UNITED STATES
                        SECURITIES AND EXCHANGE COMMISION
                             WASHINGTION, D.C. 20549
                                   FORM 10-KSB

(Mark One)
   [ X ]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934
           For the fiscal year ended   September 30, 1996

   [   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT
           For the transition period from                  to

                         Commission file number 1-14072

                             PEN INTERCONNECT, INC.
        (Exact name of small business issuer as specified in its charter)

        UTAH                                    87-0430260
(State or other jurisdiction
of incorporation or organization)       (I.R.S. Employer Identification No)

                 2351 South 2300 West, Salt Lake City, UT 84119
               (Address of Principal Executive Offices) (Zip Code)

                                 (801) 973-6090
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:
                     Common Stock, Par Value $0.01 Per Share
                              Common Stock Warrants

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

                                    Yes X No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated  by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. X check

        State issuer's revenues for its most recent fiscal year.   $25,106,734

     As of  December  20,  1996,  there were  3,033,407  shares of the  Issuer's
commons stock,  par value $0.01,  issued and  outstanding.  The aggregate market
value of the  Issuer's  voting  stock  held by  nonaffiliates  of the Issuer was
approximately  $7,219,500,  computed at the closing  quotations for the Issuer's
common stock of $2.38 as of December 20, 1996.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Definitive  Proxy  Statement for the Annual Meeting of  Shareholders  to be
held February 19, 1997.  Certain  information  therein is incorporated into Part
III hereof.


<PAGE>


                                   FORM 10-KSB

                             PEN INTERCONNECT, INC.

                                Table of Contents

                                                                           Page

PART I

1.   Description of Business                                                  3

2.   Description of Property                                                  8

3.   Legal Proceedings                                                        9

4.   Submission of Matters to a Vote of Security Holders                      9

PART II

5.   Market for Common Equity and Related Stockholder Matters                 9

6.   Management's Discussion and Analysis or Plan of Operation               10

7.   Financial Statements                                                    13

8.   Changes in and Disagreements With Accountants on
         Accounting and Financial Disclosure                                 13

PART III

9.   Directors, Executive Officers, Promoters and Control Persons;
         Compliance With Section 16(a) of the Exchange Act                   13

10.   Executive Compensation                                                 14

11.   Security Ownership of Certain Beneficial Owners and Management         14

12.   Certain Relationships and Related Transactions                         14

13.  Exhibits and Reports on Form 8-K                                        14




                                        2


<PAGE>



                                     PART I


                         ITEM 1. DESCRIPTION OF BUSINESS



BUSINESS DEVELOPMENT

 General

     Pen Interconnect,  Inc. (the "Company" or "Pen") develops and produces on a
turnkey basis custom cable  interconnections for original equipment manufactures
("OEMs")   in   the   computer,    computer   peripheral,    telecommunications,
instrumentation and testing equipment industries (See "Business of Issuer"). The
Company was  incorporated  under the laws of the State of Utah on September  30,
1985.  The  Company  maintains  divisions  located in Salt Lake  City,  Utah and
Tustin,  California.  During fiscal year 1996 the Company had a division located
in San  Jose,  California.  The San Jose  Division  was sold by the  Company  on
November 12, 1996 (See "Business Development - Subsequent Event"). The executive
offices of the Company are located at 2351 South 2300 West, SLC, UT 84119.


 Summary of fiscal year 1996 events


     On November 17, 1995, the Company successfully  completed an initial public
offering  of  1,000,000  shares of its common  stock and  warrants  to  purchase
1,000,000  shares of common stock.  The initial public  offering price was $6.00
per share of common  stock and $0.10 per warrant.  Each warrant was  immediately
exercisable  and entitled the registered  holder to purchase one share of common
stock at a price of  $6.50.  The  warrants  expire on  November  17,  2000.  The
outstanding warrants may be redeemed by the Company upon 30 days' written notice
at $0.05 per warrant,  provided  that the closing bid  quotations  of the common
stock have averaged at least $9.00 per share for a period of any 20  consecutive
trading days ending on the third day prior to the day on which the Company gives
notice.

     In connection  with the offering,  the Company  granted the underwriter the
right to purchase up to 100,000 shares of common stock and 100,000 warrants. The
underwriter  was also  granted an  over-allotment  option of  150,000  shares of
common stock and/or warrants to purchase an additional  150,000 shares of common
stock. In December 1995, the underwriter  exercised its option and purchased the
150,000 warrants.  The option to purchase the 150,000 shares of common stock has
expired.

                                       3

<PAGE>


     Effective  January 1, 1996,  the  Company  acquired  the assets of Overland
Communication,   Inc.  dba  MOTO-SAT  ("Moto-Sat  Division")  by  assuming  that
company's  debt  and  offering  future  stock   distributions   contingent  upon
achievement of  performance  criteria.  MOTO-SAT is a  manufacturer  of high-end
satellite   television   receiving  systems  for  recreational   vehicles.   The
acquisition  gave the Company a new product line,  and allowed it to utilize its
manufacturing   capacity  to  help  Moto-Sat  focus  on  sales  and  research  &
development activities. (See Note B of Notes to Financial Statements)

     On April 8, 1996, the Company entered into a three year financing agreement
with  National Bank of Canada for a $6 million line of credit with the option to
extend  the line on an as needed  basis.  This line of  credit  replaced  the $3
million  line of  credit  which had a  two-and-  three-quarters  (2.75)  percent
interest rate over prime. (See Note G of Notes to Financial Statements.)

     Effective  April 1, 1996,  the Company  acquired  substantially  all of the
assets and assumed certain  liabilities and the operations of InCirT  Technology
("InCirT  Division"),  a division of the Cerplex  Group,  Inc.  for $5.3 million
comprised  of $3.5  million  in cash and  333,407  shares of common  stock.  The
Company also agreed to deliver to Cerplex  .09261 shares of its common stock for
every dollar of past due over 90 days accounts receivable of InCirT collected by
the Company during the first 180 days after the date of the acquisition  closing
up to a maximum  of  55,568  shares  of  common  stock.  (See Note B of Notes to
Financial Statements)


 Subsequent event

     On November 12, 1996,  the Company sold all of the net assets used by it in
the operations of its San Jose Division to Touche Electronics,  Inc., ("Touche")
a subsidiary  of TMCI  Electronics,  Inc.("TMCI").  The sale was effective as of
November 1, 1996.

     The sales price for the net assets of the San Jose Division was $3,300,000,
consisting  of  $2,000,000 in cash,  $900,000 in  promissory  notes,  and 53,669
shares of TMCI common stock with an agreed upon guaranteed value of $400,000. In
addition,  the Company has the right to receive $700,000 in contingent earn outs
for a potential  total sales price of $4,000,000.  Pen originally  purchased the
San Jose  Division in March 1995 for  approximately  $2,200,000.  As part of the
transaction,  Touche and TMCI also assumed certain  liabilities  associated with
the operations of the Division. (See Note P of Notes to Financial Statements).

 (b)  BUSINESS OF ISSUER

 Products

     The Company develops,  produces and acts as a sub-contract manufacturer for
total interconnect solutions on a turn key basis. The types of products produced
by the Company include custom cables, harness, ribbons, specialty cable, surface
mount   technology  and  construction  &  testing  of  printed  circuit  boards,
interconnections    for   OEMs   in   the   computer,    computer    peripheral,
telecommunications,  medical,  instrumentation and testing equipment industries.
The Company's  products  connect  electronic  equipment,  such as computers,  to
various external devices (such as video screens, printers, external disk drives,
modems, telephone jacks, peripheral interfaces and networks) and connect devices
within  the  equipment  (such as power  supplies,  computer  hard  drives and PC
cards).

                                       4

<PAGE>


     Most of the  Company's  sales  consist  of  custom  cable  interconnections
developed in close  collaboration  with its customers.  The Company's  customers
include OEMs of computers including mainframes,  desktops,  portables,  laptops,
notebooks,  pens, and palmtops as well as OEMs of computer peripheral  equipment
such as modems, memory cards, LAN adapters, cellular phones, faxes and printers.
Other customers include OEMs of telecommunications, medical, instrumentation and
testing  equipment.  The Company's  InCirT Division is engaged in the Electronic
Manufacturing  Services  Industry  (EMSI) and provides  sophisticated  ISO 9002-
certified  assembly and testing  services for complex printed circuit boards and
subsystems through advanced surface mount technology (SMT) manufacturing as well
as traditional  through-hole assembly.  These products are used primarily in the
computer instrumentation, testing equipment and medical equipment.

     Many OEMs in the industries that the Company serves  increasingly rely upon
outsourcing of their manufacturing. Outsourcing allows OEMs to take advantage of
the  expertise  and  capital  investments  of contract  manufacturers,  enabling
companies to concentrate on their core activities.  Using its in-house technical
capabilities  and  multiple  molding  machines,  the  Company  assists  its  OEM
customers  by quickly  developing  and  prototyping  customized  interconnection
assemblies  in  conjunction  with  the  customers'   design  staffs,   and  then
efficiently  producing  the  customized  interconnections  in  time  frames  and
specialized quantities to meet its customers' needs in rapidly changing markets.
With its U.S.  domestic  facilities  and in-house  technical  capabilities,  the
Company  concentrates on higher margin  products,  which require  customization,
rapid production turnaround and constant,  real-time client  communication.  The
Company also has entered into an agreement with lower cost foreign manufacturers
in order to competitively  service the customers'  needs for lower margin,  high
volume standardized products.

     Until 1993 the Company manufactured standard cabling interconnections for a
small  number  of OEMs in the  mainframe  computer  industry.  The  Company  has
experienced  increases in sales since 1993 as a result of its  participation  in
the growth of portable  computers  and related  peripherals  by  developing  and
producing cabling  interconnections using the emerging  industry-wide  standards
for the  personal  computer,  or "PC"  card.  The PC card is a credit  card size
device  containing a large amount of electronic  solid state  circuitry which is
used  extensively  with  portable  computers.  In the early  1990s,  the Company
assisted in the development of the cabling interconnections  associated with the
standards  that have been  established  by the  Personal  Computer  Memory  Card
International  Association  ("PCMCIA").  Throughout the year the majority of the
computer and computer peripheral manufacturers have introduced multiple products
using the PCMCIA architecture.

 Distribution of Products

     The Company  markets  its  products  through  in-house  salesmen  and sales
representatives  to OEMs in the computer,  medical and  instrumentation  markets
throughout  the  continental  U.S.  and Canada and into some  selective  foreign
countries.

                                        5

<PAGE>



 New Products

     The Moto-Sat Division has developed a satellite receiving system for use on
recreational  vehicles,  buses,  boats,  yachts,  and  similar  vehicles  with a
mid-level price range to enhance its sales of its high-end  satellite  receiving
systems.  The Moto-Sat  Division  anticipates the future release of an in-motion
satellite receiving system for all types of vehicles.


 Competition


     The Company  competes  directly with numerous other cable  manufacturers in
its custom standard cable assembly business. Many of these manufacturers tend to
be relatively  small and  fragmented.  The Company also competes with  computer,
cabling and connector  manufacturers  that produce  custom cable  assemblies for
their own use, thereby  reducing  potential sales to such  manufacturers  and to
third parties by the Company. The PCMCIA cable assembly industry is dominated by
approximately 15 companies,  including  connector  manufacturers,  with revenues
ranging from $5 million to $100 million  annually.  The InCirT division competes
directly  with  several  Electronic   Manufacturing   Services  Industry  (EMSI)
companies.


     Across all product lines, computer, cabling and connector manufacturers are
generally substantially larger and have greater resources than the Company.

     High  technology  companies  often use outside  contract  manufacturers  to
produce  components or assemblies more  inexpensively  and more efficiently than
they could  themselves.  Contract  manufacturers  typically produce a relatively
large  volume of such  products  and can more  readily  amortize  the  requisite
capital  equipment  and  personnel  costs.  The Company  competes  against other
contract  manufacturers on the basis of product quality,  technical support, and
rapid  design,  engineering  and delivery of prototype  connections.  Successful
competition requires rapid response and quick solutions to customer requests for
highly customized work.

     Several of the Company's contract manufacturing competitors seek to develop
price  advantages by assembling  cabling  overseas in countries with lower labor
costs. As new cable interconnection products become standardized and produced in
large quantities, these overseas producers can generally offer lower prices than
the Company.  The Company has now started to focus its marketing efforts on this
part of the market and has developed a strategic  manufacturing  alliance with a
company  in China to sell its  products  competitively  and  still  control  the
quality of its products.  Historically, the Company believed that the quality of
cable  assemblies  manufactured  overseas had not generally  been  equivalent to
products manufactured domestically. Moreover, by originally focusing its efforts
on the development and production of customized  cable  assemblies,  the Company
developed the ability to service the critical  need for  immediate  responses to
client demands which has to date avoided the relatively  long turnaround time of
overseas manufacture for custom cable assemblies.

                                       6

<PAGE>


 Product Components

     The  Company  generally   purchases  cable,   connectors,   and  electronic
components from a large number of unaffiliated  U.S. and foreign  companies that
manufacture  the products  that meet the  specifications  of the OEM  customers.
Certain  components are custom designed and purchased from a specific  supplier.
Most of the other components utilized by the Company are available from a number
of manufacturers and the Company's decisions with respect to suppliers are based
on availability of the necessary  component,  the reliability of the supplier in
meeting its commitments, and pricing.

 Customers

     Sales by the Company have historically been concentrated with several large
customers.  However, only one customer exceeded 10% of the overall Company sales
for fiscal year ended 1996 (three in 1995).  This customer's  sales were 16% and
23% for the fiscal years ended  September  30, 1996 and 1995  respectively.  The
Company continues to have significant  sales from its major customers;  however,
due to recent  acquisitions  and the  resulting  increased  customer  base these
customers  constitute  less than 10% of the  total  sales of the  Company,  even
though  there has been no  decrease  in the  dollar  volume  of sales  from this
customer.

 Employees

     As of September 30, 1996, the Company employed  approximately  360 full and
part-time employees. Seven employees were executive personnel, 22 were technical
and  engineering  personnel,  14  were  in  marketing  and  sales,  299  were in
manufacturing, and 18 were administrative,  accounting, information systems, and
clerical  personnel.  The Company  reduced its manpower in its cable  operations
through  attrition and automated  efficiency by approximately  28% by the end of
fiscal year 1996 compared to fiscal year 1995.

 Regulatory Matters

     Computer  cables  must  satisfy  electrical  magnetic   interference  (EMI)
standards  which are  imposed  by the  Federal  Communications  Commission.  The
Company  relies  on the  manufacturer  of its cable for  compliance  with  these
requirements.



                                        7


<PAGE>






                         ITEM 2. DESCRIPTION OF PROPERTY



 FACILITIES

     The Company maintains  manufacturing and administrative  facilities in Salt
Lake City, Utah under a lease which expires  September 30, 1998 and provides for
$147,060 in annual rental payments.  The building contains 40,500 square feet of
space, of which 3,000 square feet are utilized for sales and  administration and
37,500 square feet are dedicated to  manufacturing,  material  control,  quality
control and the machine shop for prototype development.


     The InCirT division's  manufacturing and administration facility is located
in Tustin,  California,  under a sublease  (former  parent  company holds lease)
which expires December 31, 2001. The annual rental is approximately $126,700 per
year. The premises  consists of  approximately  120,300 sq. feet of which InCirT
subleases  approximately 24,500 sq. feet of which 2,000 sq. ft. are utilized for
sales and  administration  and 22,500 sq.ft. are dedicated to manufacturing  and
engineering.

     The Moto-sat  division's  sales and  engineering  facilities are located in
Salt Lake City,  Utah,  under a lease which expires  November 2000. The premises
contains  approximately  7,000 square feet of space all of which is utilized for
sales, research, development,  production and administration.  The annual rental
is approximately $30,000.

     The San Jose division's  manufacturing  and  administration  facilities are
located in San Jose,  California,  under a lease which expired June 30, 1996 and
was subsequently  rented on a month to month basis at approximately  $16,500 per
month.  The premises  contain 26,000 square feet of space, of which 3,000 square
feet are  utilized  for sales and  administration;  and 23,000  square  feet are
dedicated to manufacturing and engineering.

     In May 1996,  the Company  entered  into a lease to  relocate  the San Jose
Division  under a lease which  expires  December  2002.  The  premises  contains
approximately  49,560  square  feet of which the  Company  leases  approximately
35,400  square feet to be used for sales,  production  and  administration.  The
annual rental is approximately $344,000. The Division was to relocate in January
1997.  This  Division was  subsequently  sold and  management  intends to either
sublease the facility or assign its interest in the lease.



                                        8


<PAGE>






                            ITEM 3. LEGAL PROCEEDINGS


     No  proceedings  are pending  against the Company or any of its  properties
which,  if determined  adversely to the Company,  would have a material  adverse
effect on the Company's financial condition or results of operations



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



 None.


                                     PART II

                      ITEM 5. MARKET FOR COMMON EQUITY AND
                          RELATED STOCKHOLDERS MATTERS



     The common  stock and  warrants of the  Company are listed on the  National
Association of Securities Dealers,  Inc., Automated Quotation system ("Nasdaq"),
under the symbol "PENC" for the stock and "PENCW" for the  warrants.  The common
stock and warrants were first publicly traded on November 17, 1995.

     The  following  table  sets  forth  the  range of high and low bids for the
common stock of the Company during the periods indicated.

<TABLE>
<CAPTION>
                  Quarter Ended                               High Bid                  Low Bid
                  -------------                               --------                  -------
                  <S>                                         <C>                       <C>
                  December 31, 1995                            $ 6.50                    $ 5.25
                  March 31, 1996                                 6.13                      5.13
                  June 30, 1996                                  7.63                      4.50
                  September 30, 1996                             6.25                      2.75

</TABLE>


     On December 20, 1996, the closing  quotation for the common stock on NASDAQ
was $2.38 per share.  As of December 20, 1996,  there were  3,033,407  shares of
common stock issued and outstanding,  held by approximately  650 shareholders of
record, including several holders who are nominees for an undetermined number of
beneficial owners.

                                        9

<PAGE>



     The  following  table  sets  forth  the  range of high and low bids for the
warrants of the Company during the periods indicated.
<TABLE>
<CAPTION>

                  Quarter Ended                               High Bid                  Low Bid
                  -------------                               --------                  -------
                  <S>                                         <C>                       <C>
                  December 31, 1995                            $ 2.13                    $ 1.00
                  March 31, 1996                                 2.19                      1.00
                  June 30, 1996                                  2.75                      0.94
                  September 30, 1996                             1.94                      0.63
</TABLE>

     On December 20, 1996, the closing  quotation for the warrants on NASDAQ was
$ 0.64 per  warrant.  As of December  20, 1996,  there were  1,150,000  warrants
issued and outstanding.

     The  trading  volume of the common  stock and  warrants  of the  Company is
limited,  creating  significant changes in the trading price of the common stock
as a result of relatively minor changes in the supply and demand.  Consequently,
potential  investors  should  be aware  that the price of the  common  stock and
warrants in the trading market can change  dramatically  over short periods as a
result of factors  unrelated  to the earnings  and  business  activities  of the
Company.

     The Company has not paid any  dividends,  with  respect to common stock and
does not  anticipate  paying any  dividends  in the near future.  The  Company's
credit facility with National Bank of Canada  prohibits the payment of dividends
without the consent of the bank.




                  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION




     The following  discussion and analysis  provides certain  information which
the Company's management believes is relevant to an assessment and understanding
of the Company's  results of operations  and financial  condition for the fiscal
years ended  September 30, 1996 and 1995. This discussion and analysis should be
read  in  conjunction  with  the  Company's  financial  statements  and  related
footnotes.



                                        10

<PAGE>



 Results of Operations

     The acquisition of the net assets of InCirT Technology (InCirT),  which was
effective  as of  April  1,  1996  has been  accounted  for as a  purchase.  The
statement of operations  data for the year ended September 30, 1996 includes the
results of operations of InCirT for the period from April 1, 1996.

     The acquisition of the net assets of MOTO-SAT in 1996,  which was effective
as of January 1, 1996 has been  accounted  for as a purchase.  The  statement of
operations  data for the year ended  September  30, 1996 includes the results of
operations of MOTO-SAT for the period from January 1, 1996.


     The acquisition of the net assets of QIS in San Jose,  California (San Jose
Division) on March 24, 1995 has been accounted for as a purchase. The statements
of operations  data for the years ended  September 30, 1996 and 1995 include the
results of operations of QIS from March 24, 1995.


Net sales. Net sales for the Company  increased  approximately  67% for the year
ended  September 30, 1996  ("1996") as compared to the year ended  September 30,
1995  ("1995").  The  significant  increase  is  principally  the  result of the
inclusion of the recent  acquisitions  of the InCirT  Division  (April '96), San
Jose Division (March '95) and the MOTO-SAT  Division  (January '96).  There have
been no  material  increases  in the  prices  of any of the  Company's  products
between the two periods,  but due to  competitive  pressure and the emergence of
far east  competitors  the Company  has  reduced its prices to its large  volume
customers.   The  Company   anticipates  that  prices  will  remain  subject  to
competitive pressures in the foreseeable future which may prohibit a significant
price increase.

Cost of sales.  Cost of sales as a  percentage  of net sales  has  increased  to
approximately  90% in 1996 as  compared to 79% in 1995.  This  increase in costs
resulted primarily from the following  factors:  1) the recording of a series of
unusual  one-time  production  expenses;  2) the Salt  Lake  City  Division  has
increased its per hour wages due to an increased  demand for skilled workers and
a very low unemployment  rate in the area; the Salt Lake Division because of the
low  unemployment  and  availability  of  manpower  had to hire low  skilled and
untrained  employees,  which increased training costs,  created  inefficiency in
production and created  additional  costs in reworking  defective  products.  In
addition,  the low unemployment  rate caused an increase in entry level wages as
well as the trained  employees  wages in an effort to keep skilled labor. 3) the
InCirT  Division has  experienced a temporary shift in its product mix resulting
in an increase in low margin orders from several customers;  4) the Company also
adjusted its WIP  inventory at year end to reflect  inventory  obsolescence  and
required  adjustments in material rework and 5) the San Jose Division has seen a
sharp decease in its standard cable and harness orders due to a softening in the
market.  However,  as the decrease was thought to be temporary  the Division did
not reduce its indirect  support  personnel in anticipation of a market rebound.
This decision has effected the quarter and year-to-date margins in 1996.

                                       11

<PAGE>



     The  unusual  production   expenses  are  estimated  by  management  to  be
approximately  $395,000 and consist of labor  inefficiencies,  inventory  costs,
excessive material rework costs, severance,  finders fees, reorganization costs,
etc. The Company  continues to take steps to improve its gross profit  margin by
reorganizing its production  facilities improving training and also is currently
implementing  a new  manufacturing  software  package  to allow for more  timely
information to management. In addition the Company has responded to the changing
market by reducing the labor force,  reducing operating costs,  reducing general
and  administrative  costs and has made  efforts  to  transfer  more high  labor
products to its strategic contract manufacturer in China.

Operating  expenses.  Operating expenses in total as a percent of net sales have
remained relatively constant at about 12% for both years presented.  However, on
a dollar for dollar basis the Company has  proactively  increased  its sales and
marketing expenses to support the ever changing customer base resulting from the
recent  acquisitions  and  to  support  its  efforts  to  expand  into  a  total
interconnect  market place,  due to the additional costs in absorbing its recent
acquisitions and in being a first year public company.  The Company  experienced
increases in audit fees,  consulting,  legal fees,  insurance,  travel and other
operating  expenses.  These increased  costs did not allow any significant  cost
saving  in the  current  year in its  general  and  administrative  expenses  as
previously anticipated.

Other income and expenses. Other income and expenses have increased as a percent
of net sales  from 2.0% in 1995 to 2.2% in 1996.  This  percentage  increase  is
primarily  due to increases in reserves for bad debt,  warranty,  and  vacation.
These  increases were partly offset by savings in interest  expense as a percent
of net sales due to an  improved  interest  rate from an  average  of 3.25% over
prime in 1995 to 0.5% over prime since April of 1996. In addition, 1995 interest
expense included interest expenses  associated with the bridge loan used to fund
the QIS acquisition  which was repaid in November 1995 with some of the proceeds
received from the initial public offering.

Net earnings (loss) and earnings (loss) per share.  The Company  recorded a loss
of $709,010  ($0.26 per share) for 1996,  compared  to net  earnings of $617,618
($0.36 per share) for 1995.  The reasons for the loss in the current year are as
listed above. In addition the per share earnings are further reduced because the
Company  has issued an  additional  1,333,407  shares  since  September  1995 in
connection with its initial public  offering and the recent InCirT  acquisition,
resulting in additional weighted shares outstanding.

 Liquidity and Capital Resources

     The Company has historically financed its operations through operating cash
flow and lines of credit.  However,  on November 17, 1995, the Company completed
an initial public  offering  (IPO) which produced net proceeds of  approximately
$4.7  million  . This  offering  significantly  increased  the cash  and  equity
balances.  It also allowed the Company to retire the $1,600,000  debt associated
with the San Jose Division acquisition, and to purchase additional inventory and
equipment to support the increased production levels.

     Working capital increased from $126,710 at September 30, 1995 to $3,189,817
at September 30, 1996. The increase is principally due to the  acquisitions  and
the net proceeds received from the initial public offering.

                                       12

<PAGE>


     The  current  ratio  has  increased  from 1.0 at  September  1995 to 1.4 at
September 30, 1996. This significant  improvement is primarily the result of the
IPO and the acquisitions.

     Management believes that additional working capital may be required to meet
its  future  operating  costs,  for  business  expansion  opportunities  and  to
adequately support its China strategic manufacturing alliance in addition to its
existing cash balances,  borrowings available under the line of credit, and cash
generated  from  operations.  However,  there  can  be no  assurance  that  such
additional financing, if required, would be available on favorable terms.

 Inflation and Seasonality

     The  Company  does  not  believe  that  it  is  significantly  impacted  by
inflation.  Historically,  the  industry  sales  tend  to  decline  in  January,
February,  July and August when activity in the personal  computer industry as a
whole is reduced.  During the fourth  quarter,  the Company  experienced a sharp
downturn in the semi conductor capital equipment market,  slow down in purchases
and rescheduled orders in the telecommunication  industry.  These fourth quarter
changes have  significantly  effected the Company's sales and resulted in a loss
for both the fourth quarter of 1996 and a loss for 1996.




                          ITEM 7. FINANCIAL STATEMENTS



     The financial  statements and supplementary  data are included beginning at
page 19. See page 18 for the index to the financial statements.




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



         None.


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


     The  information  required is set forth  under the  captions  "Election  of
Directors,  Directors and Excecutive  Officer;  Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14A and is incorporated herein by reference.

                                       13

<PAGE>






                         ITEM 10. EXECUTIVE COMPENSATION



     The information  required is set forth under the caption  "Compensation  of
Executive  Officers" in the  Company's  definitive  Proxy  Statement to be filed
pursuant to Regulation 14A and is incorporated herein by reference.



          ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                                   MANAGEMENT



     The information required is set forth under the caption "Security Ownership
of Certain  Beneficial Owners and Management" in the Company's  definitive Proxy
Statement to be filed pursuant to Regulation 14A and is  incorporated  herein by
reference.




             ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



     The  information  required  is set forth  under the  caption  "Election  of
Directors - Certain  Relationships  and Related  Transactions"  in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A and is
incorporated herein by reference.




                    ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K



No reports on form 8-K were filed by the Company  during the three  months ended
September 30, 1996.

                                       14

<PAGE>


                                INDEX OF EXHIBITS

Exhibit No.           Description

1    Form of  Underwriter's  Warrant  Agreement  including Form of Underwriter's
     Warrant.  See  Registration  Statement  filed  on Form  SB-2,  SEC File No.
     33-96444


2    Plan  of  acquisition,   reorganization,   arrangement,   liquidation,   or
     succession: Not applicable.

3    Articles of incorporation and By-laws. See Registration  Statement filed on
     Form SB-2, SEC File No. 33-96444

10.1 Asset  Purchase  Agreement for the purchase of InCirT  Technology  from the
     Cerplex  Group,  Inc.  See Exhibit to report on Form 10-QSB  dated June 30,
     1996.

10.2 Employment  Agreement  between  James S.  Pendleton  and the  Company.  See
     Exhibit to report on Form 10-QSB dated June 30, 1996.

10.3 Employment  Agreement between Wayne R. Wright and the Company.  See Exhibit
     to report on Form 10-QSB dated June 30, 1996.

10.4 Employment  Agreement  between Robert D. Deforest Sr. and the Company.  See
     Exhibit to report on Form 10-QSB dated June 30, 1996.

10.5 Employment  Agreement  between Lewis Carl  Rasmussen  and the Company.  See
     Exhibit to report on Form 10-QSB dated June 30, 1996.

10.6 Employment Agreement between Alan L. Weaver and the Company. See Exhibit to
     report on Form 10-QSB dated June 30, 1996.

10.7 Loan and Security  Agreement dated February 29, 1996 between  National Bank
     of Canada and the Company. This filing page 47

10.8 Form of  Warrant  Agreement  to be  entered  into  between  Registrant  and
     American Stock Transfer & Trust Company.  See Registration  Statement filed
     on Form SB- 2, SEC File No. 33-96444

10.9 Asset  Purchase   Agreement  dated  March  22,  1995  between   Registrant,
     Insulectro,  Quality Interconnect  Systems,  Quintec Interconnect  Systems,
     Quintec Industries and QIS Electronics. See Registration Statement filed on
     Form SB-2, SEC File No. 33-96444

10.10Real Estate Lease dated June 2, 1993 between  Registrant  and The Equitable
     Life Insurance Society. See Registration  Statement filed on Form SB-2, SEC
     File No. 33-96444

                                       15

<PAGE>



10.11Form of 1995 Stock Option Plan. See  Registration  Statement  filed on Form
     SB-2, SEC File No. 33-96444

11   Statement re: computation of per share earnings. This filing page 78

27.  Financial Data Schedule.

                                       16


<PAGE>



                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                 PEN INTERCONNECT, INC.

                                 By:  /s/ James S. Pendleton
                                 James S. Pendleton,
                                 CEO and  Director


                                By: /s/ Wayne R. Wright
                                 Wayne R. Wright,
                                 CFO, Principal Accounting
                                 Officer and Director


                                By: /s/ Alan Weaver
                                 Alan Weaver,
                                 President



                                By: /s/ Steven Fryer
                                 Steven Fryer,
                                 Director



                                 By: /s/ C. Reed Brown
                                 C. Reed Brown
                                 Director


                                        17


<PAGE>


                          INDEX TO FINANCIAL STATEMENTS

                                                                    Page
PEN INTERCONNECT, INC.

Report of Independent Certified Public Accountants                     19

Financial Statements

    Balance Sheets as of September 30, 1996 and 1995                   20

    Statements of Operations for the Years Ended
        September 30, 1996 and 1995                                    22

    Statement of Stockholders' Equity for the Years Ended
        September 30, 1996 and 1995                                    23

    Statements of Cash Flows for the Years Ended
        September 30, 1996 and 1995                                    24

    Notes to Financial Statements                                      28



                                        18


<PAGE>


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Pen Interconnect, Inc.


We have audited the  accompanying  balance sheets of Pen  Interconnect,  Inc. (a
Utah Corporation), as of September 30, 1996 and 1995, and the related statements
of operations,  stockholders'  equity,  and cash flows for the years then ended.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Pen Interconnect,  Inc., as of
September 30, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended,  in  conformity  with  generally  accepted  accounting
principles.


                             /s/ Grant Thornton LLP

Salt Lake City, Utah
November 22, 1996



                                        19


<PAGE>



                             Pen Interconnect, Inc.

                                 BALANCE SHEETS

                                  September 30,


                                     ASSETS
<TABLE>
<CAPTION>

                                                                                      1996              1995
                                                                                ----------------  ----------

CURRENT ASSETS
<S>                                                                              <C>                  <C>
    Cash and cash equivalents                                                    $   169,445          $    376,488
    Receivables (Notes C and G)
        Trade accounts, less allowance for doubtful
            accounts of $273,852 in 1996 and $12,500
            in 1995                                                                4,259,298             2,192,368
        Current maturities of notes receivable
            (Notes D and M)
               Related party                                                              -                 13,894
               Other                                                                  37,494                13,433
    Income tax refund receivable (Note J)                                            228,241                    -
    Inventories (Notes E and G)                                                    6,198,392             3,362,394
    Prepaid expenses                                                                 386,494               135,789
    Deferred tax asset (Note J)                                                      525,800                33,000
                                                                               -------------         -------------

                    Total current assets                                          11,805,164             6,127,366


PROPERTY AND EQUIPMENT, AT COST
    (Notes G,H and I)
        Production equipment                                                       3,010,575             1,825,867
        Furniture and fixtures                                                       717,821               419,144
        Transportation equipment                                                      49,373                36,008
        Leasehold improvements                                                       354,150               340,429
                                                                                 -----------        --------------

                                                                                   4,131,919             2,621,448
        Less accumulated depreciation                                              1,065,205               815,614
                                                                                 -----------          ------------

                                                                                   3,066,714             1,805,834
OTHER ASSETS
    Notes receivable, less current maturities (Notes D and M)
            Related party                                                                 -                 33,417
            Other                                                                     19,630                39,905
    Deferred offering costs (Note O)                                                      -                294,158
    Goodwill                                                                       1,589,313                     -
    Other                                                                            176,097                50,143
                                                                                ------------         -------------

                                                                                   1,785,040               417,623
                                                                                 -----------          ------------

                                                                                 $16,656,918            $8,350,823
                                                                                 ===========            ==========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       20

<PAGE>


                             Pen Interconnect, Inc.

                           BALANCE SHEETS - CONTINUED

                                  September 30,


                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                                                      1996              1995
                                                                                ----------------  ----------

CURRENT LIABILITIES
<S>                                                                        <C>                       <C>
    Notes payable (Notes F and O)                                          $              -          $   1,600,000
    Line of credit (Note G)                                                        4,969,864             2,082,897
    Current maturities of long-term obligations
        (Note H)                                                                      19,265               199,200
    Current maturities of capital leases (Note I)                                     59,878                54,556
    Accounts payable                                                               2,954,601             1,443,395
    Accrued liabilities                                                              611,739               332,608
    Income taxes payable (Note J)                                                         -                288,000
                                                                          ------------------          ------------

                    Total current liabilities                                      8,615,347              6,000,656

LONG-TERM OBLIGATIONS, less current
    maturities (Note H)                                                               96,758               151,000

CAPITAL LEASE OBLIGATIONS, less current
    maturities (Note I)                                                              150,382               208,594

DEFERRED INCOME TAXES (Note J)                                                       225,800               194,000
                                                                                ------------           -----------

                    Total liabilities                                              9,088,287              6,554,250

COMMITMENTS AND CONTINGENCIES (Notes I
    and L)                                                                                -                     -

STOCKHOLDERS' EQUITY (Notes B,G,K,N, and O)
    Preferred stock, $0.01 par value, authorized
        5,000,000 shares, none issued                                                     -                     -
    Common stock, $0.01 par value, authorized
        50,000,000 shares, issued and outstanding
        3,033,407 shares in 1996 and 1,700,000 shares
        in 1995                                                                       30,334                17,000
    Additional paid-in capital                                                     7,431,669               963,935
    Retained earnings                                                                106,628               815,638
                                                                                ------------           -----------

                    Total stockholders' equity                                     7,568,631              1,796,573
                                                                                 -----------            -----------

                                                                                 $16,656,918             $8,350,823
                                                                                 ===========             ==========
</TABLE>

The accompanying notes are an integral part of these statements.


                                       21

<PAGE>


                             Pen Interconnect, Inc.

                            STATEMENTS OF OPERATIONS

                            Year ended September 30,

<TABLE>
<CAPTION>

                                                                                   1996                  1995
                                                                            ------------------     ----------

<S>                                                                           <C>                     <C>
Net sales (Note C)                                                            $   25,106,734          $ 15,021,839
Cost of sales                                                                     22,582,187            11,842,864
                                                                              --------------          ------------

            Gross profit                                                           2,524,547             3,178,975

Operating expenses
    Sales and marketing                                                            1,156,657               795,017
    General and administrative                                                     1,663,684               925,179
    Depreciation and amortization                                                    304,848               148,277
                                                                            ----------------        --------------

            Total operating expenses                                               3,125,189             1,868,473
                                                                             ---------------         -------------

            Operating income (loss)                                                 (600,642)            1,310,502

Other income (expense)
    Interest expense                                                                (513,956)             (332,787)
    Other income (expense) (Note M)                                                  (35,026)               30,903
                                                                          -------------------       --------------

            Total other income (expense)                                            (548,982)             (301,884)
                                                                            ----------------         -------------

             Earnings (loss) before
               income taxes                                                       (1,149,624)            1,008,618

Income taxes (benefit)  (Note J)                                                    (440,614)              391,000
                                                                           ------------------       --------------

            NET EARNINGS (LOSS)                                            $        (709,010)        $     617,618
                                                                           ==================        =============

Earnings (loss) per common share  - Primary                              $            (0.26)       $          0.36
                                                                         ===================       ===============

                                  - Fully dilutive                       $            (0.26)       $          0.36
                                                                         ===================       ===============


Weighted average common
    shares outstanding - Primary                                                   2,700,028             1,700,000
                                                                             ===============           ===========

                       - Fully dilutive                                           2,720,866             1,700,000
                                                                            ===============           ===========

</TABLE>

The accompanying notes are an integral part of these statements.


                                       22

<PAGE>




                             Pen Interconnect, Inc.

                        STATEMENT OF STOCKHOLDERS' EQUITY

                     Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>


                                                     Common stock         Additional
                                               Number                        paid-in      Retained
                                              of shares       Amount         capital      earnings          Total

<S>                                           <C>         <C>               <C>          <C>                <C>        
Balance at October 1, 1994                    1,200,000   $   12,000        $  718,935   $ 198,020          $   928,955
Common stock sold for cash
    (Note O)                                    500,000        5,000           245,000           -              250,000
Net                                                   -             -                -     617,618              617,618
                                         ------------------------------------------------------------------------------

Balance at September 30, 1995                1,700,000         17,000          963,935     815,638            1,796,573
Common stock sold in IPO
    (Note O )                                1,000,000         10,000        4,671,068           -            4,681,068
Common stock issued in acquisition
    (Note B)                                   333,407          3,334        1,796,666           -            1,800,000
Net loss                                             -             -                 -    (709,010)            (709,010)
                                        --------------------------------------------------------------------------------

Balance at September 30, 1996                3,033,407      $  30,334      $ 7,431,669   $ 106,628            $7,568,631
                                             =========================================   =========            ==========
</TABLE>


The accompanying notes are an integral part of this statement.


                                       23


<PAGE>



                             Pen Interconnect, Inc.

                            STATEMENTS OF CASH FLOWS

                            Year ended September 30,


<TABLE>
<CAPTION>

                                                                                   1996                  1995
                                                                            ------------------     ----------

Increase (decrease) in cash and cash equivalents
    Cash flows from operating activities
<S>                                                                          <C>                    <C>
        Net earnings (loss)                                                  $      (709,010)       $      617,618
        Adjustments to reconcile net earnings (loss)to net
            cash used in operating activities
               Depreciation and amortization                                         304,849               148,277
               Bad debts                                                              23,551                14,322
               Deferred income taxes                                                (176,900)               78,000
               Gain on sale of property and equipment                                     -                (19,000)
               Changes in assets and liabilities
                    Trade accounts receivable                                      1,362,345             (564,753)
                    Inventories                                                      781,724              (772,200)
                    Prepaid expenses                                                (239,471)              (32,932)
                    Other assets                                                     (95,530)                28,204
                    Deferred offering costs                                          294,158              (294,158)
                    Accounts payable                                              (2,308,412)               114,995
                    Accrued liabilities                                              199,016                194,170
                    Income taxes                                                    (800,341)               282,000
                                                                            -----------------         -------------

                        Total adjustments                                           (655,011)             (823,075)
                                                                             ---------------         --------------

                        Net cash used in operating activities                     (1,364,021)             (205,457)
                                                                            ----------------         -------------

    Cash flows from investing activities
        Purchase of property and equipment                                          (760,817)             (593,846)
        Acquisition of businesses                                                 (3,500,000)           (2,107,457)
        Proceeds from sale of property and
            equipment   -                                                             35,000
        Issuance of notes receivable                                                 (76,362)                   -
        Collections on notes receivable                                              119,887                38,456
                                                                            ----------------         -------------

                        Net cash used in investing
                            activities                                            (4,217,292)           (2,627,847)
                                                                            ----------------          ------------
</TABLE>

                                   (Continued)
                                       24

<PAGE>


                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended September 30,


<TABLE>
<CAPTION>

                                                                                   1996                  1995
                                                                            -------------------   -----------

    Cash flows from financing activities
<S>                                                                         <C>                   <C>
        Proceeds from notes payable                                                       -              1,925,488
        Principal payments on notes payable                                       (1,600,000)             (167,577)
        Proceeds from line of credit                                              19,701,401            17,204,792
        Principal payments on line of credit                                     (16,814,434)          (16,112,431)
        Principal payments on long-term obligations                                 (593,765)                   -
        Proceeds from sale of common stock                                         4,681,068               250,000
                                                                            ----------------        --------------

                        Net cash provided by
                            financing activities                                   5,374,270              3,100,272
                                                                             ---------------          -------------

                        Net increase (decrease) in cash
                            and cash equivalents                                    (207,043)               266,968

Cash and cash equivalents at beginning of year                                       376,488               109,520
                                                                            ----------------       ---------------

Cash and cash equivalents at end of year                                     $       169,445          $    376,488
                                                                             ===============          ============


Supplemental disclosures of cash flow information

    Cash paid during the year for
        Interest                                                            $        492,170           $   234,440
        Income taxes        428,538                                                   25,000

</TABLE>

Noncash investing and financing activities

     During the year ended  September  30, 1995  capital  lease  obligations  of
     $148,049 were incurred when the Company entered into leases for equipment.


                                   (Continued)

                                       25


<PAGE>



                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended September 30,

Acquisition of businesses

Effective  April 1, 1996,  the  Company  acquired  substantially  all assets and
assumed certain liabilities and the operations of InCirT Technology,  a division
of the Cerplex Group,  Inc. for $3.5 million in cash and 333,407 shares of stock
(Note B).  Assets  aquired  and  liabilities  assumed in  conjunction  with this
acquisition were as follows:
 <TABLE>
 <CAPTION>

<S>                                                                                                        <C>
       Accounts receivable (net)                                                                           $ 3,307,387
       Inventories                                                                                           3,311,416
       Prepaid expenses                                                                                          5,436
       Property and equipment                                                                                  705,899
       Other assets                                                                                             30,424
       Accounts payable                                                                                     (3,563,436)
       Accrued liabilities                                                                                     (33,906)
                                                                                                      -----------------

       Net assets acquired                                                                                   3,763,220

       Excess purchase price over net assets acquired allocated
           to goodwill                                                                                       1,536,780

       Purchase price                                                                                        5,300,000
       Less stock issued                                                                                     1,800,000
                                                                                                         -------------
       Total cash paid                                                                                    $  3,500,000
                                                                                                          ============
</TABLE>


Effective  January 1, 1996, the Company acquired selected net assets of Overland
Communications  (MOTO-SAT) (Note B). Assets acquired and liabilities  assumed in
conjunction with this acquisition were as follows:
<TABLE>
<CAPTION>

<S>                                                                                                        <C>
       Accounts receivable (net)                                                                           $   145,439
       Inventories                                                                                             306,306
       Prepaid and other assets                                                                                  5,798
       Furniture and equipment                                                                                  43,755
       Accounts payable                                                                                       (256,182)
       Accrued liabilities                                                                                     (46,209)
       Long term obligations                                                                                  (306,698)
                                                                                                           ------------
       Net liabilities assumed                                                                             $  (107,791)
                                                                                                           ============
</TABLE>

Excess  purchase  price over net assets  acquired  resulted  in  recognition  of
goodwill

                                   (Continued)
                                       26

<PAGE>


                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended September 30,

On March 24, 1995,  the Company  acquired  substantially  all assets and assumed
certain  liabilities  of Quintec  Interconnect  Systems for  approximately  $2.1
million (Note B). Assets  acquired and liabilities  assumed in conjunction  with
this acquisition were as follows:

<TABLE>
<CAPTION>

<S>                                                                                                       <C>
       Accounts receivable                                                                                $    705,010
       Inventories                                                                                           1,209,983
       Prepaid expenses                                                                                          6,400
       Deposits                                                                                                  5,300
       Property and equipment                                                                                  294,645
       Notes payable                                                                                           (32,322)
       Accounts payable                                                                                       (636,951)
                                                                                                            -----------

       Net assets acquired                                                                                   1,552,065

       Excess purchase price over net assets acquired allocated
           to inventory, property and equipment                                                                555,392

       Total cash paid                                                                                   $   2,107,457
                                                                                                         =============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       27

<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant  accounting  policies applied in the preparation of
the accompanying financial statements follows.

1.   Business activity

     Pen  Interconnect,  Inc.  (the Company) was  incorporated  on September 30,
     1985, in the State of Utah. The Company develops and produces, on a turnkey
     basis,  interconnections  solutions  for original  equipment  manufacturers
     ("OEMs") in the computer,  computer  peripheral and other computer  related
     industries,  such as the  telecommunications,  instrumentation  and testing
     equipment industries.  The Company's products connect electronic equipment,
     such as computers,  to various  external  devices  (such as video  screens,
     printers,   external  disk  drives,  modems,  telephone  jacks,  peripheral
     interfaces and networks) and connect  devices within the equipment (such as
     power supplies,  computer hard drives and PC cards).  Most of the Company's
     sales  consist  of  custom  cable   interconnections   developed  in  close
     collaboration with its customers.  The Company's  customers include OEMs of
     computers including mainframes,  desktops,  portables,  laptops, notebooks,
     pens and palmtops,  as well as, OEMs of computer peripheral  equipment such
     as modems, memory cards, LAN adapters, cellular phones, faxes and printers.
     Other customers  include OEMs of  telecommunications,  instrumentation  and
     testing equipment.

     The InCirT  Division is engaged in the  electronic  manufacturing  services
     industry (EMSI), and provides sophisticated ISO 9002-certified assembly and
     testing  services for complex  printed  circuit boards and  subsystems.  In
     addition,  the Company's  MOTO-SAT  Division is a manufacturer of satellite
     receiving systems for recreational vehicles.

2.   Inventories

     Inventories  consist  primarily  of cable,  components,  and boards and are
     valued at the lower of cost or market (first-in,  first-out  basis).  Costs
     include materials, labor, and overhead.


                                   (Continued)
                                       28

<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

3.   Property and equipment

     Property and equipment are recorded at cost. Expenditures for additions and
     major   improvements   are   capitalized.   Expenditures  for  repairs  and
     maintenance and minor improvements are charged to expense as incurred. When
     property or equipment is retired or otherwise disposed of, the related cost
     and accumulated depreciation are removed from the accounts. Gains or losses
     from retirements and disposals are recorded as other income or expense.

     Property and equipment are depreciated  over their estimated  useful lives.
     Leasehold  improvements  and  assets  financed  under  capital  leases  are
     amortized over their estimated useful lives or the lease term, whichever is
     shorter.  Depreciation and amortization are calculated using  straight-line
     and accelerated methods over the following estimated useful lives:

                                                                   Years
               Production equipment                                   5-10
               Furniture and fixtures                                  7
               Transportation equipment                               5-10
               Leasehold improvements                                 7-10

4.   Goodwill.

     The Company capitalized as goodwill,  the excess acquisition costs over the
     fair  value  of  net  assets   acquired,   in   connection   with  business
     acquisitions,  which costs are being  amortized on a  straight-line  method
     over 15 years. The carrying value of goodwill will be reviewed periodically
     based on the  undiscounted  cash  flows of the  entities  aquired  over the
     remaining amortization period. Should this review indicate that goodwill is
     impaired,  the Company's  carrying value of the goodwill will be reduced by
     the estimated shortfall of undiscounted cash flows.

5.   Income taxes

     The Company utilizes the liability method of accounting for income taxes as
     set  forth  in  Statement  of  Financial   Accounting  Standards  No.  109,
     "Accounting for Income Taxes".  Under the liability method,  deferred taxes
     are determined

                                   (Continued)



                                       29


<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

5.   Income taxes - Continued


     based on the  difference  between the financial  statement and tax bases of
     assets and  liabilities  and are measured using enacted tax rates that will
     be in effect when the  differences  are  expected to reverse.  An allowance
     against  deferred  tax assets is  recorded  when it is more likely than not
     that such tax benefits will not be realized.


6.   Revenue recognition

     Revenue is recognized upon shipment of products.

7.   Cash and cash equivalents

     For financial statement  purposes,  the Company considers all highly liquid
     investments  with an  original  maturity  of  three  months  or  less  when
     purchased to be cash equivalents.


8.   Warranties

     The Company's  standard  warranty is one year on parts and labor.  Warranty
     costs are accrued and expensed  when revenue is  recognized  based upon the
     Company's  experience with such costs.  Returns have been  insignificant to
     date.


9.   Research and development

     All research  expenditures  are charged against  operations as incurred and
     are not significant to the financial statements taken as a whole.

10.  Earnings (loss) per share

     Earnings  or loss per common and common  equivalent  share is  computed  by
     dividing  net  earnings  (loss)  by  the  weighted  average  common  shares
     outstanding during each year, including common equivalent shares (if

                                   (Continued)
                                       30

<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -  CONTINUED

10.  Earnings (loss) per share - Continued

     dilutive).  Common  equivalent  shares  include stock options and warrants.
     Common  stock  issued at prices  below the  offering  price of the  initial
     public  offering (Note O) have been included in the  calculation as if they
     were outstanding for all periods presented. All per share amounts have been
     retroactively  restated to reflect the  one-for-five  reverse  stock split,
     effective March 1995.

11.  Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that  affect the  reported  amounts  of  assets,  liabilities,
     revenues and expenses  during the reporting  period.  Estimates also affect
     the  disclosure of  contingent  assets and  liabilities  at the date of the
     financial  statements.  Actual  results could differ from these  estimates.
     Such  estimates of  significant  accounting  sensitivity  are allowance for
     doubtful acccounts.

12.  Accounting standards not yet adopted

     In October 1995, the Financial  Accounting Standards Board issued Statement
     of  Financial  Accounting  Standards  No. 123,  Accounting  for Stock Based
     Compensation (SFAS 123). The Company is required to adopt the provisions of
     this statement for years  beginning after December 15, 1995. This statement
     encourages,  but does not require, all entities to adopt a fair value based
     method  of  accounting   for  employee  stock  options  or  similar  equity
     instruments.  However,  it also  allows an entity to  continue  to  measure
     compensation  cost for  those  plans  using the  intrinsic-value  method of
     accounting  prescribed  by  Accounting  Principles  Board  Opinion  No. 25,
     Accounting  for Stock Issued to Employees  (APB 25).  Entities  electing to
     remain with the accounting in APB 25 must make pro forma disclosures of net
     income  and  earnings  per  share  as if the fair  value  based  method  of
     accounting  defined in this  statement  had been  applied.  It is currently
     anticipated that the Company will continue to measure compensation costs in
     accordance with APB 25 and provide the disclosures required by SFAS 123.




                                   (Continued)
                                       31

<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE B - ACQUISITIONS

       InCirT Technology

     Effective  April 1, 1996, the Company  entered into an agreement to acquire
     substantially all assets and assumed certain liabilities and the operations
     of InCirT  Technology,  a division  of the  Cerplex  Group,  Inc.  for $5.3
     million  comprised  of $3.5  million in cash and  333,407  shares of common
     stock.  The cash portion of the purchase price consisted of $2.5 million in
     additional  borrowing and $1 million in public offering funds. In addition,
     the Company will deliver to Cerplex  .09261  shares of its common stock for
     every dollar of past due over 90 days accounts  receivable of ICT collected
     by the Company during the first 180 days after the date of the  acquisition
     closing up to a maximum of 55,568 shares of common stock.  This transaction
     was  accounted for using the purchase  method of accounting  and the excess
     purchase  price  over  fair  value  of  net  tangible  assets  acquired  of
     $1,536,780 is being  amortized over 15 years.  The results of operations of
     the acquired business have been included in the financial  statements since
     the effective date of acquisition.

       MOTO-SAT

     Effective  January 1, 1996 the  Company  acquired  the  assets of  Overland
     Communication,  Inc. dba MOTO-SAT by assuming  that  company's  net debt of
     $107,791  and  offering   future  stock   distributions   contingent   upon
     achievement  of  performance  milestones.  MOTO-SAT  is a  manufacturer  of
     satellite receiver systems for recreational vehicles.  This transaction was
     accounted  for using the purchase  method of  accounting;  accordingly  the
     purchased  assets and liabilities have been recorded at their fair value at
     the date of  acquisition.  The excess purchase price over fair value of net
     liabilities  assumed of  $107,791  is being  amortized  over 15 years.  The
     results of  operations  of the acquired  business have been included in the
     financial statements since the effective date of acquisition.


                                   (Continued)


                                       32


<PAGE>




                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE B - ACQUISITIONS - CONTINUED


        Quintec Interconnect Systems

     Effective March 24, 1995, the Company acquired substantially all assets and
     assumed  certain  liabilities  and the  operations of Quintec  Interconnect
     Systems (QIS) for $2,107,457 including acquisition costs for $107,457. This
     transaction  was  accounted  for using the purchase  method of  accounting;
     accordingly  the  purchased  assets and  liabilities  have been recorded at
     their  estimated  fair  value at the date of  acquisition.  The  results of
     operations  of the acquired  business  have been  included in the financial
     statements since the date of acquisition.

       Pro forma results of operations

     Assuming  all  of the  acquisitions  described  above  had  occured  at the
     beginning of each period presented below, the Company's unaudited pro forma
     condensed results of operations,  exclusive of nonrecurring charges,  would
     have been approximately as follows:

                                               (amounts in thousands,
                                                   except share data)
                                               Year  ended September 30,
                                                   1996            1995
         Net sales                             $ 32,917         $ 31,917
         Operating income (loss)                   (447)           3,321
         Net earnings (loss)                       (708)           1,547
         Earnings (loss) per share                (0.18)            0.76


     The unaudited pro forma condensed results of operations are not necessarily
     indicative  of the actual  results  that would have been  achieved  had the
     aforementioned  acquisitions  taken  place at the dates set forth above and
     are not necessarily indicative of future results.


                                       33


<PAGE>




                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE C - MAJOR CUSTOMERS AND CREDIT CONCENTRATION


     Financial  instruments,  which  potentially  subject  the Company to credit
     risk, consist primarily of trade accounts receivable.  The Company sells to
     customers  in  the  computer,   computer  peripheral,   telecommunications,
     instrumentation  and testing equipment  industries  located  throughout the
     United States. Sales have historically been concentrated with several large
     original  equipment  manufacturers  (OEMs)  on a turnkey  basis.  To reduce
     credit  risk  the  Company  performs  ongoing  credit  evaluations  of  its
     customers'  financial  condition and generally does not require collateral.
     The  majority  of its  trade  receivables  are  unsecured.  Allowances  are
     maintained  for potential  credit  losses.  The resulting  losses have been
     insignificant to date and have been within management's expectations.

     Revenue  from  shipments  in fiscal 1996 and 1995 to the largest  customers
     (representing over 10% of sales) are as follows:

                                       1996                     1995
                                       ----                     ----

            Customer A                 16%                       23%
            Customer B                  n/a                      19%
            Customer C                  n/a                      12%

     At September  30, 1996,  the Company had accounts  receivable  due from the
     largest OEM representing about 7% of receivables as well as a select number
     of other OEMs.  Remaining trade accounts  receivable at September 30, 1996,
     were due from a variety of other customers under normal credit terms.



                                       34


<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE D - NOTES RECEIVABLE


       Notes receivable consist of the following:
<TABLE>
<CAPTION>

                                                                                    1996                 1995
                                                                              ---------------      ----------
<S>                                                                           <C>                  <C>
            10% note receivable from a company, due
               in monthly payments of $1,500 includ-
               ing interest, collateralized by inventory,
               accounts receivable, machinery, and
               equipment                                                            $37,630               $44,028

            10%note  receivable  from a company,  due in monthly  payments  of $
               1,297 including interest,  collateralized by inventory,  accounts
               receivable, machinery, and
               equipment                                                             13,612                    -


            12% notes receivable from two companies,
               due in monthly payments aggregating
               $1,000 including interest                                              5,882                 9,310

            10% note receivable from an officer/stock-
               holder due in monthly payments of
               $1,500 including interest                                                 -                 47,311
                                                                             --------------             ---------


                                                                                     57,124               100,649
            Less current maturities                                                  37,494                27,327
                                                                              -------------         -------------

                                                                              $      19,630          $     73,322
                                                                              =============          ============



NOTE E - INVENTORIES

       Inventories consist of the following:
                                                                                   1996                  1995
                                                                              ---------------      ----------

            Raw materials                                                       $ 3,780,800           $ 1,788,640
            Work-in-process                                                       1,830,891             1,395,241
            Finished goods                                                          586,701               178,513
                                                                               ------------         -------------

                                                                                 $6,198,392            $3,362,394
                                                                                 ==========            ==========
</TABLE>



                                       35


<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE F - NOTES PAYABLE


     During  March  1995,  certain  investors,  in  connection  with  a  private
     placement (Note Q), loaned the Company $1,600,000.  The loans are unsecured
     and bear  interest  at the rate of 8% per annum.  These  notes and  related
     interest  were  paid in  full  upon  successful  completion  of the  public
     offering in November, 1995.


NOTE G - CREDIT FACILITY

     On April 8, 1996, the Company  completed a new 3 year  financing  agreement
     with a bank for a $6 million  revolving  line of credit  with  interest  at
     one-half  (.5)  percent  over  the  prime  rate.  The  line  of  credit  is
     collateralized by accounts receivable,  inventory,  property and equipment.
     This agreement  requires that the Company maintain certain financial ratios
     and  meet  specified   minimum   levels  of  total  assets,   earnings  and
     restrictions  on the  payments  of  dividends.  Because the Company did not
     comply with certain of these requirements,  the bank exercised its right to
     increase  the interest  rate to 2.5% over prime  (10.75 % at September  30,
     1996)  until  such  time as these  requirements  are met.  This new line of
     credit  replaced  the previous  $3,000,000  revolving  line of credit.  The
     Company has borrowed  $4,969,864  under the new line of credit at September
     30, 1996 (the Company still has $1,030,136  available under the line). As a
     result of the Company's failure to meet these  requirements the Company was
     in default under the loan  agreement.  The lender has waived these defaults
     as of September 30, 1996.


     During  1995 and part of 1996,  the Company  had a credit  facility  with a
     financing company which consisted of a line of credit and a long-term note.

     At September  30,  1995,  the Company had a  $3,000,000  revolving  line of
     credit with interest at a base rate plus 3.25% (12.00% at September  1995),
     payable  monthly.  The Company had  borrowed  $2,082,897  under the line of
     credit at September  30, 1995.  Advances on the line of credit were limited
     to 80% of qualified accounts receivable and 35% of eligible inventory.  The
     line  of  credit,   which  was   collateralized  by  accounts   receivable,
     inventories, property and equipment, was paid in full during 1996.


                                       36


<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE H - LONG-TERM OBLIGATIONS

       Long-term obligations consist of the following:

<TABLE>
<CAPTION>

                                                                                     1996                 1995
                                                                                --------------       ---------
<S>                                                                             <C>                  <C>
            Note to an individual with interest imputed
               at 10% per annum, payable in monthly
               payments of $2,500.                                                $ 116,023          $          -


            Prime plus 3.25% (12% at September  30,  1995),  note to a financial
               institution  payable, in 35 monthly installments of $5,000 with a
               balloon payment of $125,000 due on August 1, 1997, plus interest,
               collateralized by substantially all of the Company's property and
               equipment and substantially all personal
               assets of the Company's president                                         -                350,200
                                                                              -------------              --------

                                                                                    116,023               350,200
               Less current maturities                                               19,265               199,200
                                                                                   --------              --------

                                                                                   $ 96,758              $151,000
                                                                                   ========              ========
</TABLE>

                                   (Continued)


                                       37


<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE H - LONG-TERM OBLIGATIONS - CONTINUED

     Maturities of long-term obligations are as follows:

               Year ending
               September 30,
               1997                                  $ 19,265
               1998                                    21,282
               1999                                    23,511
               2000                                    25,973
               2001                                    25,992
               thereafter                                  -
                                                ------------

                                                     $116,023
NOTE I - LEASES

1.   Operating leases

     The Company conducts a portion of its operations in leased facilities under
     noncancelable  operating  leases  expiring  through 2001. In addition,  the
     Company leases  equipment  under  noncancelable  operating  leases expiring
     through 1999. The minimum future rental  commitments under operating leases
     are as follows:

<TABLE>
<CAPTION>

                 Year ending
                    September 30,                                   Facilities      Equipment            Total
                 <S>                                                                    <C>              <C>                <C>
                      1997                                             $617,634         $327,197           $944,831
                      1998                                              659,622          186,200            845,822
                      1999                                              522,030          170,883            692,913
                      2000                                              510,124               -             510,124
                      2001                                              138,144               -             138,144
                   Thereafter                                                -                -                 -
                                                                  -------------      -----------     ------------

                                                                     $2,447,554         $684,280         $3,131,834
                                                                     ==========         ========         ==========
</TABLE>

     Rental expense for all operating  leases is $ 402,873 and $ 155,989 for the
     years ended September 30, 1996 and 1995, respectively.

                                   (Continued)
                                       38

<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

NOTE I - LEASES - CONTINUED

       2.   Capital leases

       Maturities of capital lease obligations are as follows:

        Year ending
        September 30,
        1997                                                            $ 80,136
        1998                                                              80,136
        1999                                                              67,457
        2000                                                              20,272
    Thereafter                                                                -

   Total minimum lease payments                                          248,001
   Less amount representing interest                                      37,741

   Present value of net minimum lease
      payments                                                           210,260
   Less current portion                                                   59,878
                                                                        $150,382

     Included in property and  equipment is $307,657 of equipment  under capital
     leases at  September  30, 1996.  The related  accumulated  amortization  is
     $59,165.

NOTE J - INCOME TAXES (BENEFIT)

       Components of income taxes (benefit) are as follows:

                                            1996                   1995
                                        -------------          --------

            Current
               Federal                    $  (226,000)           $  263,000
               State                          (37,714)               50,000
                                         -------------             --------

                                             (263,714)              313,000
                                          ------------              -------
            Deferred
               Federal                       (152,100)               66,000
               State                          (24,800)               12,000
                                         -------------             --------

                                             (176,900)               78,000
                                        --------------             --------

            Income taxes (benefit)        $  (440,614)             $391,000
                                          ============             ========

                                   (Continued)


                                       39


<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE J - INCOME TAXES (BENEFIT) - CONTINUED


     Reconciliation of income taxes (benefit)  computed at the federal statutory
     rate and the income tax expense are as follows:
<TABLE>
<CAPTION>

                                                                                  1996                   1995
                                                                              -------------          --------
<S>                                                                              <C>                    <C>
            Federal income taxes at statutory rate                               $ (402,370)            $ 343,000

            State income taxes, net of federal benefit                              (38,244)               41,000

            Nondeductible expenses                                                       -                  7,000
                                                                            ---------------             ---------

                                                                                 $ (440,614)            $ 391,000
                                                                                 ===========            =========

       Deferred tax assets and liabilities consist of the following:

                                                                                        1996              1995
                                                                                  -------------     ----------
            Deferred tax assets (liabilities)
                 Accumulated depreciation                                            $(225,800)         $(194,000)
                 Net operating loss                                                    284,100                 -
                 Reserve for inventory obsolescence                                     92,100             11,000
                 Allowance for doubtful accounts                                       108,900              5,000
                 Reserve for warranties                                                 14,200              9,000
                 Reserve for vacation                                                   26,500              8,000
                                                                                   -----------        -----------

            Net deferred tax asset (liability)                                       $ 300,000        $  (161,000)
                                                                                     =========        ===========
</TABLE>


NOTE K - EMPLOYEE STOCK OWNERSHIP PLAN

     During 1986,  the Company  established  a  noncontributory  Employee  Stock
     Ownership  Plan (the ESOP) for all employees who have completed one year of
     service with the Company.  Contributions  to the ESOP, which are determined
     by  the  Company's  Board  of  Directors,  are  not  to  exceed  25% of the
     compensation of the plan's participants. No contributions have been made to
     the ESOP since  1989.  The ESOP owns 63,771  shares of common  stock of the
     Company which are held in a trust, the trustees of which are also directors
     of the Company.  Distributions  of account  balances to participants of the
     ESOP are only made upon the death, disability, or termination of employment
     of the participant.




                                       40


<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE L - COMMITMENTS AND CONTINGENCIES

1.   Employment agreements

     The  Company has  entered  into  agreements  with five key  officers  which
     provide for annual salaries and incentive  bonuses.  Incentive  bonuses are
     calculated as a percentage of gross profits and/or sales.

     Annual salaries under these employment agreements are as follows:

                 Year ending
                    September 30,

                      1997                       $  550,600
                      1998                          550,600
                      1999                          550,600
                      2000                          550,600
                      2001                          137,650
                      Thereafter                         -
                                           ---------------

                                                 $2,340,050

2.   Litigation

     From time to time the Company is engaged in various lawsuits or disputes as
     plaintiff or  defendant  arising in the normal  course of business.  In the
     opinion of management,  based upon advice of counsel,  the ultimate outcome
     of these matters will not have a material impact on the Company's financial
     position or results of operations.


NOTE M - RELATED PARTY TRANSACTIONS

     During 1989, the Company loaned to its Chairman and Chief Executive Officer
     $370,335.  The note bears interest at 10%. The balance of the loan was zero
     and  $47,311 as of  September  30,  1996 and 1995,  respectively.  Interest
     income  received was $ 5,006 and $7,846 for the years ended  September  30,
     1996 and 1995, respectively.

     During the year ended September 30, 1995, the Company  guaranteed  personal
     indebtedness  of its Chairman and CEO in the maximum amount  outstanding at
     any one time of $180,000.  This indebtedness was paid in full during fiscal
     year 1996 and the guarantee removed.

                                       41

<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS



NOTE N - STOCK OPTION PLAN


     During  March 1995 the  Company  adopted  the Pen  Interconnect  1995 Stock
     Option Plan (the Option Plan). The Option Plan provides for the granting of
     both  Incentive  Stock Options  (ISOs) or  Non-Qualified  Options (NQOs) to
     purchase not more than 270,000 shares of common stock.  ISOs are granted at
     not less than market value on the date of grant whereas NQOs may be granted
     at not less  than 85% of  market  value on date of  grant.  Options  may be
     granted under the Option Plan to all officers,  directors, and employees of
     the Company. In addition,  NQOs may be granted to other parties who perform
     services  for the  Company.  During  October  1995,  the Board of Directors
     authorized  the granting of options to acquire  255,000  shares of stock at
     $6.00 per share.  The options vest at 20% per year  beginning one year from
     the date of the grant. No options are currently exercisable.


NOTE O - STOCK TRANSACTIONS


1.   Stock split

     During March 1995,  the Board of  Directors  and  shareholders  approved an
     increase in the  authorized  number of shares from 6,000,000 to 50,000,000.
     Also in March  1995,  the Company  effected a  one-for-five  reverse  stock
     split.  All per share and weighted average share amounts have been restated
     to reflect the reverse stock split.

2.   Stock issued


     In October 1994, the Company sold 500,000 shares of common stock at a price
     of $0.50 per share including 47,000 shares to an officer.




                                   (Continued)


                                       42


<PAGE>


                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE O - STOCK TRANSACTIONS - CONTINUED


3.   Preferred stock

     The  Company is  authorized  to issue  5,000,000  shares of $0.01 par value
     preferred  stock.  The Board of Directors is  authorized to provide for the
     issuance  of the  preferred  stock  in one or  more  series  and to fix the
     designations, powers, preferences, and rights of any such series. No shares
     have been designated or issued.

4.   Private placement

     In March 1995, the Company  completed a private  placement of 32 Units (the
     Bridge Units). Each Bridge Unit consists of an unsecured promissory note in
     the principal  amount of $50,000  (total of  $1,600,000)  (Note F), bearing
     interest at an annual rate of 8%, and warrants to acquire  50,000 shares of
     common  stock at $6.50 per share (the  Bridge  Warrants),  expiring in five
     years.  The notes and related  interest  were paid in full upon  successful
     completion  of the  offering  in  November,  1995.  The terms of the Bridge
     Warrants   included  in  the  Bridge  Units  are   identical  to  and  were
     automatically  converted into a number of similar  warrants  offered in the
     initial public offering.

5.   Initial public offering

     On November 17, 1995, the Company successfully  completed an initial public
     offering  of  1,000,000  shares of common  stock and  1,000,000  redeemable
     common stock purchase warrants for $6,100,000 ($6.00 per share and $.10 per
     warrant) less  underwriting  commissions  and other expenses of $1,418,932.
     Each warrant was immediately exercisable and entitled the registered holder
     to  purchase  one share of common  stock at a price of $6.50 and expires on
     November 17, 2000. The outstanding  warrants may be redeemed by the Company
     upon 30 days'  written  notice  at $0.05  per  warrant,  provided  that the
     closing bid quotations of the common stock have averaged at least $9.00 per
     share for a period of any 20 trading  days ending on the third day prior to
     the day on which the Company gives notice.




                                   (Continued)



                                       43


<PAGE>



                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

5.   Initial public offering - Continued


     In connection with the offering,  the Company granted the  underwriters the
     right to  purchase  up to  100,000  shares  of  common  stock  and  100,000
     warrants.  The  underwriter  was also granted an  over-allotment  option of
     150,000  shares of common stock and/or  warrants to purchase an  additional
     150,000  shares  of  common  stock.  In  December  1995,  the  underwriters
     exercised  the option on the 150,000  warrants.  The option to purchase the
     150,000  shares of common  stock  has  expired.  The  Company  has  granted
     registration  rights to certain  stockholders of the Company and has agreed
     to bear the cost associated therewith within certain limits.

NOTE P - SUBSEQUENT EVENT

       Sale of Division

     Effective November 1, 1996, the Company sold all of the net assets totaling
     approximately  $650,000  used  by it in  the  operations  of its  San  Jose
     Division to Touche  Electronics,  Inc., a subsidiary  of TMCI  Electronics,
     Inc. The Company will recognize a gain after tax of approximately  $450,000
     on this transaction.

     The sales price was $3,300,000;  consisting of $2,000,000 in cash, $900,000
     in promissory  notes, and 53,669 shares of TMCI common stock with an agreed
     upon guaranteed value of $400,000.  In addition,  the Company has the right
     to receive  $700,000 in  contingent  earn outs for a  potential  total sale
     price of $4,000,000. The Company originally purchased the Division in March
     1995 for approximately $2,200,000.  As part of the transaction,  Touche and
     TMCI also assumed certain liabilities associated with the operations of the
     Division.

     The $900,000 in promissory  notes are comprised of two promissory  notes in
     the amounts of $400,000 and $500,000, respectively. The $400,000 promissory
     note bears  interest at one-half of one percent above the prime rate and is
     to be fully amortized and paid monthly over a 24 month period. The $500,000
     promissory note bears interest at the rate of one-half of one percent above
     the prime rate, is amortized over a 48 month period and is payable  monthly
     with the entire balance coming due on October 31, 1999.

                                   (Continued)


                                       44


<PAGE>




                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE P - SUBSEQUENT EVENT - CONTINUED

     The Company also has the right to receive up to $700,000 of contingent earn
     outs. These contingent earn outs are described as follows:

     1. Accounts  Receivable  Over 120 Days.  The Company is entitled to receive
     .13417  shares of TMCI common  stock for every $1 of past due over 120 days
     accounts receivable of the Division as of October 31, 1996 collected within
     180 days of the closing  date, up to a maximum of 13,417 shares of stock or
     $100,000.

     2.  Division  Earnings.  The  Company has the right to receive up to 80,503
     shares of TMCI  common  shares  or cash  equivalent  at the  option of TMCI
     contingent upon the earnings of the Division. To the extent the earnings of
     the  Division,  determined  before  interest,  income  taxes and  corporate
     overhead allocations, exceed $800,000 in any one year, the Company shall be
     entitled to receive such excess on a dollar for dollar basis in the form of
     TMCI  common  shares  valued at $7.4532  per share  until the  Company  has
     received  up to  $600,000 in the  aggregate  worth of TMCI common  stock or
     80,503 shares or cash equivalent at the option of TMCI. The Company has the
     right to earn these shares during the calendar years 1997 through 2000.

     The net assets  sold by the  Company  include all of the assets used by the
     Division  in its  operations  including,  but not  limited  to,  inventory,
     accounts  receivable,  furniture,  fixtures and equipment,  customer lists,
     intellectual  property  and the  assumption  of accounts  payable and other
     liabilities.

     The sales price for the Division was determined on the basis of arms-length
     negotiations between the Company,  Touche and TMCI and was based in a large
     part on the earnings and net assets of the Division.  There was no material
     relationship between the Company and TMCI prior to the acquisition however,
     the registrant leased space and sold product to Touche in the normal course
     of business.

                                   (Continued)


                                       45


<PAGE>




                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS


NOTE P - SUBSEQUENT EVENT - CONTINUED

     The following unaudited pro forma information shows the condensed operating
     results for the years  presented as though the  Company's San Jose Division
     had been sold at the beginning of the earliest period presented:
<TABLE>
<CAPTION>
                                                                                              (amounts in thousands,
                                                                                                  except share data)
                                                                                             Year ended September 30 ,
                                                                                             ------------------------
                                                                         1996                            1995
                                                                        -------                          ----
<S>                                                                      <C>                              <C>
       Net sales                                                         $18,205                          $11,702
       Operating income (loss)                                           (1,423)                              507
       Net earnings (loss)                                               (1,003)                              227
       Earnings (loss) per share                                          (0.37)                             0.13
</TABLE>

     The unaudited pro forma  information is not  necessarily  indicative of the
     actual results that would have occurred had the  aforementioned  sale taken
     place at the beginning of the earliest period set forth above.



                                       46

<PAGE>




                                                                   EXHIBIT 10.7
                           LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY  AGREEMENT  made this 29th day of February,  1996 by
and between NATIONAL BANK OF CANADA, a Canadian chartered bank ("Lender"),  with
an address at One Tabor Center, 1200 17th Street,  Suite 2760, Denver,  Colorado
80202, and PEN INTERCONNECT,  INC., a Utah corporation,  with an address at 2351
South 2300 West, Salt Lake City, Utah 84119 ("Borrower"),

                                                    WITNESSETH:

     WHEREAS,  the  parties  wish to provide for the terms and  conditions  upon
which Loans may be made, and Letters of Credit may be issued, for the account of
Borrower;

     NOW, THEREFORE, in consideration of any Loans made and/or Letters of Credit
issued  for  the  account  of   Borrower,   and  for  other  good  and  valuable
consideration,  the receipt and sufficiency of which are hereby  acknowledged by
Borrower, the parties agree as follows:

         I .    DEFINITIONS.

     (a) "Account," "Account Debtor," "Chattel Paper," "Documents," "Equipment,"
"General  Intangibles,"  "Goods,"  "Instruments"  and "Inventory" shall have the
respective meanings assigned to such terms, as of the date of this Agreement, in
the  Uniform  Commercial  Code as in  effect  from  time to time in the State of
Colorado.

     (b) "Affiliate"  shall mean any Person directly or indirectly  controlling,
controlled by or under common control with another Person.

     (c) "Agreement" shall mean this Loan and Security  Agreement,  any exhibits
or  schedules  hereto,  any  concurrent  or  subsequent  riders  hereto  and any
extensions, supplements, amendments or modifications hereto.

     (d) "Blocked  Account"  shall have the meaning  specified in paragraph 8(a)
hereof.

     (e)  "Collateral"  shall mean all of the property of Borrower  described in
paragraph  5  hereof,  together  with all other  real or  personal  property  of
Borrower  now or hereafter  pledged to Lender to secure  repayment of any of the
Liabilities,  including  without  limitation  all Accounts,  Inventory,  General
Intangibles and Equipment of Borrower.

     (f) "Collateral  Report" shall have the meaning specified in paragraph 9(a)
hereof.

                                       47

<PAGE>



     (g) "Eligible  Accounts"  shall mean those  Accounts of Borrower  which are
unpaid less than ninety (90) days from  invoice  date,  and which  Lender in its
sole discretion determines to be eligible. Without limiting Lender's discretion,
unless  otherwise agreed by Lender,  the following  Accounts of Borrower are not
Eligible Accounts: (i) all Accounts owing by a single Account Debtor,  including
currently  scheduled  Accounts,  if  twenty-five  percent  (25%)  or more of the
balance owing by such Account  Debtor to Borrower is ineligible  for any reason;
(ii) Accounts with respect to which the Account Debtor is an officer,  director,
employee,  Subsidiary or Affiliate of Borrower;  (iii)  Accounts with respect to
which the  Account  Debtor is the United  States of  America or any  department,
agency or instrumentality  thereof, unless Borrower assigns its right to payment
of such  Accounts  to Lender  pursuant  to,  and in full  compliance  with,  the
Assignment  of Claims Act of 1940,  as amended;  (iv)  Accounts  with respect to
which the Account  Debtor is not a resident  of the  continental  United  States
unless (A) the Account Debtor has supplied  Borrower with an irrevocable  letter
of credit,  in form and  substance  satisfactory  to Lender,  issued by a United
States financial institution satisfactory to Lender, to cover the full amount of
such  Account,  and such letter of credit is assigned and delivered to Lender or
(B) such Accounts are insured by a policy of insurance satisfactory to Lender in
its sole  discretion;  (v)  Accounts  in  dispute  or with  respect to which the
Account Debtor has asserted or may assert a counterclaim  or has asserted or may
assert a right of setoff;  (vi)  Accounts  with respect to which the prospect of
payment  or  performance  by the  Account  Debtor  is or  will be  impaired,  as
determined by Lender in the exercise of its sole discretion; (vii) Accounts with
respect to which Lender does not have a first and valid fully perfected security
interest;  (viii)  Accounts  with  respect  to which the  Account  Debtor is the
subject  of  bankruptcy  or a  similar  insolvency  proceeding  or has  made  an
assignment  for the benefit of creditors or whose assets have been conveyed to a
receiver or trustee;  (ix) Accounts  with respect to which the Account  Debtor's
obligation to pay the Account is conditional upon the Account Debtor's  approval
or is otherwise  subject to any prepurchase  obligation or return right, as with
sales  made  on a  bill-and-hold,  guaranteed  sale,  sale-and-  retum,  sale on
approval  or  consignment  basis;  (x)  Accounts  to the extent that the Account
Debtor's indebtedness to Borrower exceeds a credit limit determined by Lender in
Lender's  discretion;  (xi) Accounts with respect to which the Account Debtor is
located in New Jersey unless Borrower has received a certificate of authority to
do  business  and is in good  standing  in New  Jersey  or has filed a Notice of
Business Activities Report with the New Jersey Division of Taxation for the then
current year;  (xii)  Accounts which arise out of sales not made in the ordinary
course of Borrower's business; (xiii) Accounts with respect to which the Account
Debtor has returned to Borrower any portion of the  Inventory  the sale of which
gave  rise to such  Accounts;  and  (xiv)  Accounts  with  respect  to which any
document or  agreement  executed or delivered in  connection  therewith,  or any
procedure used in connection  with any such document or agreement,  fails in any
material respect to comply with the requirements of applicable law.

                                       48

<PAGE>


     (h) "Eligible  Inventory" shall mean Inventory of Borrower of raw materials
and  finished  goods  which  Lender  in its  sole  discretion  determines  to be
eligible.  Without  limiting  Lender's  discretion,  unless  otherwise agreed by
Lender,  the  following  Inventory  of Borrower is not Eligible  Inventory:  (i)
Inventory which is in transit; (ii) Inventory which is not in good condition, or
not currently usable or currently  saleable in the ordinary course of Borrower's
business;  (iii)  Inventory  which is  obsolete;  (iv)  Inventory  which  Lender
determines,  in the exercise of its sole  discretion,  to be unacceptable due to
age, type, category and/or quantity;  (v) Inventory with respect to which Lender
does  not  have a first  and  valid  fully  perfected  security  interest;  (vi)
Inventory consisting of work-in-progess,  packaging materials or supplies; (vii)
Inventory  which  is  stored  with  or  located  on the  premises  of a  bailee,
consignee,  warehouseman,  processor or other third party;  and (viii) Inventory
which is not located at an address described forth on Exhibit A.

     (i) "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.

     0) "Event of Default"  shall have the meaning  specified  in  paragraph  13
hereof.

     (k) "Increased  Amount" shall have the meaning  specified in paragraph 2(a)
hereof.

     (1)  "Indemnified  Party" shall have the meaning  specified in paragraph 15
hereof.

     (m) "Initial  Amount"  shall have the meaning  specified in paragraph  2(a)
hereof.

     (n) "Letters of Credit"  shall mean any Letter of Credit which shall now or
hereafter  be issued by Lender at the  request  and for the  account of Borrower
pursuant to the terms of this Agreement.

                                       49

<PAGE>


     (o)  "Liabilities"  shall  mean any and all  obligations,  liabilities  and
indebtedness  of  Borrower  to Lender or to any  Affiliate  of Lender of any and
every kind and nature,  howsoever  created,  arising or evidenced  and howsoever
owned, held or acquired,  whether now or hereafter existing,  whether now due or
to  become  due,  whether  primary,  secondary,   direct,  indirect,   absolute,
contingent  or  otherwise   (including   without   limitation   obligations   of
performance),  whether several,  joint or joint and several, and whether arising
or existing  under written or oral  agreement or by operation of law,  including
without  limitation all  obligations for payment of the Loans and for payment of
the  reimbursement  obligations  under paragraph 2(b) hereof with respect to the
Letters of Credit.

     (P) "Loan" or "Loans"  shall mean all  advances  made by Lender to Borrower
pursuant to paragraph 2(a) hereof.

     (q) "Loan  Availability"  shall mean,  at any time,  (i) up to  eighty-five
percent (85%) of the face amount (less maximum discounts, credits and allowances
which may be taken by or  granted to Account  Debtors in  connection  therewith)
then  outstanding  under  existing  Eligible  Accounts  at such time,  less such
reserves as Lender in its sole  discretion  elects to  establish,  plus (ii) the
lesser of (A) One Million  Dollars  ($1,000,000.00)  and (B) up to fifty percent
(50%) of the value of then existing Eligible  Inventory,  valued at the lower of
cost  (determined on a first in, first out basis) or market,  less such reserves
as Lender in its sole discretion elects to establish,  minus (iii) the aggregate
undrawri face amount of the Letters of Credit.

     (r)  "Obligor"  shall mean  Borrower and each Person who is or shall become
primarily or secondarily liable for any of the Liabilities.

     (s)  "Other   Agreements"  shall  mean  all  agreements,   instruments  and
documents,  including without  limitation  guaranties,  mortgages,  trust deeds,
pledges,  powers  of  attorney,  consents,  assignments,   security  agreements,
intercreditor   agreements,   financing   statements   and  all  other  writings
heretofore,  now or from  time to time  hereafter  executed  by or on  behalf of
Borrower or any other  Person and  delivered  to Lender or to any  Affiliate  of
Lender in  connection  with the  Liabilities  or the  transactions  contemplated
hereby.

     (t)  "Permitted  Liens"  shall  mean  (i)  statutory  liens  of  landlords,
carriers,  warehousemen,  mechanics,  materialmen  or suppliers  incurred in the
ordinary  course of business and securing  amounts not yet due or declared to be
due by the  claimant  thereunder,  (ii) liens or security  interests in favor of
Lender and (iii) zoning  restrictions  and  easements,  licenses,  covenants and
other  restrictions  affecting the use of real property that do not individually
or in the aggregate have a material adverse effect on Borrower's  ability to use
such real  property  for its  intended  purpose in  connection  with  Borrower's
business.

                                       50

<PAGE>


     (U) "Person" shall mean any individual,  sole proprietorship,  partnership,
joint venture, trust,  unincorporated  organization,  association,  corporation,
institution,  entity,  party or foreign  or United  States  government  (whether
federal,  state,  county,  city,  municipal  or  otherwise),  including  without
limitation any instrumentality, division, agency, body or department thereof.

     (v) "Plan" shall mean any employee  benefit plan defined in Section 3(3) of
ERISA,  including any  multiemployer  plan or any employee  welfare benefit plan
which is maintained or has been maintained  pursuant to a collective  bargaining
agreement to which two or more unrelated employers  contribute and in respect of
which Borrower is an "employer" as defined in Section 3(5) of ERISA.

     (W)  "Reference  Rate" shall mean the rate of interest  publicly  announced
from time to time by  National  Bank of Canada  at its  principal  office as its
prime  lending  rate.  The  Reference  Rate is a  reference  rate  and  does not
necessarily  represent the lowest or best rate actually charged to any customer.
Any change in the  Reference  Rate shall be effective as of the  effective  date
stated in the announcement by National Bank of Canada of such change.

     (x)  "Subsidiary"  shall  mean any  corporation  of which  more than  fifty
percent (50%) of the  outstanding  capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation  (irrespective of
whether at the time stock of any other class of such  corporation  shall have or
might have voting power by reason of the happening of any contingency) is at the
time,  directly or indirectly,  owned by Borrower or by any partnership or joint
venture  of which  more  than  fifty  percent  (50%) of the  outstanding  equity
interests are at the time, directly or indirectly, owned by Borrower.

                                       51

<PAGE>


     (y)  "Termination  Date" shall mean the  earliest to occur of (i) April 30,
1999 (which date shall be automatically  extended to April 30 of each succeeding
year  thereafter  unless  within  sixty (60) days prior to such date or extended
date  either  Borrower  or Lender  provides  notice to the other  that such date
should not be extended,  which either  Borrower or Lender may do in its sole and
absolute  discretion),  (ii) the  date on which  this  Agreement  is  terminated
pursuant  to  paragraph  7(a)  hereof,  and (iii) the date the  Liabilities  are
accelerated  pursuant to paragraph  14(a)  hereof.  Borrower  acknowledges  that
Lender has not agreed to extend the  Termination  Date beyond April 30, 1999 and
has no obligation to extend the Termination Date.

         2.       LOANS; LETTERS OF CREDIT.

     (a) Subject to the terms and  conditions  of this  Agreement  and the Other
Agreements, prior to the Termination Date and so long as no Event of Default has
occurred under this Agreement or the Other  Agreements,  Lender shall make Loans
to Borrower as Borrower  shall from time to time  request or as may be necessary
to pay any fees and charges  payable to Lender  pursuant to  paragraph 3 hereof.
The aggregate  unpaid  principal of all Loans  outstanding at any one time shall
not  exceed  the  lesser of (i) Three  Million  Five  Hundred  Thousand  Dollars
($3,500,000.00)  ("Initial  Amount") minus the aggregate  undrawn face amount of
the Letters of Credit and (ii) Loan Availability at such time; provided that the
Initial  Amount shall be increased,  so long as no Event of Default has occurred
or will occur under this  Agreement or the Other  Agreements  as a result of the
increase, to Six Million Dollars ($6,000,000.00)  ("Increased Amount") minus the
aggregate  undrawn face amount of the Letters of Credit  effective ten (10) days
after Lender receives  Borrower's  written request for such increase and payment
of (A) a further facility fee of Fifteen  Thousand Dollars  ($15,000.00) and (B)
any retroactive  unused  facility fee described in paragraph 3(d) hereof.  If at
any  time  the  outstanding   principal   balance  of  the  Loans  exceeds  Loan
Availability,  Borrower shall immediately, and without the necessity of a demand
of Lender,  pay to Lender  such amount as may be  necessary  to  eliminate  such
excess.

     (b) Subject to the terms and  conditions  of this  Agreement  and the Other
Agreements,  prior to the Termination  Date, Lender may, in its sole discretion,
at Borrower's  request,  cause Letters of Credit to be issued for the account of
Borrower;  provided  that the  aggregate  undrawn  face amount of the Letters of
Credit  shall not at any time  exceed the lesser of (i) Three  Hundred  Thousand
Dollars  ($300,000.00)  and (ii) the amount by which Loan  Availability  at such
time exceeds the outstanding  principal balance of the Loans at such time. If at
any  time  the  outstanding  principal  balance  of the  Loans  is zero and Loan
Availability is less than zero, Borrower shall provide cash collateral to Lender
in an amount equal to the amount by which Loan Availability is less than zero to
secure any Letters of Credit.  No Letter of Credit shall have an expiration date
later than twelve (12) months from the date of issuance or the Termination Date.
Borrower shall reimburse  Lender,  immediately upon demand, in the amount of any
payments made by Lender to any Person with respect to the Letters of Credit, and
until Lender shall have been so  reimbursed  by Borrower such payments by Lender
shall be deemed to be Loans. In connection with the Letters of Credit,  Borrower
hereby  indemnities  Lender for any payments  made by Lender with respect to the
Letters of Credit and for any taxes, levies,  deductions,  charges and costs and
expenses incurred by Lender with respect to the Letters of Credit.

                                       52


<PAGE>



3.       FEES AND CHARGES.

     (a)  Borrower  shall pay to Lender  interest on the  outstanding  principal
balance  of the  Loans  monthly  in  arrears  beginning  on April 1, 1996 and at
maturity,  at the per annum rate of one-half  percent  (1/2%) plus the Reference
Rate.  Following the  occurrence of an Event of Default,  Borrower  shall pay to
Lender  interest on the  outstanding  principal  balance of the Loans at the per
annum  rate of two and  one-half  percent  (2-1/2%)  plus  the  Reference  Rate.
Interest  shall be computed on the basis of a year of three  hundred sixty (360)
days for the actual number of days elapsed.

     (b)  Borrower  shall  pay to  Lender a Letter  of  Credit  fee equal to two
percent (2%) per annum  (computed on the basis of a year of three  hundred sixty
(360)  days  for the  actual  number  of days  elapsed)  of the  average  of the
aggregate  undrawn  face  amount of the Letters of Credit  during each  calendar
month,  payable  monthly in arrears  beginning on April 1, 1996;  provided that,
following the occurrence of an Event of Default,  the Letter of Credit fee shall
increase to four percent  (4%) per annum.  In  addition,  Borrower  shall pay to
Lender  all  expenses  incurred  by  Lender  and all fees  charged  by Lender in
connection  with the issuance,  negotiation and payment of any Letter of Credit,
payable on the date incurred by Lender.

     (c)  Borrower  shall pay to  Lender  an annual  audit fee at a rate of Five
Hundred   Dollars   ($500.00)  per  auditor  per  day,  plus  travel  and  other
out-of-pocket  expenses,  which shall be payable by Borrower upon  completion of
each audit.

     (d)  Borrower  shall  pay  to  Lender  an  unused  facility  fee  equal  to
one-quarter  percent (I /4%) per annum (computed on the basis of a year of three
hundred  sixty (3 60) days for the actual  number of days elapsed) of the amount
by which the Initial Amount exceeds the sum of the average  outstanding  balance
of the Loans and the average undrawn face amount of the Letters of Credit during
each  calendar  month,  payable  monthly in arrears  beginning on April 1, 1996;
provided that, if the Initial Amount has been increased to the Increased  Amount
in accordance with paragraph 2(a) hereof,  then the unused facility fee shall be
calculated based on the Increased Amount  retroactively to January I of the year
in which the Initial Amount was  increased.  Notwithstanding  the foregoing,  so
long as no Event of Default occurs before May 1, 1997,  the unused  facility fee
shall not  commence to accrue  until May 1, 1997 and shall not be payable  until
June 1, 1997.  If an Event of  Default  occurs  before  May 1, 1997,  the unused
facility fee shall accrue  retroactively to the date of this Agreement,  and any
such accrued fee shall be immediately due and payable.

                                       53

<PAGE>



     (e) Except as provided in paragraph 7 hereof,  if Borrower  terminates this
Agreement,  Borrower  shall pay to Lender a  termination  fee of (i) two percent
(2%) of the Increased  Amount if the tennination is effective on or before April
30, 1998 and (ii) one percent (I%) of the Increased Amount if the termination is
effective  after April 3 0, 1998.  It is the intent of the parties that the rate
of  interest  and the other fees and charges to  Borrower  under this  Agreement
shall be lawftil;  therefore,  if for any reason the  interest or other fees and
charges  payable  under  this  Agreement  are  found  by a  court  of  competent
jurisdiction,  in a final  determination,  to exceed the amount  that Lender may
lawfully charge Borrower,  then the obligation to pay interest and other charges
shall  automatically  be reduced to the maximum lawful amount and, if any amount
in excess of such lawful amount shall have been paid,  then such amount shall be
reftmded to Borrower.

     4. CONDITIONS OF ADVANCES AND LETTERS OF CREDIT.  The making of any advance
and the issuance of any Letter of Credit provided for in this Agreement shall be
conditioned upon the following:

     (a)  Lender  shall  have  received  (i) with  respect  to a request  for an
advance, by at least  eleven-thirty  o'clock a.m. (1 1:30 a.m.) Mountain time on
the day on which such advance is requested  to be made  hereunder,'a  telephonic
request  from an  officer of  Borrower  (or any Person  authorized  by  Borrower
pursuant  to a written  list  provided  to Lender)  for an advance in a specific
amount  and (ii) with  respect  to a  request  for the  issuance  of a Letter of
Credit,  at least  five (5) days  prior to the date  such  Letter  of  Credit is
requested to be issued,  an application for such Letter of Credit executed by an
officer of  Borrower;  in addition,  Lender shall also have  received all of the
schedules and reports  required to have been  delivered by Borrower  pursuant to
paragraph 9 hereof,

     (b) No Default shall have occurred and be continuing;

     (c) All of the representations  and warranties  contained in this Agreement
and the Other  Agreements  shall be true and  correct as if made on the date the
request for an advance or Letter of Credit is made; and

                                       54

<PAGE>


     (d) Lender  shall have  received,  in form and  substance  satisfactory  to
Lender, all certificates,  orders, authorities, consents, affidavits, schedules,
instruments,  security  agreements,  financing  statements,  mortgages and other
documents  which are  provided  for  hereunder  or which  Lender may at any time
request.

     5. GRANT OF  SECURITY  INTEREST TO LENDER.  As security  for the payment or
other  satisfaction  of all  Liabilities,  Borrower hereby assigns to Lender and
grants to Lender a continuing  security  interest in the  following  property of
Borrower,  whether now or  hereafter  owned,  existing,  acquired or arising and
wherever  now or hereafter  located:  (a) all Accounts and all Goods whose sale,
lease or other  disposition by Borrower has given rise to Accounts and have been
returned to or  repossessed  or stopped in transit by Borrower;  (b) all Chattel
Paper,  Instruments,   Documents  and  General  Intangibles  (including  without
limitation all patents, patent applications, trademarks, trademark applications,
tradenames,  trade  secrets,  goodwill,  copyrights,  registrations,   licenses,
franchises,  customer  lists,  tax reftmd claims,  claims  against  carriers and
shippers,  guarantee claims,  contracts  rights,  security  interests,  security
deposits  and any rights to  indemnification)  and  specifically  including  the
insurance  policy with American  Credit  Indemnity;  (c) all Inventory and other
Goods,  including without limitation Equipment,  vehicles and fixtures;  (d) all
deposits  and cash and any other  property of Borrower  now or  hereafter in the
possession, custody or control of Lender or any agent or any Affiliate of Lender
or any  participant  with Lender in the Loans  and/or  Letters of Credit for any
purpose  (whether  for  safekeeping,   deposit,  collection,   custody,  pledge,
transmission or otherwise); and

     (e) all additions and accessions to,  substitutions  for, and replacements,
products and proceeds of the foregoing  property,  including without  limitation
proceeds of all insurance policies insuring the foregoing  property,  and all of
Borrower's  books and records relating to any of the foregoing and to Borrower's
business.

                                       55

<PAGE>


     6.  PRESERVATION  OF  COLLATERAL  AND  PERFECTION  OF  SECURITY   INTERESTS
THER]EIN.  Borrower  shall,  at Lender's  request,  at any time and from time to
time,  execute and deliver to Lender such  financing  statements,  documents and
other  agreements and  instruments  (and pay the cost of filing or recording the
same in all public offices deemed  necessary or desirable by Lender) and do such
other acts and  things as Lender may deem  necessary  or  desirable  in order to
establish and maintain a valid,  attached and perfected security interest in the
Collateral  in favor of Lender  (free and clear of all other  liens,  claims and
rights  of  third  parties  whatsoever,  whether  voluntarily  or  involuntarily
created,  except Permitted  Liens) to secure payment of the Liabilities,  and in
order to facilitate  the  collection  of the  Collateral.  Borrower  irrevocably
hereby makes,  constitutes  and appoints  Lender (and all Persons  designated by
Lender  for  that   purpose)  as  Borrower's   true  and  lawful   attorney  and
agent-in-fact  to  execute  such  financing  statements,   documents  and  other
agreements and instruments and do such other acts and things as may be necessary
to preserve and perfect  Lender's  security  interest in the  Collateral  in the
event that (a) an Event of Default  occurs  under  this  Agreement  or the Other
Agreements  or (b)  Borrower  neglects  or refuses to execute  and  deliver  any
financing statements, documents or other agreements and instruments requested by
Borrower within three (3) business days after Lender's written request therefor.
Borrower  further  agrees  that a  carbon,  photographic,  photostatic  or other
reproduction  of this Agreement or of a financing  statement shall be sufficient
as a financing statement.

     7.  CAPITAL  ADEQUACY.  If  Lender  shall  reasonably  determine  that  the
application or adoption of any law, rule, regulation, directive, interpretation,
treaty or guideline regarding capital adequacy,  or any change therein or in the
interpretation  or  administration  thereof,  whether or not having the force of
law,  increases  the amount of capital  required or expected to be maintained by
Lender or any Person  controlling,  directly  or  indirectly,  Lender,  and such
increase is based upon the existence of Lender's obligations hereunder and other
commitments  of this type,  then from time to time,  within ten (1 0) days after
demand from Lender,  Borrower at its option (a) shall  terminate this Agreement,
in which case the  termination  fee described in paragraph 3(e) hereof shall not
be payable, or (b) shall pay to Lender such amount or amounts as will compensate
Lender  or such  controlling  Person,  as the  case may be,  for such  increased
capital  requirement.  The  determination  of any amount to be paid by  Borrower
under this paragraph 7 shall take into  consideration  the policies of Lender or
any Person  controlling  Lender with  respect to capital  adequacy  and shall be
based upon any reasonable averaging, attribution and allocation methods selected
by Lender.  A certificate of Lender setting forth the amount or amounts as shall
be necessary  to  compensate  Lender as  specified in this  paragraph 7 shall be
delivered to Borrower and shall be conclusive in the absence of manifest error.

                                       56

<PAGE>


8.       COLLECTIONS.

     (a)  Borrower  shall  establish  one or  more  accounts  (each  a  "Blocked
Account") in Borrower's name with a financial institution  acceptable to Lender,
into which Borrower will immediately  deposit all payments  received by Borrower
with respect to Accounts and other  Collateral  in the  identical  form in which
such payments were made, whether by cash or check. If Borrower, any Affiliate or
Subsidiary of Borrower, any shareholder, officer, director, employee or agent of
Borrower or any  Affiliate or  Subsidiary of Borrower or any other Person acting
for or in concert with Borrower shall receive any monies,  checks, notes, drafts
or other  payments  relating to or as proceeds of Accounts or other  Collateral,
Borrower and each such Person shall  receive all such items in trust for, and as
the sole and exclusive  property of, Lender and immediately upon receipt thereof
shall remit the same (or cause the same to be  remitted)  in kind to the Blocked
Account. The financial institution with which the Blocked Account is established
shall  acknowledge  and agree,  in a manner  satisfactory  to  Lender,  that the
amounts on deposit in such Blocked  Account are the sole and exclusive  property
of Lender,  that such financial  institution  has no right to setoff against the
Blocked  Account and that such  financial  institution  shall wire, or otherwise
transfer in  innnediately  available  funds in a manner  satisfactory to Lender,
funds  deposited in the Blocked Account to Lender on a daily basis as such ftmds
are  collected.  Lender shall,  two (2) business days after receipt by Lender of
immediately available ftmds in its account,  apply the whole or any part of such
collections  or proceeds  against the  Liabilities in such order as Lender shall
determine in its sole discretion. All payments deposited to such Blocked Account
or  otherwise  received  by Lender,  whether in  respect of the  Accounts  or as
proceeds of other  Collateral or  otherwise,  shall be applied on account of the
Liabilities in accordance with the terms of this Agreement.  All checks, drafts,
instruments  and other  items of  payment or  proceeds  of  Collateral  shall be
endorsed by Borrower to Lender,  and, if that endorsement of any such item shall
not be made for any reason,  Lender is hereby irrevocably  authorized to endorse
the same on Borrower's behalf. For the purpose of this paragraph 8(a),  Borrower
irrevocably  hereby  makes,  constitutes  and  appoints  Lender (and all Persons
designated by Lender for that purpose) as  Borrower's  true and lawful  attorney
and  agentin-fact  (i) to  endorse  Borrower's  name upon said  items of payment
and/or proceeds of Collateral and upon any Chattel Paper, document,  instrument,
invoice or similar document or agreement  relating to any Account of Borrower or
goods  pertaining  thereto,  (ii) to take  control  in any manner of any item of
payment or  proceeds  thereof and (iii) to have access to any lock box or postal
box into which any of Borrower's mail is deposited,  and to open and process all
mail addressed to Borrower and deposited therein.

                                       57

<PAGE>


     (b) Lender may, at any time and from time to time after the  occurrence  of
an Event of Default,  whether before or after notification to any Account Debtor
and whether before or after the maturity of any of the Liabilities,  (i) enforce
collection  of  any of  Borrower's  Accounts  or  contract  rights  by  suit  or
otherwise,  (ii) exercise all of Borrower's  rights and remedies with respect to
proceedings  brought  to  collect  any  Accounts,  (iii)  surrender,  release or
exchange all or any part of any  Accounts,  or compromise or extend or renew for
any period  (whether or not longer than the  original  period) any  indebtedness
thereunder,  (iv) sell or assign any  Account of Borrower  upon such terms,  for
such amount and at such time or times as Lender  deems  advisable,  (v) prepare,
file and sign  Borrower's  name on any  proof  of  claim in  bankruptcyor  other
similar  document  against  any  Account  Debtor  and (vi) do all other acts and
things which are necessary,  in Lender's sole discretion,  to fulfill Borrower's
obligations under this Agreement and to allow Lender to collect the Accounts. In
addition to any other provision hereof,  Lender may at any time,  whether before
or after the occurrence of an Event of Default,  at Borrower's  expense,  notify
any parties  obligated on any of the Accounts to make payment directly to Lender
of any amounts due or to become due thereunder.

     (c)  Lender,  in its sole  discretion,  without  waiving or  releasing  any
obligation,  liability  or duty of Borrower  under this  Agreement  or the Other
Agreements  or any Event of  Default,  may at any time or times  hereafter,  but
shall not be obligated to, pay,  acquire or accept an assignment of any security
interest,  lien,  encumbrance or claim asserted by an Person in, upon or against
the Collateral.  All sums paid by Lender in respect thereof and all costs,  fees
and expenses,  including without limitation  reasonable attorney fees, all court
costs and all other charges relating thereto incurred by Lender shall constitute
Loans,  payable by  Borrower to Lender on demand  and,  until  paid,  shall bear
interest at the highest rate then applicable to Loans hereunder.

     (d) Immediately  upon  Borrower's  receipt of any portion of the Collateral
evidenced by an agreement,  Instrument or Document, including without limitation
any  Chattel  Paper,  Borrower  shall  deliver  the  original  thereof to Lender
together  with  an  appropriate   endorsement  or  other  specific  evidence  of
assignment thereof to Lender (in form and substance acceptable to Lender). If an
endorsement  or  assigrunent of any such items shall not be made for any reason,
Lender  is  hereby   irrevocably   authorized,   as   Borrower's   attorney  and
agent-in-fact, to endorse or assign the same on Borrower's behalf.

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<PAGE>


         9.       SCHEDULES AND REPORTS.

     (a) Borrower shall deliver to Lender, on a weekly or more frequent basis if
requested by Lender, a collateral report  ("Collateral  Report")  describing the
aging of the  Accounts,  all Eligible  Accounts  created or acquired by Borrower
subsequent to the  inunediately  preceding  Collateral  Report,  information  in
connection with any Account which has ceased to be an Eligible Account since the
most recent  Collateral  Report,  and  information  on all amounts  collected by
Borrower on Accounts subsequent to the immediately  preceding Collateral Report.
The  Collateral  Reports  shall also  include a schedule of  Inventory  owned by
Borrower and in  Borrower's  possession  valued at cost on a first in, first out
basis,  information  on all sales of or other  reduction of and all additions to
Inventory,  all returns of  Inventory,  all credits  issued by Borrower  and all
complaints and claims against  Borrower in connection with Inventory  subsequent
to the immediately  preceding  Collateral  Report.  The Collateral Reports shall
contain such additional information as Lender shall require. Borrower shall also
furnish copies of any other reports or  information  concerning the Accounts and
Inventory  included,  described  or  referred  to  in  the  Collateral  Reports,
including  without  limitation,  but only if  specifically  requested by Lender,
copies of all invoices prepared in connection with Accounts. Lender, through its
officers,  employees or agents,  shall have the right, at any time and from time
to time in Lender's  name,  in the name of a nominee of Lender or in  Borrower's
name, to verify the validity,  amount or any other matter relating to any of the
Accounts, by mail,  telephone,telegraph  or otherwise.  Borrower shall reimburse
Lender,  on demand,  for all costs, fees and expenses incurred by Lender in this
regard.

     (b) Without  limiting  the  generality  of the  foregoing,  Borrower  shall
deliver to Lender,  at lease once a month (or more  frequently when requested by
Lender), a report with respect to Borrower's Accounts and Inventory  reconciling
the information described in paragraph 9(a) hereof for such month.

     (c) All schedules, certificates,  reports, and assigm-nents and other items
delivered  by Borrower to Lender  hereunder  shall be executed by an  authorized
representative  of  Borrower  and  shall  be  in  such  form  and  contain  such
information as Lender shall specify.

                                       59

<PAGE>


     10.  TERMINATION.  This Agreement  shall be in effect until the Termination
Date.  The security  interests and liens  created  under this  Agreement and the
Other Agreements shall survive such termination until the Letters of Credit have
been terminated and canceled and the payment of the other Liabilities has become
indefeasible.  At such time as Borrower  has repaid all of the  Liabilities  and
this Agreement has terminated,  the parties shall deliver to each other a mutual
release,  in form and  substance  satisfactory  to Lender and  Borrower,  of all
obligations  and  liabilities  of  each  party  and  its  officers,   directors,
employees, agents and Affiliates to the other party-

     11. REPRESENTATIONS,  WARRANTIES AND COVENANTS. Borrower hereby represents,
warrants and covenants that:

     (a) The  financial  statements  delivered or to be delivered by Borrower to
Lender at or prior to the date of this  Agreement  and at all  times  subsequent
thereto  fairly present the financial  condition of Borrower in accordance  with
generally accepted accounting  principles  consistently  applied,  and there has
been no material  adverse change in the financial  condition,  the operations or
any  other  status  of  Borrower  since  the  date of the  financial  statements
delivered to Lender most recently prior to the date of this Agreement;

     (b) The office  where  Borrower  keeps its books,  records and accounts (or
copies  thereof)  concerning  the  Collateral,  Borrower's  principal  place  of
business and all of Borrower's other places of business, locations of Collateral
and post office  boxes are as set forth in Exhibit A;  Borrower  shall  promptly
(but in no event less than ten (IO) days prior thereto) advise Lender in writing
of the  proposed  opening  of any new  place of  business,  the  closing  of any
existing  place of  business,  any change in the location of  Borrower's  books,
records and accounts  (or copies  thereof) or the opening or closing of any post
office box of Borrower;

     (c) The Collateral,  including without limitation the Equipment (except any
part  thereof  which  prior to the date of this  Agreement  Borrower  shall have
advised Lender in writing consists of Collateral  normally used in more than one
state)  is and  shall be kept,  or in the case of  vehicles  based,  only at the
addresses set forth on the first page of this Agreement and on Exhibit A;

     (d) If any of the  Collateral  consists of Goods of a type normally used in
more than one state, whether or not actually so used, Borrower shall immediately
give  written  notice to Lender of any use of any such Goods in any state  other
than a state in which Borrower has previously advised Lender such Goods shall be
used,  and such Goods  shall  not,  unless  Lender  shall  otherwise  consent in
writing, be used outside of the continental United States;

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<PAGE>


     (e) Each Account or item of Inventory which Borrower shall, expressly or by
implication,  request  Lender to classify as an Eligible  Account or as Eligible
Inventory,  respectively,  shall,  as of the time  when  such  request  is made,
conform in all respects to the requirements of such  classification as set forth
in the respective  definitions of "Eligible Account" and "Eligible Inventory" as
defined in paragraph I hereof and as otherwise  established  by Lender from time
to time,  and  Borrower  shall  promptly  notify  Lender in  writing if any such
Eligible Account or Eligible Inventory shall subsequently become ineligible;

     (o Borrower is and shall at all times be the lawful  owner of its  property
now purportedly owned or hereafter  purportedly acquired by Borrower,  free from
all liens,  claims,  security  interests and  encumbrances  whatsoever,  whether
voluntarily or  involuntarily  created and whether or not perfected,  other than
the Permitted Liens and those described on Exhibit B;

     (g) Borrower has the right and power and is duly  authorized  and empowered
to enter into,  execute and deliver this Agreement and the Other  Agreements and
to perform its  obligations  hereunder  and  thereunder;  Borrower's  execution,
delivery and performance of this Agreement and the Other Agreements does not and
shall not conflict with the provisions of any statute, regulation,  ordinance or
rule of law,  or any  agreement,  contract  or other  document  which may now or
hereafter  be  binding on  Borrower,  and  Borrower's  execution,  delivery  and
performance of this Agreement and the Other  Agreements  shall not result in the
imposition of any lien or other encumbrance upon any of the Borrower's  property
under any existing indenture,  mortgage, deed of trust, loan or credit agreement
or other agreement or instrument by which Borrower or any of its property may be
bound or affected;

     (h) There are no actions or  proceedings  which are pending or, to the best
of the knowledge of Borrower,  threatened against Borrower which might result in
any material adverse change in its financial  condition or materially  adversely
affect Borrower's property,  and Borrower shall, promptly upon becoming aware of
any such pending or threatened action or proceeding, give written notice thereof
to Lender;

     (i)  Borrower has obtained all  licenses,  authorizations,  approvals,  and
permits, the lack of which would have a material adverse effect on the operation
of its business,  and Borrower is and shall remain in compliance in all material
respects with all applicable federal, state, local and foreign statutes, orders,
regulations,  rules and  ordinances,  the  failure to comply  with  which  could
reasonably  be  expected  to have a  material  adverse  effect on its  business,
property, assets, operations or condition, financial or otherwise;

                                       61

<PAGE>



     0) All  written  information  now,  heretofore  or  hereafter  fumished  by
Borrower to Lender is and shall be true and correct as of the date with  respect
to which such information was or is @shed;

     (k) Borrower is not  conducting,  permitting  or suffering to be conducted,
nor  shall it  conduct,  permit or suffer to be  conducted,  any  activities  or
transactions  with any  Affiliate of Borrower;  provided that Borrower may enter
into transactions with Affiliates of Borrower in the ordinary course of business
pursuant to terms that are no less  favorable  to  Borrower  than the terms upon
which such transfers or transactions  would have been made had they been made to
or  with a  Person  who is not an  Affiliate  of  Borrower  and,  in  connection
therewith,  may  transfer  cash or property to  Affiliates  of Borrower for fair
value;

     (1) Borrower's name has always been Pen National, Inc. or Pen Interconnect,
Inc.,  and Borrower uses no tradenames or division names in the operation of its
business  other than those  described on Exhibit C; Borrower shall notify Lender
in  writing  within  ten (IO)  days of the  change of its name or the use of any
tradenames or division names not previously disclosed to Lender in writing;

     (m) With respect to Borrower's  Equipment,  (i) except for Permitted  Liens
and those  described  on  Exhibit  B,  Borrower  has good and  indefeasible  and
merchantable  title  to  and  ownership  of  all  Equipment,  including  without
limitation  the Equipment  described or listed on Exhibit D, (ii) Borrower shall
keep and maintain the Equipment in good operating condition and repair and shall
make all necessary  replacements  thereof and renewals thereto so that the value
and operating efficiency thereof shall at all times be preserved and maintained,
(iii)  Borrower  shall not  permit  any such  items to become a fixture  to real
estate  or  an  accession  to  other  personal  property,   and  (iv)  Borrower,
immediately on demand by Lender, shall deliver to Lender any and all evidence of
ownership  of,   including   without   limitation   certificates  of  title  and
applications of title to, any of the Equipment;

     (n) This  Agreement and the Other  Agreements to which  Borrower is a party
are the legal,  valid and binding  obligations  of Borrower and are  enforceable
against Borrower in accordance with their respective terms;

                                       62

<PAGE>


     (o)  Borrower is  solvent,  is able to pay its debts as they become due and
has capital  sufficient  to carry on its business,  now owns  property  having a
value both at fair valuation and at present fair saleable value greater than the
amount  required  to pay its debts,  and will not be rendered  insolvent  by the
execution  and  delivery  of  this  Agreement  or  the  Other  Agreements  or by
completion of the transactions contemplated hereunder or thereunder;

     (p) Borrower is not now obligated,  nor shall it create,  incur,  assume or
become  obligated  (directly or indirectly) for any loans or other  indebtedness
for  borrowed  money  other  than the Loans and the  indebtedness  described  on
Exhibit E, except that  Borrower  (i) may borrow  money from a Person other than
Lender on an unsecured and  subordinated  basis if a subordination  agreement in
favor of Lender and in form and substance  satisfactory to Lender isexecuted and
delivered to Lender relative  thereto and (ii) may incur unsecured  indebtedness
to trade creditors in the ordinary course of Borrower's business;

     (q) Borrower does not own any margin  securities,  and none of the proceeds
of the Loans shall be used for the purpose of  purchasing or carrying any margin
securities or for the purpose of reducing or retiring any indebtedness which was
originally  incurred to purchase any margin  securities or for any other purpose
not  permitted by  Regulation G or Regulation U of the Board of Governors of the
Federal Reserve System as in effect from time to time;

     (r)  Exhibit  F sets  forth the names of all of the  Persons  who hold,  of
record or  beneficially,  ten percent (IO%) or more of the  outstanding  capital
stock of Borrower;  Borrower has no Subsidiaries  or divisions,  nor is Borrower
engaged in any joint venture or  partnership  with any other Person,  other than
those described on Exhibit G;

     (s)  Borrower  is duly  organized  and in good  standing  in its  state  of
organization  and is duly qualified and in good standing in all states where the
nature and  extent of the  business  transacted  by it or the  ownership  of its
assets  makes such  qualification  necessary,  except  such  states in which the
failure to qualify would not materially adversely affect the business,  property
or results of operations of Borrower;

     (t) Borrower is not in material default under any material contract,  lease
or commitment to which it is a party or by which it is bound,  nor does Borrower
know of any  dispute  regarding  any  contract,  lease  or  commitment  which is
material to the continued financial success of Borrower;

                                       63

<PAGE>


     (u) There are no controversies  pending or threatened  between Borrower and
any of its  employees,  other than employee  grievances  arising in the ordinary
course of business  which are not, in the  aggregate,  material to the continued
financial  success of Borrower,  and Borrower is in  compliance  in all material
respects with all federal and state laws  respecting  employment  and employment
terms, conditions and practices; and

     (v) Borrower possesses,  and shall continue to possess,  adequate licenses,
patents, patent applications,  copyrights, service marks, trademarks,  trademark
applications,  tradestyles and tradenames to continue to conduct its business as
heretofore conducted by it.

     Borrower   represents,   warrants   and   covenants   to  Lender  that  all
representations,   warranties  and  covenants  of  Borrower  contained  in  this
Agreement  (whether  appearing in paragraph I I or 12 hereof or elsewhere) shall
be true at the time of Borrower's execution of this Agreement, shall survive the
execution,  delivery and acceptance hereof by the parties hereto and the closing
of the transactions  described herein or related hereto, shall remain true until
the  repayment  in  full  of all of the  Liabilities  and  termination  of  this
Agreement,  and shall be remade by  Borrower  at the time any advance is made or
any Letters of Credit are issued pursuant to this Agreement.

     12. ADDITIONAL COVENANTS OF BORROWER. Until payment or satisfaction in full
of all  Liabilities  and the  termination  of this  Agreement,  unless  Borrower
obtains  Lender's prior written  consent  waiving or modifying any of Borrower's
covenants hereunder in any specific instance, Borrower covenants that:

     (a) Borrower shall at all times keep accurate and complete  books,  records
and  accounts  with  respect  to  all  of  Borrower's  business  activities,  in
accordance with sound  accounting  practices and generally  accepted  accounting
principles  consistently  applied,  and  shall  keep  such  books,  records  and
accounts,  and any copies  thereof,  only at the  addresses  indicated  for such
purpose on Exhibit A;

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<PAGE>


     (b)  Borrower   agrees  to  deliver  to  Lender  the  following   financial
information,  all of which  shall  be  prepared  in  accordance  with  generally
accepted  accounting   principles   consistently  applied,  (i)  no  later  than
twenty-five (25) days after each calendar month,  copies of internally  prepared
financial statements, including without limitation balance sheets and statements
of income,  retained earnings and cash flow of Borrower,  certified by the chief
financial officer of Borrower, (ii) no later than ninety (90) days after the end
of each of Borrower's  fiscal years,  annual financial  statements  certified by
independent  certified public accountants  selected by Borrower and satisfactory
to Lender, which financial statements shall be accompanied by a letter from such
accountants  acknowledging  that they are aware that Lender is relying upon such
financial  statements in connection  with the exercise of its rights  hereunder,
and (iii) such other financial  information as Lender shall reasonably  request,
in each case  accompanied  by a certificate  of Borrower in the form attached as
Exhibit H;

     (c)  Borrower  shall  promptly  advise  Lender in writing  of any  material
adverse  change in business,  assets or condition,  financial or  otherwise,  of
Borrower,  the occurrence of any Event of Default hereunder or the occurrence of
any event which,  if uncured,  will become an Event of Default  hereunder  after
notice or lapse of time (or both);

     (d) Lender, or any Persons designated by it, shall have the right, upon two
(2) business  days notice in writing to Borrower  prior to the  occurrence of an
Event of Default  and at any time upon and after the  occurrence  of an Event of
Default,  to call at Borrower's places of business at any reasonable times, and,
without  hindrance or delay,  to inspect the Collateral  and to inspect,  audit,
check and make  extracts  from  Borrower's  books,  records,  journals,  orders,
receipts and any correspondence and other data relating to Borrower's  business,
the Collateral or any transactions  between the parties hereto, and Lender shall
have the right to make  such  verification  concerning  Borrower's  business  as
Lender may consider  reasonable under the circumstances;  Borrower shall furnish
to Lender such  information  relevant to Lender's rights under this Agreement as
Lender  shall  at any  time  and  from  time  to  time  request,  so long as the
disclosure  thereof does not violate rules and regulations of the Securities and
Exchange Commission; Borrower authorizes Lender to discuss the affairs, finances
and business of Borrower with any officers,  employees or directors of Borrower,
any Affiliate or the officers,  employees or directors of any Affiliate,  and to
discuss  the  financial  condition  of  Borrower  with  Borrower's   independent
certified public accountants (any such discussions shall be without liability to
Lender or such accountants); Borrower shall pay to Lender all customary fees and
out-of-pocket  expenses  incurred  by  Lender  in the  exercise  of  its  rights
hereunder,  and all of such fees and expenses shall  constitute Loans hereunder,
payable on demand and, until paid,  shall bear interest at the highest rate then
applicable to Loans hereunder;

                                       65

<PAGE>


     (e) Borrower  shall keep the  Collateral  properly  housed,  shall keep the
Collateral  insured for the full insurable  value thereof against loss or damage
by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles)
and such other risks as are  customarily  insured  against by Persons engaged in
businesses  similar to that of Borrower and shall maintain such public liability
and third party property damage insurance as is customary for Persons engaged in
businesses  similar to that of Borrower,  in each case with such  companies,  in
such amounts,  with such deductibles and under policies in such form as shall be
satisfactory to Lender; at the request of Lender, original (or certified) copies
of such  policies of  insurance  shall be  delivered  to Lender,  together  with
evidence of payment of all premiums therefor;  each such policy shall contain an
endorsement, in form and substance acceptable to Lender, showing loss under such
insurance  policies  payable  to Lender;  such  endorsement,  or an  independent
instrument  furnished to Lender,  shall provide that the insurance company shall
give Lender at least thirty (30) days written  notice  before any such policy of
insurance is altered or canceled and that no act,  whether willful or negligent,
or default of Borrower or any other  Person  shall affect the right of Lender to
recover  under such  policy of  insurance  in case of loss or  damage;  Borrower
hereby directs all insurers under such policies of insurance to pay all proceeds
payable  thereunder  directly to Lender, and all proceeds received by Lender may
be  applied  to the  Liabilities  in such  order  and  manner  as  Lender  shall
determine;  Borrower irrevocably makes, constitutes and appoints Lender (and all
officers,  employees  or agents  designated  by Lender) as  Borrower's  true and
lawful attorney (and agent-in- fact) after the occurrence of an Event of Default
for the purpose of making,  settling and adjusting claims under such policies of
insurance,  endorsing  the name of Borrower on any check,  draft,  instrument or
other item of payment for the proceeds of such  policies of insurance and making
all  determinations  and  decisions  with respect to such policies of insurance;
provided  that,  if Borrower at any time shall fail to obtain or maintain any of
the  policies of insurance  required  above or to pay any premium in whole or in
part relating thereto, then Lender,  without waiving or releasing any obligation
or default by  Borrower  hereunder,  may (but shall be under no  obligation  to)
obtain and maintain such policies of insurance and to pay such premiums and take
such other  actions with respect  thereto as Lender  deems  advisable;  all sums
disbursed  by Lender in  connection  with any such  actions,  including  without
limitation court costs, expenses,  other charges relating thereto and reasonable
attorney fees,  shall  constitute Loans hereunder and shall be payable on demand
by Borrower to Lender and,  until paid,  shall bear interest at the highest rate
then applicable to Loans hereunder;

                                       66

<PAGE>


     (f)  Borrower  shall  not use its  property,  or any part  thereof,  in any
unlawful  business or for any  unlawful  purpose or use or  maintain  any of its
property  in any  manner  that does or could  result in  material  damage to the
environment  or a  violation  of any  applicable  environmental  laws,  rules or
regulations;  shall keep its property in good condition, repair and order; shall
not permit its property, or any part thereof, to be levied upon under execution,
attachment, distraint or other legal process; shall not sell, lease, transfer or
otherwise dispose of any of its property except for the sale of Inventory in the
ordinary  course of its  business;  and shall not  secrete or abandon any of its
property,  or remove or permit  removal of any of its  property  from any of the
locations  listed on Exhibit A or in any  written  notice to Lender  pursuant to
paragraph  1 1 (b)  hereof,  except  for the  removal of  Inventory  sold in the
ordinary course of Borrower's business;

     (g) All monies and other property obtained by Borrower from Lender pursuant
to this Agreement shall be used solely for the business purposes of Borrower;

     (h)  Borrower  shall,  at the  request of Lender,  indicate  on its records
concerning the Collateral a notation,  in form  satisfactory  to Lender,  of the
security  interest  of  Lender  hereunder,   and  Borrower  shall  not  maintain
duplicates  or copies of such  records  at any  address  other  than  Borrower's
principal place of business set forth on the first page of this Agreement;

     (i)  Borrower  shall file all required tax returns and pay all of its taxes
when due,  including  without  limitation  taxes  imposed by  federal,  state or
municipal agencies, and shall cause any liens for taxes to be promptly released;
provided that Borrower shall have the right to contest the payment of such taxes
in good faith by appropriate  proceedings so long as (i) the amount so contested
is shown on Borrower's  financial  statements,  (ii) the  contesting of any such
payment does not give rise to a lien for taxes,  (iii) Borrower keeps on deposit
with Lender (such deposit to be held without interest) an amount of money which,
in the sole judgment of Lender, is sufficient to pay such taxes and any interest
or penalties  that may accrue  thereon,  and (iv) if Borrower fails to prosecute
such contest with reasonable diligence,  Lender may apply the money so deposited
in payment of such  taxes;  if  Borrower  fails to pay any such taxes and in the
absence  of any such  contest  by  Borrower,  Lender  may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the  release of any lien  therefor,  and any sums so  advanced  by Lender
shall  constitute  Loans  hereunder,  shall be payable by  Borrower to Lender on
demand, and, until paid, shall bear interest at the highest rate then applicable
to Loans hereunder;

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<PAGE>


     0) Borrower  shall not assume,  guarantee or endorse,  or otherwise  become
liable in connection with, the obligations of any Person,  except by endorsement
of instruments for deposit or collection or similar transactions in the ordinary
course of business;

     (k) Without the prior written consent of Lender, which consent shall not be
unreasonably   withheld,   Borrower   shall  not  enter   into  any   merger  or
consolidation,  or enter into any  transaction  outside the  ordinary  course of
Borrower's  business,  including without limitation any purchase,  redemption or
retirement of any shares of any class of its capital stock,  and any issuance of
any shares of, or warrants or other rights to receive or purchase any shares of,
any class of its capital stock;

     (1) Borrower  shall not declare or pay any  dividend or other  distribution
(whether in cash or in kind) on any class of its capital stock;

     (m) Without the prior written consent of Lender, which consent shall not be
unreasonably  withheld,  Borrower  shall  not pay  compensation  in the  form of
salaries or consulting  fees to any of its officers in any fiscal year in excess
of one hundred twenty-five percent (125%) of the amount paid to such officers in
the  immediately  preceding  fiscal  year and  shall  not make any  loans to its
officers, directors or employees;

     (n)  Borrower  shall (i) keep in full  force and  effect  any and all Plans
which may, from time to time, come into existence under ERISA, unless such Plans
can be terminated without liability to Borrower,  (ii) make contributions to all
of the Plans in a timely  manner and in a  sufficient  amount to comply with the
requirements  of ERISA,  (iii)  comply with all material  requirements  of ERISA
which  relate  to  Plans  (including  without  limitation  the  minimum  funding
standards  of Section  302 of ERISA) and (iv)  notify  Lender  immediately  upon
receipt by Borrower of any notice of the  institution of any proceeding or other
action which may result in the termination of any Plans;

     (o) Without the prior written consent of Lender, which consent shall not be
unreasonably  withheld,  Borrower  shall not invest in,  purchase  or  otherwise
acquire,  or  contract  to  invest  in,  purchase  or  otherwise  acquire,   the
obligations or capital stock of any Person, other than direct obligations of the
United States;

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<PAGE>


     (p)  Borrower  shall not amend its  organizational  documents or change its
fiscal year;

     (q) Borrower shall reimburse  Lender for all costs and expenses,  including
without  limitation  legal  expenses and reasonable  attorney fees,  incurred by
Lender in connection with the documentation and consummation of this transaction
and any other  transactions  between  Borrower  and  Lender,  including  without
limitation  Uniform  Commercial  Code and other  public  record  searches,  lien
filings,  Federal  Express or similar express or messenger  delivery,  appraisal
costs, surveys,  title insurance and envirorunental audit or review costs, or in
seeking to  administer,  collect,  protect  or  enforce  any rights in or to the
Collateral,  to collect any  Liabilities or to administer,  participate,  assign
and/or  enforce  any of  Lender's  rights  under  this  Agreement  and the Other
Agreements;  all  such  costs,  expenses  and  charges  shall  constitute  Loans
hereunder,  shall be payable by Borrower to Lender on demand,  and,  until paid,
shall bear interest at the highest rate then applicable to Loans hereunder;

     (r) At no time on or before  April  30,  1997  shall  Borrower  permit  the
principal  balance  outstanding  on the Loans to be less than One  Million  Five
Hundred Thousand Dollars ($1,500,000.00);

     (s) The capital expenditures of Borrower shall not exceed (i) Seven Hundred
Fifty Thousand Dollars  ($750,000.00)  during each of the years ending September
30, 1996,  September  30, 1997 and September 30, 1998 and (ii) such amount as is
agreed in writing by Lender and Borrower for fiscal years ending after September
30, 1998;

     (t) The value of the total assets of Borrower  (excluding  the value of any
intangible  assets and accounts  receivable  due from  officers and directors of
Borrower) less the value of the total  liabilities of Borrower shall be at least
(i) Seven Million Fifty  Thousand  Dollars  ($7,050,000.00)  as of September 30,
1996, (ii) Seven Million Six Hundred Fifty Thousand Dollars  ($7,650,000.00)  as
of September 30, 1997,  (iii) Eight Million Two Hundred Fifty  Thousand  Dollars
($8,250,000.00) as of September 30, 1998 and (iv) as agreed in writing by Lender
and Borrower for fiscal years ending after September 30, 1998;

                                       69

<PAGE>


     (u) Earnings of Borrower after income taxes but before  extraordinary items
and  nonoperating  gains  shall be at least  (i) Six  Hundred  Thousand  Dollars
($600,000.00)  for each of the years ending  September  30, 1996,  September 30,
1997 and September 30, 1998 and (ii) as agreed in writing by Lender and Borrower
for fiscal years ending after September 30, 1998; and

     (v) The interest expense payable by Borrower to Lender and others shall not
exceed  (i)  four  (4)  times  its  earnings  before  interest,   income  taxes,
depreciation,  amortization, extraordinary items and nonoperating gains for each
of the years ending  September  30, 1996,  September  30, 1997 and September 30,
1998 and (ii) such  amount as is agreed in writing by Lender  and  Borrower  for
fiscal years ending after September 30, 1998.

     (w) At no time shall the ratio of the total  liabilities of Borrower to the
net worth of Borrower,  in each case  calculated  in accordance  with  generally
accepted accounting  principles  consistently  applied,  exceed three (3) to one
(1), with net worth being defined as (i) shareholders' equity (including capital
stock,  additional paid-in capital and retained earnings) plus (ii) indebtedness
subordinated  to the  Liabilities in fon-n and substance  satisfactory to Lender
minus (iii) intangible assets (including goodwill).

     13. EVENT OF DEFAULT.  The  occurrence  of any one or more of the following
events  shall  constitute  an event of default  ("Event of Default") by Borrower
hereunder:

     (a) The failure of any  Obligor to pay when due or declared  due any of the
Liabilities;

     (b) The  failure of any  Obligor  to  perform,  keep or observe  any of the
covenants, conditions, promises, agreements or obligations of such obligor under
this Agreement or the Other Agreements;

     (c) The  failure of any  Obligor  to  perform,  keep or observe  any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
any other agreement with any Person if such failure may have a material  adverse
effect on such Obligor's business,  property,  assets,  operations or condition,
financial or otherwise;

     (d)  The   making  or   furnishing   by  any   Obligor  to  Lender  of  any
representation,  warranty, certificate,  schedule, report or other communication
which is untrue or  misleading in any material  respect  within or in connection
with this  Agreement or the Other  Agreements  or in  connection  with any other
agreement between such Obligor and Lender;

     (e) The making or any attempt to make any levy,  seizure or  attachment  of
any of Borrower's property;

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<PAGE>


     (f) The  commencement  of any  proceedings  in bankruptcy by or against any
Obligor or for the  liquidation or  reorganization  of any Obligor,  or alleging
that such Obligor is insolvent or unable to pay its debts as they mature, or for
the readjustment or arrangement of anyObligor's debts,  whether under the United
States  Bankruptcy Code or under any other state or federal law now or hereafter
existing  for the  relief  of  debtors,  or the  commencement  of any  analogous
statutory or non-statutory  proceedings involving any Obligor; provided that, if
such  commencement  of proceedings  against such Obligor is involuntary and such
Obligor is  contesting  such  proceedings  in good faith,  such action shall not
constitute an Event of Default unless such  proceedings are not dismissed within
thirty (30) days after the commencement thereof,

     (g) The  appointment  of a receiver or trustee for any Obligor,  for any of
the  Collateral  or for any  substantial  part of any  Obligor's  assets  or the
institution  of any  proceedings  for the  dissolution,  or the full or  partial
liquidation,  of any Obligor which is a corporation or a  partnership;  provided
that, if such appointment or commencement of proceedings against such Obligor is
involuntary and such Obligor is contesting such proceedings in good faith,  such
action shall not constitute an Event of Default  unless such  appointment is not
revoked or such  proceedings are not dismissed within thirty (30) days after the
appointment or commencement thereof;

     (h) The entry of any final  judgment or order against any Obligor  granting
equitable  relief or awarding money damages in excess of Fifty Thousand  Dollars
($50,000.00) which remains  unsatisfied or undischarged and in effect for ninety
(90) days after such entry without a stay of enforcement or execution;

     (i) The death of any Obligor who is a natural Person or the  dissolution of
any Obligor which is a partnership or corporation;

     0) The  occurrence of a material  change in the identity or  composition of
the Persons who are directors or executive officers of Borrower;

     (k) The  occurrence  of an event of default  under,  or the  revocation  or
termination of, any agreement,  instrument or document executed and delivered by
any Person to Lender  pursuant to which such Person has guaranteed to Lender the
payment  of all or any of the  Liabilities  or has  granted  Lender  a  security
interest  in or lien  upon some or all of such  Person's  real  and/or  personal
property to secure the payment of all or any of the Liabilities;

                                       71

<PAGE>


     (1) The  institution  in any court of a  criminal  proceeding  against  any
Obligor, or the indictment of any Obligor for any crime; or

     (m) Lender shall feel insecure for any reason whatsoever, including without
limitation fear of removal or waste of all or part of the Collateral.

           14.      REMEDIES UPON AN EVENT OF DEFAULT.

     (a) Upon the occurrence of an Event of Default described in paragraph 13(f)
hereof,  all  Liabilities  shall  immediately and  automatically  become due and
payable,  without notice of any kind.  Upon the occurrence of any other Event of
Default,  all  Liabilities  may, at the option of Lender,  and  without  demand,
notice or legal process of any kind, be declared,  and immediately shall become,
due and payable.

     (b) Upon the  occurrence  of an Event of Default,  Lender may exercise from
time to  time  any  rights  and  remedies  available  to it  under  the  Uniform
Commercial Code and any other applicable law in addition to, and not in lieu of,
any rights and  remedies  expressly  granted in this  Agreement or in any of the
Other  Agreements,  and all of Lender's  rights and remedies shall be cumulative
and non-exclusive to the extent permitted by law. In particular,  but not by way
of limitation of the  foregoing,  Lender may,  without  notice,  demand or legal
process  of any  kind,  take  possession  of any  or all of the  Collateral  (in
addition to Collateral of which it already has  possession),  wherever it may be
found,  and for that purpose may pursue the same  wherever it may be found,  and
may enter into any of Borrower's premises where any of the Collateral may be and
search for, take  possession  of,  remove,  keep and store any of the Collateral
until the same shall be sold or otherwise disposed of, and Lender shall have the
right to store the same at any of Borrower's premises without cost to Lender. At
Lender's request,  Borrower shall at Borrower's  expense assemble the Collateral
and make it available to Lender at one or more places to be designated by Lender
and reasonably  convenient to Lender and Borrower.  Borrower  recognizes that if
Borrower  fails to perform,  observe or discharge any of the  Liabilities  under
this Agreement or the Other  Agreements,  no remedy at law will provide adequate
relief to Lender, and Borrower agrees that Lender shall be entitled to temporary
and  permanent  injunctive  relief in any such case  without  the  necessity  of
proving  actual  damages.  Any  notification  required  by law  of the  intended
disposition of any Collateral  shall be deemed  reasonably and properly given if
given at least ten (1 0) calendar days before such disposition.  Any proceeds of
any  disposition  by Lender of any  Collateral  may be  applied by Lender to the
payment  of  expenses  in  connection  with the  Collateral,  including  without
limitation legal expenses and reasonable  attorney fees, and any balance of such
proceeds may be applied by Lender toward the payment of such of the Liabilities,
and in such  order  of  application,  as  Lender  may from  time to time  elect,
including without limitation to provide cash collateral to secure the Letters of
Credit.

                                       72

<PAGE>


     15.  INDEMNIFICATION.  Borrower shall defend (with counsel  satisfactory to
Lender),  protect,  indemnify and hold hannless Lender, each Affiliate of Lender
and each of their  respective  officers,  directors,  employees,  attorneys  and
agents (each an "Indemnified  Party") from and against any and all  liabilities,
obligations,  losses, damages,  penalties,  actions,  judgments,  suits, claims,
costs,  expenses and  disbursements  of any  judgments,  suits,  claims,  costs,
expenses and disbursements of any kind or nature (including  without  limitation
the disbursements and the reasonable fees of counsel for each Inderymified Party
in connection with any  investigative,  administrative  or judicial  proceeding,
whether or not the Indemnified Party shall be designated a party thereto), which
may be imposed on,  incurred  by, or  asserted  against  any  Indemnified  Party
(whether  direct,  indirect or  consequential  and whether based on any federal,
state or local laws or regulations,  including  without  limitation  securities,
environmental  and  commercial  laws and  regulations,  under  common  law or in
equity,  or based on contract or otherwise) in any manner relating to or arising
out of this Agreement or the Other Agreements,  or any act, event or transaction
related or attendant thereto,  the making and the management of the Loans or any
Letters of Credit or the use or intended use of the proceeds of the Loans or any
Letters  of  Credit;  provided  that  Borrower  shall  not have  any  obligation
hereunder  to any  Indemnified  Party  with  respect  to  matters  caused  by or
resulting from the willful  misconduct or gross  negligence of such  Indemnified
Party.  To the  extent  that  the  undertaking  to  indemnify  set  forth in the
preceding  sentence may be  unenforceable  because it is violative of any law or
public  policy,  Borrower  shall satisfy such  undertaking to the maximum extent
permitted by applicable law. Any liability,  obligation,  loss, damage, penalty,
cost or expense  covered  by this  indemnify  shall be paid to each  Indemnified
Party on demand,  and,  failing prompt  payment,  shall,  together with interest
thereon at the highest rate then  applicable  to Loans  hereunder  from the date
incurred  by each  Indemnified  Party  until paid by  Borrower,  be added to the
Liabilities and be secured by the  Collateral.  The provisions of this paragraph
15 shall  survive  the  satisfaction  and  payment  of the  Liabilities  and the
termination of this Agreement.

                                       73

<PAGE>


     16.  NOTICE.  All written  notices and other  written  communications  with
respect to this  Agreement  shall be sent by  ordinary,  certified  or overnight
mail,  by facsimile  transmission  or  delivered  in person,  and in the case of
Lender shall be sent to it at One Tabor  Center,  1200 17th Street,  Suite 2760,
Denver,  Colorado 80202,  Attention:  William N. Tsiouvaras,  and in the case of
Borrower shall be sent to it at its principal place of business set forth on the
first page of this Agreement, Attention: Wayne R. Wright.

     17. CHOICE OF GOVERNING LAW; CONSTRUCTION;  FORUM SELECTION. This Agreement
and the Other  Agreements  are  submitted  by  Borrower  to Lender for  Lender's
acceptance or rejection at Lender's  principal  place of business as an offer by
Borrower to borrow  monies from Lender now and from time to time  hereafter  and
shall not be binding upon Lender or become effective until accepted by Lender in
writing at said place of business.  If so accepted by Lender, this Agreement and
the  Other  Agreements  shall  be  deemed  to have  been  made at said  place of
business.  THIS  AGREEMENT  AND THE  OTHER  AGREEMENTS  SHALL  BE  GOVERNED  AND
CONTROLLED BY THE INTERNAL  LAWS OF THE STATE OF COLORADO AS TO  INTERPRETATION,
ENFORCEMENT,   VALIDITY,  CONSTRUCTION,  EFFECT,  AND  IN  ALL  OTHER  RESPECTS,
INCLUDING  WITHOUT  LIMITATION  THE  LEGALITY  OF THE  INTEREST  RATE AND  OTHER
CHARGES,  BUT EXCLUDING  PERFECTION OF THE SECURITY INTERESTS IN THE COLLATERAL,
WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION.
If any provision of this Agreement  shall be held to be prohibited by or invalid
under  applicable law, such provision shall be ineffective only to the extent of
such  prohibition  or  invalidity,  without  invalidating  the remainder of such
provision or remaining provisions of this Agreement.  To induce Lender to accept
this Agreement,  Borrower  irrevocably agrees that, subject to Lender's sole and
absolute  election,  ALL ACTIONS OR  PROCEEDINGS  IN ANY WAY,  MANNER OR RESPECT
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE
COLLATERAL  SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY AND COUNTY
OF DENVER,  STATE OF  COLORADO.  BORROWER  HEREBY  CONSENTS  AND  SUBMITS TO THE
JURISDICTION OF ANY LOCAL,  STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND
COUNTY AND STATE.  BORROWER  HEREBY  WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR
CHANGE  THE  VENUE OF ANY  LITIGATION  BROUGHT  AGAINST  BORROWER  BY  LENDER IN
ACCORDANCE WITH THIS PARAGRAPH 17.

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<PAGE>


     18. PARTICIPATION; ASSIGNMENT. Lender shall have the right to assign all or
any of its rights under this Agreement and the Other Agreements, and/or to offer
participation  interests  therein to any Person without the consent of Borrower.
In such event, Borrower shall execute such agreements, instruments and documents
as Lender shall request and as are customary in connection therewith,  including
without  limitation  agreements,  instruments  and  documents  in  favor of each
assignee and participant.

     19.  MODIFICATION  AND BENEFIT OF AGREEMENT.  This  Agreement and the Other
Agreements  may not be  modified,  altered or amended  except by an agreement in
writing signed by Borrower and Lender. Borrower may not sell, assign or transfer
this Agreement or the Other Agreements or any portion thereof, including without
limitation  Borrower's  rights,  titles,  interest,  remedies,  powers or duties
hereunder or thereunder.

     20.  HEADINGS  OF  SUBDIVISIONS.  The  headings  of  subdivisions  in  this
Agreement  are for  convenience  of  reference  only,  and shall not  govern the
interpretation of any provisions of this Agreement.

     21.  POWER  OF  ATTORNEY.   Borrower   acknowledges  and  agrees  that  its
appointment  of  Lender  as its  attorney  and  agent-in-fact  for the  purposes
specified in this Agreement is an appointment coupled with an interest and shall
be  irrevocable  until the  Liabilities  are paid in full and this  Agreement is
terminated.

         22.      WAIVER OF JURY TRIAL; OTHER WAIVERS.

     (a)  BORROWER  HEREBY  WAIVES  ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING  WHICH PERTAINS  DIRECTLY OR INDIRECTLY TO THIS AGREEMENT,  THE OTHER
AGREEMENTS,  THE  LIABILITIES,  THE COLLATERAL,  ANY ALLEGED TORTIOUS CONDUCT BY
BORROWER OR LENDER OR WHICH, IN ANY WAY,  DIRECTLY OR INDIRECTLY,  ARISES OUT OF
OR RELATES TO THE RELATIONSHIP  BETWEEN  BORROWER AND LENDER.  IN NO EVENT SHALL
LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.

     (b)  Borrower  hereby  waives  demand,  presentment,  protest and notice of
nonpayment, and Borrower further waives the benefit of all valuation,  appraisal
and exemption laws.

     (c)  BORROWER  HEREBY  WAIVES ALL RIGHTS TO NOTICE AND  HEARING OF ANY KIND
PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO  REPOSSESS  THE  COLLATERAL  OF
BORROWER  WITHOUT  JUDICIAL  PROCESS  OR TO  REPLEVY,  ATTACH  OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

                                       75

<PAGE>


     (d) Lender's  failure,  at any time or times  hereafter,  to require strict
performance  by  Borrower  of any  provision  of  this  Agreement  or the  Other
Agreements shall not waive, affect or diminish any right of Lender thereafter to
demand strict compliance and performance therewith.  Any suspension or waiver by
Lender of an Event of Default  under this  Agreement  or any  default  under the
Other Agreements  shall not suspend,  waive or affect any other Event of Default
under this  Agreement or any other default under the Other  Agreements,  whether
the same is prior or  subsequent  thereto and whether of the same or a different
kind or  character.  No delay on the part of Lender in the exercise of any right
or remedy under this Agreement or the Other  Agreements  shall preclude other or
further  exercise  thereof or the  exercise of any right or remedy.  None of the
undertakings,  agreements, warranties, covenants and representations of Borrower
contained  in this  Agreement  or the Other  Agreements  and no Event of Default
under this  Agreement or default under the Other  Agreements  shall be deemed to
have been  suspended or waived by Lender unless such  suspension or waiver is in
writing,  signed by a duly authorized officer of Lender and directed to Borrower
specifying such suspension or waiver.

                                   Signatures

     IN WITNESS THEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.

                                              NATIONAL BANK OF CANADA

                                           By /s/ William N. Tsiouvaras
                                            Name William N. Tsiouvaras
                                               Title Vice President


                                              PEN INTERCONNECT, INC.

                                    By: /s/ James S. Pendleton
                                    Name:  James S. Pendleton
                                    Title:  President

                                     76

<PAGE>



Exhibits:

                A     -    Business and Collateral Locations
                B     -    Existing Liens
                C     -    Tradenames and Division Names
                D     -    Equipment
                E     -    Existing Indebtedness
                F     -    Shareholders
                G     -    Subsidiaries and Divisions
                H     -    Financial Statement Certificate



                                       77


<PAGE>



                                   EXHIBIT 11

                             PEN INTERCONNECT, INC.

                    Calculation of Earnings (Loss) Per Share

                             FOR FISCAL YEARS ENDED

                           SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>

                                                                                                           Fully
                                                                                       Primary          dilutive
                                                                      Months          Weighted          Weighted
                                                      Common         out-              Average           Average
   1996                                             Shares          Standing           Shares             Shares
   -------------------------------------------------------------------------------------------------------------

<S>                                                <C>              <C>            <C>               <C>
Balance at October 1, 1995                         1,700,000              12        20,400,000        20,400,000
Issued November 17, 1995                           1,000,000            10.5        10,500,000        10,500,000
Issued May 15, 1996                                  333,407             4.5         1,500,332         1,500,332
                                                     -------                         ---------
Balance at Sept. 30, 1996 - Primary                3,033,407                        32,400,332
                                                   =========                        ==========

Contingent Shares                                     55,568             4.5                             250,056
                                                                                                         -------
Balance at Sept. 30, 1996 - Fully dilutive                                                            32,650,388
                                                                                                      ==========

Weighted average number of shares for twelve months                                  2,700,028         2,720,866
                                                                                     ---------         ---------
Loss for fiscal year ended Sept. 30                                                $ (709,010)       $ (709,010)
                                                                                   ===========       ===========
Loss per share                                                                        $ (0.26)          $ (0.26)
                                                                                      ========          ========


   1995

Balance at October 1, 1994                         1,200,000              12        14,400,000        14,400,000
Issued October  1994                                 500,000              12         6,000,000         6,000,000
                                                     -------                         ---------         ---------
Balance at Sept. 30, 1995 - Primary                1,700,000                        20,400,000        20,400,000
                                                   =========                        ==========        ==========

Weighted average number of shares for twelve months                                  1,700,000         1,700,000
                                                                                     ---------         ---------
Earnings for fiscal year ended Sept. 30                                              $ 617,618         $ 617,618
                                                                                     =========         =========
Earnings per share                                                                      $ 0.36            $ 0.36
                                                                                        ======            ======

</TABLE>




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