Exhibit 10.3

SECURITY AGREEMENT

This SECURITY AGREEMENT dated as of March 26, 2007 is entered into by and
between ELECTROGLAS, INC., a Delaware corporation, ELECTROGLAS INTERNATIONAL,
INC., a Delaware corporation (collectively, the “Grantor”) and THE BANK OF NEW
YORK TRUST COMPANY, N.A., in its capacity as collateral agent (and any successor
collateral agent, the “Agent”) for the holders of the Notes (the “Holders”).

WITNESSETH:

WHEREAS, pursuant to that certain Indenture dated as of the date hereof by and
among the Grantor, Electroglas International, Inc. and The Bank of New York
Trust Company, N.A. (the “Trustee”), as from time to time amended, restated,
supplemented or otherwise modified (the “Indenture”), the Grantor has authorized
the issuance from time to time of 6.25% Convertible Senior Subordinated Secured
Notes due 2027 (the “Notes”);

WHEREAS, the Grantor has agreed to grant a continuing second priority Lien on
the Collateral (as hereinafter defined) to secure the Obligations (as
hereinafter defined);

NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1. DEFINED TERMS. The following terms shall have the following respective
meanings:

“Accounts” shall mean all present and future rights of the Grantor to payment of
a monetary obligation, whether or not earned by performance, which is not
evidenced by chattel paper or an instrument: (a) for property that has been or
is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for
services rendered or to be rendered, (c) for a secondary obligation incurred or
to be incurred, or (d) arising out of the use of a credit, charge or debit card
along with all information contained on or for use with such card.

“Affiliate” shall mean, with respect to a specified Person, any other Person
which directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with such Person, and without limiting
the generality of the foregoing, includes (a) any Person which beneficially owns
or holds five percent (5%) or more of any class of Voting Stock of such Person
or other equity interests in such Person, (b) any Person of which such Person
beneficially owns or holds five percent (5%) or more of any class of Voting
Stock or in which such Person beneficially owns or holds five percent (5%) or
more of the equity interests and (c) any director or executive officer of such
Person. For purposes of this definition, the term “control” (including, with
correlative meanings, the terms “controlled by” and “under common control
with”), as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of Voting Stock, by
agreement or otherwise.

 

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“Agent’s Commercial Judgment” shall mean the commercially reasonable judgment of
the Agent as to credit or, where applicable, other matters, in each case
exercised in good faith.

“Capital Stock” shall mean, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person’s capital stock, or partnership, limited liability company or other
equity interests at any time outstanding, and any and all rights, warrants or
options exchangeable for or convertible into such capital stock or other
interests (but excluding any debt security that is exchangeable for or
convertible into such capital stock).

“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.

“Collateral” shall have the meaning set forth in Section 2 hereof.

“Documents” shall mean all documents as such term is defined in the UCC,
including bills of lading, warehouse receipts or other documents of title, now
owned or hereafter acquired by the Grantor.

“Equipment” shall mean all of the Grantor’s now owned and hereafter acquired
equipment, wherever located, including machinery, data processing and computer
equipment and computer hardware and software, whether owned or licensed, and
including embedded software, vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.

“ERISA” shall mean the United States Employee Retirement Income Security Act of
1974, as amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.

“ERISA Affiliate” shall mean any person required to be aggregated with the
Grantor or any Subsidiary of the Grantor under Sections 414(b), 414(c), 414(m)
or 414(o) of the Code.

“Excluded Collateral” shall mean all of the following:

(a) any lease, license, contract, property right or agreement to which the
Grantor is a party or any of the Grantor’s rights or interests thereunder if and
only for so long as the grant of a Lien under the Security Documents will
constitute or result in a breach, termination or default under any such lease,
license, contract, property right or agreement (other than to the extent that
any such term would be rendered ineffective pursuant to Sections 9-406, 9-407,
9-408 or 9-409 of the Uniform Commercial Code of any relevant jurisdiction or
any other applicable law or principles of equity); provided that such lease,
license, contract, property right or agreement will be an Excluded Asset only to
the extent and for so long as the consequences specified above will result and
will cease to be an Excluded Asset and will become subject to the Lien granted
under the Security Documents, immediately and automatically, at such time as
such consequences will no longer result;

 

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(b) real property acquired by the Grantor after the date of this Indenture that
has a fair market value not exceeding $100,000 in the aggregate, and any real
property leased by the Grantor;

(c) one-third of the Capital Stock of each Foreign Subsidiary; and

(d) any other property or assets in which a Lien cannot be perfected by the
filing of a financing statement under the Uniform Commercial Code of the
relevant jurisdiction, so long as the aggregate fair market value of all such
property and assets does not at any one time exceed $250,000.

“Foreign Subsidiaries” shall mean any direct Subsidiary of the Grantor other
than a direct Subsidiary that was formed under the laws of the United States or
any state of the United States or the District of Columbia.

“Intellectual Property” shall mean all of the Grantor’s now owned and hereafter
arising or acquired: patents, patent rights, patent applications, copyrights,
works which are the subject matter of copyrights, copyright registrations,
trademarks, service marks, trade names, trade styles, trademark and service mark
applications, and licenses and rights to use any of the foregoing; all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing; all rights to sue for past,
present and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys,
reports, manuals, and operating standards; goodwill (including any goodwill
associated with any trademark or the license of any trademark); customer and
other lists in whatever form maintained; and trade secret rights, copyright
rights, rights in works of authorship, domain names and domain name
registrations; software and contract rights relating to software, in whatever
form created or maintained, including, without limitation, that intellectual
property listed in Schedule III and Schedule IV attached hereto.

“Instruments” shall mean all instruments as such term is defined in the UCC, now
owned or hereafter acquired by the Grantor.

“Inventory” shall mean all of the Grantor’s now owned and hereafter existing or
acquired goods, wherever located, which (a) are leased by the Grantor as lessor;
(b) are held by the Grantor for sale or lease or to be furnished under a
contract of service; (c) are furnished by the Grantor under a contract of
service; or (d) consist of raw materials, work in process, finished goods or
materials used or consumed in its business.

“Lien” shall mean, with respect to any asset, any mortgage, deed of trust, deed
to secure debt, lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement or any lease in the nature thereof); provided that in no
event shall an operating lease be deemed to constitute a Lien.

 

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“Multiemployer Plan” shall mean a “multi-employer plan” as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year
or the immediately preceding six (6) years contributed to by the Grantor or any
ERISA Affiliate.

“Obligations” shall mean any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the Notes, the Indenture, the Securities and all other obligations, liabilities
and indebtedness of every kind, nature and description owing by the Grantor
under the Securities, the Indenture, the Securities Purchase Agreement, and the
Registration Rights Agreement, in each case whether now or hereafter existing,
direct or indirect, absolute or contingent, due or not due, primary or
secondary, liquidated or unliquidated, renewed or restructured, whether or not
from time to time decreased or extinguished and later increased, created or
incurred, whether or not arising on or after the commencement of a proceeding
under Title 11, U.S. Code or any similar federal or state law for the relief of
debtors (including post-petition interest) and whether or not allowed or
allowable as a claim in any such proceeding.

“Person” or “person” shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Code), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.

“Plan” shall mean an employee benefit plan (as defined in Section 3(3) of ERISA)
which the Grantor sponsors, maintains, or to which it makes, is making, or is
obligated to make contributions, or in the case of a Multiemployer Plan has made
contributions at any time during the immediately preceding six (6) plan years.

“Real Property” shall mean all now owned and hereafter acquired real property of
the Grantor, including leasehold interests, together with all buildings,
structures, and other improvements located thereon and all licenses, easements
and appurtenances relating thereto, wherever located.

“Receivables” shall mean all of the following now owned or hereafter arising or
acquired property of the Grantor: (a) all Accounts; (b) all interest, fees, late
charges, penalties, collection fees and other amounts due or to become due or
otherwise payable in connection with any Account; and (c) all payment
intangibles of the Grantor and other contract rights, chattel paper,
instruments, notes, and other forms of obligations owing to the Grantor, whether
from the sale and lease of goods or other property, licensing of any property
(including Intellectual Property or other general intangibles), rendition of
services or from loans or advances by the Grantor or to or for the benefit of
any third person (including loans or advances to any Affiliates or Subsidiaries
of the Grantor) or otherwise associated with any Accounts, Inventory or general
intangibles of the Grantor (including, without limitation, choses in action,
causes of action, tax refunds, tax refund claims, any funds which may become
payable to the Grantor in connection with the termination of any Plan or other
employee benefit plan and any other amounts payable to the Grantor from any Plan
or other employee benefit plan, rights and claims against carriers and shippers,
rights to indemnification, business interruption insurance and proceeds thereof,
casualty or any similar types of insurance and any proceeds thereof and proceeds
of insurance covering the lives of employees on which the Grantor is a
beneficiary).

 

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“Records” shall mean all of the Grantor’s present and future books of account of
every kind or nature, purchase and sale agreements, invoices, ledger cards,
bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any account
debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of the Grantor with respect to the
foregoing maintained with or by any other person).

“Required Holders” shall mean such Holder(s) as are entitled to take action or
direct the Trustee pursuant to the terms of the Indenture.

“Securities” shall have the meaning ascribed to it in the Securities Purchase
Agreement.

“Subsidiary” or “subsidiary” shall mean, with respect to any Person, any
corporation, limited liability company, limited liability partnership or other
limited or general partnership, trust, association or other business entity of
which an aggregate of at least a majority of the outstanding Capital Stock or
other interests entitled to vote in the election of the board of directors of
such corporation (irrespective of whether, at the time, Capital Stock of any
other class or classes of such corporation shall have or might have voting power
by reason of the happening of any contingency), managers, trustees or other
controlling persons, or an equivalent controlling interest therein, of such
Person is, at the time, directly or indirectly, owned by such Person and/or one
or more subsidiaries of such Person.

“UCC” means the Uniform Commercial Code, as in effect from time to time, of the
State of New York or of any other state the laws of which are required as a
result of such law to be applied in connection with perfection of security
interests.

“Uniform Commercial Code jurisdiction” means any jurisdiction that has adopted
“Revised Article 9” of the UCC on or after July 1, 2001.

“Voting Stock” shall mean with respect to any Person, (a) one (1) or more
classes of Capital Stock of such Person having general voting powers to elect at
least a majority of the board of directors, managers or trustees of such Person,
irrespective of whether at the time Capital Stock of any other class or classes
have or might have voting power by reason of the happening of any contingency,
and (b) any Capital Stock of such Person convertible or exchangeable without
restriction at the option of the holder thereof into Capital Stock of such
Person described in clause (a) of this definition.

All other capitalized terms used but not otherwise defined herein have the
meanings given to them in the Indenture. All other undefined terms contained in
this Security Agreement, unless the context indicates otherwise, have the
meanings provided for by the UCC to the extent the same are used or defined
therein.

 

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2. GRANT OF LIEN.

As security for all Obligations, the Grantor hereby grants to the Agent, for the
benefit of the Agent, the Trustee and the Holders, a continuing security
interest in and lien on all right, title and interest of the Grantor in all
personal and real property and fixtures, whether now owned or hereafter acquired
or existing, and wherever located (together with all other collateral security
for the Obligations at any time granted to or held or acquired by the Agent,
collectively, the “Collateral”), including:

(a) all Accounts;

(b) all general intangibles, including, without limitation, all Intellectual
Property;

(c) all goods, including, without limitation, Inventory and Equipment;

(d) all Real Property and fixtures;

(e) all chattel paper (including all tangible and electronic chattel paper);

(f) all Instruments (including all promissory notes);

(g) all Documents;

(h) all deposit accounts;

(i) all letters of credit, banker’s acceptances and similar instruments and
including all letter-of-credit rights;

(j) all supporting obligations and all present and future liens, security
interests, rights, remedies, title and interest in, to and in respect of
Receivables and other Collateral, including (i) rights and remedies under or
relating to guaranties, contracts of suretyship, letters of credit and credit
and other insurance related to the Collateral, (ii) rights of stoppage in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid vendor, lienor or secured party, (iii) goods described in invoices,
documents, contracts or instruments with respect to, or otherwise representing
or evidencing, Receivables or other Collateral, including returned, repossessed
and reclaimed goods, and (iv) deposits by and property of account debtors or
other persons securing the obligations of account debtors;

(k) all (i) investment property (including securities, whether certificated or
uncertificated, securities accounts, security entitlements, commodity contracts
or commodity accounts) and (ii) monies, credit balances, deposits and other
property of the Grantor now or hereafter held or received by or in transit to
Agent, any Holder or any of their respective Affiliates or at any other
depository or other institution from or for the account of the Grantor, whether
for safekeeping, pledge, custody, transmission, collection or otherwise;

(l) all commercial tort claims;

 

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(m) to the extent not otherwise described above, all Receivables;

(n) all Records; and

(o) all products and proceeds of the foregoing, in any form, including insurance
proceeds and all claims against third parties for loss or damage to or
destruction of or other involuntary conversion of any kind or nature of any or
all of the other Collateral.

Notwithstanding the foregoing, “Collateral” shall not include the Excluded
Collateral.

3. PERFECTION AND PROTECTION OF SECURITY INTEREST.

(a) The Grantor shall, at its own expense, perform all steps reasonably
requested by the Agent at any time to perfect, maintain, protect, and enforce
the Agent’s Liens, including: (i) filing financing or continuation statements,
and amendments thereof, in form and substance reasonably satisfactory to the
Agent, including filing each of the Patent Agreement and the Trademark Agreement
with the United States Patent and Trademark Office substantially in the form of
Exhibits A and B attached hereto; (ii) placing notations on the Grantor’s books
of account to disclose the Agent’s security interest; and (iii) taking such
other steps as are reasonably deemed necessary or desirable to maintain and
protect the Agent’s Liens. Notwithstanding the foregoing, the Grantor shall not
be required to take any action to perfect the Agent’s Lien (A) other than
(1) filing a financing statement, if and to the extent such Lien can be
perfected by such filing, and (2) using commercially reasonable efforts to
deliver to the Agent, within 30 days after any written request therefor,
original share certificates for the capital stock of any Subsidiary of a Grantor
to the extent such capital stock constitutes Collateral, together with
appropriate stock powers, duly endorsed in blank, or (B) with respect to
Excluded Collateral. Within ninety (90) days after the end of each calendar
year, the Company shall furnish the Agent an Opinion of Counsel pursuant to
Section 17.4 of the Indenture, if and to the extent such Opinion of Counsel is
required by the TIA. The Grantor agrees that a carbon, photographic,
photostatic, or other reproduction of this Security Agreement or of a financing
statement is sufficient as a financing statement.

(b) The Grantor hereby irrevocably authorizes the Agent at any time and from
time to time to file in any filing office in any Uniform Commercial Code
jurisdiction where filing is necessary to perfect the Agent’s Lien any initial
financing statements and amendments thereto that (i) accurately describe the
Collateral and (ii) contain any other information required by part 5 of Article
9 of the UCC for the sufficiency or filing office acceptance of any financing
statement or amendment, including whether the Grantor is an organization, the
type of organization and any organization identification number issued to the
Grantor. The Grantor agrees to furnish any such information to the Agent
promptly upon request. The Grantor also ratifies its authorization for the Agent
to have filed in any Uniform Commercial Code jurisdiction any like initial
financing statements or amendments thereto if filed prior to the date hereof.

(c) Subject to Section 20(f), so long as the Indenture is in effect and until
all Obligations have been fully satisfied, the Agent’s Liens shall continue in
full force and effect in all Collateral.

 

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(d) The Grantor acknowledges that it is not authorized to file any financing
statement or amendment or termination statement with respect to any financing
statement filed to perfect the Agent’s Lien without the prior written consent of
the Agent and agrees that it will not do so without the prior written consent of
the Agent, subject to the Grantor’s rights under Section 9-509(d)(2) of the UCC.

4. LOCATION OF GRANTOR; LOCATION OF COLLATERAL. The Grantor represents and
warrants to the Agent, the Trustee and the Holders that Schedule I is a correct
and complete list of the location of its chief executive office and the location
of its books and records. The locations of the Collateral as of the date of this
Agreement are as set forth on Schedule I hereto.

5. JURISDICTION OF ORGANIZATION. Grantor shall not change its name or
jurisdiction of organization without giving prior written notice to Agent.
Schedule II hereto identifies the Grantor’s name as of the Closing Date as it
appears in official filings in the state of its incorporation, the type of
entity of the Grantor (including corporation, partnership, limited partnership
or limited liability company), organizational identification number issued by
the Grantor’s state of incorporation or organization or a statement that no such
number has been issued and the jurisdiction in which the Grantor is incorporated
or organized. The Grantor has only one state of incorporation or organization.

6. TITLE TO, LIENS ON, AND SALE AND USE OF COLLATERAL. The Grantor represents
and warrants to the Agent, the Trustee and the Holders and agrees with the
Agent, the Trustee and the Holders that: (a) the Agent’s Liens in the Collateral
will not be subject to any prior Lien except as set forth in the Indenture; and
(b) the Grantor will use, store, and maintain the Collateral with all reasonable
care and will use such Collateral for lawful purposes only.

7. ACCESS AND EXAMINATION. After the occurrence and during the continuance of an
Event of Default, the Grantor shall permit representatives and independent
contractors of Agent access to its properties and records from time to time upon
the reasonable request of Agent.

8. COLLATERAL REPORTING. After the occurrence and during the continuance of an
Event of Default, the Grantor shall provide the Agent with such reports as to
the Collateral as the Agent shall in the Agent’s Commercial Judgment request
from time to time; together, in each case, with a certificate of the Grantor
executed by an officer thereof certifying as to the accuracy and completeness of
the foregoing.

9. ACCOUNTS. The Grantor hereby represents and warrants to the Agent, the
Trustee and the Holders, with respect to the Grantor’s Accounts, that each
existing Account represents, and each future Account will represent, a bona fide
sale or lease and shipment of goods by the Grantor, or rendition of services by
the Grantor, in the ordinary course of the Grantor’s business.

10. INVENTORY. The Grantor represents and warrants to the Agent, the Trustee and
the Holders and agrees with the Agent, the Trustee and the Holders that all of
the Inventory

 

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owned by the Grantor is and will be held for sale or lease, or to be furnished
in connection with the rendition of services, in the ordinary course of the
Grantor’s business, and is and will be fit for such purposes. The Grantor will
keep its Inventory in good and marketable condition, except for damaged or
defective goods arising in the ordinary course of the Grantor’s business. The
Grantor agrees that all Inventory produced by the Grantor in the United States
of America will be produced in accordance with the Federal Fair Labor Standards
Act of 1938, as amended, and all rules, regulations, and orders thereunder.
After the occurrence and during the continuance of an Event of Default, the
Grantor will conduct a physical count of the Inventory up to once each calendar
quarter at such times as the Agent requests.

11. EQUIPMENT.

(a) The Grantor represents and warrants to the Agent, the Trustee and the
Holders and agrees with the Agent, the Trustee and the Holders that all of the
Equipment owned by the Grantor is and will be used or held for use in the
Grantor’s business (other than obsolete Equipment), and is and will be fit for
such purposes. The Grantor shall keep and maintain its Equipment in good
operating condition and repair (ordinary wear and tear excepted) and shall make
all necessary replacements thereof.

(b) The Grantor will not, without the Agent’s prior written consent, alter or
remove any identifying symbol or number on any of the Grantor’s Equipment
constituting Collateral.

12. DOCUMENTS, INSTRUMENTS, AND CHATTEL PAPER. The Grantor represents and
warrants to the Agent that all Documents, Instruments, and chattel paper
describing, evidencing, or constituting Collateral, and all signatures and
endorsements thereon, are and will be valid and genuine in all material
respects.

13. RIGHT TO CURE. The Agent may, in its discretion, and shall, at the direction
of the Trustee (acting at the direction of the Required Holders), pay any amount
or do any act required of the Grantor hereunder or under the Indenture or any
other Security Document in order to preserve, protect, maintain or enforce the
Obligations, the Collateral or the Agent’s Liens therein, and which the Grantor
fails to pay or do, including payment of any judgment against the Grantor, any
insurance premium, any warehouse charge, any finishing or processing charge, any
landlord’s or bailee’s claim, and any other Lien upon or with respect to the
Collateral; provided, however, that the Agent shall be under no obligation to
take any action which in its sole discretion would subject the Agent to personal
or financial liability. Any payment made or other action taken by the Agent
under this Section 13 shall be without prejudice to any right to assert an Event
of Default hereunder and to proceed thereafter as herein provided.

14. LIMITED POWER OF ATTORNEY. The Grantor hereby appoints the Agent and the
Agent’s designee as the Grantor’s attorney, with power after the occurrence and
during the continuance of an Event of Default: (a) to endorse the Grantor’s name
on any checks, notes, acceptances, money orders, or other forms of payment or
security that come into the Agent’s possession; (b) to sign the Grantor’s name
on any invoice, bill of lading, warehouse receipt or other negotiable or
non-negotiable Document constituting Collateral, on drafts against

 

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customers, on assignments of Accounts, on notices of assignment, financing
statements and other public records and to file any such financing statements by
electronic means with or without a signature as authorized or required by
applicable law or filing procedure; (c) to notify the post office authorities to
change the address for delivery of the Grantor’s mail to an address designated
by the Agent and to receive, open and dispose of all mail addressed to the
Grantor; (d) to send requests for verification of Accounts to customers; (e) to
complete in the Grantor’s name or the Agent’s name, any order, sale or
transaction, obtain the necessary Documents in connection therewith, and collect
the proceeds thereof; (f) to clear Inventory through customs in the Grantor’s
name, the Agent’s name or the name of the Agent’s designee, and to sign and
deliver to customs officials limited powers of attorney in the Grantor’s name
for such purpose; (g) to the extent that the Grantor’s authorization given in
Section 3 of this Security Agreement is not sufficient, to file such financing
statements with respect to this Security Agreement, with or without the
Grantor’s signature, or to file a photocopy of this Security Agreement in
substitution for a financing statement, as the Agent may deem appropriate and to
execute in the Grantor’s name such financing statements and amendments thereto
and continuation statements which may require the Grantor’s signature; and
(h) to do all things necessary to carry out the Indenture and this Security
Agreement. The Grantor ratifies and approves all acts of such attorney done
after the occurrence and during the continuance of an Event of Default. None of
Agent nor its attorneys will be liable for any acts or omissions or for any
error of judgment or mistake of fact or law except for their own willful
misconduct. This power, being coupled with an interest, is irrevocable until the
Indenture has been terminated and the Obligations have been fully satisfied.

15. THE AGENT’S AND HOLDERS’ RIGHTS, DUTIES AND LIABILITIES.

(a) Each Holder hereby appoints The Bank of New York Trust Company, N.A. to act
as the Agent for such Person under this Security Agreement and the other
Security Documents. Each Holder hereby irrevocably authorizes the Agent to take
such action on its behalf under the provisions of this Security Agreement and
the other Security Documents and to exercise such powers and to perform such
duties hereunder and thereunder as are specifically delegated to or required of
the Agent by the terms hereof and thereof and such other powers as are
reasonably incidental thereto and the Agent shall hold all Collateral, charges
and collections received pursuant to this Security Agreement, for the ratable
benefit of the Holders. The Agent may perform any of its duties hereunder by or
through its agents or employees. As to any matters not expressly provided for by
this Security Agreement (including without limitation, collection of the Notes)
the Agent shall not be required to exercise any discretion or take any action,
but shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Trustee or the Required Holders, and such instructions shall be binding;
provided, however, that the Agent shall not be required to take any action which
in the Agent’s reasonable discretion exposes it to liability or which is
contrary to this Security Agreement or the other Security Documents or
applicable law unless the Agent is furnished with an indemnification reasonably
acceptable to the Agent in its sole discretion with respect thereto and the
Agent shall not be responsible for any misconduct or negligence on the part of
any agents appointed with due care by the Agent. The Agent shall have no duties
or responsibilities except those expressly set forth in this Security Agreement
and the other Security Documents. The Agent shall not be under any obligation to
any Holder to ascertain or to inquire as to the observance or performance of any
of the agreements contained in, or conditions of, this Security Agreement or any
of the other Security Documents. The Agent

 

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shall not have by reason of this Security Agreement a fiduciary relationship in
respect of any Holder; and nothing in this Security Agreement, expressed or
implied, is intended to or shall be so construed as to impose upon the Agent any
obligations in respect of this Security Agreement except as expressly set forth
herein.

(b) The Grantor assumes all responsibility and liability arising from or
relating to the use, sale, license or other disposition of the Collateral. The
Obligations shall not be affected by any failure of the Agent, the Trustee or
any Holder to take any steps to perfect the Agent’s Liens or to collect or
realize upon the Collateral, nor shall loss of or damage to the Collateral
release the Grantor from any of the Obligations. After the occurrence and during
the continuation of an Event of Default, the Agent may (but shall not be
required to), and at the direction of the Required Holders shall, without notice
to or consent from the Grantor, sue upon or otherwise collect, extend the time
for payment of, modify or amend the terms of, compromise or settle for cash,
credit, or otherwise upon any terms, grant other indulgences, extensions,
renewals, compositions, or releases, and take or omit to take any other action
with respect to the Collateral, any security therefor, any agreement relating
thereto, any insurance applicable thereto, or any Person liable directly or
indirectly in connection with any of the foregoing, without discharging or
otherwise affecting the liability of the Grantor for the Obligations or under
the Indenture or any other agreement now or hereafter existing between the Agent
and/or the Trustee or any Holder and the Grantor.

(c) It is expressly agreed by the Grantor that, anything herein to the contrary
notwithstanding, the Grantor shall remain liable under each of its contracts and
each of its licenses to observe and perform all the conditions and obligations
to be observed and performed by it thereunder. None of the Agent, the Trustee
nor any Holder shall have any obligation or liability under any contract or
license by reason of or arising out of this Security Agreement or the granting
herein of a Lien thereon or the receipt by Agent, the Trustee or any Holder of
any payment relating to any contract or license pursuant hereto. None of the
Agent, the Trustee nor any Holder shall be required or obligated in any manner
to perform or fulfill any of the obligations of the Grantor under or pursuant to
any contract or license, or to make any payment, or to make any inquiry as to
the nature or the sufficiency of any payment received by it or the sufficiency
of any performance by any party under any contract or license, or to present or
file any claims, or to take any action to collect or enforce any performance or
the payment of any amounts which may have been assigned to it or to which it may
be entitled at any time or times.

(d) In no event shall the Trustee or any Noteholder be responsible or liable for
special, indirect, or consequential loss or damage of any kind whatsoever
(including, but not limited to, loss of profit) irrespective of whether the
Trustee has been advised of the likelihood of such loss or damage and regardless
of the form of action.

16. COST AND EXPENSES; INDEMNIFICATION.

(a) The Grantor agree to pay to the Agent, for its benefit, on demand, all
reasonable costs and expenses that Agent pays or incurs in connection with the
negotiation, preparation, administration, enforcement, and termination of this
Security Agreement or any of the other Security Documents, including: (i) all
reasonable fees, expenses and disbursements of any law firm or other counsel
engaged by the Agent; (ii) costs and expenses (including

 

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reasonable attorneys’ and paralegals’ fees and disbursements) for any amendment,
supplement, waiver, consent, or subsequent closing in connection with the
Security Documents and the transactions contemplated thereby; (iii) costs and
expenses of lien searches; (iv) taxes, fees and other charges for filing
financing statements and continuations, and other actions to perfect, protect,
and continue the Agent’s Liens (including costs and expenses paid or incurred by
the Agent in connection with the consummation of this Security Agreement);
(v) sums paid or incurred to pay any amount or take any action required of the
Grantor under this Agreement that the Grantor fails to pay or take; and
(vi) costs and expenses of preserving and protecting the Collateral. The
foregoing shall not be construed to limit any other directly contrary provisions
of this Agreement regarding costs and expenses to be paid by the Grantor.

(b) The Grantor will save, indemnify and keep Agent, the Trustee and the Holders
harmless from and against all expense (including reasonable attorneys’ fees and
expenses), loss, claim, liability or damage arising out of their actions or
inaction hereunder suffered by reason of any defense, setoff, counterclaim,
recoupment or reduction of liability whatsoever of any Person obligated on the
Collateral, arising out of a breach by the Grantor of any obligation thereunder
or arising out of any other agreement, indebtedness or liability at any time
owing to, or in favor of, such obligor or its successors from the Grantor,
except in the case of Agent, the Trustee or any Holder, to the extent such
expense, loss, or damage is determined by a court of competent jurisdiction in a
final nonappealable judgment to have resulted from the gross negligence or
willful misconduct of Agent, the Trustee or such Holder as finally determined by
a court of competent jurisdiction. All such obligations of the Grantor shall be
and remain enforceable against and only against the Grantor and shall not be
enforceable against Agent, the Trustee or any Holder.

(c) The benefits of this Section 16 shall survive the termination of this
Agreement.

17. REMEDIES; RIGHTS UPON DEFAULT.

(a) In addition to all other rights and remedies granted to it under this
Security Agreement, the Indenture, and under any other instrument or agreement
securing, evidencing or relating to any of the Obligations, and subject to the
terms of the Intercreditor Agreement, if any Event of Default shall have
occurred and be continuing, the Agent may exercise all rights and remedies of a
secured party under the UCC. Without limiting the generality of the foregoing,
the Grantor expressly agrees that in any such event the Agent, without demand of
performance or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale) to or upon
the Grantor or any other Person (all and each of which demands, advertisements
and notices are hereby expressly waived to the maximum extent permitted by the
UCC and other applicable law), may forthwith enter upon the premises of the
Grantor where any Collateral is located through self-help, without judicial
process, without first obtaining a final judgment or giving the Grantor or any
other Person notice and opportunity for a hearing on the Agent’s claim or action
and may collect, receive, assemble, process, appropriate and realize upon the
Collateral, or any part thereof, and may forthwith sell, lease, license, assign,
give an option or options to purchase, or sell or otherwise dispose of and
deliver the Collateral (or contract to do so), or any part thereof, in one or
more parcels at a public or private sale or sales, at any exchange at such
prices as it may deem acceptable, for cash or on credit or for

 

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future delivery without assumption of any credit risk. The Agent, the Trustee or
any Holder shall have the right but not the obligation upon any such public sale
or sales and, to the extent permitted by law, upon any such private sale or
sales, to purchase for the benefit of the Agent, the Trustee and Holders, the
whole or any part of the Collateral so sold, free of any right or equity of
redemption, which equity of redemption the Grantor hereby releases. Such sales
may be adjourned and continued from time to time with or without notice. The
Agent shall have the right to conduct such sales on the Grantor’s premises or
elsewhere and shall have the right to use the Grantor’s premises without charge
for such time or times as the Agent reasonably deems necessary or advisable.

(b) The Grantor further agrees, at the Agent’s request, to assemble the
Collateral and make it available to the Agent at a place or places designated by
the Agent which are reasonably convenient to the Agent and Grantor, whether at
the Grantor’s premises or elsewhere. Until the Agent is able to effect a sale,
lease, or other disposition of Collateral, the Agent shall have the right to
hold or use Collateral, or any part thereof, to the extent that it deems
appropriate for the purpose of preserving Collateral or its value or for any
other purpose deemed appropriate by the Agent. The Agent shall have no
obligation to the Grantor to maintain or preserve the rights of the Grantor as
against third parties with respect to Collateral while Collateral is in the
possession of the Agent. The Agent may, if it so elects, seek the appointment of
a receiver or keeper to take possession of Collateral and to enforce any of the
Agent’s remedies (for the benefit of the Agent, the Trustee and Holders), with
respect to such appointment without prior notice or hearing as to such
appointment. The Agent shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale to the Obligations as
provided herein, in the Intercreditor Agreement and in the Indenture, and only
after so paying over such net proceeds, and after the payment by the Agent of
any other amount required by any provision of law, need the Agent account for
the surplus, if any, to the applicable Grantor. To the maximum extent permitted
by applicable law, the Grantor waives all claims, damages, and demands against
the Agent, the Trustee or any Holder arising out of the repossession, retention
or sale of the Collateral except such as determined by a court of competent
jurisdiction in a final nonappealable judgment to have resulted primarily from
the gross negligence or willful misconduct of the Agent, the Trustee or such
Holder. The Grantor agrees that ten (10) days prior written notice by the Agent
of the time and place of any public sale or of the time after which a private
sale may take place is reasonable notification of such matters. The Grantor
shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all Obligations, including
any reasonable attorneys’ fees or other out-of-pocket expenses actually incurred
by the Agent, the Trustee or any Holder to collect such deficiency.

(c) Except as otherwise specifically provided herein, the Grantor hereby waives
presentment, demand, protest or any notice (to the maximum extent permitted by
applicable law) of any kind in connection with this Security Agreement or any
Collateral.

(d) To the extent that applicable law imposes duties on the Agent to exercise
remedies in a commercially reasonable manner, the Grantor acknowledges and
agrees that it is not commercially unreasonable for the Agent (a) to fail to
incur expenses reasonably deemed significant by the Agent to prepare Collateral
for disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (b) to

 

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fail to obtain third party consents for access to Collateral to be disposed of,
or to obtain or, if not required by other law, to fail to obtain governmental or
third party consents for the collection or disposition of Collateral to be
collected or disposed of, (c) to fail to exercise collection remedies against
account debtors or other Persons obligated on Collateral or to remove Liens on
or any adverse claims against Collateral, (d) to exercise collection remedies
against account debtors and other Persons obligated on Collateral directly or
through the use of collection agencies and other collection specialists, (e) to
advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (f) to
contact other Persons, whether or not in the same business as the Grantor, for
expressions of interest in acquiring all or any portion of such Collateral,
(g) to hire one or more professional auctioneers to assist in the disposition of
Collateral, whether or not the Collateral is of a specialized nature, (h) to
dispose of Collateral by utilizing Internet sites that provide for the auction
of assets of the types included in the Collateral or that have the reasonable
capacity of doing so, or that match buyers and sellers of assets, (i) to dispose
of assets in wholesale rather than retail markets, (j) to disclaim disposition
warranties, such as title, possession or quiet enjoyment, (k) to purchase
insurance or credit enhancements to insure the Agent against risks of loss,
collection or disposition of Collateral or to provide to the Agent a guaranteed
return from the collection or disposition of Collateral, or (l) to the extent
deemed appropriate by the Agent, to obtain the services of other brokers,
investment bankers, consultants and other professionals to assist the Agent in
the collection or disposition of any of the Collateral. The Grantor acknowledges
that the purpose of this Section 17(d) is to provide non-exhaustive indications
of what actions or omissions by the Agent would not be commercially unreasonable
in the Agent’s exercise of remedies against the Collateral and that other
actions or omissions by the Agent shall not be deemed commercially unreasonable
solely on account of not being indicated in this Section 17(d). Without
limitation upon the foregoing, nothing contained in this Section 17(d) shall be
construed to grant any rights to the Grantor or to impose any duties on Agent
that would not have been granted or imposed by this Security Agreement or by
applicable law in the absence of this Section 17(d).

18. GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY. For the sole purpose of
enabling the Agent to exercise rights and remedies under Section 17 hereof
(including, without limiting the terms of Section 17 hereof, in order to take
possession of, hold, preserve, process, assemble, prepare for sale, market for
sale, sell or otherwise dispose of Collateral) at such time as the Agent shall
be lawfully entitled to exercise such rights and remedies, to the extent of the
Grantor’s legal and contractual rights to make such grant, the Grantor hereby
grants to the Agent, for the benefit of the Agent, the Trustee and Holders, an
irrevocable, nonexclusive license (exercisable without payment of royalty or
other compensation to the Grantor) to use, license or sublicense any
Intellectual Property now owned or hereafter acquired by the Grantor, and
wherever the same may be located, and including in such license access to all
media in which any of the licensed items may be recorded or stored and to all
computer software and programs used for the compilation or printout thereof.

19. LIMITATION ON AGENT’S AND HOLDERS’ DUTY IN RESPECT OF COLLATERAL.

(a) None of the Agent, the Trustee or any Holder shall have any other duty as to
any Collateral in its possession or control or in the possession or control of
any agent or nominee of the Agent, the Trustee or such Holder, or as to the
preservation of rights against prior parties or any other rights pertaining
thereto.

 

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(b) The Agent shall not be responsible for filing any financing or continuation
statements or recording any documents or instruments in any public office at any
time or times or otherwise perfecting or maintaining the perfection of any
security interest in the Collateral. The Agent shall be deemed to have exercised
reasonable care in the custody of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which it accords
its own property and shall not be liable or responsible for any loss or
diminution in the value of any of the Collateral, by reason of the act or
omission of any carrier, forwarding agency or other agent or bailee selected by
the Agent in good faith.

(c) The Agent shall not be responsible for the existence, genuineness or value
of any of the Collateral or for the validity, perfection, priority or
enforceability of the Liens in any of the Collateral, whether impaired by
operation of law or by reason of any action or omission to act on its part
hereunder, except to the extent such action or omission constitutes gross
negligence, bad faith or willful misconduct on the part of the Agent, for the
validity or sufficiency of the Collateral or any agreement or assignment
contained therein, for the validity of the title of the Grantor to the
Collateral, for insuring the Collateral or for the payment of taxes, charges,
assessments or Liens upon the Collateral or otherwise as to the maintenance of
the Collateral.

20. MISCELLANEOUS.

(a) Reinstatement. This Security Agreement shall remain in full force and effect
and continue to be effective should any petition be filed by or against the
Grantor for liquidation or reorganization, should the Grantor become insolvent
or make an assignment for the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of the
Grantor’s assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Obligations, or any
part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.

(b) Notices. Except as otherwise provided herein, whenever it is provided herein
that any notice, demand, request, consent, approval, declaration or other
communication shall or may be given to or served upon any of the parties by any
other party, or whenever any of the parties desire to give and serve upon the
other party any communication with respect to this Security Agreement, each such
notice, demand, request, consent, approval, declaration or other communication
shall be in writing and shall be given in the manner, and deemed received, as
provided for in the Indenture; provided, however that notice to the Agent shall
be delivered to the following address or such other address as notified by the
Agent from time to time:

The Bank of New York Trust Company, N.A.

 

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Attention: Corporate Trust Administration

700 S. Flower Street - Suite 500

Los Angeles, CA 90017

Fax: 213-630-6298

(c) Severability. Whenever possible, each provision of this Security Agreement
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision of this Security Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Security Agreement. This Security
Agreement is to be read, construed and applied together with the Indenture and
the other Security Documents which, taken together, set forth the complete
understanding and agreement of Agent, the Trustee, the Holders and the Grantor
with respect to the matters referred to herein and therein.

(d) No Waiver; Cumulative Remedies. Neither the Agent, the Trustee nor any
Holder shall by any act, delay, omission or otherwise be deemed to have waived
any of its rights or remedies hereunder, and no waiver shall be valid unless in
writing, signed by the Agent and then only to the extent therein set forth. A
waiver by the Agent of any right or remedy hereunder on any one occasion shall
not be construed as a bar to any right or remedy which the Agent would otherwise
have had on any future occasion. No failure to exercise nor any delay in
exercising on the part of the Agent, the Trustee or any Holder, any right, power
or privilege hereunder, shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, power or privilege hereunder preclude any
other or future exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies hereunder provided are cumulative and may be
exercised singly or concurrently, and are not exclusive of any rights and
remedies provided by law. None of the terms or provisions of this Security
Agreement may be waived, altered, modified or amended except by an instrument in
writing, duly executed by the Agent and the Grantor.

(e) Limitation by Law. All rights, remedies and powers provided in this Security
Agreement may be exercised only to the extent that the exercise thereof does not
violate any applicable provision of law, and all the provisions of this Security
Agreement are intended to be subject to all applicable mandatory provisions of
law that may be controlling and to be limited to the extent necessary so that
they shall not render this Security Agreement invalid, unenforceable, in whole
or in part, or not entitled to be recorded, registered or filed under the
provisions of any applicable law.

(f) Termination of this Security Agreement. Subject to Section 20(a) hereof,
this Security Agreement shall terminate upon the payment in full in cash or
satisfaction in full of all other Obligations (other than indemnification
Obligations as to which no claim has been asserted).

(g) Intercreditor Agreement. Notwithstanding anything herein to the contrary,
the lien and security interest granted to the Agent pursuant to this Agreement
and the exercise of any right or remedy by the Agent hereunder are subject to
the provisions of the Intercreditor and Subordination Agreement dated as of even
date herewith (the “Intercreditor

 

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Agreement”) among Comerica Bank, as Senior Agent, The Bank of New York Trust
Company, N.A., as Trustee, and the Grantor. In the event of any conflict between
the terms of the Intercreditor Agreement and this Agreement, the terms of the
Intercreditor Agreement shall govern.

(h) Successors and Assigns. This Security Agreement and all obligations of the
Grantor hereunder shall be binding upon the successors and assigns of the
Grantor (including any debtor-in-possession on behalf of the Grantor) and shall,
together with the rights and remedies of the Agent, for the benefit of the
Agent, the Trustee and Holders, hereunder, inure to the benefit of the Agent,
the Trustee and Holders, all future holders of any instrument evidencing any of
the Obligations and their respective successors and assigns. No sales of
participations, other sales, assignments, transfers or other dispositions of any
agreement governing or instrument evidencing the Obligations or any portion
thereof or interest therein shall in any manner affect the Lien granted to the
Agent, for the benefit of the Agent, the Trustee and Holders, hereunder. Except
as permitted by the Indenture, Grantor may not assign, sell, hypothecate or
otherwise transfer any interest in or obligation under this Security Agreement.

(i) Counterparts. This Security Agreement may be authenticated in any number of
separate counterparts, each of which shall collectively and separately
constitute one and the same agreement. This Security Agreement may be
authenticated by manual signature, facsimile or, if approved in writing by the
Agent, electronic means, all of which shall be equally valid.

(j) Governing Law. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
INDENTURE OF ANY OF THE SECURITY DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SECURITY AGREEMENT AND
THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND ANY
APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

(k) Waiver of Jury Trial. THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING
IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE AGENT AND THE GRANTOR ARISING OUT
OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN
CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF THE OTHER SECURITY DOCUMENTS
OR THE TRANSACTIONS RELATED HERETO OR THERETO.

(l) In no event shall the Agent be responsible or liable for any failure or
delay in the performance of its obligations hereunder arising out of or caused
by, directly or indirectly, forces beyond its control, including, without
limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil
or military disturbances, nuclear or natural catastrophes or acts of God, and
interruptions, loss or malfunctions of utilities, communications or computer
(software and hardware) services; it being understood that the Agent shall use
reasonable efforts which are consistent with accepted practices in the banking
industry to resume performance as soon as practicable under the circumstances.

 

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(m) Section Titles. The Section titles contained in this Security Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.

(n) No Strict Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Security Agreement. In the event an ambiguity
or question of intent or interpretation arises, this Security Agreement shall be
construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Security Agreement.

(o) Benefit of Holders. All Liens granted or contemplated hereby shall be for
the benefit of the Agent, the Trustee and the Holders, and all proceeds or
payments realized from Collateral in accordance herewith shall be applied to the
Obligations in accordance with the terms of the Indenture.

(p) Incorporation by Reference. All of the rights, protections, immunities and
privileges granted to the Trustee under the Indenture are incorporated by
reference herein and shall inure to the benefit of the Agent herein.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
executed and delivered by its duly authorized officer as of the date first set
forth above.

 

ELECTROGLAS, INC., as a Grantor By:  

/s/ Thomas Brunton

Name:  

Thomas Brunton

Title:  

CFO

 

ELECTROGLAS INTERNATIONAL,
INC., as a Grantor By:  

/s/ Thomas Brunton

Name:  

Thomas Brunton

Title:  

CFO

 

THE BANK OF NEW YORK TRUST
COMPANY, N.A., as Agent By:  

/s/ Raymond Torres

Name:  

Raymond Torres

Title:  

Assistant Vice President