SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                Form 10-KSB

[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 
    1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________

                         Commission File No. 0-28102
                                             -------

                             BONDED MOTORS, INC.
                             -------------------
               (Name of small business issuer in its charter) 

California                                                      95-2698520   
----------                                                      ----------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)

7522 South Maie Avenue, Los Angeles, CA                           90001
---------------------------------------                           -----
(Address of principal executive offices)                         Zip Code

Issuer's telephone number: (213) 583-8631
                           --------------

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act: Common Stock

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for 
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

                               Yes [x]   No [_]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements 
incorporated by reference in Part III of this Form 10-KSB or any amendment to 
this form 10-KSB. [   ] 

Issuer's revenues for its most recent fiscal year: $24,076,192.

The aggregate market value, calculated on the basis of the closing price of 
such stock on the National Association of Securities Dealers Automated 
Quotation System, of the voting stock held by non-affiliates of the Registrant
at March 10, 1998 was approximately $30,780,405.

There were 3,040,040 shares of common stock outstanding at March 10, 1998.

Part III of the Registrant's Proxy Statement relating to its 1998 Annual 
Meeting of Shareholders is incorporated by reference herein.

<PAGE>

                                   PART I

ITEM 1. DESCRIPTION OF BUSINESS.

General

    Bonded Motors, Inc. (the "Company") is one of the largest independent 
engine remanufacturers in the United States serving the automotive aftermarket
for end users and installers such as discount automotive parts chains, fleet 
owners, professional installers and "do-it-yourselfers."  The Company 
remanufacturers and distributes in the United States replacement engines for 
domestic and Japanese cars, light trucks and specialty vehicles.  The Company 
currently remanufactures an average of approximately 2,000 domestic and 500 
Japanese engines per month in its Los Angeles production facility in California
and 400 domestic engines per month in its Macon production facility in Georgia.
The Company also operates distribution centers in Washington, Ohio,
Pennsylvania and Colorado.

    The Company's principal customers are comprised of discount automotive
parts chain stores including The Pep Boys - Manny, Moe & Jack, CSK Automotive,
(formerly Northern Automotive Corporation), Paccar Automotive, Inc. and Trak
Auto Corporation, which sell replacement engines to end users and to
installers.  During the last several years, the Company has increased its
marketing efforts to discount automotive parts chain stores, which the Company
believes is the fastest growing segment of the automotive aftermarket industry.
Approximately 68% and 71% of the Company's sales were to four discount
automotive parts chain stores for fiscal 1997 and fiscal 1996 respectively.
The Company believes it has obtained this business because of its ability to
deliver quality remanufactured engines in a timely and cost-effective manner.
The Company is generally able to complete the manufacturing process within
three days for most of the approximately 1,500 engine types and variations
that it remanufactures.  The Company has developed a flexible and efficient
manufacturing system, stringent quality controls and an innovative employee
incentive program which it believes has facilitated  its ability to
efficiently service its customers.

Industry

    There is a growing trend for consumers to replace automobile engines rather
than to purchase new automobiles.  Remanufacturing offers consumers a
significantly lower cost alternative to newly manufactured replacement engines
and also makes available to consumers discontinued automobile engines.
According to industry reports there are currently 80 million domestic vehicles
in the United States.  Such vehicle population is older today than it has been
at any time during the past 50 years.  As of January 1997, the average age of
domestic vehicles was approximately nine years, as compared to eight years in
vehicles in 1989.  Vehicles 10 years or older account for more than 45% of 
domestic vehicles now on the road in the United States.  The Company believes
that there is a relationship between the increase in the average age of
vehicles and the growth in the market for remanufactured engines and that
demand for the Company's products will continue to grow as the age of vehicles
increases.

    Recently, there has been a shift in the distribution channels for
remanufactured engines.  In the past independent garage, repair shops and
traditional automobile parts stores were the principal customers for
remanufactured engines.  More recently, large discount automotive parts chain
stores have emerged to supply remanufactured engines directly to consumers and
installers.  As a result of this trend, large discount automotive parts chain
stores now constitute a major portion of the Company's total revenues.

                                    -2-
<PAGE>

Operations

    The Company's engines are remanufactured for use in most domestic and
Japanese automobiles and light trucks.  The Company has also remanufactured
a limited number of engines manufactured by European automakers, although this
market does not constitute a material part of the Company's business.  The
Company remanufactures a broad range of engines in order to accommodate the
numerous and increasing varieties of vehicles in use.  The Company currently
provides approximately 1,500 different engine types and variations.  The
Japanese vehicles for which the Company remanufactures engines include those
commonly called "transplants" (automobiles manufactured in the United States
by foreign automobile companies such as Honda, Toyota, Nissan and Mazda) and
"captive imports" (vehicles manufactured outside the United States by certain
domestic manufacturers such as Chrysler and Ford).

    Cores.  In its remanufacturing operations, the Company obtains used
engines, commonly known as "cores".  The majority of the cores used for
remanufacturing by the Company are obtained from the Company's customers as
"trade-ins."  The trade-ins are generally credited against purchases by the
same customers.  To a lesser extent, the Company also purchases cores in the
open market, as well as other materials and components used in the
remanufacturing process.  Of the cores acquired by the Company during 1996 and
1997, approximately 60% were obtained from the Company's customers as
trade-ins, and approximately 40% were obtained from core vendors.

    Production Process.  The process of remanufacturing an automotive engine
involves a number of steps.  First, the engine cores, which are sorted by make
and model and stored until needed, are completely disassembled into components
parts.  Then, all pistons, rings, bearings, seals, lifters, soft plugs, oil
galley plugs, timing chains, timing gears and many other components are
immediately discarded.  Other components that are to be incorporated into the
remanufactured product are thoroughly cleaned, checked for cracks and wear,
and re-machined.  The major engine components that are subject to wear such as
the engine block, cylinder head, crankshaft and connecting rods are baked in an
oven for approximately four hours and then blasted with steel pellets to remove
any remaining residue.  The components are inspected, and all wearing surfaces
are then re-machined to the proper size and restored to the original finishes.
New pistons, rings, and bearings are used to restore original specifications
and tolerances and proper fits and clearances.  The engine is then reassembled
using new and remanufactured components.  Inspection and testing are conducted
at various stages of the remanufacturing process, and each finished engine is
inspected and tested using computerized equipment to measure compression, oil
pressure and oil flow.  The Company has developed proprietary procedures and
controls to assure the quality of all of its remanufactured engines.  The
Company's engines are warranted up to 12,000 miles, and the Company offers
three year/36,000 miles warranties at an additional cost.

Incentive Bonus Program

    Throughout the entire remanufacturing process, quality is stressed and
built into every engine. To provide an incentive to its non-officer employees,
the Company has adopted its Yardstick incentive bonus program, which
emphasizes quality and efficiency.  Under the Yardstick program, which was
developed  over two years and fully implemented in July 1995, the Company
posts daily on an employee bulletin board the previous day's unit production,
the Company's operating statement for the previous day and month-to-date and
various other relevant data.  Employees are thereby able to gauge their

                                   -3-

<PAGE>

performance and understand how their contributions affect the Company's
business.  Participating employees are entitled to receive quarterly bonuses
based on a percentage of the Company's profitability.  Bonuses under the
Yardstick program are generally 3.5% of the participating employees' gross
quarterly wages.  All employees are entitled to participate at no cost to the
employee, provided that participating employees attend Company-sponsored
classes that teach employees how to read a financial statement, how the
Company earns money, how earning money insures job security and how individual
employees' efforts contribute to profits.

Marketing and Distribution

    Remanufacturing of replacement engines is a significant segment of the
automotive aftermarket industry.  The Company markets to discount automotive
parts chain stores, traditional automotive parts stores and repair facilities,
and fleets, which the Company believes constitute the vast majority of rebuilt
engine resellers, installers and/or users.  A number of the largest chains of
discount automotive parts stores in the United States obtain their
remanufactured domestic and Japanese engines from the Company, as well as from
other engine remanufacturers.  These chain stores,  The Pep Boys - Manny, Moe &
Jack, CSK Automotive, (formerly Northern Automotive Corporation) Paccar
Automotive, Inc. and Trak Auto Corporation, are the Company's largest
customers.  They accounted for approximately 71% of the Company's total sales
in 1996 as compared to approximately 68% in 1997.  Sales to each of The Pep
Boys - Manny, Moe & Jack and CSK Automotive, (formerly Northern Automotive
Corporation) individually accounted for greater than 10% of the Company's
sales in 1997 and together comprised 60%.  Although a majority of the Company's
sales are to large chain stores, the Company also does a substantial amount of
business with smaller chain stores and the local automotive trade, including
various automotive repair facilities, garages, fleets, new car dealerships and
service stations.

    Sales to discount automotive parts chain stores involve an efficient
distribution process.  Certain of these customers stock from four to
thirty-five of the Company's most popular engine configurations and place
special orders for other engines from among the Company's selection of over
1,500 engine types and variations.  Engines that are stocked by the discount
automotive parts chain stores are delivered directly by or on behalf of the
Company to the chain store's distribution centers, which then deliver the
engines directly to the chain stores for purchase by consumers.  Special
orders are usually remanufactured to order and shipped directly to the chain's
store making the sale to the consumer.

    The Company's marketing activities through 1995 had concentrated on sales
to the Southwest and Northwest operations of national and regional discount
automotive parts chain stores.  During 1996, the Company aggressively expanded
its nationwide market with existing customers as well as new chain store
customers by opening new distribution centers in Atlanta, Georgia, Cincinnati,
Ohio, and Harrisburg, Pennsylvania.  In January, 1997, the Company opened its
distribution center in Denver, Colorado.  In August, 1997, the Company
purchased substantially all of the assets of Wheeler Manufacturing of Macon,
Georgia.  In September, 1997, the Company closed its Atlanta distribution
center and transferred those goods to its new Macon, Georgia manufacturing
plant and distribution center.

    With the rate of growth the Company experienced during 1996, in October
1996 the Company recruited and hired a National Director of Sales and
Marketing, Mr. Glenn Berg, to implement its current marketing program to
include: first, the national operations of its existing national discount
automotive parts chain store customers; second, national discount automotive
parts chain stores not presently served by the Company; and third, regional
discount automotive parts chain stores and smaller buyers of remanufactured
engines located in regions of the country not presently served by the Company.

                                  -4-

<PAGE>

The Company markets its products principally through its senior officers,
national director of sales and marketing , and commissioned sales personnel
and rarely engages in wide-scale advertising or other promotional activities.
The Company's products are marketed under the names "BONDED MOTORS".

Competition

    The Company believes it is one of the largest remanufacturers of
replacement engines for domestic and Japanese imported engines for passenger
cars and light trucks servicing the remanufactured engine aftermarket in the
United States.  The Company's segment of the automotive aftermarket industry,
composed of engine remanufacturers, is highly competitive.  The Company's
competitors include a number of relatively large national, as well as smaller
regional and local, engine remanufacturers.  The Company also competes with
remanufacturers that are authorized by certain automobile manufacturers to
remanufacture their engines for authorized distribution to such manufacturers'
dealerships.  Some of these remanufacturers have greater resources than the
Company.

    A key competitive advantage of the Company is its ability to rapidly ship
engines.  The Company is able to provide such rapid delivery by maintaining a
large supply of cores and utilizing a flexible and efficient manufacturing
system that accomplishes a very short production cycle time.  This process
utilizes mobile carts on which engines are moved through the production cycle,
allowing special orders to move ahead of less time sensitive production to
ensure fast delivery of orders.  In addition, by adding four distribution
centers, the Company has developed its engine distribution network with the
goal of next-day delivery to all 48 contiguous states.

    Other elements of competition in the Company's industry include service and
reliability, and the price, quality, product performance and selection of
remanufactured engines as well as the availability of cores.  The Company
believes its ability to offer and distribute a full line of engines has been
and will continue to be an important factor in enabling the Company to compete
effectively.  The Company believes that its proposed expansion of inventory
into several regional distribution centers will permit the Company to provide
prompt delivery to customers on a national basis.  The Company believes this
will further enhance its competitive position in its segment of the automotive
aftermarket industry.

Governmental Regulation

    The Company's operations are subject to federal, state, and local laws and
regulations governing, among other things, emissions to air, discharge to
waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials.  The Company is not subject to any such
laws and regulations that are specific to the automotive aftermarket industry.
The Company believes that its business, operations and facilities have been and
are being operated in compliance in all material respects with applicable
environmental and health and safety laws and regulations, many of which provide
for substantial fines and criminal sanctions for violations.  The operation of
automotive parts remanufacturing plants, however, entails risks in these areas,
and there can be no assurance that the Company will not incur material costs
or liabilities or that environmental laws will not change so as to cause the
Company not to be in compliance.  In addition, potentially significant
expenditures could be required in order to comply with evolving environmental
and health and safety laws, regulations or requirements that may be adopted or
imposed in the future or evolving interpretations of existing laws, regulations
and requirements.  The Company believes, although there can be no assurance,
that the overall impact of compliance with regulations and legislation
protecting the environment will not have a material effect on its future
financial position or results of operations.

                                     -5-

<PAGE>

    In February 1996, the Company removed a 12,000 gallon underground storage
tank ("UST") at its Los Angeles production facility.  The UST was used to store
gasoline prior to 1993.  Analysis of soil samples taken during the removal of
the UST confirmed the absence of levels of contamination requiring remediation.
Accordingly, no provision for loss has been accrued in the accompanying
financial statements.  The cost of $20,000 for the removal of the UST and the
associated soil sampling was recognized as an expense during the year ended
December 31, 1995.  The Company operates two wastewater clarifiers at its
Los Angeles production facility, and a third clarifier was removed in 1994.
The Company retained an environmental consultant to perform soil sampling in
the area of the closed and the two active clarifiers.  Based upon the results
of such soil sampling the Company believes that costs, if any, to remediate
soil in the area of the clarifiers would not be material to the Company's
financial position or results of operation.  There is no assurance, however,
that further testing would not uncover additional contamination which could
materially affect the Company's financial position or results of operation.

Employees

    The Company has approximately 336 full time employees, of whom 41 are
salaried and 295 are employed on an hourly basis.  Of the Company's employees,
19 perform administrative functions and eight are commissioned sales
representatives.  None of the Company's employees is a party to any collective
bargaining agreement.  The Company has not experienced any work stoppages and
considers its employee relations to be excellent.  Many of the Company's
employees have enjoyed long terms of employment, several over twenty years,
and the average term of key personnel is over 10 years.  All of the Company's
non-officer employees are eligible to participate in the Company's Yardstick
incentive bonus program.  See "Business - Incentive Bonus Program."

ITEM 2. DESCRIPTION OF PROPERTIES.

    The Company currently maintains its principal facility in an unincorporated
area of Los Angeles County.  The facility is approximately 60,000 square feet
within four buildings, extensive outside storage areas and three parking lots.
The facility accommodates the Company's corporate headquarters and production,
warehouse and other functions.  The Company has occupied the main building
since 1974.  It added the second, third and fourth buildings in 1982, 1988,
and 1996 respectively.  The 25 year lease for the first three buildings,
extensive outside storage area and three parking lots provides for a monthly
rent of $8,000 and terminates January 31, 2015.  The lease provides for an
increase of monthly rent on February 1, 2000 and at five-year intervals
thereafter based upon the Consumer Price Index.  The facility is leased to
the Company by The Landon Family Trust.  The Company believes that the
terms of the lease are at least as favorable to the Company as those
which could be otherwise obtained in a transaction between the Company and
an unrelated third party.  In order to permit increased production at its
remanufacturing facility, in October, 1996 the Company leased the fourth
building, a 20,000 square foot warehouse, next door.  The lease for this
facility provides for a monthly rent of $5,000 and terminates on September 30,
1999. The Company also has a three year lease for its Georgia manufacturing
facility, a three year lease for its Washington distribution center, a two year
lease for its Ohio distribution center, a two year lease for its Pennsylvania
distribution center, and a three year lease for its Colorado distribution
center.

                                    -6-

<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

    There are no pending material legal proceedings to which the Company or
any of its properties is subject nor, to the knowledge of the Company, are
any legal proceedings threatened.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None.

                                     -7-

<PAGE>

                                   PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

    The Company's Common Stock, no par value, (the "Common Stock"), commenced
trading on April 2, 1996 on the over-the-counter market and is quoted on the
National Association of Securities Dealers' Automated Quotation ("NASDAQ")
National Market under the symbol BMTR.  The following table sets forth the high
and low bid prices for the common stock during each quarter of fiscal 1997 and
1996 as reported by NASDAQ.  The prices reported reflect inter-dealer
quotations, may not represent actual transactions and do not include retail
mark-ups, mark-downs or commissions.

                             Fiscal 1997           Fiscal 1996
                             -----------           -----------
                           High       Low       High       Low
                           ----       ---       ----       ---
First Quarter             11 1/8     7 3/4
Second Quarter            11 1/8     6 1/4      9 5/8     6 3/8
Third Quarter             12 1/4     6 3/4      8 3/8     6 1/4
Fourth Quarter             9 3/4     7 5/8     11 1/8     6 1/2

    As of December 31, 1997, there were 3,037,540 shares of Common Stock
outstanding.  On March 10, 1998, the Company estimates that it had 880
shareholders, comprised of 80 shareholders of record and 800 beneficial
shareholders whose shares are being held in brokerage firm accounts in
"street name".

    The Company has not declared or paid dividends on the Common Stock in
the past two fiscal year.

    The declaration of dividends and analysis in the future will be at the
election of the Board of Directors and depend upon earnings, capital
requirements and financial position of the Company, general economic
conditions, state law requirements and other factors.  The Company does not
expect to pay dividends in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
        OF OPERATIONS

General

    The following discussion analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.

    This Form 10-KSB contains forward-looking statements including, without
limitation, statements relating to the Company's plans, expectations,
intentions, and adequate resources, and are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.  The words
"believes," "intends," "expects," "plans," "anticipates," "estimates," or
"potential" and similar expressions identify forward-looking statements.  The
Company does not undertake to update, revise or correct any of the
forward-looking information.  Actual results may differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.  Some important factors that could cause the Company's actual results
or expectations to differ materially from those discussed in the
forward-looking statements include, but are not limited to, loss of the
Company's significant customers, changes in consumer demand for remanufactured
automobile engines, weather, fuel costs and availability, regulatory action,
Federal and State legislation, labor strikes, maintenance and capital
expenditures and local economic conditions.

                                     -8-

<PAGE>

Results of Operation

                                         Year Ended December 31,
                                         -----------------------
                                       1997        1996        1995
                                       ----        ----        ----
Net Sales                              100.0%      100.0%      100.0%
Cost of Goods Sold                      80.4        77.0        74.7

Gross Profit                            19.6        23.0        25.3
Selling , Gen'l and Admin Expenses      15.4        14.4        15.5

Operating Income                         4.2         8.6         9.8
Interest Expense, Net                    0.8         0.0         0.6
Other (Income) Expense                   0.0         0.0        (0.5)

Earnings Before Extraordinary Item       3.4         8.6         9.7
Extraordinary Item (Income)              0.0         0.0        (0.9)
Income Taxes (Benefit) Expense          (1.4)        0.2         1.2

Net Income                               4.8         8.4         9.4

Fiscal 1997 Compared to Fiscal 1996

    Net sales for fiscal 1997 increased $5,439,588 or 29.2% from $18,636,604
in 1996 to $24,076,192 in 1997.  The increase in sales is attributable to the
general growth of business with existing customers and to sales to new
customers.  During 1997 the Company opened its new Regional Distribution
Center ("RDC") in Denver, Colorado.  In August, 1997, the Company purchased
substantially all of the assets of Wheeler Manufacturing of Macon Georgia.
In September, 1997, the Company closed its Atlanta distribution center and
transferred those goods to its new Macon, Georgia manufacturing plant and
distribution center.  The RDC's allowed the Company to increase shipments
to its four key customers by 23.8%, from $13,203,133 in 1996 to $16,348,296 in
1997.  Sales to all other customers increased 42.2%, from $5,433,471 in 1996
to $7,727,896 in 1997.  This increase is attributable to geographic expansion
through the Company's RDC's.  Sales to the Company's two largest customers
increased 26.5%, from $11,467,143 in 1996 to $14,509,103 in 1997.

    Cost of goods sold increased 35.0% or $5,017,663 from the prior year.  Cost
of sales as a percentage of net sales increased from 77.0% in 1996 to 80.4%
in 1997.  The Company believes that this increase in cost of goods sold is
primarily attributable to the labor and overhead costs associated with the
expansion of the Company's production capacity as well as expensed start-up
costs associated with the new Macon, Georgia manufacturing facility.

    Selling, general and administrative expenses over the periods increased
38.0% or $1,021,174 from $2,685,029 in 1996 to $3,706,203 in 1997.  As a
percentage of sales, selling, general and administrative expenses increased
from 14.4% in 1996 to 15.4% in 1997.  These changes are primarily attributable
to the addition of new sales personnel, the increasing administrative expense
to support the growth of sales and the production.

    Interest expense increased from $68,657 in 1996 to $193,247 in 1997. The
increase was primarily attributable to borrowings for the twelve months ended
December 31, 1997 due to a build up of inventory and accounts receivable, which
are attributable to sales increases, and also due to the acquisition of Wheeler
Manufacturing.

                                     -9-

<PAGE>

    Pre-tax income decreased $779,038 or 48.7% over the period.  After tax
earnings decreased $424,861 or 27.0% for the twelve month periods from a year
earlier, due to the items mentioned above.

    The Company receives State of California tax credits for its hiring
practices and because of its location within the Los Angeles Revitalization
Zone (LARZ).  These credits may be carried forward through the year 2012, and
availability to earn these credits expired at December 31, 1997.  At present,
the Company is earning these tax credits in excess of the Company's 
California tax liability.  The net deferred credits are being reported as a
credit against total tax liabilities on the Company's income statement.  There
is additional legislation being considered by the California legislature to
continue availability to earn these credits beyond the current expiration date,
however no such legislation has been passed to date, and there is no assurance
that any new legislation will be passed into law.

Liquidity and Capital Resources

The Company's operations have been financed principally by borrowing under its
bank credit facility, and cash flows from operations.  As of December 31, 1997
the Company's working capital was $9,128,853.

Net cash used in operating activities during fiscal 1997 and fiscal 1996 was
$2,714,955 and 2,661,013, respectively.  In 1997 the Company increased
its inventory by $2,167,221 in order to meet increased demand for its products.

Net cash used in investing activities in 1997 and 1996 was $1,412,923 and
$647,607, respectively. The 1997 amount was primarily for the purchase of new
equipment for Los Angeles facility and the purchase of inventory, plant
machinery and equipment from Wheeler Manufacturing Company.

Net cash provided by financing activities in 1997 and 1996 was $4,351,423
and 3,268,381, respectively.  The 1997 amount was primarily from the
issurance of common stocks and borrowings from the bank.

In January, 1998 the Company amended its credit agreement with Comerica Bank
(the "bank").  The credit agreement provides a revolving credit facility in
an aggregate principal amount not exceeding $7,500,000, and the credit facility
is secured by a lien on substantially all of the assets of the Company.  This
facility has a maturity date of May 1, 2000, and provides for an interest
rate on borrowings at the lower of the bank's prime lending rate or LIBOR rate
plus 2.00%.  In addition, the bank has provided the Company with a specific
advance facility of up to $8,000,000 to replace all existing term loans, and
the credit is secured by a lien on substantially all of the assets of the
Company plus specific filings on equipment purchased. This facility has a
maturity date of two years from funding and provides for an interest rate
on borrowings at the lower of the bank's prime interest rate plus 0.25%,
LIBOR plus 2.25%, or Cost of Funds plus 2.25% for the tenor of each
obligation.  At December 31, 1997, the Company had borrowed $3,200,000 under
the revolving credit facility, and the Company had borrowed $856,523 under
the specific advance facility.

The Company's accounts receivable as of December 31, 1997 was $3,728,530.  This
represents an increase of $1,826,911 or 96.1% over accounts receivable on
December 31, 1996. December 1997 sales increased by 80.9% over December 1996
sales, which accounts for most of the accounts receivable increase.  Also,
customers have different payment terms, which causes accounts receivable as
a percentage of quarterly sales to increase or decrease as customer mix
changes.

The Company's inventory as of December 31, 1997 was $7,276,961 which is an
increase of $2,304,897 or 46.4% over inventory at December 31, 1996.  The
increase is primarily attributable to the Company's opening of one new
distribution center in January, 1997, and to increasing finished goods
inventory at all distribution centers.  In addition, the Company maintains a
large inventory at its Los Angeles facility in anticipation of increased demand
for the Company's products in 1998.

                                     -10-

<PAGE>

In 1996 and prior years, quarterly inventory values were estimated based upon
historical values.  At fiscal year ended December 31, 1996, a physical 
inventory was taken and an adjustment of $447,977 to inventory valuations
was made.  Because quarterly physical inventories were not taken throughout
1996, no quarterly adjustments could be calculated.

Beginning the first quarter of 1997, physical inventories have been taken on
a quarterly basis, resulting in no significant inventory valuation adjustment
at year ended 1997.  This procedure will continue throughout 1998.

The "Year 2000 issue" arises because most computer systems and programs were
designed to handle only a two-digit year, not a four-digit year.  When the
Year 2000 begins, these computers may interpret "00" as the year 1900 and
could either stop processing date-related computations or could process them
incorrectly.  The Company will commence, for all of its information systems,
a year 2000 date conversion project to address all necessary code changes,
testing and implementation and accordingly does not anticipate any internal
Year 2000 issues form its own information systems, databases or programs.
The Company is in the process of developing a plan to determine the impact
that third parties who are not Year 2000 compliant may have on the operations
of the Company.  Management has assessed the Year 2000 compliance expense
approximately in amount of $10,000.

The Company believes that the existing cash and unused borrowing facilities
and cashflow from operations will provide sufficient liquidity and enable
it to meet its current and foreseeable working capital requirements.

ITEM 7. FINANCIAL STATEMENTS

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

    Not applicable.


                                     -11-

<PAGE>

                                  PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT.

    The information required by this item is incorporated by reference herein
in the "Election of Directors" section of the Company's Proxy Statement to be
filed pursuant to Regulation 14A.

ITEM 10. EXECUTIVE COMPENSATION.

    The information required by this item is incorporated by reference herein
in the "Executive Compensation" section of the Company's Proxy Statement to be
filed pursuant to Regulation 14A.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The information required by this item is incorporated by reference herein
in the "Security Ownership of Management" section of the Company's Proxy
Statement to be filed pursuant to Regulation 14A.

ITEM 12. CERTAIN RELATIONSHIPS TO RELATED TRANSACTIONS.

    The information required by this item is incorporated by reference herein
in the "Certain Transactions" section of the Company's Proxy Statement to be
filed pursuant to Regulation 14A.

                                     -12-

<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

a.    EXHIBITS:

Number    Description of Exhibit

3.1       Amended and Restated Articles of Incorporation as filed with the
          California Secretary of State on March 15, 1996  (1)

3.3       Amended and Restated Bylaws  (1)

4.1       Form of Underwriters' Warrant Agreement  (1)

4.2       Form of Common Stock Certificate  (1)

4.3       1996 Stock Option Plan  (1)

4.4       1996 Non-Employee Director Stock Option Plan  (1)

10.1      Lease Agreements  (1) & (2)

10.2      Note to Aaron Landon  (1)

10.3      Employment Agreement with Aaron Landon  (1)

10.4      Employment Agreement with Buddy Mercer  (1)

10.5      Employment Agreement with Paul Sullivan  (1)

10.6      Loan Agreement with Metrobank  (2)

10.7      Form of Financial Consulting Agreement with Commonwealth Associates
          (1)

10.8      Agreement for Purchase and Sale of Assets and Real Property, dated 
          as of August 6, 1997, by and between Bonded Motors, Inc. and Wheelers
          Manufacturing Company, Inc.  (3)

10.9      Employment Agreement with Richard Funk  (4)

10.10     Lease Agreement between the Company and KEW Management Corp., dated
          as of December 5, 1996  (4)

10.11     Lease Agreement between the Company and Kidder Industrial, dated as 
          of February 11, 1997  (4)

10.12     Lease Agreement between the Company and Charles H. Wheeler, dated as
          of August 6, 1997  (4)


                                     -13-

<PAGE>

24.0      Power of Attorney  (1)

99.1      1996 Incentive Stock Plan, as amended  (5)

99.2      1996 Non-Employee Directors Stock Option Plan, as amended  (5)


(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-00402-LA) declared effective on April 2, 1996 (the "Registration
Statement").
(2) Incorporated by reference to the Company's Annual Report on Form 10KSB
filing dated March 14, 1997.
(3) Incorporated by reference to the Company's 8-K filing dated August 14,
1997.
(4) Filed herewith
(5) Incorporated by reference to the Company's Form S-8 filing dated
November 7, 1997.(No. 333-39829)

b. REPORTS ON FORM 8-K:

No reports on Form 8-K were filed by the Company during the fiscal quarter 
ended December 31, 1997.


                                     -14-

<PAGE>
<TABLE>
<CAPTION>
                                    BONDED MOTORS, INC.
                              INDEX TO FINANCIAL STATEMENTS

                                                                                      Page
<S>                                                                                   <C>
Independent Auditors' Report                                                           F-2

Financial Statements
   Balance Sheet as of December 31, 1997 and 1996                                      F-3
   Statements of Earnings for the years ended December 31, 1997 and 1996               F-4
   Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996   F-5
   Statements of Cash Flows for the years ended December 31, 1997 and 1996             F-6
   Notes to Financial Statements                                                       F-8
</TABLE>


                                           F-1
<PAGE>

                        INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Bonded Motors, Inc.:


We have audited the accompanying balance sheets of Bonded Motors, Inc. as
of December 31, 1997 and 1996 and the related statements of earnings,
shareholders' equity and cash flows for the years then ended.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bonded Motors, Inc. as
of December 31, 1997 and 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.


/S/KPMG PEAT MARWICK LLP
------------------------

Los Angeles, California
February 11, 1998

                                     F-2

<PAGE>

                              BONDED MOTORS, INC.
                                 Balance Sheets
                           December 31, 1997 and 1996

                 Asset                                     1997        1996 
                                                        ----------  ----------
Current assets:
  Cash                                                  $  297,043      73,498
  Trade accounts receivable (less allowance for
   doubtful accounts of $118,586 in 1997 and 
   $67,866 in 1996) (note 3)                             3,728,530   1,901,619

  Inventories:
    Parts (note 3)                                       1,320,005     823,383
    Work in process                                        622,159     293,688
    Finished goods (note 3)                              5,334,797   3,854,993
                                                        ----------  ----------
                                                         7,276,961   4,972,064
                                                        ----------  ----------

  Deferred tax assets (note 6)                             459,853     421,414
  Prepaid expenses and other current assets                183,732     143,771
  Prepaid income taxes (note 6)                            177,700     287,004
                                                        ----------  ----------
    Total current assets                                12,123,819   7,799,370
                                                        ----------  ----------

Property and equipment, at cost:
  Machinery and equipment                                2,463,791   1,478,181
  Furniture and fixtures                                   432,397     358,215
                                                        ----------  ----------
                                                         2,896,188   1,836,396
  Less accumulated depreciation                          1,308,166   1,131,640
                                                        ----------  ----------
    Net property and equipment                           1,588,022     704,756
                                                        ----------  ----------

Goodwill, less accumulated amortization of $7,945
  (note 9)                                                 203,934        -
Deferred tax assets (note 6)                             1,229,043     520,223
Other assets                                                 5,709       5,551
                                                        ----------  ----------
                                                       $15,150,527   9,029,900
                                                        ==========  ==========

          Liabilities and Shareholders' Equity             1997        1996
                                                        ----------  ----------
Current liabilities:
  Current maturities of notes payable to related
   parties (note 5)                                     $  100,000     100,000
  Current installments of notes payable to bank
   (note 4)                                                385,128        -
  Accounts payable                                       1,672,230   1,218,004
  Accrued expenses                                         427,608     319,452
  Accrued warranty obligations                             410,000     350,000
                                                        ----------  ----------
    Total current liabilities                            2,994,966   1,987,456
                                                        ----------  ----------

Notes payable to bank, excluding current
  installments (note 4)                                    471,395        -
Long-term debt (note 4)                                  3,200,000        -   

Commitments and contingencies (note 7)

Shareholders' equity (note 10):
  Preferred stock, no par value.  Authorized
    1,000,000 shares; none issued and outstanding             -           -
  Common stock, no par value.  Authorized
    10,000,000 shares; issued and outstanding
    3,037,540 shares and 3,002,940 shares as of 
    December 31, 1997 and 1996, respectively.            4,873,319   4,678,419
  Retained earnings                                      3,710,847   2,564,025
  Notes receivable from exercise of stock options         (100,000)   (200,000)
                                                        ----------  ----------
    Total shareholders' equity                           8,484,166   7,042,444
                                                        ----------  ----------
                                                       $15,150,527   9,029,900
                                                        ==========  ==========
See accompanying notes to financial statements

                                     F-3

<PAGE>

                             BONDED MOTORS, INC.
                           Statements of Earnings
                   Years ended December 31, 1997 and 1996

                                                         1997          1996
                                                      ----------    ----------

Net sales                                            $24,076,192    18,636,604
Cost of sales                                         19,368,877    14,351,214
                                                      ----------    ----------
      Gross profit                                     4,707,315     4,285,390

Selling, general and administrative expenses           3,706,203     2,685,029
                                                      ----------    ----------
      Earnings from operations                         1,001,112     1,600,361

Other (expense) income:
  Interest expense                                      (193,247)      (68,657)
  Interest income                                         16,971        68,650
  Other                                                   (3,520)         -   
                                                      ----------    ----------
      Earnings before income taxes                       821,316     1,600,354

Income tax (benefit) expense (note 6)                   (325,506)       28,671
                                                      ----------    ----------
      Net earnings                                   $ 1,146,822     1,571,683
                                                      ==========    ==========

Basic earnings per share                             $      .38           .57
Diluted earnings per share                                  .37           .56
                                                      ==========    ==========
Weighted average common shares outstanding
  (notes 2 and 10)                                     3,021,000     2,750,000
                                                      ==========    ==========
Weighted average common and common equivalent shares
  outstanding (notes 2 and 10)                         3,116,000     2,797,000
                                                      ==========    ==========

See accompanying notes to financial statements

                                     F-4

<PAGE>
                                         BONDED MOTORS, INC.
                                 Statements of Shareholders' Equity
                               Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                                             Notes  
                                                                           receivable         
                                                                         from exercise       Net
                                          Common stock         Retained     of stock   shareholders'
                                      Shares       Amount      earnings       options       equity
                                     ---------   ---------    ----------    --------       ---------
<S>                                  <C>        <C>           <C>          <C>             <C>

Balance at December 31, 1995         2,000,000  $  212,500      992,342     (200,000)      1,004,842

Public sale of common stock at
  $5.875 per share, net of expenses  1,000,000   4,436,151         -            -          4,436,151

Issuance of common stock to employee     2,940      29,768         -            -             29,768

Net earnings                              -           -       1,571,683         -          1,571,683
                                     ---------   ---------    ---------     --------       ---------
Balance at December 31, 1996         3,002,940   4,678,419    2,564,025     (200,000)      7,042,444

Exercise of stock options               34,600     194,900         -            -            194,900

Payment of notes receivable               -           -            -         100,000         100,000

Net earnings                              -           -       1,146,822         -          1,146,822
                                     ---------   ---------    ---------     --------       ---------
Balance at December 31, 1997         3,037,540  $4,873,319    3,710,847     (100,000)      8,484,166
                                     =========   =========    =========     ========       =========
</TABLE>

See accompanying notes to financial statements.

                                               F-5

<PAGE>
<TABLE>
<CAPTION>
                                  BONDED MOTORS, INC.
                               Statements of Cash Flows
                          Years ended December 31, 1997 and 1996
                                                                   1997        1996
                                                                 ---------   ---------
<S>                                                             <C>         <C>
Cash flows from operating activities: 
  Net earnings                                                  $1,146,822   1,571,683
                                                                 ---------   ---------
  Adjustments to reconcile net earnings to net cash used in
   operating activities: 
    Depreciation and amortization                                  184,526     107,297
    Loss on sale of property and equipment                           3,520        -
    (Increase) decrease in assets:
      Accounts receivable                                       (1,826,911)   (323,436)
      Inventories                                               (2,167,221) (2,869,308)
      Prepaid expenses and other assets                            (40,118)    109,334
      Deferred tax assets                                         (747,259)   (422,637)
    Increase (decrease) in liabilities:
      Accounts payable                                             454,226    (275,367)
      Accrued expenses                                             108,156      (8,640)
      Accrued warranty obligations                                  60,000      60,000
      Income taxes payable                                         109,304    (609,939)
                                                                 ---------   ---------
        Total adjustments                                       (3,861,777) (4,232,696)
                                                                 ---------   ---------
        Net cash used in operating activities                   (2,714,955) (2,661,013)
                                                                 ---------   ---------
Cash flows from investing activities:
      Purchases of equipment                                      (755,405)   (647,607)
      Acquisition of Wheeler Manufacturing                        (667,318)       -
      Proceeds from sale of equipment                                9,800        -
                                                                 ---------   ---------
        Net cash used in investing activities                   (1,412,923)   (647,607)
                                                                 ---------   ---------

</TABLE>
                                     (Continued)

                                         F-6

<PAGE>
<TABLE>
<CAPTION>
                                  BONDED MOTORS, INC.
                          Statements of Cash Flows, Continued
                                                                   1,997       1,996 
                                                                 ---------   ---------
<S>                                                             <C>         <C>

Cash flows from financing activities:
  Net proceeds from exercise of stock options                   $  194,900   4,436,151
  Borrowings from bank                                           5,730,000   1,820,000
  Repayments of notes payable to related parties                      -       (917,770)
  Repayments of bank borrowings                                 (1,673,477) (2,070,000)
  Prepayment on notes receivable from sale of stock                100,000        -
                                                                 ---------   ---------
      Net cash provided by financing activities                  4,351,423   3,268,381
                                                                 ---------   ---------
      Net increase (decrease) in cash                              223,545     (40,239)

Cash at beginning of year                                           73,498     113,737
                                                                 ---------   ---------
Cash at end of year                                             $  297,043      73,498
                                                                 =========   =========


Supplemental disclosure of cash flow information:
  Cash paid for:
    Interest                                                    $  159,368      74,476
    Income taxes                                                   278,998   1,073,000
                                                                 =========   =========
</TABLE>

See accompanying notes to financial statements.

                                         F-7
<PAGE>
                             BONDED MOTORS, INC.
                        Notes to Financial Statements
                         December 31, 1997 and 1996

(1) The Company

    Bonded Motors, Inc. (the Company) remanufactures automobile engines
    primarily for domestic and Japanese imported cars and light trucks in the
    United States for resale to automotive retailers, end users and
    installers.  Substantially all of the Company's sales are currently
    generated in the Southwest and Northwest regions of the United States,
    including those to significant customers (note 8).  

(2) Summary of Significant Accounting Policies

    Inventories

    Inventories are stated at the lower of average cost or market (net
    realizable value).  Included in inventories were cores of $1,778,179 and
    $1,190,801 at December 31, 1997 and 1996, respectively.

    Revenue Recognition and Core Accounting

    Revenue is recognized upon shipment of product, net of a provision for
    core returns.  The Company's customers are encouraged to return their old,
    rebuildable core as a credit against the identical engine purchased.  The
    Company identifies the returned core to the original customer invoice and
    issues a credit memo equal to the core charge reflected on the original
    invoice.  These core returns, recorded as a reduction in net sales, were
    $6,729,801 and $5,024,263 during the years ended December 31, 1997
    and 1996, respectively.

    Cores returned from customers are recorded into inventory on the same
    basis as the Company records purchases of cores from independent core
    suppliers into inventory, at the lower of average cost or market (net
    realizable value).  

    Product Warranty

    The Company provides the ultimate customer with a warranty with each
    engine.  Warranty expense is accrued at the time of sale based upon actual
    claims history.  

    Goodwill 

    Goodwill represents the excess of the purchase price over the fair value
    of the net assets acquired resulting from a business combination and is
    being amortized on a straight-line basis over ten years. 

    Depreciation and Amortization

    The Company provides for depreciation of machinery and equipment by use
    of the straight-line and declining-balance methods over the estimated
    useful lives of the related assets, which range from 3 to 12 years.
    Amortization of leasehold improvements is provided under the straight-
    line method over the term of the lease, not to exceed the economic useful
    lives of the related assets.

    Research and Development Costs

    Research and development costs are charged to expense as incurred.
    Research and development costs aggregated approximately $66,000 during the
    year ended December 31, 1996.  No research and development costs were
    incurred in 1997.

                                     F-8
<PAGE>

                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued 

    Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

    The Company adopted the provisions of SFAS No. 121, "Accounting for the
    Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
    Of," on January 1, 1996.  This statement requires that long-lived assets
    and certain identifiable intangibles be reviewed for impairment whenever
    events or changes in circumstances indicate that the carrying amount of an
    asset may not be recoverable.  Recoverability of assets to be held and
    used is measured by a comparison of the carrying amount of an asset to
    future undiscounted net operating cash flows expected to be generated by
    the asset.  If such assets are considered to be impaired, the impairment to
    be recognized is measured by the amount by which the carrying amount of the
    assets exceeds the fair value of the assets.  Assets to be disposed of are
    reported at the lower of the carrying amount or fair value, less costs to
    sell.  Adoption of this statement did not have a material impact on the
    Company's financial position, results of operations or liquidity. 

    Income Taxes

    The Company accounts for income taxes under the asset and liability
    method, whereby deferred tax assets and liabilities are recognized for
    the future tax consequences attributable to differences between financial
    statement carrying amounts of existing assets and liabilities and their
    respective tax bases.  Deferred tax assets and liabilities are measured
    using tax rates expected to apply to taxable income in the years in which
    those temporary differences are expected to be recovered or settled.  The
    effect on deferred tax assets and liabilities of a change in tax rates is
    recognized in income in the period that includes the enactment date.  The
    realizability of deferred tax assets is assessed throughout the year and
    a valuation allowance is established accordingly.  

    Earnings per Share

    The Financial Accounting Standards Board issued statement No. 128,
    "Earnings per Share" (SFAS No. 128), in March  1997 and effective for
    fiscal years ending after December 15, 1997.  The Company adopted SFAS
    No. 128 in 1997.  This statement requires the presentation of "Basic"
    earnings per share which represents net earnings divided by the weighted
    average shares outstanding, excluding all common stock equivalents.  A
    dual presentation of "Diluted" earnings per share reflecting the dilutive
    effects of all common stock equivalents is also required.  Figures for
    1996 have been restated for the effects of the adoption of SFAS No. 128.
    
    The weighted average common shares outstanding during the years ended
    December 31, 1997 and 1996 were 3,021,000 and 2,750,000, respectively.
    For purposes of diluted earnings per share, the incremental common
    equivalent shares due to outstanding stock options and warrants during
    the years ended December 31, 1997 and 1996 were 95,000 and 47,000,
    respectively.  No adjustments to net income were made for the purpose
    of computing diluted earnings per share.  

    Stock-Based Compensation

    The Company has two option plans which reserve shares of common stock
    for issuance to executives, key employees and directors.  The Company has
    adopted the disclosure-only provisions of Statement of Financial
    Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
    Accordingly, the Company is recognizing compensation cost pursuant to the
    provisions of APB No. 25.  Had compensation cost for the Company's two
    stock option plans been determined based on the fair value at the grant

                                     F-9
<PAGE>

                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued


    date for awards in 1997 and 1996 consistent with the provisions of
    SFAS No. 123, the Company's net earnings and earnings per share would
    have been reduced to the pro forma amount as indicated below:

                                                    1997             1996
                                               ------------     ------------

    Net earnings as reported                  $1,146,822        $1,571,683

    Pro forma net earnings                       453,567           952,151

    Basic net earnings per share as reported        .38               .57

    Pro forma basic net earnings per share          .15               .35
                                               ============     ============


    The fair value of each option grant is estimated on the date of grant
    using the Black-Scholes option-pricing model with the following weighted
    average assumptions used for grants in 1997 and 1996: dividend yield of
    0%; expected volatility of 34% and 35%, respectively; risk-free interest
    rate of between 6.0% and 6.7%; and expected lives of five years.

    The weighted average fair value of options granted during 1997 and 1996
    is $3.62 and $2.48, respectively.  

    Fair Value of Financial Instruments

    The carrying amounts of accounts receivable, inventories, accounts
    payable, accrued expenses and notes payable to bank and related parties
    approximate fair value because of the short maturity of these items.  

    Use of Estimates

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make certain
    estimates and assumptions.   These affect the reported amounts of assets,
    liabilities, revenues and expenses and the amount of any contingent
    assets or liabilities disclosed in the financial statements.  Actual
    results could differ from the estimates made. 

(3) Core Credits

    The Company has a core exchange program, whereby customers are entitled
    to receive a credit for any cores returned.  A core provision is recorded
    against accounts receivable for the credits expected to be issued with
    respect to sales made during the year.  This provision totaled $301,000
    and $181,000 for the years ended December 31, 1997 and 1996, respectively.
    In addition, the cost of those cores expected to be returned are added to
    parts inventory at cost.  This adjustment totaled $180,000 and $108,000 at
    December 31, 1997 and 1996, respectively.  

                                     F-10

<PAGE>

                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued

(4) Long-Term Debt and Notes Payable to Bank

    Long-Term Debt

    In January 1998, the Company entered into an amended credit agreement
    (Agreement) providing for a revolving line of credit for borrowings up to
    $7,500,000 through May 1, 2000.  Borrowings under the Agreement bear
    interest at LIBOR (5.84% at December 31, 1997) plus 2.0% or at prime
    (8.50% at December 31, 1997).  The choice of the interest rate is at the
    discretion of the Company.  Borrowings under the line of credit are
    secured by the Company's assets.  Total amounts outstanding under the
    revolving line of credit at December 31, 1997 were $3,200,000.  The
    Company had available borrowings under the line of credit of $4,300,000
    at December 31, 1997.

    The Agreement also provides for an acquisition facility for borrowings up
    to $8,000,000 for a period of two years from the date of funding.  This
    facility is to be used for general corporate purposes and in the event the
    Company enters into an acquisition in the automotive industry.  Borrowings
    under the credit agreement bear interest at prime plus 0.25% or LIBOR plus
    2.25% or cost of funds plus 2.25% and are secured by the assets of the
    Company and of the acquired company. The choice of the interest rate is at
    the discretion of the Company.  At December 31, 1997, $856,523 had been
    drawn down and were outstanding under this facility.  The Company had
    available borrowings under this facility of $7,143,477 at December 31,
    1997.

    The Agreement includes various financial covenants, the more significant
    of which are tangible net worth, debt coverage ratio, senior debt to
    tangible net worth and quick ratio.  The Company was in compliance with
    all such covenants as of December 31, 1997.  

    Notes Payable to Bank

    The Company's notes payable to bank consisted of the following at
    December 31, 1997 and 1996:


                                                              1997       1996
                                                          ---------   ---------

  Note payable to bank, payable in monthly installments
    of $3,188 plus interest at prime plus .375%, maturing
    December 2, 1999
                                                          $  73,323       -

  Note payable to bank, payable in monthly installments
    of $20,833 plus interest at prime, maturing August 1,
    2002                                                    465,491       -

  Note payable to bank, payable in monthly installments
    of $8,073 plus interest at prime plus .37%, maturing
    August 1, 2002                                          317,709       -
                                                          ---------   ---------

    Total notes payable to bank                             856,523       -

  Less installments due within one year                     385,128       -
                                                          ---------   ---------

    Notes payable to bank, excluding current installments $ 471,395       -
                                                          =========   =========

  In January 1998, all the above term loans were placed under the $8,000,000
  acquisition facility under the amended Agreement.  The term of the loans
  remained the same under this new facility.

                                     F-11
<PAGE>

                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued 

(5) Related Party Transactions

    Notes payable to related parties consisted of the following:

                                                              1997       1996

                                                          ---------   ---------

    Note payable to affiliate of shareholder, non-
    interest bearing, unsecured and due on demand         $ 100,000     100,000
      Less current maturities                               100,000     100,000
                                                          ---------   ---------

                                                          $    -           -
                                                          =========   =========


    Interest incurred on notes payable to related parties was $17,251 during
    the year ended December 31, 1996.  No interest was incurred in 1997.

    In the normal course of business, the Company purchased cores from a
    relative of the Chief Executive Officer and majority shareholder.  Total
    purchases were $462,000 in the year ended December 31, 1996.  No amounts
    were outstanding in relation to those purchases by the Company at
    December 31, 1996.  No such purchases were made during 1997.  

(6) Income Taxes

    Income tax (benefit) expense is comprised of the following:


                                         1997       1996
                                     ---------   ---------

                   Current:
                     Federal         $ 409,774     446,390
                     State              11,978       4,918
                                     ---------   ---------
                                       421,752     451,308
                                     ---------   ---------

                   Deferred:
                     Federal          (109,959)     25,674
                     State            (637,299)   (448,311)
                                     ---------   ---------
                                      (747,258)   (422,637)
                                     ---------   ---------
                                     $(325,506)     28,671
                                     =========   =========

                                     F-12
<PAGE>

                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued 

    Actual income tax (benefit) expense differs from those obtained by
    applying the Federal income tax rate of 34% to earnings before income
    taxes and extraordinary item as follows:


                                                           1997        1996
                                                        ---------   ---------
Computed "expected" income taxes                        $ 279,000     544,000
State income taxes, net of Federal income tax benefit      89,000      98,000
State income tax credits earned                          (718,000)   (600,000)
Other                                                      24,494     (13,329)
                                                        ---------   ---------
                                                        $(325,506)     28,671
                                                        =========   =========

    The primary components of temporary differences which give rise to
    deferred tax assets and liabilities at December 31, 1997 and 1996 are:


                                                           1997        1996
                                                        ----------  ----------

Deferred tax assets:
  State tax credits                                     $1,387,850    716,267
  Warranty provision                                       139,400    140,350
  Sales returns allowance                                  160,893    114,201
  Allowance for doubtful accounts                           40,319     27,214
  Other                                                    176,037     32,213
                                                        ----------  ----------

    Total gross deferred tax assets                      1,904,499  1,030,245
                                                        ==========  ==========


Deferred tax liabilities:
  Depreciation                                              23,807     15,910
  Sales returns allowance                                  102,402     72,698
  Other                                                     89,394       -
                                                        ----------  ----------
    Total gross deferred tax liabilities                   215,603     88,608
                                                        ----------  ----------
    Net deferred tax assets                             $1,688,896    941,637
                                                        ==========  ==========


    In assessing the realizability of deferred tax assets, management
    considers whether it is more likely than not that some portion or all
    of the deferred tax assets will not be realized.  The ultimate
    realization of deferred tax assets is dependent upon the generation of
    future taxable income during the periods in which those temporary
    differences become deductible.  Management considers the scheduled
    reversal of deferred tax liabilities, projected future taxable income
    and tax planning strategies in making this assessment.  Based upon the
    level of historical taxable income and projections for future taxable
    income over the periods which the deferred tax assets are deductible,
    management believes it is more likely than not the Company will realize
    the benefits of these deductible differences at December 31, 1997.
    The amount of the deferred tax asset considered realizable, however,
    could be reduced in the near term if the Company's estimate of future
    taxable income is reduced.

                                     F-13

<PAGE>
                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued


    At December 31, 1997 and 1996, the Company had California state tax credit
    carryforwards of approximately $1,388,000 and $716,000, respectively,
    available to offset future taxable income, if any, through 2012.  Effective
    January 1, 1998, the California state credit program ceased and no further
    credits are currently anticipated to be earned.

(7) Commitments and Contingencies

    Leases

    The Company leases certain facilities under a noncancelable operating
    lease through 2015 from its major shareholder.  The Company also leases
    other facilities and certain equipment under noncancelable operating
    leases through 2000.  Rental expense for the years ended December 31,
    1997 and 1996 amounted to $282,847 and $132,066, respectively, of which
    approximately $96,000 was incurred under the lease with the shareholder
    in both 1997 and 1996.

    Future minimum lease payments under these leases at December 31, 1997 are
    as follows:  
                      1998               $   315,000
                      1999                   258,000
                      2000                   136,000
                      2001                    96,000
                      2002                    96,000
                      Thereafter           1,248,000
                                          ----------
                                         $ 2,149,000
                                         ===========

    Environmental

    The Company operates two wastewater clarifiers at its Los Angeles
    production facility and a third clarifier was removed in 1994.  In
    February 1996, the Company retained an environmental consultant to
    perform soil sampling in the area of the closed and the two active
    clarifiers.  The consultant concluded that in his opinion, based on the
    data collected, there is a high probability that remedial costs to reduce
    the concentrations of soil contaminants in the vicinity of the clarifiers
    will not exceed $100,000.  The Company believes that the cost to remediate,
    if any, will not be material to the Company's financial position or results
    of operations.  There is no assurance, however, that further testing would
    not uncover additional contamination, which might require remediation.
    The ultimate costs, if any, related to this matter are indeterminable,
    and no provision for loss has been accrued in the accompanying financial
    statements.  

    Other

    In December 1995, the Company entered into employment agreements with its
    officers for three-year terms providing for base salaries plus bonuses.

    The Company is subject to certain miscellaneous legal claims in the
    ordinary course of business.  Management does not believe that any
    liability as a result of adverse settlement of such claims would have a
    material impact on the accompanying financial statements.

                                     F-14

<PAGE>
                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued


(8) Concentration of Credit Risk and Significant Customers

    The Company sells its products principally to customers in the Southwest
    and Northwest regions of the United States.  Management performs regular
    evaluations concerning the ability of its customers to satisfy their
    obligations and records a provision for doubtful accounts based upon these
    evaluations.  The Company's credit losses for the period presented were not
    material and have not exceeded management's estimates.

    The Company had sales with two significant customers constituting
    approximately 26% and 34%, respectively,  of net sales in 1997 and 30%
    and 32%, respectively, of net sales in 1996.  Additionally, these
    customers comprised 25% and 47%, respectively, of accounts receivable at
    December 31, 1997 and 28% and 47%, respectively, of accounts receivable at
    December 31, 1996.  The loss of either of these customers could have a
    material adverse effect on the Company.

(9) Acquisition

    On August 6, 1997, the Company acquired certain assets of Wheeler
    Manufacturing of Macon, Georgia, an automotive engine remanufacturing
    firm.  The Company accounted for the acquisition using the purchase
    method.  This purchase included manufacturing machinery and equipment,
    plant equipment, office furniture, fixtures and equipment, automotive
    parts inventory and supplies.  The excess of acquisition costs over the
    fair value of net assets acquired is included in and has been allocated
    to goodwill.  Goodwill is amortized on a straight-line basis over a
    ten-year period.  The fair values of the assets acquired were as follows
    on the acquisition date.

            Inventories                        $  137,676
            Plant, machinery and equipment        317,762
            Goodwill                              211,880
                                               ----------
              Total acquisition costs          $  667,318
                                               ==========

(10)Shareholders' Equity, Stock Options and Stock Warrants

    In April 1996, the Company completed an underwritten initial public
    offering of 1,000,000 shares of its common stock, at a public offering
    price of $5.875 per share (the Offering).  The net proceeds from the
    Offering of approximately $4,436,151 were used in part to repay a portion
    of the Company's debt, and the balance was used to fund working capital
    requirements.

    In December 1995, the Company amended its Articles of Incorporation to
    authorize 1,000,000 shares of preferred stock and increase the authorized
    shares of common stock to 10,000,000 shares.  In connection with this
    amendment, the Company effected a 3,600-for-1 common stock split.

                                     F-15

<PAGE>
                             BONDED MOTORS, INC.
                  Notes to Financial Statements, Continued


    During March 1994, the Company granted, at estimated fair market value,
    stock options to two of its officers for the purchase of an ownership
    interest in the Company aggregating 10%.  These stock options were
    exercised during December 1995 for an aggregate amount of $200,000.
    The payments for shares issued pursuant to these stock options were made
    through the issuance of promissory notes from these officers.  The notes
    are secured by the underlying shares and certain real property, bear
    interest at 8% and are due on or before December 7, 2002.  During 1997,
    one of the officers repaid their note of $100,000.

    The Company adopted a stock option plan in January 1996 which provides
    for the issuance of options to employees, officers and directors of the
    Company to purchase up to an aggregate of 400,000 shares of common stock.
    In 1997, the plan was amended to increase the number of shares of common
    stock that could be purchased to an aggregate of 600,000 shares.  During
    1997 and 1996, the Company issued 185,000 and 255,000 options,
    respectively, with exercise prices ranging between $5.50 and $10.00, the
    estimated fair market value at date of grant, with vesting periods of
    between one and three years and exercise dates of between one and five
    years from the date of issuance of the option.  During 1997, 34,600
    options were exercised for total proceeds of $194,900 and 7,500 options
    were canceled upon termination of employment by one of the employees.
    Total outstanding options under this plan were 400,400 as of December 31,
    1997, of which 119,500 were exercisable.

    The Company also adopted a directors' plan in January 1996 which provides
    for the issuance of options to outside directors of the Company to
    purchase up to an aggregate of 50,000 shares of common stock.  During 1997
    and 1996, 6,000 and 20,000 options were issued, respectively, with exercise
    prices ranging between $6.50 and $7.375, the estimated fair market value at
    date of grant.  During 1997, 10,000 options were canceled.  Total
    outstanding options under this plan were 16,000 as of December 31, 1997,
    of which 10,900 were exercisable.  

    During 1996, the Company issued 100,000 warrants to purchase common stock
    to the Company's underwriters on completion of the Company's initial public
    offering.  These warrants have exercise prices of $7.05 per share, the then
    estimated fair market value, vesting over one year, with a five-year term.
    Warrants of 100,000 are outstanding as of December 31, 1997, all of which
    were exercisable.  

(11)Significant Fourth-Quarter Adjustment

    During the fourth quarter of the year ended December 31, 1996, the Company
    recorded an adjustment of $447,977 for the effects of a change in the
    Company's estimate of overhead costs included in finished engine inventory.

                                     F-16

<PAGE>

                                 SIGNATURES

    In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto 
duly authorized.

Date:  March 10, 1998

                                                     BONDED MOTORS, INC.

                                                     By: /S/ AARON LANDON
                                                        -----------------
                                                     Aaron Landon,
                                                     Chairman of the Board and
                                                     Chief Executive Officer

    In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.


SIGNATURE                TITLE                                    DATE

/S/ AARON LANDON           Chairman of the Board,                March 10, 1998
    Aaron Landon           Chief Executive Officer and Director
                           (Principal executive officer)

/S/ RICHARD FUNK           President and Director                March 10, 1998
    Richard Funk

/S/ BUDDY MERCER           Chief Operating Officer and Director  March 10, 1998
    Buddy Mercer

/S/ PAUL SULLIVAN          Chief Financial Officer and Director  March 10, 1998
    Paul Sullivan

/S/ CORNELIUS P. McCARTHY  Director                              March 10, 1998
    Cornelius P. McCarthy

/S/ EDWARD T. BRADFORD     Director                              March 10, 1998
    Edward T. Bradford

/S/ JOHN F. CREAMER        Director                              March 10, 1998
    John F. Creamer

                                     -15-

<PAGE>

                              Index to Exhibits

Number    Description of Exhibit                                     Page
------    ----------------------                                     -----

10.9      Employment Agreement with Richard Funk                      E-1

10.10     Lease Agreement between the Company and KEW
          Management Corp., dated as of December 5, 1996              E-13

10.11     Lease Agreement between the Company and Kidder              
          Industrial, dated as of February 11, 1997                   E-26

10.12     Lease Agreement between the Company and Charles             
          H. Wheeler, dated as of August 6, 1997                      E-45

<PAGE>

                                Exhibit 10.9

BONDED MOTORS, INC.
7522 S. Maie Ave., Los Angeles, CA 90001
(213)583-8631  Fax (213)589-2900


October 24, 1997



                            EMPLOYMENT AGREEMENT


To:  RICHARD FUNK

Dear Richard:

This letter will confirm our agreement regarding your employment by Bonded
Motors, Inc. (the "Company").

     1.  Position/Duties: You will be employed as President, and continue to
         ---------------
serve as a member of the Board of Directors.  Your employment and duties will
commence November 3, 1997.  You will be expected to devote your full time and
attention to the business and affairs of the Company, and to perform such
duties and maintain such standards of conduct as are requested of you by the
Chief Executive Officer and/or Board of Directors, consistent with your title
and position in the Company.  Regardless of any inference to the contrary,
such employment will be an employment at will within the context of applicable
California law.

     2.  Compensation: As compensation for your services you will receive the
         ------------
following:

         a)  Salary:  You shall receive a salary of $14,166.67 per month,
             ------
payable semi-monthly.  Such salary will be reviewed on an annual basis and
adjusted consistent with your performance and the performance of the Company.
In addition, you will have an incentive bonus plan, which is attached hereto.

         b)  Expenses:  You will be reimbursed for all reasonable out-of-pocket
             --------
expenses incurred by you in the performance of your duties promptly upon the
submission and approval of an expense report covering such expenses.

         c)  Expense Allowances:  You will receive a monthly housing allowance
             ------------------
of $1,300 per month and a monthly auto allowance of $500 per month.  You will
be reimbursed for your existing medical insurance plan.

                                     E-1

<PAGE>

     3.  Stock Options:  Provided you join the Company on or before November 3,
         -------------
1997, the Company will grant you an incentive stock option covering 100,000
shares substantially in the form of the Incentive Stock Option Agreement
attached as Exhibit A to this Agreement.

     All of the stock issued pursuant to such options shall be subject to a
Buy/Sell Agreement which will enable the Company to repurchase such stock at
the then fair market value if you cease to be an employee of the Company.
There are currently authorized for issuance 10 million shares, of which
3,032,940 are presently issued and outstanding.  Any further issuances of stock
will dilute your percentage of the total outstanding stock of the Company.

     4.  Benefits:  Subject to any applicable law, you will be eligible to
participate in benefit programs now or in the future provided by the Company
for its employees in general or executives of the same level of responsibility.

     5.  Employee Invention and Secrecy Agreement:  Concurrently with execution
of this Agreement, you will execute the Company's standard Employee Invention
and Secretary Agreement, which is included as Exhibit B to this Agreement.

     The provisions of this offer letter and the conditions of your employment
shall be subject to and interpreted in accordance with the laws of the State of
California.

     Richard, I am looking forward to having you join Bonded Motors, Inc. and
Believe that you will make a valuable contribution to the future success of the
Company.  If the foregoing terms of employment are agreeable to you, please
sign and return to me a copy of this letter to indicate your acceptance of
employment as provided.  This offer, if not accepted, will expire on October
31, 1997.


Very truly your,

BONDED MOTORS, INC.

By:/S/AARON LANDON
   --------------------------------
     Aaron Landon, Chief Executive Officer

ACCEPTED:

/S/RICHARD FUNK
-----------------------------
Richard Funk

                                     E-2

<PAGE>


                                  EXHIBIT A

                             BONDED MOTORS, INC.

                      INCENTIVE STOCK OPTION AGREEMENT


    THIS INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is made and entered
into as of the date set forth below, by and between BONDED MOTORS, INC., a
California corporation (the "Company"), and the employee of the Company named
in Section 1(b)  ("Optionee").

    In consideration of the covenants herein set forth, the parties hereto
agree as follows: 

1.    Option Information.

      (a)  Date of Option:    November 3, 1997

      (b)  Optionee:          Richard Funk

      (c)  Number of Shares:  100,000

      (d)  Exercise Price:    $8.625
 
2.    Acknowledgements.

      (a)  Optionee is an employee of the Company. 

      (b)  The Board of Directors (the "Board" which term shall include an
authorized committee of the Board of Directors) and shareholders of the
Company have heretofore adopted a 1997 Incentive Stock Plan (the "Plan"),
pursuant to which this Option is being granted.

      (c)  The Board has authorized the granting to Optionee of an incentive
stock option ("Option") as defined in Section 422 of the Internal Revenue Code
of 1986, as amended, (the "Code") to purchase shares of common stock of the
Company ("Stock") upon the terms and conditions hereinafter stated and pursuant
to an exemption from registration under the Securities Act of 1933, as amended
(the "Securities Act") provided by Rule 701 thereunder.

3.    Shares; Price.  The Company hereby grants to Optionee the right to
purchase, upon and subject to the terms and conditions herein stated, the
number of shares of Stock set forth in Section 1(c) above (the "Shares") for
cash (or other consideration as is authorized under the Plan and acceptable
to the Board, in their sole and absolute discretion) at the price per Share
set forth in Section 1(d) above (the "Exercise Price"), such price being not
less than the fair market value per share of the Shares covered by this Option

                                     E-3

<PAGE>

as of the date hereof (unless Optionee is the owner of Stock possessing ten
percent or more of the total voting power or value of all outstanding Stock
of the Company, in which case the Exercise Price shall be no less than 110%
of the fair market value of such Stock). 

4.    Term of Option; Continuation of Employment.  This Option shall expire,
and all rights hereunder to purchase the Shares shall terminate, five (5)
years from the date hereof.  This Option shall earlier terminate subject to
Sections 7 and 8 hereof upon, and as of the date of, the termination of
Optionee's employment if such termination occurs prior to the end of such five
year period. Nothing contained herein shall confer upon Optionee the right to
the continuation of his employment by the Company or to interfere with the
right of the Company to terminate such employment or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof. 

5.    Vesting of Option.  Subject to the provisions of Sections 7 and 8
hereof, this Option shall become exercisable during the term of Optionee's
employment in two equal annual installments of fifty percent (50%) of the
Shares covered by this Option, the first installment to be exercisable on the
first anniversary of the date of this Option and the second installment to be
exercisable on the second anniversary of the date of this Option.  The
installments shall be cumulative (i.e., this option may be exercised, as to
any or all Shares covered by an installment, at any time or times after an
installment becomes exercisable and until expiration or termination of this
option).

6.    Exercise.  This Option shall be exercised by delivery to the Company of
(a)written notice of exercise stating the number of Shares being purchased
(in whole shares only) and such other information set forth on the form of
Notice of Exercise attached hereto as Appendix A, (b) a check or cash in the
amount of the Exercise Price of the Shares covered by the notice (or such other
consideration as has been approved by the Board of Directors consistent with
the Plan) and (c) a written investment representation as provided for in
Section 13 hereof.  This Option shall not be assignable or transferable,
except by will or by the laws of descent and distribution, and shall be
exercisable only by Optionee during his lifetime, except as provided in
Section 8 hereof. 

7.    Termination of Employment.  If Optionee shall cease to be employed by
the Company for any reason, whether voluntarily or involuntarily, other than
by his death, Optionee (or if the Optionee shall die after such termination,
but prior to such exercise date, Optionee's personal representative or the
person entitled to succeed to the Option) shall have the right at any time
within three (3) months following such termination of employment or the
remaining term of this Option, whichever is the lesser, to exercise in whole
or in part this Option to the extent, but only to the extent, that this Option
was exercisable as of the date of termination of employment and had not
previously been exercised; provided, however:

      (i)if Optionee is permanently disabled (within the meaning of Section
22(e)(3) of the Code) at the time of termination, the foregoing three (3)
month period shall be extended to one (1) year; or

                                     E-4

<PAGE>


      (ii)if Optionee is terminated "for cause" as that term is defined under
Section 2922 of the California Labor Code and case law related thereto, or by
the terms of the Plan or this Option Agreement or by any employment agreement
between the Optionee and the Company, this Option shall automatically
terminate as to all Shares covered by this Option not exercised prior to
termination.

Unless earlier terminated, all rights under this Option shall terminate in
any event on the expiration date of this Option as defined in Section 4 hereof.

8.    Death of Optionee.  If the Optionee shall die while in the employ of the
Company, Optionee's personal representative or the person entitled to
Optionee's rights hereunder may at any time within one (1) year after the date
of Optionee's death, or during the remaining term of this Option, whichever
is the lesser, exercise this Option and purchase Shares to the extent, but
only to the extent, that Optionee could have exercised this Option as of the
date of Optionee's death; provided, in any case, that this Option may be so
exercised only to the extent that this Option has not previously been
exercised by Optionee. 

9.    No Rights as Shareholder.  Optionee shall have no rights as a
shareholder with respect to the Shares covered by any installment of this
Option until the effective date of issuance of Shares following exercise of
this Option, and no adjustment will be made for dividends or other rights for
which the record date is prior to the date such stock certificate or
certificates are issued except as provided in Section 10 hereof. 

10.   Recapitalization.  Subject to any required action by the shareholders
of the Company, the number of Shares covered by this Option, and the Exercise
Price thereof, shall be proportionately adjusted for any increase or decrease
in the number of issued shares resulting from a subdivision or consolidation
of shares or the payment of a stock dividend, or any other increase or decrease
in the number of such shares effected without receipt of consideration by the
Company; provided however that the conversion of any convertible securities
of the Company shall not be deemed having been "effected without receipt of
consideration by the Company."

      In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets or capital stock of the Company
(collectively, a "Reorganization"), unless otherwise provided by the Board,
this Option shall terminate immediately prior to such date as is determined
by the Board, which date shall be no later than the consummation of such
Reorganization.  In such event, if the entity which shall be the surviving
entity does not tender to Optionee an offer, for which it has no obligation
to do so, to substitute for any unexercised Option a stock option or capital
stock of such surviving of such surviving entity, as applicable, which on an
equitable basis shall provide the Optionee with substantially the same
economic benefit as such unexercised Option, then the Board may grant to such
Optionee, in its sole and absolute discretion and without obligation, the
right for a period commencing not later than thirty (30) days prior to and
ending immediately prior to the date determined by the Board pursuant hereto

                                     E-5

<PAGE>

for termination of the Option or during the remaining term of the Option,
whichever is the lesser, to exercise any unexpired Option or Options without
regard to the installment provisions of Section 5; provided, however, that
such exercise shall be subject to the consummation of such Reorganization.

      Subject to any required action by the shareholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation,
this Option thereafter shall pertain to and apply to the securities to which
a holder of Shares equal to the Shares subject to this Option would have been
entitled by reason of such merger or consolidation, and the installment
provisions of Section 5 shall continue to apply. 

      In the event of a change in the shares of the Company as presently
constituted, which is limited to a change of all of its authorized Stock
without par value into the same number of shares of Stock with a par value,
the shares resulting from any such change shall be deemed to be the Shares
within the meaning of this Option. 

      To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as hereinbefore expressly provided, Optionee shall have no rights by
reason of any subdivision or consolidation of shares of Stock of any class or
the payment of any stock dividend or any other increase or decrease in the
number of shares of stock of any class, and the number and price of Shares
subject to this Option shall not be affected by, and no adjustments shall be
made by reason of, any dissolution, liquidation, merger, consolidation or sale
of assets or capital stock, or any issue by the Company of shares of stock of
any class or securities convertible into shares of stock of any class. 

      The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or 
changes in its capital or business structure or to merge, consolidate,
dissolve or liquidate or to sell or transfer all or any part of its business
or assets. 

11.   Additional Consideration.  Should the Internal Revenue Service determine
that the Exercise Price established by the Board as the fair market value per
Share is less than the fair market value per Share as of the date of Option
grant, Optionee hereby agrees to tender such additional consideration, or
agrees to tender upon exercise of all or a portion of this Option, such fair
market value per Share as is determined by the Internal Revenue Service. 

12.   Modification, Extension and Renewal of Options.  The Board or Committee,
as described in the Plan, may modify, extend or renew this Option or accept the
surrender thereof (to the extent not theretofore exercised) and authorize the
granting of a new option in substitution therefore (to the extent not
theretofore exercised), subject at all times to the Plan, Sections 422 and 
424(h) of the Code and Section 260.140.41 of the Corporate Securities Rules
of the California Corporations Commissioner. Notwithstanding the foregoing
provisions of this Section 12, no modification shall, without the consent of
the Optionee, alter to the Optionee's detriment or impair any rights of
Optionee hereunder. 

                                     E-6

<PAGE>

13.   Investment Intent; Restrictions on Transfer.  

      (a)Optionee represents and agrees that if Optionee exercises this
Option in whole or in part, Optionee will in each case acquire the Shares
upon such exercise for the purpose of investment and not with a view to,
or for resale in connection with, any distribution thereof; and that upon
such exercise of this Option in whole or in part, Optionee (or any person or
persons entitled to exercise this Option under the provisions of Sections 7
and 8 hereof) shall furnish to the Company a written statement to such effect,
satisfactory to the Company in form and substance.  If the Shares represented
by this Option are registered under the Securities Act, either before or after
the exercise of this Option in whole or in part, the Optionee shall be 
relieved of the foregoing investment representation and agreement and shall
not be required to furnish the Company with the foregoing written statement.

      (b)Optionee further represents that Optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business,
operations and financial condition, and to obtain additional information
reasonably necessary to verify the accuracy of such information.

      (c)Unless and until the Shares represented by this Option are registered
under the Securities Act, all certificates representing the Shares and any
certificates subsequently issued in substitution therefor and any certificate
for any securities issued pursuant to any stock split, share reclassification,
stock dividend or other similar capital event shall bear legends in
substantially the following form:

    "THESE SECURITIES HAVE NOT BEEN REGISTERED OR OTHERWISE QUALIFIED UNDER
    THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER THE APPLICABLE
    SECURITIES LAWS OF ANY STATE.  NEITHER THESE SECURITIES NOR ANY INTEREST
    THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE
    ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE
    SECURITIES LAWS OF ANY STATE, UNLESS PURSUANT TO EXEMPTIONS THEREFROM."

    THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO
    THAT CERTAIN INCENTIVE STOCK OPTION AGREEMENT DATED    BETWEEN THE
    COMPANY AND THE ISSUEE WHICH RESTRICTS THE TRANSFER OF THESE SHARES WHICH
    ARE SUBJECT TO REPURCHASE BY THE COMPANY UNDER CERTAIN CONDITIONS."

and/or such other legend or legends as the Company and its counsel deem
necessary or appropriate.  Appropriate stop transfer instructions with
respect to the Shares have been placed with the Company's transfer agent.

                                     E-7

<PAGE>

14.   Effects of Early Disposition. Optionee understands that if an Optionee
disposes of shares acquired hereunder within two (2) years after the date of
this Option or within one (1) year after the date of issuance of such shares
to Optionee, such Optionee will be treated for income tax purposes as having
received ordinary income at the time of such disposition of an amount
generally measured by the difference between the purchase price and the fair
market value of such stock on the date of exercise, subject to adjustment for
any tax previously paid, in addition to any tax on the difference between the
sales price and Optionee's adjusted cost basis in such shares. The foregoing
amount may be measured differently if Optionee is an officer, director or ten
percent holder of the Company.  Optionee agrees to notify the Company within
ten (10) working days of any such disposition.

15.   Stand-off Agreement.  Optionee agrees that in connection with any
registration of the Company's securities under the Securities Act, and upon
the request of the Company or any underwriter managing an underwritten
offering of the Company's securities, Optionee shall not sell, short any sale
of, loan, grant an option for, or otherwise dispose of any of the Shares
(other than Shares included in the offering) without the prior written consent
of the Company or such managing underwriter, as applicable, for a period of at
least one year following the effective date of registration of such offering.

16.   Restriction Upon Transfer.  The Shares may not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated by
the Optionee except as hereinafter provided.

      (a) Repurchase Right on Termination Other Than for Cause.  For the
purposes of this Section, a "Repurchase Event" shall mean an occurrence of
one of (i) termination of Optionee's employment by the Company, voluntary or
involuntary and with or without cause; (ii) retirement or death of Optionee;
(iii) bankruptcy of Optionee, which shall be deemed to have occurred as of
the date on which a voluntary or involuntary petition in bankruptcy is filed
with a court of competent jurisdiction; (iv) dissolution of the marriage of
Optionee, to the extent that any of the Shares are allocated as the sole and
separate property of Optionee's spouse pursuant thereto (in which case this
Section shall only apply to the Shares so affected); or (v) any attempted
transfer by the Optionee of Shares, or any interest therein, in violation of
this Agreement.  Upon the occurrence of a Repurchase Event, the Company shall
have the right (but not an obligation) to repurchase all or any portion of the
Shares of Optionee at a price equal to the fair market value of the Shares
(determined in accordance with Section 260.140.50 of the Rules of the
California Commissioner of Corporations) as of the date of the Repurchase
Event.

      (b) Repurchase Right on Termination for Cause.  In the event Optionee's
employment is terminated by the Company "for cause", then the Company shall
have the right (but not an obligation) to repurchase Shares of Optionee at a
price equal to the Exercise Price.  Such right of the Company to repurchase
Shares shall apply to 100% of the Shares for one (1) year from the date of
this Agreement; and shall thereafter lapse at the rate of twenty percent (20%)
of the Shares on each anniversary of the date of this Agreement.  In addition,
the Company shall have the right, in the sole discretion of the Board and
without obligation, to repurchase upon termination for cause all or any
portion of the Shares of Optionee, at a price equal to the fair value of the

                                     E-8

<PAGE>

Shares as of the date of termination, which right is not subject to the
foregoing lapsing of rights.  In the event the Company elects to repurchase
the Shares, the stock certificates representing the same shall forthwith be
returned to the Company for cancellation.

      (c) Exercise of Repurchase Right.  Any Repurchase Right under Paragraphs
16(a) or 16(b) shall be exercised by giving notice of exercise as provided
herein to Optionee or the estate of Optionee, as applicable.  Such right shall
be exercised, and the repurchase price thereunder shall be paid, by the
Company within a ninety (90) day period beginning on the date of notice to the
Company of the occurrence of such Repurchase Event (except in the case of
termination of employment or retirement, where such option period shall begin
upon the occurrence of the Repurchase Event).  Such repurchase price shall be
payable only in the form of cash (including a check drafted on immediately
available funds) or cancellation of purchase money indebtedness of the
Optionee for the Shares.  If the Company can not purchase all such Shares
because it is unable to meet the financial tests set forth in sections 500
and 501 of the California Corporations Code, the Company shall have the right
to purchase as many Shares as it is permitted to purchase under such sections.
Any Shares not purchased by the Company hereunder shall no longer be subject
to the provisions of this Section 16.

      (d) Right of First Refusal.  In the event Optionee desires to transfer
any Shares during his lifetime, Optionee shall first offer to sell such Shares
to the Company.  Optionee shall deliver to the Company written notice of the
intended sale, such notice to specify the number of Shares to be sold, the
proposed purchase price and terms of payment, and grant the Company an option
for a period of thirty days following receipt of such notice to purchase the
offered Shares upon the same terms and conditions.  To exercise such option,
the Company shall give notice of that fact to Optionee within the thirty (30)
day notice period and agree to pay the purchase price in the manner provided
in the notice.  If the Company does not purchase all of the Shares so offered
during foregoing option period, Optionee shall be under no obligation to sell
any of the offered Shares to the Company, but may dispose of such Shares in
any lawful manner during a period of one hundred and eighty (180) days
following the end of such notice period, except that Optionee shall not sell
any such Shares to any other person at a lower price or upon more favorable
terms than those offered to the Company.

      (e) Acceptance of Restrictions.  Acceptance of the Shares shall
constitute the Optionee's agreement to such restrictions and the legending
of his/her certificates with respect thereto.  Notwithstanding such
restrictions, however, so long as the Optionee is the holder of the Shares,
or any portion thereof, he or she shall be entitled to receive all dividends
declared on and to vote the Shares and to all other rights of a shareholder
with respect thereto.

      (f) Permitted Transfers.  Notwithstanding any provisions in this Section
16 to the contrary, the Optionee may transfer Shares subject to this Agreement
to his parents, spouse, children, or grandchildren, or a trust for the benefit
of the Optionee or any such transferee(s);  provided, that such permitted
transferee(s) shall hold the Shares subject to all the provisions of this
Agreement (all references to the Optionee herein shall in such cases refer
mutatis mutandis to the permitted transferee, except in the case of clause
(iv) of Section 16(a) wherein the permitted transfer shall be deemed to be
rescinded); and provided further, that notwithstanding any other provisions in

                                     E-9

<PAGE>

this Agreement, a permitted transferee may not, in turn, make permitted
transfers without the written consent of the Optionee and the Company.

      (g) Release of Restrictions on Shares.  All other restrictions under
this Section 16 shall terminate five (5) years following the date of this 
Agreement, or when the Company's securities are publicly traded, whichever
occurs earlier.

17.   Notices.  Any notice required to be given pursuant to this Option or
the Plan shall be in writing and shall be deemed to be delivered upon receipt
or, in the case of notices by the Company, five (5) days after deposit in the
U.S. mail, postage prepaid, addressed to Optionee at the address last
provided to the Company by Optionee for his employee records. 

18.   Agreement Subject to Plan; Applicable Law.  This Option is made pursuant
to the Plan and shall be interpreted to comply therewith.  A copy of such Plan
is available to Optionee, at no charge, at the principal office of the Company.
Any provision of this Option inconsistent with the Plan shall be considered
void and replaced with the applicable provision of the Plan.  This Option has
been granted, executed and delivered in the State of California, and the
interpretation and enforcement shall be governed by the laws thereof and
subject to the exclusive jurisdiction of the courts therein.


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

                                 BONDED MOTORS, INC.


                                 By:/S/AARON LANDON
                                    ---------------------------------
                                    Aaron Landon, President

                                    /S/RICHARD FUNK
                                    ---------------------------------
                                    RICHARD FUNK



(one of the following, as appropriate, shall be signed) 

I certify that as of the date         By her signature, the spouse
Hereof I am unmarried                 of Optionee hereby agrees to be
                                      bound by the provisions of the
                                      foregoing INCENTIVE STOCK OPTION
                                      AGREEMENT


                                      /S/MARLENE M. FUNK
--------------------                  ---------------------------------
Optionee                               Spouse of Optionee

                                     E-10

<PAGE>

                                 Appendix A
                             NOTICE OF EXERCISE



Bonded Motors, Inc.
7522 South Maie Avenue
Los Angeles, CA 90001

                         Re: Incentive Stock Option

  Notice is hereby given pursuant to Section 6 of my Incentive Stock Option
Agreement that I elect to purchase the number of shares set forth below at
the exercise price set forth in my option agreement: 

  Incentive Stock Option Agreement dated:
                                         -----------------------
  Number of shares being purchased:
                                         -----------------------

  Exercise Price:                       $
                                         -----------------------

  A check in the amount of the aggregate price of the shares being purchased
is attached.

  I hereby confirm that such shares are being acquired by me for my own account
for investment purposes, and not with a view to, or for resale in connection
with, any distribution thereof.  I will not sell or dispose of my Shares in 
violation of the Securities Act of 1933, as amended, or any applicable federal
or state securities laws.  Further, I understand that the exemption from
taxable income at the time of exercise is dependent upon my holding such stock
for a period of at least one year from the date of exercise and two years from
the date of grant of the Option. 

  I understand that the certificate representing the Option Shares will bear a
restrictive legend within the contemplation of the Securities Act and as
required by such other state or federal law or regulation applicable to the
issuance or delivery of the Option Shares.

  I agree to provide to the Company such additional documents or information
as may be required pursuant to the Company's 1997 Incentive Stock Plan. 



                                                   -------------------
                                                   (signature)

                                                   -------------------
                                                   (name of Optionee)

                                     E-11

<PAGE>
                                   Exhibit B


              New           Defective     Warranty     Direct       Indirect
              Returns       Returns       Expense      Labor        Labor

Current        12.16%        12.34%        6.89%        15.46%        3.77%

Level 1        11.00%        12.00%        6.50%        14.00%        3.80%
Level 2        10.00%        10.50%        6.00%        13.50%        3.60%
Level 3         9.50%         9.00%        5.50%        13.50%        3.60%
Level 4         9.00%         8.00%        5.00%        13.00%        3.40%
Level 5         8.50%         7.00%        4.50%        12.50%        3.20%
Level 6         8.00%         6.00%        4.00%        12.00%        3.00%

     It has been determined that "New Returns" have less impact than other 
categories.  Therefore, the monthly value of successes will be as follows:

     For each % point drop in "New Returns,     "Monthly Bonus=         $200
     For each % point drop in "Defective Returns,"                      $400
     For each % point drop in "Warranty Expense,"                       $400

     For each 1 hour drop in "Direct Labor,"                            $400
     For each 1 hour drop in "Indirect Labor,"                          $400

The above is cumulative, so that if some items go up and some go down at a net
result of nothing gained, then no bonus would be accrued.  And it's also
cumulative monthly, calculated quarterly, and paid annually, with a "draw"
available equal to 50% of the accrual after two consecutive quarters have been
finalized.  Total bonus must be paid on the same day as the annual report is
filed with the SEC.

If you attained the goals outlined above at the specified date, your bonus
calculation would be this:

                                                                       (OLD)
Bonus Accrual For      Level 1                          $1,096        $1,014
                       Level 2                          $2,160        $2,006
                       Level 3                          $3,010        $2,603
                       Level 4                          $3,624        $3,357
                       Level 5                          $4,862        $4,110
                       Level 6                          $5,800        $4,863

                                     E-12

<PAGE>

                                Exhibit 10.10


                                    LEASE
                                  AGREEMENT


THIS LEASE AGREEMENT, made and entered into this 5th day of December, 1996, by
and between KEW Management Corp., hereinafter to as "Landlord", and Bonded
Motors, hereinafter referred to as "Tenant";

    WITNESSETH;

    In consideration of the covenants, terms, conditions, agreements and 
payments as hereinafter set forth, the parties hereto covenant and agree
as follows:

    1. PROPERTY - LEASED PREMISES
    Landlord hereby leases unto Tenant the following describe premises: 5750 E.
58th avenue, Unit K, Commerce City, CO 80022, and described as approximately,
7,500 square feet of office and warehouse space, which shall hereinafter be
referred to as the "Leased Premises" and shown herein as "Exhibit A"; the 
leasing of which shall be covered by the terms of this Agreement.

    2. TERM
    The term of this Lease shall commence at 12:00 noon on the 1st day of 
January, 1997 and unless terminated as herein provided for, shall end at 12:00
noon of the 31st day of December, 1999

    3. RENT
    Tenant shall pay to Landlord, at the address of Landlord as herein set 
forth, the following as rental for the Leased Premises:

    A. BASE RENTAL
    The base rental for the full term hereof shall be - Ninety Five Thousand
Six Hundred Twenty Five and 00/100ths Dollars ($95,625). Said rental shall
be payable in monthly installments (basic monthly rental) of Two Thousand
Five Hundred and 00/100ths Dollars ($2,500) in advance on the first day of
each month during the term hereof.  Landlord acknowledges receipt of the sum
of Two Thousand Five Hundred and 00/100ths Dollars ($2,500) paid by Tenant
upon the execution hereof being in payment of rent for the month of, January,
1997. *See Addendum "A" Rent Payment and Escalation

    B. SECURITY DEPOSIT
    Landlord further acknowledges receipt of the sum of Two Thousand Five
Hundred and 00/100ths Dollars ($2,500.00) to be retained by Landlord without
responsibility for payment of interest thereon, as security for performance of
all the terms and conditions of this Lease Agreement to be performed by Tenant,
including payment of all rental due under the terms hereof. Deductions may be
made by Landlord from the amount so retained for the reasonable cost of 
repairs, to the demised premises (ordinary wear and tear excepted), for any
rental delinquent under the terms hereof and/or any sum used in any manner to
cure any default in the performance of Tenant under the terms of this Lease.
In the event deductions are so made during the rental term upon notice by
Landlord, Tenant shall redeposit such amount so expended so as to maintain 
the deposit in the amount as herein provided for, and failure to so redeposit
shall be deemed a failure to pay rent under the terms hereof. Nothing herein 
contained shall limit the liability of Tenant as to any damage to the leased
premises, and Tenant shall be responsible for the total amount of any damage
and/or loss occasioned by actions of Tenant, Landlord may deliver the funds
deposited hereunder by Tenant to any purchase of Landlord's interest in the
leased premises in the event such interest shall be sold, and thereupon 
Landlord shall be discharged from any further liability with respect to such
deposit.

    C. COST OF LIVING ADJUSTMENT

    D. PERCENTAGE RENT : Not Applicable
    4. TAXES-REAL PROPERTY-ADJUSTMENT

                                     E-13

<PAGE>

    A. Real Property Tax Paid by Tenant

    B. Real Property Tax Paid by Landlord
    The general real property taxes for the real property and improvements of
which the leased premises are a part, as levied and assessed for the year 1997
are the base taxes on which the basic rental due hereunder is based.

    5. TAXES -- PERSONAL PROPERTY -RESPOSIBILITY
    Tenant shall be responsible and pay for any and all taxes and/or
assessments levied and/or assessed against any furniture, fixtures, equipment
and items of a similar nature installed and/or located in or about the leased
premises by Tenant.

    6. UTILITIES
    Tenant shall be solely responsible for and promptly pay all charges, for
heat, water, gas electric, sewer service and any other utility service used or
consumed on the leased premises. Should Landlord elect to supply all or any of
the utility services to be used or consumed on the lease premises, Tenant
shall, within ten days from presentation of the statement for such utility
service, pay to Landlord, as additional rent under the terms hereof, the amount
of said statement if it represents utility service to the lease premises only
or Twenty Three and 08/100ths percent (23.08 %) of said statement if it
includes utility service to all area rather than the leased premises. In no
event shall Landlord be liable for any interruption or failure in the supply
of any such utility to the lease premises. Said proration of utilities shall
be reviewed by Landlord and Tenant at the end of the first year of occupancy,
at which time Landlord shall determine if the present percentage of said total
utilities is equitable in relation to the use of total services by all the
Tenants and will be adjusted by Landlord if necessary:

    7. HOLDING OVER
    If after expiration of the term of this Lease, Tenant shall remain in
possession of the leased premises and continue to pay rent without a written
agreement as to such possession, then Tenant shall be deemed a month-to-month
Tenant and the rental date during such holdover tenancy shall be equivalent to
(150%) of the monthly rental paid for the last month of tenancy under the this
Lease. No holding over by Tenant shall operate to renew or extend this Lease
without the written consent of Landlord to such renewal or extension having
been first obtained.

    8. MODIFICATION OR EXTENSIONS
    No modification or extension of this Lease shall be binding unless in
writing, signed by the parties hereto and endorsed hereon or attached hereto.

    9. ALTERATION-CHANGES AND ADDITIONS-RESPONSILITY
    Subject to Landlord's prior approval, which shall not be unreasonably
withheld, Tenant may, during the term of this Lease, at Tenant's expense, erect
inside partitions, add to existing electric power service, add telephone
outlets, add light fixtures, install additional heating and/or air conditioning
or make such other changes or alterations as Tenant may desire. At the end of
this Lease, all such fixtures, equipment, additions and/or alterations (except
trade fixtures installed by Tenant,) shall be and remain the property of
Landlord; provided, however, Landlord shall have the option to require Tenant
to remove any or all such fixtures, equipment, additions and restore the leased
premises to the condition existing immediately prior to such change and/or
installation, normal wear and tear excepted, all at Tenant's cost and expense.
All such work shall be done in a good and workmanlike manner and shall consist
of new materials unless agreed to otherwise by Landlord. Any and all repairs,
changes and/or modifications thereto shall be the responsibility and at the
cost of Tenant. Landlord may require adequate security from Tenant assuring
mechanic's liens on account of work done on the premises by Tenant. Landlord
may also require adequate security to assure Landlord that the premises will
be restored to its original condition upon termination of the lease.

    10. APPROVAL OF CHANGES-SIGN APPROVAL
    Landlord must approve in writing any sign to be placed in or on the leased
premises, regardless of size or value and/or all addition, change or
alteration to the exterior of the leased premises. Prior to the cutting of any
holes in the roof or prior to any work being performed and/or any equipment
being installed on the roof by Tenant, the prior written approval of Landlord
is to be obtained by Tenant. If Tenant fails to get such prior written
approval, then any roof repairs required shall be the responsibility of Tenant.
Landlord must approve in writing any other improvements, additions, alterations
and/or changes to the lease of said premises in excess of Two Thousand and
00/100 Dollars ($2,000.00). As a condition to the granting of such approval,
Landlord shall have the right to require Tenant to furnish a bond or other
security acceptable to Landlord sufficient to insure completion of and payment
for any such work to be so performed.

                                     E-14

<PAGE>

    11. CARE OF LEASED PREMISES -RESPONSIBILITY OF TENANT
    During the term of the Lease, Tenant agrees to keep and maintain the
interior of the leased premises, including the plumbing, healing, air
conditioning and electrical systems, in good condition and repair at Tenant's
cost and expense. Tenant further agrees at the end of the term to return the
leased premises to Landlord in substantially as good condition as when
received except for usual and ordinary wear and tear. Tenant further agrees
to be responsible for any repairs and/or maintenance required for any part of
the improvements of which the leased premises are a part where such repair
and/or maintenance is necessitated by actions or inaction of Tenant on the
leased premises.

    12. MAINTENANCE RESPOSIBILITY OF LANDLORD
    Except as herein otherwise provided for, Landlord shall keep and
maintain the roof and/or exterior of building, the exterior grounds and all
common areas of the improvements of which the leased premises are a part in
good repair and condition.

    13. COMMON AREA CHARGES
    See Addendum Paragraph 47

    14. CONTROL OF COMMON AREAS
    All parking areas, driveways, entrances and exits, common areas and other
facilities furnished by Landlord in, on or near the improvements of which the
leased premises are a portion, shall at all times be subject to the exclusive
control and management of Landlord, notwithstanding that Tenant's employees
and/or customers may have a nonexclusive right to the use thereof. Landlord
shall have the right from time to time to establish, modify and enforce
reasonable rules and regulations with respect to said facilities and areas.

    15. USE OF PREMISES AND CARE OF GROUNDS-TENANT
    Tenant shall conform to all present and future laws and ordinances of any
governmental authority having jurisdiction over the leased premises. Tenant
shall not allow any accumulation of trash or debris on the leased premises
within any portion of the improvements of which the leased premises are a
part. All receiving and delivery of goods and merchandise and all removal
of garbage and refuse shall be made only by way of the rear and/or other
service doors provided therefor. In the event the leased premises shall have
no such door, then these matters shall be handled in a manner satisfactory to
Landlord. No storage of any material outside of the leased premises shall be
allowed unless first approved by Landlord in writing, and then in only such
areas as are designated by Landlord. Tenant shall not commit or stuffer any
waste on the leased premises, nor shall Tenant permit any nuisance to be
maintained on the leased premises or permit any disorderly conduct, common
noise or other activity having a tendency to annoy or disturb any occupants
of any part of the improvements of which the leased premises are a part
and/or any adjoining property.

    16. LIABILITY FOR OVERLOAD-TENANT
    Tenant shall be liable for the cost of any damages to the leased premises,
the improvements of which the leased premises are a part of the sidewalks and
pavements adjoining the same which will result from the movement of heavy
articles. Tenant shall not unduly load or unload the floors or any part on any
part of the leased premises.

    17. GLASS AND DOOR RESPONSIBILILLY--TENANT
    All glass and doors on the leased premises shall be the responsibility of
the Tenant. Any replacement or repair shall be promptly completed at the
expense of the Tenant.

    18. RULES AND REGULATIONS
    Landlord reserves the right to adopt and promulgate rules and regulations
applicable to the leased premises and the land and improvements of which the
leased premises are a part and from time to time to amend or supplement said
rules or regulations. Notice of such rules and regulations and amendments and
supplements thereto shall be given to Tenant, and Tenant agrees to comply with
and observe such rules and regulations and amendments and supplements thereto,
provided, however, the same apply uniformly to all tenants of the improvements
of which the leased premises are a part.

                                     E-15

<PAGE>

    19. USE OF PREMISES
    Tenant shall use the leased premises as general office, warehouse, and
distribution, of motors, and related products, and for no other purpose
whatsoever except with the written consent of the Landlord.

    20. PAKKING
    Throughout the term. of this Lease, Landlord shall provide a reasonable
area for off-street parking, if available, and a part of the properly being
leased for use of customers or tenant in-common with customers of other
occupants or other portions of the improvements of which the leased premises
are a part, Tenant shall park all vehicles of whatever type used by Tenant
and/or Tenants employees only in those areas which are designated by Landlord
for this purpose, and Tenant accepts the responsibility of seeing that Tenant's
employees park only in such areas as are so designated.

    21. INSURANCE - RESPONSIBILITY OF TENANT
    Tenant shall procure, pay for and maintain comprehensive public liability
insurance providing coverage from any loss or damage occasioned by an
accident or casualty, about or adjacent to the leased premises, which policy
shall be written on an "occurrence basis" with limits of not less than
$ 1,000,000.00 liability coverage and $500,000.00 property damage coverage.
In addition thereto, Tenant shall, at all times, procure, pay for and maintain
fire and liability insurance coverage on the leased premises. Certificates of
such insurance shall be delivered to Landlord annually and shall provide that
said coverage shall not be, modified, reduced or canceled without thirty (30)
days' prior written notice thereof being given to Landlord. If Tenant uses, in
the leased premises, any kind of steam or other high-pressure boiler or other
apparatus which present any possibility of damage to the leased premises or
the improvements of which the leased premises are a part or the life or limb
of persons having such premises, Tenant agrees to carry appropriate boiler
insurance in all amount satisfactory to Landlord to indemnify against any loss
resulting from any explosion or other damage or liability.

    22. INSURANCE-RESPONSIBILITY OF LANDLORD
    The Landlord shall be responsible for and shall have in effect at all times
fire extended coverage and vandalism and malicious mischief insurance in such
amounts as shall be determined appropriate by Landlord.

    23. REGULATIONS ON USE-TENANT RESPOSIBILITY
    It shall be Tenant's sole and exclusive responsibility to meet all
regulations and laws of any governmental body having jurisdiction over the
leased premises as such regulations affect Tenant's operations, all at Tenant's
sole cost and expense. Tenant further agrees not to install any electrical
equipment that overloads any electrical paneling, circuitry or wiring, and
further agrees to comply with the requirements of the insurance underwriter
or any governmental authorities having jurisdiction thereof.

    24. DAMAGE TO LEASE PREMISES
    In the event the leased premises and/or the improvements of which the
leased premises are a part shall be totally destroyed by any fire or other
casualty or so badly damaged that, in the opinion of Landlord, it is not
feasible to repair or rebuild same, Landlord shall have the right to
terminate this Lease upon written notice to Tenant. If the leased premises
shall be partially damaged by fire or other casualty, except if caused by
Tenant's negligence, and said leased premises is not rendered untenantable
thereby, as determined by Landlord, all appropriate reduction of the rent
shall be allowed for the unoccupied portion of the leased premises until
repair thereof shall be substantially completed. If the leased premises
is rendered untenantable thereby, except if caused by Tenant's negligence,
Tenant may, at its election, terminate this Lease as of the date of the
damage. If Tenant elects not to terminate the Lease, the rent shall abate
in proportion to the loss of use of the leased premises by Tenant during
such untenantability.

    25. INSPECTION OF AND RIGHT OF ENTRY TO LEASED PREMISES
    A. The premises shall be deemed ready for occupancy upon substantial
completion of the leased premises and improvements (as shown in "Exhibit B" 
and "Exhibit C"), Tenant may inspect the leased premises and will accept the
same in the condition that exists will the exception of any minor punch list
items.

    B. Landlord, and/or Landlord's agents and employees, shall have the right
to enter the leased premises at all times during regular business hours and,
at all time during emergencies, to examine the leased premises, to make such
repairs, alterations, improvements or additions as Landlord may deem necessary
or desirable, and Landlord shall be allowed to take all materials into and
upon said premises that may be required therefore without the same constituting
an eviction of Tenant in whole or in part, and the rent reserved shall in no
way abate while such repairs, alterations, improvements or additions are being
made, by reason of loss or interruption of business of Tenant or otherwise.
During the six months prior to the expiration of the term of this Lease or any
renewal thereof, Owner may exhibit the premises to prospective tenants and/or
purchasers and may place upon the leased premises the usual notices indicating
the leased premises are for lease and/or sale.

    26. DEFAULT- REMEDIES OF LANDLORD
    If Tenant shall default in the payment of rent or in the keeping of any of
the terms, covenants or conditions of this Lease to be kept and/or performed by
Tenant, Landlord, may immediately, or at any time thereafter, re-enter the
leased premises, remove all persons and property therefrom, Without being 
liable to indictment, prosecution for damage therefore, or for forcible entry
and detainer and repossess and enjoy the leased premises, together with all
additions thereto or alterations and improvements thereof. Landlord may, at 
its option, at any time and from time to time thereafter, relet the leased
premises or any part thereof for the account of Tenant or otherwise, and
receive and collect the rents therefore and apply the same, first to the 
payment of such expenses as Landlord may have incurred in recovering

                                     E-16

<PAGE>

possession and for putting the same in good order and condition for re-rental,
and expense, commissions and charges paid by Landlord in reletting the
leased premises. Any such reletting may be for the remainder of the term
of this Lease or for a longer or shorter period. In lieu of reletting such
leased premises, Landlord may occupy the same or cause the same to be
occupied by others, whether or not the leased premises or any part thereof be
relet. Tenant shall pay the Landlord the rent, and all other charges required
to be paid by Tenant up to the time of the expiration of this Lease or such
recovered possession, as the case may be, and thereafter. Tenant, if required
by Landlord, shall pay to Landlord until the end of the term of this Lease, the
equivalent of the amount of all rent reserved herein and all other charges
required to be paid by Tenant, less the net amount received by Landlord for
such reletting, if any. If the leased premises shall be reoccupied by Landlord,
then, from and after the date of repossession, Tenant shall be discharged of
any obligations to Landlord under the provisions hereof for the payment of
rent. In event of any default by Tenant, and regardless of whether the
premises shall be relet or possessed by Landlord, and fixtures, additions,
furniture, and the like then on the premises may be retained by Landlord.
In the event Tenant is in default under the terms hereof and, by the sole
determination of Landlord has abandoned the leased premises, Landlord shall
have the right to remove all the Tenant's property from the leased premises
and dispose of said property in such a manner as determined best by Landlord,
all at the cost and expense of Tenant and without liability of Landlord for
the actions so taken. In the event all assignment of Tenant's business or
property shall be made for the benefit of creditors or, if the Tenants
leasehold interest under the terms of this Agreement shall be levied upon by
execution or seized by virtue of any writ of any court of law, or if
application be made for the appointment of a receiver for the business or
property of Tenant, or, if a petition in bankruptcy shall be filed by or
against Tenant, then and in any such case, at Landlord's options, with or
without notice, Landlord may terminate this Lease and immediately retake
possession of the leased premises without the same working any forfeiture of
the obligations of Tenant hereunder. In addition to remedy granted to Landlord
by the terms hereof, Landlord shall have available any and all rights and
remedies available under the Statutes of the State of Colorado. No remedy
herein or otherwise conferred upon or reserved to Landlord shall be considered
exclusive of any other remedy but shall be cumulative and shall be in addition
to every other remedy given hereunder or now or hereafter existing at law or
in equity or by Statute. Further, all powers and remedies given by this Lease
to Landlord may be exercised, from little to time, and as often as occasion
may arise or as may be deemed expedient. No delay or omission of Landlord to
exercise any right or power arising from any default shall impair any such
right or power or shall be considered to be a waiver of any such default or
acquiescence thereof The acceptance of rental by Landlord shall not be deemed
to be a waiver of any breach of any of the covenants herein contained or of
any of the rights of Landlord to any remedies herein given.

    27. LEGAL PROCEEDINGS -RESPONSIBILITIES
    In the event of proceeding at law or in equity by either party hereto,
and if the non-defaulting party shall pursue his rights through legal
proceedings, then the defaulting party shall pay all costs and expenses,
including all reasonable attorney's fees incurred by the non-defaulting party
in pursuing such remedy in the event such non-defaulting party is awarded
substantially the relief requested.

    28. HOLD HARMLESS OF TENANT
    Tenant will indemnify and hold Landlord harmless from and against any and
all claims, losses, expenses, costs, judgments and/or demands arising from the
conduct of Tenant on the leased premises and/or on account of any operation or
action by Tenant and/or from and against all claims arising from any breach
or default on the part of Tenant or any act of negligence of Tenant, it
agents, contractors, servants, employees, licensees, or livitees; or any
accident, injury or death of any person or damage to any property in or about
the leased premises.

    29. ASSIGNMENT OR SUBLETTING
    Tenant may not assign the Lease or sublet the leased premises without the
consent of Landlord; such consent shall not be unreasonably withheld provided,
however, no such assignment or subletting shall relieve Tenant of any of its
obligations hereunder, and performance of the covenants herein by subtenants
shall be considered as performance pro tanto by the Tenant.

    30. WARRANTY OF TITLE
    Landlord covenants it has good right to lease the leased premises in the
manner described herein and that Tenant shall peaceably and quietly have,
hold, occupy, and enjoy the premises during the term of the Lease.

    31. ACCESS
    Landlord shall provide Tenant non-exclusive access to the leased premises
through and across land and/or other improvements owned by Landlord. Landlord
shall have the right to designate, during the term of this Lease, all such
non-exclusive access and other common facilities of the land and/or
improvements of which the leased premises are a part,

    32. GOVERNMENTAL ACQUISITION OF PROPERTY
    The parties agree that Landlord shall have complete freedom of negotiation
and settlement of all matters pertaining to the acquisition of the property by
any governmental body, it being understood and agreed that any financial
settlement respecting land to be taken whether resulting from negotiation and
agreement or condemnation proceedings, shall be the exclusive property of
Landlord, there being no sharing whatsoever between Landlord and Tenant of any
start received in settlement. In the event of any such governmental taking,
Landlord shall have the right to terminate this Lease on the date possession
is delivered by the governmental body. Such taking of the property by a
governmental body shall not be a breach of this Lease by Landlord, nor give
rise to any claims to Tenant for damages or compensation from Landlord.

                                     E-17

<PAGE>

    33. CHANGES AND ADDITIONS TO IMPROVEMENT
    Landlord reserves the right at any time to make alterations or additions
to the improvements of which the leased premises are a part and/or to build
additions or other structures adjoining said improvements. Landlord also
reserves the right to construct other buildings and/or improvements in the
immediate area of the improvements in which the leased premises are located
and to make alterations or additions thereto, all as Landlord shall determine.
Easements for light and air are not included in the leasing of the leased
premises to Tenant. Landlord further reserves the exclusive right to the roof
of the improvements of which the leased premises are a part except as provided
for in this Lease Agreement. Landlord also reserves the right at any time to
relocate, vary and adjust the size or any of the improvements, parking areas
or other common areas relating to the land and/or improvement to which the
leased premises are a part, provided, however, that all such changes shall be
in compliance with the minimum requirements of governmental authorities having
jurisdiction over the properly.

    34. SUBORDINATION
    The Tenant agrees that its Lease rights will be subordinate to those of
any lending institutions making any loan upon the real property of which the
leased premises are a part. Tenant further agrees to sign reasonable documents
reflecting this subordination when and if requested by the Landlord.

    35. OPTION TO EXTEND
    Upon full all complete performance of all the terms, covenants and
conditions herein contained by Tenant and payment of all rental due under the
terms hereof, Tenant shall be given the option to renew this Lease for an
additional term of three (3) years. In the event Tenant desires to exercise
said option, Tenant shall give written notice of such fact to Landlord not
less than ninety (90) days nor more than one hundred twenty (120) days prior to
the expiration of the then-current term of this Lease. In the event of such
exercise, this Lease Agreement shall be deemed to be extended for the
additional period; provided, however, Landlord shall have the right to increase
the basic monthly rental to the current market rate. Any such increased rental
shall be subject to adjustments and be payable as herein provided for.
Landlord shall further have the right to make any further adjustments and/or
assessment of charges against Tenant as herein provided for. In the event of
exercise of said option, any funds retained by Landlord as herein provided for
shall be continued to be so held subject to the same terms and conditions.

    36. GUARANTEE AND FINANCIAL STATEMENTS

    37. INTEREST ON PAST-DUE OBLIGATIONS
    Any amount due to Landlord not paid shall bear interest at one and
one-half percent (1 1/2%) per month from due date until paid. Payment of such
interest shall not excuse or cure any default by Tenant under this Lease.

    38. LATE CHARGE
    The Landlord shall have the right to collect from Tenant, in addition to
any amounts due under paragraph 37 above, a monthly collection service charge
for any payment due to Landlord hereunder which is delinquent ten days or
longer, said charge being Twenty Five and no/100ths Dollars ($25.00) or five
percent (5%) of said payment, whichever sum shall be greater.

    39. MEMORANDUM OF LEASE-RECORDING
    The parties hereto agree this Lease shall not be recorded in the office of
the Clerk and Record of the county in which the leased premises is located. In
order to affect public recordation, the parties hereto may, at the time this
Lease is executed, agree to execute a Memorandum of Lease incorporated therein
by reference the terms of this Lease, but deleting therefrom any expressed
statement or mention of the amount of rent herein reserved, which instrument
may be recorded by either party in the office of the Clerk and Recorder of the
county in which the leased premises is located.

    40. NOTICE PROCEDURE
    All notices, demands and requests which may or are required to be given by
either party to the other shall be in writing and such that are to be given to
Tenant shall be deemed to have been properly given if served on Tenant or an
employee of Tenant or sent to Tenant by United States registered mail, return
receipt requested, properly sealed, stamped, and addressed to Tenant at Bonded
Motors. 7522 S. Maie Ave. Los Angeles, CA 90001 Attn: Aaron Landon , or at
such other place as Tenant may from time to time designate in a written notice
to Landlord; and, such as are to be given to Landlord shall be deemed to have
been properly given if personally served on Landlord or if sent to Landlord,
United States registered mail, return receipt requested, properly sealed,
stamped and addressed to Landlord at KEW Management Corporation- 1001 South
Monaco Parkway, Suite 310. Denver, Colorado 80224 , or at such other place as
Landlord may from time to time designate in a written notice to Tenant. Any
notice given by mailing shall be effective as of the date of mailing as shown
by the receipt given therefor.

    41. CONTROLLING LAW
    The Lease, and all terms hereunder, shall be construed consistent with the
laws of the State of Colorado. Any dispute resulting in litigation hereunder
shall be resolved in court proceedings instituted in Adams County and in no
other jurisdiction.

                                     E-18

<PAGE>

    42. BINDING UPON SUCCESSORS
    The covenants and agreements herein contained shall bind and inure to the
benefit of Landlord and Tenant and their respective successors. This Lease
shall be signed by the parties in duplicate, each of which shall be a complete
and effective original Lease.

    43. PARTIAL INVALIDITY
    If any term, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease or the application of such term,
covenant or condition to persons and circumstances other than those to which
it has been field invalid or unenforceable, shall not be affected thereby,
and each term, covenant and condition of this Lease shall be valid and shall
be enforced to the fullest extent permitted by law.

    44. CONDITION OF SPACE
    With the exception of the changes, additions and corrections herein noted,
Tenant agrees to accept this space "as is". Any changes desired by Tenant in
addition to those listed and agreed to by Landlord shall be done at the sole
expense of the Tenant unless otherwise agreed in the addendum to this Lease
attached hereto, or as noted in Paragraph 46.

    45. REAL ESTATE COMMISSION

    A.  FIRST TERM OF LEASE
    The parties hereto acknowledge that a real estate commission is owing by
the Landlord and shall be paid to Senter & Co. The amount of such commission
is Three Thousand Eight Hundred Twenty Five and 00/100ths Dollars representing
the commission for the initial lease term. Such amount is due and payable in
full upon execution of the Lease.

    46. MISCELLANEOUS
    All marginal notations and paragraph headings are for purposes of
reference and shall not affect the true meaning and intent of the terms
hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" 
are used, they shall include and imply to the singular, plural, persons both
male and female, companies, partnerships and corporations, and in reading said
Lease, the necessary grammatical changes required to make the provisions
hereof mean and apply as aforesaid shall be made in the same manner as though
originally included in said Lease.

See Addendum "A", Paragraphs 47 - 64, attached hereto and incorporated herein

IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof.


                                       LANDLORD: KEW MANAGEMENT CORPORATION
                                             By: /S/KEW MANAGEMENT CORPORATION
                                                -----------------------------

                                       TENANT:   BONDED MOTORS
                                             By: /S/BUDDY MERCER
                                                 ----------------------------

                                     E-19

<PAGE>

                               ADDENDUM " A "

THIS ADDENDUM is attached hereto and forms a part of that certain lease dated
   , 1996 by and between Kew Management Corporation , hereinafter referred to
as "Landlord," and Bonded Motors , hereinafter referred to as "Tenant,"
covering approximately 7,500 square feet of office and warehouse space
located at 5750 East 58th Avenue. Unit K. Commerce City, CO 80022.

    47. Operating Expenses. The rental charged for the premises includes the
        sum of ($1.03) per square foot per year to cover a pro rata share of
        Landlord' projected operating expenses of the premises, land
        underneath and surrounding the same, and the parking areas for the
        calendar year in which the term of this Lease begins.  The operating
        expenses included, but are not limited to all professional management
        fees, all general and specific real estate or ad valorem taxes and
        insurance, Operating and maintaining the facilities shall include snow
        removal, line painting, care of grass, shrubs and plants, payment of
        water and sewer charges and general maintenance of all areas and
        facilities provided by the Landlord for the common use of the
        occupants of the premises. Tenant shall pay to Landlord, as additional
        rent, a proportionate share of the amount, if any, by which Landlord's
        operating expenses exceed Landlord's projected operating expenses
        during the lease term calculated by dividing the amount such actual
        operating expenses exceeded the project's operating expenses by the
        number of square feet in the complex (32,500) square feet and
        multiplying the resulting per square foot increase by the number of
        square feet in the premises (7,500) square feet to determine Tenant's
        pro rata share of such amount. Tenant shall reimburse Landlord for the
        amount, if any, of such excess within fifteen (15) days after receipt
        of written notification thereof, which notification shall include
        computation of the amount due Landlord by Tenant. Tenant upon written
        notification to Landlord shall have the right to review respective
        valuations of operating expenses exceeding the projected operating
        expenses as described above. All determination's by Landlord pursuant
        to this paragraph shall be conclusive. Until Tenant is advised of the
        adjustment in the rent, if any, pursuant to the provisions of this
        paragraph, Tenants monthly rental shall continue to be paid at the
        then current rate (including all prior adjustments to the operating
        expenses). Operating expenses shall be capped at an increase of five
        percent (5%) per year excluding, taxes and insurance.

    48. Tenant Improvements/Failure to Give Possession

    48.1 Landlord at its sole cost and expense, shall:
              *Build-out warehouse area as per the attached "Exhibit B" and
               "Exhibit. C".
              *Build-out the office area as to the attached plan and
               Landlord's Work shown as "Exhibit B" and "Exhibit C"
               respectively.

         It is mutually understood and agreed between Landlord and Tenant
         that Tenant anticipates making certain minor leasehold Improvements
         including but not limited to the following.
             (a) Drywall coverage (interior surface, only) of the southmost
             glass personnel door within the demised premises.
             (b) Application of a qualify floor seat to the entire warehouse
             area.
         Said improvements shall be accomplished at Tenant's sole expense using
         quality materials and skilled workmanship.

    48.2 In the event that the premises is not ready for occupancy on the
         estimated occupancy date of January 1, 1997 due to a delay in the
         anticipated completion of Tenant Finish as described in this
         paragraph, the lease shall continue in full force and effect except
         that the provision for payment of rent shall be waived on a daily
         basis until the date of substantial completion.

    49. Option to Renew - Non applicable.

    50. Exculpation. Not withstanding anything to the contrary contained
        herein, Landlord's liability under this lease shall be limited
        strictly to its interest in the Land and Improvements located at 5750
        East 58th Avenue, Commerce City, CO 80022 at which the leased premises
        is a part.

    51. Tenant's Personal Property. Landlord shall not bear any responsibility
        whatsoever for any of Tenant's personal property used or kept on the
        leased premises. Any losses suffered by Tenant for Tenant's personal
        property because of fire, theft, vandalism or any other risk shall be
        born solely by Tenant.

    52. Lien Protection. Tenant shall keep the premises free of mechanics
        liens. Tenant shall defend against all such liens, and if Tenant fails
        to do so, Landlord may do so at Tenant's expense.

    53. Hazardous Materials - Environmental Compliance. Tenant, its agents,
        employees, contractors and invitees shall use the Premises and
        conduct any operations thereon in compliance with all applicable
        federal, state and local environmental statutes, regulations,
        ordinances and any permits, approvals or judicial or administrative
        orders issued thereunder.

    53.1 Landlord represents and warrants as follows:
         (a) At no time have the premises been used for the generation,

                                     E-20

<PAGE>

         storage or disposal of hazardous Materials or as a land-fill or other
         waste disposal site. There are not now, nor have there ever been,
         underground storage tanks on the premises.

         (b) Landlord and the Premises are in full compliance with all laws,
         regulations, rules, or requirements of law of the Federal, State and
         local municipalities relating to the pollution or protection of the
         environment (including without limitation, air, water and land) and
         with all permits or licenses issued thereunder. No event has occurred
         which, would constitute non-compliance with such environmental laws.

         (c) There are no agreements, consent orders, decrees, judgments,
         license or permit conditions, or other directives, issued by a
         municipal department or agency which relate to the future use of the
         Premises or require any, change in the present condition or the
         Premises.

         (d) There are no actions, suites, claims or proceedings relating to
         a violation or non-compliance with any environmental law or with
         respect to the disposal, discharge or release of Hazardous Materials
         at or from the Premises.

         (e) Landlord has not received any notice from its insurance carrier
         or mortgagee as to recommendations made regarding Hazardous Materials
         at the Premises, and Landlord has not been denied insurance coverage
         (nor has any insurance coverage been canceled) by reason of Hazardous
         Materials at the Premises.

    53.2 Landlord covenant that it will not, prior to closing:
         (a) Make any change in the present use of the Premises.
         (b) Generate, store or dispose of Hazardous Materials, in a manner
         not legally permitted or authorized, on or from fire Premises nor
         permit others to do so.

    54. Environmental Hazards. Tenant covenants that:

    54.1 No Hazardous Substances (as hereinafter defined) shall be generated,
         treated, or stored of disposed of, or otherwise deposited in or
         located on the Premises, including without limitation, the surface
         and subsurface waters of the Premises. Except those substances
         incidental and used in Tenants business trade provided those
         substances are handled, stored and disposed of in accordance with
         all applicable laws.

    54.2 No activity shall be undertaken on the Premises which would cause:

         (a) The Premises to become a hazardous waste treatment, storage or
         disposal facility within the meaning of, or otherwise cause the
         Promises to be in violation of the Resource Conservation and
         Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., or any
         similar state law or local ordinance;

         (b) A release or threatened release from any source on the Premises
         of Hazardous Substances within the meaning of, or otherwise cause the
         Premises to be covered by, the Comprehensive Liability Act ("CERCLA"),
         42 U.S.C. Section 9601 et seq., or any similar state law or local
         ordinance or any other environmental law;

         (c) The discharge of pollutants or effluents into any water source or
         system, or the discharge into the air of any emissions which would
         require a permit under the federal water Pollution Control Act
         ("FWPCA"), 33 U.S.C. Section 1251 et seq., or the Clean Air Act
         ("CAA"), 42 U.S.C Section 7401 at seq., or any similar state law or
         local ordinance;

         (d) There shall be no substances or conditions in or on the Premises
         which may support a claim or cause of action under RCPA, CERCLA, any
         other federal, state or local environmental statutes, regulations,
         ordinances or other environmental regulatory requirements or under
         any common law claim relating to environmental matters, or could
         result in recovery by any governmental or private party of remedial
         or removal costs, natural resources damages, property damages in
         personal injuries of other costs, expenses or damages, or could
         result in injunctive relief arising from any alleged injury or
         threat of injury to health, safety or the environmental; and

        (e) There shall be no underground storage tanks or release or
         threatened releases from such tanks located on the Promises.

        For the purposes of this Lease, "Hazardous Substance" shall mean any
        and all hazardous or toxic substances, hazardous constituents,
        contaminants, wastes, pollutants or petroleum (including without
        limitation crude oil or any fraction thereof including without
        limitation hazardous or toxic substances, pollutants and/or
        contaminants as such terms are defined in CERCLA or RCA; asbestos
        or material containing asbestos; and PCBs, PCB articles, PCB
        containers, PCB article containers, PCB equipment. PCB transformers
        or PCB contaminated electrical equipment (as such terms are

                                     E-21

<PAGE>

        defined in Part 761 or Title 40, Code of Federal Regulations).

    55. Cleanup Obligation. If it is discovered that any Hazardous Substances
        or other materials described in Article 54.0 above have been deposited,
        released, discharged or otherwise caused to exist, on or from the
        Premises in violation of the provisions of Article 54.0 above, then
        Tenant agrees within a reasonable time to remove, clean up or take
        such other remedial action with regard to such substances as may be
        required by applicable law or regulations. Any such remedial action
        shall be the sole responsibility of Tenant and shall be conducted at
        Tenant's sole cost and expense. If Tenant fails to commence or
        diligently pursue such remedial action in Landlord's sole judgment,
        then after a notice to Tenant, Landlord may either declare an event of
        default under this Lease and exercise any and all remedies hereunder,
        or cause the taking of such remedial action as may be required at
        Tenants sole cost and expense, Tenant grants to Landlord and its
        agents and employees access to the Premises and the license to carry
        out such remedial action.

    56. Environmental Notice. Tenant shall give Landlord prompt notice of any
        of the following occurrences arising with regard to the Premises or
        Tenant's activities thereon:

    56.1 Any spill, release, threatened release or other occurrence that would
         constitute a violation of the provision of Articles 53.0 and 54.0
         above;

    56.2 The notification of any of the events set forth in Article 56.1 above
         to any federal, state or local governmental agency or authority;

    56.3 Any notices, claims or allegations of environmental violations or
         contamination received from any federal, state or local governmental
         agency or authority of the filing or commencement of any judicial
         or administrative proceeding by any such agency; or

    56.4 The filing or threatened filing of any judicial or administrative
         proceeding by any private party alleging injury or threat of injury to
         property, health, safety or the environment.

    57 Indemnity.

    57.1 Tenant hereby agrees to indemnify, defend and hold harmless the
         Landlord and its agents, affiliates, officers. directors and
         employees (all of such entities and persons being referred to herein
         individually as "Indemnified Person" and collectively as the
         "Indemnified Parties") from and against any and all liability,
         claims, demands, actions and causes of action, whatsoever (including
         without limitation reasonable attorney's fees and expenses and costs
         and expenses reasonably incurred to which any Indemnified Person may
         be subject insofar as they arise out of or relate to any alleged
         contamination of the Premises or alleged violation of environment
         statutes arising from any violation of Tenant's obligations under
         Articles 53.0 through and including Article 56.0 above

    57.2 Those costs, damages, liabilities, losses, claims, expenses
         (including without limitation attorney's fees and disbursements)
         for which the Indemnified Parties are indemnified hereunder shall
         be reimbursable as incurred without any requirement of waiting for
         the ultimate outcome of any litigation, claim or other Proceeding,
         and Tenant shall pay such costs, expenses, damages, liabilities,
         losses, claims, expenses (including without limitation attorney's
         fees and disbursements) as incurred by Landlord or other Indemnified
         Persons within fifteen (15) days after notice itemizing the amounts
         incurred to the date of such notice.

    58. Survival. The obligations of Tenant set forth in this Article 53.0
        shall survive the expiration or termination a the term of this Lease
        or the exercise by Landlord of any of its remedies hereunder.

    59. Subordination, Estoppel Letter and Attornment. Tenant shall at any
        time, and from time to time, upon not less than ten (10) days prior
        written notice from Landlord, execute, acknowledge, and deliver to
        Landlord a statement in writing, certifying that this Lease is
        unmodified and in full force and effect (or, if modified, stating
        the nature of such modification and certifying that this lease as so
        modified, is in full force and effect) and the dates to which rent
        and other charges are paid in advance, if any, and acknowledging that
        there are not, to Tenant's knowledge, any uncured defaults on the part
        of the Landlord hereunder, or specifying such default, if any are
        claimed, or acknowledging to any mortgagee that Tenant will not modify
        or amend this Lease without consent of such mortgagee, and certifying
        as to such other matters Landlord may reasonably request.
        In the event that Landlord or its principal sells, conveys, transfers
        or grants the Building or the premises to and by person, firm,
        corporation, company, or entity during the term hereby demises, Tenant
        agrees to attorn to such new owner, and Landlord and its principal
        shall be released from performance hereunder.

    60. Default. Three (3) days notice for rent default shall be given. For
        any other default Tenant shall have thirty (30) days to cure unless
        such default cannot be reasonably cured within thirty (30) days in
        which event Tenant must diligently proceed to cure the default.

    61. Subordination. Upon change of ownership through foreclosure or
        otherwise, the Purchaser shall not disturb Tenant's peaceful
        possession of the Premises providing Tenant is not in default under
        this lease.

                                     E-22

<PAGE>

    62. Waiver of Subrogation. Tenant and Landlord in consideration of the
        execution of this Lease, do herewith and hereby release and relieve
        the other for loss or damage arising out of or incident to the
        perils of fire, explosion, or any other peril described in "extended
        coverage" insurance endorsements approved for use in the State of
        Colorado which occurs, in, on or about the said Premises, whether
        due to negligence of any parties, their agents or employees or
        otherwise. This agreement shall apply to events involving such
        perils, which occur after this date and before this agreement is
        terminated in writing.

    63. Rent Payment and Escalation. The monthly rent and operating expenses
        will be paid in the amounts and on the dates listed below:

        January 1, 1997 to December 31, 1997   S2,500.00 per month
        January 1. 1998 to December 31, 1998   $2,656.25 per month
        January 1, 1999 to December 31, 1999   S2,812.50 per month

    64. Access prior to Commencement. It is mutually agreed and understood
        that the commencement date of this lease agreement shall be effective
        upon substantial completion of the improvements. Landlord agrees that
        upon execution of this agreement by all parties concerned, Tenant will
        be allowed access to the demised premises, rent free, until said
        commencement date, for the express purpose or making leasehold
        improvements.

                                     E-23

<PAGE>

                       NOICE TO OWNERS AND PROSPECTIVE
                            TENANTS AND BUYERS OF
                         REAL PROPERTY REGARDING THE
                       AMERICANS WITH DISABILITIES ACT


Please be advised that an owner or tenant of real property may be subject to
the Americans With Disabilities Act (the ADA), a Federal law codified at 42
USC 121 01, et seq. Among other requirements of the ADA that could apply to
your property, Title III of the ADA requires owners and tenants of "public
accommodations" to remove barriers to access by disabled persons and provide
auxiliary aids and services for hearing, vision or speech impaired persons by
January 26, 1992. The regulations under Title III of the ADA are codified at
28 CI-R Part 36.

We recommend that you and your attorney review the ADA and the regulations,
and, if appropriate, your proposed lease or purchase agreement, to determine 
if this law would apply to you, and the nature of the requirements. These
are legal issues. You are responsible for conducting your own independent
investigation of these issues. Please acknowledge your receipt of this notice
by signing and dating if below, Thank you.


Received this,  day Of August, 1995

/S/KEW MANAGEMENT CORP.
-----------------------
Lessor Signature
Kew Management Corporation
1001 S. Monaco Parkway. Suite 310, Denver, CO 80224

Received this 5th day of Dec.,1996

/S/BUDDY MERCER
-----------------------
Lessee Signature


                                     E-24

<PAGE>

                                  EXHIBIT C
                               LANDLORD'S WORK


The Landlord's Work outlined below is based upon the drawings herein set forth
as "Exhibit B". As such, Landlord's Work will be limited to the work set forth
herein. The Tenant shall be responsible for all costs associated with any
delays caused by additional work requests, changes to the original plans or
any other request which deviate from the original plan and construction bid,
per "Exhibit B"

    PLANS:       Landlord will provide the required blueprints for the
                 construction to complete Tenant's build-out.

    WALLS:       Warehouse Area: Drywall demising walls per code, fire taped.
                 Office Area: Per code, taped, sanded and painted.

    PARTITIONS:  Office Area: Landlord will provide one 400 square foot room
                 with one bathroom as per plan (Exhibit B).

    FLOORING:    Warehouse Area: Concrete floor to a smooth finish.
                 Office Area: Standard industrial grade carpet provided in
                 office, VCT provided in bathroom.

    DOORS:       Warehouse Area: Three (3) drive-in doors , three (3) exit
                 man doors
                 Office Area: Office entry door to be glass. Interior office
                 doors - 2 paint grade, solid core 1 3/4" wood.

    BUILT-IN'S:  None

    CEILING:     Warehouse Area: Open floor to deck ceiling.
                 Office Area: 2'x 4'aconstic ceiling tiles at a height of 8'.

    LIGHTING:    Warehouse Area: (6) 8' fluorescent fixtures.
                 Office Area: standard 2'x4' fluorescent fixtures.

    ELECTRICAL:  Warehouse Area: Standard 200 amps, 220V, 3 phase service
                 with one panel per plan. Landlord will provide limited 110
                 outlets to be determined, Any upgrade in additional service,
                 outlets lighting, electrical boxes, separate lines for
                 specific equipment (i.e. dedicated circuits) will be at
                 Tenant's expense.

                 Office Area: (5) 110 duplex receptacles

    SPRINKLERS:  Standard fire sprinkler system

    WASHROOM:    One (1) toilet, (1) lavatory

                 Washrooms shall have standard hot and cold water lines, hot
                 water heater, VCT flooring, painted drywall, handicap
                 handrail, and acoustic tile ceiling at a height of 8'.
                 Placement of fixtures, and size of doors to meet handicap
                 code requirements. Washrooms will remain in position where
                 drains are laid out.
                 Should Tenant desire to relocate the washroom, then any and
                 all expenses to do so will be born by Tenant.

    HEATING & AIR
    CONDITIONING:Warehouse Area: Landlord will provide Three (3 ) Reznor F130
                 unit gas heaters as per plan.
                 Office Area: Landlord will provide a heating and air
                 conditioning system.

Tenant is responsible for any and all utility and equipment connections,
deposits, impact fees and assessments imposed by any governmental authority
with respect to the use of these premises, and any and all work not provided
by Landlord.

It is Landlord's intention to provide Tenant with a basic build-out. All
decorator items, designer soffits, upgraded items, interior changes,
cabinetry, additional sinks, built-ins, additional HVAC, additional work
required specific to a piece of equipment, Finishing decor, improvements,
fixtures and equipment, not listed above, is the responsibility of the Tenant.

                                     E-25

<PAGE>

                                Exhibit 10.11

                               LEASE AGREEMENT

THIS LEASE AGREEMENT (the "Lease") is entered into this 11 day of February
1997, between Kidder Industrial ("Landlord") and Bonded Motors ("Tenant").
Landlord and Tenant agree as follows:

1. LEASE SUMMARY AND EXHIBITS.

   a. Leased Premises. The leased premises (the "Premises") consist of the 
   real property legally described on attached Exhibit A, and all 
   improvement thereon.

   b. Lease Commencement Date. The Lease shall commence on April 1, 1997, or
   such earlier or later date as provided in Section 3 (the "Commencement 
   Date").

   c. Lease Termination Date. The Lease shall terminate on April 1, 2000, or
   such earlier or later date as provided in Section 3 (the "Termination
   Date").

   d. Base Rent. The base monthly rent shall be: $1750.00. Rent shall be
   payable at Landlord's address shown in Section 1(h) below, or such 
   other place designated in writing by Landlord.

   e. Prepaid Rent. Upon execution of this Lease, Tenant shall deliver to 
   Landlord the sum of $1750.00 as prepaid rent, to be applied to the 
   Rent due for the 1st month of the Lease.

   f. Security Deposit. The amount of the security deposit is $1750.00.

   g. Permitted Use. The Premises shall be used only for WAREHOUSING &
   DISTRIBUTION ONLY (NO REBUILDING OR MANUFACTURING OF ANY KIND).

   h. Notice and Payment Addresses:
   Landlord:  KIDDER INDUSTRIAL 3223 C. ST N.E. BAY 2 AUBURN, WA 98002
              Fax No.: (206) 735-9319
   Tenant:    Bonded Motors
              Fax No.: (213) 589-2900

   i. Lease Commission.  Landlord shall pay a commission to BILL RUTLEDGE 
   ("Landlord's Broker") in the amount stated in a separate listing 
   agreement of, if there is no listing agreement, then (check one)
   [x]5.00% (complete only one) of the gross rent payable pursuant to
   section 1(d) or
   [ ]per square foot of the Premises.  The commission shall be earned upon
   occupancy of the Premises by Tenant, and paid one-half upon execution
   of this Lease and one-half upon occupancy of the Premises by Tenant.
   Landlord's Broker shall pay to ("Tenant's Broker") the amount stated in a
   Separate agreement between them or, if there is no agreement, 
   (complete only one) of the commission paid to Landlord's Broker, within
   five (5) days after receipt by Landlord's Broker.

   j. Exhibits.
   Exhibit A   Legal Description
   Exhibit B   Tenant Improvement Schedule

2. PREMISES. 
   Landlord leases to Tenant, and Tenant leases from Landlord the Premises 
   upon the terms s Lease.

3. TERM.
a. Commencement Date. The Lease shall commence on the date specified in 
   Section 1(b), or an such earlier date as may be specified by written 
   notice delivered by Landlord to Tenant advising Tenant that the premises 
   are ready for possession and specifying the Commencement Date which 
   shall not be less than 10 (30 if not completed) days following the date 
   of such notice. If Tenant occupies the Premises before the Commencement 
   Date specified in section 1(b), then the Commencement Date shall be the 
   date of occupancy. If Landlord acts diligently to make the Premises 
   available to Tenant, neither Landlord nor any agent or employee of 
   Landlord shall be liable for any damage or loss due to Landlord's 
   inability or failure to deliver possession of the Premises to Tenant as 
   provided in this Lease. The Termination Date shall be modified upon any 
   change in the Commencement Date so that the length of the Lease term is 
   not changed. If the Landlord does not deliver possession of the Premises 
   to Tenant within 10 days (60 if not completed) after the date specified 
   in Section 1(b), Tenant may elect to cancel this Lease by giving written 
   notice to Landlord within 10 days after such time period ends. If Tenant 
   gives such notice, the Lease shall be cancelled, all prepaid rent and 
   security deposits shall be refunded to tenant, and neither Landlord nor 
   Tenant shall have any further obligations to the other. The first "Lease 
   Year" commence on the Commencement Date and shall end on the date which 
   is twelve (12) months from the end of the month in which the Commencement 
   Date occurs. Each successive Lease Year during the initial term and any 
   extension term shall be twelve (12) months, commencing on the first day 
   following the end of preceding Lease Year, except that the last Lease Year
   shall end on the Termination Date.


                                     E-26

<PAGE>

b. Tenant Obligations. To the extent Tenant's tenant improvements are not 
   completed in time for the Tenant to occupy or take possession of the 
   Premises on the Commencement Date due to the failure of Tenant to 
   fulfill any of its obligations under this Lease, the Lease shall 
   nevertheless commence on the Commencement Date.

   Except as specified elsewhere in this Lease, Landlord makes no 
   representations or warranties to Tenant regarding the Premises, including 
   the structural condition of the Premises and the condition of all 
   mechanical, electrical, and other systems on the Premises. Except for any 
   tenant improvements described on attached Exhibit B to be completed by 
   Landlord (defined therein as "Landlord's Work"), Tenant shall be 
   responsible for performing any work necessary to bring the Premises into 
   condition satisfactory to Tenant. By signing this Lease, Tenant 
   acknowledges that it has had adequate opportunity to investigate the 
   Premises, acknowledges responsibility for making any corrections, 
   alterations and repairs to the Premises (other than the Landlord's Work), 
   and acknowledges that the time needed to complete any such items shall not 
   delay the Commencement Date.

   Attached Exhibit B sets forth all Landlord's Work, if any, and all 
   tenant improvements to be completed by Tenant ("Tenant's Work") which is 
   to be performed on the Premises. Responsibilities for design, payment 
   and performance of all such work shall be as set forth on attached 
   Exhibit B. If Tenant fails to notify Landlord of any defects in the 
   Landlord's Work within ten (10) days of delivery of possession to Tenant,
   Tenant shall be deemed to have accepted the Premises in their then 
   condition. If Tenant discovers any major defects in the Landlord's Work 
   during this 10-day period that would prevent Tenant from using the 
   Premises for its intended purpose, Tenant shall so notify Landlord in 
   writing and the Commencement Date shall be delayed until after Landlord 
   has corrected the major defects and Tenant has had five (5) days to 
   inspect and approve the Premises after Landlord's correction of such 
   defects. The Commencement Date shall not be delayed if Tenant's 
   inspection reveals minor defects in the Landlord's Work that will not 
   prevent Tenant from using the Premises for their intended purpose. 
   Tenant shall prepare a punch list of all minor defects and provide the 
   punch list to Landlord. Landlord shall promptly correct all punch list 
   items.

4. RENT. Tenant shall pay Landlord without demand, deduction or offset, 
   in lawful money of the United States, the monthly rental stated in 
   Section 1(d) in advance on or before the first day of each month during 
   the Lease Term, and any other additional payments due to Landlord 
   (collectively the "Rent") when required under this Lease. Payments for 
   any partial month at the beginning or end of the Lease term shall be 
   prorated.

   If any sums payable by Tenant to Landlord under this Lease are not 
   received by the fifth (5th) day of each month, Tenant shall pay Landlord
   in addition to the amount due, for the cost of collecting and handling 
   such late payment, an amount equal to the greater of $100 or five 
   percent (5%) of the delinquent amount. In addition, a11 delinquent sums
   payable by Tenant to Landlord and not paid within five days of the due 
   date shall, at Landlord's option, bear interest at the rate of twelve 
   percent (12%) per annum, or the highest rate of interest allowable by law,
   Whichever is less. Interest on all delinquent amounts shall be calculated 
   from the original due date to the date of payment.

   Landlord's acceptance of less than the full amount of any payment due 
   from Tenant shall not be deemed an accord and satisfaction or compromise
   of such payment unless Landlord specifically consents in writing to 
   payment of such lesser sum as an accord and satisfaction or compromise of
   the amount which Landlord claims.

5. SECURIIY DEPOSIT. Upon execution of this Lease. Tenant shall deliver to 
   Landlord the security deposit specified in Section 1(f) above. Landlord 
   may commingle the security deposit with its other funds. If Tenant 
   breaches any covenant or condition of this Lease, including but not 
   limited to the payment of Rent, Landlord may apply all or any part of the
   security deposit to the payment of any sum in default and any damage 
   suffered by Landlord as a result of Tenant's breach. In such event, 
   Tenant shall, within five (5) days after written demand therefor by 
   Landlord, deposit with Landlord the amount so applied. Any payment to 
   Landlord from the security deposit shall not be construed as
   a payment of liquidated damages for any default. If Tenant complies with
   all of the covenants and conditions of this Lease throughout the Lease 
   term, the security deposit shall be repaid to Tenant without interest 
   within 30 days after the vacation of the Premises by Tenant.

6. USES. The Premises shall be used only for the use(s) specified in 
   Section 1 g) above (the "Permitted Use"), and for no other, business or 
   purpose without the prior written consent of Landlord. No act shall be 
   done on or around the Premises that is unlawful or that will increase the 
   existing rate of insurance on the Premises. Tenant shall not commit or 
   allow to be committed any waste upon the Premises, or any public or 
   private nuisance.

7. COMPLIANCE WITH LAWS. Tenant shall not cause or permit the Premises to 
   be used in any way which violates any law, ordinance, or governmental 
   regulation or order. Landlord represents to Tenant that, to the best of 
   Landlord's knowledge, with the exception of any Tenant's Work, as of the 
   Commencement Date, the Premises comply with all applicable laws, rules, 
   regulations, or orders, including without limitation, the Americans With 
   Disabilities Act, if applicable, and Landlord shall be responsible to 
   promptly cure any noncompliance which existed on the Commencement Date. 
   Tenant shall be responsible for complying with all laws applicable to the 
   Premises as a result of Tenant's particular use, such as modifications 
   required by the Americans With Disabilities Act as a result of Tenant 
   opening, the Premises to the public as a place of public accommodation. 
   If the enactment or enforcement of any law, ordinance, regulation or code

                                     E-27

<PAGE>

   during the Lease term requires any changes to the Premises during the Lease
   term, the Tenant shall perform all such changes at its expense if the
   changes are required due to the nature of Tenant's activities at the
   Premises, or to alterations that Tenant seeks to make to the Premises;
   otherwise, Landlord shall perform all such changes at its expense.

8. UTILITIES. Landlord shall not be responsible for providing any 
   utilities to the Premises, but represents and warrants to Tenant that as 
   of the Commencement Date electricity, water, sewer, and telephone 
   utilities are available at or adjacent to the Premises. Tenant shall 
   determine whether the available capacity of such utilities will meet 
   Tenant's needs. Tenant shall install and connect, if necessary, and 
   directly pay for all water, sewer, gas, janitorial, electricity, garbage 
   removal, heal, telephone, and other utilities and services used by Tenant 
   on the Premises during the Term, whether or not such services are billed 
   directly to Tenant. Tenant will also procure, or cause to be procured, 
   without cost to Landlord, all necessary permits, licenses or other 
   authorizations required for the lawful and proper installation, 
   maintenance, replacement, and removal on or from the Premises of wires, 
   pipes, conduits, tubes, and other equipment and appliances for use in 
   supplying all utilities or services to the Premises. Landlord, upon 
   request of Tenant, and at the sole expense and liability of Tenant, shall 
   join with Tenant in any application required for obtaining or continuing 
   such utilities or services. 

9. TAXES. Tenant shall pay all Taxes (defined below) applicable to the 
   Premises during the Lease term. All payments for Taxes shall be made at 
   least ten (10) days prior to their due date. Tenant shall promptly furnish 
   Landlord with satisfactory evidence that Taxes have been paid. If any 
   Taxes paid by Tenant cover any period of time before or after the 
   expiration of term, Tenant's share of those Taxes paid will be prorated 
   to cover only the period of time within the tax fiscal year during which 
   this Lease was in effect, and Landlord shall promptly reimburse Tenant to 
   the extent required. If Tenant fails to timely pay any Taxes, Landlord 
   may pay them, and Tenant shall repay such amount to Landlord with 
   Tenant's next rent installment. The term "Taxes" shall mean: (i) any form
   of real estate tax or assessment imposed on the Premises by any 
   authority, including any city, state or federal government, or any 
   improvement district, as against any legal or equitable interest of 
   Landlord or Tenant in the Premises or in the real property of which the 
   Premises are a part, or against rent paid for leasing the Premises; and 
   (ii) any form of personal property tax or assessment imposed on any 
   personal property, fixtures, tenant improvements, equipment, inventory, 
   or other items, and all replacements, improvements, and additions to 
   them, located on the Premises, whether owned by Landlord or Tenant. 
   "Taxes" shall exclude any net income tax impose on Landlord for income 
   that Landlord receives under this Lease. 

   Tenant may contest the amount or validity, in whole or in part, of any 
   Taxes at its sole expense, only after paying such Taxes or posting such 
   security as Landlord may reasonably require in order to protect the 
   Premises against loss or forfeiture. Upon the termination of any such 
   proceedings, Tenant shall pay the amount of such Taxes or part of such 
   Taxes as finally determined, together with any cost, fees, interest 
   penalties, or other related liabilities. Landlord shall cooperate with 
   Tenant in contesting any Taxes, provided landlord incurs no expense or 
   liability in doing so.

10.ALTERATIONS. Tenant may make alterations, additions or improvement to 
   the Premises, including any Tenant's work identified on attached Exhibit B
   ("Alterations"), with the prior written consent of Landlord. The term 
   "Alterations" shall not include the installation of shelves, movable 
   partitions. Tenant's equipment, and trade fixtures which may be performed 
   without damaging existing improvements or the structural integrity of the 
   Premises, and Landlord's consent shall not be required for Tenant's 
   installation of those items. Tenant shall complete all Alterations at 
   Tenant's expense in compliance with all applicable laws and in accordance 
   with plans and specifications approved by Landlord, and using contractors 
   approved by Landlord. Landlord shall be deemed the owner of a11 
   Alterations except for those which Landlord requires to be remove at the 
   end of the Lease term. Tenant shall remove all Alterations at the end of 
   the Lease term unless Landlord conditioned its consent upon Tenant 
   leaving a specified Alteration at the Premises, in which case Tenant 
   shall not remove such Alteration. Tenant sha11 immediately repair any 
   damage to the Premises caused by removal of Alterations. 

11.REPAIRS AND MAINTENANCE. Tenant shall, at its sole expense, maintain 
   the Premises in good condition and promptly make all repairs and 
   replacements, whether structural or non-structural, necessary to keep the 
   Premises in safe operating condition, including all utilities and other 
   systems serving the Premises, but excluding the roof, foundation and 
   exterior walls which Landlord shall maintain in good condition and repair 
   at Landlord's expense. Tenant shall not damage any demising wall or 
   disturb the structural integrity of the Premises and shall promptly 
   repair any damage or injury done to any such demising walls or structural 
   elements caused by Tenant or its employees, agents, contractors, or 
   invitees. Notwithstanding anything in this Section to the contrary, 
   Tenant shall not be responsible for any repairs to the Premises made 
   necessary by the acts of Landlord or its agents, employees, contractors 
   or invitees therein. 

   Upon expiration of the Lease term, whether by lapse of time or otherwise, 
   Tenant shall promptly and peacefully surrender the Premises, together 
   with all keys, to the Landlord in as good condition as when received by 
   Tenant from Landlord or as thereafter improved, reasonable wear and tear 
   and insured casualty excepted.

                                     E-28

<PAGE>

12.ACCESS. After reasonable notice from Landlord (except in cases of 
   emergency, where no notice is required), Tenant shall permit Landlord and 
   its agents and employees to enter the Premises at all reasonable times 
   for the purposes of repair or inspection. This Section shall not impose 
   any repair or other obligation upon Landlord not expressly stated 
   elsewhere in, this Lease. After reasonable notice to Tenant, Landlord 
   shall have the right to enter the Premises for the purpose of showing the 
   Premises to prospective purchasers or lenders at any time, and to 
   prospective tenants within 180 days prior to the expiration or sooner 
   termination of the Lease term.

13.SIGNAGE. Tenant shall obtain Landlord's written consent before 
   installing any signs upon the Premises. Tenant shall install any approved 
   signage at Tenant's sole expense and in compliance with all applicable 
   laws. Tenant shall not damage or deface the Premises in installing or 
   removing signage and shall repair any injury or damage to the Premises 
   caused by such installation or removal.

14.DESTRUCTION OR CONDEMNATION.

a. Damage and Repair. If the Premises are partially damaged but not 
   rendered untenantable, by fire or other casualty, then Landlord shall 
   diligently restore the Premises and this Lease shall not terminate. The 
   Premises shall not be deemed untenantable if less than twenty-five 
   percent (25%) of the Premises are damaged. Landlord shall have no 
   obligation to restore the Premises if insurance proceeds are not 
   available to pay the entire cost of such restoration. If insurance 
   proceeds are available to Landlord but are not sufficient to pay the 
   entire cost of restoring the Premises, then Landlord may elect to 
   terminate this Lease and keep the insurance proceeds, by notifying 
   Tenant within sixty (60) days of the date of such casualty. 

   If the Premises are entirely destroyed, or partially damaged and 
   rendered untenantable, by fire or other casualty, Landlord may, at its 
   option: (a) terminate this Lease as provided herein, or (b) restore the 
   Premises to their previous condition. If, within 60 days after receipt 
   by Landlord from Tenant of written notice that Tenant deems the Premises 
   untenantable, Landlord fails to notify Tenant of its election to restore 
   the Premises, or if Landlord is unable to restore the Premises within 
   six (6) months of the date of the casualty event, then Tenant may elect 
   to terminate the Lease. 

   If Landlord restores the Premises under this Section 14(a), Landlord 
   shall proceed with reasonable diligence to complete the work, and the 
   base monthly rent shall be abated in the same proportion as the 
   untenantable portion of the Premises bears to the whole Premises, 
   provided that there shall be a rent abatement only if the damage or 
   destruction of the Premises did not result from, or was not contributed 
   to directly or indirectly by the act, fault or neglect of Tenant, or 
   Tenant's officers, contractors, licensees, agents, servants, employees, 
   guests. invitees or visitors. Provided, Landlord complies with its 
   obligations under this Section, no damages, compensation or claim shall 
   be payable by Landlord for inconvenience, loss of business or annoyance 
   directly, incidentally or consequentially arising from any repair or 
   restoration of any portion of the Premises. Landlord will not carry 
   insurance of any kind for the protection of Tenant or any improvements 
   paid for by Tenant as provided in Exhibit B or on Tenant's furniture or 
   on any fixtures, equipment, improvements or appurtenances of Tenant 
   under this Lease, and Landlord shall not be obligated to repair any 
   damage thereto or replace the same unless the damages caused by 
   Landlord's negligence.

b. If the Premises are made untenantable by eminent domain, or conveyed 
   under a threat of condemnation, this Lease shall automatically terminate 
   as of the earlier of the date title vests in the condemning authority or 
   the condemning authority first has possession of the Premises and all 
   Rents and other payments shall be paid to that date. In case of taking 
   of a part of the Premises that does not render the Premises 
   untenantable, then this Lease shall continue in full force and effect 
   and the base monthly rental shall be equitably reduced based on the 
   proportion by which the floor area of any structures is reduced, such 
   reduction in Rent to be effective as of the earlier of the date the 
   condemning authority first has possession of such portion or title vests 
   in the condemning authority. Landlord shall be entitled to the entire 
   award from the condemning authority attributable to the value of the 
   Premises and Tenant shall make no claim for the value of its leasehold. 
   Tenant shall be permitted to make a separate claim against the 
   condemning authority for moving expenses or damages resulting from 
   interruption in its business, provided that in no event shall Tenant's 
   claim reduce Landlord's award.

15.INSURANCE.

a. Liability Insurance. During the Lease term, Tenant shall pay for and 
   maintain commercial general liability insurance with broad form property 
   damage and contractual liability endorsements. This policy shall name 
   Landlord as an additional insured, and shall insure Tenant's activities 
   and those of Tenant's employees, officers, contractors, licensees, 
   agents, servants, employees, guests, invitees or visitors with respect 
   to the Premises against loss, damage or liability for personal injury or 
   death or loss or damage to property with a combined single limit of not 
   less than $1,000,000, and a deductible of not more than $5,000. The 
   insurance will be noncontributory with any liability insurance carried 
   by Landlord.

b. Casualty Insurance. During the Lease term, Tenant shall pay for and 
   maintain all-risk coverage casualty insurance(with coverage for 
   earthquake and, if the Premises are in a flood plain, flood damage) for 
   the Premises, in an amount sufficient to prevent Landlord or Tenant from 
   becoming a co-insurer under the terms of the policy, and in an amount 
   not less than the replacement cost of the Premises with a deductible of 
   not more than $5,000. The casualty insurance policy shall name tenant as 

                                     E-29

<PAGE>

   the insured and Landlord and Landlord's lender(s) as additional 
   insured, with loss payable to Landlord. Landlord's lender(s), and 
   Tenant as their interest may appear. In the event of a casualty loss on 
   the Premises, Landlord may apply insurance proceeds under the casualty 
   insurance policy in the manner described in Section 14(a).

c. Miscellaneous. Insurance required under this Section shall be with 
   companies rated A-XV or better in Best's Insurance Guide, and which are 
   authorized to transact business in the State of Washington. No insurance 
   policy shall be cancelled or reduced in coverage and each such policy 
   shall provide that it is not subject to cancellation or a reduction in 
   coverage, age except after thirty (30) days prior written notice to 
   Landlord. Tenant shall deliver to Landlord upon commencement of the 
   Lease and from time to time thereafter, copies or certificates of the 
   insurance policies required by this Section. In no event shall the limit 
   of such policies be considered as limiting the liability of Tenant under 
   this Lease. 

d. Waiver of Subrogation. Landlord and Tenant hereby release each other 
   and any other tenant, their agents or employees, from responsibility 
   for, and waive their entire claim of recovery for any loss or damage 
   arising from any cause covered by insurance required to be carried by 
   each of them. Each party shall provide notice to the insurance carrier 
   or carriers of this mutual waiver of subrogation, and shall cause its 
   respective insurance carriers to waive all rights of subrogation against 
   the other. This waiver shall not apply to the extent of the deductible 
   amounts to any such policies or to the extent of liabilities exceeding 
   the limits of such policies.

16.INDEMNIFICATION. Tenant shall defend, indemnify, and hold Landlord 
   harmless against all liabilities, damages, costs, and expenses, including 
   attorneys' fees, arising from any negligent or wrongful act or omission 
   of Tenant or Tenant's officers, contractors, licensees, agents, servants, 
   employees, guests, invitees, or visitors on or around the Premises as a 
   result of  any act, omission or negligence of Tenant, or Tenant's 
   officers, contractors, licensees, agents, servants, employees, guests, 
   invitees, or visitors, or arising from any breach of this Lease by 
   Tenant. Tenant shall use legal counsel acceptable to Landlord in defense 
   of any action within Tenant's defense obligation. Landlord shall defend, 
   indemnify and hold Tenant harmless against all liabilities, damages, 
   costs, and expenses, including attorneys' fees, arising from any 
   negligent or wrongful act or omission of Landlord or Landlord's officers, 
   contractors, licensees, agents, servants, employees, guests, invitees or 
   visitors on or around the Premises as a result of any act, omission or 
   negligence of Landlord. or Landlord's officers, contractors, licensees, 
   agents, servants, employees. guests, invitees, or visitors, or arising 
   from any breach of this Lease by Landlord. Landlord shall use legal 
   counsel acceptable to Tenant in defense of any action within Landlord's 
   defense obligation. 

17.ASSIGNMENT AND SUBLETTING. Tenant shall not assign, sublet, mortgage, 
   encumber or otherwise transfer any interest in this Lease (collectively 
   referred to as a "Transfer") or any part of the Premises, without first 
   obtaining Landlord's written consent which shall not be unreasonably 
   withheld or delayed. No Transfer shall relieve Tenant of any liability 
   under this Lease notwithstanding Landlord's consent to such transfer. 
   Consent to any Transfer shall not operate as a waiver of the necessity 
   for Landlord's consent to any subsequent Transfer.

   If Tenant is a partnership, limited liability company, corporation, or 
   other entity, any transfer of this Lease by merger, consolidation, 
   redemption or liquidation, or any change(s) in the ownership of, or power 
   to vote, which singularly or collective represents a majority of the 
   beneficial interest in Tenant, shall constitute a Transfer under this 
   Section.

   As a condition to Landlord's approval, if given, any potential assignee 
   or sublessee otherwise approved by Landlord shall assume all obligations 
   of Tenant under this Lease and shall be jointly and severally liable with 
   Tenant and any guarantor, if required, for the payment of Rent and 
   performance of a11 terms of this Lease. In connection with any Transfer, 
   Tenant shall provide Landlord with copies of all assignments, Subleases 
   and assumption instruments.

18.LIENS. Tenant shall keep the Premises free from any liens created by 
   or through Tenant. Tenant shall indemnify and hold Landlord harmless from 
   liability from any such liens including, without limitation, liens 
   arising from any alterations. If a lien is filed against the Premises by 
   any person claiming by, through or under Tenant, Tenant shall, upon 
   request of Landlord, at tenant's expense, immediately furnish to Landlord 
   a bond in form and amount and issued by a surety satisfactory to 
   Landlord, indemnifying Landlord and the Premises against all liabilities, 
   costs and expenses, including attorneys' fees, which Landlord could 
   reasonably incur as a result of such lien(s). 

19.DEFAULT. The following occurrences shall each be deemed an Event of 
   Default by Tenant. 

a. Failure To Pay. Tenant fails to pay any sum, including Rent, due under 
   this Lease following five (5) days written notice from Landlord of the 
   failure to pay. 

b. Vacation/Abandonment. Tenant vacates the Premises (defined as an 
   absence for at least 15 consecutive days without prior notice to 
   Landlord), or Tenant abandons the Premises (defined as an absence of 
   five (5) days or more while Tenant is in breach of some other term of 
   this Lease). Tenant's vacation or abandonment of the Premises shall not 
   be subject to any notice or right to cure. 

c. Insolvency. Tenant becomes insolvent, voluntarily or involuntarily 
   bankrupt, or a receiver, assignee or other liquidating officer is appointed
   for Tenant's business, provided that in the event of any involuntary

                                     E-30

<PAGE>

   bankruptcy or other insolvency proceeding, the existence of such proceeding
   such constitute and Event of Default only if such proceeding is not
   dismissed or vacated within 60 days after its institution or commencement.

d. Levy or Execution. Tenant's interest in this Lease or the Premises, or 
   any part thereof, is taken by execution or other process of law directed 
   against Tenant, or is taken upon or subjected to any attachment by any 
   creditor of Tenant, if such attachment is not discharged within 15 days 
   after being levied.

e. Other Non-Monetary Defaults. Tenant breaches any agreement, term or 
   covenant of this Lease other than one requiring the payment of money and 
   not otherwise enumerated in this Section, and the breach continues for a 
   period of 30 days after notice by Landlord to Tenant of the breach.

f. Failure to Take Possession. Tenant fails to take possession of the 
   Premises on the Commencement Date.

20.REMEDIES.
   Landlord shall have the following remedies upon an Event of Default.
   Landlord's rights and remedies under this Lease shall be cumulative, and 
   none shall exclude any other right or remedy allowed by law.

a. Termination of Lease. Landlord may terminate Tenant's interest under 
   the Lease, but no act by Landlord other than written notice from 
   Landlord to Tenant of termination shall terminate this Lease. The Lease 
   shall terminate on the date specified in the notice of termination. Upon 
   termination of this Lease, Tenant will remain liable to Landlord for 
   damages in an amount equal to the rent and other sums that would have 
   been owing by Tenant under this Lease for the balance of the Lease term, 
   less the net proceeds, if any, of any reletting of the Premises by 
   Landlord subsequent to the termination, after deducting all Landlord's 
   Reletting Expenses (as defined below). Landlord shall be entitled to 
   either collect damages from Tenant monthly on the days on which rent or 
   other amounts would have been payable under the Lease or alternatively, 
   Landlord may accelerate Tenant's obligations under the Lease and recover 
   from Tenant: (i)unpaid rent which had been earned at the time of 
   termination; (ii) the amount by which the unpaid rent which would have 
   been earned after termination until the time of award exceeds the amount 
   of rent loss that Tenant proves could reasonably have been avoided;
   (iii) the amount by which the unpaid rent for the balance of the term of 
   the Lease after the time of award exceeds the amount of rent loss that 
   Tenant proves could reasonably be avoided (discounting such amount by 
   the discount rate of the Federal Reserve Bank of San Francisco at the 
   time of the award, plus 1%); and (iv) any other amount necessary to 
   compensate Landlord for a11 the detriment proximately caused by Tenant's 
   failure to perform its obligations under the Lease, or which in the 
   ordinary course would be likely to result from the Event of Default, 
   including without limitation Relettling Expenses described in Section 
   20b.

b. Re-Entry and Reletting. Landlord may continue this Lease in full force 
   and effect, and without demand or notice, re-enter and take possession 
   of the Premises or any part thereof, expel the Tenant from the Premises 
   and anyone claiming through or under the Tenant, and remove the personal 
   property of either. Landlord may relet the Premises, or any part of 
   them, in Landlord's or Tenant's name for the account of Tenant, for such 
   period of time and at such other terms and conditions, as Landlord, in 
   its discretion, may determine. Landlord may collect and receive the 
   rents for the Premises. Re-entry or taking possession of the Premises by 
   Landlord under this Section shall not be construed as an election on 
   Landlord's part to terminate this Lease, unless a written notice of 
   termination is given to Tenant. Landlord reserves the right following 
   any re-entry or reletting, or both, under this Section to exercise its 
   right to terminate the Lease. During the event of Default, Tenant will 
   pay Landlord the rent and other sums which would be payable under this 
   Lease if repossession had not occurred, plus the net proceeds, if any, 
   after reletting the Premises, after deducting Landlord's reletting 
   Expenses. "Reletting Expenses" is defined to include all expenses 
   incurred by Landlord in connection with reletting the Premises, 
   including without limitation, all repossession costs, brokerage 
   commissions, attorneys fees, remodeling and repair costs, costs for 
   removing and storing Tenant's property and equipment, and rent 
   concessions granted by Landlord, to any new Tenant, prorated over the 
   life of the new lease.

c. Waiver of Redemption Rights. Tenant, for itself, and on behalf of any 
   and all persons claiming through or under Tenant, including creditors of 
   all kinds, hereby waives and surrenders all rights and privileges which 
   they may have under any present or future law, to redeem the Premises or 
   to have a continuance of this Lease for the Lease term, as it may have 
   been extended.

d. Nonpayment of Additional Rent. All costs which Tenant agrees to pay to 
   Landlord pursuant to this Lease shall in the event of nonpayment be 
   treated as if they were payments of Rent, and Landlord shall have all 
   the rights herein provided for in case of nonpayment of Rent.

e. Failure to Remove Property. If Tenant fails to remove any of its 
   property from the Premises at Landlord's request following an uncured 
   Event of Default, Landlord may, at its option, remove and store the 
   property at Tenant's expense and risk. If Tenant does not pay the 
   storage cost within five (5) days of Landlord's request, Landlord may, 
   at its option, have any or a11 of such property sold at public or 
   private sale (and Landlord may become a purchaser at such sale), in such 
   manner as Landlord deems proper, without notice to Tenant. Landlord 
   shall apply the proceeds of such sale: (i) to the expense of such sale, 
   including reasonable attorneys fees actually incurred, (ii) to the 

                                     E-31

<PAGE>

   payment of the costs or charges for storing such property;, (iii) to the 
   payment of any other sums of money which may then be or thereafter 
   become due Landlord from Tenant under any of the terms hereof; and (iv) 
   the balance, if any, to Tenant. Nothing in this Section shall limit 
   Landlord's right to sell Tenant's personal property as permitted by law 
   to foreclose Landlord's lien for unpaid rent.

21.MORTGAGE SUBORDINATION AND ATTORNMENT. This Lease shall automatically 
   be subordinate to any mortgage or deed of trust created by Landlord which 
   is now existing or hereafter placed upon the Premises including any 
   advances, interest, modifications, renewals, replacements or extensions 
   ("Landlord's Mortgage"), provided the holder of any Landlord's Mortgage 
   or any person(s) acquiring the Premises at any sale or other proceeding 
   under any such Landlord's Mortgage shall elect to continue this Lease in 
   full force and effect. Tenant shall attorn to the holder of any 
   Landlord's Mortgage or any person(s) acquiring the Premises at any sale 
   or other proceeding under any Landlord's Mortgage provided such person(s) 
   assume the obligations of Landlord under this Lease. Tenant shall 
   promptly and in no event later than fifteen (15) days execute, 
   acknowledge and deliver documents which the holder of any Landlord's 
   Mortgage may reasonably require as further evidence of this subordination 
   and attornment. Notwithstanding the foregoing, Tenant's obligations under 
   this Section are conditioned on the holder of each of Landlord's Mortgage 
   and each person acquiring the Premises at any sale or other proceeding 
   under any such Landlord's Mortgage not disturbing Tenant's occupancy and 
   other rights under this Lease, so long as no uncured Event of Default 
   exists.

22.NON-WAIVER. Landlord's waiver of any breach of any term contained in this
   Lease shall not be deemed to be a waiver of the same term for subsequest
   acts of Tenant. The acceptance by Landlord of Rent or other amounts due
   by Tenant hereunder shall not be deemed to be a waiver of any breach by
   Tenant preceding such acceptance. 

23.HOLDOVER. If Tenant shall, the written consent of Landlord, hold over 
   after the expiration or termination of the Term, such tenancy shall be 
   deemed to be on a month-to-month basis and may be terminated according to 
   Washington law. During such tenancy, Tenant agrees to pay to Landlord 
   125% the rate of rental last payable under this Lease, unless a different 
   rate is agreed upon by Landlord. All other terms of the Lease shall 
   remain in effect. 

24.NOTICES. All notices under this Lease shall be in writing and 
   effective (i) when delivered in person, (ii) three (3) days after being 
   sent by registered or certified mail to Landlord or Tenant, as the Case 
   may be, at the Notice Addresses set forth in Section 1 (h), or (iii) upon 
   confirmed transmission by facsimile to such persons at the facsimile 
   numbers set forth in Section 1 (h)or such other addresses/facsimile 
   numbers as may from time to time be designated by such parties in 
   writing.

25.COSTS AND ATTORNEYS' FEES. If Tenant or Landlord engage the services 
   of an attorney to collect monies due or to bring any action for any 
   relief against the other, declaratory or otherwise, arising out of this 
   Lease, including any suit by Landlord for the recovery of Rent or other 
   payments, or possession, of the Premises, the losing party shall pay the 
   prevailing party a reasonable sum for attorneys fees in such suit, at 
   trial and on appeal.

26.ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written 
   request of Landlord, execute, acknowledge and deliver to Landlord or its 
   designee a written statement specifying the following, subject to any 
   modifications necessary to make such statements true complete (i) the 
   date the Lease term commenced and the date it expires; (ii) the amount 
   of minimum monthly Rent and the date to which such Rent has been paid; 
   (iii) that this Lease is in full force and effect and has not been 
   assigned, modified, supplemented or amended in any way; (iv) that this 
   Lease represents the entire agreement between the parties; (v) that all 
   conditions under this Lease to be performed by Landlord have been 
   satisfied; (vi) that there are no existing claims, defenses or offsets 
   which the Tenant has against the enforcement of this Lease by Landlord; 
   (vii) that no Rent has been paid more than one month in advance; and 
   (viii) that no security has been deposited with Landlord (or, if so, the
   amount thereof).  Any such statement delivered pursuant to this Section
   may be relied upon by a prospective purchaser of Landlord's interest or
   assignee of any mortgage or new mortgagee of Landlord's interest in 
   the Premises. If Tenant shall fail to respond within ten (10) days of 
   receipt by Tenant of a written request by Landlord as herein provided, 
   Tenant shall be deemed to have given such certificate as above provided 
   without modification and shall be deemed to have admitted the accuracy of 
   any information supplied by Landlord to a prospective purchaser or 
   mortgagee.

27.TRANSFER OF LANDLORD'S INTEREST. This Lease shall be assignable by 
   Landlord without the consent of Tenant. In the event of any transfer or 
   transfers of Landlord's interest in the Premises, other than a transfer 
   for security purposes only, upon the assumption of this Lease by the 
   transferee, Landlord shall be automatically relieved of obligations and 
   liabilities accruing from and after the date of such transfer, except for 
   any retained security deposit or prepaid rent, and Tenant shall attorn to 
   the transferee.

28.RIGHT TO PERFORM. If Tenant shall fail to timely pay any sum or perform
   any other act on its part to be performed hereunder, Landlord may make
   any such payment or perform any such other act on Tenant's part to 
   be made or performed as provided in this Lease. Tenant shall, on demand, 
   reimburse Landlord for its expenses incurred in making such payment 
   performance. Landlord shall (in addition to any other right or remedy of 
   Landlord provided by law) have the same rights and remedies in the event 
   of the nonpayment of sums due under this Section as in the case of 
   default by Tenant in the payment of Rent.

                                     E-32

<PAGE>

29.HAZARDOUS MATERIAL. Landlord represents and warrants to Tenant that 
   to the best of Landlord's knowledge, there is no "Hazardous Material" (as 
   defined below) on, in, or under the Premises as of the Commencement Date 
   otherwise disclosed to Tenant in writing before the execution of this 
   Lease. If there is any Hazardous Material on, in, or under the Premises 
   as of the Commencement Date which has been or thereafter becomes 
   unlawfully released through no fault of Tenant, then Landlord shall 
   indemnify, defend and hold Tenant harmless from any and all claims, 
   judgments, damages, penalties, fines, costs, liabilities or losses 
   including without limitation sums paid in settlement of claims, 
   attorneys' fees, consultant fees and expert fees, incurred or suffered by 
   Tenant either during or after the Lease term as the result of such 
   Contamination.

   Tenant shall not cause or permit any Hazardous Material to be brought 
   upon, kept, or used in or about, or disposed of on the Premises by 
   Tenant, its agents, employees, contractors or invitees, except in strict 
   compliance with all applicable federal, state and local laws, 
   regulations, codes and ordinances. If Tenant breaches the obligations 
   stated in the preceding sentence, then Tenant shall indemnify, defend and 
   hold Landlord harmless from any and all claims, judgments, damages, 
   penalties, fines, costs, liabilities or losses including, without 
   limitation, diminution in the value of the Premises, damages for the loss 
   or restriction on use of rentable or usable space or of any amenity of 
   the Premises, or elsewhere, damages arising from any adverse impact on 
   marketing of space at the Premises, and sums paid in settlement of 
   claims, attorneys' fees, consultant fees and expert fees incurred or 
   suffered by Landlord either during or after the Lease term. These 
   indemnifications by Landlord and Tenant include, without limitation, costs
   incurred in connection with any investigation of site conditions or any 
   clean-up, remedial, removal or restoration work, whether or not required 
   by any federal, state or local governmental agency or political subdivision,
   because of Hazardous Material present in the Premises, or in soil or 
   ground water on or under the Premises. Tenant shall immediately notify 
   Landlord of any inquiry, investigation or notice that Tenant may receive 
   from any third party regarding the actual or suspected presence of 
   Hazardous Material on the Premises. 

   Without limiting the foregoing, if the presence of any Hazardous Material 
   brought upon, kept or used in or about the Premises by Tenant, its 
   agents, employees. contractors or invitees, results in any unlawful 
   release of Hazardous Material or the Premises or any other property, 
   Tenant shall promptly take all actions, at its sole expense, as are 
   necessary to return the Premises or any other property, to the condition 
   existing prior to the release of any such Hazardous Material, provided, 
   Landlord's approval of such actions shall first be obtained, which 
   approval may be withheld at Landlord's sole discretion.

   As used herein, the term "Hazardous Material" means any hazardous, 
   dangerous, toxic or harmful substance, material or waste including 
   biomedical waste which is or becomes regulated by any local governmental 
   authority, the State of Washington or the United States Government due to 
   its potential harm to the health, safety or welfare of humans or the 
   environment. 

30.QUIET ENJOYMENT. So long as Tenant pays the Rent and performs all of 
   its obligations in this Lease, Tenant's possession of the Premises will 
   not be disturbed by Landlord or anyone claiming by, through or under 
   Landlord. or by the holders of any Landlord's Mortgage or any successor 
   therto.
    

31. GENERAL.

a. Heirs and Assigns. This Lease shall apply to and be binding upon 
   Landlord and Tenant and their respective heirs. executors, 
   administrators, successors and assigns. 

b. Brokers' Fees. Tenant represents and warrants to Landlord that it has 
   not engaged any broker, finder or other persons who would be entitled to 
   any commission or fees for the negotiation, execution, or delivery of 
   this Lease other than disclosed in Section 1(i) or elsewhere in this 
   Lease. Tenant shall indemnify and hold Landlord harmless against any 
   loss cost, liability or expense incurred by Landlord as a result of any 
   claim asserted by any such broker, finder or other person on the basis 
   of any arrangements or agreements made or alleged to have been made by 
   or on behalf of Tenant. This subparagraph shall not apply to brokers 
   with whom Landlord has an express written brokerage agreement. 

c. Entire Agreement. This Lease contains all of the covenants and 
   agreements between Landlord and Tenant relating to the Premises. No 
   prior agreements or understanding pertaining to the Lease shall be valid 
   or of any force or effect and the covenants and agreements of this Lease 
   shall not be altered, modified or added to except in writing signed by 
   Landlord and Tenant. 

d. Severability. Any provision of this Lease which shall prove to be 
   invalid, void or illegal shall in no way affect, impair, invalidate any 
   other provision of this Lease.

e. Force Majeure. Time periods for either party's performance under any 
   provisions of this Lease (excluding payment of Rent) shall be extended 
   for periods of time during which the party's performance is prevented 
   due to circumstances beyond such party's control, including without 
   limitation, fires, floods, earthquakes, lockouts, strikes, embargoes, 
   governmental regulations, acts of God, public enemy, war or other 
   strife.

f. Governing Law. This Lease shall be governed by and construed in accordance
   with the laws of the State of Washington.


                                     E-33

<PAGE>

g. Memorandum of Lease. This Lease shall not be recorded. However, Landlord
   and Tenant shall, at the other's request, execute and record a memorandum
   of Lease in recordable form that identifies Landlord and Tenant, the
   commencement and expiration dates of the Lease, and the legal description
   of the Premises as set forth on attached Exhibit A.

h. Submission of Lease Form Not an Offer. One party's submission of this
   Lease to the other for review shall not constitute an offer to lease the
   Premises. This Lease shall not become effective and binding upon Landlord
   and Tenant until it has been fully signed by both Landlord and Tenant.

i. Authority of Parties. Any individual signing this Lease on behalf of a
   entity represents and warrants to the other that such individual has
   authority to do so and, upon such individual's execution, that this
   Lease shall be binding upon a enforceable against the party on behalf of
   whom such individual is signing.

32.EXHIBITS AND RIDERS. The following exhibits and riders are made a part
   of this Lease:

   Exhibit A - Legal Description 
   Exhibit B - Tenant Improvement Schedule

   (Check the box for any of the following that will apply. Any riders
   checked shall be effective only upon being initialed by the parties and
   attached to the Lease. Capitalized terms used in the Riders have the
   meanings given to them in the Lease.)

   [x] Rent Rider
   [ ] Retail Use Rider
   [x] Arbitration Rider
   [x] Limitation on Landlord's Liability Rider
   [x] Guaranty of Tenant's Lease Obligations Rider
   [x] Option to Extend Rider

33.BROKER PROVISIONS. Landlord shall pay to Landlord's Broker an 
   additional commission upon the exercise by Tenant any option to extend
   the Term according to any commission agreement or, in the absence of one,
   according to Landlord Broker's commission schedule in effect as of the 
   execution of this Lease. If Landlord's Broker is the procuring cause of a 
   other lease or sale entered into between Landlord and Tenant concerning 
   the Premises, Landlord shall pay a commission the amount set forth in 
   Landlord's Broker's commission schedule in effect as of the execution of 
   this Lease. Landlord successor shall be obligated to pay any unpaid 
   commissions upon any transfer of this Lease and any such transfer shall 
   not release the transferor from liability to pay such commissions. If 
   Landlord's Broker is required to employ an attorney to enforce or declare 
   its rights under this Section, the prevailing party in any such action 
   shall be entitled to recover its reasonable attorneys fees, in an amount
   determined by the court.

   LANDLORD'S BROKER HAS MADE NO REPRESENTATIONS OR WARRANTIES CONCERNING 
   THE PREMISES, TH MEANING OF THE TERMS AND CONDITIONS OF THIS LEASE, 
   LANDLORD'S OR TENANT'S FINANCIAL STANDING, ZONING. COMPLIANCE OF THE 
   PREMISES WITH APPLICABLE LAWS, SERVICE OR CAPACITY OF UTILITIES, 
   OPERATING EXPENSES, OR HAZARDOUS MATERIALS. LANDLORD AND TENANT ARE EACH 
   ADVISED TO SEEK INDEPENDENT LEGAL ADVICE ON THESE AND OTHER MATTERS 
   ARISING UNDER THIS LEASE. IF THE SAME BROKE REPRESENTED BOTH LANDLORD AND 
   TENANT IN THIS LEASING TRANSACTION, LANDLORD AND TENANT HEREBY CONFIRM 
   THAT THEY WERE TIMELY ADVISED OF THE DUAL REPRESENTATION, THEY CONSENTED 
   AND HEREBY CONSENT TO THE SAME, AND THEY DO NOT EXPECT THE BROKER TO 
   DISCLOSE TO EITHER OF THEM THE CONFIDENTIAL INFORMATION OF THE OTHER 
   PARTY.

   IN WITNESS WHEREOF this has been executed the date and year first above 
   written .


/S/ D.KIDDER                     /S/ BUDDY MERCER
-------------------              -----------------
     LANDLORD:                        TENANT:

-------------------              -----------------
     LANDLORD:                        TENANT:

MASTER LEASOR
-------------------              -----------------
       By:                              By:

PRES.                            Secretary, Bonded Motors & C.O.O.
-------------------              ------------------
       Its:                             Its:

                                     E-34

<PAGE>

STATE OF CALIFORNIA
COUNTY OF Los Angeles


I certify that I know or have satisfactory evidence that BUDDY MERCER is 
the person who appeared before me and said person acknowledged that HE 
signed this instrument, on oath stated that HE was authorized to execute 
the instrument and acknowledged it as the Secretary of Bonded Motors, 
Inc. to be the free and voluntary act of such party for the uses and 
purposes mentioned in the instrument.


     DATED: FEB 21st, 1997.


(Seal or stamp)          /S/RODOLFO GARCIA
                         --------------------------------------
                         Printed Name: Rodolfo Garcia
                                      -------------------------
                         NOTARY PUBLIC in and for the State of California
                         residing at Los Angeles County
                                     --------------------------
                         My Commission expires: JULY-17th-1997
                                               ----------------


STATE OF CALIFORNIA
COUNTY OF Los Angeles


I certify that I know or have satisfactory evidence that BUDDY MERCER is 
the person who appeared before me and said person acknowledged that he 
signed this instrument, on oath stated that he was authorized to execute 
the instrument and acknowledged it as the Secretary of Bonded Motors, 
Inc. to be the free and voluntary act of such party for the uses and 
purposes mentioned in the instrument.


     DATE 2-21-1997

(Seal or Stamp)
                         /S/ BUDDY MERCER
                         --------------------------------------
                         Printed Name: Buddy Mercer
                                       ------------------------
                         NOTARY PUBLIC in and for the State
                         of Washington, residing at
                                                   ------------
                         My Commission expires:
                                               ----------------


                                     E-35

<PAGE>

                                PARKING RIDER


Tenant's right to park on the Property shall be as follows (check one):

[x]Tenant shall be entitled to use parking stalls in the Building or 
other designated parking area on a (check one) [x] reserved 
[ ]unreserved (unreserved, if not completed) basis at the prevailing monthly 
rate as established by Landlord from time to time. Tenant shall comply 
with the reasonable rules and regulations which Landlord or its garage 
operator may adopt from time to time for the safe and orderly operation of
the parking areas.

[x]Tenant and its customers shall be entitled to share parking with 
Landlord's other tenants and their customers at the designated parking 
areas for the Property at no charge. Tenant shall comply and shall be 
responsible for the compliance of its customers with the terms of the 
Lease and any riders and any reasonable rules and regulations adopted by 
Landlord from time to time for the safe and orderly sharing of parking.



/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:


                                     E-36

<PAGE>

                                 RENT RIDER


Landlord and Tenant should complete only those provisions below which 
apply. Any provision below which is not completed shall apply to the 
Lease.


1. BASE MONTHLY RENT SCHEDULE. Tenant shall pay Landlord base monthly 
   rent during the Lease Term according to the following schedule:

   Lease Year (Stated in Years or Months)      Base Monthly Rent Amount
   4-1-1997                                    $1,750.00  35 cents SQ FT.
   4-1-1998                                    $1,750.00  35 cents SQ FT.
   4-1-1999                                    $1,750.00  35 cents SQ FT.
   4-1-2000                                     
                                               -------------------------

2. CONSUMER PRICE INDEX ADJUSTMENT ON BASE MONTHLY RENT. The base monthly 
   rent shall be increased on the first day of (if not completed, this 
   paragraph does not apply)4-1-2000 Lease Year (except the Commencement 
   Date and the first day of any extension term) in accordance with the 
   increase in the United States Department of Labor, Bureau of Labor of 
   Statistics, Consumer Price Index for All Urban Consumers (all items for 
   the geographical Statistical Area in which the Premises is located on the 
   basis of 1982-1984 equals 100) (the "Index"). The base monthly rent 
   payable immediately prior to each adjustment date shall be increased by 
   the percentage that the Index published for the date nearest preceding 
   the adjustment date has increased over the Index published for the date 
   nearest preceding the first day of the Lease Year from which the 
   adjustment is being measured. Upon the calculation of each annual 
   increase, Landlord shall notify Tenant of the new base monthly rent 
   payable hereunder. Within twenty (20) days of the date of Landlord's 
   notice, Tenant shall pay the deficiency in any Rent paid for a period 
   following the subject adjustment date and shall thereafter pay the 
   increased Rent until receiving the next notice of increase from 
   Landlord. If the components of the Index are materially changed after the 
   Commencement Date, or if the Index is discontinued during the Lease Term, 
   Landlord shall notify Tenant of a substitute published index which in 
   Landlord's reasonable discretion, approximates the Index and use the 
   substitute index to make subsequent adjustments.
   LEASE AMOUNT INCREASE NOT TO EXCEED 10%.


/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:


3.                           ADDENDUM

   IN ADDITION TO THE $1,750.00 PER MONTH RENT, TENANT IS OBLIGATED
   TO PAY AND ADDITIONAL $.06 PER SQUARE FOOT PER MONTH ($300.00 PER
   MONTH) TO COVER ALL TAXES, INSURANCE, AND PROPERTY MAINTENANCE
   COSTS INCURRED BY LANDLORD. MAXIMUM OBLIGATION FOR TENANT EACH
   MONTH IS $2,050.00 ALL INCLUSIVE.

   /S/D.K.                          
   -------------------              -----------------
   Landlord's Initials:             Tenant's Initials:


                                     E-37

<PAGE>

                              ARBITRATION RIDER


Any controversy or claim arising out of or relating to this Lease, or the 
breach thereof, other than an action by Landlord against Tenant for 
nonpayment of Rent, or for unlawful detainer or ejectment, shall be 
settled by arbitration in accordance with the Commercial Arbitration 
Rules of the American Arbitration Association, and judgment upon the 
award rendered by the arbitrator(s)may be entered in any court having 
jurisdiction thereof.


/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:


                                     E-38

<PAGE>

                 LIMITATION ON LANDLORD'S LIABILITY RIDER

Landlord and Tenant agree that Tenant's recourse against Landlord for any 
obligations of Landlord under this Lease shall be limited to Tenant's 
execution against Landlord's right, title and interest from time to time in 
the Premises. Neither Landlord nor any of its partners, shareholders, 
members, officers, directors, or other principals shall have any personal 
liability to Tenant as the result of any breach or default by Landlord 
under this Lease. 

/S/ D.K.                          /S/ B.M.
------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/ D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:


                                     E-39

<PAGE>

                GUARANTY OF TENANT'S LEASE OBLIGATIONS RIDER

The undersigned hereby unconditionally guarantee, jointly and severally, 
to Kidder Industrial, ("Landlord"), IE DENNY KIDDER, its successors and 
assigns, the full and prompt payment of Rent and any and all other sums 
and charges payable by BONDED MOTORS ("Tenant"), its successors, assigns 
and subtenants, and the full performance and observance of all of the 
covenants, terms, conditions and agreements to be performed and observed 
by Tenant, its successors, subtenants and assigns pursuant to the terms 
of the Lease Agreement dated 2-11-1997, regarding the premises commonly 
known as 3223 C ST NE AUBURN (the "Lease")

This Guaranty is an absolute and unconditional guaranty of payment and 
performance by Tenant under the Lease. It shall be enforceable against 
the undersigned without the necessity of any suit or proceeding on the 
part of Landlord against Tenant or any other party.

Except for the right to receive such notice of default by Tenant, the 
undersigned waives any necessity of notice of nonpayment, nonperformance, 
or nonobservance by Tenant of any term or provision of the Lease. This 
Guaranty shall not be discharged by reason of any assignment, renewal, 
modification or extension of the Lease or waiver or forbearance by 
Landlord of any of its terms, notice of all of which the undersigned 
hereby waives. If Landlord is required to employ an attorney to enforce 
or declare rights hereunder, the prevailing party in any such action 
shall be entitled to recover its attorneys' fees, and costs from the
nonprevai1ing party, in an amount to be determined by the court in any such
action. 


Dated:         19     
      ---------  -----

------------------------        ---------------------- 
GUARANTORS                      GURANTORS


/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:


                                     E-40

<PAGE>


                           OPTION TO EXTEND RIDER

Provided Tenant is not in default at the time of exercise or upon the 
commencement of any extension term, Tenant shall have (if not completed, 
zero) (1) successive options to extend the term of this Lease for 
(5) years each. Tenant shall exercise each option by delivering with 
notice to Landlord not less than one hundred eighty (180) days prior to 
the expiration of the then current Lease term. Upon the exercise of any 
option, the term of this Lease shall be extended for the period of the 
subject option upon all of the same terms, conditions and covenants as set 
forth herein, except for the amount of the base monthly rental stated in 
the Lease, which shall be increased or decreased to the amount of fair 
market rental for the Premises. If Landlord and Tenant are not able to 
agree on the amount of fair market rental within thirty (30) days after 
the date Tenant exercises its extension option in each case, then the 
parties shall submit the determination of the fair market rental value of 
the Premises to binding arbitration. If Landlord and Tenant are not able 
to agree upon a single arbitrator within thirty (30) days of their 
agreement to arbitrate the dispute, then during the following ten (10) 
day period, Landlord and Tenant shall each designate an expert, who shall 
be a licensed MIA appraiser or a commercial real estate agent with at 
least (5) years experience in the commercial leasing market in which the 
Premises are located. The two experts so selected shall appoint an 
arbitrator similarly qualified, whose determination of fair market rental 
value shall be binding upon Landlord and Tenant. Each party shall bear 
their own expenses of the arbitration except that the cost of the 
arbitrator shall be paid by the party whose final offer of fair market 
rent during the thirty (30) day negotiation period is farthest from the 
amount determined by arbitrator



/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

/S/D.K.                          /S/ B.M.
-------------------              -----------------
Landlord's Initials:             Tenant's Initials:

                                     E-41

<PAGE>


                                  EXHIBIT A


THE LAND REFERRED TO IN THIS COMMITMENT IS SITUATED IN THE STATE OF 
WASHINGTON, COUNTY OF KING AND IS DESCRIBED AS FOLLOWS:

PARCEL A:

THAT PORTION OF H.H. JONES D.L.C. NO. 39 IN SECTION 6, TOWNSHIP 21 NORTH,
RANGE 5 EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, WASHINGTON, DESCRIBED AS 
FOLLOWS:

STARTING AT A POINT ON THE WEST LINE OF SAID SECTION 6, SAID POINT BEING 905 
FEET NORTH OF THE NORTH MARGIN OF 30TH ST. N.E. AS OF JUNE 1, 1972 AND 38.6 
FEET NORTH OF THE WEST QUARTER CORNER OF SAID SECTION 6; 
THENCE SOUTH 89 DEGREE 06' EAST 110.5 FEET ON A LINE PARALLEL WITH 30TH ST. 
N.E. TO THE TRUE POINT OF BEGINNING;
THENCE SOUTH 89 DEGREE 06' EAST 321 FEET TO THE WEST MARGIN OF "C" ST. 
N.E.;
THENCE NORTH 0 DEGREE 53'30" WEST 198.48 FEET ALONG THE WESTERLY MARGIN 
OF "C" ST. N.E.;
THENCE SOUTH 89 DEGREE 08'45" WEST 321 FEET;
THENCE SOUTH 0 DEGREE 53'30" EAST 198.73 FEET TO THE TRUE POINT OF BEGINNING.

PARCEL B:

THAT PORTION OF THE HARVEY H. JONES DONATION LAND CLAIM NO. 39, OF SECTION 6, 
TOWNSHIP 21 NORTH, RAGE 5 EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, 
WASHINGTON, DESCRIBED AS FOLLOWS:

BEGINNING AT A POINT ON THE WEST LINE OF SAID SECTION 6, SAID POINT BEING 905 
FEET NORTH THE NORTH MARGIN OF 30TH STREET NORTHEAST, AND 38.6 FEET NORTH 
OF THE WEST QUARTER OF SAID SECTION 6;
THENCE EAST 431.5 FEET PARALLEL TO THE NORTH MARGIN OF SAID 30TH STREET 
NORTHEAST TO A POINT ON THE WEST RIGHT OF WAY LINE OF "C" STREET 
NORTHEASE;
THENCE NORTH 228.5 FEET, MORE OR LESS ALONG SAID RIGHT OF WAY 
LINE TO THE CENTERLINE OF BONNEVILLE POWER EASEMENT;
THENCE WEST ON SAID CENTERLINE TO THE WEST LINE OF SAID SECTION 6;
THENCE SOUTH ALONG SAID SECTION LINE TO THE POINT OF BEGINNING;

EXCEPT THE FOLLOWING DESCRIBED PROPERTY:

THAT PORTION OF H. H. JONES DONATION LAND CLAIM NO. 39 IN SECTION 6, TOWNSHIP 
21 NORTH, RANGE 5 EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, WASHINGTON, 
DESCRIBED AS FOLLOWS:

BEGINNING AT A POINT ON THE WEST LINE OF SAID SECTION 6, SAID POINT BEING 905 
FEET NORTH OF THE NORTH MARGIN OF 30TH STREET NORTHEAST; 
THENCE SOUTH 89 DEGREE 06' EAST 110.5 FEET ON A LINE PARALLEL WITH 30TH STREET
NORTHEAST TO THE TRUE POINT OF BEGINNING;
THENCE SOUTH 89 DEGREE 06' EAST 321 FEET TO THE WEST MARGIN OF "C" STREET 
NORTHEAST;
THENCE NORTH 0 DEGREE 53' 30" WEST 198.48 FEET ALONG THE WESTERLY MARGIN OF 
"C" STREET NORTHEAST;
THENCE SOUTH 89 DEGREE 08' 45" WEST 321 FEET;
THENCE SOUTH 0 DEGREE 53' 30" EAST 198.73 FEET TO THE TRUE POINT OF BEGINNING; 

                                     E-42

<PAGE>

AND THE SOUTH 333.38 FEET OF THE NORTH 583.38 FEET OF THE FOLLOWING 
DESCRIBED TRACT;

BEGINNING AT A POINT 30 FEET NORTH OF THE SOUTHWEST CORNER OF THE H.H. 
JONES DONATION CLAIM NO. 39;
THENCE NORTH 1,716.5 FEET;
THENCE EAST 461.5 FEET;
THENCE SOUTH 1716.5 FEET;
THENCE WEST 461.5 FEET TO THE POINT OF BEGINNING;

EXCEPT PORTION CONVEYED TO THE CITY OF AUBURN BY DEED RECORDED UNDER 
RECORDING NUMBER 5791052.

ALL SITUATE IN THE COUNTY OF KING, STATE OF WASHINGTON.

                                     E-43

<PAGE>

                                     EXHIBIT B
                          [Tenant Improvement Schedule]

The wood wall separating front and back half of Bay 8 will be removed at 
landlords expense. Roll up door between Bay 7 and Bay 8 will be secured 
for the duration of this lease.


                                     E-44

<PAGE>

                                Exhibit 10.12

                                    LEASE

                                   PREAMBLE

       THIS LEASE is entered into on August 6, 1997, by and between Charles H.
Wheeler, an individual (hereinafter "Landlord") and Bonded Motors, a California
corporation (hereinafter "Tenant").

       Landlord hereby leases to Tenant on the terms and conditions set forth
in this lease the real property, together with buildings and other improvements
located on the real property, located at 2889 Waterville Road, Macon, Georgia
31206, and particularly described in Exhibit A annexed hereto, with all
easements, rights and appurtenances in connection therewith or thereunto
belonging (hereinafter "Property" or "Premises").

                          ARTICLE 1. TERM OF LEASE

       Section 1.1.  Term.
       ------------  -----

       The term of this lease shall be for a period of three (3) years
commencing at 12:01 A.M. on August 1, 1997, and ending on 12:01 A.M. on
July 31, 2000, unless terminated sooner or extended further as provided in this
lease.

       Section 1.2.  Option to Extend Term.
       ------------  ----------------------

       Tenant shall have the option to extend the term of this lease for an
additional period of three (3) years commencing on expiration of the original
term specified in Section 1.1 of this lease.  If Tenant chooses to exercise
this option to renew this lease for the three (3) year term, at the end of this
three (3) year period, Tenant shall have another option to extend the terms of
this lease for an additional period of four (4) years.

       Section 1.3.  Written Notice.
       ------------  ---------------

       Written notice of Tenant's election to renew the term of this lease
shall be delivered by Tenant to Landlord at least sixty  (60) days before
expiration of the previous period term.

       Section 1.4.  Terms and Conditions of Renewed Terms.
       ------------  --------------------------------------

       The renewed terms of this lease shall be subject to the same terms and
conditions as are contained in this lease, including the amount of rent.

       Section 1.5.  Option to Purchase Property.
       ------------  ----------------------------

       Tenant shall have the option to purchase the Premises during the period
of this lease or during the renewed periods of this lease.  Landlord shall not

                                     E-45

<PAGE>

sell the Premises to anyone other than Tenant during the original and any
renewed periods of this lease without first providing Tenant with an
opportunity to purchase the Property, under the purchase price set forth in
Section 1.6 below.  Tenant shall have sixty (60) days, from the time that
Landlord notifies Tenant of its intent to sell to a third party buyer and
provides to Tenant the documents evidencing and outlining such sale, to
exercise its option to purchase the Property by providing Landlord notice of
its intent to exercise the option.  Tenant may file a notice of abstract of
this option with the County Recorder's Office. 

       Section 1.6.  Purchase Price.
       ------------  ---------------

       Should Tenant exercise its option to purchase the Premises, the purchase
price shall be Five Hundred Seventy-Five Thousand Dollars ($575,000).  Under
this option to purchase, the purchase amount shall be offset and reduced by the
full amount of any estimated cost of remediation based on the environmental due
diligence and assessments performed by Geomatrix Consultants.  With respect to
any such remediation work to be performed under this paragraph, Geomatrix
Consultants shall perform the professional consulting component of the work,
including analysis, design, cost estimates, supervision of remedial
contractors, and negotiation with appropriate governmental agencies to obtain
approval and closure for the remediation work performed.  The Landlord may
select the contractors to perform the site remediation activities component of
the work, provided that Geomatrix Consultants shall approve the selection of
the contractors, supervise the contractors' work, and approve the final work
product of each contractor retained by Landlord.  All remediation work,
including the professional consulting and site remediation activities
components, shall be paid for by Landlord with funds withheld from the
purchase price of the real estate purchase and placed into escrow.

       Section 1.7.  Right to Assign Option.
       ------------  -----------------------

       During the period in which Tenant has a right to exercise its option
to purchase the Premises, Tenant may assign such right to any third party.

       Section 1.8.  No Encumbrance.
       ------------  ---------------

       During the term of this Lease, Landlord shall not encumber the Premises
or allow any encumbrances on the Premises in anyway.  Landlord shall take all
necessary steps to remove any encumbrance in violation of this section.

                                     E-46

<PAGE>

                         ARTICLE 2.  RENT AND TAXES

       Section 2.1.  Rent.
       ------------  -----

       Tenant agrees to pay Landlord during the original terms of this lease
and any renewed terms of this lease as follows:

       (1)  Four Thousand Seven Hundred Ninety One Dollars and 66/100
($4,791.66) per month on the first day of each and every month, commencing on
August 1, 1997;

       (2)  Should the lease end on any day other than the last day of a month,
the rent for that month shall be calculated on a pro rata basis.

       Section 2.2.  Taxes.
       ------------  ------

       In addition to the rent specified in Section 2.1 of this lease, Tenant
agrees to pay Landlord as additional rent for the use and occupancy of the
Premises the real property taxes assessed against the Premises during the term
of this lease or any extended term of this lease.

       Section 2.3.  Right to Contest Taxes.
       ------------  -----------------------

       Tenant shall have the right to protest or contest the amount of any tax
or assessment or to defer payment of the tax or assessment until final
determination of the issue.

                     ARTICLE 3.  REPAIRS AND MAINTENANCE

       Section 3.1.  Present Condition of Premises.
       ------------  ------------------------------

       Landlord agrees that the Premises are in good and tenantable condition
on the date of this lease and that the improvements on the Premises have been
constructed by Landlord and delivered to Tenant in good and tenantable
condition. 

       Section 3.2.  Repairs by Tenant.
       ------------  ------------------

       Tenant shall, at tenant's own cost and expense, during the term of this
lease or any extension of the term of this lease, keep and maintain in good
order and repair all of the Premises including grounds, paving, building doors,
and glazing, except those repairs required of the Landlord in the following
Section 3.3.  

       Section 3.3.  Repair by Landlord.
       ------------  -------------------

       During the term of this lease or extension of the term of this lease,
Landlord shall at Landlord's own cost and expense, repair the foundation and
exterior wall of the Premises.

                                     E-47

<PAGE>

       Section 3.4.  Tenant alterations.
       ------------  -------------------

       Tenant may make nonstructural alterations or improvements to the
Premises deemed necessary by Tenant without Landlord's approval, provided that
Tenant notifies Landlord in writing at least three (3) days before the date
construction for alterations or improvements are to commence so that Landlord
may post and record any notice of nonresponsibility, and further provided that
all construction complies with the requirements of all appropriate governmental
agencies.  Before making structural alterations or improvements to the
Premises, Tenant shall submit to and obtain landlord's written approval on
final construction plans and specifications for the alterations or
improvements.  Landlord shall not unreasonably withhold such consent.

       Section 3.5.  Surrender of Premises.
       ------------  ----------------------

       On expiration or earlier termination of this lease, provided that Tenant
has not exercised its option to purchase the Premises, Tenant shall promptly
surrender possession of the Premises to the Landlord on as good condition as
the Premises are on the date of this lease, reasonable wear and tear excepted.

                         ARTICLE 4.  USE OF PREMISES

       Section 4.1.  Use of Premises.
       ------------  ----------------

       Tenant shall use the Premises for operating and conducting an automobile
parts manufacturing or remanufacturing business and all business activities
incident thereto, and for no other purpose without the written consent of
Landlord.  Landlord shall not unreasonably withhold consent.

       Section 4.2.  Compliance With Law.
       ------------  --------------------

       The Premises shall not be used or permitted by Tenant to be used in
violation of any law or ordinance.

       Section 4.3.  Signs.
       ------------  ------

       Tenant may erect and maintain any signs on the Premises relating to
Tenant's business on the Premises, provided the signs so erected comply with
any law or ordinance of any governmental agency having jurisdiction over the
Premises.

                            ARTICLE 5.  INSURANCE

       Section 5.1.  Fire Insurance.
       ------------  ---------------

       Tenant shall, at its own cost and expense, at all times during the full
term of the lease and any extended term of this lease, keep all buildings,

                                     E-48

<PAGE>

improvements, and other structures on the Premises insured for their full
value against loss or destruction by fire and the perils, including vandalism
and malicious mischief, commonly covered under the standard extended coverage
endorsements in Bibb County, Georgia.  Landlord shall be named as an additional
insured on the policies and the policies shall also contain cross liability
endorsements.

       Section 5.2.  Liability Insurance.
       ------------  --------------------

       Tenant shall, at Tenant's own cost and expense, secure and maintain
during the entire term of the lease and any extended term of this lease, public
liability, property damage, and products liability insurance insuring Tenant
and Tenant's employees against all bodily injury, property damage, personal
injury, and other loss of liability caused by or connected with Tenant's
occupation and use of the Premises under this lease in amounts not less than
those amounts currently provided by Landlord's insurance coverages.

       Landlord shall be named as an additional insured and the policies shall
also contain cross liability endorsements.

       Section 5.3.  Additional Insured.
       ------------  -------------------

       Landlord and Tenant agree that the other shall be named as an additional
insured on all policies of insurance and that the liability insurance policies
described in this article shall contain cross-liability endorsements.

                 ARTICLE 6.  DESTRUCTION OF PREMISES

       Section 6.1.  Duty to Repair.
       ------------  ---------------

       If any improvements, including buildings and other structures, located
on the Premises are damaged or destroyed during the term of this lease or any
renewal thereof, the damage shall be repaired as follows:

       (a)  If the damage or destruction is caused by peril against which fire
and extended coverage insurance is required to be carried by Section 5.01 of
this lease, Tenant shall repair that damage as soon as reasonably possible,
restore the Premises and improvements to substantially the same condition as
existed before the damage or destruction.

                                     E-49

<PAGE>

       (b)  If the damage or destruction is caused by a peril against which
insurance is not required to be carried by this lease, Landlord shall repair
that damage as soon as reasonably possible and restore the Premises to
substantially the same condition as existed before the damage or destruction.

       (c)  In the event of any damage or destruction, Tenant may either
terminate this lease or abate rent for the time and to the extent Tenant is
prevented from occupying the Premises for the use authorized in this lease.

                          ARTICLE 7.  CONDEMNATION

       Section 7.1.  Condemnation.
       ------------  -------------

       In the event of total or partial condemnation, Tenant may terminate
this lease.  Where partial condemnation results, and Tenant elects to maintain
this lease, Landlord shall restore, at Landlord's own cost and expense, the
improvements on the remainder of the Premises to a condition making the
Premises tenantable by Tenant.  Any rent payable under this lease after the
date actual physical possession is taken by the condemnor of the portion of the
Premises condemned shall be reduced by the percentage of the ground area of the
portion taken by eminent domain bears to the total ground area of the Premises
on the date of this lease.

                         ARTICLE 8.  INDEMNIFICATION

       Section 8.1.  Tenant's Hold Harmless Clause.
       ------------  ------------------------------

       Except as otherwise provided in Section 8.2, Tenant shall indemnify and
hold Landlord harmless from any and all liability, damages or claims, costs,
suits, liens, judgments, costs of defense, attorneys' fees and other
consequences arising by reason of the death or injury of any person, as a
result of Tenant's breach of this lease or Tenant's gross negligence, provided
that Landlord is not in any way at fault.

       Section 8.2.  Landlord's Hold-Harmless Clause.
       ------------  --------------------------------

       Notwithstanding the provisions of Section 8.1 of this lease, Tenant
shall be under no duty to indemnify and hold Landlord harmless from any
liability, claims or damages arising in any part because of Landlord's failure
to make any repairs required by this lease to be made by Landlord or because
of any negligence or willful acts of misconduct by Landlord or by any person
who is an agent or employee of Landlord.  Landlord agrees to indemnify, defend,
protect and hold Tenant free and harmless from any and against any and all
liability, damages or claims, costs, suits, liens, judgments, costs of defense,
attorneys' fees, and other consequences arising from or in connection with
Landlord's failure to make any repairs required by this lease to be made by

                                     E-50

<PAGE>

Landlord or because of any negligence or willful acts of misconduct by Landlord
or by any person who is an agent or employee of Landlord acting in the course
and scope of its agency or employment.

       Landlord further agrees to indemnify, defend, and hold harmless Tenant,
its agents, employees, lender and assigns from and against any and all
liability damages or claims, costs, suits, liens, judgments, penalties, costs
of defense, environmental consulting and remediation costs, attorneys' fees,
or other consequences arising from or relating to the presence, release, or
discharge of hazardous substances or other environmental contamination or
conditions which existed or were caused by conduct occurring prior to Tenant's
possession of the Premises.  For purpose of this indemnity, the term "hazardous
substances" shall have the meaning set forth in CERCLA Section 101(14), U.S.C.
9601(14) and State counterparts.

                 ARTICLE 9.  QUIET ENJOYMENT AND POSSESSION

       Section 9.1.  Covenant of Quiet Enjoyment and Possession.
       ------------  -------------------------------------------

       Landlord covenants and agrees that Tenant shall be put in possession
of the Premises and shall quietly have and enjoy the Premises during the term
of this lease and any renewal term of this lease without hindrance or
molestation by anyone by or through Landlord.

                        ARTICLE 10.  NON-DISTURBANCE

       Section 10.1.  Non-Disturbance.
       -------------  ----------------

       In the event that the mortgagee, beneficiary, or any other person,
acquires title to the Property pursuant to the exercise of any remedy provided
for in a mortgage or deed of trust on the Property, or by any other action or
proceeding for the enforcement thereof, or by any sale thereunder, this lease
will not be terminated or affected, nor will possession or any other rights of
Tenant under this lease be disturbed, as long as Tenant is not then in default
of its obligations under the lease.  Landlord shall obtain such a
nondisturbance clause satisfactory to the Tenant from all future mortgagees
and lienholders on the property, if any are permitted by the Tenant.  With
respect to any current mortgages or lienholders, Landlord shall use its best
efforts to obtain a nondisturbance clause prior to the commencement of the
terms of this lease.

       Where a mortgagee, beneficiary, or any other person acquires title to
the Property pursuant to the exercise of such right, Tenant agrees to attorn to
the mortgagee, beneficiary or such other person as its new landlord and the

                                     E-51

<PAGE>

lease shall continue in full force and effect as a direct lease with Tenant and
mortgagee, beneficiary or such other person, upon all the terms, covenants and
agreements set forth in this Lease.

                         ARTICLE 11.  MISCELLANEOUS

       Section 11.1.  Assignment and Subletting.
       -------------  --------------------------

       Tenant may assign or sublet the Premises at any time during its lease
or any extended term of the lease.

       Section 11.2.  Notices.
       -------------  --------

       All notices or other communications required or permitted by this lease
or by law to be served on or given to either party to this lease by the other
party shall be in writing and shall be deemed duly served and given when
personally delivered to the party to whom it is directed or to any managing
employee or officer of that party or, in lieu of personal service, when sent
by registered or certified mail with postage prepaid: 

If to Tenant, as follows:

                  Mr. Aaron Landon
                  Bonded Motors
                  7522 S. Maie Avenue
                  Los Angeles, California  90001

and if to Landlord, as follows:

                  Mr. Charles H. Wheeler
                  Wheeler's Manufacturing Company, Inc.
                  P.O. Box 1094
                  Macon, GA 31297-4399

       Either party may change its address for purposes of this section by
giving written notice of such in the manner provided in this section.

       Section 11.3.  Binding Heirs and Successors.
       -------------  -----------------------------

       This lease shall be binding on and shall inure to the benefit of the
heirs, executors, administrators, successors, and assigns of each Landlord and
Tenant.

       Section 11.4.  Time of Essence.
       -------------  ----------------

       Time is expressly declared to be of the essence in this case.

                                     E-52

<PAGE>

       Section 11.5.  Drafting Party.
       -------------  ---------------

       Neither party will be deemed to have drafted this instrument for the
purpose of constructing any provisions against one party or another.

       Section 11.6.  Sole and Only Agreement.
       -------------  ------------------------

       This agreement constitutes the sole and only agreement between Landlord
and Tenant respecting the Premises, the leasing of the Premises to Tenant, and
the lease terms contained in this lease, and correctly sets forth the
obligations of Landlord and Tenant to each other as of its date.  Any such
agreements or representations not set forth in this instrument are null and
void.

       Executed this   6th  day of August, 1997 at Los Angeles, California.
                    --------


                                            /S/AARON LANDON
                                            -------------------------
                                            Aaron Landon
                                            For Bonded Motors, Tenant


                                            /S/CHARLES H. WHEELER
                                            -------------------------
                                            Charles H. Wheeler
                                            Individual, Landlord

                                     E-53