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DEBTOR-IN-POSSESSION LOAN AGREEMENT

by and among

REDENVELOPE, INC.

as Borrower

GRANITE CREEK PARTNERS AGENT, LLC

as Agent

and

the other Parties Hereto from Time to Time

as Lenders

Dated: April 17, 2008

TABLE OF CONTENTS

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-ii-

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EXHIBITS/SCHEDULES EXHIBITS

-iv-

DEBTOR-IN-POSSESSION LOAN AGREEMENT

This DEBTOR-IN-POSSESSION LOAN AGREEMENT (this “Agreement”) is entered into as of April 17, 2008 between RedEnvelope, Inc., a Delaware corporation and a debtor and a debtor-in-possession (“Borrower”), Granite Creek Partners Agent, LLC, a Delaware limited liability company, as administrative agent (the “Agent”), and the other parties hereto from time to time as lenders (the “Lenders”). Capitalized terms utilized herein shall have the meanings ascribed to such terms in Section 1.1 of this Agreement unless otherwise specified herein.

RECITALS

WHEREAS, on April 17, 2008 (“Petition Date”), the Borrower has filed, or shall file, a petition under the Bankruptcy Code in the Bankruptcy Court, to retain possession of its assets and to be authorized under Bankruptcy Code ¤¤ 1107 and 1108 to continue the management and operation of its business as a debtor in possession;

WHEREAS, as of the Petition Date, the Borrower is a retail catalogue and mail order miscellaneous consumer goods retailer;

WHEREAS, the Borrower plans to sell all or substantially all of the assets of the Borrower pursuant to the Asset Sale;

WHEREAS, the Borrower and Creative Catalogs Corporation, a Delaware corporation (“CCC”), as stalking horse bidder (the “Stalking Horse Bidder”), have entered into the Asset Purchase Agreement whereby the Borrower plans to sell, and the Stalking Horse Bidder plans to purchase, subject to higher bidders pursuant to the Bidding Procedures Order, all or substantially all of the assets of the Borrower pursuant to the Asset Sale;

WHEREAS, in order to provide liquidity for the Borrower in the Bankruptcy Case and to facilitate the Asset Sale, the Borrower has requested that the Lender provide a debtor-in-possession financing facility to the Borrower to provide ongoing working capital funds that the Borrower requires, in accordance with the terms of an Approved Budget and the terms herein, principally to (i) pay the Borrower’s ongoing and budgeted operating expenses, (ii) pay the fees and expenses associated with this Agreement, the Asset Purchase Agreement and the transactions contemplated hereby and thereby, and (iii) pay allowed Administrative Fees and Expenses;

WHEREAS, the Lenders have indicated their willingness to extend financing to Borrower upon the terms and conditions set forth in this Agreement upon the entry of the Interim Order and Bidding Procedures Order acceptable to Lenders in their sole discretion;

WHEREAS, the Borrower has agreed to use its best efforts to provide such other protection, as described in this Agreement and the Financing Order, subject to the approval of the Bankruptcy Court; and

WHEREAS, the Borrower shall use its best efforts to have the Bankruptcy Court enter the Interim Order, Bidding Procedures Order and Financing Order pursuant to which the Lenders shall make post-petition loans, advances and other financial accommodations to the Borrower, subject to any exclusions as set forth in the Financing Order and/or this Agreement.

NOW, THEREFORE, in consideration of these premises and of the mutual undertakings set forth herein, the parties hereto agree to as follows:

ARTICLE 1

DEFINITIONS, CONSTRUCTION AND RATIFICATION

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

“Accounts” means, in addition to the definition of accounts in the UCC, all presently existing and hereafter arising accounts receivable, contract rights, and all other forms of obligations owing to the Borrower arising out of the sale, lease, license or assignment of goods or other property, or the rendition of services by the Borrower, whether or not earned by performance, and Borrower’s Books relating to any of the foregoing.

“Administrative Expense” means a claim against the Borrower and/or its estate in the Bankruptcy Case that is an administrative expense claim having priority over unsecured claims pursuant to Section 503(b) of the Bankruptcy Code.

“Administrative Fees and Expenses” means any claim, as allowed by the Bankruptcy Court, against the Borrower for fees and/or expenses pursuant to Bankruptcy Code sections 327, 328 and/or 330.

“Advance Commitments” means with respect to each Lender or all Lenders, as the context requires, the aggregate commitment of such Lender or Lenders to make Advances as set forth under their respective signatures on the signature page to this Agreement or in any assignment or joinder for such Lender and designated as the “Advance Commitment”. The aggregate Advance Commitment for all Lenders shall be $4,500,000.00 or such lesser amount as is set forth in the Financing Order.

“Advances” means all loans, advances and other financial accommodations by the Lenders to or on account of the Borrower under Section 2.1.

“Adverse Claim” means the assertion or joinder in any claim, counter-claim, action, proceeding, application, motion, objection, defense, or other contested matter, the purpose of which is to seek any order, judgment, determination, or similar relief: (x) invalidating, setting aside, avoiding, subordinating, in whole or in part, the Obligations, or liens and security interests securing such Obligations; (y) preventing, hindering, or delaying, whether directly or indirectly, the assertion or enforcement by the Agent or Lenders of their liens or realization upon any of their respective Collateral, other than to

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protest in good faith the existence of a Default or Event of Default; or (z) week challenging the liens or claims of, or seeking an affirmative recovery from the Agent or the Lenders.

“Agreement” means this Debtor-In-Possession Loan Agreement, as amended, modified, revised or restated from time to time.

“Approved Budget” means the rolling ten (10) week cash revenue and expense budget compiled by week and showing the weekly and cumulative expenses, revenues, Cash Shortfall and Advance needs and otherwise in form and substance satisfactory to the Agent and Lenders in their sole discretion and that has been approved in writing (including by attachment to this document) by the Agent and Lenders. The initial Approved Budget is attached as Exhibit A hereto. The Approved Budget shall be Exhibit A, as modified or revised from time-to-time in accordance with Section 6.1 or otherwise with the written approval of the Agent and the Lenders.

“Assets” means all real and personal property of the Borrower, whether now owned or existing, or hereafter acquired or arising, and wherever located, and whether owned before or after the Petition Date including all of the following assets, properties and interests in property of the Borrower: all Accounts; Equipment; General Intangibles; Payment Intangibles; Chattel Paper; Inventory; Negotiable Collateral; Investment Property; Financial Assets; Deposit Accounts; Documents; money or any assets of the Borrower, including assets which hereafter come into the possession, custody, or control of the Agent or any Lender; all proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all tangible or intangible property resulting from the sale, lease, license or other disposition of the foregoing, or any portion thereof or interest therein, and all proceeds thereof; and all other property of the Borrower’s estate in the Bankruptcy Case or otherwise.

“Asset Sale” means the sale of substantially all of the Assets of the Borrower under the terms of the Asset Purchase Agreement.

“Asset Purchase Agreement” means that certain Asset Purchase Agreement by and between the Stalking Horse Bidder and the Borrower dated as of the date hereof, as it may be amended, restated or modified from time to time.

“Authorized Officer” means any officer or other representative of the Borrower authorized to transact business with the Agent or the Lenders.

“Available Cash Surplus” at any time, means an amount not less than zero equal to Total Cash minus Restricted Cash at such time.

“Avoidance Action” means all actions for preferences, fraudulent conveyances, and other avoidance power claims and any recoveries under Section 552(b), Section 506(c) and Sections 542, 544, 545, 547, 548, 549, 550 and 553 of the Bankruptcy Code.

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“Bankruptcy Case” means the case of the Borrower under Chapter 11 of the Bankruptcy Code, pending in the Bankruptcy Court as Case No. 08-______.

“Bankruptcy Code” means title 11 of the United States Code, 11 U.S.C. ¤¤ 101 et seq.

“Bankruptcy Court” means the United States Bankruptcy Court for the Northern District of California.

“Bidding Procedures” shall mean the bidding procedures and other requirements set forth in Exhibit B to the Bidding Procedures Order.

“Bidding Procedures Order” shall mean that certain order approving, among other things, the Bidding Procedures, including bid protections, approving the form and manner of notice, establishing procedures to determine cure amounts and deadlines for objections for certain contracts and leases to be assumed and assigned by the debtors, approving the Break-Up Fee and Expense Reimbursement and scheduling a hearing to consider a sale of substantially all of the assets of the Borrower’s business, as well as the identification of CCC as the Stalking Horse Bidder.

“Borrower’s Books” means all of the Borrower’s books and records including all of the following: ledgers; records indicating, summarizing, or evidencing the Borrower’s assets or liabilities; all information relating to the Borrower’s business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information, and the facilities containing such information, but specifically excluding the Borrower’s corporate minute books, stock ledgers and the like.

“Borrowing Request” means a request by the Borrower in the form of Exhibit B.

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

“Carve Out” means the payment of professional fees and disbursements incurred by the Borrower and any statutory committees in the Bankruptcy Case accrued but unpaid in an amount not to exceed the amount set forth in the Approved Budget.

“Cash” means money, currency or the available credit balance in dollars in a Deposit Account.

“Cash Flow Sweep Amount” means the Available Cash Surplus as calculated based on the weekly Variance Report and officer’s certificate most recently delivered pursuant to Section 6.1 minus Net Weekly Disbursements as calculated based on the Approved Budget.

“Cash Shortfall” means, for any period, the amount that (x) cash requirements of the Borrower for the categories of expenses and costs included in the Approved Budget exceed (y) cash collections received by the Borrower that are available for use by the Borrower in the ordinary course of business.

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“Chapter 7 Carve-Out” means the fees and expenses of administration (including attorneys’ fees) of a superseding Chapter 7 case.

“Chattel Paper” shall have the same meaning ascribed to such term in the UCC.

“Collateral” means collectively all of the Borrower’s Assets securing the Obligations of the Borrower hereunder as set forth in Section 4.1, including without limitation cash and property of the Borrower in the possession of other parties as deposits or retainers (subject to the interest of the beneficiaries of such funds) and any proceeds of Collateral. Notwithstanding any other provision of any Financing Agreement to the contrary, the Collateral shall not include the right, title and interest of the Borrower in the Avoidance Actions, other than Avoidance Actions pursuant to Section 549 of the Bankruptcy Code.

“Collateral Account” means an account satisfactory to the Lenders in its sole discretion and which is in the name of the Agent or over which the Agent has “control” as defined in the UCC.

“Committee” means the official committee of unsecured creditors and any other committee formed, appointed, or approved in the Bankruptcy Case and each of such committees shall be referred to herein as a Committee.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

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

“Default” means any event or occurrence or set of facts which could constitute an Event of Default with the passage of time or the giving of notice.

“Deposit Account” shall have the meaning ascribed to such term in the UCC.

“DIP Facility” means the revolving credit debtor-in-possession facility in the aggregate amount not to exceed $4,500,000.

“Documents” shall have the meaning ascribed to such term in the UCC.

“Effective Date” shall have the meaning ascribed to such term in Section 2.7.

“Equipment” means in addition to the definition of equipment in the UCC all of the Borrower’s present and hereafter acquired equipment, furniture, furnishings, fixtures, goods (other than consumer goods or farm products) and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located.

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“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

“Event of Default” means any event specified in Article 8.

“Extraordinary Receipts” shall have the meaning ascribed to such term in Section 2.4(b)(iii).

“Final Order” means the order of the Bankruptcy Court entered in the Bankruptcy Cases after a final hearing under Bankruptcy Rule 4001(c)(2) or such other procedures as approved by the Bankruptcy Court which order shall be in form and substance satisfactory to Lenders in the Lenders’ sole discretion, and from which no appeal or motion to reconsider has been timely filed, or if timely filed, such appeal or motion to reconsider has been dismissed or denied (unless Lender waives such requirement), together with all extensions, modifications and amendments thereto, which, among other matters but not by way of limitation, authorizes Borrower to obtain credit, incur (or guaranty) indebtedness, and grant superpriority, priming, first priority liens under this Agreement and the other Financing Agreements, as the case may be, and provides for the super-priority administrative expense status of Lenders’ and Agent’s claims.

“Financial Assets” shall have the meaning ascribed to such term in the UCC.

“Financing Agreements” shall mean, collectively, this Agreement, the Financing Order, and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

“Financing Order” shall mean, collectively and individually, the Interim Order, until such time as it is superseded by the Final Order, and such other orders, and related findings of fact and conclusions of law in support thereof, relating thereto or authorizing on or after the Petition Date, the incurrence of indebtedness by the Borrower, the provision of loans, advances and other financial accommodations by the Lenders to the Borrower, the granting of liens, interests, priority claims and other rights in favor of the Lenders and Agent pursuant to the Financing Agreements, on an emergency, interim, final or other basis pursuant to Section 364 of the Bankruptcy Code and other applicable sections of the Bankruptcy Code as may be issued or entered in the Bankruptcy Case, each and all in form and substance acceptable to the Lenders and the Agent in their sole and absolute discretion.

“First Day Orders” shall mean, collectively and individually, each order entered in the Bankruptcy Case as a result of a motion or application filed by the Borrower in the Bankruptcy Case on or about the Petition Date, each in form and substance acceptable to the Lenders and the Agent in their sole and absolute discretion, that is not subject to any stay or injunction pending any appeal or petition for certiorari, review, rehearing, reconsideration, or otherwise.

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“General Intangibles” means, in addition to the definition of general intangibles in the UCC, all of the Borrower’s present and future general intangibles and other personal property (including goodwill, Patents, Patent Applications, Intellectual Property, trade names, trademarks, service marks, blueprints, drawings, purchase orders, customer lists, infringement claims, computer programs, computer discs, computer tapes, Borrower’s Books, literature, reports, catalogs, insurance premium rebates, tax refunds, and tax refund claims) other than goods and Accounts.

“Governmental Authority” means any United States federal, state or local or any foreign government, governmental regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body.

“Insolvency Proceeding” means any proceeding commenced by or against any person or entity under any provision of the Bankruptcy Code, as amended, or under any other state or federal insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, or extensions generally with its creditors.

“Instruments” shall have the meaning ascribed to such term in the UCC.

“Intellectual Property” means the following property of the Borrower: (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all rights arising under or in connection with all Patents, Patent Applications and Patent disclosures, (ii) all trademarks, service marks, trade dress, logos, slogans, trade names and corporate names, together with all translations, adaptations, derivations and combinations thereof (including all goodwill associated therewith), and all applications, registrations and renewals, (iii) all copyrightable works, all copyrights and all applications, registrations and renewals, (iv) all trade secrets and confidential business information (including, without limitation, ideas, research, know-how, techniques, methods, data, product drawings, training manuals, clinical and regulatory strategies, and business and marketing plans and proposals), (v) all computer software, (vi) all computer generated data and documentation, (vii) all Third Party License Rights, (viii) all designs, plans and documentation in whatever form related to products under development or products subject to a change in design or composition, (ix) all other proprietary rights, and (x) all copies and tangible embodiments thereof (in whatever form or medium).

“Interim Order” means the order of the Bankruptcy Court entered in the Bankruptcy Case after an interim hearing (assuming satisfaction of the standards prescribed in Section 364 of the Bankruptcy Code and Bankruptcy Rule 4001 and other applicable law), together with all extensions, modifications, and amendments thereto, in form and substance satisfactory to Lenders in the Lenders’ sole discretion, which, among other matters, but not by way of limitation, authorizes, on an interim basis, Borrower to execute and perform its obligations under the terms of this Agreement and the other Loan Documents, substantially in the form of Exhibit C.

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“Inventory” means, in addition to the definition of inventory in the UCC, all present and future inventory in which the Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service, the Borrower’s present and future raw materials, work in process, finished goods, tangible property, stock in trade, wares, and materials used in or consumed in the Borrower’s business, goods which have been returned to, repossessed by, or stopped in transit by the Borrower, packing and shipping materials, wherever located, any documents of title representing any of the above, and the Borrower’s Books relating to any of the foregoing.

“Investment Property” means, in addition to the definition of investment property in the UCC, all Equity Interests.

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

“Lender” or “Lenders” has the meaning ascribed to such term in the caption of this Agreement.

“Liens” means all liens, security interests, encumbrances and claims (including, but not limited to, any “claim” as defined in section 101(5) or “lien” as defined in section 101(37) of the Bankruptcy Code), reclamation claims, mortgages, deeds of trust, pledges, covenants, restrictions, hypothecations, charges, indentures, loan agreements, instruments, contracts, leases, licenses, options, rights of first refusal, contracts, offsets, recoupment, rights of recovery, judgments, orders and decrees of any court or foreign or domestic governmental entity, claims for reimbursement, contribution, indemnity or exoneration, assignment, preferences, debts, charges, suits, licenses, options, rights of recovery, interests, products liability, alter-ego, environmental, successor liability, tax and other liabilities, causes of action and claims, or other encumbrances or restrictions on or conditions to transfer or assignment of any kind (including without limitation to the generality of the foregoing restrictions or conditions on or to the transfer, assignment, or renewal of licenses, permits, registrations, and authorizations or approvals of or with respect to governmental units and instrumentalities) to the fullest extent of the law, in each case whether secured or unsecured, choate or inchoate, filed or unfiled, scheduled or unscheduled, noticed or unnoticed, recorded or unrecorded, perfected or unperfected, allowed or disallowed, contingent or non-contingent, liquidated or unliquidated, matured or unmatured, material or non-material, disputed or undisputed, or known or unknown, whether arising prior to, on, or subsequent to the commencement of the Bankruptcy Case, whether imposed by agreement, understanding, law, equity or otherwise.

“Loan Documents” means, collectively, this Agreement, the Note, the Financing Order, the Approved Budget, each Borrowing Request, and any other agreements, instruments, amendments, or documents, if any, which create, evidence, create a security interest in or secure the Obligations, and any other agreement, instrument, amendment, or document entered into among the Borrower, Agent and/or any Lender or in favor of Agent or any Lender relating to or in connection with this Agreement or any other Loan Document or the Obligations if such agreement, instrument, amendment or document states that it is a “Loan Document”.

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“Material Adverse Change” means a material adverse change in (a) the Borrower’s ability to pay or perform its Obligations in accordance with the terms of the Loan Documents, or (b) the validity or enforceability of the Financing Order or any of the other Loan Documents, or (c) the rights and remedies of the Agent or any Lender under the Financing Order and the other Loan Documents.

“Maturity Date” means the date that is the earliest to occur of (i) ninety (90) days from the date of this Agreement; (ii) the confirmation of a plan of reorganization or liquidation; (iii) the conversion of the Bankruptcy Case to a Chapter 7 case; or (iv) the effective date of a sale of substantially all of Borrower’s Assets pursuant to the provisions of ¤¤ 105, 363(b), 363(f), 363(m), 363(n) and 365 of the Bankruptcy Code.

“Negotiable Collateral” means all of the Borrower’s present and future letters of credit, notes, drafts, instruments, documents, leases and Chattel Paper.

“Net Cash Proceeds” means, with respect to any Asset disposition or sale the aggregate cash, or other payment in kind, goods or services, and any proceeds thereof received by or for the benefit of Borrower from such Asset disposition or sale (including, without limitation, cash received by way of deferred payment pursuant to a note receivable, conversion of non-cash consideration, cash payments in respect of purchase price adjustments or otherwise, but only as and when such cash is received and excluding any deferred payment pursuant to any non-cash consideration to the extent such payment represents interest income to Borrower) minus (i) the direct costs and expenses incurred in connection therewith (including in the case of any Asset disposition or sale, the payment of the outstanding principal amount of, premium, if any, and interest on any Indebtedness (other than hereunder) required to be repaid as a result of such Asset disposition or sale); (ii) any provision for taxes in respect thereof made in accordance with GAAP; provided that such expenses shall only include taxes to the extent that taxes are payable in cash in the current year or the following year as a result of such Asset disposition or sale; and (iii) any portion of any such proceeds which Borrower determines in good faith should be reserved for post-closing adjustments (to the extent Borrower delivers to the Agent and each Lender a certificate signed by the senior financial officer of Borrower as to such determination), it being understood and agreed that on the day that all such post-closing adjustments have been determined (which shall not be later than three months following the date of the respective asset disposition or sale), the amount (if any) by which the reserved amount in respect of such sale or disposition exceeds the actual post-closing adjustments payable by Borrower shall constitute Net Cash Proceeds on such date received by Borrower. Any proceeds received in a currency other than dollars shall, for purposes of the calculation of the amount of Net Cash Proceeds, be in an amount equal to the dollar equivalent thereof as of the date of receipt thereof by such Person.

“Net Weekly Disbursements” means, for any week, an amount not less than zero equal to the Cash Shortfall for the upcoming week pursuant to the Approved Budget.

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“Note” means the promissory note, substantially in the form of Exhibit D hereto, made by the Borrower to the order of any Lender concurrently herewith or at any time hereafter.

“Obligations” means all loans, advances, including, but not limited to Advances, and any overadvances, debts, liabilities, obligations, covenants, and duties owing by the Borrower to any Lender or the Agent of any kind and description in connection with any Loan Documents, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, including any debt, liability or obligation owing from the Borrower to others which any Lender or the Agent may obtain by assignment or otherwise, all interest thereon.

“Patent” means United States Letters Patent and design patent, including any extension, registration, confirmation, continuation, division, continuation-in-part, reissue, re-examination or renewal thereof, and also including any foreign equivalents of any of the foregoing.

“Patent Application” means an application, including a provisional application, for a Patent.

“Payment Intangibles” means all “payment intangibles” as such term is defined in the UCC, now owned or hereinafter acquired by any Person, including a General Intangible under which an Account debtor’s principal obligation is a monetary obligation.

“Permitted Liens” means the Liens described in the first sentence of Section 5.15(b).

“Person” means any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof) and shall include such Person’s successors and assigns.

“Petition Date” shall have the meaning ascribed to such term in the above Recitals.

“Post-Petition” means the time period beginning immediately after the filing of the Bankruptcy Case.

“Pre-Petition” means the time period ending immediately prior to the filing of the Bankruptcy Case.

“Pro Rata Share” means as to any Lender, the fraction (expressed as a percentage) the numerator of which is such Lender’s Advance Commitment and the denominator of which is the aggregate amount of all of the Advance Commitments of the Lenders, as adjusted from time to time in accordance with the provisions of this Agreement.

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“Regulatory Problem” shall mean any transaction, circumstance or situation whereby (i) any Person and such Person’s affiliates would own, control or have power over a greater quantity of securities of any kind issued by Borrower than are permitted under any requirement of the SBA or any other Governmental Authority, or (ii) any Governmental Authority has asserted (or such Person believes that there is a risk of such assertion) that such Person and its affiliates are not entitled to hold, or exercise any significant right with respect to, the common stock of Borrower held by such Person, including without limitation the existence of any other set of facts or circumstances wherein it has been asserted by any Governmental Authority (or any SBIC Holder reasonably believe that there is a substantial risk of such assertion) that any SBIC Holder or its affiliates is not entitled to hold, or exercise any significant right with respect to any of Borrower’s securities.

“Regulatory Violation” shall mean, with respect to any SBIC Holder providing financing (within the meaning of the SBIC Regulations) under this Agreement, (i) a diversion of the proceeds of such financing from the reported use thereof on SBA Form 1031 delivered in connection with the closing of the transactions contemplated hereby, if such diversion was effected without obtaining the prior written consent of the SBIC Holders (which may be withheld in their sole discretion) or (ii) a change in the principal business activity of the Borrower to an ineligible business activity (within the meaning of the SBIC Regulations).

“Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty (30) day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. ¤ 4043.

“Requisite Lenders” means Lenders that have made and funded commitments representing an aggregate of more than 50% of the DIP Facility.

“Restricted Cash” at any time, means an amount equal to the book balance amount of outstanding checks written by Borrower plus $200,000.

“Sale Milestone” means each of the following:

(a) the Asset Purchase Agreement shall be executed on or before the Petition Date;

(b) a Bidding Procedures Order shall be entered on or before April 26, 2008, or such other date as soon as reasonably practical thereafter as the Bankruptcy Court’s schedule permits;

(c) all bids shall have been received at least 3 Business Days prior to the Bankruptcy Court hearing on the sale;

(d) the auction pursuant to the Bidding Procedures Order shall be conducted at the sale hearing as provided in clause (e) below;

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(e) a hearing shall be held by the Bankruptcy Court no later than May 30, 2008 regarding the sale of all or substantially all of the assets of Borrower in accordance with the Bidding Procedures Order, or such other date as soon as reasonably practical thereafter as the Bankruptcy Court’s schedule permits;

(f) an order of the Bankruptcy Court, in form and substance acceptable to the Lenders in their reasonable discretion, evidencing the approval described in the foregoing clause (e) entered on or prior to May 30, 2008, or such other date as soon as reasonably practical thereafter as the Bankruptcy Court’s schedule permits; and

(g) the closing of the Asset Sale on or prior to June 10, 2008.

“Sale Order” means the order of the Bankruptcy Court entered in the Bankruptcy Case approving a sale of substantially all of the Borrower’s assets pursuant to the provisions of ¤¤ 105, 363(b), 363(f), 363(m), 363(n) and 365 of the Bankruptcy Code.

“SBA” shall mean the U.S. Small Business Administration or any successor agency.

“SBIC” shall mean a small business investment company licensed under the SBIC Act.

“SBIC Act” shall mean the Small Business Investment Act of 1958, as amended and the regulations promulgated thereunder.

“SBIC Holder” shall mean any holder of the Note, which is an SBIC.

“SBIC Regulations” shall mean the Small Business Investment Company Act of 1958, as amended, and the regulations issued by the SBA thereunder, codified as Title 13 of the Code of Federal Regulations, 107 and 121, as amended.

“Stalking Horse Bidder” shall have the meaning ascribed to such term in the recitals.

“Term” means the period from the Effective Date through and including the earlier of (a) the Termination Date and (b) the indefeasible payment and performance in full of the Obligations and termination of the Advance Commitments.

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date of termination in whole of the Advance Commitments pursuant to the terms of this Agreement, including pursuant to an exercise of remedies pursuant to Section 9.1, (iii) the date of the closing of the Asset Sale pursuant to the Asset Purchase Agreement, (iv) the earlier or the date, if any, that the Borrower executes a definitive agreement for the sale of all or substantially all of the Borrower’s assets to any party other than the Stalking Horse Bidder or on which a bid other than the Stalking Horse Bidder’s is selected at any auction for all of the Borrower’s assets unless a sale of assets of the Borrower to the Stalking Horse Bidder has been consummated prior to such date; (v) the effective date of any plan of reorganization; (vi) immediately upon conversion of the

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Bankruptcy Case to a case under Chapter 7 of the Bankruptcy Code; (vii) immediately upon dismissal of the Bankruptcy Case; (viii) the date of delivery by Borrower of notice of the termination of the Asset Purchase Agreement by Borrower, except, if such termination shall be attributable to a material breach by the Stalking Horse Bidder, or (ix) on the date that is ten (10) days after the termination of the Asset Purchase Agreement as a result of a material breach by the Borrower of such agreement.

“Third Party License Rights” means all permissions, licenses, covenants not to sue, grants, and other express or implied authorization to make, use, sell, import, create derivative works, publicly display, publicly perform, rent, or otherwise operate that may be needed in the operation of the Borrower’s business to avoid violating an Intellectual Property right of a third party.

“Total Cash” at any time, means the actual amount of Cash, excluding cash in the Collateral Account, held by Borrower.

“UCC” means California’s codification of the Uniform Commercial Code.

“Variance Report” shall mean a report to be delivered by the Borrower to the Agent and each Lender in form and substance satisfactory to Agent, on a weekly basis (commencing on the second Wednesday after the entry of the Financing Order) reflecting without limitation, the following: (i) the actual cash receipts and disbursements on a line item basis for the preceding week and (ii) the actual cash receipts and disbursements on a cumulative basis since the Petition Date, (iii) the Cash Shortfall for the week and on a cumulative basis, (iv) the Cash Flow Sweep Amount for the week, the dollar amount and percentage variance of such amounts from those set forth in the Approved Budget for such preceding week and (v) containing a narrative analysis of Borrower’s performance for the preceding week and any line-by-line variance from such period in the Approved Budget.

“Wages Order” shall mean that certain order authorizing, but not directing, the Borrower to pay certain Pre-Petition wages, compensation and employee benefits in the ordinary course of business and authorizing, but not directing, the Borrower to continue to honor their practices, programs, and policies with respect to their employees.

1.2 Interpretation.

a. Whenever the words “include,” “includes” or “including” are used in this Agreement they shall be deemed to be followed by the words “without limitation.”

b. Words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning.

c. A reference to any party to this Agreement or any other agreement or document shall include such party’s successors and permitted assigns.

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d. A reference to any legislation or to any provision of any legislation shall include any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto.

e. All references to “$” and dollars shall be deemed to refer to United States currency.

f. All references to any financial or accounting terms shall be defined in accordance with GAAP as applicable in the United States and consistently applied by the Borrower.

g. 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 Article, Section, Recitals, Schedule and Exhibit references are to this Agreement unless otherwise specified.

h. The meanings given to terms defined herein shall be equally applicable to both singular and plural forms of such terms.

i. The Borrower, the Lenders and the Agent each hereby acknowledge that (i) the Borrower, the Lenders and the Agent jointly and equally participated in the drafting of this Agreement and all other agreements contemplated hereby, (ii) the Borrower, the Lenders and the Agent have been adequately represented and advised by legal counsel with respect to this Agreement and the transactions contemplated hereby, and (iii) no presumption shall be made that any provision of this Agreement shall be construed against either party by reason of such role in the drafting of this Agreement and any other agreement contemplated hereby.

j. The headings of the Articles and Sections herein are inserted for convenience of reference only and are not intended to be a part of, or to affect the meaning or interpretation of, this Agreement.

k. References to any document, instrument, mortgage or agreement of any kind shall refer to any permitted amendments, restatements or other modifications thereof.

1.3 Exhibits. All of the exhibits, addenda or riders attached to this Agreement shall be deemed incorporated herein by reference.

1.4 UCC. Any terms used in this Agreement that are defined in the UCC shall be construed and defined as set forth in the UCC, unless otherwise defined herein.

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ARTICLE 2

ADVANCES AND TERMS OF PAYMENT

2.1 Advance Commitments; Advances; Advance Limit; Increase to Advance Limit; Use of Proceeds.

a. Advance Commitments. Subject to the terms and conditions set forth herein, each Lender severally and jointly agrees to fund its Pro Rata Share of Advances from time to time in accordance with the Approved Budget during the Term in an aggregate principal amount that will not result in the Lenders making aggregate Advances that exceed the Advance Commitment for the Lenders.

b. Advances and Advance Limit. Upon one (1) Business Day written request of the Borrower in the form of a Borrowing Request, which requests shall not exceed two (2) per calendar week, during the Term and so long as (i) no Default or Event of Default has occurred and is continuing and (ii) the conditions precedent in Section 3 have been satisfied or waived in writing by the Lenders, the Lenders shall make Advances not to exceed two (2) per week. Subject to the conditions herein, the Borrower may borrow from time to time between the date of this Agreement and the Termination Date, in an amount not-to-exceed the lesser of (a) an amount equal to (i) the aggregate weekly amounts of Cash Shortfall on a cumulative basis from the Effective Date through the date of determination minus (ii) the aggregate amount outstanding of all Advances made to the Borrower hereunder from the Effective Date through such date of determination, and (b) the actual weekly amounts of Cash Shortfall as indicated in the current Variance Report as of the time of any request for an Advance, and, in each case, shall not to exceed at any time the Advance Commitment. Borrowing Requests for Advances shall be for Advances in the minimum amount of $100,000 and minimum additional increments of $50,000. The date of determination for any Borrowing Request shall be the date on which the Advance subject of such Borrowing Request is to be funded.

c. Use of Proceeds. Borrower is authorized to use said Advances to (i) pay the Borrower’s operating and working capital expenses in the ordinary course of business as ongoing and budgeted operating expenses set forth in the Approved Budget and (ii) pay Administrative Fees and Expenses approved by the Bankruptcy Court, including, but not limited to, freight forwarding charges and reclamation charges.

2.2 Authorization to Make Advances. Each Lender is hereby authorized to make Advances based upon a written Borrowing Request substantially in the form attached hereto as Exhibit B received by Agent from anyone purporting to be an Authorized Officer. All requests for Advances shall be made pursuant to a Borrowing Request delivered to Agent specifying the date on which such Advance is to be made (which day shall be a Business Day at least three Business Days after the request of such Advance, other than the initial advance which shall be delivered on the Effective Date and shall be for an amount not to exceed the amount for such Advance set forth in the Approved Budget) and the amount of such Advance. All Advances made under this

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Agreement shall be conclusively presumed to have been made to, at the request of, and for the benefit of the Borrower when deposited to the credit of the Borrower or otherwise disbursed in accordance with the instructions of the Borrower or in accordance with the terms and conditions of this Agreement. Unless otherwise requested by the Borrower, all Advances shall be made by a wire transfer to the deposit account of the Borrower set forth on Schedule 2.2 or otherwise designated by the Borrower from time to time to the Agent in a written notice delivered pursuant to Article 12.

2.3 Interest.

a. Except where specified to the contrary in the Loan Documents, the outstanding principal balance of the DIP Facility shall bear interest at the fixed rate of ten percent (10%) per annum. After the occurrence of and during the continuation of a Default or Event of Default, the Obligations shall accrue interest, at the applicable rate for each Advance outstanding plus five percent (5.00%) (the “Default Rate”). All interest payable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed on the Daily Balance. Interest as provided for herein shall continue to accrue until the obligations are indefeasibly paid in full or otherwise settled pursuant to a confirmed plan of reorganization consented to by the Requisite Lenders.

b. In no event shall interest on the DIP Facility exceed the highest lawful rate in effect from time-to-time. It is not the intention of the parties hereto to make an agreement which violates any applicable state or federal usury laws. In no event shall the Borrower pay or any Lender accept or charge any interest which, together with any other charges upon the principal or any portion thereof, exceeds the maximum lawful rate of interest allowable under any applicable state or federal usury laws. Should any provision of this Agreement or any existing or future Notes or Loan Documents between the parties be construed to require the payment of interest or any other fees or charges which could be construed as interest which, together with any other charges upon the principal or any portion thereof and any other fees or charges which could be construed as interest, exceeds the maximum lawful rate of interest, then any such excess shall be applied to the remaining principal balance of the DIP Facility, if any, and the remainder refunded to the Borrower.

2.4 Principal Repayment. Any prepayment in whole or in part shall include accrued interest and all other sums then due hereunder. No partial prepayment shall affect the obligation of Borrower to make any payment of principal or interest hereunder on the due dates specified.

a. Voluntary Payment. The Borrower shall have the right (i) from time-to-time, to prepay all or any part of the outstanding principal balance without premium or penalty in accordance with the Approved Budget, or (ii) at any time, to indefeasibly pay in full all of the Obligations without premium or penalty concurrent with the termination of this Agreement and the Advance Commitments.

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