<PAGE>   1
                                                                   Exhibit 10.56


               THIRD AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT
                           AND CERTAIN LOAN DOCUMENTS

                  This THIRD AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT AND
CERTAIN LOAN DOCUMENTS (this "Third Amendment") is entered into as of October
30, 1998 by and among ADFlex Solutions, Inc., a Delaware corporation (the
"Borrower"), and the banks and other financial institutions that either now or
in the future are parties thereto as lenders (collectively the "Lenders" and
each individually a "Lender"), BankBoston, N.A. in its capacity as the L/C
Issuer (in such capacity, together with any successors thereto in such capacity,
the "L/C Issuer"), and BankBoston N.A., as agent and representative for the
Lenders (in such capacity BankBoston N.A. or any successor in such capacity is
referred to herein as the "Agent"). The Lenders, the L/C Issuer, and the Agent
are collectively referred to herein as the "Lender Parties" and each
individually as a "Lender Party".

                                    RECITALS

                  A. Borrower and Lender Parties are parties to that certain
Senior Secured Credit Agreement dated as of June 5, 1997, as amended by that
certain First Amendment to Senior Secured Credit Agreement and Certain Loan
Documents (the "First Amendment") dated February 9, 1998 and that certain Second
Amendment to Senior Secured Credit Agreement and Certain Loan Documents; Waiver
of Existing Default (the "Second Amendment") dated May 11, 1998 (as so amended,
the "Credit Agreement"), pursuant to which the Lenders agreed to make available
to Borrower certain credit facilities, and certain related loan documents (the
"Loan Documents").

                  B. By a letter of notification dated October 1, 1998, Borrower
has notified Agent that it is in default with respect to (i) the interest
coverage ratio covenant contained in Section 6.5.3 of the Credit Agreement, and
(ii) the minimum net income covenant contained in Section 6.5.5 of the Credit
Agreement. Borrower has requested, and the Lender Parties have agreed, that the
resulting Defaults shall be waived for the Fiscal Quarter ending in September
1998.

                  C. Borrower and the Lender Parties have agreed to make certain
amendments to the Credit Agreement and to certain of the Loan Documents, subject
to the conditions and in reliance on the representations and warranties set
forth below.

                  NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, each Lender Party and
Borrower hereby agree as follows:

                                    AGREEMENT

                  1. DEFINED TERMS; SECTION REFERENCES. Initially capitalized
terms used but not defined in this Third Amendment shall have the meanings
assigned to such terms in the 


                                Third Amendment
                                       1
<PAGE>   2
Credit Agreement. All "Section" references herein are to sections of the Credit
Agreement unless otherwise specified.

                  2.       AMENDMENTS TO SECTION 1.1 OF THE CREDIT AGREEMENT.

                  (a) The definition of "Base Rate" is hereby amended to provide
in its entirety as follows:

                 ""BASE RATE" means, for the purposes of this Credit Agreement,
the greater of (i) the rate of interest announced from time to time by
BankBoston, N.A. as its head office as its "Base Rate," and (ii) the Federal
Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to
the next 1/8 of 1%), provided that if either the Senior Debt Leverage Ratio
shall exceed 0.50 to 1.00 or the Interest Coverage Ratio is equal to or less
than 2.00 to 1.00, "Base Rate" means the greater of (a) the rate of interest
announced from time to time by BankBoston, N.A. as its head office as its "Base
Rate" plus 1/2 of 1% per annum, and (ii) the Federal Funds Effective Rate plus
1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%)."

                  (b) A new definition of "Chandler Mortgage" is hereby added to
Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:

                 ""CHANDLER MORTGAGE" means the Mortgage in favor of a lender
reasonably acceptable to Agent which is secured by the Chandler Property,
provided that such Debt secured by the Chandler Mortgage shall not exceed 80% of
the appraised value of the Chandler Property."

                  (c) A new definition of "Chandler Property" is hereby added to
Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:

                 ""CHANDLER PROPERTY" means the headquarters building, the
manufacturing facility, the underlying land and all other buildings located at
2001 West Chandler Boulevard, Chandler, Arizona."

                  (d) The definition of "Debt Service Coverage Ratio" is hereby
amended to provide in its entirety as follows:

                 ""DEBT SERVICE COVERAGE RATIO" means, at the end of any Fiscal
Quarter, the ratio of (i) (a) EBITDA for the two consecutive Fiscal Quarters
then ended minus (b) Capital Expenditures for such period (provided that, upon
the closing of a Junior Capital Transaction, Borrower shall be entitled to
offset such Capital Expenditures with the proceeds from such Junior Capital
Transaction up to an aggregate amount equal to $15,000,000 over the term of this
Credit Agreement), plus (c) if Capital Expenditures includes the acquisition of
the Chandler Property, the cash proceeds received by Borrower from the Chandler
Mortgage upon the closing of such mortgage, to (ii) (a) Interest Expense for
such period, plus (b) scheduled payments of principal in respect of Debt of the
Borrower or any Consolidated Subsidiary for such period, excluding payments by
the Borrower pursuant to Section 2.8.1.1(i) of this Credit Agreement."


                                Third Amendment
                                       2
<PAGE>   3
                  (e) A new definition of "Subsidiary Accounts Receivable" is
hereby added to Section 1.1 of the Credit Agreement, and shall provide in its
entirety as follows:

                  ""SUBSIDIARY ACCOUNTS RECEIVABLE" means all accounts
receivable now owned by or belonging or owing to each Subsidiary (including,
without limitation, under any trade name, style or division thereof) arising out
of goods sold or services rendered by each Subsidiary, and all monies due or to
become due to each Subsidiary under all purchase orders and contracts for the
sale of goods or the performance of services or both by each Subsidiary."

                  (f) The definition of "Investment" is hereby amended to
provide in its entirety as follows:

                  ""INVESTMENT" means, with respect to any Person, (i) any
direct or indirect purchase or other acquisition by that Person of stock or
securities, or any beneficial interest in stock or other securities, of any
other Person, any partnership (whether general or limited) or limited liability
company interest in any other Person, or all or any substantial part of the
business or assets of any other Person, (ii) any direct or indirect loan,
advance or capital contribution by that Person to any other Person, including
all indebtedness and accounts receivable from that other Person that are not
current assets or did not arise from sales to that other Person in the ordinary
course of business. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment, but shall not include the amount of any loan or
other indebtedness to the extent such loan or indebtedness has been repaid."

                  (g) A new definition of "Junior Capital Transaction" is hereby
added to Section 1.1 of the Credit Agreement, and shall provide in its entirety
as follows:

                  ""JUNIOR CAPITAL TRANSACTION" means one or more transactions
occurring after October 1, 1998 in which the Borrower receives gross proceeds of
at least $20,000,000 by issuing Capital Stock or Subordinated Debt, on terms and
conditions acceptable to, and approved by, the Required Lenders."

                  (h) A new definition of "Senior Debt Leverage Ratio" is hereby
added to Section 1.1 of the Credit Agreement, and shall provide in its entirety
as follows:

                  ""SENIOR DEBT LEVERAGE RATIO" means the ratio of (a) Senior
Funded Debt minus Borrower's Cash, divided by (b) Borrower's Shareholder Equity
plus Subordinated Debt."

                  (i) A new definition of "Senior Funded Debt" is hereby added
to Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:

                  ""SENIOR FUNDED DEBT" means all of Borrower's Debt which is
not (i) Subordinated Debt, (ii) obligations in respect of any letters of credit
or bankers acceptances, or (iii) Contingent Obligations.


                                Third Amendment
                                       3
<PAGE>   4
                  (j) A new definition of "Shareholder Equity" is hereby added
to Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:

                  ""SHAREHOLDER EQUITY" means the sum of Capital Stock,
additional paid in capital and retained earnings less treasury stock, determined
in accordance with GAAP."

                  (k) A new definition of "Subordinated Debt" is hereby added to
Section 1.1 of the Credit Agreement, and shall provide in its entirety as
follows:

                  ""SUBORDINATED DEBT" means all Debt of the Borrower which by
its terms is subordinate to Borrower's Senior Funded Debt and which was
authorized by the Required Lenders."

                  (l) The definition of "Term Loan Maturity Date" is hereby
amended to provide in its entirety as follows:

                  ""TERM LOAN MATURITY DATE" means the last Business Day of the
Fiscal Year ending in December 2002."

                  (m) A new definition of "Warrants" is hereby added to Section
1.1 of the Credit Agreement, and shall provide in its entirety as follows:

                  ""WARRANTS" means the Warrants, in the form of Exhibit W,
issued to each Lender (or its designee) in the amounts as provided in Schedule
1.1A."

                  3. AMENDMENTS TO SECTION 2.1.4.1 OF THE CREDIT AGREEMENT.

                  Section 2.1.4.1 of the Credit Agreement is hereby amended to
provide in its entirety as follows:

                  "2.1.4.1. When the Borrower desires to borrow Loans pursuant
         to Section 2.1, it shall deliver to the Agent a Notice of Borrowing
         substantially in the form of Exhibit E-1, duly completed and executed
         by a Responsible Officer (a "Notice of Borrowing"), (a) no later than
         12:00 noon (Boston time) on the proposed Funding Date, in the case of a
         Borrowing of Base Rate Loans, or (b) no later than 2:00 p.m.(Boston
         time) at least three LIBOR Business Days before the proposed Funding
         Date, in the case of a Borrowing of LIBOR Rate Loans."

                  4. AMENDMENTS TO SECTION 2.1.4.5 OF THE CREDIT AGREEMENT.

                  Section 2.1.4.5 of the Credit Agreement is hereby amended to
provide in its entirety as follows:

                  "2.1.4.5. The Agent shall promptly notify each Lender of the
         contents of any Notice of Borrowing (or telephonic notice in lieu
         thereof) received by it and such Lender's pro rata portion of the
         Borrowing requested. Not later than 1:00 p.m. (Boston time) on the date
         specified in such notice as the Funding Date (or, in the case of Base


                                Third Amendment
                                       4
<PAGE>   5
         Rate Loans, 5:00 p.m. (Boston time) on such date), each Lender, subject
         to the terms and conditions hereof, shall make its pro rata portion of
         the Borrowing available, in immediately available funds, to the Agent
         at the Agent's Account."

                  5. AMENDMENTS TO SECTION 2.4.3.1 OF THE CREDIT AGREEMENT.

                  Section 2.4.3.1 of the Credit Agreement is hereby amended to
provide in its entirety as follows:

                  "2.4.3.1. Subject to this Section 2.4.3 and Sections 2.4.2 and
2.11, the Borrower shall have the option (a) at any time, to convert all or any
part of its outstanding Base Rate Loans to LIBOR Rate Loans, (b) on the last day
of the Interest Period applicable thereto, to (i) convert all or any part of its
outstanding LIBOR Rate Loans to Base Rate Loans, (ii) to continue all or any
part of its LIBOR Rate Loans as Loans of the same Type, or (iii) to convert all
or any part of its outstanding LIBOR Rate Loans to LIBOR Rate Loans of another
Type; provided that, in the case of clause (a), (b) (ii) or (b)(iii), there does
not exist a Default or an Event of Default at such time. If a Default or an
Event of Default shall exist upon the expiration of the Interest Period
applicable to any LIBOR Rate Loan or if the Senior Debt Leverage Ratio shall
exceed 0.50 to 1.00 upon the expiration of the Interest Period applicable to any
LIBOR Rate Loan or if the Interest Coverage Ratio is less than 2:00 to 1.00 upon
the expiration of the Interest Period applicable to any LIBOR Rate Loan, such
Loan automatically shall be converted into a Base Rate Loan."

                  6. AMENDMENTS TO SECTION 2.6.1 OF THE CREDIT AGREEMENT.

                  Section 2.6.1 of the Credit Agreement is hereby amended to
provide in its entirety as follows:

                  "2.6.1. COMMITMENT FEE. The Borrower shall pay to the Agent,
for the pro rata benefit of the Lenders, a commitment fee for each day from and
after the Closing Date until the Stated Termination Date, upon the excess, if
any, of (a) the aggregate Revolving Commitments of the Lenders over (b) the
Revolving Commitment Usage of all Lenders, in each case for such day. Such Fee
shall be payable in arrears on each Interest Payment Date and the Termination
Date. The commitment fee shall accrue at a rate of (i) at any time when the
Applicable Margin is less than 2.00, 0.20% per annum; (ii) at any time when the
Applicable Margin is 2.00 or 2.25, 0.25% per annum; and (iii) at any time when
either the Senior Debt Leverage Ratio is greater than 0.50 to 1.00 or the
Interest Coverage Ratio is equal to or less than 2.00 to 1.00, 0.50% per annum."

                  7. AMENDMENTS TO SECTION 2.7.1 OF THE CREDIT AGREEMENT.

                  Section 2.7.1. of the Credit Agreement is hereby amended to
provide in its entirety as follows:

                  "2.7.1. Each Lender's Revolving Commitment shall terminate
without further action on the part of such Lender on the earlier to occur of (a)
the last Business Day of the Fiscal 


                                Third Amendment
                                       5
<PAGE>   6
Year ending in December 2000 (the "Stated Termination Date"), and (b) the date
of termination of the Revolving Commitment pursuant to Section 2.7.2 or 7.2
(such earlier date being referred to herein as the "Termination Date")."

                  8. AMENDMENTS TO SECTION 2.8.1.1 OF THE CREDIT AGREEMENT.

                  Section 2.8.1.1 is hereby amended to provide in its entirety
as follows:

                  "2.8.1.1. The Borrower shall make principal payments as
follows: (i) a principal payment in the amount of $5,000,000 will be paid on or
before January 20, 1999, (ii) a principal payment in the amount of $750,000 will
be paid on the last Business Day of each of the four fiscal quarters beginning
with the quarter that ends in December 1998, (iii) a principal payment in the
amount of $1,300,000 will be paid on the last Business Day of each of the twelve
fiscal quarters beginning with the quarter that ends in December 1999 and (iv) a
principal payment equal to the outstanding balance of the Term Loans will be
paid on the last Business Day of the fiscal quarter that ends in December 2002
(each such payment date being referred to hereinafter as a "Term Loan Payment
Date"). The Term Loans in any event shall be paid in full on the Term Loan
Maturity Date. The principal amount of the Term Loans prepaid or repaid by the
Borrower may not be reborrowed."

                  9. NEW SECTION 2.8.2.4 OF THE CREDIT AGREEMENT. A new Section
2.8.2.4 is hereby added, and provides in its entirety as follows:

                  "2.8.2.4 EXCESS TERM LOANS. If at any time the aggregate Term
Loans of all Lenders exceeds the aggregate amount of the Term Commitments then
in effect and if there is availability under the Borrowing Base then in effect,
the Borrower shall be deemed to have automatically requested a Revolving Loan
and the proceeds of such Revolving Loan shall be deemed to have been used to
repay Term Loans and each Lender shall be deemed to have made a Revolving Loan
in an amount as may be necessary so that, after giving effect to such Revolving
Loan, such excess amount of Term Loans is eliminated."

                  10. AMENDMENTS TO SECTION 5.1 OF THE CREDIT AGREEMENT. Section
5.1 of the Credit Agreement is hereby amended as follows:

                           (a) The introductory sentence of Section 5.1 of the
Credit Agreement is hereby amended to provide in its entirety as follows:

                           "The Borrower shall deliver to the Agent who shall in
turn deliver promptly to the Lender Parties:"

                           (b) Section 5.1.3 of the Credit Agreement is hereby
amended to provide in its entirety, as follows:

                           "as soon as practicable and in any event within
fifteen days after the end of each calendar month, (a) a Borrowing Base
Certificate, in substantially the form of Exhibit F-5 (a "Borrowing Base
Certificate", setting forth Borrower's calculation of the Borrowing Base as of


                                Third Amendment
                                       6
<PAGE>   7
the end of such calendar month, (b) a consolidated balance sheet of the Borrower
and the Consolidated Subsidiaries as of the end of such month and the related
consolidated statements of income and cash flow for such month and the portion
of the Fiscal Year ended at the end of such month, all in reasonable detail and
certified by the Borrower's chief financial officer as fairly presenting the
consolidated financial condition of the Borrower and its Consolidated
Subsidiaries as of the dates indicated, and their consolidated results of
operations and cash flows for the periods indicated, in conformity with GAAP,
subject to normal year-end adjustments and the absence of footnotes, and (c)
together with each delivery of financial statements pursuant to subsection (b)
above, a certificate of the chief financial officer or the chief executive
officer of the Borrower, duly completed and setting forth the calculations
required to establish compliance with Section 6.5.6 on the date of such
financial statements;"

                           (c) Section 5.1.12 of the Credit Agreement is hereby
amended by deleting the "and" at the end thereof, by renumbering 5.1.13 to
5.1.14, and inserting the following new 5.1.13:

                           "5.1.13. on Monday of each week, a liquidity forecast
which shall be sent to the Agent via facsimile and shall set forth forecasted
receipts, disbursements, cash, borrowings and net position of the Borrower, for
such week and the succeeding eight weeks; and"

                  11. NEW SECTION 5.3.3 OF THE CREDIT AGREEMENT. A new Section
5.3.3 is hereby added, and provides in its entirety as follows:

                  "5.3.3 Without limiting the Borrower's obligations under
Section 5.3.1 and Section 5.3.2 hereof, on or before December 31, 1998 Borrower
shall deliver an appraisal of all Collateral consisting of Equipment, Fixtures
or other fixed assets which is located in the United States of America or Mexico
and all Collateral consisting of the raw material portion of inventory which is
located in the United States of America, provided that the Agent shall have
approved the appraiser selected by the Borrower."

                  12. NEW SECTION 5.10.2 OF THE CREDIT AGREEMENT. A new Section
5.10.2 is hereby added, and provides in its entirety as follows:

                  "5.10.2 Beginning as soon as possible, but in no event later
than December 1998 and subject to limitations imposed by local foreign laws, if
the Subsidiary Accounts Receivable of a Subsidiary exceed $750,000 for a
calendar month, Borrower shall cause such Subsidiary to transfer and assign all
of its Subsidiary Accounts Receivable generated during such month to Borrower."

                  13. NEW SECTION 5.13 OF THE CREDIT AGREEMENT. A new Section
5.13 is hereby added, and provides in its entirety as follows:

                  "5.13 WARRANTS VESTING. If the Warrants shall fail to vest in
accordance with their terms for any reason, Borrower shall pay Agent a fee of
$300,000 to be applied pro rata based upon each Lender's Commitment."


                                Third Amendment
                                       7
<PAGE>   8
                  14. AMENDMENTS TO SECTION 6.2.6 OF THE CREDIT AGREEMENT.
Section 6.2.6 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.2.6. Other Debt of the Borrower that is (i) unsecured, (ii)
secured by the Chandler Mortgage, or (iii) secured only by a valid and perfected
purchase money security interest, in an aggregate amount incurred during the
term of this Agreement not exceeding $10,000,000;"

                  15. AMENDMENTS TO SECTION 6.4.4 OF THE CREDIT AGREEMENT.
Section 6.4.4 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.4.4. the Borrower may make Investments in any Subsidiary
after the Closing Date if (i) in the case of any United States-based Subsidiary,
the Borrower has complied with Section 5.10 and (ii) in the case of any
Subsidiary, the aggregate amount of such Investments in all such Subsidiaries
does not exceed an amount equal to ten percent (10%) of Borrower's Tangible Net
Worth as at the time such Investment is made plus $25,000,000; and"

                  16.      AMENDMENTS TO SECTION 6.5 OF THE CREDIT AGREEMENT.

                           (a) Section 6.5.1 of the Credit Agreement is hereby
amended to provide in its entirety as follows:

                           "6.5.1 LEVERAGE RATIO. The Leverage Ratio for any
Fiscal Quarter ending in December 1999 or any prior Fiscal Quarter shall not
exceed 2.00 to 1.00 at any time, and the Leverage Ratio for any Fiscal Quarter
ending subsequent to December 1999 shall not exceed 1.75 to 1.00 at any time."

                           (b) A new Section 6.5.6 is hereby added, and provides
in its entirety as follows:

                           "6.5.6 REVENUES. At the end of each period in the
table below, Borrower's gross revenues (determined in accordance with GAAP) to
date for the fiscal quarter in which such period falls, shall not be less than
the amount set forth opposite such period in the table below:

<TABLE>
<S>                                                    <C>
            FOR DECEMBER 1998 QUARTER

            by end of month 1:                              $ 7,200,000

            by end of month 2:                               18,000,000

            by quarter end                                   36,000,000

            FOR THE MARCH 1999 QUARTER

            by end of Month 1:                              $ 7,600,000

            by end of Month 2:                               19,000,000

            by quarter end:                                  38,000,000
</TABLE>


                                Third Amendment
                                       8
<PAGE>   9
                  This covenant shall cease to apply if the Company closes a
Junior Capital Transaction."

                  17. AMENDMENTS TO SECTION 6.5.2 OF THE CREDIT AGREEMENT.
Section 6.5.2 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.5.2 MINIMUM CONSOLIDATED TANGIBLE NET WORTH. Consolidated
Tangible Net Worth shall not be less than the sum of (a) $42,000,000; plus (b)
commencing with the fiscal quarter ending in September 1998, seventy-five
percent (75%) of Borrower's Net Income for the applicable period on a cumulative
basis, provided that for the purposes of this Section 6.5.1 the cumulative
amount of Borrower's Net Income shall be calculated with out giving effect to
any quarters in which the Borrower's Net Income is less than zero; plus (c) one
hundred percent (100%) of the amount of any new equity investment in the
Borrower."

                  18. AMENDMENTS TO SECTION 6.5.3 OF THE CREDIT AGREEMENT.
Section 6.5.3 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.5.3 SENIOR DEBT LEVERAGE RATIO. The Senior Debt Leverage
Ratio at all times after March 31, 1999 shall not exceed 0.50 to 1.00."

                  19. AMENDMENTS TO SECTION 6.5.4 OF THE CREDIT AGREEMENT.
Section 6.5.4 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.5.4 DEBT SERVICE COVERAGE RATIO. As of the last day of the
Fiscal Quarter ending in June 1999, the Debt Service Coverage Ratio for the two
consecutive Fiscal Quarters then ended shall not be less than 1.00 to 1.00, and
as of the last day of the Fiscal Quarter ending in September 1999 and each
Fiscal Quarter thereafter, the Debt Service Coverage Ratio for the two
consecutive Fiscal Quarters then ended shall not be less than 2.00 to 1.00."

                  20. AMENDMENTS TO SECTION 6.5.5 OF THE CREDIT AGREEMENT.
Section 6.5.5 of the Credit Agreement is hereby amended to provide in its
entirety as follows:

                  "6.5.5 MINIMUM EBIT. As of the last day of each of the Fiscal
Quarters ending in September 1998, December 1998 and March 1999, Borrower's EBIT
shall not exceed a loss of greater than $3,300,000, shall not exceed a loss of
greater than $1,500,000, and shall be greater than or equal to zero,
respectively. As of the last day of each Fiscal Quarter ending in June 1999 and
each Fiscal Quarter thereafter: (i) Borrower's EBIT for the two consecutive
Fiscal Quarters then ended shall each be greater than zero, and (ii) if
Borrower's EBIT is a negative number as a result of losses, the absolute value
of such EBIT shall not exceed five percent (5%) of Consolidated Tangible Net
Worth."

                  21. AMENDMENTS TO SECTION 6.14 OF THE CREDIT AGREEMENT.
Section 6.14 of the Credit Agreement is hereby deleted in its entirety and a new
Section 6.14 is hereby added, and provides in its entirety as follows:


                                Third Amendment
                                       9
<PAGE>   10
                  "6.14 CHANDLER MORTGAGE. Neither Borrower nor any of
Borrower's Subsidiaries shall enter into the Chandler Mortgage or otherwise
acquire the Chandler Property until after the consummation of a Junior Capital
Transaction, including the receipt by Borrower of the proceeds of such
transaction."

                  22. AMENDMENTS TO SCHEDULES AND EXHIBITS TO THE CREDIT
AGREEMENT.

                  (a) Schedule 1.1A to the Credit Agreement is hereby amended to
provide in its entirety as set forth on the Amended Schedule 1.1A attached
hereto.

                  (b) Schedule 1.1E to the Credit Agreement is hereby amended to
provide in its entirety as set forth on the Amended Schedule 1.1.E attached
hereto.

                  (b) Exhibit F-6 to the Credit Agreement is hereby amended to
provide in its entirety as set forth on the Exhibit F-6 attached hereto.

                  (c) Exhibit W to the Credit Agreement is hereby amended to
provide in its entirety as set forth on the Exhibit W attached hereto.

                  23. ACKNOWLEDGMENT OF SENIOR DEBT LEVERAGE RATIO AND INTEREST
RATE COVERAGE RATIO. Borrower and the Lender Parties hereby acknowledge that as
of the date hereof, (a) the Senior Debt Leverage Ratio exceeds 0.50 to 1.00, and
(b) the Interest Coverage Ratio is less than 2:00 to 1.00, and that pursuant to
Section 2.4.3.1 Borrower shall not have the option to borrow LIBOR Rate Loans or
to continue existing loans as LIBOR Rate Loans so long as its Senior Debt
Leverage Ratio exceeds 0.50 to 1.00 or its Interest Coverage Ratio is less than
2:00 to 1.00.

                  24. WAIVER OF EXISTING DEFAULTS. On a one-time-only basis, by
its signature below each Lender Party hereby waives the Defaults that exist as
of the end of the Fiscal Quarter that ended in September 1998 as a result of
Borrower's failure to comply with each of the Interest Coverage Ratio covenant
contained in Section 6.5.3 of the Credit Agreement and the minimum net income
covenant Section 6.5.5 of the Credit Agreement for such Fiscal Quarter;
provided, however, that Borrower agrees and acknowledges that Sections 6.5.3 and
6.5.5 shall be in full force and effect, subject to the amendments contained in
this Third Amendment, as if it had never been waived, with respect to the Fiscal
Quarter ending in December 1998, and for each relevant period thereafter.

                  25. WAIVER LIMITED. The waiver given herein is strictly
limited to its terms and shall not have any force and effect other than as
expressly set forth herein. No further waiver, either of additional terms or for
any additional period, shall be implied from the waiver provided herein. Without
limiting the foregoing, the waiver provided herein is subject to the limitations
set forth in Section 9.3.1.5 of the Credit Agreement.

                  26. AMENDMENT FEE. On the date hereof, Borrower shall pay to
Agent, for the ratable benefit of the Lenders, an amendment fee (the "Amendment
Fee") of Forty Thousand Dollars ($40,000).


                                 Third Amendment
                                       10
<PAGE>   11
                  27. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS THIRD
AMENDMENT. Lender Parties' obligations under this Third Amendment are
conditioned upon, and this Third Amendment shall not be effective until,
satisfaction in full of each of the following:

                  (a) Agent shall have received this Third Amendment, duly
executed by each appropriate Person and in form and substance satisfactory to
Agent and its counsel;

                  (b) Lenders (or their designees) shall have received Warrants
in the amounts as set forth in Schedule 1.1A, duly executed by Borrower;

                  (c) Borrower shall have paid to Agent (i) the Amendment Fee;
and (ii) all amounts then due and payable pursuant to Section 9.1 of the Credit
Agreement which shall have been presented for payment;

                  (d) All of the representations and warranties of Borrower
contained herein, in the Credit Agreement and in each other Loan Document shall
be true and correct in all material respects on and as of the effective date of
this Third Amendment, as though made on and as of that date (except to the
extent that such representations and warranties expressly relate to an earlier
date or reflect changes brought about by this Third Amendment);

                  (e) Borrower shall have delivered to Agent certified copies of
resolutions of its Board of Directors authorizing Borrower to execute and
deliver this Third Amendment and the Warrants, in form and substance
satisfactory to Agent in its sole and absolute discretion;

                  (f) No Default or Event of Default shall have occurred and be
continuing or would result from the consummation of the transactions
contemplated in this Third Amendment; and

                  (g) All other documents, certificates, consents and opinions
required by Agent in connection with the transactions contemplated by this Third
Amendment shall have been executed and delivered in form and substance
satisfactory to Agent in its sole and absolute discretion.

                  28. REPRESENTATIONS AND WARRANTIES. In order to induce Lender
Parties to enter into this Third Amendment, Borrower makes the following
representations and warranties:

                  (a) The representations and warranties contained in the Credit
Agreement (and in the Schedules thereto) and each of the other Loan Documents
(and in the Schedules thereto) are true, correct and complete in all material
respects at and as of the effective date of this Third Amendment (except to the
extent that such representations and warranties expressly relate to an earlier
date or reflect changes brought about by this Third Amendment); and

                  (b) This Third Amendment and all other agreements and
documents executed by Borrower in connection herewith have been duly executed
and delivered by Borrower and constitute the legal, valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
terms, except as enforcement may be limited by bankruptcy, insolvency,


                                 Third Amendment
                                       11
<PAGE>   12
reorganization, moratorium or similar laws relating to the enforcement of the
rights of creditors generally, or the exercise of judicial discretion with
respect to equitable remedies.

                  29. REFERENCES. All references in the Credit Agreement to
"this Agreement", "hereof", "herein", "hereto", or words of similar import, and
all references in all other Loan Documents to "the Credit Agreement" shall be,
and shall be deemed to be for all purposes, references to the Credit Agreement
as amended.

                  30. CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS OTHERWISE NOT
AFFECTED. Except as expressly amended pursuant to this Third Amendment, the
Credit Agreement and each of the other Loan Documents shall remain unchanged and
in full force and effect and are hereby ratified and confirmed in all respects.
Each Lender Party continues to reserve any and all rights and remedies under the
Credit Agreement and each of the other Loan Documents, and no failure, delay or
discontinuance on the part of any Lender Party in exercising any right, power or
remedy thereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
This Third Amendment and the Credit Agreement shall be read together, as one
document.

                  31. BINDING EFFECT. This Third Amendment shall be binding
upon, inure to the benefit of and be enforceable by Borrower and each Lender
Party and their respective successors and assigns, as permitted pursuant to the
Credit Agreement.

                  32. TIME OF THE ESSENCE. Time and exactitude of each of the
terms, obligations, covenants and conditions of this Third Amendment are hereby
declared to be of the essence.

                  33. GOVERNING LAW. THIS THIRD AMENDMENT IS A CONTRACT UNDER
THE LAWS OF THE STATE OF CALIFORNIA AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY SUCH LAWS (EXCLUDING THE LAWS APPLICABLE TO
CONFLICTS OR CHOICE OF LAW).

                  34. COUNTERPARTS. This Third Amendment may be executed in
several counterparts and by each party on a separate counterpart, each of which
when executed and delivered shall be an original, and all of which together
shall constitute one instrument. In proving any matter with respect to this
Third Amendment it shall not be necessary to produce or account for more than
one such counterpart signed by the party against whom enforcement is sought.


                                 Third Amendment
                                       12
<PAGE>   13
                  IN WITNESS WHEREOF, the parties hereto have duly executed this
Third Amendment, as of the date first above written.


                                AGENT:

                                BANKBOSTON, N.A.,
                                A NATIONAL BANKING ASSOCIATION,
                                as Agent, L/C Issuer and a Lender


                                By:     \s\ John B. Desmond
                                        ---------------------------------------
                                Name:   John B. Desmond
                                        ---------------------------------------
                                Title:  Vice President
                                        ---------------------------------------


                                LENDERS:

                                BANK ONE, ARIZONA, N.A.,
                                A NATIONAL BANKING ASSOCIATION



                                By:     \s\ Steve Reinhart
                                        ---------------------------------------
                                Name:   Steve Reinhart
                                        ---------------------------------------
                                Title:  Vice President
                                        ---------------------------------------


                                IMPERIAL BANK,
                                A CALIFORNIA BANKING CORPORATION



                                By:     \s\ Kevin C. Halloran
                                        ---------------------------------------
                                Name:   Kevin C. Halloran
                                        ---------------------------------------
                                Title:  Senior Vice President
                                        ---------------------------------------


                                THE UNION BANK OF CALIFORNIA,
                                A NATIONAL BANKING ASSOCIATION



                                By:     \s\ Scott Lane
                                        ---------------------------------------
                                Name:   Scott Lane
                                        ---------------------------------------
                                Title:  Vice President
                                        ---------------------------------------


                                 Third Amendment
                                       13
<PAGE>   14
                                BORROWER:

                                ADFLEX SOLUTIONS, INC.,
                                A DELAWARE CORPORATION


                                By:     \s\ Donald E. Frederick
                                        ---------------------------------------
                                Name:   Donald E. Frederick
                                        ---------------------------------------
                                Title:  Chief Financial Officer
                                        ---------------------------------------


                                 Third Amendment
                                       14
<PAGE>   15
                                                                   SCHEDULE 1.1A

                                   COMMITMENTS


<TABLE>
<CAPTION>
Lender                                 Commitment          Revolving Commitment     Term Commitment           Warrants
------                                -----------          --------------------     ---------------           --------
<S>                                   <C>                  <C>                      <C>                       <C>   
BankBoston, N.A                       $13,125,000          $     5,833,333.333      $ 7,291,666.667           14,583
Bank One, Arizona, N.A                 11,250,000                5,000,000.000        6,250,000.000           12,500
The Union Bank of California           11,250,000                5,000,000.000        6,250,000.000           12,500
Imperial Bank                           9,375,000                4,166,666.667        5,208,333.333           10,417
                                      -----------          --------------------     ---------------           ------
Total                                 $45,000,000          $    20,000,000.000      $25,000,000.000           50,000
                                      ===========          ===================      ===============           ======
</TABLE>


                                 Third Amendment
                                  Schedule 1.1A
<PAGE>   16
                                                                   SCHEDULE 1.1E

                          APPLICABLE MARGIN & FEE RATE

         The "APPLICABLE MARGIN" in respect of LIBOR Rate Loans and the "FEE
RATE" for any day are the respective rates per annum set forth below in the
applicable row under the column corresponding to the Pricing Level that applies
on such day:



<TABLE>
<CAPTION>
                                 LEVEL I         LEVEL II       LEVEL III       LEVEL IV            LEVEL V
PRICING LEVEL                    PRICING         PRICING         PRICING        PRICING             PRICING
-------------                    -------         --------       ---------       --------            -------
<S>                              <C>             <C>            <C>             <C>              <C>            
Applicable Margin (LIBOR            1.50            1.75            2.00          2.25           LIBOR Rate Not
Rate Loans)                                                                                         Permitted

Fee Rate                            0.20            0.20            0.25          0.25                0.50
</TABLE>


         For purposes of this Schedule, the following terms have the following
meanings:

         "LEVEL I PRICING" applies during any Pricing Period if, at the end of
the Fiscal Quarter most recently ended prior to the first day of such Pricing
Period, the Interest Coverage Ratio for the two consecutive Fiscal Quarters then
ended was greater than 5.00 to 1.00.

         "LEVEL II PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 5.00 to
1.00, but greater than 4.00 to 1.00.

         "LEVEL III PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 4.00 to
1.00, but greater than 3.00 to 1.00.

         "LEVEL IV PRICING" applies during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 3.00 to
1.00, but greater than 2.00 to 1.00.

         "LEVEL V PRICING" applies (i) during any Pricing Period if no higher
Pricing Level applies and, at the end of the Fiscal Quarter most recently ended
prior to the first day of such Pricing Period, the Interest Coverage Ratio for
the two consecutive Fiscal Quarters then ended was less than or equal to 2.00 to
1.00, or (ii) on the first day of such Pricing Period the financial 


                                 Third Amendment
                                  Schedule 1.1E
<PAGE>   17
statements required by Section 5.1.2 of the Credit Agreement shall not have been
delivered with respect to such Fiscal Quarter.

         "PRICING PERIOD" means a period beginning on (and including) the day on
which a Compliance Certificate required pursuant to Section 5.1.2 of the Credit
Agreement is delivered, and ending on (and excluding) the day on which the next
such Compliance Certificate is delivered. The first Pricing Period shall begin
on the day on which the Borrower delivers a Compliance Certificate or other
evidence establishing that the Senior Debt Leverage Ratio does not exceed 0.50
to 1.00.

         "PRICING LEVEL" refers to such of Level I Pricing, Level II Pricing,
Level III Pricing, Level IV Pricing or Level V Pricing as applies during any
particular day. The numbering of Pricing Levels is in ascending order (e.g.,
Level II Pricing is referred to as a "higher" Pricing Level than Level I
Pricing).


                                 Third Amendment
                                  Schedule 1.1E
<PAGE>   18
                                   Exhibit W

                                     WARRANT

THE WARRANT EVIDENCED OR CONSTITUTED HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD,
OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION
UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL,
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION
RULE 144.

           WARRANT TO PURCHASE COMMON STOCK OF ADFLEX SOLUTIONS, INC.

                             (Subject to Adjustment)

NO. __                                                          October 30, 1998

THIS CERTIFIES THAT, for value received, ________________________________, or
its permitted registered assigns ("Holder"), is entitled, subject to the terms
and conditions of this Warrant, at any time or from time to time after March 14,
1999 (the "Effective Date"), and before 5:00 p.m. California Time on the last
day of the Company's (as defined below) fiscal year in the year 2002 (the
"Expiration Date"), to purchase from ADFlex Solutions, Inc., a Delaware
corporation (the "Company"), [WARRANT SHARES (IN WORDS)] ([WARRANT SHARES (IN
NUMBERS]) shares of Common Stock of the Company at a price per share equal to
the Exercise Price. Both the number of shares of Common Stock purchasable upon
exercise of this Warrant and the Exercise Price are subject to adjustment and
change as provided herein.

1.       CERTAIN DEFINITIONS. As used in this Warrant the following terms shall
         have the following respective meanings:

         1.1.     "Fair Market Value" of a share of Common Stock as of a
                  particular date shall mean:

                  (a)      If traded on a securities exchange or the Nasdaq
                           National Market, the Fair Market Value shall be
                           deemed to be the average of the closing prices of the
                           Common Stock of the Company on such exchange or
                           market over the ten (10) trading days ending
                           immediately prior to the applicable date of
                           valuation;

                  (b)      If actively traded over-the-counter, the Fair Market
                           Value shall be deemed to be the average of the
                           closing bid prices over the thirty (30)-day period
                           ending immediately prior to the applicable date of
                           valuation; and 


                                       1
<PAGE>   19
                  (c)      If there is no active public market, the Fair Market
                           Value shall be the value thereof, as agreed upon by
                           the Company and the Holder; provided, however, that
                           if the Company and the Holder cannot agree on such
                           value, such value shall be determined by an
                           independent valuation firm experienced in valuing
                           businesses such as the Company and jointly selected
                           in good faith by the Company and the Holder. Fees and
                           expenses of the valuation firm shall be paid for by
                           the Company.
        
         1.2.     "Registered Holder" shall mean any Holder in whose name this
                   Warrant is registered upon the books and records maintained
                   by the Company.

         1.3.     "Warrant" as used herein, shall include this Warrant and any
                  warrant delivered in substitution or exchange therefor as
                  provided herein.

         1.4.     "Common Stock" shall mean the Common Stock of the Company and
                  any other securities at any time receivable or issuable upon
                  exercise of this Warrant.

         1.5.     "Exercise Price" shall mean $5.00.

         1.6.     "Concurrent Warrants" as used herein, shall include all other
                  warrants issued to the Lenders pursuant to the Third Amendment
                  and any warrants delivered in substitution or exchange
                  therefor as provided in such warrants.

         1.7.     "Third Amendment" shall mean that certain Third Amendment To
                  Senior Secured Credit Agreement and Certain Loan Documents,
                  dated as of October 30, 1998 among the Company, the banks and
                  other financial institutions that either now or in the future
                  are parties thereto as lenders (collectively the "Lenders" and
                  each individually a "Lender"), BankBoston, N.A. in its
                  capacity as the L/C Issuer (in such capacity, together with
                  any successors thereto in such capacity, the "L/C Issuer"),
                  and BankBoston N.A., as agent and representative for the
                  Lenders (in such capacity BankBoston N.A. or any successor in
                  such capacity is referred to herein as the "Agent"). 


2.       EXERCISE OF WARRANT

         2.1.     Payment. Subject to compliance with the terms and conditions
                  of this Warrant and applicable securities laws, this Warrant
                  may be exercised, in whole or in part at any time or from time
                  to time, after the Effective Date and on or before the
                  Expiration Date by the delivery (including, without
                  limitation, delivery by facsimile) of the form of Notice of
                  Exercise attached hereto as Exhibit 1 (the "Notice of
                  Exercise"), duly executed by the Holder, at the principal
                  office of the Company referred to in Section 15, and as soon
                  as practicable after such date, surrendering

                  (a)      this Warrant at the principal office of the Company,
                           and


                                       2
<PAGE>   20
                  (b)      payment, (i) in cash (by check) or by wire transfer,
                           (ii) by cancellation by the Holder of indebtedness of
                           the Company to the Holder; or (iii) by a combination
                           of (i) and (ii), of an amount equal to the product
                           obtained by multiplying the number of shares of
                           Common Stock being purchased upon such exercise by
                           the then effective Exercise Price (the "Exercise
                           Amount").


         2.2.     Net Issue Exercise. In lieu of the payment methods set forth
                  in Section 2.1(b) above, the Holder may elect to exchange all
                  or some of this Warrant for shares of Common Stock equal to
                  the value of the amount of the Warrant being exchanged on the
                  date of exchange. If Holder elects to exchange this Warrant as
                  provided in this Section 2.2, Holder shall tender to the
                  Company the Warrant for the amount being exchanged, along with
                  written notice of Holder's election to exchange some or all of
                  the Warrant, and the Company shall issue to Holder the number
                  of shares of the Common Stock computed using the following
                  formula:

                           X =    Y (A-B)
                                -------------
                                     A

                          Where X =  the number of shares of Common Stock to
                                     be issued to Holder pursuant to this
                                     Section 2.2.

                                Y =  the number of shares of Common Stock
                                     covered by this Warrant and in respect of
                                     which the net issue exercise is made
                                     pursuant to this Section 2.2 (as adjusted
                                     to the date of such calculation).

                                A =  the Fair Market Value of one share of the
                                     Common Stock at the time the net issue
                                     exercise is made.

                                B =  Exercise Price (as adjusted to the date
                                     of such calculation).


         2.3.     "Easy Sale" Exercise. In lieu of the payment methods set forth
                  in Section 2.1(b) above, when permitted by law and applicable
                  regulations (including Nasdaq and NASD rules), the Holder may
                  pay the Exercise Price through a "same day sale" commitment
                  from the Holder (and if applicable a broker-dealer that is a
                  member of the National Association of Securities Dealers (a
                  "NASD Dealer")), whereby the Holder irrevocably elects to
                  exercise this Warrant and to sell a portion of the shares so
                  purchased to pay the Exercise Price, and the Holder (or, if
                  applicable, the NASD Dealer) commits upon sale (or, in the
                  case of the NASD Dealer, upon receipt) of such shares to
                  forward the Exercise Price directly to the Company.

         2.4.     Stock Certificates; Fractional Shares. As soon as practicable
                  on or after the date of any exercise of this Warrant, the
                  Company shall issue and deliver to the person or persons
                  entitled to receive the same a certificate or certificates for
                  the number 


                                       3
<PAGE>   21
                  of whole shares of Common Stock issuable upon such exercise,
                  together with cash in lieu of any fraction of a share equal to
                  such fraction of the current Fair Market Value of one whole
                  share of Common Stock as of such date of exercise. No
                  fractional shares or scrip representing fractional shares
                  shall be issued upon an exercise of this Warrant. 

         2.5.     Partial Exercise; Effective Date of Exercise. In case of any
                  partial exercise of this Warrant, the Company shall cancel
                  this Warrant upon surrender hereof and shall execute and
                  deliver a new Warrant of like tenor and date for the balance
                  of the shares of Common Stock purchasable hereunder. This
                  Warrant shall be deemed to have been exercised immediately
                  prior to the close of business on the date of its surrender
                  for exercise as provided above, provided that if the Warrant
                  as provided in Section 2.1(a) and, if applicable, the payment
                  therefor as provided in Section 2.1(b), are not delivered
                  concurrently with the Notice of Exercise, this Warrant shall
                  be deemed to have been exercised at such later date as this
                  Warrant and, if applicable, the above-described payment are
                  delivered. The person entitled to receive the shares of Common
                  Stock issuable upon exercise of this Warrant shall be treated
                  for all purposes as the holder of record of such shares as of
                  the close of business on the date the Holder is deemed to have
                  exercised this Warrant. 

         2.6.     Vesting. This Warrant will vest on December 15, 1998 if the
                  Company has not consummated a Junior Capital Transaction (as
                  such term is defined in the Third Amendment) and raised gross
                  proceeds of at least $20,000,000. If the Warrant shall fail to
                  vest because the Company shall have consummated a Junior
                  Capital Transaction and raised gross proceeds of at least
                  $20,000,000 this Warrant shall be void and shall be of no
                  further effect. 

3.       VALID ISSUANCE: TAXES. All shares of Common Stock issued upon the
         exercise of this Warrant shall be validly issued, fully paid and
         non-assessable, and the Company shall pay all taxes and other
         governmental charges that may be imposed in respect of the issue or
         delivery thereof. The Company shall not be required to pay any tax or
         other charge imposed in connection with any transfer involved in the
         issuance of any certificate for shares of Common Stock in any name
         other than that of the Registered Holder of this Warrant, and in such
         case the Company shall not be required to issue or deliver any stock
         certificate or security until such tax or other charge has been paid,
         or it has been established to the Company's reasonable satisfaction
         that no tax or other charge is due.

4.       ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number of shares
         of Common Stock issuable upon exercise of this Warrant (or any shares
         of stock or other securities or property receivable or issuable upon
         exercise of this Warrant) and the Exercise Price are subject to
         adjustment upon occurrence of the following events:

         4.1.     Adjustment for Stock Splits, Stock Subdivisions or
                  Combinations of Shares. The Exercise Price of this Warrant
                  shall be proportionally decreased and the number of shares of
                  Common Stock issuable upon exercise of this Warrant (or any
                  shares 


                                       4
<PAGE>   22
                  of stock or other securities at the time issuable upon
                  exercise of this Warrant) shall be proportionally increased to
                  reflect any stock split or subdivision of the Company's Common
                  Stock. The Exercise Price of this Warrant shall be
                  proportionally increased and the number of shares of Common
                  Stock issuable upon exercise of this Warrant (or any shares of
                  stock or other securities at the time issuable upon exercise
                  of this Warrant) shall be proportionally decreased to reflect
                  any combination of the Company's Common Stock.

         4.2.     Adjustment for Dividends or Distributions of Stock or Other
                  Securities or Property. In case the Company shall make or
                  issue, or shall fix a record date for the determination of
                  eligible holders entitled to receive, a dividend or other
                  distribution with respect to the Common Stock (or any shares
                  of stock or other securities at the time issuable upon
                  exercise of the Warrant) payable in (a) securities of the
                  Company or (b) assets (excluding cash dividends paid or
                  payable solely out of retained earnings), then, in each such
                  case, the Holder of this Warrant on exercise hereof at any
                  time after the consummation, effective date or record date of
                  such dividend or other distribution, shall receive, in
                  addition to the shares of Common Stock (or such other stock or
                  securities) issuable on such exercise prior to such date, and
                  without the payment of additional consideration therefor, the
                  securities or such other assets of the Company to which such
                  Holder would have been entitled upon such date if such Holder
                  had exercised this Warrant on the date hereof and had
                  thereafter, during the period from the date hereof to and
                  including the date of such exercise, retained such shares and
                  all such additional securities or other assets distributed
                  with respect to such shares as aforesaid during such period
                  giving effect to all adjustments called for by this Section 4.
                  

         4.3.     Reclassification. If the Company, by reclassification of
                  securities or otherwise, shall change any of the securities as
                  to which purchase rights under this Warrant exist into the
                  same or a different number of securities of any other class or
                  classes, this Warrant shall thereafter represent the right to
                  acquire such number and kind of securities as would have been
                  issuable as the result of such change with respect to the
                  securities that were subject to the purchase rights under this
                  Warrant immediately prior to such reclassification or other
                  change, and the Exercise Price therefor shall be appropriately
                  adjusted, all subject to further adjustment as provided in
                  this Section 4. No adjustment shall be made pursuant to this
                  Section 4.3 upon any conversion or redemption of the Common
                  Stock which is the subject of Section 4.5. 

         4.4.     Adjustment for Capital Reorganization, Merger or
                  Consolidation. In case of any capital reorganization of the
                  capital stock of the Company (other than a combination,
                  reclassification, exchange or subdivision of shares otherwise
                  provided for herein), or any merger or consolidation of the
                  Company with or into another corporation, or the sale of all
                  or substantially all the assets of the Company then, and in
                  each such case, as a part of such reorganization, merger,


                                       5
<PAGE>   23
                  consolidation, sale or transfer, lawful provision shall be
                  made so that the Holder of this Warrant shall thereafter be
                  entitled to receive upon exercise of this Warrant, during the
                  period specified herein and upon payment of the Exercise Price
                  then in effect, the number of shares of stock or other
                  securities or property of the successor corporation resulting
                  from such reorganization, merger, consolidation, sale or
                  transfer that a holder of the shares deliverable upon exercise
                  of this Warrant would have been entitled to receive in such
                  reorganization, consolidation, merger, sale or transfer if
                  this Warrant had been exercised immediately before such
                  reorganization, merger, consolidation, sale or transfer, all
                  subject to further adjustment as provided in this Section 4.
                  The foregoing provisions of this Section 4.4 shall similarly
                  apply to successive reorganizations, consolidations, mergers,
                  sales and transfers and to the stock or securities of any
                  other corporation that are at the time receivable upon the
                  exercise of this Warrant. If the per-share consideration
                  payable to the Holder hereof for shares in connection with any
                  such transaction is in a form other than cash or marketable
                  securities, then the value of such consideration shall be
                  determined in good faith by the Company's Board of Directors.
                  In all events, appropriate adjustment (as determined in good
                  faith by the Company's Board of Directors) shall be made in
                  the application of the provisions of this Warrant with respect
                  to the rights and interests of the Holder after the
                  transaction, to the end that the provisions of this Warrant
                  shall be applicable after that event, as near as reasonably
                  may be, in relation to any shares or other property
                  deliverable after that event upon exercise of this Warrant.

         4.5.     Conversion of Common Stock. In case all or any portion of the
                  authorized and outstanding shares of Common Stock of the
                  Company are redeemed or converted or reclassified into other
                  securities or property pursuant to the Company's Certificate
                  of Incorporation or otherwise, or the Common Stock otherwise
                  ceases to exist, then, in such case, the Holder of this
                  Warrant, upon exercise hereof at any time after the date on
                  which the Common Stock is so redeemed or converted,
                  reclassified or ceases to exist (the "Termination Date"),
                  shall receive, in lieu of the number of shares of Common Stock
                  that would have been issuable upon such exercise immediately
                  prior to the Termination Date, the securities or property that
                  would have been received if this Warrant had been exercised in
                  full and the Common Stock received thereupon had been
                  simultaneously converted immediately prior to the Termination
                  Date, all subject to further adjustment as provided in this
                  Warrant. Additionally, the Exercise Price shall be immediately
                  adjusted to equal the quotient obtained by dividing (x) the
                  aggregate Exercise Price of the maximum number of shares of
                  Common Stock for which this Warrant was exercisable
                  immediately prior to the Termination Date by (y) the number of
                  shares of Common Stock of the Company for which this Warrant
                  is exercisable immediately after the Termination Date, all
                  subject to further adjustment as provided herein. 


                                       6
<PAGE>   24
5.       CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in the
         Exercise Price, or number or type of shares issuable upon exercise of
         this Warrant, the Chief Financial Officer or Controller of the Company
         shall compute such adjustment in accordance with the terms of this
         Warrant and prepare a certificate setting forth such adjustment and
         showing in detail the facts upon which such adjustment is based,
         including a statement of the adjusted Exercise Price. The Company shall
         promptly send (by facsimile and by either first class mail, postage
         prepaid or overnight delivery) a copy of each such certificate to the
         Holder.

6.       LOSS OR MUTILATION. Upon receipt of evidence reasonably satisfactory to
         the Company of the ownership of and the loss, theft, destruction or
         mutilation of this Warrant, and of indemnity reasonably satisfactory to
         it, and (in the case of mutilation) upon surrender and cancellation of
         this Warrant, the Company will execute and deliver in lieu thereof a
         new Warrant of like tenor as the lost, stolen, destroyed or mutilated
         Warrant. 

7.       RESERVATION OF COMMON STOCK. The Company hereby covenants that at all
         times there shall be reserved for issuance and delivery upon exercise
         of this Warrant and the Concurrent Warrants such number of shares of
         Common Stock or other shares of capital stock of the Company as are
         from time to time issuable upon exercise of this Warrant and the
         Concurrent Warrants and, from time to time, will take all steps
         necessary to amend its Certificate of Incorporation to provide
         sufficient reserves of shares of Common Stock issuable upon exercise of
         this Warrant and the Concurrent Warrants. All such shares shall be duly
         authorized, and when issued upon exercise as provided herein, shall be
         validly issued, fully paid and non-assessable, free and clear of all
         liens, security interests, charges and other encumbrances or
         restrictions on sale and free and clear of all preemptive rights,
         except encumbrances or restrictions arising under federal or state
         securities laws. Issuance of this Warrant and the Concurrent Warrants
         shall constitute full authority to the Company's Officers who are
         charged with the duty of executing stock certificates to execute and
         issue the necessary certificates for shares of Common Stock upon the
         due exercise of this Warrant and the Concurrent Warrants. 

8.       TRANSFER AND EXCHANGE. Subject to the terms and conditions of this
         Warrant and compliance with all applicable securities laws, this
         Warrant and all rights hereunder may be transferred to any Registered
         Holder's parent, subsidiary or affiliate, in whole or in part, on the
         books of the Company maintained for such purpose at the principal
         office of the Company referred to in Section 15, by the Registered
         Holder hereof in person, or by duly authorized attorney, upon execution
         of an assignment in the form of Exhibit 2 and surrender of this Warrant
         properly endorsed and upon payment of any necessary transfer tax or
         other governmental charge imposed upon such transfer. Upon any
         permitted partial transfer, the Company will issue and deliver to the
         Registered Holder a new Warrant or Warrants with respect to the shares
         of Common Stock not so transferred. Each taker and holder of this
         Warrant, by taking or holding the same, consents and agrees that when
         this Warrant shall have been so endorsed, the person in possession of
         this Warrant may be treated by the Company, and all other persons
         dealing with this Warrant, 


                                       7
<PAGE>   25
         as the absolute owner hereof for any purpose and as the person entitled
         to exercise the rights represented hereby, any notice to the contrary
         notwithstanding; provided, however that until a transfer of this
         Warrant is duly registered on the books of the Company, the Company may
         treat the Registered Holder hereof as the owner for all purposes. 

9.       RESTRICTIONS ON TRANSFER. The Holder, by acceptance hereof, agrees
         that, absent an effective registration statement filed with the
         Securities and Exchange Commission (the "SEC") under the Securities Act
         covering the disposition or sale of this Warrant or the Common Stock
         issued or issuable upon exercise hereof, as the case may be, and
         registration or qualification under applicable state securities laws,
         such Holder will not sell, transfer, pledge, or hypothecate (other than
         to subsidiaries or affiliates) any or all of this Warrant or such
         Common Stock, as the case may be, unless either (i) the Company has
         received an opinion of counsel, in form and substance reasonably
         satisfactory to the Company, to the effect that such registration is
         not required in connection with such disposition or (ii) the sale of
         such securities is made pursuant to SEC Rule 144.

10.      COMPLIANCE WITH SECURITIES LAWS. By acceptance of this Warrant, the
         Holder hereby represents, warrants and covenants that this Warrant and
         any shares of stock purchased upon exercise of this Warrant shall be
         acquired for investment only and not with a view to, or for sale in
         connection with, any distribution thereof; that the Holder has had such
         opportunity as such Holder has deemed adequate to obtain from
         representatives of the Company such information as is necessary to
         permit the Holder to evaluate the merits and risks of its investment in
         the Company; that the Holder is able to bear the economic risk of
         holding this Warrant and such shares as may be acquired pursuant to the
         exercise of this Warrant for an indefinite period; that the Holder is
         an "accredited investor" as defined in Rule 501(a) promulgated under
         the Securities Act; that the Holder understands that this Warrant and
         the shares of stock acquired pursuant to the exercise of this Warrant
         will not be registered under the Securities Act (unless otherwise
         required pursuant to exercise by the Holder of the registration rights,
         if any, granted to the Registered Holder) and will be "restricted
         securities" within the meaning of Rule 144 under the Securities Act and
         that the exemption from registration under Rule 144 will not be
         available for at least one (1) year from the date of exercise of this
         Warrant, and even then will not be available unless a public market
         then exists for the stock, adequate information concerning the Company
         is then available to the public, and other terms and conditions of Rule
         144 are complied with; and that all stock certificates representing
         shares of stock issued to the Holder upon exercise of this Warrant or
         upon conversion of such shares may have affixed thereto a legend
         substantially in the following form: 

         THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE
         SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO
         RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
         OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE
         APPLICABLE STATE 


                                       8
<PAGE>   26
         SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
         INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
         FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
         THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
         FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
         PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT
         AND ANY APPLICABLE STATE SECURITIES LAWS.

11.      NO RIGHTS OR LIABILITIES AS STOCKHOLDERS. This Warrant shall not
         entitle the Holder to any voting rights or other rights as a
         stockholder of the Company. In the absence of affirmative action by
         such Holder to purchase Common Stock by exercise of this Warrant or
         Common Stock upon conversion thereof, no provisions of this Warrant,
         and no enumeration herein of the rights or privileges of the Holder
         hereof shall cause such Holder hereof to be a stockholder of the
         Company for any purpose.

12.      REGISTRATION RIGHTS. All shares of Common Stock issuable upon exercise
         of this Warrant shall be "Registrable Securities" or such other
         definition of securities entitled to registration rights pursuant to
         Exhibit 3 to this Warrant. 

13.      REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
         represents and warrants to Holder that: 

         13.1.    Due Authorization; Consents. All corporate action on the part
                  of the Company, its officers, directors and shareholders
                  necessary for (a) the authorization, execution and delivery
                  of, and the performance of all obligations of the Company
                  under, this Warrant, and (b) the authorization, issuance,
                  reservation for issuance and delivery of all of the Common
                  Stock issuable upon exercise of this Warrant, has been duly
                  taken. This Warrant constitutes a valid and binding obligation
                  of the Company enforceable in accordance with its terms,
                  subject, as to enforcement of remedies, to applicable
                  bankruptcy, insolvency, moratorium, reorganization and similar
                  laws affecting creditors' rights generally and to general
                  equitable principles. All consents, approvals and
                  authorizations of, and registrations, qualifications and
                  filings with, any federal or state governmental agency,
                  authority or body, or any third party, required in connection
                  with the execution, delivery and performance of this Warrant
                  and the consummation of the transactions contemplated hereby
                  and thereby have been obtained.

         13.2.    Organization. The Company is a corporation duly organized,
                  validly existing and in good standing under the laws of the
                  State of Delaware and has all requisite corporate power to
                  own, lease and operate its property and to carry on its
                  business as now being conducted and as currently proposed to
                  be conducted. 

         13.3.    SEC Reports; Financial Statements. 


                                       9
<PAGE>   27
                  (a)      The Company has duly filed with the SEC the Company's
                           annual report on Form 10-K for the year ended
                           December 31, 1997 and its quarterly reports on Form
                           10-Q for the quarters ended March 31, 1998 and June
                           30, 1998 (collectively, the "ADFlex Solutions, Inc.
                           SEC Reports"). As of their respective filing dates,
                           the ADFlex Solutions, Inc. SEC Reports complied in
                           all material respects with the requirements of the
                           Securities Exchange Act of 1934, as amended, and none
                           of the ADFlex Solutions, Inc. SEC Reports contained
                           any untrue statement of a material fact or omitted to
                           state a material fact required to be stated therein
                           or necessary to make the statements made therein, in
                           light of the circumstances in which they were made,
                           not misleading, except to the extent corrected by a
                           subsequently filed document with the SEC.

                  (b)      Each of the consolidated financial statements
                           (including, in each case, any related notes)
                           contained in the ADFlex Solutions, Inc. SEC Reports
                           complied as to form in all material respects with the
                           applicable published rules and regulations of the SEC
                           with respect thereto, was prepared in accordance with
                           generally accepted accounting principles applied on a
                           consistent basis throughout the periods involved
                           (except as may be indicated in the notes to such
                           financial statements or, in the case of unaudited
                           statements, as permitted by Form 10-Q) and presented
                           fairly, in all material respects, the consolidated
                           financial position of the Company and its
                           subsidiaries as at the respective dates and the
                           consolidated results of its operations and cash flows
                           for the periods indicated, except that the unaudited
                           interim financial statements are subject to normal
                           and recurring year-end adjustments which are not
                           expected to be material in amount. 

         13.4.    Capitalization. The authorized capital stock of the Company
                  consists of 40,000,000 shares of Common Stock, $0.01 par value
                  and 10,000,000 shares of preferred stock, $0.01 par value (the
                  "Preferred Stock"). As of September 30, 1998: (i) 8,928,249
                  shares of Common Stock were issued and outstanding, all of
                  which are validly issued, fully paid and nonassessable; (ii)
                  1,107,430 shares of Common Stock were reserved for issuance
                  under the Company's stock option plans, 911,868 of which
                  shares were subject to options outstanding on such date; (iii)
                  173,423 shares of Common Stock were reserved for issuance
                  under the Company's employee stock purchase plan; (iv) no
                  shares of Common Stock were reserved for issuance upon
                  exercise of outstanding warrants; and (v) no shares of
                  Preferred Stock were issued and outstanding. No material
                  change in such capitalization has occurred between September
                  30, 1998 and the issuance date of this Warrant.

         13.5.    Valid Issuance of Stock. The outstanding shares of the capital
                  stock of the Company are duly and validly issued, fully paid
                  and non-assessable, and such shares, and all outstanding
                  options and other securities of the Company, have been issued
                  in full compliance with the registration and prospectus
                  delivery 


                                       10
<PAGE>   28
                  requirements of the Securities Act and the registration and
                  qualification requirements of all applicable state securities
                  laws, or in compliance with applicable exemptions therefrom,
                  and all other provisions of applicable federal and state
                  securities laws, including without limitation, anti-fraud
                  provisions. 

         13.6.    Governmental Consents. All consents, approvals, orders,
                  authorizations or registrations, qualifications, declarations
                  or filings with any federal or state governmental authority on
                  the part of the Company required in connection with the
                  consummation of the transactions contemplated herein shall
                  have been obtained prior to and be effective as of the
                  Effective Date. 

14.      INFORMATION RIGHTS. The Company shall deliver to each holder of this
         Warrant or any securities issued (directly or indirectly) upon exercise
         hereof, upon request, copies of the Company's reports on Forms 10-K,
         10-Q, and 8-K and Annual Reports to Shareholders promptly after such
         documents are filed with the SEC.

15.      NOTICES. Except as may be otherwise provided herein, all notices,
         requests, waivers and other communications made pursuant to this
         Agreement shall be in writing and shall be conclusively deemed to have
         been duly given (a) when hand delivered to the other party; (b) when
         received when sent by facsimile at the address and number set forth
         below; (c) three business days after deposit in the U.S. mail with
         first class or certified mail receipt requested postage prepaid and
         addressed to the other party as set forth below; or (d) the next
         business day after deposit with a national overnight delivery service,
         postage prepaid, addressed to the parties as set forth below with
         next-business-day delivery guaranteed, provided that the sending party
         receives a confirmation of delivery from the delivery service provider.

         To Holder:                   To the Company: 
                                      ADFlex Solutions, Inc. 
                                      2001 W. Chandler Blvd. 
                                      Chandler, AZ 85224 
                                      Fax Number: (602) 786-8280 

         Fax Number:
                                      Attention: Rolando C. Esteverena 
                                      President and Chief Executive Officer

         With copies to:              Fennemore Craig, P.C.
                                      3003 North Central Avenue
                                      Suite 2600
                                      Phoenix, Arizona 85012
                                      Fax Number:  (602) 916-5507

                                      Attention:  Karen C. McConnell


                                       11
<PAGE>   29
           Fax Number:

         Each person making a communication hereunder by facsimile shall
         promptly confirm by telephone to the person to whom such communication
         was addressed each communication made by it by facsimile pursuant
         hereto but the absence of such confirmation shall not affect the
         validity of any such communication. A party may change or supplement
         the addresses given above, or designate additional addresses, for
         purposes of this Section 15 by giving the other party written notice of
         the new address in the manner set forth above.

16.      HEADINGS. The headings in this Warrant are for purposes of convenience
         in reference only, and shall not be deemed to constitute a part hereof.

17.      LAW GOVERNING. THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN
         ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE (OTHER THAN CHOICE
         OF LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF ANY
         OTHER JURISDICTION).

18.      NO IMPAIRMENT. The Company will not, by amendment of its Certificate of
         Incorporation or bylaws, or through reorganization, consolidation,
         merger, dissolution, issue or sale of securities, sale of assets or any
         other voluntary action, avoid or seek to avoid the observance or
         performance of any of the terms of this Warrant, but will at all times
         in good faith assist in the carrying out of all such terms and in the
         taking of all such action as may be necessary or appropriate in order
         to protect the rights of the Registered Holder of this Warrant against
         impairment. Without limiting the generality of the foregoing, the
         Company (a) will not increase the par value of any shares of stock
         issuable upon the exercise of this Warrant above the amount payable
         therefor upon such exercise, and (b) will take all such action as may
         be necessary or appropriate in order that the Company may validly and
         legally issue fully paid and non-assessable shares of Common Stock upon
         exercise of this Warrant.

19.      NOTICES OF RECORD DATE. In case:


         19.1.    the Company shall take a record of the holders of its Common
                  Stock (or other stock or securities at the time receivable
                  upon the exercise of this Warrant), for the purpose of
                  entitling them to receive any dividend or other distribution,
                  or any right to subscribe for or purchase any shares of stock
                  of any class or any other securities or to receive any other
                  right; or

         19.2.    of any consolidation or merger of the Company with or into
                  another corporation, any capital reorganization of the
                  Company, any reclassification of the Capital Stock of the
                  Company, or any conveyance of all or substantially all of the
                  assets of the Company to another corporation in which holders
                  of the Company's stock are to receive stock, securities or
                  property of another corporation; or 


                                       12
<PAGE>   30
         19.3.    of any voluntary dissolution, liquidation or winding-up of the
                  Company; or


         19.4.    of any redemption or conversion of all outstanding Common
                  Stock;

         then, and in each such case, the Company will mail or cause to be
         mailed to the Registered Holder of this Warrant a notice specifying, as
         the case may be, (i) the date on which a record is to be taken for the
         purpose of such dividend, distribution or right, or (ii) the date on
         which such reorganization, reclassification, consolidation, merger,
         conveyance, dissolution, liquidation, winding-up, redemption or
         conversion is to take place, and the time, if any is to be fixed, as of
         which the holders of record of Common Stock (or such stock or
         securities as at the time are receivable upon the exercise of this
         Warrant), shall be entitled to exchange their shares of Common Stock
         (or such other stock or securities), for securities or other property
         deliverable upon such reorganization, reclassification, consolidation,
         merger, conveyance, dissolution, liquidation or winding-up. Such notice
         shall be delivered at least thirty (30) days prior to the date therein
         specified.

20.      SEVERABILITY. If any term, provision, covenant or restriction of this
         Warrant is held by a court of competent jurisdiction to be invalid,
         void or unenforceable, the remainder of the terms, provisions,
         covenants and restrictions of this Warrant shall remain in full force
         and effect and shall in no way be affected, impaired or invalidated.

21.      COUNTERPARTS. For the convenience of the parties, any number of
         counterparts of this Warrant may be executed by the parties hereto and
         each such executed counterpart shall be, and shall be deemed to be, an
         original instrument. 

22.      NO INCONSISTENT AGREEMENTS. The Company will not on or after the date
         of this Warrant enter into any agreement with respect to its securities
         which is inconsistent with the rights granted to the Holders of this
         Warrant or otherwise conflicts with the provisions hereof. The rights
         granted to the Holders hereunder do not in any way conflict with and
         are not inconsistent with the rights granted to holders of the
         Company's securities under any other agreements, except rights that
         have been waived. 

23.      SATURDAYS, SUNDAYS AND HOLIDAYS. If the Expiration Date falls on a
         Saturday, Sunday or legal holiday, the Expiration Date shall
         automatically be extended until 5:00 p.m. the next business day. 

24.      DISPUTE RESOLUTION. The parties agree to negotiate in good faith to
         resolve any dispute between them regarding this Warrant. If the
         negotiations do not resolve the dispute to the reasonable satisfaction
         of both parties, then each party shall nominate one senior officer of
         the rank of Vice President or higher as its representative. These
         representatives shall, within thirty (30) days of a written request by
         either party to call such a meeting, meet in person and alone (except
         for one assistant for each party) and shall attempt in good faith to
         resolve the dispute. If the disputes cannot be resolved by such senior
         managers in such meeting, the parties agree that they shall, if
         requested in writing by either party, meet within thirty (30) days
         after such written notification for one 


                                       13
<PAGE>   31
         day with an impartial mediator and consider dispute resolution
         alternatives other than litigation. If an alternative method of dispute
         resolution is not agreed upon within thirty (30) days after the one day
         mediation, either party may begin litigation proceedings. This
         procedure shall be a prerequisite before taking any additional action
         hereunder. 

25.      CHOICE OF FORUM. 

         25.1.    All actions or proceedings arising in connection with this
                  Agreement shall be tried and litigated in state or Federal
                  courts located in County of Suffolk, Commonwealth of
                  Massachusetts, unless such actions or proceedings are required
                  to be brought in another court to obtain subject matter
                  jurisdiction over the matter in controversy. EACH OF THE
                  COMPANY AND THE HOLDER WAIVES ANY RIGHT IT MAY HAVE TO ASSERT
                  THE DOCTRINE OF FORUM NON CONVENIENS, TO ASSERT THAT IT IS NOT
                  SUBJECT TO THE JURISDICTION OF SUCH COURTS OR TO OBJECT TO
                  VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE
                  WITH THIS SECTION.

         25.2.    IN ANY ACTION AGAINST THE COMPANY OR THE HOLDER, AS THE CASE
                  MAY BE, SERVICE OF PROCESS MAY BE MADE UPON THE COMPANY OR THE
                  HOLDER, AS THE CASE MAY BE, BY REGISTERED OR CERTIFIED MAIL,
                  RETURN RECEIPT REQUESTED, TO ITS ADDRESS INDICATED IN SECTION
                  15, WHICH SERVICE SHALL BE DEEMED SUFFICIENT FOR PERSONAL
                  JURISDICTION AND SHALL BE DEEMED EFFECTIVE 10 DAYS AFTER
                  MAILING. 

         25.3.    Nothing contained in this Section shall preclude the Holder
                  from bringing any action or proceeding arising out of or
                  relating to this Warrant in the courts of any place where the
                  Company or any of its assets may be found or located. TO THE
                  EXTENT PERMITTED BY THE APPLICABLE LAWS OF ANY SUCH
                  JURISDICTION, THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE
                  JURISDICTION OF ANY SUCH COURT AND EXPRESSLY WAIVES, IN
                  RESPECT OF ANY SUCH ACTION OR PROCEEDING, THE JURISDICTION OF
                  ANY OTHER COURT OR COURTS THAT NOW OR HEREAFTER, BY REASON OF
                  SUCH PARTY'S PRESENT OR FUTURE DOMICILE, OR OTHERWISE, MAY BE
                  AVAILABLE TO IT.


                                       14
<PAGE>   32
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the
Effective Date.

<TABLE>
<S>                                                             <C>
BANKBOSTON, N.A., A NATIONAL BANKING ASSOCIATION                ADFLEX SOLUTIONS, INC.

By  \s\ Cynthia K. Duda                                         By    \s\ Donald E. Frederick
-------------------------------------------------------         ------------------------------------------------------
Printed Name   Cynthia K. Duda                                  Printed Name    Donald E. Frederick
-------------------------------------------------------         ------------------------------------------------------
Title          Vice President                                   Title     Chief Financial Officer
-------------------------------------------------------


BANK  ONE,   ARIZONA,   N.A.,   A   NATIONAL   BANKING
ASSOCIATION

By       \s\   Michael McCann
-------------------------------------------------------
Printed Name  Michael McCann
-------------------------------------------------------
Title    Vice President
-------------------------------------------------------


IMPERIAL BANK, A CALIFORNIA BANKING CORPORATION

By   \s\ Kevin C. Halloran
-------------------------------------------------------
Printed Name   Kevin C. Halloran
-------------------------------------------------------
Title   Senior Vice President
-------------------------------------------------------


THE  UNION  BANK OF  CALIFORNIA,  A  NATIONAL  BANKING
ASSOCIATION


By    \s\ Robert S. Clarke
-------------------------------------------------------
Printed Name   Robert S. Clarke
-------------------------------------------------------
Title    President
</TABLE>


                                       15
<PAGE>   33
                                    EXHIBIT 1
                               NOTICE OF EXERCISE
                    (To be executed upon exercise of Warrant)

ADFLEX SOLUTIONS, INC.

The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
the securities of ADFlex Solutions, Inc., as provided for therein, and (check
the applicable box):

/ /      tenders herewith payment of the exercise price in full in the form of
         cash or a certified or official bank check in same-day funds in the
         amount of $____________ for _________ such securities. 

/ /      Elects the Net Issue Exercise option pursuant to Section 2.2 of the 
         Warrant, and accordingly requests delivery of a net of ______________
         of such securities. 

/ /      Elects the Easy Sale Exercise option pursuant to, and in accordance 
         with the requirements of, Section 2.3 of the Warrant.

Please issue a certificate or certificates for such securities in the name of,
and pay any cash for any fractional share to (please print name, address and
social security number):


Name:
                   -------------------------------------------------------------

Address:
                   -------------------------------------------------------------

Signature:
                   -------------------------------------------------------------

Note: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.

If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher whole number of shares.


                                       16
<PAGE>   34
                                    EXHIBIT 2
                                   ASSIGNMENT

          (To be executed only upon assignment of Warrant Certificate)

For value received, the undersigned hereby sells, assigns and transfers unto
____________________________ the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:



NAME(S) OF ASSIGNEE(S)                 ADDRESS                    # OF WARRANTS

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

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

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

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



And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.


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

Dated:
                   -------------------------------------------------------------

Signature:
                   -------------------------------------------------------------

Notice: The signature to the foregoing Assignment must correspond to the name as
written upon the face of this security in every particular, without alteration
or any change whatsoever; signature(s) must be guaranteed by an eligible
guarantor institution (banks, stock brokers, savings and loan associations and
credit unions with membership in an approved signature guarantee medallion
program) pursuant to Securities and Exchange Commission Rule 17Ad-15.


                                       17
<PAGE>   35
                                    EXHIBIT 3

1.       REGISTRATION RIGHTS.


         1.1      Definitions.  For purposes of this Section 1:

                  (a)      Registration. The terms "register," "registered," and
                           "registration" refer to a registration effected by
                           preparing and filing a registration statement in
                           compliance with the Securities Act of 1933, as
                           amended, (the "Securities Act"), and the declaration
                           or ordering of effectiveness of such registration
                           statement.

                  (b)      Registrable Securities. The term "Registrable
                           Securities" means: (1) any Common Stock of the
                           Company issued or to be issued upon exercise of the
                           Warrant or Concurrent Warrants, and (2) any shares of
                           Common Stock of the Company issued as (or issuable
                           upon the conversion or exercise of any warrant, right
                           or other security which is issued as) a dividend or
                           other distribution with respect to, or in exchange
                           for or in replacement of, any shares of Common Stock
                           described in clause (1) of this subsection (b).
                           Notwithstanding the foregoing, "Registrable
                           Securities" shall exclude any Registrable Securities
                           sold by a person in a transaction in which rights
                           under this Section 1 are not assigned in accordance
                           with this Agreement or any Registrable Securities
                           sold in a public offering, whether sold pursuant to
                           Rule 144 promulgated under the Securities Act, or in
                           a registered offering, or otherwise.

                  (c)      Registrable Securities Then Outstanding. The number
                           of shares of "Registrable Securities then
                           outstanding" shall mean the number of shares of
                           Common Stock of the Company that are Registrable
                           Securities and (l) are then issued and outstanding or
                           (2) are then issuable pursuant to an exercise of the
                           Warrant or the Concurrent Warrants or pursuant to
                           conversion of securities issuable pursuant to an
                           exercise of the Warrant or the Concurrent Warrants.

                  (d)      Holder. For purposes of this Section 1, the term
                           "Holder" means any person owning of record
                           Registrable Securities that have not been sold to the
                           public or pursuant to Rule 144 promulgated under the
                           Securities Act or any permitted assignee of record of
                           such Registrable Securities to whom rights under this
                           Section 1 have been duly assigned in accordance with
                           this Agreement.

                  (e)      Form S-3. The term "Form S-3" means such form under
                           the Securities Act as is in effect on the date hereof
                           or any successor registration form under the
                           Securities Act subsequently adopted by the SEC which
                           permits 


                                       18
<PAGE>   36
                           inclusion or incorporation of substantial information
                           by reference to other documents filed by the Company
                           with the SEC.

                  (f)      SEC. The term "SEC" or "Commission" means the U.S.
                           Securities and Exchange Commission.

         1.2      [Intentionally Omitted].

         1.3      Piggyback Registrations. The Company shall notify all Holders
                  of Registrable Securities in writing at least twenty-one (21)
                  days prior to filing any registration statement under the
                  Securities Act for purposes of effecting a public offering of
                  securities of the Company (including, but not limited to,
                  registration statements relating to secondary offerings of
                  securities of the Company, but excluding registration
                  statements relating to any registration under Section 1.4 of
                  this Agreement or to any employee benefit plan or any
                  acquisition transaction or a corporate reorganization) and
                  will afford each such Holder an opportunity to include in such
                  registration statement all or any part of the Registrable
                  Securities then held by such Holder. Each Holder desiring to
                  include in any such registration statement all or any part of
                  the Registrable Securities held by such Holder shall within
                  fifteen (15) days after receipt of the above-described notice
                  from the Company, so notify the Company in writing, and in
                  such notice shall inform the Company of the number of
                  Registrable Securities such Holder wishes to include in such
                  registration statement. If a Holder decides not to include all
                  of its Registrable Securities in any registration statement
                  thereafter filed by the Company, such Holder shall
                  nevertheless continue to have the right to include any
                  Registrable Securities in any subsequent registration
                  statement or registration statements as may be filed by the
                  Company with respect to offerings of its securities, all upon
                  the terms and conditions set forth herein.

                  (a)      Underwriting. If a registration statement under which
                           the Company gives notice under this Section 1.3 is
                           for an underwritten offering, then the Company shall
                           so advise the Holders of Registrable Securities. In
                           such event, the right of any such Holder's
                           Registrable Securities to be included in a
                           registration pursuant to this Section 1.3 shall be
                           conditioned upon such Holder's participation in such
                           underwriting and the inclusion of such Holder's
                           Registrable Securities in the underwriting to the
                           extent provided herein. All Holders proposing to
                           distribute their Registrable Securities through such
                           underwriting shall enter into an underwriting
                           agreement in customary form with the managing
                           underwriter or underwriters selected for such
                           underwriting (including a market stand-off agreement
                           of up to 180 days if required by such underwriters).
                           Notwithstanding any other provision of this
                           Agreement, if the managing underwriter(s)
                           determine(s) in good faith that marketing factors
                           require a limitation of the number of shares to be
                           underwritten, then the managing underwriter(s) may
                           exclude shares (including up to seventy-five percent
                           (75%) of the Registrable 


                                       19
<PAGE>   37
                           Securities) from the registration and the
                           underwriting, and the number of shares that may be
                           included in the registration and the underwriting
                           shall be allocated, first to the Company, and second,
                           to each of the Holders requesting inclusion of their
                           Registrable Securities in such registration statement
                           on a pro rata basis based on the total number of
                           Registrable Securities then held by each such Holder;
                           provided, however, that the right of the underwriters
                           to exclude shares (including Registrable Securities)
                           from the registration and underwriting as described
                           above shall be restricted so that (i) the number of
                           Registrable Securities included in any such
                           registration is not reduced below twenty-five percent
                           (25%) of the aggregate number of Registrable
                           Securities for which inclusion has been requested;
                           and (ii) all shares that are not Registrable
                           Securities and are held by any other person,
                           including, without limitation, any person who is an
                           employee, officer or director of the Company (or any
                           subsidiary of the Company) shall first be excluded
                           from such registration and underwriting before any
                           Registrable Securities are so excluded, provided
                           however that Xyratex Limited shall have the right to
                           participate equally with the holders of Registrable
                           Securities included in any such registration. If any
                           Holder disapproves of the terms of any such
                           underwriting, such Holder may elect to withdraw
                           therefrom by written notice to the Company and the
                           underwriter(s), delivered at least ten (10) business
                           days prior to the effective date of the registration
                           statement. Any Registrable Securities excluded or
                           withdrawn from such underwriting shall be excluded
                           and withdrawn from the registration. For any Holder
                           that is a partnership, the Holder and the partners
                           and retired partners of such Holder, or the estates
                           and family members of any such partners and retired
                           partners and any trusts for the benefit of any of the
                           foregoing persons, and for any Holder that is a
                           corporation, the Holder and all corporations that are
                           affiliates of such Holder, shall be deemed to be a
                           single "Holder," and any pro rata reduction with
                           respect to such "Holder" shall be based upon the
                           aggregate amount of shares carrying registration
                           rights owned by all entities and individuals included
                           in such "Holder," as defined in this sentence.

                  (b)      Expenses. All expenses incurred in connection with a
                           registration pursuant to this Section 1.3 (excluding
                           underwriters' and brokers' discounts and commissions
                           relating to shares sold by the Holders and legal fees
                           of counsel for the Holders), including, without
                           limitation all federal and "blue sky" registration,
                           filing and qualification fees, printers' and
                           accounting fees, and fees and disbursements of
                           counsel for the Company, shall be borne by the
                           Company.

                  (c)      No Limit on Registrations. Except as otherwise
                           provided herein, there shall be no limit on the
                           number of times the Holders may request registration
                           of Registrable Securities under this Section 1.3.


                                       20
<PAGE>   38
         1.4      Form S-3 Registration. In case the Company shall at any time
                  after March 14, 1999, receive from any Holder or Holders of a
                  majority of all Registrable Securities then outstanding a
                  written request or requests that the Company effect a
                  registration on Form S-3 and any related qualification or
                  compliance with respect to all or a part of the Registrable
                  Securities owned by such Holder or Holders, then the Company
                  will:

                  (a)      Notice. Promptly give written notice of the proposed
                           registration and the Holder's or Holders' request
                           therefor, and any related qualification or
                           compliance, to all other Holders of Registrable
                           Securities; and

                  (b)      Registration. As soon as practicable, effect such
                           registration and all such qualifications and
                           compliances as may be so requested and as would
                           permit or facilitate the sale and distribution of all
                           or such portion of such Holders or Holders'
                           Registrable Securities as are specified in such
                           request, together with all or such portion of the
                           Registrable Securities of any other Holder or Holders
                           joining in such request as are specified in a written
                           request given within twenty (20) days after the
                           Company provides the notice contemplated by Section
                           1.4(a); provided, however, that the Company shall not
                           be obligated to effect any such registration,
                           qualification or compliance pursuant to this Section
                           1.4:

                           (1)      if Form S-3 is not available for such
                                    offering by the Holders:

                           (2)      if the Holders, together with the holders of
                                    any other securities of the Company entitled
                                    to inclusion in such registration, propose
                                    to sell Registrable Securities and such
                                    other securities (if any) at an aggregate
                                    price to the public of less than $500,000;

                           (3)      if the Company shall furnish to the Holders
                                    a certificate signed by the President or
                                    Chief Executive Officer of the Company
                                    stating that in the good faith judgment of
                                    the Board of Directors of the Company, it
                                    would be materially detrimental to the
                                    Company and its shareholders for such Form
                                    S-3 Registration to be effected at such
                                    time, in which event the Company shall have
                                    the right to defer the filing of the Form
                                    S-3 registration statement no more than once
                                    during any twelve month period for a period
                                    of not more than ninety (90) days after
                                    receipt of the request of the Holder or
                                    Holders under this Section 1.4;

                           (4)      if the Company has, within the six (6) month
                                    period preceding the date of such request,
                                    already effected a registration under the
                                    Securities Act other than a registration
                                    from which the Registrable Securities of
                                    Holders have been excluded (with respect to
                                    all or any portion of the Registrable
                                    Securities the Holders requested be 


                                       21
<PAGE>   39
                                    included in such registration) pursuant to
                                    the provisions of Section 1.3(a); or

                           (5)      in any particular jurisdiction in which the
                                    Company would be required to qualify to do
                                    business or to execute a general consent to
                                    service of process in effecting such
                                    registration, qualification or compliance.

                  (c)      Expenses. The Company shall pay all expenses incurred
                           in connection with each registration requested
                           pursuant to this Section 1.4, (excluding
                           underwriters' or brokers' discounts and commissions
                           relating to shares sold by the Holders and legal fees
                           of counsel for the Holders), including without
                           limitation federal and "blue sky" registration,
                           filing and qualification fees, printers' and
                           accounting fees, and fees and disbursements of
                           counsel.

                  (d)      No Limit on Registrations. Except as otherwise
                           provided herein, there shall be no limit on the
                           number of times the Holders may request registration
                           of Registrable Securities under this Section 1.4.

         1.5      Obligations of the Company. Whenever required to effect the
                  registration of any Registrable Securities under this
                  Agreement the Company shall, as expeditiously as reasonably
                  possible:

                  (a)      Registration Statement. Prepare and file with the SEC
                           a registration statement with respect to such
                           Registrable Securities and use reasonable, good faith
                           efforts to cause such registration statement to
                           become effective, provided, however, that the Company
                           shall not be required to keep any such registration
                           statement effective for more than ninety (90) days.

                  (b)      Amendments and Supplements. Prepare and file with the
                           SEC such amendments and supplements to such
                           registration statement and the prospectus used in
                           connection with such registration statement as may be
                           necessary to comply with the provisions of the
                           Securities Act with respect to the disposition of all
                           securities covered by such registration statement.

                  (c)      Prospectuses. Furnish to the Holders such number of
                           copies of a prospectus, including a preliminary
                           prospectus, in conformity with the requirements of
                           the Securities Act, and such other documents as they
                           may reasonably request in order to facilitate the
                           disposition of the Registrable Securities owned by
                           them that are included in such registration.

                  (d)      Blue Sky. Use reasonable, good faith efforts to
                           register and qualify the securities covered by such
                           registration statement under such other securities or
                           Blue Sky laws of such jurisdictions as shall be
                           reasonably requested by the Holders, provided that
                           the Company shall not be required 


                                       22
<PAGE>   40
                           in connection therewith or as a condition thereto to
                           qualify to do business or to file a general consent
                           to service of process in any such states or
                           jurisdictions.

                  (e)      Underwriting. In the event of any underwritten public
                           offering, enter into and perform its obligations
                           under an underwriting agreement in usual and
                           customary form, with the managing underwriter(s) of
                           such offering. Each Holder participating in such
                           underwriting shall also enter into and perform its
                           obligations under such an agreement.

                  (f)      Notification. Notify each Holder of Registrable
                           Securities covered by such registration statement at
                           any time when a prospectus relating thereto is
                           required to be delivered under the Securities Act of
                           the happening of any event as a result of which the
                           prospectus included in such registration statement,
                           as then in effect, includes an untrue statement of a
                           material fact or omits to state a material fact
                           required to be stated therein or necessary to make
                           the statements therein not misleading in the light of
                           the circumstances then existing.

                  (g)      Opinion and Comfort Letter. Furnish, at the request
                           of any Holder requesting registration of Registrable
                           Securities, on the date that such Registrable
                           Securities are delivered to the underwriters for
                           sale, if such securities are being sold through
                           underwriters, or, if such securities are not being
                           sold through underwriters, on the date that the
                           registration statement with respect to such
                           securities becomes effective, (i) an opinion, dated
                           as of such date, of the counsel representing the
                           Company for the purposes of such registration, in
                           form and substance as is customarily given to
                           underwriters in an underwritten public offering and
                           reasonably satisfactory to a majority in interest of
                           the Holders requesting registration, addressed to the
                           underwriters, if any, and to the Holders requesting
                           registration of Registrable Securities and (ii) a
                           "comfort" letter dated as of such date, from the
                           independent certified public accountants of the
                           Company, in form and substance as is customarily
                           given by independent certified public accountants to
                           underwriters in an underwritten public offering and
                           reasonably satisfactory to a majority in interest of
                           the Holders requesting registration, addressed to the
                           underwriters, if any, and to the Holders requesting
                           registration of Registrable Securities.

         1.6      Furnish Information. It shall be a condition precedent to the
                  obligations of the Company to take any action pursuant to
                  Sections 1.3 or 1.4 that the selling Holders shall furnish to
                  the Company such information regarding themselves, the
                  Registrable Securities held by them, and the intended method
                  of disposition of such securities as shall be required to
                  timely effect the Registration of their Registrable
                  Securities.


                                       23
<PAGE>   41
         1.7      Indemnification. In the event any Registrable Securities are
                  included in a registration statement under Sections 1.3 or
                  1.4:

                  (a)      By the Company. To the extent permitted by law the
                           Company will indemnify and hold harmless each Holder,
                           the partners, officers and directors of each Holder,
                           any underwriter (as determined in the Securities Act)
                           for such Holder and each person, if any, who controls
                           such Holder or underwriter within the meaning of the
                           Securities Act or the Securities Exchange Act of
                           1934, as amended, (the "1934 Act"), against any
                           losses, claims, damages, or Liabilities (joint or
                           several) to which they may become subject under the
                           Securities Act, the 1934 Act or other federal or
                           state law, insofar as such losses, claims, damages,
                           or liabilities (or actions in respect thereof) arise
                           out of or are based upon any of the following
                           statements, omissions or violations (collectively a
                           "Violation"):

                           (i)      any untrue statement or alleged untrue
                                    statement of a material fact contained in
                                    such registration statement, including any
                                    preliminary prospectus or final prospectus
                                    contained therein or any amendments or
                                    supplements thereto;

                           (ii)     the omission or alleged omission to state
                                    therein a material fact required to be
                                    stated therein, or necessary to make the
                                    statements therein not misleading, or

                           (iii)    any violation or alleged violation by the
                                    Company of the Securities Act, the 1934 Act,
                                    any federal or state securities law or any
                                    rule or regulation promulgated under the
                                    Securities Act, the 1934 Act or any federal
                                    or state securities law in connection with
                                    the offering covered by such registration
                                    statement;

                           and the Company will reimburse each such Holder,
                           partner, officer or director, underwriter or
                           controlling person for any legal or other expenses
                           reasonably incurred by them, as incurred, in
                           connection with investigating or defending any such
                           loss, claim, damage, liability or action; provided,
                           however, that the indemnity agreement contained in
                           this subsection 1.7(a) shall not apply to amounts
                           paid in settlement of any such loss, claim, damage,
                           liability or action if such settlement is effected
                           without the consent of the Company (which consent
                           shall not be unreasonably withheld), nor shall the
                           Company be liable in any such case for any such loss,
                           claim, damage, liability or action to the extent that
                           it arises out of or is based upon a Violation which
                           occurs in reliance upon and in conformity with
                           written information furnished expressly for use in
                           connection with such registration by such Holder,
                           partner, officer, director, underwriter or
                           controlling person of such Holder.


                                       24
<PAGE>   42
                  (b)      By Selling Holders. To the extent permitted by law,
                           each selling Holder will indemnify and hold harmless
                           the Company, each of its directors, each of its
                           officers who have signed the registration statement,
                           each person, if any, who controls the Company within
                           the meaning of the Securities Act, any underwriter
                           and any other Holder selling securities under such
                           registration statement or any of such other Holder's
                           partners, directors or officers or any person who
                           controls such Holder within the meaning of the
                           Securities Act or the 1934 Act, against any losses,
                           claims, damages or liabilities (joint or several) to
                           which the Company or any such director, officer,
                           controlling person, underwriter or other such Holder,
                           partner or director, officer or controlling person of
                           such other Holder may become subject under the
                           Securities Act, the 1934 Act or other federal or
                           state law, insofar as such losses, claims, damages or
                           liabilities (or actions in respect thereto) arise out
                           of or are based upon any Violation, in each case to
                           the extent (and only to the extent) that such
                           Violation occurs in reliance upon and in conformity
                           with written information furnished by such Holder
                           expressly for use in connection with such
                           registration; and each such Holder will reimburse any
                           legal or other expenses reasonably incurred by the
                           Company or any such director, officer, controlling
                           person, underwriter or other Holder, partner,
                           officer, director or controlling person of such other
                           Holder in connection with investigating or defending
                           any such loss, claim, damage, liability or action:
                           provided, however, that the indemnity agreement
                           contained in this subsection 1.7(b) shall not apply
                           to amounts paid in settlement of any such loss,
                           claim, damage, liability or action if such settlement
                           is effected without the consent of the Holder, which
                           consent shall not be unreasonably withheld; and
                           provided, further, that the total amounts payable in
                           indemnity by a Holder under this Section 1.7(b) in
                           respect of any Violation shall not exceed the net
                           proceeds received by such Holder in the registered
                           offering out of which such Violation arises.

                  (c)      Notice. Promptly after receipt by an indemnified
                           party under this Section 1.7 of notice of the
                           commencement of any action (including any
                           governmental action), such indemnified party will, if
                           a claim in respect thereof is to be made against any
                           indemnifying party under this Section 1.7, deliver to
                           the indemnifying party a written notice of the
                           commencement thereof and the indemnifying party shall
                           have the right to participate in, and, to the extent
                           the indemnifying party so desires, jointly with any
                           other indemnifying party similarly noticed, to assume
                           the defense thereof with counsel mutually
                           satisfactory to the parties; provided, however, that
                           an indemnified party shall have the right to retain
                           its own counsel, with the fees and expenses to be
                           paid by the indemnifying party, if representation of
                           such indemnified party by the counsel retained by the
                           indemnifying party would be inappropriate due to
                           actual or potential conflict of interests between
                           such indemnified party and any other party
                           represented by such counsel in such proceeding. The
                           failure to deliver 


                                       25
<PAGE>   43
                           written notice to the indemnifying party within a
                           reasonable time of the commencement of any such
                           action shall relieve such indemnifying party of
                           liability to the indemnified party under this Section
                           1.7 to the extent the indemnifying party is
                           prejudiced as a result thereof, but the omission so
                           to deliver written notice to the indemnified party
                           will not relieve it of any liability that it may have
                           to any indemnified party otherwise than under this
                           Section 1.7.

                  (d)      Defect Eliminated in Final Prospectus. The foregoing
                           indemnity agreements of the Company and Holders are
                           subject to the condition that, insofar as they relate
                           to any Violation made in a preliminary prospectus but
                           eliminated or remedied in the amended prospectus on
                           file with the SEC at the time the registration
                           statement in question becomes effective or the
                           amended prospectus filed with the SEC pursuant to SEC
                           Rule 424(b) (the "Final Prospectus"), such indemnity
                           agreement shall not inure to the benefit of any
                           person if a copy of the Final Prospectus was timely
                           furnished to the indemnified party and was not
                           furnished to the person asserting the loss,
                           liability, claim or damage at or prior to the time
                           such action is required by the Securities Act.

                  (e)      Contribution. In order to provide for just and
                           equitable contribution to joint liability under the
                           Securities Act in any case in which either (i) any
                           Holder exercising rights under this Agreement, or any
                           controlling person of any such Holder, makes a claim
                           for indemnification pursuant to this Section 1.7 but
                           it is judicially determined (by the entry of a final
                           judgment or decree by a court of competent
                           jurisdiction and the expiration of time to appeal or
                           the denial of the last right of appeal) that such
                           indemnification may not be enforced in such case
                           notwithstanding the fact that this Section 1.7
                           provides for indemnification in such case, or (ii)
                           contribution under the Securities Act may be required
                           on the part of any such selling Holder or any such
                           controlling person in circumstances for which
                           indemnification is provided under this Section 1.7;
                           then, and in each such case, the Company and such
                           Holder will contribute to the aggregate losses,
                           claims, damages or liabilities to which they may be
                           subject (after contribution from others) in such
                           proportion so that such Holder is responsible for the
                           portion represented by the percentage that the public
                           offering price of its Registrable Securities offered
                           by and sold under the registration statement bears to
                           the public offering price of all securities offered
                           by and sold under such registration statement, and
                           the Company and other selling Holders are responsible
                           for the remaining portion; provided, however, that,
                           in any such case: (A) no such Holder will be required
                           to contribute any amount in excess of the public
                           offering price of all such Registrable Securities
                           offered and sold by such Holder pursuant to such
                           registration statement; and (B) no person or entity
                           guilty of fraudulent misrepresentation (within the
                           meaning of Section 11(f) of the 


                                       26
<PAGE>   44
                           Securities Act) will be entitled to contribution from
                           any person or entity who was not guilty of such
                           fraudulent misrepresentation.

                  (f)      Survival. The obligations of the Company and Holders
                           under this Section 1.7 shall survive until the fifth
                           anniversary of the completion of any offering of
                           Registrable Securities in a registration statement,
                           regardless of the expiration of any statutes of
                           limitation or extensions of such statutes.

         1.8      Termination of the Company's Obligations. The Company shall
                  have no obligations pursuant to Sections 1.3 and 1.4 with
                  respect to any Registrable Securities proposed to be sold by a
                  Holder in a registration pursuant to Section 1.3 or 1.4 more
                  than seven (7) years after the date of this Agreement, or, if,
                  in the opinion of counsel to the Company, all such Registrable
                  Securities proposed to be sold by a Holder may then be sold
                  under Rule 144 in one transaction without exceeding the volume
                  limitations thereunder.


                                       27