LOAN AND SECURITY AGREEMENT

Exhibit 10.19

LOAN AND SECURITY AGREEMENT

dated as of January 7, 2009

between

ENERGY RECOVERY, INC.,
a Delaware corporation,
as Borrower,

and

CITIBANK, N.A.,
as Lender

$15,000,000

TABLE OF CONTENTS

TABLE OF CONTENTS
(continued)

LOAN AND SECURITY AGREEMENT

     This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of January 7, 2009 between Citibank, N.A. (“Lender”), and Energy Recovery, Inc., a Delaware corporation (“Borrower”), provides the terms on which Lender shall lend to Borrower and Borrower shall repay Lender. The parties agree as follows:

SECTION 1

DEFINITIONS

     Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 1.1. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

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

      “Account” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

      “Account Debtor” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

      “Advance” or “Advances” means an advance (or advances) under the Revolving Line of Credit, including LIBOR Advances and Prime Rate Advances.

      “Affiliate” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

      “Agreement” is defined in the preamble hereof.

      “Alternative Dispute Resolution Agreements” means those certain Alternative Dispute Resolution Agreements to be executed by Borrower and by each Guarantor.

      “Base LIBOR” means the rate per annum, determined by Lender in accordance with its customary procedures and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to five decimal places where the sixth digit is five or more), at which Dollar deposits are offered in the London interbank market shortly after 11:00 a.m. (London time) two banking days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Advance. If the Base LIBOR becomes unavailable during the term of this Agreement, Lender may designate a substitute index after notifying Borrower.

      “Borrower” is defined in the preamble hereof.

      “Borrower’s Books” are all Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

      “Borrowing Resolutions” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors and delivered by such Person to Lender approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary (or other authorized officer) on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its

obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Lender may conclusively rely on such certificate unless and until such Person shall have delivered to Lender a further certificate canceling or amending such prior certificate.

      “Business Day” means any day that is not a Saturday, Sunday, or other day on which federally chartered banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Advance, the term “Business Day” also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market.

      “Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; (c) Lender’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.

      “Cash Secured Letters of Credit” means the aggregate face amount of the Permitted Comerica Letters of Credit plus the aggregate face amount of any other cash-secured letters of credit with Borrower or any of its Subsidiaries as the applicant.

      “Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing twenty-five percent (25%) or more of the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Borrower (together with any new directors whose election by the Board of Directors of Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office. Notwithstanding the foregoing, a “Change in Control” will not be deemed to have occurred by reason of (x) the appointment of two additional members to Borrower’s Board of Directors, consistent with Borrower’s bylaws as in effect on the date hereof, or (y) the shareholders of Borrower as of the date hereof sell securities of Borrower that collectively represent up to 50% of the combined voting power of Borrower’s then outstanding securities, provided that no purchaser of such securities acquires beneficial ownership (as broadly defined under Rule 13d-3 under the Exchange Act) of 25% or more of the combined voting power of Borrower’s then outstanding securities.

      “Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Lender’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

      “Collateral” is any and all properties, rights and assets of Borrower described on Exhibit A.

      “Comerica Control Agreement” means the Pledge and Security Agreement with respect to the pledge of cash in an account at Comerica Bank to secure the Permitted Comerica Letters of Credit, executed by Borrower in favor of Comerica Bank and acknowledged and approved by Comerica Bank and Citibank, N.A.

      “Communication” is defined in Section 10.

      “Compliance Certificate” is that certain certificate in the form attached hereto as Exhibit D.

      “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

      “Continuation Date” means any date on which Borrower elects or is deemed to have elected to continue a LIBOR Advance into another Interest Period.

      “Control Agreement” is any control agreement entered into between the depository institution at which Borrower maintains a Deposit Account, and between Borrower and Lender, pursuant to which Lender obtains control (within the meaning of the Code) over such Deposit Account.

      “Conversion Date” means any date on which Borrower elects to convert a Prime Rate Advance to a LIBOR Advance or a LIBOR Advance to a Prime Rate Advance.

      “Credit Party” means Borrower and each of Borrower’s Subsidiaries.

      “Current Assets” are amounts that under GAAP should be included on that date as current assets on Borrower’s consolidated balance sheet, less (without duplication) the amount of Borrower’s prepaid expenses.

      “Current Liabilities” are all obligations and liabilities of Borrower to Lender, plus, without duplication, (i) the amount of all letters of credit outstanding at any one time with Borrower or any of its Subsidiaries as the applicant, including Letters of Credit issued hereunder (including the drawn and unreimbursed amounts of all such letters of credit) and (ii) the aggregate amount of Borrower’s Total Liabilities that mature within one (1) year.

      “Default Rate” is defined in Section 2.3(b).

      “Deposit Account” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

      “Designated Deposit Account” is Borrower’s deposit account, account number [***], maintained with Lender.

      “Diligence Certificate” is defined in Section 5.1.

      “Diligence Review” is Lender’s inspection of Borrower’s current consolidated financial statements and financial projections, accounts receivable agings and inventory report.

      “Dollar(s) or $” means United States dollars.

      “Effective Amount” means with respect to any Advances on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowing and prepayments or repayments thereof occurring on such date.

      “Encumbered Cash” means cash and Cash Equivalents, if any, that have been pledged as collateral to Comerica Bank under the Comerica Control Agreement.

      “Energy International” means Energy Recovery, Inc. International, a Delaware corporation and a wholly-owned subsidiary of Borrower.

      “Equipment” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

      “ERISA” is the Employee Retirement Income Security Act of 1974, and its regulations.

      “Event of Default” is defined in Section 8.

      “Foreign Currency” means lawful money of a country other than the United States of America.

      “Funding Date” is any date on which a Loan is made to or on account of Borrower which shall be a Business Day.

      “GAAP” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

      “General Intangibles” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

      “Governmental Approval” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

      “Governmental Authority” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

      “Guarantor” is any present or future guarantor of the Obligations, including Osmotic Power and Energy International.

      “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

      “Index” means an interest rate which is subject to change from time to time based on changes in an independent index, which is The Wall Street Journal Prime Rate. The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this Agreement, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 3.25%. The interest rate to be applied to the unreimbursed amount of drawn Letters of Credit will be at a rate of 3.00 percentage points over the Index, resulting in an initial rate of 6.25%. NOTICE : Under no circumstances will the effective rate of interest under this Agreement be more than the maximum rate allowed by applicable law.

      “Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

      “Interest Expense” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Loan and other Indebtedness of Borrower and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

      “Interest Payment Date” means, with respect to any LIBOR Advance, the last day of each Interest Period applicable to such LIBOR Advance and, with respect to Prime Rate Advances, the first (1st) day of each month (or, if the first day of the month does not fall on a Business Day, then on the first Business Day following such date), and each date a Prime Rate Advance is converted into a LIBOR Advance to the extent of the amount converted to a LIBOR Advance.

      “Interest Period” means, with respect to each LIBOR Advance, a period commencing on the date of the making of such LIBOR Advance and ending 1, 2, 3, or 6 months thereafter, in each case as Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion/Continuation or as Borrower may be deemed to have elected; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c) and (d) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, 3 or 6 months after the date on which the Interest Period began, as applicable, and (d) Borrower may not elect an Interest Period which will end after the Revolving Line Maturity Date.

      “Interest Rate Determination Date” means each date for calculating the LIBOR Rate for purposes of determining the interest rate in respect of an Interest Period. The Interest Rate Determination Date shall be the second Business Day prior to the first day of the related Interest Period for a LIBOR Advance.

      “Inventory” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

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

      “Lender” is defined in the preamble hereof.

      “Lender Expenses” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, amending, negotiating, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

      “Letter of Credit” means a standby letter of credit issued by Lender or another institution based upon an application, guarantee, indemnity, warranty or similar agreement on the part of Lender as set forth in Section 2.1.2, which definition specifically excludes the Permitted Comerica Letters of Credit.

      “Letter of Credit Application” is defined in Section 2.1.2(a).

      “Letter of Credit Availability Amount” means (i) Fourteen Million Eight Hundred Fifty Thousand Dollars ($14,850,000) minus (ii) the outstanding principal amount of all Advances minus (iii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit).

      “LIBOR Rate” means, as of the date of determination thereof, the rate per annum determined as the sum of:

          (a) the quotient of (i) Base LIBOR for the relevant Interest Period, divided by (ii) the number equal to one hundred percent (100%) minus the LIBOR Reserve Percentage as of such date; plus

          (b) 1.3750 percentage points.

The LIBOR Rate shall be adjusted automatically on the effective date of any change in the LIBOR Reserve Percentage, such adjustment to affect any LIBOR Advance outstanding on such effective date. Each determination of a LIBOR Rate by Lender shall be conclusive and final in the absence of manifest error. NOTICE: Under no circumstances will the effective rate of interest under this Agreement be more than the maximum rate allowed by applicable law.

      “LIBOR Advance” means each Advance that bears interest at the LIBOR Rate. The initial LIBOR Advance must be for a minimum of $500,000 and in integral multiples of One Hundred Thousand Dollars ($100,000) in excess thereof. Each subsequent LIBOR Advance must be in a minimum amount of One Hundred Thousand Dollars ($100,000) and in integral multiples of One Hundred Thousand Dollars ($100,000) in excess thereof.

      “LIBOR Reserve Percentage” means, on any day, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor governmental authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as “eurocurrency liabilities”) of Lender, but so long as Lender is not required or directed under applicable regulations to maintain such reserves, the LIBOR Reserve Percentage shall be zero.

      “Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

      “Loan” means each Advance, loan and financial accommodation from Lender to Borrower, whether now existing or hereafter arising and however evidenced, including those Advances, loans, Letters of Credit and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

     “ Loan Documents” are, collectively, this Agreement, the Comerica Control Agreement, the Diligence Certificate, each Letter of Credit Application and Letter of Credit, the Alternative Dispute Resolution Agreements, the Notice of Insurance Requirements, Agreement to Provide Insurance, Authorized Signatories and MIFT Agreement, any note, or notes or guaranties or security agreement executed by Borrower or any Guarantor, and any other present or future agreement between Borrower any Guarantor and/or for the benefit of Lender in connection with this Agreement, all as amended, restated, or otherwise modified.

      “Material Adverse Change” is (a) a material impairment in the perfection or priority of Lender’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; or (c) a material impairment of the prospect of repayment of any portion of the Obligations.

      “Material Indebtedness” is any Indebtedness the principal amount of which is equal to or greater than $1,000,000.

      “Net Income” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.

      “Notice of Borrowing” means a notice given by Borrower to Lender in accordance with Section 3.2(a), substantially in the form of Exhibit B , with appropriate insertions.

      “Notice of Conversion/Continuation” means a notice given by Borrower to Lender in accordance with Section 3.5, substantially in the form of Exhibit C, with appropriate insertions.

      “Obligations” are any Credit Party’s obligation to pay when due any debts, principal, interest, Lender Expenses and other amounts any Credit Party owes Lender now or later, whether under this Agreement or any other of the Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), deposit accounts, cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of any Credit Party assigned to Lender, and the performance of any Credit Party’s duties under the Loan Documents.

      “Organizational Documents” are, for any Person, such Person’s formation documents, as certified with the Secretary of State of such Person’s state of formation on a date that is no earlier than 30 days prior to the date hereof, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

      “Osmotic Power” means Osmotic Power, Inc., a Delaware corporation and a wholly-owned subsidiary of Borrower.

      “Permitted Comerica Letters of Credit” means the standby letters of credit issued by Comerica Bank described on Exhibit F hereto.

      “Permitted Distributions” means:

          (a) distributions or dividends consisting solely of Borrower’s capital stock;

          (b) purchases of capital stock in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations;

          (c) purchases of fractional shares of capital stock arising out of stock dividends, splits or combinations or business combinations;

          (d) distributions or dividends from Borrower’s Subsidiaries to Borrower or to any of Borrower’s Subsidiaries;

          (e) purchases of capital stock of Borrower from officers, directors or employees of Borrower and its Subsidiaries under the terms of applicable purchase agreements in an aggregate amount of up to $250,000 per year; and

          (f) other purchases of capital stock of Borrower in the aggregate amount of up to $5,000,000.

      “Permitted Indebtedness” is:

          (a) Permitted Comerica Letters of Credit;

          (b) Borrower’s Indebtedness to Lender under this Agreement and any other Loan Document;

          (c) Subordinated Debt;

          (d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

          (e) guaranties of Permitted Indebtedness;

          (f) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;

          (g) Indebtedness between Borrower and any Guarantor;

          (h) capitalized leases and purchase money Indebtedness not to exceed $1,000,000 in the aggregate in any fiscal year secured by Permitted Liens;

          (i) Indebtedness specifically disclosed to, and specifically approved by, Lender in writing on or prior to the date of this Agreement; and

          (j) refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is not increased except by an amount equal to a reasonable premium or other reasonable amount paid in connection with such refinancing and by an amount equal to any existing, but unutilized, commitment thereunder.

      “Permitted Investments” are:

          (a) Investments existing on the date hereof and specifically disclosed in writing to Lender;

          (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agencies maturing within 3 years from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., and (iii) Lender’s certificates of deposit maturing no more than 2 years after issue;

          (c) Investments in or to Borrower or any Guarantor;

          (d) Investments consisting of Deposit Accounts in the name of Borrower or any Guarantor so long as Lender has a first priority, perfected security interest in such Deposit Accounts;

          (e) Investments consisting of extensions of credit to Borrower’s or a Guarantor’s customers in the nature of accounts receivable, prepaid royalties or notes receivable arising from the sale or lease of goods, provision of services or licensing activities of Borrower;

          (f) Investments acquired in exchange for any other Investments in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization;

          (g) Investments acquired as a result of a foreclosure with respect to any secured Investment; and

          (h) other Investments, if, on the date of incurring any Investments pursuant to this clause (h), the outstanding aggregate amount of all Investments incurred pursuant to this clause (h) does not exceed $3,000,000 (not including the value of consideration in transactions under Section 7.3).

      “Permitted Liens” are:

          (a) the Lien arising from the pledge of cash pursuant to the Comerica Control Agreement to secure the Permitted Comerica Letters of Credit;

          (b) (i) Liens securing Permitted Indebtedness described under clauses (b) and (i) of the definition of “Permitted Indebtedness” or (ii) Liens arising under this Agreement or other Loan Documents;

          (c) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

          (d) Liens (including with respect to capital leases) (i) on property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) acquired or held by Borrower or its Subsidiaries incurred for financing such property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) other than Accounts, and Inventory, or (ii) existing on property (and accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) when acquired other than Accounts and Inventory, if the Lien is confined to such property (including accessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof);

          (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness it secures may not increase;

          (f) leases or subleases of real property granted in the ordinary course of business, and leases, subleases, non-exclusive licenses or sublicenses of property (other than real property or intellectual property) granted in the ordinary course of Borrower’s business, if the leases, subleases, licenses and sublicenses do not prohibit granting Lender a security interest;

          (g) non-exclusive license of intellectual property granted to third parties in the ordinary course of business;

          (h) leases or subleases granted in the ordinary course of Borrower’s business, including in connection with Borrower’s leased premises or leased property;

          (i) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Sections 8.4 and 8.7;

          (j) Liens in favor of other financial institutions arising in connection with Borrower’s deposit or securities accounts held at such institutions, provided that such accounts are permitted to be established at such institutions under Section 6.5 hereof;

          (k) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory and which are not

delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

          (l) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

          (m) Liens not otherwise permitted, provided that (i) the amount of all such Liens is not in excess of $250,000 (with any such Lien valued as the amount of the obligation secured by such Lien), (ii) such Liens are subordinate in priority to Lender’s Lien hereunder and (iii) no Event of Default is otherwise caused thereby.

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

      “Prime Rate Advance” means an Advance that bears interest based on the Index, The initial Prime Rate Advance must be for a minimum of $500,000 and in integral multiples of One Hundred Thousand Dollars ($100,000) in excess thereof. Each subsequent Prime Rate Advance must be in a minimum amount of One Hundred Thousand Dollars ($100,000) and in integral multiples of One Hundred Thousand Dollars ($100,000) in excess thereof.

      “Regulatory Change” means, with respect to Lender, any change on or after the date of this Agreement in United States federal, state, or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class of lenders including Lender, of or under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

      “Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

      “Responsible Officer” is any of the Chief Executive Officer, President, or Chief Financial Officer of Borrower.

      “Revolving Availability Amount” means Ten Million Dollars ($10,000,000).

      “Revolving Line of Credit” is defined in Section 2.1.1(a).

      “Revolving Line Maturity Date” is December 31, 2009.

      “Security Agreement” is that certain Security Agreement executed by Guarantors in favor of Lender.

      “Subordinated Debt” is (a) Indebtedness incurred by Borrower subordinated to Borrower’s Indebtedness owed to Lender and which is reflected in a written agreement in a manner and form reasonably acceptable to Lender and approved by Lender in writing, and (b) to the extent the terms of subordination do not change adversely to Lender, refinancings, refundings, renewals, amendments or extensions of any of the foregoing.

      “Subsidiary” means, with respect to any Person, any Person of which more than 50.0% of the voting stock or other equity interests (in the case of Persons other than corporations) is owned or controlled directly or indirectly by such Person or one or more of Affiliates of such Person.

      “Tangible Net Worth” is, on any date, the consolidated total assets of Borrower and its Subsidiaries minus (a) any amounts attributable to (i) goodwill, (ii) intangible items including unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, (iii) notes, accounts receivable and other obligations owing to Borrower from its officers or other Affiliates, and (iv) reserves not already deducted from assets, minus (b) Total Liabilities.

      “Total Availability Amount” is $15,000,000.

      “Total Liabilities” is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower’s consolidated balance sheet, including all Indebtedness.

      “Transfer” is defined in Section 7.1.

SECTION 2

LOAN; PAYMENT TERMS

     2.1 Promise to Pay. Borrower hereby unconditionally promises to pay Lender the outstanding principal amount of all Loans and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

     2.1.1 Revolving Line of Credit.

          (a)  Availability. Subject to the terms and conditions of this Agreement, Lender shall make Advances not exceeding the Revolving Availability Amount. Each Advance will, at Borrower’s option in accordance with the terms of this Agreement, be either in the form of a Prime Rate Advance or a LIBOR Advance. No more than six (6) LIBOR Advances may be outstanding at any time. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein. The credit facility described in this Section 2.1.1 is referred to as the “Revolving Line of Credit” .

          (b)  Termination; Repayment. The Revolving Line of Credit terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line of Credit shall be immediately due and payable.

     2.1.2 Letters of Credit Sublimit.

          (a) As part of the Revolving Line of Credit, Lender shall issue or have issued Letters of Credit for Borrower’s account. Such aggregate amounts utilized hereunder shall at all times reduce the amount otherwise available for Advances under the Revolving Line of Credit. The amount of the Letters of Credit outstanding at any one time (including the drawn and unreimbursed amounts of the Letters of Credit) may not exceed the Letter of Credit Availability Amount. If, on the Revolving Line Maturity Date, there are any outstanding Letters of Credit, then on such date Borrower shall provide to Lender cash collateral in an amount equal to 101% of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Lender in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit. All Letters of Credit shall be in form and substance acceptable to Lender in its sole discretion and shall be subject to the terms and conditions of Lender’s standard application and letter of credit agreement, the forms of which may vary from time to time although a sample form is attached hereto as Exhibit E (the “Letter of Credit Application”). Borrower agrees to execute any further documentation in connection with the Letters of Credit as Lender may reasonably request. Borrower further agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Lender and opened for Borrower’s account or by Lender’s interpretations of any Letter of Credit issued by Lender for Borrower’s account and Borrower understands and agrees that Lender shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

          (b) Except as provided in the following sentence, all Letters of Credit will have an initial maturity of no more than one year, renewable annually, if timely requested by Borrower and permitted by Lender in Lender’s sole discretion, for additional one-year periods up to a total maximum maturity of five years. A Letter of Credit that is not subject to annual renewal at Lender’s discretion may have a maturity longer than one year and less than or equal to five years, but the aggregate face amount of all such Letters of Credit (including the accrued and unreimbursed amounts of such Letters of Credit) may not exceed $5,000,000.

          (c) The obligation of Borrower to immediately reimburse Lender for drawings made under Letters of Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit Application.

          (d) Borrower may request that Lender issue a Letter of Credit payable in a Foreign Currency. If a demand for payment is made under any such Letter of Credit, Lender shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in New York, New York, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

          (e) Borrower agrees that (i) any sum drawn under a Letter of Credit that has not been immediately repaid when due may, at the option of Lender, be deemed an Advance and added to the principal amount outstanding under this Agreement and (ii) that such Advance will bear interest at a floating rate equal to 3.00 percentage points over the Index, which interest shall be payable monthly in accordance with Section 2.3(f) below.

     2.2 Overadvances. If at any time the Loans under Section 2.1.1 exceed the Revolving Availability Amount, then Borrower must immediately pay to Lender in cash such excess and Lender will apply such cash amount to repay outstanding Advances. If at any time the aggregate amount of all Loans outstanding, including drawn and undrawn Letters of Credit, exceeds the Letter of Credit Availability Amount, Borrower must immediately pay to Lender in cash such excess amount (the “Overadvance Amount”). Lender will then apply the Overadvance Amount to repay outstanding Advances so that the outstanding Advances are no more than the Revolving Availability Amount and deposit the remaining portion of the Overadvance Amount in a blocked, segregated deposit account as security for the Obligations, including Contingent Obligations. Borrower may apply, no more often than once per calendar month, for a return of the cash on deposit in the blocked account and Lender must return the portion of such cash amount that exceeds the Overadvance Amount, as the Overadvance Amount is calculated by Lender as of the time of Borrower’s application.

     2.3 Payment of Interest on the Loans.

          (a) Interest Rate. Subject to Section 2.3(b) and unless otherwise stated, each Advance shall bear interest on the outstanding principal amount thereof from the date when made, continued or converted until paid in full at a rate per annum equal to the Index or the LIBOR Rate, as the case may be. Pursuant to the terms hereof, interest on each Advance shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of any Advance pursuant to this Agreement for the portion of any Advance so prepaid and upon payment (including prepayment) in full thereof. All accrued but unpaid interest on the Advances shall be due and payable on the Revolving Line Maturity Date.

          (b) Default Rate. If any Event of Default shall occur, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the interest rate otherwise payable hereunder by 3.000 percentage points. Specifically and without limiting the previous sentence, on and after the expiration of any Interest Period applicable to any LIBOR Advance outstanding on the date of occurrence of an Event of Default or acceleration of the Obligations, the Effective Amount of such LIBOR Advance shall, during the continuance of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Index plus 5.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law (the “Default Rate”). Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Lender.

          (c) Adjustment to Interest Rate. Changes to the interest rate of any Loan based on changes to the Index shall be effective on the effective date of any change to the