LOAN AND SECURITY AGREEMENT

This Loan And Security Agreement is entered into as of February 5, 2009, by and between Peninsula Bank Business Funding, a division of The Private Bank of the Peninsula (“Bank”) and The Orchard Enterprises, Inc. (“Orchard” or “Lead Borrower”), a corporation formed under the laws of the State of Delaware, Digital Rights Agency, Inc . (“Digital”), a corporation formed under the laws of the State of California and a wholly owned subsidiary of Orchard, and Orchard Enterprises NY, Inc. (“Orchard NY” and collectively with Digital and Orchard, “Borrowers” and each a “Borrower”), a corporation formed under the laws of the State of New York and a wholly owned subsidiary of Orchard.

Borrowers wish to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrowers.  This Agreement sets forth the terms on which Bank will advance credit to Borrowers, and Borrowers will repay the amounts owing to Bank.

1.       Definitions and Construction .

1.1             Definitions .  As used in this Agreement, the following terms shall have the following respective definitions:

“Accounts” means all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to Borrowers arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrowers, whether or not earned by performance, and any and all credit insurance, guaranties and other security therefor, as well as all merchandise returned to or reclaimed by Borrowers and Borrowers’ Books relating to any of the foregoing.

“Advance” or “Advances” means a cash advance or cash advances under the Revolving Facility.

“Affiliate” means, with respect to any specified Person, any other Person that owns or controls directly or indirectly such specified Person and any other Person that controls or is controlled by or is under common control with such specified Person, and each of such Person’s senior executive officers, directors, and partners.

“Bank Expenses” means all:  reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, administration and enforcement of the Loan Documents; reasonable Collateral audit fees ( provided , however , that “Bank Expenses” (exclusive of any incurred prior to the execution and delivery of this Agreement) shall not include in excess of an aggregate of five thousand dollars ($5,000) of costs, fees or expenses with respect to any one or more audits conducted in any 12-month period, except to the extent any such audit giving rise to such costs, fees or expenses is conducted after the occurrence and during the continuation of an Event of Default); and Bank’s reasonable attorneys’ fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding against any Borrower, whether or not suit is brought.

“Borrower’s Books” means all of Borrower’s books and records, including: ledgers; records concerning a Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs or tape files, and the equipment, containing such information.

“Borrowing Base” means an amount equal to eighty percent (80%) of Eligible Accounts, as determined in good faith by Bank with reference to the sales figures delivered by Lead Borrower.

“Business Day” means any day that is not a Saturday, Sunday or other day on which banks in the State of California or New York are authorized or required to close.

“Change in Control” shall mean a transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) who or that was not, prior to such transaction, the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of a Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the Board of Directors of such Borrower becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of such Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the Board of Directors of such Borrower, who did not have such power before such transaction; provided however that a transfer in beneficial ownership of any Borrower from any Borrower to another Borrower shall not constitute a Change in Control.

“Closing Date” means the date of this Agreement.

“Code” means the California Uniform Commercial Code.

“Collateral” means the property described on Exhibit A attached hereto.

“Collateral Account” has the meaning assigned thereto in Section 2.3(d).

“Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any agreement or arrangement designed to protect such Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided , however , that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business.  The amount of any Contingent Obligation of any Person shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is assumed or made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by Bank in good faith; provided , however , that such amount shall not in any event exceed the maximum amount of the obligations of such Person under the guarantee or other support arrangement with respect to such primary obligation.

“Copyrights” means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof.

“Credit Extension” means each Advance or any other extension of credit by Bank for the benefit of Borrowers hereunder.

“Daily Balance” means the amount of the Obligations owed at the end of a given day.

“Eligible Accounts” means those outstanding Accounts that have arisen in the ordinary course of the relevant Borrower’s business and that are in compliance with all of such Borrower’s representations and warranties to Bank set forth in Section  5.4 with respect to such Accounts; provided , that standards of eligibility may be fixed and revised from time to time by Bank in Bank’s reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof.  Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following:

(a)            an outstanding Account that the relevant account debtor has failed to pay within ninety (90) days following the date on which the invoice covering such Account was sent by the relevant Borrower to such account debtor (any outstanding Account that the relevant account debtor has failed to pay within ninety (90) days following the date on which the invoice covering such Account was sent by the relevant Borrower to such account debtor is hereinafter referred to as a “Delinquent Account”);

(b)            outstanding Accounts with respect to any account debtor if more than twenty-five percent (25%) of the aggregate amount of all outstanding Accounts then owed by such account debtor to Borrowers are Delinquent Accounts;

(c)            outstanding Accounts with respect to which the account debtor is an officer, employee or agent of any Borrower (with it being agreed and understood that eMusic.com, Inc, shall not be deemed to be an officer, employee or agent of any Borrower);

(d)            outstanding Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold or other terms by reason of which the payment by the relevant account debtor may be conditional;

(e)            outstanding Accounts with respect to which the relevant account debtor is an Affiliate of any Borrower (with it being agreed and understood that eMusic.com, Inc. shall not be deemed to be an Affiliate of any Borrower);

(f)            pre-billings or progress billings ( provided , however , that any pre-billing or progress billing shall be excluded from being an Eligible Accounts only to the extent that the amount of such pre-billing or progress billing exceeds the billing for goods or services that have been provided or rendered);

(g)            outstanding Accounts (other than Eligible Foreign Accounts) with respect to which the relevant account debtor does not have its principal place of business in the United States or Canada;

(h)            outstanding Accounts with respect to which the relevant account debtor is the United States or any department, agency or instrumentality of the United States;

(i)            outstanding Accounts with respect to which any Borrower is liable to the relevant account debtor for goods sold or services rendered by such account debtor to such Borrower or for deposits or other property of such account debtor held by such Borrower, but only to the extent of any amounts so owing by such Borrower to such account debtor;

(j)            except as approved in writing by Bank, outstanding Accounts that are owed to one or more of Borrowers by an account debtor and that, when aggregated with all other outstanding Accounts that are owed to one or more of Borrowers by Subsidiaries and Affiliates of such account debtor, exceed thirty percent (30%) of all outstanding Accounts (“Concentration Limit”), but only to the extent that such Accounts exceed the Concentration Limit; provided , however , that for purposes of the foregoing, Accounts owed by iTunes and its domestic Subsidiaries and Affiliates (as account debtors) shall not be excluded pursuant to this clause (j) except to the extent the aggregate amount of such Accounts exceeds the greater of the Concentration Limit or $2,500,000;

(k)            Accounts with respect to which the account debtor is iTunes or any of its domestic Subsidiaries and Affiliates, to the extent such obligations exceed $2,500,000;

(l)            outstanding Accounts with respect to which the relevant account debtor disputes liability to the relevant Borrower or makes any claim against the relevant Borrower with respect thereto and as to which Bank in good faith believes, in its sole discretion that there is a valid claim (but only to the extent of the amount of such valid claim);

(m)            outstanding Accounts with respect to which the relevant account debtor is subject to any Insolvency Proceeding, has become insolvent or has gone out of business or is in the process of winding down its business;

(n)            outstanding Accounts arising out of the disposition of any interest in, including any licenses of, any Intellectual Property owned by a Borrower (for the sake of clarity, this does not apply to any Accounts arising out of Intellectual Property licensed to a Borrower) (“IP Accounts”) as set forth on Exhibit E; and

(o)            outstanding Accounts to the extent Bank has in good faith determined the same to be doubtful or uncollectible.

“Eligible Foreign Accounts” means Accounts with respect to which the relevant account debtor does not have its principal place of business in the United States or Canada and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, reasonably acceptable to Bank or (ii) Bank approves on a case-by-case basis.

“Equipment” means, with respect to any Borrower, all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which such Borrower has any interest, exclusive, however, of the foregoing, that under the terms of any lease or other agreement, are the property of a landlord, lessor or other Person.

“Equipment Financer” means any Person from which any Borrower has acquired, or with which Borrower had entered into an agreement (including a capital lease) to acquire, any Equipment or any Person that has provided financing for the acquisition of any Equipment.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

“GAAP” means generally accepted accounting principles as in effect from time to time; provided , however , that, when applied to any financial statements prepared on a basis other than a fiscal year basis or as of any date other than as of the end of any fiscal year, any such financial statements shall be deemed to comply with GAAP notwithstanding the lack of footnote disclosure and the absence of year-end adjustments.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including, without limitation, reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

“Insolvency Proceeding” means, with respect to any Person, any proceeding commenced by or against such Person before a court of competent jurisdiction under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors or proceedings seeking reorganization, arrangement, or other relief.

“Intellectual Property” means all of a Borrower’s right, title, and interest in and to the following: Copyrights, Trademarks and Patents; all trade secrets, all design rights, claims for damages by way of past, present and future infringement of any of the rights included above, all licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; all amendments, renewals and extensions of any Copyrights, Trademarks or Patents; and all proceeds and products of the foregoing, including, without limitation, all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

“Inventory” means, with respect to any Borrower, all inventory in which such Borrower has or acquires any interest, including work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by such Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any Accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and such Borrower’s Books relating to any of the foregoing.

“Investment” means any beneficial ownership of (including stock, partnership interest or other securities) any Person or any loan, advance or capital contribution to any Person.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” means, collectively, this Agreement, any note or notes executed by any Borrower to or to the order of Bank or Bank’s affiliates as provided hereunder and any other agreement entered into by any Borrower in connection with this Agreement, all as amended or extended from time to time.

“Material Adverse Effect” means a material and adverse effect on (i) the business operations, condition (financial or otherwise) or prospects of the Borrowers taken as a whole. (ii) the ability of Borrowers (taken as a whole) to repay the Obligations or otherwise perform their obligations under the Loan Documents or (iii) the value of, or the validity or priority of Bank’s security interests in, the Collateral.

“Negotiable Collateral” means all letters of credit of which any Borrower is a beneficiary, notes, drafts, instruments, securities, documents of title and chattel paper and such Borrower’s Books relating to any of the foregoing.

“Obligations” means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by any Borrower pursuant to this Agreement or any other agreement (not including any obligations owing from any Borrower to others that Bank may have obtained by assignment), whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and against any Borrower, including any debt, liability.

“Patents” means all patents, patent applications and like protections, including, without limitation, improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Periodic Payments” means all installments or similar recurring payments that Borrowers may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of this Agreement or any other Loan Document.

“Permitted Contingent Obligations” means any of the following: (a) any obligation any Borrower may have with respect to charges made by any director, officer or employee on any credit card issued at the request or for the account of such Borrower in the ordinary course of business; (b) royalty payments and similar advances made in the ordinary course of business; and (c) any obligation of any Borrower with respect to any obligation or liability of another Borrower.

“Permitted Indebtedness” means:

(a)           Indebtedness of Borrowers in favor of Bank arising under this Agreement or any other Loan Document;

(b)           Indebtedness existing on the Closing Date and disclosed in the Schedule on the Closing Date;

(c)           Indebtedness secured by a Lien described in clause (c) of the defined term “Permitted Liens” or clause (d) of the defined term “Permitted Liens” in so far as such clause (d) relates to any extension, renewal or refinancing of the indebtedness secured by Liens of the type described in said clause (c), provided (i) such Indebtedness does not exceed the lesser of the cost or fair market value (determined as of the date of acquisition) of the equipment financed with such Indebtedness and (ii) such Indebtedness does not exceed $250,000 in the aggregate at any given time;

(d)           Indebtedness of any Borrower to any other Borrower;

(e)           Permitted Contingent Obligations; and

(f)           Subordinated Debt.

“Permitted Investment” means:

(a)           stock or other interests in any other Borrower or any Subsidiary and other Investments existing on the Closing Date and disclosed in the Schedule on the Closing Date; and

(b)           (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and at the time the same is acquired having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank or any other banking institution having aggregate net assets (as of the last reported quarterly period prior to the purchase of such certificates of deposit) comparable to Bank, and (iv)  money market, checking or savings accounts of Bank or any other banking institution referred to in the foregoing clause (iii);

(c)           Royalty Advances; and

(d)           stock or other equity securities issued by vendors or suppliers to a Borrower without any outlay of cash by a Borrower to such vendor or supplier.

“Permitted Liens” means the following:

(a)           Any Liens existing on the Closing Date and disclosed in the Schedule on the Closing Date or arising under this Agreement or the other Loan Documents;

(b)           Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank’s security interests;

(c)           Liens (i) upon or in any Equipment acquired or held by any Borrower or any of its Subsidiaries to secure the purchase price of such Equipment, (ii) under or with respect to any indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, the products and proceeds (which may include any related insurance proceeds) of such Equipment and any Books related thereto;

(d)           Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase;

(e)           statutory Liens, including those of landlords, carriers, warehousemen, mechanics, workmen, repairmen, bailees, attorneys and/or materialmen;

(f)           other Liens imposed by law or that arise by operation of law in the ordinary course of business from the date of creation thereof, in each case only for amounts not yet due or that are being contested in good faith by appropriate proceedings;

(g)           any lease, license or similar arrangement entered into by any Borrower in the ordinary course of business;

(h)           Liens on any deposit or bond (whether under any lease or similar arrangement or made under any escrow arrangement or under any bid);

(i)           Liens that, in the aggregate, do not secure obligations in excess of two hundred and fifty thousand dollars ($250,000);

(j)           zoning, building codes and other land use laws or other restrictions regulating the use or occupancy of any real property or the activities conducted thereon;

(k)           easements, covenants, conditions, restrictions and other similar matters of record affecting title to any real property;

(l)           Liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations;

(m)           Liens that secure obligations that, pursuant to a written subordination agreement that has been executed and delivered to Bank and that is in form and substance satisfactory to Bank, have been subordinated to the Obligations; and

(n)           Liens created pursuant to the terms of any of the Loan Documents or otherwise arising in favor of Bank.

“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

“Prime Rate” means the variable rate of interest, per annum, that appears in The Wall Street Journal from time to time, whether or not such announced rate is the lowest rate available from Bank, provided, however , at no time shall the Prime Rate be less than the prime rate that appears in The Wall Street Journal on the Closing Date.

“Responsible Officer” means any of the Chief Executive Officer, the Chief Financial Officer and the VP of Finance of Lead Borrower.

“Revolving Facility” means the facility under which Borrowers may request Bank to issue Advances, as specified in Section  2.1(a) hereof.

“Revolving Line” means a credit extension of up to Three Million Dollars ($3,000,000); provided, however, upon Bank’s grant(s) of participation in its interest in the Loan Documents or upon Bank’s approval of an increase to the credit extension to Borrowers based on an increase in Bank’s lending limit, and upon Lead Borrower’s consent, Revolving Line shall mean a credit extension of up to Four Million Dollars ($4,000,000) (the “Increased Revolving Line”).

“Revolving Maturity Date” means the day before the first anniversary of the Closing Date.  Borrowers may request, and Bank may approve, an annual renewal of Revolving Line, subject to Bank’s normal internal credit review and approval processes.

“Royalty Advances” means advance payments of royalties or similar obligations made in the ordinary course of business.

“Schedule” means the schedule attached hereto, as the same may be amended, supplemented or otherwise modified from time to time by written notice from any Borrower to Bank.

“Subordinated Debt” means any debt incurred by any Borrower that is subordinated to the debt owing by such Borrower to Bank on terms acceptable to Bank (and identified as being such by such Borrower and Bank).

“Subsidiary” means, with respect to any specified Person, (i) any partnership in which such specified Person owns, directly or indirectly, any general partnership interest or (ii) any corporation, limited liability company or business trust in which such specified Person owns, directly or indirectly, a majority equity interest, the ownership of which equity interest entitles such specified Person to elect a majority of the board of directors, managers or trustees of such corporation, limited liability company or business trust.

 “Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

“Transfer” has the meaning assigned thereto in Section 7.1.

1.2             Accounting Terms .  All accounting terms not specifically defined herein shall be construed in accordance with GAAP, and all calculations made hereunder shall be made in accordance with GAAP.  When used herein, the terms “financial statements” shall include any notes and schedules thereto.

2.         Loan and Terms Of Payment .

2.1             Credit Extensions .  Each Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all outstanding Credit Extensions made by Bank to Borrowers hereunder. Borrowers shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

(a)           Revolving Advances.

(i)            Subject to and upon the terms and conditions of this Agreement, Lead Borrower may (on its own behalf and on behalf of other Borrowers) request Advances in an aggregate outstanding amount not to exceed the lesser of (i) the Revolving Line or (ii) the Borrowing Base.  Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(a) shall be immediately due and payable.  Borrowers may prepay any Advances without penalty or premium.

(ii)            Whenever Lead Borrower desires an Advance, Lead Borrower will notify Bank by facsimile transmission or telephone no later than 11:00 a.m. Pacific time, on the Business Day that the Advance is to be made.  Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto.  Lead Borrower will deliver copies of invoices in connection with any Advance request and all supporting documents, plus transaction files for all invoices and payment application in an electronic format reasonably acceptable to Bank for processing.  Documents received by 11:00 a.m. Pacific time and reasonably acceptable to Bank will be processed on the same Business Day.  Documents received after then will be processed on the next Business Day.  Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank’s reasonable discretion such Advances are necessary to meet Obligations that have become due and remain unpaid.  Bank shall be entitled to rely on any telephonic notice given by an individual who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrowers shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance.  Bank will credit the amount of Advances made under this Section 2.1 to such deposit account(s) as Lead Borrower may have specified.

2.2             Overadvances .  If the aggregate amount of the outstanding Advances exceeds the lesser of the Revolving Line or the Borrowing Base at any time, Borrowers shall immediately pay to Bank, in cash or other immediately available funds, the amount of such excess.  Notwithstanding the foregoing, if the outstanding Advances exceeds the Borrowing Base as a result of a change in the standards of eligibility made by Bank pursuant to the proviso in the definition of “Eligible Accounts,” Borrowers shall have thirty (30) days to pay to Bank, in cash or other immediately available funds, the amount of such excess.

2.3             Interest Rates, Payments, and Calculations .

(a)             Interest Rates.   Except as set forth in Section  2.3 (b) , the Advances shall bear interest, on the outstanding Daily Balance thereof, at a rate equal to four percent (4%) above the Prime Rate; provided , however , that (i) at no time shall the rate be less than eight percent (8%) or greater than ten percent (10%) and (ii) the minimum interest payable with respect to any calendar quarter shall be $20,000 ( pro rated for any partial calendar quarter during which any Advances are outstanding hereunder or Bank is obligated hereunder to make Advances) .

(b)             Late Fee; Default Rate .  If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank (in addition to the increased interest provided for in the following sentence) a late fee equal to two percent (2%) of the amount of such overdue payment.  All Obligations that are outstanding shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of such Event of Default.

(c)             Payments .  Interest hereunder shall be due and payable on the last Business Day of each calendar month during the term hereof.  Bank shall, at its option, charge such interest, all Periodic Payments and all Bank Expenses against the Collateral Account or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder.  Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.  All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment.

(d)             Lockbox.     Borrowers shall direct all account debtors to wire any amounts owing to Borrower to an account established by Borrowers and Bank at Citibank (such account, the “Collateral Account”) or to mail all payments made by check to a post office box under Citibank’s control for deposit into the Collateral Account.  All invoices shall specify such post office box as the payment address.  If any Borrower receives any amount despite such instructions, such Borrower shall promptly, and in any event within one (1) Business Day, following its receipt, deliver such payment, in the form received (except for an endorsement to the order of Citibank), to Citibank for deposit into the Collateral Account and, pending such delivery, shall hold such payment in trust for Bank.  Borrowers shall enter into such lockbox agreement with respect to the Collateral Account as Bank shall reasonably request, subject, however, to approval thereof by Citibank.

(e)             Computation .  In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate.  All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year of twelve (12) thirty-day months for the actual number of days elapsed.

2.4             Crediting Payments .  Except during the continuation of, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Lead Borrower specifies.  After the occurrence and during the continuation of an Event of Default, the receipt by Bank of any wire transfer of funds, check or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available funds or unless and until such check or other item of payment is honored when presented for payment.  Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 1:00 PM Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day.  Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

2.5             Fees .  Borrowers shall pay to Bank the following:

(a)             Facility Fee .  On the Closing Date, a Facility Fee equal to $30,000, which shall be nonrefundable.  Upon the availability of the Increased Revolving Line, Borrowers shall pay to Bank an additional Facility Fee of in an amount equal to one percent (1%) of the amount by which the amount of the Increased Revolving Line exceeds $3,000,000, which shall be nonrefundable.

(b)             Bank Expenses .

(i)            On the Closing Date, all Bank Expenses (exclusive of any Bank Expenses in excess of $5,000 related to the audit of Borrowers’ Accounts) incurred through the Closing Date and invoiced to Borrowers, including reasonable attorneys’ fees and expenses (subject to the foregoing limitation).

(ii)            After the Closing Date, all Bank Expenses, including reasonable attorneys’ fees and expenses that, pursuant to the terms hereof, are payable by Borrowers within ten (10) Business Days   of receipt of invoice.

2.6             Term .  This Agreement shall become effective on the Closing Date and, subject to Section  12.8 , shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement.  Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.  Notwithstanding termination, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

3.       Conditions of Loans .

3.1             Conditions Precedent to Initial Credit Extension .  The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

(a)            this Agreement;

(b)            a certificate of the Secretary of each Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement by such Borrower;

(c)            UCC National Form Financing Statement, covering the Collateral, in favor of Bank;

(d)            guaranties executed by Borrower’s Subsidiaries that are not party to this Agreement;

(e)            account control agreement with Citibank;

(f)            payment of the fees and Bank Expenses then due as specified in Section  2.5 hereof;

(g)            current consolidated financial statements of Lead Borrower;

(h)            Lead Borrower’s consolidated financial plan for fiscal year 2009;

(i)            an audit of the Collateral, the results of which shall be satisfactory to Bank; and

(j)            such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2             Conditions Precedent to all Credit Extensions .  The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

(a)            timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and

(b) &n