Dilution.  It specifically acknowledges that the Parent’s
obligation to issue the shares of Common Stock upon conversion of the Notes and
exercise of the Warrants is binding upon the Parent and enforceable regardless
of the dilution such issuance may have on the ownership interests of other
shareholders of the Parent.

 

(z)                                   Patriot
Act.  It certifies that, to the best
of its knowledge, neither it nor any of its Subsidiaries has been designated,
nor is or shall be owned or controlled, by a “suspected terrorist” as defined
in Executive Order 13224.  It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. 
In furtherance of those efforts, it hereby represents, warrants and
covenants that:  (i) none of the
cash or property that it or any of its Subsidiaries will pay or will contribute
to Laurus has been or shall be derived from, or related to, any activity that
is deemed criminal under United States law; and (ii) no contribution or
payment by it or any of its Subsidiaries to Laurus, to the extent that they are
within its or any such Subsidiary’s control shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act 

 

21

 

of 1986 or the United
States International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001.  It shall promptly notify Laurus
if any of these representations, warranties and covenants ceases to be true and
accurate regarding it or any of its Subsidiaries.  It shall provide Laurus with any additional
information regarding it and each Subsidiary thereof that Laurus deems necessary
or convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities.  It
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus’ investment in it.  It further understands that Laurus may
release confidential information about it and its Subsidiaries and, if
applicable, any underlying beneficial owners, to proper authorities if Laurus,
in its sole discretion, determines that it is in the best interests of Laurus
in light of relevant rules and regulations under the laws set forth in subsection (ii) above.

 

(aa)                            Company
Name; Locations of Offices, Records and Collateral.  Schedule 12(aa) sets forth each
Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations
where records with respect to Collateral are kept (including in each case the
county of such locations) and, except as set forth in such Schedule 12(aa),
such locations have not changed during the preceding twelve months.  As of the Closing Date, during the prior five
years, except as set forth in Schedule 12(aa), no Company has been
known as or conducted business in any other name (including trade names).  Each Company has only one state of
organization.

 

(bb)                          ERISA.  Based upon the Employee Retirement Income
Security Act of 1974 (“ERISA”), and the regulations and published
interpretations thereunder:  (i) neither
it nor any of its Subsidiaries has engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it
and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
it nor any of its Subsidiaries has any knowledge of any event or occurrence
which would cause the Pension Benefit Guaranty Corporation to institute
proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) neither
it nor any of its Subsidiaries has any fiduciary responsibility for investments
with respect to any plan existing for the benefit of persons other than its or
such Subsidiary’s employees; and (v) neither it nor any of its
Subsidiaries has withdrawn, completely or partially, from any multi-employer
pension plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980.

 

(cc)                            Working
Capital Lender Loan Documents. 
Laurus has received a complete and correct copy of each of the Working
Capital Lender Loan Documents (including all exhibits, schedules and disclosure
letters referred to therein or delivered pursuant thereto, if any) and all
amendments thereto, waivers relating thereto and other side letters or
agreements affecting the terms thereof.

 

22

 

13.                                 Covenants.  Each Company, as applicable, covenants and
agrees with Laurus as follows:

 

(a)                                  Stop-Orders.  It shall advise Laurus, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Parent, or of the suspension
of the qualification of the Common Stock of the Parent for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.

 

(b)                                 Listing.  It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon
conversion of the Notes and exercise of the Warrants on the Principal Market
upon which shares of Common Stock are listed or quoted, as applicable, (subject
to official notice of issuance) and shall maintain such listing or quotation,
as applicable, so long as any other shares of Common Stock shall be so listed
or quoted, as applicable.  The Parent
shall maintain the listing or quotation, as applicable, of its Common Stock on
the Principal Market, and will comply in all material respects with the Parent’s
reporting, filing and other obligations under the bylaws or rules of the
National Association of Securities Dealers (“NASD”) and such exchanges,
as applicable.

 

(c)                                  Market
Regulations.  It shall notify the
SEC, NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to Laurus and promptly provide copies thereof to
Laurus.

 

(d)                                 Reporting
Requirements.  It shall timely file
with the SEC all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or
regulations thereunder would permit such termination.

 

(e)                                  Use
of Funds.  It shall use the proceeds
of the Loans for general working capital purposes only.

 

(f)                                    Access
to Facilities.  Intentionally
Omitted.

 

(g)                                 Taxes.  It shall, and shall cause each of its
Subsidiaries to, promptly pay and discharge, or cause to be paid and
discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon it and its Subsidiaries’ income,
profits, property or business, as the case may be; provided, however, that any
such tax, assessment, charge or levy need not be paid currently if (i) the
validity thereof shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or levy shall
have no effect on the Lien priority of Laurus in the Collateral, and (iii) if
it and/or such Subsidiary, as applicable, shall have set aside on its and/or
such Subsidiary’s books adequate reserves with respect thereto in accordance
with GAAP; and provided, further, that it shall, and shall cause each of its
Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith
upon the commencement of proceedings to foreclose any lien which may have
attached as security therefor.

 

23

 

(h)                                 Insurance.  It shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral.  Parent and each of its Subsidiaries shall
maintain and pay insurance upon all Collateral wherever located and with
respect to Parent’s and each of the Subsidiaries’ business, covering casualty,
hazard, public liability and such other risks in such amounts and with such
insurance companies as are reasonably satisfactory to Laurus. Parent shall
deliver the originals of such policies to Laurus with satisfactory lender loss
payable endorsements, naming Laurus as loss payee, assignee or additional
insured, as appropriate. Each policy of insurance or endorsement shall contain
a clause requiring the insurer to give not less than thirty (30) days prior
written notice to Laurus in the event of cancellation of the policy for any
reason whatsoever and a clause specifying that the interest of Laurus shall not
be impaired or invalidated by any act or neglect of any Company, any Subsidiary
of any Company or the owner of the property or by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If Parent
fails to provide and pay for such insurance (including, without limitation, the
credit insurance), Laurus may, at its option, but shall not be required to,
procure the same and charge Parent therefor. Parent agrees to deliver to
Laurus, promptly as rendered, true copies of all reports made in any reporting
forms to insurance companies.  It shall
instruct the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to Laurus and not to any Company or
any of its Subsidiaries and Laurus jointly. 
If any insurance losses are paid by check, draft or other instrument
payable to any Company and/or any of its Subsidiaries and Laurus jointly,
Laurus may endorse, as applicable, such Company’s and/or any of its
Subsidiaries’ name thereon and do such other things as Laurus may deem
advisable to reduce the same to cash. 
Laurus is hereby authorized to adjust and compromise claims.  All loss recoveries received by Laurus upon
any such insurance may be applied to the Obligations, in such order as Laurus
in its sole discretion shall determine or shall otherwise be delivered to
Company Agent for the benefit of the applicable Company and/or its
Subsidiaries.  Any surplus shall be paid
by Laurus to Company Agent for the benefit of the applicable Company and/or its
Subsidiaries, or applied as may be otherwise required by law.  Any deficiency thereon shall be paid, as
applicable, by Companies and their Subsidiaries to Laurus, on demand.

 

(i)                                     Intellectual
Property.  It shall, and shall cause
each of its Subsidiaries to, maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.

 

(j)                                     Properties.  It shall, and shall cause each of its
Subsidiaries to, keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and it shall, and shall cause each of its Subsidiaries to, at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.

 

(k)                                  Confidentiality.  It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. 
Notwithstanding the foregoing, each 

 

24

 

Company and its
Subsidiaries may disclose Laurus’ identity and the terms of this Agreement to
its current and prospective debt and equity financing sources.

 

(l)                                     Required
Approvals.  It shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
Laurus, (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than (1) each
Company’s indebtedness to Laurus, (2) the indebtedness set forth on Schedule 13(l)(i) attached
hereto and made a part hereof, (3) indebtedness to Working Capital Lender
pursuant to the terms of the Working Capital Lender Loan Documents as in effect
on the Closing Date, (4) indebtedness of any Subsidiary to any Company
relating to loans permitted by clause (v)(z) below, (5) Purchase Money
Indebtedness to the extent permitted under the terms of the Working Capital Lender
Loan Agreement as in effect on the Closing Date; (ii) cancel any debt
owing to it in excess of $50,000 in the aggregate during any 12 month period; (iii) assume,
guarantee, endorse or otherwise become directly or contingently liable in
connection with any obligations of any other Person, except the endorsement of
negotiable instruments by it or its Subsidiaries for deposit or collection or
similar transactions in the ordinary course of business; (iv) directly or
indirectly declare, pay or make any dividend or distribution on any class of
its Stock or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any of its or its Subsidiaries’ Stock
outstanding on the date hereof, or issue any preferred stock; (v) purchase
or hold beneficially any Stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances to, or make any investment or
acquire any interest whatsoever in, any other Person, including any partnership
or joint venture, except (w) travel advances, (x) loans to its and its
Subsidiaries’ officers and employees not exceeding at any one time an aggregate
of $10,000, (y) advances against commissions and other similar advances in the
ordinary course of business, and (z) loans to its existing Subsidiaries so long
as such Subsidiaries are designated as either a co-borrower hereunder or has
entered into such guaranty and security documentation required by Laurus,
including, without limitation, to grant to Laurus a perfected security interest
in substantially all of such Subsidiary’s assets to secure the Obligations
subject only to Permitted Liens; (vi) create or permit to exist any
Subsidiary, other than any Subsidiary in existence on the date hereof and
listed in Schedule 12(b) unless such new Subsidiary is a
wholly-owned Subsidiary and is designated by Laurus as either a co-borrower or
guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Laurus, including, without limitation, to grant to
Laurus a perfected security interest in substantially all of such Subsidiary’s
assets to secure the Obligations subject only to Permitted Liens; (vii) directly
or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise
acquire any indebtedness (other than to Laurus and in the ordinary course of
business) except to make scheduled payments of principal and interest thereof; (viii) enter
into any merger, consolidation or other reorganization with or into any other
Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no
Event of Default shall exist immediately prior to and after giving effect to
such merger or consolidation, (3) such Company shall have provided Laurus
copies of all documentation relating to such merger or consolidation and (4) such
Company shall have provided Laurus with at least thirty (30) days’ prior
written notice of such merger or consolidation; (ix) materially change the
nature of the business in which it is presently engaged; (x) become subject to
(including, without limitation, by way of amendment to or modification of) any
agreement or instrument which by its terms would (under any circumstances)
restrict its or 

 

25

 

any of its Subsidiaries’
right to perform the provisions of this Agreement or any of the Ancillary
Agreements; (xi) change its fiscal year or make any changes in accounting
treatment and reporting practices without prior written notice to Laurus except
as required by GAAP or in the tax reporting treatment or except as required by
law; (xii) enter into any transaction with any employee, director or Affiliate,
except in the ordinary course of business pursuant to the reasonable
requirements of its or its Subsidiaries business which are fully disclosed to
Laurus and that are no less favorable to it or its Subsidiaries than would be obtained
on a comparable arms-length transaction with a Person not an Affiliate; (xiii)
bill Accounts under any name except the present name of such Company; or (xiv)
sell, lease, transfer or otherwise dispose of any of its properties or assets,
or any of the properties or assets of its Subsidiaries, except for (1) the
sale of Inventory in the ordinary course of business and (2) the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment and only to the extent that (x) the
proceeds of any such disposition are used to acquire replacement Equipment
which is subject to Laurus’ security interest of at least the same priority as
the Lien on the Equipment which was disposed of or are used to repay Loans or
to pay general corporate expenses, or (y) following the occurrence of an Event
of Default which continues to exist, the proceeds of which are remitted to
Laurus to be held as cash collateral for the Obligations.

 

(m)                               Reissuance
of Securities.  The Parent shall
reissue certificates representing the Securities without the legends set forth
in Section 39 below at such time as:

 

(i)                                     the
holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k)
under the Securities Act; or

 

(ii)                                  upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.

 

The Parent agrees to cooperate with Laurus in
connection with all resales pursuant to Rule 144(d) and Rule 144(k)
and provide legal opinions necessary to allow such resales provided the Parent
and its counsel receive reasonably requested representations from Laurus and
broker, if any.

 

(n)                                 Opinion.  On the Closing Date, it shall deliver to
Laurus an opinion acceptable to Laurus from each Company’s legal counsel.  Each Company will provide, at the Companies’
joint and several expense, such other legal opinions in the future as are
reasonably necessary for the conversion of the Notes and the exercise of the
Warrants.

 

(o)                                 Legal
Name, etc.  It shall not, without
providing Laurus with 30 days prior written notice, change (i) its name as
it appears in the official filings in the state of its organization, (ii) the
type of legal entity it is, (iii) its organization identification number,
if any, issued by its state of organization, (iv) its state of
organization or (v) amend its certificate of incorporation, by-laws or
other organizational document.

 

(p)                                 Compliance
with Laws.  The operation of each of
its and each of its Subsidiaries’ business is and shall continue to be in
compliance in all material respects with all applicable federal, state and
local laws, rules and ordinances, including to all laws, rules,
regulations and orders relating to taxes, payment and withholding of payroll
taxes, employer and 

 

26

 

employee contributions
and similar items, securities, employee retirement and welfare benefits,
employee health and safety and environmental matters.

 

(q)                                 Notices.  It and each of its Subsidiaries shall
promptly inform Laurus in writing of:  (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any event which could reasonably be expected to have singly or
in the aggregate, a Material Adverse Effect; (ii) any change which has
had, or could reasonably be expected to have, a Material Adverse Effect; (iii) any
Event of Default or Default; and (iv) any default or any event which with
the passage of time or giving of notice or both would constitute a default
under any agreement for the payment of money to which it or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries or any of its
or any such Subsidiary’s properties may be bound the breach of which would have
a Material Adverse Effect.

 

(r)                                    Margin
Stock.  It shall not permit any of
the proceeds of the Loans made hereunder to be used directly or indirectly to “purchase”
or “carry” “margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

(s)                                  Offering
Restrictions.  Except as previously
disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock
options granted to its employees or directors, neither it nor any of its
Subsidiaries shall, prior to the full repayment or conversion of the Notes
(together with all accrued and unpaid interest and fees related thereto), (x)
enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a
variable/floating conversion and/or pricing feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement).

 

(t)                                    Authorization
and Reservation of Shares.  The
Parent shall at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the conversion of the Notes and exercise
of the Warrants.

 

(u)                                 Financing
Right of First Refusal.

 

(i)                                     It
hereby grants to Laurus a right of first refusal to provide any Additional
Financing (as defined below) to be issued by any Company and/or any of its
Subsidiaries (the “Additional Financing Parties”), subject to the
following terms and conditions.  From and
after the date hereof, prior to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests of the Additional Financing
Parties (an “Additional Financing”), Company Agent shall notify Laurus
of such Additional Financing.  In
connection therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed Term Sheet”) to Laurus setting forth the terms, conditions and
pricing of any such Additional Financing (such financing to be negotiated on “arm’s
length” terms and the terms thereof to be negotiated in good faith) proposed to
be entered into by the Additional Financing Parties.  Laurus shall have the right, but not the
obligation, to deliver to Company Agent its own proposed term sheet (the 

 

27

 

“Laurus Term Sheet”)
setting forth the terms and conditions upon which Laurus would be willing to
provide such Additional Financing to the Additional Financing Parties.  The Laurus Term Sheet shall contain terms no
less favorable to the Additional Financing Parties than those outlined in
Proposed Term Sheet.  Laurus shall
deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. 
If the provisions of the Laurus Term Sheet are at least as favorable to
the Additional Financing Parties as the provisions of the Proposed Term Sheet,
the Additional Financing Parties shall use their reasonable best efforts to enter
into and consummate the Additional Financing transaction outlined in the Laurus
Term Sheet within ninety (90) days of the acceptance of the Laurus Term Sheet.

 

(ii)                                  It
shall not, and shall not permit its Subsidiaries to, agree, directly or
indirectly, to any restriction with any Person which limits the ability of
Laurus to consummate an Additional Financing with it or any of its
Subsidiaries.

 

(v)                                 Prohibition
of Amendments to Working Capital Loan Documents.  It will not, without the prior written
consent of Laurus, (i) amend, modify or in any way alter the terms of the
Working Capital Loan Documents, except to the extent permitted by the terms of
the Intercreditor Agreement or (ii) permit, at any time, the amount of
Working Capital Lender Loans to exceed the Working Capital Lender Borrowing
Base except to the extent permitted by the terms of the Intercreditor Agreement.

 

(w)                               Prohibition
of Amendments to Subordinated Debt Documentation.  It shall not, without the prior written
consent of Laurus, amend, modify or in any way alter the terms of any of the
Subordinated Debt Documentation.

 

(x)                                   Prohibition
of Grant of Collateral for Subordinated Debt Documentation.  It shall not, without the prior written
consent of Laurus, grant or permit any of its Subsidiaries to grant to any
Person any Collateral of such Company or any collateral of any of its
Subsidiaries as security for any obligation arising under the Subordinated Debt
Documentation.

 

(y)                                 Prohibitions
of Payment Under Subordinated Debt Documentation.  Neither it nor any of its Subsidiaries shall,
without the prior written consent of Laurus, make any payments in respect of
the indebtedness evidenced by the Subordinated Debt Documentation, other than
as expressly permitted by the terms of the applicable Subordination Agreement.

 

14.                                 Further
Assurances.  At any time and from time to time, upon the
written request of Laurus and at the sole expense of Companies, each Company
shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further action as Laurus may request (a) to
obtain the full benefits of this Agreement and the Ancillary Agreements, (b) to
protect, preserve and maintain Laurus’ rights in the Collateral and under this
Agreement or any Ancillary Agreement, and/or (c) to enable Laurus to
exercise all or any of the rights and powers herein granted or any Ancillary
Agreement.

 

28

 

15.                                 Representations,
Warranties and Covenants of Laurus.  Laurus hereby
represents, warrants and covenants to each Company as follows:

 

(a)                                  Requisite
Power and Authority.  Laurus has all
necessary power and authority under all applicable provisions of law to execute
and deliver this Agreement and the Ancillary Agreements and to carry out their
provisions.  All corporate action on
Laurus’ part required for the lawful execution and delivery of this Agreement
and the Ancillary Agreements have been or will be effectively taken prior to
the Closing Date.  Upon their execution
and delivery, this Agreement and the Ancillary Agreements shall be valid and
binding obligations of Laurus, enforceable in accordance with their terms,
except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights, and (b) as limited by general principles
of equity that restrict the availability of equitable and legal remedies.

 

(b)                                 Investment
Representations.  Laurus understands
that the Securities are being offered pursuant to an exemption from
registration contained in the Securities Act based in part upon Laurus’
representations contained in this Agreement, including, without limitation,
that Laurus is an “accredited investor” within the meaning of Regulation D
under the Securities Act.  Laurus has
received or has had full access to all the information it considers necessary
or appropriate to make an informed investment decision with respect to the
Notes to be issued to it under this Agreement and the Securities acquired by it
upon the conversion of the Notes.

 

(c)                                  Laurus
Bears Economic Risk.  Laurus has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Parent so that it is
capable of evaluating the merits and risks of its investment in the Parent and
has the capacity to protect its own interests. 
Laurus must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement
under the Securities Act, or (ii) an exemption from registration is
available.

 

(d)                                 Investment
for Own Account.  The Securities are
being issued to Laurus for its own account for investment only, and not as a
nominee or agent and not with a view towards or for resale in connection with
their distribution.

 

(e)                                  Laurus
Can Protect Its Interest.  Laurus
represents that by reason of its, or of its management’s, business and
financial experience, Laurus has the capacity to evaluate the merits and risks
of its investment in the Notes, and the Securities and to protect its own
interests in connection with the transactions contemplated in this Agreement,
and the Ancillary Agreements.  Further,
Laurus is aware of no publication of any advertisement in connection with the
transactions contemplated in the Agreement or the Ancillary Agreements.

 

(f)                                    Accredited
Investor.  Laurus represents that it
is an accredited investor within the meaning of Regulation D under the
Securities Act.

 

(g)                                 Shorting.  Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to directly engage in “short
sales” of the Parent’s Common Stock as long as any Minimum Borrowing Note shall
be outstanding.

 

29

 

(h)                                 Patriot
Act.  Laurus certifies that, to the
best of Laurus’ knowledge, Laurus has not been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order
13224.  Laurus seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, Laurus
hereby represents, warrants and covenants that: 
(i) none of the cash or property that Laurus will use to make the
Loans has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no disbursement by
Laurus to any Company to the extent within Laurus’ control, shall cause Laurus
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001.  Laurus shall promptly notify the
Company Agent if any of these representations ceases to be true and accurate
regarding Laurus.  Laurus agrees to
provide the Company any additional information regarding Laurus that the
Company deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities.  Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus’ investment in the Parent.  Laurus further understands that the Parent
may release information about Laurus and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant rules and
regulations under the laws set forth in subsection (ii) above.

 

(i)                                     Limitation
on Acquisition of Common Stock. 
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, or any document, instrument or agreement entered into
in connection with any other transaction entered into by and between Laurus and
any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other
rights shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by any
Company to Laurus not to qualify as portfolio interest, within the meaning of Section 881(c)(2) of
the Internal Revenue Code of 1986, as amended (the “Code”) by reason of Section 881(c)(3) of
the Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) of
the Code (the “Stock Acquisition Limitation”).  The Stock Acquisition Limitation shall
automatically become null and void without any notice to any Company upon the
earlier to occur of either (a) the Parent’s delivery to Laurus of a Notice
of Redemption (as defined in the Notes) or (b) the existence of an Event
of Default at a time when the average closing price of the Common Stock as
reported by Bloomberg, L.P. on the Principal Market for the immediately
preceding five trading days is greater than or equal to 150% of the Fixed
Conversion Price (as defined in the Notes).

 

16.                                 Power
of Attorney.  Each Company hereby
appoints Laurus, or any other Person whom Laurus may designate as such Company’s
attorney, with power to:  (i) endorse
such Company’s name on any checks, notes, acceptances, money orders, drafts or
other forms of payment or security that may come into Laurus’ possession; (ii) sign
such Company’s name on 

 

30

 

any invoice or bill of lading relating to any Accounts,
drafts against Account Debtors, schedules and assignments of Accounts, notices
of assignment, financing statements and other public records, verifications of
Account and notices to or from Account Debtors; (iii) verify the validity,
amount or any other matter relating to any Account by mail, telephone,
telegraph or otherwise with Account Debtors; (iv) do all things necessary
to carry out this Agreement, any Ancillary Agreement and all related documents;
and (v) on or after the occurrence and during the continuation of an Event
of Default, notify the post office authorities to change the address for
delivery of such Company’s mail to an address designated by Laurus, and to
receive, open and dispose of all mail addressed to such Company.  Each Company hereby ratifies and approves all
acts of the attorney.  Neither Laurus,
nor the attorney will be liable for any acts or omissions or for any error of
judgment or mistake of fact or law, except for gross negligence or willful
misconduct.  This power, being coupled
with an interest, is irrevocable so long as Laurus has a security interest and
until the Obligations have been fully satisfied.

 

17.                                 Term
of Agreement.  Laurus’
agreement to make Loans and extend financial accommodations under and in
accordance with the terms of this Agreement or any Ancillary Agreement shall
continue in full force and effect until the expiration of the Term.  At Laurus’ election following the occurrence
of an Event of Default and the expiration of any applicable grace periods,
Laurus may terminate this Agreement.  The
termination of the Agreement shall not affect any of Laurus’ rights hereunder
or any Ancillary Agreement and the provisions hereof and thereof shall continue
to be fully operative until all transactions entered into, rights or interests
created and the Obligations have been irrevocably disposed of, concluded or
liquidated.  Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable payment to it of all Obligations if each
Company shall have (i) provided Laurus with an executed release of any and
all claims which such Company may have or thereafter have under this Agreement
and all Ancillary Agreements and (ii) paid to Laurus an early payment fee
in an amount equal to (1) five percent (5%) of the Capital Availability
Amount if such payment occurs prior to the first anniversary of the Closing
Date, (2) four percent (4%) of the Capital Availability Amount if such
payment occurs on or after the first anniversary of the Closing Date and prior
to the second anniversary of the Closing Date and (3) three percent (3%)
of the Capital Availability Amount if such termination occurs thereafter during
the Term; such fee being intended to compensate Laurus for its costs and
expenses incurred in initially approving this Agreement or extending same. Such
early payment fee shall be due and payable jointly and severally by the
Companies to Laurus upon termination by acceleration of this Agreement by
Laurus due to the occurrence and continuance of an Event of Default.

 

18.                                 Termination
of Lien.  The Liens and rights granted to Laurus
hereunder and any Ancillary Agreements and the financing statements filed in
connection herewith or therewith shall continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that any Company’s
account may from time to time be temporarily in a zero or credit position,
until all of the Obligations have been indefeasibly paid or performed in full
after the termination of this Agreement. 
Laurus shall not be required to send termination statements to any
Company, or to file them with any filing office, unless and until this
Agreement and the Ancillary Agreements shall have been terminated in accordance
with their terms and all Obligations indefeasibly paid in full in immediately
available funds.

 

31

 

19.                                 Events
of Default.  The occurrence of any of the following shall
constitute an “Event of Default”:

 

(a)                                  failure
to make payment of any of the Obligations when required hereunder, and, in any
such case, such failure shall continue for a period of three (3) days
following the date upon which any such payment was due;

 

(b)                                 failure
to perform under, and/or committing any breach of, in any material respect,
this Agreement or any covenant contained herein, which failure or breach shall
continue without remedy for a period of fifteen (15) days after the occurrence
thereof;

 

(c)                                  any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should prove to be false or
misleading in any material respect on the date as of which made or deemed made;

 

(d)                                 the
occurrence of any default (or similar term) in the observance or performance of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries (including, without
limitation, the indebtedness evidenced by the Working Capital Lender Loan
Documents or the Subordinated Debt Documentation) beyond the period of grace
(if any), the effect of which default is to cause, or permit the holder or
holders of such indebtedness or beneficiary or beneficiaries of such contingent
obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;

 

(e)                                  attachments
or levies in excess of $250,000 in the aggregate are made upon any Company’s
assets or a judgment is rendered against any Company’s property involving a
liability of more than $250,000 which shall not have been vacated, discharged,
stayed or bonded within thirty (30) days from the entry thereof;

 

(f)                                    any
change in any Company’s or any of its Subsidiary’s condition or affairs
(financial or otherwise) which in Laurus’ reasonable, good faith opinion, could
reasonably be expected to have a Material Adverse Effect;

 

(g)                                 any
Lien created hereunder or under any Ancillary Agreement for any reason ceases
to be or is not a valid and perfected Lien having the priority as in effect on
the Closing Date;

 

(h)                                 any
Company or any of its Subsidiaries shall (i) apply for, consent to or
suffer to exist the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now
or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
a petition seeking to take advantage of any other law providing for the relief
of debtors, (vi) acquiesce to without challenge within ten (10) days
of the filing thereof, or failure to have dismissed within thirty (30) days,
any petition filed against it in any involuntary case under such bankruptcy
laws, or (vii) take any action for the purpose of effecting any of the
foregoing;

 

32

 

(i)                                     any
Company or any of its Subsidiaries shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;

 

(j)                                     any
Company or any of its Subsidiaries directly or indirectly sells, assigns,
transfers, conveys, or suffers or permits to occur any sale, assignment,
transfer or conveyance of any assets of such Company or any interest therein,
except as permitted herein;

 

(k)                                  any
“Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof) is or becomes the “beneficial
owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act),
directly or indirectly, of 35% or more on a fully diluted basis of the then
outstanding voting equity interest of any Company (other than a “Person” or “group”
that beneficially owns 35% or more of such outstanding voting equity interests
of the respective Company on the date hereof or if such Person is a Current
Owner) or (ii) the Board of Directors of the Parent shall cease to consist
of a majority of the Parent’s board of directors on the date hereof (or
directors appointed by a majority of the board of directors in effect
immediately prior to such appointment);

 

(l)                                     the
indictment or conviction of any Company or any of its Subsidiaries or any
executive officer of any Company or any of its Subsidiaries under any criminal
statute, or commencement of criminal or civil proceeding against any Company or
any of its Subsidiaries or any executive officer of any Company or any of its
Subsidiaries pursuant to which statute or proceeding penalties or remedies
sought or available include forfeiture of any of the property of any Company or
any of its Subsidiaries;

 

(m)                               an
Event of Default shall occur under and as defined in any Note or in any other
Ancillary Agreement;

 

(n)                                 any
Company or any of its Subsidiaries shall breach any term or provision of any
Ancillary Agreement to which it is a party, in any material respect which
breach is not cured within any applicable cure or grace period provided in
respect thereof (if any);

 

(o)                                 any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under this Agreement or any Ancillary Agreement,
or any proceeding shall be brought to challenge the validity, binding effect of
any Ancillary Agreement or any Ancillary Agreement ceases to be a valid,
binding and enforceable obligation of such Company or any of its Subsidiaries
(to the extent such Persons are a party thereto);

 

(p)                                 an
SEC stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive Business Days or five (5) Business
Days during a period of ten (10) consecutive days, excluding in all cases
a suspension of all trading on a Principal Market, provided that the Parent
shall not have been able to cure such trading suspension within thirty (30) Business
Days of the notice thereof or list the Common Stock on another Principal Market
within sixty (60) Business Days of such notice;

 

(q)                                 the
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days or any Company is
required to issue a 

 

33

 

replacement Note to
Laurus and such Company shall fail to deliver such replacement Note within
seven (7) Business Days; or

 

(r)                                    any
Company, or any of its Subsidiaries shall take or participate in any action
which would be prohibited under the provisions of any of the Subordinated Debt
Documentation or Working Capital Lender Loan Documents or make any payment on
the indebtedness evidenced by the Subordinated Debt Documentation to a Person
that was not entitled to receive such payments under the subordination
provisions of applicable Subordinated Debt Documentation.

 

20.                                 Remedies.  Following the occurrence of an Event of
Default, Laurus shall have the right to demand repayment in full of all
Obligations, whether or not otherwise due. 
Until all Obligations have been fully and indefeasibly satisfied, Laurus
shall retain its Lien in all Collateral. 
Laurus shall have, in addition to all other rights provided herein and
in each Ancillary Agreement, the rights and remedies of a secured party under
the UCC, and under other applicable law, all other legal and equitable rights
to which Laurus may be entitled, including the right to take immediate
possession of the Collateral, to require each Company to assemble the
Collateral, at Companies’ joint and several expense, and to make it available
to Laurus at a place designated by Laurus which is reasonably convenient to
both parties and to enter any of the premises of any Company or wherever the
Collateral shall be located, with or without force or process of law, and to
keep and store the same on said premises until sold (and if said premises be
the property of any Company, such Company agrees not to charge Laurus for
storage thereof), and the right to apply for the appointment of a receiver for
such Company’s property.  Further, Laurus
may, at any time or times after the occurrence of an Event of Default, sell and
deliver all Collateral held by or for Laurus at public or private sale for
cash, upon credit or otherwise, at such prices and upon such terms as Laurus,
in Laurus’ sole discretion, deems advisable or Laurus may otherwise recover
upon the Collateral in any commercially reasonable manner as Laurus, in its
sole discretion, deems advisable.  The
requirement of reasonable notice shall be met if such notice is mailed postage
prepaid to Company Agent at Company Agent’s address as shown in Laurus’
records, at least ten (10) days before the time of the event of which
notice is being given.  Laurus may be the
purchaser at any sale, if it is public. 
In connection with the exercise of the foregoing remedies, Laurus is
granted permission to use all of each Company’s Intellectual Property.  The proceeds of sale shall be applied first
to all costs and expenses of sale, including attorneys’ fees, and second to the
payment (in whatever order Laurus elects) of all Obligations.  After the indefeasible payment and
satisfaction in full of all of the Obligations, and after the payment by Laurus
of any other amount required by any provision of law, including Section 9-608(a)(1) of
the UCC (but only after Laurus has received what Laurus considers reasonable
proof of a subordinate party’s security interest), the surplus, if any, shall
be paid to Company Agent (for the benefit of the applicable Companies) or its
representatives or to whosoever may be lawfully entitled to receive the same,
or as a court of competent jurisdiction may direct.  The Companies shall remain jointly and
severally liable to Laurus for any deficiency.

 

21.                                 Waivers.  To the full extent permitted by applicable
law, each Company hereby waives (a) presentment, demand and protest, and
notice of presentment, dishonor, intent to accelerate, acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension or
renewal of any or all of this Agreement and the Ancillary Agreements or 

 

34

 

any other notes, commercial paper, Accounts, contracts,
Documents, Instruments, Chattel Paper and guaranties at any time held by Laurus
on which such Company may in any way be liable, and hereby ratifies and
confirms whatever Laurus may do in this regard; (b) all rights to notice
and a hearing prior to Laurus’ taking possession or control of, or to Laurus’
replevy, attachment or levy upon, any Collateral or any bond or security that
might be required by any court prior to allowing Laurus to exercise any of its
remedies; and (c) the benefit of all valuation, appraisal and exemption
laws.  Each Company acknowledges that it
has been advised by counsel of its choices and decisions with respect to this
Agreement, the Ancillary Agreements and the transactions evidenced hereby and
thereby.

 

22.                                 Expenses.  The Companies shall jointly and severally pay
all of Laurus’ out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or outside counsel and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary
Agreement.  The Companies shall also
jointly and severally pay all of Laurus’ reasonable fees, charges,
out-of-pocket costs and expenses, including fees and disbursements of counsel
and appraisers, in connection with (a) the preparation, execution and
delivery of any waiver, any amendment thereto or consent proposed or executed
in connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Laurus’ obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Laurus’ security interests, assignments of
rights and Liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise
dispose of any Collateral, (d) any appraisals or re-appraisals of any
property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of
the foregoing.  The Companies shall also
jointly and severally pay Laurus’ customary bank charges for all bank services
(including wire transfers) performed or caused to be performed by Laurus for
any Company or any of its Subsidiaries at any Company’s or such Subsidiary’s
request or in connection with any Company’s loan account with Laurus.  All such costs and expenses together with all
filing, recording and search fees, taxes and interest payable by the Companies
to Laurus shall be payable on demand and shall be secured by the
Collateral.  If any tax by any
Governmental Authority is or may be imposed on or as a result of any
transaction between any Company and/or any Subsidiary thereof, on the one hand,
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, the Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and the Companies will repay to Laurus the
amount of any such taxes which shall be charged to the Companies’ account; and
until the Companies shall furnish Laurus with indemnity therefor (or supply
Laurus with evidence satisfactory to it that due provision for the payment
thereof has been made), Laurus may hold without interest any balance standing
to each Company’s credit and Laurus shall retain its Liens in any and all
Collateral.

 

23.                                 Assignment
By Laurus.  Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person and
any such assignee shall succeed to all of Laurus’ rights with respect thereto;
provided that Laurus shall not be permitted to effect any such assignment to a
competitor of any Company unless an Event of Default has 

 

35

 

occurred and is continuing. 
Upon such assignment, Laurus shall be released from all responsibility
for the Collateral to the extent same is assigned to any transferee.  Laurus may from time to time sell or
otherwise grant participations in any of the Obligations and the holder of any
such participation shall, subject to the terms of any agreement between Laurus
and such holder, be entitled to the same benefits as Laurus with respect to any
security for the Obligations in which such holder is a participant.  Each Company agrees that each such holder may
exercise any and all rights of banker’s lien, set-off and counterclaim with
respect to its participation in the Obligations as fully as though such Company
were directly indebted to such holder in the amount of such participation.

 

24.                                 No
Waiver; Cumulative Remedies.  Failure by
Laurus to exercise any right, remedy or option under this Agreement, any
Ancillary Agreement or any supplement hereto or thereto or any other agreement
between or among any Company and Laurus or delay by Laurus in exercising the
same, will not operate as a waiver; no waiver by Laurus will be effective
unless it is in writing and then only to the extent specifically stated.  Laurus’ rights and remedies under this
Agreement and the Ancillary Agreements will be cumulative and not exclusive of
any other right or remedy which Laurus may have.

 

25.                                 Application
of Payments.  Each Company irrevocably
waive the right to direct the application of any and all payments at any time
or times hereafter received by Laurus from or on such Company’s behalf and each
Company hereby irrevocably agrees that Laurus shall have the continuing
exclusive right to apply and reapply any and all payments received at any time
or times hereafter against the Obligations hereunder in such manner as Laurus
may deem advisable notwithstanding any entry by Laurus upon any of Laurus’
books and records.

 

26.                                 Indemnity.  Each Company hereby jointly and severally
indemnify and hold Laurus, and its respective affiliates, employees, attorneys
and agents (each, an “Indemnified Person”), harmless from and against
any and all suits, actions, proceedings, claims, damages, losses, liabilities
and expenses of any kind or nature whatsoever (including attorneys’ fees and
disbursements and other costs of investigation or defense, including those
incurred upon any appeal) which may be instituted or asserted against or
incurred by any such Indemnified Person as the result of credit having been
extended, suspended or terminated under this Agreement or any of the Ancillary
Agreements or with respect to the execution, delivery, enforcement, performance
and administration of, or in any other way arising out of or relating to, this
Agreement, the Ancillary Agreements or any other documents or transactions
contemplated by or referred to herein or therein and any actions or failures to
act with respect to any of the foregoing, except to the extent that any such
indemnified liability is finally determined by a court of competent
jurisdiction to have resulted solely from such Indemnified Person’s gross
negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR
LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED
OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF
ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

 

36

 

27.                                 Revival.  The Companies further agree that to the
extent any Company makes a payment or payments to Laurus, which payment or
payments or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside and/or required to be repaid to a
trustee, receiver or any other party under any bankruptcy act, state or federal
law, common law or equitable cause, then, to the extent of such payment or
repayment, the obligation or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if said payment had not been
made.

 

28.                                 Borrowing
Agency Provisions.

 

(a)                                  Each
Company hereby irrevocably designates Company Agent to be its attorney and
agent and in such capacity to borrow, sign and endorse notes, and execute and
deliver all instruments, documents, writings and further assurances now or
hereafter required hereunder, on behalf of such Company, and hereby authorizes
Laurus to pay over or credit all loan proceeds hereunder in accordance with the
request of Company Agent.

 

(b)                                 The
handling of this credit facility as a co-borrowing facility with a borrowing
agent in the manner set forth in this Agreement is solely as an accommodation
to the Companies and at their request.  Laurus
shall not incur any liability to any Company as a result thereof.  To induce Laurus to do so and in
consideration thereof, each Company hereby indemnifies Laurus and holds Laurus
harmless from and against any and all liabilities, expenses, losses, damages
and claims of damage or injury asserted against Laurus by any Person arising
from or incurred by reason of the handling of the financing arrangements of the
Companies as provided herein, reliance by Laurus on any request or instruction
from Company Agent or any other action taken by Laurus with respect to this
Paragraph 28.

 

(c)                                  All
Obligations shall be joint and several, and the Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of the Companies shall in no way be
affected by any extensions, renewals and forbearance granted by Laurus to any
Company, failure of Laurus to give any Company notice of borrowing or any other
notice, any failure of Laurus to pursue to preserve its rights against any
Company, the release by Laurus of any Collateral now or thereafter acquired
from any Company, and such agreement by any Company to pay upon any notice
issued pursuant thereto is unconditional and unaffected by prior recourse by
Laurus to any Company or any Collateral for such Company’s Obligations or the
lack thereof.

 

(d)                                 Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company may
now or hereafter have against the other or other Person directly or
contingently liable for the Obligations, or against or with respect to any
other’s property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been indefeasibly paid in full and
this Agreement has been irrevocably terminated.

 

(e)                                  Each
Company represents and warrants to Laurus that (i) Companies have one or
more common shareholders, directors and officers, (ii) the businesses and
corporate activities of Companies are closely related to, and substantially
benefit, the business and 

 

37

 

corporate activities of
Companies, (iii) the financial and other operations of Companies are
performed on a combined basis as if Companies constituted a consolidated
corporate group, (iv) Companies will receive a substantial economic
benefit from entering into this Agreement and will receive a substantial
economic benefit from the application of each Loan hereunder, in each case,
whether or not such amount is used directly by any Company and (v) all
requests for Loans hereunder by the Company Agent are for the exclusive and
indivisible benefit of the Companies as though, for purposes of this Agreement,
the Companies constituted a single entity although each Company is a separate
legal entity.

 

29.                                 Notices.  Any notice or request hereunder may be given
to any Company, Company Agent or Laurus at the respective addresses set forth
below or as may hereafter be specified in a notice designated as a change of
address under this Section.  Any notice
or request hereunder shall be given by registered or certified mail, return
receipt requested, hand delivery, overnight mail or telecopy (confirmed by
mail).  Notices and requests shall be, in
the case of those by hand delivery, deemed to have been given when delivered to
any officer of the party to whom it is addressed, in the case of those by mail
or overnight mail, deemed to have been given three (3) Business Days after
the date when deposited in the mail or with the overnight mail carrier, and, in
the case of a telecopy, when confirmed.

 

Notices shall be provided as follows:

 

	
  If to Laurus:

  	
  Laurus Master Fund,
  Ltd.

  
	
   

  	
  c/o Laurus Capital
  Management, LLC

  
	
   

  	
  825 Third Avenue, 14th
  Fl.

  
	
   

  	
  New York, New York
  10022

  
	
   

  	
  Attention:

  	
  John E.
  Tucker, Esq.

  
	
   

  	
  Telephone:

  	
  (212) 541-4434

  
	
   

  	
  Telecopier:

  	
  (212) 541-5800

  
	
   

  	
   

  
	
  With a copy to:

  	
  Loeb &
  Loeb & Loeb LLP

  
	
   

  	
  345 Park Avenue

  
	
   

  	
  New York, New York
  10154

  
	
   

  	
  Attention:

  	
  Scott J.
  Giordano, Esq.

  
	
   

  	
  Telephone:

  	
  (212) 407-4000

  
	
   

  	
  Facsimile:

  	
  (212) 407-4990

  
	
   

  	
   

  
	
  If to any Company,

  	
   

  	
   

  
	
  or Company Agent:

  	
  IWT Tesoro Corporation

  
	
   

  	
  191 Post Road West

  
	
   

  	
  Westport, Connecticut
  06880

  
	
   

  	
  Attention:

  	
  Henry J.
  Boucher, Jr., CEO

  
	
   

  	
  Telephone:

  	
  (203) 221-2770

  
	
   

  	
  Facsimile:

  	
  (203) 221-2797

  
				

 

38

 

	
  With a copy to:

  	
  Rader and Coleman, P.L.

  
	
   

  	
  2101 N.W. Boca Raton
  Blvd., Suite 1

  
	
   

  	
  Boca Raton, Florida
  33431

  
	
   

  	
  Attention:

  	
  Gayle
  Coleman, Esq.

  
	
   

  	
  Telephone:

  	
  (561) 368-0545

  
	
   

  	
  Facsimile:

  	
  (561) 367-1725

  

 

or such other address as may be designated in writing
hereafter in accordance with this Section 29 by such Person.

 

30.                                 Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)                                  THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.

 

(b)                                 EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND
EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK;
AND FURTHER  PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE
DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF LAURUS. 
EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY
WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.  EACH COMPANY HEREBY WAIVES PERSONAL SERVICE
OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT
AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE
MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS
SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED
UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS
AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

39

 

(c)                                  THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO ACHIEVE
THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION,
THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING
BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE
BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.

 

31.                                 Limitation
of Liability.  Each Company
acknowledges and understands that in order to assure repayment of the
Obligations hereunder Laurus may be required to exercise any and all of Laurus’
rights and remedies hereunder and agrees that, except as limited by applicable
law, neither Laurus nor any of Laurus’ agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad faith.

 

32.                                 Entire
Understanding; Maximum Interest.  This
Agreement and the Ancillary Agreements contain the entire understanding among
each Company and Laurus as to the subject matter hereof and thereof and any
promises, representations, warranties or guarantees not herein contained shall
have no force and effect unless in writing, signed by each Company’s and Laurus’
respective officers.  Neither this
Agreement, the Ancillary Agreements, nor any portion or provisions thereof may
be changed, modified, amended, waived, supplemented, discharged, cancelled or
terminated orally or by any course of dealing, or in any manner other than by
an agreement in writing, signed by the party to be charged.  Nothing contained in this Agreement, any
Ancillary Agreement or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum rate permitted by
applicable law.  In the event that the
rate of interest or dividends required to be paid or other charges hereunder
exceed the maximum rate permitted by such law, any payments in excess of such
maximum shall be credited against amounts owed by the Companies to Laurus and
thus refunded to the Companies.

 

33.                                 Severability.  Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.

 

34.                                 Survival.  The representations, warranties, covenants
and agreements made herein shall survive any investigation made by Laurus and
the closing of the transactions contemplated hereby to the extent provided
therein.  All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Companies pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Companies hereunder solely as of the date of such certificate or instrument.  All indemnities set forth herein shall
survive the execution, delivery 

 

40

 

and termination of this Agreement and the Ancillary
Agreements and the making and repaying of the Obligations.

 

35.                                 Captions.  All captions are and shall be without
substantive meaning or content of any kind whatsoever.

 

36.                                 Counterparts;
Telecopier Signatures.  This
Agreement may be executed in one or more counterparts, each of which shall
constitute an original and all of which taken together shall constitute one and
the same agreement.  Any signature
delivered by a party via telecopier transmission shall be deemed to be any
original signature hereto.

 

37.                                 Construction.  The parties acknowledge that each party and
its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.

 

38.                                 Publicity.  Each Company hereby authorizes Laurus to make
appropriate announcements of the financial arrangement entered into by and
among each Company and Laurus, including, without limitation, announcements
which are commonly known as tombstones, in such publications and to such
selected parties as Laurus shall in its sole and absolute discretion deem
appropriate, or as required by applicable law.

 

39.                                 Joinder.  It is understood and agreed that any Person
that desires to become a Company hereunder, or is required to execute a
counterpart of this Agreement after the date hereof pursuant to the
requirements of this Agreement or any Ancillary Agreement, shall become a
Company hereunder by (a) executing a Joinder Agreement in form and
substance satisfactory to Laurus, (b) delivering supplements to such
exhibits and annexes to this Agreement and the Ancillary Agreements as Laurus
shall reasonably request and (c) taking all actions as specified in this
Agreement as would have been taken by such Company had it been an original
party to this Agreement, in each case with all documents required above to be
delivered to Laurus and with all documents and actions required above to be
taken to the reasonable satisfaction of Laurus.

 

40.                                 Legends.  The Securities shall bear legends as follows;

 

(a)                                  The
Notes shall bear substantially the following legend:

 

“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.  THIS NOTE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL REASONABLY 

 

41

 

SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(b)                                 Any
shares of Common Stock issued pursuant to conversion of the Notes or exercise
of the Warrants, shall bear a legend which shall be in substantially the
following form until such shares are covered by an effective registration
statement filed with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS.  THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(c)                                  The
Warrants shall bear substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.  THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

[Balance of page intentionally left blank;
signature page follows.]

 

42

 

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

 

 

	
   

  	
  IWT
  TESORO CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  INTERNATIONAL
  WHOLESALE TILE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS
  MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

43

 

Annex A - Definitions

 

“Account Debtor” means any Person who is or may
be obligated with respect to, or on account of, an Account.

 

“Accountants” has the meaning given to such
term in Section 11(a)

 

“Affiliate” means Person (other than a
Subsidiary):  (a) which, directly or
indirectly, through one or more intermediaries controls, or is controlled by,
or is under common control with a Person; or (b) who is a director or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above; or (c) which beneficially
owns or holds 5% or more of any class of the voting Stock of a Person; or (d) 5%
or more of the voting Stock of which is beneficially owned or held by a Person
or a Subsidiary of a Person.  For the
purposes of this definition, control of a Person shall mean the power (direct
or indirect) to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise.

 

“Ancillary Agreements” means the Notes, the
Warrants, the Registration Rights Agreements, each Guaranty, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security agreements,
trust agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of any Company, any of its Subsidiaries or any other
Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may
be amended, supplemented, restated or otherwise modified from time to time.

 

“Average Loan Amount” has the meaning given to
such term in Section 5(b)(ii).

 

“Balance Sheet Date” has the meaning given such
term in Section 12(f)(ii).

 

“Blocked Accounts” has the meaning given such
term in Section 8(a).

 

“Books and Records” means all books, records,
board minutes, contracts, licenses, insurance policies, environmental audits,
business plans, files, computer files, computer discs and other data and
software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and
any and all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.

 

“Borrowing Base” means at the date of
determination thereof, the difference, if any, between (a) an amount equal
to the sum of (i) 90% of the net amount of Eligible Accounts outstanding
at such date; plus (ii) 95% of the insured net amount of Eligible Extended
Term Accounts at such date; plus (iii) the sum of (1) the applicable
Inventory Advance Rate of the value of Eligible Inventory consisting of floor
tile, wall tile, marble and decorative tile; plus (2) the applicable
Inventory Advance Rate of the value of Eligible Inventory consisting of trim;
plus (3) the applicable Inventory Advance Rate of the value of Eligible
Inventory consisting of 

 

44

 

Listello; plus (4) the applicable Inventory Advance Rate of
Intransit Inventory at such date, each calculated on the basis of the lower of
cost or market with the cost of raw materials and finished goods calculated on
a first-in, first-out basis; provided, however, such sum shall
not exceed the Inventory Maximum Percentage of the sum of the amounts set forth
in (a)(i), (ii) and (iii) above and (b) the amount of Working
Capital Lender Loans outstanding on such date.

 

“Borrowing Base Certificate” has the meaning
given to such term in the Working Capital Lender Loan Agreement as in effect on
the Closing Date.

 

“Business Day” means a day on which Laurus is
open for business and that is not a Saturday, a Sunday or other day on which
banks are required or permitted to be closed in the State of New York.

 

“Capital Availability Amount” means $5,000,000.

 

“Charter” has the meaning given such term in Section 12(c)(iv).

 

“Closing Date” means the date on which any
Company shall first receive proceeds of the initial Loans or the date hereof,
if no Loan is made under the facility on the date hereof.

 

“Code” has the meaning given such term in Section 15(i).

 

“Collateral” means all of each Company’s
property and assets, whether real or personal, tangible or intangible, and
whether now owned or hereafter acquired, or in which it now has or at any time
in the future may acquire any right, title or interests including all of the
following property in which it now has or at any time in the future may acquire
any right, title or interest:

 

(a)                                  all
Inventory;

 

(b)                                 all
Equipment;

 

(c)                                  all
Goods;

 

(d)                                 all
Fixtures;

 

(e)                                  all
General Intangibles;

 

(f)                                    all
Payment Intangibles;

 

(g)                                 all
Software

 

(h)                                 all
Accounts;

 

(i)                                     all
Health Care Insurance Receivables;

 

(j)                                     all
Deposit Accounts, other bank accounts and all funds on deposit therein;

 

45

 

(k)                                  all
Investment Property;

 

(l)                                     all
Stock except for the Stock of any Subsidiary in existence on the Closing Date;

 

(m)                               all
Chattel Paper;

 

(n)                                 all
Letter-of-Credit Rights;

 

(o)                                 all
Instruments;

 

(p)                                 all
Documents;

 

(q)                                 all
Commercial Tort Claims set forth on Schedule 1(A);

 

(r)                                    all
Books and Records;

 

(s)                                  all
Intellectual Property;

 

(t)                                    all
Supporting Obligations including letters of credit and guarantees issued in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;

 

(u)                                 (i) all
money, cash and cash equivalents and (ii) all cash held as cash collateral
to the extent not otherwise constituting Collateral, all other cash or property
at any time on deposit with or held by Laurus for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and

 

(v)                                 all
products and Proceeds of all or any of the foregoing, tort claims and all
claims and other rights to payment including (i) insurance claims against
third parties for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under leases, rentals
and hires of any or all of the foregoing and Proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.

 

“Common Stock” means the shares of stock
representing the Parent’s common equity interests.

 

“Company Agent” means Parent

 

“Contract Rate” has the meaning given such term
in the respective Note.

 

“Current Owner” means any of Henry J. Boucher, Jr.,
Paul Boucher, Forest Jordan or Grey Perna.

 

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

 

“Disclosure Controls” has the meaning given
such term in Section 12(f)(iv).

 

46

 

“Eligible Account” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

 

“Eligible Inventory” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

 

“Eligible Extended Term Account” has the
meaning given to such term in the Working Capital Lender Loan Agreement as in
effect on the Closing Date.

 

“Eligible Subsidiary” means each Subsidiary of
the Parent set forth on Exhibit A hereto, as the same may be updated
from time to time with Laurus’ written consent.

 

“ERISA” has the meaning given such term in Section 12(bb).

 

“Event of Default” means the occurrence of any
of the events set forth in Section 19.

 

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

 

“Exchange Act Filings” means the Parent’s
filings under the Exchange Act made prior to the date of this Agreement.

 

“Financial Reporting Controls” has the meaning
given such term in Section 12(f)(v).

 

“Formula Amount” has the meaning given such
term in Section 2(a)(i).

 

“GAAP” means generally accepted accounting
principles, practices and procedures in effect from time to time in the United
States of America.

 

“Goodwill” means all goodwill, trade secrets,
proprietary or confidential information, technical information, procedures,
formulae, quality control standards, designs, operating and training manuals,
customer lists, and distribution agreements now owned or hereafter acquired by
any Person.

 

“Governmental Authority” means any nation or government,
any state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.

 

“Guarantor” means each Person that executes a
guaranty or a support, put or other similar agreement in favor of Laurus in
connection with the transactions contemplated by this Agreement.

 

“Guaranty” means any agreement to perform all
or any portion of the Obligations on behalf of any Company for the benefit of
Laurus, together with all amendments, modifications and supplements thereto.

 

47

 

“Intellectual Property” means any and all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
Licenses, information and other proprietary rights and processes and all
Goodwill associated therewith.

 

“Intercreditor Agreement” means the Senior
Subordination Agreement among Laurus, Working Capital Lender, Company and each
Guarantor.

 

“Intransit Inventory” has the meaning given to
such term in the Working Capital Lender Loan Agreement as in effect on the
Closing Date.

 

“Inventory Advance Rate” means (i) as
respect Eligible Inventory consisting of floor tile, wall tile, marble and
decorative tile, 80%, as reduced by 2% per month commencing on October 1,
2005 and on the first day of each month thereafter to and including February 1,
2006, (ii) as respect Eligible Inventory consisting of trim, 60%, as
reduced by 1% per month commencing on October 1, 2005 and on the first day
of each month thereafter to and including February 1, 2006, (iii) as
respect Eligible Inventory consisting of Listello, 50% as reduced by 1% per
month commencing on October 1, 2005 and on the first day of each month
thereafter to and including February 1, 2006 and (iv) as respect
Intransit Inventory, 25%, as reduced by 2% per month commencing on October 1,
2005 and on the first day of each month thereafter to and including February 1,
2006.

 

“Inventory Maximum Percentage” means 80% as
reduced by 2% per month commencing on October 1, 2005 and on the first day
of each month thereafter to and including February 1, 2006.

 

“License” means any rights under any written
agreement now or hereafter acquired by any Person to use any trademark,
trademark registration, copyright, copyright registration or invention for
which a patent is in existence or other license of rights or interests now held
or hereafter acquired by any Person.

 

“Lien” means any interest in property securing
an obligation owed to, or a claim by, a Person other than the owner of such
property, whether such interest is based on common law, statute or
contract.  The term “Lien shall also
include reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting property.  For the
purpose of this Agreement, the Companies shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional sale agreement
or other arrangement pursuant to which title to the property has been retained
by or vested in some other Person for security purposes.

 

“Loans” has the meaning given such term in Section 2(a)(i) and
shall include all other extensions of credit hereunder and under any Ancillary
Agreement.

 

“Material Adverse Effect” means a material
adverse effect on (a) the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of any Company or
any of its Subsidiaries (taken individually and as a whole), (b) any
Company’s or any of its Subsidiary’s ability to pay or perform the Obligations
in accordance with the terms hereof or any Ancillary Agreement, (c) the
value of the Collateral, the Liens on the Collateral or 

 

48

 

the priority of any such Lien or (d) the practical realization of
the benefits of Laurus’ rights and remedies under this Agreement and the
Ancillary Agreements.

 

“Minimum Borrowing Amount” means $2,000,000.

 

“Minimum Borrowing Notes” means that certain
Secured Convertible Minimum Borrowing Note dated as of the Closing Date made by
the Companies in favor of Laurus evidencing $3,000,000 of the Loans made on the
Closing Date and each other Secured Convertible Minimum Borrowing Note made by
the Companies in favor of Laurus which evidences the Minimum Borrowing Amount,
as each of the same may be amended, supplemented, restated and/or otherwise
modified from time to time.

 

“NASD” has the meaning given such term in Section 13(b).

 

“Next Unissued Serialized Note” has the meaning
given such term in Section 2(a)(i).

 

“Note Shares” has the meaning given such term
in Section 12(a).

 

“Notes” means the Minimum Borrowing Notes and
the Revolving Note made by Companies in favor of Laurus in connection with the
transactions contemplated hereby, as each of the same may be amended,
supplemented, restated and/or otherwise modified from time to time.

 

“Obligations” means all Loans, all advances,
debts, liabilities, obligations, covenants and duties owing by each Company and
each of its Subsidiaries to Laurus (or any corporation that directly or
indirectly controls or is controlled by or is under common control with Laurus)
of every kind and description (whether or not evidenced by any note or other
instrument and whether or not for the payment of money or the performance or
non-performance of any act), direct or indirect, absolute or contingent, due or
to become due, contractual or tortious, liquidated or unliquidated, whether existing
by operation of law or otherwise now existing or hereafter arising including
any debt, liability or obligation owing from any Company and/or each of its
Subsidiaries to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at
the then applicable rate provided in this Agreement after the maturity of the
Loans and interest accruing at the then applicable rate provided in this
Agreement after the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding, whether or not a claim
for post-filing or post-petition interest is allowed or allowable in such
proceeding), charges or any other payments each Company and each of its
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement, the Ancillary Agreements or otherwise, together with
all reasonable expenses and reasonable attorneys’ fees chargeable to the
Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in
connection therewith.

 

“Overadvance” has the meaning given to such
term in Section 5(b)(iii).

 

“Permitted Liens” means (a) Liens of
carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred
in the ordinary course of business securing sums not overdue; (b) Liens
incurred in the ordinary course of business in connection with worker’s 

 

49

 

compensation, unemployment insurance or other forms of governmental insurance
or benefits, relating to employees, securing sums (i) not overdue or (ii) being
diligently contested in good faith provided that adequate reserves with respect
thereto are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; (c) Liens in favor of Laurus; (d) Liens
for taxes (i) not yet due or (ii) being diligently contested in good
faith by appropriate proceedings, provided that adequate reserves with respect
thereto are maintained on the books of the Companies and their Subsidiaries, as
applicable, in conformity with GAAP; and which have no effect on the priority
of Liens in favor of Laurus or the value of the assets in which Laurus has a
Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the
extent permitted in this Agreement ; (f) Liens in favor of the Working
Capital Lender; and (g) Liens specified on Schedule 2 hereto.

 

“Person” means any individual, sole
proprietorship, partnership, limited liability partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof), and shall
include such Person’s successors and assigns.

 

“Principal Market” means the NASD Over The
Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System,
American Stock Exchange or New York Stock Exchange (whichever of the foregoing
is at the time the principal trading exchange or market for the Common Stock).

 

“Purchase Money Indebtedness” means (a) any
indebtedness incurred for the payment of all or any part of the purchase price
of any fixed asset (other than the Obligations), (b) any indebtedness (other
than the Obligations) incurred at the time of or within ten (10) days
prior to or after the acquisition of any fixed asset for the purpose of
financing all or part of the purchase price thereof, and (c) any renewals,
extensions or refinancings thereof (but not any increases in the principal
amounts thereof outstanding at that time).

 

“Purchase Money Lien” means any Lien upon any
fixed assets that secures the Purchase Money Indebtedness related thereto but
only if such Lien shall at all times be confined solely to the fixed asset the
purchase price of which was financed or refinanced through the incurrence of
the Purchase Money Indebtedness secured by such Lien and only if such Lien
secures only such Purchase Money Indebtedness.

 

“Registration Rights Agreements” means that
certain Minimum Borrowing Note Registration Rights Agreement dated as of the
Closing Date by and between the Parent and Laurus and each other registration
rights agreement by and between the Parent and Laurus, as each of the same may
be amended, modified and supplemented from time to time.

 

“Revolving Note” means that certain Secured
Revolving Note dated as of the Closing Date made by the Companies in favor of
Laurus in the original principal amount of $5,000,000, as the same may be
amended, supplemented, restated and/or otherwise modified from time to time.

 

“SEC” means the Securities and Exchange
Commission.

 

50

 

“SEC Reports” has the meaning given such term
in Section 12(u).

 

“Securities” means the Notes and the Warrants
and the shares of Common Stock which may be issued pursuant to conversion of
such Notes in whole or in part or exercise of such Warrants.

 

“Securities Act” has the meaning given such
term in Section 12(r).

 

“Security Documents” means all security
agreements, mortgages, cash collateral deposit letters, pledges and other
agreements which are executed by any Company or any of its Subsidiaries in
favor of Laurus.

 

“Stock” means all certificated and
uncertificated shares, options, warrants, membership interests, general or
limited partnership interests, participation or other equivalents (regardless
of how designated) of or in a corporation, partnership, limited liability
company or equivalent entity whether voting or nonvoting, including common
stock, preferred stock, or any other “equity security” (as such term is defined
in Rule 3a11-1 of the General Rules and Regulations promulgated by
the SEC under the Securities Exchange Act of 1934).

 

“Subordinated Debt Documentation” means any and
all agreements, instruments or documents which now or at any time hereafter are
executed and/or delivered by any Company or its Subsidiaries with or in favor
of any subordinated lender which evidences the principal, interest and other
amounts owed by any of its Subsidiaries to such subordinated lender.

 

“Subsidiary” means, with respect to any Person,
(i) any other Person whose shares of stock or other ownership interests
having ordinary voting power (other than stock or other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the directors or other governing body of such other Person, are
owned, directly or indirectly, by such Person or (ii) any other Person in
which such Person owns, directly or indirectly, more than 50% of the equity
interests at such time.

 

“Term” means the Closing Date through the close
of business on the day immediately preceding the third anniversary of the
Closing Date, subject to acceleration at the option of Laurus upon the
occurrence of an Event of Default hereunder or other termination hereunder.

 

“Transferable Amount” has the meaning given
such term in Section 2(a)(i).

 

“UCC” means the Uniform Commercial Code as the
same may, from time to time be in effect in the State of New York; provided,
that in the event that, by reason of mandatory provisions of law, any or all of
the attachment, perfection or priority of, or remedies with respect to, Laurus’
Lien on any Collateral is governed by the Uniform Commercial Code as in effect
in a jurisdiction other than the State of New York, the term “UCC” shall mean
the Uniform Commercial Code as in effect in such other jurisdiction for
purposes of the provisions of this Agreement relating to such attachment,
perfection, priority or remedies and for purposes of definitions related to
such provisions; provided further, that to the extent that UCC is used to
define any term herein or in any Ancillary Agreement and such term is defined
differently in 

 

51

 

different Articles or Divisions of the UCC, the definition of such term
contained in Article or Division 9 shall govern.

 

“Warrant Shares” has the meaning given such
term in Section 12(a).

 

“Warrants” means that certain Common Stock
Purchase Warrant dated as of the Closing Date made by the Parent in favor of
Laurus and each other warrant made by the Parent in favor Laurus, as each of
the same may be amended, restated, modified and/or supplemented from time to
time.

 

“Working Capital Lender” means Fleet Capital
Corporation, and, if at any time, the Working Capital Lender shall assign or
syndicate all or any of the Working Capital Lender Loans, such term shall
include such assignee or other such members of the syndicate.

 

“Working Capital Lender Borrowing Base” has the
meaning given to the terms “Borrowing Base” in the Working Capital Lender Loan
Agreement as in effect on the Closing Date.

 

“Working Capital Lender Loan Agreement” means
the Amended and Restated Loan and Security Agreement dated as of December 31,
2004 among Working Capital Lender, Parent and Eligible Subsidiary.

 

“Working Capital Lender Loans” has the meaning
given to the terms Loans (as such term is defined in the Working Capital Lender
Loan Agreement).

 

“Working Capital Lender Loan Documents” means
collectively, the Working Capital Lender Loan Agreement and all agreements,
instruments, documents, mortgages, pledges, powers of attorney, consents,
assignments, contracts, notice, security agreements, trust agreements and
guarantees executed in connection with the Working Capital Lender Loan
Agreement.

 

52

 

Exhibit A

 

Eligible Subsidiaries

 

International Wholesale Tile, Inc.

 

53Exhibit 10.18

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. 
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

 

THIS NOTE IS
SUBJECT TO THE TERMS OF THE SENIOR SUBORDINATION AGREEMENT BETWEEN LAURUS
MASTER FUND, LTD. AND FLEET CAPITAL CORPORATION TO WHICH REFERENCE IS MADE FOR
THE TERMS OF SUBORDINATION AND FOR LIMITATIONS OF ENFORCEMENT OF THE PROVISIONS
HEREOF.

 

SECURED REVOLVING
NOTE

 

FOR VALUE RECEIVED, each of IWT TESORO CORPORATION, a
Nevada corporation (the “Parent”), and
the other companies listed on Exhibit A attached hereto (such other
companies together with the Parent, each a “Company”
and collectively, the “Companies”),
jointly and severally, promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church
Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of Five Million Dollars ($5,000,000), without duplication of
any amounts owing by the Companies to the Holder under the Minimum Borrowing
Notes (as defined in the Security Agreement referred to below), or, if
different, the aggregate principal amount of all Loans (as defined in the
Security Agreement referred to below), together with any accrued and unpaid
interest hereon, on August 25, 2008 (the “Maturity Date”)
if not sooner indefeasibly paid in full.

 

Capitalized terms used herein without definition shall
have the meanings ascribed to such terms in the Security Agreement among the
Companies and the Holder dated as of the date hereof (as amended, modified and/or
supplemented from time to time, the “Security Agreement”).

 

The following terms shall
apply to this Secured Revolving Note (this “Note”):

 

ARTICLE I

CONTRACT RATE AND MINIMUM BORROWING NOTE

 

1.1                                 Contract
Rate.  Subject to Sections 3.2 and
4.10, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum equal to
the “prime rate” published in The Wall Street Journal from time to time
(the “Prime Rate”), plus one and one-half
percent (1.5%) (the “Contract Rate”).  The Contract Rate shall be increased or
decreased as the case may be for each increase or decrease in the Prime 

 

 

Rate in an amount equal
to such increase or decrease in the Prime Rate; each change to be effective as
of the day of the change in the Prime Rate. 
Subject to Section 1.2, the Contract Rate shall not at any time be
less than six percent (6.0%).  Interest
shall be (i) calculated on the basis of a 360 day year, and (ii) payable
monthly, in arrears, commencing on October 1, 2005 on the first business
day of each consecutive calendar month thereafter through and including the
Maturity Date, and on the Maturity Date, whether by acceleration or otherwise.

 

1.2                                 Contract
Rate Adjustments and Payments.  The
Contract Rate shall be calculated on the last business day of each calendar
month hereafter (other than for increases or decreases in the Prime Rate which
shall be calculated and become effective in accordance with the terms of Section 1.1)
until the Maturity Date (each a “Determination Date”)
and shall be subject to adjustment as set forth herein.  If (i) the Parent shall have registered
the shares of the Common Stock underlying the conversion of each Minimum
Borrowing Note and each Warrant on a registration statement declared effective
by the Securities and Exchange Commission (the “SEC”),
and (ii) the market price (the “Market Price”)
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the five (5) trading days immediately preceding a Determination Date
exceeds the then applicable Fixed Conversion Price by at least twenty-five
percent (25%), the Contract Rate for the succeeding calendar month shall
automatically be reduced by 200 basis points (200 b.p.) (2%) for each
incremental twenty-five percent (25%) increase in the Market Price of the
Common Stock above the then applicable Fixed Conversion Price.  Notwithstanding the foregoing (and anything
to the contrary contained herein), in no event shall the Contract Rate at any
time be less than zero percent (0%).

 

1.3                                 Allocation
of Principal to Minimum Borrowing Note. 
Notwithstanding anything herein to the contrary, whenever during the
Term the outstanding balance on the Minimum Borrowing Note shall be less than
the Minimum Borrowing Amount (such amount being referred to herein as the “Transferable Amount”) to the extent that
the outstanding balance on the Revolving Note should equal or exceed $2,000,000,
that portion of the balance of the Revolving Note that exceeds $2,000,000, but
does not exceed the Transferable Amount, shall be segregated from the
outstanding balance under the Revolving Note and allocated to and aggregated
with the then existing balance of the next unissued serialized Minimum
Borrowing Note (the “Next Unissued Serialized
Note”); provided that such segregated balance shall remain subject
to the terms and conditions of such Revolving Note until a new serialized
Minimum Borrowing Note is issued as set forth below.  The Next Unissued Serialized Note shall
remain in book entry form until the balance thereunder shall equal the Minimum
Borrowing Amount, at which time a new serialized Minimum Borrowing Note in the
face amount equal to the Minimum Borrowing Amount will be issued and registered
as set forth in the Registration Rights Agreement (and the outstanding balance
under the Revolving Note shall at such time be correspondingly reduced in the
amount equal to the Minimum Borrowing Amount as a result of the issuance of
such new serialized Minimum Borrowing Note).

 

ARTICLE II

CONVERSION RIGHTS AND FIXED CONVERSION PRICE

 

2.1                                 Optional
Conversion.  Subject to the terms of
this Article II, the Holder shall have the right, but not the obligation,
at any time until the Maturity Date, or during an Event of Default (as defined
in Article III), and, subject to the limitations set forth in Section 2.2

 

2

 

hereof, to convert all or
any portion of the outstanding Principal Amount and/or accrued interest and
fees due and payable into fully paid and nonassessable restricted shares of the
Common Stock at the Fixed Conversion Price (defined below).  For purposes hereof, subject to Section 2.6
hereof, the initial “Fixed Conversion Price”
means $ 2.74 subject to adjustment as provided in Section 2.6 of this Note.  The shares of Common Stock to be issued upon
such conversion are herein referred to as the “Conversion
Shares.”

 

2.2                                 Conversion
Limitation.  Notwithstanding anything
contained herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Note an amount that would be convertible into
that number of Conversion Shares which would exceed the difference between (i) 4.99%
of the issued and outstanding shares of Common Stock and (ii) the number
of shares of Common Stock beneficially owned by the Holder.  For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section 13(d) of
the Exchange Act and Regulation 13d-3 thereunder.  The Conversion Shares limitation described in
this Section 2.2 shall automatically become null and void following notice
to any Company upon the occurrence and during the continuance of an Event of
Default, or upon 120 days prior notice to the Parent, except that at no time
shall the number of shares of Common Stock beneficially owned by the Holder
exceed 19.99% of the outstanding shares of Common Stock.  Notwithstanding anything contained herein to
the contrary, the total number of shares of Common Stock issuable by the Parent
and acquirable by the Holder at a price below $2.65 per share pursuant to the
terms of this Note, the Security Agreement or any other Ancillary Agreement,
shall not exceed an aggregate of 2,339,050 shares of Common Stock (subject to
appropriate adjustment for stock splits, stock dividends, or other similar
recapitalizations affecting the Common Stock) (the “Maximum
Common Stock Issuance”), unless the issuance of Common Stock
hereunder in excess of the Maximum Common Stock Issuance shall first be
approved by the Parent’s shareholders in accordance with applicable state and
federal laws.  If at any point in time
and from time to time the number of shares of Common Stock issued pursuant to
the terms of this Note, the Security Agreement or any other Ancillary
Agreement, together with the number of shares of Common Stock that would then
be issuable by the Parent to the Holder in the event of a conversion or
exercise pursuant to the terms of this Note, the Security Agreement or any
other Ancillary Agreement, would exceed the Maximum Common Stock Issuance but
for this Section 2.2, the Parent shall promptly call a shareholders
meeting to solicit shareholder approval for the issuance of the shares of
Common Stock hereunder in excess of the Maximum Common Stock Issuance.  Notwithstanding anything contained herein to
the contrary, the provisions of this Section 2.2 are irrevocable and may
not be waived by the Holder or any Company.

 

2.3                                 Mechanics
of Holder’s Conversion.  In the event
that the Holder elects to convert this Note into Common Stock, the Holder shall
give notice of such election by delivering an executed and completed notice of
conversion in substantially the form of Exhibit B hereto (appropriately
completed) (“Notice of Conversion”) to the
Parent and such Notice of Conversion shall provide a breakdown in reasonable
detail of the Principal Amount, accrued interest and fees that are being
converted.  On each Conversion Date (as
hereinafter defined) and in accordance with its Notice of Conversion, the Holder
shall make the appropriate reduction to the Principal Amount, accrued interest
and fees as entered in its records and shall provide written notice thereof to
the Parent within five (5) Business Days after the Conversion Date.  Each date 

 

3

 

on which a Notice of
Conversion is delivered or telecopied to the Parent in accordance with the
provisions hereof shall be deemed a Conversion Date (the “Conversion
Date”).  Pursuant to the terms
of the Notice of Conversion, the Parent will issue instructions to the transfer
agent accompanied by an opinion of counsel within three (3) Business Days
of the date of the delivery to the Parent of the Notice of Conversion and shall
cause the transfer agent to transmit the certificates representing the
Conversion Shares to the Holder by crediting the account of the Holder’s
designated broker with the Depository Trust Corporation (“DTC”)
through its Deposit Withdrawal Agent Commission (“DWAC”)
system within three (3) Business Days after receipt by the Parent of the
Notice of Conversion (the “Delivery Date”).  In the case of the exercise of the conversion
rights set forth herein the conversion privilege shall be deemed to have been
exercised and the Conversion Shares issuable upon such conversion shall be
deemed to have been issued upon the date of receipt by the Parent of the Notice
of Conversion.  The Holder shall be
treated for all purposes as the record holder of the Conversion Shares, unless
the Holder provides the Parent written instructions to the contrary.

 

2.4                                 Late
Payments.  Each Company understands
that a delay in the delivery of the Conversion Shares in the form required
pursuant to this Article beyond the Delivery Date could result in economic
loss to the Holder.  As compensation to
the Holder for such loss, in addition to all other rights and remedies which
the Holder may have under this Note, applicable law or otherwise, the Companies
shall, jointly and severally, pay late payments to the Holder for any late
issuance of Conversion Shares in the form required pursuant to this Article II
upon conversion of this Note, in the amount equal to $500 per Business Day
after the Delivery Date.  The Companies
shall, jointly and severally, make any payments incurred under this Section in
immediately available funds upon demand.

 

2.5                                 Conversion
Mechanics.  The number of shares of
Common Stock to be issued upon each conversion of this Note shall be determined
by dividing that portion of the principal and interest and fees to be
converted, if any, by the then applicable Fixed Conversion Price.

 

2.6                                 Adjustment
Provisions.  The Fixed Conversion
Price and number and kind of shares or other securities to be issued upon
conversion determined pursuant to Section 2.1 shall be subject to
adjustment from time to time upon the occurrence of certain events during the
period that this conversion right remains outstanding, as follows:

 

(a)                                  Reclassification.  If the Parent at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note, as to the
unpaid Principal Amount and accrued interest thereon, shall thereafter be
deemed to evidence the right to purchase an adjusted number of such securities
and kind of securities as would have been issuable as the result of such change
with respect to the Common Stock (i) immediately prior to or (ii) immediately
after, such reclassification or other change at the sole election of the
Holder.

 

(b)                                 Stock
Splits, Combinations and Dividends. 
If the shares of Common Stock are subdivided or combined into a greater
or smaller number of shares of Common Stock, or if a dividend is paid on the
Common Stock or any preferred stock issued by the Parent in shares of Common
Stock, the Fixed Conversion Price shall be proportionately 

 

4

 

reduced in case of
subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event bears
to the total number of shares of Common Stock outstanding immediately prior to
such event.

 

(c)                                  Share
Issuances.  Subject to the provisions
of this Section 2.6, if the Parent shall at any time prior to the
conversion or repayment in full of the Principal Amount issue any shares of
Common Stock or securities convertible into Common Stock to a Person other than
the Holder (except (i) pursuant to Sections 2.6(a) or (b) above;
(ii) pursuant to options, warrants, or other obligations to issue shares
outstanding on the date hereof as disclosed to the Holder in writing; or (iii) pursuant
to options that may be issued under any employee incentive stock option and/or
any qualified stock option plan adopted by the Parent) for a consideration per
share (the “Offer Price”) less than the Fixed
Conversion Price in effect at the time of such issuance, then the Fixed
Conversion Price shall be immediately reset to such lower Offer Price.  For purposes hereof, the issuance of any
security of the Parent convertible into or exercisable or exchangeable for
Common Stock shall result in an adjustment to the Fixed Conversion Price upon
the issuance of such securities.

 

(d)                                 Computation
of Consideration.  For purposes of any
computation respecting consideration received pursuant to Section 2.6(c) above,
the following shall apply:

 

(i)                                     in
the case of the issuance of shares of Common Stock for cash, the consideration
shall be the amount of such cash, provided that in no case shall any deduction
be made for any commissions, discounts or other expenses incurred by the Parent
for any underwriting of the issue or otherwise in connection therewith;

 

(ii)                                  in
the case of the issuance of shares of Common Stock for a consideration in whole
or in part other than cash, the consideration other than cash shall be deemed
to be the fair market value thereof as determined in good faith by the Board of
Directors of the Parent (irrespective of the accounting treatment thereof); and

 

(iii)                               upon
any such exercise, the aggregate consideration received for such securities
shall be deemed to be the consideration received by the Parent for the issuance
of such securities plus the additional minimum consideration, if any, to be
received by the Parent upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as provided in
subsections (i) and (ii) of this Section 2.6(d)).

 

2.7                                 Reservation
of Shares.  During the period the
conversion right exists, the Parent will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Conversion Shares upon the full conversion of this Note and the
Warrant.  The Parent represents that upon
issuance, the Conversion Shares will be duly and validly issued, fully paid and
non-assessable.  The Parent agrees that
its issuance of this Note shall constitute full authority to its officers,
agents, and transfer agents who are charged with the duty of executing and
issuing stock certificates to execute and issue the necessary certificates for
the Conversion Shares upon the conversion of this Note.

 

5

 

ARTICLE III

EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

 

3.1                                 Events
of Default.  The occurrence of an
Event of Default under the Security Agreement shall constitute an event of
default (“Event of Default”) hereunder.

 

3.2                                 Default
Interest.  Following the occurrence
and during the continuance of an Event of Default and the expiration of any
applicable grace period, the Companies shall, jointly and severally, pay
additional interest on the outstanding principal balance of this Note in an
amount equal to the Contract Rate plus five percent (5%) per annum, and all
outstanding Obligations, including unpaid interest, shall continue to accrue
interest at such additional interest rate from the date of such Event of
Default until the date such Event of Default is cured or waived.

 

3.3                                 Default
Payment.  Following the occurrence
and during the continuance of an Event of Default, the Holder, at its option,
may elect, in addition to all rights and remedies of the Holder under the
Security Agreement and the other Ancillary Agreements and all obligations and
liabilities of each Company under the Security Agreement and the other
Ancillary Agreements, to require the Companies, jointly and severally, to make
a Default Payment (“Default Payment”).  The Default Payment shall be 130% of the
outstanding principal amount of the Note, plus accrued but unpaid interest, all
other fees then remaining unpaid, and all other amounts payable hereunder.  The Default Payment shall be applied first to
any fees due and payable to the Holder pursuant to the Notes , the Security
Agreement and/or the Ancillary Agreements, then to accrued and unpaid interest
due on the Notes and then to the outstanding principal balance of the
Notes.  The Default Payment shall be due
and payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 3.3.

 

ARTICLE IV

MISCELLANEOUS

 

4.1                                 Conversion
Privileges.  The conversion
privileges set forth in Article II shall remain in full force and effect
immediately from the date hereof until the date this Note is indefeasibly paid
in full and irrevocably terminated.

 

4.2                                 Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

 

4.3                                 Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder hereof in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

4.4                                 Notices.  Any notice herein required or permitted to be
given shall be in writing and shall be deemed effective given (a) upon
personal delivery to the party notified, (b) when sent by confirmed telex
or facsimile if sent during normal business hours of the recipient, if not,
then on the next business day, (c) five days after having been sent by
registered or 

 

6

 

certified mail, return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt.  All
communications shall be sent to the respective Company at the address provided
for such Company in the Security Agreement executed in connection herewith, and
to the Holder at the address provided in the Security Agreement for the Holder,
with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York,
New York 10022, facsimile number (212) 541-4434, or at such other address as
the respective Company or the Holder may designate by ten days advance written
notice to the other parties hereto.  A
Notice of Conversion shall be deemed given when made to the Parent pursuant to
the Purchase Agreement.

 

4.5                                 Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

 

4.6                                 Assignability.  This Note shall be binding upon each Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.  No Company may not assign any of its
obligations under this Note without the prior written consent of the Holder,
any such purported assignment without such consent being null and void.

 

4.7                                 Cost
of Collection.  In case of any Event
of Default under this Note, the Companies shall, jointly and severally, pay the
Holder the Holder’s reasonable costs of collection, including reasonable
attorneys’ fees.

 

4.8                                 Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)                                  THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.

 

(b)                                 EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY
AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT
OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER
ANCILLARY AGREEMENTSPROVIDED, THAT EACH COMPANY ACKNOWLEDGES THAT ANY
APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE
OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER  PROVIDED,
THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR 

 

7

 

OTHER COURT ORDER IN
FAVOR OF THE HOLDER.  EACH COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH
IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID

 

(c)                                  EACH
COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO ACHIEVE
THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION,
EACH COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT,
OR OTHERWISE BETWEEN THE HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED
WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY
AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

4.9                                 Severability.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision
which may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of this Note.

 

4.10                           Maximum
Payments.  Nothing contained herein
shall be deemed to establish or require the payment of a rate of interest or
other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.

 

4.11                           Security
Interest and Guarantee.  The Holder
has been granted a security interest in certain assets of the Companies as more
fully described in the Security Agreement. 
The obligations of the Companies under this Note are guaranteed by
certain Subsidiaries of the Companies pursuant to the Subsidiary Guaranty dated
as of the date hereof.

 

4.12                           Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that 

 

8

 

ambiguities are to be
resolved against the drafting party shall not be applied in the interpretation
of this Note to favor any party against the other.

 

[Balance of page intentionally left blank;
signature page follows]

 

9

 

IN WITNESS WHEREOF, each Company
has caused this Secured Revolving Note to be signed in its name effective as of
this      day of August, 2005.

 

 

	
   

  	
  IWT TESORO CORPORATION

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
				

 

 

WITNESS:

 

	
   

  	
   

  

 

 

	
   

  	
  INTERNATIONAL WHOLESALE
  TILE, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
					

 

 

WITNESS:

 

	
   

  	
   

  

 

10

 

EXHIBIT A

 

OTHER COMPANIES

 

International Wholesale Tile, Inc., a Florida
corporation

 

11

 

EXHIBIT B

 

NOTICE OF
CONVERSION

 

(To be executed by the Holder in order to convert the
Secured Revolving Note)

 

The undersigned hereby elects to convert $            
of the principal and $            
of the interest due on the Secured Revolving Note dated as of             
     , 2005 (the “Note”) issued
by IWT TESORO CORPORATION (the “Parent”) and
the other Companies named and as defined therein into shares of Common Stock of
the Parent (“Shares) in accordance with the terms and conditions set forth in
the Note, as of the date written below.

 

	
  Date of Conversion:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Conversion Price:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares To Be Delivered:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Print Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Holder DWAC
  instructions

  	
   

  	
   

  

 

12

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