INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

      INTELLECTUAL PROPERTY SECURITY AGREEMENT (this "Agreement" dated as of

December 16, 2005, by and among Luna Technologies International, Inc., a

Delaware corporation (the "Company"), and the secured parties signatory hereto

and their respective endorsees, transferees and assigns (collectively, the

"Secured Party").

 

                              W I T N E S S E T H :

 

      WHEREAS, pursuant to a Securities Purchase Agreement, dated the date

hereof, between Company and the Secured Party (the "Purchase Agreement"),

Company has agreed to issue to the Secured Party and the Secured Party has

agreed to purchase from Company certain of Company's 8% Callable Secured

Convertible Notes, due three years from the date of issue (the "Notes"), which

are convertible into shares of Company's Common Stock, par value $.0001 per

share (the "Common Stock"). In connection therewith, Company shall issue the

Secured Party certain Common Stock purchase warrants (the "Warrants"); and

 

      WHEREAS, in order to induce the Secured Party to purchase the Notes,

Company has agreed to execute and deliver to the Secured Party this Agreement

for the benefit of the Secured Party and to grant to it a first priority

security interest in certain Intellectual Property (defined below) of Company to

secure the prompt payment, performance and discharge in full of all of Company's

obligations under the Notes and exercise and discharge in full of Company's

obligations under the Warrants; and

 

      NOW, THEREFORE, in consideration of the agreements herein contained and

for other good and valuable consideration, the receipt and sufficiency of which

is hereby acknowledged, the parties hereto hereby agree as follows:

 

      1. Defined Terms. Unless otherwise defined herein, terms which are defined

in the Purchase Agreement and used herein are so used as so defined; and the

following terms shall have the following meanings:

 

      "Software Intellectual Property" shall mean:

 

      (a) all software programs (including all source code, object code and all

related applications and data files), whether now owned, upgraded, enhanced,

licensed or leased or hereafter acquired by the Company, above;

 

      (b) all computers and electronic data processing hardware and firmware

associated therewith;

 

      (c) all documentation (including flow charts, logic diagrams, manuals,

guides and specifications) with respect to such software, hardware and firmware

described in the preceding clauses (a) and (b); and

 

      (d) all rights with respect to all of the foregoing, including, without

limitation, any and all upgrades, modifications, copyrights, licenses, options,

warranties, service contracts, program services, test rights, maintenance

rights, support rights, improvement rights, renewal rights and indemnifications

and substitutions, replacements, additions, or model conversions of any of the

foregoing.

 

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      "Copyrights" shall mean (a) all copyrights, registrations and applications

for registration, issued or filed, including any reissues, extensions or

renewals thereof, by or with the United States Copyright Office or any similar

office or agency of the United States, any state thereof, or any other country

or political subdivision thereof, or otherwise, including, all rights in and to

the material constituting the subject matter thereof, including, without

limitation, any referred to in Schedule B hereto, and (b) any rights in any

material which is copyrightable or which is protected by common law, United

States copyright laws or similar laws or any law of any State, including,

without limitation, any thereof referred to in Schedule B hereto.

 

      "Copyright License" shall mean any agreement, written or oral, providing

for a grant by the Company of any right in any Copyright, including, without

limitation, any thereof referred to in Schedule B hereto.

 

      "Intellectual Property" shall means, collectively, the Software

Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses,

Trademarks, Trademark Licenses and Trade Secrets.

 

      "Obligations" means all of the Company's obligations under this Agreement

and the Notes, in each case, whether now or hereafter existing, voluntary or

involuntary, direct or indirect, absolute or contingent, liquidated or

unliquidated, whether or not jointly owed with others, and whether or not from

time to time decreased or extinguished and later decreased, created or incurred,

and all or any portion of such obligations or liabilities that are paid, to the

extent all or any part of such payment is avoided or recovered directly or

indirectly from the Secured Party as a preference, fraudulent transfer or

otherwise as such obligations may be amended, supplemented, converted, extended

or modified from time to time.

 

      "Patents" shall mean (a) all letters patent of the United States or any

other country or any political subdivision thereof, and all reissues and

extensions thereof, including, without limitation, any thereof referred to in

Schedule B hereto, and (b) all applications for letters patent of the United

States and all divisions, continuations and continuations-in-part thereof or any

other country or any political subdivision, including, without limitation, any

thereof referred to in Schedule B hereto.

 

      "Patent License" shall mean all agreements, whether written or oral,

providing for the grant by the Company of any right to manufacture, use or sell

any invention covered by a Patent, including, without limitation, any thereof

referred to in Schedule B hereto.

 

      "Security Agreement" shall mean the a Security Agreement, dated the date

hereof between Company and the Secured Party.

 

      "Trademarks" shall mean (a) all trademarks, trade names, corporate names,

company names, business names, fictitious business names, trade styles, service

marks, logos and other source or business identifiers, and the goodwill

associated therewith, now existing or hereafter adopted or acquired, all

registrations and recordings thereof, and all applications in connection

therewith, whether in the United States Patent and Trademark Office or in any

similar office or agency of the United States, any state thereof or any other

country or any political subdivision thereof, or otherwise, including, without

limitation, any thereof referred to in Schedule B hereto, and (b) all reissues,

extensions or renewals thereof.

 

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      "Trademark License" shall mean any agreement, written or oral, providing

for the grant by the Company of any right to use any Trademark, including,

without limitation, any thereof referred to in Schedule B hereto.

 

      "Trade Secrets" shall mean common law and statutory trade secrets and all

other confidential or proprietary or useful information and all know-how

obtained by or used in or contemplated at any time for use in the business of

the Company (all of the foregoing being collectively called a "Trade Secret"),

whether or not such Trade Secret has been reduced to a writing or other tangible

form, including all documents and things embodying, incorporating or referring

in any way to such Trade Secret, all Trade Secret licenses, including each Trade

Secret license referred to in Schedule B hereto, and including the right to sue

for and to enjoin and to collect damages for the actual or threatened

misappropriation of any Trade Secret and for the breach or enforcement of any

such Trade Secret license.

 

      2. Grant of Security Interest. In accordance with Section 3(m) of the

Security Agreement, to secure the complete and timely payment, performance and

discharge in full, as the case may be, of all of the Obligations, the Company

hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the

Secured Party, a continuing security interest in, a continuing first lien upon,

an unqualified right to possession and disposition of and a right of set-off

against, in each case to the fullest extent permitted by law, all of the

Company's right, title and interest of whatsoever kind and nature in and to the

Intellectual Property (the "Security Interest").

 

      3. Representations and Warranties. The Company hereby represents and

warrants, and covenants and agrees with, the Secured Party as follows:

 

      (a) The Company has the requisite corporate power and authority to enter

into this Agreement and otherwise to carry out its obligations thereunder. The

execution, delivery and performance by the Company of this Agreement and the

filings contemplated therein have been duly authorized by all necessary action

on the part of the Company and no further action is required by the Company.

This Agreement constitutes a legal, valid and binding obligation of the Company

enforceable in accordance with its terms, except as enforceability may be

limited by bankruptcy, insolvency, reorganization, moratorium or similar laws

affecting the enforcement of creditor's rights generally.

 

      (b) The Company represents and warrants that it has no place of business

or offices where its respective books of account and records are kept (other

than temporarily at the offices of its attorneys or accountants) or places where

the Intellectual Property is stored or located, except as set forth on Schedule

A attached hereto;

 

      (c) The Company is the sole owner of the Intellectual Property (except for

non-exclusive licenses granted by the Company in the ordinary course of

business), free and clear of any liens, security interests, encumbrances, rights

or claims, and is fully authorized to grant the Security Interest in and to

pledge the Intellectual Property, except as set forth on Schedule D, or for a

financing statement covering assets acquired by the Company after the date

hereof. There is not on file in any governmental or regulatory authority, agency

or recording office an effective financing statement, security agreement,

license or transfer or any notice of any of the foregoing (other than those that

have been filed in favor of the Secured Party pursuant to this Agreement)

covering or affecting any of the Intellectual Property, except as set forth on

Schedule D. So long as this Agreement shall be in effect, the Company shall not

execute and shall not knowingly permit to be on file in any such office or

agency any such financing statement or other document or instrument (except to

the extent filed or recorded in favor of the Secured Party pursuant to the terms

of this Agreement), except as set forth on

 

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Schedule D or for a financing statement covering assets acquired by the Company

after the date hereof, provided that the value of the Intellectual Property

covered by this Agreement along with the Collateral (as defined in the Security

Agreement) is equal to at least 150% of the Obligations.

 

      (d) The Company shall at all times maintain its books of account and

records relating to the Intellectual Property at its principal place of business

and its Intellectual Property at the locations set forth on Schedule A attached

hereto and may not relocate such books of account and records unless it delivers

to the Secured Party at least 30 days prior to such relocation (i) written

notice of such relocation and the new location thereof (which must be within the

United States) and (ii) evidence that the necessary documents have been filed

and recorded and other steps have been taken to perfect the Security Interest to

create in favor of the Secured Party valid, perfected and continuing first

priority liens in the Intellectual Property to the extent they can be perfected

through such filings.

 

      (e) This Agreement creates in favor of the Secured Party a valid security

interest in the Intellectual Property securing the payment and performance of

the Obligations and, upon making the filings required hereunder, a perfected

first priority security interest in such Intellectual Property to the extent

that it can be perfected through such filings.

 

      (f) Upon request of the Secured Party, the Company shall execute and

deliver any and all agreements, instruments, documents, and papers as the

Secured Party may request to evidence the Secured Party's security interest in

the Intellectual Property and the goodwill and general intangibles of the

Company relating thereto or represented thereby, and the Company hereby appoints

the Secured Party its attorney-in-fact to execute and file all such writings for

the foregoing purposes, all acts of such attorney being hereby ratified and

confirmed; such power being coupled with an interest is irrevocable until the

Obligations have been fully satisfied and are paid in full.

 

      (g) Except as set forth on Schedule D, the execution, delivery and

performance of this Agreement does not conflict with or cause a breach or

default, or an event that with or without the passage of time or notice, shall

constitute a breach or default, under any agreement to which the Company is a

party or by which the Company is bound. No consent (including, without

limitation, from stock holders or creditors of the Company) is required for the

Company to enter into and perform its obligations hereunder.

 

      (h) The Company shall at all times maintain the liens and Security

Interest provided for hereunder as valid and perfected first priority liens and

security interests in the Intellectual Property to the extent they can be

perfected by filing in favor of the Secured Party until this Agreement and the

Security Interest hereunder shall terminate pursuant to Section 11. The Company

hereby agrees to defend the same against any and all persons. The Company shall

safeguard and protect all Intellectual Property for the account of the Secured

Party. Without limiting the generality of the foregoing, the Company shall pay

all fees, taxes and other amounts necessary to maintain the Intellectual

Property and the Security Interest hereunder, and the Company shall obtain and

furnish to the Secured Party from time to time, upon demand, such releases

and/or subordinations of claims and liens which may be required to maintain the

priority of the Security Interest hereunder.

 

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      (i) The Company will not transfer, pledge, hypothecate, encumber, license

(except for non-exclusive licenses granted by the Company in the ordinary course

of business), sell or otherwise dispose of any of the Intellectual Property

without the prior written consent of the Secured Party, which consent will not

be unreasonably withheld.

 

      (j) The Company shall, within ten (10) days of obtaining knowledge

thereof, advise the Secured Party promptly, in sufficient detail, of any

substantial change in the Intellectual Property, and of the occurrence of any

event which would have a material adverse effect on the value of the

Intellectual Property or on the Secured Party's security interest therein.

 

      (k) The Company shall permit the Secured Party and its representatives and

agents to inspect the Intellectual Property at any time, and to make copies of

records pertaining to the Intellectual Property as may be requested by the

Secured Party from time to time; provided however, that the Secured Party shall

not publicly disclose any information which the Company advises the Secured

Party is confidential.

 

      (l) The Company will take all steps reasonably necessary to diligently

pursue and seek to preserve, enforce and collect any rights, claims, causes of

action and accounts receivable in respect of the Intellectual Property.

 

      (m) The Company shall promptly notify the Secured Party in sufficient

detail upon becoming aware of any attachment, garnishment, execution or other

legal process levied against any Intellectual Property and of any other

information received by the Company that may materially affect the value of the

Intellectual Property, the Security Interest or the rights and remedies of the

Secured Party hereunder.

 

      (n) All information heretofore, herein or hereafter supplied to the

Secured Party by or on behalf of the Company with respect to the Intellectual

Property is accurate and complete in all material respects as of the date

furnished.

 

      (o) Schedule A attached hereto contains a list of all of the subsidiaries

of Company.

 

      (p) Schedule B attached hereto includes all Licenses, and all Patents and

Patent Licenses, if any, owned by the Company in its own name as of the date

hereof. Schedule B hereto includes all Trademarks and Trademark Licenses, if

any, owned by the Company in its own name as of the date hereof. Schedule B

hereto includes all Copyrights and Copyright Licenses, if any, owned by the

Company in its own name as of the date hereof. Schedule B hereto includes all

Trade Secrets and Trade Secret Licenses, if any, owned by the Company as of the

date hereof. To the best of the Company's knowledge, each License, Patent,

Trademark, Copyright and Trade Secret is valid, subsisting, unexpired,

enforceable and has not been abandoned. Except as set forth in Schedule B, none

of such Licenses, Patents, Trademarks, Copyrights and Trade Secrets is the

subject of any licensing or franchise agreement. To the best of the Company's

knowledge, no holding, decision or judgment has been rendered by any

Governmental Body which would limit, cancel or question the validity of any

License, Patent, Trademark, Copyright and Trade Secrets . Except as set forth in

Schedule B, no action or proceeding is pending (i) seeking to limit, cancel or

question the validity of any License, Patent, Trademark, Copyright or Trade

Secret, or (ii) which, if adversely determined, would have a material adverse

effect on the value of any License, Patent, Trademark, Copyright or Trade

Secret. The Company has used and will continue to use for the duration of this

Agreement, proper statutory notice in connection with its use of the Patents,

Trademarks and Copyrights and consistent standards of quality in products leased

or sold under the Patents, Trademarks and Copyrights.

 

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<PAGE>

 

      (q) With respect to any Intellectual Property:

 

            (i) such Intellectual Property is subsisting and has not been

      adjudged invalid or unenforceable, in whole or in part;

 

            (ii) such Intellectual Property is valid and enforceable;

 

            (iii) the Company has made all necessary filings and recordations to

      protect its interest in such Intellectual Property, including, without

      limitation, recordations of all of its interests in the Patents, Patent

      Licenses, Trademarks and Trademark Licenses in the United States Patent

      and Trademark Office and in corresponding offices throughout the world and

      its claims to the Copyrights and Copyright Licenses in the United States

      Copyright Office and in corresponding offices throughout the world;

 

            (iv) other than as set forth in Schedule B, the Company is the

      exclusive owner of the entire and unencumbered right, title and interest

      in and to such Intellectual Property and no claim has been made that the

      use of such Intellectual Property infringes on the asserted rights of any

      third party; and

 

            (v) the Company has performed and will continue to perform all acts

      and has paid all required fees and taxes to maintain each and every item

      of Intellectual Property in full force and effect throughout the world, as

      applicable.

 

      (r) Except with respect to any Trademark or Copyright that the Company

shall reasonably determine is of negligible economic value to the Company, the

Company shall:

 

            (i) maintain each Trademark and Copyright in full force free from

      any claim of abandonment for non-use, maintain as in the past the quality

      of products and services offered under such Trademark or Copyright; employ

      such Trademark or Copyright with the appropriate notice of registration;

      not adopt or use any mark which is confusingly similar or a colorable

      imitation of such Trademark or Copyright unless the Secured Party shall

      obtain a perfected security interest in such mark pursuant to this

      Agreement; and not (and not permit any licensee or sublicensee thereof to)

      do any act or knowingly omit to do any act whereby any Trademark or

      Copyright may become invalidated;

 

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            (ii) not, except with respect to any Patent that it shall reasonably

      determine is of negligible economic value to it, do any act, or omit to do

      any act, whereby any Patent may become abandoned or dedicated; and

 

            (iii) notify the Secured Party immediately if it knows, or has

      reason to know, that any application or registration relating to any

      Patent, Trademark or Copyright may become abandoned or dedicated, or of

      any adverse determination or development (including, without limitation,

      the institution of, or any such determination or development in, any