Exhibit 10.3

















Exhibit 10.3








	







WELLS FARGO
	
		
TERM NOTE

	
		$1,000,000.00
	Irvine, California

		January 4, 2006



FOR VALUE RECEIVED, the
undersigned Pro-Dex, Inc. ("Borrower") promises to pay to the order of
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Orange County
RCBO, 2030 Main Street, Suite #900, Irvine, CA 92614, or at such other
place as the holder hereof may designate, in lawful money of the United States
of America and in immediately available funds, the principal sum of $1,000,000.00,
with interest thereon as set forth herein.




1.         DEFINITIONS:




As used herein, the following
terms shall have the meanings set forth after each, and any other term defined
in this Note shall have the meaning set forth at the place defined:




1.1       "Business Day" means
any day except a Saturday, Sunday or any other day on which commercial banks in
  California re authorized or required by law to close.




1.2       "Fixed Rate Term" means
a period commencing on a Business Day and continuing for 1, 2, 3, or
6 months, as designated by Borrower, during which all or a portion of the
outstanding principal balance of this Note bears interest determined in
relation to LIBOR; provided, however, that no Fixed Rate Term may be selected
for a principal amount less than $1,000,000.00; and provided further,
that no Fixed Rate Term shall extend beyond the scheduled maturity date
hereof.  If any Fixed Rate Term would end on a day which is  not a Business
Day, then such Fixed Rate Term shall be extended to the next succeeding
Business Day.




1.3       "LIBOR" means the rate
per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%)
determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR
Reserve Percentage.




(a)        "Base
LIBOR" means the rate per annum for United States dollar deposits quoted by
Bank as the Inter-Bank Market Offered Rate, with the understanding that such
rate is quoted by Bank for the purpose of calculating effective rates of
interest for loans making reference thereto, on the first day of a Fixed Rate
Term for delivery of funds on said date for a period of time approximately
equal to the number of days in such Fixed Rate Term in an amount approximately
equal to the principal amount to which such Fixed Rate Term applies.  Borrower
understands and agrees that Bank may base its quotation of the Inter-Bank
Market Offered Rate upon such offers or other market indicators of the
Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.

 

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(b)        "LIBOR
Reserve Percentage" means the reserve percentage prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for "Eurocurrency
Liabilities" (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted for Bank for expected changes in such reserve percentage
during the applicable Fixed Rate Term.


1.4       "Prime Rate" means at
any time the rate of interest most recently announced within Bank at its
principal office as its Prime Rate, with the understanding that the Prime Rate
is one of Bank's base rates and serves as the basis upon which effective rates
of interest are calculated for those loans making reference thereto, and is
evidenced by the recording thereof after its announcement in such internal
publication or publications as Bank may designate.




2.         INTEREST:


2.1       Interest.  The
outstanding principal balance of this Note shall bear interest (computed on the
basis of a 360-day year, actual days elapsed) either (a) at a fluctuating rate
per annum equal to the Prime Rate in effect from time to time, or (b) at
a fixed rate per annum determined by Bank to be 2.50000% above LIBOR in
effect on the first day of the applicable Fixed Rate Term.  When interest is
determined in relation to the Prime Rate, each change in the rate of interest
hereunder shall become effective on the date each Prime Rate change is
announced within Bank.  With respect to each LIBOR selection hereunder, Bank is
hereby authorized to note the date, principal amount, interest rate and Fixed
Rate Term applicable thereto and any payments made thereon Bank's books and
records (either manually or by electronic entry) and/or on any schedule
attached to this Note, which notations shall be prima facie evidence of the
accuracy of the information noted.




2.2       Selection of
Interest Rate Options.  At any time any portion of this Note bears interest
determined in relation to LIBOR, it may be continued by Borrower at the end of
the Fixed Rate Term applicable thereto so that all or a portion thereof bears
interest determined in relation to the Prime Rate or to LIBOR for a new Fixed
Rate Prime Rate, Borrower may convert all or a portion thereof so that it bears
interest determined in relation to LIBOR for a Fixed Rate Term designed by
Borrower.  At the time this Note is disbursed or Borrower wishes to select a
LIBOR option for all or a portion of the outstanding principal balance hereof,
and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying: (a) the interest rate option selected by Borrower; (b) the
principal amount subject thereto; and (c) for each LIBOR selection, the length
of the applicable Fixed Rate Term.  Any such notice may be given by telephone
(or such other electronic method as Bank may permit) so long as, with respect
to each LIBOR selection, (i) if requested by Bank, Borrower provides to Bank
written confirmation thereof not later than 3 Business Days after such notice
is given, and (ii) such notice is given to Bank prior to 10:00 a.m. on the
first day of the Fixed Rate Term, or at a later time during any Business Day if
Bank, at its sole option but without obligation to do so, accepts Borrower's
notice and quotes a fixed rate to Borrower.  If Borrower does not immediately
accept a fixed rate when quoted by Bank, the quoted rate shall expire and any
subsequent LIBOR request from Borrower shall be subject to a redetermination by
Bank of the applicable fixed rate.  If no specific designation of interest is
made at the time this Note is disbursed or at the end of any Fixed Rate Term,
Borrower shall be deemed to have made a Prime Rate interest selection for this
Note of the principal amount to which such Fixed Rate Term applied.

 

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2.3       Taxes and Regulatory
Costs.  Borrower shall pay to Bank immediately upon demand, in addition to
any other amounts due or to become due hereunder, any and all (a) withholdings,
interest equalization taxes, stamp taxes or other taxes (except income and
franchise taxes) imposed by any domestic or foreign governmental authority and
related in any manner to LIBOR, and (b) future, supplemental, emergency or
other changes in the LIBOR Reserve Percentage, assessment rates imposed by the
Federal Deposit Insurance Corporation, or similar requirements or costs imposed
by any domestic or foreign governmental authority or resulting from compliance
by Bank with any request or directive (whether or not having the force of law)
from any central bank or other governmental authority and related in any manner
to LIBOR to the extent they are included in the calculation of LIBOR.  In
determining which of the foregoing are attributable to any LIBOR option
available to Borrower hereunder, any reasonable allocation made by Bank among
its operations shall be conclusive and binding upon Borrower.




2.4        Payment of Interest. 
Interest accrued on this Note shall be payable on the 4th day
of each month, commencing February 4, 2006.






2.5       Default Interest. 
From and after the maturity date of this Note, or such earlier date as all
principal owing hereunder becomes due and payable by acceleration or otherwise,
the outstanding principal balance of this Note shall bear interest until paid
in full at an increased rate per annum (computed on the basis of a 360-day
year, actual days elapsed) equal to 4% above the rate of interest from time to
time applicable to this Note.




2.6       Collection of 
Payment.  Borrower authorizes Bank to collect all principal and interest
due hereunder by charging Borrower's account number 4169-538501 with
Bank, or any other deposit account maintained by any Borrower with Bank, for
the full amount thereof.  Should there be insufficient funds in any such
deposit account to pay all such sums when due, the full amount of such
deficiency shall be immediately due and payable by Borrower.




3.          REPAYMENT AND
PREPAYMENT:


3.1       Repayment. 
Principal shall be payable on the 4th day of each month in
installments of $20,833.33 each, commencing February 4, 2006, and
continuing up to and including December 4, 2009, with a final
installment consisting of all remaining unpaid principal due and payable in
full on January 4, 2010.


3.2       Application of
Payments.  All payments credited to principal shall be applied first, to
the outstanding principal balance of this Note which bears interest determined
in relation to the Prime Rate, if any, and second to the outstanding principal
balance of this Note which bears interest determined in relation to LIBOR, with
such payments applied to the oldest Fixed Rate Term first.




3.3        Prepayment.  




(a)        Prime
Rate.  Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to the Prime Rate at any time, in any
amount and without penalty.

 

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(b)        LIBOR. 
Borrower may prepay principal on any portion of this Note which bears interest
determined in relation to LIBOR at any time and in the minimum amount of
$1,000,000.00; provided however, that if the outstanding principal balance of
such portion of this Note is less than said amount, the minimum prepayment amount
shall be the entire outstanding principal balance thereof.  In consideration of
Bank providing this prepayment option to Borrower, or if any such portion of
this Note shall become due and payable at any time prior to the last day of the
Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall
pay to Bank immediately upon demand a fee which is the sum of the discounted
monthly differences for each month from the month of prepayment through the
month in which such Fixed Rate Term matures, calculated as follows for each
such month:




(i)         Determine
the amount of interest which would have accrued each month  on the amount of
prepaid at the interest rate applicable to such amount had it remained
outstanding until the last day of the Fixed Rate Term applicable thereto.




(ii)        Subtract
from the amount determined in (i) above the amount of interest which would have
accrued for the same month on the amount prepaid for the remaining term of such
Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made
for such term and in a principal amount equal to the amount prepaid.




(iii)       If
the result obtained in (ii) for any month is greater than zero, discount that
difference by LIBOR used in (ii) above.




Each Borrower acknowledges that
prepayment of such amount may result in Bank incurring additional costs,
expenses and/or liabilities, and that it is difficult to ascertain the full
extent of such costs, expenses and/or liabilities.  Each Borrower, therefore,
agrees to pay the above-described prepayment fee and agrees that said amount
represents a reasonable estimate of the prepayment cots, expenses and/or
liabilities of Bank.  If Borrower fails to pay any prepayment fee when due, the
amount of such prepayment fee shall thereafter bear interest until paid at a
rate per annum 2.000% above the Prime Rate in effect from time to time
(computed on the basis of a 360-day year, actual days elapsed).  Each change in
the rate of interest on any such past due prepayment fee shall become effective
on the date each Prime Rate change is announced within Bank.




All prepayments of principal
shall be applied on the most remote principal installment or installments then
unpaid. 




4.         COLLATERAL:

As security for the payment and
performance of all obligations of Borrower under this Note, Borrower grants to
Bank security interests of first priority (except as agreed otherwise by Bank
in Writing) in the following property of Borrower, now owned or at any time
hereafter acquired:  all accounts receivable other rights to payment and
general intangibles; all inventory; all equipment, together
with security interests in all other personal property of Borrower now owned or
at any time hereafter pledged to Bank as collateral for any other commercial
credit accommodation granted by Bank to Borrower.  All of the foregoing shall
be evidenced by and subject to the terms of such security agreements, financing
statements and other documents as Banks hall reasonably require, all in form
and substance satisfactory to Bank.  Borrower shall reimburse Bank immediately
upon demand for all costs and expenses incurred by Bank in connection with any
of the foregoing security, including without limitation, filing fees and
allocated costs of collateral audits.

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5.         EVENTS OF DEFAULT:


Any default in the payment or
performance of any obligation under this Note, or any defined event of default
under any loan agreement now or at any time hereafter in effect between
Borrower and Bank (whether executed prior to, concurrently with or at any time
after this Note), shall constitute an "Event of Default" under this Note.




6.         MISCELLANEOUS:


6.1       Remedies.  Upon
the occurrence of any Event of Default, the holder of this Note, at the
holder's option, may declare all sums of principal, interest, fees and other
charges outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice and dishonor, all of which are expressly waived by each Borrower, and
the obligation, if any, of the holder to extend any further credit hereunder
shall immediately cease and terminate.  Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel),
expended or incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.




6.2       Obligations Joint
and Several.  Should more than one person or entity sign this Note as a
Borrower, the obligations of each Borrower shall be joint and several.




6.3       Governing Law. 
This Note shall be governed by and construed in accordance with the laws of the
State of California.




IN WITNESS WHEREOF, the
undersigned has executed this Note as of the date first written above.




Pro-Dex, Inc.




By: ______/s/ Jeffrey Ritchey ________________________

       Jeffrey Ritchey, CFO, Treasurer, Secretary




By: _____/s/ Patrick Johnson ________________________

       Patrick Johnson, President, CEO

 

 

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