CREDIT AND SECURITY AGREEMENT

EXHIBIT 10.1

CREDIT AND SECURITY AGREEMENT DATED AS OF MAY 21, 2007

BETWEEN PETROHUNTER ENERGY CORPORATION AND PETROHUNTER

OPERATING COMPANY AND GLOBAL PROJECT FINANCE AG

<PAGE>

CREDIT AND SECURITY AGREEMENT

Dated as of May 21, 2007

PETROHUNTER ENERGY CORPORATION, a Maryland corporation, and its

wholly-owned subsidiary, PETROHUNTER OPERATING COMPANY, a Maryland corporation

(collectively, the "Borrower"), and GLOBAL PROJECT FINANCE AG (the "Lender"),

hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 DEFINITIONS. For all purposes of this Agreement, except as

otherwise expressly provided or unless the context otherwise requires:

(a) the terms defined in this Article have the meanings

assigned to them in this Article, and include the plural as well as the

singular; and

(b) all accounting terms not otherwise defined herein have the

meanings assigned to them in accordance with GAAP.

"ACCOUNTS" means any "account," as such term is defined in the

Uniform Commercial Code, and, in any event, shall include, without limitation,

"supporting obligations" as defined in the Uniform Commercial Code.

"AFFILIATE" or "AFFILIATES" means any Person controlled by,

controlling or under common control with the Borrower, including (without

limitation) any Subsidiary of the Borrower. For purposes of this definition,

"control," when used with respect to any specified Person, means the power to

direct the management and policies of such Person, directly or indirectly,

whether through the ownership of voting securities, by contract or otherwise.

"AGREEMENT" means this Credit and Security Agreement, as

amended, supplemented or restated from time to time.

"AS-EXTRACTED COLLATERAL" means any "as-extracted collateral,"

as such term is defined in the Uniform Commercial Code.

"AVAILABILITY PERIOD" means the period commencing upon the

Funding Date and ending eighteen (18) months after the date of this Agreement.

"BANKING DAY" means a day other than a Saturday, Sunday or

other day on which banks are generally not open for business in Denver,

Colorado.

"BASE RATE" means the Prime Rate of interest as published in

the WALL STREET JOURNAL.

1

<PAGE>

"CHATTEL PAPER" means any "chattel paper," as such term is

defined in the Uniform Commercial Code.

"COLLATERAL" means all of the Borrower's Instruments (together

with all payments thereon or thereunder), Accounts, Inventory, General

Intangibles (including payment intangibles (as defined in the Uniform Commercial

Code) and Software), Equipment, Documents, Contracts, Goods, Investment

Property, As-extracted Collateral, Trademarks, Patents and Copyrights, and all

other tangible and intangible property of Borrower, including, without

limitation, all Proceeds, tort claims, products, accessions, rents, profits,

income, benefits, substitutions, additions and replacements of and to any of the

property of Borrower described above (including, without limitation, any

proceeds of insurance thereon, insurance claims and all rights, claims and

benefits against any Person relating thereto), other rights to payments not

otherwise included in the foregoing, and all books, correspondence, files,

records, invoices and other papers, including without limitation all tapes,

cards, computer runs, computer programs, computer files and other papers,

documents and records in the possession or under the control of Borrower or any

computer bureau or service company from time to time acting for Borrower, all of

the foregoing as related to the Properties, and excluding any other assets owned

by Borrower.

"COMMITMENT" means the Lender's best-efforts commitment to make

Advances to or for the Borrower's account pursuant to Article II.

"CONTRACTS" means all contracts, undertakings, or other

agreements (other than rights evidenced by Chattel Paper, Documents or

Instruments) in or under which the Borrower may now or hereafter have any right,

title or interest, including, without limitation, with respect to an Account,

any agreement relating to the terms of payment or the terms of performance

thereof.

"COPYRIGHTS" means any copyrights, rights and interests in

copyrights, works protectable by copyrights, copyright registrations and

copyright applications, including, without limitation, the copyright

registrations and applications listed on SCHEDULE 1.1 attached hereto, and all

renewals of any of the foregoing, all income, royalties, damages and payments

now and hereafter due and/or payable under or with respect to any of the

foregoing, including, without limitation, damages and payments for past, present

and future infringements of any of the foregoing and the right to sue for past,

present and future infringements of any of the foregoing.

"CREDIT FACILITY" means the discretionary credit facility being

made available to the Borrower by the Lender pursuant to Article II.

"DEBT" of any Person means all items of indebtedness or

liability which in accordance with GAAP would be included in determining total

liabilities as shown on the liabilities side of a balance sheet of that Person

as of the date as of which Debt is to be determined. For purposes of determining

a Person's aggregate Debt at any time, "Debt" shall also include the aggregate

payments required to be made by such Person at any time under any lease that is

considered a capitalized lease under GAAP.

2

<PAGE>

"DEFAULT" means an event that, with giving of notice or passage

of time or both, would constitute an Event of Default.

"DEFAULT PERIOD" means any period of time beginning on the

first day of any month during which a Default or Event of Default has occurred

and ending on the date the Lender notifies the Borrower in writing that such

Default or Event of Default has been cured or waived.

"DOCUMENTS" means any "documents," as such term is defined in

the Uniform Commercial Code, and shall include, without limitation, all

documents of title (as defined in the Uniform Commercial Code), bills of lading

or other receipts evidencing or representing Inventory or Equipment.

"ERISA" means the Employee Retirement Income Security Act of

1974, as amended.

"ENVIRONMENTAL LAWS" has the meaning specified in Section 5.12.

"EQUIPMENT" means any "equipment," as such term is defined in

the Uniform Commercial Code and, in any event, shall include, Motor Vehicles.

"EVENT OF DEFAULT" has the meaning specified in Section 8.1.

"FLOATING RATE" means an annual rate equal to the sum of the

Base Rate plus six and three-fourths percent (6.75%), which annual rate shall

change when and as the Base Rate changes.

"FUNDING DATE" has the meaning given in Section 2.1.

"GAAP" means generally accepted accounting principles, applied

on a basis consistent with the accounting practices applied in the financial

statements described in Section 5.5, except for any change in accounting

practices to the extent that, due to a promulgation of the Financial Accounting

Standards Board changing or implementing any new accounting standard, the

Borrower either (i) is required to implement such change, or (ii) for future

periods will be required to and for the current period may in accordance with

generally accepted accounting principles implement such change, for its

financial statements to be in conformity with generally accepted accounting

principles (any such change is herein referred to as a "Required GAAP Change"),

provided that the Borrower shall fully disclose in such financial statements any

such Required GAAP Change and the effects of the Required GAAP Change on the

Borrower's income, retained earnings or other accounts, as applicable.

"GENERAL INTANGIBLES" means any "general intangibles," as such

term is defined in the Uniform Commercial Code, and, in any event, shall

include, without limitation, all right, title and interest in or under any

Contract, models, drawings, materials and records, claims, literary rights,

goodwill, rights of performance, Copyrights, Trademarks, Patents, warranties,

rights under insurance policies and rights of indemnification.

3

<PAGE>

"GOODS" means any "goods", as such term is defined in the

Uniform Commercial Code, including, without limitation, fixtures and embedded

Software to the extent included in "goods" as defined in the Uniform Commercial

Code.

"INSTRUMENTS" means any "instrument," as such term is defined

in the Uniform Commercial Code, and shall include, without limitation,

promissory notes, drafts, bills of exchange, trade acceptances, letters of

credit, letter of credit rights (as defined in the Uniform Commercial Code), and

Chattel Paper.

"INVENTORY" means all of the Borrower's inventory, as such term

is defined in the UCC, whether now owned or hereafter acquired, whether

consisting of whole goods, spare parts or components, supplies or materials,

whether acquired, held or furnished for sale, for lease or under service

contracts or for manufacture or processing, and wherever located.

"INVESTMENT PROPERTY" means any "investment property", as such

term is defined in the Uniform Commercial Code.

"LOAN DOCUMENTS" means this Agreement, the Note and the

Security Documents.

"MATURITY DATE" means thirty (30) months from the date of this

Agreement.

"MAXIMUM LINE" means Sixty Million Dollars ($60,000,000.00).

"MOTOR VEHICLES" means motor vehicles for which ownership is

evidenced by a Certificate of Title.

"NOTE" means the Borrower's promissory note, payable to the

order of the Lender in substantially the form of EXHIBIT A hereto, as the same

may hereafter be amended, supplemented or restated from time to time, and any

note or notes issued in substitution therefor, as the same may hereafter be

amended, supplemented or restated from time to time and any note or notes issued

in substitution therefor.

"PATENTS" means any patents and patent applications, including,

without limitation, the inventions and improvements described and claimed

therein, all patentable inventions and those patents and patent applications

listed on Schedule 1.1 attached hereto, and the reissues, divisions,

continuations, renewals, extensions and continuations-in-part of any of the

foregoing, and all income, royalties, damages and payments now or hereafter due

and/or payable under or with respect to any of the foregoing, including, without

limitation, damages and payments for past, present and future infringements of

any of the foregoing and the right to sue for past, present and future

infringements of any of the foregoing.

"PERMITTED LIEN" has the meaning given in Section 7.1.

4

<PAGE>

"PERSON" means any individual, corporation, partnership, joint

venture, limited liability company, association, joint-stock company, trust,

unincorporated organization or government or any agency or political subdivision

thereof.

"PETROHUNTER STOCK" means the common stock of PetroHunter

Energy Corporation, a Maryland corporation.

"PLAN" means an employee benefit plan or other plan maintained

for the Borrower's employees and covered by Title IV of ERISA.

"PROCEEDS" means "proceeds," as such term is defined in the

Uniform Commercial Code and, in any event, includes, without limitation, (a) any

and all proceeds of any insurance, indemnity, warranty or guaranty payable with

respect to any of the Collateral, (b) any and all payments (in any form

whatsoever) made or due and payable from time to time in connection with any

requisition, confiscation, condemnation, seizure or forfeiture of all or any

part of the Collateral by any governmental body, authority, bureau or agency (or

any person acting under color of governmental authority), and (c) any and all

other amounts from time to time paid or payable under, in respect of or in

connection with any of the Collateral.

"PROPERTIES" means the Borrower's oil and gas mineral interests

owned as set forth on Schedule 1.1.

"REPORTABLE EVENT" shall have the meaning assigned to that term

in Title IV of ERISA.

"SECURITY DOCUMENTS" means this Agreement and any other

document delivered to the Lender from time to time to secure the repayment of

the Note, as the same may hereafter be amended, supplemented or restated from

time to time.

"SECURITY INTEREST" has the meaning given in Section 3.1.

"SOFTWARE" means all "software" as such term is defined in the

Uniform Commercial Code, now owned or hereafter acquired by the Borrower, other

than software embedded in any category of Goods, including, without limitation,

all computer programs and all supporting information provided in connection with

a transaction related to any program.

"SUBSIDIARY" means any corporation or entity of which more than

50% of the equity is at the time directly or indirectly owned by the Borrower,

by the Borrower and one or more other Subsidiaries, or by one or more other

Subsidiaries.

"TERMINATION DATE" means the earliest of (i) the end of the

Availability Period, (ii) the date the Borrower terminates the Credit Facility,

or (iii) the date the Lender demands payment of the Note.

"TRADEMARKS" means any trademarks, trade names, corporate

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

service marks, logos, other business identifiers, prints and labels on which any

of the foregoing have appeared or

5

<PAGE>

appear, all registrations and recordings thereof, and all applications in

connection therewith, including, without limitation, the trademarks and

applications listed in SCHEDULE 1.1 attached hereto and renewals thereof, and

all income, royalties, damages and payments now or hereafter due and/or payable

under or with respect to any of the foregoing, including, without limitation,

damages and payments for past, present and future infringements of any of the

foregoing and the right to sue for past, present and future infringements of any

of the foregoing.

"UCC" means the Uniform Commercial Code as in effect from time

to time in the state designated in Section 9.13 as the state whose laws shall

govern this Agreement, or in any other state whose laws are held to govern this

Agreement or any portion hereof.

Section 1.2 CROSS REFERENCES. All references in this Agreement to

Articles, Sections and subsections, shall be to Articles, Sections and

subsections of this Agreement unless otherwise explicitly specified.

ARTICLE II

AMOUNT AND TERMS OF THE CREDIT FACILITY

Section 2.1 ADVANCES. The Lender shall use its best efforts to make

advances in such amounts and at such dates as may be agreed upon by the Lender

and the Borrower from the date all of the conditions set forth in Section 4.1

are satisfied (the "FUNDING DATE") to the Termination Date, on the terms and

subject to the conditions herein set forth (the "ADVANCES"). The Advances shall

not exceed the amount of the Maximum Line. The Borrower's obligation to pay the

Advances shall be evidenced by the Note and shall be secured by the Collateral

as provided in Article III. The Borrower agrees to comply with the following

procedures in requesting Advances under this Section 2.1:

(a) The Borrower shall make each request for an Advance to the

Lender in writing, specifying the date of the requested Advance and the amount

thereof. Each request shall be by (i) any officer of either of the entities

constituting the Borrower; or (ii) any person designated as the Borrower's agent

by any officer of either of the entities constituting the Borrower in a writing

delivered to the Lender; or (iii) any person whom the Lender reasonably believes

to be an officer of the Borrower or such a designated agent.

(b) Upon fulfillment of the applicable conditions set forth in

Article IV, the Lender shall disburse the proceeds of the requested Advance

within five (5) days by wiring the same to the Borrower's account identified in

the Advance request. Any request for an Advance shall be deemed to be a

representation by the Borrower that the conditions set forth in Section 4.2 have

been satisfied as of the time of the request.

Section 2.2 INTEREST; USURY. Interest accruing on the Note shall be due

and payable in arrears on the last day of each calendar quarter, beginning June

30, 2007.

(a) NOTE. Except as set forth in Section 2.2(b), the

outstanding principal balance of the Note shall bear interest at the Floating

Rate. Advances shall be added to the principal balance of the Note upon receipt

of the Advance by the Borrower. An Advance

6

<PAGE>

shall be deemed to be received by the Borrower when it is credited to the

account identified in the Borrower's wiring instructions.

(b) USURY. In any event no rate change shall be put into effect

which would result in a rate greater than the highest rate permitted by law.

Notwithstanding anything to the contrary contained in any Loan Document, all

agreements which either now are or which shall become agreements between the

Borrower and the Lender are hereby limited so that in no contingency or event

whatsoever shall the total liability for payments in the nature of interest,

additional interest and other charges exceed the applicable limits imposed by

the usury laws of the State of Colorado. If any payments in the nature of

interest, additional interest and other charges made under any Loan Document are

held to be in excess of the applicable limits imposed by the usury laws of the

State of Colorado, it is agreed that any such amount held to be in excess shall

be considered payment of principal hereunder, and the indebtedness evidenced

hereby shall be reduced by such amount so that the total liability for payments

in the nature of interest, additional interest and other charges shall not

exceed the applicable limits imposed by the usury laws of the State of Colorado,

in compliance with the desires of the Borrower and the Lender. This provision

shall never be superseded or waived and shall control every other provision of

the Loan Documents and all agreements between the Borrower and the Lender, or

their successors and assigns.

Section 2.3 ADVANCE FEES. The Borrower hereby agrees to pay the Lender

an Advance Fee equal to two percent (2%) of the amount of the Advance, payable

when the Lender makes the Advance to Borrower. Section 2.4 WARRANTS. The

Borrower shall issue to the Lender warrants to purchase two million (2,000,000)

shares of PetroHunter Stock upon the execution of this Agreement and warrants to

purchase four hundred thousand (400,000) shares of PetroHunter Stock for each

One Million Dollars ($1,000,000) of Advance upon each Advance. The warrants will

be exercisable until five (5) years of the date of this Agreement. The exercise

price of the warrants shall be a price equal to one hundred twenty percent

(120%) of the weighted average price of the PetroHunter Stock for the thirty

(30) days immediately prior to each warrant issuance date.

Section 2.5 COMPUTATION OF INTEREST; WHEN INTEREST DUE AND PAYABLE.

Interest accruing on the outstanding principal balance of the Advances

outstanding from time to time shall be computed on the basis of actual number of

days elapsed in a year of 365 days. Interest shall be payable in arrears on the

last day of each calendar quarter beginning June 30, 2007 and on the Maturity

Date.

Section 2.6 VOLUNTARY PREPAYMENT; TERMINATION OF THE CREDIT FACILITY BY

THE BORROWER. Except as otherwise provided herein, the Borrower may prepay the

Advances in whole or in part at any interest payment date without notice,

penalty, or bonus. The Borrower may terminate the Credit Facility at any time if

it (i) gives the Lender at least 30 days' prior written notice. Subject to

termination of the Credit Facility and payment and performance of the Note, the

Lender shall release or terminate the Security Interest and the Security

Documents to which the Borrower is entitled by law.

7

<PAGE>

Section 2.7 MANDATORY PREPAYMENT. If the Properties are sold in whole

or in part, Borrower agrees to make a mandatory prepayment in an amount equal to

such sales proceeds, not to exceed the outstanding balances under the Credit

Facility only with respect to that portion of the Properties sold.

Section 2.8 MANDATORY REPAYMENT. Beginning at the end of the first

quarter following the end of the Availability Period, the Borrower shall

commence making principal payments. Principal payments shall be made in such

amounts as may be agreed upon by the Borrower and the Lender based on the then

outstanding principal balance in order to repay the Advances by the Maturity

Date.

Section 2.9 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be

made hereunder shall be stated to be due on a day which is not a Banking Day,

such payment may be made on the next succeeding Banking Day, and such extension

of time shall in such case be included in the computation of interest on the

Advances, as the case may be.

Section 2.10 USE OF PROCEEDS. The Borrower shall use the proceeds of

Advances to provide funds for drilling, development, installation and operation

of facilities all related to Borrower's interest in its Piceance Basin

properties in Colorado, and other mineral interests owned and to be acquired by

Borrower, as well as ongoing working capital needs.

ARTICLE III

SECURITY INTEREST

Section 3.1 GRANT OF SECURITY INTEREST. The Borrower hereby pledges,

assigns and grants to the Lender a first priority perfected mortgage and

security interest (collectively referred to as the "SECURITY INTEREST") in the

Properties and Collateral, as security for the payment of the Note and its

performance under the Loan Documents, limited to the specific portion of the

Properties and Collateral to which the Advances are applied by the Borrower and

hereafter acquired by the Borrower. The Lender hereby acknowledges and agrees

that the Security Interest in the Properties and Collateral is also available on

a pro rata basis with the lender identified in that certain Credit and Security

Agreement dated as of January 9, 2007 between the Borrower and Global Project

Finance AG.

Section 3.2 VENDOR AND OTHER FINANCING. The Lender hereby agrees to

cooperate and work with the Borrower to the fullest extent possible to

accommodate vendor financing and other potential facilities by which the

Borrower shall seek to finance supplementally stand-alone development activities

on the Properties.

Section 3.3 NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. During

any Default Period, the Lender may notify any account debtor or other person

obligated to pay the amount due that such right to payment has been assigned or

transferred to the Lender for security and shall be paid directly to the Lender.

The Borrower will join in giving such notice if the Lender so requests. At any

time after the Borrower or the Lender gives such notice to an account debtor or

other obligor, the Lender may, but need not, in the Lender's name or in the

Borrower's name, demand, sue for, collect or receive any money or property at

any time payable or receivable on account of, or securing, any such right to

payment, or grant any extension to, make

8

<PAGE>

any compromise or settlement with or otherwise agree to waive, modify, amend or

change the obligations (including collateral obligations) of any such account

debtor or other obligor.

Section 3.4 ASSIGNMENT OF INSURANCE. As additional security for the

payment of the Note, the Borrower hereby assigns to the Lender any and all

monies (including, without limitation, proceeds of insurance and refunds of

unearned premiums) due or to become due under, and all other rights of the

Borrower with respect to, any and all policies of insurance now or at any time

hereafter covering the Collateral or any evidence thereof or any business

records or valuable papers pertaining thereto, and the Borrower hereby directs

the issuer of any such policy to pay all such monies directly to the Lender. At

any time, whether or not a Default Period then exists, the Lender may (but need

not), in the Lender's name or in the Borrower's name, execute and deliver proof

of claim, receive all such monies, endorse checks and other instruments

representing payment of such monies, and adjust, litigate, compromise or release

any claim against the issuer of any such policy.

Section 3.5 LICENSE. The Borrower hereby grants to the Lender a

non-exclusive, worldwide and royalty-free license to use or otherwise exploit

all trademarks, franchises, trade names, copyrights and patents of the Borrower

for the purpose of selling, leasing or otherwise disposing of any or all

Collateral during any Default Period.

Section 3.6 FINANCING STATEMENT. A carbon, photographic or other

reproduction of this Agreement or of any financing statements signed by the

Borrower is sufficient as a financing statement and may be filed as a financing

statement in any state to perfect the security interests granted hereby. For

this purpose, the following information is set forth:

Name and address of Debtor:

PetroHunter Energy Corporation

1875 Lawrence Street, Suite 1400

Denver, CO 80202

Federal Tax Identification No. 98-0431245

Name and address of Secured Party:

Global Project Finance AG

Tuerlacherweg 40

6060 Sarnen

Switzerland

ARTICLE IV

CONDITIONS OF LENDING

Section 4.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of

the Lender to make the initial Advance hereunder shall be subject to the

following conditions:

9

<PAGE>

(a) Receipt of the following, each in form and substance

satisfactory to the Lender:

(i) This Agreement, properly executed by the Borrower.

(ii) The Note, properly executed by the Borrower.

(iii) Such financial statements of the Borrower as

requested by the Lender.

(iv) Current searches of appropriate filing offices

showing that (A) no state or federal tax liens have been filed and remain in

effect against the Borrower, (B) no financing statements or assignments of

patents, trademarks or copyrights have been filed and remain in effect against

the Borrower except those financing statements and assignments of patents,

trademarks or copyrights relating to Permitted Liens or to liens held by Persons

who have agreed in writing that upon receipt of proceeds of the Advances, they

will deliver UCC releases and/or terminations and releases of such assignments

of patents, trademarks or copyrights satisfactory to the Lender, and (C) the

Lender has duly filed all financing statements necessary to perfect the Security

Interest, to the extent the Security Interest is capable of being perfected by

filing.

(v) A certificate of the Borrower's Secretary or

Assistant Secretary certifying as to (A) the resolutions of the Borrower's

directors and, if required, shareholders, authorizing the execution, delivery

and performance of the Loan Documents, (B) the Borrower's articles of

incorporation and bylaws, and (C) the signatures of the Borrower's officers or

agents authorized to execute and deliver the Loan Documents and other

instruments, agreements and certificates, including Advance requests, on the

Borrower's behalf.

(vi) A current certificate issued by the Secretary of

State of Colorado certifying that Borrower is in compliance with all applicable

organizational requirements of the State of Colorado.

(vii) Evidence that the Borrower is duly licensed or

qualified to transact business in all jurisdictions where the character of the

property owned or leased or the nature of the business transacted by it makes

such licensing or qualification necessary.

(viii) A certificate of an officer of Borrower

confirming, in his personal capacity, the representations and warranties set

forth in Article V.

(ix) An opinion of counsel to the Borrower, addressed to

the Lender.

(x) Such other documents as the Lender in its sole

discretion may require.

(b) Receipt of reimbursement for all reasonable agreed-upon

expenses for which invoices have been presented to the Borrower.

10

<PAGE>

(c) The Lender's completion and satisfaction of the business,

gas market, financial, legal, title, engineering and environmental due diligence

on the Properties, the Collateral and the Borrower conducted by the Lender.

(d) Title review of the Properties, including the Borrower's

right to produce oil and gas from wells held under oil and gas leases,

satisfactory to the Lender and its counsel.

(e) No material adverse changes in the Borrower or the

Properties shall have occurred.

Section 4.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The Lender will not

fund further requests for an Advance unless on such date:

(a) the representations and warranties contained in Article V

are correct on and as of the date of such Advance as though made on and as of

such date, except to the extent that such representations and warranties relate

solely to an earlier date; and

(b) no event has occurred and is continuing, or would result

from such Advance which constitutes a Default or an Event of Default.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lender as follows:

Section 5.1 CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE

OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. Each

Borrower is a corporation, duly organized, validly existing and in good standing

under the laws of the State of Maryland and is duly licensed or qualified to

transact business in all jurisdictions where the character of the property owned

or leased or the nature of the business transacted by it makes such licensing or

qualification necessary. The Borrower has all requisite power and authority,

corporate or otherwise, to conduct its business, to own its properties and to

execute and deliver, and to perform all of its obligations under, the Loan

Documents. During its existence, the Borrower has done business solely under the

names set forth in Schedule 5.1 hereto. The Borrower's chief executive office

and principal place of business is located at the address set forth in Schedule

5.1 hereto, and all of the Borrower's records relating to its business or the

Collateral are kept at that location. All Inventory and Equipment is located at

that location or at one of the other locations set forth in Schedule 5.1 hereto.

The Borrower's tax identification numbers are correctly set forth in Section 3.6

hereto.

Section 5.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR

AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan

Documents and the borrowings from time to time hereunder have been duly

authorized by all necessary corporate action and do not and will not (i) require

any consent or approval of the Borrower's

11

<PAGE>

stockholders; (ii) require any authorization, consent or approval by, or

registration, declaration or filing with, or notice to, any governmental

department, commission, board, bureau, agency or instrumentality, domestic or

foreign, or any third party, except such authorization, consent, approval,

registration, declaration, filing or notice as has been obtained, accomplished

or given prior to the date hereof; (iii) violate any provision of any law, rule

or regulation (including, without limitation, Regulation X of the Board of

Governors of the Federal Reserve System) or of any order, writ, injunction or

decree presently in effect having applicability to the Borrower or of the

Borrower's articles of incorporation or bylaws; (iv) result in a breach of or

constitute a default under any indenture or loan or credit agreement or any

other material agreement, lease or instrument to which the Borrower is a party

or by which it or its properties may be bound or affected; or (v) result in, or

require, the creation or imposition of any mortgage, deed of trust, pledge,

lien, security interest or other charge or encumbrance of any nature (other than

the Security Interest) upon or with respect to any of the properties now owned

or hereafter acquired by the Borrower.

Section 5.3 LEGAL AGREEMENTS. This Agreement constitutes and, upon due

execution by the Borrower, the other Loan Documents will constitute the legal,

valid and binding obligations of the Borrower, enforceable against the Borrower

in accordance with their respective terms.

Section 5.4 SUBSIDIARIES. Except as set forth in Schedule 5.4, the

Borrower has no Subsidiaries.

Section 5.5 FINANCIAL CONDITION; NO ADVERSE CHANGE. The Borrower has

heretofore furnished to the Lender consolidated audited financial statements of

the Borrower for the year ended September 30, 2006 and consolidated unaudited

financial statements for the six months ended March 31, 2007, and those

statements fairly present the Borrower's financial condition on the dates

thereof and the results of its operations and cash flows for the periods then

ended and were prepared in accordance with generally accepted accounting

principles. Since the date of the most recent financial statements, there has

been no material adverse change in the Borrower's business, properties or

condition (financial or otherwise).

Section 5.6 LITIGATION. There are no actions, suits or proceedings

pending or, to the Borrower's knowledge, threatened against or affecting the

Borrower or the properties of the Borrower before any court or governmental

department, commission, board, bureau, agency or instrumentality, domestic or

foreign, which, if determined adversely to the Borrower, would have a material

adverse effect on the financial condition, properties or operations of the

Borrower.

Section 5.7 REGULATION U. The Borrower is not engaged in the business

of extending credit for the purpose of purchasing or carrying margin stock

(within the meaning of Regulation U of the Board of Governors of the Federal

Reserve System), and no part of the proceeds of any Advance 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.

12

<PAGE>

Section 5.8 TAXES. The Borrower has paid or caused to be paid to the

proper authorities when due all federal, state and local taxes required to be

withheld by it. The Borrower has filed all federal, state and local tax returns

which to the knowledge of the officers of the Borrower, are required to be

filed, and the Borrower has paid or caused to be paid to the respective taxing

authorities all taxes as shown on said returns or on any assessment received by

any of them to the extent such taxes have become due.

Section 5.9 TITLES AND LIENS. Borrower has good an