REIMBURSEMENT AGREEMENT

by and among

DNA COMPUTING SOLUTIONS, INC.

TERAFORCE TECHNOLOGY CORPORATION

and

Richard E. Bean
Robert E. Garrison II
Steven A. Webster
James Hawkins
Peter Badger
John Styles
Donald Campbell

Dated as of October 22, 2004

1

REIMBURSEMENT AGREEMENT

This REIMBURSEMENT AGREEMENT dated as of October 22, 2004, (the “Agreement), is
made by and between TERAFORCE TECHNOLOGY CORPORATION, a Delaware corporation (
“TERA”), DNA COMPUTING SOLUTIONS, INC, a Delaware corporation and a wholly-owned
subsidiary of TERA (“DNA-CS”) (TERA and DNA-CS collectively referred to as the
Companies) and Richard E. Bean, an individual residing in Texas, Robert E.
Garrison II, an individual residing in Texas, Steven A. Webster, an individual
residing in Texas, James Hawkins, an individual residing in Texas, Peter Badger,
an individual residing in Texas, Donald Campbell, an individual residing in
Texas, and John Styles, an individual residing in Texas ( each individual a
“Guarantor” and collectively the “Guarantors”) (the TERA, DNA-CS and Guarantors
collectively referred to as the “Parties”)

W I T N E S S E T H:

WHEREAS, the Companies contemplate entering into a loan agreement with First
Capital Bank (the “Bank”) providing for the loan of up to $600,000 to DNA-CS
(the “October Loan Agreement”) ; and

WHEREAS, the Companies previously entered into a loan agreement with the Bank
dated July 30, 2004 providing for the loan of up to $575,000 to DNA-CS (the
“July Loan Agreement”); and

WHEREAS, in order to enter into the July Loan Agreement the bank required the
Guarantors to provide limited guarantees aggregating $776,250 and the Guarantors
provided these limited guarantees pursuant to a Reimbursement Agreement dated
July 27, 2004 among the Parties; and,

WHEREAS, DNA-CS have granted the Bank a security interest in certain assets,
including accounts receivable, fixed assets and inventories; and

WEREAS, in order to enter into the October Loan Agreement the Bank has required
the Guarantors to provide limited guarantees aggregating $810,000; and

WHEREAS, in order to induce the Bank to enter into the October Loan Agreement,
each Guarantor has executed a limited guarantee to secure the loan there under
in the amount as indicated in Schedule I ( the “Guarantee”); and

WHEREAS, the Bank shall provide Advances (as hereinafter defined) to the DNA-CS
in accordance with the provisions of the October Loan Agreement and shall be
entitled to make demand upon the Guarantors pursuant to the provisions of the
Guarantees in the case of an Event of Default (as defined in the October Loan
Agreement) by the Companies under the October Loan Agreement; and

NOW, THEREFORE, in consideration of the foregoing, the Companies and the
Guarantors covenant and agree as follows:

ARTICLE I

GENERAL TERMS

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

“Advances” shall mean an advance of funds under and subject to the terms and
conditions of the October Loan Agreement provided that the principal amount
outstanding shall never exceed the Loan Maximum.

“Agreement” shall have the meaning specified in the preamble.

“Associated Expenses” shall mean the expenses associated with recovering the
Guarantor Advances, excluding the Guarantor Advances and interest thereon.

“Bank” shall have the meaning set forth in the recitals.

“Common Stock” shall mean the common stock, par value $0.01, of TERA.

“Demand for Reimbursement” shall have the meaning specified in Section 3.2(a).

“Governmental Authority” means any United States or foreign federal,
territorial, state or local governmental authority, quasi-governmental
authority, instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.

“Guarantor Advance” shall mean the amount of money advanced by the Guarantor to
the Bank pursuant to a demand for payment by the Bank on the Guarantee.

“Guarantor” and “Guarantors” shall have the meanings specified in the preamble.

“Guarantee” shall have the meaning set forth in the recitals.

“Guarantor’s Percentage ” shall mean the amount of a Guarantor’s Guarantee
divided by the aggregate amount of Guarantees provided by the Guarantors.

“Loans” shall mean the Companies’ obligations pursuant to the October Loan
Agreement and the July Loan Agreement.

“Loan Documents” shall mean the October Loan Agreement and all exhibits and
related documents thereto, as they may be amended, extended or modified from
time to time, including, without limitation, a promissory note.

“Loan Maximum” shall mean the principal amounts outstanding of $600,000.

“Person” means an individual, corporation, partnership, association, limited
liability company, trust, estate or other similar business entity or
organization, including a Governmental Authority.

“Registration Rights Agreement” shall have the meaning specified in Section 4.3.

“Reimbursement Obligation” shall have the meaning specified in Section 3.2(a).

“Related Documents” shall mean the Warrants and the Registration Rights
Agreement.

“Warrants” shall have the meaning specified in Section 4.1.

Section 1.2. Interpretation.

(a) In this Agreement:

(i) the singular number includes the plural number and vice versa;

(ii) reference to any gender includes each other gender;

(iii) the words “herein,” “hereof” and “hereunder” and other words of similar
import refer to this Agreement as a whole and not to any particular Article,
Section or other subdivision;

(iv) reference to any Person includes such Person’s heirs, administrators,
successors and assigns but, if applicable, only if such heirs, administrators,
successors and assigns are permitted by this Agreement, and reference to a
Person in a particular capacity excludes such Person in any other capacity or
individually, provided that nothing in this sub clause (iv) is intended to
authorize any assignment not otherwise permitted by this Agreement;

(v) reference to any agreement, document or instrument means such agreement,
document or instrument as amended, supplemented or modified and in effect from
time to time in accordance with the terms thereof and, if applicable, the terms
hereof, and reference to the Note includes any Note issued pursuant hereto in
extension or renewal hereof and in substitution or replacement here for;

(vi) unless the context indicates otherwise, reference to any Article, Section,
Schedule or Exhibit means such Article or Section hereof or such Schedule or
Exhibit hereto;

(vii) the words “including” (and with correlative meaning “include”) means
including, without limiting the generality of any description preceding such
term;

(viii) with respect to the determination of any period of time, the word “from”
means “from and including” and the word “to” means “to, but excluding”;

(ix) reference to any law means such as amended, modified, codified or
reenacted, in whole or in part, and in effect from time to time; and

(b) No provision of this Agreement shall be interpreted or construed against any
Person solely because that Person or its legal representative drafted such
provision.

ARTICLE II

THE GUARANTIES

Section 2.1 Guarantees. On the terms and subject to the terms hereof, each
Guarantor agrees to provide the Guarantee in the amount as indicated on
Schedule I in substantially the form as in Exhibit A.

ARTICLE III

ASSUMPTION OF LOAN, REIMBURSEMENT

Section 3.1 Assumption of Loan. Should the Guarantors be required to make
payment to the Bank pursuant to the Guarantee, the Companies hereby consent to
the assumption of the October Loan Agreement the Guarantors, including all
collateral rights. The Companies will use their best efforts to facilitate such
assumption.

Section 3.2. Reimbursable Amounts and Other Payments

(a) Amounts. Should the Guarantors not elect to, or be unable for any reason to,
assume the October Loan Agreement, the Companies shall reimburse each Guarantor
the amount paid by the Guarantor to the Bank equal to the amount of his
Guarantor Advance and any interest, taxes, fees, charges or other costs and
expenses incurred by Guarantor in connection with such payment (the
“Reimbursement Obligation”). Each such Reimbursement Obligation shall be paid by
the Companies to Guarantor promptly upon written demand from Guarantor (“Demand
for Reimbursement”), but in no event later than thirty (30) days after such
demand. Each such Demand for Reimbursement, in order to be valid, shall be
accompanied by sufficient documentation, such as copies of documents provided by
the Bank to the Guarantors, supporting the amount of the Reimbursement
Obligation.

(b) Interest. The Company shall pay interest on any and all amounts remaining
unpaid under Section 3.1(a) at any time from the date such amounts become
payable until paid in full, payable on demand, at simple interest at the prime
rate established by Bank One, N.A., plus 2.0% per annum (or, if less, the
highest rate permitted under applicable law). The Guarantors may, at their
election, receive interest payments in shares of Common Stock. The number of
shares of Common Stock to be issued shall be determined by dividing the amount
of the interest payment by $0.18.

(c) Currency. All payments by the Company to Guarantor shall be made in lawful
currency of the United States of America and in immediately available funds at,
and pursuant to, such instructions as Guarantor may from time to time give.

Section 3.2. Obligations Absolute.

(a) The DNA-CS’s obligations under this Article III shall be absolute and
unconditional irrespective of any set-off, counterclaim, or defense to payment
which the Company may have or have had against the Bank.

(b) The DNA-CS hereby agrees that Guarantor shall not be responsible for, and
the Reimbursement Obligations shall not be affected by, among other things,

(i) the validity or genuineness of documents or of any endorsements thereon even
though such documents shall prove to be invalid, fraudulent, or forged;

(ii) any dispute between the DNA-CS, TERA and the Bank; or

(iii) any claims whatsoever of the DNA-CS or TERA against the Bank.

(c) Guarantor shall not be liable for any error, omission, interruption or delay
in transmission, dispatch or delivery of any message or advice, howsoever
transmitted, in connection with the Guaranty, except for errors or omissions
caused by Guarantor’s primary negligence or willful misconduct.

(d) The Companies agrees that any action taken or omitted by the Guarantor in
connection with the Guaranty, provided Guarantor’s actions are not the result of
Guarantor’s primary negligence, willful misconduct, or breach of contractual
obligations, shall be binding on the DNA-CS and TERA and shall not result in any
liability to Guarantor.

Section 3.3 Indemnity In addition to the rights and obligations set forth in
Section 3.2(a), the Companies hereby agrees to indemnify and hold harmless
Guarantor, and each of his respective successors, heirs and assigns, from and
against any and all claims and damages, losses, liabilities, costs or expenses
(including reasonable attorneys fees) which Guarantor may incur by reason of or
in connection with the issuance, execution and delivery or transfer or payment
or failure to pay the Guarantee except to the extent of the primary negligence
or willful misconduct of Guarantor, or as may be attributable to Guarantor’s
breach of his obligations under this Agreement.

Section 3.4 Agreement Among Guarantors Upon the Bank invoking any or all of the
Guarantees, each Guarantor shall fund an amount equal to the total amount of
payments made to the Bank times his Guarantor’s Percentage. Should any
Guarantor’s Guarantor Advance be in excess of this amount, the other Guarantors
shall reimburse that Guarantor such that each Guarantor Advance is proportionate
to each Guarantor’s Percentage. Such reimbursement shall be made within 30 days
of a demand from another Guarantor

ARTICLE IV
CONVERSION RIGHTS AND WARRANTS

Section 4.1. Warrants. As an inducement to enter into this Agreement, TERA
agrees to issue to the Guarantors Warrants to purchase an aggregate of 6,666,667
shares of Common Stock at an exercise price per share of $0.20, the form of
which is attached as Exhibit B (the “Warrants”). Each Guarantor shall receive
Warrants to purchase a number of shares of Common Stock equal to the aggregate
number of Warrants times his Guarantor’s Percentage.

Section 4.2 Conversion Rights. As long as any Loans are outstanding or DNA-CS is
able to incur Loans under the October Loan Agreement, each Guarantor shall have
the right to purchase a number of shares of Common Stock equal to his
proportionate share of the Loan Maximum divided by $0.18. Proceeds from the
issuance of such shares of Common Stock shall be utilized by TERA to repay
amounts outstanding under the October Loan Agreement and cause the Bank to
release Guarantees underlying the amount of the Loan repaid. The Companies will
undertake such procedures to ensure the Guarantor that the Guarantee will be
released immediately upon the purchase of the shares of Common Stock. Further,
each Guarantor shall have the right to covert any Reimbursement Obligation into
a number of shares of Common Stock equal to the amount of the Reimbursement
Obligation divided by $0.18. The Companies shall give the Guarantors not less
than 30 days notice of the intent to repay the Loans and obtain the release of
the Guarantees.

Section 4.3. Registration Rights. The TERA further agrees to grant the
registration rights to register the resale of the shares of Common Stock to be
issued pursuant to the Conversion Rights and the Warrants and the in accordance
with the Registration Rights Agreement attached hereto as Exhibit C (the
“Registration Rights Agreement”).

Section 4.4. Subsequent Financings. Should TERA, at any time while the
Guarantees are outstanding, issue Common Stock at a price per share less than
$0.18, or issue warrants or convertible securities that provide for an exercise
or conversion price of less than $0.18 per share, then the conversion rate in
Section 4.2 and the Warrant exercise price in Sections 4.1 above shall be
reduced to such lesser amount and the exercise price of the warrants shall be
reduced to such lesser amount.

Section 4.5 Sharing of Consideration. Should any Guarantor be required to make a
Guarantor Advance in an amount in excess of an amount equal to the Loan Maximum
times his Guarantor’s Percentage and does not receive reimbursement from the
other Guarantors pursuant to Section 3.4 of this Agreement and within the time
frame required by Section 3.4, that Guarantor shall receive additional Warrants
and Conversion Rights proportionate with the amount of such excess funding. Any
Guarantor not making reimbursement to other Guarantors pursuant to Section 3.4
of this Agreement shall forfeit Warrants and Conversion Rights proportionate to
the amount of reimbursement not made.

2

ARTICLE V
REPRESENTATIONS AND WARRANTIES

Section 5.1. Representations and Warrants of the TERA and DNA-CS. TERA and
DNA-CS hereby represents and warrants to Guarantors as follows:

(a) Corporate Existence and Good Standing. Each is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own its
property and carry on its business as now conducted, and is in good standing and
authorized to do business in each jurisdiction in which the it owns real
property or conducts such business, where the failure to maintain such good
standing or authorization is reasonably expected to have a materially adverse
effect on its business, operations or financial or other condition, or could
materially adversely affect its ability to perform its obligations under this
Agreement.

(b) Authorization and Validity. This Agreement and Related Documents have been
duly authorized by all necessary corporate action, and each has been duly
executed and delivered by TERA and DNA-CS and each is valid, binding and
enforceable against the TERA and DNA-CS in accordance with its terms except as
may be limited by bankruptcy or insolvency laws and similar laws affecting
creditor rights generally and by generally and by general principles of equity.

(c) No Conflict; Government Consent; Title to Assets; No Liens. Neither the
execution and delivery of this Agreement and Related Documents, nor the
consummation of the transactions contemplated hereby or thereby nor compliance
with the terms hereof or thereof under the circumstances contemplated hereby or
thereby will conflict with, are prohibited by or will contravene, violate or
constitute a breach of or a default under the Amended and Restated Certificate
of Incorporation or By-Laws of TERA or DNA-CS or constitute on the part of the
TERA or DNA-CS a material breach of or a material default under any agreement or
other instrument to which the either company is a party or any existing law,
administrative regulation, or, to its knowledge, any court order or consent
decree to which TERA or DNA-CS is subject, or by which any of its properties is
bound.

5.2 Representations of Guarantors. Each Guarantor represents and warrants to the
TERA and DNA-CS that he has full power and authority to execute and deliver this
Agreement and the Related Documents, and that this Agreement and Related
Documents are valid, binding and enforceable in accordance with their terms as
they relate to such Guarantor, except as may be limited by bankruptcy and
insolvency laws, and similar laws affecting creditors rights generally and by
general principals of equity. Each Guarantor represents and warrants that he or
she (a) has such knowledge and experience in financial and business matters that
such Guarantor is capable of evaluating the merits and risks of his or her
investment and has the financial ability to assume the monetary risk associated
therewith; (b) is able to bear the complete loss of his or her investment;
(c) has received such documents and information from the TERA or DNA-CS as such
Guarantor has requested and has had the opportunity to ask questions of, and
receive answers from, the TERA and DNA-CS and the terms and conditions of the
offering of the Warrants and the Common Stock to be issued pursuant to the
Conversion Rights and the Warrants and to obtain additional information; (d) is
an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated
under the 1933 Act; and (e) is not relying upon any statements or instruments
made or issued by any person other than the TERA or DNA-CS in making a decision
to invest in the Shares.

ARTICLE VI
AFFIRMATIVE AND NEGATIVE COVENANTS

Section 6.1 Conduct of Business. The TERA and DNA-CS covenant and agree that
each shall remain duly incorporated, validly existing and in good standing as a
domestic corporation in the State of Delaware, will not voluntarily dissolve
without first discharging its obligations under this Agreement.

Section 6.2 Limitation on Borrowings. TERA and DNA-CS covenant and agree that
amount of the Loans shall not exceed an amount equal to the sum of (a) the sum
of the amount of DNA-CS inventories and fixed assets each multiplied by 50% and
(b) the amount of DNA-CS accounts receivable multiplied by 80%. On a monthly
basis the Companies will provide to the Guarantors, or their designee, an
officer’s certificate as to compliance with this Section 6.2.

Section 6.3 Pledge of Assets. The Companies will not pledge any assets, other
than in relation to the October Loan Agreement and the July Loan Agreement,
without the express written consent of the Guarantors.

ARTICLE VII
COVENANTS

Section 7.1 Successors and Assigns. This Agreement shall be binding upon each
party and their respective successors, heirs and assigns.

Section 7.2. Notices. All notices, requests and demands to or upon the
respective parties shall be in writing (including by facsimile) and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made (a) in the case of delivery by hand, when delivered, (b) in the case of
delivery by mail, three (3) days after being deposited in the mails, postage
prepaid, or (c) in the case of delivery by facsimile, when sent and receipt has
been confirmed, addressed as follows:

     
If to Guarantors:
  to the addresses as indicated on Schedule I
 
   
If to the Company:
  TeraForce Technology Corporation

Attn.: Herman M. Frietsch, Chairman & CEO
1240 East Campbell Road
Richardson, Texas 75081
Telecopier: (469) 330-4999

Any entity entitled to receive notice hereunder may, by notice given hereunder,
designate any further or different addresses to which subsequent notices,
certificates or other communications shall be sent.

Section 7.3. Amendment. This Agreement may be amended, modified or discharged
only upon an agreement in writing of TERA, DNA-CS and each of the Guarantors.

Section 7.4. Effect of Delay and Waivers. No delay or omission to exercise any
right or power accruing upon any default, omission or failure of performance
hereunder shall impair any such right or power or shall be construed to be a
waiver thereof, but any such right and power may be exercised from time to time
and as often as may be deemed expedient. In order to entitle Guarantors to
exercise any remedy now or hereafter existing at law or in equity or by statute,
it shall not be necessary to give any notice, other than such notice as may be
herein expressly required. In the event any provision contained in this
Agreement should be breached by any party and thereafter waived by the other
party so empowered to act, such waiver shall be limited to the particular breach
so waived and shall not be deemed to waive any other breach hereunder. No
waiver, amendment, release or modification of this Agreement shall be
established by conduct, custom or course of dealing, but solely by an instrument
in writing duly executed by the parties thereunto duly authorized by this
Agreement.

Section 7.5. Counterparts. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.

Section 7.6. Severability. The invalidity or unenforceability of any one or more
phrases, sentences, clauses or Sections contained in this Agreement shall not
affect the validity or enforceability of the remaining portions of this
Agreement, or any part thereof. In particular, this section means (among other
things) that TERA and DNA-CS do not agree or intend to pay, and Guarantors do
not agree to contract for, charge, collect, take, reserve or receive
(collectively referred to herein as “charge or collect”), any amount in the
nature of interest or in the nature of a fee for anything construed to be a
loan, which would in any way or event (including demand, prepayment, or
acceleration) cause Guarantors to charge or collect more for entering into this
Agreement than the maximum amount Guarantors would be permitted to charge or
collect by federal law or the laws of the State of Texas. Any such excess
interest or unauthorized fee shall, instead or anything stated to the contrary,
be applied first to reduce the principal balance of the loan, if any, and when
the principal has been paid in full, refunded to the Companies.

Section 7.7. Governing Law and Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.

3

This Agreement has been signed by the Company as of the date first above
written.

TERA:
TeraForce Technology Corporation

By:/s/ Robert P. Capps

      Robert P. Capps, Executive Vice President

DNA-CS:
DNA Computing Solutions, Inc.

By: /s/ Robert P. Capps

      Robert P. Capps, Executive Vice President

GUARANTORS:

/s/ Richard E. Bean

      Richard E. Bean
/s/ Robert E. Garrison II
Robert E. Garrison II

/s/ Steven A. Webster

      Steven A. Webster

/s/ James Hawkins

      James Hawkins

/s/ Peter Badger

      Peter Badger

/s/ John Styles

      John Styles

/s/ Donald Campbell

      Donald Campbell

4

Schedule I
Guarantors

                                         
 
                                  Proportionate

 
          Limit of   Guarantor’s
          Share of
Name
  Address   Guarantee   Percentage
  Warrants
  Loan Maximum

 
                                       
 
  P.O. Box 35068
                               
 
  Houston, TX 77235
                               
Richard E. Bean
  Fax: (713) 551-0427
  $ 148,500     18.33 %     1,222,223     $ 110,000  
 
                                       
 
  600 Travis                                
 
  Suite 3000
                               
Robert E. Garrison
  Houston, TX 77030
                               
II
  Fax: (713) 993-4677
  $ 148,500       18.33 %     1,222,222     $ 110,000  
 
                                       
 
  14701 St.                                
 
  Mary’s Lane Suite
                               
 
  800                                
 
  Houston, Texas 77079
                               
Steven A. Webster
  Fax: (281) 558-3011
  $ 148,500     18.33 %     1,222,222     $ 110,000  
 
                                       
 
  P.O. Box 8216                                
 
  Waco, TX 76714                                
James Hawkins
  Fax: (254) 761-2951
  $ 148,500       18.33 %     1,222,222     $ 110,000  
 
                                       
 
  600 Travis                                
 
  Suite 3100                                
 
  Houston, TX 77030                                
Peter Badger
  Fax: (713) 993-4606
  $ 148,500       18.33 %     1,222,222     $ 110,000  
 
                                       
 
  2200 Southwest Frwy                                
 
  Suite 500                                
 
  Houston, TX 77098                                
John Styles
  Fax: (713) 383-9549
  $ 33,750       4.17 %     277,778     $ 25,000  
 
                                       
 
  323 Tamerlaine                                
 
  Houston, TX 77024                                
Donald Campbell
  Fax: (713) 827-1191
  $ 33,750       4.17 %     277,778     $ 25,000  
 
                                       

5