Loan andSecurity Agreement

EXHIBIT 10.1

Silicon Valley Bank

Loan and Security Agreement

This LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California  95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Silicon”) and the borrowers named above (jointly and severally the “Borrower”), with offices located at the above address (“Borrower’s Address”).  The Schedule and Exhibits to this Agreement (the “Schedule” and the “Exhibits,” respectively) shall for all purposes be deemed to be part of this Agreement, and the same are integral parts of this Agreement.  (Definitions of certain terms used in this Agreement are set forth in Section 8 below.)

RECITALS

Each of the entities comprising the Borrower wishes to obtain credit from time to time from Silicon, and Silicon desires to extend credit to each and/or any one of the entities comprising the Borrower.  This Agreement sets forth the terms on which Silicon will advance credit to Borrower, and Borrower, jointly and several, will repay the amounts owing to Silicon.

1.             LOANS.

1.1          Loans.  Silicon will make loans to Borrower (the “Loans”) ­up to the amounts (the “Credit Limit”) shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of any Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time, upon notice to Borrower.  Amounts borrowed may be repaid and reborrowed during the term of this Agreement.

1.2          Interest.  All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement.  Interest shall be payable monthly, on the last day of the month.  Interest may, in Silicon’s discre­tion, be charged to Borrower’s loan account, and the same shall thereafter bear interest at the same rate as the other Loans.  Silicon may, in its discretion, charge interest to Borrower’s Deposit Accounts maintained with Silicon.

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1.3          Overadvances.  If at any time or for any reason the total of all outstanding Loans and all other Obligations ex­ceeds the Credit Limit (an “Overadvance”), Borrower shall immediately pay the amount of the excess to Silicon, with­out notice or demand.  Without limiting Borrower’s obliga­tion to repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at a rate equal to the interest rate which would otherwise be applicable to the Overadvance, plus an additional two percent (2%) per annum.

1.4          Fees.  Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all interest and other sums payable to Silicon and are not refundable.

1.5          Loan Requests.  To obtain a Loan, Borrower shall make a request to Silicon by facsimile or telephone.  Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day.  Silicon may rely on any telephone request for a Loan given by a person whom Silicon believes is an authorized representative of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance.  In the event Borrower has elected to be on “non-borrowing reporting status” (see Section 6 of the Schedule), Borrower shall furnish Silicon with a Loan request at least thirty (30) days prior to the requested funding date.

1.6          Letters of Credit.  At the request of Borrower, Silicon may, in its commercially reasonable discretion, issue or arrange for the issuance of letters of credit for the account of Borrower, in each case in form and substance satisfactory to Silicon in its commercially reasonable discretion (collectively, “Letters of Credit”).  The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the “Letter of Credit Sublimit”), and shall be reserved against Loans which would otherwise be available hereunder.  Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such commercially reasonable additional fee as Silicon’s letter of credit department shall charge in connection with the issuance of the Letters of Credit.  Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made.  Each Letter of Credit shall have an expiry date no later than thirty days prior to the Maturity Date.  Borrower hereby agrees to indemnify, save, and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys’ fees incurred by Silicon arising out of or in connection with any Letters of Credit, excluding gross negligence or willful misconduct by Silicon.  Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Silicon and opened for Borrower’s account or by Silicon’s interpretations of any Letter of Credit issued by Silicon for Borrower’s account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.  Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank.  Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon’s indemnification of any such issuing bank.  The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Silicon relating to Letters of Credit are cumulative.

1.7          Foreign Exchange Sublimit. Borrower may use up to the amount set forth on the Schedule for foreign exchange forward contracts with Silicon under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one business day after the contract date (the “FX Forward Contract”).  Silicon shall subtract 10% of each outstanding FX Forward Contract from the foreign exchange sublimit.   Silicon may terminate the FX Forward Contracts if an Event of Default occurs.

1.8          Cash Management Services Sublimit.  Borrower may use up to the amount set forth on the Schedule for Cash Management Services.  Such aggregate amounts utilized under the Cash Management Services Sublimit shall at all times reduce the amount otherwise available for Loans hereunder.  Any amounts Silicon pays on behalf

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of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans hereunder and will accrue interest at the interest rate applicable to Loans.

1.9          Designation of Agent.  Each Borrower hereby designates SatCon Technology Corporation (the”Agent”) as the agent of that Borrower to discharge the duties and responsibilities of the Agent as provided herein.

1.10        Operation of Agreement. (a) Except as otherwise permitted by Silicon, loans hereunder shall be re­quested solely by the Agent as agent for each Borrower.

(b)           Any Loan which may be made by Silicon under this Agreement and which is directed to the Agent is received by the Agent in trust for that Borrower who is intended to receive such Loan. The Agent shall distribute the proceeds of any such Loan solely to that Borrower.  Each Borrower shall be directly indebted to Silicon for each Loan distributed to any Borrower by the Agent, together with all accrued interest thereon, as if that amount had been advanced directly by Silicon to a Borrower (whether or not the subject Loan was based upon the accounts and/or inventory or other assets of the Borrower which actually received such distribution), in addition to which each Borrow­er shall be liable to Silicon for all Obligations under this Agreement, whether or not the proceeds of the Loan are distributed to any particular Borrower.

(c)           Silicon shall have no responsibility to inquire as to the distribution of Loans made by Silicon through the Agent as described herein.

1.11                        Loans Directly to Borrower.  (a) If, for any reason, and at any time during the term of this Agreement,

(i)            any Borrower, including the Agent, as agent for each Borrower, shall be unable to, or prohib­ited from carrying out the terms and conditions of this Agreement (as deter­mined by Silicon in Silicon’s sole and absolute discretion); or

(ii)           Silicon deems it inexpedient (in Silicon’s sole and absolute discretion) to continue making Loans to or for the account of any particular Borrower, or to channel such loans and Loans through the Agent, then Silicon may make Loans directly to such Borrower as Silicon determines to be expedient, which Loans may be made without regard to the procedures otherwise included in this Article 1.

(b)           In the event that Silicon determines to forgo the procedures included herein pursuant to which Loans are to be channeled through the Agent, then Silicon may designate one or more Borrower to fulfill the financial and other reporting requirements otherwise imposed herein upon the Agent.

(c)           Each Borrower shall remain liable to Silicon for the payment and performance of all Obligations (which payment and perfor­mance shall continue to be secured by all Collateral) notwithstanding any determination by Silicon to cease making Loans to or for the benefit of any Borrow­er.

1.12                        Continuation of Authority of Agent.  The authority of the Agent to request Loans on behalf of, and to bind, each Borrower, shall continue unless and until Silicon acts as provided in Section 1.8, above, or Silicon actually receives:

(a)           written notice of: (i) the termina­tion of such authority, and (ii) the subsequent appointment of a successor Agent, which notice is executed by the respective Presidents of each Borrower (other than the President of the Agent being replaced) then eligible for borrowing under this Agreement; and

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(b)           written notice from the successor Agent (i) accept­ing such appointment; (ii) acknowledging that the removal and appoint­ment has been effected by the respective Presidents of each Borrower eligible for borrowing under the within Agreement; and (iii) acknowledging that from and after the date of appointment, the newly appointed Agent shall be bound by the terms hereof, and that as used herein, the term “Agent” shall mean and include the newly appointed Agent.

1.13        Indemnification.  The Agent and each Borrower respectively shall indem­nify, defend, and save and hold Silicon harmless from and against any liabilities, claims, demands, expenses, or losses made against or suffered by Silicon on account of, or arising out of, this Agreement, Silicon’s reliance upon Loan requests made by the Agent, or any other action taken by Silicon hereunder or under any of Silicon’s various agreements with the Agent and/or any Borrower and/or any other person arising under this Agreement.

2.  SECURITY INTEREST.

2.1          Security Interest.  To secure the payment and performance of all of the Obligations when due, and the performance of each of the Borrower’s duties under this Agreement and all documents executed in connection herewith, Borrower hereby grants to Silicon a continuing security interest in all of Borrower’s interest in the following, whether now owned or hereafter acquired, and wherever located:  All Inventory, Equipment, Payment Intangibles, Letter-of-Credit Rights, Supporting Obligations, Receivables, and General Intangibles, including, without limitation, all of Borrower’s Intellectual Property, Deposit Accounts, and all money, and all property now or at any time in the future in Silicon’s possession (including claims and credit balances), and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Silicon may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the “Collateral”).  The security interest granted herein shall be a first priority security interest in the Collateral.  After the occurrence of a Default, Silicon may place a “hold” on any Deposit Account pledged as collateral.  Borrower is not a party to, nor is bound by, any license or other agreement with respect to which the Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property.  Without prior consent from Silicon, Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower’s business or financial condition.  Borrower shall take such steps as Silicon requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed “Collateral” and for Silicon to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future.

3.  REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the fol­lowing representations will continue to be true, and that Borrower will at all times comply with all of the following covenants:

3.1          Corporate Existence and Authority.  Borrower, if a corporation, is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation.  Borrower is and will con­tinue to be qualified and licensed to do business in all ju­risdictions in which any failure to do so would have a ma­terial adverse effect on Borrower.  The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as en­forcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors’ rights generally), (iii) do not violate Borrower’s articles or certificate of incorporation, Borrower’s by-laws, or any law or any  material agreement or instru­ment which is binding upon Borrower or its property, and (iv) do not constitute

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grounds for acceleration of any material indebtedness or obligation under any material agreement or instru­ment which is binding upon Borrower or its property.

3.2          Name; Trade Names and Styles.  The name of Borrower set forth in the heading to this Agreement is its correct name.  Listed on the Schedule are all prior names of Borrower and all of Borrower’s present and prior trade names during the past five (5) years.  Borrower shall give Silicon 30 days’ prior written notice before changing its name or doing business under any other name.  The Borrower will be deemed to be in compliance with this provision by furnishing Silicon with notice of acquiring any new trade name within fifteen (15) days after such acquisition provided that prior notice, as otherwise required hereunder, was prohibited by a confidentiality agreement to which the Borrower is a party. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name.

3.3          Place of Business; Location of Collateral.  The ad­dress set forth in the heading to this Agreement is Borrower’s chief executive office.  In addition, Borrower’s places of business and Collateral are located only at the locations set forth on the Schedule.  Borrower will give Silicon at least 30 days prior written notice before opening any additional place of business, changing its chief execu­tive office, changing its state of formation or moving any of the Collateral to a location other than Borrower’s Address or one of the locations set forth on the Schedule, except for the movement of goods in the ordinary course of business.  The Borrower will be deemed to be in compliance with this provision by furnishing Silicon with notice of a new location where Collateral may be located within fifteen (15) days after establishing such location provided that prior notice, as otherwise required hereunder, was prohibited by a confidentiality agreement to which the Borrower is a party.

3.4          Title to Collateral; Permitted Liens.  Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower.  The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens.  Silicon now has, and will continue to have, a first-priority perfected and enforceable security in­terest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others.  None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture.  Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or im­pair Borrower’s right to remove any Collateral from the leased premises.  Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to exe­cute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify, so as to ensure that Silicon’s rights in the Collateral are, and will continue to be, superior to the rights of any such third party.  Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located.

3.5          Maintenance of Collateral.  Borrower will maintain the Collateral in good working condition, and Borrower will not use the Collateral for any unlawful purpose.  Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral.

3.6          Books and Records.  Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records, comprising an accounting system in ac­cordance with generally accepted accounting principles.

3.7          Financial Condition, Statements and Reports.  All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the fi­nancial condition of Borrower, at the times and for the pe­riods therein stated.  Between the last date covered by any such statement provided to Silicon and the date hereof,

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there has been no material adverse change in the financial condition or business of Borrower.  Borrower is now and will continue to be solvent.

3.8          Tax Returns and Payments; Pension Contributions.  Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, as­sessments, deposits and contributions now or in the future owed by Borrower.  Borrower may, however, defer pay­ment of any contested taxes, provided that Borrower (i) in good faith contests Borrower’s obligation to pay the taxes by appropriate proceedings promptly and diligently insti­tuted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) takes all reasonable steps required to keep the contested taxes from becoming a lien upon any of the Collateral.  Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower.  Borrower has paid, and shall continue to pay all amounts necessary to fund all pre­sent and future pension, profit sharing and deferred com­pensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, in­cluding any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.  Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic de­posit of all payroll taxes payable by Borrower.

3.9          Compliance with Law.  Except as disclosed in the Schedule, Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, those relating to Borrower’s ownership of real or personal prop­erty, the conduct and licensing of Borrower’s business, and all environmental matters.

3.10        Litigation.  Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investiga­tion pending or (to best of Borrower’s knowledge) threat­ened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in any material adverse change in the fi­nancial condition or business of Borrower, or in any mate­rial impairment in the ability of Borrower to carry on its business in substantially the same manner as it is now be­ing conducted.  Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of $100,000 or more, or involving $200,000  or more in the aggregate.

3.11        Use of Proceeds.  All proceeds of all Loans shall be used solely for working capital purposes.  Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit to others for the purpose of purchasing or carrying any “margin stock.”

3.12        Withholding for SatCon Power Systems Canada Ltd. In the event any payments are received by Silicon from SatCon Power Systems Canada Ltd. (the “Cdn Borrower”) hereunder such payments will be made subject to applicable withholding for any taxes, levies, fees, deductions, withholding, restrictions or conditions of any nature whatsoever.  Specifically, if at any time any governmental authority, applicable law, regulation or international agreement requires the Cdn Borrower to make any such withholding or deduction from any such  payment or other sum payment hereunder to Silicon, the Cdn Borrower hereby covenants and agrees that the amount due from the Cdn Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, Silicon receives a net sum equal to the sum which it would have received had no withholding or deduction been required and the Cdn Borrower shall pay the full amount withheld or deducted to the relevant governmental authority.  The Cdn Borrower will, upon request, furnish Silicon with proof satisfactory to Silicon indicating that the Cdn Borrower has made such withholding payment provided, however, that the Cdn Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings

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and as to which payment in full is bonded or reserved against by the Cdn Borrower.  The agreements and obligations of the Cdn Borrower contained in this Section shall survive the Maturity Date.

4.  RECEIVABLES.

4.1          Representations Relating to Receivables.  Borrower represents and warrants to Silicon as follows:  Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing un­conditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower’s business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below.

4.2          Representations Relating to Documents and Legal Compliance.  Borrower represents and warrants to Silicon as follows:  All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and cor­rect and all such invoices, instruments and other docu­ments and all of Borrower’s books and records are and shall be genuine and in all respects what they purport to be, and all signatories and endorsers have the capacity to contract.  All sales and other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations.  All signatures and endorsements on all documents, instru­ments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accor­dance with their terms.

4.3          Schedules and Documents relating to Receivables.  Borrower shall deliver to Silicon transaction reports and loan requests (including, without limitation, a statement setting forth the intended use of each requested Loan), schedules and assignments of all Receivables, and schedules of collections, all on Silicon’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Silicon’s security interest and other rights in all of Borrower’s Receivables, nor shall Silicon’s failure to ad­vance or lend against a specific Receivable affect or limit Silicon’s security interest and other rights therein.  In the event Borrower has elected to be on “non-borrowing reporting status” (see Section 6 of the Schedule), Borrower shall furnish Silicon with a Loan request at least thirty (30) days prior to the requested funding date.  Otherwise, Loan requests received after 12:00 Noon will not be considered by Silicon until the next Business Day.  Together with each such schedule and assignment, or later if requested by Silicon, Borrower shall, at Silicon’s request, furnish Silicon with copies or originals of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the fore­going.  Borrower shall also furnish to Silicon an aged ac­counts receivable trial balance in such form and at such intervals as Silicon shall request.  In addition, Borrower shall deliver to Silicon the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, immediately upon receipt thereof and in the same form as received, with all necessary endorsements, all of which shall be with recourse.  Borrower shall also pro­vide Silicon with copies of all credit memos within two days after the date issued.

4.4          Collection of Receivables. Borrower shall cause the Account Debtors to remit all Receivables to Silicon and Silicon shall hold all payments on, and proceeds of, Receivables in a lockbox account, or such other “blocked account” as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may reasonably specify.  All such payments on, and proceeds of, Receivables shall be applied to the Obligations in such order as Silicon shall determine.  ­Silicon or its designee may, at any time, notify Account Debtors that the Receivables have been assigned to Silicon.

4.5.         Remittance of Proceeds.  All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which re­ceived by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; pro­vided that, if no Default or Event of Default has occurred, Borrower shall not be obligated to remit to

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Silicon the pro­ceeds of the sale of worn out or obsolete equipment dis­posed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year).  Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon.  Nothing in this  Section 4.5 limits the restrictions on disposi­tion of Collateral set forth elsewhere in this Agreement.

4.6          Disputes.  Borrower shall notify Silicon promptly of all disputes or claims relating to Receivables.  Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm’s length transactions, which are re­ported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is con­tinuing; and (iii) taking into account all such discounts set­tlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit.  Silicon may, at any time after the occurrence of an Event of Default, settle or adjust dis­putes or claims directly with Account Debtors for amounts and upon terms which Silicon considers advisable in its reasonable credit judgment and, in all cases, Silicon shall credit Borrower’s Loan account with only the net amounts received by Silicon in payment of any Receivables.

4.7          Returns.  Provided no Event of Default has oc­curred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount (sending a copy to Silicon).  In the event any attempted return oc­curs after the occurrence of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for Silicon, (ii) segregate all returned Inventory from all of Borrower’s other property, (iii) conspicuously label the returned Inventory as Silicon’s property, and (iv) immediately notify Silicon of the return of any Inventory, specifying the reason for such return, the loca­tion and condition of the returned Inventory, and on Silicon’s request deliver such returned Inventory to Silicon.

4.8          Verification.  Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose.

4.9          No Liability.  Silicon shall not under any circum­stances be responsible or liable for any shortage or dis­crepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower’s obligations under any contract or agreement giving rise to a Receivable.  Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct.

5.  ADDITIONAL DUTIES OF THE BORROWER.

5.1          Financial and Other Covenants.  Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.

5.2          Insurance.  Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require, and Borrower shall provide evidence of such insurance to Silicon, so that Silicon is satisfied that such insurance is, at all times, in full force and effect.  All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee en­dorsement in form reasonably acceptable to Silicon.  Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole discretion, except that, provided no Default or Event of Default has

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occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the in­surance proceeds were paid.  Silicon may require reasonable assurance that the insurance proceeds so released will be so used.  If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower’s expense.  Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies.

5.3          Reports.  Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify.

5.4          Access to Collateral, Books and Records.  At rea­sonable times, and on one Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records.  Silicon shall take reasonable steps to keep confi­dential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attor­neys, and pursuant to any subpoena or other legal process.  Silicon acknowledges that Borrower is a publicly traded company and that federal and state law restricts the disclosure and use of certain material, non-public information regarding the Borrower’s finances.  The foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $750 per person per day (or such higher amount as shall repre­sent Silicon’s then current standard charge for the same), plus reasonable out of pocket expenses.  Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower’s books or records at any location other than Borrower’s Address, without first obtaining Silicon’s written consent, which may be conditioned upon such accounting firm, service bureau or other third party agreeing to give Silicon the same rights with respect to access to books and records and related rights as Silicon has under this Loan Agreement.  Borrower waives the benefit of any accountant-client privi­lege or other evidentiary privilege precluding or limiting the disclosure, divulgence or delivery of any of its books and records (except that Borrower does not waive any at­torney-client privilege).

5.5          Negative Covenants.  Except as may be permitted in the Schedule, Borrower shall not, without Silicon’s prior written consent, do any of the following:  (i) merge or con­solidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower’s business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (v) except as shown on the Schedule, store any Inventory or other Collateral with any ware­houseman or other third party;  (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other con­tingent basis; (vii) make any loans of any money or other assets; (viii) incur any debts outside the ordinary course of business; (ix) guarantee or otherwise become liable with respect to the obligations of another party or entity; (x) pay or declare any dividends on Borrower’s stock (except for dividends payable solely in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower’s stock; (xii) make any change in Borrower’s capital structure which would have a material adverse effect on Borrower or on the prospect of repayment of the Obligations; or (xiii) dissolve or elect to dissolve.  Transactions permitted by the foregoing provisions of this Section 5.5 are only permitted if no Default or Event of Default would occur as a result of such transac­tion.

5.6          Litigation Cooperation.  Should any third-party suit or proceeding be instituted by or against Silicon with re­spect to any Collateral or in any manner relating to Borrower, Borrower shall, without expense to Silicon, make available Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding, provided, however, that such cooperation by Borrower shall not be construed as a waiver of its attorney-client privilege.

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5.7          Further Assurances.  Borrower agrees, at its ex­pense, on request by Silicon, to execute all documents and take all actions, as Silicon may deem reasonably neces­sary or useful in order to perfect and maintain Silicon’s perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement.

6.   TERM.

6.1          Maturity Date.  This Agreement shall continue in effect until the maturity date set forth on the Schedule (the “Maturity Date”), subject to Section 6.2 below.

6.2          Payment of Obligations.  On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable.  Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit is­sued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to 105% the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection there­with, to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon’s then standard form cash pledge agreement.  Notwithstanding any termination of this Agreement, all of Silicon’s security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; pro­vided that Silicon may, in its sole discre­tion, refuse to make any further Loans after termination.  No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination re­lieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full.  Upon payment and performance in full of all the Obligations and written termination of this Agreement by Silicon, Silicon shall promptly de­liver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Silicon’s security interests.

7.  EVENTS OF DEFAULT AND REMEDIES.

7.1          Events of Default.  The occurrence of any of the following events shall constitute an “Event of Default” un­der this Agreement, and Borrower shall give Silicon im­mediate written notice thereof: (a) Any warranty, represen­tation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower’s officers, em­ployees or agents, now or in the future, shall be untrue or misleading in a material respect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) Borrower shall fail to per­form any other non-monetary Obligation, which failure is not cured within 5 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encum­brance (other than a Permitted Lien) is made on all or any part of the Collateral ­, including, without limitation, the service of process upon Silicon seeking to attach by trustee, mesne, or other process, Borrower’s funds on deposit with, or assets of the Borrower in the possession of, Silicon in an amount in excess of $200,000; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has or may reasonably be ex­pected to have a material adverse effect on Borrower’s business or financial condition; or (i) Dissolution, termina­tion of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custo­dian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement,

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readjustment of debt, dissolution or liquidation law or statute of any juris­diction, now or in the future in effect; or (j) the com­mencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganiza­tion, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any juris­diction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; or (k) revocation or termination of, or limita­tion or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordina­tion agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 35% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstand­ing shares of stock of Borrower in effect on the date hereof, without the prior written consent of Silicon; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its prop­erty which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) ­there shall be (i) a material impairment in the perfection or priority of Silicon’s security interest in the Collateral or in the value of such Collateral; (ii) a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower; (iii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iv) Silicon determines, based upon information available to it and in its reasonable judgment, that there is significant likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 5.1 during the next succeeding financial reporting period; or (q) Silicon, acting in good faith and in a commercially reasonable manner, deems itself inse­cure because of the occurrence of a materially adverse event prior to the ef­fective date hereof of which Silicon had no knowledge on the effective date or because of the occurrence of an event on or subsequent to the effective date; or (r) Borrower shall breach any term of the IP Security Agreement.  Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred.

7.2          Remedies.  Upon the occurrence of any Event of Default which has not been timely cured, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or other­wise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and de­clare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any de­ferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take posses­sion of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower’s premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custo­dian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take posses­sion of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dis­pose of, any such Collateral until after trial or final judg­ment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places desig­nated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower’s premises, vehicles, hoists, lifts, cranes, equip­ment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condi­tion at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, ex­change or other property, or on credit, and to adjourn any such sale from

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time to time without notice other than oral announcement at the time scheduled for sale.  Silicon shall have the right to conduct such disposition on Borrower’s premises without charge, for such time or times as Silicon deems reasonable, or on Silicon’s premises, or elsewhere and the Collateral need not be located at the place of dis­position.  Silicon may directly or through any affiliated company purchase or lease any Collateral at any such pub­lic disposition, and if permissible under applicable law, at any private disposition.  Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connec­tion therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower’s name on all collections, re­ceipts, instruments and other documents, to take posses­sion of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon’s sole dis­cretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; (h) Offset against any sums in any of Borrower’s general, special or other Deposit Accounts with Silicon; and (i) Demand and receive possession of any of Borrower’s federal and state income tax returns and the books and records utilized in the preparation thereof or re­ferring thereto.  All reasonable attorneys’ fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  Without limiting any of Silicon’s rights and remedies, from and after the occur­rence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent (4%) per annum.

7.3          Standards for Determining Commercial Reasonableness.  Borrower and Silicon agree that a sale or other disposition (collectively, “sale”) of any Collateral which complies with the following standards will conclu­sively be deemed to be commercially reasonable:  (i) Notice of the sale is given to Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m;  (v) Payment of the purchase price in cash or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same.  Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable.

7.4          Power of Attorney.  Upon the occurrence of any Event of Default, without limiting Silicon’s other rights and remedies, Borrower grants to Silicon an irrevocable limited power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower’s expense, to do any or all of the following, in Borrower’s name or otherwise, but Silicon agrees to exer­cise the following powers in a commercially reasonable manner:  (a) Execute on behalf of Borrower any docu­ments that Silicon may, in its sole discretion, deem advis­able in order to perfect and maintain Silicon’s security in­terest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on be­half of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon’s Collateral or in which Silicon has an interest; (c) Execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic’s, materialman’s or other lien, or assignment or satisfaction of mechanic’s, materialman’s or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; en­dorse the name of Borrower upon any instruments, or doc­uments, evidence of payment or Collateral that may come into Silicon’s possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle (upon commercially reasonable terms) any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) Grant extensions of time to pay,

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compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) Pay any sums required on account of Borrower’s taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or con­trol of any books or records belonging to, or relating to, Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum re­quired of Borrower pursuant to this Agreement and any other present or future agreements.  Any and all reasonable sums paid and any and all reasonable costs, expenses, lia­bilities, obligations and attorneys’ fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.  In no event shall Silicon’s rights under the foregoing power of attorney or any of Silicon’s other rights under this Agreement be deemed to indicate that Silicon is in control of the busi­ness, management or properties of Borrower.  The irrevocable limited power of attorney shall cease if and when the Event of Default is cured by Borrower and Silicon is reimbursed all reasonable costs occasioned by the Event of Default.

7.5          Application of Proceeds.  All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion.  Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency.  If, Silicon, in its sole discretion, directly or indirectly en­ters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its sole discre­tion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor.

7.6          Remedies Cumulative.  In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party un­der the Massachusetts Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive.  Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from sub­sequent exercise or partial exercise of any other rights or remedies.  The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and ef­fect until all of the Obligations have been fully paid and performed.

8.             DEFINITIONS.

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

“Account Debtor” means the obligor on a Receivable.

“Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person.

“Business Day” means a day on which Silicon is open for business.

“Cash Management Services” means Silicon’s cash management services, direct deposit of payroll, business credit card, and check cashing services as may be further identified in the various cash management services agreements related to such Cash Management Services.

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“Code” means the Uniform Commercial Code as adopted and in effect in the Commonwealth of Massachusetts from time to time.

“Collateral” has the meaning set forth in Section 2.1 above.

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

“Deposit Account” has the meaning set forth in Section 9-102 of the Code.

“Eligible Inventory” means Borrower’s  raw materials, finished goods and work in process arising in the ordinary course of Borrower’s business, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate; provided, however, Eligible Inventory does not include, in any event, (i) used, returned, obsolete, consigned, demonstrative or custom Inventory or supplies, or (ii) any raw materials, finished goods or work in process not subject to a first perfected security interest in favor of Silicon, or (iii) any of Borrower’s raw materials, finished goods or work in process not in Borrower’s possession.

“Eligible Receivables” means Receivables arising in the ordinary course of Borrower’s business from the sale of goods or rendition of services, which Silicon, in its sole judgment, shall deem eligible for borrowing, based on such considerations as Silicon may from time to time deem appropriate.  Without limiting the fact that the determina­tion of which Receivables are eligible for borrowing is a matter of Silicon’s discretion, the following (the “Minimum Eligibility Requirements”) are the minimum requirements for a Receivable to be an Eligible Receivable:  (i) the Receivable must not be outstanding for more than 90 days from its invoice date, (ii) the Receivable must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, (iii)  the Receivable must not be subject to any contingencies (including Receivables arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be condi­tional, except as may otherwise be acceptable to Silicon in its discretion), (iv) the Receivable must not be owing from an Account Debtor with whom the Borrower has any dispute (whether or not relating to the particular Receivable), (v) the Receivable must not be owing from an Affiliate of Borrower, (vi) the Receivable must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a mate­rial portion of its business, (vii) the Receivable must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon’s satisfaction, with the United States Assignment of Claims Act), (viii) the Receivable must not be owing from an Account Debtor located outside the United States or Canada  (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit sat­isfactory to Silicon, or FCIA insured satisfactory to Silicon), and (ix) the Receivable must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise. Receivables owing from one Account Debtor will not be deemed Eligible Receivables to the extent they exceed 25% of the total Receivables outstanding.  In addi­tion, if more than 50% of the Receivables owing from an Account Debtor are outstanding more than 90 days from their invoice date (without regard to unapplied credits) or are otherwise not eligible Receivables, then all Receivables owing from that Account Debtor will be deemed ineligible for borrowing.  Silicon may, from time to time, in its discretion, revise the Minimum Eligibility Requirements, upon written notice to the Borrower.

“Equipment” means all of Borrower’s present and here­after acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower’s operations or owned by Borrower and any interest in any of the forego­ing, and all attachments, accessories, accessions, replace­ments, substitutions, additions or improvements to any of the foregoing, wherever located.

“Event of Default” means any of the events set forth in Section 7.1 of this Agreement.

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“General Intangibles” means all general intangibles of Borrower, whether now owned or hereafter created or ac­quired by Borrower, including, without limitation, all choses in action, rights to payment for credit extended, amounts due to Borrower, credit memoranda in favor of Borrower, warranty claims, causes of action, corporate or other busi­ness records, deposits, Deposit Accounts, inventions, designs, draw­ings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security  and other deposits, rights in all litigation presently or here­after pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter aris­ing therefrom, all claims of Borrower against Silicon, rights to purchase or sell real or personal property, rights as a li­censor or licensee of any kind, royalties, telephone numbers, proprietary informa­tion, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnifica­tion and all other intangible property of every kind and nature (other than Receivables).

“Intellectual Property” is the Intellectual Property Collateral, as defined in the IP Security Agreement.

“IP Security Agreement” means that certain Intellectual Property Security Agreement dated as of the date hereof by and between Silicon and Borrower.

“Inventory” means all of Borrower’s now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any con­tract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit), and all materials and supplies of every kind, nature and description which are owned by Borrower and are intended for use or are used or consumed in Borrower’s business or used in con­nection with the manufacture, packing, shipping, advertis­ing, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, docu­ments of title and other documents representing any of the foregoing.

“Letter-of-Credit Rights” means all letter-of-credit rights including, without limitation, “letter-of-credit rights” as defined in the Code and also any right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

“Obligations” means all present and future Loans, ad­vances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, including, without limitation, the  Borrower’s obligations pursuant to the IP Security Agreement, whether aris­ing from an extension of credit, opening of a letter of credit, banker’s acceptance, FX Forward Contracts, loan, Cash Management Services, guaranty, indemnifica­tion or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower’s debts owing to oth­ers), absolute or contingent, due or to become due, includ­ing, without limitation, all interest, charges, expenses, fees, attorney’s fees, expert witness fees, audit fees, letter of credit fees, Collateral Handling Fees, closing fees, facility fees, Cancellation Fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agree­ment between Borrower and Silicon.

“Payment” means all checks, wire transfers and other items of payment received by Silicon (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrower’s outstanding Loans or, if the balance of the Loans have been reduced to zero, for credit to its Deposit Accounts.

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“Payment Intangibles” means all payment intangibles including, without limitation, “payment intangibles” as defined in the Code and also any general intangible under which the Account Debtor’s primary obligation is a monetary obligation.

“Permitted Liens” means the following:  (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, which consent shall not be unreasonably withheld; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, ware­housemen, carriers, or other similar liens arising in the or­dinary course of business and securing obligations which are not delinquent; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or re­placement lien is limited to the property encumbered by the existing lien and the principal amount of the indebted­ness being extended, renewed or refinanced does not in­crease; and (viii)liens in favor of customs and revenue author­ities which secure payment of customs duties in connec­tion with the importation of goods.  Silicon will have the right to require, as a condition to its consent under sub­section (iv) above, that the holder of the additional se­curity interest or lien sign an intercreditor agreement on Silicon’s then standard form, acknowledge that the secu­rity interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any un­cured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.

“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organiza­tion, association, corporation, government, or any agency or political division thereof, or any other entity.

“Receivables” means all of Borrower’s now owned and hereafter acquired accounts (whether or not earned by performance), accounts receivable, health-care insurance receivables, rights to payment, letters of credit, contract rights, chattel paper, in­struments, securities, securities accounts, investment property, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party.

“Reserves” means, as of any date of determination, such amounts as Silicon may from time to time establish and revise in good faith reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule:  (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in good faith, do or may affect in any material respect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Receivables), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon’s good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

“Supporting Obligations” means all supporting obligations including, without limitation, “supporting obligations” as defined in the Code and also any letter-of-credit right or secondary obligations which supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property.

Other Terms.  All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied.  All

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other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein.

9.  GENERAL PROVISIONS.

9.1          Interest Computation; Float Charge.  In computing interest on the Obligations, all Payments received after 12:00 Noon on any day shall be deemed received on the next Business Day.  In addition, at any time that Loans are outstanding Silicon shall be entitled to charge Borrower a “float” charge in an amount equal to three Business Days interest, at the interest rate applicable to the Loans, on all Payments received by Silicon.  Said float charge is not included in interest for purposes of computing Minimum Monthly Interest (if any) under this Agreement.  The float charge for each month shall be payable on the last day of the month.  Silicon shall not, however, be required to credit Borrower’s account for the amount of any item of payment which is unsatisfactory to Silicon in its good faith business judgment, and Silicon may charge Borrower’s loan account for the amount of any item of payment which is returned to Silicon unpaid.

9.2          Application of Payments.  All payments with re­spect to the Obligations may be applied, and in Silicon’s sole discretion reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its sole discretion.

9.3          Charges to Accounts.  Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower’s Loan account, in which event they will bear interest at the same rate appli­cable to the Loans.  Silicon may also, in its discretion, charge any monetary Obligations to Borrower’s Deposit Accounts maintained with Silicon.

9.4          Monthly Accountings.  Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement.  Such account shall be deemed correct, accurate and bind­ing on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of er­rors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within thirty days after each account is rendered, describing the nature of any al­leged errors or omissions.

9.5          Notices.  All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt re­quested, addressed to Silicon or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party.  Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager.  All no­tices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expira­tion of one Business Day following delivery to the private delivery service, or two Business Days following the de­posit thereof in the United States mail, with postage pre­paid.

9.6          Severability.  Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.

9.7          Integration.  This Agreement and such other written agreements, documents and instruments as may be exe­cuted in connection herewith are the final, entire and com­plete agreement between Borrower and Silicon and super­sede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement.  There are no oral under­standings, representations or agreements between the par­ties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith.

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                9.8          Waivers; Indemnity.  The failure of Silicon at any time or times to require Borrower to strictly comply with any of the pro­visions of this Agreement or any other present or future agreement between Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and re­ceive strict compliance therewith.  Any waiver of any de­fault shall not waive or affect any other default, whether prior or subsequent, and whether or not similar.  None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower.  Borrower waives demand, protest, notice of protest and notice of de­fault or dishonor, notice of payment and nonpayment, re­lease, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement.  Borrower hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys’ fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Silicon and Borrower, or any other matter, relating to Borrower or the Obligations; provided, that this indemnity shall not extend to damages proximately caused by the indemnitee’s own gross negligence or willful misconduct.  Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect for a period up to the statute of limitations for any actions that arise or could arise under the indemnity.

9.9          No Liability for Ordinary Negligence.  Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, de­mands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct.

9.10        Amendment.  The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized offi­cer of Silicon.

9.11        Time of Essence.  Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.

9.12        Attorneys Fees and Costs.  Borrower shall reim­burse Silicon for all reasonable attorneys’ fees and all fil­ing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys’ fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; en­force, or seek to enforce, any of its rights; prosecute ac­tions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceed­ing; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; exam­ine, audit, copy, and inspect any of the Collateral or any of Borrower’s books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon’s secu­rity interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower.  In satisfying Borrower’s obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon’s attorneys, Riemer & Braunstein, LLP, but Borrower acknowledges and agrees that Riemer & Braunstein, LLP is representing only Silicon and not Borrower in connection with this Agreement.  If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, Silicon shall be entitled to recover its reason­able costs and attorneys’ fees, including (but not limited to) reasonable attorneys’ fees and costs incurred in the en­forcement of, execution upon or defense of any order, de­cree, award or judgment.  All attorneys’ fees and costs to which

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Silicon may be entitled pursuant to this Section 9.12 shall immediately become part of Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations.

9.13        Benefit of Agreement.  The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void.  No consent by Silicon to any assignment shall re­lease Borrower from its liability for the Obligations.

9.14        Right of Set-Off.   Borrower and any guarantor hereby grant to Silicon, a lien, security interest and right of setoff as security for all Obligations to Silicon, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Silicon or any entity under the control of Silicon Valley Bank or in transit to any of them.  At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Silicon may set off the same or any part thereof and apply the same to any liability or obligation of Borrower and any guarantor even though unmatured and regardless of the adequacy of any other collateral securing the loan.  ANY AND ALL RIGHTS TO REQUIRE SILICON TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

9.15.       Joint and Several Liability.  If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the re­lease of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.

9.16        Limitation of Actions.  Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other present or future document or agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after Borrower’s knowledge of the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter.  Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action.  The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion.  This provision shall survive any termination of this Loan Agreement or any other present or future agreement.

9.17        Section Headings; Construction.  Section headings are only used in this Agreement for convenience.  Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applica­ble section, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement.  The term “including”, when­ever used in this Agreement, shall mean “including (but not limited to)”.  This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise.

9.18        Governing Law; Jurisdiction; Venue.  This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the Commonwealth of Massachusetts.  As a ma­terial part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees

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that all actions and pro­ceedings relating directly or indirectly to this Agreement shall, at Silicon’s option, be litigated in state or federal courts located within Massachusetts; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal de­livery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding, provided, however, that if for any reason Silicon cannot avail itself of such courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa Clara, California.

9.19        Ratification of IP Security Agreement.  Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of the IP Security Agreement and acknowledges, confirms and agrees that the IP Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral as defined therein.

9.20        Mutual Waiver of Jury Trial.  BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FU­TURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

9.21        Confidentiality.  In handling any confidential information, Silicon shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made:  (i) to Silicon’s subsidiaries or affiliates in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of any interest in the Loans; (iii) as required by law, regulation, subpoena, or other order; (iv) as required in connection with Silicon’s examination or audit; and (v) as Silicon considers appropriate in exercising remedies under this Agreement.  Confidential information does not include information that either:  (a) is in the public domain or in Silicon’s possession when disclosed to Silicon, or becomes part of the public domain after disclosure to Silicon (through no act or omission of Silicon); or (b) is disclosed to Silicon by a third party, which third party is not under any non-disclosure obligation.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first above written.

Borrower:

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Silicon:

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Silicon Valley Bank

Schedule to

Loan and Security Agreement

This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date.

1.  CREDIT LIMIT

                (Section 1.1):         An amount not to exceed the lesser of (A) or (B), below:

(A)          (i)            $7,000,000 (the “Maximum Credit Limit”); minus

(ii)           the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.

(B)           (i)            80.0% of the amount of the Borrower’s Eligible Receivables;

                                plus

                (ii)           the lesser of

(a)  (x) 40% of Borrower’s Eligible Inventory comprised of raw materials and finished goods (valued at the lower of actual cost or fair market value), plus (y) the lesser of (A) 10% of Borrower’s Eligible Inventory comprised of work in process (valued at the lower of actual cost or fair market value) or (B) $300,000; or

(b) 85% of the orderly liquidation value of Borrower’s Eligible Inventory; or

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(c) the lesser of (x) 25% of the amount set forth in Section (B) (i) above (regarding availability based on Borrower’s Eligible Receivables) or (y) $1,000,000.00;

minus

(iii)                               the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.

Silicon may, from time to time, modify the advance rate(s) set forth herein in its good faith business judgment upon notice to Borrower based on changes in collection experience with respect to the Receivables or other issues or factors relating to the Receivables or the Collateral.

Borrower acknowledges that (i) Silicon will make no advances under this Agreement unless and until it has received an audit of the Collateral in form and substance satisfactory to Silicon, and (ii) Silicon will make no advances under this Agreement based upon Borrower’s Eligible Inventory unless and until it has received an appraisal of Borrower’s Inventory in form and substance satisfactory to Silicon performed by an independent auditor that is acceptable to Silicon in its sole discretion.

                Letter of Credit/Foreign Exchange Contract/Cash Management Services Sublimit

                (Section 1.6, 1.7, and 1.8):   $3,000,000

2.  INTEREST.

Interest Rate (Section 1.2):

                A rate equal to the greater of (i) 6.75% per annum or (ii) the “Prime Rate” in effect from time to time, plus 2.00% per annum.  Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed.  “Prime Rate” means the rate announced from time to time by Silicon as its “prime rate;” it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon.  The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate.

                Minimum Monthly Interest (Section 1.2, 9.1) None.

3.  FEES (Section 1.4):

Cancellation Fee:  If the Obligations are voluntarily or involuntarily (in the event of bankruptcy) prepaid or if this Agreement is otherwise terminated prior to its maturity (a “Cancellation Event”), the Borrower shall pay to Silicon a termination fee (the “Cancellation Fee”) in the amount equal to 0.50% of the Maximum Credit Limit if a Cancellation Event occurs on or before six (6) months from the date hereof, provided that no such Cancellation Fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon.  The Cancellation Fee shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of  involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.

4.  MATURITY DATE

5.  FINANCIAL COVENANTS

                (Section 5.1):         Borrower shall comply with each of the following covenant(s).  Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

                a. Minimum Tangible Net Worth:

                Borrower shall maintain an Tangible Net Worth of not less than the sum of (i) plus (ii) below:

(i)                                     (a) from October 1, 2004  through and including October 31, 2004 - $9,000,000;

(b) from November 1, 2004 through November 30, 2004 - $8,250,000.00;

(c) from December 1, 2004 through December 31, 2004 - $12,500,000;

(d) from January 1, 2005 through January 31, 2005 - $11,750,000;

(e) from February 1, 2005 through February 28, 2005 - $11,000,000;

(f) from March  1, 2005 through March 31, 2005 - $12,500,000;

(e) from April 1, 2005 through April 30, 2005 -  $11,750,000;

(f) from May 1, 2005 through May 31, 2005 - $11,000,000;

(g) from June 1, 2005 through June 30, 2005 - $12,500,000;

(h) from July 1, 2005 through July 31, 2005 - $11,750,000;

(i) from August 1, 2005 through August 31, 2005 - $11,000,000;

(j) from September 1, 2005 through September 30, 2005 - $12,500,000

(k) from October 1, 2005 through October 31, 2005 - $11,750,000;

(l) from November 1, 2005 through November 30, 2005 - $11,000,000; and

(m) from December 1, 2005 through December 31, 2005 - $12,500,000

(ii) 80% of all consideration received in addition to those amount to be received pursuant to the Capitalization Event (as defined in Section 8 (4) of this Schedule to Loan and Security Agreement) from proceeds from the issuance of any equity securities of the Borrower and/or subordinated debt incurred by the Borrower.

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                b. Minimum Cash or Excess Availability:

The Borrower shall at all times maintain $400,000.00 in (i) cash deposits maintained at Silicon, and/or (ii) excess “availability” under this Agreement (net of Loans, Letters of Credit or other indebtedness under this Agreement), as determined by Silicon based upon the Credit Limit restrictions set forth in Section 1 above).

                Definitions.           For purposes of the foregoing financial covenants, the following term shall have the following meaning:

                                “Liabilities” shall have the meaning ascribed thereto by generally accepted accounting principles.

                                “Tangible Net Worth” shall mean the excess of total assets over total Liabilities, determined in accordance with generally accepted accounting principles, with the following adjustments:

                                (A) there shall be excluded from assets:  (i) notes, accounts receivable and other obligations owing to the Borrower from its officers or other Affiliates, and (ii) all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises

                                (B) there shall be excluded from Liabilities:  all indebtedness which is subordinated to the Obligations under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon in its discretion.

6.  REPORTING.

Borrower shall provide Silicon with the following:

i.              Weekly (monthly, if no amounts are outstanding under this Agreement and Borrower has advised Silicon in writing that it has elected to be on “non-borrowing reporting status”), and upon each loan request, borrowing base certificates and transaction reports.

ii.             Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen days after the end of each month.

iii.            Monthly accounts receivable agings, aged by invoice date, and receivable reconciliations, within fifteen days after the end of each month.

iv.            Monthly unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month; provided, however, for the months ending March, June, September and December, Borrower shall forward only a draft of such financial statements, with a final statement due within forty-five days after the end of such month.

v.             Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.

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vi.            Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower.

vii.           Draft annual financial statements, as soon as available, and in any event within 45 days following the end of Borrower’s fiscal year, prepared under GAAP, consistently applied.

viii.          Annual audited financial statements, as soon as available, and in any event within 90 days following the end of Borrower’s fiscal year, prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Silicon.

ix.            Such additional reports and information as Silicon may from time to time specify.

                Borrower may elect to be on “non-borrowing reporting status” if Borrower notifies Silicon in writing that it so elects and  there are no Loans or other Obligations outstanding hereunder (including, without limitation, any issued Letters of Credit).  After Borrower has notified Silicon of its intention to be on “non-borrower reporting status”, as further set forth in Section 4.3 of this Agreement, Borrower must provide Silicon at least 30 days prior written notice of its intention to borrow.

7.  BORROWER INFORMATION:

Litigation (Section 3.10):    None

8.  OTHER COVENANTS

(2)           Subordination of Inside Debt.  All present and future indebtedness (excluding reasonable salary, bonus and expense reimbursement) of the Borrower to its officers, directors and shareholders,(“Inside Debt”) shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon’s standard form.  Borrower represents and warrants that there is no Inside Debt presently outstanding.  Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon’s standard form.

(3)           Subordination Agreements. Borrower represents and warrants that Borrower is not presently indebted to any third party for borrowed money.  Prior to incurring any such indebtedness (which incurrence may only occur upon Silicon’s prior written consent), Borrower shall cause each creditor to execute and deliver to Silicon a subordination agreement on Silicon’s standard form subordinating to the Obligations the indebtedness of Borrower to any such creditor and shall cause such subordination agreements to continue in full force and effect at all times during the term of this Agreement.

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Borrower:

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