10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31990

TEL-INSTRUMENT ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

New Jersey	22-1441806
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One Branca Road

East Rutherford, NJ 07073

(Address of principal executive offices)

(201) 933-1600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes ý   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes ý   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No ý

As of August 10, 2012, there were 2,712,215 shares outstanding of the registrant’s common stock.

TEL-INSTRUMENT ELECTRONICS CORPORATION

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.
		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
		18
Item 4.	Controls and Procedures.
		18
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	19
Item 1A.	Risk Factors.	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	Mine Safety Disclosures.	19
Item 5.	Other Information.	19
Item 6.	Exhibits.	20
Signatures		21

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2012			March 31, 2012
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	166,674			413,195
Accounts receivable, net		539,446			1,694,636
Unbilled government receivables		1,768,208			1,780,381
Inventories, net		7,101,996			5,023,975
Prepaid expenses and other		134,587			220,255
Deferred debt expense		108,321			108,321
Deferred income tax asset		1,288,631			1,288,631
Total current assets		11,107,863			10,529,394
Equipment and leasehold improvements, net		654,287			706,870
Deferred debt expenses – long-term		237,704			264,784
Deferred income tax asset – non-current		1,112,334			948,489
Other assets		56,872			56,872
Total assets	$	13,169,060		$	12,506,409
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion long-term debt		605,492			542,382
Capital lease obligations		67,921			64,675
Accounts payable		3,821,297			2,850,432
Deferred revenues – current portion		25,765			34,767
Accrued payroll, vacation pay and payroll taxes		484,585			440,116
Accrued expenses		2,615,472			2,074,911
Total current liabilities		7,620,532			6,007,283
Subordinated notes payable-related parties, net of debt discount		250,000			250,000
Capital Lease Obligations		131,910			149,582
Deferred revenues		3,470			4,637
Warranty Liability		105,896			355,290
Long-term debt, net of debt discount		1,355,525			1,490,302
Total liabilities		9,467,333			8,257,094
Commitments
Stockholders' equity:
Common stock, par value $.10 per share, 2,710,715 and           2,646,215 issued and outstanding as of June 30,           2012 and March 31, 2012, respectively		271,071			268,421
Additional paid-in capital		6,040,003			5,921,441
Accumulated deficit		(2,609,347	)		(1,940,547	)
Total stockholders' equity		3,701,727			4,249,315
Total liabilities and stockholders' equity	$	13,169,060		$	12,506,409

See accompanying notes to condensed consolidated financial statements.

3

TEL-INSTRUMENT ELECTRONICS CORPORATION

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	June 30, 2012			June 30, 2011
				(Restated)
Net sales	$	1,177,288		$	3,990,211
Cost of sales		893,594			2,128,580
Gross margin		283,694			1,861,631
Operating expenses:
Selling, general and administrative		653,888			798,822
Engineering, research and development		578,604			849,038
Total operating expenses		1,232,492			1,647,860
Income (loss) from operations		(948,798)			213,771
Other income (expense):
Amortization of debt discount		(13,392	)		(13,395	)
Amortization of debt expense		(27,080	)		(27,080	)
Change in fair value of common stock warrants		249,394			(168,586	)
Proceeds from life insurance policy		-			300,029
Interest income		-			93
Interest expense		(92,468	)		(102,694	)
Total other income (expense)		116,454			(11,633	)
Income (loss) before income taxes		(832,344	)		202,138
Income tax provision (benefit)		(163,544	)		282,933
Net loss	$	(668,800	)	$	(80,795	)
Net loss per share:
Basic loss per common share	$	(0.25	)	$	(0.03	)
Diluted loss per common share	$	(0.25	)	$	(0.03	)
Weighted average shares outstanding:
Basic		2,698,984			2,647,138
Diluted		2,698,984			2,647,138

See accompanying notes to condensed consolidated financial statements.

4

TEL-INSTRUMENT ELECTRONICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended
	June 30, 2012			June 30, 2011
				(Restated)
Cash flows from operating activities:
Net loss	$	(668,800	)	$	(80,795	)
Adjustments to reconcile net income (loss) to net cash provided by     (used in) operating activities:
Deferred income taxes		(163,845	)		282,017
Depreciation and amortization		53,231			29,881
Provision for inventory obsolescence		-			10,000
Amortization of debt discount		13,392			13,395
Amortization of debt expense		27,080			27,080
Increase in cash surrender value of life insurance		-			2,011
Proceeds from life insurance policy		-			(300,029	)
Change in fair value of common stock warrant		(249,394	)		168,586
Non-cash stock-based compensation		22,277			24,231
Changes in assets and liabilities:
Decrease in accounts receivable		1,155,190			870,875
Decrease in unbilled government receivables		12,173			-
(Increase) decrease in inventories		(2,078,021	)		439,886
Decrease (increase) in prepaid expenses & other		85,668			(3,569	)
Increase in other assets		-			(32,316	)
Increase (decrease) in accounts payable		970,865			(868,418	)
(Decrease) increase in accrued payroll, vacation pay & withholdings		44,469			(1,381)
Decrease in deferred revenues		(10,169	)		(13,276	)
Decrease increase in progress billings		-			(424,202	)
Increase in accrued expenses		540,561			164,353
Net cash (used in) provided by operating activities		(245,323	)		308,329
Cash flows from investing activities:
Purchases of equipment		(648	)		-
Net cash used in investing activities		(648	)		-
Cash flows from financing activities:
Proceeds from the exercise of stock options		98,935			5,390
Repayment of long-term debt		(85,059	)		-
Repayment of capitalized lease obligations		(14,426	)		(8,332	)
Proceeds from life insurance policy		-			285,981
Net cash (used in) provided by  financing activities		(550	)		283,039
Net (decrease) increase in cash and cash equivalents		(246,521	)		591,368
Cash and cash equivalents at beginning of period		413,195			123,955
Cash and cash equivalents at end of period	$	166,674		$	715,323
Taxes paid	$	-		$	-
Interest paid	$	83,809		$	87,192

See accompanying notes to condensed consolidated financial statements.

5

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2012, the results of operations for the three months ended June 30, 2012 and June 30, 2011, and statements of cash flows for the three months ended June 30, 2012 and June 30, 2011  These results are not necessarily indicative of the results to be expected for the full year.  The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2012 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date.  Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Note 2 – Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)

Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion.  The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits.  When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods.  The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.  These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.  There have been no progress billings or revenues recognized during the three months ended June 30, 2012.

In July 2011, the Company secured a $599,000 contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from U.S. Navy technical evaluation testing.  The AN/ARM-206 ITATS program is proceeding well with the enhancements funded by the U.S. Navy last year now substantially complete and the platform verification substantially completed by the U.S. Navy. TIC is in the process of performing final bench level verification testing on these units and expects to secure a production release on the 102 unit U.S. Navy production delivery order. It is expected that this product will enter full rate production this calendar year.

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	June 30, 2012			March 31, 2012
Government	$	238,513		$	1,272,436
Commercial		336,403			457,670
Less: Allowance for doubtful accounts		(35,470	)		(35,470	)
	$	539,446		$	1,694,636

6

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 –Inventories, net

Inventories consist of:

	June 30, 2012			March 31, 2012
Purchased parts	$	5,292,049		$	3,452,832
Work-in-process		1,982,159			1,725,395
Finished goods		27,788			45,748
Less: Inventory reserve		(200,000	)		(200,000	)
	$	7,101,996		$	5,023,975

Note 5 – Loss Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”).

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options.  Diluted loss per share for the three months ended June 30, 2012 and 2011 do not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	June 30, 2012			June 30, 2011 (Restated)
Basic net loss per share computation:
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Basic net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)
Diluted net loss per share computation
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		2,698,984			2,647,138
Diluted net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)

7

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2,500,000 in the form of a Promissory Note (“the “Note”).  The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees.  These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses are amortized over the term of the loan.

The features of the note are as follows:

(1)   The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount.  Payments for the first year were interest only and amounted to $28,762 monthly.  In September 2011, the Company began making monthly payments of approximately $69,000 for interest and principal for the remaining term of the loan.

(2)   The Company issued BCA  a nine-year warrant for 136,090 shares, based upon 4.5% of the fully-diluted outstanding shares of the Company’s common stock exercisable at $6.70 per share, the average closing price of the common stock over the three days preceding the loan closing on the NYSE-Mkt Exchange.  In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the purchase of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Condensed Consolidated Financial Statements).  The debt discount is to be amortized over the life of the loan.

(3)   Loan provisions also contain customary representations and warranties.

(4)   BCA has a lien on all of the Company’s assets.  In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.

(5)   The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year.  Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.

(6)   Upon the occurrence of a Change of Control (as defined in the Agreement) or within five (5) Business Days of an O’Hara Life Insurance Realization Event (as defined in the Agreement), the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first year of the loan, 102% in the second year of the loan, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”).  If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid.  At the   election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of common stock of the Company in marketable condition in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations.  In the event BCA makes the election contemplated by the immediately preceding sentence, the Company shall issue to BCA that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.

(7)   The Note contains a number of affirmative and negative covenants which restrict our operations.  The BCA agreement contains a number of affirmative and negative covenants. For the quarter ended June 30, 2012, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA).  However, the Company received a waiver from BCA on each of the above mentioned covenants.

(8)   The Company and BCA have amended certain provisions to ease some restrictions.

8

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 – Stock Options

The Company adopted FASB ASC 718, utilizing the modified prospective method.  FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant.  Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption.  The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years.  As a result of adopting ASC 718, operations was charged $22,277 and $24,231 for three months ended June 30, 2012 and 2011, respectively.  The Company estimates the fair value of each option using the Black Scholes option-pricing model. The Company did not grant any options during the three months ended June 30, 2012 and 2011.

Note 8 – Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial.  There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops.  The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

Management evaluates the performance of its segments and allocates resources to them based on gross margin.  The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific.  As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2012 and 2011:

Three Months Ended	Avionics		Avionics		Avionics			Corporate
June 30, 2012	Gov’t		Comm’l.		Total			Items			Total
Net sales		549,966		627,322		1,177,288			-			1,177,288
Cost of Sales		315,929		577,665		893,594			-			893,594
Gross Margin		234,037		49,657		283,694			-			283,694
Engineering, research, and development						578,604						578,604
Selling, general, and admin.						316,989			336,899			653,888
Amortization of debt discount									13,392			13,392
Amortization of debt expense									27,080			27,080
Change in fair value of common stock warrants									(249,394	)		(249,393	)
Interest (income) expense, net						0			92,468			92,467
Total expenses						895,593			220,445			1,116,038
Loss before income						(611,899	)		(220,445	)		(832,344	)

9

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – Segment Information (Continued)

Three Months Ended	Avionics		Avionics		Avionics		Corporate
June 30, 2011	Gov’t		Comm’l.		Total		Items			Total
Net sales		3,145,592		844,619		3,990,211		-			3,990,211
Cost of Sales		1,674,813		453,767		2,128,580		-			2,128,580
Gross Margin		1,470,779		390,852		1,861,631		-			1,861,631
Engineering, research, and development						849,038					849,038
Selling, general, and admin.						361,816		437,006			798,822
Amortization of debt discount								13,395			13,395
Amortization of debt expense								27,080			27,080
Change in fair value of common stock warrants								168,586			168,586
Proceeds from life insurance								(300,029	)		(300,029	)
Interest (income) expense, net						-		102,601			102,601
Total expenses						1,210,854		448,639			1,659,493
Income (loss) before income						650,777		(448,639	)		202,138

Note 9 – Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007.  ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying June 30, 2012 and March 31, 2012 condensed consolidated balance sheets.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse (See Critical Accounting Policies – Income Taxes).

10

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable.  The Company classifies fair value balances based on the observability of those inputs. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820-10 are as follows:

·   Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

·   Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

·   Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The valuation techniques that may be used to measure fair value are as follows:

·   Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

·   Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

·   Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2012 and March 31, 2012.  As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

11

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 – Fair Value Measurements (Continued)

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		105,896		105,896
Total Liabilities	$	-	$	-	$	105,896	$	105,896

March 31, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		355,290		355,290
Total Liabilities	$	-	$	-	$	355,290	$	355,290

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation.  The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire.  Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

	At Inception			March 31, 2012			June 30, 2012
Risk free interest rate		2.81	%		2.23	%		1.67	%
Expected life in years		9.00			7.45			7.20
Expected volatility		28.51	%		53.19	%		41.45	%
Fair market value per share	$	6.70		$	6.33		$	3.68
Exercise price	$	6.70		$	6.70		$	6.70
Warrant Liability	$	281,656		$	355,290		$	105,896

The volatility calculation was based on the 30 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes.  The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised.  All inputs to the Black-Scholes options model are evaluated each reporting period.

12

TEL-INSTRUMENT ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

Note 12 – Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award. In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011.

In May 2012, the Kansas Supreme Court reversed the decision of the lower court only as regards to jurisdiction. Tel continues to remain confident as to the outcome of this litigation.

Note 13 – Restatement

The state and local deferred tax provision was increased for the year ended March 31, 2012 as a result of a change in New Jersey tax law which, in substance, lowered the New Jersey tax rate, which resulted in lowering the carrying value of the New Jersey net deferred tax assets and net income by $394,604 and $256,644, respectively. The New Jersey tax law change was effective for the first quarter of fiscal year 2012, ending June 30, 2011. As such, the accompanying statement of operations has been restated to reflect the adjustment to net income in the first quarter of fiscal year 2012. This change has also been reported in the Company’s report on Form 8-K filed on July 13, 2012. The Company did not lose any future benefit, and the result is such that the Company will have lower NJ tax expense in the future.

Note 14 – New Accounting Pronouncements

For the three months ended June 30, 2012, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Company’s financial position, operations or cash flows.

Note 15 – Subsequent Event

On July 26, 2012 the Company entered into a Securities Purchase Agreement with a private investor.  Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $481,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The Note, together with all unpaid interest and principal is due on March 31, 2013.  The Common Stock underlying the Warrant is exercisable at a price of $3.35 per share and the Warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K on August 3, 2012.

On August 15, 2012, the Company received approval for a $990,000 progress payment invoice related to the CRAFT program. It is expected that the funding will be received within the following 2 weeks.

13

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management.  Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended March 31, 2012, filed with the SEC on July 16, 2012 relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.  Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).  These accounting principles require us to make certain estimates, judgments and assumptions.  We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made.  These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.  Our financial statements would be affected to the extent there are material differences between these estimates and actual results.  In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.  There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

Overview

As previously reported, TIC has recorded sharply reduced revenues and a significant loss in the first quarter of fiscal 2013 ended June 30, 2012 due mainly to a temporary hold in CRAFT 708 production shipments to correct issues discovered in prior CRAFT 719 deliveries and to incorporate the final AIMS approved software configuration which includes several product enhancements. TIC also continues to experience delays in securing a production release on the TS-4530A program from the Army. The Company is working closely with the Navy and the Army to secure production releases on the CRAFT and TS-4530A programs and is optimistic that this will occur within the short-term.

With the delays on the CRAFT and TS-4530A production in the current quarter ending June 30, 2012, TIC’s cash flow has been negatively impacted. As such, the Company secured additional short-term financing and a progress payment from the government on the CRAFT program. Based on expected production releases, the Company believes that it will have adequate liquidity, and backlog to fund operating plans for at least the next twelve months.  Currently, the Company has no material future capital expenditure requirements.

If the Company is unable to obtain production releases with a reasonable period of time and/or our vendors begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments.

14

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Overview (continued)

CRAFT “Communications/Navigation (COMM/NAV) Radio Frequency (RF) Avionics Flight line Tester”) (AN/USM-708 and AN/USM-719) with the U.S. Navy

In March 2012, the U.S. Navy placed a temporary hold on CRAFT 708 production shipments to correct issues discovered in prior CRAFT 719 deliveries and incorporate the final AIMS approved software configuration which includes several product enhancements. The U.S. Navy requested that the Company perform a Root Cause Analysis on the issues seen in the CRAFT 719 units. On June 14, 2012, the U.S. Navy, based upon observations at the Company’s facility, indicated that the Company’s Root Cause Analysis was adequate and that the Company has made progress in addressing the quality issues found in the production of the CRAFT units. As a result, the U.S. Navy granted the Company permission to resume limited production, a combination of new units and rework units. Once these units are completed, the U.S. Navy will assess these units and a determination will be made with respect to resumption of full rate production. Currently, a number of units have been reviewed by the U.S. Navy, and the U.S. Navy has been satisfied with their operation. The Company expects to resume production in September 2012. The Company has approximately $12,400,000 in orders for this program.

The issues identified with the CRAFT units will require that all CRAFT 719 and CRAFT 708 units be updated with revised software and TIC will revalidate all of the 460 ship-in-place units at TIC before they are shipped to the customer. (These ship-in-place units had been built and paid for by the U.S. Navy but could not be shipped to the field due to regulatory restrictions.)  TIC and the U.S. Navy have finalized the upgraded test procedure for these units. The test procedure needed to be upgraded to reflect the extensive changes to the units over the last few years. The U.S. Navy has also verified and approved these new test procedures and reviewed TIC’s quality assurance procedures. The U.S. Navy has also indicated that additional foreign military sales (“FMS”) are expected for the CRAFT product, and the Company is also actively quoting orders for other customers.

TS-4530 IFF test set with the U.S. Army Aviation and Missile Command (continued)

The TS-4530A program has been essentially complete from a design standpoint. The Mode 5 conversion kits and new IFF test sets will incorporate Tel’s proprietary electronics and IFF technology in addition to Mode S Enhanced Surveillance (”EHS”) and Automatic Dependent Surveillance - Broadcast (“ADS-B”) test functionality. In August 2012 the U.S. Army completed its production assurance review. This production assurance review went very well, and represents an important event with respect to entering full rate production phase of this program. In September, this product is scheduled toundergo final regression testing by the Department of Defense (DoD) AIMS Program Office to approve its TS-4530A Flight Line Test Set authorizing its use for Mark XIIA IFF (“Identification Friend and Foe”), Mode S (ELS/EHS/ADS-B) and TCAS systems.  Once approved, TIC and the U.S. Army will work together to secure timing on a full production release for this program. On August 14, 2012, the U.S. Army released an order for 30 TS-4530A low rate initial production (“LRIP”) Kits. The Company hopes to secure the production release early in the third quarter of the current fiscal year. The TS-4530A program is a critical program with almost $20,000,000  of booked production orders which will help drive TIC’s revenues growth and profitability.

At June 30, 2012, the Company’s backlog was approximately $38,900,000 as compared to approximately $48.,00,000 million at June 30, 2011.

Results of Operations

Sales

For the three months ended June 30, 2012, sales decreased $ 2,812,923 (70.5%) to $ 1,177,288, as compared to $ 3,990,211 for the same period in the prior year.

Avionics Government sales decreased $ 2,595,626 (82.5%) to $ 549,966 for the three months ended June 30, 2012, as compared to $3,145,592 for the same period last year.  This decrease in Avionics Government sales is due mainly to a temporary hold in CRAFT 708 production shipments to correct issues discovered in prior CRAFT 719 deliveries and incorporate the final AIMS approved software configuration which includes several product enhancements. TIC has also continues to experience delays in securing a production release on the TS-4530A program from the Army. The Company continues to work closely with the Navy and the Army to secure production releases on the CRAFT and TS-4530A programs and is optimistic that this will occur in the near term.

Commercial sales decreased $217,297 (25.7%) to $ 627,322 for the three months ended June 30, 2012, as compared to $ 844,619 in the same period in the prior year.   This decrease is due to lower sales of the TR-220 and from overhaul and repairs. This decrease is due to economic conditions in the commercial market which remains depressed.

15

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations (continued)

Gross Margin

Gross margin decreased $1,577,937 (84.8%) to $283,694 for the three months ended June 30, 2012 as compared to $1,861,631 for the same three months in the prior fiscal year.  Gross profit was affected by the lower sales volume due to the temporary hold in CRAFT 708 production shipments and the delay in securing a production release on the TS-4530A program.  The gross margin percentage for the three months ended June 30, 2012, was 24.1%, as compared to 46.7%, for the three months ended June 30, 2011.  

Operating Expenses

Selling, general and administrative expenses decreased 144,934 (18.1%) to $653,888 for the three months ended June 30, 2012, as compared to $798,822 for the three months ended June 30, 2011.  This decrease is attributed mainly to lower marketing consulting, outside commissions, professional fees and no accrued bonus compensation expense for the period.

Engineering, research and development expenses decreased $270,434 (31.9%) to $578,604 for three months ended June 30, 2012 as compared to $849,038 for the three months ended June 30, 2011, primarily as a result of a decrease in salaries and consulting fees as a result of the Company finalizing the engineering efforts on the CRAFT and TS-4530A programs.

Other Income (Expense), Net

For the three months ended June 30, 2012, total other income was $116,454, as compared to other expense of $11,633 for the three months ended June 30, 2011. For the three months ended June 30, 2012 the Company recorded a gain on valuation of the common stock warrants of $249,394 as compared to a loss of $168,586 for the three months ended June 30, 2011. This was offset partially by the proceeds from a life insurance policy during the three months ended June 30, 2011 in the amount of $300,029.

Income (Loss) before Income Taxes

As a result of the above, the Company recorded a loss before income taxes of $832,344 for the three months ended June 30, 2012, as compared to income before taxes of $202,138 for the three months ended June 30, 2011.  

Income Taxes

For the three months ended June 30, 2012, the Company recorded an income tax benefit of $163,544 as compared to an income tax provision of $282,933 for the three months ended June 30, 2011.  For the three months ended June 30, 2012 the amount represents the effective federal and state tax rate on the Company’s loss before taxes.  The state and local deferred tax provision was increased for the year ended March 31, 2012 as a result of a change in New Jersey tax law which, in substance, lowered the New Jersey tax rate, which resulted in lowering the carrying value of the New Jersey net deferred tax assets and net income by $394,604 and $256,644, respectively. The New Jersey tax law change was effective for the first quarter of fiscal year 2012, ending June 30, 2011. As such, the three months ended June 30, 2011 statement of operations included herein has been restated to reflect the adjustment to the income tax provision and net income. The change has also been reported on Form 8-K. The Company did not lose any future benefit, and the result is such that the Company will have lower NJ tax expense in the future.  

Net Income (Loss)

As a result of the above, the Company recorded a net loss of $668,600 for the three months ended June 30, 2012, as compared to a net loss of $80,795 for the three months ended June 30, 2011.

16

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity and Capital Resources

At June 30, 2012, the Company had working capital of $3,487,331, as compared to $4,522,111 at March 31, 2012. This change is primarily the result of the reduction in accounts receivable as a result of the lower sales.

During the three months ended June 30 2012, the Company’s cash balances decreased by $246,521 to $166,674.  The Company’s principal sources and uses of funds were as follows:

Cash provided by/used in operating activities.For the three months ended June 30, 2012, the Company used $245,323 in cash for operations as compared to providing $308,329 in cash from operations for the three months ended June 30, 2011.  This decrease is primarily attributed to the lower operating income and increase in inventories offset partially by the increase in accounts payable and accrued expenses.

Cash used in investing activities.  For the three months ended June 30, 2012, the Company used $648 of its cash for investing activities, as compared to $-0- for the three months ended June 30, 2011.

Cash provided by financing activities. Net cash used in financing activities for the three months ended June 30, 2012 was $550, as compared to providing $283,039 for the three months ended June 30, 2011.  This decrease was primarily the result of the proceeds from a life insurance policy that the Company received during the three months ended June 30, 2011 which did not occur this year.

On July 26, 2012 the Company entered into a Securities Purchase Agreement with a private investor.  Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $481,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The Note, together with all unpaid interest and principal is due on March 31, 2013.  The Common Stock underlying the Warrant is exercisable at a price of $3.35 per share and the Warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement.

On certain government contracts the Company has been granted progress payments from the government, which allows the Company to bill and collect a portion of its incurred costs on long-term programs before shipment of units, thus helping to fund the costs of these programs. In August 2012, the Company received approval for a $990,000 progress billing.

The Company believes that it has adequate liquidity, based on its backlog, to fund operating plans for at least the next twelve months. If the Company is unable to obtain production releases with a reasonable period of time and/or our vendors begin to pursue legal action demanding payments, it would result in a material adverse effect on the Company’s operations and its ability to pay its obligations. As such, the Company may need to pursue additional sources of financing and/or additional progress payments.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended June 30, 2012.  These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the SEC on July 16, 2012.

Off-Balance Sheet Arrangements

As of June 30, 2012, the Company had no off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended March 31, 2012. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2012 consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 2012.

17

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We do not hold any derivative instruments and do not engage in any hedging activities.

Item 4.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Management designed the disclosure controls and procedures to provide reasonable assurance of achieving the desired control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our PEO and PFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, the PEO and PFO concluded that the Company’s disclosure controls and procedures were not effective due to the fact that the Company did not maintain a sufficient level of resources related to tax accounting thus contributing to a material weakness in internal control. In connection with the preparation of the Company’s financial statements for the fiscal year ended March 31, 2012, the Company re-evaluated certain accounting policies and procedures relating to taxes and determined that it had not properly accounted for a change in the New Jersey tax law N.J.S.A. 54:10A. Such change lowered the Company’s New Jersey tax rate, resulting in lowering the carrying value of the New Jersey net deferred tax assets and increasing the tax provision by $256,644. Such change should have been recorded during the period ended June 30, 2011. The change did not cause the Company to lose any future benefit, and the result is such that the Company will have lower New Jersey tax expenses in the future.  Please see Report on Form 8-K filed with the SEC on July 13, 2012.

Notwithstanding the material weakness in accounting for income taxes, management believes that the condensed consolidated financial statements which are included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the financial position of the Company at June 30, 2012 and March 31, 2012 and their condensed consolidated results of operations and cash flows for each of the three months ended June 30, 2012 and 2011 in conformity with U.S. generally accepted accounting principles.

Material Weakness and Related Remediation Initiatives

Through the efforts of management, external consultants, and our Audit Committee, we are currently in the process of executing a plan of action to remediate the material weakness identified above.  We expect to complete this action plan during fiscal year 2013.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

18

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

Other than as disclosed in Note 12, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.  There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A.  Risk Factors.

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the SEC on July 16, 2012.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of the Company’s equity securities during the quarter ended June 30, 2012.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

There is no other information required to be disclosed under this item which was not previously disclosed.

19

Item 6.  Exhibits.

Exhibit No.	Description
4.1	Form of Promissory Note *
10.1	Form of Securities Purchase Agreement*
10.2	Form of Intercreditor Agreement*
10.3	Form of Investor Rights Agreement*
10.4	Form of Subordination Agreement*
10.5	Form of Security Agreement*
31.1	Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
31.2	Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002*
32.1	Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS	XBRL Instance Document**
101.SCH	Taxonomy Extension Schema Document**
101.CAL	Taxonomy Extension Calculation Linkbase Document**
101.DEF	Taxonomy Extension Definition Linkbase Document**
101.LAB	Taxonomy Extension Label Linkbase Document**
101.PRE	Taxonomy Extension Presentation Linkbase Document**

* filed herewith

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TEL-INSTRUMENT ELECTRONICS CORP.
Date: August 20, 2012	By:	/s/ Jeffrey C. O’Hara
		Name: Jeffrey C. O’Hara
		Title: Chief Executive Officer           Principal Executive Officer

Date: August 20, 2012	By:	/s/ Joseph P. Macaluso
		Name: Joseph P. Macaluso
		Title: Principal Financial Officer           Principal Accounting Officer

21

EX-4.1

Exhibit 4.1

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

US$500,000	June __, 2012
New York, New York

PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, TEL-INSTRUMENT ELECTRONICS CORP., a corporation incorporated under the laws of the State of New Jersey (the “Borrower”), hereby promises to pay to the order of [  ], a limited liability trust company organized and existing under the laws of the State of [Ÿ] (the “Lender”), on the Maturity Date (as defined below), the unpaid principal amount of the loan (the “Loan”) made by the Lender to the Borrower on the date hereof, as evidenced hereby, in the principal amount of FIVE HUNDRED THOUSAND UNITED STATES DOLLARS (US$500,000).  The Borrower hereby promises to pay interest on the unpaid principal amount of the Loan on the dates and at the rate provided for herein.

Section 1.  Certain Terms Defined.The following terms for all purposes of this Promissory Note shall have the respective meanings specified below.

[   ]., a limited partnership organized and existing under the laws of the State of Delaware.

[   ] means that certain securities purchase agreement, dated as of September 10, 2010, by and between the Borrower, as issuer, and [   ], as purchaser.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized by law to close.

“Default” means any event which, with the giving of notice, lapse of time, determination of materiality or fulfillment of any other applicable condition (or any combination of the foregoing), would constitute an Event of Default.

“Event of Default” has the meaning given to it in Section 9.

“Intercreditor Agreement” means that certain intercreditor agreement by and among the Borrow, the Lender and [   ], pursuant to which the rights of the parties and inter-relationship between this Promissory Note and the [   ] Agreement are governed.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, prospects, condition (financial or otherwise) or property of the Borrower, (b) the validity or enforceability of any provision of any Transaction Document, (c) the ability of any party to any Transaction Document to timely perform its obligations thereunder, or (d) the rights and remedies of the Lender under any Transaction Document.

“Maturity Date” means December 31, 2012.

“Person” means and includes any natural person, individual, partnership, joint venture, corporation, trust, limited liability company, limited company, joint stock company, unincorporated organization, government entity or any political subdivision or agency thereof, or any other entity.

“Security Agreement” means the Security Agreement dated of even date herewith made by and among the Borrower, as grantor, and Lender, as grantee.

“Transaction Documents” means this Promissory Note, the Intercreditor Agreement, the Warrant Agreement and the Security Agreement.

“Warrant Agreement” means that certain common stock warrant agreement dated of event date herewith made by and between the Borrower and Lender.

Section 2.  Maturity Of the Loan.  The Loan shall mature, and the principal amount thereof shall be due and payable in full (together accrued but unpaid interest thereon), on the Maturity Date.

Section 3.  Interest Payments.  The unpaid principal amount of the Loan shall bear interest at a rate per annum equal to fourteen percent (14.00%).  Such interest shall be payable in arrears on the last day of each month (or if such day is not a Business Day, then on the next succeeding Business Day).  The first payment of interest shall be paid on July 31, 2012 and shall be computed for the actual number of days elapsed from the date hereof until such date.

Any overdue principal of or interest on the Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the lesser of (i) the maximum interest rate permitted by applicable law and (ii) eighteen percent (18.00%) (the “Default Rate”).

Interest shall be computed on the basis of a year of 360 days and paid on the last day of each month for the actual number of days elapsed (including the first day but excluding the last day).

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Section 4.  Optional Prepayments.  The Borrower may prepay the Loan in whole or in part at any time without penalty by paying the principal amount to be prepaid together with interest accrued thereon to the date of prepayment.

Section 5.  General Provisions As To Payments.  All payments of principal of and interest on the Loan by the Borrower hereunder shall be made not later than 12:00 Noon (New York City time) on the date when due by cashier’s check or by wire transfer of immediately available funds to the Lender's account at a bank in the United States specified by the Lender in writing to the Borrower without reduction by reason of any set-off or counterclaim.

Section 6.  Representations and Warranties of the Borrower.  The Borrower represents and warrants to the Lender that:

a.   it is duly organized, validly existing and in good standing under the laws of the State of New Jersey;

b.   the execution, delivery and performance of this Promissory Note are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate action;

c.   this Promissory Note has been duly executed by an authorized officer of the Borrower and constitutes a legal, valid and binding obligation enforceable against the Borrower; and

d.   this Promissory Note does not violate any of the Borrower’s organizational documents.

Section 7.  Affirmative Covenants.  Unless the Lender shall otherwise agree, the Borrower shall:

a.   (i) maintain its corporate existence and qualify and remain qualified to conduct business as currently conducted; (ii) maintain all approvals necessary for the Loan and the Transaction Documents; and (iii) operate its business with due diligence, efficiency and in conformity with sound business practices;

b.   comply with the requirements of all applicable laws, rules, regulations, and orders of any government authority, a breach of which would or would reasonably be expected to result in a Material Adverse Effect; and

c.   obtain, make and keep in full force and effect all material licenses, contracts, consents, approvals and authorizations from and registrations with government authorities that may be required to conduct its business, to maintain compliance with all applicable laws and regulations, and remit monies payable pursuant to this Promissory Note.

Section 8.  Negative Covenants.  Unless the Lender shall otherwise agree, the Borrower shall not:

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a.   make any material change to the scope or nature of its respective business activities as carried on at the date hereof or undertake any operations not permitted by the Transaction Documents;

b.   (i) violate any laws, ordinances, government rules or regulations to which it is subject or (ii) fail to obtain or maintain any patents, trademarks, service marks, trade names, copyrights, design patents, licenses, permits, franchises or other governmental authorizations necessary to ownership of its property or the conduct of its respective business, in either case where such failure would have or could reasonably be expected to have a Material Adverse Effect; and

c.   assign or otherwise transfer, terminate, waive or amend any of the Transaction Documents without the prior consent of the Lender.

Section 9.  Events Of Default.  Each of the following events shall constitute an “Event of Default”:

a.   the principal of the Loan shall not be paid within ten (10) Business Days of the Maturity Date;

b.   any interest on the Loan shall not be paid within five (5) Business Days of the date that such interest was due;

c.   the Borrower defaults in the due and punctual observance or performance of any covenant, condition or agreement contained in this Promissory Note and such default is not cured within five (5) days after notice from the Lender;

d.   a court shall enter a decree or order for relief in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or for any substantial part of the property of the Borrower or ordering the winding up or liquidation of the affairs of the Borrower, and such decree or order shall remain unstayed and in effect for a period of sixty (60) consecutive days;

e.   the Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or for any substantial part of the property of the Borrower, or the Borrower shall make any general assignment for the benefit of creditors; or

4

f.   an Event of Default occurs under the [   ] Agreement and [   ]A declares the principal of and accrued interest on any promissory note due in connection therewith to be immediately due and payable.

Subject at all times to the terms and conditions of the Intercreditor Agreement, if an Event of Default described above shall occur, the unpaid principal and accrued interest on the Loan shall become immediately due and payable without any declaration or other act on the part of the Lender.  Subject at all times to the terms and conditions of the Intercreditor Agreement, immediately upon the occurrence of any Event of Default described above, or upon failure to pay this Promissory Note on the Maturity Date, the Lender may proceed to protect, enforce, exercise and pursue any and all rights and remedies available to the Lender under this Promissory Note and any other agreement or instrument, and any and all rights and remedies available to the Lender at law or in equity.

Section 10.  Further Assurances.  The Borrower hereby agrees that, from time to time upon the written request of the Lender, the Borrower will execute and deliver such further documents and do such other acts and things as the Lender may reasonably request in order to fully effect the purposes of this Promissory Note and to protect and preserve the priority and validity of the security interests granted hereunder.

Section 11.  Powers And Remedies Cumulative; Delay Or Omission Not Waiver Of Event Of Default.   No right or remedy herein conferred upon or reserved to the Lender is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

No delay or omission of the Lender to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any Event of Default or an acquiescence therein; and every power and remedy given by this Promissory Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Lender.

Section 12.  Transfers.  The Borrower may not transfer or assign this Promissory Note nor any right or obligation hereunder to any person or entity without the prior written consent of the Lender.  This Promissory Note is freely transferable by the Lender.

Section 13.  Modification.  This Promissory Note may be modified only with the written consent of both the Borrower and the Lender.

Section 14.  Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given when delivered by an internationally recognized overnight courier service to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, provided that a notice of change of address(es) shall be effective only from the date of its receipt by the other party):

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if to the Lender, to:

[   ]

[●]

with a copy (which shall not constitute notice) to:

[●]

if to the Borrower, then to:

Tel-Instrument Electronics Corp.

One Branca Road

East Rutherford, NJ 07073

Attn: Jeff C. O’Hara

Chief Executive Officer

with a copy (which shall not constitute notice) to:

Lucosky Brookman LLP

33 Wood Avenue South, 6th Floor

Iselin, NJ 08830

Attn: Joseph M. Lucosky, Esq.

Notices by e-mail, facsimile or other means not expressly permitted hereunder shall have no force and effect, unless the party receiving a given notice waives, in writing, as to that notice the form of delivery requirement set forth in this Section.  The parties agree, however, that, where practicable, they will contemporaneously e-mail to counsel for the opposing party (at the respective address set forth above) a courtesy copy of any notices or communications sent concerning this Promissory Note.

Section 15Miscellaneous.  This Promissory Note shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said state.  The parties hereto hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of or any default under this Promissory Note, except as specifically provided herein, and assent to extensions of the time of payment, or forbearance or other indulgence without notice.  The Section headings herein are for convenience only and shall not affect the construction hereof.  Any provision of this Promissory Note which is illegal, invalid, prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such illegality, invalidity, prohibition or unenforceability without invalidating or impairing the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.  This Promissory Note shall bind the Borrower and his or her heirs, administrators, executors, personal representatives and permitted assigns.  The rights under and benefits of this Promissory Note shall inure to the Lender and its successors and assigns.

[signature page follows]

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IN WITNESS WHEREOF, the Borrower has caused this instrument to be duly executed on the date indicated below.

Date:  June ___, 2012

TEL-INSTRUMENT ELECTRONICS CORP.

By:__________________________

Name:

Title:

EX-10.1

Exhibit 10.1

EXECUTION VERSION

___________________________________________________________________

SECURITIES PURCHASE AGREEMENT

by and between

TEL-INSTRUMENT ELECTRONICS CORP.

as the Issuer

and

[   ]

as the Purchaser

Dated as of July __, 2012

___________________________________________________________________

NOTICE:  REVIEW THE NOTICE REQUIREMENTS AND SECTION 12.05(C) PRIOR TO DELIVERING ANY INFORMATION OR OTHER MATERIALS TO THE PURCHASER HEREUNDER

TABLE OF CONTENTS

ARTICLE 1 DEFINITIONS			1
	1.01.	Definitions	1
	1.02.	Accounting Terms; Financial Statements	21
	1.03.	Knowledge of the Credit Parties	21
	1.04.	Uniform Commercial Code Terms	21
	1.05.	Certain Matters of Construction	22
ARTICLE 2 PURCHASE AND SALE OF THE SECURITIES			22
	2.01.	Purchase and Sale of the Note	22
	2.02.	Purchase and Sale of the Warrant	23
	2.03.	Expenses	23
	2.04.	Closing	23
	2.05.	Financial Accounting Positions; Tax Reporting	23
	2.06.	Interest	24
ARTICLE 3 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS TO PURCHASE THE SECURITIES			25
	3.01.	Representations and Warranties	25
	3.02.	Compliance with this Agreement	25
	3.03.	Secretary’s Certificates	25
	3.04.	Transaction Documents	25
	3.05.	Purchase of Securities Permitted by Applicable Laws	26
	3.06.	[   ] Loan Documents	26
	3.07.	Approval of Counsel to the Purchaser	26
	3.08.	Consents and Approvals	26
	3.09.	Security Documents	26
	3.10.	No Material Judgment or Order	26
	3.11.	[Reserved]	27
	3.12.	[Reserved]	27
	3.13.	No Litigation	27
	3.14.	[Reserved]	27
	3.15.	[Reserved]	27
	3.16.	Adverse Change	27
	3.17.	[Reserved]	27
	3.18.	Fees and Expenses	27
	3.19.	Conduct of Business	27
	3.20.	Transfer Taxes	27
	3.21.	Landlord Waivers and Agreements	28
ARTICLE 4 CONDITIONS TO THE OBLIGATIONS OF THE ISSUER TO ISSUE AND SELL THE SECURITIES			28
	4.01.	Representations and Warranties	28
	4.02.	Compliance with this Agreement	28
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES			28
	5.01.	Corporate Existence and Power	28

	5.02.	Authorization; No Contravention	29
	5.03.	Governmental Authorization; Third Party Consents	29
	5.04.	Binding Effect	29
	5.05.	Litigation	29
	5.06.	Compliance with Laws	30
	5.07.	No Default or Breach	30
	5.08.	Title to Properties	30
	5.09.	Use of Real Property	31
	5.10.	Taxes	31
	5.11.	SEC Reports; Financial Statements and Projections	32
	5.12.	Operating Company	33
	5.13.	Disclosure	33
	5.14.	Absence of Certain Changes or Events	34
	5.15.	O.S.H.A. and Environmental Compliance	34
	5.16.	Investment Company	35
	5.17.	Subsidiaries	35
	5.18.	Capitalization	36
	5.19.	Private Offering	36
	5.20.	Broker’s, Finder’s or Similar Fees	37
	5.21.	Labor Relations	37
	5.22.	Employee Benefit Plans	37
	5.23.	Intellectual Property.	38
	5.24.	Potential Conflicts of Interest	39
	5.25.	Government Contracts.	40
	5.26.	Indebtedness	40
	5.27.	Material Contracts	41
	5.28.	Insurance	41
	5.29.	Assignment of Payments.	41
	5.30.	Compliance with the FCPA.	41
	5.31.	Products Liability	42
	5.32.	Solvency	42
	5.33.	[Reserved]	42
	5.34.	Location of Assets	42
	5.35.	Certain Payments	42
	5.36.	Margin Requirements	42
	5.37.	Anti-Terrorism Laws	43
	5.38.	Trading with the Enemy	43
	5.39.	Interest Rate Hedges and Other Hedging Agreements	43
	5.40.	[  ] Agreements	43
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER			43
	6.01.	Authorization; No Contravention	43
	6.02.	Binding Effect	44
	6.03.	No Legal Bar	44
	6.04.	Purchase for Own Account	44
	6.05.	Broker’s, Finder’s or Similar Fees	44
	6.06.	Governmental Authorization; Third Party Consent	44

ARTICLE 7 INDEMNIFICATION			45
	7.01.	Indemnification	45
	7.02.	Procedure; Notification	46
	7.03.	Survival	46
ARTICLE 8 AFFIRMATIVE COVENANTS			47
	8.01.	Information	47
	8.02.	Preservation of Existence	48
	8.03.	Payment of Obligations	49
	8.04.	Compliance with Laws	49
	8.05.	[Reserved]	49
	8.06.	[Reserved]	49
	8.07.	Inspection	49
	8.08.	Payment of the Note	50
	8.09.	Insurance	50
	8.10.	Books and Records	50
	8.11.	Use of Proceeds	50
	8.12.	Standards of Financial Statements	51
	8.13.	Reservation of Equity Interests	51
	8.14.	Additional Real Property	51
	8.15.	Cash Management Systems.	52
	8.16.	Landlord Waivers	52
ARTICLE 9 NEGATIVE COVENANTS			52
	9.01.	Fundamental Changes; Consolidations, Mergers and Acquisitions	52
	9.02.	Creation of Liens	53
	9.03.	Guarantees	53
	9.04.	Investments	53
	9.05.	Loans	53
	9.06.	Restricted Payments	54
	9.07.	Indebtedness	54
	9.08.	Nature of Business	55
	9.09.	Transactions with Affiliates; ITI and Tel Holdings	55
	9.10.	Leases	56
	9.11.	Subsidiaries; Partnerships; Joint Ventures	56
	9.12.	Fiscal Year and Accounting Changes	56
	9.13.	Amendment of Organizational Documents	56
	9.14.	Limitation on Modifications of Indebtedness; Modifications of Certain Other Agreements; Etc.	56
	9.15.	Financial Covenants	57
	9.16.	Compliance with ERISA	57
	9.17.	Prepayment of Indebtedness	58
	9.18.	Anti-Terrorism Laws	58
	9.19.	Trading with the Enemy Act	58
	9.20.	Additional Negative Pledges	58
ARTICLE 10 PREPAYMENT			59
	10.01.	Optional Prepayment	59

	10.02.	Scheduled Payments; Mandatory Prepayments	59
ARTICLE 11 EVENTS OF DEFAULT; REMEDIES			60
	11.01.	Events of Default	60
	11.02.	Acceleration and Remedies	63
	11.03.	Application of Proceeds	64
ARTICLE 12 MISCELLANEOUS			64
	12.01.	Survival of Representations and Warranties	64
	12.02.	Notices	64
	12.03.	Successors and Assigns.	65
	12.04.	Amendment and Waiver.	66
	12.05.	Confidentiality.	66
	12.06.	Signatures; Counterparts	67
	12.07.	Headings	68
	12.08.	GOVERNING LAW	68
	12.09.	JURISDICTION; JURY TRIAL WAIVER.	68
	12.10.	Severability	69
	12.11.	Entire Agreement	69
	12.12.	Certain Expenses	69
	12.13.	Publicity	70
	12.14.	Further Assurances	70
	12.15.	No Strict Construction	70
	12.16.	Joint and Several Liability	71
	12.17.	Transfer of the Note.	71
ARTICLE 13 TAXES, YIELD PROTECTION AND ILLEGALITY			72
	13.01.	Taxes.	72
	13.02.	Certificates of Purchaser	73

LIST OF EXHIBITS AND SCHEDULES

Exhibits

Exhibit A	Form of Promissory Note
Exhibit B	Form of Warrant
Exhibit C	Form of Compliance Certificate
Exhibit D	Form of Security Agreement
Exhibit E	Form of Investor Rights Agreement
Exhibit F	[Reserved]
Exhibit G	[Reserved]
Exhibit H	Form of Intercreditor Agreement
Exhibit I	Form of Subordination Agreement

Schedules

Schedule 5.01 – Jurisdiction of Organization and Qualifications

Schedule 5.08(a) – Owned Real Property

Schedule 5.08(b) – Leased Real Property

Schedule 5.11 – Financial Statements

Schedule 5.17 – Subsidiaries

Schedule 5.18 – Capitalization

Schedule 5.20 – Brokers’ or Finders’ Fees

Schedule 5.22(a) – Employee Benefit Plans

Schedule 5.23 – Intellectual Property

Schedule 5.24 – Conflicts of Interest

Schedule 5.26 – Indebtedness

Schedule 5.34 – Location of Assets

Schedule 5.35 – Certain Payments

Schedule 9.02 – Permitted Liens

Schedule 9.04 – Investments

Schedule 9.06 – Restricted Payments

Schedule 9.07 – Indebtedness

Schedule 9.09 – Transactions with Affiliates

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT, dated as of July __, 2012, by and between TEL-INSTRUMENT ELECTRONICS CORP., a New Jersey corporation (“Issuer”), and [   ], an Illinois limited liability company (the “Purchaser”).

W I T N E S S E T H:

WHEREAS, the Issuer wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Issuer, a promissory note (the “Note”), due on March 31, 2013, in the aggregate principal amount of $600,000; and

WHEREAS, the Issuer wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Issuer, a Warrant (the “Warrant”) to purchase 50,000 shares of common stock of the Issuer;

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

1.01.Definitions.  As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated:

“Affiliate” shall mean, with respect to any Person, any other Person (a) directly or indirectly controlling, controlled by, or under common control with, such Person, (b) directly or indirectly owning or holding twelve and one-half percent (12.5%) or more of any Equity Interests in such Person, or (c) twelve and one-half percent (12.5%) or more of whose voting stock or other Equity Interests is directly or indirectly owned or held by such Person.  For purposes of this definition, “control” (including with correlative meanings, the terms “controlling”, “controlled by” and under “common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” shall mean this Securities Purchase Agreement, including the exhibits and schedules attached hereto, as the same may be amended, restated, supplemented or modified in accordance with the terms hereof.

“Anti-Terrorism Laws” shall mean any Applicable Laws relating to terrorism or money laundering, including Executive Order No. 13224, the USA Patriot Act, the Applicable Laws comprising or implementing the Bank Secrecy Act, and the Applicable Laws administered by the United States Treasury Department’s Office of Foreign Asset Control (as any of the foregoing Applicable Laws may from time to time be amended, renewed, extended, or replaced).

“Applicable Law” shall mean all international, foreign, Federal, provincial, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

“Assignment of Claims Act” means Title 31, United States Code § 3727 and Title 41, United States Code § 15, as revised or amended, and any rules or regulations issued pursuant thereto, and also shall be deemed to include any other laws, rules or regulations governing the assignment of government contracts or claims against a Governmental Authority.

“Authorized Officer” shall mean any of the President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or Controller of a Credit Party (or any other officer authorized by a Credit Party to perform all or any portion of the same or similar functions of any of such enumerated officers, as applicable).

“Bank Secrecy Act” shall mean 31 U.S.C. Sections 5311-5330, as the same has been, or shall hereafter be, extended, amended or replaced.

“[   ]” shall mean [   ].

“[   ] Debt” shall mean the Indebtedness outstanding under the [   ] Loan Documents.

“[    ] Loan Documents” shall mean the Securities Purchase Agreement dated as of September 10, 2010 between the Issuer and [   ], as the same has been amended to the date hereof and as the same may be further amended, restated, supplemented or otherwise modified from time to time, and the Transaction Documents (as defined therein).

“[   ] Warrants” shall have the meaning assigned to that term in Section 5.18(a) hereof.

“Blocked Person” shall mean (i) a Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (iii) a Person with which Purchaser is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, (iv) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in Executive Order No. 13224, (v) a Person that is named as a “specially designated national” on the most current list published by the U.S. Treasury Department Office of Foreign Asset Control at its official website or any replacement website or other replacement official publication of such list, or (vi) a Person who is affiliated or associated with a Person listed above.

“Board of Directors” shall mean the board of directors of any corporation, board of managers of any limited liability company or similar governing body of any other Person.

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“Business” shall mean the business of design and manufacture of avionics test and measurement solutions for the commercial air transport, general aviation, government/military aerospace, and defense markets.

“Business Day” shall mean any day other than a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close.

“Capital Expenditures” shall mean expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capital Lease Obligations, which, in accordance with GAAP, would be classified as capital expenditures.

“Capital Lease Obligations” shall mean any Indebtedness of the Credit Parties represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

“Cash Equivalents” shall mean: (i) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year from the date of acquisition thereof; (ii) commercial paper maturing no more than one (1) year from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor’s Ratings Group, a division of McGraw-Hill, Inc., or at least P-1 from Moody’s Investors Service, Inc.; (iii) certificates of deposit or bankers’ acceptances maturing within one (1) year from the date of issuance thereof issued by, or overnight reverse repurchase agreements from, any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having combined capital and surplus of not less than $500,000,000; (iv) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks having membership in the Federal Deposit Insurance Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of the Credit Parties’ and their respective Subsidiaries’ deposits at such institution; and (v) deposits or investments in mutual or similar funds offered or sponsored by brokerage or other companies having membership in the Securities Investor Protection Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of the Credit Parties’ and their respective Subsidiaries’ deposits at such institution.  Notwithstanding the foregoing, Cash Equivalents does not include and each Credit Party is prohibited from purchasing, purchasing participations in, entering into any type of swap or other equivalent derivative transaction, or otherwise holding or engaging in any ownership interest in any type of debt instrument, including any corporate or municipal bond with a long-term nominal maturity for which the interest rate is reset through a dutch auction and more commonly referred to as an auction rate security.

“Cash on Hand”shall mean cash balances in the bank accounts of the Credit Parties, less checks drawn and not as yet presented and provided that all of the Credit Parties’ debts, obligations and payables are current in accordance with the Credit Parties’ usual business practices.

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“CERCLA” shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. §§9601 et seq.

“Change in Law” shall mean the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.

“Change of Control” shall mean (a) the occurrence of any of the following (i) any event or condition as a result of which the power, direct or indirect (A) to vote 100% of the Equity Interests having ordinary voting power for the election of directors (or the individuals performing similar functions) of any Subsidiary of Issuer (other than ITI and Tel Holdings) or (B) to direct or cause the direction of the management and policies (by contract or otherwise) of any Subsidiary of Issuer (other than ITI and Tel Holdings) is not held legally and beneficially by Issuer, (ii) (A) the Specified Holders, collectively, shall cease to own and control, directly or indirectly, at least forty percent (40%) of the outstanding voting Equity Interests of Issuer, (B) any Person or group of Persons (within the meaning of Section 13(d) or Section 14(a) of the Exchange Act), other than the Specified Holders, shall, following the Closing Date, have acquired legal or beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Commission under the Exchange Act) of 50% or more of the voting Equity Interests of Issuer, or (C) within a period of twelve (12) consecutive months, individuals who were directors of Issuer on the first day of such period, together with directors who were approved in the ordinary course of business by the directors then in office during such period, shall cease to constitute a majority of the board of directors of Issuer, (iii) the combination of Issuer, with another Person, as a result of which (A) any Person or group of  Persons (as defined above) other than the Specified Holders, become the legal or beneficial ownership (as defined above) of 50% or more of the voting Equity Interests of the combined entity or (B) the directors of Issuer constitute less than a majority of the Board of Directors of the combined entity, (iv) the sale or other disposition of all or substantially all of the assets of any of the Issuer or of one or more of their respective Subsidiaries that, individually or in the aggregate, constitute 50% or more of the business, operations or assets of the Credit Parties and their Subsidiaries, taken as a whole, and (v) the liquidation, dissolution or winding up of any of the Credit Parties and their Subsidiaries that, individually or in the aggregate, constitute 50% or more of the business, operations or assets of the Credit Parties and their Subsidiaries, taken as a whole or (b) the occurrence of any “Change of Control” (or similar term) under (and as defined in) the [   ] Loan Documents or any documents evidencing Indebtedness subordinated to the Indebtedness existing pursuant to the Note and this Agreement.  For purposes of this definition “control” means the power to direct or cause the direction of management and policies of a Person, whether by contract or otherwise.

“Closing” shall have the meaning assigned to that term in Section 2.04.

“Closing Date” shall have the meaning assigned to that term in Section 2.04.

“Code” shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.

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“Collateral” shall mean all property and other assets (whether real, personal or mixed, and whether tangible or intangible) and interests therein and proceeds thereof now owned or hereafter acquired by any Credit Party and any other Person who has granted a Lien to Purchaser, in or upon which a Lien now or hereafter exists in favor of Purchaser, whether under this Agreement or under any Security Documents executed by any such Persons and delivered to Purchaser.

“Commission” shall mean the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act.

“Common Stock” shall mean the common stock, par value $.10 per share, of the Issuer.

“Compliance Certificate” shall have the meaning assigned to that term in Section 8.01(d).

“Consents” shall mean all filings and all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Authorities and other third parties, domestic or foreign, necessary to carry on each Credit Party’s business or necessary (including to avoid a conflict or breach under any agreement, instrument, other document, license, permit or other authorization) for the execution, delivery or performance of this Agreement or any of the Transaction Documents, including any Consents required under all applicable federal, state or other Applicable Law.

“Consolidated Basis” shall mean, with respect to the financial statements or other financial information of the Credit Parties, the accounts and other items of the Credit Parties on a consolidated basis in accordance with GAAP applied on a basis consistent with prior practices.

“Consolidating Basis” shall mean, with respect to the financial statements or other financial information of the Credit Parties, the accounts and other items of each of the Credit Parties on a consolidating basis in accordance with GAAP applied on a basis consistent with prior practices.

“Contingent Obligation” shall mean, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

“Contractual Obligations” shall mean as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument or arrangement (whether in writing or otherwise) to which such Person is a party or by which it or any of such Person’s property is bound.

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“Control Agreement” shall mean a tri-party deposit account, securities account or commodities account control agreement by and among the applicable Credit Party, the Purchaser and the depository, securities intermediary or commodities intermediary, each in form and substance reasonably satisfactory in all respects to the Purchaser and in any event providing to the Purchaser “control” of such deposit account, securities or commodities account within the meaning of Articles 8 and 9 of the Uniform Commercial Code, as applicable, on a “springing” dominion basis upon the occurrence and during the continuance of an Event of Default.

“Controlled Group” shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which are, together with any Credit Party, treated as a single employer under Section 414 of the Code.

“Copyright Licenses” shall mean any agreement, whether written or oral, providing for the grant by or to a Person of any right under any Copyright, including, without limitation, any thereof referred to in Schedule 5.23(c).

“Copyrights” shall mean all copyrights (other than copyrights of de minimis value) of the Credit Parties and their Subsidiaries in all works, now existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Copyright Office or in any similar office or agency of the United States, any state thereof or any other country or any political subdivision thereof, or otherwise, including, without limitation, any thereof referred to in Schedule 5.23(b) and all renewals thereof.

“Credit Parties” shall mean the Issuer and each Guarantor.

“Current Market Price” shall mean, with respect to each share of Common Stock for any day, (a) the last reported sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported on the principal national securities exchange on which the Common Stock is listed or admitted for trading or (b) if the Common Stock is not listed or admitted for trading on any national securities exchange, the last reported sale price or, in case no such sale takes place on such day, the average of the highest reported bid and the lowest reported asked quotation for the Common Stock, in either case as reported by the National Quotation Bureau or similar institution compiling and reporting such information.

“Default” shall mean a condition, act or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition, act or event were not cured or removed within any applicable grace or cure period.

“Debt Service Coverage Ratio” shall mean, with respect to any period of the Credit Parties, the ratio of (a) EBITDA less amounts paid for Permitted Payments made during such period to (b) the sum for such period of (i) Interest Expense, plus (ii) Required Principal Amortization.

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“Earnings Before Interest and Taxes” shall mean for any period the sum of (i) net income (or loss) of the Credit Parties on a Consolidated Basis for such period (excluding extraordinary gains and extraordinary losses, so long as any such exclusion from the calculation of Earnings Before Interest and Taxes is made in accordance with GAAP), plus (ii) to the extent deducted in the determination of net income (or loss) for such period, (A) all interest expense of the Credit Parties on a Consolidated Basis for such period, including interest expense resulting from original issue discount, plus (B) all charges against income of the Credit Parties on a Consolidated Basis for such period for federal, state and local income taxes, plus (C) any non-cash expense associated with FASB No. 142 or FASB No. 144, plus (D) any non-cash expenses associated with stock options and stock grants, plus (vi) any non-cash expenses incurred in connection with the early extinguishment of Indebtedness.  In addition, the calculation of Earnings Before Interest and Taxes for any period shall be adjusted to exclude (w) any aggregate net gain or loss arising from any permitted sale, conversion, exchange or other disposition of capital assets made during such period, including (1) all non-current assets, and (2) without duplication, the following assets, whether or not current: fixed assets, whether tangible or intangible, inventory sold in connection with the disposition of fixed assets and all Equity Interests and other securities, (x) any net gain from the collection during such period of any proceeds of life insurance policies, (y) any gain or loss (or other impact to the financial statements) arising from the repurchase during such period of Equity Interests permitted pursuant to Section 9.06 and (z) any non-cash income or expense realized during such period relating to an Interest Rate Hedge or any Other Hedging Agreement.

“EBITDA” shall mean for any period, the sum of (i) Earnings Before Interest and Taxes for such period, plus to the extent deducted in the determination of net income (or loss) for such period (ii) depreciation expenses of the Credit Parties on a Consolidated Basis for such period plus (iii) amortization expenses of the Credit Parties on a Consolidated Basis for such period.

“Employee Options” shall have the meaning assigned to that term in Section 5.18(a) hereof.

“Environmental Laws” shall mean all present and future Applicable Laws, Requirements of Law, or Consents, relating to the protection of human health and safety or the environment, including (a) all Applicable Laws, Requirements of Law, or Consents, pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of hazardous materials, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid, or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the presence, generation, discharge, release, removal, manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, emissions, contaminants, or hazardous, radioactive or toxic substances, materials, or wastes, whether solid, liquid, or gaseous in nature; and (b) all Applicable Laws, Requirements of Law or Consents, pertaining to the protection of the health and safety of employees or the public.

“Equity Documents” shall mean the Warrant, the Investor Rights Agreement, and all documents, instruments and agreements executed or delivered pursuant thereto, as each may be amended, modified, supplemented or restated from time to time.

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“Equity Interests” of any Person shall mean any and all shares, rights to purchase, options, warrants, general, limited or limited liability partnership interests, member interests, participation or other equivalents of or interest in (regardless of how designated) equity of such Person, whether voting or nonvoting, including common stock, preferred stock, convertible securities or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Commission under the Exchange Act).

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time and the rules and regulations promulgated thereunder.

“ERISA Affiliate” shall mean any trade or business (whether or not incorporated) under common control with any Credit Party within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).

“Event of Default” shall have the meaning assigned to such term in Section 11.01.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder.

“Excluded Taxes” shall mean, with respect to Purchaser or any other recipient of any payment to be made by or on account of any obligation of Issuer hereunder, (i) Taxes imposed on net income imposed by the jurisdiction in which the Purchaser is organized or doing business by virtue of the Purchaser being organized or doing business in such jurisdiction and (ii) U.S. withholding taxes unless such U.S. withholding taxes are imposed as a result of a Change in Law (including a change in interpretation of existing law by a court or administrative agency) after the date of this Agreement.

“Executive Order No. 13224” shall mean the Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, as the same has been, or shall hereafter be renewed, extended, amended or replaced.

“Exercisable Interests” shall have the meaning assigned to such term in Section 8.13.

“Financial Statements” shall have the meaning assigned to that term in Section 5.11(e) hereof.

“Fixed Charge Coverage Ratio” shall mean, with respect to any period of the Credit Parties, the ratio of (a) EBITDA less amounts paid for Permitted Payments made during such period to (b) the sum for such period of (i) Interest Expense paid in cash, plus (ii) Required Principal Amortization, plus (iii) all income Taxes paid in cash by the Issuer or any of its Subsidiaries, plus (iii) Capital Expenditures of the Credit Parties on a Consolidated Basis during such period which are not funded by borrowed money.

“Foreign Purchaser” shall mean a Purchaser that is not a United States Person as defined in Section 7701(a)(30) of the Code.

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“Funded Debt” shall mean, with respect to the Credit Parties and their respective Subsidiaries, all Indebtedness for borrowed money for which such Credit Party or such Subsidiary is obligated including all Capital Lease Obligations and the Notes.

“GAAP” shall mean generally accepted accounting principles in effect within the United States, consistently applied.

“Governmental Authority” shall mean the government of any nation, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, regulation or compliance, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

“Government Contract” shall mean any contract entered into between a Credit Party or any of its Subsidiaries and the government of the United States of America, or any department, agency, public corporation, or other instrumentality or agent thereof or any state government or any department, agency or instrumentality or agent thereof.

“Guarantor” shall mean any Subsidiary of the Issuer and any other Person who may hereafter guarantee payment or performance of the whole or any part of the obligations of the Issuer under the Note and this Agreement, and “Guarantors” shall mean collectively all such Persons.

“Guaranty” shall mean any guaranty of the obligations of the Issuer executed by a Guarantor in favor of Purchaser.

“Hazardous Materials” shall mean any chemical, pollutant, contaminant, pesticide, petroleum or petroleum product or byproduct, radioactive substance, solid waste (hazardous or extremely hazardous), special, dangerous or toxic waste, hazardous or toxic substance, chemical or material regulated, listed, referred to, limited or prohibited under any Environmental Law, including:  (i) friable or damaged asbestos, asbestos containing material, polychlorinated biphenyls (PCBs), solvents and waste oil; (ii) any “hazardous substance” as defined under CERCLA or any Environmental Law; (iii) any hazardous waste defined under RCRA or any Environmental Law; and (iv) even if not prohibited, listed, limited or regulated by an Environmental Law, all pollutants, contaminants, hazardous, dangerous or toxic chemical, materials, wastes or any other substances, including any industrial process or pollution control waste (whether or not hazardous within the meaning of RCRA) which could pose a hazard to the environment, or the health or safety of any Person or impair the use or value of any portion of the Real Property of the Credit Parties or their respective Subsidiaries.

“Hazardous Substance” shall mean any flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or related materials as defined in CERCLA, the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et  seq.), RCRA or any other applicable Environmental Law and in the regulations adopted pursuant thereto.

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“Hazardous Wastes” shall mean all waste materials subject to regulation under CERCLA, RCRA or applicable state law, and any other applicable Federal and state laws now in force or hereafter enacted relating to hazardous waste disposal.

“Indebtedness” shall mean, as to any Person, without duplication, (i) all indebtedness of such Person for borrowed money (including any progress payments or other advances made to such Person pursuant to any Government Contract or otherwise) or for the deferred purchase price of property or services, (ii) the maximum amount available to be drawn or paid under all letters of credit, bankers’ acceptances, bank guaranties, surety and appeal bonds and similar obligations issued for the account of such Person and all unpaid drawings and unreimbursed payments in respect of such letters of credit, bankers’ acceptances, bank guaranties, surety and appeal bonds and similar obligations, (iii) all indebtedness of the types described in clause (i), (ii), (iv), (v), (vi), (vii) or (viii) of this definition secured by any Lien on any property owned by such Person, whether or not such indebtedness has been assumed by such Person (provided that, if the Person has not assumed or otherwise become liable in respect of such indebtedness, such indebtedness shall be deemed to be in an amount equal to the fair market value of the property to which such Lien relates as determined in good faith by such Person), (iv) the aggregate amount of all Capital Lease Obligations of such Person, (v) all obligations of such Person to pay a specified purchase price for goods or services, whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vi) all Contingent Obligations of such Person, (vii) all obligations under any Interest Rate Hedges, Other Hedging Agreements or under any similar type of agreement and (viii) all Off-Balance Sheet Liabilities of such Person.  Notwithstanding the foregoing, Indebtedness shall not include trade payables, accrued expenses and deferred Tax and other credits incurred by any Person in the Ordinary Course of Business.

“Indemnified Party” shall have the meaning assigned to that term in Section 7.01.

“Indemnified Taxes” shall mean Taxes other than Excluded Taxes or Other Taxes.

“Information”shall have the meaning assigned to that term in Section 12.05(b).

“Intellectual Property” means all (a) foreign and domestic trademarks, service marks, brand names, certification marks, collective marks, d/b/a’s, Internet domain names, logos, symbols, trade dress, assumed names, fictitious names, trade names, and other indicia of origin, all applications and registrations for all of the foregoing, and all goodwill associated therewith and symbolized thereby, including, but not limited to, all extensions, modifications and renewals of same; (b) foreign and domestic inventions, discoveries and ideas, whether patentable or not, and all patents, registrations, and applications therefor, including, but not limited to, divisions, continuations and continuations-in-part and including, but not limited to, extensions and reissues; (c) Trade Secrets; (d) foreign and domestic published and unpublished works of authorship, whether copyrightable or not, copyrights therein and thereto, and registrations and applications therefor, and all renewals, extensions, restorations and reversions thereof, including computer software and data; and (e) all other intellectual property or proprietary rights and claims or causes of action arising out of or related to any infringement, misappropriation or other violation of any of the foregoing, including, but not limited to, rights to recover for past, present and future violations thereof.

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“Intercreditor Agreement” shall mean the Intercreditor Agreement, dated as of the Closing Date, by and among [   ], Issuer and Purchaser, substantially in the form of Exhibit H hereto, as amended, supplemented or otherwise modified from time to time.

“Interest” shall have the meaning assigned to that term in Section 2.06.

“Interest Expense” shall mean for any period the interest expense of the Credit Parties on a Consolidated Basis for such period (including all imputed interest on Capital Lease Obligations).

“Interest Payment Date” shall have the meaning assigned to that term in Section 2.06(a).

“Interest Rate” shall have the meaning assigned to that term in Section 2.06.

“Interest Rate Hedge” shall mean an interest rate exchange, collar, cap, swap, adjustable strike cap or similar agreements entered into by any Credit Party solely to provide protection to, or minimize the impact upon, the Credit Parties of increasing floating rates of interest applicable to Indebtedness.

“Investment” shall mean, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of the Equity Interests of another Person, (b) a loan, advance or capital contribution to, guarantee or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit.  For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.

“Investor Rights Agreement” shall mean that certain Investor Rights Agreement, dated as of the Closing Date, among the Issuer, the Purchaser and certain Specified Holders substantially in the form of Exhibit E, as amended, supplemented or otherwise modified from time to time.

“Issuer” shall have the meaning set forth in the first paragraph of this Agreement, and shall include each Person which becomes a successor or permitted assign of Issuer.

“ITATS Contract” shall mean Contract No. N68335-06-D-0020 awarded July 19, 2006 by the United States Navy to Issuer.

“ITI” shall mean Innerspace Technology, Inc., a New Jersey corporation.

“Judgment” shall mean any order, decision, decree, award or injunction of any Governmental Authority.

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“Lending Office” shall mean, with respect to the Purchaser, the office or offices of the Purchaser specified in Section 12.02, or such other office or offices of the Purchaser as it may notify the Issuer pursuant to Section 12.02 from time to time.

“Liabilities” shall have the meaning assigned to that term in Section 7.01.

“License” or “Licenses” shall mean any license, permit, directive, authorization, approval or stipulation required to operate the Business at any location.

“Lien” shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement held or asserted in respect of any asset of any kind or nature whatsoever, including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction.

“Life Insurance Policy” shall mean the [   ] Life Insurance Policy.

“Litigation” shall mean any action, proceeding, litigation, investigation, arbitration, mediation or claim.

“Mandatory Redemption Payment” shall have the meaning assigned to that term in Section 10.02(b) hereof.

“Margin Stock” shall have the meaning assigned to that term in Regulation U of the Federal Reserve Board.

“Marketable Securities” shall means shares of Common Stock which (i) are listed or quoted on a United States national securities exchange or quoted on any United States national automated inter dealer quotation system and (ii) are eligible for sale by the Purchaser pursuant to a registration statement effective under the Securities Act, or pursuant to Rule 144(b)(1) of the Securities Act or any similar provision then in force and (iii) are not, at such time, subject to (x) any lock-up or similar restrictions on transfer or (y) any volume restrictions on trading by the Purchaser pursuant to Rule 144(e).

“Material Adverse Effect” shall mean (a) a material adverse change in, or a material adverse effect upon, the assets, properties, operations, business, condition (financial or otherwise), or prospects of the Business, any Credit Party or any of its Subsidiaries, or, (b) a material impairment of the ability of any Credit Party or any Affiliate of any Credit Party to perform under any Transaction Document to which it is a party, or (c) a material adverse effect upon the legality, validity, binding effect, or enforceability against each Credit Party of any Transaction Document to which it is a party.

“Material Contracts” shall have the meaning assigned to that term in the [   ] Loan Documents (as in effect on the Closing Date).

“Maturity Date” shall mean March 31, 2013.

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“Modification” shall mean, with respect to any agreement, instrument or other document, any amendment, supplement or modification of or to any provision of such document, any waiver of any provision of such document, and any consent to any departure by any party from the terms of any provision of such document.

“Most Recent Balance Sheet” shall have the meaning assigned to that term in Section 5.11(c).

“Multiemployer Plan” shall mean a multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code.

“Net Operating Cash Flow” shall mean with respect to any fiscal period of the Credit Parties, EBITDA less (i) Capital Expenditures of the Credit Parties determined on a Consolidated Basis during such period, less (ii) all other cash expenditures of the Credit Parties that are not included in net income of the Credit Parties determined on a Consolidated Basis during such period.

“Net Proceeds” with respect to any sale of assets shall mean cash proceeds received by any of the Credit Parties from such sale, net of (x) the costs of such sale (including Taxes attributable to such sale), and (y) amounts applied to repayment of Indebtedness secured by a Lien on the assets sold.

“Net Progress Payments” shall mean, with respect to each Government Contract pursuant to which Progress Payments have been made, the aggregate amount of such Progress Payments less the aggregate price of the goods relating to such Progress Payments delivered by any Credit Party or any of its Subsidiaries in accordance with the terms of such Government Contract.

“New Mortgages” shall have the meaning assigned to that term in Section 8.14.

“Note Register” shall have the meaning assigned to that term in Section 12.17(b).

“Note” shall have the meaning assigned to that term in the recitals to this Agreement.

“Off-Balance Sheet Liabilities” of any Person shall mean (i) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (ii) any liability of such Person under any sale and leaseback transactions that do not create a liability on the balance sheet of such Person, (iii) any obligation under any lease that is treated as an operating lease for financial accounting purposes and a financing lease for tax purposes (i.e., a synthetic lease) or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheet of such Person.

“[   ] Life Insurance Policy” shall mean key-man life insurance on the life of [   ] in the amount of $2,500,000.

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“[   ] Life Insurance Realization Event” shall mean the death of [   ] and the receipt by any Credit Party of any proceeds from the [   ] Life Insurance Policy.

“Ordinary Course of Business” shall mean the ordinary course of the Credit Parties’ business as conducted on the Closing Date.

“Organization Documents” shall mean, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.

“Other Hedging Agreements” shall mean any foreign exchange contracts, cur­rency swap agreements, commodity agreements or other similar agreements or arrangements designed to protect against fluctuations in currency or commodity values.

“Other Taxes” shall mean all present or future stamp or documentary Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made hereunder or under any other Transaction Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Transaction Document.

“Patent Licenses” shall mean all agreements, whether written or oral, providing for the grant by or to a Person of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in Schedule 5.23(c).

“Patents” shall mean (a) all letters patent (other than letters patent of de minimis value) of the United States or any other country, now existing or hereafter arising, and all improvement patents, reissues, reexaminations, patents of additions, renewals and extensions thereof, including, without limitation, any thereof referred to in Schedule 5.23 (b), and (b) all applications for letters patent of the United States or any other country, now existing or hereafter arising, and all provisionals, divisions, continuations and continuations-in-part and substitutes thereof, including, without limitation, any thereof referred to in Schedule 5.23(b).

“PBGC” shall mean the Pension Benefit Guaranty Corporation established pursuant to Title IV of ERISA, or any successor agency or other Governmental Authority succeeding to the functions thereof.

“Pension Plan” shall mean any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by any Credit Party or any ERISA Affiliate or to which any Credit Party or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.

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“Permitted Acquisition” means any acquisition, whether by merger or otherwise, of all or a substantial portion of the assets or Equity Interests of any Person (the “Target”)by a Credit Party, in each case to the extent that: (a) such acquisition shall not be hostile and shall have been approved by the board of directors (or other similar body) and/or the stockholders or other equity holders of the Target; (b) the aggregate consideration paid in respect of all such acquisitions shall not exceed $500,000, and (c) no Default or Event of Default is in existence or would occur after giving effect to such acquisition.

“Permitted Liens” shall mean (a) Liens in favor of the Purchaser, for its benefit, (b) Liens for Taxes, assessments or other governmental charges not delinquent or being Properly Contested; (c) deposits or pledges to secure obligations under worker’s compensation, social security or similar laws, or under unemployment insurance; (d) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the Ordinary Course of Business; (e) Liens arising by virtue of the rendition, entry or issuance against any Credit Party or any of its Subsidiaries, or any property of any such Person, of any judgment, writ, order or decree, provided that such Liens are in existence for less than twenty (20) consecutive days after it first arises or are being contested in good faith by appropriate proceedings diligently conducted which stay the enforcement of any Lien and for which adequate reserves in accordance with GAAP are being maintained by the Credit Parties and their Subsidiaries; (f) mechanics’, workers’, materialmen’s or other like Liens arising in the Ordinary Course of Business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings diligently conducted which stay the enforcement of any Lien and for which adequate reserves in accordance with GAAP are being maintained by the Credit Parties and their Subsidiaries; (g) Liens placed upon equipment or Real Estate hereafter acquired or leased to secure a portion of the purchase price or lease thereof, provided that (A) any such lien shall not encumber any other property of the Credit Parties and (B) the aggregate amount of Indebtedness incurred as a result of such purchases, during any fiscal year, shall not exceed the amount provided for in Section 9.15(d); (h) Liens disclosed on Schedule 9.02; (i) non-exclusive licenses of Intellectual Property, and leases or subleases of equipment or Real Property, in each case granted to third Persons in the Ordinary Course of Business and which do not interfere in any material respect with the operations of the business of the Credit Parties; and (j) so long as the Intercreditor Agreement is in effect, Liens securing the [   ] Debt.

“Permitted Payment” shall mean any Permitted Share Repurchase and any Permitted Debt Prepayment.

“Permitted Share Repurchase” shall have the meaning assigned to that term in Section 9.06.

“Permitted Debt Prepayment” shall have the meaning assigned to that term in Section 9.06.

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“Person” shall mean any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.

“Plan” shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA, other than a Multiemployer Plan, maintained for employees of the Credit Parties prior to the Closing Date, or any member of the Controlled Group or any such Plan to which any Credit Party or any member of the Controlled Group is required to contribute on behalf of any of its employees.

“Progress Payment Liquidation” shall mean, with respect to any Progress Payment, the delivery by any Credit Party or any of its Subsidiaries of any goods relating to such Progress Payment.

“Progress Payments” shall mean progress payments or other advances made by the applicable Governmental Authority to any Credit Party pursuant to the Government Contracts set forth on Schedule 8.01(p) attached hereto.

“Properly Contested” shall mean contested in good faith by appropriate proceedings diligently conducted which stay the enforcement of any Lien and for which adequate reserves in accordance with GAAP are being maintained by the Credit Parties and their Subsidiaries; provided, that no such Lien shall have any effect on the priority of the Liens in favor of Purchaser or the value of the assets on which Purchaser has such a Lien and a stay of enforcement of any such Lien shall be in effect.

“Purchase Money Indebtedness” shall mean and include (i) Indebtedness (other than the Indebtedness under the Note) of any Credit Party for the payment of all or any part of the purchase price of any equipment, (ii) any Indebtedness (other than the Indebtedness under the Note) of any Credit Party incurred at the time of or within thirty (30) days prior to or one hundred twenty (120) days after the acquisition of any equipment for the purpose of financing all or any part of the purchase price thereof (whether by means of a loan agreement, Capital Lease or otherwise), and (iii) any renewals, extensions or refinancings (but not any increases in the principal amounts) thereof outstanding at the time.

“Purchaser” shall have the meaning set forth in the first paragraph of this Agreement, and shall include each Person which becomes a transferee, successor or assign of the Purchaser.

“Questionnaire” shall mean the perfection questionnaire and the responses thereto provided by the Credit Parties and delivered to Purchaser.

“Ratable Portion” shall mean an amount equal to the product of (a) the net proceeds from a Recovery Event multiplied by (b) a fraction, the numerator of which is the aggregate outstanding principal amount of the Note and the denominator of which is the sum of (x) the aggregate outstanding principal amount of the Note and (y) the aggregate outstanding principal amount of the [   ] Debt.

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“RCRA” shall mean the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq., as same may be amended from time to time.

“Real Property” shall mean, with respect to each Credit Party, all of such Credit Party’s right, title and interest in and to (x) the leased premises identified on Schedules 5.08(a) and 5.08(b) hereto, and (y) any owned or leased premises acquired by such Credit Party after the Closing Date.

“Recovery Event” shall mean any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of any Credit Party.

“Reinvestment Deferred Amount” shall mean, with respect to any Reinvestment Event, the aggregate proceeds received by any Credit Party in connection therewith that are not applied to prepay the Note pursuant to Section 10.02(d) as a result of the delivery of a Reinvestment Notice.

“Reinvestment Event” shall mean any Recovery Event in respect of which the Issuer has delivered a Reinvestment Notice.

“Reinvestment Notice” shall mean a written notice delivered within five (5) Business Days after a Recovery Event, executed by an Authorized Officer stating that no Event of Default has occurred and is continuing and that the Issuer intends and expects to use all or a specified portion of the proceeds in respect of a Recovery Event to acquire or repair assets useful in its business.

“Reinvestment Prepayment Amount” shall mean, with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire or repair assets useful in the Issuer’s business.

“Reinvestment Prepayment Date” shall mean, with respect to any Reinvestment Event, the earlier of (a) the date occurring 120 days after such Reinvestment Event and (b) the date on which the Issuer shall have determined not to, or shall have otherwise ceased to, acquire or repair assets useful in the Issuer’s business with all or any portion of the relevant Reinvestment Deferred Amount.

“Releases” shall have the meaning assigned to that term in Section 5.15(c) hereof.

“Reportable Event” shall mean a reportable event described in Section 4043(b) of ERISA or the regulations promulgated thereunder.

“Required Principal Amortization” shall mean for any period the payments of principal of Indebtedness of the Credit Parties on a Consolidated Basis required to be made during such period (including with respect to Capital Lease Obligations).

“Requirement of Law” or “Requirements of Law” shall mean any requirement, direction, policy or procedure of any Applicable Law or License, Judgment, or Consent.

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“Restricted Payment” shall mean: (a) any dividend or other distribution, direct or indirect (whether in cash or property), on account of any Equity Interests of any Credit Party or any of its Subsidiaries, now or hereafter outstanding, except a dividend payable solely in shares of that class of Equity Interest to the holders of that class; (b) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, retirement, defeasance, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Equity Interests of any Credit Party or any of its Subsidiaries now or hereafter outstanding, or the issuance of a notice of an intention to do any of the foregoing (or setting aside any funds for any of the foregoing purposes); (c) any payment or prepayment of interest on, principal of, premium, if any, redemption, conversion, exchange, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Indebtedness subordinated to the Indebtedness existing pursuant to the Note and this Agreement; (d) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any Equity Interests of any Credit Party or any of its Subsidiaries now or hereafter outstanding; (e) any director fee paid to any member of the Board of Directors of any Credit Party who is also an employee of any Credit Party; (f) any payment by any Credit Party of any management, consulting or similar fees to any Affiliate of any Credit Party, whether pursuant to a management agreement or otherwise; or (g) any payment under any non-compete agreement.

“SEC Reports” with respect to any Person shall mean all forms, reports, statements and other documents (including, without limitation, exhibits, annexes, supplements and amendments to such documents) filed or required to be filed by it, or sent or made available by it to its security holders, under the Exchange Act, the Securities Act, any national securities exchange or quotation system or comparable Governmental Authority since the date of such Person’s initial public offering.

“Securities” shall mean the Note and the Warrant.

“Securities Act” shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations thereunder as the same shall be in effect at the time.

“Security Agreement” shall mean the Security Agreement, dated as of the Closing Date, by and among each Credit Party and the Purchaser, substantially in the form of Exhibit D hereto, as amended, supplemented or otherwise modified from time to time.

“Security Documents” shall mean the Security Agreement, any Control Agreement, any New Mortgage and any other agreement delivered in connection herewith or therewith which purports to grant a Lien in the Purchaser, to secure all or any of the Indebtedness under this Agreement and the Note (or any Guaranty thereof).

“Semaphore Warrants” shall have the meaning assigned to that term in Section 5.18(a) hereof.

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“Solvent” shall mean, with respect to the Credit Parties and their Subsidiaries considered as a whole, based on the Most Recent Balance Sheet, that (i) the assets and the property of the Credit Parties and their Subsidiaries, considered as a whole, exceed the aggregate liabilities (including contingent and unliquidated liabilities) of the Credit Parties and their Subsidiaries, considered as a whole, (ii) after giving effect to the transactions contemplated by this Agreement and the other Transaction Documents, the Credit Parties and their Subsidiaries, considered as a whole, will not be left with unreasonably small capital, and (iii) after giving effect to the transactions contemplated by this Agreement, the Credit Parties and their Subsidiaries, considered as a whole, are able to both service and pay their liabilities as they mature.  In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that is likely to become an actual or matured liability.

“Specified Holders” shall mean Harold K. Fletcher, his estate or surviving spouse, George J. Leon, George J. Leon Family Trust and Jeffrey C. [   ].

“Subordinated Debt” shall mean the unpaid principal of and interest due and owing by the Issuer under the Subordinated Notes (as defined in the Subordination Agreement).

“Subordination Agreement” shall mean the Intercreditor and Subordination Agreement, dated as of the Closing Date, by and among [   ] (or his estate or surviving spouse), [   ]. [   ], Issuer and Purchaser, substantially in the form of Exhibit I hereto, as amended, supplemented or otherwise modified from time to time.

“Subsidiary” of a Person (the “parent”), shall mean a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, by such parent.  For purposes of this definition, “controlled by” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.  Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of a Credit Party.

“Tax” shall mean any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

“Tax Return” shall mean any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

“[   ]” shall mean [   ]., a New Jersey corporation.

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“Termination Event” shall mean (i) a Reportable Event with respect to any Plan or Multiemployer Plan; (ii) the withdrawal of any Credit Party or any member of the Controlled Group from a Plan or Multiemployer Plan during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan; (v) any event or condition (a) which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of any Credit Party or any member of the Controlled Group from a Multiemployer Plan.

“Total Leverage Ratio” shall mean, with respect to each measuring period, the ratio of (a) the aggregate principal balance of all Funded Debt outstanding on the last day of such measuring period to (b) EBITDA for such measuring period.

“Trademark License” shall mean any agreement, whether written or oral, providing for the grant by or to a Person of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule 5.23(c).

“Trademarks” shall mean (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, service marks, elements of package or trade dress of goods or services, logos and other source or business identifiers (other than such items that are of de minimis value), together with the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, including, without limitation, any thereof referred to in Schedule 5.23(b), and (b) all renewals thereof including, without limitation, any thereof referred to in Schedule 5.23(b).

“Trade Secrets” means confidential and proprietary information, trade secrets and know-how, including, but not limited to, processes, schematics, databases, formulae, drawings, prototypes, models, designs, price lists, cost data, financial data, and customer lists.

“Trading with the Enemy Act” shall mean the foreign assets control regulations of the United States Treasury Department (31CFR, Subtitle B, Chapter V, as amended) and any enabling legislation, regulations or executive order relating thereto.

“Transaction Documents” shall mean collectively, this Agreement, the Note, any Guaranty, the Intercreditor Agreement, the Security Documents, the Equity Documents and the Subordination Agreement, as each may be amended, modified, supplemented or restated from time to time.

“Transactions” shall mean the consummation of the transactions contemplated under this Agreement and under the Transaction Documents.

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“Uniform Commercial Code” shall have assigned to that term in Section 1.04 hereof.

“USA PATRIOT Act” shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as the same has been, or shall hereafter be, renewed, extended, amended or replaced.

“Warrant” shall have the meaning assigned to that term in the recitals to this Agreement.

1.02.Accounting Terms; Financial Statements.  All accounting terms used herein and not expressly defined in this Agreement shall have the respective meanings given to them in conformance with GAAP, as consistently applied to the applicable Person.  Financial statements and other information furnished after the date hereof pursuant to the Agreement or the other Transaction Documents shall be prepared in accordance with GAAP as in effect at the time of such preparation, provided, however, that if at any time any change in GAAP would affect the computation of any financial ratio or financial requirement set forth in any Transaction Document, and either the Issuer or the Purchaser shall so request, the Purchaser and the Issuer shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP; provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) the Credit Parties shall provide to the Purchaser financial statements and other documents required under this Agreement which include a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.

1.03.Knowledge of the Credit Parties.  All references to the knowledge of any Credit Party or to facts known by any Credit Party shall mean actual knowledge or notice of a senior officer of such Credit Party or of any of such Credit Party’s Subsidiaries or any division of such Credit Party, as the case may be, or knowledge which such Person could reasonably have acquired through the exercise of reasonable inquiry regarding the accuracy of any representation, warranty, covenant or agreement contained in this Agreement.

1.04.Uniform Commercial Code Terms.  All terms used herein and defined in the Uniform Commercial Code as adopted in the State of New York from time to time (the “Uniform Commercial Code”) shall have the meaning given therein unless otherwise defined herein.  Without limiting the foregoing, the terms “accounts”, “chattel paper”, “instruments”, “general intangibles”, “payment intangibles”, “supporting obligations”, “securities”, “investment property”, “documents”, “deposit accounts”, “software”, “letter of credit rights”, “inventory”, “equipment” and “fixtures”, as and when used shall have the meanings given to such terms in Articles 8 or 9 of the Uniform Commercial Code.  To the extent the definition of any category or type of collateral is expanded by any amendment, modification or revision to the Uniform Commercial Code, such expanded definition will apply automatically as of the date of such amendment, modification or revision.

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1.05.Certain Matters of Construction.  The terms “herein”, “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision.  All references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement.  Any pronoun used shall be deemed to cover all genders.  Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa.  All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations.  Unless otherwise provided, all references to any instruments or agreements to which Purchaser is a party, including references to any of the Transaction Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof.  All references herein to the time of day shall mean the time in New York, New York.  Whenever the words “including” or “include” shall be used, such words shall be understood to mean “including, without limitation” or “include, without limitation”.  Unless the context otherwise requires, “or” is not exclusive.  A Default or Event of Default shall be deemed to exist at all times during the period commencing on the date that such Default or Event of Default occurs to the date on which such Default or Event of Default is waived in writing pursuant to this Agreement or, in the case of a Default, is cured within any period of cure expressly provided for in this Agreement; and an Event of Default shall “continue” or be “continuing” until such Event of Default has been waived in writing by the Purchaser.  Any Lien referred to in this Agreement or any of the Security Documents as having been created in favor of Purchaser, any agreement entered into by Purchaser pursuant to this Agreement or any of the Transactions Documents, any payment made by or to or funds received by Purchaser pursuant to or as contemplated by this Agreement or any of the Transaction Documents, or any act taken or omitted to be taken by Purchaser, shall, unless otherwise expressly provided, be created, entered into, made or received, or taken or omitted, for the benefit or account of Purchaser.  All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or otherwise within the limitations of, another covenant shall not avoid the occurrence of a default if such action is taken or condition exists.  In addition, all representations and warranties hereunder shall be given independent effect so that if a particular representation or warranty proves to be incorrect or is breached, the fact that another representation or warranty concerning the same or similar subject matter is correct or is not breached will not affect the incorrectness of a breach of a representation or warranty hereunder.

ARTICLE 2

PURCHASE AND SALE OF THE SECURITIES

2.01.Purchase and Sale of the Note.  Subject to the terms and conditions herein set forth, Issuer agrees that it will issue and sell to Purchaser, and Purchaser agrees that it will acquire from the Issuer, on the Closing Date, the Note substantially in the form attached hereto as Exhibit A, appropriately completed in conformity herewith, in the principal amount of $600,000, at the purchase price of $573,481.

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2.02.Purchase and Sale of the Warrant.  Subject to the terms and conditions herein set forth, Issuer agrees that it will issue and sell to Purchaser, and Purchaser agrees that it will acquire from Issuer, on the Closing Date, the Warrant in substantially the form attached hereto as Exhibit B, appropriately completed in conformity herewith initially exercisable for 50,000 shares of Common Stock at the purchase price of $26,519.

2.03.Expenses.  At the Closing, the Issuer shall reimburse all of the Purchaser’s reasonable out-of-pocket expenses (including fees, charges and disbursements of counsel and consultants) incurred in connection with (i) the negotiation and execution and delivery of this Agreement and the other Transaction Documents and the Purchaser’s due diligence investigation and (ii) the transactions contemplated by this Agreement and the other Transaction Documents against receipt of reasonably detailed invoices therefor, which payments shall be made by wire transfer of immediately available funds to an account or accounts designated by the Purchaser.

2.04.Closing.  The purchase and issuance of the Securities shall take place at the closing (the “Closing”) to be held at the offices of Schiff Hardin LLP, 666 Fifth Avenue, 17th Floor, New York, New York 10103 at 10:00 a.m., New York time, on _______ __, 2012 (the “Closing Date”).  At the Closing, the Issuer shall deliver the Note and the Warrant to the Purchaser against delivery by the Purchaser to the Issuer of the respective purchase prices therefor.  Payment of the purchase price for the Note and the purchase price for the Warrant shall be by wire transfer of immediately available funds to an account designated by the Issuer prior to the Closing.

2.05.Financial Accounting Positions; Tax Reporting.  Each of the parties hereto agrees to take reporting and other positions with respect to the Securities which are consistent with the purchase price of the Securities set forth herein for all financial accounting purposes, unless otherwise required by applicable GAAP or Commission rules (in which case the parties agree only to take positions inconsistent with the purchase price of the Securities set forth herein provided that the Purchaser has consented thereto, which consent shall not be unreasonably withheld).  If any position inconsistent with the purchase price of the Securities set forth herein is taken, the covenants shall be adjusted to the extent necessary to eliminate any impact caused by such inconsistent position.  Each of the parties to this Agreement agrees to take reporting and other positions with respect to the Securities which are consistent with the purchase price of the Securities set forth herein for all other purposes, including for all federal, state and local tax purposes, except as otherwise required by Applicable Law.

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2.06.Interest.  The Issuer shall pay interest (“Interest”) on the outstanding principal amount of the Note at the rate of fourteen percent (14%) per annum (the “Interest Rate”).  Interest on the Note shall accrue from and including the date of issuance through and until repayment of the principal amount of the Note and payment of all Interest in full, and all computations of Interest hereunder shall be made based on the actual number of days elapsed over a year of 360 days.  Interest shall be paid as provided in this Section 2.06 and Section 10.02 and all Interest accrued and unpaid through the Maturity Date shall be paid in full on the Maturity Date:

(a)Basic Interest.  Interest shall be paid monthly in arrears on the last day of each calendar month of each year or, if any such date shall not be a Business Day, on the immediately preceding Business Day to occur prior to such date (each date upon which interest shall be so payable, an “Interest Payment Date”), beginning on July 31, 2012, by wire transfer of immediately available funds to an account at a bank designated in writing by the Purchaser.  In the absence of any such written designation, any such Interest payment shall be deemed made on the date a check in the applicable amount payable to the order of the Purchaser is delivered to the Purchaser at its last address as reflected in the Note Register of the Issuer; if no such address appears, then to the Purchaser in care of the last address in such Note Register of any predecessor holder of the Note (or its predecessor).

(b)Default Interest.  Notwithstanding any provision of this Agreement to the contrary, but subject to Section 2.06(d), any overdue principal of and overdue Interest on the Note shall bear interest, payable on demand in immediately available funds, for each day from the date payment thereof was due to the date of actual payment, at a rate equal to the sum of (i) the Interest Rate and (ii) an additional ten percent (10%) per annum.  Additionally, upon and during the occurrence of an Event of Default, the Note shall bear interest in addition to (and not in substitution of) the Interest Rate, from the date of the occurrence of such Event of Default until such Event of Default is cured or waived, payable on demand in immediately available funds, at a rate equal to ten percent (10%) per annum.  Subject to Applicable Law, any interest that shall accrue on overdue interest on the Note (as provided in this Section 2.06(b)) and shall not have been paid in full on or before the next Interest Payment Date to occur after the date on which the overdue interest became due and payable shall itself be deemed to be overdue interest to which this Section 2.06(b) shall apply.

(c)Late Fee.  Notwithstanding the foregoing, if the Issuer fails to pay the Obligations in full on or prior to the Maturity Date, then the Credit Parties shall pay the Purchaser a late fee in the amount of $25,000.

(d)No Usurious Interest. In the event that any interest rate(s) or premiums provided for in this Section 2.06 or otherwise in this Agreement, shall be determined to be unlawful, such interest rate(s) shall be computed at the highest rate permitted by Applicable Law.  Any payment by the Credit Parties of any interest amount in excess of that permitted by Applicable Law shall be considered a mistake, with the excess being applied to the principal amount of the Note without prepayment premium or penalty; if no such principal amount is outstanding, such excess shall be returned to the Credit Parties.

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ARTICLE 3

CONDITIONS TO THE OBLIGATIONS OF THE

PURCHASERS TO PURCHASE THE SECURITIES

The obligation of the Purchaser to purchase the Securities and to pay the purchase price therefor at the Closing and to perform any obligations hereunder shall be subject to the satisfaction as determined by, or waiver by, the Purchaser of the following conditions on or before the Closing Date; provided, however, that any waiver of a condition shall not be deemed a waiver of any breach of any representation, warranty, agreement, term or covenant or of any misrepresentation by the Credit Parties.

3.01.Representations and Warranties.  The representations and warranties of the Credit Parties contained in Article 5 hereof shall be true and correct at and as of the Closing Date as if made at and as of such date, and, by its execution hereof, the Issuer certifies to the foregoing.

3.02.Compliance with this Agreement.  The Credit Parties shall have performed and complied with all of their agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Credit Parties on or before the Closing Date, and, by its execution hereof, the Issuer certifies to the foregoing.

3.03.Secretary’s Certificates.  The Purchaser shall have received a certificate from each Credit Party, dated the Closing Date and signed by the Secretary or an Assistant Secretary of such Credit Party, certifying (a) that the attached copies of the Organization Documents of such Credit Party, as the case may be, (or other applicable organizational or constituent documents), and resolutions of the Board of Directors (or other applicable authority) of such Credit Party approving the Transaction Documents to which it is a party and the transactions contemplated hereby and thereby are all true, complete and correct and remain unamended and in full force and effect, and (b) the incumbency and specimen signature of each officer of such Credit Party executing any Transaction Document to which it is a party or any other document delivered in connection herewith and therewith on behalf of such Credit Party.

3.04.Transaction Documents.  The Purchaser shall have received duly executed Transaction Documents and true, complete and correct copies of such agreements, schedules, exhibits, certificates, documents, financial information and filings as it may reasonably request in connection with or relating to the transactions contemplated hereby, all in form and substance satisfactory to the Purchaser.

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3.05.Purchase of Securities Permitted by Applicable Laws.  The acquisition of and payment for the Securities to be acquired by the Purchaser hereunder and the consummation of the transactions contemplated hereby and by the Transaction Documents (a) shall not be prohibited by any Requirement of Law, (b) shall not subject the Purchaser to any penalty or other onerous condition under or pursuant to any Requirement of Law, and (c) shall be permitted by all Requirements of Law to which the Purchaser or the transactions contemplated by or referred to herein or in the Transaction Documents are subject; and the Purchaser shall have received such certificates or other evidence as the Purchaser may reasonably request to establish compliance with this condition.

3.06.[   ] Loan Documents.  The Purchaser shall have received a true, correct and complete copy of the [   ] Loan Documents as in effect on the Closing Date.1

3.07.Approval of Counsel to the Purchaser.  All actions and proceedings hereunder and all agreements, schedules, exhibits, certificates, financial information, filings and other documents required to be delivered by the Credit Parties and each of their respective Subsidiaries hereunder or in connection with the consummation of the transactions contemplated hereby, and all other related matters, shall have been in form and substance acceptable to Schiff Hardin LLP, counsel to the Purchaser, in its reasonable judgment.

3.08.Consents and Approvals.  All Consents, exemptions, authorizations, or other actions by, or notices to, or filings with, Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to those Contractual Obligations of each Credit Party and each of its Subsidiaries necessary, desirable, or required in connection with the execution, delivery or performance (including the payment of interest on the Note and the issuance of Common Stock upon the exercise of the Warrant) by such Credit Party, or enforcement against such Credit Party of the Transaction Documents to which it is a party, shall have been obtained and be in full force and effect, and the Purchaser shall have been furnished with appropriate evidence thereof, and all waiting periods shall have lapsed without extension or the imposition of any conditions or restrictions.

3.09.Security Documents.  The Collateral shall be subject to no Liens in favor of any Persons (other than Permitted Liens, and Liens to be terminated on the Closing Date).

3.10.No Material Judgment or Order.  There shall not be on the Closing Date any judgment or order of a court of competent jurisdiction or any ruling of any Governmental Authority or any condition imposed under any Requirement of Law which, in the judgment of the Purchaser, would prohibit the purchase of the Securities hereunder or subject the Purchaser to any penalty or other onerous condition under or pursuant to any Requirement of Law if the Securities were to be purchased hereunder.

1           Note:  The [   ] will need to be amended to permit this transaction.

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3.11.[Reserved].

3.12.[Reserved].

3.13.No Litigation.  No Litigation shall have been commenced or threatened, and no investigation by any Governmental Authority shall have been commenced or threatened:  (i) seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions, or (ii) which, if resolved adversely to any such Person, could reasonably be expected to have a Material Adverse Effect.

3.14.[Reserved].

3.15.[Reserved].

3.16.Adverse Change.  Nothing shall have occurred since March 31, 2012, which the Purchaser shall determine has had, or could reasonably be expected to have, a Material Adverse Effect.

3.17.[Reserved].

3.18.Fees and Expenses.  On the Closing Date, the Purchaser shall have received all costs, fees and expenses contemplated by Section 2.03.

3.19.Conduct of Business.  Since March 31, 2012, the Credit Parties shall have conducted their business in the Ordinary Course of Business.

3.20.Transfer Taxes.  The Credit Parties shall pay all (i) sales, use, transfer, real property transfer and other similar Taxes, if any, arising out of or in connection with the transactions effected pursuant to this Agreement and (ii) costs relating to the preparation and filing of any Tax Returns relating thereto.

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3.21.Landlord Waivers and Agreements. The Purchaser shall have received the waivers and agreements in accordance with Section 8.16.

ARTICLE 4

CONDITIONS TO THE OBLIGATIONS OF

THE ISSUER TO ISSUE AND SELL THE SECURITIES

The obligations of the Issuer to issue and sell the Securities and to perform their other obligations hereunder relating thereto shall be subject to the satisfaction as determined by, or waiver by, the Issuer of the following conditions on or before the Closing Date:

4.01.Representations and Warranties.  The representations and warranties of the Purchaser contained in Article 6 hereof shall be true and correct at and as of the date hereof and the Closing Date as if made at and as of such date.

4.02.Compliance with this Agreement.  The Purchaser shall have performed and complied with all of the agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Purchaser on or before the Closing Date.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES

The Credit Parties, jointly and severally, represent and warrant to the Purchaser that the following are, and after giving effect to the transactions contemplated by the Transaction Documents will be, true, correct and complete:

5.01.Corporate Existence and Power.  Each Credit Party and each of its Subsidiaries:  (a) is a corporation, limited liability company or limited partnership, as applicable, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently, or is currently proposed to be, engaged; (c) is duly qualified as a foreign entity, licensed and in good standing under the laws of its state of organization and of each other jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except to the extent that the failure to so qualify would not have a Material Adverse Effect; and (d) has the power and authority to execute, deliver and perform its obligations under each Transaction Document to which it is or will be a party and to borrow hereunder.  Schedule 5.01 contains a true, complete and correct list of each Credit Party’s and each of its Subsidiaries’ jurisdiction of organization and each jurisdiction where it is qualified to do business as a foreign entity.  Neither ITI nor Tel Holdings engages in any business or otherwise conducts any activities.

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5.02.Authorization; No Contravention.  The execution, delivery and performance by each Credit Party of this Agreement and each other Transaction Document to which it is or will be a party and the consummation of the transactions contemplated hereby and thereby, including the issuance of, or performance of the terms of, the Securities:  (a) has been duly authorized by all necessary action (including, obtaining approval of its stockholders, partners, general partners, members or other applicable equity owners, if necessary); (b) do not and will not contravene the terms of the Organization Documents of such Credit Party or any of its Subsidiaries (or any other applicable organizational or constituent documents), or any amendment thereof or any Requirement of Law applicable to such Person or such Person’s assets, business or properties; (c) do not and will not (i) conflict with, contravene, result in any violation or breach of or default under (with or without the giving of notice or the lapse of time or both), (ii) create in any other Person a right or claim of termination or amendment of, or (iii) require modification, acceleration or cancellation of, any Contractual Obligation of any Credit Party or any of its Subsidiaries; and (d) do not and will not result in the creation of any Lien (or obligation to create a Lien) against any property, asset or business of any Credit Party or any of its Subsidiaries (other than Permitted Liens).

5.03.Governmental Authorization; Third Party Consents.  No approval, consent, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirement of Law or Contractual Obligation, and no lapse of a waiting period under a Requirement of Law or Contractual Obligation, is necessary or required in connection with the execution, delivery or performance by (including the payment of interest on the Note), or enforcement against, any Credit Party of the Transaction Documents to which it is a party or the consummation of the transactions contemplated hereby or thereby.

5.04.Binding Effect.  This Agreement has been, and each of the Transaction Documents to which any Credit Party will be a party will be, duly executed and delivered by such Credit Party and this Agreement constitutes, and such Transaction Documents will constitute, the legal, valid and binding obligation of such Credit Party enforceable against such Credit Party in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity relating to enforceability.

5.05.Litigation.  Except as set forth in the SEC Reports, there are no legal actions, suits, proceedings, claims or disputes pending or, to the knowledge of any Credit Party, threatened, at law, in equity, in arbitration or before any Governmental Authority against or affecting such Credit Party or any of its Subsidiaries that (a) purport to affect or pertain to this Agreement, any other Transaction Document, or any of the transactions contemplated hereby or thereby, or (b) could reasonably be expected to result in equitable relief or in monetary judgments, individually or in the aggregate, in excess of $100,000.  No injunction, writ, temporary restraining order, decree or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of the Transaction Documents.

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5.06.Compliance with Laws.  Each Credit Party and each of its Subsidiaries is in compliance with all Requirements of Law.

5.07.No Default or Breach.  No event has occurred and is continuing or would result from the incurring of obligations by the Credit Parties under the Transaction Documents which constitutes or, with the giving of notice or lapse of time or both, would constitute an Event of Default.  Neither any Credit Party nor any of its Subsidiaries is in default under or with respect to any Contractual Obligation in any material respect.

5.08.Title to Properties.

(a)Schedule 5.08(a) contains a true, complete and correct list of all owned real property reflected on the Most Recent Balance Sheet or used in connection with the respective businesses of the Credit Parties and each of their respective Subsidiaries.  Each Credit Party and/or each of its Subsidiaries has good indefeasible and marketable title in and to all real property and good title to all other properties reflected on the Most Recent Balance Sheet or used in connection with their respective businesses, in each case, free and clear of all Liens, liabilities and rights except as provided on Schedule 5.08(a).

(b)Schedule 5.08(b) contains a list of all real property leases reflected on the Most Recent Balance Sheet or used in connection with the respective businesses of the Credit Parties and each of their respective Subsidiaries.  Each Credit Party and/or each of its Subsidiaries holds all of the right, title and interest of the tenant under the leases reflected on the Most Recent Balance Sheet or used in connection with their respective businesses free and clear of all Liens, liabilities and rights except as provided on Schedule 5.08(b).

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5.09.Use of Real Property.  None of the Credit Parties nor any of their Subsidiaries owns any Real Property.  Except as set forth in the SEC Reports, (x) the leased real properties reflected on the Most Recent Balance Sheet or used in connection with the respective businesses of the Credit Parties and their respective Subsidiaries are used and operated in compliance and conformity with all Contractual Obligations and Requirements of Law, except to the extent that the failure so to comply would not have a Material Adverse Effect, and (y) neither any Credit Party nor any of its Subsidiaries has received notice of violation of any applicable zoning or building regulation, ordinance or other law, order, regulation or other Requirements of Law relating to the operations of any Credit Party or any of its Subsidiaries and there is no such violation.  Each lease relating to leased real property reflected on the Most Recent Balance Sheet or used in connection with the business of the Credit Parties or any of their respective Subsidiaries, is in full force and effect, and the applicable Credit Party and/or Subsidiary enjoys peaceful and undisturbed possession thereunder.  There is no default on the part of any Credit Party or any of its Subsidiaries or event or condition which (with notice or lapse of time, or both) would constitute a default on the part of any Credit Party or any of its Subsidiaries, under any such lease.  There are no pending or, to the knowledge of any Credit Party, threatened condemnation or eminent domain proceedings that would affect any part of the leased property reflected on the Most Recent Balance Sheet or used in connection with the business of the Credit Parties and their respective Subsidiaries.  There is no Litigation pending or, to the knowledge of any Credit Party, threatened against the real property or the leased property on the Most Recent Balance Sheet or used in connection with the business of the Credit Parties and their respective Subsidiaries which would in any way affect title to such real property or leased property.

5.10.Taxes.

(a)Each Credit Party and each of its Subsidiaries has filed all Tax Returns that it was required to file.  All such Tax Returns were true, correct and complete in all material respects.  All Taxes owed by any Credit Party or any of its Subsidiaries (whether or not shown on any Tax Return) have been paid.  There are no Liens on any of the assets of any Credit Party or any of their respective Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Tax, other than Permitted Liens.  The Issuer has, since its inception, been treated as a corporation for federal, state and local income Tax purposes.

(b)Each Credit Party and each of its Subsidiaries has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

(c)There is no dispute or claim concerning any Tax liability of any Credit Party or any of its Subsidiaries either (i) claimed or raised by any Governmental Authority in writing or (ii) as to which any Credit Party has knowledge based upon personal contact with any agent of such authority.

(d)Neither any Credit Party nor any of its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

(e)Neither any Credit Party nor any of its Subsidiaries has any liability for the Taxes of any Person other than such Credit Party and its Subsidiaries (i) as a transferee or successor, (ii) by contract, or (iii) otherwise.

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(f)The Issuer has not been a United States real property holding corporation within the meaning of Code Sec. 897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii).

(g)Neither any Credit Party nor any of its Subsidiaries has participated in any listed transaction, tax shelter or reportable transaction as described in the Code and Treasury Regulations.

(h)Neither any Credit Party nor any of its Subsidiaries (i) has been a member of an affiliated group (within the meaning of Code Section 1504) filing a consolidated federal income Tax Return (other than an affiliated group the common parent of which was the Issuer) or (ii) has any liability for the Taxes of any Person (other than any of the Credit Parties or its Subsidiaries) under Treas. Reg. § 1.1502-6 (or any similar provision of state, local, or foreign law).

(i)The unpaid Taxes of the Credit Parties do not, as of the Closing Date, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the most recent balance sheet (rather than in any notes thereto).

(j)Neither any Credit Party nor any of its Subsidiaries has a permanent establishment or office or fixed place of business outside the United States.

(k)Any reference in this Section 5.10 to any Credit Party shall be deemed to include each predecessor of such Credit Party, each subsidiary of such Credit Party, and each entity with respect to which such Credit Party has successor or transferee liability.

5.11.SEC Reports; Financial Statements and Projections.

(a)Issuer has filed all SEC Reports and has made available to the Purchaser each SEC Report.  None of the Credit Parties has any knowledge of any event occurring on or prior to the Closing Date (other than the transactions contemplated by this Agreement) that would require the filing of a Form 8-K after the Closing.  The SEC Reports of Issuer, including, without limitation, any financial statements or schedules included or incorporated therein by reference, (i) comply in all material respects with the requirements of the Exchange Act or the Securities Act or both, as the case may be, applicable to those SEC Reports and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated or necessary in order to make the statements made in those SEC Reports, in light of the circumstances under which they were made, not misleading.  None of the Credit Parties (other than Issuer) (i) is subject to the periodic reporting requirements of the Exchange Act or is otherwise required to file any documents with the Commission or any national securities exchange or quotation service or comparable Governmental Authority, or (ii) has filed a registration statement that has not yet become effective under the Securities Act.

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(b)The Chief Executive Officer and the Chief Financial Officer of Issuer have signed, and Issuer has furnished to the Commission, all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  Such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn; and none of the Credit Parties and any of their respective officers has received notice from any governmental entity questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certifications.  The Credit Parties are otherwise in compliance in all material respects with all applicable effective provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations issued thereunder by the Commission.

(c)The balance sheet of the Credit Parties on a Consolidated Basis dated as of December 31, 2011 (the “Most Recent Balance Sheet”) furnished to the Purchaser on the Closing Date is complete in all material respects (but without footnote disclosures) and fairly reflects the financial condition of the Credit Parties on Consolidated Basis as of December 31, 2011 since which date there have been no material changes to the financial condition of the Credit Parties.

(d)[Reserved].

(e)Except as set forth on Schedule 5.11, each of the consolidated balance sheets of the Credit Parties and the related consolidated statements of income, stockholders’ equity and cash flow, together with the notes thereto (collectively, the “Financial Statements”), which are included in or incorporated by reference into the SEC Reports of the Issuer filed on or after January 1, 2007 fairly present, in all material respects, the financial position of each of the Credit Parties as of the respective dates thereof, and the results of operations and cash flows of each of the Credit Parties as of the respective dates or for the respective periods set forth therein, all in conformity with GAAP consistently applied during the periods involved, except as otherwise set forth in the notes thereto and subject, in the case of unaudited quarterly financial statements, to normal year-end audit adjustments.  Except as set forth on the face of the balance sheets which are a part of the Financial Statements, none of the Credit Parties had any material obligation, indebtedness or liability (whether accrued, absolute, contingent or otherwise, and whether due or to become due), other than those incurred since March 31, 2012 in the Ordinary Course of Business and which are fully reflected on the Credit Parties’ books of account and which, individually or in the aggregate, would not have a Material Adverse Effect.

5.12.Operating Company.  Each Credit Party is “an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital” within the meaning of the U.S. Department of Labor plan asset regulations, 29 C.F. R. §2510.3 101.

5.13.Disclosure.

(a)Agreement and Other Documents.  This Agreement, together with all exhibits and schedules hereto, and the agreements, certificates and other documents furnished to the Purchaser by or on behalf of the Credit Parties and their respective Subsidiaries at the Closing, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading.

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(b)Material Adverse Effects.  There is no fact known to any Credit Party which such Credit Party has not disclosed to the Purchaser in writing which could reasonably be expected to have a Material Adverse Effect.

5.14.Absence of Certain Changes or Events.  Since March 31, 2012, except as set forth in the SEC Reports, neither any Credit Party nor any of its Subsidiaries has (i) issued any stock, bonds or other corporate securities, (ii) borrowed any amount or incurred any liabilities (absolute or contingent), other than in the Ordinary Course of Business, in excess of $25,000, (iii) discharged or satisfied any Lien or incurred or paid any obligation or liability (absolute or contingent), other than in the Ordinary Course of Business, in excess of $25,000, (iv) declared or made any payment or distribution to the holders of its Equity Interests or purchased or redeemed any shares of its Equity Interests, (v) mortgaged, pledged or subjected to Lien any of its assets, tangible or intangible, (vi) sold, assigned or transferred any of its tangible assets, or canceled any debts or claims, (vii) sold, assigned or transferred any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets, (viii) suffered any losses of property, or waived any rights of substantial value, (ix) suffered any Material Adverse Effect, (x) expended any material amount, granted any bonuses or extraordinary salary increases, (xi) entered into any transaction involving consideration in excess of $50,000, except in connection with such Person’s performance, in the Ordinary Course of Business, under any Government Contract in effect as of March 31, 2012, or as otherwise contemplated hereby, or (xii) entered into any agreement or transaction, or amended or terminated any agreement, with an Affiliate.

5.15.O.S.H.A. and Environmental Compliance.

(a)Each Credit Party and each of its Subsidiaries has duly complied in all material respects with, and its facilities, business, assets, property, leaseholds, Real Property and equipment are in compliance in all material respects with and (the provisions of the Federal Occupational Safety and Health Act, the Environmental Protection Act, RCRA and all other Environmental Laws; there are no outstanding citations, notices or orders of non-compliance issued to any Credit Party or any of its Subsidiaries as of the Closing Date or relating to their business, assets, property, leaseholds, Real Property or equipment under any such laws, rules or regulations;

(b)Each Credit Party and each of its Subsidiaries has all federal, state and local licenses, certificates or permits relating to all applicable Environmental Laws necessary to operate the business of the Credit Parties and its Subsidiaries; and

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(c)(i) There are no signs of releases, spills, discharges, leaks or disposal (collectively referred to as “Releases”), of Hazardous Substances at, upon, under or within any Real Property owned or leased by any Credit Party or any of its Subsidiaries, (ii) there are no underground storage tanks or to the best of any Credit Party’s knowledge polychlorinated biphenyls on any Real Property owned or leased by any Credit Party or any of its Subsidiaries, (iii) no Real Property owned or leased by any Credit Party or any of its Subsidiaries has ever been used as a treatment, storage or disposal facility of Hazardous Waste; (iv) no Hazardous Substances or substances governed by an Environmental Law are present on any Real Property owned or leased by any Credit Party or any of its Subsidiaries excepting such quantities as are handled in compliance with all applicable manufacturer’s instructions and Environmental Laws and in proper storage containers and as are necessary for the operation of the commercial business of the Credit Parties, their respective Subsidiaries or of their respective tenants; and (v) all underground storage tanks on the Real Property are in good condition and are being maintained in compliance with all applicable federal, state and local laws and regulations, including all Environmental Laws.

5.16.Investment Company.  No Credit Party is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

5.17.Subsidiaries.

(a)Schedule 5.17 sets forth a complete and accurate list of all of the Subsidiaries of each Credit Party as of the Closing Date together with their respective jurisdictions of incorporation or organization.  All of the outstanding Equity Interests in, the Subsidiaries are validly issued, fully paid and non-assessable.  Except as set forth on Schedule 5.17, as of the Closing Date, all of the outstanding Equity Interests in each of the Subsidiaries are owned by a Credit Party or by a wholly-owned Subsidiary free and clear of any Liens.  No Subsidiary has outstanding options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating the Subsidiary to issue, transfer or sell any securities of the Subsidiary.

(b)Except for the Subsidiaries of the Credit Parties, no Credit Party owns of record or beneficially, directly or indirectly, (i) any Equity Interests convertible into Equity Interests any other Person, and (ii) any Equity Interest in any limited liability company, partnership, joint venture or other non-corporate business enterprises.

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5.18.Capitalization.

(a)Schedule 5.18 sets forth, as of the Closing Date (after giving effect to the transactions contemplated hereby), a true and complete listing of each class of authorized Equity Interests of each Credit Party and its Subsidiaries, of which all of such issued Equity Interests are validly issued and outstanding, and, with respect to the Equity Interests of Issuer’s Subsidiaries, such Equity Interests are owned beneficially and of record by the Persons and in the amounts listed on Schedule 5.18.  Schedule 5.18 also sets forth a list of all holders of warrants, rights and securities convertible into Equity Interests of each Credit Party, together with the number of Equity Interests to be issued upon the exercise or conversion of such warrants, rights and convertible securities.  No Credit Party has any Equity Interests held in treasury.  As of the Closing Date, after giving effect to the transactions contemplated hereby and in the other Transaction Documents, there will be:  (i) 2,697,215 shares of Common Stock issued and outstanding; (ii) 156,920 shares of Common Stock reserved for issuance upon exercise of the warrants issued to [   ] [   ]. (the “[   ] Warrants”); (iii) 50,000 shares of Common Stock reserved for issuance upon exercise of the Warrant (iv) 362,678 shares of Common Stock reserved for issuance pursuant to the exercise of stock options issued or issuable in accordance with the terms of the 2003 and 2006 Employee Stock Option Plans of the Credit Parties (which options shall not in the aggregate exceed 14.27% of the fully diluted capital stock of the Issuer) (“Employee Options”); and (v) 10,416 shares of Common Stock reserved for issuance upon exercise of the warrants issued to [   ] (the “Semaphore Warrants”).  The Warrant, the Employee Options, the [   ] Warrants, the Semaphore Warrants and all outstanding Equity Interests of the Issuer have been duly authorized by all necessary corporate action.  All outstanding Equity Interests of the Issuer are, and upon exercise of the Warrant, the Employee Options, the [   ] Warrants and the Semaphore Warrants, when issued and paid for in accordance with their terms, will be, validly issued, fully paid and non-assessable and shall be free and clear of all Liens and the issuance of the foregoing has not been or will not be, as the case may be, subject to preemptive rights in favor of any Person and will not result in the issuance of any additional Equity Interests of the Issuer or the triggering of any anti-dilution or similar rights contained in any options, warrants, debentures or other securities or agreements of the Issuer.

(b)On the Closing Date, except for the Warrant, the Semaphore Warrants, the [   ] Warrants and the Employee Options, there will be no outstanding securities convertible into or exchangeable for the Equity Interests of any Credit Party or any of its Subsidiaries or options, warrants or other rights to purchase or subscribe to the Equity Interests of any Credit Party or any of its Subsidiaries or contracts, commitments, agreements, understandings or arrangements of any kind to which any Credit Party or any of its Subsidiaries is a party relating to the issuance of any Equity Interests of any Credit Party or any of its Subsidiaries, any such convertible or exchangeable securities or any such options, warrants or rights.

5.19.Private Offering.  No form of general solicitation or general advertising was used by any Credit Party or any of its Subsidiaries, or their respective representatives in connection with the offer or sale of the Securities.  No registration of the Securities pursuant to the provisions of the Securities Act or the state securities or “blue sky” laws will be required for the offer, sale or issuance of the Securities pursuant to this Agreement.  Assuming the accuracy of Purchaser’s representations and warranties contained in Section 6.04, each Credit Party agrees that neither it, nor anyone acting on its behalf, will offer or sell the Securities or any other security so as to require the registration of the Securities pursuant to the provisions of the Securities Act or any state securities or “blue sky” laws, unless such Securities are so registered.

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5.20.Broker’s, Finder’s or Similar Fees.  Except as set forth on Schedule 5.20, there are no brokerage commissions, finder’s fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with any Credit Party or any of its Subsidiaries, or any action taken by any such Person.

5.21.Labor Relations.  Neither any Credit Party nor any of its Subsidiaries has committed or is engaged in any unfair labor practice.  Except as set forth in the SEC Reports, there is (a) no unfair labor practice complaint pending or threatened against any Credit Party or any of its Subsidiaries before the National Labor Relations Board or any other Governmental Authority and no grievance or arbitration proceeding arising out of or under collective bargaining agreements is so pending or threatened, (b) no strike, labor dispute, slowdown or stoppage pending or threatened against any Credit Party or any of its Subsidiaries, (c) no union representation question existing with respect to the employees of any Credit Party or any of its Subsidiaries and no union organizing activities are taking place, and (d) no employment contract with any employee or independent contractor of any Credit Party or any of its Subsidiaries.  Each Credit Party and each of its Subsidiaries is in compliance in all material respects with all Applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours.  Neither any Credit Party nor any of its Subsidiaries is a party to any collective bargaining agreement.

5.22.Employee Benefit Plans.  Neither any Credit Party nor any member of the Controlled Group maintains or contributes to any Plan other than those listed on Schedule 5.22(a) hereto.  Except as set forth in the SEC Reports, (i) no Plan has incurred any “accumulated funding deficiency,” as defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code, whether or not waived, and each Credit Party and each member of the Controlled Group has met all applicable minimum funding requirements under Section 302 of ERISA in respect of each Plan, (ii) each Plan which is intended to be a qualified plan under Section 401(a) of the Code as currently in effect has been determined by the Internal Revenue Service to be qualified under Section 401(a) of the Code and the trust related thereto is exempt from federal income Tax under Section 501(a) of the Code, (iii) neither any Credit Party nor any member of the Controlled Group has incurred any liability to the PBGC other than for the payment of premiums, and there are no premium payments which have become due which are unpaid, (iv) no Plan has been terminated by the plan administrator thereof nor by the PBGC, and there is no occurrence which would cause the PBGC to institute proceedings under Title IV of ERISA to terminate any Plan, (v) at this time, the current value of the assets of each Plan exceeds the present value of the accrued benefits and other liabilities of such Plan and neither any Credit Party nor any member of the Controlled Group knows of any facts or circumstances which would materially change the value of such assets and accrued benefits and other liabilities, (vi) neither any Credit Party nor any member of the Controlled Group has materially breached any of the responsibilities, obligations or duties imposed on it by ERISA with respect to any Plan, (vii) neither any Credit Party nor any member of a Controlled Group has incurred any material liability for any excise Tax arising under Section 4972 or 4980B of the Code, and, to the best of each Credit Party’s knowledge, no fact exists which could give rise to any such liability, (viii) neither any Credit Party nor any member of the Controlled Group nor any fiduciary of, nor any trustee to, any Plan, has engaged in a material non-exempt “prohibited transaction” described in Section 406 of the ERISA or Section 4975 of the Code, nor taken any action which would constitute or result in a Termination Event with respect to any such Plan which is subject to ERISA, (ix) each Credit Party and each member of the Controlled Group has made all contributions due and payable with respect to each Plan, (x) there exists no event described in Section 4043(b) of ERISA, for which the thirty (30) day notice period contained in 29 C.F.R. §2615.3 has not been waived, (xi) neither any Credit Party nor any member of the Controlled Group has any fiduciary responsibility for investments with respect to any Plan existing for the benefit of persons other than employees or former employees of the Credit Parties or any member of the Controlled Group, (xii) neither any Credit Party nor any member of the Controlled Group has withdrawn, completely or partially, from any Multiemployer Plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980; and (xiii) no Credit Party is, and no Credit Party shall become, a member of a Multiemployer Plan.

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5.23.Intellectual Property.

(a)           Each Credit Party and each of its Subsidiaries owns, or has the legal right to use, all Intellectual Property necessary for each of them to conduct its respective business as currently conducted.

(b)       Schedule 5.23(b) (together with any supplements or modifications thereto provided by the Credit Parties from time to time) contains a list and description (including application number, registration number or equivalent identifying information, where applicable) of all registered and pending applications to register (x) Copyrights (y) Patents and (z) Trademarks, owned by any Credit Party or any Subsidiary of any Credit Party.

(c)           Schedule 5.23(c) (together with any supplements or modifications thereto provided by the Credit Parties from time to time) contains a list and description (stating the name of the licensee and licensor and either date of execution or effectiveness) of each Copyright License, Patent License and Trademark License to which any Credit Party or any Subsidiary of any Credit Party is a party, other than such licenses the lack of which, singly or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 

(d)       Except as disclosed in Schedule 5.23(d) hereto, (i) one or more of the Credit Parties and its Subsidiaries has the right to use the Intellectual Property disclosed in Schedule 5.23(b) for the duration of their legal existence and without payment of royalties, (ii) each Credit Party and its Subsidiaries, is currently in compliance in all material respects with legal requirements (including timely payment of filing, examination and maintenance fees, as well as timely post-registration filing of affidavits of use, incontestability and renewal applications) with respect to the Intellectual Property disclosed in Schedule 5.23(b), and (iii) to the knowledge of any Credit Party there are no restrictions on the direct or indirect transfer of any Contractual Obligation, or any interest therein, held by any of the Credit Parties or any of their respective Subsidiaries in respect of the Intellectual Property disclosed in Schedule 5.23(b) or 5.23(c).

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(e)       Except as could not reasonably be expected to have a Material Adverse Effect, none of the Credit Parties is in default (or with the giving of notice or lapse of time or both, would be in default) under any Copyright License, Patent License or Trademark License listed on Schedule 5.23(c); no claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property licensed pursuant thereto or the validity or effectiveness of any such Intellectual Property license, nor does any Credit Party or any Subsidiary of any Credit Party know of any such claim; and, to the knowledge of any Credit Party, the use of Intellectual Property subject to such license by the any Credit Party or any Subsidiary of any Credit Party does not infringe on the rights of any Person.

(f)           Each Credit Party and each of its Subsidiaries has taken reasonable steps to maintain the confidentiality of all material Trade Secrets used, in development or for use in the Business, including the adoption and implementation of physical and electronic security measures and controls.  To any Credit  Party’s Knowledge, there has been no misappropriation of any such Trade Secrets by any Person, and no such Trade Secrets or other proprietary information have been used by, disclosed to or discovered by any Person except pursuant to valid and appropriate non-disclosure, assignment and/or license agreements that have not been breached.  Each Credit Party and each of its Subsidiaries owns and has the exclusive right to use in its Business all Trade Secrets relating to all of its existing and currently planned products, including product formulations, ingredient lists, and methods and processes of manufacture.

(g)        Either or both of Schedules 5.23 (b) and 5.23(c) may be updated from time to time by the Credit Parties to include new Intellectual Property acquired after the Closing Date by giving written notice thereof to the Purchaser.

5.24.Potential Conflicts of Interest.  Except as set forth on Schedule 5.24, no officer or director of any Credit Party or any of its Subsidiaries:  (a) owns, directly or indirectly, any interest in (excepting less than 5% holdings for investment purposes in Equity Interests of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person that is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of, or lender to or from, such Credit Party or any of such Credit Party’s Subsidiaries; (b) owns, directly or indirectly, in whole or in part, any tangible or intangible property that any Credit Party or any of its Subsidiaries uses in the conduct of business; or (c) has any cause of action or other claim whatsoever against, or owes or has advanced any amount to, any Credit Party or any of its Subsidiaries, except for claims in the Ordinary Course of Business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof.  Except as disclosed in the SEC Reports, none of the directors or officers of any of the Credit Parties or any Persons covered under Item 404(a), (b) or (c) of Regulation S-K of the Commission has entered into any transaction with any Credit Party that would be required to be disclosed pursuant to Item 404(a), (b) or (c) of Regulation S-K of the Commission.

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5.25.Government Contracts.

(a)No Credit Party or any of its Subsidiaries is materially in default as to the terms of any Government Contract or has received any notices of default or notices to cure under any Government Contract for which the performance deficiency noted by any Governmental Authority has not been cured or otherwise resolved to such Governmental Authority’s satisfaction.

(b)Each Government Contract has been properly approved and executed by each Credit Party party thereto and, to the knowledge of such Credit Party, by the applicable Governmental Authority party thereto.

(c)No Credit Party is currently, or has ever been, debarred or suspended from (or has received notice that it is under investigation with respect to a possible debarment or suspension from) bidding on or entering into any Government Contract with or for any Governmental Authority.  No event has occurred and no condition exists that could reasonably be expected to result in the debarment or suspension of any Credit Party from any Government Contract.

(d)No Credit Party has been given notice (i) that any Government Contract may be or will be terminated for the convenience of a Governmental Authority, (ii) that a major program or contract of any Credit Party will be eliminated, substantially reduced or suspended, (iii) requiring or resulting in, loss of use or substantial impairment or interference of use by any Credit Party of any facilities owned by a Governmental Authority, or (iv) that any relevant budget authority or contract authority has been exceeded with respect to any Government Contract, in each case, that could reasonably be expected to have a Material Adverse Effect.  No Credit Party anticipates incurring cost overruns on any Government Contract which could reasonably be expected to have a Material Adverse Effect.  To each Credit Party’s knowledge, there are no offsets and there are not currently threatened or pending any claims or offsets against any Credit Party by any Governmental Authority, in each case, that could reasonably be expected to have a Material Adverse Effect.  All assignments of claims with respect to any Government Contract and notices of such assignments forwarded to or filed with any Person (including any Governmental Authority) pursuant to 48 C.F.R. Sections 32.802(e) and 32.805(b) shall have been fully released in accordance with 48 C.F.R. Section 32.805(e).  There are no other assignments of claims with respect to or Liens (other than Permitted Liens) on Government Contracts, other than in favor of a Governmental Authority in respect of set-off rights as provided in the Federal Acquisition Regulation (Title 48 of the Code of Federal Regulations, as amended, modified and supplemented from time to time).

5.26.Indebtedness.  Schedule 5.26 lists (i) the amount of all outstanding Indebtedness of the Credit Parties and their respective Subsidiaries (other than Indebtedness under this Agreement) as of the Closing Date, (ii) the Liens that relate to such Indebtedness and that encumber the assets of the Credit Parties and their respective Subsidiaries, (iii) the name of each lender thereof, and (iv) the amount of any unfunded commitments available to the Credit Parties or any of their respective Subsidiaries in connection with any such Indebtedness.

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5.27.Material Contracts.  Neither any Credit Party nor any of its Subsidiaries is or will be a party to any Contractual Obligation, or is subject to any charge, corporate restriction, judgment, injunction, decree, or Requirement of Law, that could reasonably be expected to have a Material Adverse Effect.  Each Material Contract in full force and effect.  Each Credit Party and each of its Subsidiaries has satisfied in full or provided for all of its liabilities and obligations under each Material Contract requiring performance prior to the date hereof in all material respects, and are not in default under any of them, nor, to the knowledge of any Credit Party, does any condition exist that with notice or lapse of time or both would constitute such a default.  To the knowledge of any Credit Party, no other party to any such Material Contract is in default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute such a default.  No approval or consent of any Person is needed for all of the Material Contracts to continue to be in full force and effect.

5.28.Insurance.  The Life Insurance Policy and all of the insurance policies or programs of the Credit Parties and their Subsidiaries are in full force and effect, are underwritten by financially sound and reputable insurers, are sufficient for all applicable Requirements of Law and otherwise are in compliance with the criteria set forth in Section 8.09 hereof.  All such policies will remain in full force and effect and will not in any way be affected by, or terminate or lapse by reason of any of the transactions contemplated hereby.

5.29.Assignment of Payments.

Except with respect to contracts for which the government has determined that a prohibition on assignment of claims is in the government’s interest, each of the Credit Parties and their Subsidiaries has the right to assign to the Purchaser all payments due or to become due under each of such Person’s Government Contracts, and there exists no uncancelled prior assignment of payments under any of such Credit Party’s Government Contracts.

5.30.Compliance with the FCPA.

Each of the Credit Parties and their Subsidiaries is in compliance with the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq., and any foreign counterpart thereto.  None of the Credit Parties or their Subsidiaries has made a payment, offering, or promise to pay, or authorized the payment of, money or anything of value (a) in order to assist in obtaining or retaining business for or with, or directing business to, any foreign official, foreign political party, party official or candidate for foreign political office, (b) to a foreign official, foreign political party or party official or any candidate for foreign political office, and (c) with the intent to induce the recipient to misuse his or her official position to direct business wrongfully to such Credit Party or its Subsidiary or to any other Person, in violation of the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq.

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5.31.Products Liability.  Except as set forth in the SEC Reports, there is no action, suit, proceeding, inquiry or investigation pending, or, to the knowledge of any Credit Party, threatened, by or before any Governmental Authority against any Credit Party or any of its Subsidiaries relating to any product alleged to have been sold by any Credit Party or any of its Subsidiaries and alleged to have been defective, or improperly designed or manufactured, nor to the knowledge of any Credit Party is there any valid basis for any such action, proceeding or investigation.

5.32.Solvency.  The Credit Parties and their Subsidiaries, taken as a whole, are Solvent.

5.33.[Reserved].

5.34.Location of Assets.  The chief executive offices of each Credit Party and each of its Subsidiaries and the books and records of each Credit Party and each of its Subsidiaries concerning their respective accounts are located only at the address set forth on Schedule 5.34 identified as such, and the only other places of business and locations of assets of each Credit Party and each of its Subsidiaries, if any, are the addresses set forth on Schedule 5.34.

5.35.Certain Payments.  Except as set forth on Schedule 5.35, neither the execution, delivery and performance by any Credit Party of this Agreement, nor the execution, delivery and performance by any Credit Party or any of its Subsidiaries of any of the other Transaction Documents, nor the consummation of the transactions contemplated hereby or thereby shall require any payment by any Credit Party or any of its Subsidiaries, in cash or kind, under any other agreement, plan, policy, commitment or other arrangement.  There are no agreements, plans, policies, commitments or other arrangements with respect to any compensation, benefits or consideration which will be materially increased, or the vesting of benefits of which will be materially accelerated, as a result of this Agreement, the other Transaction Documents or the occurrence of any of the transactions contemplated hereby or thereby.  Except as set forth on Schedule 5.35, there are no payments or other benefits payable by any Credit Party or any of its Subsidiaries, the value of which will be calculated on the basis of any of the transactions contemplated by this Agreement or the other Transaction Documents.

5.36.Margin Requirements.  No part of the proceeds from the sale of the Securities hereunder will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock.  Neither the sale of the Securities nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System.

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5.37.Anti-Terrorism Laws.

(a)General.  Neither any Credit Party nor any Subsidiary or Affiliate of any Credit Party is in violation of any Anti-Terrorism Law or engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

(b)Executive Order No. 13224.  Neither any Credit Party nor any Subsidiary or Affiliate of any Credit Party or their respective agents acting or benefiting in any capacity in connection with the Note or other transactions hereunder is a Blocked Person.

(c)Blocked Person or Transactions.  Neither any Credit Party nor to any Credit Party’s knowledge any of its Subsidiaries, Affiliates or agents acting in any capacity in connection with the Note or other transactions hereunder (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224.

5.38.Trading with the Enemy.  Neither any Credit Party nor any of its Subsidiaries has engaged, nor does any Credit Party or any of its Subsidiaries intend to engage, in any business or activity prohibited by the Trading with the Enemy Act.

5.39.Interest Rate Hedges and Other Hedging Agreements.  As of the Closing Date, neither any Credit Party nor any of their Subsidiaries are a party to any Interest Rate Hedges or any Other Hedging Agreements.

5.40.[   ] Agreements.  As of the Closing Date, neither any Credit Party nor any of their Subsidiaries are a party to (a) any account control agreement or deposit account control agreement in favor of [   ] or (b) any mortgage, deed of trust or similar document in favor of [   ].

ARTICLE 6

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

Purchaser hereby represents and warrants to the Issuer as follows:

6.01.Authorization; No Contravention.  The execution, delivery and performance by it of this Agreement and the other Transaction Documents to which it is party:  (a) is within its power and authority and has been duly authorized by all necessary action; (b) does not contravene the terms of its organizational documents or any amendment thereof; and (c) will not violate, conflict with or result in any breach or contravention of any of its Contractual Obligations, or any order or decree directly relating to it.

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6.02.Binding Effect.  This Agreement and the other Transaction Documents to which it is party have been duly executed and delivered by it, and this Agreement and each other Transaction Document constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

6.03.No Legal Bar.  The execution, delivery and performance of this Agreement and the other Transaction Documents by it will not violate any Requirement of Law applicable to it.

6.04.Purchase for Own Account.  The Securities to be acquired by it pursuant to this Agreement are being or will be acquired for its own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the Purchaser’s right at all times to sell or otherwise dispose of all or any part of the Securities, in the case of the Purchaser under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of its property being at all times within its control.  If the Purchaser should in the future decide to dispose of any of the Securities, the Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect.

6.05.Broker’s, Finder’s or Similar Fees.  Except as set forth in Section 2.03 hereof, there are no brokerage commissions, finder’s fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with Purchaser or any action taken by it.

6.06.Governmental Authorization; Third Party Consent.  No approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person in respect of any Requirement of Law, and no lapse of a waiting period under a Requirement of Law, is necessary or required in connection with the execution, delivery or performance by it or enforcement against it of this Agreement or the transactions contemplated hereby.

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ARTICLE 7

INDEMNIFICATION

7.01.Indemnification.  In addition to all other sums due hereunder or provided for in this Agreement, each Credit Party, jointly and severally, agrees to indemnify and hold harmless the Purchaser and its Affiliates and each of their respective officers, directors, agents, employees, Subsidiaries, partners, members, attorneys, accountants and controlling persons (each, an “Indemnified Party”) to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including reasonable fees, disbursements and other charges of counsel and costs of investigation incurred by an Indemnified Party in any action or proceeding between any Credit Party or any of its Subsidiaries and such Indemnified Party (or Indemnified Parties) or between an Indemnified Party (or Indemnified Parties) and any third party or otherwise) or other liabilities, losses, or diminution in value (collectively, “Liabilities”) resulting from or arising out of any breach of any representation or warranty, covenant or agreement of any Credit Party in this Agreement, the Note, the Warrant, or any of the other Transaction Documents, including the failure to make payment when due of amounts owing pursuant to this Agreement, the Note, or any of the other Transaction Documents, on the due date thereof (whether at the scheduled maturity, by acceleration or otherwise) or any legal, administrative or other actions (including actions brought by the Purchaser, any Credit Party, any of its Subsidiaries or any holders of equity or indebtedness of any Credit Party or any of its Subsidiaries or derivative actions brought by any Person claiming through or in the name of any Credit Party or any of its Subsidiaries, proceedings or investigations (whether formal or informal), or written threats thereof, based upon, relating to or arising out of any of the Transaction Documents, the transactions contemplated thereby, or any Indemnified Party’s role therein or in the transactions contemplated thereby; provided, however, that neither any Credit Party nor any of its Subsidiaries shall be liable under this Section 7.01 to an Indemnified Party:  (a) for any amount paid by the Indemnified Party in settlement of claims by the Indemnified Party without such Credit Party’s consent (which consent shall not be unreasonably withheld or delayed), (b) to the extent that it is judicially determined in a final non-appealable judgment that such Liabilities resulted primarily from the willful misconduct or gross negligence of such Indemnified Party or (c) to the extent that it is judicially determined in a final non-appealable judgment that such Liabilities resulted primarily from the breach by such Indemnified Party of any representation, warranty, covenant or other agreement of such Indemnified Party contained in this Agreement; provided, further, that if and to the extent that such indemnification is unenforceable for any reason, the Credit Parties shall make the maximum contribution to the payment and satisfaction of such Liabilities which shall be permissible under Applicable Laws.  In connection with the obligation of the Credit Parties to indemnify for expenses as set forth above, each Credit Party further agrees, upon presentation of appropriate invoices containing reasonable detail, to reimburse each Indemnified Party for all such expenses (including fees, disbursements and other charges of counsel and costs of investigation incurred by an Indemnified Party in any action or proceeding between any Credit Party (or any of its Subsidiaries) and such Indemnified Party (or Indemnified Parties) or between an Indemnified Party (or Indemnified Parties) and any third party or otherwise) as they are incurred by such Indemnified Party; provided, however, that if an Indemnified Party is reimbursed hereunder for any expenses, such reimbursement of expenses shall be refunded to the extent it is finally judicially determined that the Liabilities in question resulted primarily from (i) the willful misconduct or gross negligence of such Indemnified Party or (ii) the breach by such Indemnified Party of any representation, warranty, covenant or other agreement of such Indemnified Party contained in this Agreement or any other Transaction Document.

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7.02.Procedure; Notification.  Each Indemnified Party under this Article 7 will, promptly after the receipt of notice of the commencement of any action, investigation, claim or other proceeding against such Indemnified Party in respect of which indemnity may be sought from the Credit Parties under this Article 7, notify the Credit Parties in writing of the commencement thereof.  The omission of any Indemnified Party so to notify the Credit Parties of any such action shall not relieve the Credit Parties from any liability which they may have to such Indemnified Party unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses of the Credit Parties.  In case any such action, claim or other proceeding shall be brought against any Indemnified Party and it shall notify the Credit Parties of the commencement thereof, the Credit Parties shall be entitled to assume the defense thereof at their own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, however, that, if the Credit Parties have assumed the defense of any such action, claim or other proceeding, any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense.  Notwithstanding the foregoing, in any action, claim or proceeding in which the Credit Parties, on the one hand, and an Indemnified Party, on the other hand, is, or is reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel at the expense of the Credit Parties and to control its own defense of such action, claim or proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a conflict or potential conflict exists between the Credit Parties, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable; provided, however, that in no event shall the Credit Parties be required to pay fees and expenses under this Article 7 for more than one firm of attorneys in any jurisdiction in any one legal action or group of related legal actions.  Each Credit Party agrees that it will not, without the prior written consent of the Purchaser, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Purchaser and each other Indemnified Party from all liability arising or that may arise out of such claim, action or proceeding.  Neither any Credit Party nor any of its Subsidiaries shall be liable for any settlement of any claim, action or proceeding effected against an Indemnified Party without their written consent, which consent shall not be unreasonably withheld.  The rights accorded to Indemnified Parties hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise.

7.03.Survival.  The obligations of the Credit Parties under this Article 7 shall survive termination of this Agreement and the Transaction Documents and payment in full of the Note.

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ARTICLE 8

AFFIRMATIVE COVENANTS

Until the payment in full of all principal of and interest on the Note and all other amounts due to the Purchaser under this Agreement and the other Transaction Documents, including all fees, expenses and amounts due in respect of indemnity obligations under Article 7, each Credit Party hereby covenants and agrees with the Purchaser as set forth in this Article 8, provided, however, that following payment in full of all such amounts, for so long as the Warrant is outstanding, each Credit Party hereby covenants and agrees with the Purchaser only as set forth in Sections 8.02, 8.10 and 8.13:

8.01.Information.  Each Credit Party shall maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP (it being understood that monthly financial statements are not required to have footnote disclosures).  The Credit Parties shall deliver to the Purchaser each of the information described below:

(a)[Reserved].

(b)[Reserved].

(c)[Reserved].

(d)[Reserved].

(e)[Reserved].

(f)[Reserved].

(g)[Reserved].

(h)SEC Filings/Press Releases.  Furnish Purchaser with, promptly after the same are (i) filed, copies of all SEC Reports, (ii) sent, copies of all financial statements, management reports and reports related thereto which any Credit Party or Subsidiary sends generally to its public shareholders, and (iii) made available, all press releases to the public concerning material developments in the business of any of the Credit Parties or any of their respective Subsidiaries.

(i)[Reserved].

(j)[Reserved].

(k)Subsidiaries.  Not more than fifteen (15) days after creating a Subsidiary or acquiring the Equity Interests in a Person, such that such Person will become a Subsidiary, the applicable Credit Party shall notify the Purchaser of such Credit Party’s or of such Credit Party’s Subsidiary’s creation of such Subsidiary or acquisition of such Equity Interests, and promptly cause such Subsidiary to execute a joinder to this Agreement, and the other Transaction Documents and a Guaranty in form and substance satisfactory to the Purchaser.

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(l)[Reserved].

(m)[Reserved].

(n)[Reserved].

(o)[Reserved].

(p)Other Information.  With reasonable promptness, each Credit Party shall deliver such other information and data (including, information relating to Progress Payments) with respect to such Credit Party or any of its Subsidiaries as from time to time may be reasonably required by the Purchaser.  Promptly upon request therefor by the Purchaser, the Credit Parties shall deliver such other business or financial data, reports, appraisals and projections as the Purchaser may reasonably request.

(q)[Reserved].

(r)[Reserved].

(s)Additional Documents.  Execute and deliver to Purchaser, upon request, such documents and agreements as Purchaser may, from time to time, reasonably request to carry out the purposes, terms or conditions of this Agreement.

8.02.Preservation of Existence.  Each Credit Party shall, and shall cause each of its Subsidiaries to:

(a)conduct continuously and operate actively its business according to good business practices and maintain all of its properties useful or necessary in its business in good working order and condition (reasonable wear and tear excepted and except as may be disposed of in each case in accordance with the terms of this Agreement), including all licenses, patents, copyrights, design rights, tradenames, trade secrets and trademarks, in each case that are material to its business, and take all actions necessary to enforce and protect the validity of any intellectual property right;

(b)keep in full force and effect its existence and comply in all material respects with Applicable Laws governing the conduct of its business; and

(c)except as otherwise permitted herein, make all such reports and pay all such franchise and other taxes and license fees and do all such other acts and things as may be lawfully required to maintain its rights, licenses, leases, powers and franchises under the laws of the United States or any political subdivision thereof.

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8.03.Payment of Obligations.  Each Credit Party shall, and shall cause each of its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including:

(a)all Tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless same are being Properly Contested;

(b)all lawful claims which any Credit Party or any of its Subsidiaries is obligated to pay, which are due and which, if unpaid, might by law become a Lien upon its property, unless the same are being Properly Contested; and

(c)pay, discharge or otherwise satisfy at or before maturity (subject, where applicable, to specified grace periods and, in the case of the trade payables, to normal payment practices) all its obligations and liabilities of whatever nature, except when the failure to do so could not reasonably be expected to have a Material Adverse Effect or when the amount or validity thereof is currently being Properly Contested.

8.04.Compliance with Laws.  Each Credit Party shall comply, and shall cause each of its Subsidiaries to comply, in all material respects with all Requirements of Law and with the directions of each Governmental Authority having jurisdiction over them or their respective business or property (including all applicable Environmental Laws), including any requirements to clean up, remove, or remediate Hazardous Materials at any location where necessary to protect human health or the environment.

8.05.[Reserved].

8.06.[Reserved].

8.07.Inspection.  Each Credit Party will permit, and will cause each of its Subsidiaries to permit, representatives of the Purchaser to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers and, subject to the presence or participation of a representative of the Issuer in any such discussion, the certified public accountants of the Credit Parties, all at such reasonable times during normal business hours and as often as may be reasonably requested, upon reasonable advance notice; provided, however, that no such inspection, examination or inquiry, the failure to conduct same, nor any knowledge of the Purchaser, including any knowledge obtained by the Purchaser in connection with any such inspection, investigation or inquiry, shall constitute a waiver of any rights the Purchaser may have under any representation, warranty, covenant, term or agreement under any of the Transaction Documents.

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8.08.Payment of the Note.  The Issuer shall pay the principal of, interest on and other amounts due in respect of, the Note on the dates and in the manner provided in the Note and this Agreement.

8.09.Insurance.  Each Credit Party shall maintain or cause to be maintained, and shall cause its Subsidiaries to maintain or cause to be maintained, in good repair, working order and condition all material properties used in their respective businesses and will make or cause to be made, and shall cause its Subsidiaries to make or cause to be made, all appropriate repairs, renewals and replacements thereof.  Each Credit Party and its Subsidiaries will maintain or cause to be maintained with financially sound and reputable insurers that have a rating of “A” or better as established by Best’s Rating Guide (or an equivalent rating with such other publication of a similar nature as shall be in current use), the Life Insurance Policy and public liability and property damage insurance with respect to their respective businesses and properties against loss or damage of the kinds customarily carried or maintained by a company of established reputation engaged in similar businesses and in amounts acceptable to Purchaser and will deliver evidence thereof to Purchaser.  Without limiting the foregoing, each Credit Party and its Subsidiaries will establish on the Closing Date and maintain at all times thereafter (a) business interruption insurance in an amount satisfactory to the Purchaser, (b) products liability insurance coverage for the Credit Parties in amounts satisfactory to the Purchaser, and (c) the Life Insurance Policy.  All such insurance policies shall provide that they may not be canceled unless the insurance carrier gives at least 30 days prior written notice of such cancellation to Purchaser.

8.10.Books and Records.  Each Credit Party shall keep, and shall cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of such Credit Party and each of its Subsidiaries in accordance with GAAP consistently applied to the Credit Parties and their Subsidiaries taken as a whole.

8.11.Use of Proceeds.

(a)The Credit Parties shall use the proceeds of the sale of the Securities hereunder only as follows:  (i) for the payment of fees and expenses in connection with the transactions contemplated hereunder and in the other Transaction Documents and (ii) for general corporate purposes.

(b)No proceeds of the Note will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock.  Neither the sale of any Securities or nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulation T, U, or X of the Board of Governors of the Federal Reserve System.

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8.12.Standards of Financial Statements.  The Credit Parties shall cause all financial statements referred to in Section 8.01 (h), as to which GAAP is applicable, to fairly present the information presented (subject, in the case of interim financial statements, to normal year-end audit adjustments and the absence of footnotes) and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as concurred in by such reporting accountants or officer, as the case may be, and disclosed therein).

8.13.Reservation of Equity Interests.  The Issuer shall at all times reserve and keep available out of its authorized Equity Interests, solely for the purpose of issuance and delivery upon exercise of the Warrant, the [   ] Warrants, the Semaphore Warrants and the Employee Options, the number of Equity Interests issuable in accordance with the terms of the Warrant, the [   ] Warrants, the Semaphore Warrants and the Employee Options (the “Exercisable Interests”).  The Exercisable Interests, when issued or delivered in accordance with the Warrant, the [   ] Warrants, the Semaphore Warrants or the Employee Options, as the case may be, shall be duly and validly issued and fully paid and non-assessable.  The Issuer shall issue such Equity Interests in accordance with the provisions of the Warrants, the [   ] Warrants, the Semaphore Warrants or the Employee Options, as the case may be, and shall otherwise comply, in each case, with the terms thereof.

8.14.Additional Real Property.  If any Credit Party acquires at any time or times hereafter any fee simple interest in real property, then within ninety (90) days of the acquisition thereof such Credit Party shall execute and deliver to Purchaser, as additional security and Collateral for the obligations, deeds of trust, security deeds, mortgages or other collateral assignments reasonably satisfactory in form and substance to Purchaser and its counsel (herein collectively referred to as “New Mortgages”) covering such real property.  The New Mortgages shall be duly recorded (at the Credit Parties’ expense) in each office where such recording is required to constitute a valid lien on the real property covered thereby.  In respect of any New Mortgage, Credit Parties shall deliver to Purchaser, at Credit Parties’ expense, mortgagee title insurance policies issued by a title insurance company reasonably satisfactory to Purchaser, which policies shall be in form and substance reasonably satisfactory to Purchaser and shall insure a valid lien in favor of Purchaser on the property covered thereby, subject only to Permitted Liens and those other exceptions reasonably acceptable to Purchaser and its counsel.  Credit Parties shall also deliver to Purchaser such other usual and customary documents, including ALTA surveys of the real property described in the New Mortgages, as Purchaser and its counsel may reasonably request relating to the real property subject to the New Mortgages.

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8.15.Cash Management Systems.

(a)Each Credit Party shall, upon request by the Purchaser, enter into, and cause each financial institution, depository intermediary, securities intermediary or commodities intermediary to enter into, Control Agreements with respect to each deposit, securities, commodity or similar account maintained by such Person from time to time. The Issuer shall not establish any new deposit, securities, commodity or similar account with any financial institution, depository intermediary, securities intermediary or commodities intermediary unless prior thereto the Issuer and the Purchaser shall have entered into a Control Agreement with such Person, or unless the Purchaser shall have waived such requirement. Only after the occurrence and during the continuation of an Event of Default, the Purchaser shall be entitled to deliver a notice to any financial institution that is party to a Control Agreement of its exercise of control over any deposit, securities, commodity or other account subject to such Control Agreement. Each Credit Party shall provide the Purchaser with electronic access at all times to each of its and its Subsidiaries' depositary, securities intermediary or commodities intermediary accounts so that the Purchaser may monitor the activity in such accounts.

(b)Section 8.15(a) shall not apply to (i) any payroll account so long as such payroll account is a zero balance account, or (ii) withholding Tax, employee benefits and similar fiduciary accounts.

8.16.Landlord Waivers.Each Credit Party shall use commercially reasonable efforts to promptly obtain a collateral lease assignment, landlord agreement or bailee or mortgagee waivers, as applicable, from the lessor of each leased property, bailee in possession of any Collateral or, mortgagee of any owned property with respect to each location where Collateral is stored or located, which agreement shall be reasonably satisfactory in form and substance to the Purchaser.  Without limiting the foregoing, Issuer shall, within twenty (20) days following the Closing Date, obtain a duly notarized copy of the Landlord Consent and Waiver executed and delivered by 210 Garibaldi Avenue Group at the Closing.

ARTICLE 9

NEGATIVE COVENANTS

Until the payment in full of all principal of and interest on the Note and all other amounts due to the Purchaser under this Agreement and the other Transaction Documents, including all fees, expenses and amounts due at such time in respect of indemnity obligations under Article 7, each Credit Party covenants and agrees with the Purchaser as set forth in this Article 9, provided, however, that following payment in full of all such amounts, for so long as the Warrant is outstanding, each Credit Party hereby covenants and agrees with the Purchaser only as set forth in Section 9.09:

9.01.Fundamental Changes; Consolidations, Mergers and Acquisitions.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly: (a) enter into any merger, consolidation or other reorganization with or into any other Person or acquire all or a substantial portion of the assets or Equity Interests of any Person or permit any other Person to consolidate with or merge with it except for Permitted Acquisitions, and (b) sell, lease, transfer or otherwise dispose of any of its properties or other assets, except (i) dispositions of inventory in the Ordinary Course of Business Permitted Dispositions and (ii) sales of assets provided the following conditions are met: (x) the market value of the assets with respect to all such sales does not exceed $250,000 in the aggregate; (b) the Net Proceeds received is at least equal to the fair market value of such assets;  and (c) no Default or Event of Default then exists or shall result from any such sale.

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9.02.Creation of Liens.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly, create or suffer to exist any Lien or transfer upon or against any of its property or assets now owned or hereafter acquired, except Permitted Liens and Liens in favor of the applicable Governmental Authority in respect of the goods relating to the Progress Payments expressly permitted by Section 9.07(h) hereof.

9.03.Guarantees.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly become liable upon the obligations or liabilities of any Person by assumption, endorsement or guaranty thereof or otherwise (other than to Purchaser) except (a) guarantees made in the Ordinary Course of Business up to an aggregate amount of $50,000, (b) the endorsement of checks in the Ordinary Course of Business and (c) guarantees by Guarantors of the [   ] Debt.

9.04.Investments.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly make any Investments, except:

(a)investments in Cash and Cash Equivalents;

(b)investments existing on the Closing Date as set forth on Schedule 9.04 hereto;

(c)investments in wholly-owned Subsidiaries of such Credit Party created or acquired after the Closing Date, to the extent permitted hereunder;

(d)loans permitted by Section 9.05;

(e)investments by the Credit Parties and their respective Subsidiaries in Capital Expenditures permitted to be made pursuant to Section 9.15(c).

9.05.Loans.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly make or have outstanding advances, loans or extensions of credit to any Person, including any Subsidiary or Affiliate, except for (a) the extension of commercial trade credit in connection with the sale of inventory in the Ordinary Course of Business and (b) loans to its employees or subcontractors in the Ordinary Course of Business not to exceed, in the aggregate, $100,000 at any time outstanding.

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9.06.Restricted Payments.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly declare, pay or make any Restricted Payments, except (i) as set forth on Schedule 9.06 and (ii) that at any time following September 10, 2012, Issuer (x) may purchase shares of Common Stock for cash (“Permitted Share Repurchase”) and (y) so long as no Default or Event of Default has occurred and is then continuing, may prepay all or any portion of the Subordinated Debt in cash (“Permitted Debt Prepayment”); provided, however, that no such Permitted Payment shall be made unless (A) Issuer shall prepay the principal amount of the Note in accordance with the terms of Section 10.02 hereof in an amount equal to the amount of such Permitted Payment, (B) Cash on Hand shall exceed $1,000,000, determined on a pro forma Consolidated Basis after giving effect to such Permitted Payment and such prepayment of the principal amount of the Note, (C) Net Operating Cash Flow, determined for the most recent month for which financial statements have been delivered on a pro forma Consolidated Basis after giving effect to such Permitted Payment and such prepayment of the principal amount of the Note shall be greater than zero, and (D) the Credit Parties shall (x) be in compliance with the covenants set forth in Section 9.15 on a pro forma Consolidated Basis after giving effect to such Permitted Payment and prepayment of the principal amount of the Note, recomputed for the most recent month for which financial statements have been delivered, and (y) believe in good faith that they shall thereafter continue to be in compliance with Section 9.15.

9.07.Indebtedness.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly create, incur, assume or suffer to exist any Indebtedness except:

(a)trade debt incurred in the Ordinary Course of Business,

(b)the Indebtedness created under this Agreement;

(c)Indebtedness for Capital Expenditures permitted under Section 9.15(d), including Purchase Money Indebtedness and indebtedness incurred under Capital Lease Obligations, in each case incurred in connection with such Capital Expenditures, in an aggregate amount not to exceed $250,000 at any one time outstanding for all Credit Parties and their respective Subsidiaries;

(d)Indebtedness disclosed on Schedule 9.07;

(e)Indebtedness under any Interest Rate Hedge or any Other Hedging Agreement reasonably acceptable to Purchaser;

(f)guaranty obligations permitted pursuant to Section 9.03 hereof;

(g)the [   ] Debt in an outstanding principal amount not to exceed $2,132,141; and

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(h)Progress Payments provided that (A) [Reserved], (B) such Progress Payment complies with all Contractual Obligations of the Credit Parties and their respective Subsidiaries and Applicable Law, (C) the Credit Parties and their respective Subsidiaries shall be in compliance with the financial covenants set forth in Section 9.15, calculated for the most recent ended fiscal quarter immediately preceding such Progress Payment and reflecting such payment on a pro forma basis, (D) the aggregate Net Progress Payments at any one time outstanding with respect to (1) all Government Contracts (other than the ITATS Contract) for all Credit Parties and their respective Subsidiaries shall not exceed $1,000,000 and (2) the ITATS Contract for all Credit Parties and their respective Subsidiaries shall not exceed $1,400,220, and (E) the Company shall cease to request or accept any Progress Payments upon the written request of the Purchaser and shall repay all, or any portion of all, outstanding Progress Payments within sixty (60) days following Purchaser's written request.

9.08.Nature of Business.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, substantially change the nature of the business in which it is presently engaged, or except as specifically permitted hereby purchase or invest, directly or indirectly, in any assets or property other than in the Ordinary Course of Business and where such assets or property are useful in, necessary for and are to be used in its business as presently conducted.

9.09.Transactions with Affiliates; ITI and Tel Holdings.

(a)           No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise enter into any transaction or deal with, any Affiliate, except (i) for transactions in the Ordinary Course of Business, entered into on an arm’s-length basis on fair and reasonable terms no less favorable than terms which would have been obtainable from a Person other than an Affiliate; (ii) for the payment of customary and reasonable directors’ fees to directors who are not employees of the Credit Parties or any Affiliate of the Credit Parties as well as the payment of their reasonable out-of-pocket expenses incurred in performing their directorial or committee duties and the payment of indemnities owing to them as directors; and (iii) as set forth on Schedule 9.09.

(b)           Notwithstanding any provision in this Agreement or any other Transaction Document to the contrary, no Credit Party shall, and no Credit Party shall permit or cause any of its Subsidiaries, Affiliates, officers, directors or employees to, directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise enter into any transaction or deal or conduct any business with, ITI or Tel Holdings except as may be reasonably necessary to effect the dissolution and liquidation of ITI or Tel Holdings, provided that no Credit Party nor any of its Subsidiaries, Affiliates, officers, directors or employees makes any Investment or otherwise expends any funds in connection therewith (other than ordinary and reasonable out-of-pocket expenses that may be incurred in connection with the dissolution of ITI and Tel Holdings).  Neither ITI nor Tel Holdings shall engage in any business or otherwise conduct any activities.

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9.10.Leases.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to,  directly or indirectly enter as lessee into any lease arrangement for real or personal property (unless capitalized and permitted under Section 9.07(c) hereof) if after giving effect thereto, aggregate annual rental payments for all leased property, whether real or personal, would exceed $300,000 in any one fiscal year in the aggregate for all Credit Parties and their respective Subsidiaries.

9.11.Subsidiaries; Partnerships; Joint Ventures.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, form any Subsidiary (other than a Subsidiary, the formation of which shall have been consented to in advance in writing by the Purchaser), or enter into any partnership, joint venture or similar arrangement.

9.12.Fiscal Year and Accounting Changes.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, directly or indirectly maintain a fiscal year other than a year ending on March 31, or make any change (i) in accounting treatment and reporting practices except as required by GAAP or (ii) in Tax reporting treatment except as required or permitted by Applicable Law.

9.13.Amendment of Organizational Documents.  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, amend, modify or waive any material term or material provision of its Organizational Documents unless required by Applicable Law.

9.14.Limitation on Modifications of Indebtedness; Modifications of Certain Other Agreements; Etc.

  No Credit Party shall, and no Credit Party shall permit any of its Subsidiaries to, (i) amend or modify, or permit the amendment or modification of, any provision of the Indebtedness described in Section 9.07 hereto or of any agreement (including any purchase agreement, indenture, loan agreement or security agreement) relating thereto other than any amendments or modifications to such Indebtedness which do not in any way adversely affect the interests of the Purchaser and are otherwise permitted under Section 9.07, (ii) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or any prepayment or redemption as a result of any asset sale, change of control or similar event of, any Indebtedness which is contractually subordinated to the Note, or (iii) amend or modify, or permit the amendment or modification of any Equity Document, except for amendments or modifications which are not in any way adverse in any material respect to the interests of the Purchaser.

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9.15.Financial Covenants.

(a)Total Leverage Ratio.  The Credit Parties shall maintain, and shall cause their respective Subsidiaries to maintain, a Total Leverage Ratio, as of and for each period of four consecutive fiscal quarters of, not greater than 1.50:1.00.

(b)Debt Service Coverage Ratio.  The Credit Parties shall maintain, and shall cause their respective Subsidiaries to maintain, a Debt Service Coverage Ratio, as of and for each period of four consecutive fiscal quarters, of not less than 2.50:1.00.

(c)Fixed Charge Coverage.  The Credit Parties shall maintain, and shall cause each of their respective Subsidiaries to maintain, a Fixed Charge Coverage Ratio, as of and for each period of four consecutive fiscal quarters, of not less than 2.25:1.00.

(d)Capital Expenditures.  The Credit Parties shall not, and shall cause their respective Subsidiaries not to, contract for, purchase or make any expenditure or commitments for Capital Expenditures in any fiscal year in an aggregate amount in excess of $250,000 unless the Credit Parties are in compliance on a pro forma basis, after giving effect to such Capital Expenditures, with the other covenants set forth in this Section 9.15, recomputed for the most recent month for which financial statements have been delivered.

(e)Minimum EBITDA.  The Credit Parties shall not permit EBITDA, measured as of the last day of each period of four consecutive fiscal quarters, to be less than $1,250,000 for each such period.

Compliance with the covenants in this Section 9.15 shall be determined on a Consolidated Basis in accordance with GAAP consistently applied, unless explicitly stated otherwise.

9.16.Compliance with ERISA.  No Credit Party shall, nor shall any Credit Party permit any of its Subsidiaries, to (x) maintain, or permit any member of the Controlled Group to maintain, or (y) become obligated to contribute, or permit any member of the Controlled Group to become obligated to contribute, to any Plan, other than those Plans disclosed on Schedule 5.22, (ii) engage, or permit any member of the Controlled Group to engage, in any non-exempt “prohibited transaction”, as that term is defined in section 406 of ERISA and Section 4975 of the Code; (iii) incur, or permit any member of the Controlled Group to incur, any “accumulated funding deficiency”, as that term is defined in Section 302 of ERISA or Section 412 of the Code, (iv) terminate, or permit any member of the Controlled Group to terminate, any Plan where such event could result in any liability of any Credit Party or any member of the Controlled Group or the imposition of a lien on the property of any Credit Party or any member of the Controlled Group pursuant to Section 4068 of ERISA, (v) assume, or permit any member of the Controlled Group to assume, any obligation to contribute to any Multiemployer Plan not disclosed on Schedule 5.22, (vi) incur, or permit any member of the Controlled Group to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail promptly to notify Purchaser of the occurrence of any Termination Event, (viii) fail to comply, or permit a member of the Controlled Group to fail to comply, with the requirements of ERISA or the Code or other Applicable Laws in respect of any Plan , (ix) fail to meet, or permit any member of the Controlled Group to fail to meet, all minimum funding requirements under ERISA or the Code or postpone or delay or allow any member of the Controlled Group to postpone or delay any funding requirement with respect of any Plan.

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9.17.Prepayment of Indebtedness.  No Credit Party shall, nor shall any Credit Party permit any of its Subsidiaries to, at any time, directly or indirectly, prepay any Indebtedness (other than to Purchaser), or repurchase, redeem, retire or otherwise acquire any Indebtedness (other than to Purchaser), except as expressly permitted by and in accordance with Section 9.06.

9.18.Anti-Terrorism Laws.  No Credit Party shall, nor shall any Credit Party permit any Affiliate or agent to: (a) conduct any business or engage in any transaction or dealing with any Blocked Person, including the making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, (b) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order No. 13224 and (c) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in the Executive Order No. 13224, the USA Patriot Act or any other Anti-Terrorism Law.  Each Credit Party shall deliver to Purchaser any certification or other evidence reasonably requested from time to time by Purchaser, in its sole discretion, confirming such Credit Party’s compliance with this Section.

9.19.Trading with the Enemy Act.  No Credit Party shall nor shall any Credit Party permit any of its Subsidiaries to engage in any business or activity in violation of the Trading with the Enemy Act.

9.20.Additional Negative Pledges.  "No Credit Party shall, nor shall any Credit Party permit any of its Subsidiaries, to create or otherwise cause or suffer to exist or become effective, directly or indirectly, (i) any prohibition or restriction (including any agreement to provide equal and ratable security to any other Person) on the creation or existence of any Lien upon the assets of any Credit Party or any of its Subsidiaries, other than Permitted Liens and Liens in favor of the applicable Governmental Authority in respect of the goods relating to the Progress Payments expressly permitted by Section 9.07(h) hereof, or (ii) any contractual obligation which may restrict or inhibit Purchaser's rights or ability to sell or otherwise dispose of the Collateral or any part thereof after the occurrence of an Event of Default.

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ARTICLE 10

PREPAYMENT

10.01.Optional Prepayment.  The Issuer may prepay the outstanding principal amount (together with accrued Interest) on the Note as follows:

(a)(a)  The Issuer may, at its option, at any time upon notice given to Purchaser as provided in Section 10.01(b), prepay, by wire transfer of immediately available funds, all or any portion of the principal amount of the Note, together with Interest accrued and unpaid on the principal amount of the Note so prepaid through the date fixed for such prepayment, provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) [reserved] and (iii) Issuer shall pay Purchaser all (A) Interest, including default interest, if any, (B) reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (C) all other costs, expenses and indemnities then payable under this Agreement; provided, however, that each payment of less than the full outstanding balance of the principal amount of the Note shall be in an aggregate amount of not less than $25,000 or integral multiples of $25,000 in excess thereof.  Any optional prepayment under this Section 10.01 shall be applied first to all costs, expenses and indemnities payable under this Agreement, then to payment of default interest, if any, then to accrued but unpaid Interest, if any, and thereafter to the premium and principal amount.

(b)The Issuer shall give written notice of prepayment of the Note pursuant to this Section 10.01 not less than 5 nor more than 30 Business Days prior to the date fixed for such prepayment.  Such notice of prepayment pursuant to this Section 10.01 shall be given in the manner specified in Section 12.02 of this Agreement and shall specify the principal amount of the Note to be prepaid.  Upon notice of prepayment pursuant to this Section 10.01 being given by the Issuer, the Issuer covenants and agrees that it will prepay, on the date therein fixed for prepayment, the principal amount so called for prepayment, together will all other amounts required under Section 10.01(a), all in the manner provided under Section 10.01(a).

10.02.Scheduled Payments; Mandatory Prepayments.

(a)The principal amount of the Note together with accrued and unpaid Interest shall be paid by wire transfer of immediately available funds in installments on the Maturity Date.

(b)Change of Control; [   ] Life Insurance Realization Event.  Upon the occurrence of a Change of Control or within five (5) Business Days of an [   ] Life Insurance Realization Event, the Issuer shall, in each case at the election of the Purchaser, prepay by wire transfer of immediately available funds the entire outstanding principal amount of the Note at 100% of the outstanding principal amount thereof, together with (x) Interest, including default interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”).  At the election of the Purchaser, all or any portion of the Mandatory Redemption Payment may be paid in the form of Marketable Securities in lieu of cash, subject to Section 6.04 hereof and to the extent available.  In the event Purchaser makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.

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(c)[Reserved].

(d)Recovery Event.  Within five (5) Business Days of any Credit Party’s receipt of proceeds in excess of $325,000 from any Recovery Event, unless a Reinvestment Notice shall have been timely delivered to Purchaser in respect thereof, the Issuer shall, at the election of the Purchaser, apply the Ratable Portion of the proceeds received by the Credit Parties in respect of such Recovery Event to prepay the Note and any other obligations then owing hereunder; provided that, notwithstanding the foregoing, (x) the aggregate proceeds in respect of Recovery Events that may be excluded from the foregoing prepayment requirements pursuant to a Reinvestment Notice shall not exceed $500,000 in any fiscal year of the Issuer, and (y) on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied towards the prepayment of the Note.  Any prepayment under this Section 10.02(d) shall be applied in the same order as set forth in Section 11.03 below.

(e)Notice.  The Issuer shall give written notice to the Purchaser of any mandatory prepayment pursuant to Section 10.02(b) by reason of a Change of Control at least ten (10) Business Days prior to the date of such prepayment.  Such notice shall be given in the manner specified in Section 12.02 of this Agreement.

ARTICLE 11

EVENTS OF DEFAULT; REMEDIES

11.01.Events of Default.  An “Event of Default” shall occur if:

(a)any Credit Party shall default in the payment of the principal amount of the Note or any installment thereof, when and as the same shall become due and payable, whether at maturity or at a date fixed for payment or prepayment or by acceleration or otherwise, and such default shall continue for a period of two (2) days after the due date for the payment thereof; or

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(b)any Credit Party shall default in the payment of any installment of Interest or any other amount due under this Agreement or the Note (other than as set forth in clause (a) of this Section 11.01) according to its terms, when and as the same shall become due and payable and such default shall continue for a period of two (2) days after the due date for the payment thereof; or

(c)any Credit Party or any of its Subsidiaries shall default in the due observance or performance of any covenant to be observed or performed pursuant to Sections 8.01, 8.02, 8.03, 8.08 (subject to clause (b) of this Section 11.01), or Article 9 of this Agreement; or

(d)any Credit Party or any of its Subsidiaries shall default in the due observance or performance of any other covenant, condition or agreement on the part of such Credit Party or such Subsidiary to be observed or performed pursuant to the terms hereof or any of the Transaction Documents (other than those referred to in clauses (a), (b) or (c) of this Section 11.01), and such default shall continue for fifteen (15) days after the earliest of (A) if any Credit Party has knowledge of such default, the date such Credit Party is required pursuant to the Transaction Documents or otherwise to give notice thereof to the Purchaser (whether or not such notice is actually given) or (B) the date of written notice thereof, specifying such default, shall have been given to the Credit Parties by the Purchaser; or

(e)any representation, warranty or certification made by or on behalf of any Credit Party or any of its Subsidiaries in this Agreement, the Note, the Transaction Documents or in any certificate or other document delivered pursuant hereto or thereto shall have been incorrect in any material respect (without duplication of any materiality qualification therein) when made; or

(f)(x) any event or condition shall occur that results in (A) the acceleration of the maturity of any Indebtedness of any Credit Party or of any of their Subsidiaries, or (B) a default of any Indebtedness of any Credit Party or any of its Subsidiaries that continues beyond any applicable period of cure, in either case in an amount in excess of $100,000 for any Credit Party or its Subsidiaries or $200,000 for all Credit Parties and their respective Subsidiaries; or

(g)any uninsured damage to or loss, theft or destruction of any assets of any Credit Party or any of its Subsidiaries shall occur that is in excess of $325,000 in the aggregate for all Credit Parties and Subsidiaries; or

(h)an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (A) relief in respect of any Credit Party or any of its Subsidiaries, or of a substantial part of any of their respective property or assets, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (B) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Credit Party or any of its Subsidiaries, or for a substantial part of any of their respective property or assets, or (C) the winding up or liquidation of any Credit Party or any of its Subsidiaries; and such proceeding or petition shall continue undismissed for sixty (60) days, or an order or decree approving or ordering any of the foregoing shall be entered; or

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(i)any Credit Party or any of its Subsidiaries shall (A) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar Applicable Law, (B) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (h) of this Section 11.01, (C) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official, for a substantial part of its property or assets, (D) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (E) make a general assignment for the benefit of creditors, (F) become unable, admit in writing its inability or fail generally to pay its debts as they become due, or (G) take any action for the purpose of effecting any of the foregoing; or

(j)one or more judgments for the payment of money in an aggregate amount in excess of $200,000 shall be rendered against one or more of the Credit Parties or their respective Subsidiaries (in either case, except to the extent covered by insurance as to which the insurance company has acknowledged coverage) and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of any Credit Party or any of its Subsidiaries to enforce any such judgment; or

(k)any Credit Party or any of its Subsidiaries shall commence legal action challenging the validity and binding effect of any provision of any of the Transaction Documents or any of the Transaction Documents shall for any reason (except to the extent permitted by its express terms) cease to be effective or, if in the case of the Transaction Documents intended to provide a Lien in favor of the Purchaser, fail to create a valid and perfected first priority Lien (except for Permitted Liens that by operation of law would take priority) on, or security interest in, any of the Collateral purported to be covered; or

(l)unless otherwise waived or consented to by the Purchaser in writing, the subordination provisions relating to the Subordinated Debt or any other Indebtedness subordinated to the Indebtedness pursuant to the Note and the Agreement in excess of $100,000 in the aggregate for all subordinated debt (collectively, the “Subordination Provisions”) shall fail to be enforceable by the Purchaser in accordance with the terms thereof, or the monetary obligations pursuant to the Note and this Agreement shall fail to constitute “Senior Debt” (or similar term) referring to such obligations; or any Credit Party shall, directly or indirectly, disavow or contest in any manner (i) the effectiveness, validity or enforceability of any of the Subordination Provisions, (ii) that the Subordination Provisions exist for the benefit of the Purchaser or (iii) that all payments of principal of or premium and interest on the such subordinated Indebtedness, or realized from the liquidation of any property of any Credit Party or Subsidiary, shall be subject to any of such Subordination Provisions; or

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(m)Robert H. Walker or Jeffrey C. [   ] (or any replacement appointed in accordance with this Section 11.01(m)) shall cease to have the title and perform the functions of Chairman and Chief Executive Officer, and President and Chief Operating Officer, respectively, of Issuer at any time and Issuer shall fail to appoint a replacement for such office and functions reasonably acceptable to Purchaser, within ninety (90) days after such vacancy; or

(n)(i) with respect to any Government Contract, receipt of a written termination for default issued by the applicable Governmental Authority and such default is not waived or cured within the applicable grace period; or (ii) any Credit Party or any Subsidiary shall have (A) received a written notice of debarment or suspension from contracting with any Governmental Authority or (B) been debarred or suspended from contracting with any Governmental Authority; or (iii)  receipt of a written termination for default of a Government Contract issued by the applicable Governmental Authority based on a finding of fraud, criminal activity, deception or willful misconduct; or

(o)(i) any Credit Party shall be debarred or suspended from any contracting with a Governmental Authority; (ii) any notice of debarment or notice of suspension shall have been issued to any Credit Party; or (iii) any notice of termination for default or the actual termination for default of any Material Contract shall have been issued to or received by any Credit Party; or

(p)a Litigation set forth on Schedule 5.05 shall be resolved adversely to any Credit Party and such adverse resolution could reasonably be expected to have a Material Adverse Effect.

11.02.Acceleration and Remedies.  If an Event of Default occurs under Section 11.01(h) or (i), then the outstanding principal of and all accrued Interest on the Note shall automatically become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived.  If any other Event of Default occurs and is continuing, Purchaser may, by written notice to the Credit Parties, declare the principal of and accrued Interest on the Note to be immediately due and payable.  Upon any such declaration, such principal and Interest shall become immediately due and payable.  The Purchaser may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived, except nonpayment of principal or Interest that has become due solely because of the acceleration, and if the rescission would not conflict with any judgment or decree.  Any notice or rescission shall be given in the manner specified in Section 12.02 hereof.  Upon the occurrence of an Event of Default, Purchaser shall have the right to exercise any and all rights and remedies provided for herein, under the Security Documents, under the Uniform Commercial Code and at law or equity generally, including the right to foreclose the security interests granted under the Security Documents and to realize upon any collateral by any available judicial procedure and/or to take possession of and sell any or all of the collateral with or without judicial process.

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11.03.Application of Proceeds.  Notwithstanding any other provisions of this Agreement to the contrary, after the occurrence and during the continuance of an Event of Default, all amounts collected or received by the Purchaser on account of the Note or any other amounts outstanding under any of the Transaction Documents or in respect of the Collateral may, at Purchaser’s discretion be paid over or delivered as follows:

(a)FIRST, to the payment of all reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) of the Purchaser in connection with enforcing its rights and the rights of the Purchaser under this Agreement and the other Transaction Documents;

(b)SECOND, to the payment of any fees owed to the Purchaser;

(c)THIRD, to the payment of all accrued fees and Interest which has not been included in the principal amount, in respect of the Note, this Agreement or the other Transaction Documents;

(d)FOURTH, to the payment of the principal amount of the Note;

(e)FIFTH, to all other obligations which shall have become due and payable under the Transaction Documents or otherwise and not repaid pursuant to clauses “FIRST” through “FOURTH” above; and

(f)SIXTH, the balance, if any, to whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing, amounts received shall be applied in the numerical order provided until exhausted prior to application to the next succeeding category.

ARTICLE 12

MISCELLANEOUS

12.01.Survival of Representations and Warranties.  All of the representations and warranties made herein shall survive the execution and delivery of this Agreement and any investigation by or on behalf of the Purchaser, acceptance of the Securities and payment therefor.

12.02.Notices.  All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first class mail, return receipt requested, facsimile (with receipt confirmed), electronic transmission (i.e., e-mail), courier service or personal delivery:

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if to the Purchaser:

 [   ]

with a copy to:

[   ]

if to any Credit Party:

Tel-Instrument Electronics Corp.

728 Garden Street

Carlstadt, New Jersey 07072

Facsimile: (201) 933-7340

Attention:  Joseph P. Macaluso

with a copy to:

Lucosky Brookman LLP

33 Wood Avenue South, 6th Floor

Iselin, New Jersey 08830

Facsimile: (732) 395-4401 (201) 933-7340

Attention: Seth Brookman

All such notices and communications shall be deemed to be effective: (i) in the case of hand-delivery, when delivered; (ii) in the case of a facsimile transmission, when sent to the applicable party’s facsimile machine’s telephone number, if the party sending such notice or communication receives confirmation of the delivery thereof from its own facsimile machine; (iii) in the case of electronic transmission, when actually received; (iv) in the case of mail, five (5) Business Days after being deposited in the mail, postage prepaid; or (v) if given by any other means (including by overnight courier), when actually received.

12.03.Successors and Assigns.

(a)This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto.  Subject to applicable securities laws, and subject to the prior written consent of the Issuer (such consent not to be unreasonably withheld, conditioned or delayed), the Purchaser may assign any of its rights under any of the Transaction Documents, in whole or in part, to any Person, and any such purported assignment without such consent shall be void and of no effect; provided, however, that no such consent will be required (i) with respect to any transfer or assignment to any partner, member or Affiliate of the Purchaser, or (ii) upon or following the occurrence of any Default or Event of Default.  No Credit Party may assign any of their respective rights, or delegate any of its obligations, under this Agreement or any of the other Transaction Documents without the prior written consent of the Purchaser, and any such purported assignment by any Credit Party without the written consent of the Purchaser shall be void and of no effect.  Except as provided in Article 7, no Person other than the parties hereto and to the other Transaction Documents and their successors and permitted assigns is intended to be a beneficiary of any of such Transaction Documents.

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(b)Notwithstanding any other provision of this Agreement or any other Transaction Document to the contrary, the Purchaser may at any time create a security interest in all or any portion of its rights under this Agreement, the Note or any other Transaction Document, and the Collateral.

12.04.Amendment and Waiver.

(a)No failure or delay on the part of any of the parties hereto in exercising any right, power or remedy hereunder 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.  The remedies provided for in this Agreement are cumulative and are not exclusive of any remedies that may be available to the parties hereto at law, in equity or otherwise.

(b)Any Modification of this Agreement, the Note or the Security Documents, shall be effective as to the parties hereto (i) only if it is made or given in writing and signed by each Credit Party and the Purchaser, and (ii) only in the specific instance and for the specific purpose for which made or given.  No amendment, supplement or modification of or to any provision of this Agreement or any of the other Transaction Documents, or any waiver of any such provision or consent to any departure by any party from the terms of any such provision may be made orally.  Except where notice is specifically required by this Agreement, no notice to or demand on any party hereto in any case shall entitle such party to any other or further notice or demand in similar or other circumstances.

(c)Any Modification of the Warrant shall be effective as to Issuer and Purchaser (i) only if it is made or given in writing and signed by Issuer and Purchaser and the, and (ii) only in the specific instance and for the specific purpose for which made or given.

12.05.Confidentiality.

(a)To the extent the Purchaser receives an Information (as defined below), Purchaser agrees to maintain the confidentiality of such Information in accordance with its customary procedures for handling confidential information, except that Information may be disclosed by Purchaser: (i) to its Affiliates and to its and its Affiliates’ respective partners, equity holders, directors, officers, employees, agents, advisors and other representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential in the same manner as provided herein); (ii) to the extent requested by any regulatory authority or self-regulatory authority purporting to have jurisdiction over it; (iii) to the extent required by Applicable Law or by any subpoena or similar legal process (provided that (A) if Information is to be disclosed pursuant to this clause (iii), Purchaser will, to the extent practicable, promptly notify Issuer thereof and cooperate with Issuer, to the extent legally permissible, if Issuer should seek to obtain an order or other reliable assurance that confidential treatment will be accorded to designated portions of the Information, and (B) Purchaser shall be entitled to reimbursement from Issuer for all expenses incurred by it or any of its Affiliates, including the fees and expenses of counsel, in connection with any action taken pursuant to the proviso to this clause (iii)); (iv) to any other party hereto; (v) in connection with the exercise of any remedies hereunder or under any other Transaction Document or any action or proceeding relating to this Agreement or any other Transaction Document or the enforcement of rights hereunder or thereunder; (vi) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee or transferee of, or any prospective assignee or transferee of, any of its rights or obligations under this Agreement; (vii) with the consent of the applicable Credit Party; or (viii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Section or (B) is disclosed to any Purchaser or any of their respective Affiliates by a third party not apparently acting at the direction of any Credit Party; provided such Person does not have knowledge, after reasonable inquiry, that such third party is prohibited from disclosing such information or has wrongfully obtained it.

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(b)For purposes of this Section, “Information” means all information received from the Credit Parties or any of their respective Subsidiaries relating to such Person or any of their respective Subsidiaries or any of their respective businesses, other than any such information that is available to any Purchaser on a nonconfidential basis prior to disclosure by such Person.

(c)The Credit Parties hereby agree that they shall (i) identify in writing, and (ii) to the extent reasonably practicable, clearly and conspicuously mark any information or other materials delivered by a Credit Party pursuant hereto that contain any information that is publicly available or that is not material for purposes of United States federal and state securities laws as “PUBLIC”.  The Credit Parties agree that by identifying such information or other materials as “PUBLIC” or including such information in SEC Reports, then the Purchaser shall be entitled to treat such information or other material as not containing any material non-public information for purposes of United States federal and state securities laws (“MNPI”).  The Credit Parties further represent, warrant, acknowledge and agree that the Transaction Documents, including the schedules and exhibits attached thereto following documents and materials shall be deemed to be PUBLIC, whether or not so marked, and do not contain any MNPI: (A) the Transaction Documents, including the schedules and exhibits attached thereto, and (B) administrative materials of a customary nature prepared by the Credit Parties (including, notices of prepayment and routine notices required to maintain the security interests granted pursuant to the Transaction Documents).

12.06.Signatures; Counterparts.  Facsimile or electronic transmissions of any executed original document and/or retransmission of any executed facsimile or electronic transmission shall be deemed to be the same as the delivery of an executed original.  At the request of any party hereto, the other parties hereto shall confirm facsimile or electronic transmissions by executing duplicate original documents and delivering the same to the requesting party or parties.  This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

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12.07.Headings.  The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

12.08.GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.

12.09.JURISDICTION; JURY TRIAL WAIVER.

(a)EACH PARTY HERETO HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE SECURITIES OR ANY AGREEMENTS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY SHALL BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM.  EACH PARTY HERETO HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 12.02, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY HERETO OR THE HOLDER OF THE NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OTHER PARTY HERETO IN ANY OTHER JURISDICTION IN THE EVENT THAT A STATE OR FEDERAL COURT LOCATED IN THE COUNTY OF NEW YORK DECLINES JURISDICTION.

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(b)EACH PARTY HERETO AND EACH OF ITS SUBSIDIARIES, HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE SECURITIES OR ANY OF THE OTHER TRANSACTION DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.  EACH PARTY HERETO AND EACH OF ITS SUBSIDIARIES (I) CERTIFIES THAT NEITHER THE OTHER PARTY HERETO NOR ITS REPRESENTATIVES OR ATTORNEYS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT EACH PARTY HERETO HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, AND THE OTHER TRANSACTION DOCUMENTS TO WHICH IT IS PARTY BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

12.10.Severability.  If any one or more of the provisions contained in this Agreement, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions of this Agreement.  The parties hereto further agree to replace such invalid, illegal or unenforceable provisions of this Agreement with valid, legal and enforceable provisions that will achieve, to the extent possible, the economic, business and other purposes of such invalid, illegal or unenforceable provisions.

12.11.Entire Agreement.  This Agreement, together with the exhibits and schedules hereto and the other Transaction Documents, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein.  There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein.  This Agreement, together with the exhibits and schedules hereto, and the other Transaction Documents supersede all prior agreements and understandings between the parties with respect to such subject matter.

12.12.Certain Expenses.  The Credit Parties will pay all reasonable expenses of the Purchaser (including fees, charges and disbursements of counsel) in connection with (i) any amendment, supplement, modification or waiver of or to any provision of this Agreement or any of the other Transaction Documents or any documents relating thereto (including a response to a request by any Credit Party for the Purchaser’s consent to any action otherwise prohibited hereunder or thereunder), or consent to any departure from, the terms of any provision of this Agreement or such other documents, (ii) all efforts made to enforce payment of the Note, (iii) instituting, maintaining, preserving, enforcing and foreclosing on Purchaser’s security interest in or Lien on any of the Collateral, or maintaining, preserving or enforcing any of Purchaser’s or the Purchaser’s rights hereunder and under all related agreements, documents and instruments, whether through judicial proceedings or otherwise, (iv) defending or prosecuting any actions or proceedings arising out of or relating to the Purchaser’s transactions with any Credit Party (provided, however, that any expenses paid under this clause (iv) shall be refunded to the Credit Parties to the extent that it is finally judicially determined that the subject matter in question under such action or proceeding resulted primarily from (A) the willful misconduct or gross negligence of Purchaser or (B) the breach by Purchaser of any representation, warranty, covenant or other agreement contained in this Agreement or any other Transaction Document), or (v) any advice given to the Purchaser with respect to its rights and obligations under this Agreement and all related agreements, documents and instruments.  Such payment will be made by the Credit Parties against receipt of reasonably detailed invoices therefor.

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12.13.Publicity.  Except as may be required by Applicable Law, none of the parties hereto shall issue a publicity release or announcement or otherwise make any public disclosure concerning this Agreement or the transactions contemplated hereby, without prior approval by the other parties hereto.  If any announcement is required by law to be made by any party hereto, prior to making such announcement such party will deliver a draft of such announcement to the other parties and shall give the other parties an opportunity to comment thereon.  Notwithstanding the foregoing, the Purchaser or any Affiliate of the Purchaser may (i) disclose a general description of transactions arising under the Transaction Documents for advertising, marketing or other similar purposes, and (ii) use any Credit Party’s name, logo or other indicia germane to such party in connection with such advertising, marketing or other similar purposes, and, in each case, may post such information on its website but, in each case, only after the Credit Parties have publicly disclosed the matter as may be required under Applicable Law.

12.14.Further Assurances.  Each of the parties shall execute such documents and perform such further acts (including obtaining any consents, exemptions, authorizations, or other actions by, or giving any notices to, or making any filings with, any Governmental Authority or any other Person) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement, including, subject to Section 12.03(a) hereof, any post-closing assignment(s) by the Purchaser of a portion of the Securities to a Person not currently a party hereto.

12.15.No Strict Construction.  The parties hereto have participated jointly in the negotiation and drafting of this Agreement and the other Transaction Documents.  In the event an ambiguity or question of intent or interpretation arises under any provision of this Agreement or any Transaction Document, this Agreement or such other Transaction Document shall be construed as if drafted jointly by the parties thereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement or any other Transaction Document.  No knowledge of, or investigation, including due diligence investigation, conducted by, or on behalf of, the Purchaser shall limit, modify or affect the representations set forth in Article 5 of this Agreement or the right of the Purchaser to rely thereon.

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12.16.Joint and Several Liability.  All amounts funded by the Purchaser hereunder shall be deemed to be jointly funded to, or at the direction of, and received by, or at the direction of, the Credit Parties.  Each Credit Party jointly and severally agrees to pay, and shall be jointly and severally liable under this Agreement for, all obligations to the Purchaser regardless of the manner or amount in which proceeds are used, allocated, shared, or disbursed by or among the Credit Parties themselves.  Each Credit Party shall be liable for all amounts due to the Purchaser under this Agreement and the Note, regardless of which Credit Party actually receives such funds.

12.17.Transfer of the Note.

(a)The term “Purchaser” as used herein shall include any transferee of the Note whose name has been recorded by the Issuer in the Note Register.  Each transferee of the Note acknowledges that the Note has not been registered under the Securities Act, and may be transferred only pursuant to an effective registration under the Securities Act or pursuant to an applicable exemption from the registration requirements of the Securities Act, and otherwise in accordance with Section 12.03(a) hereof.

(b)The Issuer shall maintain a register (the “Note Register”) in its principal offices for the purpose of registering the Note has and any transfer or partial transfer thereof, which register shall reflect and identify, at all times, the ownership of record of any interest in the Note has or any interest therein.  Upon the issuance of the Note, the Issuer shall record the name and address of the initial purchaser of the Note in the Note Register as the first Purchaser.  Upon surrender for registration of transfer or exchange of the Note at the principal offices of the Issuer, the Issuer shall, at its expense, execute and deliver one or more new Notes of like tenor and of denominations of at least $50,000 (except as may be necessary to reflect any principal amount not evenly divisible by $50,000) of a like aggregate principal amount, registered in the name of the Purchaser or a transferee or transferees.  Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by written instrument of transfer duly executed by the Purchaser of such Note or the Purchaser’s attorney duly authorized in writing.

(c)On receipt by the Issuer of an affidavit of an authorized representative of the Purchaser stating the circumstances of the loss, theft, destruction or mutilation of the Note (and in the case of any such mutilation, on surrender and cancellation of such Note), the Issuer, at its expense, will promptly execute and deliver, in lieu thereof, a new Note of like tenor.  If required by the Issuer, the Purchaser must provide indemnity sufficient in the reasonable judgment of the Issuer to protect the Issuer from any loss which they may suffer if a lost, stolen or destroyed Note is replaced.

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ARTICLE 13

TAXES, YIELD PROTECTION AND ILLEGALITY

13.01.Taxes.

(a)Any and all payments by or on account of any obligation of each Credit Party hereunder or under any other Transaction Document shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if any Credit Party shall be required by Applicable Law to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions for Indemnified Taxes or Other Taxes (including deductions applicable to additional sums payable under this Section) Purchaser receives an amount equal to the sum it would have received had no such deductions for Indemnified Taxes or Other Taxes been made, (ii) such Credit Party shall make such deductions and (iii) such Credit Party shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with Applicable Law.

(b)Without limiting the provisions of paragraph (a) above, each Credit Party shall timely pay any (i) Other Taxes to the relevant Governmental Authority in accordance with Applicable Law and (ii) costs relating to the preparation and filing of any Tax Returns relating thereto.

(c)Each Credit Party shall jointly and severally indemnify the Purchaser, within thirty (30) days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Purchaser and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority.  A certificate as to the amount of such payment or liability delivered to such Credit Party, signed by an authorized person on behalf of Purchaser, shall be presumptive evidence of the matters set forth therein, absent manifest error.

(d)As soon as practicable after any payment of Indemnified Taxes or Other Taxes by a Credit Party to a Governmental Authority, such Credit Party shall deliver to Purchaser the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Purchaser.

(e)A Foreign Purchaser that is entitled to an exemption from or reduction of withholding Tax under the law of the United States, or any treaty to which such jurisdiction is a party, with respect to payments by a Credit Party under this Agreement or under any other Transaction Document shall deliver to such Credit Party, at the time or times reasonably requested by Issuer two original Internal Revenue Service Form W-8 (e.g., W-8 BEN, W-8 ECI), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, and related documentation certifying that such Foreign Purchaser is exempt from or entitled to a reduced rate of United States federal withholding tax on payments pursuant to this Agreement or any other Transaction Document.  In addition, the Purchaser, if requested by Issuer or the Purchaser, shall deliver such other documentation prescribed by Applicable Law or reasonably requested by Issuer or the Purchaser as will enable Issuer to determine whether or not the Purchaser is subject to backup withholding or information reporting requirements; provided, that the Issuer or the Purchaser, as applicable, agrees to maintain the confidentiality of any non-public information provided by the Purchaser in accordance with its customary procedures for handling confidential information and to not disclose such information except as required by Applicable Law, and provided, further, that should the Purchaser become subject to Indemnified Taxes because of its failure to deliver a form required hereunder, the Credit Parties shall take such steps as the Purchaser shall reasonably request to reasonably assist (consistent with its preexisting internal policies applied on a nondiscriminatory basis and legal and regulatory restrictions) the Purchaser to recover such Indemnified Taxes.

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(f)The agreements in this Section shall survive the termination of this Agreement and payment of the Note and all other amounts payable hereunder, under the Note or under any other Transaction Document.

(g)No Purchaser shall be obligated to contest a Tax indemnified by a Credit Party under the Transaction Documents that is asserted in the name of the Purchaser nor will the Credit Parties be permitted to contest such a Tax, unless (i) in the judgment of the Purchaser, there is a reasonable basis for such contest and the contest and its resolution does not materially disadvantage the Purchaser, and (ii) the Credit Parties bear the expense of such contest.

(h)In the event that a Purchaser is entitled, on the effective date of any assignment and acceptance under this Agreement, to the benefits of a payment pursuant to subsection (a), (b) or (c) of this Section 13.01, the assignee of the Purchaser shall be entitled, without duplication, to the benefits of such payments (in addition to any future benefits of payment that may arise with respect to such assignee) that would have been available to the Purchaser had the Purchaser not entered into such assignment and acceptance with such assignee.

13.02.Certificates of Purchaser.  To the extent Purchaser claims reimbursement or compensation pursuant to this Article 13, Purchaser shall deliver to Issuer a certificate, signed by an authorized person on behalf of Purchaser, setting forth in reasonable detail the amount payable to the Purchaser hereunder and such certificate shall be presumptive evidence of the matters set forth therein, absent manifest error.

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

TEL-INSTRUMENT ELECTRONICS CORP.

By:________________________________

Name:

Title:

[                ]

By:

Name: 

Title:

_________________________________________

Read and Approved by: [                 ]

 [signature page to securities purchase agreement]

EXHIBIT A

FORM OF NOTE

EXHIBIT B

FORM OF WARRANT

EXHIBIT C

[RESERVED]

EXHIBIT D

FORM OF SECURITY AGREEMENT

EXHIBIT E

FORM OF INVESTOR RIGHTS AGREEMENT

EXHIBIT F

[Reserved]

EXHIBIT G

[RESERVED]

EXHIBIT H

FORM OF INTERCREDITOR AGREEMENT

EXHIBIT I

FORM OF SUBORDINATION AGREEMENT

EX-10.2

Exhibit 10.2

INTERCREDITOR AGREEMENT

between

[   ]

and

[   ]

Dated as of July [__], 2012

TABLE OF CONTENTS

SECTION 1. Definitions.		2
1.1.	Defined Terms.	2
1.2.	Terms Generally.	7
SECTION 2. Lien Priorities.		7
2.1.	Relative Priorities.	7
2.2.	Perfection.	7
2.3.	Prohibition on Contesting Liens.	8
2.4.	New Liens.	8
2.5.	Similar Liens.	8
2.6.	Gratuitous Bailee for Perfection.	8
SECTION 3. Enforcement.		10
3.1.	Exercise of Collateral Remedies.	10
SECTION 4. Payments.		11
4.1.	Application of Proceeds.	11
SECTION 5. Other Agreements.		12
5.1.	Insurance.	12
5.2.	Amendments to [] Loan Documents and [] Loan Documents.	12
5.3.	Rights As Unsecured Creditors.	13
5.4.	When Discharge of [] Obligations Deemed to Not Have Occurred.	14
5.5.	When Discharge of [] Obligations Deemed to Not Have Occurred.	14
SECTION 6. Insolvency or Liquidation Proceedings.		14
6.1.	[Reserved].	14
6.2.	No Waiver.	14
6.3.	Distribution of Debt Obligations.	15
6.4.	Post-Petition Claims.	15
6.5.	Effectiveness in Insolvency or Liquidation Proceedings.	15
SECTION 7. Consent; Reliance; Waivers; Etc.		15
7.1.	Consent to [] Loan Agreement.	15
7.2.	Reliance.	15
7.3.	No Warranties or Liability.	16
7.4.	No Waiver of Lien Priorities; Marshaling.	16
7.5.	Obligations Unconditional.	17

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SECTION 8. Miscellaneous.		17
8.1.	Conflicts.	17
8.2.	Effectiveness; Continuing Nature of this Agreement; Severability.	17
8.3.	Amendments; Waivers.	18
8.4.	Information Concerning Financial Condition of the Grantors and their Subsidiaries.	18
8.5.	SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.	19
8.6.	Notices.	20
8.7.	Further Assurances.	20
8.8.	APPLICABLE LAW.	20
8.9.	Successors and Assigns.	20
8.10.	Headings.	21
8.11.	Counterparts.	21
8.12.	Authorization.	21
8.13.	No Third Party Beneficiaries.	21
8.14.	Provisions Solely to Define Relative Rights.	21

ii

INTERCREDITOR AGREEMENT

This INTERCREDITOR AGREEMENT, is dated as of July [__] 2012, and entered into by and between [   ], a Delaware limited partnership, including its successors and assigns from time to time (“[   ]”) and [   ], an Illinois limited liability company, including its successors and assigns from time to time (“[   ]”).  Capitalized terms used herein but not otherwise defined herein have the meanings set forth in Section 1 below.

RECITALS

WHEREAS, Tel-Instrument Electronics Corp., a New Jersey corporation (the “Borrower”), and [   ], in its capacity as a purchaser, have entered into that certain Securities Purchase Agreement, dated as of September 10, 2010, by and between the Borrower and [   ], as amended by Amendment No. 1 thereto dated as of November 30, 2010, Amendment No. 2 thereto dated as of February 10, 2011, Amendment No. 3 thereto dated as of April 14, 2011, and Amendment No. 4 thereto dated as of December 9, 2011 (as amended, restated, supplemented, modified or Refinanced from time to time, the “[   ]”).

WHEREAS, the Borrower and [   ], in its capacity as a purchaser, have entered into that certain Securities Purchase Agreement, dated as of July __, 2012, by and between the Borrower and [   ] (as amended, restated, supplemented, modified or Refinanced from time to time, the “[   ] Loan Agreement”);

WHEREAS, the obligations of the Borrower under the [   ] Loan Agreement are secured by substantially all of the assets of the Borrower pursuant to the terms of the [   ] Collateral Documents;

WHEREAS, the obligations of the Borrower under the [   ] Loan Agreement will be secured by substantially all of the assets of the Borrower pursuant to the terms of the [   ] Collateral Documents; and

WHEREAS, in order to induce the [   ] Claimholders and [   ] Claimholders to extend credit and other financial accommodations to or for the benefit of the Borrower, or any other Grantor, the Claimholders have agreed to the intercreditor and other provisions set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and obligations herein set forth and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

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SECTION 1.   Definitions.

1.1.Defined Terms.

As used in this Agreement, the following terms shall have the following meanings:

“Agreement”means this Intercreditor Agreement, as amended, renewed, extended, supplemented or otherwise modified from time to time in accordance with the terms hereof.

“Bankruptcy Code”means title 11 of the United States Code entitled “Bankruptcy,” as now and hereafter in effect, or any successor statute.

“Bankruptcy Law”means the Bankruptcy Code and all other liquidation, receivership, moratorium, conservatorship, assignment for the benefit of creditors, insolvency or similar federal, state or foreign law for the relief of debtors.

“[   ] Claimholders”means, at any relevant time, the holders of [   ] Obligations at such time, including the [   ] Lenders and any agent of the [   ] Lenders under the [   ] Loan Agreement.

“[   ] Collateral”means all of the assets and property of any kind whatsoever of any Grantor, whether real or personal or mixed, tangible or intangible, with respect to which a Lien is granted as security for any [   ] Obligations.

“[   ] Collateral Documents”means any agreement, document or instrument pursuant to which a Lien is granted securing any [   ] Obligations or under which rights or remedies with respect to such Liens are governed.

“[   ] Lender”means [   ] and any other “Purchaser” under and as defined in the[   ] Loan Agreement.

“[   ] Loan Agreement” means(i) the [   ] Loan Agreement and (ii) any other credit agreement, loan agreement, note agreement, promissory note, indenture or other agreement or instrument evidencing or governing the terms of any indebtedness or other financial accommodation that has been incurred to extend, increase, Refinance in whole or in part the indebtedness and other obligations outstanding under the (x) [   ] Loan Agreement or (y) any subsequent [   ] Loan Agreement, in each case as permitted in accordance with the terms hereof.  Any reference to the [   ] Loan Agreement hereunder shall be deemed a reference to any [   ] Loan Agreement then in existence.

“[   ] Loan Documents”means the [   ] Loan Agreement and the “Transaction Documents” (as defined in the [   ] Loan Agreement) and each of the other agreements, documents and instruments providing for or evidencing any other [   ] Obligation, and any other document or instrument executed or delivered at any time in connection with any [   ] Obligations, including any intercreditor or joinder agreement among holders of [   ] Obligations, to the extent such are effective at the relevant time, as each may be amended or modified from time to time in accordance with this Agreement.

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“[   ] Obligations”means all Obligations outstanding under (i) the [   ] Loan Agreement and (ii) the other [   ] Loan Documents.  “[   ] Obligations” shall include (x) all interest accrued or accruing (or which would, absent commencement of an Insolvency or Liquidation Proceeding, accrue) on [   ] Obligations in accordance with the rate specified in the relevant [   ] Loan Document and (y) all out-of-pocket fees, costs and charges incurred in connection with [   ] Obligations and as provided for under the [   ] Loan Documents, in each case whether before or after commencement of an Insolvency or Liquidation Proceeding, irrespective of whether any claim for such interest, fees, costs or charges is allowed as a claim in such Insolvency or Liquidation Proceeding.

“Borrower” has the meaning set forth in the introductory paragraph of this Agreement.

“Business Day”has the meaning set forth in the [   ] Loan Agreement.

“Claimholders” means, collectively, the [   ] Claimholders and [   ] Claimholders, each being sometimes referred to herein individually as a “Claimholder”.

“Collateral”means all of the assets and property of any kind whatsoever of any Grantor, whether real or personal or mixed, tangible or intangible, constituting both [   ] Collateral and [   ] Collateral.

“Discharge of [   ] Obligations”means, except to the extent otherwise provided in Section 5.4 and subject to Section 2.1, (i) payment in full in cash of the principal of and interest (including interest accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not a claim for such interest is, or would be, allowed in such Insolvency or Liquidation Proceeding) and premium, if any, on all indebtedness outstanding under the [   ] Loan Documents  and termination of all commitments to lend or otherwise extend credit under the [   ] Loan Documents, and (ii) payment in full in cash of all other [   ] Obligations that are due and payable or otherwise accrued and owing at or prior to the time such principal and interest are paid (including legal fees and other expenses, costs or charges accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not a claim for such fees, expenses, costs or charges is, or would be, allowed in such Insolvency or Liquidation Proceeding); provided, that, if after receipt of any payment of, or application of the proceeds of any Collateral to the repayment of, all or any part of the [   ] Obligations, any [   ] Claimholder is required to surrender such payment or proceeds to any Person for any reason, then the [   ] Obligations or any part thereof intended to be satisfied shall be reinstated and the Discharge of [   ] Obligations shall be deemed not to have occurred.

“Discharge of [   ] Obligations”means, except to the extent otherwise provided in Section 5.4 and subject to Section 2.1, (i) payment in full in cash of the principal of and interest (including interest accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not a claim for such interest is, or would be, allowed in such Insolvency or Liquidation Proceeding) and premium, if any, on all indebtedness outstanding under the [   ] Loan Documents  and termination of all commitments to lend or otherwise extend credit under the [   ] Loan Documents, and (ii) payment in full in cash of all other [   ] Obligations that are due and payable or otherwise accrued and owing at or prior to the time such principal and interest are paid (including legal fees and other expenses, costs or charges accruing on or after the commencement of any Insolvency or Liquidation Proceeding, whether or not a claim for such fees, expenses, costs or charges is, or would be, allowed in such Insolvency or Liquidation Proceeding); provided, that, if after receipt of any payment of, or application of the proceeds of any Collateral to the repayment of, all or any part of the [   ] Obligations, any [   ] Claimholder is required to surrender such payment or proceeds to any Person for any reason, then the [   ] Obligations or any part thereof intended to be satisfied shall be reinstated and the Discharge of [   ] Obligations shall be deemed not to have occurred.

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“[   ] Claimholders”means, at any relevant time, the holders of the [   ] Obligations at such time, including the [   ] Lenders and any agent of the [   ] Lenders under the [   ] Loan Agreement.

“[   ] Collateral”means all of the assets and property of any kind whatsoever of any Grantor, whether real or personal or mixed, tangible or intangible, with respect to which a Lien is granted as security for any [   ] Obligations.

“[   ] Collateral Documents”means any agreement, document or instrument pursuant to which a Lien is granted securing any [   ] Obligations or under which rights or remedies with respect to such Liens are governed.

“[   ] Lenders”means [   ] and any other “Purchaser” under and as defined in the [   ] Loan Agreement.

“[   ] Loan Agreement” means(i) the [   ] Loan Agreement, (ii) any other credit agreement, loan agreement, note agreement, promissory note, indenture, or other agreement or instrument evidencing or governing the terms of any indebtedness or other financial accommodation that has been incurred to extend, increase, Refinance in whole or in part the indebtedness and other obligations outstanding under the [   ] Loan Agreement or other agreement or instrument referred to in this clause (ii), in each case as permitted in accordance with the terms hereof.  Any reference to the [   ] Loan Agreement hereunder shall be deemed a reference to any [   ] Loan Agreement then in existence.

“[   ] Loan Documents”means the [   ] Loan Agreement and the Transaction Documents (as defined in the [   ] Loan Agreement) and each of the other agreements, documents and instruments providing for or evidencing any other [   ] Obligation, and any other document or instrument executed or delivered at any time in connection with any [   ] Obligations, as the same may be amended or modified from time to time in accordance with this Agreement.

“[   ] Obligations”means all Obligations outstanding under the [   ] Loan Agreement and the other [   ] Loan Documents.  “[   ] Obligations” shall include (i) all interest accrued or accruing (or which would, absent commencement of an Insolvency or Liquidation Proceeding, accrue) in accordance with the rate specified in the relevant [   ] Loan Document and (ii) all out-of-pocket fees, costs and charges incurred in connection with the [   ] Loan Documents and provided for thereunder, in each case whether before or after commencement of an Insolvency or Liquidation Proceeding irrespective of whether any claim for such interest, fees, costs or charges is allowed as a claim in such Insolvency or Liquidation Proceeding.

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“Exercise of Collateral Remedies” shall mean any of the following (a) any action by any Claimholder to foreclose on the Lien of such Person in any Collateral, (b) any action by any Claimholder to take possession of, or sell or otherwise realize upon, or to exercise any other rights or remedies with respect to, any Collateral, (c) the taking of any other actions by a Claimholder against any Collateral, including the taking of control or possession of, or the exercise of any right of setoff with respect to, any Collateral and/or (d) the commencement by any secured creditor of any legal proceedings or actions against or with respect to any Grantor or any of such Grantor’s property or assets or any Collateral to facilitate any of the actions described in clauses (a), (b) and (c), including the commencement of any Insolvency or Liquidation Proceeding.

“Grantors”means the Borrower and each of the Guarantors that has executed and delivered, or may from time to time hereafter execute and deliver, a [   ] Collateral Document or a [   ] Collateral Document.

“Guarantors” means any present or future guarantor of all or any part of the [   ] Obligations or the [   ] Obligations.

“Insolvency or Liquidation Proceeding”means (i) any voluntary or involuntary case or proceeding under the Bankruptcy Code or any other Bankruptcy Law with respect to any Grantor, (ii) any other voluntary or involuntary insolvency, reorganization or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding with respect to any Grantor or with respect to a material portion of their respective assets, (iii) any liquidation, dissolution, reorganization or winding up of any Grantor whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (iv) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of any Grantor.

“Lenders” shall mean, collectively, [   ] Lenders and [   ] Lenders, each being sometimes referred to herein individually as a “Lender.”

“Lien”means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing.

“Obligations”means any and all obligations, liquidated or contingent, with respect to the payment of (i) any principal of or interest or premium on any indebtedness, including any reimbursement obligation in respect of any letter of credit, or any other liability, including interest and premiums accruing after the filing of a petition initiating any proceeding under the Bankruptcy Laws irrespective of whether a claim for such interest or premium is allowed or allowable in such proceeding, (ii) any fees, indemnification obligations, expense reimbursement obligations or other liabilities payable under the documentation governing any indebtedness, including fees, costs and other charges accruing or incurred after the filing of a petition initiating any proceeding under the Bankruptcy Laws irrespective of whether a claim for such fees, costs and other charges is allowed or allowable in such proceeding, and (iii) any obligation to provide cash collateral in respect of letters of credit or any other indebtedness.

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“Person”means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governmental authorities.

“Refinance”means, in respect of any indebtedness, to refinance, replace or repay, or to issue other indebtedness, in exchange or replacement for, such indebtedness.  “Refinanced”and “Refinancing”shall have correlative meanings.

“Standstill Period” means the period beginning on the earlier of (x) March 31, 2013 and (y) the date any [   ] Claimholder notifies [   ] that there is an Event of Default (under and as defined in the [   ] Loan Agreement) and ending on the earliest of:

(i) the passage of 30 days from such date;

(ii) the filing of an Insolvency or Liquidation Proceeding involving any Grantor; or

(iii) the Discharge of [   ] Obligations.

“Subsidiary”means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof.

“Uniform Commercial Code”or “UCC” means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction.

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1.2.Terms Generally.

The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation.”  The word “will” shall be construed to have the same meaning and effect as the word “shall”.  Unless the context requires otherwise (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified to the extent not prohibited by the terms hereof, (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (iv) all references herein to Exhibits or Sections shall be construed to refer to Exhibits or Sections of this Agreement and (v) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

SECTION 2.   Lien Priorities.

2.1.Relative Priorities.

Notwithstanding the date, manner or order of grant, attachment or perfection of any Liens securing the [   ] Obligations granted on the Collateral or of any Liens securing the [   ] Obligations granted on the Collateral and notwithstanding any provision of the UCC, or any applicable law, the [   ] Claimholders and the [   ] Claimholders, hereby agree that, subject to the terms of this Agreement:  (a) any Lien on the Collateral securing any [   ] Obligations now or hereafter held by or on behalf of any [   ] Claimholder or any agent or trustee therefor, regardless of how acquired, whether by grant, possession, statute, operation of law, subrogation or otherwise, shall be pari passu in all respects to any Lien on the Collateral securing any of the [   ] Obligations and (b) any Lien on the Collateral now or hereafter held by or on behalf of any [   ] Claimholder or any agent or trustee therefor regardless of how acquired, whether by grant, possession, statute, operation of law, subrogation or otherwise, shall be pari passu in all respects to all Liens on the Collateral securing any [   ] Obligations.

2.2.Perfection.

Each Claimholder shall be solely responsible for perfecting and maintaining the perfection of its Lien in the Collateral in which such Claimholder has been granted a Lien.  The foregoing provisions of this Agreement are intended solely to govern the pari passu basis of the Liens as among the Claimholders and shall not impose on any Claimholder any obligations in respect of the disposition of proceeds of any Collateral that would conflict with prior perfected claims therein in favor of any other Person or any order or decree of any court or governmental authority or any applicable law.

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2.3.Prohibition on Contesting Liens.

The [   ] Claimholders, on the one hand, and the [   ] Claimholders, on the other hand, agree that they shall not (and hereby waive any right to) contest or support any other Person in contesting, in any proceeding (including any Insolvency or Liquidation Proceeding), the priority, validity or enforceability of a Lien held by or on behalf of any of the [   ] Claimholders in the [   ] Collateral or by or on behalf of any of the [   ] Claimholders in the [   ] Collateral, as the case may be; provided that nothing in this Agreement shall be construed to prevent or impair the rights of any Claimholder to enforce this Agreement, including the pari passu basis of the Liens securing the [   ] Obligations and [   ] Obligations as provided in Sections 2.1 and 3.1.

2.4.New Liens.

(a)So long as any [   ] Obligations remain outstanding, and subject to Section 6, each Grantor agrees that if it grants any Lien on any of its assets, or permits any of its Subsidiaries to grant a Lien on any of its assets, in favor of the [   ] Claimholders, it, or such Subsidiary, shall grant a similar Lien on such assets in favor of the [   ] Claimholders.

(b)Until the date upon which the Discharge of [   ] Obligations shall have occurred, each Grantors agrees that if it grants any Lien on any of its assets, or permits any of its Subsidiaries to grant a Lien on any of its assets, in favor of the [   ] Claimholders, it, or such Subsidiary, shall grant a similar Lien on such assets in favor of the [   ] Claimholders.

2.5.Similar Liens.

The parties hereto agree that it is their intention that the [   ] Collateral and the [   ] Collateral be identical.  In furtherance of the foregoing and of Section 8.7, the parties hereto agree, subject to the other provisions of this Agreement, upon request by a majority-in-interest of [   ] Lenders or a majority-in-interest of the [   ] Lenders, to cooperate in good faith, at the Grantors’ expense, from time to time in order to determine (i) the specific items included in the [   ] Collateral and the [   ] Collateral and the steps taken to perfect their respective Liens thereon and (ii) the identity of the respective parties obligated under the [   ] Loan Documents and the [   ] Loan Documents.

2.6.Gratuitous Bailee for Perfection.

(a) [   ] agrees to hold that part of the Collateral that is in its possession or control (or in the possession or control of its agents or bailees) to the extent that possession or control thereof is taken to perfect a Lien thereon under the UCC (such Collateral being the “Pledged Collateral”) as collateral agent for itself and as gratuitous bailee for [   ] (such bailment being intended, among other things, to satisfy the requirements of Sections 8-106(d)(3), 8-301(a)(2) and 9-313(c) of the UCC) and any assignee solely for the purpose of perfecting the security interest granted under the [   ] Loan Documents and [   ] Loan Documents, respectively, subject to the terms and conditions of this Section 2.6.  Solely with respect to any deposit accounts under the control (within the meaning of Section 9-104 of the UCC) of [   ], [   ] agrees to also hold control over such deposit accounts as gratuitous agent for [   ], subject to the terms and conditions of this Section 2.6.

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(b) [   ] agrees to hold any Pledged Collateral, as collateral agent for itself and as gratuitous bailee for [   ] (such bailment being intended, among other things, to satisfy the requirements of Sections 8-106(d)(3), 8-301(a)(2) and 9-313(c) of the UCC) and any assignee solely for the purpose of perfecting the security interest granted under the [   ] Loan Documents and [   ] Loan Documents, respectively, subject to the terms and conditions of this Section 2.6.  Solely with respect to any deposit accounts under the control (within the meaning of Section 9-104 of the UCC) of [   ], [   ] agrees to also hold control over such deposit accounts as gratuitous agent for [   ], subject to the terms and conditions of this Section 2.6.

(c) Neither [   ] nor [   ] shall have any obligation whatsoever to any other Lender, [   ] Claimholder or [   ] Claimholder to ensure that the Pledged Collateral is genuine or owned by any of the Grantors or to preserve rights or benefits of any Person except as expressly set forth in this Section 2.6.  The duties or responsibilities of [   ] under Section 2.6(a) and [   ] under Section 2.6(b) shall be limited solely to holding the Pledged Collateral as bailee (and with respect to deposit accounts, agent) in accordance with this Section 2.6 and delivering the Pledged Collateral to the other party upon the Discharge of the [   ] Obligations or the Discharge of the [   ] Obligations, as applicable, as provided in paragraph (e) below.

(d) Neither [   ] nor [   ] shall have by reason of the [   ] Collateral Documents, the [   ] Collateral Documents, this Agreement or any other document a fiduciary relationship in respect of the other Lenders, any [   ] Claimholder or any [   ] Claimholder and each of [   ], the [   ] Claimholders, [   ] and the [   ] Claimholders hereby waive and release [   ] and [   ], as applicable, from all claims and liabilities arising pursuant to the role of [   ] or [   ], as applicable, under this Section 2.6 as gratuitous bailee and gratuitous agent with respect to the Pledged Collateral.  It is understood and agreed that the interests of [   ] and [   ] may differ and each of [   ] and [   ] shall be fully entitled to act in its own interest without taking into account the interests of the other.

(e) (i) Upon the Discharge of [   ] Obligations under the [   ] Loan Documents to which [   ] is a party, [   ] shall deliver the remaining Pledged Collateral in its possession (if any) together with any necessary endorsements (such endorsement shall be without recourse and without any representation or warranty), first, to [   ] to the extent [   ] Obligations remain outstanding, and second, to the Borrower to the extent no [   ] Obligations or [   ] Obligations remain outstanding (in each case, so as to allow such Person to obtain possession or control of such Pledged Collateral).

(ii) Upon the Discharge of [   ] Obligations under the [   ] Loan Documents to which [   ] is a party, [   ] shall deliver the remaining Pledged Collateral in its possession (if any) together with any necessary endorsements (such endorsement shall be without recourse and without any representation or warranty), first, to [   ] to the extent [   ] Obligations remain outstanding, and second, to the Borrower to the extent no [   ] Obligations or [   ] Obligations remain outstanding (in each case, so as to allow such Person to obtain possession or control of such Pledged Collateral).

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SECTION 3.   Enforcement.

3.1.Exercise of Collateral Remedies.

(a)Subject to Section 3.1(b), until the Discharge of [   ] Obligations, the [   ] Claimholders shall have, and until the Discharge of [   ] Obligations, the [   ] Claimholders shall have, in each case, the right to enforce rights, exercise remedies (including set-off and the right to credit bid their debt) and make determinations regarding the release, disposition, or restrictions with respect to the Collateral without any consultation with or the consent of any [   ] Claimholder (in the case of the [   ] Claimholders) or any [   ] Claimholder (in the case of the [   ] Claimholders); provided, that all such proceedings or other actions are pursued in good faith, that the respective interests of all Claimholders attach to the proceeds thereof and all proceeds of any Exercise of Collateral Remedies are applied as required by Section 4.1.

(b)Notwithstanding anything herein to the contrary, until the expiration of the Standstill Period the [   ] Claimholders will not take any Exercise of Collateral Remedies, provided, that

(i)           the [   ] Claimholders may take any action in order to create, perfect, preserve or protect its Lien on the Collateral,

(ii)           the [   ] Claimholders shall be entitled to file any necessary responsive or defensive pleadings in opposition to any motion, claim, adversary proceeding or other pleading made by any Person objecting to or otherwise seeking the disallowance of the claims of the [   ] Claimholders, including any claims secured by the Collateral, if any, in each case not in contravention of the terms of this Agreement,

(iii)           the [   ] Claimholders shall be entitled to file any pleadings, objections, motions or agreements which assert rights or interests available to unsecured creditors of the Grantors arising under either Bankruptcy Law or applicable non-bankruptcy law, and

(iv)           the [   ] Claimholders shall be entitled to inspect and appraise the Collateral and to receive from the Grantors or third parties information and reports concerning the Collateral, in each case in accordance with the [   ] Loan Documents.

(c)           In exercising rights and remedies with respect to the Collateral, the [   ] Claimholders and the [   ] Claimholders may enforce the provisions of the [   ] Loan Documents or the [   ] Loan Documents, as applicable, and exercise remedies thereunder, all in such order and in such manner as they may determine in the exercise of their sole discretion, provided that all such rights and remedies are exercised in good faith and the proceeds thereof are applied as required by the terms of this Agreement.  Such exercise and enforcement shall include the rights of an agent appointed by the applicable Claimholders to sell or otherwise dispose of Collateral upon foreclosure, to incur expenses in connection with such sale or disposition, and to exercise all the rights and remedies of a secured creditor under the Uniform Commercial Code of any applicable jurisdiction and of a secured creditor under Bankruptcy Laws of any applicable jurisdiction.

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(d)           Each of the [   ] Claimholders and the [   ] Claimholders agree that any Collateral or any proceeds of Collateral taken or received by them, solely in connection with the Exercise of Collateral Remedies, will be applied as required by Section 4.1.

(e)           As between the [   ] Claimholders and the Borrower, the [   ] Claimholders shall be entitled to receive all payments of principal, interest, fees, expenses and other amounts due and payable as and when required pursuant to the terms of the [   ] Loan Documents (as in effect on the date hereof or as amended in accordance with this Agreement), provided, that prior to Discharge of [   ] Obligations such amounts are not proceeds of any Collateral received as result of any Exercise of Collateral Remedies by any [   ] Claimholder prior to the expiration of the Standstill Period.  As between the [   ] Claimholders and the Borrower, the [   ] Claimholders shall be entitled to receive all payments of principal, interest, fees, expenses and other amounts due and payable as and when required pursuant to the terms of the [   ] Loan Documents (as in effect on the date hereof or as amended in accordance with this Agreement).

SECTION 4.   Payments.

4.1.Application of Proceeds.

Any Collateral or proceeds of the Exercise of Collateral Remedies and any insurance proceeds in connection with a casualty event or a condemnation award with respect to Collateral, any amounts received under any Guaranty (as defined in the [   ] Loan Documents or the [   ] Loan Documents) and any amounts received under any Subordination Agreement (as defined in the [   ] Loan Documents or the [   ] Loan Documents) (collectively, “Subject Proceeds”) shall be shared among the [   ] Claimholders and the [   ] Claimholders pro rata based upon the aggregate outstanding amount of [   ] Obligations and [   ] Obligations at such time held by each such [   ] Claimholder and [   ] Claimholder.  If at any time any [   ] Claimholder or [   ] Claimholder shall have received any Subject Proceeds in excess of the payments or distributions such [   ] Claimholder or [   ] Claimholder would have been entitled to receive pursuant to the immediately preceding sentence, such [   ] Claimholder or [   ] Claimholder, as applicable, shall hold such excess Subject Proceeds in trust for the benefit of the other [   ] Claimholders or [   ] Claimholders, as applicable, and shall promptly pay over such excess payments or distributions in the form received to the appropriate [   ] Claimholder or [   ] Claimholder.  Notwithstanding any contrary provision herein or any termination of this Agreement, this Section 4.1 shall survive until all of the [   ] Obligations and [   ] Obligations are paid in full in cash or such earlier time as the parties hereto (or their representatives) have agreed in writing to terminate this Section 4.1.

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SECTION 5.   Other Agreements.

5.1.Insurance.

As between the [   ] Claimholders, on the one hand, and the [   ] Claimholders on the other, the [   ] Claimholders shall have the sole and exclusive right (a) to adjust or settle any insurance policy or claim covering any Collateral in the event of any loss thereunder and (b) to approve any award granted in any condemnation or similar proceeding affecting any Collateral.  All proceeds of any such policy and any such award in respect of any Collateral that are payable to the [   ] Claimholders or the [   ] Claimholders shall be paid to the [   ] Claimholders and the [   ] Claimholders in accordance with Section 4.1.  

5.2.Amendments to [   ] Loan Documents and [   ] Loan Documents.

(a)The [   ] Loan Documents may be amended, supplemented or otherwise modified in accordance with their terms and the [   ] Loan Agreement may be Refinanced in each case, without the consent of any [   ] Claimholder; provided, however, that the holders of such Refinancing debt bind themselves in writing to the terms of this Agreement and any such amendment, supplement, modification or Refinancing shall not:

(i)result in the aggregate principal amount of loans outstanding under the [   ] Loan Documents, after giving effect to such modification or Refinancing, exceeding $2,750,000,

(ii)increase the applicable margin or similar component of the interest rate by more than 3.00 percentage points per annum (excluding increases resulting from (i) increases in the underlying reference rate not caused by an amendment, supplement, modification or refinancing of the [   ] Loan Agreement, or (ii) the accrual of interest at the default rate),

(iii)modify or add any covenant or event of default under the [   ] Loan Documents that directly restricts any Grantor from making payments of the [   ] Obligations that would otherwise be permitted under the [   ] Loan Documents as in effect on the date hereof, or

(iv)contravene the provisions of this Agreement.

(b)The [   ] Loan Documents may be amended, supplemented or otherwise modified in accordance with their terms and the [   ] Loan Agreement may be Refinanced in each case, without the consent of any [   ] Claimholder; provided, however, that the holders of such Refinancing debt bind themselves in writing to the terms of this Agreement and any such amendment, supplement, modification or Refinancing shall not:

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(i)result in the aggregate principal amount of loans outstanding under the [   ] Loan Documents, after giving effect to such modification or Refinancing, exceeding $660,000,

(ii)increase the applicable margin or similar component of the interest rate by more than 3.00 percentage points per annum (excluding increases resulting from (i) increases in the underlying reference rate not caused by an amendment, supplement, modification or refinancing of the [   ] Loan Agreement, or (ii) the accrual of interest at the default rate),

(iii)modify or add any covenant or event of default under the [   ] Loan Documents that directly restricts any Grantor from making payments of the [   ] Obligations that would otherwise be permitted under the [   ] Loan Documents as in effect on the date hereof, or

(iv)contravene the provisions of this Agreement.

5.3.Rights As Unsecured Creditors.

Except as otherwise expressly set forth in Section 2.3 or Section 3.1, the [   ] Claimholders and the [   ] Claimholders may exercise rights and remedies as unsecured creditors against any Grantor in accordance with the terms of the [   ] Loan Documents or the [   ] Loan Documents, as applicable, and applicable law.  Nothing in this Agreement shall prohibit the receipt by the [   ] Claimholders of the required payments of interest and principal so long as such receipt is not the direct or indirect result of the Exercise of Collateral Remedies by any [   ] Claimholders prior to the expiration of the Standstill Period.  Nothing in this Agreement shall prohibit the receipt by the [   ] Claimholders of the required payments of interest and principal.  Nothing in this Agreement impairs or otherwise adversely affects any rights or remedies the [   ] Claimholders may have with respect to the Collateral.  In the event that any [   ] Claimholder or [   ] Claimholder becomes a judgment Lien creditor as a result of its enforcement of its rights as an unsecured creditor or otherwise, such judgment Lien shall be subject to the terms of this Agreement for all purposes to the same extent as all other Liens securing the [   ] Obligations and [   ] Obligations subject to this Agreement.

5.4.When Discharge of [   ] Obligations Deemed to Not Have Occurred.

If at any time after the Discharge of [   ] Obligations has occurred, any Grantor thereafter enters into any Refinancing of any [   ] Loan Document evidencing a [   ] Obligation which Refinancing is permitted hereby and by the terms of the [   ] Loan Documents, then the obligations under such Refinancing [   ] Loan Document shall automatically be treated as [   ] Obligations for all purposes of this Agreement, including for purposes of the rights in respect of Collateral set forth herein.  Upon receipt of a notice stating that the Grantors have entered into a new [   ] Loan Document, the [   ] Claimholders shall promptly enter into such documents and agreements (including amendments or supplements to this Agreement) as the Grantor or a majority-in-interest of the [   ] Claimholders shall reasonably request in order to provide to the [   ] Claimholders the rights contemplated hereby, in each case consistent in all material respects with the terms of this Agreement.  If the new [   ] Obligations under the new [   ] Loan Documents are secured by assets of the Grantors of the type constituting Collateral that do not also secure the [   ] Obligations, then the [   ] Obligations shall be secured at such time by a pari passu Lien on such assets to the same extent provided in the [   ] Collateral Documents.

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5.5.When Discharge of [   ] Obligations Deemed to Not Have Occurred.

If at any time after the Discharge of [   ] Obligations has occurred, any Grantor thereafter enters into any Refinancing of any [   ] Loan Document evidencing a [   ] Obligation which Refinancing is permitted hereby and by the terms of the [   ] Loan Documents, then the obligations under such Refinancing [   ] Loan Document shall automatically be treated as [   ] Obligations for all purposes of this Agreement, including for purposes of the Lien priorities and rights in respect of Collateral set forth herein.  Upon receipt of a notice stating that the Grantor have entered into a new [   ] Loan Document, the [   ] Claimholders shall promptly enter into such documents and agreements (including amendments or supplements to this Agreement) as the Grantor or a majority-in-interest of the [   ] Claimholders shall reasonably request in order to provide to the [   ] Claimholders the rights contemplated hereby, in each case consistent in all material respects with the terms of this Agreement.  If the new [   ] Obligations under the new [   ] Loan Documents are secured by assets of the Grantors of the type constituting Collateral that do not also secure the [   ] Obligations, then the [   ] Obligations shall be secured at such time by a pari passu Lien on such assets to the same extent provided in the [   ] Collateral Documents.

SECTION 6.   Insolvency or Liquidation Proceedings.

6.1.[Reserved].

6.2.No Waiver.

Nothing contained herein shall prohibit or in any way limit any Claimholder from objecting in any Insolvency or Liquidation Proceeding or otherwise to any action taken by any of the other Claimholders in contravention of this Agreement.

6.3.Distribution of Debt Obligations.

If, in any Insolvency or Liquidation Proceeding of any Grantor, debt obligations of the reorganized debtor secured by Liens upon any property of the reorganized debtor are distributed both on account of [   ] Obligations and on account of [   ] Obligations, then, to the extent the debt obligations distributed on account of the [   ] Obligations and on account of the [   ] Obligations are secured by Liens upon the same property, the provisions of this Agreement will survive the distribution of such debt obligations and will apply with like effect to the Liens securing such debt obligations.

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6.4.Post-Petition Claims.

(a)No [   ] Claimholder shall oppose or seek to challenge any claim by the any [   ] Claimholder for allowance in any Insolvency or Liquidation Proceeding of [   ] Obligations consisting of post-petition interest, fees, costs, charges or expenses.

(b)No [   ] Claimholder shall oppose or seek to challenge any claim by any [   ] Claimholder for allowance in any Insolvency or Liquidation Proceeding of [   ] Obligations consisting of post-petition interest, fees, costs, charges or expenses.

6.5.Effectiveness in Insolvency or Liquidation Proceedings.

This Agreement, which the parties hereto expressly acknowledge is a “subordination agreement” under Section 510(a) of the Bankruptcy Code, shall be effective before, during and after the commencement of an Insolvency or Liquidation Proceeding.  All references in this Agreement to any Grantor shall include such Person as a debtor-in-possession and any receiver or trustee for such Person in any Insolvency or Liquidation Proceeding.

SECTION 7.   Consent; Reliance; Waivers; Etc.

7.1.Consent to [   ] Loan Agreement.

By its execution hereof, [   ] hereby consents to the [   ] Loan Agreement and each other [   ] Loan Document, the incurrence of the indebtedness under the [   ] Loan Documents, the granting of the liens pursuant to the [   ] Collateral Documents and the other transactions contemplated by the [   ] Loan Documents (collectively, the “[   ] Transaction”) and agrees that notwithstanding anything in the [   ] Loan Agreement or any other [   ] Loan Document to the contrary, the execution and delivery of the [   ] Loan Documents by the Borrower and the performance of its obligations thereunder and the other [   ] Transactions shall not constitute a Default or Event of Default under the [   ] Loan Agreement.

7.2.Reliance.

The consent by the [   ] Claimholders to the execution and delivery of the [   ] Loan Documents and the grant to the [   ] Claimholders of a Lien on the Collateral and all loans and other extensions of credit made or deemed made on, prior to and after the date hereof by the [   ] Claimholders to the Grantors shall be deemed to have been given and made in reliance upon this Agreement.

7.3.No Warranties or Liability.

The [   ] Claimholders acknowledge and agree that the [   ] Claimholders have made no express or implied representation or warranty, including with respect to the execution, validity, legality, completeness, collectability or enforceability of any of the [   ] Loan Documents, the ownership of any Collateral or the perfection or priority of any Liens thereon.  The [   ] Claimholders will be entitled to manage and supervise their respective loans and extensions of credit under the [   ] Loan Documents in accordance with law and as they may otherwise, in their sole discretion, deem appropriate.  The [   ] Claimholders acknowledge and agree that the [   ] Claimholders have made no express or implied representation or warranty, including with respect to the execution, validity, legality, completeness, collectability or enforceability of any of the [   ] Loan Documents, the ownership of any Collateral or the perfection or priority of any Liens thereon.  The [   ] Claimholders will be entitled to manage and supervise their respective loans and extensions of credit under their respective [   ] Loan Documents in accordance with law and as they may otherwise, in their sole discretion, deem appropriate.  The [   ] Claimholders shall have no duty to any of the [   ] Claimholders, and the [   ] Claimholders shall have no duty to any of the [   ] Claimholders, to act or refrain from acting in a manner which allows, or results in, the occurrence or continuance of an event of default or default under any agreements with the Borrower or any other Grantor (including the [   ] Loan Documents and the [   ] Loan Documents), regardless of any knowledge thereof which they may have or be charged with.

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7.4.No Waiver of Lien Priorities; Marshaling.

Except as otherwise provided in this Agreement:

(a)No right of any [   ] Claimholders to enforce any provision of this Agreement or any [   ] Loan Document shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Borrower or any other Grantor or by any act or failure to act by any [   ] Claimholder, or by any noncompliance by any Person with the terms, provisions and covenants of this Agreement, any of the [   ] Loan Documents or any of the [   ] Loan Documents, regardless of any knowledge thereof which the any [   ] Claimholder may have or be otherwise charged with.

(b)No right of any [   ] Claimholders to enforce any provision of this Agreement or any [   ] Loan Document shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Borrower or any other Grantor or by any act or failure to act by any [   ] Claimholder, or by any noncompliance by any Person with the terms, provisions and covenants of this Agreement, any of the [   ] Loan Documents or any of the [   ] Loan Documents, regardless of any knowledge thereof which any [   ] Claimholder, may have or be otherwise charged with.

7.5.Obligations Unconditional.

Except as otherwise provided in this Agreement, all rights, interests, agreements and obligations of the [   ] Claimholders and the [   ] Claimholders, respectively, hereunder shall remain in full force and effect irrespective of:

(a)any lack of validity or enforceability of any [   ] Loan Documents or any [   ] Loan Documents or any setting aside or avoidance of any Lien;

(b)except as otherwise set forth in the Agreement, any change in the time, manner or place of payment of, or in any other terms of, all or any of the [   ] Obligations or [   ] Obligations, or any amendment or waiver or other modification, including any increase in the amount thereof, whether by course of conduct or otherwise, of the terms of any [   ] Loan Document or any [   ] Loan Document;

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(c)any exchange of any security interest in any Collateral or any other collateral, or any amendment, waiver or other modification, whether in writing or by course of conduct or otherwise, of all or any of the [   ] Obligations or [   ] Obligations or any guarantee thereof;

(d)the commencement of any Insolvency or Liquidation Proceeding in respect of the Borrower or any other Grantor; or

(e)any other circumstances which otherwise might constitute a defense available to, or a discharge of, the Borrower or any other Grantor in respect of this Agreement.

SECTION 8.   Miscellaneous.

8.1.Conflicts.

In the event of any conflict between the provisions of this Agreement and the provisions of the [   ] Loan Documents or the [   ] Loan Documents, the provisions of this Agreement shall govern and control.  The parties hereto acknowledge that the terms of this Agreement are not intended to negate any specific rights granted to the Borrower in the [   ] Loan Documents and the [   ] Loan Documents.

8.2.Effectiveness; Continuing Nature of this Agreement; Severability.

This Agreement shall become effective when executed and delivered by the parties hereto.  The [   ] Claimholders and the [   ] Claimholders each hereby waive any rights they may have under applicable law to revoke this Agreement or any of the provisions of this Agreement.  The terms of this Agreement shall survive, and shall continue in full force and effect, in any Insolvency or Liquidation Proceeding.  Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.  All references to the Borrower or any other Grantor shall include the Borrower or such Grantor as debtor and debtor-in-possession and any receiver or trustee for the Borrower or any other Grantor (as the case may be) in any Insolvency or Liquidation Proceeding.  This Agreement shall terminate and be of no further force and effect, (i) with respect to the [   ] Claimholders and the [   ] Obligations, on the date of the Discharge of [   ] Obligations, subject to the rights of the [   ] Claimholders under Section 5.5 and (ii) with respect to the [   ] Claimholders and the [   ] Obligations, on the date of the Discharge of [   ] Obligations, subject to the rights of the [   ] Claimholders under Section 5.4.

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8.3.Amendments; Waivers.

No amendment, modification or waiver of any of the provisions of this Agreement by the [   ] Claimholders or the [   ] Claimholders shall be deemed to be made unless the same shall be in writing signed on behalf of each party hereto or its authorized agent and each waiver, if any, shall be a waiver only with respect to the specific instance involved and shall in no way impair the rights of the parties making such waiver or the obligations of the other parties to such party in any other respect or at any other time.  Notwithstanding the foregoing, the Grantors shall not have any right to consent to or approve any amendment, modification or waiver of any provision of this Agreement except to the extent that the Grantors’ obligations hereunder are directly and adversely affected in a material way.

8.4.Information Concerning Financial Condition of the Grantors and their Subsidiaries.

(a)The [   ] Claimholders, on the one hand, and the [   ] Claimholders, on the other hand, shall each be responsible for keeping themselves informed of (a) the financial condition of the Grantors and their Subsidiaries and all endorsers and/or guarantors of the [   ] Obligations or the [   ] Obligations and (b) all other circumstances bearing upon the risk of nonpayment of the [   ] Obligations or the [   ] Obligations.  The [   ] Claimholders shall have no duty to advise any [   ] Claimholder of information known to them regarding such condition or any such circumstances or otherwise.  In the event any of the [   ] Claimholders, in its or their sole discretion, undertakes at any time or from time to time to provide any such information to any [   ] Claimholder, it or they shall be under no obligation (w) to make, and the [   ] Claimholders shall not make, any express or implied representation or warranty, including with respect to the accuracy, completeness, truthfulness or validity of any such information so provided, (x) to provide any additional information or to provide any such information on any subsequent occasion, (y) to undertake any investigation or (z) to disclose any information which, pursuant to accepted or reasonable commercial finance practices, such party wishes to maintain confidential or is otherwise required to maintain confidential.

(b)The Grantors by their acknowledgement hereto agree that any information provided to any [   ] Claimholder or any [   ] Claimholder may be shared by such Person with any [   ] Claimholder, any [   ] Claimholder notwithstanding a request or demand by such Grantor that such information be kept confidential; provided, that such information shall otherwise be subject to the respective confidentiality provisions in the [   ] Loan Agreement and the [   ] Loan Agreement, as applicable.

8.5.SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.

(a)ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PARTY ARISING OUT OF OR RELATING HERETO MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK TO THE EXTENT PERMITTED BY APPLICABLE LAW.  BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH PARTY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW (i) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NON-EXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (ii) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (iii) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO THE APPLICABLE PARTY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 8.6; AND (iv) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (iii) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER THE APPLICABLE PARTY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT.

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(b)EACH OF THE PARTIES HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING HEREUNDER.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER HEREOF, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS.  EACH PARTY HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 8.5(b) AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS HERETO.  IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

8.6.Notices.

Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, electronically mailed or sent by courier service or U.S. mail and shall be deemed to have been given when delivered in person or by courier service, upon receipt of electronic mail or four Business Days after deposit in the U.S. mail (registered or certified, with postage prepaid and properly addressed).  For the purposes hereof, the addresses of the parties hereto shall be as set forth below each party’s name on the signature pages hereto, or, as to each party, at such other address as may be designated by such party in a written notice to all of the other parties.

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8.7.Further Assurances.

The [   ] Claimholders, and the [   ] Claimholders, and each Grantor, agrees that each of them shall take such further action and shall execute and deliver such additional documents and instruments (in recordable form, if requested) as a majority-in-interest of [   ] Claimholders or a majority-in-interest of the [   ] Claimholders may reasonably request to effectuate the terms of this Agreement.

8.8.APPLICABLE LAW.

THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

8.9.Successors and Assigns.

(a)This Agreement shall be binding upon each of the Lenders and the Grantors and their respective successors and assigns and shall inure to the benefit of each of the Lenders and their respective successors, participants and assigns.

(b)In the case of an assignment or transfer, the assignee or transferee acquiring any interest in the [   ] Obligations or the [   ] Obligations, as the case may be, shall execute and deliver to each of the Claimholders a written acknowledgment of receipt of a copy of this Agreement and the written agreement by such Person to be bound by the terms of this Agreement, provided, that if a Lender assigns or transfers a portion of the [   ] Obligations or the [   ] Obligations, as the case may be, to an affiliate controlled by or under common control with such Lender, such Lender shall cause such Person to become bound by the terms of this Agreement, but no notice of such assignment or transfer need be given by such Lender to the [   ] Claimholders or the [   ] Claimholders, as applicable, and such affiliate shall not be required to execute any written acknowledgment or agreement.  Unless and until the applicable Claimholders receive notice of such assignment or transfer by such Lender to an affiliate, such Claimholders shall only be obligated to give any notices hereunder to such Lender and otherwise deal with such Lender and any action by such Lender shall be binding on such assignee or transferee.

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8.10.Headings.

Section 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 or be given any substantive effect.

8.11.Counterparts.

This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Delivery of an executed counterpart of a signature page of this Agreement or any document or instrument delivered in connection herewith by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement or such other document or instrument, as applicable.

8.12.Authorization.

By its signature, each Person executing this Agreement on behalf of a party hereto represents and warrants to the other parties hereto that it is duly authorized to execute this Agreement.

8.13.No Third Party Beneficiaries.

This Agreement and the rights and benefits hereof shall bind each of the parties hereto and its respective successors and assigns and shall inure to the benefit of each of the [   ] Claimholders and the [   ] Claimholders.  No other Person, including the Grantors, shall have or be entitled to assert rights or benefits hereunder.

8.14.Provisions Solely to Define Relative Rights.

The provisions of this Agreement are and are intended solely for the purpose of defining the relative rights of the [   ] Claimholders on the one hand and the [   ] Claimholders on the other hand.  Nothing in this Agreement is intended to or shall impair the rights of the Borrower or any other Grantor, or the obligations of the Borrower or any other Grantor, which are absolute and unconditional, to pay the [   ] Obligations and the [   ] Obligations as and when the same shall become due and payable in accordance with their terms.

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IN WITNESS WHEREOF, the parties hereto have executed this Intercreditor Agreement as of the date first written above.

	[   ] [   ]. By: [   ] [   ] By:   Name: Title:
Notice Address: [   ]
and with a copy to (which shall not constitute notice): [   ]

	[   ] By:    Name: Title: _____________________________________ Read and Approved by: [   ]
Notice Address: [   ]
with a copy to (which shall not constitute notice): [   ]

ACKNOWLEDGMENT

The Borrower hereby acknowledges that it has received a copy of the foregoing Intercreditor Agreement (as in effect on the date hereof, the “Initial Intercreditor Agreement”) and agrees to recognize all rights granted by the Initial Intercreditor Agreement to the [   ] Claimholders and the [   ] Claimholders, waives the provisions of Section 9-615(a) of the UCC in connection with the application of proceeds of Collateral in accordance with the provisions of the Initial Intercreditor Agreement, agrees that it will not do any act or perform any obligation which is not in accordance with the agreements set forth in the Initial Intercreditor Agreement.

ACKNOWLEDGED AS OF THE DATE FIRST WRITTEN ABOVE:

TEL-INSTRUMENT ELECTRONICS CORP.

By:  

Name:       

Title:      

EX-10.3

Exhibit 10.3

AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

           This Amended and Restated Investor Rights Agreement, made effective as of July [•], 2012 (this “Agreement”), by and among Tel-Instrument Electronics Corp., a New Jersey corporation (the “Company”), [   ]1 and [   ] (collectively, the “Specified Holders”), [   ]., a Delaware limited partnership (“[   ] Investor”), [   ], an Illinois limited liability company (“[   ] Investor” and, together with the [   ] Investor, the “Investors”, and each individually, an “Investor,” and the Investors collectively with the Specified Holders, the “Stockholders,” and each individually, a “Stockholder”).

RECITALS

A.The Company and the [   ] Investor are party to that certain Securities Purchase Agreement dated as of September 10, 2010, as amended (the “[   ] Purchase Agreement”), pursuant to which, among other things, the Company issued and sold to the BCA Investor (1) a warrant to purchase 136,920 shares of Common Stock, and (2) a warrant to purchase 20,000 shares of Common Stock (the warrants described in clauses (1) and (2), collectively, the “[   ] Warrant”).

B.The Company and the [   ] Investor are party to that certain Securities Purchase Agreement dated as of the date hereof (the “MTC Purchase Agreement,” and together with the [   ] Purchase Agreement, the “Purchase Agreements,” and each individually, a “Purchase Agreement”), pursuant to which, among other things, the Company issued and sold to the [   ] Investor a warrant (the “[   ] Warrant,” and together with the [   ]Warrant, the “Warrants,” and each individually, a “Warrant”) to purchase 50,000 shares of Common Stock.

C.The Company, the [   ] Investor and the Specified Holders entered into an Investor Rights Agreement, effective as of September 10, 2010 (the “Original Agreement”).

D.The Company, the Investors and the Specified Holders desire to amend and restate the Original Agreement in its entirety on the terms set forth in this Agreement.

AGREEMENTS

           NOW, THEREFORE, in consideration of the recitals, the mutual promises of the parties hereto and the mutual benefits to be gained by the performance thereof, and other good and valuable consideration, including the execution, delivery and performance of the Purchase Agreements, the receipt and sufficiency of which are hereby acknowledged, the Company, for its successors and permitted assigns, and the Stockholders, for themselves, their heirs, personal representatives, successors and permitted assigns, hereby agree, and amend and restate the Original Agreement in its entirety, as follows:

 

1 NTD: To be revised along with signature block upon receipt from the Company of the proper name/signatory for the Estate.

1.Preemptive Rights.

(a)The Company hereby grants to each Investor, subject to the terms and conditions specified in this Section 1, the right to purchase up to such Investor’s pro rata share (as defined below) of all New Securities (as defined in Section 1(b) hereof) that the Company may, from time to time, propose to sell and/or issue.  An Investor’s “pro rata share,” for purposes of this preemptive right, is the ratio (i) the numerator of which is the number of shares of Common Stock held by such Investor, including the number of shares of Common Stock issued or issuable to such Investor upon the exercise or conversion of all securities exercisable for or convertible into Common Stock, including Warrants, held by such Investor on the date of the Company’s written notice pursuant to Section 1(c) hereof, and (ii) the denominator of which is the number of shares of Common Stock outstanding on the date of the Company’s written notice pursuant to Section 1(c) hereof, assuming for this purpose conversion or exercise of all securities convertible into or exercisable for Common Stock and excluding any outstanding unvested shares of Common Stock.

(b)“New Securities” means any equity interests of the Company or any Subsidiary, whether or not now authorized, and rights, options or warrants to purchase such equity interests, and securities or obligations of any type whatsoever that are, or may become, convertible into or exercisable for such equity interests; provided, that the term “New Securities” does not include (i) in the case of the issuance of equity of a Subsidiary, any equity interests issued to the Company or another Subsidiary; (ii) Common Stock, or options, rights or warrants to purchase Common Stock (and Common Stock issued pursuant to the exercise thereof), or any combination thereof, issued or sold to persons who are, or who are to become, employees, officers, directors and/or consultants of the Company or any Subsidiary; provided, that such sales or issuances are approved by the Board or by a committee thereof and done in connection with such Person’s employment with, or service to, the Company or a Subsidiary (as opposed to solely for the purpose of raising capital); (iii) securities issued to a Person that is not an Affiliate of the Company in consideration of the acquisition of an interest in another company or its assets by the Company pursuant to a plan, agreement or other arrangement approved by the Board; (iv) securities issued pursuant to any stock dividend, stock split, combination or other reclassification by the Company of the Common Stock; (v) the 10,416 shares of Common Stock (subject to appropriate adjustments for any dividends, subdivisions, combinations or reclassifications of the Common Stock) to be issued upon exercise of the warrants issued to [   ] as in effect on September 10, 2010; and (vi) the Warrants or the shares of Common Stock (subject to appropriate adjustments for any dividends, subdivisions, combinations or reclassifications of the Common Stock) to be issued upon exercise of the Warrants in accordance with the terms of such Warrants in effect on the date hereof.

(c)In the event the Company proposes to undertake an issuance of New Securities, it will give each Investor written notice of its intention, describing the type of New Securities, the price, amount and the general terms upon which the Company proposes to issue the same at least thirty (30) days prior to the first closing of the proposed sale of New Securities.  Each Investor will have thirty (30) days from the date of any such notice to agree to purchase up to its pro rata share of such New Securities in accordance with Section 1(a), for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased.

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(d)In the event the Company delivers written notice described in Section 1(c), the Company will have sixty (60) days from the date of the first closing specified in such written notice to sell all such New Securities (including the New Securities, if any, to be purchased individually by an Investor pursuant to this Section 1) at a price and upon terms no more favorable to the purchasers thereof than the price and terms specified in the Company’s original notice to Investors.  In the event the Company has not sold all such New Securities within said sixty (60) day period, the Company will not thereafter issue or sell any New Securities without first offering such securities individually to Investors in the manner provided herein.

(e)The preemptive rights granted under this Section 1 will not apply to Common Stock registered pursuant to a registration statement for the sale of Common Stock in a firm underwritten public offering.

2.Rights of Co-Sale.

                      (a)           Subject to Section 2(c) below, at any time any Holder (the “Selling Holder”) has received and wishes to accept (x) a bona fide offer (the “Third Party Offer”) from a Person other than the Company (the “Offeror”) for all or any portion of the Selling Holder’s shares of Common Stock or (y) an offer from the Company to acquire any of its shares of Common Stock and the Selling Holder wishes to Transfer to such Offeror or the Company all or any portion of the Selling Holder’s shares of Common Stock, the Selling Holder will give not less than thirty (30) days’ prior written notice of such intended Transfer to each Investor (the “Section 2 Notice”), which will specifically identify the identity of the Offeror or, if applicable, the Company (the “Section 2 Offeror”), the number of shares of Common Stock being Transferred, the purchase price therefor, and a summary of the other material terms and conditions of the proposed Transfer, and will contain an offer (the “Section 2 Offer”) by the Section 2 Offeror to each Investor, which will be irrevocable for a period of 15 days after delivery thereof (the “Section 2 Period”), to purchase at the same price per share and upon the other terms offered by the Section 2 Offeror to the Selling Holder, which will be set forth in the Section 2 Notice, such Investor’s Allocable Portion of the aggregate shares of Common Stock to be acquired by the Section 2 Offeror.  For purposes of this Agreement, an Investor’s “Allocable Portion” is expressed by a fraction, (i) the numerator of which is the number of the shares of Common Stock held by such Investor, including the number of shares of Common Stock issued or issuable to such Investor upon the exercise or conversion of all securities exercisable for or convertible into shares of Common Stock (including Warrants) held by such Investor as of the date of the Section 2 Offer, and (ii) the denominator of which is the aggregate number of shares of Common Stock held by (A) such Investor, including the number of shares of Common Stock issued or issuable to such Investor upon the exercise or conversion of all securities exercisable for or convertible into shares of Common Stock (including Warrants) held by such Investor, (B) each other Investor exercising its co-sale rights under this Section 2, including the number of shares of Common Stock issued or issuable to such other Investor upon the exercise or conversion of all securities exercisable for or

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convertible into shares of Common Stock (including Warrants) held by such other Investor, and (C) the Selling Holder that are vested (or would vest in connection with the Transfer of Common Stock by the Selling Holder pursuant to this Section 2), including the number of shares of Common Stock issued or issuable to the Selling Holder upon the exercise or conversion of all securities exercisable for or convertible into such shares of Common Stock held by the Selling Holder, in each case, as of the date of the Section 2 Offer.  The Section 2 Notice will also include a copy of any written proposal, term sheet, or letter of intent or any other agreement relating to the proposed Transfer.  A copy of the Section 2 Notice will promptly be sent to the Company.  The Section 2 Offer made to each Investor may be accepted in whole or in part at the option of such Investor.  No Investor shall be required to make any representations, warranties or indemnities for the benefit of the purchaser in connection with the Section 2 Sale other than representations, warranties and indemnities made by such Investor concerning such Investor’s (i) valid ownership of its Common Stock, free of liens and encumbrances, (ii) authority, power and right to enter into and consummate such sale ((i) and (ii) collectively, “Personal Representations”) and (iii) compliance, in all material respects, with Applicable Law.  Each Investor participating in such Transfer shall provide, subject to the provisions of clauses (x), (y) and (z) below, the indemnities requested by the Selling Holder relating to the breach of any representation, warranty or covenant made by the Company, provided that (x) no Investor shall be required to pay more than its “pro rata share” of any of such indemnity obligations, (y) to the extent a participating Investor does pay more than its “pro rata share” of any of such indemnity obligations, the purchase agreement or other similar agreement relating to such Section 2 Sale shall entitle such Investor to seek contribution from the other Stockholders so that such Investor does not pay more than its “pro rata share” of such indemnity obligations, and (z) such Investor will not be liable in respect of indemnity and expense amounts for more than the net proceeds received by such Investor in connection with such Section 2 Sale.  No Investor shall be liable in respect of any Personal Representation made by any other Stockholder or any other covenant, representation or warranty that is specific to any other Stockholder nor shall any Investor be required to enter into any confidentiality, non-competition, non-hire, non-solicitation or similar restrictive covenant.  Notice of an Investor’s intention to accept a Section 2 Offer, in whole or in part, will be evidenced by a writing signed by such Investor and delivered to the Section 2 Offeror and the Company prior to the end of the Section 2 Period, setting forth the number of shares of Common Stock that such Investor elects to Transfer.  The Selling Holder shall be required to reduce the number of shares of Common Stock that it will Transfer pursuant to this Section 2 by the number of shares of Common Stock that Investors shall have elected to Transfer pursuant to this Section 2.

                      (b)           All Transfers of Common Stock to the Section 2 Offeror (including by the Holders) will be consummated contemporaneously at the offices of the Company on the later of (i) a mutually satisfactory business day as soon as practicable, but in no event more than 15 days after the expiration of the Section 2 Period, or (ii) the fifth business day following the expiration or termination of all waiting periods under Hart-Scott-Rodino Act applicable to such Transfers, or at such other time and/or place as the parties to such Transfers may agree.  The delivery of certificates or other instruments evidencing such Common Stock duly endorsed for transfer will be made on such date against payment of the purchase price for such Common Stock.

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                      (c)           The provisions of this Section 2 shall not apply to a Transfer of shares of Common Stock by a Selling Holder (i) to any spouse, issue, parents or other relatives of any of the foregoing Persons, or trusts for the benefit of such Persons, entities controlled by or controlling any of such Persons, and in the event of death or incapacity of any of such Persons, executors, heirs or testamentary legatees of such Person or (ii) pursuant to a Public Transfer.  Notwithstanding anything to the contrary contained herein, (i) no Selling Holder shall avoid the provisions of this Section 2 by making one or more Transfers to one or more entities specified in this paragraph and then disposing of all or any portion of such Selling Holder’s interest in any such entity and any Transfer (or series of related Transfers) of a controlling equity interest in a Selling Holder that is not an individual shall be deemed a Transfer by such Selling Holder of the shares of Common Stock then held by such Selling Holder and (ii) any Transfer (other than a Public Transfer) of shares of Common Stock by a Selling Holder, which Transfer is not subject to the provisions of this Section 2, shall not be effective unless the acquirer of such shares agrees in writing to be bound to the terms of this Agreement as a Holder.

3.[Reserved.]

4.Registration Rights.

(a)Demand Registrations.

(i)Requests for Investor Demand Registration.  Subject to Section 4(a)(v), at any time prior to the date that is five (5) years after the Exercise Date (as defined in the applicable Warrant) each Investor will have the right to make one (1) request for registration under the Securities Act of all or part of its Registrable Securities on Form S-1 or any similar long form registration (“Long Form Registrations”).  Subject to Section 4(a)(v), on or following the Exercise Date, each Investor shall have the right to make one (1) request per calendar year for registration under the Securities Act of all or part of its Registrable Securities, if available, on Form S-2 or S-3 or any similar short form registration (“Short Form Registrations”); provided, that the Company shall not be obligated to effect any such Short Form Registration unless the reasonably anticipated price to the public of the Registrable Securities to be registered and sold pursuant thereto exceeds $100,000.  All registrations requested pursuant to this Section 4(a)(i) are referred to herein as “Demand Registrations.”  A registration shall not count as one of the permitted Demand Registrations until it has become effective.

(ii)Demand Registration Notice.  Each request for a Demand Registration will specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering.  Within ten (10) days after receipt of any such request, the Company will give written notice of such requested registration to all other Stockholders holding Registrable Securities and will include in such registration all Registrable Securities with respect to which the Company has received from Stockholders written requests for inclusion therein within fifteen (15) days after receipt of the Company’s notice.

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(iii)Short-Form Registrations.  Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form.  The Company will use its best efforts to make Short-Form Registrations available for the sale of Registrable Securities.

(iv)Restrictions on Demand Registrations.  The Company may postpone for up to six (6) months the filing or the effectiveness of a registration statement for a Demand Registration if the Board determines, in its good faith judgment, that such Demand Registration would reasonably be expected to have an adverse effect on any proposal or plan by the Company to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction, or would require disclosure of events or matters that the Board concludes, in its good faith judgment, that it would not be in the best interests of the Company to disclose at that time; provided, that, in each such event, each Investor will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as a Demand Registration hereunder and the Company will pay all Registration Expenses in connection with such request; provided further, that the Company will not be entitled to exercise its rights under this Section 4(a)(iv) more than once with respect to any particular Demand Registration or for more than 180 days in any twelve (12) consecutive month period.

(v)Priority on Demand Registrations.  The Company will not include in any Demand Registration any securities other than Registrable Securities held by an Investor without the prior written consent of such Investor, such consent not to be unreasonably withheld.  If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities proposed to be included by an Investor and, if permitted hereunder, other securities requested to be included in such offering, exceeds the number of Registrable Securities which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration, prior to the inclusion of any securities which are not Registrable Securities owned by such Investor: (i) first, the Registrable Securities as to which Demand Registration has been requested by such Investor; and (ii) second, the number of shares of Registrable Securities which have been consented to by such Investor.

(vi)Selection of Underwriters.  The Company will have the right to select the managing underwriters to administer any private or public offering of debt, equity or other securities by the Company, who will be reasonably acceptable to each Investor and to the holders of a majority of Registrable Securities included in such Demand Registration.

(vii)Other Registration Rights.  Except as provided in this Agreement, the Company will not grant to any Persons the right to request or require the Company to register any equity securities of the Company, or any securities convertible or exchangeable into or exercisable for such securities, that are superior to or inconsistent with the registration rights granted to Investors hereunder without the prior written consent of each Investor.

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(b)Piggyback Registrations.

(i)Right to Piggyback.  Whenever the Company proposes to register any of its equity securities under the Securities Act (other than a registration on Form S-4 or Form S-8 or any successor or similar forms) and the registration form to be used may be used for the registration of Registrable Securities (a “Piggyback Registration”), whether or not for sale for its own account, the Company will give prompt written notice to each Investor of its intention to effect such a registration and will include in such registration all Registrable Securities held by each Investor with respect to which the Company has received a written request for inclusion therein within twenty (20) days after the receipt of the Company’s notice.

(ii)Priority on Primary Registrations.  If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range reasonably acceptable to the Company, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration by Investors, on a pro rata basis, and (iii) third, other securities requested to be included in such registration.

(iii)Priority on Secondary Registrations.  If a Piggyback Registration is an underwritten secondary registration on behalf of current or prospective holders of the Company’s securities (other than a Demand Registration, for which priorities are specified in Section 4(a)(v)), and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range reasonably acceptable to such holders, the Company will include in such registration (i) first, the Registrable Securities requested to be included in such registration by any holder, pro rata on the basis of the number of Registrable Securities owned by each such holder (excluding, for the purpose of this calculation, any unvested shares of Common Stock) and (ii) second, other securities requested to be included in such registration.

(c)Holdback Agreements.

(i)If requested in writing by the Company (provided that any determination made by the Company pursuant to this Section 4(c) will be effective if made by the affirmative vote of a majority of the members of the Board present at a meeting at which a quorum is present) or the managing underwriters, if any, of any registration effected pursuant to Section 4(a) or 4(b), each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the time period reasonably requested by the Company or the managing underwriters, not to exceed fourteen (14) days prior to, and the shorter of (A) the 90-day period beginning on the effective date of any underwritten Demand Registration, any underwritten Piggyback Registration, or any other underwritten registration by the Company of its securities and (B) the shortest period applicable to an Investor or a Holder who is a selling shareholder pursuant to such registration statement or who is otherwise subject to a lockup obligation with respect to such public offering (except as part of such underwritten registration); provided, however, that any waiver or release with respect to the foregoing will apply ratably to the holders of Registrable Securities.

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(ii)If requested in writing by the managing underwriters of any registration effected pursuant to Section 4(a) or 4(b), the Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the time period reasonably requested by the managing underwriters, not to exceed fourteen (14) days prior to, and the 360-day period beginning on the effective date of, any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-4 or Form S-8 or any successor forms), and (ii) use its best efforts to cause each holder of shares of Common Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock, purchased from the Company at any time after the date hereof (other than in a registered public offering), to so agree.

(d)Registration Procedures.  Whenever an Investor has requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its best efforts to effect the registration of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company will as expeditiously as possible:

(i)prepare and file with the Commission (as defined below) a registration statement with respect to such Registrable Securities and thereafter use its best efforts to cause such registration statement to become effective (provided that, before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by each Investor copies of all such documents proposed to be filed, which documents will be subject to review of such counsel, and each Investor, as applicable, will provide the Company with the documents and information required by Section 4(f) below);

(ii)prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of either (i) not less than six (6) months (subject to extension pursuant to Section 4(a)(iv)) or, if such registration statement relates to an underwritten offering, such longer period as in the opinion of counsel for the underwriters a prospectus is required by law to be delivered in connection with sales of Registrable Securities by an underwriter or dealer, subject to Section 4(f) below, or (ii) such shorter period as will terminate when all of the securities covered by such registration statement have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement (but in any event not before the expiration of any longer period required under the Securities Act), and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement, subject to Section 4(f) below;

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(iii)furnish to each seller of Registrable Securities and each underwriter such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 or Rule 430A under the Securities Act and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;

(iv)use its best efforts, subject to Section 4(f) below, to (A) register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition of the Registrable Securities owned by such seller and (B) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such seller to consummate the disposition of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction);

(v)notify each seller of Registrable Securities in writing at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the discovery of the happening of any event as a result of which, the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and, at the request of any such seller, the Company will prepare and furnish to such seller a reasonable number of copies of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading in the light of the circumstances under which they were made and, if the Company will be required to so notify such sellers, the Company will extend the period during which such registration statement will be maintained effective (including the period referred to in Section 4(d)(ii) by the number of days during the period from and including the date of the giving of notice pursuant to this Section 4(d)(v) to the date when the Company will make available to such Stockholder a prospectus supplemented or amended to conform with the requirements of this Section 4(d)(v);

(vi)use its best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed;

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(vii)provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(viii)enter into such customary agreements (including underwriting agreements with indemnification provisions in customary form) and take all such other actions as each Investor or the holders of a majority of the Registrable Securities being sold reasonably request in order to expedite or facilitate the disposition of such Registrable Securities;

(ix)upon execution of confidentiality agreements in form and substance reasonably satisfactory to the Company, make available for inspection by each Investor, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by an Investor or any such underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”), and cause the Company’s officers, directors, employees and independent accountants (subject to the accountants’ rights with respect to their work papers) to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;

(x)otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and the National Association of Securities Dealers, Inc., and make available to its security holders, as soon as reasonably practicable, an earnings statement or such other document covering the period of at least twelve (12) months beginning with the first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;

(xi)after the filing of the registration statement, (i) cause the related prospectus to be supplemented by any required prospectus supplement, and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act, (ii) comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement during the applicable period in accordance with the intended methods of disposition by the sellers of such Registrable Securities set forth in such registration statement or supplement to such prospectus and (iii) promptly notify each such seller holding Registrable Securities covered by such registration statement of any stop order issued or threatened suspending or preventing the use of any related prospectus or suspending the qualification of any securities included in such registration statement for sale in any jurisdiction and take all reasonable actions required to prevent the entry of such stop order or promptly to remove it if entered;

(xii)have its employees and personnel (i) take any actions that may be required to obtain ratings for any Registrable Securities and (ii) otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company’s businesses and the requirements of the marketing process) in the offering, marketing or selling of Registrable Securities in any underwritten offering;

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(xiii)furnish to each seller of Registrable Securities to be sold pursuant to such registration statement and to each underwriter, if any, a signed counterpart, addressed to such seller or underwriter, of a customary cold comfort letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the Company’s independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as an Investor, the holders of a majority of the Registrable Securities being sold or the managing underwriter therefor reasonably request; and

(xiv)furnish to each seller of Registrable Securities to be sold pursuant to such registration statement and to each underwriter, if any, a signed counterpart, addressed to such seller or underwriter, of a legal opinion of the Company’s outside counsel, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), with respect to the registration statement, each amendment and supplement thereto, the prospectus included herein (including the preliminary prospectus) and such other documents relating thereto in customary form and covering such matters of the type customarily covered by legal opinions of such nature.

(e)Obligations of Sellers.

(i)The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish in writing to the Company such information regarding such seller and the distribution of such securities as is customary and the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration.  Notwithstanding any provision herein to the contrary, in no event shall the Company be required to provide any audited financial statements in connection with the registration of any Registrable Securities pursuant to this Agreement, except for such audited financial statements that the Company may then otherwise be required to provide under Applicable Law (including the Securities Act, the Exchange Act, and the regulations promulgated under either of them) and/or the Purchase Agreements.

(ii)Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential will not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction.  Each seller of Registrable Securities to be sold pursuant to such registration statement will agree in the confidentiality agreement referred to in Section 4(d)(ix) that information obtained by it as a result of such inspections will be deemed confidential and will not be used by it or its Affiliates in connection with any market transactions in any securities of the Company unless and until such information is made generally available to the public.  Each such seller will further agree therein that, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, it will give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.

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(iii)Each seller of Registrable Securities to be sold pursuant to such registration statement agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(d)(v), such seller will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such seller’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 4(d)(v) (which copies such seller shall provide to all Persons to whom such seller provided the original prospectus) and, if so directed by the Company, such seller will deliver to the Company all copies, other than any permanent file copies then in such seller’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice.

(f)Registration Expenses.

(i)The Company shall pay all Registration Expenses relating to any registration of Registrable Securities held by Investors hereunder.  “Registration Expenses” will mean any and all fees and expenses incident to the Company’s performance of or compliance with this Section 4, including:  (i) Commission, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees and all listing fees and fees with respect to the inclusion of securities on the exchange on which the Company’s securities are listed, (ii) fees and expenses of compliance with state securities or “blue sky” laws and in connection with the preparation of a “blue sky” survey, including reasonable fees and expenses of blue sky counsel, (iii) security engraving and printing expenses, (iv) messenger and delivery expenses, (v) reasonable fees and disbursements of counsel for the Company and counsel for each Investor, as well as one local counsel in each jurisdiction where Registrable Securities may be offered, (vi) fees and disbursements of all independent public accountants (including the expenses of any audit and/or “cold comfort” letter) and fees and expenses of other persons, including special experts, retained by the Company, (vii) internal expenses of the Company (including all salaries and expenses of its officers and employees performing legal or accounting duties), (viii) reasonable fees and expenses of any special experts retained by the Company in connection with such registration, (ix) fees and expenses in connection with any review by the NASD of the underwriting arrangements or other terms of the offering, and all fees and expenses of any “qualified independent underwriter,” including the reasonable and documented fees and expenses of any counsel thereto, (x) any other fees and disbursements of underwriters, if any, customarily paid by issuers or sellers of securities (but excluding underwriting fees, discounts and commissions and fees and expenses of underwriter’s counsel), (xi) costs of printing and producing any agreements among underwriters, underwriting agreements, any “blue sky” or legal investment memoranda and any selling agreements and other documents in connection with the offering, sale or delivery of the Registrable Securities, and (xii) transfer agents’ and registrars’ fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering.

(ii)Notwithstanding the foregoing, (i) the provisions of this Section 4(f) will be deemed amended to the extent necessary to cause these expense provisions to comply with “blue sky” laws of each state in which the offering is made and (ii) in connection with any registration hereunder, each holder of Registrable Securities being registered will pay all underwriting fees, discounts and commissions and transfer taxes, if any, attributable to the Registrable Securities included in the offering by such holder.

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(g)Indemnification.

(i)The Company agrees to indemnify and hold harmless, to the extent permitted by law, each Investor, its officers, directors, employees, partners, trustees, custodians and agents and each Person who controls such Investor (within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act) against any losses, claims, damages, liabilities, joint or several, to which such Investor or any such director, officer, employee, partner, trustee, custodian or agent or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon (i) any untrue or alleged untrue statement of a material fact contained (A) in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or (B) in any application or other document or communication (in this Section 4(g) collectively called an “application”) executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify any securities covered by such registration statement under the “blue sky” or securities laws thereof, or (ii) any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse each Investor and each such director, officer, employee, partner, trustee, custodian or agent and controlling person for any legal or any other expenses incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission, made in such registration statement, any such prospectus or preliminary prospectus or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information prepared and furnished to the Company by such Investor expressly for use therein or by such Investor’s failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Investor with a sufficient number of copies of the same.

(ii)In connection with any registration statement in which an Investor is participating, each such participating Investor will furnish to the Company in writing such information and documents as is customary and as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify and hold harmless the Company, its directors, officers and agents and each other Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities, joint or several, to which the Company or any such director, officer or agent or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon (i) any untrue or alleged untrue statement of a material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or in any application or (ii) any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, and such Investor will reimburse the Company and each such director, officer, agent and controlling person for any legal or any other expenses incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, but in each case such Investor will have obligations under this Section 4(g)(ii) only to the extent that such untrue statement or omission is made in such registration statement, any such prospectus or preliminary prospectus or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information prepared and furnished to the Company by such Investor expressly for use therein; provided, that the obligation of such Investor to indemnify will be limited to the net amount of proceeds received by such Investor from the sale of Registrable Securities pursuant to such registration statement.

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(iii)Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification; provided, that the failure of any Person so to notify the indemnifying party will not relieve the indemnifying party of its obligations hereunder except to the extent that the indemnifying party is materially prejudiced by such failure to notify and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party.  If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld); provided, that without the prior written consent of the indemnified party, no indemnifying party will effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such proceeding.  An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim.

(iv)The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director, agent or controlling Person of such indemnified party and will survive the Transfer of securities by any holder thereof.  Each indemnifying party also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event such indemnifying party’s indemnification is unavailable for any reason.

(h)Participation in Underwritten Registrations.  If requested by the underwriters for any underwritten offering pursuant to a Demand Registration requested under Section 4(a), the Company will enter into a customary underwriting agreement with the underwriters.  Such underwriting agreement will contain such terms and conditions as are generally prevailing in agreements of that type, including indemnities and contribution agreements.  Such underwriting agreement will also contain such representations, warranties, indemnities and contributions by the participating holders as are customary in agreements of that type.  In the case of a registration pursuant to Section 4(b) hereof, if the Company will have determined to enter into any underwriting agreements in connection therewith, all of the holders’ Registrable Securities to be included in such registration will be subject to such underwriting agreement.  Such underwriting agreement will also contain such representations, warranties, indemnities and contributions by the participating holders as are customary in agreements of that type.

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(i)Current Public Information.  The Company will file all reports required to be filed by it under the Securities Act and the Securities Exchange Act and the rules and regulations adopted by the Commission thereunder, and will take such further action as any holder or holders of Registrable Securities may reasonably request, all to the extent required to enable such holders to sell Registrable Securities pursuant to Rule 144.

5.Representations and Warranties.

(a)Authority; Enforceability.  Each of the parties hereto hereby severally represents and warrants to each of the other parties hereto that such party has the legal capacity or corporate power and authority, as may be applicable, to enter into this Agreement and to carry out each of its obligations hereunder as they may hereafter arise.  Such party (in the case of parties that are not natural persons) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and, in the case of all parties hereto, has the legal right to enter into this Agreement and the execution of this Agreement and consummation of the transactions contemplated herein have been duly authorized by all necessary action.  No other act or proceeding, corporate or otherwise, on its part is necessary to authorize the execution of this Agreement or the consummation of any of the transactions contemplated hereby.  This Agreement has been duly executed by such party and constitutes its legal, valid and binding obligation, enforceable against it in accordance with the terms of this Agreement, except to the extent that such enforceability may be limited by bankruptcy, insolvency, reorganization or other laws and judicial decisions of general application relating to or affecting the enforcement of creditors’ rights general or by general equitable principles.

(b)No Breach.  Each of the parties hereto severally represents and warrants to each of the other parties hereto that neither the execution of this Agreement nor the performance by such party of its obligations hereunder does or will:

(i)in the case of parties that are not natural persons, conflict with or violate its articles of incorporation, bylaws or other applicable organizational documents;

(ii)violate, conflict with or result in the termination of, or otherwise give any other Person the right to accelerate, renegotiate or terminate or receive any payment or constitute a default or any event of default, with or without notice, lapse of time, or both, under the terms of, any contract or agreement to which it is a party or by which it or any of its assets or operations are bound or affected; or

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(iii)constitute a violation by such party of any federal, state, local or foreign statute, law, ordinance, rule, code, order, regulation, ruling, writ, injunction, award, determination or decree of any arbitral body or court or any agency, commission, department or body of any local, state, federal or foreign governmental, regulatory, administrative, judicial or quasi-governmental unit, entity or authority.

(c)Consents.  Each of the parties hereto hereby severally represents and warrants to each of the other parties hereto that no consent, waiver, approval, authorization, exemption, registration, license or declaration is required to be made or obtained by such party, other than those which have been made or obtained, in connection with (i) the execution or enforceability of this Agreement or (ii) the consummation of any of the transactions contemplated hereby, except as may be required following the date hereof under the Securities Act, Exchange Act or “blue sky” laws.

6.Term.

(a)This Agreement will terminate on September 10, 2019, unless sooner terminated upon the written agreement of the Company and each of the Stockholders.

(b)Each Investor and each Holder will cease to be an Investor or Holder, as the case may be, under this Agreement at such time as such Investor or such Holder, as the case may be, ceases to own any shares of Common Stock or securities, directly or indirectly convertible or exercisable for shares of Common Stock.

7.Notices and Offers.  All notices, requests, demands, claims, and other communications hereunder will be in writing.  Any notice, request, demand, claim, or other communication hereunder will be deemed duly given (i) when delivered personally to the recipient, (ii) one business day after being sent to the recipient by reputable overnight courier service (charges prepaid), (iii) if delivered by telecopy, on the date of transmission if transmitted on a business day before 5:00 p.m. (New York time) or, if not, on the next succeeding business day, with receipt confirmed; (c) if delivered by overnight courier, one business day after delivery to such courier properly addressed, or (iv) four (4) business days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, and addressed to the intended recipient as set forth below:

If to a Stockholder:	at the address set forth on Schedule A hereto.
If to the Company:	Tel-Instrument Electronics Corp.
	728 Garden Street
	Carlstadt, New Jersey07072
	Attention: Joseph P. Macaluso
	Fax No.: (201) 933-7340
	Telephone No.: (201) 933-1600

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           Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth.

8.Restrictive Agreements.  Neither the Company nor any Stockholder will enter into, become a party to, become subject to or authorize any agreement or instrument that would restrict, prohibit or interfere with its performance of its obligations under the terms of this Agreement.

9.Delays or Omissions.  No delay or omission to exercise any right, power or remedy accruing to any party, upon any breach or default of any other party under this Agreement will impair any such right, power or remedy of such party, nor will it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor will any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.  No waiver shall be deemed to be made by any party of its rights hereunder unless the same shall be in writing signed on behalf of such party, and each waiver, if any, shall in no way impair the rights or obligations of any other party in any other respect at any other time.

10.Remedies; Specific Performance.  The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party will not preclude or waive the right to use any or all other remedies.  Such rights and remedies are given in addition to any other rights the parties may have under law or otherwise.  The parties acknowledge that all legal remedies for any breach of this Agreement may be inadequate, and therefore they (a) consent to the entry by any court of competent jurisdiction of any appropriate equitable remedy, including specific performance of this Agreement and the enjoining of any continuing breach of this Agreement, without the necessity of proving actual damages, and without posting bond or other security, in addition to any other remedy at law to which an aggrieved party may be entitled and (b) waive any and all defenses in any action for specific performance or other equitable relief that a remedy at law would be adequate.

11.Delegation; Assignment.  No Holder will delegate or assign any duties or rights under this Agreement without the prior written consent of all parties to this Agreement.  Any such delegation or assignment without the prior written consent of all parties to this Agreement will be void.  Subject to Section 9 of the applicable Warrant and Section 6(a) hereof, each Investor shall have the right to delegate or assign any duties or any rights under this Agreement to any Person to whom such Investor Transfers (other than a Public Transfer) such Warrant or Common Stock.  No party delegating or assigning duties or rights hereunder shall be released from its duties hereunder and such party will continue to be jointly and severally liable with the Person to whom it has delegated duties for all defaults and breaches of this Agreement by either of them.  Subject to Section 6(b) hereof, upon and at any time after a Transfer by an Investor or any Holder permitted hereunder, references to such Investor or such Holder herein, as the case may be, will be deemed to refer to such Investor or such Holder, as the case may be, and each such transferee.

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12.Binding Effect; Successors and Assigns.  Except as expressly provided herein, this Agreement will be binding upon and inure to the benefit of the parties and their respective heirs, personal representatives, successors and permitted transferees and assigns; provided, however, that, except as expressly provided herein, no purchaser or transferee of shares of Common Stock will derive any rights under this Agreement unless and until such purchaser or transferee has delivered to the Company a valid undertaking to become, and becomes, bound by the terms of this Agreement to which the seller or transferor, as applicable, of such shares of Common Stock is subject.  Notwithstanding any provision in this Agreement to the contrary, no Person who acquires Common Stock from a Stockholder pursuant to a Public Transfer shall have any rights or be subject to any duties or obligations under this Agreement.

13.STATE LAW; JURISDICTION; FORUM.  THIS AGREEMENT WILL BE SUBJECT TO, GOVERNED BY AND CONSTRUED UNDER AND IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS OR CHOICE OF LAW PROVISIONS OR PRINCIPLES THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.  BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY, INVESTORS AND EACH OF THE HOLDERS SUBMITS TO THE PERSONAL JURISDICTION OF ANY STATE OR FEDERAL COURT IN THE STATE OF NEW YORK IN ANY SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND HEREBY AGREES THAT THE APPROPRIATE AND EXCLUSIVE FORUM FOR ANY DISPUTES BETWEEN ANY OF THE PARTIES HERETO ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY WILL BE IN ANY STATE OR FEDERAL COURT IN THE STATE AND CITY OF NEW YORK.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OTHER PARTY HERETO IN ANY OTHER JURISDICTION IN THE EVENT THAT A STATE OR FEDERAL COURT LOCATED IN THE STATE AND CITY OF NEW YORK DECLINES JURISDICTION.

14.Entire Agreement.  This Agreement, the Purchase Agreements and the other Transaction Documents contain the entire understanding among the parties with respect to the subject matter hereof and thereof and supersede any prior agreement (including the Original Agreement) between the parties hereto concerning the subject matter hereof or thereof.

15.Additional Securities; Recapitalizations; Exchanges; etc.  Except as otherwise provided herein, the provisions of this Agreement will apply to the full extent set forth herein with respect to (a) the shares of Common Stock held by, or issued to, the Stockholders on or after the date hereof; and (b) any and all Common Stock or shares of capital stock of any successor or assign of the Company (whether by merger, consolidation, exchange, sale of assets or otherwise), which may be issued in respect of, in exchange for, or in substitution for such shares, by reason of any stock dividend, stock split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise.  References to the “Company” in this Agreement will be deemed to refer to any such successor or assign and such entity will execute an appropriate instrument of assumption agreeing to be bound by the terms hereof.

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16.Severability.  Wherever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement will be prohibited by or invalid under any such law, such provision will be limited to the minimum extent necessary to render the same valid or will be excised from this Agreement, as the circumstances require, and this Agreement will be construed as if said provision had been incorporated herein as so limited or as if said provision had not been included herein, as the case may be, and enforced to the maximum extent permitted by law.

17.Construction.  In the construction of this Agreement, the masculine gender will include the feminine or the neuter in all cases where such meanings would be appropriate.  Headings contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, or extend the scope or intent of this Agreement or any provision hereof.  The words “herein,” “hereof,” “hereunder,” “hereby” and other words of similar import refer to this Agreement as a whole and not to any particular provision, and the words “include,” “includes” and “including” are deemed to be followed by the phrase “without limitation.”

18.Amendment.  This Agreement will not be modified or amended, nor will the operation of any provision hereof be waived, except in a writing signed by the Company, each Investor and each Holder; provided that, the Transfer of rights pursuant to Section 11 shall not be deemed an amendment for purposes of this Section 18.

19.Counterparts.  This Agreement may be executed in counterparts, each of which will be deemed an original hereof but all of which together constitute one and the same instrument.

20.No Waiver.  Notwithstanding any provision herein to the contrary, nothing herein shall be construed to limit, waive, amend or alter the terms and provisions of the Purchase Agreements and the Transaction Documents (as defined in the Purchase Agreements) or any rights or remedies available to Investors and their respective Affiliates as creditors of the Company and its Subsidiaries (as defined in the Purchase Agreements) or their respective Affiliates, as the case may be.  Without limiting the generality of the foregoing, any such Person, in exercising its rights as a creditor, will have no duty to consider (a) its status as a direct or indirect stockholder of the Company, or (b) any duty it may have to any other direct or indirect stockholder of the Company, except as may be required under the applicable loan or purchase documents or by applicable law.

21.Definitions.  All capitalized terms used in this Agreement without definition will have the respective meanings given to them in the Purchase Agreements.  As used herein, the following terms have the following meanings:

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“Affiliate” means, with respect to any Person, any other Person which directly or indirectly through one or more intermediaries Controls, is Controlled by, or is under Common Control with such Person and, in the case of an Investor includes any Related Fund of such Investor.

“Agreement” has the meaning set forth in the preface.

“Allocable Portion” has the meaning set forth in Section 2(a).

“BCA Investor” has the meaning set forth in the preface.

“BCA Purchase Agreement” has the meaning set forth in the Recitals.

“BCA Warrant” has the meaning set forth in the Recitals.

“Board” shall mean the Board of Directors of the Company.

“Commission” means the United States Securities and Exchange Commission.

“Common Stock” means the Company’s common stock, par value $.10 per share, and any class or series of common stock of the Company authorized after the date hereof, or any other class or series of stock resulting from successive changes or reclassifications of any class or series of common stock of the Company.

“Company” has the meaning set forth in the preface.

“Control” (including, with correlative meaning, the terms “Controlling,” “Controlled by,” and “under Common Control with”) means (A) the ownership, directly or indirectly, of more than twelve and one-half percent (12.5%) of the voting securities of such Person, or (B) the power to otherwise direct the management and policies of such Person whether by contract or otherwise.

“Demand Registrations” has the meaning set forth in Section 4(a)(i).

“Holders” means each of the Specified Holders, together with any spouse, issue, parents or other relatives of any of the foregoing Persons, or trusts for the benefit of such Persons, entities controlled by or controlling any of such Persons, and in the event of death or incapacity of any of such Persons, executors, heirs or testamentary legatees of such Person, so long as such Person is holding shares of Common Stock.

“Inspectors” has the meaning set forth in Section 4(d)(ix).

“Investors” has the meaning set forth in the preface.

“Long-Form Registrations” has the meaning set forth in Section 4(a)(i).

“MTC Investor” has the meaning set forth in the preface.

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“MTC Purchase Agreement” has the meaning set forth in the Recitals.

“MTC Warrant” has the meaning set forth in the Recitals.

“New Securities” has the meaning set forth in Section 1(b).

“Offeror” has the meaning set forth in Section 2(a).

“Original Agreement” has the meaning set forth in the Recitals.

“Person” means any individual, partnership, corporation, limited liability company, unincorporated organization or association, trust (including the trustees thereof, in their capacity as such) or other entity.

“Personal Representations” has the meaning set forth in Section 2(a).

“Piggyback Registration” has the meaning set forth in Section 4(b)(i).

“Public Offering” means any offering by the Company of its Common Stock to the public pursuant to an effective registration statement under the Securities Act or any comparable statement under any similar federal statute then in force.

“Public Transfer” means any Transfer of Common Stock pursuant to (a) a public offering of Common Stock pursuant to a registration statement filed by the Company with the Commission or (b) ordinary broker’s transactions (as defined in Section 4(4) of the Securities Act).

“Purchase Agreements” has the meaning set forth in the Recitals.

“Records” has the meaning set forth in Section 4(d)(ix).

“Registrable Securities” means (i) any shares of Common Stock owned by a Stockholder (including any shares of Common Stock converted or convertible in connection with a Public Offering) and (ii) any securities that were issued as a dividend on or other distribution with respect to or in exchange, replacement or in subdivision of, any such shares of common stock of the Company.  As to any particular Registrable Securities, such securities will cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities will have been declared effective under the Securities Act and such securities will have been disposed of in accordance with such registration statement, or (ii) such securities will have been sold (other than in a privately negotiated sale) pursuant to Rule 144 (or any successor provision) under the Securities Act.

“Registration Expenses” has the meaning set forth in Section 4(f)(i).

“Related Fund” means, with respect to an Investor, any fund or entity that (A) invests in securities and (B) is advised, managed or serviced by (i) such Investor, (ii) the same investment advisor as such Investor or (iii) an Affiliate of such Investor or such investment advisor.

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“Section 2 Notice” has the meaning set forth in Section 2(a).

“Section 2 Offer” has the meaning set forth in Section 2(a).

“Section 2 Offeror” has the meaning set forth in Section 2(a).

“Section 2 Period” has the meaning set forth in Section 2(a).

“Securities Act” means the Securities Act of 1933, as amended from time to time.

“Selling Holder” has the meaning set forth in Section 2(a).

“Short-Form Registrations” has the meaning set forth in Section 4(a)(i).

“Specified Holders” has the meaning set forth in the preface.

“Stockholder(s)” has the meaning set forth in the preface.

“Third Party Offer” has the meaning set forth in Section 2(a).

“Transfer” means to sell, assign, transfer, pledge, hypothecate, mortgage or dispose of (whether by gift or otherwise), or in any way encumber.

“Warrants” has the meaning set forth in the Recitals.

[THE NEXT PAGE IS THE SIGNATURE PAGE.]

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           IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written.

COMPANY:                                                                        TEL-INSTRUMENT ELECTRONICS CORP.

                                                                                                            By:  

Name: 

Title:  

STOCKHOLDERS:

[   ]

By:           [   ]

its General Partner

By:                                                                      

Name:                                                                       

Title:                                                                      

[   ]

By:                                                                      

Name:                                                                      

Title: 

Read and Approved by: [   ]

[ESTATE OF [   ]]

­­­­­­­­­­­

____________________________________

[   ]

SCHEDULE A

STOCKHOLDER ADDRESSES

[   ]

with a copy to:

[   ]

[   ]

with a copy to:

[   ]

Estate of [   ]

[   ]

with a copy to:

[Company counsel to update]

EX-10.4

Exhibit 10.4

INTERCREDITOR AND SUBORDINATION AGREEMENT

INTERCREDITOR AND SUBORDINATION AGREEMENT dated as of July 26, 2012, by and among [    ] as the executor (the “Executor”) for [   ], [   ], an individual, the “Subordinated Lenders” and each, a “Subordinated Lender”), TEL-INSTRUMENT ELECTRONICS CORP., a New Jersey corporation (“Issuer”), and [   ], an Illinois limited liability company (“Purchaser”).

WHEREAS, Issuer and Purchaser have entered into the Securities Purchase Agreement (as defined below) on the date hereof pursuant to which, among other things, Purchaser has agreed, subject to the terms and conditions set forth in the Securities Purchase Agreement, to extend credit to Issuer as evidenced by that certain Senior Secured Promissory Note of even date herewith issued by Issuer to Purchaser in the original principal amount of $600,000;

WHEREAS, in accordance with the terms of the Securities Purchase Agreement and the other Senior Loan Documents (as hereinafter defined), Issuer has granted Purchaser a lien on, security interest in and right of set-off against any and all right, title and interest of Issuer in and to the Collateral; and

WHEREAS, as an inducement to and as one of the conditions precedent to the agreement of Purchaser to consummate the transactions contemplated by the Securities Purchase Agreement and the other Senior Loan Documents, Purchaser requires the execution and delivery of this Agreement by each Subordinated Lender and Issuer.

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1.Definitions.

(a)Capitalized terms used but not defined herein (including in the preamble and recitals above) shall have the meanings given such terms in the Securities Purchase Agreement.

(b)The following terms shall have the following meanings:

“Agreement” means this Intercreditor and Subordination Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof.

“Bankruptcy Code” means the Bankruptcy Reform Act of 1978, as codified under Title 11 of the United States Code, or any successor statutes, and the bankruptcy rules promulgated thereunder, as the same may be in effect from time to time.

“Collateral” means the collective reference to the “Collateral” (as defined in the Security Agreement) and any and all other property from time to time subject to Liens or security interests to secure payment or performance of the Senior Obligations.

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“Credit Parties” means Issuer and any other Person that at any time is or becomes directly or indirectly liable on or in respect of, or that provides security for, any Senior Obligations, and their successors and permitted assigns.

“Enforcement Action” means, with respect to the Subordinated Obligations, any action to collect all or any portion of the Subordinated Obligations, to accelerate or demand payment of all or any portion of the Subordinated Obligations or to enforce any of the rights and remedies of any holder of any of the Subordinated Obligations, either pursuant to the Subordinated Loan Documents, at law, or in equity, including, but not limited to: (i) commencing or pursuing legal proceedings to collect any amounts owed with respect to the Subordinated Obligations; (ii) execution upon, or otherwise enforcing any judgment obtained with respect to, amounts owed on the Subordinated Obligations; or (iii) commencing or pursuing any judicial or non-judicial proceedings with respect to the Subordinated Obligations to foreclose upon, or to acquire title in lieu of foreclosure as to, all or any portion of the assets of Issuer.

“Insolvency Event” means (i) Issuer or any of its Subsidiaries commencing any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Issuer or any of its Subsidiaries making a general assignment for the benefit of its creditors; (ii) there being commenced against Issuer or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above; (iii) there being commenced against Issuer or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets; (iv) Issuer or any of its Subsidiaries taking any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) Issuer or any of its Subsidiaries generally not paying, or being unable to pay, or admitting in writing its inability to pay, its debts as they become due.

“Insolvency Proceeding” means the occurrence or commencement of any proceeding specified in clause (i) or clause (ii) of the definition of “Insolvency Event” in this Agreement.

“Issuer” has the meaning specified in the recitals of this Agreement.

“Permitted Refinancing” means any refinancing of the Senior Obligations under the Transaction Documents; provided that the financing documentation entered into by the Credit Parties in connection with such Permitted Refinancing constitutes Permitted Refinancing Loan Documents.

“Permitted Refinancing Loan Documents” means any financing documentation which replaces the Transaction Documents and pursuant to which the Senior Obligations under the Transaction Documents are refinanced, as such financing documentation may be amended, restated, supplemented or otherwise modified from time to time as permitted hereunder.

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“Permitted Interest Payments” means regularly scheduled cash payments of interest, at the non-default rate of interest, pursuant to and in accordance with the Subordinated Notes.

“Permitted Subordinated Debt Payments” means (i) Permitted Interest Payments and (ii) Permitted Debt Prepayments, pursuant to and in accordance with the terms and conditions of the Securities Purchase Agreement (including Section 9.06 thereof).

“Person” shall mean any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity.

“Purchaser” has the meaning specified in the recitals of this Agreement.

“Securities Purchase Agreement” means the Securities Purchase Agreement, dated as of the date hereof, by and among Issuer, Purchaser and the other parties from time to time party thereto, as such Securities Purchase Agreement may be amended, restated, modified or supplemented from time to time, including, without limitation, amendments, modifications, supplements and restatements thereof giving effect to increases, renewals, extensions, refundings, deferrals, restructurings, replacements or refinancings of, or additions to, the arrangements provided in such Securities Purchase Agreement (whether provided by the original Purchaser under the Securities Purchase Agreement or a successor Purchaser).

“Security Agreement” means the Security Agreement, dated as of the date hereof, by and among Issuer, Purchaser and the other parties from time to time party thereto, as such Security Agreement may be amended, restated, modified or supplemented from time to time.

“Senior Default” means any “Default” or an “Event of Default” under the Securities Purchase Agreement or any other Senior Loan Document.

“Senior Lender” means Purchaser, each other holder of a Senior Obligation and each of their respective successors and assigns.

“Senior Loan Documents” means the collective reference to the Securities Purchase Agreement, the other Transaction Documents (as defined in the Securities Purchase Agreement) and all other documents, instruments and agreements that from time to time evidence the Senior Obligations or secure or support payment or performance thereof, as the same may be amended, restated, modified or supplemented from time to time, including, without limitation, amendments, modifications, supplements and restatements thereof giving effect to increases, renewals, extensions, refundings, deferrals, restructurings, replacements or refinancings of, or additions to, the arrangements provided therein (whether provided by Purchaser under the Securities Purchase Agreement or a successor Purchaser).

“Senior Obligations” means the “Secured Obligations”, as such term is defined in the Security Agreement, including, without limitation, all principal, interest, fees, expenses, indemnities and reimbursement obligations at any time owed by the Credit Parties to Senior Lender pursuant to the terms of the Transaction Documents, in each instance, whether before or after the commencement of an Insolvency Proceeding and without regard to whether or not an allowed claim, and all obligations and liabilities incurred with respect to Permitted Refinancings, together with any amendments, restatements, modifications, renewals or extensions thereof.

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“Subordinated Event of Default” means an Event of Default (as defined in any Subordinated Note or other Subordinated Loan Document as in effect on the date hereof).

“Subordinated Lenders” has the meaning specified in the recitals of this Agreement.

“Subordinated Loan Documents” means the collective reference to the Subordinated Notes and any other documents, agreements or instruments that from time to time evidence or otherwise relate to the Subordinated Obligations.

“Subordinated Notes” means, collectively, the (i) Subordinated Note dated as of February 22, 2010 in the original principal amount of $125,000 issued by Issuer to [   ], an individual, and that is currently held by the Executor on behalf of the [   ], in the form of Exhibit A hereto, and (ii) Subordinated Note dated as of February 22, 2010 in the original principal amount of $125,000 issued by Issuer to [   ], in the form of Exhibit B hereto, each as in effect as of the date hereof and as amended, supplemented, restated or otherwise modified from time to time as permitted by this Agreement and the Senior Loan Documents, including any notes issued in exchange or substitution therefor.

“Subordinated Obligations” means the collective reference to the unpaid principal of and interest on the Subordinated Notes and all other Indebtedness of Issuer owing to the Subordinated Lenders (including, without limitation, interest accruing at the then applicable rate provided therein after the maturity of the Subordinated Notes and interest accruing at the then applicable rate provided in the Subordinated Notes after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to Issuer, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Subordinated Notes, this Agreement, or any other Subordinated Loan Document, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Subordinated Lenders that are required to be paid by Issuer pursuant to the terms of any other Subordinated Loan Document); provided, however, that Subordinated Obligations shall not include obligations for compensation, employee benefits and reimbursement of related costs incurred in the Ordinary Course of Business, to the extent any of the foregoing constitutes Indebtedness, and to the extent such Indebtedness is permitted by the Securities Purchase Agreement.

(c)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, and section and paragraph references are to this Agreement unless otherwise specified.

(d)The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

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(e)No inference in favor of, or against, any party to this Agreement shall be drawn from the fact that such party has drafted any portion of this Agreement.

2.Subordination; Enforcement Action.  Issuer and each Subordinated Lender hereby agrees, for itself and each future holder of the Subordinated Obligations, that:

(a)No part of the Subordinated Obligations shall have any claim to any assets of Issuer on a parity with or prior to the claim of any of the Senior Obligations.

(b)Unless and until the Senior Obligations have been paid in full, without the express prior written consent of Senior Lender, (1) no Subordinated Lender shall, directly or indirectly, take, demand, accept or receive from Issuer or any other Person, in cash or other property or by setoff or in any other manner, payment of all or any of the Subordinated Obligations, and (2) Issuer shall not make, give or permit, directly or indirectly, by setoff, redemption, purchase or in any other manner, any payment of or with respect to, or any collateral or other security for, the whole or any part of the Subordinated Obligations, including, without limitation, any guarantee, letter of credit or similar credit support to support payment of any of the Subordinated Obligations; provided, however, that, subject in all respects to the other terms and provisions hereof, (x) each Subordinated Lender may accept and retain, and Issuer may make, Permitted Subordinated Debt Payments so long as no Blockage Period is then in effect; and (y) Issuer may resume making any Permitted Interest Payment, and may make any Permitted Interest Payment missed during any Blockage Period, upon the cessation of a Blockage Period.  A “Blockage Period” shall exist from and after the date that any Senior Default shall have occurred, until the earlier to occur of (a) the cure or waiver of such Senior Default, as determined by Senior Lender in its sole discretion and (b) the payment in full of the Senior Obligations.

(c)Unless and until the Senior Obligations have been paid in full, without the express written consent of Senior Lender, no Subordinated Lender shall commence any Enforcement Action.

(d)The expressions “prior payment in full,” “payment in full,” “paid in full” and any other similar terms or phrases when used herein with respect to the Senior Obligations shall mean (i) the indefeasible payment in full, in immediately available funds, of all of the Senior Obligations and the performance in full of all of the Senior Obligations, (ii) the termination or expiration of all Senior Loan Documents, and (iii) termination of any and all commitments to lend under the Senior Loan Documents.  Senior Obligations shall be considered to be outstanding whenever any loan commitment under any Senior Loan Document is outstanding.

(e)Each holder of Senior Obligations, whether now outstanding or hereafter created, incurred, assumed or guaranteed, shall be deemed to have acquired Senior Obligations in reliance upon the provisions contained in this Agreement.

3.Additional Provisions Concerning Subordination.  Without limiting any other term or provision in this Agreement:

(a)The Subordinated Lenders and Issuer hereby agree that upon the occurrence of any Insolvency Event:

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(i)all Senior Obligations shall be paid in full before any payment or distribution is made with respect to any of the Subordinated Obligations; and

(ii)any payment or distribution of assets of any Credit Party of any kind or character, whether in cash, property or securities, to which any Subordinated Lender would be entitled except for the provisions hereof, shall be paid or delivered by such Credit Party, or any receiver, trustee in bankruptcy, liquidating trustee, disbursing agent or other Person making such payment or distribution, directly to Senior Lender for application against the Senior Obligations (in accordance with the terms of the applicable Senior Loan Documents), to the extent necessary to pay in full all Senior Obligations, before any payment or distribution shall be made to any Subordinated Lender, and (x) each Subordinated Lender hereby unconditionally authorizes, empowers and directs all trustees, receivers, custodians, conservators, or any other Persons having authority over the property of any Credit Party to effect delivery of all such payments and distributions to Senior Lender and (y) each Subordinated Lender agrees to execute and deliver to Senior Lender such further instruments as may be requested by Senior Lender to confirm the authorization referred to in the foregoing clause (x).

(b)Upon the occurrence of any Insolvency Proceeding commenced by or against any Credit Party:

(i)each Subordinated Lender irrevocably authorizes and empowers Senior Lender to demand, sue for, collect and receive every payment or distribution on account of any of the Subordinated Obligations payable or deliverable in connection with such event or proceeding, until the Senior Obligations are paid in full, and give acquittance therefor;

(ii)each Subordinated Lender irrevocably authorizes and empowers Senior Lender to file claims and proofs of claim in any such Insolvency Proceeding and take such other actions, in its own name, or in the name of the Subordinated Lenders or otherwise, as Senior Lender may deem necessary or advisable for the enforcement of the provisions of this Agreement; provided, however, that the foregoing authorization and empowerment imposes no obligation on Senior Lender to take any such action;

(iii)each Subordinated Lender shall take such action, duly and promptly, as Senior Lender may request from time to time:

(A)to collect the Subordinated Obligations for the account of the Senior Lenders until the Senior Obligations are paid in full; and

(B)to file appropriate proofs of claim in respect of the Subordinated Obligations and deliver copies of any such proofs of claim to Senior Lender; and

(iv)each Subordinated Lender shall execute and deliver such powers of attorney, assignments or proofs of claim or other instruments as Senior Lender may request to enable Senior Lender to enforce any and all claims in respect of the Subordinated Obligations and to collect and receive any and all payments and distributions, until the Senior Obligations are paid in full, which may be payable or deliverable at any time upon or in respect of the Subordinated Obligations.

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(c)Except as otherwise expressly permitted by the terms hereof, if any payment or distribution, whether consisting of money, property or securities, shall be collected or received by or come into the custody, control or possession of any Subordinated Lender in respect of the Subordinated Obligations, such Subordinated Lender shall forthwith deliver the same to Senior Lender for application against the Senior Obligations, in the exact form received, duly endorsed to Senior Lender, if required, in each case to be applied to the payment or prepayment of the applicable Senior Obligations in accordance with the terms of the applicable Senior Loan Documents until such Senior Obligations are paid in full.  Until so delivered, such payment or distribution shall be held in trust by such Subordinated Lender as the property of the Senior Lenders, segregated from other funds and property held by such Subordinated Lender.

4.Subrogation.  Until the Senior Obligations are paid in full, the Subordinated Lenders shall not make or assert any claim of subrogation under applicable law or otherwise with respect to the Senior Lenders or the Senior Obligations.  Upon the payment in full of the Senior Obligations, the Subordinated Lenders shall be subrogated to the rights of the Senior Lenders to receive payments or distributions of assets of Issuer and each other Credit Party in respect of the Senior Obligations until the Senior Obligations shall be paid in full.  For the purposes of such subrogation, payments or distributions to Senior Lender of any money, property or securities to which any Subordinated Lender would be entitled except for the provisions of this Agreement shall be deemed, as between Issuer and its creditors (other than the Senior Lenders and such Subordinated Lender), to be a payment by Issuer to or on account of Subordinated Obligations (it being understood that the provisions of this Agreement are, and are intended solely, for the purpose of defining the relative rights of the Subordinated Lenders, on the one hand, and Senior Lender, on the other hand).

5.Consents, Waivers and Covenants of Subordinated Lenders.

(a)Each Subordinated Lender consents and agrees that, without the necessity of any reservation of rights against any Subordinated Lender, and without notice to or further assent by any Subordinated Lender:

(i)any demand for payment of any Senior Obligations made by Senior Lender may be rescinded in whole or in part by Senior Lender, and any Senior Obligation may be continued, and the Senior Obligations, or the liability of any Credit Party or any guarantor or any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, or any obligation or liability of any Credit Party or any other party under any Senior Loan Document, or any other agreement, may, from time to time, in whole or in part, be amended, restated, renewed, extended, increased, modified, accelerated, compromised, restructured, waived, surrendered, or released by Senior Lender;

(ii)the Securities Purchase Agreement, the other Senior Loan Documents and the Senior Obligations may be amended, restated, modified, extended, increased, renewed, restructured, supplemented or terminated, in whole or in part, as Senior Lender may deem advisable from time to time, and any collateral security at any time held by Senior Lender for the payment of any of the Senior Obligations may be sold, exchanged, restructured, waived, surrendered or released, in each case all without notice to or further assent by any Subordinated Lender, which will remain bound under this Agreement, and Senior Lender shall have the right to grant waivers or consents to any Credit Party with respect to any of the Senior Obligations or any Senior Loan Document in any manner whatsoever, all without impairing, abridging, releasing or affecting the subordination provided for herein; and

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(iii)any Permitted Refinancing may be consummated by any Credit Party to the extent that such Permitted Refinancing constitutes a Senior Obligation.

(b)Each Subordinated Lender waives any and all notice of the creation, renewal, extension, increase, or accrual of any of the Senior Obligations and notice of or proof of reliance by Senior Lender upon this Agreement.  The Senior Obligations shall be deemed conclusively to have been created, contracted or incurred in reliance upon this Agreement, and all dealings between the Credit Parties and Senior Lender shall be deemed to have been consummated in reliance upon this Agreement.  Each Subordinated Lender acknowledges and agrees that Senior Lender has relied upon the subordination provided for herein in entering into the Senior Loan Documents and in making funds available to Issuer thereunder.  Each Subordinated Lender waives notice of or proof of reliance on this Agreement and protest, demand for payment and notice of default.

(c)The Subordinated Lenders hereby consent to the Liens on the Collateral created  in favor of Senior Lender under the Senior Loan Documents, and agree that the grant, perfection, priority and existence of such Liens does not and shall not constitute a Subordinated Event of Default or any other default under any Subordinated Loan Document.

(d)Concurrently with the issuance thereof, the Subordinated Lenders shall provide Senior Lender with a copy of any written notice of any Subordinated Event of Default or similar communication given by any Subordinated Lender to Issuer pursuant to or in connection with any of the Subordinated Loan Documents.  Upon demand by Senior Lender, the Subordinated Lenders will furnish to Senior Lender a statement of the indebtedness owing from Issuer to the Subordinated Lenders.  Senior Lender may rely without further investigations upon such statements.

(e)           Notwithstanding anything in the Subordinated Notes or any other agreement or instrument to the contrary, the Subordinated Lenders and Issuer hereby acknowledge and agree that the maturity date of each of the Subordinated Notes shall be the date upon which the Senior Obligations are paid in full.

6.Negative Covenants of the Subordinated Lenders.  Until the payment in full of the Senior Obligations, no Subordinated Lender shall, without the prior written consent of Senior Lender:

(a)sell, assign, or otherwise transfer, in whole or in part, the Subordinated Obligations or any interest therein to any other Person (a “Transferee”) or create, incur or suffer to exist any security interest, Lien, charge or other encumbrance whatsoever upon any of the Subordinated Obligations or under any Subordinated Loan Document in favor of any Transferee unless:

(i)such action is made expressly subject to this Agreement; and

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(ii)the Transferee expressly acknowledges to Senior Lender, by a written agreement in form and substance satisfactory to Senior Lender or by delivery of an executed counterpart of this Agreement or an intercreditor and subordination agreement substantially identical to this Agreement, the subordination provided for herein and agrees to be bound by all of the terms and provisions hereof;

(b)permit any of the Subordinated Loan Documents or the Subordinated Obligations to be amended, restated, renewed, restructured, increased, extended, supplemented or otherwise modified in any respect;

(c)permit or require any Subsidiary of Issuer or any other Credit Party to guarantee any of the Subordinated Obligations;

(d)permit or require Issuer, any Subsidiary of Issuer or any other Credit Party to create any Lien on any of its assets or properties to secure the payment or performance of any of the Subordinated Obligations;

(e)commence, or join with any creditors (other than Senior Lender) in commencing, or otherwise cause, any Insolvency Proceeding;

(f)challenge the validity, enforceability, priority of, or any other term or provision of, any Senior Loan Document;

(g)challenge the extent, validity, creation, perfection or priority of, any Lien created or purported to be created pursuant to any Senior Loan Document or seek to avoid or subordinate any such Lien; or

(h)interfere in any respect with the exercise by Senior Lender of any right or remedy under any Senior Loan Document or applicable law;

provided, however, that a transfer by operation of law to the estate of a deceased Subordinated Lender shall not be a default hereunder; provided, further, that it is the express intent of all parties hereto that such transfer shall be expressly subject to this Agreement, and that the Transferee of the estate expressly acknowledges to Senior Lender, by a written agreement in form and substance satisfactory to Senior Lender or by delivery of an executed counterpart of this Agreement or an intercreditor and subordination agreement substantially identical to this Agreement, the subordination provided for herein and agrees to be bound by all of the terms and provisions hereof.

7.Senior Obligations Unconditional.  All obligations and agreements of the Subordinated Lenders hereunder shall be irrevocable, unconditional, continuing and absolute.  All rights and interests of Senior Lender hereunder, and all agreements and obligations of the Subordinated Lenders and Issuer, shall remain in full force and effect irrespective of:

(a)any lack of validity or enforceability of any Senior Loan Document or if all or any portion of the Senior Obligations and/or the Liens securing same are subordinated, set aside, avoided or disallowed, in each case pursuant to an Insolvency Proceeding or otherwise (as a result of the fraudulent transfer provisions under the Bankruptcy Code, under any State fraudulent conveyance or fraudulent transfer statute, or otherwise);

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(b)any change in the time, manner or place of payment of, or in any other term of, all or any of the Senior Obligations, or any amendment or waiver or other modification, whether by course of conduct or otherwise, of the terms of any Senior Loan Document, including, without limitation, any increase in any of the Senior Obligations resulting from the extension of additional credit to any Credit Party or otherwise;

(c)any exchange, release or nonperfection of any Lien upon any Collateral, or any release, amendment, waiver or other modification, whether in writing or by course of conduct or otherwise, of all or any of the Senior Obligations or any guarantee thereof;

(d)the existence of any claim, set-off, defense, counterclaim or other right that any Subordinated Lender, any Credit Party or any other Person may have against any Person, including, without limitation, Senior Lender;

(e)any manner of application of Collateral or any other collateral, or proceeds thereof, to all or any of the Senior Obligations, or any manner of sale or other disposition of any Collateral or any other collateral for all or any of the Senior Obligations or any obligations of the Credit Parties under the Senior Loan Documents or any other assets of the Credit Parties;

(f)any change, restructuring or termination of the corporate or other organizational structure or existence of any Credit Party;

(g)any failure of Senior Lender to disclose to any Subordinated Lender any information relating to the business, condition (financial or otherwise), operations, performance, properties or prospects of Issuer or any of its Subsidiaries now or hereafter known to Senior Lender (each Subordinated Lender hereby waiving any duty on the part of Senior Lender to disclose such information); or

(h)any other event or circumstance which otherwise might constitute a defense or counterclaim available to, or a discharge of, Issuer in respect of any of the Senior Obligations, or of any Subordinated Lender or Issuer in respect of this Agreement.

8.Representations and Warranties.  Each Subordinated Lender represents and warrants to Senior Lender that:

(a)its Subordinated Note: (i) has been issued to it for good and valuable consideration; (ii) is owned by such Subordinated Lender free and clear of any security interests, Liens, charges or encumbrances whatsoever arising from, through or under such Subordinated Lender, other than the interest of Senior Lender under this Agreement; (iii) is payable solely and exclusively to such Subordinated Lender and to no other Person and is payable without deduction for any defense, recoupment, offset or counterclaim, and (iv) constitutes the only evidence of the obligations evidenced thereby;

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(b)such Subordinated Lender has the power and authority and the legal right to execute and deliver and to perform its obligations under this Agreement and has taken all necessary action to authorize its execution, delivery and performance of this Agreement;

(c)this Agreement has been duly executed and delivered by such Subordinated Lender and constitutes a legal, valid and binding obligation of such Subordinated Lender, enforceable against such Subordinated Lender in accordance with its terms;

(d)the execution, delivery and performance of this Agreement will not violate any provision of any requirement of law applicable to such Subordinated Lender or contractual obligation of such Subordinated Lender and will not result in the creation or imposition of any Lien on any of the properties or revenues of such Subordinated Lender pursuant to any requirement of law affecting, or any contractual obligation of, such Subordinated Lender, except the interest of Senior Lender under this Agreement;

(e)no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or governmental authority or any other Person (including, without limitation, any creditor of such Subordinated Lender), is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement;

(f)no pending or, to the best of its knowledge, threatened litigation, arbitration or other proceedings if adversely determined would in any way prevent the performance of the terms of this Agreement; and

(g)as of the date hereof, Issuer is indebted to the Subordinated Lenders under the Subordinated Loan Documents in the aggregate amount of $323,036.

9.No Representation by Senior Lender.  Senior Lender has not made, and does not hereby or otherwise make to any of the Subordinated Lenders, any representations or warranties, express, or implied, nor does Senior Lender assume any liability or obligation to or of any Subordinated Lender with respect to:

(a)the financial or other condition of any Credit Party or any other obligors under any instruments of guarantee with respect to the Senior Obligations;

(b)the enforceability, validity, value or collectibility of any of the Senior Obligations or the Subordinated Obligations, any collateral therefor, or any guarantee or security which may have been granted in connection with any of the Senior Obligations or the Subordinated Obligations; or

(c)the title or right of any Credit Party or any other Person to transfer any collateral or security.

10.Waiver of Claims.  To the maximum extent permitted by law, each Subordinated Lender waives any claim it might have against Senior Lender with respect to, or arising out of, any action or failure to act or any error of judgment, negligence, or mistake or oversight whatsoever on the part of Senior Lender or its affiliates, directors, officers, employees, advisors, attorneys or agents with respect to any exercise of any rights or remedies under any of the Senior Loan Documents or any transaction relating to any of the Collateral or any guarantee.  Neither Senior Lender nor any of its affiliates, directors, officers, employees, advisors, attorneys or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or any guarantee or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral or realize upon any guarantee upon the request of any Credit Party or any Subordinated Lender or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof or any guarantee.

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11.Additional Provisions Applicable After Insolvency Event or Proceeding.  Without limiting any other term or provision in this Agreement or any Senior Loan Document:

(a)The provisions of this Agreement shall continue in full force and effect notwithstanding the occurrence of any Insolvency Event or Insolvency Proceeding.

(b)Each Subordinated Lender agrees that it will not, directly or indirectly (including as a member of any unsecured creditors’ committee), take any action in or relating to any proceeding arising from, as a result of, in connection with or relating to any Insolvency Proceeding to challenge, contest or object in any manner to (i) the extent, validity, creation, enforceability, perfection or priority of any of the Senior Obligations or any Senior Loan Document or any Liens or security interests created under any Senior Loan Document, or any term or provision of this Agreement or any Subordinated Lender's obligations, undertakings, acknowledgments and agreements set forth in this Agreement; (ii) any pleading, motion, notice, objection or argument of or made by or on behalf of any holder of any of the Senior Obligations based on, under or in respect of Section 361, 362, 363 or 364 of the Bankruptcy Code, including in respect of permitting the use of any cash or other collateral by, or providing any financing to, any Credit Party under either Section 363 or 364 of the Bankruptcy Code (including, without limitation, any request for adequate protection, or in respect of the sale or other disposition of any property by any Credit Party under Section 363 of the Bankruptcy Code or pursuant to a plan of reorganization or any other arrangement (and each Subordinated Lender shall be deemed to have consented to any such sale or disposition and all of the terms applicable thereto); or (iii) the payment of interest, fees, expenses or other amounts to Senior Lender under Sections 506(b) or 506(c) of the Bankruptcy Code or otherwise.  Each Subordinated Lender agrees that it will not seek relief from the automatic stay or from any other stay in any Insolvency Proceeding or take any action in derogation thereof, without the prior written consent of Senior Lender.  Subordinated Lenders shall not support or vote in favor of any plan of reorganization (and they shall be deemed to have voted to reject any plan of reorganization) unless such plan (i) pays off, in cash in full, all Senior Obligations or (ii) is accepted by Senior Lender.  This Agreement, which the parties hereto expressly acknowledge is a “subordination agreement” under Section 510(a) of the Bankruptcy Code, shall be effective, during and after the commencement of an Insolvency Proceeding.

12.Further Assurances.  The Subordinated Lenders and Issuer, at their own sole cost and expense and at any time from time to time, upon the written request of Senior Lender will promptly and duly execute and deliver such further instruments and documents and take such further actions as Senior Lender reasonably may request for the purposes of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted.  Without limiting the generality of the foregoing, in the event of an assignment pursuant to any Senior Loan Document or in the event of a Permitted Refinancing, the Subordinated Lenders and Issuer shall, upon the request of Senior Lender, execute a new intercreditor and subordination agreement upon the same terms as this Agreement to further evidence and confirm that the Subordinated Obligations are and shall remain junior and subordinate in right of payment to the Senior Obligations or such Permitted Refinancing, as applicable.

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13.Reinstatement.  The terms and provisions of this Agreement shall continue to be effective or be reinstated, and the Senior Obligations shall not be deemed to be paid in full, as the case may be, if at any time any payment of any of the Senior Obligations is rescinded or avoided, or must otherwise be returned by Senior Lender pursuant to any Insolvency Proceeding or otherwise, all as though such payment had not been made.

14.Expenses.  Each Subordinated Lender, jointly and severally, shall pay or reimburse Senior Lender, upon demand, for all of its costs and expenses incurred in connection with the enforcement or preservation of any rights and remedies with respect to the Subordinated Lenders under this Agreement, including, without limitation, fees and disbursements of counsel to Senior Lender.

15.Provisions Define Relative Rights.  This Agreement is intended solely for the purpose of defining the relative rights of Senior Lender, on the one hand, and the Subordinated Lenders, on the other, and the obligations of Issuer in connection with the foregoing and no other Person shall have any right, benefit or other interest under this Agreement.  Issuer hereby agrees that it will not make any payment on or in respect of any of the Subordinated Obligations, or take any other actions, in contravention of the provisions of this Agreement.

16.Legend.  Each Subordinated Lender will cause each of the Subordinated Notes (and each other Subordinated Loan Document as Senior Lender shall request) to bear upon its face the following legend:

“ALL INDEBTEDNESS EVIDENCED BY THIS NOTE IS SUBORDINATED TO OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE SUBJECT TO THE TERMS OF, THE INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF JULY 26, 2012 (THE “SUBORDINATION AGREEMENT”), AS THE SAME MAY BE AMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME, BY AND AMONG TEL-INSTRUMENT ELECTRONICS CORP., A NEW JERSEY CORPORATION, MILLENNIUM TRUST COMPANY, LLC CUSTODIAN FBO VINCENT J. DOWLING, JR., ROTH IRA, AN ILLINOIS LIMITED LIABILITY COMPANY, AND THE HOLDERS FROM TIME TO TIME OF THE OBLIGATIONS ARISING UNDER THE SUBORDINATED LOAN DOCUMENTS REFERRED TO IN THE SUBORDINATION AGREEMENT, INCLUDING, WITHOUT LIMITATION, THIS NOTE, AND EACH HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF, ACKNOWLEDGES AND AGREES TO BE BOUND BY THE PROVISIONS OF THE SUBORDINATION AGREEMENT.”

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17.Powers Coupled With An Interest.  All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until the Senior Obligations are paid in full.

18.Authority of Senior Lender.  Issuer and each Subordinated Lender acknowledges and agrees that the rights and responsibilities of Senior Lender under this Agreement with respect to any action taken by Senior Lender or the exercise or non-exercise by Senior Lender of any option, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall be governed by the Senior Loan Documents and by such other agreements with respect thereto as may exist from time to time among, but, as between Senior Lender, on the one hand, and Issuer and the Subordinated Lenders, on the other hand, Senior Lender shall be conclusively presumed to be acting with full and valid authority so to act or refrain from acting, and neither Issuer nor any Subordinated Lender shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

19.Notices.

(a)All notices, requests and demands to or upon Senior Lender, Issuer or any Subordinated Lender under this Agreement to be effective shall be in writing (or by fax or similar electronic transfer confirmed in writing) and shall be deemed to have been duly given or made (i) when delivered by hand or (ii) if given by mail, when deposited in the mails by certified mail, return receipt requested, or (iii) if by fax or similar electronic transfer, when sent and receipt has been confirmed, addressed as follows:

If to Senior Lender:	[  ]
with a copy to:	[  ]
If to Issuer:	Tel-Instrument Electronics Corp.
	728 Garden Street
	Carlstadt, NJ 07072
	Facsimile: (201) 933-7340
	Attention: Joseph P. Macaluso
with a copy to:	Lucosky Brookman LLP
	33 Wood Avenue South, 6th Floor
	Iselin, New Jersey 08830
	Facsimile: (732) 395-4401
	Attention: Seth Brookman, Esq.

(b)If to any Subordinated Lender, at its address or transmission number for notices set forth under its signature below.

(c)Senior Lender, any Credit Party and any Subordinated Lender may change their addresses and transmission numbers for notices by notice in the manner provided in this Section 19.

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20.Counterparts.  This Agreement may be executed by one or more of the parties on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument.  Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic means shall be effective as delivery of an original executed counterpart of this Agreement.

21.Severability.  Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

22.Integration.  THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT OF SENIOR LENDER, ISSUER AND THE SUBORDINATED LENDERS WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THERE ARE NO PROMISES OR REPRESENTATIONS BY SENIOR LENDER, ISSUER OR ANY SUBORDINATED LENDER RELATIVE TO THE SUBJECT MATTER HEREOF NOT REFLECTED HEREIN.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

23.Amendments in Writing; No Waiver; Cumulative Remedies.

(a)None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by Senior Lender, Issuer and each Subordinated Lender.

(b)No failure to exercise, nor any delay in exercising, on the part of Senior Lender, any right, remedy power or privilege hereunder shall operate as a waiver thereof.  No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

(c)The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

(d)If any Subordinated Lender or Issuer violates any of the terms or provisions of this Agreement, in addition to any remedies in law, at equity or otherwise, Senior Lender may restrain or enjoin such violation in any court of competent jurisdiction and may interpose this Agreement as a defense or counterclaim in any action or proceeding by any Subordinated Lender or Issuer.

24.Section Headings.  The section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

25.Successors and Assigns.  This Agreement shall be binding upon the successors and assigns of Issuer and each Subordinated Lender and shall inure to the benefit of Senior Lender and its successors and assigns.

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26.Governing Law; etc.  This Agreement shall be governed by, and construed and interpreted in accordance with, the law of the State of New York.  Each party hereto hereby irrevocably and unconditionally submits for itself and its property in any legal action or proceeding arising out of or relating to this Agreement, or for recognition and enforcement of any judgment in respect thereof, to the exclusive general jurisdiction of the courts of the State of New York, the federal courts of the United States in the State of New York, and any appellate court from any thereof.

27.Waiver of Jury Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.

[the remainder of this page intentionally left blank]

[Signature Page to Intercreditor and Subordination Agreement]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written.

SENIOR LENDER: [   ]
By:	_______________________________
Name:	_______________________________
Title:	_______________________________

___________________________________

Read and Approved by: [   ]

Signatures Continue on Next Page

[Signature Page to Intercreditor and Subordination Agreement]

ISSUER: TEL-INSTRUMENT ELECTRONICS CORP.
By:	_______________________________
Name:	_______________________________
Title:	_______________________________

Signatures Continue on Next Page

[Signature Page to Intercreditor and Subordination Agreement]

SUBORDINATED LENDERS:

_______________________________

[   ]

Address for Notices:

c/o Tel-Instrument Electronics Corp.

728 Garden Street

Carlstadt, New Jersey  07072

Attention:  Joseph P. Macaluso

Fax No.:  (201) 933-7340

Telephone No.: (201) 933-1600

_______________________________

Jeffrey C. O’Hara

Address for Notices:

c/o Tel-Instrument Electronics Corp.

728 Garden Street

Carlstadt, New Jersey  07072

Attention:  Joseph P. Macaluso

Fax No.:  (201) 933-7340

Telephone No.: (201) 933-1600

Exhibit A

[   ] Subordinated Note

See attached.

Exhibit B

[   ] Subordinated Note

See attached.

EX-10.5

Exhibit 10.5

SECURITY AGREEMENT

THIS SECURITY AGREEMENT is dated as of July __, 2012 by and among TEL-INSTRUMENT ELECTRONICS CORP., a New Jersey corporation (the “Issuer”), each additional “Debtor” (as hereinafter defined) and [   ], a limited liability trust company organized and existing under the laws of the State of Illinois (“Secured Party” or “Purchaser”).

W I T N E S S E T H:

WHEREAS, pursuant to a certain Securities Purchase Agreement of even date herewith (as the same may be amended, restated, modified or supplemented and in effect from time to time, the “Purchase Agreement”) by and among the Issuer and Purchaser, Purchaser has agreed, subject to the satisfaction of certain conditions precedent, to purchase a certain promissory note (the “Note”) issued by the Issuer; and

WHEREAS, it is a condition precedent to the issuance and purchase of the Note that the Issuer shall have granted the security interests contemplated by this Agreement in order to secure the payment and performance of the Secured Obligations (as hereinafter defined).

NOW, THEREFORE, in consideration of the foregoing, and in order to induce the Purchaser to purchase the Note under the Purchase Agreement, each Debtor hereby agrees with Secured Party as follows:

SECTION 1.Definitions.

1.1The following terms, as used herein, have the meanings set forth below:

“Account Debtor” means the account debtor with respect to any Account and/or the prospective purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with any Debtor, pursuant to which such Debtor is to deliver any personal property or perform any services

“Agreement” means this Security Agreement, as the same may be amended, restated, modified or supplemented and in effect from time to time in accordance with the terms hereof.

“Blocked Accounts” has the meaning assigned to that term in Section 4.12(b).

“Collateral” has the meaning assigned to that term in Section 2.

“Collecting Banks” has the meaning assigned to that term in Section 4.12(b).

“Copyrights” means any copyrights, copyright registrations and copyright applications, and all renewals, extensions and continuations of any of the foregoing.

“Debtor” means (i) the Issuer and (ii) each Person that becomes a party to this Agreement pursuant to Section 16 hereof.

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“Deposit Account Control Agreement” has the meaning assigned to that term in Section 4.12(a).

“Depository Account” has the meaning assigned to that term in Section 4.12(c).

“Federal Registration Collateral” means Collateral with respect to which Liens may be registered, recorded or filed under, or notice thereof given under, any federal statute or regulation.

“Intellectual Property” means, collectively, all Copyrights, Patents and Trademarks.

“Patents” means any patents, patent registrations and patent applications and all renewals, extensions and continuations of any of the foregoing.

“Secured Obligations” means, collectively:

(a)the full and prompt payment when due (whether at stated maturity, by acceleration or otherwise) of all obligations, liabilities and indebtedness (including principal, premium, interest, fees, costs and indemnities (including all interest and fees that accrue after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency, reorganization or similar proceeding of any Debtor at the rate provided for in the respective documentation, whether or not a claim for post-petition interest or fees is allowed in any such proceeding)) of such Debtor to Secured Party, whether now existing or hereafter incurred under, arising out of, or in connection with, the Purchase Agreement, the Note and the other Transaction Documents to which such Debtor is a party and the due performance and compliance by such Debtor with all of the terms, conditions and agreements contained in the Purchase Agreement, the Note and in such other Transaction Documents to which it is a party;

(b)any and all reasonable sums advanced by Secured Party in order to preserve the Collateral or preserve its security interest in the Collateral;

(c)in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities of such Debtor referred to in clause (a) above, after an Event of Default shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by Secured Party of its rights hereunder, together with reasonable attorneys’ fees and court costs; and

(d)all amounts owing to Secured Party pursuant to any of the Transaction Documents in its capacity as such.

“Security Interests” means the security interests granted or provided for pursuant to Section 2 hereof, as well as all other security interests created, assigned or provided as additional security for the Secured Obligations pursuant to the provisions of this Agreement or any of the other Transaction Documents.

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“Trademarks” means any trademarks, trademark registrations, and trademark applications, all renewals, extensions and continuations of any of the foregoing and all goodwill attributable to any of the foregoing.

1.2Other Definition Provisions.  References to “Sections” or “Schedules” shall be to Sections or Schedules of this Agreement unless otherwise specifically provided.  For purposes hereof, “including” is not limiting and “or” is not exclusive.  Except as provided by Section 1.3, capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided for in the Purchase Agreement.  Any of the terms defined in Section 1.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference.  All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations.

1.3Uniform Commercial Code Terms.  All terms used herein and defined in the Uniform Commercial Code as adopted in the State of New York from time to time (the “Uniform Commercial Code”, or “UCC”) shall have the meaning given therein unless otherwise defined herein.  To the extent the definition of any category or type of collateral is expanded by any amendment, modification or revision to the Uniform Commercial Code, such expanded definition will apply automatically as of the date of such amendment, modification or revision.

SECTION 2.Grant of Security Interests.

To secure the payment and performance of the Secured Obligations, each Debtor hereby grants to Secured Party a lien on, security interest in and right of set-off against any and all right, title and interest of Debtor in and to any and all of the following property, whether now owned or existing or hereafter created, acquired or arising (all being collectively referred to herein as the “Collateral”):

(a)all Accounts;

(b)all Chattel Paper (including all Tangible Chattel Paper and all Electronic Chattel Paper);

(c)all Commercial Tort Claims, including those Commercial Tort Claims in which such Debtor has any interest specified on Schedule 3.9;

(d)all Contracts, together with all Contract Rights arising thereunder;

(e)all Deposit Accounts, all cash, and other property deposited therein or otherwise credited thereto from time to time and other monies and property in the possession or under the control of Secured Party or any affiliate, representative, agent or correspondent of Secured Party;

(f)all Documents;

(g)all General Intangibles, including any and all Intellectual Property;

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(h)all Goods any and all Inventory, any and all Equipment and any and all Fixtures;

(i)all Instruments;

(j)all Investment Property;

(k)all Letter-of-Credit Rights;

(l)all Supporting Obligations;

(m)any and all other personal property and interests in personal property whether or not subject to the UCC;

(n)any and all books and records, in whatever form or medium, that at any time evidence or contain information relating to any of the foregoing properties or interests in properties or are otherwise necessary or helpful in the collection thereof or realization thereon;

(o)all Accessions and additions to, and substitutions and replacements of, any and all of the foregoing; and

(p)all Proceeds and products of the foregoing, and all insurance pertaining to the foregoing and proceeds thereof.

SECTION 3.Representations and Warranties.

Issuer represents and warrants to Secured Party, from and after the Closing, and each other Debtor represents to Secured Party, from and after the date of its applicable joinder agreement, in each case, as follows:

3.1Binding Obligation; Perfection.  This Agreement constitutes a valid and binding obligation of such Debtor, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other Applicable Law relating to the enforcement of creditors’ rights generally and by general equitable principles.  Secured Party has a valid and perfected first priority security interest in the Collateral securing the payment of the Secured Obligations, and such Security Interests are entitled to all of the rights, priorities and benefits afforded by, and subject to any limitation of, the Uniform Commercial Code or other Applicable Law as enacted in any relevant jurisdiction which relates to perfected security interests.

3.2Organizational Information.  Schedule 3.2 hereto sets forth (i) the full, correct and current name of such Debtor, as its appears in such Debtor’s Organization Documents, (ii) any names of such Debtor other than such Debtor’s current name, as set forth on such Debtor’s Organization Documents during the five (5) year period preceding the Closing Date, (iii) such Debtor’s type of organization and whether such Debtor is a Registered Organization, (iv) such Debtor’s jurisdiction of organization, (v) such Debtor’s location (as determined pursuant to Section 9-307 of the Uniform Commercial Code), (vi) such Debtor’s organizational identification number (if any) and (vii) whether or not such Debtor is a Transmitting Utility.

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3.3Collateral Locations.  Schedule 3.3 hereto sets forth all addresses at which any Collateral is located, indicating for each whether such location is owned or leased by such Debtor, or owned or operated by a third-party such as a warehouseman, consignee or processor.  Schedule 3.3 hereto indicates which of the foregoing addresses serves as such Debtor’s chief executive office.  Schedule 3.3 hereto sets forth the legal description of all real properties maintained by such Debtor, leased or owned, on which any Fixtures are located, together with the name and address of the record owner of each such property.

3.4Existing Liens.  Except for Permitted Liens, such Debtor owns the Collateral, and will own all after acquired Collateral, free and clear of any Lien.  No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office, except for those pertaining to Permitted Liens.

3.5Governmental Authorizations; Consents; Federal Registration Collateral.  No authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or consent of any other Person is required for (i) the grant by such Debtor of the Security Interests granted hereby or for the execution, delivery or performance of this Agreement by such Debtor; or (ii) the exercise by Secured Party of its rights and remedies hereunder (except as may have been accomplished by or at the direction of such Debtor or Secured Party).  Except as set forth on Schedule 3.5 hereto, none of the Collateral is Federal Registration Collateral.  Except for (a) the filing of UCC financing statements with the Secretary of State of such Debtor’s jurisdiction of organization, (b) the filing of any necessary registrations, recordations or notices, as applicable, in respect of any Federal Registration Collateral and (c) execution and delivery of Deposit Account Control Agreements in respect of Deposit Accounts, no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or consent of any other Person is required for the perfection of the Security Interests granted hereby and pursuant to any other Transaction Documents.

3.6Accounts.  Each existing Account constitutes, and each hereafter arising Account will constitute, the legally valid and binding obligation of the applicable Account Debtor.  The amount represented by such Debtor to Secured Party as owing by each Account Debtor, and the amount set forth on any invoice pertaining to any Account is, or will be, the correct amount actually and unconditionally owing, except for normal cash discounts and allowances where applicable.  No Account Debtor has, or will have, any defense, set-off, claim or counterclaim against such Debtor that can be asserted against Secured Party, whether in any proceeding to enforce Secured Party’s rights in the Collateral or otherwise, except defenses, setoffs, claims or counterclaims that are not, in the aggregate, material to the value of the Accounts.  None of the Accounts is, nor will any hereafter-arising Account be, evidenced by a promissory note or other Instrument other than a check, unless such note or other Instrument has been (i) issued in accordance with the terms and conditions of the Purchase Agreement and (ii) endorsed over and delivered to Purchaser.  The right to receive payment under each Account is assignable except where the Account Debtor with respect to such Account is a Governmental Authority, to the extent assignment of any such right to payment is prohibited or limited by Applicable Law.

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3.7Inventory.  All Inventory is, and will be, of good and merchantable quality, free from any material defects subject to any reserves taken in Debtor’s audited financial statements in accordance with GAAP.  Such Inventory is not, and will not be, subject to any licensing, patent, trademark, trade name or copyright agreement with any Person that restricts such Debtor’s or Secured Party’s ability to manufacture and/or sell the Inventory.  The completion and manufacturing process of such Inventory by a Person other than such Debtor would be permitted under any contract to which such Debtor is a party or to which the Inventory is subject.  Such Debtor does not sell any Inventory to any customer on approval or on any other basis that entitles the customer to return, or which may obligate such Debtor to repurchase, such Inventory.  None of such Debtor’s Inventory has been, or will be, produced in violation of any material provision of the Fair Labor Standards Act of 1938, or in material violation of any Applicable Law.

3.8Intellectual Property.  The Copyrights, Patents and Trademarks listed on Schedule 3.8 hereto constitute all of the Intellectual Property owned by such Debtor.  All Intellectual Property owned by such Debtor is valid, subsisting and enforceable and all filings necessary to maintain the effectiveness of such registrations have been made.  Such Debtor is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to all Intellectual Property purported to be owned by such Debtor, free and clear of any Liens, including licenses and covenants by such Debtor not to sue third persons.  Such Debtor has no notice of any suits or actions commenced or threatened with reference to any Intellectual Property.  The execution, delivery and performance of this Agreement by such Debtor will not violate or cause a default under any Intellectual Property or any agreement in connection therewith.

3.9Certain Collateral Disclosures.  Except in each case as set forth on Schedule 3.9 hereto, such Debtor has no ownership interest in any Chattel Paper, Letter of Credit Rights, Commercial Tort Claims, Documents, or Equipment covered by any certificate of title.

3.10Control Arrangements.  Except for Control arising by operation of law in favor of banks and securities intermediaries having custody over Deposit Accounts and Securities Accounts set forth on Schedule 3.10 hereto, no Person has Control of any Deposit Accounts, Electronic Chattel Paper, Investment Property or Letter of Credit Rights in which such Debtor has any interest.

3.11Accurate Information.  All information heretofore, herein or hereafter supplied to Secured Party by an Authorized Officer on behalf of such Debtor with respect to the Collateral is and will be accurate and complete in all material respects.  Without limiting the foregoing, all written information heretofore, herein or hereafter supplied to Secured Party by or on behalf of such Debtor with respect to the Collateral is and will be accurate and complete in all material respects.

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3.12Survival of Representations and Warranties.  All representations and warranties of such Debtor contained in this Agreement shall survive the execution and delivery of this Agreement.

SECTION 4.Covenants and Further Assurances.

4.1Name or Entity Changes.  No Debtor shall change its name, type of organization or jurisdiction of organization without the prior written consent of Secured Party, which consent shall not be unreasonably withheld.

4.2Accounts.  Except as otherwise provided in this Section 4.2, each Debtor shall continue to collect, at its own expense, all amounts due or to become due to such Debtor with respect to Accounts and apply such amounts as are so collected to the outstanding balances thereof.  In connection with such collections, such Debtor may take (and at Secured Party’s direction during the continuance of any Event of Default, shall take) such action as such Debtor or Secured Party, as applicable, may deem necessary or advisable to enforce collection of the Accounts.  Secured Party shall have the right at any time after the occurrence and during the continuance of an Event of Default to: (i)  notify the Account Debtor under any Accounts (or any other Person obligated thereon) of the Lien granted upon such Accounts in favor of Secured Party and to direct such Account Debtors and other Persons to make payment of all amounts due or to become due or otherwise render performance directly to Secured Party; (ii) exercise the rights of such Debtor with respect to the obligation of the Account Debtor to make payment or otherwise render performance to such Debtor and with respect to any property that secures the obligations of the Account Debtor or any other Person obligated on the Collateral; and (iii) adjust, settle or compromise the amount or payment of such Accounts.  After the occurrence and during the continuance of an Event of Default, all amounts and Proceeds received by such Debtor with respect to the Accounts shall be received in trust for the benefit of Secured Party (on behalf of Secured Party), shall be segregated from other funds of such Debtor and shall be forthwith paid over to Secured Party in the same form as so received (with any necessary endorsement) to be held in any Deposit Account pursuant to Section 4.12 and applied pursuant to the terms of the Purchase Agreement.  No Debtor shall adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any Account Debtor, or allow any credit or discount thereon (other than credits and discounts in the Ordinary Course of Business) without the prior consent of Secured Party.Each Debtor agrees to execute any document or instrument, and to take any action, necessary under Applicable Law (including the Assignment of Claims Act) in order for Secured Party to exercise its rights and remedies (or be able to exercise its rights and remedies at some future date) with respect to any Accounts of such Debtor where the Account Debtor is a Governmental Authority.

4.3Intellectual Property.

(a)In the event any Debtor acquires or becomes entitled to any new or additional Federal Registration Collateral consisting of Intellectual Property, or rights thereto, such Debtor shall give to Secured Party prompt written notice thereof, and shall amend (and hereby so authorizes Secured Party to amend) the schedules to the respective security agreements or enter into new or additional security agreements to include any such new or additional Intellectual Property.

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(b)Each Debtor shall: (i) diligently prosecute any Intellectual Property application at any time pending; (ii) make application for registration or issuance of all new or additional Intellectual Property as reasonably deemed appropriate by such Debtor; (iii) preserve and maintain all rights in the Intellectual Property; and (iv) use commercially reasonable efforts to obtain any consents, waivers or agreements necessary to enable Secured Party to exercise its remedies with respect to any and all Intellectual Property.

(c)No Debtor shall abandon any material right to file an Intellectual Property application nor shall any Debtor abandon any material pending Intellectual Property application, or registered Intellectual Property.

(d)No Debtor shall sell or assign its interest in, or grant any license under, any Intellectual Property or enter into any other agreement with respect to any Intellectual Property, and each Debtor further agrees that it shall not take any action or permit any action to be taken by others subject to its control, including licensees, or fail to take any action which would affect the validity or enforcement of the rights granted to Secured Party under this Agreement.

(e)Each Debtor agrees (i) to maintain the quality of any and all products in connection with which the Trademarks are used, consistent with commercially reasonable business practices, and (ii) to provide Secured Party, upon Secured Party’s request from time to time, with a certificate of an officer of such Debtor certifying such Debtor’s compliance with the foregoing.  Upon the occurrence of an Event of Default, each Debtor agrees that Secured Party, or a conservator appointed by Secured Party, shall have the right to establish such additional product quality controls as Secured Party, or said conservator, in its reasonable judgment, may deem necessary to assure maintenance of the quality of products sold by such Debtor under the Trademarks.

(f)Each Debtor hereby assigns, transfers and conveys to Secured Party all Intellectual Property owned or used by such Debtor to the extent necessary to enable Secured Party, effective upon the occurrence of any Event of Default, to realize on the Collateral and any successor or assign to enjoy the benefits of the Collateral.  This right and assignment shall inure to the benefit of Secured Party and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise.  Such right and assignment is granted free of charge, without requirement that any monetary payment whatsoever including any royalty or license fee, be made to such Debtor or any other Person by Secured Party or any other Person.

4.4Bailees.  No Collateral having a value, individually or in the aggregate, in excess of $75,000 shall at any time be in the possession or control of any warehouse, consignee, bailee or any of any Debtor’s agents or processors without prior written notice to Secured Party and the receipt by Secured Party, if Secured Party has so requested, of warehouse receipts or bailee lien waivers (as applicable) satisfactory to Secured Party prior to the commencement of such possession or control.  Each Debtor shall, upon the request of Secured Party, notify any such warehouse, consignee, bailee, agent or processor of the Security Interests, shall instruct such Person to hold all such Collateral for Secured Party’s account subject to Secured Party’s instructions and shall obtain an acknowledgement from such Person that such Person holds the Collateral for Secured Party’s benefit.

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4.5Chattel Paper and Instruments.  Each Debtor shall deliver to Secured Party all Tangible Chattel Paper and all Instruments duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party.  Each Debtor shall provide Secured Party with Control of all Electronic Chattel Paper by having Secured Party identified as the assignee of the Records pertaining to the single authoritative copy thereof and otherwise complying with the applicable elements of Control set forth in the UCC.  Each Debtor also shall deliver to Secured Party all security agreements securing any Chattel Paper and securing any Instruments.  Each Debtor will mark conspicuously all Chattel Paper and all Instruments with a legend, in form and substance satisfactory to Secured Party, indicating that such Chattel Paper and such Instruments are subject to the Security Interests.  Notwithstanding anything herein to the contrary, the terms and provisions of this Section 4.5 shall not apply to Checks received and processed by Debtors in the Ordinary Course of Business so long as no Event of Default has occurred and is then continuing.

4.6Letters of Credit.  Each Debtor shall deliver to Secured Party all Letters of Credit duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party.  Each Debtor also shall deliver to Secured Party all security agreements securing any Letters of Credit. Each Debtor shall take any and all actions as may be necessary or desirable, or that Secured Party may reasonably request, from time to time, to cause Secured Party to obtain exclusive Control of any Letter-of-Credit Rights owned by such Debtor in a manner acceptable to Secured Party.

4.7Equipment.  Each Debtor shall cause all Equipment to be maintained and preserved in the same condition, repair and in working order as when new, ordinary wear and tear and obsolescence excepted, and shall promptly make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable to such end.  Upon request of Secured Party, such Debtor shall promptly deliver to Secured Party any and all certificates of title, applications for title or similar evidence of ownership of all Equipment having a value in excess of $75,000 and shall cause Secured Party to be named as lienholder on any such certificate of title or other evidence of ownership.  Each Debtor shall promptly inform Secured Party of any deletions from the Equipment (other than deletions pursuant to asset dispositions permitted by the Purchase Agreement) and shall not permit any such items to become Fixtures to real estate other than real estate subject to mortgages or deeds of trust in favor of Secured Party.

4.8Investment Property.  Each Debtor shall take any and all actions as may be necessary or desirable, or that Secured Party may reasonably request from time to time, to (i) cause Secured Party to obtain exclusive Control of any Investment Property owned by such Debtor in a manner acceptable to Secured Party and (ii) obtain from any issuers of Investment Property and such other Persons, for the benefit of Secured Party, written confirmation of Secured Party’s Control over such Investment Property upon terms and conditions acceptable to Secured Party.

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4.9General Intangibles.  Each Debtor shall use commercially reasonable efforts to obtain any consents, waivers or agreements necessary to enable Secured Party to exercise remedies hereunder and under the other Transaction Documents with respect to any of such Debtor’s rights under any General Intangibles, including such Debtor’s rights as a licensee of Software.

4.10Commercial Tort Claims.  Each Debtor shall promptly advise Secured Party upon such Debtor becoming aware that it has any interest in Commercial Tort Claims.  With respect to any Commercial Tort Claim in which any Debtor has any interest, such Debtor shall execute and deliver such documents as may be necessary or desirable, or that Secured Party may request, to create, perfect and protect Secured Party’s security interest in such Commercial Tort Claim.

4.11Taxes and Claims.  Each Debtor shall pay when due all property and other taxes, assessments and governmental charges imposed upon, and all claims against, the Collateral (including claims for labor, materials and supplies); provided that no such tax, assessment or charge need be paid to the extent the same are Properly Contested and the same may be contested without risk of loss or forfeiture or material impairment of the Collateral or the use thereof.

4.12Bank Accounts; Collection of Accounts and Payments.

(a)Upon request by Secured Party, each Debtor agrees to enter into a deposit account control agreement (“Deposit Account Control Agreement”), in a form reasonably acceptable to Secured Party, with each financial institution with which such Debtor maintains from time to time any Deposit Account, other than those accounts described in Section 8.15(b) of the Purchase Agreement.  No Debtor shall establish any Deposit Account with any financial institution unless prior thereto Secured Party and such Debtor shall have entered into a Deposit Account Control Agreement with such financial institution, or unless Secured Party shall have waived such requirement.  Each Deposit Account Control Agreement shall provide, among other things, that the financial institution maintaining the Deposit Account will waive certain rights of setoff and will, from and after receipt by such financial institution of written notice from Secured Party, transfer all amounts held by such financial institution on behalf of such Debtor, as Secured Party may direct.  The parties hereto agree that such written notice from Secured Party may only be given if an Event of Default under the Purchase Agreement has occurred and is continuing.

(b)Upon request by Secured Party at any time after the occurrence and during the continuance of an Event of Default, each Debtor agrees to establish lock box and blocked accounts (collectively, “Blocked Accounts”) in such Debtor's name with such banks as are acceptable to Secured Party (“Collecting Banks”), subject to irrevocable instructions in a form specified by Secured Party, to which Account Debtors shall directly remit all payments on Accounts and in which such Debtor will immediately deposit all cash payments for Inventory or other cash payments constituting proceeds of Collateral in the identical form in which such payment was made, whether by cash or check.  In addition, Secured Party may establish one or more depository accounts at each Collecting Bank or at a centrally located bank in the name of Secured Party or such Debtor as customer (collectively, the “Depository Account”).  Each Debtor shall cause each Collecting Bank, pursuant to an agreement in form and substance satisfactory to Secured Party, to cause all amounts held or deposited in the Blocked Accounts held by such Collecting Bank to be transferred to the Depository Account on a daily basis.

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4.13Collateral Generally.

(a)Each Debtor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto (or similar documents required by any laws of any applicable jurisdiction), relating to all or any part of the Collateral without the signature of such Debtor (to the extent such signature is required under the laws of any applicable jurisdiction), which financing statements may describe the Collateral as “all assets” or “all personal property” or words of like import.

(b)Each Debtor will furnish to Secured Party, from time to time upon request, statements and schedules further identifying, updating, and describing the Collateral and such other information, reports and evidence concerning the Collateral as Secured Party may reasonably request, all in reasonable detail.

(c)Each Debtor shall not use or permit any Collateral to be used unlawfully or in material violation of any provision of Applicable Law, or any policy of insurance covering any of the Collateral.

(d)Subject to the next sentence, each Debtor shall keep the Collateral (other than Collateral in the possession of Secured Party, cash on deposit in permitted Deposit Accounts and investments in permitted Securities Accounts) at the locations maintained by such Debtor and set forth on Schedule 3.3 hereto.  Each Debtor shall give Secured Party not less than thirty (30) days prior written notice of any change in such Debtor’s chief executive office and principal place of business or of any new location of business or any new location for any of the Collateral.  With respect to any new location (which in any event shall be within the continental United States), each Debtor shall execute and deliver such instruments, documents and notices and take such actions as may be necessary, or that Secured Party may request, to create, perfect and protect the Security Interests.

(e)Each Debtor shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Secured Party may reasonably request indicating that the Collateral is subject to the Security Interests.

(f)Except as otherwise permitted herein or by the Purchase Agreement, no Debtor shall (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral or (ii) create or suffer to exist any Lien upon or with respect to any of the Collateral to secure indebtedness of such Debtor or any other Person except for the Security Interests and Permitted Liens.

(g)Beyond the safe custody and reasonable care in preservation thereof, each Debtor agrees that Secured Party shall have no duties concerning the custody and preservation of any Collateral in its possession (or in the possession of any agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto.  Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property.  Secured Party shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other agent or bailee selected by Secured Party in good faith.

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(h)Each Debtor shall do nothing to impair the rights of Secured Party in the Collateral.  Each Debtor assumes all liability and responsibility in connection with the Collateral acquired, held or used by it, and the liability of such Debtor to pay the Secured Obligations shall in no way be affected or diminished by reason of the fact that such Collateral may be lost, stolen, damaged, or for any reason whatsoever unavailable to such Debtor.

(i)Secured Party agrees that upon payment in full of all Secured Obligations, the Security Interests shall terminate and all rights to the Collateral shall revert to the applicable Debtor.  Secured Party further agrees that upon such termination of the Security Interests or release of any Collateral, Secured Party shall, at the joint and several expense of the Debtors, execute and deliver to each Debtor such documents as such Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be.

4.14Federal Compliance.

(a)As soon as possible after the end of each month (but in any event within five (5) Business Days after the end thereof) or more frequently as Secured Party may request following the occurrence and during the continuation of an Event of Default, each Debtor shall notify Secured Party in writing of any and all interest acquired in Federal Registration Collateral during such month.  Each Debtor shall take such steps as may be necessary, or that Secured Party may request, in order to perfect any Security Interests in Federal Registration Collateral.

(b)As soon as possible after the end of each month (but in any event within five (5) Business Days after the end thereof) or more frequently as Secured Party may request following the occurrence and during the continuation of an Event of Default, each Debtor shall notify Secured Party in writing of any and all Collateral which constitutes a claim against the United States government or any instrumentality or agency thereof arising in the Ordinary Course of Business during such month, the assignment of which claim is restricted by federal law.  Each Debtor shall promptly notify Secured Party in writing of any Collateral which constitutes a claim against the United States government or any instrumentality or agency thereof not arising outside of the Ordinary Course of Business, the assignment of which claim is restricted by federal law.  Upon the request of Secured Party, each Debtor shall take such steps as may be necessary, or that Secured Party may request, to comply with any applicable federal assignment of claims laws and other comparable laws.

(c)Each Debtor shall not produce any Inventory in violation of any material provision of the Fair Labor Standards Act of 1938, or in material violation of any other law.

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4.15Debtors Remain Liable.  Anything herein to the contrary notwithstanding: (i) each Debtor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein and shall perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (ii) the exercise by Secured Party of any of the rights hereunder shall not release any Debtor from any of its duties or obligations under the contracts and agreements included in the Collateral; (iii) Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of any Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder; and (iv) Secured Party shall not have any liability in contract or tort for any Debtor’s acts or omissions.

4.16Insurance.  The assets and properties of each Debtor at all times shall be maintained in accordance with the requirements of the Purchase Agreement.  Debtors shall bear the full risk of any loss of any nature whatsoever with respect to the Collateral.  Debtors will furnish Secured Party with (i) copies of all insurance policies and evidence of the maintenance of such policies by the renewal thereof at least thirty (30) days before any expiration date, and (ii) appropriate lender loss payable and additional insured endorsements in form and substance satisfactory to Secured Party, naming Secured Party as a lender loss payee and additional insured as its interests may appear with respect to property, casualty and liability insurance coverage, and providing (A) that all proceeds thereunder shall be payable to Secured Party as its interests may appear, (B) no such insurance shall be affected by any act or neglect of the insured or owner of the property described in such policy, and (C) that such policy and loss payable clauses may not be cancelled, amended or terminated unless at least thirty (30) days’ prior written notice is given to Secured Party.  In the event of any loss thereunder, the carriers named therein hereby are directed by Secured Party and Debtors to make payment for such loss to Secured Party and not to such Debtor and Secured Party jointly.  If any such insurance losses are paid by check, draft or other instrument payable to any Debtor and Secured Party jointly, Secured Party may endorse such Debtor’s name thereon and do such other things as Secured Party may deem advisable to reduce the same to cash.  If any payment for such loss is made to a Debtor and not Secured Party, such Debtor shall turn over such payment to Secured Party.  Secured Party is hereby authorized to adjust and compromise claims under insurance coverage referred to above.  All loss recoveries received by Secured Party upon any such insurance may, subject to the following provisions of this section, be applied to the Secured Obligations in accordance with the applicable provisions of the Purchase Agreement.  Any surplus shall be paid by Secured Party to Debtors or applied as may be otherwise required by law.  Any deficiency thereon shall be paid by Debtors to Secured Party, on demand.

4.17Other Documents and Actions.  Each Debtor shall, from time to time, at its expense, promptly execute and deliver all further instruments, documents and notices and take all further action that may be necessary, or that Secured Party may request, in order to create, perfect and protect any Security Interests, or to enable Secured Party to exercise and enforce its rights and remedies hereunder or under any other Transaction Document with respect to any Collateral.  Without limiting the generality of the foregoing, each Debtor shall:  (i) at any reasonable time, upon demand by Secured Party to such Debtor, allow inspection of the Collateral by Secured Party or Persons designated by Secured Party and to examine and make copies of the records of such Debtor related thereto, and to discuss the Collateral and the records of such Debtor with respect thereto with, and to be advised as to the same by, such Debtor’s officers and employees (with all of such information to be held by Secured Party in accordance with the terms and conditions of the Purchase Agreement) and, after the occurrence and during the continuance of an Event of Default, with any other Person which is or may be obligated with respect to any Collateral; and (ii) upon Secured Party’s request, appear in and defend any action or proceeding that may affect such Debtor’s title to or Secured Party’s security interest in the Collateral.

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SECTION 5.Remedial Provisions.

(a)Upon the occurrence and during the continuance of an Event of Default, Secured Party or its attorneys shall have the right without notice or demand or legal process (unless the same shall be required by Applicable Law), personally, or by an agent, (i) to enter upon, occupy and use any premises owned or leased by a Debtor or where the Collateral is located (or is believed to be located), subject to Applicable Law, until the Secured Obligations are paid in full without any obligation to pay rent to such Debtor, to render the Collateral useable or saleable and to remove the Collateral or any part thereof to the premises of Secured Party for such time as Secured Party may desire in order to effectively collect or liquidate the Collateral and use in connection with such removal any and all services, supplies and other facilities of such Debtor; (ii) to take possession of such Debtor’s original books and records, to obtain access to such Debtor’s data processing equipment, computer hardware and Software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner Secured Party deems appropriate; and (iii) to notify postal authorities to change the address for delivery of such Debtor’s mail to an address designated by Secured Party and to receive, open and dispose of all mail addressed to such Debtor.  If any Debtor’s books and records are prepared or maintained by an accounting service, contractor or other third party agent, such Debtor hereby irrevocably authorizes such service, contractor or other agent, upon notice by Secured Party to such Person that an Event of Default has occurred and is continuing, to deliver to Secured Party or its designees such books and records, and to follow Secured Party’s instructions with respect to further services to be rendered.

(b)If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein, in the Purchase Agreement or otherwise available to it, all the rights and remedies of Secured Party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (i) require each Debtor to, and each Debtor hereby agrees that it will, at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at any place or places designated by Secured Party which is reasonably convenient to Secured Party in which event such Debtor shall at its own expense (A) forthwith cause the same to be moved to the place or places so designated by Secured Party, (B) store and keep any Collateral so delivered to Secured Party at such place or places pending further action by Secured Party, and (C) while Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain the Collateral in good condition; (ii) withdraw all cash in any Deposit Account and apply such monies in payment of the Secured Obligations; and (iii) without notice except as specified below, sell, lease, license or otherwise dispose of the Collateral or any part thereof by one or more contracts, in one or more parcels at public or private sale, and without the necessity of gathering at the place of sale of the property to be sold, at any of Secured Party’s offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable.  Secured Party shall have no obligation to marshal any Collateral in favor of the any Debtor or any other Credit Party.

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(c)Each Debtor agrees that, to the extent notice of sale shall be required by law, a reasonable authenticated notification of disposition shall be a notification given at least ten (10) days prior to any such sale and such notice shall (i) describe Secured Party and the applicable Debtor, (ii) describe the Collateral that is the subject of the intended disposition, (iii) state the method of intended disposition, (iv) state that such Debtor is entitled to an accounting of the Secured Obligations and state the charge, if any, for an accounting, and (v) state the time and place of any public disposition or the time after which any private sale is to be made.  At any sale of the Collateral, if permitted by law, Secured Party may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, license or other disposition of the Collateral or any portion thereof for the account of Secured Party (on behalf of Secured Party and the Purchaser).  Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given.  Secured Party may disclaim any warranties that might arise in connection with the sale, lease, license or other disposition of the Collateral and have no obligation to provide any warranties at such time.  Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.  To the extent permitted by law, each Debtor hereby specifically waives all rights of redemption, stay or appraisal, which it has or may have under any law now existing or hereafter enacted.

(d) If an Event of Default has occurred and is continuing, each Debtor hereby irrevocably authorizes and empowers Secured Party, without limiting any other authorizations or empowerments contained in any of the other Transaction Documents, to assert, either directly or on behalf of such Debtor, any claims such Debtor may have, from time to time, against any other party to any of the agreements to which such Debtor is a party or to otherwise exercise any right or remedy of such Debtor under any such agreements (including the right to enforce directly against any party to any such agreement all of such Debtor’s rights thereunder, to make all demands and give all notices and to make all requests required or permitted to be made by such Debtor thereunder).

(e)If an Event of Default has occurred and is continuing, the proceeds of any collection, enforcement, sale or other disposition of, or other realization upon, all or any part of the Collateral and any cash held in any Deposit Account shall be applied in accordance with the applicable provisions of the Purchase Agreement.

(f)Each Debtor acknowledges and agrees that a breach of any of the covenants contained in Sections 4, 5 and 6 hereof will cause irreparable injury to Secured Party and that Secured Party has no adequate remedy at law in respect of such breaches and therefore agrees, without limiting the right of Secured Party to seek and obtain specific performance of other obligations of such Debtor contained in this Agreement, that the covenants of such Debtor contained in the Sections referred to in this Section shall be specifically enforceable against such Debtor.

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(g)No failure or delay on the part of any party hereto in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or any other right, power or privilege.  All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

SECTION 6.Attorney-in-Fact.

Each Debtor hereby irrevocably appoints Secured Party, its nominee, and any other Person whom Secured Party may designate, as such Debtor’s attorney in fact, with full power during the existence of any Event of Default: (i) to sign such Debtor’s name on verifications of Accounts and other Collateral; (ii) to send requests for verification of Collateral to such Debtor’s customers, Account Debtors and other obligors; (iii) to endorse such Debtor’s name on any checks, notes, acceptances, money orders, drafts, and any other forms of payment or security that may come into Secured Party’s possession or on any assignments, stock powers, or other instruments of transfer relating to the Collateral or any part thereof; (iv) to sign such Debtor’s name on any invoice or bill of lading relating to any Collateral, on claims to enforce collection of any Collateral, on notices to and drafts against customers and Account Debtors and other obligors, on schedules and assignments of Collateral, on notices of assignment and on public records; (v) to notify the post office authorities to change the address for delivery of such Debtor’s mail to an address designated by Secured Party; (vi) to receive, open and dispose of all mail addressed to such Debtor; (vii) to sign any document which may be required by the United States Patent and Trademark Office or United States Copyright Office or similar registrar in order to effect an absolute assignment of all right, title and interest in any Intellectual Property, and record the same, as applicable; (viii) to execute any document or instrument, and to take any action, necessary under Applicable Law (including the Assignment of Claims Act) in order for Secured Party to exercise its rights and remedies (or to be able to exercise its rights and remedies at some future date) with respect to any Account of an Account Debtor, customer or other obligor (including any such Account Debtor, customer or obligor that is a Governmental Authority); and (ix) to do all things necessary to carry out the terms and provisions of this Agreement.  Each Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither Secured Party nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than, and to the extent of, such Person’s gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final non-appealable judgment).  The foregoing powers of attorney, being coupled with an interest, are irrevocable until the Secured Obligations have been fully paid and satisfied and the Security Interests shall have terminated in accordance with the terms hereof.

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SECTION 7.Expenses.

(a)Without limiting any Debtor’s obligations under the Purchase Agreement or the other Transaction Documents, each Debtor hereby agrees to promptly pay all fees, costs and expenses (including reasonable attorneys’ fees and expenses) incurred in connection with (i) protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral, (ii) creating, perfecting, maintaining and enforcing Secured Party’s Liens and (iii) collecting, enforcing, retaking, holding, preparing for disposition, processing and disposing of the Collateral.

(b)If any Debtor fails to promptly pay any portion of the above costs, fees and expenses when due or to perform any other obligation of such Debtor under this Agreement, Secured Party may, at its option, but shall not be required to, pay or perform the same and charge such Debtor’s account for all fees, costs and expenses incurred therefor, and the Debtors jointly and severally agree to reimburse Secured Party therefor on demand.  All sums so paid or incurred by Secured Party for any of the foregoing, any and all other sums for which any Debtor may become liable hereunder and all fees, costs and expenses (including attorneys’ fees, legal expenses and court costs) incurred by Secured Party in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Secured Obligations, shall bear interest until paid at the highest rate provided in the Purchase Agreement and shall be secured by the Collateral.

SECTION 8.Notices.

All notices, approvals, requests, demands and other communications hereunder to be delivered to any Debtor and all notices, approvals, requests, demands and other communications hereunder shall be given in accordance with the notice provision of the Purchase Agreement.

SECTION 9.Successors and Assigns.

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns except that (x) no Debtor may assign its rights or obligations hereunder without the written consent of Secured Party (and any such assignment or transfer without such consent shall be null and void ab initio) and (y) Secured Party may assign its rights or obligations hereunder except to the extent prohibited by the Purchase Agreement.  No sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner impair the Lien granted to Secured Party, for its benefit and the benefit of the Purchaser, hereunder, subject to the rights of any such assignee.

SECTION 10.Changes in Writing.

No amendment, modification, termination or waiver of any provision of this Agreement shall be effective unless the same shall be in writing signed by Secured Party (or with such other consent as is required by the Purchase Agreement) and the Debtors.

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SECTION 11.GOVERNING LAW.

THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED IN ACCORDANCE WITH, AND ENFORCED UNDER, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS OR INSTRUMENTS ENTERED INTO AND PERFORMED ENTIRELY WITHIN SUCH STATE.

SECTION 12.JURISDICTION; JURY TRIAL WAIVER.

(a)EACH PARTY HERETO HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY HERETO HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM.  EACH PARTY HERETO HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 12.02 OF THE PURCHASE AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OTHER PARTY HERETO IN ANY OTHER JURISDICTION IN THE EVENT THAT A STATE OR FEDERAL COURT LOCATED IN THE COUNTY OF NEW YORK DECLINES JURISDICTION.

(b)EACH PARTY HERETO HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.  EACH PARTY HERETO (I) CERTIFIES THAT NEITHER THE OTHER PARTY NOR ITS REPRESENTATIVES, AGENTS OR ATTORNEYS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS TO WHICH IT IS PARTY BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

To the extent that any Debtor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether from service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, such Debtor hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Transaction Documents.

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SECTION 13.Counterparts; Integration.

Facsimile or electronic transmissions of any executed original document and/or retransmission of any executed facsimile or electronic transmission shall be deemed to be the same as the delivery of an executed original.  At the request of any party hereto, the other parties hereto shall confirm facsimile or electronic transmissions by executing duplicate original documents and delivering the same to the requesting party or parties.  This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  This Agreement constitutes the entire agreement and understanding among the parties hereto and supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.

SECTION 14.Headings.

Headings and captions used in this Agreement are included for convenience of reference and shall not be given any substantive effect.

SECTION 15.General Terms and Conditions.

In addition to and without limitation of any of the foregoing, this Agreement shall be deemed to be a Transaction Document and shall otherwise be subject to all of the general terms and conditions contained in Article 12 of the Purchase Agreement, mutatis mutandi.

SECTION 16.Additional Debtors.

It is understood and agreed that any Subsidiary of the Issuer or other Person that desires to become a Debtor hereunder, or is required to become a party to this Agreement after the date hereof pursuant to the requirements of the Purchase Agreement, any other Transaction Document or otherwise, shall become a Debtor hereunder by (x) executing a joinder agreement in form and substance satisfactory to Secured Party, (y) delivering supplements to Schedules hereto as are necessary to cause such Schedules to be complete and accurate with respect to such additional Debtor on such date and (z) taking all actions as specified in this Agreement as would have been taken by such Debtor had it been an original party to this Agreement, in each case with all documents required above to be delivered to Secured Party and with all documents and actions required above to be taken to the reasonable satisfaction of Secured Party.

[Signature page follows]

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Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above.

DEBTORS:

TEL-INSTRUMENT ELECTRONICS CORP.

By:           __________________________________

Name:           __________________________________

Title:           __________________________________

SECURED PARTY:

[   ]

By:           ____________________________________

Name:           ____________________________________

Title:           ____________________________________

_________________________________________

Read and Approved by: [   ]

Schedules to Security Agreement

Schedule 3.2

Organizational Information

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Schedules to Security Agreement

Schedule 3.3

Collateral Locations, Chief Executive Office, Real Estate, Legal Descriptions

Schedule 3.5

Federal Registration Collateral

Schedule 3.6

Intellectual Property

Schedule 3.9

Chattel Paper, Letter-of-Credit Rights, Commercial Tort Claims, Documents,

Titled Equipment

Schedule 3.10

Deposit and Securities Accounts

Bank Account No. Type of Account Description

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey C. O’Hara, certify that:

1.	I have reviewed this Form 10-Q of Tel-Instrument Electronics Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
4.	Along with the Principal Financial Officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 20, 2012	By:	/s/ Jeffrey C. O’Hara
		Jeffrey C. O’Hara
		Principal Executive Officer Tel-Instrument Electronics Corp.

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Joseph P. Macaluso, certify that:

1.	I have reviewed this Form 10-Q of Tel-Instrument Electronics Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;
4.	Along with the Principal Executive Officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 20, 2012	By:	/s/ Joseph P. Macaluso
		Joseph P. Macaluso
		Principal Financial Officer Tel-Instrument Electronics Corp.

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of Tel-Instrument Electronics Corp. (the “Company”), on Form 10-Q for the quarter ended June 30, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Jeffrey C. O’Hara, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) Such Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in such Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 20, 2012	By:	/s/ Jeffrey C. O’Hara
		Jeffrey C. O’Hara
		Principal Executive Officer Tel-Instrument Electronics Corp.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report of Tel-Instrument Electronics Corp. (the “Company”), on Form 10-Q for the quarter ended June 30, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Joseph P. Macaluso, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) Such Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in such Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 20, 2012	By:	/s/ Joseph P. Macaluso
		Joseph P. Macaluso
		Principal Financial Officer Tel-Instrument Electronics Corp.

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Note 8 - Segment Information (Detail) - Schedule of segment reporting, by segment (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Net sales	$ 1,177,288	$ 3,990,211
Cost of Sales	893,594	2,128,580
Gross Margin	283,694	1,861,631
Engineering, research, and development	578,604	849,038
Selling, general, and admin.	653,888	798,822
Amortization of debt discount	13,392	13,395
Amortization of debt expense	27,080	27,080
Change in fair value of common stock warrants	(249,394)	168,586
Proceeds from life insurance		(300,029)
Interest (income) expense, net	92,467	102,601
Total expenses	1,116,038	1,659,493
Income (loss) before income taxes	(832,344)	202,138
Avionics Gov't [Member]
Net sales	549,966	3,145,592
Cost of Sales	315,929	1,674,813
Gross Margin	234,037	1,470,779
Engineering, research, and development		0
Selling, general, and admin.	0	0
Amortization of debt discount	0	0
Amortization of debt expense	0	0
Change in fair value of common stock warrants	0	0
Proceeds from life insurance		0
Interest (income) expense, net	0	0
Total expenses	0	0
Income (loss) before income taxes	0	0
Avionics Comm'l. [Member]
Net sales	627,322	844,619
Cost of Sales	577,665	453,767
Gross Margin	49,657	390,852
Engineering, research, and development		0
Selling, general, and admin.	0	0
Amortization of debt discount	0	0
Amortization of debt expense	0	0
Change in fair value of common stock warrants	0	0
Proceeds from life insurance		0
Interest (income) expense, net	0	0
Total expenses	0	0
Income (loss) before income taxes	0	0
Avionics Total [Member]
Net sales	1,177,288	3,990,211
Cost of Sales	893,594	2,128,580
Gross Margin	283,694	1,861,631
Engineering, research, and development	578,604	849,038
Selling, general, and admin.	316,989	361,816
Amortization of debt discount	0	0
Amortization of debt expense	0	0
Change in fair value of common stock warrants	0	0
Proceeds from life insurance		0
Interest (income) expense, net	0	0
Total expenses	895,593	1,210,854
Income (loss) before income taxes	(611,899)	650,777
Corporate [Member]
Net sales	0	0
Cost of Sales	0	0
Gross Margin	0	0
Engineering, research, and development		0
Selling, general, and admin.	336,899	437,006
Amortization of debt discount	13,392	13,395
Amortization of debt expense	27,080	27,080
Change in fair value of common stock warrants	(249,394)	168,586
Proceeds from life insurance		(300,029)
Interest (income) expense, net	92,468	102,601
Total expenses	220,445	448,639
Income (loss) before income taxes	$ (220,445)	$ (448,639)

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Note 10 - Fair Value Measurements (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		105,896		105,896
Total Liabilities	$	-	$	-	$	105,896	$	105,896

March 31, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		355,290		355,290
Total Liabilities	$	-	$	-	$	355,290	$	355,290

Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Table Text Block]

Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

	At Inception			March 31, 2012			June 30, 2012
Risk free interest rate		2.81	%		2.23	%		1.67	%
Expected life in years		9.00			7.45			7.20
Expected volatility		28.51	%		53.19	%		41.45	%
Fair market value per share	$	6.70		$	6.33		$	3.68
Exercise price	$	6.70		$	6.70		$	6.70
Warrant Liability	$	281,656		$	355,290		$	105,896

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Note 13 - Restatement (Detail) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Tax Credit Carryforward, Deferred Tax Asset	$ 394,604
Net Income (Loss) Attributable to Parent	(668,800)	(80,795)
Restate Prior Year Income [Member]
Net Income (Loss) Attributable to Parent	$ 256,644

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Note 4 -Inventories, net

3 Months Ended

Jun. 30, 2012

Inventory Disclosure [Text Block]

Note 4 –Inventories, net

Inventories consist of:

	June 30, 2012			March 31, 2012
Purchased parts	$	5,292,049		$	3,452,832
Work-in-process		1,982,159			1,725,395
Finished goods		27,788			45,748
Less: Inventory reserve		(200,000	)		(200,000	)
	$	7,101,996		$	5,023,975

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Note 5 - Income (Loss) Per Share (Detail) - Schedule of earnings per share reconciliation (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Basic net loss per share computation:
Net loss attributable to common stockholders (in Dollars)	$ (668,800)	$ (80,795)
Weighted-average common shares outstanding	2,698,984	2,647,138
Basic net loss per share attributable to common stockholders (in Dollars per share)	$ (0.25)	$ (0.03)
Diluted net loss per share computation
Net loss attributable to common stockholders (in Dollars)	$ (668,800)	$ (80,795)
Weighted-average common shares outstanding	2,698,984	2,647,138
Incremental shares attributable to the assumed exercise of outstanding stock options	0	0
Total adjusted weighted-average shares	2,698,984	2,647,138
Diluted net loss per share attributable to common stockholders (in Dollars per share)	$ (0.25)	$ (0.03)

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Note 4 -Inventories, net (Detail) - Schedule of inventory (USD $)	Jun. 30, 2012	Mar. 31, 2012
Purchased parts	$ 5,292,049	$ 3,452,832
Work-in-process	1,982,159	1,725,395
Finished goods	27,788	45,748
Less: Inventory reserve	(200,000)	(200,000)
	$ 7,101,996	$ 5,023,975

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Note 6 - Long-Term Debt (Detail) (USD $)	3 Months Ended		12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Aug. 31, 2011	Jul. 31, 2012	Jul. 26, 2012	Sep. 30, 2010
Debt Instrument, Face Amount (in Dollars)					$ 600,000	$ 2,500,000
Debt Issuance Cost (in Dollars)	541,604
Debt Instrument, Maturity Date, Description	five
Debt Instrument, Interest Rate, Stated Percentage	14.00%			14.00%
Debt Instrument, Periodic Payment (in Dollars)		$ 69,000	$ 28,762
Warrant term	nine
Class of Warrant or Right, Number of Securities Called by Warrants or Rights (in Shares)	136,090
Fully-dilutive basis used for the calculation of warrant issuance	4.50%
Class of Warrant or Right, Exercise Price of Warrants or Rights (in Dollars per Item)	6.70
Debt Instrument, Collateral	$1,000,000
Debt Instrument, Payment Terms	$25,000
Prepayment penalty, year 1 [Member]
Prepayment penalty	3.00%
Prepayment penalty, year 2 [Member]
Prepayment penalty	2.00%
Prepayment penalty, after year 2 [Member]
Prepayment penalty	100.00%

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Note 7 - Stock Options (Detail) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	4 years
Share-based Compensation	$ 22,277	$ 24,231

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Note 3 - Accounts Receivable, net

3 Months Ended

Jun. 30, 2012

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3 – Accounts Receivable, net

The following table sets forth the components of accounts receivable:

	June 30, 2012			March 31, 2012
Government	$	238,513		$	1,272,436
Commercial		336,403			457,670
Less: Allowance for doubtful accounts		(35,470	)		(35,470	)
	$	539,446		$	1,694,636

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Note 8 - Segment Information (Detail)	3 Months Ended
	Jun. 30, 2012
Number of Reportable Segments	2

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Mar. 31, 2012
Current assets:
Cash and cash equivalents	$ 166,674	$ 413,195
Accounts receivable, net	539,446	1,694,636
Unbilled government receivables	1,768,208	1,780,381
Inventories, net	7,101,996	5,023,975
Prepaid expenses and other	134,587	220,255
Deferred debt expense	108,321	108,321
Deferred income tax asset	1,288,631	1,288,631
Total current assets	11,107,863	10,529,394
Equipment and leasehold improvements, net	654,287	706,870
Deferred debt expenses – long-term	237,704	264,784
Deferred income tax asset – non-current	1,112,334	948,489
Other assets	56,872	56,872
Total assets	13,169,060	12,506,409
Current liabilities:
Current portion long-term debt	605,492	542,382
Capital lease obligations	67,921	64,675
Accounts payable	3,821,297	2,850,432
Deferred revenues – current portion	25,765	34,767
Accrued payroll, vacation pay and payroll taxes	484,585	440,116
Accrued expenses	2,615,472	2,074,911
Total current liabilities	7,620,532	6,007,283
Subordinated notes payable-related parties, net of debt discount	250,000	250,000
Capital Lease Obligations	131,910	149,582
Deferred revenues	3,470	4,637
Warranty Liability	105,896	355,290
Long-term debt, net of debt discount	1,355,525	1,490,302
Total liabilities	9,467,333	8,257,094
Commitments	0	0
Stockholders' equity:
Common stock, par value $.10 per share, 2,710,715 and 2,646,215 issued and outstanding as of June 30, 2012 and March 31, 2012, respectively	271,071	268,421
Additional paid-in capital	6,040,003	5,921,441
Accumulated deficit	(2,609,347)	(1,940,547)
Total stockholders' equity	3,701,727	4,249,315
Total liabilities and stockholders' equity	$ 13,169,060	$ 12,506,409

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Note 1 - Basis of Presentation

3 Months Ended

Jun. 30, 2012

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

Note 1 – Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of Tel-Instrument Electronics Corp. as of June 30, 2012, the results of operations for the three months ended June 30, 2012 and June 30, 2011, and statements of cash flows for the three months ended June 30, 2012 and June 30, 2011  These results are not necessarily indicative of the results to be expected for the full year.  The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include disclosures normally made in an Annual Report on Form 10-K.  The March 31, 2012 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date.  Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

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Note 10 - Fair Value Measurements (Detail) - Schedule of fair value, assets and liabilties measured on recurring basis (USD $)	Jun. 30, 2012	Mar. 31, 2012	Jan. 02, 2010
Total Assets	$ 0	$ 0
Warrant liability	105,896	355,290	281,656
Total Liabilities	105,896	355,290
Fair Value, Inputs, Level 1 [Member]
Total Assets	0	0
Warrant liability	0	0
Fair Value, Inputs, Level 2 [Member]
Total Assets	0	0
Warrant liability	0	0
Fair Value, Inputs, Level 3 [Member]
Total Assets	0	0
Warrant liability	105,896	355,290
Total Liabilities	$ 105,896	$ 355,290

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Note 4 -Inventories, net (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Inventory, Current [Table Text Block]

Inventories consist of:

	June 30, 2012			March 31, 2012
Purchased parts	$	5,292,049		$	3,452,832
Work-in-process		1,982,159			1,725,395
Finished goods		27,788			45,748
Less: Inventory reserve		(200,000	)		(200,000	)
	$	7,101,996		$	5,023,975

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Note 10 - Fair Value Measurements (Detail) - Fair value measuements, valuation assumptions (USD $)	1 Months Ended	3 Months Ended	12 Months Ended
	Jan. 02, 2010	Jun. 30, 2012	Mar. 31, 2012
Risk free interest rate	2.81%	1.67%	2.23%
Expected life in years	9.00	7.20	7.45
Expected volatility	28.51%	41.45%	53.19%
Fair market value per share (in Dollars per share)	$ 6.70	$ 3.68	$ 6.33
Exercise price (in Dollars per share)	$ 6.70	$ 6.70	$ 6.70
Warrant Liability (in Dollars)	$ 281,656	$ 105,896	$ 355,290

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Note 8 - Segment Information (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Segment Reporting Information, by Segment [Table Text Block]

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2012 and 2011:

Three Months Ended	Avionics		Avionics		Avionics			Corporate
June 30, 2012	Gov’t		Comm’l.		Total			Items			Total
Net sales		549,966		627,322		1,177,288			-			1,177,288
Cost of Sales		315,929		577,665		893,594			-			893,594
Gross Margin		234,037		49,657		283,694			-			283,694
Engineering, research, and development						578,604						578,604
Selling, general, and admin.						316,989			336,899			653,888
Amortization of debt discount									13,392			13,392
Amortization of debt expense									27,080			27,080
Change in fair value of common stock warrants									(249,394	)		(249,393	)
Interest (income) expense, net						0			92,468			92,467
Total expenses						895,593			220,445			1,116,038
Loss before income						(611,899	)		(220,445	)		(832,344	)

Three Months Ended	Avionics		Avionics		Avionics		Corporate
June 30, 2011	Gov’t		Comm’l.		Total		Items			Total
Net sales		3,145,592		844,619		3,990,211		-			3,990,211
Cost of Sales		1,674,813		453,767		2,128,580		-			2,128,580
Gross Margin		1,470,779		390,852		1,861,631		-			1,861,631
Engineering, research, and development						849,038					849,038
Selling, general, and admin.						361,816		437,006			798,822
Amortization of debt discount								13,395			13,395
Amortization of debt expense								27,080			27,080
Change in fair value of common stock warrants								168,586			168,586
Proceeds from life insurance								(300,029	)		(300,029	)
Interest (income) expense, net						-		102,601			102,601
Total expenses						1,210,854		448,639			1,659,493
Income (loss) before income						650,777		(448,639	)		202,138

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Note 2 - Revenue Recognition - Percentage-of-Completion - ITATS ("Intermediate Level TACAN Test Set") (AN/ARM-206)

3 Months Ended

Jun. 30, 2012

Revenue Recognition, Percentage-of-Completion Method [Policy Text Block]

Note 2 – Revenue Recognition – Percentage-of-Completion – ITATS (“Intermediate Level TACAN Test Set”) (AN/ARM-206)

Due to the unique nature of the ITATS program, wherein a significant portion of this contract will not be delivered for over a year, revenues under this contract are recognized on a percentage-of-completion basis, which recognizes sales and profit as they are earned, rather than at the time of shipment.  Revenues and profits are estimated using the cost-to-cost method of accounting where revenues are recognized and profits recorded based upon the ratio of costs incurred to estimate of total costs at completion.  The ratio of costs incurred to date to the estimate of total costs at completion is applied to the contract value to determine the revenues and profits.  When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods.  The Company also receives progress billings on this program, which is a funding mechanism by the government to assist contractors on long-term contracts prior to delivery.  These progress payments are applied to Unbilled Government Receivables resulting from revenues recognized under percentage-of-completion accounting.  There have been no progress billings or revenues recognized during the three months ended June 30, 2012.

In July 2011, the Company secured a $599,000 contract modification from the U.S. Navy to incorporate product enhancements to the ITATS AN/ARM-206 TACAN test set resulting from U.S. Navy technical evaluation testing.  The AN/ARM-206 ITATS program is proceeding well with the enhancements funded by the U.S. Navy last year now substantially complete and the platform verification substantially completed by the U.S. Navy. TIC is in the process of performing final bench level verification testing on these units and expects to secure a production release on the 102 unit U.S. Navy production delivery order. It is expected that this product will enter full rate production this calendar year.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)	Jun. 30, 2012	Mar. 31, 2012
Common stock, par value (in Dollars per share)	$ 0.10	$ 0.10
Common stock, shares issued (in Shares)	2,710,715	2,646,215
Common stock, shares outstanding (in Shares)	2,710,715	2,646,215

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Note 12 - Litigation

3 Months Ended

Jun. 30, 2012

Legal Matters and Contingencies [Text Block]

Note 12 – Litigation

On March 24, 2009, Aeroflex Wichita, Inc. (“Aeroflex”) filed a petition against the Company and two of its employees in the District Court, Sedgwick County, Kansas, Case No. 09 CV 1141 (the “Aeroflex Action”), alleging that the Company and its two employees misappropriated Aeroflex’s proprietary technology in connection with the Company winning a substantial contract from the U.S. Army (the “Award”), to develop new Mode-5 radar test sets and kits to upgrade the existing TS-4530 radar test sets to Mode 5. Aeroflex’s petition alleges that in connection with the Award, the Company and its named employees misappropriated Aeroflex’s trade secrets; tortiously interfered with its business relationship; conspired to harm Aeroflex and tortiously interfered with its contract and seeks injunctive relief and damages. The central basis of all the claims in the Aeroflex Action is that the Company misappropriated and used Aeroflex proprietary technology in winning the Award. In February 2009, subsequent to the Award to the Company, Aeroflex filed a protest of the Award with the Government Accounting Office (“GAO”). In its protest, Aeroflex alleged, inter alia, that the Company used Aeroflex’s proprietary technology in order to win the Award, the same material allegations as were later alleged in the Aeroflex Action. On or about March 17, 2009, the Army Contracts Attorney and the Army Contracting Officer each filed a statement with the GAO, expressly rejecting Aeroflex’s allegations that the Company used or infringed Aeroflex proprietary technology in winning the Award, and concluding that the Company had used only its own proprietary technology. On April 6, 2009, Aeroflex withdrew its protest.

In December 2009, the Kansas court dismissed the Aeroflex civil suit against the Company. While this decision was based on jurisdictional issues, the ruling did note that Aeroflex, after discovery proceedings, did not provide any evidence that Tel or its employees misappropriated Aeroflex trade secrets. The Kansas ruling also referenced the Army’s findings, in its response to the General Accountability Office (“GAO”), which rejected Aeroflex’s claims and determined that Tel used its own proprietary technology on this program. Aeroflex has elected to appeal this Kansas decision and has agreed to stay any action against the two former employees until a decision is reached. The appeal was argued in the Kansas Supreme Court in January 2011.

In May 2012, the Kansas Supreme Court reversed the decision of the lower court only as regards to jurisdiction. Tel continues to remain confident as to the outcome of this litigation.

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Document And Entity Information	3 Months Ended
	Jun. 30, 2012	Aug. 10, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	TEL INSTRUMENT ELECTRONICS CORP
Document Type	10-Q
Current Fiscal Year End Date	--03-31
Entity Common Stock, Shares Outstanding		2,712,215
Amendment Flag	false
Entity Central Index Key	0000096885
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2012
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1

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Note 13 - Restatement

3 Months Ended

Jun. 30, 2012

Restatement Of Prior Year Income [Text Block]

Note 13 – Restatement

The state and local deferred tax provision was increased for the year ended March 31, 2012 as a result of a change in New Jersey tax law which, in substance, lowered the New Jersey tax rate, which resulted in lowering the carrying value of the New Jersey net deferred tax assets and net income by $394,604 and $256,644, respectively. The New Jersey tax law change was effective for the first quarter of fiscal year 2012, ending June 30, 2011. As such, the accompanying statement of operations has been restated to reflect the adjustment to net income in the first quarter of fiscal year 2012. This change has also been reported in the Company’s report on Form 8-K filed on July 13, 2012. The Company did not lose any future benefit, and the result is such that the Company will have lower NJ tax expense in the future.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Net sales	$ 1,177,288	$ 3,990,211
Cost of sales	893,594	2,128,580
Gross margin	283,694	1,861,631
Operating expenses:
Selling, general and administrative	653,888	798,822
Engineering, research and development	578,604	849,038
Total operating expenses	1,232,492	1,647,860
Income (loss) from operations	(948,798)	213,771
Other income (expense):
Amortization of debt discount	(13,392)	(13,395)
Amortization of debt expense	(27,080)	(27,080)
Change in fair value of common stock warrants	249,394	(168,586)
Proceeds from life insurance policy		300,029
Interest income		93
Interest expense	(92,468)	(102,694)
Total other income (expense)	116,454	(11,633)
Income (loss) before income taxes	(832,344)	202,138
Income tax provision (benefit)	(163,544)	282,933
Net loss	$ (668,800)	$ (80,795)
Net loss per share:
Basic loss per common share (in Dollars per share)	$ (0.25)	$ (0.03)
Diluted loss per common share (in Dollars per share)	$ (0.25)	$ (0.03)
Weighted average shares outstanding:
Basic (in Shares)	2,698,984	2,647,138
Diluted (in Shares)	2,698,984	2,647,138

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Note 7 - Stock Options

3 Months Ended

Jun. 30, 2012

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Note 7 – Stock Options

The Company adopted FASB ASC 718, utilizing the modified prospective method.  FASB ASC 718 requires the measurement of stock-based compensation based on the fair value of the award on the date of grant.  Under the modified prospective method, the provisions of ASC 718 apply to all awards granted after the date of adoption.  The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, typically four years.  As a result of adopting ASC 718, operations was charged $22,277 and $24,231 for three months ended June 30, 2012 and 2011, respectively.  The Company estimates the fair value of each option using the Black Scholes option-pricing model. The Company did not grant any options during the three months ended June 30, 2012 and 2011.

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Note 6 - Long-Term Debt

3 Months Ended

Jun. 30, 2012

Long-term Debt [Text Block]

Note 6 – Long-Term Debt

In September 2010, the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2,500,000 in the form of a Promissory Note (“the “Note”).  The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees.  These expenses are included as deferred debt expense in the accompanying balance sheet, and these expenses are amortized over the term of the loan.

The features of the note are as follows:

(1)   The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount.  Payments for the first year were interest only and amounted to $28,762 monthly.  In September 2011, the Company began making monthly payments of approximately $69,000 for interest and principal for the remaining term of the loan.

(2)   The Company issued BCA  a nine-year warrant for 136,090 shares, based upon 4.5% of the fully-diluted outstanding shares of the Company’s common stock exercisable at $6.70 per share, the average closing price of the common stock over the three days preceding the loan closing on the NYSE-Mkt Exchange.  In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the purchase of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount and warrant liability, which is being marked to fair value at the end of each period (see Note 10 to Notes to the Condensed Consolidated Financial Statements).  The debt discount is to be amortized over the life of the loan.

(3)   Loan provisions also contain customary representations and warranties.

(4)   BCA has a lien on all of the Company’s assets.  In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.

(5)   The Company may prepay a portion of the principal amount provided that (i) any such prepayment shall be applied in the inverse order of the maturity of the principal amount of the Note, (ii) the Company shall pay to BCA an additional amount equal to (A) 3% of the outstanding principal amount being prepaid if such prepayment is made during the first loan year, and (B) 2% of the outstanding principal amount then being prepaid if such prepayment is being made during the second loan year.  Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.

(6)   Upon the occurrence of a Change of Control (as defined in the Agreement) or within five (5) Business Days of an O’Hara Life Insurance Realization Event (as defined in the Agreement), the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first year of the loan, 102% in the second year of the loan, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”).  If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid.  At the   election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of common stock of the Company in marketable condition in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations.  In the event BCA makes the election contemplated by the immediately preceding sentence, the Company shall issue to BCA that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.

(7)   The Note contains a number of affirmative and negative covenants which restrict our operations.  The BCA agreement contains a number of affirmative and negative covenants. For the quarter ended June 30, 2012, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA).  However, the Company received a waiver from BCA on each of the above mentioned covenants.

(8)   The Company and BCA have amended certain provisions to ease some restrictions.

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Note 5 - Income (Loss) Per Share (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Earnings Per Share Reconciliation [Table Text Block]

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. Diluted loss per share for the three months ended June 30, 2012 and 2011 do not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	June 30, 2012			June 30, 2011 (Restated)
Basic net loss per share computation:
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Basic net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)
Diluted net loss per share computation
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		2,698,984			2,647,138
Diluted net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)

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Note 14 - New Accounting Pronouncements

3 Months Ended

Jun. 30, 2012

New Accounting Pronouncements, Policy [Policy Text Block]

Note 14 – New Accounting Pronouncements

For the three months ended June 30, 2012, there have been no significant accounting pronouncements or changes in accounting pronouncements that have become effective that are expected to have a material impact on the Company’s financial position, operations or cash flows.

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Note 10 - Fair Value Measurements

3 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Text Block]

Note 10 – Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.

As defined in ASC 820-10, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable.  The Company classifies fair value balances based on the observability of those inputs. ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820-10 are as follows:

·   Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

·   Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.  Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

·   Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The valuation techniques that may be used to measure fair value are as follows:

·   Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

·   Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method.

·   Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The carrying value of the Company’s borrowings is a reasonable estimate of its fair value as borrowings under the Company’s credit facility reflect currently available terms and conditions for similar debt.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2012 and March 31, 2012.  As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

June 30, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		105,896		105,896
Total Liabilities	$	-	$	-	$	105,896	$	105,896

March 31, 2012	Level I		Level II		Level III		Total
Total Assets	$	-	$	-	$	-	$	-
Warrant liability		-		-		355,290		355,290
Total Liabilities	$	-	$	-	$	355,290	$	355,290

The Company adopted the guidance of ASC 815, which requires that we mark the value of our warrant liability (see Note 6) to market and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant.  The fair value of the warrant is calculated using the Black-Scholes valuation model.

The common stock warrant was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign corporation.  The warrants do not qualify for hedge accounting, and, as such, all changes in the fair value of these warrants are recognized as other income/expense in the statement of operations until such time as the warrants are exercised or expire.  Since these common stock warrants do not trade in an active securities market, the Company recognizes a warrant liability and estimates the fair value of these warrants using the Black-Scholes options model using the following assumptions:

	At Inception			March 31, 2012			June 30, 2012
Risk free interest rate		2.81	%		2.23	%		1.67	%
Expected life in years		9.00			7.45			7.20
Expected volatility		28.51	%		53.19	%		41.45	%
Fair market value per share	$	6.70		$	6.33		$	3.68
Exercise price	$	6.70		$	6.70		$	6.70
Warrant Liability	$	281,656		$	355,290		$	105,896

The volatility calculation was based on the 30 months for the Company’s stock price prior to the measurement date, utilizing January 1, 2010 as the initial period, as the Company believes that this is the best indicator of future performance, and the source of the risk free interest rate is the US Treasury rate related to 10 year notes.  The exercise price is per the agreement, the fair market value is the closing price of our stock on the date of measurement, and the expected life is based on management’s current estimate of when the warrants will be exercised.  All inputs to the Black-Scholes options model are evaluated each reporting period.

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Note 8 - Segment Information

3 Months Ended

Jun. 30, 2012

Segment Reporting Disclosure [Text Block]

Note 8 – Segment Information

In accordance with FASB ASC 280, “Disclosures about Segments of an Enterprise and related information”, the Company determined it has two reportable segments - avionics government and avionics commercial.  There are no inter-segment revenues.

The Company is organized primarily on the basis of its avionics products.  The avionics government segment consists primarily of the design, manufacture, and sale of test equipment to the U.S. and foreign governments and militaries either directly or through distributors.  The avionics commercial segment consists of design, manufacture, and sale of test equipment to domestic and foreign airlines, directly or through commercial distributors, and to general aviation repair and maintenance shops.  The Company develops and designs test equipment for the avionics industry and as such, the Company’s products and designs cross segments.

Management evaluates the performance of its segments and allocates resources to them based on gross margin.  The Company’s general and administrative costs and sales and marketing expenses, and engineering costs are not segment specific.  As a result, all operating expenses are not managed on a segment basis.  Net interest includes expenses on debt and income earned on cash balances, both maintained at the corporate level.

The table below presents information about reportable segments within the avionics business for the periods ending June 30, 2012 and 2011:

Three Months Ended	Avionics		Avionics		Avionics			Corporate
June 30, 2012	Gov’t		Comm’l.		Total			Items			Total
Net sales		549,966		627,322		1,177,288			-			1,177,288
Cost of Sales		315,929		577,665		893,594			-			893,594
Gross Margin		234,037		49,657		283,694			-			283,694
Engineering, research, and development						578,604						578,604
Selling, general, and admin.						316,989			336,899			653,888
Amortization of debt discount									13,392			13,392
Amortization of debt expense									27,080			27,080
Change in fair value of common stock warrants									(249,394	)		(249,393	)
Interest (income) expense, net						0			92,468			92,467
Total expenses						895,593			220,445			1,116,038
Loss before income						(611,899	)		(220,445	)		(832,344	)

Three Months Ended	Avionics		Avionics		Avionics		Corporate
June 30, 2011	Gov’t		Comm’l.		Total		Items			Total
Net sales		3,145,592		844,619		3,990,211		-			3,990,211
Cost of Sales		1,674,813		453,767		2,128,580		-			2,128,580
Gross Margin		1,470,779		390,852		1,861,631		-			1,861,631
Engineering, research, and development						849,038					849,038
Selling, general, and admin.						361,816		437,006			798,822
Amortization of debt discount								13,395			13,395
Amortization of debt expense								27,080			27,080
Change in fair value of common stock warrants								168,586			168,586
Proceeds from life insurance								(300,029	)		(300,029	)
Interest (income) expense, net						-		102,601			102,601
Total expenses						1,210,854		448,639			1,659,493
Income (loss) before income						650,777		(448,639	)		202,138

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Note 9 - Income Taxes

3 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Text Block]

Note 9 – Income Taxes

The Company adopted FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, effective April 1, 2007.  ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.  The Company does not have any unrecognized tax benefits.

The tax effect of temporary differences, primarily net operating loss carryforwards, asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying June 30, 2012 and March 31, 2012 condensed consolidated balance sheets.  Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse (See Critical Accounting Policies – Income Taxes).

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Note 11 - Reclassifications

3 Months Ended

Jun. 30, 2012

Reclassifications [Text Block]

Note 11 – Reclassifications

Certain prior year and period amounts have been reclassified to conform to the current period presentation.

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Note 10 - Fair Value Measurements (Detail)	3 Months Ended
	Jun. 30, 2012
Fair value assumptions, volatility, description	30 months
Fair Value Assumptions, Risk Free Interest Rate, Description	10 year notes

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Note 3 - Accounts Receivable, net (Tables)

3 Months Ended

Jun. 30, 2012

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

The following table sets forth the components of accounts receivable:

	June 30, 2012			March 31, 2012
Government	$	238,513		$	1,272,436
Commercial		336,403			457,670
Less: Allowance for doubtful accounts		(35,470	)		(35,470	)
	$	539,446		$	1,694,636

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Note 2 - Revenue Recognition - Percentage-of-Completion - ITATS ("Intermediate Level TACAN Test Set") (AN/ARM-206) (Detail) (USD $)	3 Months Ended
	Jun. 30, 2012
Contract Modification (in Dollars)	$ 599,000
Number of units for production delivery order	102

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	3 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net loss	$ (668,800)	$ (80,795)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Deferred income taxes	(163,845)	282,017
Depreciation and amortization	53,231	29,881
Provision for inventory obsolescence		10,000
Amortization of debt discount	13,392	13,395
Amortization of debt expense	27,080	27,080
Increase in cash surrender value of life insurance		2,011
Proceeds from life insurance policy		(300,029)
Change in fair value of common stock warrant	(249,394)	168,586
Non-cash stock-based compensation	22,277	24,231
Changes in assets and liabilities:
Decrease in accounts receivable	1,155,190	870,875
Decrease in unbilled government receivables	12,173
(Increase) decrease in inventories	(2,078,021)	439,886
Decrease (increase) in prepaid expenses & other	85,668	(3,569)
Increase in other assets		(32,316)
Increase (decrease) in accounts payable	970,865	(868,418)
(Decrease) increase in accrued payroll, vacation pay & withholdings	44,469	(1,381)
Decrease in deferred revenues	(10,169)	(13,276)
Decrease increase in progress billings		(424,202)
Increase in accrued expenses	540,561	164,353
Net cash (used in) provided by operating activities	(245,323)	308,329
Cash flows from investing activities:
Purchases of equipment	(648)
Net cash used in investing activities	(648)
Cash flows from financing activities:
Proceeds from the exercise of stock options	98,935	5,390
Repayment of long-term debt	(85,059)
Repayment of capitalized lease obligations	(14,426)	(8,332)
Proceeds from life insurance policy		285,981
Net cash (used in) provided by financing activities	(550)	283,039
Net (decrease) increase in cash and cash equivalents	(246,521)	591,368
Cash and cash equivalents at beginning of period	413,195	123,955
Cash and cash equivalents at end of period	166,674	715,323
Taxes paid	0	0
Interest paid	$ 83,809	$ 87,192

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Note 5 - Income (Loss) Per Share

3 Months Ended

Jun. 30, 2012

Earnings Per Share [Text Block]

Note 5 – Loss Per Share

Financial Accounting Standards Board (“FASB”) ASC 260 requires presentation of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”).

The Company’s basic income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income (loss) per common share is based on net income (loss), divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options.  Diluted loss per share for the three months ended June 30, 2012 and 2011 do not include common stock equivalents, as these stock equivalents would be anti-dilutive.

	Three Months Ended			Three Months Ended
	June 30, 2012			June 30, 2011 (Restated)
Basic net loss per share computation:
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Basic net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)
Diluted net loss per share computation
Net loss attributable to common stockholders	$	(668,800	)	$	(80,795	)
Weighted-average common shares outstanding		2,698,984			2,647,138
Incremental shares attributable to the assumed exercise of outstanding stock options		-			-
Total adjusted weighted-average shares		2,698,984			2,647,138
Diluted net loss per share attributable to common stockholders	$	(0.25	)	$	(0.03	)

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Note 3 - Accounts Receivable, net (Detail) - Schedule of accounts receivable (USD $)	Jun. 30, 2012	Mar. 31, 2012
Less: Allowance for doubtful accounts	$ (35,470)	$ (35,470)
	539,446	1,694,636
Government Receivables [Member]
Accounts Receivable	238,513	1,272,436
Commercial Receivables [Member]
Accounts Receivable	$ 336,403	$ 457,670

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Note 15 - Subsequent Event (Detail) (USD $)	0 Months Ended	1 Months Ended
	Aug. 15, 2012	Jul. 31, 2012	Jul. 26, 2012	Jun. 30, 2012	Mar. 31, 2012	Sep. 30, 2010
Debt Instrument, Face Amount			$ 600,000			$ 2,500,000
Debt Instrument, Amount, Net of Expenses		481,000
Debt Instrument, Interest Rate, Stated Percentage		14.00%		14.00%
Warrants Issued, Shares (in Shares)		50,000
Common Stock, Par or Stated Value Per Share (in Dollars per share)		$ 0.10		$ 0.10	$ 0.10
Investment Warrants, Exercise Price (in Dollars per share)		$ 3.35
Progress Payment Receivable		$ 990,000
Time Progress Funding is to be Received	2 weeks

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Note 15 - Subsequent Event

3 Months Ended

Jun. 30, 2012

Subsequent Events [Text Block]

Note 15 – Subsequent Event

On July 26, 2012 the Company entered into a Securities Purchase Agreement with a private investor.  Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $481,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The Note, together with all unpaid interest and principal is due on March 31, 2013.  The Common Stock underlying the Warrant is exercisable at a price of $3.35 per share and the Warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K on August 3, 2012.

On August 15, 2012, the Company received approval for a $990,000 progress payment invoice related to the CRAFT program. It is expected that the funding will be received within the following 2 weeks.