Exhibit 10.2

                           LOAN AND SECURITY AGREEMENT

                                 by and between


                           AVTEL COMMUNICATIONS, INC.,
                             a Delaware corporation,

                              MATRIX TELECOM, INC.,
                               a Texas corporation


                                       and


                             COAST BUSINESS CREDIT,
                       a division of Southern Pacific Bank


                           Dated as of October 2, 1998















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                                TABLE OF CONTENTS

                                                                            Page


1.       DEFINITIONS..........................................................1
                  Account Debtor..............................................1
                  Affiliate...................................................1
                  Audit.......................................................1
                  Availability................................................1
                  Billed Receivables..........................................1
                  Borrower....................................................1
                  Borrower's Address..........................................2
                  Business Day................................................2
                  Change of Control...........................................2
                  Closing Date................................................2
                  Coast.......................................................2
                  Code........................................................2
                  Collateral..................................................2
                  Credit Limit................................................2
                  Default.....................................................2
                  Deposit Account.............................................2
                  Dilution Percentage.........................................2
                  Dollars or $................................................2
                  Early Termination Fee.......................................2
                  EBIT........................................................2
                  EBITDA......................................................2
                  Eligible Receivables........................................2
                  Equipment...................................................3
                  Equipment Acquisition Loans.................................4
                  Event of Default............................................4
                  GAAP........................................................4
                  General Intangibles.........................................4
                  Inventory...................................................4
                  Letter of Credit............................................4
                  Letter of Credit Sublimit...................................4
                  Loan Documents..............................................4
                  Loans.......................................................4
                  Material Adverse Effect.....................................4
                  Maturity Date...............................................4
                  Maximum Dollar Amount.......................................4
                  Minimum Monthly Interest....................................5
                  Net Worth...................................................5
                  Obligations.................................................5
                  Permitted Liens.............................................5
                  Person......................................................5
                  Prime Rate..................................................5
                  Receivable Loans............................................5
                  Receivables.................................................5
                  Renewal Date................................................6
                  Renewal Fee.................................................6
                  Solvent.....................................................6
                  Unbilled Receivables........................................6
                  Term Loan...................................................6
                  Year or Yearly..............................................6
                  Year 2000 Problem...........................................6
                  Other Terms.................................................6
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2.       CREDIT FACILITIES....................................................6
         2.1      Loans.......................................................6
         2.2      Letters of Credit...........................................6

3.       INTEREST AND FEES....................................................7
         3.1      Interest....................................................7
         3.2      Fees........................................................7

4.       SECURITY INTEREST....................................................7

5.       CONDITIONS PRECEDENT.................................................7
         5.1      Status of Accounts at Closing...............................7
         5.2      Minimum Availability........................................7
         5.3      Landlord Waiver.............................................8
         5.4      Executed Agreement..........................................8
         5.5      Opinion of Borrower's Counsel...............................8
         5.6      Priority of Coast's Liens...................................8
         5.7      Insurance...................................................8
         5.8      Borrower's Existence........................................8
         5.9      Organizational Documents....................................8
         5.10     Taxes.......................................................8
         5.11     Year 2000 Problem Assessment Certificate....................8
         5.12     Due Diligence...............................................8
         5.13     Management Background Checks................................8
         5.14     Lockbox/Triparty/Blocked Account Agreements.................8
         5.15     Net Worth...................................................8
         5.16     Other Documents and Agreements..............................9

6.       REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER............9
         6.1      Existence and Authority.....................................9
         6.2      Name; Trade Names and Styles................................9
         6.3      Place of Business; Location of Collateral...................9
         6.4      Title to Collateral; Permitted Liens........................9
         6.5      Maintenance of Collateral..................................10
         6.6      Books and Records..........................................10
         6.7      Financial Condition, Statements and Reports................10
         6.8      Tax Returns and Payments; Pension Contributions............10
         6.9      Compliance with Law........................................10
         6.10     Litigation.................................................10
         6.11     Use of Proceeds............................................10
         6.12     Year 2000 Compliance.......................................10

7.       RECEIVABLES.........................................................11
         7.1      Representations Relating to Receivables....................11
         7.2      Representations Relating to Documents and Legal Compliance.11
         7.3      Schedules and Documents relating to Receivables............11
         7.4      Collection of Receivables..................................11
         7.5      Remittance of Proceeds.....................................11
         7.6      Disputes...................................................12
         7.7      Returns....................................................12
         7.8      Verification...............................................12
         7.9      No Liability...............................................12
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8.       ADDITIONAL DUTIES OF THE BORROWER...................................12
         8.1      Financial and Other Covenants..............................12
         8.2      Insurance..................................................12
         8.3      Reports....................................................13
         8.4      Access to Collateral, Books and Records....................13
         8.5      Negative Covenants.........................................13
         8.6      Litigation Cooperation.....................................14
         8.7      Further Assurances.........................................14

9.       TERM................................................................14
         9.1      Maturity Date..............................................14
         9.2      Early Termination..........................................14
         9.3      Payment of Obligations.....................................14

10.      EVENTS OF DEFAULT AND REMEDIES......................................14
         10.1     Events of Default..........................................14
         10.2     Remedies...................................................16
         10.3     Standards for Determining Commercial Reasonableness........17
         10.4     Power of Attorney..........................................17
         10.5     Application of Proceeds....................................18
         10.6     Remedies Cumulative........................................18

11.      GENERAL PROVISIONS..................................................19
         11.1     Interest Computation.......................................19
         11.2     Application of Payments....................................19
         11.3     Charges to Accounts........................................19
         11.4     Monthly Accountings........................................19
         11.5     Notices....................................................19
         11.6     Severability...............................................19
         11.7     Integration................................................19
         11.8     Waivers....................................................19
         11.9     No Liability for Ordinary Negligence.......................20
         11.10 Amendment.....................................................20
         11.11 Time of Essence...............................................20
         11.12 Attorneys Fees, Costs and Charges.............................20
         11.13 Benefit of Agreement..........................................20
         11.14 Publicity.....................................................21
         11.15 Paragraph Headings; Construction..............................21
         11.16 Governing Law; Jurisdiction; Venue............................21
         11.17 Mutual Waiver of Jury Trial...................................21
         11.18 Confidentiality...............................................21
<PAGE>



                  Coast

                  Loan and Security Agreement

Borrower:                  AVTEL COMMUNICATIONS, INC.,
                           a Delaware corporation

Address:          501 Bath Street
                           Santa Barbara, California  93101

Borrower:                  MATRIX TELECOM, INC.,
                           a Texas corporation

Address:          8721 Airport Freeway
                           Fort Worth, Texas  76180

Date:                      October 2, 1998

THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS  CREDIT,  a division of Southern  Pacific Bank ("Coast"),  a California
corporation,  with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California  90025,  and the borrowers  named above (jointly and  severally,  the
ABorrower@),  whose chief  executive  offices are located at the above addresses
(ABorrower=s  Address@).  The Schedule to this Agreement (the ASchedule@)  shall
for all  purposes be deemed to be a part of this  Agreement,  and the same is an
integral  part of this  Agreement.  (Definitions  of certain  terms used in this
Agreement are set forth in Section 1 below.)

1.   DEFINITIONS.  As used in this  Agreement,  the  following  terms  have  the
     following meanings:

     "Account Debtor" means the obligor on a Receivable or General Intangible.

     "Affiliate"  means,  with  respect  to any  Person,  a  relative,  partner,
shareholder,  director,  officer,  or employee of such Person,  or any parent or
subsidiary  of such Person,  or any Person  controlling,  controlled by or under
common control with such Person.

     "Audit" means to inspect,  audit and copy Borrower's  books and records and
the Collateral.


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                      Coast Business Credit          
 
                     Loan and Security Agreement


     "Availability" means the amount of Eligible  Receivables  multiplied by the
advance  percentage  described  in the Schedule  net of  Borrower's  outstanding
Obligations.

     "Billed  Receivables" means Receivables that have been invoiced and sent to
an  Account  Debtor  for  payment,  by  Borrower,  by a local  exchange  carrier
(including,  Bell Atlantic, SBC Communications,  Ameritech and US West), or by a
third party billing company (including, OAN and GTE Choicebilling).

     "Borrower" has the meaning set forth in the introduction to this Agreement.

     "Borrower's  Address" has the meaning set forth in the introduction to this
Agreement.

     "Business Day" means a day on which Coast is open for business.

     "Change  of  Control"  shall be deemed to have  occurred  at such time as a
"person" or "group"  (within the meaning of Sections  13(d) and  14(d)(2) of the
Securities  Exchange  Act of  1934)  (other  than  the  current  holders  of the
ownership  interests in any Borrower) becomes the "beneficial owner" (as defined
in  Rule  13d-3  under  the  Securities  Exchange  Act  of  1934),  directly  or
indirectly,  as a result of any  single  transaction,  of more than  twenty-five
percent  (25%)  of the  total  voting  power  of all  classes  of stock or other
ownership  interests then outstanding of any Borrower  normally entitled to vote
in the election of directors or analogous governing body.

     "Closing Date" date of the initial funding under this Agreement.

     "Coast" has the meaning set forth in the introduction to this Agreement.

     "Code"  means the Uniform  Commercial  Code as adopted and in effect in the
State of California from time to time.

     "Collateral" has the meaning set forth in Section 4 hereof.

     "Credit  Limit"  means the  maximum  amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.

     "Default"  means any event  which  with  notice or passage of time or both,
would constitute an Event of Default.

     "Deposit Account" has the meaning set forth in Section 9105 of the Code.

     "Dilution Percentage" shall mean the total amount of chargebacks, discounts
and other items reducing the outstanding amounts of Receivables, calculated as a
percentage of the total amount of outstanding Receivables.

     "Dollars or $" means United States dollars.

     "Early  Termination  Fee" means the amount set forth on the  Schedule  that
Borrower  must pay Coast if this  Agreement is  terminated  by Borrower or Coast
pursuant to Section 9.2 hereof.



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         "EBIT" means, in any fiscal period,  Borrower's consolidated net income
(other than  extraordinary or non-recurring  items of Borrower for such period),
plus (i) the amount of all  interest  expense and income tax expense of Borrower
for such period, on a consolidated basis, and plus or minus (as the case may be)
(ii) any other non-cash charges which have been added or subtracted, as the case
may be, in calculating Borrower's consolidated net income for such period.

         "EBITDA"  means,  in any fiscal  period,  Borrower's  consolidated  net
income (other than  extraordinary  or  non-recurring  items of Borrower for such
period),  plus (i) the  amount of all  interest  expense,  income  tax  expense,
depreciation expense, and amortization expense of Borrower for such period, on a
consolidated  basis,  and  plus or minus  (as the  case  may be) (ii) any  other
non-cash  charges  (including  non-cash  expenses for the  amortization of stock
options) which have been added or subtracted, as the case may be, in calculating
Borrower's consolidated net income for such period.

         "Eligible   Receivables"   means   Billed   Receivables   and  Unbilled
Receivables  arising in the ordinary course of Borrower's business from the sale
of goods or rendition of services,  which Coast, in its sole  reasonable  credit
judgment,  shall deem eligible for borrowing,  based on such  considerations  as
Coast may from time to time deem  appropriate.  Eligible  Receivables  shall not
include the following:

     (a)  Billed Receivables that the Account Debtor has failed to pay within 90
          days of invoice date or Accounts  with  selling  terms of more than 30
          days;

     (b)  Unbilled  Receivables  that  have  not  been  invoiced  and sent to an
          Account  Debtor  for  payment  within  45  days  of  Account  Debtor's
          incurring of the obligation to be invoiced;

     (c)  Receivables  owed  by  an  Account  Debtor  or  its  Affiliates  where
          twenty-five  percent  (25%)  or more of all  Receivables  owed by that
          Account Debtor (or its Affiliates) are deemed  ineligible under clause
          (a) above;

     (d)  Receivables  with respect to which the Account  Debtor is an employee,
          or agent of Borrower;

     (e)  Receivables  with respect to an Account  Debtor who is an Affiliate of
          Borrower whose total  obligations owing to Borrower exceed ten percent
          (10%) of all  Eligible  Receivables,  to the extent of the  obligation
          owing by such Account Debtor in excess of such percentage.

     (f)  Receivables  with  respect to which  goods are placed on  consignment,
          guaranteed sale, sale or return,  sale on approval,  bill and hold, or
          other terms by reason of which the  payment by the Account  Debtor may
          be conditional;

     (g)  Receivables  that are not payable in Dollars or with  respect to which
          the Account Debtor:  (i) does not maintain its chief executive  office
          in the United States,  or (ii) is not organized  under the laws of the
          United States or any State thereof,  or (iii) is the government of any
          foreign  country  or  sovereign  state,  or of  any  state,  province,
          municipality,  or  other  political  subdivision  thereof,  or of  any
          department,  agency,  public  corporation,  or  other  instrumentality
          thereof;

     (h)  Receivables with respect to which the Account Debtor is either (i) the
          United States or any department,  agency,  or  instrumentality  of the
          United States (exclusive,  however,  of Accounts with respect to which
          Borrower  has  complied,  to  the  satisfaction  of  Coast,  with  the
          Assignment of Claims Act, 31 U.S.C. ' 3727),  or (ii) any State of the
          United States  (exclusive,  however,  of Receivables owed by any State
          that does not have a statutory counterpart to the Assignment of Claims
          Act);



<PAGE>


     (i)  Receivables  with respect to which the Account Debtor is a creditor of
          Borrower: (1) who has a right of setoff or who has asserted a right of
          setoff,  but only to the extent of the setoff, or (2) who has disputed
          its liability,  or has made any claim with respect to the Receivables,
          provided, however, that Coast, on a case-by-case basis and in its sole
          discretion,  may limit this provision to the extent of the obligations
          in dispute;

     (j)  Receivables with respect to an Account Debtor whose total  obligations
          owing  to  Borrower  exceed  twenty  percent  (20%)  of  all  Eligible
          Receivables,  to the extent of the  obligations  owing by such Account
          Debtor in excess of such percentage;

     (k)  Receivables with respect to which the Account Debtor is subject to any
          reorganization,  bankruptcy, insolvency, arrangement,  readjustment of
          debt, dissolution or liquidation proceeding,  or becomes insolvent, or
          goes out of business;

     (l)  Receivables  the collection of which Coast,  in its reasonable  credit
          judgment,  believes  to be  uncollectible  by  reason  of the  Account
          Debtor's financial condition;

     (m)  Receivables  with  respect  to which  the  goods  giving  rise to such
          Receivable have not been shipped and billed to the Account Debtor, the
          services  giving rise to such  Receivable  have not been performed and
          accepted by the Account Debtor,  or the Receivable  otherwise does not
          represent  a final  sale  except  for those  Receivables  in which the
          Account Debtor has entered into an agreement  with  Borrower,  in form
          and substance  acceptable to Coast,  whereby Borrower is contractually
          bound to pay the  Receivables  and/or  estopped  from  contesting  the
          Receivables;

     (n)  Receivables with respect to which the Account Debtor is located in the
          states of New Jersey,  Minnesota,  Indiana,  or West  Virginia (or any
          other  state  that  requires a  creditor  to file a Business  Activity
          Report or similar document in order to bring suit or otherwise enforce
          its remedies  against such Account Debtor in the courts or through any
          judicial  process of such state),  unless Borrower has qualified to do
          business in New Jersey,  Minnesota,  Indiana,  West Virginia,  or such
          other states, or has filed a Notice of Business Activities Report with
          the applicable  division of taxation,  the  department of revenue,  or
          with such other state offices,  as appropriate,  for the  then-current
          year, or is exempt from such filing requirement; and

     (o)  Receivables that represent progress payments or other advance billings
          that are due prior to the completion of performance by Borrower of the
          subject contract for goods or services except for those Receivables in
          which the Account  Debtor has entered into an agreement  with Borrower
          in form  and  substance  acceptable  to  Coast,  whereby  Borrower  is
          contractually  bound  to pay  the  Receivables  and/or  estopped  from
          contesting the Receivables.

     "Equipment"  means  all  of  Borrower's   present  and  hereafter  acquired
machinery,  molds, machine tools,  motors,  furniture,  equipment,  furnishings,
fixtures,  trade fixtures,  motor vehicles,  tools, parts, dies, jigs, goods and
other  goods  (other  than  Inventory)  of every  kind and  description  used in
Borrower's  operations  or  owned by  Borrower  and any  interest  in any of the
foregoing,   and  all  attachments,   accessories,   accessions,   replacements,
substitutions,  additions  or  improvements  to any of the  foregoing,  wherever
located.

     "Equipment  Acquisition  Loans" means the Loans described in Section [2(b)]
of the Schedule.

     "Event of  Default"  means any of the events  set forth in Section  10.1 of
this Agreement.



<PAGE>


     "GAAP" means  generally  accepted  accounting  principles as in effect from
time to time in the United States, consistently applied.

     "General  Intangibles" means all general  intangibles of Borrower,  whether
now owned or  hereafter  created or acquired  by  Borrower,  including,  without
limitation,  all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property,  inventions,  designs, drawings,
blueprints,  patents,  patent  applications,  trademarks and the goodwill of the
business  symbolized  thereby,  names,  trade names,  trade  secrets,  goodwill,
copyrights,  registrations,  licenses, franchises,  customer lists, security and
other deposits,  rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract,  tort or otherwise),  and all judgments now
or hereafter arising therefrom,  all claims of Borrower against Coast, rights to
purchase or sell real or personal property,  rights as a licensor or licensee of
any  kind,  royalties,  telephone  numbers,  proprietary  information,  purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance,  credit insurance,  liability insurance,  property
insurance  and other  insurance),  tax refunds and  claims,  computer  programs,
discs,  tapes and tape files,  claims under  guaranties,  security  interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).

     "Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property,  wherever located, to be furnished under
any contract of service or held for sale or lease (including  without limitation
all raw materials,  work in process,  finished  goods and goods in transit,  and
including without limitation all farm products),  and all materials and supplies
of every kind,  nature and description which are or might be used or consumed in
Borrower's  business  or used  in  connection  with  the  manufacture,  packing,
shipping, advertising,  selling or finishing of such goods, merchandise or other
personal  property,  and all  warehouse  receipts,  documents of title and other
documents representing any of the foregoing.

     "Investment Property" has the meaning set forth in Section 9115 of the Code
as in effect as of the date hereof.

     "Letter of Credit" has the meaning set forth in Section 2.2 hereof.

     "Letter  of Credit  Sublimit"  has the  meaning  set forth in  Section  2.2
hereof.

     "Loan Documents" means this Agreement,  the agreements and documents listed
on Section 5 of the Schedule,  and any other  agreement,  instrument or document
executed in connection herewith or therewith.

     "Loans" has the meaning set forth in Section 2.1 hereof.

     "Material  Adverse  Effect"  means a  material  adverse  effect  on (i) the
business,  assets,  financial  condition or results of operations of Borrower or
any subsidiary of Borrower or any guarantor of any of the Obligations,  (ii) the
ability of Borrower or any  guarantor of any of the  Obligations  to perform its
obligations under this Agreement  (including,  without limitation,  repayment of
the  Obligations  as they come due) or (iii) the validity or  enforceability  of
this Agreement or any other  agreement or document  entered into by any party in
connection herewith, or the rights or remedies of Coast hereunder or thereunder.

     "Maturity  Date"  means  the date  that this  Agreement  shall  cease to be
effective,  as set forth on the Schedule,  subject to the  provisions of Section
9.1 and 9.2 hereof.

     "Maximum  Dollar  Amount"  has the  meaning  set forth in  Section 2 of the
Schedule.


<PAGE>


     "Minimum  Monthly  Interest"  has the meaning set forth in Section 3 of the
Schedule.

     "Net Worth"  means  consolidated  shareholders's  equity of a Person at any
date determined in accordance with GAAP, plus subordinated debt.

     "Obligations"  means  all  present  and  future  Loans,  advances,   debts,
liabilities,  obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other  instrument or document,  whether  arising from an extension of credit,
opening  of  a  letter  of  credit,   banker's   acceptance,   loan,   guaranty,
indemnification  or otherwise,  whether direct or indirect  (including,  without
limitation,  those  acquired by  assignment  and any  participation  by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees  (including  attorneys' fees and expenses  incurred in bankruptcy),  expert
witness fees,  audit fees,  letter of credit fees,  collateral  monitoring fees,
closing fees, facility fees,  termination fees, minimum interest charges and any
other  sums  chargeable  to  Borrower  under this  Agreement  or under any other
present or future instrument or agreement between Borrower and Coast.

     "Permitted Liens" means the following:

          (1)  purchase money security interests in specific items of Equipment;

          (2)  leases of specific items of Equipment;

          (3)  liens for taxes not yet payable;

          (4)  additional  security  interests and liens consented to in writing
               by Coast, which consent shall not be unreasonably withheld;

          (5)  security  interests being terminated  substantially  concurrently
               with this Agreement;

          (6)  liens of materialmen, mechanics, warehousemen, carriers, or other
               similar  liens  arising in the  ordinary  course of business  and
               securing obligations which are not delinquent;

          (7)  liens  incurred  in  connection  with the  extension,  renewal or
               refinancing  of the  indebtedness  secured  by  liens of the type
               described  above in clauses (1) or (2) above,  provided  that any
               extension, renewal or replacement lien is limited to the property
               encumbered by the existing  lien and the principal  amount of the
               indebtedness  being  extended,  renewed  or  refinanced  does not
               increase; or

          (8)  liens in favor of customs and revenue  authorities  which  secure
               payment of customs duties in connection  with the  importation of
               goods.

Coast  will have the right to  require,  as a  condition  to its  consent  under
subparagraph (4) above,  that the holder of the additional  security interest or
lien sign an intercreditor  agreement on Coast=s then standard form, acknowledge
that the security  interest is subordinate to the security  interest in favor of
Coast,  and agree not to take any action to  enforce  its  subordinate  security
interest so long as any Obligations remain outstanding,  and that Borrower agree
that any uncured default in any obligation  secured by the subordinate  security
interest,  subject to any applicable notice and cure period applicable  thereto,
shall also constitute an Event of Default under this Agreement.



<PAGE>


     "Person" means any individual,  sole  proprietorship,  general partnership,
limited partnership,  limited liability partnership,  limited liability company,
joint venture, trust,  unincorporated  organization,  association,  corporation,
government, or any agency or political division thereof, or any other entity.

     "Prime Rate" means the actual  "Reference Rate" or the substitute  therefor
of the Bank of  America NT & SA, or its  successor,  whether or not that rate is
the lowest interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal on the first business day of the  applicable  month,  as
the base rate on corporate loans at large U.S. money center commercial banks.

     "Receivable  Loans"  means  the  Loans  described  in  Section  2(a) of the
Schedule.

     "Receivables"  means all of  Borrower's  now owned and  hereafter  acquired
accounts  (whether or not earned by  performance),  letters of credit,  contract
rights, chattel paper, instruments,  securities, documents, securities accounts,
security  entitlements,  commodity  contracts,  commodity  accounts,  investment
property and all other forms of obligations  at any time owing to Borrower,  all
guaranties  and  other  security  therefor,   all  merchandise  returned  to  or
repossessed  by  Borrower,  and all rights of  stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.

     "Renewal  Date" shall mean the Maturity  Date if this  Agreement is renewed
pursuant  to Section  9.1  hereof,  and each  anniversary  thereafter  that this
Agreement is renewed pursuant to Section 9.1 hereof.

     "Renewal  Fee" means the fee that  Borrower  must pay Coast upon renewal of
this  Agreement  pursuant to Section 9.1 hereof,  in the amount set forth on the
Schedule.

     "Solvent"  means,  with respect to any Person on a particular date, that on
such  date (a) at fair  valuations,  all of the  properties  and  assets of such
Person are greater than the sum of the debts, including contingent  liabilities,
of such Person,  (b) the present fair salable value of the properties and assets
of such  Person is not less than the  amount  that will be  required  to pay the
probable  liability  of such  Person on its debts as they  become  absolute  and
matured,  (c) such Person is able to realize upon its  properties and assets and
pay  its  debts  and  other  liabilities,   contingent   obligations  and  other
commitments  as they mature in the normal  course of  business,  (d) such Person
does not intend to, and does not believe  that it will,  incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in  business  or a  transaction,  and is not about to engage  in  business  or a
transaction,  for which such  Person's  properties  and assets would  constitute
unreasonably  small capital  after giving due  consideration  to the  prevailing
practices  in the  industry in which such Person is engaged.  In  computing  the
amount  of  contingent  liabilities  at  any  time,  it is  intended  that  such
liabilities  will be computed at the amount that,  in light of all the facts and
circumstances  existing at such time,  represents the amount that reasonably can
be expected to become an actual or matured liability.

     "Unbilled  Receivables"  means  Receivables that have not been invoiced and
sent to an Account Debtor for payment, by Borrower,  by a local exchange carrier
(including  Bell Atlantic,  SBC  Communications,  Ameritech and US West) or by a
third party billing company (including, OAN and GTE Choicebilling).

     "Term Loan" means the Loans described in Section 2(c) of the Schedule.

     "Year or Yearly" shall mean a calendar year unless as otherwise set forth.



<PAGE>


         "Year 2000 Problem" means the risk that computer systems,  software and
applications  used by a Person may be unable to recognize  and perform  properly
date-sensitive  functions  involving  certain dates prior to and any dates after
December 31, 1999.

         "Other  Terms." All  accounting  terms used in this  Agreement,  unless
otherwise  indicated,  shall have the meanings given to such terms in accordance
with  GAAP.  All other  terms  contained  in this  Agreement,  unless  otherwise
indicated,  shall have the  meanings  provided  by the Code,  to the extent such
terms are defined therein.

2.       CREDIT FACILITIES.

         2.1 Loans. Coast will make loans to Borrower (the "Loans"),  in amounts
and in percentages to be determined by Coast in its good faith discretion, up to
the Credit  Limit,  provided no Default or Event of Default has  occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables without declaring a Default or an Event of
Default if it  determines  that there has  occurred a Material  Adverse  Effect.
Notwithstanding  the  foregoing,  Coast  shall  establish a reserve in an amount
equal to 45% of all  recurring  telecommunication  collections  or such  amount,
determined  by Coast in its sole  discretion,  which  will  ensure  the  monthly
payment in full to the local exchange  carriers but in no event will the reserve
exceed the outstanding local exchange carrier obligations.  Said reserve will be
released upon Coast's: (1) receipt of satisfactory evidence of the wire transfer
payments,  or (2) the  monthly  payments  by Coast,  with the  authorization  of
Borrower, to the local exchange carriers from established availability reserves.

         2.2 Letters of Credit.  At the request of  Borrower,  Coast may, in its
sole  discretion,  arrange for the issuance of letters of credit for the account
of Borrower  (collectively,  "Letters of Credit"),  by issuing guarantees to the
issuer of the letter of credit or by other means. All Letters of Credit shall be
in form  and  substance  satisfactory  to  Coast  in its  sole  discretion.  The
aggregate  face  amount of all  outstanding  Letters of Credit from time to time
shall not  exceed  the  amount  shown on the  Schedule  (the  ALetter  of Credit
Sublimit@),  and shall be  reserved  against  Loans  which  would  otherwise  be
available  hereunder.  Borrower  shall pay all bank  charges for the issuance of
Letters of Credit.  Any payment by Coast under or in connection with a Letter of
Credit shall  constitute a Loan hereunder on the date such payment is made. Each
Letter of Credit  shall have an expiry date no later than thirty (30) days prior
to the Maturity Date. Borrower hereby agrees to indemnify,  save, and hold Coast
harmless from any loss, cost, expense, or liability,  including payments made by
Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of
or in connection with any Letters of Credit.  Borrower agrees to be bound by the
regulations  and  interpretations  of  the  issuer  of  any  Letters  of  Credit
guarantied   by  Coast  and  opened  for   Borrower's   account  or  by  Coast's
interpretations of any Letter of Credit issued by Coast for Borrower's  account,
and  Borrower  understands  and agrees  that  Coast  shall not be liable for any
error, negligence,  or mistake, whether of omission or commission,  in following
Borrower's  instructions  or those  contained  in the  Letters  of Credit or any
modifications,  amendments,  or supplements  thereto.  Borrower understands that
Letters of Credit may require  Coast to  indemnify  the issuing bank for certain
costs or  liabilities  arising out of claims by Borrower  against  such  issuing
bank.  Borrower  hereby agrees to indemnify and hold Coast harmless with respect
to any loss, cost,  expense,  or liability incurred by Coast under any Letter of
Credit as a result of Coast's  indemnification  of any such  issuing  bank.  The
provisions of this Agreement, as it pertains to Letters of Credit, and any other
present or future documents or agreements between Borrower and Coast relating to
Letters of Credit are cumulative.



<PAGE>


30       INTEREST AND FEES.

         3.1 Interest.  All Loans and all other monetary  Obligations shall bear
interest at the rate shown on the Schedule,  except where expressly set forth to
the contrary in this Agreement.  Interest shall be payable monthly,  on the last
day of the month. Interest may, in Coast=s discretion,  be charged to Borrower=s
loan account,  and the same shall  thereafter  bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time,  Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement  with respect to the  Receivable  Loans in the amount set
forth on the Schedule.

         3.2 Fees.  Borrower  shall pay Coast the fee(s) shown on the  Schedule,
which are in addition to all  interest and other sums payable to Coast under the
Loan Documents and are deemed fully earned and are nonrefundable.

40       SECURITY INTEREST.

         To secure the payment and  performance of all of the  Obligations  when
due,  Borrower  hereby grants to Coast a security  interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles,  including, without limitation, all of Borrower's Deposit Accounts,
and all  money,  and all  property  now or at any time in the  future in Coast's
possession  (including claims and credit  balances),  and all proceeds of any of
the  foregoing  (including  proceeds  of any  insurance  policies,  proceeds  of
proceeds,  and  claims  against  third  parties),  all  products  of  any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing,  together  with all other  property  in which Coast may now or in the
future  be  granted  a  lien  or  security  interest,  is  referred  to  herein,
collectively, as the "Collateral")

50       CONDITIONS PRECEDENT.

         The   obligation  of  Coast  to  make  the  Loans  is  subject  to  the
satisfaction,  in the sole discretion of Coast, at or prior to the first advance
of funds hereunder, of each, every and all of the following conditions:

         5.1 Status of Accounts at Closing. No accounts payable shall be due and
unpaid sixty (60) days past its due date except for such accounts  payable being
contested  in good  faith in  appropriate  proceedings  and for  which  adequate
reserves have been provided.

         5.2 Minimum  Availability.  Borrower  shall have minimum  Availability,
which shall include Borrower's cash on hand,  immediately  following the initial
funding in the amount set forth on the Schedule.

         5.3 Landlord Waiver.  Coast shall have received duly executed  landlord
waivers and access  agreements in form and substance  satisfactory  to Coast, in
Coast's sole and absolute discretion,  and, when deemed appropriate by Coast, in
form for  recording in the  appropriate  recording  office,  with respect to all
leased locations where Borrower maintains any inventory or equipment.

         5.4 Executed  Agreement.  Coast shall have received this Agreement duly
executed  and in form  and  substance  satisfactory  to  Coast  in its  sole and
absolute discretion.

         5.5 Opinion of Borrower's Counsel. Coast shall have received an opinion
of Borrower's counsel,  in form and substance  satisfactory to Coast in its sole
and absolute discretion.



<PAGE>


     5.6 Priority of Coast's Liens. Coast shall have received the results of "of
record"  searches  satisfactory  to Coast in its sole and  absolute  discretion,
reflecting its Uniform Commercial Code filings against Borrower  indicating that
Coast has a perfected,  first  priority lien in and upon all of the  Collateral,
subject only to Permitted Liens.

     5.7 Insurance. Coast shall have received copies of the insurance binders or
certificates evidencing Borrower's compliance with Section 8.2 hereof, including
lender's loss payee endorsements.

     5.8 Borrower's  Existence.  Coast shall have received  copies of Borrower's
articles or  certificate of  incorporation  and all  amendments  thereto,  and a
Certificate  of Good  Standing,  each certified by the Secretary of State of the
state of Borrower's  organization,  and dated a recent date prior to the Closing
Date, and Coast shall have received  Certificates of Foreign  Qualification  for
Borrower  from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.

     5.9  Organizational   Documents.   Coast  shall  have  received  copies  of
Borrower's  By-laws and all  amendments  thereto,  and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this  Agreement and the other  documents  contemplated
hereby, and authorizing the transactions  contemplated hereunder and thereunder,
and authorizing  specific  officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.

     5.10 Taxes.  Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal  Revenue Service  regulations
and that Borrower has paid and is current on all taxes,  whether federal,  state
or other applicable taxing body, in form and substance  satisfactory to Coast in
its sole and absolute discretion.

     5.11 Year 2000 Problem Assessment Certificate.  Coast shall have received a
certificate  from the relevant  officer of Borrower to the effect  that,  as the
result of a  comprehensive  assessment  undertaken  by  Borrower  of  Borrower's
computer  systems,  software  and  applications  and after due  inquiry  made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
that would cause Borrower to reasonably  believe that the Year 2000 Problem will
cause a Material Adverse Effect.

     5.12 Due  Diligence.  Coast shall have  completed  its due  diligence  with
respect to Borrower.

     5.13 Management Background Checks. Coast shall have received the results of
management background checks, including,  without limitation, TRWs, tax lien and
other litigation searches,  LEXIS/NEXIS searches and such other due diligence as
Coast may deem necessary,  on certain key officers of Borrower selected by Coast
in Coast's sole and absolute discretion.



<PAGE>


         5.14  Lockbox/Triparty/Blocked  Account  Agreements.  Coast  shall have
received  evidence  that all cash  remittances  of Borrower  shall be  collected
pursuant  to  one  or  more  lockbox/triparty   agreements  or  blocked  account
agreements,  in form and substance  acceptable to Coast.  The  agreements  shall
provide,   without  limitation,   that  remittances  resulting  from  Borrower's
invoicing of Receivables  are to be remitted  through a lockbox and  remittances
resulting from the invoicing of  Receivables  by a local  exchange  carrier or a
third party billing company are to be remitted by wire transfer.  The provisions
of this paragraph which provide for agreements from the local exchange  carriers
and the third party billing companies (collectively,  "third parties"),  will be
satisfied  when  Coast  has  received   agreements   from  third  parties  whose
collections  on Receivables  represent 80% of all  collections on Receivables by
third parties.  The initial advance percentage against  Receivables  invoiced by
third  parties will be in an amount equal to the  percentage of  collections  of
those third parties who have provided signed  agreements to Coast. Any remaining
agreements  from third  parties  are to be  obtained  subsequent  to the initial
advance of funds hereunder and will result in a commensurate percentage increase
in the advance of funds.

         5.15 Net Worth.  Coast shall have  received  evidence  satisfactory  to
Coast in its sole and absolute  discretion that Borrower's Net Worth is equal to
or greater than ($2,000,000).

         5.16 Other  Documents  and  Agreements.  Coast shall have received such
other  agreements,  instruments and documents as Coast may require in connection
with  the  transactions   contemplated   hereby,   all  in  form  and  substance
satisfactory to Coast in Coast's sole and absolute  discretion,  and in form for
filing in the appropriate  filing office,  including,  but not limited to, those
documents listed in Section 5 of the Schedule.

60       REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.

         In order to  induce  Coast to enter  into  this  Agreement  and to make
Loans,  Borrower  represents  and  warrants  to Coast as follows,  and  Borrower
covenants that the following representations will continue to be true during the
term hereof,  and that  Borrower will at all times during the term hereof comply
with all of the following covenants:

         6.1 Existence and Authority.  Borrower is and will continue to be, duly
organized,  validly  existing  and  in  good  standing  under  the  laws  of the
jurisdiction of its organization.  Borrower is and will continue to be qualified
and licensed to do business in all  jurisdictions  in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and  validly  authorized,  (b) are  enforceable  against  Borrower  in
accordance  with their terms (except as enforcement  may be limited by equitable
principles and by bankruptcy, insolvency, reorganization,  moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower=s
articles or certificate of  incorporation or Borrower=s  by-laws,  or any law or
any material  agreement  or  instrument  which is binding  upon  Borrower or its
property,  and (d) do not constitute  grounds for  acceleration  of any material
indebtedness or obligation  under any material  agreement or instrument which is
binding upon Borrower or its property.

         6.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this  Agreement is its correct  name.  Listed on the Schedule are all
prior names of Borrower  and all of  Borrower=s  present and prior trade  names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply,  with all laws relating to the conduct of business under a
fictitious business name.

         6.3 Place of Business; Location of Collateral. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and  Collateral is located only at the locations
set forth on the  Schedule.  Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional  place of business,  changing
its chief executive  office, or moving any of the Collateral to a location other
than Borrower=s Address or one of the locations set forth on the Schedule.



<PAGE>


         6.4 Title to Collateral;  Permitted Liens. Borrower is now, and will at
all times in the future be,  the sole  owner of all the  Collateral,  except for
items of Equipment which are leased by Borrower.  The Collateral now is and will
remain  free  and  clear  of any and all  liens,  charges,  security  interests,
encumbrances and adverse claims,  except for Permitted Liens. Coast now has, and
will  continue to have, a  first-priority  perfected  and  enforceable  security
interest in all of the  Collateral,  subject only to the  Permitted  Liens,  and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture.  Borrower is not and
will not become a lessee  under any real  property  lease  pursuant to which the
lessor  may obtain  any  rights in any of the  Collateral  and no such lease now
prohibits,  restrains,  impairs or will prohibit,  restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located  upon  premises in which any third party has an interest  (whether as
owner,  mortgagee,  beneficiary  under a deed  of  trust,  lien  or  otherwise),
Borrower shall,  whenever requested by Coast, use its best efforts to cause such
third party to execute and deliver to Coast, in form  acceptable to Coast,  such
waivers and  subordinations as Coast shall reasonably  specify,  so as to ensure
that Coast's rights in the Collateral  are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and effect,
and will comply with all the terms of, any lease of real  property  where any of
the  Collateral  now or in the  future may be  located.  Coast  agrees  that its
default rights resulting from Borrower's  noncompliance  with this paragraph are
subject to the existence of a Material Adverse Effect.

         6.5 Maintenance of Collateral. Borrower will maintain the Inventory and
Equipment in good working  condition,  and Borrower will not use the  Collateral
for any unlawful purpose.  Borrower will immediately  advise Coast in writing of
any material loss or damage to the Collateral.

         6.6 Books and Records.  Borrower has  maintained  and will  maintain at
Borrower's  Address  complete and  accurate  books and  records,  comprising  an
accounting system in accordance with GAAP.

         6.7  Financial   Condition,   Statements  and  Reports.  All  financial
statements  now or in the future  delivered  to Coast  have  been,  and will be,
prepared in  conformity  with GAAP (except,  in the case of unaudited  financial
statements,  for the  absence  of  footnotes  and  subject  to  normal  year-end
adjustments)  and  now and in the  future  will  fairly  reflect  the  financial
condition of Borrower in all material respects, at the times and for the periods
therein stated.  Between the last date covered by any such statement provided to
Coast and the date hereof,  there has been no Material Adverse Effect.  Borrower
is now and will continue to be Solvent.

         6.8 Tax Returns  and  Payments;  Pension  Contributions.  Borrower  has
timely  filed,  and will timely  file,  all tax returns and reports  required by
foreign,  federal,  state and local law, and Borrower has timely paid,  and will
timely pay, all foreign, federal, state and local taxes,  assessments,  deposits
and contributions now or in the future owed by Borrower.  Borrower may, however,
defer payment of any contested  taxes,  provided that Borrower (i) in good faith
contests  Borrower's  obligation  to pay the  taxes by  appropriate  proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the  commencement of, and any material  development in, the proceedings,  and
(iii) posts bonds or takes any other steps required to keep the contested  taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years  which  could  result in  additional  taxes  becoming  due and  payable by
Borrower.  Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future  pension,  profit sharing and deferred  compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete  termination of, or permit the
occurrence  of any other event with respect to, any such plan which could result
in any liability of Borrower,  including  any  liability to the Pension  Benefit
Guaranty  Corporation  or its  successors  or  any  other  governmental  agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.



<PAGE>


         6.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects,  with all provisions of all material foreign,  federal, state
and local laws and regulations relating to Borrower,  including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's  ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.

         6.10  Litigation.  Except as  disclosed  in the  Schedule,  there is no
claim,  suit,  litigation,  proceeding or  investigation  pending or (to best of
Borrower=s  knowledge)  threatened  by or against or  affecting  Borrower in any
court  or  before  any  governmental  agency  (or any  basis  therefor  known to
Borrower) which may result, either separately or in the aggregate, in a Material
Adverse Effect.  Borrower will promptly inform Coast in writing,  upon discovery
by Borrower, of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving an amount set forth on
the Schedule.

         6.11 Use of  Proceeds.  All  proceeds of all Loans shall be used solely
for lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as  defined in  Regulation  G of the Board of  Governors  of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any  "margin  stock" or to extend  credit to others for the  purpose of
purchasing or carrying any "margin stock."

         6.12 Year 2000 Compliance.  As the result of a comprehensive review and
assessment  undertaken by Borrower of Borrower's computer systems,  software and
applications  and after  due  inquiry  made of  Borrower's  material  suppliers,
vendors  and  customers  Borrower  represents  and  warrants  that the Year 2000
problem will not result in a Material Adverse Effect.

70       RECEIVABLES.

         7.1  Representations  Relating to Receivables.  Borrower represents and
warrants to Coast as follows:  Each  Receivable  with respect to which Loans are
requested  by  Borrower  shall,  on the date  each Loan is  requested  and made,
represent an  undisputed  bona fide  existing  unconditional  obligation  of the
Account  Debtor  created by the sale,  delivery and  acceptance  of goods or the
rendition of services in the ordinary course of Borrower's business.

         7.2  Representations   Relating  to  Documents  and  Legal  Compliance.
Borrower  represents and warrants to Coast as follows:  All statements  made and
all unpaid balances  appearing in all invoices,  instruments and other documents
evidencing  the  Receivables  are and  shall  be true and  correct  and all such
invoices,  instruments  and  other  documents  and all of  Borrower's  books and
records are and shall be genuine and in all  respects  what they  purport to be.
All sales and other  transactions  underlying or giving rise to each  Receivable
shall  fully  comply  with  all  applicable  laws  and  governmental  rules  and
regulations. All signatures and indorsements on all documents,  instruments, and
agreements  relating to all Receivables  are and shall be genuine,  and all such
documents,  instruments  and agreements are and shall be legally  enforceable in
accordance  with their terms (except as enforcement  may be limited by equitable
principles and by bankruptcy, insolvency, reorganization,  moratorium or similar
laws relating to creditors' rights generally).



<PAGE>


         7.3 Schedules and Documents  relating to  Receivables.  Borrower  shall
deliver to Coast via  facsimile,  unless  otherwise  directed by Coast,  at such
locations and at such  intervals as Coast may request,  transaction  reports and
loan requests,  schedules of Receivables,  and schedules of collections,  all on
Coast's standard forms;  provided,  however,  that Borrower's failure to execute
and deliver the same shall not affect or limit  Coast's  security  interest  and
other rights in all of  Borrower's  Receivables,  nor shall  Coast's  failure to
advance or lend against a specific  Receivable  affect or limit Coast's security
interest and other rights therein.  Loan requests  received after 10:30 A.M. Los
Angeles,  California  time,  will  not be  considered  by Coast  until  the next
Business Day. Together with each such schedule,  or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request,  originals) of
all contracts,  orders,  invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery,  for any  goods  the sale or  disposition  of which  gave rise to such
Receivables,  and Borrower  warrants the  genuineness  of all of the  foregoing.
Borrower shall also furnish to Coast an aged accounts  receivable  trial balance
in such form and at such intervals as Coast shall request. In addition, Borrower
shall deliver to Coast the  originals,  as and when  requested by Coast,  of all
instruments, chattel paper, security agreements,  guarantees and other documents
and property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary  indorsements,  all of which shall
be with  recourse.  Borrower  shall also provide Coast with copies of all credit
memos as and when requested by Coast.

         7.4 Collection of Receivables. Borrower shall have the right to collect
all  Receivables,  unless and until an Event of Default has  occurred.  Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower  shall  deliver all such  payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall  determine.
Coast may,  in its  discretion,  require  that all  proceeds  of  Collateral  be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.

         7.5 Remittance of Proceeds.  All proceeds  arising from the disposition
of any Collateral  shall be delivered to Coast within one (1) Business Day after
receipt by Borrower,  in their  original  form,  duly  endorsed to Coast,  to be
applied to the  Obligations  in such order as Coast  shall  determine.  Borrower
agrees that it will not commingle  proceeds of Collateral with any of Borrower's
other funds or  property,  but will hold such  proceeds  separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.

         7.6 Disputes.  Borrower  shall notify Coast promptly of all disputes or
claims  relating  to  Receivables.  Borrower  shall not forgive  (completely  or
partially),  compromise or settle any  Receivable for less than payment in full,
or agree to do any of the  foregoing,  except that Borrower may do so,  provided
that: (a) Borrower does so in good faith, in a commercially  reasonable  manner,
in the ordinary course of business, and in arm=s length transactions,  which are
reported to Coast on the regular  reports  provided to Coast;  (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an Event
of Default,  settle or adjust  disputes or claims  directly with Account Debtors
for amounts and upon terms which Coast  considers  advisable  in its  reasonable
credit  judgment and, in all cases,  Coast shall credit  Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.

         7.7  Returns.  Provided  no  Event  of  Default  has  occurred  and  is
continuing,  if any  Account  Debtor  returns any  Inventory  to Borrower in the
ordinary  course of its business,  Borrower shall promptly  determine the reason
for such return and promptly issue a credit  memorandum to the Account Debtor in
the  appropriate  amount.  In the event any  attempted  return  occurs after the
occurrence  of any  Event of  Default,  Borrower  shall  (a)  hold the  returned
Inventory in trust for Coast,  (b) segregate all returned  Inventory from all of
Borrower=s other property,  (c)  conspicuously  label the returned  Inventory as
subject to Coast's security  interest,  and (d) immediately  notify Coast of the
return of any Inventory, specifying the reason for such return, the location and
condition  of the  returned  Inventory,  and on  Coast's  request  deliver  such
returned Inventory to Coast.

         7.8  Verification.  Coast may, from time to time,  verify directly with
the respective  Account Debtors the validity,  amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Coast or such other name as Coast may choose.


<PAGE>


         7.9  No  Liability.   Coast  shall  not  under  any   circumstances  be
responsible or liable for any shortage or discrepancy  in, damage to, or loss or
destruction of, any goods, the sale or other  disposition of which gives rise to
a Receivable,  or for any error, act, omission or delay of any kind occurring in
the  settlement,  failure to  settle,  collection  or  failure  to  collect  any
Receivable,  or for settling any Receivable in good faith for less than the full
amount  thereof,  nor  shall  Coast  be  deemed  to be  responsible  for  any of
Borrower's  obligations  under  any  contract  or  agreement  giving  rise  to a
Receivable.  Nothing herein shall, however, relieve Coast from liability for the
gross  negligence or willful  misconduct of Coast,  or its directors,  officers,
employees, agents or contractors.

80       ADDITIONAL DUTIES OF THE BORROWER.

         8.1 Financial and Other  Covenants.  Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.

         8.2 Insurance.  Borrower shall, at all times insure all of the tangible
personal  property  Collateral  and carry such other  business  insurance,  with
insurers  reasonably  acceptable to Coast, in such form and amounts as Coast may
reasonably  require,  and Borrower  shall provide  evidence of such insurance to
Coast,  so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability  insurance policies of Borrower shall name Coast
as an  additional  insured,  and all  property  casualty  and related  insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably  acceptable to Coast.
Upon  receipt of the  proceeds  of any such  insurance,  Coast  shall apply such
proceeds in reduction of the  Obligations  as Coast shall  determine in its sole
discretion,  except  that,  provided no Default or Event of Default has occurred
and is  continuing,  Coast shall  release to Borrower  insurance  proceeds  with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule,  which  shall be  utilized  by  Borrower  for the  replacement  of the
Equipment  with respect to which the  insurance  proceeds  were paid.  Coast may
require reasonable  assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any  insurance,  Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.

         8.3 Reports.  Borrower,  at its expense,  shall  provide Coast with the
written  reports set forth in Section 8 of the Schedule,  and such other written
reports  with  respect  to  Borrower  (including  budgets,   sales  projections,
operating plans and other financial documentation),  as Coast shall from time to
time reasonably specify.



<PAGE>


     8.4 Access to Collateral,  Books and Records.  At reasonable  times but not
less frequently  than quarterly and on one (1) Business Day=s notice,  Coast, or
its agents,  shall have the right to perform Audits. Coast shall take reasonable
steps to keep confidential all confidential  information  obtained in any Audit,
but Coast shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys,  and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower=s expense and the charge for the Audits
shall be Seven Hundred  Fifty Dollars  ($750) per person per day (or such higher
amount as shall  represent  Coast's then current  standard charge for the same),
plus  reasonable  out-of-pocket  expenses.  Borrower  will  not  enter  into any
agreement  with any  accounting  firm,  service  bureau or third  party to store
Borrower's  books or records at any  location  other  than  Borrower's  Address,
without first  notifying  Coast of the same and obtaining the written  agreement
from such accounting firm, service bureau or other third party to give Coast the
same  rights with  respect to access to books and records and related  rights as
Coast has under this Loan  Agreement.  Borrower  shall  also take all  necessary
steps to  assure  that  this  material  accounting  and  software,  systems  and
applications,  and those of its  accounting  firm,  service  bureau or any other
third  party  vendor  or  supplier,  will,  on a timely  basis,  adequately  and
completely address the Year 2000 Problem in all material respects.

     8.5 Negative  Covenants.  Borrower shall not, without Coast's prior written
consent, do any of the following:

          (a) merge or consolidate with another entity,  except in a transaction
     in which (i) the owners of the Borrower  hold at least fifty  percent (50%)
     of the ownership  interest in the surviving entity  immediately  after such
     merger or consolidation, and (ii) the Borrower is the surviving entity;

          (b) acquire any assets, except (i) in the ordinary course of business,
     or (ii) in a  transaction  or a series of  transactions  not  involving the
     payment of an aggregate amount in excess of the amount set forth in Section
     8 of the Schedule;

          (c) enter into any other  transaction  outside the ordinary  course of
     business;

          (d) sell or transfer any  Collateral,  except for the sale of finished
     Inventory in the ordinary course of Borrower's business, and except for the
     sale of obsolete or unneeded Equipment in the ordinary course of business;

          (e) store any Inventory or other  Collateral with any  warehouseman or
     other third party;

          (f)  sell  any  Inventory  on  a   sale-or-return,   guaranteed  sale,
     consignment, or other contingent basis;

          (g) make any loans of any money or other  assets,  except (i) advances
     to customers or suppliers in the ordinary  course of business,  (ii) travel
     advances,  employee  relocation loans and other employee loans and advances
     in the ordinary course of business, and (iii) loans to employees,  officers
     and  directors  for the  purpose of  purchasing  equity  securities  of the
     Borrower;

          (h) incur any debts,  outside the ordinary  course of business,  which
     would have a Material Adverse Effect;

          (i)  guarantee  or  otherwise   become  liable  with  respect  to  the
     obligations of another party or entity;

          (j) pay or declare any  dividends or  distributions  on the  ownership
     interests in Borrower (except for dividends or distributions payable solely
     in stock form of ownership interests in Borrower);

          (k) make any change in Borrower's capital structure which would have a
     Material Adverse Effect;

          (l)  transfer  or  sidestream  any funds to any  Affiliate  other than
     transfers between Borrowers; or

          (m) dissolve or elect to dissolve.



<PAGE>


         Transactions  permitted by the foregoing provisions of this Section are
only permitted in the ordinary course of business as indicated and if no Default
or  Event  of  Default  is  continuing  or  would  occur  as a  result  of  such
transaction.

         8.6 Litigation  Cooperation.  Should any third-party suit or proceeding
be instituted by or against Coast with respect to any  Collateral or relating to
Borrower,  Borrower shall, without expense to Coast, make available Borrower and
its officers,  employees  and agents and  Borrower's  books and records,  to the
extent that Coast may deem them  reasonably  necessary  in order to prosecute or
defend any such suit or proceeding.

         8.7 Further Assurances.  Borrower agrees, at its expense, on request by
Coast,  to  execute  all  documents  and take all  actions,  as Coast,  may deem
reasonably  necessary  or  useful  in  order to  perfect  and  maintain  Coast's
perfected security interest in the Collateral,  and in order to fully consummate
the transactions contemplated by this Agreement.

90       TERM.

         9.1 Maturity Date.  This  Agreement  shall continue in effect until the
Maturity Date;  provided that the Maturity Date shall automatically be extended,
and this Agreement shall  automatically  and continuously  renew, for successive
additional terms of one year each,  unless one party gives written notice to the
other, not less than one hundred twenty (120) days prior to the Maturity Date or
the next  Renewal  Date,  that such party  elects to  terminate  this  Agreement
effective on the Maturity Date or such next Renewal  Date. If this  Agreement is
renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the
amount  shown in Section 3 of the  Schedule.  The  Renewal  Fee shall be due and
payable on the Renewal Date and  thereafter  shall bear interest at a rate equal
to the rate applicable to the Receivable Loans.

         9.2 Early  Termination.  This Agreement may be terminated  prior to the
Maturity Date as follows: (a) by Borrower, effective on the last Business Day of
the first full month  following the calendar  month in which  written  notice of
termination is given to Coast;  or (b) by Coast at any time after the occurrence
of an Event of Default, without notice, effective immediately. If this Agreement
is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay
to  Coast an Early  Termination  Fee in the  amount  shown in  Section  3 of the
Schedule.  The Early  Termination  Fee shall be due and payable on the effective
date of  termination  and  thereafter  shall bear interest  until paid at a rate
equal to the rate applicable to the Receivable Loans.

         9.3  Payment of  Obligations.  On the  Maturity  Date or on any earlier
effective  date of  termination,  Borrower  shall  pay and  perform  in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such  Obligations  are  otherwise  then due and  payable.
Notwithstanding  any  termination  of this  Agreement,  all of Coast's  security
interests in all of the  Collateral  and all of the terms and provisions of this
Agreement  shall  continue in full force and effect until all  Obligations  have
been paid and performed in full;  provided that,  without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination.  No termination shall in any
way  affect  or  impair  any  right or  remedy  of  Coast,  nor  shall  any such
termination  relieve  Borrower  of any  Obligation  to  Coast,  until all of the
Obligations  have been paid and performed in full.  Upon payment and performance
in full of all the Obligations  and  termination of this Agreement,  Coast shall
promptly deliver to Borrower termination statements,  requests for reconveyances
and such other documents as may be required to fully terminate  Coast's security
interests.



<PAGE>


100      EVENTS OF DEFAULT AND REMEDIES.

     10.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this  Agreement,  and Borrower shall give
Coast immediate written notice thereof:

          (a) Any warranty,  representation,  statement,  report or  certificate
     made or  delivered  to Coast by  Borrower  or any of  Borrower's  officers,
     employees or agents,  now or in the future,  shall be untrue or  misleading
     and results in a Material Adverse Effect; or

          (b)  Borrower  shall  fail to pay when  due any  Loan or any  interest
     thereon or any other monetary Obligation; or

          (c) the  total  Loans and other  Obligations  outstanding  at any time
     shall exceed the Credit Limit; or

          (d) Borrower shall fail to deliver the proceeds of Collateral to Coast
     as provided in Section 7.5 above, or shall fail to give Coast access to its
     books and records or Collateral as provided in Section 8.4 above,  or shall
     breach any negative covenant set forth in Section 8.5 above; or

          (e) Borrower  shall fail to comply with the  financial  covenants  (if
     any)  set  forth  in the  Schedule  or  shall  fail to  perform  any  other
     non-monetary Obligation which by its nature cannot be cured; or

          (f) Borrower shall fail to perform any other non-monetary  Obligation,
     which failure is not cured within ten (10) days after the date due; or

          (g) Any levy,  assessment,  attachment,  seizure,  lien or encumbrance
     (other than a Permitted  Lien) is made on all or any part of the Collateral
     which is not cured within ten (10) days after the  occurrence  of the same;
     or

          (h) any  default  or event of  default  occurs  under  any  obligation
     secured by a  Permitted  Lien that  results in a Material  Adverse  Effect,
     which is not cured within any  applicable  cure period or waived in writing
     by the holder of the Permitted Lien; or

          (i) Borrower breaches any material  contract or obligation,  which has
     or may reasonably be expected to have a Material Adverse Effect; or

          (j)  Dissolution,  termination  of  existence,  insolvency or business
     failure  of  Borrower  or any  guarantor  of any  of  the  Obligations;  or
     appointment of a receiver, trustee or custodian, for all or any part of the
     property  of,   assignment   for  the  benefit  of  creditors  by,  or  the
     commencement  of any  proceeding by Borrower or any guarantor of any of the
     Obligations under any reorganization,  bankruptcy, insolvency, arrangement,
     readjustment  of debt,  dissolution  or  liquidation  law or statute of any
     jurisdiction, now or in the future in effect; or

          (k)  the  commencement  of  any  proceeding  against  Borrower  or any
     guarantor of any of the Obligations under any  reorganization,  bankruptcy,
     insolvency,  arrangement,  readjustment of debt, dissolution or liquidation
     law or statute of any jurisdiction,  now or in the future in effect,  which
     is (i) not timely controverted,  or (ii) not cured by the dismissal thereof
     within thirty (30) days after the date commenced; or



<PAGE>


          (l) revocation or termination of, or limitation or denial of liability
     upon,  any  guaranty  of the  Obligations  or any  attempt to do any of the
     foregoing,  or  commencement  of proceedings by any guarantor of any of the
     Obligations under any bankruptcy or insolvency law; or

          (m) revocation or termination of, or limitation or denial of liability
     upon,  any  pledge  of any  certificate  of  deposit,  securities  or other
     property  or asset of any kind  pledged by any third party to secure any or
     all of the  Obligations,  or any  attempt  to do any of the  foregoing,  or
     commencement  of  proceedings  by or against any such third party under any
     bankruptcy or insolvency law; or

          (n)  Borrower or any  guarantor  of any of the  Obligations  makes any
     payment  on  account  of any  indebtedness  or  obligation  which  has been
     subordinated to the Obligations,  other than as permitted in the applicable
     subordination  agreement,  or if  any  Person  who  has  subordinated  such
     indebtedness   or   obligations   terminates  or  in  any  way  limits  his
     subordination agreement; or

          (o) Except as permitted under Section 8.5(a), Borrower shall suffer or
     experience  any Change of Control  without  Coast's prior written  consent,
     which  consent  shall be in the  discretion of Coast in the exercise of its
     reasonable business judgment; or

          (p) Borrower shall  generally not pay its debts as they become due, or
     Borrower shall conceal,  remove or transfer any part of its property,  with
     intent to hinder,  delay or defraud  its  creditors,  or make or suffer any
     transfer  of  any  of its  property  which  may  be  fraudulent  under  any
     bankruptcy, fraudulent conveyance or similar law; or

          (q) there shall be any Material Adverse Effect.

Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.

     10.2 Remedies.  Upon the  occurrence,  and during the  continuance,  of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly  waived by Borrower),  may do any one or more
of the following:

          (a) Cease making Loans or otherwise extending credit to Borrower under
     this Agreement or any other document or agreement;

          (b)  Accelerate  and declare all or any part of the  Obligations to be
     immediately due, payable and performable,  notwithstanding  any deferred or
     installment  payments  allowed by any instrument  evidencing or relating to
     any Obligation;

          (c) Take possession of any or all of the Collateral wherever it may be
     found,  and for that  purpose  Borrower  hereby  authorizes  Coast  without
     judicial  process  to  enter  onto  any  of  Borrower's   premises  without
     interference to search for, take  possession of, keep,  store or remove any
     of the  Collateral,  and remain on the  premises  or cause a  custodian  to
     remain on the premises in exclusive control thereof,  without charge for so
     long as Coast  deems it  reasonably  necessary  in  order to  complete  the
     enforcement  of its rights  under this  Agreement  or any other  agreement;
     provided,  however, that should Coast seek to take possession of any of the
     Collateral by Court process, Borrower hereby irrevocably waives:

               (i) any bond and any surety or security relating thereto required
          by any  statute,  court  rule  or  otherwise  as an  incident  to such
          possession;



<PAGE>


               (ii) any demand for possession  prior to the  commencement of any
          suit or action to recover possession thereof; and

               (iii) any  requirement  that Coast retain  possession of, and not
          dispose of, any such Collateral until after trial or final judgment;

          (d) Require Borrower to assemble any or all of the Collateral and make
     it available to Coast at places  designated  by Coast which are  reasonably
     convenient  to Coast and  Borrower,  and to remove the  Collateral  to such
     locations as Coast may reasonably deem advisable;

          (e) Complete the processing, manufacturing or repair of any Collateral
     prior to a disposition thereof and, for such purpose and for the purpose of
     removal,  Coast shall have the right to use Borrower's premises,  vehicles,
     hoists,  lifts,  cranes,  equipment and all other property  without charge.
     Coast is hereby  granted a license or other right to use,  without  charge,
     Borrower's labels,  patents,  copyrights,  rights of use of any name, trade
     secrets, trade names, trademarks, service marks, and advertising matter, or
     any  property of a similar  nature,  as it pertains to the  Collateral,  in
     completing  production of, advertising for sale, and selling any Collateral
     and Borrower's rights under all licenses and all franchise agreements shall
     inure to Coast's benefit;

          (f) Sell, lease or otherwise dispose of any of the Collateral,  in its
     condition  at the time  Coast  obtains  possession  of it or after  further
     manufacturing,  processing or repair,  at one or more public and/or private
     sales,  in lots or in bulk,  for cash,  exchange or other  property,  or on
     credit, and to adjourn any such sale from time to time without notice other
     than oral announcement at the time scheduled for sale. Coast shall have the
     right to conduct such  disposition on Borrower's  premises  without charge,
     for such time or times as Coast deems  reasonable,  or on Coast's premises,
     or  elsewhere  and the  Collateral  need  not be  located  at the  place of
     disposition.  Coast may directly or through any affiliated company purchase
     or lease any Collateral at any such public disposition,  and if permissible
     under  applicable  law,  at any  private  disposition.  Any  sale or  other
     disposition  of  Collateral  shall not relieve  Borrower  of any  liability
     Borrower  may have if any  Collateral  is defective as to title or physical
     condition or otherwise at the time of sale;

          (g) Demand  payment  of,  and  collect  any  Receivables  and  General
     Intangibles  comprising Collateral and, in connection  therewith,  Borrower
     irrevocably  authorizes  Coast to  endorse or sign  Borrower's  name on all
     collections,  receipts, instruments and other documents, to take possession
     of and open mail addressed to Borrower and remove  therefrom  payments made
     with respect to any item of the  Collateral  or proceeds  thereof,  and, in
     Coast's  reasonable  discretion,  to  grant  extensions  of  time  to  pay,
     compromise  claims and settle  Receivables  and the like for less than face
     value; and

          (h) Demand and receive  possession  of any of  Borrower's  federal and
     state  income  tax  returns  and the  books  and  records  utilized  in the
     preparation thereof or referring thereto.

         All attorneys'  fees,  expenses,  costs,  liabilities  and  obligations
incurred by Coast (including attorneys' fees and expenses incurred in connection
with bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand.  Coast may charge the same to Borrower=s loan account,  and the
same shall  thereafter  bear  interest at the same rate as is  applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies,  from and
after the  occurrence of any Event of Default,  the interest rate  applicable to
the Obligations shall be increased by an additional three percent per annum.



<PAGE>


         10.3 Standards for Determining Commercial Reasonableness.  Borrower and
Coast  agree  that a sale or other  disposition  (collectively,  Asale@)  of any
Collateral  which  complies with the following  standards will  conclusively  be
deemed to be commercially reasonable:

          (a) Notice of the sale is given to  Borrower  at least  seven (7) days
     prior to the sale, and, in the case of a public sale, notice of the sale is
     published at least seven (7) days before the sale in a newspaper of general
     circulation in the county where the sale is to be conducted;

          (b)  Notice  of  the  sale   describes  the   collateral  in  general,
     non-specific terms;

          (c) The sale is  conducted  at a place  designated  by Coast,  with or
     without the Collateral being present;

          (d) The sale  commences at any time between 8:00 a.m. and 6:00 p.m Los
     Angeles, California time;

          (e) Payment of the  purchase  price in cash or by  cashier=s  check or
     wire transfer is required; and

          (f) With respect to any sale of any of the Collateral,  Coast may (but
     is not obligated to) direct any prospective purchaser to ascertain directly
     from Borrower any and all information concerning the same.

         Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.

         10.4 Power of Attorney.  Borrower grants to Coast an irrevocable  power
of attorney  coupled with an interest,  authorizing and permitting Coast (acting
through any of its  employees,  attorneys or agents) at any time, at its option,
but without  obligation,  with or without notice to Borrower,  and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast  agrees to exercise  the  following  powers in a  commercially  reasonable
manner:

          (a) Execute on behalf of Borrower any documents that Coast may, in its
     sole  discretion,  deem advisable in order to perfect and maintain  Coast's
     security  interest  in the  Collateral,  or in order to exercise a right of
     Borrower or Coast,  or in order to fully  consummate  all the  transactions
     contemplated  under  this  Agreement,  and all  other  present  and  future
     agreements relating to the Obligations;

          (b) After the occurrence of an Event of Default,  execute on behalf of
     Borrower any document  exercising,  transferring or assigning any option to
     purchase,  sell or  otherwise  dispose of or to lease (as lessor or lessee)
     any real or personal  property  which is part of Coast's  Collateral  or in
     which Coast has an interest;

          (c) After the occurrence of an Event of Default,  execute on behalf of
     Borrower,  any invoices  relating to any Receivable,  any draft against any
     Account Debtor and any notice to any Account Debtor,  any proof of claim in
     bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
     lien, or assignment or satisfaction of mechanic's,  materialman's  or other
     lien;



<PAGE>


          (d)  Take  control  in any  manner  of any cash or  non-cash  items of
     payment or proceeds of  Collateral;  endorse the name of Borrower  upon any
     instruments, or documents,  evidence of payment or Collateral that may come
     into Coast's possession;

          (e)  Endorse  all checks and other  forms of  remittances  received by
     Coast;

          (f) After the  occurrence  of an Event of  Default,  pay,  contest  or
     settle any lien, charge,  encumbrance,  security interest and adverse claim
     in or to any of the Collateral, or any judgment based thereon, or otherwise
     take any action to terminate or discharge the same;

          (g After the  occurrence of an Event of Default,  grant  extensions of
     time  to  pay,   compromise  claims  and  settle  Receivables  and  General
     Intangibles  for less than face value and  execute all  releases  and other
     documents in connection therewith;

          (h After the occurrence of an Event of Default,  pay any sums required
     on  account  of  Borrower's  taxes or to secure  the  release  of any liens
     therefor, or both;

          (i After the occurrence of an Event of Default, settle and adjust, and
     give releases of, any insurance claim that relates to any of the Collateral
     and obtain payment therefor;

          (j Instruct any third party having  custody or control of any books or
     records  belonging  to, or  relating  to,  Borrower  to give Coast the same
     rights of access and other rights with  respect  thereto as Coast has under
     this Agreement; and

          (k After the occurrence of an Event of Default, take any action or pay
     any sum  required of  Borrower  pursuant  to this  Agreement  and any other
     present or future agreements.

         Any and all sums  paid and any and all  costs,  expenses,  liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and  become  part of the  Obligations,  and shall be payable on demand.
Coast may charge the  foregoing to  Borrower=s  loan  account and the  foregoing
shall  thereafter  bear interest at the same rate  applicable to the  Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's  other  rights under this  Agreement  be deemed to indicate  that
Coast is in control of the  business,  management  or  properties  of  Borrower.
Borrower shall pay, indemnify,  defend, and hold Coast and each of its officers,
directors,   employees,   counsel,   agents,  and  attorneys-in-fact  (each,  an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against  any  and  all  claims,   demands,   suits,   actions,   investigations,
proceedings,  and damages,  and all attorneys fees and  disbursements  and other
costs and expenses actually  incurred in connection  therewith (as and when they
are incurred and irrespective of whether suit is brought),  at any time asserted
against,  imposed upon,  or incurred by any of them in  connection  with or as a
result of or related to the execution, delivery,  enforcement,  performance, and
administration   of  this   Agreement  and  any  other  Loan  Documents  or  the
transactions  contemplated  herein,  and  with  respect  to  any  investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the  proceeds  of the  credit  provided  hereunder  (irrespective  of
whether any Indemnified Person is a party thereto), or any act, omission,  event
or circumstance in any manner related thereto (all the foregoing,  collectively,
the  "Indemnified  Liabilities").  Borrower  shall  have  no  obligation  to any
Indemnified Person hereunder with respect to any Indemnified Liability resulting
from the gross negligence or willful misconduct of any Indemnified Person or any
contractor  of  any  Indemnified   Person.  This  provision  shall  survive  the
termination of this Agreement and the repayment of the Obligations.



<PAGE>


         10.5  Application of Proceeds.  All proceeds  realized as the result of
any  sale of the  Collateral  shall be  applied  by  Coast  first to the  costs,
expenses, liabilities,  obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall  determine in its sole  discretion.  Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any  deficiency.  If, Coast,  in its sole  discretion,  directly or
indirectly  enters into a deferred payment or other credit  transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole  discretion,  of either  reducing the  Obligations  by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.

         10.6  Remedies  Cumulative.  In addition to the rights and remedies set
forth in this  Agreement,  Coast  shall have all the other  rights and  remedies
accorded  a  secured  party in  equity,  under  the  Code,  and  under all other
applicable  laws,  and under any other  instrument  or  agreement  now or in the
future  entered  into  between  Coast and  Borrower,  and all of such rights and
remedies are cumulative and none is exclusive.  Exercise or partial  exercise by
Coast of one or more of its rights or remedies  shall not be deemed an election,
nor bar Coast from subsequent  exercise or partial  exercise of any other rights
or  remedies.  The failure or delay of Coast to exercise  any rights or remedies
shall not  operate  as a waiver  thereof,  but all  rights  and  remedies  shall
continue  in full  force  and  effect  until  all of the  Obligations  have been
indefeasibly paid and performed.

11.      GENERAL PROVISIONS.

         11.1 Interest  Computation.  In computing  interest on the Obligations,
all  checks,  wire  transfers  and  other  items of  payment  received  by Coast
(including proceeds of Receivables and payment of the Obligations in full) shall
be deemed applied by Coast on account of the  Obligations  two (2) Business Days
after receipt by Coast of immediately  available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles,  California time,
on any day shall be deemed  received on the next  Business  Day.  Coast shall be
entitled  to  charge  Borrower's  account  for  such  two (2)  Business  Days of
"clearance"  or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks,  wire  transfers  and other items  received by Coast,  regardless of
whether such two (2) Business Days of "clearance" or "float" actually occur, and
shall be  deemed to be the  equivalent  of  charging  two (2)  Business  Days of
interest  on  such  collections.  This  across-the-board  two (2)  Business  Day
clearance or float charge on all  collections is  acknowledged by the parties to
constitute an integral  aspect of the pricing of Coast's  financing of Borrower.
Coast  shall not,  however,  be required  to credit  Borrower's  account for the
amount of any item of payment which is unsatisfactory to Coast in its reasonable
credit judgment,  and Coast may charge Borrower's loan account for the amount of
any item of payment  which is returned to Coast unpaid only if Coast  previously
shall have applied such item of payment.

         11.2  Application  of  Payments.  Subject to Section  7.5  hereof,  all
payments  with respect to the  Obligations  may be applied,  and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and manner
as Coast shall determine in its sole discretion.

         11.3 Charges to Accounts.  Coast may, in its  discretion,  require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower=s
Loan  account,  in which event they will bear  interest from the date due to the
date paid at the same rate applicable to the Loans.



<PAGE>


         11.4 Monthly Accountings.  Coast shall provide Borrower monthly with an
account of  advances,  charges,  expenses  and  payments  made  pursuant to this
Agreement.  Such  account  shall be deemed  correct,  accurate  and  binding  on
Borrower  and an account  stated  (except for  reverses  and  reapplications  of
payments made and  corrections of errors  discovered by Coast),  unless Borrower
notifies  Coast in writing to the  contrary  within  thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.

         11.5 Notices.  All notices to be given under this Agreement shall be in
writing and shall be given either  personally or by reputable  private  delivery
service or by regular  first-class  mail,  facsimile  or  certified  mail return
receipt requested,  addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement,  or at any other address designated in writing by one
party to the other party.  Notices to Coast shall be directed to the  Commercial
Finance  Division,  to the  attention  of the  Division  Manager or the Division
Credit Manager.  All notices shall be deemed to have been given upon delivery in
the case of notices  personally  delivered,  faxed (at time of  confirmation  of
transmission),  or at the expiration of one (1) Business Day following  delivery
to the private delivery service,  or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.

         11.6  Severability.  Should any provision of this  Agreement be held by
any court of competent  jurisdiction  to be void or  unenforceable,  such defect
shall not affect the remainder of this  Agreement,  which shall continue in full
force and effect.

         11.7  Integration.  This  Agreement and such other written  agreements,
documents  and  instruments  as may be executed in  connection  herewith are the
final,  entire and complete  agreement  between Borrower and Coast and supersede
all  prior  and  contemporaneous   negotiations  and  oral  representations  and
agreements,  all of which are merged and integrated in this Agreement. There are
no oral understandings,  representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.

         11.8  Waivers.  The  failure  of Coast at any time or times to  require
Borrower to strictly  comply with any of the provisions of this Agreement or any
other present or future agreement  between Borrower and Coast shall not waive or
diminish  any  right of Coast  later to demand  and  receive  strict  compliance
therewith.  Any  waiver of any  Default  shall  not  waive or  affect  any other
Default,  whether prior or subsequent,  and whether or not similar.  None of the
provisions  of  this  Agreement  or any  other  agreement  now or in the  future
executed by Borrower and  delivered to Coast shall be deemed to have been waived
by any act or  knowledge  of Coast or its  agents  or  employees,  but only by a
specific  written waiver signed by an authorized  officer of Coast and delivered
to Borrower.  Borrower waives demand,  protest,  notice of protest and notice of
default or  dishonor,  notice of payment and  nonpayment,  release,  compromise,
settlement,  extension or renewal of any commercial paper, instrument,  account,
General  Intangible,  document  or  guaranty  at any time held by Coast on which
Borrower  is or may in any way be  liable,  and  notice of any  action  taken by
Coast, unless expressly required by this Agreement.

         11.9 No Liability for Ordinary  Negligence.  Neither Coast,  nor any of
its  directors,  officers,  employees,  agents,  attorneys  or any other  Person
affiliated with or representing  Coast shall be liable for any claims,  demands,
losses or damages, of any kind whatsoever,  made, claimed,  incurred or suffered
by Borrower or any other party through the ordinary  negligence of Coast, or any
of its directors,  officers,  employees,  agents,  attorneys or any other Person
affiliated  with or representing  Coast,  but nothing herein shall relieve Coast
from  liability for the gross  negligence or willful  misconduct of Coast or its
directors, officers, employees, agents or contractors.

         11.10 Amendment.  The terms and provisions of this Agreement may not be
waived or amended,  except in a writing executed by a duly authorized officer of
Borrower and a duly authorized officer of Coast.



<PAGE>


         11.11 Time of  Essence.  Time is of the essence in the  performance  by
Borrower of each and every obligation under this Agreement.

         11.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast
for all  attorneys'  fees  (including  attorneys'  fees  and  expenses  incurred
pursuant to bankruptcy)  and all filing,  recording,  search,  title  insurance,
appraisal,  audit,  and  other  costs  incurred  by  Coast,  pursuant  to, or in
connection  with,  or  relating to this  Agreement  (whether or not a lawsuit is
filed),  including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses  incurred  pursuant to bankruptcy)  Coast incurs in
order  to do the  following:  prepare  and  negotiate  this  Agreement  and  the
documents  relating to this  Agreement;  obtain legal advice in connection  with
this  Agreement or  Borrower;  enforce,  or seek to enforce,  any of its rights;
prosecute  actions  against,  or defend actions by, Account  Debtors;  commence,
intervene in, or defend any action or  proceeding;  initiate any complaint to be
relieved of the  automatic  stay in  bankruptcy;  file or prosecute  any probate
claim,  bankruptcy claim,  third-party  claim, or other claim;  examine,  audit,
copy, and inspect any of the Collateral or any of Borrower's  books and records;
protect,  obtain possession of, lease,  dispose of, or otherwise enforce Coast=s
security  interest in, the  Collateral;  and  otherwise  represent  Coast in any
litigation  relating to Borrower.  If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such  action  shall be  entitled  to recover  its costs and  attorneys'  fees
(including  attorneys'  fees and  expenses  incurred  pursuant  to  bankruptcy),
including  (but not  limited  to)  attorneys'  fees and  costs  incurred  in the
enforcement  of,  execution  upon or  defense  of any  order,  decree,  award or
judgment.  Borrower shall also pay Coast=s  standard charges for returned checks
and for wire transfers,  in effect from time to time. All attorneys' fees, costs
and  charges  (including  attorneys'  fees and  expenses  incurred  pursuant  to
bankruptcy)  and other  fees,  costs and  charges to which Coast may be entitled
pursuant to this  Agreement may be charged by Coast to  Borrower=s  loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.

         11.13 Benefit of Agreement.  The provisions of this Agreement  shall be
binding  upon and inure to the benefit of the  respective  successors,  assigns,
heirs,  beneficiaries  and  representatives  of  Borrower  and Coast;  provided,
however,  that  Borrower may not assign or transfer any of its rights under this
Agreement  without  the  prior  written  consent  of Coast,  and any  prohibited
assignment  shall be void. No consent by Coast to any  assignment  shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties  hereunder  without the consent of Borrower  and, so long as
Coast remains the Agent under this Agreement,  Coast may assign and delegate its
duties  hereunder  without  notice  to  Borrower.  Coast  reserves  the right to
syndicate all or a portion of the  transaction  created herein or sell,  assign,
transfer,  negotiate,  or grant  participations  in all or any  part of,  or any
interest in Coast's rights and benefits  hereunder.  In connection with any such
syndication,   assignment   or   participation,   Coast  may,   subject  to  the
confidentiality   provisions  of  Section  11.18   disclose  all  documents  and
information  which  Coast now or  hereafter  may have  relating  to  Borrower or
Borrower's business. To the extent that Coast assigns its rights and obligations
hereunder  to a third  Person,  Coast  thereafter  shall be  released  from such
assigned  obligations  to Borrower to the extent  arising  after the date of the
assignment,   provided  that  the  third  Person  assumes  Coast's   obligations
hereunder.

         11.14 Publicity.  Coast is hereby authorized,  at its expense, to issue
appropriate  press releases and to cause a tombstone to be published  announcing
the consummation of this transaction and the aggregate amount thereof.



<PAGE>


         11.15 Paragraph  Headings;  Construction.  Paragraph  headings are only
used in this Agreement for convenience.  Borrower and Coast acknowledge that the
headings  may not  describe  completely  the  subject  matter of the  applicable
paragraph, and the headings shall not be used in any manner to construe,  limit,
define  or  interpret  any  term  or  provision  of  this  Agreement.  The  term
Aincluding@,  whenever used in this  Agreement,  shall mean  Aincluding (but not
limited to)@. This Agreement has been fully reviewed and negotiated  between the
parties  and no  uncertainty  or  ambiguity  in any  term or  provision  of this
Agreement shall be construed  strictly  against Coast or Borrower under any rule
of construction or otherwise.

         11.16 Governing Law;  Jurisdiction;  Venue. This Agreement and all acts
and transactions  hereunder and all rights and obligations of Coast and Borrower
shall be  governed  by the  internal  laws of the State of  California,  without
regard  to  its  conflicts  of  law  principles.  As  a  material  part  of  the
consideration  to Coast to enter into this  Agreement,  Borrower (a) agrees that
all actions and  proceedings  relating  directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California,  and
that the exclusive venue therefor shall be Los Angeles  County;  (b) consents to
the  jurisdiction and venue of any such court and consents to service of process
in any such  action or  proceeding  by  personal  delivery  or any other  method
permitted by law; and (c) waives any and all rights  Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.

         11.17 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING  BASED UPON,  ARISING OUT
OF, OR IN ANY WAY  RELATING TO, THIS  AGREEMENT  OR ANY OTHER  PRESENT OR FUTURE
INSTRUMENT  OR AGREEMENT  BETWEEN COAST AND  BORROWER,  OR ANY CONDUCT,  ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS,  OFFICERS,  EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.



<PAGE>


         11.18  Confidentiality.  Coast will maintain the confidentiality of any
non public  information  marked as  confidential  and  relating to the  business
operations  and  methodology  of Borrower and financial  performance of Borrower
("Borrower  Information")  provided to Coast  solely by the Borrower as required
under the terms of this Agreement, and will not disclose Borrower Information to
any person,  other than  employees,  agents,  attorneys or accountants of Coast.
Coast will not disclose Borrower information to any other party unless, prior to
such disclosure,  Coast obtains an executed acknowledgment binding such party to
maintain the  confidentiality  of the  information,  prohibiting  its disclosure
except for the purposes  permitted under this  Agreement,  and agreeing that the
information  may not be used to compete  with the  Borrower  in any way.  In the
event Coast  receives a subpoena or other process for any Borrower  Information,
it will  immediately  give notice in writing of the  subpoena or other  process,
including a copy thereof, to Borrower.

BORROWER:

AVTEL COMMUNICATIONS, INC.,
a Delaware corporation


By                                                                         
    ---------------------------------
         President or Vice President

By                                                                         
    ---------------------------------
         Secretary or Ass't Secretary


MATRIX TELECOM, INC.,
a Texas corporation


By                                                                         
    ---------------------------------
         President or Vice President


By                                                                         
    ---------------------------------
         Secretary or Ass't Secretary


COAST:

COAST BUSINESS CREDIT,
a division of Southern Pacific Bank


By                                                                           
      -------------------------------
Title:                                                                      
      -------------------------------

<PAGE>






                                      Coast
                                   SCHEDULE TO
                           LOAN AND SECURITY AGREEMENT


Borrower:                  AVTEL COMMUNICATIONS, INC.,
                                            a Delaware corporation

Address:                   501 Bath Street
                                            Santa Barbara, California  93101

Borrower:                  MATRIX TELECOM, INC.,
                                            a Texas corporation

Address:                   8721 Airport Freeway
                                            Fort Worth, Texas  76180

Date:                                       October 2, 1998


This Schedule forms an integral part of the Loan and Security  Agreement between
Coast  Business   Credit,   a  division  of  Southern   Pacific  Bank,  and  the
above-borrower of even date.



SECTION 2 - CREDIT FACILITIES

Section 2.1 - Credit Limit: 

     Loans in a total amount at any time outstanding not to exceed the lesser of
     a total of Seven Million Five Hundred Thousand Dollars  ($7,500,000) at any
     one time outstanding (the AMaximum Dollar Amount@),  or the sum of (a), (b)
     and (c) below:

     (a)  Receivable  Loans in an  amount  not to  exceed  75% of the  amount of
          Borrower=s  Eligible  Receivables  (as  defined  in  Section  1 of the
          Agreement), however, if the Dilution Percentage on the Billed Eligible
          Receivables  and Unbilled  Eligible  Receivables is less than 5%, this
          advance rate will be increased to 85%, plus

          When Borrower  attains a consolidated  positive  EBITDA,  Borrower may
          convert the structure for obtaining Receivable Loans to the following:

          Advances up to three (3) times recurring monthly collections  received
          by Coast measured on a trailing  three-month  moving average provided,
          however that the advances may not exceed  either:  (a) Eighty  percent
          (80%) of the orderly liquidation value of Borrower's  subscriber base,
          as determined by yearly appraisals (or, if an Event of Default exists,
          as frequently  as required by Coast),  to be conducted by an appraiser
          acceptable to Coast in its sole and absolute  discretion;  or (b) Four
          (4)  times  annualized  trailing  EBITDA  based on a  rolling  six (6)
          months.

     (b)  Equipment Acquisition Loans, to be drawn within eighteen (18) month(s)
          from the date  hereof,  in minimum  advances of One  Hundred  Thousand
          Dollars  ($100,000),  commencing  on the day such  advance  is made by
          Coast,  and  amortized  pursuant to a  thirty-six  (36) month  monthly
          amortization  of  principal  plus  interest,  in a total amount not to
          exceed the lesser of:


<PAGE>



          (1)  Eighty  percent  (80%)  of  the  cost  of  new  Equipment  (after
               subtracting taxes and installation  charges) excluding furniture,
               fixtures, and computer equipment; and

          (2)  Seven Hundred and Fifty Thousand Dollars ($750,000), plus

                    Drawsunder this facility are subject to Borrower's attaining
                    of  EBIT/interest  ratio  equal  to  or  greater  than  1.25
                    measured on a quarterly rolling basis.

               (b)  Coast  may  fund,  subject  to the  Maximum  Dollar  Amount,
                    Acquisitions  from  time to  time,  so long as an  Event  of
                    Default  will  not  result  from  the  consummation  of  the
                    proposed  acquisition  and  so  long  as  the  assets  being
                    acquired,  or the  Corporation  whose capital stock is being
                    acquired, have reasonable business synergies with Borrower's
                    business  activities.  Coast's decision to fund Acquisitions
                    will be at Coast's sole and absolute  discretion and will be
                    subject to the  completion of Coast's due diligence into the
                    company to be acquired with the due  diligence  review to be
                    acceptable  to Coast in its  sole and  absolute  discretion.
                    Coast agrees that it will act in a reasonably  prompt manner
                    in deciding whether to fund Acquisitions;

Section 2.2 - Letter of Credit  Sublimit: 

     One Million Dollars ($1,000,000) for Standby Letters of Credit.



SECTION 3 - INTEREST AND FEES



<PAGE>


Section 3.1 - Interest  Rate:

     A rate equal to the Prime Rate plus 2% per annum,  calculated  on the basis
     of a 360-day year for the actual number of days elapsed.  The interest rate
     applicable  to all Loans shall be  adjusted  monthly as of the first day of
     each month, and the interest to be charged for each month shall be based on
     the highest  Prime Rate in effect  during the prior month,  but in no event
     shall the rate of  interest  charged on any Loans in any month be less than
     9% per annum.

Section 3.1 - Minimum Monthly Interest:

     The  product of 20% of the  Maximum  Dollar  Amount and the  Interest  Rate
     enumerated  in Section 3.1 of the Schedule for the actual days in the month
     on the basis of a 360-day year.

Section 3.2 - Loan Fee:

     One percent (1.0%) of the Maximum  Dollar  Amount,  such amount being fully
     earned on the Closing Date, and payable:  (1) one-half of one percent (.5%)
     on the Closing Date,  with said one-half of one percent to  apportioned  by
     payment to Coast of .433% and payment to an intermediary of .067%,  and (2)
     one-half of one percent (.5%) payable to Coast on the first  anniversary of
     the Closing Date.

Section 3.2 - Facility  Fee:

     $1,500, per quarter,  payable on the Closing Date (prorated for any partial
     quarter at the beginning of the term of this Agreement).

Section 3.2 - Letter of Credit  Fees: 

     Two percent (2%)  guarantee fee for all  outstanding  Letters of Credit per
     calendar month, plus bank charges and fees.

Section 9.1 - Renewal Fee:

     .50% of the Maximum Dollar Amount per year.

Section 9.2 -  Early  TerminationAn  amount  equal  to two  percent  (2%) of the
     Maximum  Dollar Fee:

     Amount (as defined in the Schedule), if termination occurs on or before the
     first anniversary of the effective date of this Agreement;  and one percent
     (1%) of the Maximum  Dollar Amount,  if termination  occurs after the first
     anniversary and before the Maturity Date. Notwithstanding the foregoing, if
     there is a public debt or equity  funding that  results in the  Obligations
     being  repaid  in full,  then the Early  Termination  Fee will be an amount
     equal to two percent (2%) of the Maximum  Dollar  Amount (as defined in the
     Schedule),  if  termination  occurs  during the first  eleven  (11)  months
     immediately  following the effective  date of this  Agreement;  one percent
     (1%) if termination  occurs during months twelve (12) through  twenty-three
     (23);  and there will be no early  termination  fee if  termination  occurs
     thereafter.






SECTION 5 - CONDITIONS PRECEDENT

Section 5.2 - Minimum Availability: 

     $4,000,000

Section 5.13 - Other  Documents and  Agreements: 

     1. Joint and Several Borrower Rider; 2. UCC-1 financing statements, fixture
     filings and  termination  statements;  3.  Intellectual  Property  Security
     Agreement; 4. Tri-Party Agreements with local exchange carriers and billing
     services; 5. Landlord Waivers; and 6. Lockbox Agreements.



SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS

Section 6.2 - Prior Names of Borrower: 

     None.

Section 6.2 - Prior Trade Names of Borrower: 

     None.



<PAGE>


Section 6.2 - Existing  Trade  Names of  Borrower: 

     AvTel AvTel Communications Matrix Matrix Telecom

Section 6.3 - Other  Locations and Addresses:

          Borrower - AvTel  Communications,  Inc.  23046  Avenida de la Carlota,
          Suite 600,  Laguna Hills,  CA 92653 350 W.  Broadway,  Suite 111, Salt
          Lake City, UT 84101 901 S. Orem Blvd., Orem, UT 84058

          Borrower - Matrix Telecom, Inc. None.

Section 6.10 - Material Adverse Litigation:

          Matrix Telecom,  Inc.  ("MTI") received a letter dated August 20, 1998
          from O'Donnell,  Ramis, Crew, Corrigan & Bacharach,  LLP ("ORCCB"), as
          counsel to Matrix Communications  Corporation ("MCC") which is located
          in Milwaukie,  Oregon, alleging that Matrix's use of the name "MATRIX"
          or "MATRIX  TELECOM"  infringes  on MCC's  rights to the service  mark
          "MATRIX  COMMUNICATIONS." The ORCCB letter indicated that MCC had used
          the mark in Oregon and Southwest Washington since January 24, 1994 and
          the mark was registered by MCC in Oregon on June 23, 1993.

          Seed,  Mackall & Cole ("SMC"),  as counsel to MTI,  responded to MCC's
          claim in SMC's September 3, 1998 letter to ORCCB. In SMC's letter, SMC
          advised MCC of the following:

          1. MTI registered  the service mark "MATRIX  TELECOM" on the Principal
          Register of the United States Patent and Trademark Office on August 1,
          1995.



<PAGE>


          2.  MTI  qualified  to  transact  business  in  Oregon  as  a  foreign
          corporation  on February 24, 1992, and has been engaged in business in
          Oregon since at least that date.

          3. MTI's predecessor entity, Matrix Telecom, a Texas partnership,  has
          provided  telecommunications  services in Oregon  since at least March
          27, 1991.

          4. MTI  qualified  to transact  business as a foreign  corporation  in
          Washington  on  June  3,  1994  and  has  been  engaged  in  providing
          telecommunications services in Washington since at least that date.

          As a result of the above, MTI believes that its rights to the mark are
          superior to the rights of MCC.  SMC's letter to ORCCB demands that MCC
          immediately  cease and desist  further  use of the mark and provide to
          SMC written  assurance that MCC has complied with this demand no later
          than September 10, 1998. As of September 9, 1998,  neither SMC nor MTI
          has received a response from ORCCB or MCC.

          MTI makes no  representations  or warranties  about the outcome of the
          above claim.


Section 6.10 - Future Claims and  Litigation:


<PAGE>


     Borrower  will promptly  inform Coast in writing of any claim,  proceeding,
     litigation or  investigation  in the future  threatened or instituted by or
     against  Borrower  involving  any single  claim of Fifty  Thousand  Dollars
     ($50,000) or more, or involving One Hundred Thousand Dollars  ($100,000) or
     more in the aggregate.



SECTION 8 - ADDITIONAL DUTIES OF BORROWER

Section 8.1 - Other Provisions:

     1.  Borrower  shall at all times  maintain a minimum  Net Worth equal to or
     greater than Two Million Dollars ($2,000,000).

     2. Borrower shall at all times maintain a Minimum  Availability equal to or
     greater than One Million Dollars  ($1,000,000)  until a positive EBITDA has
     been  achieved  for  three  consecutive  months  and  until  the  ratio  of
     EBIT/interest is equal to or greater than 1.25.

     3. Each carrier  accounts  payable of Borrower shall be kept current during
     the term of this Agreement.

Section 8.2 - Insurance:

     Subject to the limitations set forth in Section 8.2 of the Agreement, Coast
     shall  release to Borrower  insurance  proceeds  with  respect to Equipment
     totaling  less than One Hundred  Thousand  Dollars  ($100,000)  in a single
     transaction  subject  to a  yearly  limitation  of Two  Hundred  and  Fifty
     Thousand Dollars ($250,000).

Section 8.3 - Reporting:

     Borrower shall provide Coast with the following:

     1. Monthly  Receivable  agings,  aged by invoice date, within ten (10) days
     after the end of each month.

     2. Monthly accounts  payable agings,  aged by invoice date, and outstanding
     or held check registers within ten (10) days after the end of each month.

     3. Monthly internally prepared financial statements,  on a consolidating to
     consolidated  basis,  as soon as available,  and in any event within thirty
     (30) days after the end of each month.

     4.  Quarterly  internally  prepared  financial   statements,   as  soon  as
     available,  and in any event within  forty-five  (45) days after the end of
     each fiscal quarter of Borrower.

     5. Quarterly customer lists,  including customer name,  address,  and phone
     number.

     6. Annual  financial  statements,  as soon as  available,  and in any event
     within  ninety  (90) days  following  the end of  Borrower's  fiscal  year,
     containing the unqualified opinion of, and certified by, (a) an independent
     certified  public  accountant  from a "Big Six"  accounting  firm or (b) an
     independent certified public accountant reasonably acceptable to Coast.

     7.  Monthly   collateral/reserves   roll   forward   with  General   Ledger
     reconciliation,  in form and substance  satisfactory  to Coast,  within ten
     (10) days after the end of each month.

     8. Reports for Unbilled  Receivables  as frequently as Coast shall require,
     in form and substance satisfactory to Coast.

     9.  Monthly  Atlantax,  Inc.  tax  payment  report,  in form and  substance
     satisfactory to Coast, within ten (10) days after the end of each month.

     10. Annual  projections,  on a month-to-month  basis, in form and substance
     satisfactory to Coast,  are to be provided to Coast before each anniversary
     date of the effective date of this Agreement.

     11. Weekly  Borrowing Base reporting which includes sales,  collections and
     credits,  in form and  substance  satisfactory  to Coast,  within three (3)
     business days after the end of each week.

Section 8.5 - Negative Covenants (Acquired Assets):

     Seven Hundred and Fifty  Thousand  Dollars  ($750,000) in the aggregate for
     all  acquisitions  during a calendar year, or a proportionate  amount for a
     partial year,  but in no event will any single  acquisition  amount to over
     One Hundred Thousand Dollars ($100,000).


SECTION 9 - TERM

Section 9.1 - Maturity Date:

     The last  Business  Day of the month two (2) years from the  Closing  Date,
     subject to automatic  renewal as provided in Section 9.1 of the  Agreement,
     and early termination as provided in Section 9.2 of the Agreement.