AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT AMONG NETLIST, INC. AND NETLIST TECHNOLOGY TEXAS LP, AS BORROWERS AND WELLS FARGO BUSINESS CREDIT, INC. AS LENDER as of December 27, 2003

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Exhibit 10.1

EXECUTION COPY

AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

AMONG

NETLIST, INC.

AND

NETLIST TECHNOLOGY TEXAS LP, AS BORROWERS

AND

XXXXX FARGO BUSINESS CREDIT, INC.

AS LENDER

as of

December 27, 2003

TABLE OF CONTENTS

			Page
ARTICLE I DEFINITIONS			1
	Section 1.1	Definitions	1
	Section 1.2	Other Definitional Terms; Rules of Interpretation	11
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY			11
	Section 2.1	Revolving Advances	11
	Section 2.2	Procedures for Requesting Advances	11
	Section 2.3	Intentionally Omitted	12
	Section 2.4	Capital Adequacy; Funding Exceptions	12
	Section 2.5	Letters of Credit	13
	Section 2.6	Special Account	13
	Section 2.7	Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement	13
	Section 2.8	Obligations Absolute	14
	Section 2.9	Intentionally Omitted	14
	Section 2.10	Inventory Appraisals	14
	Section 2.11	Intentionally Omitted	15
	Section 2.12	Interest; Applicable Margin; Minimum Interest Charge; Default Interest; Participations; Clearance Days; Usury	15
	Section 2.13	Fees	16
	Section 2.14	Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest and Fees	18
	Section 2.15	Lockbox; Collateral Account; Application of Payments	18
	Section 2.16	Voluntary Prepayment; Termination of the Credit Facility by the Borrowers	18
	Section 2.17	Mandatory Prepayment	19
	Section 2.18	Revolving Advances to Pay Obligations	19
	Section 2.19	Use of Proceeds	19
	Section 2.20	Liability Records	19
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF			19
	Section 3.1	Grant of Security Interest	19
	Section 3.2	Notification of Account Debtors and Other Obligors	19
	Section 3.3	Assignment of Insurance	19
	Section 3.4	Occupancy	20
	Section 3.5	License	20
	Section 3.6	Financing Statement	20
	Section 3.7	Setoff	21
	Section 3.8	Power of Attorney	21
ARTICLE IV CONDITIONS OF LENDING			22
	Section 4.1	Conditions Precedent to the Initial Advances and Letter of Credit	22
	Section 4.2	Conditions Precedent to All Advances and Letters of Credit	23
ARTICLE V REPRESENTATIONS AND WARRANTIES			23
	Section 5.1	Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal Employer Identification Number	23
	Section 5.2	Capitalization	24
	Section 5.3	Authorization of Borrowing; No Conflict as to Law or Agreements	24
	Section 5.4	Legal Agreements	24
	Section 5.5	Subsidiaries	24

	Section 5.6	Financial Condition; No Adverse Change	24
	Section 5.7	Litigation	25
	Section 5.8	Regulation U	25
	Section 5.9	Taxes	25
	Section 5.10	Titles and Liens	25
	Section 5.11	Intellectual Property Rights	25
	Section 5.12	Plans	26
	Section 5.13	Default	26
	Section 5.14	Environmental Matters	26
	Section 5.15	Submissions to Lender	27
	Section 5.16	Financing Statements	27
	Section 5.17	Rights to Payment	27
	Section 5.18	Eligible Accounts; Eligible Foreign Accounts	27
	Section 5.19	Eligible Inventory	27
	Section 5.20	Equipment	27
	Section 5.21	Fraudulent Transfer	27
ARTICLE VI COVENANTS			28
	Section 6.1	Reporting Requirements	28
	Section 6.2	Financial Covenants	31
	Section 6.3	Permitted Liens; Financing Statements	31
	Section 6.4	Indebtedness	32
	Section 6.5	Guaranties	32
	Section 6.6	Investments and Subsidiaries	32
	Section 6.7	Dividends and Distributions	33
	Section 6.8	Salaries	33
	Section 6.9	Intentionally Omitted	33
	Section 6.10	Books and Records; Inspection and Examination	33
	Section 6.11	Account Verification	33
	Section 6.12	Compliance with Laws	33
	Section 6.13	Payment of Taxes and Other Claims	33
	Section 6.14	Maintenance of Properties	34
	Section 6.15	Insurance	34
	Section 6.16	Preservation of Existence	34
	Section 6.17	Delivery of Instruments, etc	34
	Section 6.18	Sale or Transfer of Assets; Suspension of Business Operations	34
	Section 6.19	Consolidation and Merger; Asset Acquisitions	35
	Section 6.20	Sale and Leaseback	35
	Section 6.21	Restrictions on Nature of Business	35
	Section 6.22	Accounting	35
	Section 6.23	Discounts, etc	35
	Section 6.24	Plans	35
	Section 6.25	Place of Business	35
	Section 6.26	Change in Name, Trade Name, Trade Style or FEIN	35
	Section 6.27	Transactions With Affiliates	35
	Section 6.28	Performance by the Lender	35
ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES			36
	Section 7.1	Events of Default	36
	Section 7.2	Rights and Remedies	39
	Section 7.3	Disclaimer of Warranties	40
	Section 7.4	Compliance With Laws	41

	Section 7.5	No Marshalling	41
	Section 7.6	Borrowers to Cooperate	41
	Section 7.7	Application of Proceeds	41
	Section 7.8	Remedies Cumulative	41
	Section 7.9	Lender Not Liable For The Collateral	41
ARTICLE VIII MISCELLANEOUS			41
	Section 8.1	No Waiver	41
	Section 8.2	Amendments, Etc	41
	Section 8.3	Addresses for Notices; Requests for Accounting	42
	Section 8.4	Intentionally Omitted	42
	Section 8.5	Further Documents	42
	Section 8.6	Costs and Expenses	42
	Section 8.7	Indemnity	42
	Section 8.8	Participants	43
	Section 8.9	Advertising and Promotion	43
	Section 8.10	Execution in Counterparts; Telefacsimile Execution	43
	Section 8.11	Retention of Borrowers' Records	43
	Section 8.12	Binding Effect; Assignment; Complete Agreement; Exchanging Information	43
	Section 8.13	Severability of Provisions	44
	Section 8.14	Revival and Reinstatement of Obligations	44
	Section 8.15	Headings	44
	Section 8.16	Governing Law; Jurisdiction, Venue; Waiver of Jury Trial	44
ARTICLE IX JOINT AND SEVERAL LIABILITY; SINGLE LOAN ACCOUNT			44
	Section 9.1	Joint and Several Liability	44
	Section 9.2	Primary Obligation; Waiver of Marshalling	45
	Section 9.3	Financial Condition of Borrowers	45
	Section 9.4	Continuing Liability	45
	Section 9.5	Additional Waivers	45
	Section 9.6	Settlement or Releases	47
	Section 9.7	No Election	48
	Section 9.8	Indefeasible Payment	48
	Section 9.9	Single Loan Account	48
	Section 9.10	Apportionment of Proceeds of Advances	48
	Section 9.11	Lender Held Harmless	49
	Section 9.12	Borrowers' Integrated Operations	49

iii

AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

Dated as of December 27, 2003

NETLIST, INC., a Delaware corporation ("Netlist"), NETLIST TECHNOLOGY TEXAS, L.P., a Texas limited partnership ("NTTLP"), and XXXXX FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), are entering into this Agreement with reference to the following facts:

WHEREAS, Netlist and the Lender previously entered into that certain Credit and Security Agreement, dated as of July 2, 2003, as amended by that certain First Amendment to Credit and Security Agreement, dated as of October 30, 2003, and a second amendment which is also entitled the First Amendment to Credit and Security Agreement, dated as of December 5, 2003 (as so amended, the "Prior Agreement").

WHEREAS, Netlist has requested that its Subsidiary, NTTLP, be a co-borrower and the Lender has agreed with such request, subject to the terms and conditions of this Agreement.

WHEREAS, the parties hereto hereby agree to enter into this Agreement in order to amend and restate in its entirety, and continue the Obligations incurred under, the Prior Agreement.

NOW THEREFORE, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided, the following terms shall have the meanings assigned to them in this Section or in the Section referenced after such term:

"Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible.

"Accounts" means all of each Borrower's now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the UCC), and any and all supporting obligations in respect thereof.

"Advance" means a Revolving Advance.

"Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of stock, by contract, or otherwise; provided, however, that, in any event: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person, (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person, and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person.

"Agreement" means this Amended and Restated Credit and Security Agreement.

"Applicable Margin" means fifty (50) basis points; provided that (1) if the condition(s) described in the table below are fulfilled to the satisfaction of the Lender, and (2) if no Default Period is then

continuing, then the Applicable Margin shall mean the margin set forth in the table below opposite the applicable condition, effective the first day of the month following the fulfillment of such condition:

Condition		Applicable Margin
Receipt of Netlist's 12/31/03 audited financial statements evidencing Net Income during such fiscal year of not less than $2,500,000		Twenty-five (25) basis points
Receipt of Netlist's 12/31/04 audited and consolidated financial statements evidencing Net Income during such fiscal year of not less than $2,500,000		Zero (0) basis points

"Approved Buyer" means an Account Debtor under an Eligible Foreign Account that is (i) not located in a country that is unacceptable to the Lender in its sole discretion, and (ii) otherwise acceptable to the Lender in its sole discretion. Unacceptable countries are determined by the Lender from time to time, in its sole discretion. As of September 30, 2003, the unacceptable countries are listed on Schedule 1 attached hereto.

"Availability" means the difference of (i) the Borrowing Base and (ii) the sum of (A) the outstanding principal balance of the Revolving Note and (B) the L/C Amount.

"Banking Day" means a day on which the Federal Reserve Bank of New York is open for Business.

"Bankruptcy Code" means the United States Bankruptcy Code, as in effect from time to time.

"Base Rate" means the rate of interest publicly announced from time to time by Xxxxx Fargo Bank National Association at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Xxxxx Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for loans making reference thereto.

"Book Net Worth" means the aggregate of the common and preferred stockholders' equity in the Borrowers, prepared on a consolidating and consolidated basis including any Subsidiaries, determined in accordance with GAAP.

"Borrowers" means Netlist and NTTLP (each, a "Borrower").

"Borrowing Base" means at any time the lesser of:

(a) the Maximum Line; or

(b) the sum of following:

(i) 85% of Eligible Accounts less the amount, if any, of the Dilution Reserve; plus

(ii) 30 days following the Lender's receipt of the FREP Activation Notice, the lesser of (A) 85% of Eligible Foreign Accounts, or (B) $1,500,000, less the amount, if any, of the Dilution Reserve; plus

(iii) the lowest of (A) the Inventory Advance Rate times the Eligible Inventory, or (B) $5,000,000, or (C) 50% of Eligible Accounts; provided, however, that Advances against Eligible Inventory shall not be available until completion of an appraisal of the Inventory conducted by the Lender, or the Lender's representative. The Borrower shall provide the Lender with not less than 60 days' prior written notice of the Borrower's request to have the Inventory appraised for purposes hereof.

Notwithstanding the foregoing, the Lender may reduce the advance rates or create additional reserves against the Eligible Accounts, the Eligible Foreign Accounts and/or the Eligible Inventory, in its sole and absolute discretion, without declaring an Event of Default if it reasonably determines that there has occurred a Material Adverse Effect.

"Capital Expenditures" means for a period, any expenditure of money during such period for the purchase or construction of assets, or for improvements or additions thereto, which are capitalized on the Borrowers' balance sheet.

"Change of Control" means the occurrence of any of the following events:

(a) any Person or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than ten percent of the voting power of all classes of voting stock of the Borrowers.

(b) During any consecutive two-year period, individuals who at the beginning of such period constituted the board of Directors of the Borrowers (together with any new Directors whose election to such board of Directors, or whose nomination for election by the owners of such Borrower, was approved by a vote of 66²/3% of the Directors then still in office who were either Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of Directors of the Borrowers then in office.

"Collateral" means all of each Borrower's Accounts, chattel paper, deposit accounts, documents, Equipment, General Intangibles, goods, instruments, Inventory, Investment Property, letter-of-credit rights, letters of credit, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) in the case of all goods, all accessions; (iii) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any goods; (iv) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (v) all collateral subject to the Lien of any Security Document; (vi) any money, or other assets of either Borrower that now or hereafter come into the possession, custody, or control of the Lender; (vii) all sums on deposit in the Special Account; and (viii) proceeds of any and all of the foregoing.

"Collateral Account" means the "Lender Account" as defined in the Lockbox and Collection Account Agreement.

"Commitment" means the Lender's commitment to make Advances to, and to cause the Issuer to issue Letters of Credit for the account of, the Borrowers pursuant to Article II.

"Constituent Documents" means with respect to any Person, as applicable, such Person's certificate of incorporation, articles of incorporation, by-laws, certificate of formation, articles of organization, limited liability company agreement, management agreement, operating agreement, shareholder agreement, partnership agreement or similar document or agreement governing such Person's existence, organization or management or concerning disposition of ownership interests of such Person or voting rights among such Person's owners.

"Credit Facility" means the credit facility being made available to the Borrowers by the Lender under Article II.

"Daily Balance" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day.

"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 day a Default or Event of Default occurs and ending on the date the Lender notifies the Borrower in writing that such Default or Event of Default has been cured or waived.

"Default Rate" means an annual interest rate equal to three percent (3%) over the initial Floating Rate, which interest rate shall change when and as the Base Rate changes.

"Dilution" means, as of any date of determination, a percentage, based upon the experience of the calendar year-to-date period ending on the date of determination, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrower's sales during such period (excluding extraordinary items) plus the Dollar amount of clause (a).

"Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts and/or the Eligible Foreign Accounts by one percentage point for each percentage point by which Dilution is in excess of 4%.

"Director" means a director if the Borrower is a corporation, a manager if the Borrower is a limited liability company, or a general partner if the Borrower is a partnership.

"Dollars" or "$" means lawful currency of the United States of America.

"ERISA" means the Employee Retirement Income Security Act of 1974.

"ERISA Affiliate" means any trade or business (whether or not incorporated) that is a member of a group which includes the Borrowers and which is treated as a single employer under Section 414 of the IRC.

"Eligible Accounts" means those Accounts created by either Borrower in the ordinary course of its business, that arise out of such Borrower's sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made by the Borrowers in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by the Lender in the Lender's sole and absolute discretion to address the results of any audit performed by the Lender from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash remitted to the Borrower. Eligible Accounts shall not include the following:

(i) That portion of Accounts unpaid 90 days or more after the invoice date;

(ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account;

(iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer, including progress xxxxxxxx;

(iv) Accounts constituting proceeds of copyrightable material unless such copyrightable material shall have been registered with the United States Copyright Office and shall be covered by a duly executed copyright security agreement, in form and substance satisfactory to the Lender, and filed in the United States Copyright Office;

(v) Accounts owed by an Account Debtor that is not Solvent, the subject of an Insolvency Proceeding or has gone out of business;

(vi) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;

(vii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any Lien other than a Permitted Lien;

(viii) That portion of Accounts that has been restructured, extended, amended or modified;

(ix) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes;

(x) Accounts owed by an Account Debtor (or an Affiliate of such Account Debtor), regardless of whether otherwise eligible, to the extent that the balance of such Accounts exceeds 15% of the aggregate amount of all Accounts (except in the case of Dell Computer Corporation (excluding Dell Computer-Ireland), in which case such percentage shall be 65% through June 30, 2004, and 50% thereafter);

(xi) Accounts owed by an Account Debtor (or an Affiliate of such Account Debtor), regardless of whether otherwise eligible, if 15% or more of the total amount due under Accounts from such Account Debtor is ineligible under clauses (i), (ii)or (x) above;

(xii) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a xxxx and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional;

(xiii) Accounts that are not payable in Dollars;

(xiv) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any state thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to the Lender (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Lender and is directly drawable by the Lender, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, satisfactory to the Lender;

(xv) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which the Borrower has complied, to the reasonable satisfaction of the Lender, with the Assignment of Claims Act, 31 USC § 3727), or (ii) any state of the United States (exclusive, however, of (y) Accounts owed by any state that does not have a statutory counterpart to the Assignment of Claims Act, or (z) Accounts owed by any state that does have a statutory counterpart to the Assignment of Claims Act as to which the Borrower has complied to the Lender's satisfaction);

(xvi) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a business activities report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and

(xvii) Accounts, or portions thereof, of poor quality credit or otherwise deemed ineligible by the Lender in its sole discretion.

"Eligible Foreign Account" means an Account that would be an Eligible Account except that the Account Debtor either (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any state thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, but excluding any Accounts having the following characteristics:

(i) Eligible Accounts more than 180 days past shipment date as shown on a xxxx of lading or airbill;

(ii) That portion of Eligible Accounts owed by any one Account Debtor that would permit Revolving Advances supported by such Account Debtor's Eligibility Accounts to exceed the following at any one time:

(a) $500,000 for Approved Buyers that are rated BBB-minus or better by Standard and Poors,

(b) $500,000 for Approved Buyers that are controlled by entities rated BBB-minus or better by Standard and Poors, and

(iii) Eligible Accounts denominated in any currency other than United States dollars, Canadian dollars, Swiss francs, Japanese yen, United Kingdom pounds sterling or European Euros;

(iv) Eligible Accounts with respect to which the Borrower has not instructed the Account Debtor to pay the Account to the Collateral Account or lockbox;

(v) Eligible Accounts that are not covered by the Lender's credit insurance policy; and

(vi) Eligible Accounts otherwise deemed unacceptable to the Lender in its sole discretion.

"Eligible Inventory" means Inventory consisting of raw chips and first quality finished goods consisting of custom memory products held for sale in the ordinary course of either Borrower's business, that complies with each of the representations and warranties respecting Eligible Inventory made by the Borrowers in this Agreement and the Loan Documents, and that is not excluded as ineligible by virtue of the one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by the Lender in the Lender's sole and absolute discretion to address the results of any audit or appraisal performed by the Lender from time to time after the Closing Date. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with the Borrowers' historical accounting practices. The following shall not be included in Eligible Inventory:

(i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, xxxx of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender;

(ii) Supplies, packaging, maintenance parts or sample Inventory;

(iii) Work-in-process Inventory;

(iv) Inventory that is damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrowers' operations;

(v) Inventory that the applicable Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof;

(vi) Inventory that is perishable or live;

(vii) Inventory manufactured by either Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory;

(viii) Inventory that is not subject to a valid and perfected first priority Lien in favor of the Lender or is subject to any Lien other than a Permitted Lien;

(ix) Inventory the applicable Borrower does not have good, valid, and marketable title thereto; and

(x) Inventory otherwise deemed ineligible by the Lender in its sole discretion.

"Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment.

"Equipment" means all of each Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by either Borrower.

"Event of Default" has the meaning specified in Section 7.1.

"FEIN" means Federal Employer Identification Number.

"Financial Covenants" means the covenants set forth in Section 6.2.

"Floating Rate" means an annual interest rate equal to the sum of the Base Rate plus the Applicable Margin, which interest rate shall, in each case, change when and as the Base Rate changes.

"FREP Activation Notice" means a written notice from the Borrowers to the Lender of the Borrowers' request to obtain Advances against Eligible Foreign Accounts pursuant to the terms and conditions of this Agreement.

"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 5.6.

"General Intangibles" means all of each Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including all present and future Intellectual Property Rights, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use such Borrower's name, and the goodwill of such Borrower's business.

"General Partner" means Netlist Holdings GP, Inc., a Texas corporation.

"Governmental Authority" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.

"Guarantor(s)" means Xxxx X. Xxxx, Xxxxxxxxxxx Xxxxx, Xxxxxx Xxxxxx, the General Partner and the Limited Partner and any other Person now or hereafter guarantying the Obligations.

"Guaranty" means each certain Continuing Guaranty by a Guarantor in favor of the Lender.

"Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law.

"Indebtedness" means of a Person as of a given date, 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 for such Person and 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.

"IRC" means the Internal Revenue Code of 1986.

"Infringe" means when used with respect to Intellectual Property Rights means any infringement or other violation of Intellectual Property Rights.

"Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief.

"Intellectual Property Rights" means all actual or prospective rights arising in connection with any intellectual property or other proprietary rights, including all rights arising in connection with copyrights, patents, service marks, trade dress, trade secrets, trademarks, trade names or mask works.

"Inventory" means all of each 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.

"Inventory Advance Rate" means the lesser of (i) seventy percent (70%) of the appraised orderly liquidation recovery rate for Inventory or (ii) forty percent (40%).

"Investment Property" means all of each Borrower's investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities.

"Issuer" means the issuer of any Letter of Credit.

"L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement.

"L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender.

"Letter of Credit" has the meaning specified in Section 2.5.

"Licensed Intellectual Property" has the meaning given in Section 5.11(c).

"Lien" means any security interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device, including the interest of each lessor under any capitalized lease and the interest of any bondsman under any payment or performance bond, in, of or on any assets or properties of a Person, whether now owned or hereafter acquired and whether arising by agreement or operation of law.

"Limited Partner" means Netlist Holdings LP, Inc., a Delaware corporation.

"Loan Account" has the meaning given in Section 9.9.

"Loan Documents" means this Agreement, the Note, each Guaranty, the Security Documents, the Subordination Agreements and any L/C Application.

"Lockbox" means as defined in the Lockbox and Collection Account Agreement.

"Lockbox and Collection Account Agreement" means each Lockbox and Collection Account Agreement by and among Borrowers, Xxxxx Fargo Bank, N.A., and the Lender.

"Material Adverse Effect" means any of the following:

(i) a material adverse effect on the business, operations, results of operations, prospects, assets, liabilities or financial condition of either Borrower or any Guarantor;

(ii) a material adverse effect on the ability of either Borrower or any Guarantor to perform its obligations under the Loan Documents;

(iii) a material adverse effect on the ability of the Lender to enforce the Obligations or to realize the intended benefits of the Security Documents, including a material adverse effect on the validity or enforceability of any Loan Document or of any rights against any Guarantor, or on the status, existence, perfection, priority (subject to Permitted Liens) or enforceability of any Lien securing payment or performance of the Obligations; or

(iv) any claim against either Borrower or any Guarantor or threat of litigation which if determined adversely to such Borrower or such Guarantor would cause such Borrower or such Guarantor to be liable to pay an amount exceeding $100,000 or would be an event described in clauses (i), (ii) and (iii) above.

"Maturity Date" means July 2, 2006.

"Maximum Line" means $15,000,000, unless reduced pursuant to Section 2.16, in which case it means such lesser amount.

"Minimum Interest Charge" has the meaning given in Section 2.12(c).

"Multiemployer Plan" means a multiemployer plan (as defined in Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate contributes or is obligated to contribute.

"Net Income" and "Net Loss" mean fiscal year-to-date after-tax net income, or loss, as applicable, prepared on a consolidating and consolidated basis to include any Subsidiaries, from continuing operations as determined in accordance with GAAP.

"Note" means the Revolving Note.

"Obligation of Reimbursement" has the meaning given in Section 2.7(a).

"Obligations" means the Note, the Obligation of Reimbursement and each and every other debt, liability and obligation of every type and description which either Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including all indebtedness of either Borrower arising under any Credit Document or guaranty between either Borrower and the Lender, whether now in effect or hereafter entered into.

"Officer" means with respect to either Borrower, an officer if such Borrower is a corporation, or a partner if such Borrower is a partnership.

"Owned Intellectual Property" has the meaning given in Section 5.11(a).

"Owner" means with respect to each Borrower, each Person having legal or beneficial title to an ownership interest in such Borrower or a right to acquire such an interest.

"Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) maintained for employees of the Borrower or any ERISA Affiliate and covered by Title IV of ERISA.

"Permitted Lien" has the meaning given in Section 6.3(a).

"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.

"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) maintained for employees of the Borrower or any ERISA Affiliate.

"Premises" means all premises where the Borrower conducts its business and has any rights of possession, including the premises legally described in Exhibit D attached hereto.

"Reportable Event" means a reportable event (as defined in Section 4043 of ERISA), other than an event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the Pension Benefit Guaranty Corporation.

"Revolving Advance" has the meaning given in Section 2.1.

"Revolving Note" means the Borrowers' second replacement revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto.

"Security Agreements" means (i) the Security Agreement, dated as of the date hereof, executed by the General Partner in the Lender's favor, (ii) the Security Agreement, dated as of the date hereof, executed by the Limited Partner in the Lender's favor, and (iii) any other security agreement accepted by the Lender from time to time.

"Security Documents" means this Agreement, the Lockbox and Collection Account Agreement, the Security Agreements and any other document delivered to the Lender from time to time to secure the Obligations.

"Security Interest" has the meaning given in Section 3.1.

"Solvent" means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act).

"Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Section 2.6.

"Subordinated Indebtedness" has the meaning given to such term in either Subordination Agreement.

"Subordination Agreements" means (i) the Subordination Agreement, dated as of July 2, 2003, executed by Serim Paper Manufacturing Co., Ltd. in the Lender's favor and acknowledged by Netlist, (ii) the Subordination Agreement, dated as of July 2, 2003, executed by HeungHwa Industry Co. Ltd. in the Lender's favor and acknowledged by Netlist, and (iii) any other subordination agreement accepted by the Lender from time to time.

"Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of Directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, 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 Maturity Date, (ii) the date the Borrowers terminate the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 7.2.

"UCC" means the Uniform Commercial Code as in effect in the state designated in Section 8.15 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 Other Definitional Terms; Rules of Interpretation. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to Articles, Sections and subsections of, or Exhibits or Schedules attached to, this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". Defined terms include in the singular number the plural and in the plural number the singular. Reference to any agreement (including the Loan Documents), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof (and, if applicable, in accordance with the terms hereof and the other Loan Documents), except where otherwise explicitly provided, and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor. Reference to any law, rule, regulation, order, decree, requirement, policy, guideline, directive or interpretation means as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect on the determination date, including rules and regulations promulgated thereunder.

ARTICLE II

AMOUNT AND TERMS OF THE CREDIT FACILITY

Section 2.1 Revolving Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrowers from time to time from the date all of the conditions set forth in Section 4.1 are satisfied (the "Funding Date") to the Termination Date (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance to the extent the amount of the requested Revolving Advance exceeds Availability. The Borrowers' obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral. Within the limits set forth in this Section 2.1, the Borrowers may borrow, prepay pursuant to Section 2.16 and reborrow.

Section 2.2 Procedures for Requesting Advances. The Borrowers shall comply with the following procedures in requesting Revolving Advances:

(a) Time for Requests. The Borrowers shall request each Advance not later than 10:00 a.m., Pacific time on the Banking Day which is the date the Advance is to be made. Each such request shall be effective upon receipt by the Lender, shall be in writing or by telephone, telecopy transmission or email, to be confirmed in writing by the Borrowers if so requested by the Lender, shall be by (i) an Officer of the Borrowers; or (ii) a person designated as the Borrowers' agent by an Officer of the Borrowers in a writing delivered to the Lender; or (iii) a person whom the Lender reasonably believes to be an Officer of the Borrowers or such a designated agent. The Borrowers shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an

Advance, whether written or telephonic, shall be deemed to be a representation by the Borrowers that the conditions set forth in Section 4.2 have been satisfied as of the time of the request.

(b) Disbursement. Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Advance by crediting the same to the Borrowers' demand deposit account maintained with Xxxxx Fargo Bank, N.A., unless the Lender and the Borrowers shall agree in writing to another manner of disbursement.

Section 2.3 Intentionally Omitted.

Section 2.4 Capital Adequacy; Funding Exceptions.

(a) If the Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Lender may so notify the Borrowers and require the Borrowers, beginning fifteen (15) days after such notice, to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.4:

(i) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender, including rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit.

(ii) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender, including those that impose taxes, duties or other similar charges, or mandate reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit.

(iii) "Related Lender" includes (but is not limited to) the Lender, any parent of the Lender, any assignee of any interest of the Lender hereunder and any participant in the Credit Facility.

(iv) "Return", for any period, means the percentage determined by dividing (i) the sum of interest and ongoing fees earned by the Lender under this Agreement during such period, by (ii) the average capital such Lender is required to maintain during such period as a result of its being a party to this Agreement, as determined by such Lender based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules and L/C Rules then in effect, costs of issuing or maintaining any Advance or Letter of Credit and amounts received or receivable under this Agreement or the Notes with respect to any Advance or Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement.

(v) "Rule Change" means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, or any change in the interpretation or administration thereof by any governmental or regulatory authority, but the term does not include any changes that at the Funding Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that the Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of that Lender's financial condition.

(b) The initial notice sent by the Lender shall be sent as promptly as practicable after such Lender learns that its Return has been reduced, shall include a demand for payment of the amount necessary to restore such Lender's Return for the quarter in which the notice is sent, and shall state in reasonable detail the cause for the reduction in its Return and its calculation of the amount of such reduction. Thereafter, such Lender may send a new notice during each calendar quarter setting forth the calculation of the reduced Return for that quarter and including a demand for payment of the amount necessary to restore its Return for that quarter. The Lender's calculation in any such notice shall be conclusive and binding absent demonstrable error.

Section 2.5 Letters of Credit.

(a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for either Borrower's account by guaranteeing payment of such Borrower's obligations or being a co-applicant. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter of Credit to be issued would exceed the lesser of:

(i) $500,000 less the L/C Amount, or

(ii) Availability.

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into between the Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control.

(b) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance.

(c) Any request to cause an Issuer to issue a Letter of Credit shall be deemed to be a representation by the Borrowers that the conditions set forth in Section 4.2 have been satisfied as of the date of the request.

Section 2.6 Special Account. If the Credit Facility is terminated for any reason while any Letter of Credit is outstanding, the Borrowers shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. The Lender may apply amounts on deposit in the Special Account at any time or from time to time to the Obligations in the Lender's sole discretion. The Borrowers may not withdraw any amounts on deposit in the Special Account as long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrowers when the Lender is required to release its security interest in the Special Account under applicable law.

Section 2.7 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement. Each Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrowers shall pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated:

(a) The Borrowers shall pay to the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the

applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrowers' obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement").

(b) Whenever a draft is submitted under a Letter of Credit, each Borrower authorizes the Lender to make a Revolving Advance in the amount of the Obligation of Reimbursement and to apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder.

(c) If a draft is submitted under a Letter of Credit when the Borrowers are unable, because a Default Period exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrowers shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrowers' inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon.

(d) The Borrowers' obligation to pay any Revolving Advance made under this Section 2.7, shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.12.

Section 2.8 Obligations Absolute. The Borrowers' obligations arising under Section 2.7 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of Section 2.7, under all circumstances whatsoever, including (without limitation) the following circumstances:

(a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents");

(b) any amendment or waiver of or any consent to departure from all or any of the Related Documents;

(c) the existence of any claim, setoff, defense or other right which the Borrowers may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions;

(d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;

(e) payment by or on behalf of the Issuer under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or

(f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

Section 2.9 Intentionally Omitted.

Section 2.10 Inventory Appraisals. The Lender may from time to time (and will, no less than four times each year) obtain at the Borrowers' expense an appraisal of Inventory by an appraiser acceptable to the Lender in its sole discretion.

Section 2.11 Intentionally Omitted.

Section 2.12 Interest; Applicable Margin; Minimum Interest Charge; Default Interest; Participations; Clearance Days; Usury.

(a) Notes. Except as set forth in Subsections (d) and (g), the outstanding principal balance of the Note shall bear interest at the Floating Rate.

(b) Applicable Margin. Reductions and increases in the Applicable Margin will be made within five calendar days following receipt of the Netlist's consolidated financial statements and compliance certificates required under Section 6.1. Notwithstanding the foregoing, (i) if the Borrowers fail to deliver any financial statements or compliance certificates when required under Section 6.1, the Lender may, by notice to the Borrowers, increase the Applicable Margin to fifty (50) basis points until such time as the Lender has received all such financial statements and compliance certificates, and (ii) no reduction in the Applicable Margin will be made if a Default Period exists at the time that such reduction would otherwise be made.

(c) Minimum Interest Charge. Notwithstanding the interest payable pursuant to Subsection (a), the Borrowers shall pay to the Lender interest of not less than $30,000 per calendar quarter beginning October 1, 2003, and increasing to $37,500 per calendar quarter beginning January 1, 2004 (the "Minimum Interest Charge") during the term of this Agreement, and the Borrowers shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Subsection (a) on the first day of each month and on the Termination Date.

(d) Default Interest Rate. Upon notice to the Borrowers from the Lender from time to time, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective as of the first day of the month during which any Default Period begins through the last day of such Default Period. The Lender's election to charge the Default Rate shall be in its sole discretion and shall not be a waiver of any of its other rights and remedies. The Lender's election to charge interest at the Default Rate for less than the entire period during which the Default Rate may be charged shall not be a waiver of its right to later charge the Default Rate for the entire such period.

(e) Clearance Days. Notwithstanding Section 2.15(b)(ii), interest at the interest rate applicable under this Section 2.12 shall accrue on the amount of all payments (even if in the form of immediately available federal funds) for one (1) day for clearance.

(f) Participations. If any Person shall acquire a participation in the Advances or the Obligation of Reimbursement, the Borrowers shall be obligated to the Lender to pay the full amount of all interest calculated under this Section 2.12, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than that calculated under this Section 2.12, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement.

(g) 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 Borrowers 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 any applicable usury laws. 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 limits imposed by any applicable usury laws, 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 any applicable usury laws, in compliance with the desires of the Borrowers 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 Borrowers and the Lender, or their successors and assigns.

Section 2.13 Fees.

(a) Origination Fee. The Borrowers have paid the Lender a fully earned and non-refundable origination fee of $25,000 upon the execution of the Prior Agreement.

(b) Audit Fees. The Borrowers shall pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by or on behalf of the Lender of any Collateral or the Borrowers' operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $90 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection.

(c) Letter of Credit Fees. The Borrowers shall pay to the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of one percent (1.0%), of the aggregate amount that may then be drawn under it assuming compliance with all conditions for drawing (the "Aggregate Face Amount"), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, howeverthat during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to four percent (4.0%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges of the Issuer with respect to or in connection with such Letter of Credit.

(d) Letter of Credit Administrative Fees. The Borrowers shall pay to the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally.

(e) Termination Fees. If the Credit Facility is terminated (i) by the Lender during a Default Period that begins before a Maturity Date, or (ii) by the Borrowers (A) as of a date other than a Maturity Date or (B) as of a Maturity Date but without the Lender having received written notice of such termination at least 90 days before such Maturity Date, the Borrowers shall pay to the Lender a fee in an amount equal to a percentage of the Maximum Line (or the reduction of the Maximum Line, as the case may be) as follows: (A) three percent (3.0%) if the termination or reduction occurs on or before the first anniversary of the Funding Date; (B) two percent (2.0%) if the termination or reduction occurs after the first anniversary of the Funding Date but on or before the second anniversary of the Funding Date; and (C) one percent (1.0%) if the termination or reduction occurs after the second anniversary of the Funding Date.

(f) Intentionally Omitted.

(g) Waiver of Termination Fee.

(i) The Borrowers will not be required to pay the termination fee otherwise due under subsection (e) if such termination or prepayment is made because of refinancing by an affiliate of the Lender.

(ii) If at any time after the first anniversary of the Funding Date the Borrowers shall receive a written, bona fide letter of intent, commitment letter or similar offer ("Commitment

Letter") to provide financing to refinance the Obligations, the Borrowers shall immediately provide the Lender with a copy of such Commitment Letter and such other information with respect to the offeror (including name, address and contact person) as the Lender may reasonably request. Upon the date of receipt by the Lender of a Commitment Letter, the Lender shall have the exclusive right to provide to the Borrowers the financing arrangements at the terms described in such Commitment Letter for a period of 45 days following the date of such receipt by the Lender. If the Lender does not deliver to the Borrowers a written offer to provide the financing arrangements at the terms described in a Commitment Letter within such 45 day period, then, provided that no Event of Default is then continuing, the Borrowers may obtain the financing arrangements from the offeror thereof only at the terms described in such Commitment Letter for a period of 30 days following the expiration of such 45 day period without being required to pay the termination fees otherwise due under subsection (e).

(h) Unused Line Fee. On the first day of each calendar quarter during the term of this Agreement, an unused line fee in an amount equal to 0.25% per annum times the result of (a) the Maximum Line, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding calendar quarter, plus (ii) the average Daily Balance of the L/C Amount during the immediately preceding calendar quarter.

(i) Other Fees. The Lender may from time to time, upon five (5) days prior notice to the Borrowers during a Default Period, charge additional fees for Revolving Advances made and Letters of Credit issued in excess of Availability, for late delivery of reports, in lieu of imposing interest at the Default Rate, and for other reasons. The Borrowers' request for a Revolving Advance or the issuance of a Letter of Credit at any time after such notice is given and such five (5) day period has elapsed shall constitute the Borrowers' agreement to pay the fees described in such notice.

(j) Foreign Receivable Subline Fee. The Borrowers will pay a monthly fee, in advance, in the amount of $2,187.50, which monthly fee shall be due on the first day of each month, commencing on the first such day following receipt by the Lender of the FREP Activation Notice and continuing on the first day of each succeeding month for so long as the Lender is obligated to make Advances against Eligible Foreign Accounts hereunder. The Foreign Receivable Subline Fee shall be fully earned when paid and non-refundable.

Section 2.14 Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest and Fees.

(a) Time For Interest Payments. Interest shall be due and payable in arrears on the last day of each month and on the Termination Date.

(b) 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 or the fees hereunder, as the case may be.

(c) Computation of Interest and Fees. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days.

Section 2.15 Lockbox; Collateral Account; Application of Payments.

(a) Lockbox and Collateral Account.

(i) The Borrowers shall instruct all Account Debtors to pay all Accounts directly to the Lockbox. If, notwithstanding such instructions, either Borrower receives any payments on Accounts, such Borrower shall deposit such payments into the Collateral Account. The Borrowers shall also deposit all other cash proceeds of Collateral directly to the Collateral Account. Until so deposited, the Borrowers shall hold all such payments and cash proceeds in trust for and as the property of the Lender and shall not commingle such property with any of its other funds or property. All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations.

(ii) All items deposited in the Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrowers will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrowers' commercial account or other account. The Borrowers shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrowers.

(b) Application of Payments.

(i) The Borrowers may, from time to time, in accordance with the Lockbox and Collection Account Agreement, cause funds in the Collateral Account to be transferred to the Lender's general account for payment of the Obligations. Except as provided in the preceding sentence, amounts deposited in the Collateral Account shall not be subject to withdrawal by the Borrowers, except after full payment and discharge of all Obligations.

(ii) All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the Lender. Funds received from the Collateral Account shall be deemed to be immediately available. The Lender may hold all payments not constituting immediately available funds for three (3) additional days before applying them to the Obligations. Subject to Section 7.7 of this Agreement, all payments with respect to the Obligations may be applied, and in the Lender's sole discretion reversed and re-applied, to the Obligations, in such order and manner as the Lender shall determine in its sole discretion.

Section 2.16 Voluntary Prepayment; Termination of the Credit Facility by the Borrowers. Except as otherwise provided herein, the Borrowers may prepay the Advances in whole at any time or from time to time in part. The Borrowers may terminate the Credit Facility at any time if it (i) gives the Lender at least 30 days' prior written notice and (ii) pays the Lender termination and prepayment fees in accordance with Section 2.13(e). Subject to termination of the Credit Facility and payment and

performance of all Obligations, the Lender shall, at the Borrowers' expense, release or terminate the Security Interest and the Security Documents to which the Borrowers are entitled by law.

Section 2.17 Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrowers shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.17 or under Section 2.16 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine.

Section 2.18 Revolving Advances to Pay Obligations. Notwithstanding anything in Section 2.1, the Lender may, in its discretion at any time or from time to time, without the Borrowers' request and even if the conditions set forth in Section 4.2 would not be satisfied, make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable.

Section 2.19 Use of Proceeds. The Borrowers shall use the proceeds of Advances and each Letter of Credit for ordinary working capital purposes.

Section 2.20 Liability Records. The Lender may maintain from time to time, at its discretion, records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrowers establish the contrary. Upon the Lender's demand, the Borrowers will admit and certify in writing the exact principal balance of the Obligations that the Borrowers then assert to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrowers unless the Borrowers give the Lender specific written notice of exception within 30 days after receipt.

ARTICLE III

SECURITY INTEREST; OCCUPANCY; SETOFF

Section 3.1 Grant of Security Interest. Each Borrower hereby pledges, assigns and grants to the Lender a lien and security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. Upon request by the Lender, each Borrower will grant the Lender a security interest in all commercial tort claims it may have against any Person.

Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time (whether or not a Default Period then exists) 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 Borrowers will join in giving such notice if the Lender so requests. At any time after the Borrowers 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 Borrowers' name, demand, xxx 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 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 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, each Borrower hereby assigns to the Lender any and all monies (including proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of such 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 each 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 Borrowers' 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 3.4 Occupancy.

(a) Each Borrower hereby irrevocably grants to the Lender the right to take exclusive possession of the Premises at any time during a Default Period.

(b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good xxxxx xxxx to be related or incidental purposes.

(c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Credit Facility, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers.

(d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrowers shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrowers will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4.

Section 3.5 License. Without limiting the generality of any other Security Document, each Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all Intellectual Property Rights of such Borrower for the purpose of: (a) completing the manufacture of any in-process materials during any Default Period so that such materials become saleable Inventory, all in accordance with the same quality standards previously adopted by such Borrower for its own manufacturing and subject to such Borrower's reasonable exercise of quality control; and (b) selling, leasing or otherwise disposing of any or all Collateral during any Default Period.

Section 3.6 Financing Statement. Each Borrower authorizes the Lender to file from time to time where permitted by law, such financing statements against collateral described as "all personal property" or describing specific items of collateral including commercial tort claims as the Lender deems necessary or useful to perfect the Security Interest. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by either 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 Debtors:

Netlist, Inc.
0 Xxxxxxx
Xxxxxx, XX 00000
FEIN 00-0000000
Organizational Identification No. 3242099

Netlist Technology Texas, L.P.
0000 Xxxxxxxx Xxxx. Xxxxxxx XX, Xxxxx 000
Xxxxxx, XX 00000
FEIN 00-0000000
Organizational Identification No.

Name and address of Secured Party:

Xxxxx Fargo Business Credit, Inc.
000 X. Xxx Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxx, XX 00000
FEIN 00-0000000

Section 3.7 Setoff. The Lender may at any time or from time to time, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrowers by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrowers, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrowers the amount of such participating interest.

Section 3.8 Power of Attorney. Each Borrower hereby irrevocably makes, constitutes, and appoints the Lender (and any of the Lender's officers, employees, or agents designated by the Lender) as such Borrower's true and lawful attorney, with power to (a) if the Borrower refuses to, or fails timely to execute and deliver any of the documents required to be described in Section 8.5, sign the name of the Borrower on any of the documents described in Section 8.5, (b) at any time that an Event of Default has occurred and is continuing, sign the Borrower's name on any invoice or xxxx of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse the Borrower's name on any collection item that may come into the Lender's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that the Lender determines to be reasonable, and the Lender may cause to be executed and delivered any documents and releases that the Lender determines to be necessary, and (g) notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. The appointment of the Lender as each Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender's obligations to extend credit hereunder are terminated.

ARTICLE IV

CONDITIONS OF LENDING

Section 4.1 Conditions Precedent to the Initial Advances and Letter of Credit. The Lender's obligation to make the initial Advances or to cause any Letters of Credit to be issued shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender:

(a) This Agreement, duly executed by the Borrowers.

(b) The Note, duly executed by the Borrowers.

(c) A true and correct copy of any and all agreements pursuant to which the Borrowers' property is in the possession of any Person other than the Borrowers, together with, in the case of any goods held by such Person for resale, (i) a consignee's acknowledgment and waiver of Liens, (ii) UCC financing statements sufficient to protect the Borrowers and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement against such Person and covering property similar to the Borrowers other than the Borrowers, or if there exists any such secured party, evidence that each such secured party has received notice from the Borrowers and the Lender sufficient to protect the Borrowers' and the Lender's interests in the Borrowers' goods from any claim by such secured party.

(d) An acknowledgment and waiver of Liens from each warehouse in which the Borrowers are storing Inventory.

(e) A true and correct copy of any and all agreements pursuant to which the Borrowers' property is in the possession of any Person other than the Borrowers, together with, (i) an acknowledgment and waiver of Liens from each subcontractor who has possession of the Borrowers' goods from time to time, (ii) UCC financing statements sufficient to protect the Borrowers' and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement covering such Person's property other than the Borrowers, or if there exists any such secured party, evidence that each such secured party has received notice from the Borrowers and the Lender sufficient to protect the Borrowers' and the Lender's interests in the Borrowers' goods from any claim by such secured party.

(f) The Lockbox and Collection Account Agreement, duly executed by NTTLP.

(g) Control agreements in form and substance satisfactory to the Lender, each duly executed by NTTLP, the General Partner and the Limited Partner and each bank at which each of NTTLP, the General Partner and the Limited Partner maintains deposit accounts.

(h) The Guaranties, duly executed by the General Partner and the Limited Partner.

(i) The Security Agreements duly executed by the General Partner and the Limited Partner.

(j) The acknowledgements, in form and substance satisfactory to the Lender, dated as of the date hereof duly executed by Serim Paper Manufacturing Co., Ltd, HeungHwa Industry Co. Ltd, Xxxx X. Xxxx, Xxxxxxxxxxx Xxxxx and Xxxxxx Xxxxxx.

(k) Current searches of appropriate filing offices showing that (i) no Liens have been filed and remain in effect against the Borrowers except Permitted Liens or Liens held by Persons who have agreed in writing that upon receipt of proceeds of the initial Advances, they will satisfy, release or terminate such Liens in a manner satisfactory to the Lender, and (ii) 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.

(l) A certificate of the NTTLP's Secretary or Assistant Secretary certifying that attached to such certificate are (i) the resolutions of the General Partner's Directors and, if required, Owners, authorizing the execution, delivery and performance of the Loan Documents, (ii) true, correct and complete copies of the General Partners' and NTTLP's Constituent Documents, and (iii) examples of the signatures of the General Partner's Officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on NTTLP's behalf.

(m) A current certificate issued by the Secretary of State of Texas, certifying that NTTLP is in compliance with all applicable organizational requirements of the State of Texas.

(n) Evidence that NTTLP is duly licensed or qualified to transact business in the State of California and all other 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.

(o) A certificate of an Officer of NTTLP confirming, in his personal capacity, the representations and warranties set forth in Article V.

(p) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured.

(q) Payment of the fees and commissions due under Section 2.13 through the date of the initial Advance or Letter of Credit and expenses incurred by the Lender through such date and required to be paid by the Borrowers under Section 8.6, including all legal expenses incurred through the date of this Agreement.

(r) Such other documents as the Lender in its sole discretion may require.

Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The Lender's obligation to make each Advance and to cause each Letter of Credit to be issued shall be subject to the further conditions precedent that:

(a) the representations and warranties contained in Article V are correct on and as of the date of such Advance or issuance of a Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date;

(b) no event has occurred and is continuing, or would result from such Advance or issuance of a Letter of Credit which constitutes a Default or an Event of Default; and

(c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against the Borrowers, the Lender, or any of their Affiliates.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

Each Borrower represents and warrants to the Lender as follows:

Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Federal Employer Identification Number.

(a) Netlist is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware 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. Netlist has all requisite power and authority 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, Netlist has done business solely under the names set forth in Schedule 5.1 and all of Netlist's records relating to its business or the Collateral are kept at that location. Netlist's chief executive office and principal place of business is located at the address set forth in Schedule 5.1. All Inventory and Equipment is located at that location or at one of the other locations listed in Schedule 5.1. Netlist's federal employer identification number is correctly set forth in Section 3.6.

(b) NTTLP is a limited partnership, duly organized, validly existing and in good standing under the laws of the State of Texas 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. NTTLP has all requisite power and authority 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, NTTLP has done business solely under the names set forth in Schedule 5.1 and all of NTTLP's records relating to its business or the Collateral are kept at that location. NTTLP's chief executive office and principal place of business is located at the address set forth in Schedule 5.1. All Inventory and Equipment is located at that location or at one of the other locations listed in Schedule 5.1. NTTLP's federal employer identification number is correctly set forth in Section 3.6.

Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and complete list of all ownership interests of the Borrower and rights to acquire ownership interests including the record holder, number of interests and percentage interests on a fully diluted basis, and an organizational chart showing the ownership structure of all Subsidiaries of the Borrower.

Section 5.3 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 Owners; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any Governmental Authority, or any third Person, 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 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 Constituent Documents; (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 Lien (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower.

Section 5.4 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, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally.

Section 5.5 Subsidiaries. Except as set forth in Schedule 5.5 hereto, the Borrower has no Subsidiaries.

Section 5.6 Financial Condition; No Adverse Change. Netlist has furnished to the Lender its audited financial statements for its fiscal year ended December 31, 2001 and unaudited financial statements for the fiscal-year-to-date period ended May 31, 2003, and those statements fairly present Netlist'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

Netlist's business, properties or condition (financial or otherwise) which has had a Material Adverse Effect.

Section 5.7 Litigation. There are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a Material Adverse Effect.

Section 5.8 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.

Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the Officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have 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 5.10 Titles and Liens. The Borrower has good and absolute title to all Collateral free and clear of all Liens other than Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens.

Section 5.11 Intellectual Property Rights.

(a) Owned Intellectual Property. Schedule 5.11 is a complete list of all patents, applications for patents, trademarks, applications for trademarks, service marks, applications for service marks, mask works, trade dress and copyrights for which the Borrower is the registered owner (the "Owned Intellectual Property"). Except as disclosed on Schedule 5.11, (i) the Borrower owns the Owned Intellectual Property free and clear of all restrictions (including covenants not to xxx a third party), court orders, injunctions, decrees, writs or Liens, whether by written agreement or otherwise, (ii) no Person other than the Borrower owns or has been granted any right in the Owned Intellectual Property, (iii) all Owned Intellectual Property is valid, subsisting and enforceable and (iv) the Borrower has taken all commercially reasonable action necessary to maintain and protect the Owned Intellectual Property.

(b) Agreements with Employees and Contractors. The Borrower has entered into a legally enforceable agreement with each of its employees and subcontractors obligating each such Person to assign to the Borrower, without any additional compensation, any Intellectual Property Rights created, discovered or invented by such Person in the course of such Person's employment or engagement with the Borrower (except to the extent prohibited by law), and further requiring such Person to cooperate with the Borrower, without any additional compensation, in connection with securing and enforcing any Intellectual Property Rights therein; provided, however, that the foregoing shall not apply with respect to employees and subcontractors whose job descriptions are of the type such that no such assignments are reasonably foreseeable.

(c) Intellectual Property Rights Licensed from Others. Schedule 5.11 is a complete list of all agreements under which the Borrower has licensed Intellectual Property Rights from another Person ("Licensed Intellectual Property") other than readily available, non-negotiated licenses of computer software and other intellectual property used solely for performing accounting, word processing and similar administrative tasks ("Off-the-shelf Software") and a summary of any

ongoing payments the Borrower is obligated to make with respect thereto. Except as disclosed on Schedule 5.11 and in written agreements copies of which have been given to the Lender, the Borrower's licenses to use the Licensed Intellectual Property are free and clear of all restrictions, Liens, court orders, injunctions, decrees, or writs, whether by written agreement or otherwise. Except as disclosed on Schedule 5.11, the Borrower is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any Intellectual Property Rights.

(d) Other Intellectual Property Needed for Business. Except for Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned Intellectual Property and the Licensed Intellectual Property constitute all Intellectual Property Rights used or necessary to conduct the Borrower's business as it is presently conducted or as the Borrower reasonably foresees conducting it.

(e) Infringement. Except as disclosed on Schedule 5.11, the Borrower has no knowledge of, and has not received any written claim or notice alleging, any Infringement of another Person's Intellectual Property Rights (including any written claim that the Borrower must license or refrain from using the Intellectual Property Rights of any third party) nor, to the Borrower's knowledge, is there any threatened claim or any reasonable basis for any such claim.

Section 5.12 Plans. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains or has maintained any Pension Plan, (ii) contributes or has contributed to any Multiemployer Plan or (iii) provides or has provided post-retirement medical or insurance benefits with respect to employees or former employees (other than benefits required under Section 601 of ERISA, Section 4980B of the IRC or applicable state law). Neither the Borrower nor any ERISA Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA, the IRC or applicable state law with respect to any Plan. No Reportable Event exists in connection with any Pension Plan. Each Plan which is intended to qualify under the IRC is so qualified, and no fact or circumstance exists which may have an adverse effect on the Plan's tax-qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not waived, (ii) any liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan or (iii) any liability or knowledge of any facts or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than routine claims for benefits under the Plan).

Section 5.13 Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a Material Adverse Effect.

Section 5.14 Environmental Matters.

(a) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any material liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such material liability.

(b) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any material liability under any Environmental Law.

(c) There are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging material liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending.

(d) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within 12 months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed.

(e) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database.

(f) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses.

Section 5.15 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is (i) true and correct in all material respects, (ii) does not omit any material fact necessary to make such information not misleading and, (iii) as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results.

Section 5.16 Financing Statements. The Borrower has authorized the filing of financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral which is capable of being perfected by filing financing statements. None of the Collateral is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto.

Section 5.17 Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or, in the case of all future Collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the Account Debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation.

Section 5.18 Eligible Accounts; Eligible Foreign Accounts. Each Account included in the Borrowing Base is an "Eligible Account" or an "Eligible Foreign Account" as defined herein, and conforms to the definitions thereof.

Section 5.19 Eligible Inventory. All Inventory included in the Borrowing Base is "Eligible Inventory," as defined herein, and conforms to the definition thereof.

Section 5.20 Equipment. All of the Equipment is used or held for use in the Borrower's business and is fit for such purposes.

Section 5.21 Fraudulent Transfer. The Borrower is Solvent. No transfer of property is being made by the Borrower and no obligation is being incurred by the Borrower in connection with the

transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of the Borrower.

ARTICLE VI

COVENANTS

So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, each Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing:

Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender:

(a) Annual Financial Statements. As soon as available, and in any event within 90 days after the end of each fiscal year of the Borrowers, the Borrowers will deliver, or cause to be delivered, to the Lender, Netlist's audited and consolidated financial statements with the unqualified opinion of independent certified public accountants selected by the Borrowers and acceptable to the Lender, which annual financial statements shall include Netlist's balance sheet as at the end of such fiscal year and the related statements of Netlist's income, retained earnings and cash flows for the fiscal year then ended, prepared on a consolidating and consolidated basis to include any Subsidiaries, and prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; (ii) a report signed by such accountants stating that in making the investigations necessary for said opinion they obtained no knowledge, except as specifically stated, of any Default or Event of Default and all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrowers are in compliance with the Financial Covenants; and (iii) a certificate of Netlist's chief financial officer stating that such financial statements have been prepared in accordance with GAAP, fairly represent Netlist's financial position and the results of its operations, and whether or not such officer has knowledge of the occurrence of any Default or Event of Default and, if so, stating in reasonable detail the facts with respect thereto.

(b) Monthly Financial Statements. As soon as available and in any event within 20 days after the end of each month, the Borrowers will deliver to the Lender an unaudited/internal balance sheet and statements of income and retained earnings of Netlist as at the end of and for such month and for the year to date period then ended, prepared, on a consolidating and consolidated basis to include any Subsidiaries, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments and fairly represent the Borrower's financial position and the results of its operations; and accompanied by a certificate of the Borrower's chief financial Officer, substantially in the form of Exhibit C hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the Financial Covenants.

(c) Collateral Reports. The Borrower will deliver to the Lender the following documents at the following times in form satisfactory to Lender:

Daily		(a) a report of cash collections, sales assignments, credit memos/adjustments and deposits, copies of all invoices over $100,000, and a calculation of the Borrowing Base as of such date, and
		(b) notice of all returns, disputes, or claims.
Weekly		(c) A copy of Dell Computers rolling 16 week forecast needs.
Monthly (not later than the 15th day of each month)		(d) a detailed calculation of the Borrowing Base (including detail regarding those Accounts that are not Eligible Accounts or Eligible Foreign Accounts, and Inventory that is not Eligible Inventory),
		(e) a certified detailed listing and aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Lender,
		(f) a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, together with a reconciliation to the Borrower's general ledger and monthly financial statements delivered pursuant to Section 6.1(b),
		(g) an Inventory stock status report, by type and by location,
		(h) an Inventory slow moving report, and
		(i) an Inventory certification and perpetual report by location, including Inventory turnover by item number, together with a reconciliation to the Borrower's general ledger and monthly financial statements delivered pursuant to Section 6.1(b).
Semi-Annually		(j) a detailed list of Borrower's customers
Upon request by Lender		(k) copies of invoices in connection with the Accounts, credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrower, purchase orders and invoices, and
		(l) such other reports as to the Collateral, or the financial condition of Borrower, as Lender may request.

(d) Projections. At least 30 days before the beginning of each fiscal year of the Borrowers, the Borrower will deliver to the Lender the projected consolidated balance sheets and income statements for each month of such year, each in reasonable detail, representing Netlist's good faith projections and certified by Netlist's chief financial Officer as being the most accurate projections available and identical to the projections used by the Borrowers for internal planning purposes, together with a statement of underlying assumptions and such supporting schedules and information as the Lender may in its discretion require.

(e) Litigation. Immediately after the commencement thereof, the Borrower will deliver to the Lender notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower (i) of the type described in Section 5.14(c) or (ii) which seek a monetary recovery against the Borrower in excess of $100,000.

(f) Defaults. As promptly as practicable (but in any event not later than five business days) after an Officer of the Borrower obtains knowledge of the occurrence of any Default or Event of Default, the Borrower will deliver to the Lender notice of such occurrence, together with a detailed statement by a responsible Officer of the Borrower of the steps being taken by the Borrower to cure the effect thereof.

(g) Plans. As soon as possible, and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Pension Plan has occurred, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation. As soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Pension Plan under Section 412(m) of the IRC, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation. As soon as possible, and in any event with 10 days after the Borrower knows or has reason to know that it has or is reasonably expected to have any liability under Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal, reorganization or other event under any Multiemployer Plan, the Borrower will deliver to the Lender a statement of the Borrower's chief financial Officer setting forth details as to such liability and the action which Borrower proposes to take with respect thereto.

(h) Disputes. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of (i) any disputes or claims by the Borrower's customers exceeding $100,000 individually or $1,000,000 in the aggregate with the other Borrower during any fiscal year; (ii) credit memos; (iii) any goods returned to or recovered by the Borrower.

(i) Officers and Directors. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any change in the persons constituting the Borrower's Officers and Directors.

(j) Collateral. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any loss of or material damage to any Collateral or of any substantial adverse change in any Collateral or the prospect of payment thereof.

(k) Commercial Tort Claims. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of any commercial tort claims it may bring against any person, including the name and address of each defendant, a summary of the facts, an estimate of the Borrower's damages, copies of any complaint or demand letter submitted by the Borrower, and such other information as the Lender may request.

(l) Intellectual Property.

(i) The Borrower will give the Lender 30 days prior written notice of its intent to acquire material Intellectual Property Rights; except for transfers permitted under Section 6.18, the Borrower will give the Lender 30 days prior written notice of its intent to dispose of material Intellectual Property Rights; and upon request, shall provide the Lender with copies of all applicable documents and agreements.

(ii) Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of (A) any Infringement of its Intellectual Property Rights by others, (B) claims that the Borrower is Infringing another Person's Intellectual Property Rights and (C) any threatened cancellation, termination or material limitation of its Intellectual Property Rights.

(iii) Promptly upon receipt, the Borrower will give the Lender copies of all registrations and filings with respect to its Intellectual Property Rights.

(m) Reports to Owners. Promptly upon their distribution, the Borrower will deliver to the Lender copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its Owners.

(n) SEC Filings. Promptly after the sending or filing thereof, the Borrower will deliver to the Lender copies of all regular and periodic reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange.

(o) Tax Returns. Within 30 days of the date of filing, and in any event by not later November 30 of each year, copies of the Borrower's state and federal tax returns and all schedules thereto; and as soon as possible, and in any event by not later than April 20 of each year, copies of the state and federal tax returns and all schedules thereto and an updated personal financial statement of each owner of the Borrower and each Guarantor.

(p) Violations of Law. Promptly upon knowledge thereof, the Borrower will deliver to the Lender notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition.

(q) Other Reports. From time to time, with reasonable promptness, the Borrower will deliver to the Lender any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to Account Debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request.

Section 6.2 Financial Covenants.

(a) Minimum Book Net Worth. Borrowers will maintain at all times the sum of Netlist's Book Net Worth plus Subordinated Indebtedness, determined as at the end of each month, at an amount not less than the amount set forth in the table below opposite the applicable test date:

Test Date		Minimum Book Net Worth Plus Subordinated Indebtedness
12/31/03 and each month end thereafter		$	5,583,000

(b) Minimum Net Income. Netlist will achieve during each period described below minimum year to date Net Income of not less than the amount set forth opposite in the table below opposite such period:

Year to Date Period Ending		Minimum Year to Date Consolidated Net Income
12/31/03		$	3,833,000

(c) Capital Expenditures. The Borrower will not incur or contract to incur Capital Expenditures of more than $1,300,000 in the aggregate during the fiscal year ending December 27, 2003.

(d) Minimum Monthly Net Income. Netlist will achieve minimum Net Income of not less than zero ($0) as at the end of each month.

Section 6.3 Permitted Liens; Financing Statements.

(a) The Borrower will not create, incur or suffer to exist any Lien upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing, the following (collectively, "Permitted Liens"):

(i) in the case of any of the Borrower's property which is not Collateral, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted;

(ii) Liens in existence on the date hereof and listed in Schedule 6.3 hereto, securing indebtedness for borrowed money permitted under Section 6.4;

(iii) the Security Interest and Liens created by the Security Documents; and

(iv) purchase money Liens relating to the acquisition of machinery and equipment of the Borrower not exceeding the lesser of cost or fair market value thereof, not exceeding $150,000 for any one purchase or $1,300,000 in the aggregate during any fiscal year, and so long as no Default Period is then in existence and none would exist immediately after such acquisition.

(b) The Borrower will not amend any financing statements in favor of the Lender except as permitted by law. Any authorization by the Lender to any Person to amend financing statements in favor of the Lender shall be in writing.

Section 6.4 Indebtedness. The Borrower will not incur, create, assume or permit to exist any Indebtedness or liability on account of deposits or advances or any Indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other Indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except:

(a) Indebtedness arising hereunder;

(b) Indebtedness of the Borrower in existence on the date hereof and listed in Schedule 6.4 hereto;

(d) Indebtedness consisting of intercompany transactions in the ordinary course of business between the Borrowers.

Section 6.5 Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except:

(a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and

(b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 6.4 hereto.

Section 6.6 Investments and Subsidiaries. The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including any partnership or joint venture, except:

(a) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Xxxxx'x Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation);

(b) travel advances or loans to the Borrower's Officers and employees not exceeding at any one time an aggregate of $2,500;

(d) current investments in the Subsidiaries in existence on the date hereof and listed in Schedule 5.5 hereto; and

(e) Indebtedness consisting of intercompany transactions in the ordinary course of business between the Borrowers.

Section 6.7 Dividends and Distributions. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) or distributions on any class of its stock or partnership interests, as the case may be, or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or such partnership interests or make any distribution in respect thereof, either directly or indirectly.

Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable salaries, bonuses, commissions, consultant fees or other compensation; or increase the salary, bonus, commissions, consultant fees or other compensation of any Director, Officer or consultant, or any member of their families.

Section 6.9 Intentionally Omitted.

Section 6.10 Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all company and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with Account Debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its Directors, Officers, employees or agents. The Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender, at the Borrower's expense, all financial information, books and records, work papers, management reports and other information in their possession regarding the Borrower. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral or any other property of the Borrower at any time during ordinary business hours.

Section 6.11 Account Verification. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of accounts or notices of assignment to Account Debtors and other obligors. The Lender may also at any time and from time to time telephone Account Debtors and other obligors to verify accounts.

Section 6.12 Compliance with Laws.

(a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance.

(b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any material liability or obligation under the common law of any jurisdiction or any Environmental Law.

Section 6.13 Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made.

Section 6.14 Maintenance of Properties.

(a) The Borrower will keep and maintain the Collateral and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.14 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Borrower's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. The Borrower will take all commercially reasonable steps necessary to protect and maintain its Intellectual Property Rights.

(b) The Borrower will defend the Collateral against all Liens, claims or demands of all Persons (other than the Lender) claiming the Collateral or any interest therein. The Borrower will keep all Collateral free and clear of all Liens except Permitted Liens. The Borrower will take all commercially reasonable steps necessary to prosecute any Person Infringing its Intellectual Property Rights and to defend itself against any Person accusing it of Infringing any Person's Intellectual Property Rights.

Section 6.15 Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit. All policies of liability insurance required hereunder shall name the Lender as an additional insured.

Section 6.16 Preservation of Existence. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner.

Section 6.17 Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel paper constituting Collateral, duly endorsed or assigned by the Borrower.

Section 6.18 Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any Person other than (x) another Borrower, (y) the sale of Inventory in the ordinary course of business, and (z) dispositions of obsolete, worn or nonfunctional equipment. The Borrower will not liquidate, dissolve or suspend business operations. The Borrower will not transfer any part of its ownership interest in any Intellectual Property Rights and will not permit any agreement under which it has licensed Licensed Intellectual Property to lapse, except that the Borrower may transfer such rights or permit such agreements to lapse if it shall have reasonably determined that the applicable Intellectual Property Rights are no longer useful in its business. If the Borrower transfers any Intellectual Property Rights for value, the Borrower will pay over the proceeds to the Lender for application to the Obligations. The Borrower will not license any other Person to use any of the Borrower's Intellectual Property Rights, except that the Borrower may grant licenses in the ordinary course of its business in connection with sales of Inventory or provision of services to its customers.

Section 6.19 Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person.

Section 6.20 Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred.

Section 6.21 Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business.

Section 6.22 Accounting. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year.

Section 6.23 Discounts, etc. After notice from the Lender, the Borrower will not grant any discount, credit or allowance to any customer of the Borrower or accept any return of goods sold. The Borrower will not at any time modify, amend, subordinate, cancel or terminate the obligation of any Account Debtor or other obligor of the Borrower.

Section 6.24 Plans. Unless disclosed to the Lender pursuant to Section 5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt, create, assume or become a party to any Pension Plan, (ii) incur any obligation to contribute to any Multiemployer Plan, (iii) incur any obligation to provide post-retirement medical or insurance benefits with respect to employees or former employees (other than benefits required by law) or (iv) amend any Plan in a manner that would materially increase its funding obligations.

Section 6.25 Place of Business. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its jurisdiction of organization.

Section 6.26 Change in Name, Trade Name, Trade Style or FEIN. Borrower shall not change its legal name, trade names, trade styles or FEIN, or add any new trade names or trade styles from those listed on Schedule 5.1; provided, however, that Borrower may amend Schedule 5.1 so long as (i) such amendment occurs by written notice to Secured Party not less than 30 days prior to the date on which such new name, trade name, trade style or FEIN becomes effective, and (ii) at the time of such written notification, Borrower executes and delivers any financing statement amendments or fixture filing amendments necessary to continue perfected Lender security interest in the Collateral.

Section 6.27 Transactions With Affiliates. The Borrower will not directly or indirectly enter into or permit to exist any transaction with any Affiliate of the Borrower except for transactions that are in the ordinary course of the Borrower's business, upon fair and reasonable terms, that are fully disclosed to the Lender, and that are no less favorable to the Borrower than would be obtained in an arm's length transaction with a non-Affiliate.

Section 6.28 Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice

thereof (or in the case of the agreements contained in Sections 6.13 and 6.15, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including the payment of taxes, the satisfaction of Liens, the performance of obligations owed to Account Debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Default Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.28.

ARTICLE VII

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

Section 7.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events:

(a) Default in the payment of any Obligations when they become due and payable;

(b) Default in the performance, or breach, of any covenant or agreement of either Borrower contained in this Agreement;

(d) Any Financial Covenant shall become inapplicable due to the lapse of time and the failure to amend any such covenant to cover future periods;

(e) An Insolvency Proceeding is commenced by either Borrower or any Guarantor;

(f) An Insolvency Proceeding is commenced against either Borrower, or any Guarantor, and any of the following events occur: (a) such Borrower or such Guarantor consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, the Lender shall be relieved of its obligations to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, such Borrower or any such Guarantor, or (e) an order for relief shall have been entered therein;

(g) Any material portion of either Borrower's or any Guarantor's assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person;

(h) Either Borrower or any Guarantor is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs;

(i) A notice of Lien, levy, or assessment is filed of record with respect to any of Borrowers' or any Guarantor's assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether xxxxxx or otherwise, upon any of the Borrowers' or any Guarantor's assets and the same is not paid before such payment is delinquent;

(j) This Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby;

(k) Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by either Borrower, or a proceeding shall be commenced by either Borrower, or by any Governmental Authority having jurisdiction over either Borrower, seeking to establish the invalidity or unenforceability thereof, or either Borrower shall deny that such Borrower has any liability or obligation purported to be created under any Loan Document.

(l) Any representation or warranty made by each Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by each Borrower (or any of its Officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective;

(m) The rendering against either Borrower of an arbitration award, final judgment, decree or order for the payment of money not covered by insurance, and the continuance of such arbitration award, judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution;

(n) A default under any bond, debenture, note or other evidence of material Indebtedness of either Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of Indebtedness has been issued or by which it is governed, or under any material lease or other contract, and the expiration of the applicable period of grace, if any, specified in such evidence of Indebtedness, indenture, other instrument, lease or contract;

(o) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Pension Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Pension Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to either Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Pension Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan; or either Borrower or any ERISA Affiliate shall have filed for a distress termination of any Pension Plan under Title IV of ERISA; or either Borrower or any ERISA Affiliate shall have failed to make any quarterly contribution required with respect to any Pension Plan under Section 412(m) of the IRC, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a Lien on either Borrower's assets in favor of the Pension Plan; or any withdrawal, partial withdrawal, reorganization or other event occurs with respect to a Multiemployer Plan which results or could reasonably be expected to result in a material liability of either Borrower to the Multiemployer Plan under Title IV of ERISA.

(p) An event of default shall occur under any Security Document;

(q) Either Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell or attempt to sell all or substantially all of its assets;

(r) Default in the payment of any amount owed by the Borrowers to the Lender other than any Indebtedness arising hereunder;

(s) Any Guarantor or person signing a support agreement in favor of the Lender shall repudiate, purport to revoke or fail to perform his obligations under his guaranty or support agreement in favor of the Lender, any individual Guarantor shall die or any other Guarantor shall cease to exist;

(t) The Borrowers shall take or participate in any action which would be prohibited under the provisions of any Subordination Agreement or make any payment on the Subordinated Indebtedness that any Person was not entitled to receive under the provisions of the Subordination Agreements;

(u) Any event or circumstance with respect to either Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by the Borrowers under the Loan Documents is impaired or any material adverse change in the business or financial condition of either Borrower shall occur;

(v) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender shall occur; or

(w) Any other Material Adverse Effect shall occur.

Section 7.2 Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies, all of which each Borrower acknowledges and agrees are commercially reasonable:

(a) the Lender may, by notice to the Borrowers, declare the Commitment to be terminated, whereupon the same shall forthwith terminate;

(b) the Lender may, by notice to the Borrowers, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which each Borrower hereby expressly waives;

(c) the Lender may, without notice to the Borrowers and without further action, apply any and all money owing by the Lender to the Borrowers to the payment of the Obligations;

(d) the Lender may settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which the Lender considers advisable, and in such cases, the Lender will credit the Obligations with only the net amounts received by the Lender in payment of such disputed Accounts after deducting all expenses incurred or expended by the Lender in connection therewith;

(e) the Lender may cause the Borrowers to hold all returned Inventory in trust for the Lender, segregate all returned Inventory from all other assets of the Borrowers or in the Borrowers' possession and conspicuously label said returned Inventory as the property of the Lender;

(f) without notice to or demand upon the Borrowers or any Guarantor, the Lender may make such payments and do such acts as the Lender considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Collateral if the Lender so requires, and to make the Collateral available to the Lender at a place that the Lender may designate which is reasonably convenient to both parties. Each Borrower authorizes Lender to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in the Lender's determination appears to conflict with the Lender's Liens and to pay all expenses incurred in connection therewith and to charge the Obligations therefor. With respect to any of either Borrower's owned or leased premises, such Borrower hereby grants the Lender a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender's rights or remedies provided herein, at law, in equity, or otherwise;

(g) without notice to Borrowers (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the UCC), the Lender may set off and apply to the Obligations any and all (i) balances and deposits of the Borrowers held by the Lender (including any amounts received in the Lockbox), or (ii) Indebtedness at any time owing to or for the credit or the account of the Borrowers held by Lender;

(h) the Lender may hold, as cash collateral, any and all balances and deposits of the Borrowers held by the Lender, and any amounts received in the Lockbox, to secure the full and final repayment of all of the Obligations;

(i) the Lender may ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral;

(j) the Lender may sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including each Borrower's premises) as the Lender determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale;

(k) the Lender shall give notice of the disposition of the Collateral as follows:

(l) The Lender shall give the Borrowers a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, the time on or after which the private sale or other disposition is to be made; and

(i) The notice shall be personally delivered or mailed, postage prepaid, to the Borrowers as provided in Section 8.3, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market;

(ii) the Lender may credit bid and purchase at any public sale;

(m) the Lender may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing;

(n) If the Lender sells any of the Collateral on credit, the Obligations will be reduced only to the extent of payments actually received. If the purchaser fails to pay for the Collateral, the Lender may resell the Collateral and shall apply any proceeds actually received to the Obligations;

(o) the Lender shall have no obligation to attempt to satisfy the Obligations by collecting them from any third Person which may be liable for them or any portion thereof, and the Lender may release, modify or waive any collateral provided by any other Person as security for the Obligations or any portion thereof, all without affecting the Lender's rights against the Borrowers. Each Borrower waives any right it may have to require the Lender to pursue any third Person for any of the Obligations;

(p) the Lender may make demand upon the Borrowers and, forthwith upon such demand, the Borrowers will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.17 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder;

(q) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and

(r) the Lender may exercise any other rights and remedies available to it by law or agreement.

Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (e) or (f) of Section 7.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind.

Section 7.3 Disclaimer of Warranties. The Lender may sell the Collateral without giving any warranties as to the Collateral. The Lender may specifically disclaim any warranties of title or the like. This procedure will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

Section 7.4 Compliance With Laws. The Lender may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral, and the Lender's compliance therewith will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

Section 7.5 No Marshalling. The Lender shall be under no obligation to marshal any assets in favor of the Borrowers, or against or in payment of the Obligations or any other obligation owned to the Lender by the Borrowers or any other Person.

Section 7.6 Borrowers to Cooperate. Upon the exercise by the Lender of any power, right, privilege, or remedy pursuant to this Agreement which requires any consent, approval, registration, qualification, or authorization of any Governmental Authority, each Borrower agrees to execute and deliver, or will cause the execution and delivery of, all applications, certificates, instruments, assignments, and other documents and papers that the Lender or any purchaser of the Collateral may be required to obtain for such governmental consent, approval, registration, qualification, or authorization.

Section 7.7 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by the Lender:

FIRST to the costs, expenses, liabilities, obligations and attorneys' fees incurred by the Lender in the exercise of its rights under this Agreement;

SECOND to the interest and fees due upon any of the Obligations; and

THIRD to the principal of the Obligations, in such order as the Lender shall determine in its sole discretion. Any surplus shall be paid to the Borrowers or other Persons legally entitled thereto; the Borrowers shall remain liable to the Lender for any deficiency.

Section 7.8 Remedies Cumulative. The rights and remedies of the Lender under this Agreement, the other Loan Documents, and all other agreements contemplated hereby and thereby shall be cumulative. The Lender shall have all other rights and remedies not inconsistent herewith as provided under the UCC, by law, or in equity. No exercise by the Lender of any one right or remedy shall be deemed an election of remedies, and no waiver by the Lender of any default on the Borrowers' part shall be deemed a continuing waiver of any further defaults.

Section 7.9 Lender Not Liable For The Collateral. So long as the Lender complies with the obligations, if any, imposed by the UCC, the Lender shall not otherwise be liable or responsible in any way or manner for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion or from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. The Borrowers bear the risk of loss or damage of the Collateral.

ARTICLE VIII

MISCELLANEOUS

Section 8.1 No Waiver. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents.

Section 8.2 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrowers therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the

specific purpose for which given. No notice to or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances.

Section 8.3 Addresses for Notices; Requests for Accounting. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below next to its signature or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. All requests under Section 9210 of the UCC (i) shall be made in a writing signed by a person authorized under Section 2.2(b), (ii) shall be personally delivered, sent by registered or certified mail, return receipt requested, or by overnight courier of national reputation (iii) shall be deemed to be sent when received by the Lender and (iv) shall otherwise comply with the requirements of Section 9210. Each Borrower requests that the Lender respond to all such requests which on their face appear to come from an authorized individual and releases the Lender from any liability for so responding. The Borrowers shall pay Lender the maximum amount allowed by law for responding to such requests.

Section 8.4 Intentionally Omitted.

Section 8.5 Further Documents. The Borrowers will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements, control agreements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrowers execute, deliver or endorse any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion).

Section 8.6 Costs and Expenses. The Borrowers shall pay on demand all costs and expenses, including reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letter of Credit and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest.

Section 8.7 Indemnity. In addition to the payment of expenses pursuant to Section 8.6, each Borrower shall indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"):

(i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances;

(ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.14 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.12(b); and

(iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances.

If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrowers, or counsel designated by the Borrowers and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrowers' sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrowers shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrowers' obligation under this Section 8.7 shall survive the termination of this Agreement and the discharge of the Borrowers' other obligations hereunder.

Section 8.8 Participants. Each Borrower hereby authorizes the Lender to disclose to any assignee or any participant (either, a "Transferee") and any prospective Transferee any and all financial information in the Lender's possession concerning such Borrower which has been delivered to the Lender by the Borrower pursuant to this Agreement or which has been delivered to the Lender by the Borrower in connection with the Lender's credit evaluation prior to entering into this Agreement. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns.

Section 8.9 Advertising and Promotion. Each Borrower agrees that the Lender may use such Borrower's name(s) in advertising and promotional materials, and in conjunction therewith, the Lender may disclose the amount of the Commitment and the purpose thereof.

Section 8.10 Execution in Counterparts; Telefacsimile Execution. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement.

Section 8.11 Retention of Borrowers' Records. The Lender shall have no obligation to maintain any electronic records or any documents, schedules, invoices, agings, or other papers delivered to the Lender by the Borrowers or in connection with the Loan Documents for more than four months after receipt by the Lender.

Section 8.12 Binding Effect; Assignment; Complete Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrowers and the Lender and their respective successors and assigns, except that the Borrowers shall not have the right to assign their

rights thereunder or any interest therein without the Lender's prior written consent. To the extent permitted by law, each Borrower waives and will not assert against any assignee any claims, defenses or set-offs which such Borrower could assert against the Lender. This Agreement shall also bind all Persons who become a party to this Agreement as a borrower. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrowers and their Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Xxxxx Fargo & Company, and all direct and indirect subsidiaries of Xxxxx Fargo & Company, may exchange any and all information they may have in their possession regarding the Borrowers and their Affiliates, and each Borrower waives any right of confidentiality it may have with respect to such exchange of such information.

Section 8.13 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.

Section 8.14 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by either Borrower or any Guarantor or the transfer to the Lender of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender related thereto, the liability of such Borrower or any Guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made.

Section 8.15 Headings. Article, Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

Section 8.16 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of California. The parties hereto hereby (i) consent to the personal jurisdiction of the state and federal courts located in the State of California in connection with any controversy related to this Agreement; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by the Lender or the Borrowers in connection with this Agreement or the other Loan Documents may be venued in either the State or Federal courts located in Los Angeles County, State of California; and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

ARTICLE IX

JOINT AND SEVERAL LIABILITY; SINGLE LOAN ACCOUNT

Section 9.1 Joint and Several Liability. Each Borrower agrees that it is jointly and severally, directly and primarily liable to Lender for payment, performance and satisfaction in full of the Obligations and that such liability is independent of the duties, obligations, and liabilities of the other

Borrower. Lender may bring a separate action or actions on each, any, or all of the Obligations against any Borrower, whether action is brought against the other Borrower or whether the other Borrower is joined in such action. In the event that any Borrower fails to make any payment of any obligation on or before the due date thereof, the other Borrower immediately shall cause such payment to be made or each of such obligations to be made or each of such Obligations to be performed, kept, observed, or fulfilled.

Section 9.2 Primary Obligation; Waiver of Marshalling. This Agreement and the Loan Documents to which Borrowers are a party are a primary and original obligation of each Borrower, are not the creation of a surety relationship, and are an absolute, unconditional, and continuing promise of payment and performance which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to this Agreement or the Loan Documents to which Borrowers are a party. Each Borrower agrees that its liability under this Agreement and the Loan Documents which Borrowers are a party shall be immediate and shall not be contingent upon the exercise or enforcement by Lender of whatever remedies they may have against the other Borrower, or the enforcement of any lien or realization upon any security Lender may at any time possess. Each Borrower consents and agrees that Lender shall be under no obligation to marshal any assets of any Borrower against or in payment of any or all of the Obligations.

Section 9.3 Financial Condition of Borrowers. Each Borrower acknowledges that it is presently informed as to the financial condition of the other Borrower and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower hereby covenants that it will continue to keep informed as to the financial condition of the other Borrower, the status of the other Borrower and of all circumstances which bear upon the risk of nonpayment. Absent a written request from any Borrower to Lender for information, each Borrower hereby waives any and all rights it may have to require Lender to disclose to such Borrower any information which Lender may now or hereafter acquire concerning the condition or circumstances of the other Borrower.

Section 9.4 Continuing Liability. The liability of each Borrower under this Agreement and the Loan Documents to which Borrowers are a party includes Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Obligations after prior Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, each Borrower hereby waives any right to revoke its liability under this Agreement and Loan Documents as to future indebtedness, and in connection therewith, each Borrower hereby waives any rights it may have under Section 2815 of the California Civil Code.

Section 9.5 Additional Waivers. Each Borrower absolutely, unconditionally, knowingly, and expressly waives:

(a) (1) notice of acceptance hereof; (2) notice of any Advances or other financial accommodations made or extended under this Agreement and the Loan Documents to which Borrowers are a party or the creation or existence of any Obligations; (3) notice of the amount of the Obligations, subject, however, to each Borrower's right to make inquiry of Lender to ascertain the amount of the Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of the other Borrower or of any other fact that might increase such Borrower's risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any instruments among the Loan Documents to which Borrowers are a party; (6) notice of any Default or Event of Default; and (7) all other notices (except if such notice is specifically required to be given to Borrowers hereunder or under the Loan Documents to which Borrowers are a party) and demands to which such Borrower might otherwise be entitled.

(b) its right, under Sections 2845 or 2850 of the California Civil Code, or otherwise, to require Lender to institute suit against, or to exhaust any rights and remedies which Lender has or may have against, the other Borrower or any third party, or against any collateral for the Obligations provided by the other Borrower, or any third party. Each Borrower further waives any defense arising by reason of any disability or other defense (other than the defense that the Obligations shall have been fully and finally performed and indefeasibly paid) of the other Borrower or by reason of the cessation from any cause whatsoever of the liability of the other Borrower in respect thereof.

(c) (1) any rights to assert against Lender any defense (legal and equitable), set-off, counterclaim, or claim which such Borrower may now or at any time hereafter have against the other Borrower or any other party liable to Lender; (2) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Obligations or any security therefor; (3) any defense such Borrower has to performance hereunder, and any right such Borrower has to be exonerate, provided by Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise, arising by reason of: the impairment or suspension of Lender's rights or remedies against the other Borrower; the alteration by Lender of the Obligations; any discharge of the other Borrower's obligations to Lender by operation of law as a result of Lender's intervention or omission; or the acceptance by Lender of anything in partial satisfaction of the Obligations; and (4) the benefit of any statute of limitations affecting such Borrower's liability hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Borrower's liability hereunder.

(d) Each Borrower absolutely, unconditionally, knowingly, and expressly waives any defense arising by reason of or deriving from (i) any claim or defense based upon an election of remedies by Lender including any defense based upon an election of remedies by Lender under the provisions of Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or any similar law of California or any other jurisdiction; or (ii) any election by Lender under Section 1111(b) of the Bankruptcy Code to limit the amount of, or any collateral securing, its claim against the Borrowers. Pursuant to California Civil Code Section 2856(b):

Each Borrower waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed such Borrower's rights of subrogation and reimbursement against the other Borrower by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise.

Each Borrower waives all rights and defenses that such Borrower may have because the Obligations are secured by real property. This means, among other things: (1) Lender may collect from such Borrower without first foreclosing on any real or personal property collateral pledged by the other Borrower; and (2) if Lender forecloses on any real property collateral pledged by the other Borrower: (A) the amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (B) Lender may collect from such Borrower even if Lender, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from the other Borrower. This is an unconditional and irrevocable waiver of any rights and defenses each Borrower may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.

(e) If any of the Obligations at any time are secured by a mortgage or deed of trust upon real property, Lender may elect, in its sole discretion, upon a default with respect to the Obligations, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Agreement and the Loan Documents, without diminishing or affecting the liability of any Borrower hereunder except to the extent the Obligations are repaid with the proceeds of such foreclosure. Each Borrower understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures, an election by Lender nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Borrower against the other Borrower or other guarantors or sureties, and (b) absent the waiver given by such Borrower, such an election would prevent Lender from enforcing this Agreement and the Loan Documents to which Borrowers are a party against such Borrower. Understanding the foregoing, and understanding that such Borrower is hereby relinquishing a defense to the enforceability of this Agreement and the Loan Documents to which Borrowers are a party, such Borrower hereby waives any right to assert against Lender any defense to the enforcement of this Agreement and the Loan Documents to which Borrowers are a party, whether denominated "estoppel" or otherwise, based on or arising from an election by Lender nonjudicially to foreclose any such mortgage or deed of trust. Each Borrower understands that the effect of the foregoing waiver may be that each Borrower may have liability hereunder for amounts with respect to which such Borrower may be left without rights of subrogation, reimbursement, contribution, or indemnity against the other Borrower or other guarantors or sureties. Each Borrower also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure shall have no applicability with respect to the determination of such Borrower's liability under this Agreement and the Loan Documents to which Borrowers are a party.

(f) Each Borrower hereby absolutely, unconditionally, knowingly, and expressly waives: (i) any right of subrogation such Borrower has or may have as against the other Borrower with respect to the Obligations; (ii) any right to proceed against the other Borrower or any other Person, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which such Borrower may now have or hereafter have as against the other Borrower with respect to the Obligations; and (iii) any right to proceed or seek recourse against or with respect to any property or asset of the other Borrower.

(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH BORROWER HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND 726, CALIFORNIA UNIFORM COMMERCIAL CODE SECTIONS 3116, 3118, 3119, 3419, AND 3605, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL CODE.

Section 9.6 Settlement or Releases. Each Borrower consents and agrees that without notice to or by such Borrower, and without affecting or impairing the liability of such Borrower hereunder, Lender may, by action or inaction:

(a) compromise, settle, extend the duration or the time for the payment of, or discharge the performance of, or may refuse to or otherwise not enforce this Agreement and the Loan Documents, or any part thereof, with respect to the other Borrower or any Guarantor;

(b) release the other Borrower or any Guarantor or grant other indulgences to the other Borrower or any Guarantor in respect thereof;

(d) release or substitute any Guarantor, if any, of the Obligations, or enforce, exchange, release, or waive any security for the Obligations or any other guaranty of the Obligations, or any portion thereof.

Section 9.7 No Election. Lender shall have the right to seek recourse against each Borrower to the fullest extent provided for herein, and no election by Lender to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Lender's right to proceed in any other form of action or proceeding or against other parties unless Lender has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Lender under this Agreement and the Loan Documents shall serve to diminish the liability of any Borrower under this Agreement and the Loan Documents to which Borrowers are a party except to the extent that Lender finally and unconditionally shall have realized indefeasible payment by such action or proceeding.

Section 9.8 Indefeasible Payment. The Obligations shall not be considered indefeasibly paid unless and until all payments to Lender are no longer subject to any right on the part of any Person, including any Borrower, any Borrower as a debtor in possession, or any trustee (whether appointed pursuant to the Bankruptcy Code, or otherwise) of any of Borrower's assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. Upon such full and final performance and indefeasible payment of the Obligations, Lender shall have no obligation whatsoever to transfer or assign its interest in this Agreement and the Loan Documents to any Borrower. In the event that, for any reason, any portion of such payments to Lender is set aside or restored, whether voluntarily or involuntarily, after the making thereof, then the obligation intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made, and any Borrower shall be liable for the full amount Lender is required to repay plus any and all costs and expenses (including attorneys' fees and attorneys' fees incurred in proceedings brought under the Bankruptcy Code) paid by Lender in connection therewith.

Section 9.9 Single Loan Account. At the request of Borrowers to facilitate and expedite the administration and accounting processes and procedures of the Credit Facility, Lender has agreed, in lieu of maintaining separate loan accounts on Lender's books in the name of each of the Borrowers, that Lender may maintain a single loan account under the name of both Borrowers (the "Loan Account"). All Advances or any other borrowings under the Credit Facility shall be made jointly and severally to Borrowers and shall be charged to the Loan Account, together with all interest and other charges as permitted under and pursuant to this Agreement. The Loan Account shall be credited with all repayments of Obligations received by Lender, on behalf of Borrowers, from either Borrower pursuant to the terms of this Agreement.

Section 9.10 Apportionment of Proceeds of Advances. Each Borrower expressly agrees and acknowledges that Lender shall have no responsibility to inquire into the correctness of the apportionment or allocation of or any disposition by any of Borrowers of (a) the Advances or any borrowings under the Credit Facility, or (b) any of the expenses and other items charged to the Loan Account pursuant to this Agreement. The Advances and all such borrowings and such expenses and other item shall be made for the collective, joint, and several account of Borrowers and shall be charged to the Loan Account.

Section 9.11 Lender Held Harmless. Each Borrower agrees and acknowledges that the administration of this Agreement on a combined basis, as set forth herein, is being done as an accommodation to Borrowers and at their request, and that Lender shall incur no liability to Borrowers as a result thereof. To induce Lender to do so, and in consideration thereof, each Borrower hereby agrees to indemnify and hold Lender harmless from and against any and all liability, expense, loss, damage, claim of damage, or injury, made against Lender by Borrowers or by any other person or entity, arising from or incurred by reason of such administration of the Agreement.

Section 9.12 Borrowers' Integrated Operations. Each Borrower represents and warrants to Lender that the collective administration of the Credit Facility is being undertaken by Lender pursuant to this Agreement because Borrowers are integrated in their operation and administration and require financing on a basis permitting the availability of credit from time to time to Borrowers. Each Borrower will derive benefit, directly and indirectly, from such collective administration and credit availability because the successful operation of each Borrower is enhanced by the continued successful performance of the integrated group.

* * *

[remainder of this page intentionally left blank]
* * *

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

Netlist, Inc.	NETLIST, INC.
0 Xxxxxxx
Xxxxxx, Xxxxxxxxxx 00000	By:
Telecopier: (000) 000-0000
Attention: Xxx Xxxxxx e-mail: xxxxxxx@xxxxxxxxxx.xxx		Name: Xxxx X. Xxxx Its: President
Netlist Technology Texas, L.P. 0000 Xxxxxxxx Xxxx. Echelon IV, Suite 400	NETLIST TECHNOLOGY TEXAS L.P. By: Netlist Holdings GP, Inc., its general partner
Xxxxxx, Xxxxx 00000 Attention: Xxx Xxxxxx
e-mail: xxxxxxx@xxxxxxxxxx.xxx	By:
		Name: Xxxx X. Xxxx Its: President
Xxxxx Fargo Business Credit, Inc.	XXXXX FARGO BUSINESS CREDIT, INC.
000 X. Xxx Xxxxxx Xxxxxx, Xxxxx 000 Xxxxxxxx, Xxxxxxxxxx 00000
Telecopier: (000) 000-0000	By:
Attention: Xxxx Xxxxxxxx
e-mail: xxxxxxx@xxxxxxxxxx.xxx		Name: Xxxx Xxxxxxxx Its: Vice President

S-1

Table of Exhibits and Schedules

Exhibit A		Form of Replacement Revolving Note
Exhibit C		Compliance Certificate
Exhibit D		Premises
Schedule 1		Unacceptable Countries
Schedule 5.1		Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral
Schedule 5.2		Capitalization and Organizational Chart
Schedule 5.5		Subsidiaries
Schedule 5.11		Intellectual Property Disclosures
Schedule 6.3		Permitted Liens
Schedule 6.4		Permitted Indebtedness and Guaranties
Schedule E		Eligible Equipment

Exhibit A to Credit and Security Agreement

SECOND REPLACEMENT REVOLVING NOTE

$15,000,000		Irvine, California
December 27, 2003

For value received, the undersigned, NETLIST, INC., a Delaware corporation ("Netlist") and NETLIST TECHNOLOGY TEXAS, L.P., a Texas limited partnership ("NTTLP" and Netlist referred to herein collectively as the "Borrowers" and individually as the "Borrower"), hereby jointly and severally promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of XXXXX FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Fifteen Million Dollars ($15,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrowers under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Amended and Restated Credit and Security Agreement of even date herewith (the "Credit Agreement") by and between the Lender and the Borrowers. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement.

This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements.

The Borrowers shall pay all costs of collection, including reasonable attorneys' fees and legal expenses if this Note is not paid when due, whether or not legal proceedings are commenced.

Presentment or other demand for payment, notice of dishonor and protest are expressly waived.

		NETLIST, INC.
		By
			Its President
		NETLIST TECHNOLOGY TEXAS L.P.
		By:	Netlist Holdings GP, Inc., its general partner
		By
			Its President

Exhibit C to Credit and Security Agreement

Compliance Certificate

To:: Xxxx Xxxxxxxx
Xxxxx Fargo Business Credit, Inc.

Date: , 200

Subject: Netlist, Inc. and Netlist Technology Texas LP

Financial Statements

In accordance with our Amended and Restated Credit and Security Agreement dated as of December 27, 2003 ("Credit Agreement"), attached are the consolidated financial statements of Netlist, Inc. ("Netlist") and Netlist Technology Texas LP (collectively with Netlist, the "Borrowers" and, individually, the "Borrower") as of and for , 20 (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement.

The undersigned certifies that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present Netlist's financial condition as of the date thereof.

Events of Default. (Check one):

The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement except as previously reported in writing to the Lender.

The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement not previously reported in writing to the Lender and attached hereto is a statement of the facts with respect to thereto. Each of the Borrowers acknowledges that pursuant to Section 2.12(d) of the Credit Agreement, the Lender may impose the Default Rate at any time during the resulting Default Period.

Financial Covenants. Each of the undersigned further hereby certify as follows:

1. Minimum Book Net Worth Plus Subordinated Indebtedness. Pursuant to Section 6.2(a) of the Credit Agreement, as of the Reporting Date, the sum of the Book Net Worth plus Subordinated Indebtedness was $ which o satisfies o does not satisfy the requirement that such amount be not less than $ on the Reporting Date as set forth in table below:

Test Date		Minimum Book Net Worth Plus Subordinated Indebtedness
12/27/03 and each month end thereafter		$	5,583,000

2. Minimum Net Income. Pursuant to Section 6.2(b) of the Credit Agreement, Netlist's year to date minimum Net Income for the period ending on the Reporting Date, was $ , which o satisfies o does not satisfy the requirement that such amount be not less than $ during such period as set forth in table below:

Year to Date Period Ending		Minimum Year to Date Net Income
12/27/03		$	3,833,000

Exhibit C
1

3. Capital Expenditures. Pursuant to Section 6.2(c) of the Credit Agreement, for the year-to-date period ending on the Reporting Date, the Borrowers have expended or contracted to expend during the year ended , 200 , for Capital Expenditures, $ in the aggregate, which o satisfies o does not satisfy the requirement that such expenditures not exceed $1,300,000.

4. Minimum Monthly Net Income. Pursuant to Section 6.2(d) of the Credit Agreement, for the monthly period ending on the Reporting Date, the Netlist's Net Income is $ , which o satisfies o does not satisfy the requirement that Netlist will achieve minimum Net Income of not less than zero ($0) as at the end of each month.

5. Salaries. As of the Reporting Date, salaries for all Directors, Officers, consultants, and any member of their families, is set forth on Schedule 1 attached hereto.

Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP.

		NETLIST, INC.
		By
			Its Chief Financial Officer
		NETLIST TECHNOLOGY TEXAS LP
		By:	Netlist Holdings GP, Inc., its general partner
		By
			Its Chief Financial Officer

Exhibit C
2

Exhibit D to Credit and Security Agreement

Premises

The Premises referred to in the Credit and Security Agreement are legally described as follows:

Irvine, CA Location

PARCEL 7 OF PARCEL MAP NO 99-125, IN THE CITY OF IRVINE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS PER MAP FILED IN BOOK 312, PAGES 33 THROUGH 37 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.

PROPERTY ADDRESS Known as: 0 Xxxxxxx, Xxxxxxxx 0, Xxxxxx, XX

And,

PM 302-38, PAR 6 AND IRVINE SU/B XXX 000 XXX 000 POR OF XXX XXX XXX 000 XXX XX X, XX THE CITY OF IRVINE, COUNTY OF ORANGE, STATE OF CALIFORNIA
PROPERTY ADDRESS Known as: 000 Xxxxxxx, Xxxxx 000, Xxxxxx, XX

Texas Location

0000 Xxxxxxxx Xxxxxxxxx Echelon IV
Xxxxx 000
Xxxxxx, Xxxxx 00000

Exhibit D
1

Schedule 1 to Credit and Security Agreement
Unacceptable Countries

Afghanistan	Haiti	Romania
Albania	Iran	Russia
Algeria	Iraq	Serbia
Argentina	Kampuchea
Armenia	Kazakhstan	Slovenia
Azerbaijan	Kyrgystan	Sudan
Belarus	Laos	Syria
Bosnia-Herzeqovina	Latvia	Turkmenistan
Bulgaria	Lebanon	Tadjikistan
Chad	Liberia	Ukraine
Croatia	Libya	United States
Cuba	Lithuania	Uzbekistan
Estonia	Myanma	Venezuela
Georgia	North Korea

Schedule 1

Schedule E to Credit and Security Agreement
Eligible Equipment

None

Schedule E

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TABLE OF CONTENTS
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
ARTICLE I DEFINITIONS
Table of Exhibits and Schedules
Exhibit A to Credit and Security Agreement SECOND REPLACEMENT REVOLVING NOTE
Exhibit C to Credit and Security Agreement Compliance Certificate
Exhibit D to Credit and Security Agreement Premises
Schedule 1 to Credit and Security Agreement Unacceptable Countries
Schedule E to Credit and Security Agreement Eligible Equipment

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AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT AMONG NETLIST, INC. AND NETLIST TECHNOLOGY TEXAS LP, AS BORROWERS AND WELLS FARGO BUSINESS CREDIT, INC. AS LENDER as of December 27, 2003

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