EXHIBIT 10.35


                    REVOLVING CREDIT AND TERM LOAN AGREEMENT

         AGREEMENT  (this  "AGREEMENT")  is made and entered into as of the 27th
day of June,  2007,  by and between  BLUEFIN  CAPITAL,  LLC, a Delaware  limited
liability  company  (the  "LENDER"),   and  TAG-IT  PACIFIC,  INC.,  a  Delaware
corporation (the "BORROWER").

                              W I T N E S S E T H :

         WHEREAS, the Borrower is engaged in the business of distributing a full
range of apparel,  zipper and trim products to manufacturers of fashion apparel,
specialty  retailers  and  mass  merchandisers   (collectively,   the  "BUSINESS
OPERATIONS"); and

         WHEREAS, in order to provide funds for (a) the repayment and retirement
of the Convertible Debentures (as such term is hereinafter defined), and (b) the
Borrower's  working capital and other general corporate  purposes,  the Borrower
has requested the Lender to extend to the Borrower a revolving  credit  facility
and a term loan on the terms and conditions of this Agreement; and

         WHEREAS,  the Lender is  willing  and able to  provide  such  revolving
credit  facility  and make  such  term  loan to the  Borrower  on the  terms and
conditions of this Agreement;

         NOW,  THEREFORE,  in  consideration  of the  premises  and  the  mutual
covenants herein contained, the parties hereby agree as follows:

I.       DEFINITIONS

         SECTION  1.01.  DEFINED  TERMS.  In addition to the other terms defined
elsewhere in this Agreement,  as used herein, the following terms shall have the
following meanings:

                  "ACCOUNTS"  shall mean  "accounts"  (as defined in the UCC) of
the Borrower and its Subsidiaries from time to time.

                  "ACCOUNT  DEBTOR" shall mean any Person who is obligated on an
Account.

                  "ACT" shall mean the Securities  Act of 1933, as amended,  and
the rules and regulations thereunder.

                  "ADVANCES"  shall  mean the  principal  amounts  loaned to the
Borrower from time to time pursuant to Section 2.01 below.

                  "AFFILIATE" shall mean, with respect to any Person,  any other
Person in Control of,  Controlled  by, or under  common  Control  with the first
Person, and any other Person who has a substantial interest, direct or indirect,
in the first Person or any of its Affiliates, including, without limitation, any
officer or  director  of the first  Person or any of its  Affiliates;  PROVIDED,
HOWEVER,  that neither the Lender nor any of its  Affiliates  shall be deemed an
"Affiliate" of the


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Borrower for any purposes of this Agreement. For the purpose of this definition,
a "substantial  interest"  shall mean the direct or indirect legal or beneficial
ownership  of more  than ten  (10%)  percent  of any  class of stock or  similar
interest.

                  "AGREEMENT"  shall  mean this  Revolving  Credit and Term Loan
Agreement as it may from time to time be amended, modified,  supplemented and/or
restated.

                  "APPLICABLE  LAW" shall mean all applicable  provisions of all
(a) constitutions,  statutes,  ordinances,  rules, regulations and orders of all
governmental and/or quasi-governmental bodies, (b) Government Approvals, and (c)
order, judgments and decrees of all courts and arbitrators.

                  "AVAILABILITY" shall mean the amount (if any) by which, at the
time of  determination,  (a) the  Revolving  Credit  Commitment  exceeds (b) the
outstanding principal amount of Advances.

                  "BORROWING   BASE"  shall  mean  an  amount,   determined   in
accordance with the most recent  borrowing base report  theretofore  provided to
the Lender under Section 5.04(d) below,  equal to (a) 75% of Eligible  Accounts,
PLUS (b) 55% of Eligible Inventory, PLUS (c)(i) $1,200,000 at all times from the
Closing Date through and  including  June 30, 2007,  (ii)  $750,000 at all times
from July 1, 2007 through and including  September 30, 2007,  and (iii) $500,000
at all times from October 1, 2007 through and  including  March 31, 2008,  MINUS
(d) the amount (if any) of the Debenture  Reserve at the date of  determination,
MINUS (e) such other  reserves as the Lender may establish  from time to time in
its Permitted Discretion (including,  without limitation, to account for Account
concentration  and other risks of collection,  and for obsolete,  slow-moving or
otherwise problematic inventory).  In the event that the Borrower has not timely
delivered a current  Borrowing  Base report in accordance  with Section  5.04(d)
below, then the applicable Borrowing Base shall be such amount as is established
by the Lender, until such time as the Borrower has delivered a current Borrowing
Base report.

                  "BORROWING  DATE" means the  Business  Day on which the Lender
makes a Loan hereunder.

                  "BUSINESS DAY" shall mean a day other than (a) a Saturday, (b)
a Sunday,  or (c) a day on which  banking  institutions  in either  the State of
Florida  or the  State  of  California  are  authorized  or  required  by law or
executive order to close.

                  "CAPITAL  EXPENDITURES" shall mean with respect to any Person,
all expenditures of such Person for tangible assets which are  capitalized,  and
the fair value of any  tangible  assets  leased by such  Person  under any lease
which  would  be a  Capitalized  Lease,  determined  in  accordance  with  GAAP,
including  all  amounts  paid or accrued by such Person in  connection  with the
purchase  (whether  on a cash or  deferred  payment  basis) or lease  (including
Capitalized  Lease  Obligations)  of any  machinery,  equipment,  real property,
improvements to real property (including leasehold  improvements),  or any other
tangible asset of such Person which is required,  in accordance with GAAP, to be
treated as a fixed asset on the consolidated balance sheet of such Person.


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                  "CAPITALIZED LEASE" shall mean any lease which is or should be
capitalized  on the balance sheet of the lessee  thereunder  in accordance  with
GAAP.

                  "CAPITALIZED  LEASE OBLIGATION" shall mean with respect to any
Person, the amount of the liability which reflects the amount of future payments
under all  Capitalized  Leases of such  Person  as at any  date,  determined  in
accordance with GAAP.

                  "CASH  EQUIVALENTS"  shall  mean  (a)  marketable   securities
issued,  or directly and fully  guaranteed  or insured,  by the United States of
America or any agency or  instrumentality  thereof (provided that the full faith
and credit of the United States of America is pledged in support thereof) having
maturities of not more than twelve (12) months from the date of acquisition; (b)
time deposits,  demand deposits,  certificates of deposit,  acceptances or prime
commercial paper issued by, or repurchase  obligations for underlying securities
of the types  described  in clause (a)  entered  into with any  commercial  bank
having a short-term  deposit rating of at least A-2 or the equivalent thereof by
Standard  & Poor's  Corporation  or at least P-2 or the  equivalent  thereof  by
Moody's  Investors  Service,  Inc.; (c) commercial paper with a rating of A-I or
A-2 or the equivalent  thereof by Standard & Poor's Corporation or P-1 or P-2 or
the  equivalent  thereof by Moody's  Investors  Service,  Inc.  and in each case
maturing within twelve (12) months after the date of acquisition; (d) marketable
direct  obligations  issued by any state in the  United  States or any agency or
instrumentality  thereof  maturing  within  twelve  (12) months from the date of
acquisition thereof and, at the time of acquisition, have one of the two highest
ratings  generally  obtainable  from  either  Standard & Poor's  Corporation  or
Moody's  Investors  Services,  Inc.; (e) tax-exempt  commercial  paper of United
States  municipal,  state  or  local  governments  rated  at  least  A-2  or the
equivalent  thereof  by  Standard  & Poor's  Corporation  or at least P-2 or the
equivalent  thereof by Moody's  Investors  Services,  Inc. and  maturing  within
twelve (12) months after the date of  acquisition  thereof;  (f) any other items
selected by the Borrower and approved by the Lender (which approval shall not be
unreasonably  withheld  or  delayed);  or (g) any  mutual  fund or other  pooled
investment vehicle which invests principally in the foregoing obligations.

                  "CLOSING  DATE"  shall mean the date on which the Term Loan is
funded.

                  "CLOSING  FEE" shall mean the sum of $250,000  with respect to
the Term Loan, which shall be payable in accordance with Section 2.03(a) below.

                  "CODE" shall mean the Internal  Revenue Code of 1986,  and the
rules and regulations promulgated thereunder, as in effect from time to time.

                  "COLLATERAL" shall mean all collateral pledged by the Borrower
and/or any of the  Subsidiaries  as security for the payment and  performance of
the  Obligations,  whether  pursuant to the  Collateral  Agreement  or any other
Security Document.

                  "COLLATERAL  AGREEMENT"  shall mean the Collateral  Agreement,
dated as of the Closing  Date,  by and between the Borrower  and the Lender,  as
same may be amended, modified, supplemented and/or restated from time to time.

                  "COMMITMENT  FEES" shall mean the annual  fees  payable to the
Lender pursuant to Section 2.03(b)(ii) below.


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<PAGE>


                  "COMMON STOCK" shall mean the  authorized  common stock of the
Company, $.001 par value per share.

                  "CONFIDENTIAL  INFORMATION"  shall mean  information  that the
Borrower furnishes to the Lender which is not generally  available to the public
or available  to the Lender from a source other than the Borrower  which is not,
to the Lender's  knowledge,  bound by any  confidentiality  agreement in respect
thereof.

                  "CONTRACT"  shall mean any  indenture,  agreement  (other than
this Agreement),  other contractual restriction,  lease in which the Borrower or
any Subsidiary is a lessor or lessee, license or instrument.

                  "CONTROL" shall mean the  possession,  directly or indirectly,
of the power to direct or cause the direction of the management or policies of a
Person,  whether  through the  ownership  of voting  securities,  by contract or
otherwise,  and the terms  "CONTROLLING"  and  "CONTROLLED"  shall have meanings
correlative thereto.

                  "CONTROL  AGREEMENT"  shall  mean,  with  respect to each bank
account (including,  without  limitation,  the Escrow Account) and/or securities
account maintained by or in the name of the Borrower or any Subsidiary from time
to time,  an agreement  executed  and  delivered by the Borrower (or the subject
Subsidiary,  as applicable)  and the account  intermediary,  whereby the account
intermediary  acknowledges  the  Lender's  Lien on such account and all funds or
property  therein,  and  "control"  (within  the  meaning  of the UCC) over such
account is established in favor of the Lender.

                  "CONVERTIBLE DEBENTURES" shall mean the Convertible Promissory
Notes of the Borrower dated November 9, 2004 in the aggregate  principal  amount
of $12,500,000, which by their terms mature on November 9, 2007.

                  "DEBENTURE  RESERVE"  shall mean, at any time, an amount equal
to the positive difference (if any) of (a) the aggregate  outstanding  principal
amount and unpaid accrued  interest of the Convertible  Debentures at such time,
MINUS (b) the amount of funds then on deposit in the Escrow Account.

                  "DEFAULT"  shall mean any of the events  specified  in Article
VII hereof,  whether or not any requirement for the giving of notice,  the lapse
of time, or both, or any other condition, has been satisfied.

                  "DISCLOSURE  SCHEDULE"  shall  mean the  disclosure  schedule,
dated as of the Closing  Date,  executed  and  delivered  by the Borrower to the
Lender,  the section numbers of which  correspond to the Section numbers of this
Agreement.

                  "DOLLARS"  or "$" shall mean  United  States  Dollars,  lawful
currency for the payment of public and private debts.

                  "DOMESTIC  SUBSIDIARY"  shall  mean  any  Subsidiary  which is
incorporated  or  formed  under  the laws of the  United  States,  any  State or
Commonwealth in the United States, or the District of Columbia.


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<PAGE>


                  "EBITDA" shall mean, for the subject period,  for the Borrower
and its Subsidiaries on a consolidated  basis, the sum of (a) Net Income,  MINUS
(b) net income  attributable  to any  Subsidiary to the extent,  but only to the
extent,  that  such net  income is (A) not  available  for  distribution  to the
Borrower  for more  than  six (6)  months,  or (B)  required  by the  Borrower's
auditors  to be  reserved  in whole or in part as a result  of  restrictions  on
distribution  (PROVIDED,  HOWEVER,  that this clause (B) shall not apply if such
reserve(s) is included in Net Income), PLUS (c) Interest Expense deducted in the
calculation  of such Net Income,  PLUS (d) taxes on income,  whether  payable or
accrued,  deducted  in the  calculation  of such Net Income  (except  that taxes
actually paid in cash shall not be added back pursuant to this clause (d)), PLUS
(e) depreciation  expense  deducted in the calculation of such Net Income,  PLUS
(f) amortization  expense  deducted in the calculation of such Net Income,  PLUS
(g) all other non-cash  charges and expenses  (including  equity  incentive plan
expenses) deducted in the calculation of such Net Income, excluding accruals for
cash  expenses made in the ordinary  course of business,  MINUS (h) any non-cash
gains included in the  calculation of such Net Income,  PLUS (i) losses deducted
in the calculation of such Net Income from any sales of assets, other than sales
in the ordinary course of business,  MINUS (j) gains added in the calculation of
such Net  Income  from any sales of assets,  other  than  sales in the  ordinary
course of  business,  PLUS (k) other  extraordinary  or  non-recurring  non-cash
losses  deducted  in the  calculation  of  such  Net  Income,  MINUS  (l)  other
extraordinary or  non-recurring  non-cash gains added in the calculation of such
Net Income, all determined in accordance with GAAP.

                  "ELIGIBLE  ACCOUNT"  shall mean the face  amount of each trade
Account  of the  Borrower  or a  Subsidiary  (if same has  executed  a  Guaranty
Agreement and become a party to the Collateral  Agreement) for services rendered
or goods and  products  sold in the ordinary  course of the Business  Operations
which the Lender, in its Permitted Discretion,  deems to be an Eligible Account;
PROVIDED,  HOWEVER,  that an  Account  shall not be deemed an  Eligible  Account
unless it meets all of the following conditions:

                  (a) the  subject  services  or  products  and goods  have been
rendered,  shipped or delivered on an absolute  sale basis to an Account  Debtor
which is not an  Affiliate,  vendor or supplier of the Borrower or a Subsidiary,
with an invoice date  contemporaneous  with or within  thirty (30) calendar days
after  the  date of  shipment  or  service,  and  which  does not  constitute  a
consignment sale, bill-and-hold sale,  sale-and-return or other such arrangement
and is not subject to any other  repurchase,  return or offset agreement binding
upon the Borrower or a  Subsidiary;  the subject  services or products and goods
have been  rendered,  shipped and delivered (or shipped  f.o.b.) to such Account
Debtor on an open  account  basis  (or with  payment  guaranteed  by a letter of
credit,  drawn on or by a  domestic  financial  institution,  acceptable  to the
Lender in all respects), and no part of the subject services,  products or goods
has been returned,  rejected,  lost or damaged;  the Account is not evidenced by
chattel  paper or an  instrument of any kind;  and such Account  Debtor,  unless
pre-approved  in writing by the Lender,  is not  insolvent or the subject of any
bankruptcy or insolvency proceeding of any kind in any jurisdiction;

                  (b) if the Account Debtor is located  outside the  continental
United  States,  either (i) payment  for the subject  services or goods shall be
secured by an  irrevocable  letter of credit,  which letter of credit shall have
been confirmed by a financial institutional  reasonably acceptable to the Lender
payable in the full  amount of the face value of the Account in Dollars or


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other  currency  reasonably  acceptable to the Lender,  or (ii) such Account and
Account  Debtor  are  reasonably  satisfactory  to the  Lender in its  Permitted
Discretion;

                  (c)  it is a  valid,  legally  enforceable  obligation  of the
Account  Debtor  thereunder  payable  in Dollars  or other  currency  reasonably
satisfactory  to the  Lender,  and is not subject to any  recoupment,  offset or
other defense or any discount or  chargeback on the part of such Account  Debtor
(provided  that  prompt  payment  discounts  granted in the  ordinary  course of
business  shall not cause an Account to be  disqualified  hereunder,  so long as
only the discounted amount of such Account,  if not otherwise  disqualified,  is
included in the  calculation of the Borrowing  Base) or to any claim on the part
of  such  Account  Debtor  denying  liability   thereunder  (provided  that  the
undisputed portion may be considered to be an Eligible Account);

                  (d) it is subject to no Lien  whatsoever,  except for the Lien
of the Lender;

                  (e) it has not  remained  unpaid  in  whole  or in part  for a
period exceeding ninety (90) days after the original invoice date;

                  (f) it does not arise out of a transaction  (whether direct or
indirect)  with an  employee,  officer,  agent,  director  or  Affiliate  of the
Borrower  or any  Subsidiary  or with any  entity  controlled  by any  employee,
officer,  agent or director of the Borrower or any  Subsidiary  (unless,  in any
such case, a majority of the disinterested  members of the Board of Directors of
the Borrower has approved the subject  transaction and such transaction is on an
arms'-length basis);

                  (g) it is not  subject  to any  contract  retainage  or  other
withholding  of any portion of payments on amounts  invoiced,  whether to secure
the Borrower's or any Subsidiary's performance or otherwise;

                  (h) it does not represent the unpaid portion of an Account any
portion of which was  previously  paid or agreed to be paid through the issuance
or delivery of equity securities or other non-cash consideration;

                  (i) if the Account Debtor is the United  States,  any State or
Commonwealth therein, or any department,  agency or instrumentality  thereof, or
any foreign  government or agency of a foreign  government,  the Borrower or the
applicable  Domestic  Subsidiary has duly assigned its rights to payment of such
Account to the Lender  pursuant to the  federal  Assignment  of Claims Act,  any
comparable state statutes or any comparable foreign statutes (as applicable);

                  (j) the Lender has a  perfected  first  priority  Lien in such
Account;

                  (k) such  Account is not payable by any person  other than the
Account  Debtor (such as a beneficiary,  recipient or subscriber  individually),
provided that the portion  thereof which is payable by the Account Debtor may be
considered to be an Eligible Account;

                  (l) at least sixty (60%) percent in dollar amount of the total
Accounts owed by such Account Debtor and/or its Affiliates  constitute  Eligible
Accounts;


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<PAGE>


                  (m) the total  Accounts  owed by the  subject  Account  Debtor
and/or  its  Affiliates  constitute  less  than  ten  (10%)  percent  of the net
collectible dollar value of all Eligible Accounts (provided that only the excess
over ten (10%) percent shall be  disqualified  under this clause (m), unless the
Lender has otherwise consented in writing to the inclusion of all or any portion
of such excess);

                  (n) such  Account  is  payable  solely  to the  Borrower  or a
Subsidiary,  and the Borrower or such  Subsidiary is not aware of any dispute by
the Account Debtor with respect to such Account; and

                  (o) it is not  otherwise  determined  by  the  Lender,  in the
Lender's  Permitted  Discretion,  to be difficult to collect,  uncollectible  or
otherwise unacceptable for any reason.

                  "ELIGIBLE  INVENTORY"  shall  mean the lower of the cost (on a
[first in-first out] basis) or fair market value of that inventory consisting of
raw  materials  or  finished  goods (but  excluding  work in process and product
models  or  samples)  of  Borrower  or any  Subsidiary  which  is  party  to the
Collateral  Agreement which (a) is in good and merchantable  condition,  (b) was
manufactured  in  accordance  with  and  meets  all  standards  imposed  by  any
governmental  agency having  regulatory  authority  over such goods and/or their
use,  manufacture and/or sale, (c) is in the physical possession of the Borrower
or the subject  Subsidiary,  or has been  shipped to the Borrower or the subject
Subsidiary  with title thereto having passed to the Borrower or such  Subsidiary
(provided  that up to $100,000 in value of inventory  held by a  vendor/supplier
for drop  shipment to a customer  for the benefit of the Borrower or the subject
Subsidiary may be considered to be Eligible  Inventory if it otherwise meets all
other  criteria  set  forth in this  definition),  (d) is  currently  usable  or
currently saleable in the normal course of the Business  Operations,  (e) is not
on consignment to or from any Person, (f) is not subject to any Lien whatsoever,
except for the Lien of the Lender, which shall be perfected with respect to such
inventory,  (g)  has  not  been  sold  to  any  Person,  and  (h)  is  otherwise
satisfactory to the Lender in its Permitted Discretion.

                  "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as in effect from time to time.

                  "ERISA AFFILIATE" shall mean, with respect to any Person,  any
other  Person which is under  common  control  with the first Person  within the
meaning of Section 414(b) or 414(c) of the Code;  PROVIDED,  HOWEVER,  that with
respect to the  Borrower,  no Person which is an Affiliate of the Lender  (other
than the Borrower and its  Subsidiaries)  shall be deemed an ERISA Affiliate for
purposes of this Agreement

                  "ESCROW  ACCOUNT" shall mean the bank account  contemplated by
Section 2.04(b)(i) below.

                  "EVENT OF  DEFAULT"  has the  meaning set forth in Article VII
below.

                  "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.

                  "FACTORING AGREEMENT" shall mean the factoring agreement dated
July 19, 2004 by and between the  Borrower and East Asia GE  Commercial  Finance
Limited, as amended.


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                  "FINANCIAL  STATEMENTS"  has the  meaning set forth in Section
3.01(a) below.

                  "FISCAL YEAR" shall mean the fiscal year of the Borrower which
ends on December 31 of each year.

                  "FOREIGN  INVESTMENT  LIMITATION" has the meaning set forth in
Section 6.01(g) below.

                  "FOREIGN  SUBSIDIARY" shall mean any Subsidiary which is not a
Domestic Subsidiary.

                  "FREE CASH FLOW" shall mean,  for any Fiscal Year in question,
an amount equal to (a) EBITDA for the immediately  preceding  Fiscal Year, MINUS
(b) taxes  paid or payable  in cash by or in  respect  of the  Borrower  and its
Subsidiaries  during or in respect of such  immediately  preceding  Fiscal Year,
MINUS (c)  principal  and interest  payments  made or required to be made by the
Borrower and its  Subsidiaries  during such  immediately  preceding Fiscal Year,
MINUS (d) Capital Expenditures paid by the Borrower and its Subsidiaries in cash
during such immediately preceding Fiscal Year, MINUS (e) scheduled principal and
interest  payments  made  or  required  to be  made  by  the  Borrower  and  its
Subsidiaries during the subject Fiscal Year.

                  "GAAP" shall mean generally accepted accounting  principles in
the United States of America, consistently applied, unless the context otherwise
requires,  with respect to any  financial  terms  contained  herein,  as then in
effect with respect to the preparation of financial statements.

                  "GOVERNMENT  APPROVAL" shall mean an  authorization,  consent,
non-action,  approval,  license or exemption of, registration or filing with, or
report to, any governmental or  quasi-governmental  department,  agency, body or
other unit.

                  "GUARANTY",  "GUARANTEED" or to "GUARANTEE", as applied to any
Indebtedness, liability or other obligation, shall mean (a) a guaranty, directly
or  indirectly,  in any  manner,  including  by way of  endorsement  (other than
endorsements of negotiable  instruments for collection in the ordinary course of
business),  of any  part  or all  of  such  obligation,  and  (b) an  agreement,
contingent or otherwise,  and whether or not constituting a guaranty,  assuring,
or intended to assure,  the payment or performance (or payment of damages in the
event of  non-performance)  of any part or all of such  obligation  by any means
(including,  without limitation, the purchase of securities or obligations,  the
purchase or sale of property or services, or the supplying of funds).

                  "GUARANTY AGREEMENT" shall mean a guaranty agreement,  in form
and substance  satisfactory to the Lender,  to be executed by each Subsidiary in
favor of the Lender,  pursuant to which such  Subsidiary  will guaranty the full
and timely payment and performance of all of the Obligations.

                  "INDEBTEDNESS" shall mean (without duplication),  with respect
to any Person, (a) all obligations or liabilities,  contingent or otherwise, for
borrowed  money,  (b) any and all obligations  represented by promissory  notes,
bonds,  debentures or the like,  or on which  interest  charges are  customarily
paid,  (c) any  liability  secured by any  mortgage,  pledge,  lien or  security


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<PAGE>


interest on property owned or acquired, whether or not such liability shall have
been assumed,  (d)  obligations of such Person under  conditional  sale or other
title  retention  agreements  relating to property or assets  purchased  by such
Person,  (e) all  obligations  of such Person  issued or assumed as the deferred
purchase  price of property or services  (excluding  trade  payables and accrued
obligations  incurred in the ordinary  course of business),  (f) any obligations
(contingent  or  otherwise)  of such Person as an account  party or applicant in
respect of  letters  of credit  and/or  bankers'  acceptances,  or in respect of
interest rate swaps,  interest rate caps,  hedging agreements or other financial
or  hedging  obligations,  and (g)  Guarantees,  endorsements  (other  than  for
collection in the ordinary course of business) and other contingent  obligations
in respect of the obligations of others.

                  "INTELLECTUAL   PROPERTY"  shall  have  the  meaning  ascribed
thereto in the Collateral Agreement.

                  "INTEREST EXPENSE" shall mean, for the relevant period,  total
interest  expense  (including  interest  attributable  to Capitalized  Leases in
accordance with GAAP) and fees with respect to outstanding Indebtedness.

                  "INVESTMENT",  as applied to the  Borrower or any  Subsidiary,
shall mean: (a) any shares of capital stock,  evidence of  Indebtedness or other
security issued by any other Person to the Borrower or any  Subsidiary,  (b) any
loan,  advance or extension of credit to, or contribution to the capital of, any
other  Person,  other than credit  terms  extended to  customers in the ordinary
course of business,  (c) any other  investment by the Borrower or any Subsidiary
in any assets or securities of any other Person,  and (d) any commitment to make
any Investment.

                  "KNOWLEDGE"  OR "KNOWN" or words of similar import shall mean,
with  respect to the Borrower  and/or any  Subsidiary,  the actual  knowledge of
Steve Forte,  Lonnie  Schnell  and/or Wouter van Biene (and/or their  respective
successors  as  officers  of  the  Borrower)  after  reasonable  inquiry  of the
appropriate employees of the Borrower and the Subsidiaries.

                  "LANDLORD WAIVER" shall mean a landlord waiver,  subordination
and/or access agreement,  in form and substance  reasonably  satisfactory to the
Lender,  executed  in favor  of the  Lender  by the  landlord  of a Leased  Real
Property.

                  "LEASED REAL PROPERTY"  shall mean any and all Real Properties
leased or occupied by the Borrower or any Subsidiary from time to time.

                  "LENDER  SHARES"  shall mean the shares of Common  Stock to be
purchased by and issued to the Lender as contemplated by Section 2.03(d) below.

                  "LIABILITIES AND  CONTINGENCIES"  has the meaning set forth in
Section 3.01(c) below.

                  "LIEN", as applied to the property or assets (or the income or
profits therefrom) of the Borrower or any Subsidiary,  shall mean (in each case,
whether  the  same is  consensual  or  non-consensual  or  arises  by  contract,
operation of law, legal process or otherwise):  (a) any mortgage,  lien, pledge,
hypothecation, attachment, assignment, deposit arrangement, encumbrance, charge,
lease  constituting a Capitalized  Lease  Obligation,  conditional sale or other


                                       9
<PAGE>


title retention agreement, or other security interest or encumbrance of any kind
in  respect  of  any  property  (including,  without  limitation,  stock  of any
Subsidiary)  of the  Borrower or any  Subsidiary,  or upon the income or profits
therefrom;  (b) any arrangement  under which any property of the Borrower or any
Subsidiary is transferred,  sequestered or otherwise  identified for the purpose
of subjecting or making  available the same for the payment of  Indebtedness  or
the  performance  of any other  liability  in  priority  to the  payment  of the
general,  unsecured  creditors  of the  Borrower  or  any  Subsidiary;  (c)  any
Indebtedness  or liability  which remains unpaid after the same shall become due
and payable and which,  if unpaid,  by law or  otherwise  is given any  priority
whatsoever  over  the  general  unsecured  creditors  of  the  Borrower  or  any
Subsidiary;  and  (d)  any  agreement  (other  than  this  Agreement)  or  other
arrangement  which,  directly  or  indirectly,  prohibits  the  Borrower  or any
Subsidiary  from  creating or  incurring  any lien on any of its  properties  or
assets or which  conditions the ability to do so on the security,  on a PRO RATA
or other basis, of Indebtedness  other than Indebtedness  outstanding under this
Agreement.

                  "LOAN DOCUMENTS"  shall mean the collective  reference to this
Agreement,  the Notes, the Security  Documents,  the Warrants,  the Registration
Rights Agreement,  and any and all other agreements,  instruments,  certificates
and other  documents as may be executed and delivered by the Borrower and/or any
of the Subsidiaries pursuant hereto or thereto.

                  "LOANS"  shall mean,  collectively,  the Advances and the Term
Loan.

                  "MATERIAL ADVERSE EFFECT" shall mean any event, act, omission,
condition or  circumstance  which has or would  reasonably be expected to have a
material adverse effect on (a) the business,  operations,  properties, assets or
condition,  financial or otherwise, of the Borrower and the Subsidiaries,  taken
as a whole,  (b) the ability of the Borrower or any Subsidiary to perform any of
its  obligations  under  any of the  Loan  Documents,  or (c)  the  validity  or
enforceability  of, or the Lender's rights and remedies  under,  any of the Loan
Documents,  other than due to the acts or  omissions of the Lender or any of its
Affiliates.

                  "MATURITY DATE" shall mean June 30, 2010.

                  "MAXIMUM  REVOLVER  AMOUNT"  shall  mean,  at  any  date,  (a)
$5,000,000 MINUS (b) the amount of the Debenture Reserve (if any) at the date of
determination,  MINUS  (c) an  amount  equal  to 50% of all  Qualified  Proceeds
received by the Borrower from and after the repayment (or required repayment) in
full of the Term Loan.

                  "MONITORING  FEE"  shall  mean the fees  payable to the Lender
pursuant to Section 2.03(b)(i) below.

                  "NET INCOME" shall mean the  consolidated net income (or loss)
of the Borrower and its  Subsidiaries  for the period in question,  after giving
effect to deduction of or provision  for all operating  expenses,  all taxes and
reserves   (including   reserves  for  deferred  taxes)  and  all  other  proper
deductions,  all  determined  in  accordance  with  GAAP and (for so long as the
Borrower is subject thereto) Regulation S-X promulgated under the Act.

                  "NOTES" shall mean,  collectively,  the Revolving  Credit Note
and the Term Note.


                                       10
<PAGE>


                  "OBLIGATIONS"  shall  mean  the  collective  reference  to all
Indebtedness and other liabilities and obligations of every kind and description
owed by the  Borrower  to the Lender from time to time under or pursuant to this
Agreement,  the Notes,  the  Security  Documents  and the other  Loan  Documents
(excluding the Warrant and  Registration  Rights  Agreement,  other than amounts
payable from time to time  pursuant to Section 2(c) of the  Registration  Rights
Agreement), and/or otherwise in respect of the Loans, however evidenced, created
or incurred,  fixed or contingent,  now or hereafter existing,  due or to become
due.

                  "ORGANIC  DOCUMENTS"  shall mean,  with respect to any Person,
the  certificate of  incorporation,  articles of  incorporation,  certificate of
formation,  certificate of limited  partnership,  by-laws,  operating agreement,
limited partnership agreement or other such document of such Person.

                  "OWNED REAL  PROPERTY"  shall mean each Real Property in which
the Borrower or any  Subsidiary  holds an ownership or fee interest from time to
time.

                  "PERMITTED  DISCRETION" shall mean a determination or judgment
made by the Lender in good faith in the exercise of reasonable business judgment
from the perspective of a secured lender.

                  "PERMITTED  INDEBTEDNESS"  shall mean any and all Indebtedness
expressly permitted pursuant to Section 6.01 below.

                  "PERMITTED  LIENS" shall mean those Liens expressly  permitted
pursuant to Section 6.02 below.

                  "PERSON" shall mean any individual, partnership,  corporation,
limited liability  company,  banking  association,  business trust,  joint stock
company,  trust,   unincorporated  association,   joint  venture,   governmental
authority or other entity of whatever nature.

                  "QUALIFIED  PROCEEDS"  shall  mean  any and  all net  proceeds
received by the Borrower from time to time after the date of this Agreement from
the  issuance  and/or sale of any capital  stock of the Borrower or any security
(including any Indebtedness incurred subsequent to the Closing Date) convertible
into or  exchangeable  for capital stock of the  Borrower,  except to the extent
that (a) such  proceeds  are  received  from the exercise of warrants or options
that are  outstanding on the date of this  Agreement,  or (b) such proceeds are,
within thirty (30) days after the receipt  thereof,  applied to pay the purchase
price  and/or  directly  associated  expenses  of  the  Borrower's   acquisition
(directly or through a Wholly-Owned  Subsidiary which is a Domestic  Subsidiary)
of another  business  (whether  through merger,  consolidation,  share exchange,
stock  purchase,  or purchase of all or  substantially  all of the assets of the
target company or an operating division or unit thereof),  in each case effected
subject to and in accordance  with the  requirements  of this  Agreement and the
Collateral Agreement (including,  without limitation the pledge to the Lender of
the capital stock and/or assets (as  applicable) of the acquired  business).  In
determining  the amount of net proceeds for purposes of this  definition,  there
shall be deducted from gross proceeds only those reasonable expenses incurred by
the Borrower directly related to the subject issuance or sale,  exclusive of any
fees or  commissions  paid to any  officer,  director or other  Affiliate of the
Borrower or any Affiliate of any of the foregoing.


                                       11
<PAGE>


                  "REAL   PROPERTIES"   shall  mean,   collectively,   any  real
properties (land, buildings and/or improvements) now owned or leased or occupied
by the  Borrower  or any of the  Subsidiaries,  and,  during  the  period of the
Borrower's  and/or  Subsidiary's  occupancy  thereof,  any other real properties
heretofore  owned or leased by the Borrower or any  Subsidiary  (provided  that,
with respect to leased  properties,  the "Real Property" shall refer only to the
portion of the subject property  (excluding common areas) leased by the Borrower
or a Subsidiary).

                  "REGISTRATION  RIGHTS  AGREEMENT"  shall mean the Registration
Rights  Agreement,  to be dated as of the Closing Date, made by the Borrower for
the benefit of the Lender and any subsequent Holders (as such term is defined in
the  Registration  Rights  Agreement),   as  same  may  be  amended,   modified,
supplemented and/or restated from time to time.

                  "REVOLVING   CREDIT   COMMITMENT"   shall  mean  the  Lender's
agreement to make Advances to the Borrower  within the  limitations set forth in
Section 2.01 below.

                  "REVOLVING  CREDIT NOTE" shall mean the promissory note of the
Borrower issued to the Lender to represent the Advances and interest thereon, as
described in Section 2.01(f) below.

                  "SALE"  shall  mean  any  transaction  or  series  of  related
transactions  (a) whereby  Control of the Borrower is held by a Person (or group
of Persons  acting in concert)  other than the management of the Borrower on the
date of this  Agreement  (or  Affiliates  of such  management),  provided that a
"Sale" shall not be deemed to have  occurred  solely by reason of normal  market
trading in the Common Stock which does not result in the acquisition by a single
Person or "group"  (within the meaning of Section  13(d)(3) of the Exchange Act)
of a majority of the outstanding voting stock of the Borrower,  (b) in which the
Borrower is a constituent  party to any merger,  consolidation or share exchange
and as a result thereof (i) the holders of the outstanding  capital stock of the
Borrower  which  ordinarily  has  voting  power for the  election  of  directors
(including preferred stock counted on an "as converted" basis into common stock)
immediately prior to such merger or consolidation cease to own a majority of the
outstanding  capital stock of the Borrower which ordinarily has voting power for
the  election  of  directors  (including  preferred  stock  counted  on  an  "as
converted"  basis into common stock),  or (ii) the Borrower is not the surviving
corporation,  or (c)  whereby all or any  material  portion of the assets of the
Borrower or any Subsidiary are sold, assigned or transferred.

                  "SEC" shall mean the United  States  Securities  and  Exchange
Commission, and any successor agency performing the functions thereof.

                  "SEC  REPORTS"  shall mean the periodic  and current  reports,
registration statements, proxy statements and other reports filed or required to
be filed by the  Borrower  with the SEC  pursuant to the Act and/or the Exchange
Act, and any amendments or supplements thereto filed with the SEC.

                  "SECURITY  DOCUMENTS" shall mean the Guaranty  Agreement,  the
Collateral  Agreement,  any Collateral  Assignments,  Landlord Waivers,  Control
Agreements,  financing


                                       12
<PAGE>


statements or other such agreements or documents pursuant thereto, and any other
agreements or instruments  securing or creating or evidencing Liens securing the
Obligations.

                  "SUBORDINATED  DEBT"  shall  mean all  Indebtedness  for money
borrowed and other liabilities of the Borrower or any Subsidiary, whether or not
evidenced by promissory notes,  which is contractually  subordinated in right of
payment,  in a manner  satisfactory  to the Lender (as evidenced by the Lender's
prior written approval  thereof),  to all Obligations of the Borrower and/or the
subject Subsidiary to the Lender.

                  "SUBSCRIPTION   AGREEMENTS"  shall  mean  those   Subscription
Agreements  dated November 9, 2004, by and between the Borrower and the original
purchasers of the Convertible Debentures.

                  "SUBSIDIARY"  or  "SUBSIDIARIES"  shall mean the individual or
collective  reference to any  corporation,  limited  liability  company or other
entity of which 50% or more of the  outstanding  shares of stock or other equity
interests of each class having  ordinary  voting power and/or  rights to profits
(other  than  stock  having  such  power  only by reason of the  happening  of a
contingency)  is at the  time  owned by the  Borrower,  directly  or  indirectly
through one or more Subsidiaries of the Borrower.

                  "TERM LOAN" shall mean the term loan in the  principal  amount
of $9,500,000 to be made pursuant to Section 2.02(a) below.

                  "TERM NOTE"  shall mean the  promissory  note of the  Borrower
issued to the Lender as described in Section 2.02(d) below.

                  "UCC"  means the Uniform  Commercial  Code as in effect in the
State of New York on the date hereof and hereafter from time to time.

                  "WARRANTS"  shall  mean the  warrants  to  purchase  shares of
Common Stock (such warrants  covering an aggregate of 2,100,000 shares of Common
Stock,  subject to adjustment) to be issued by the Borrower to the Lender on the
Closing Date.

                  "WHOLLY-OWNED  SUBSIDIARY" shall mean each Subsidiary of which
all of the  outstanding  equity  securities  (other than  directors'  qualifying
shares) are owned by the Borrower or another such Wholly-Owned Subsidiary.

                  "WHOLLY-OWNED    DOMESTIC    SUBSIDIARY"   shall   mean   each
Wholly-Owned Subsidiary which is a Domestic Subsidiary.

         SECTION 1.02. USE OF DEFINED TERMS. All terms defined in this Agreement
shall  have  their  defined  meanings  when  used  in the  Notes,  the  Security
Documents,  the other Loan  Documents,  and all  certificates,  reports or other
documents made or delivered pursuant to this Agreement, unless otherwise defined
therein or unless the specific context shall otherwise require.

         SECTION 1.03.  ACCOUNTING  TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP.


                                       13
<PAGE>


         SECTION  1.04.  OTHER  DEFINITIONAL  PROVISIONS.  The  words  "hereof,"
"herein", "hereto" and "hereunder" and words of similar import when used in this
Agreement  shall refer to this  Agreement  as a whole and not to any  particular
provision of this Agreement, and Section references are to this Agreement unless
otherwise specified. The meanings given to terms defined herein shall be equally
applicable  to both  the  singular  and  plural  forms of such  terms.  The word
"including"  and words of similar import when used in this Agreement  shall mean
"including, without limitation," unless otherwise specified.

II.      GENERAL TERMS

         SECTION 2.01.  REVOLVING CREDIT LOANS.

                  (a) Subject at all times to all of the terms and conditions of
this  Agreement,  the Lender  hereby  agrees to extend to the Borrower a secured
revolving  credit  facility,  from the Closing Date to the Maturity  Date, in an
aggregate principal amount not to exceed, at any time outstanding, the lesser of
(i) the Borrowing Base at the subject time, or (ii) the Maximum  Revolver Amount
(the  "REVOLVING  CREDIT  COMMITMENT");  PROVIDED,  HOWEVER,  that following the
application  of all funds in the Escrow  Account to the repayment of Convertible
Debentures,  accrued  interest thereon and/or accrued interest on the Term Loan,
the amount of the Debenture  Reserve shall be disregarded in the  calculation of
the Borrowing Base and the Maximum  Revolver  Amount to the extent that Advances
then being  borrowed  hereunder  shall  immediately  be applied to  repayment of
remaining Convertible Debentures.

                  (b) Such revolving credit loans are herein sometimes  referred
to individually as an "ADVANCE" and  collectively as the "ADVANCES."  Subject at
all times to all of the terms and conditions of this Agreement, from the Closing
Date to the  Maturity  Date  and  within  the  limits  of the  Revolving  Credit
Commitment,  the Lender shall lend, and the Borrower may borrow, prepay (without
premium or penalty) and reborrow  under this Section  2.01.  Each request for an
Advance (i) shall be irrevocable,  (ii) shall be deemed to constitute an express
affirmation  that all  conditions  precedent  set forth in part B of  Article IV
hereof are  satisfied  on the date of such  request and will be satisfied on the
requested Borrowing Date, and (iii) shall be made to the Lender in writing,  not
later than three (3) Business Days prior to the requested  Borrowing Date, by an
authorized  officer  of the  Borrower  or by  telephonic  communication  by such
authorized officer to the Lender,  which shall be confirmed by written notice to
the Lender to be delivered to the Lender by the Business Day next  following the
subject request.  In no event shall the Borrower request, or shall the Lender be
required to honor,  (A) any request for an Advance in an amount greater than the
Availability at such time, (B) any request for an Advance in an amount less than
$100,000,  or (C) more than one  request  for the  borrowing  of Advances in any
seven (7) calendar day period.

                  (c) The Borrower shall pay the Lender interest on all Advances
at the rate(s) per annum as in effect from time to time in  accordance  with the
Revolving  Credit Note. Such interest shall be payable monthly in arrears on the
last day of each  calendar  month  commencing  June 30, 2007 and on the Maturity
Date,  and shall be computed on the daily unpaid  balance of all  Advances  made
under the Borrower's  revolving credit loan accounts with the Lender, based on a
three hundred sixty (360) day year,  counting the actual number of days elapsed.
The Borrower  hereby  authorizes the Lender to charge the  Borrower's  revolving
credit loan accounts for all such


                                       14
<PAGE>


interest;  PROVIDED,  HOWEVER,  that the Lender shall be under no  obligation to
make  any  such  charge  to  the  Borrower's   revolving  credit  loan  accounts
(including,  without  limitation,  if there is insufficient  Availability at the
time such interest is due and payable).

                  (d) In the  event and to the  extent  that,  at any time,  the
outstanding principal amount of Advances exceeds the Revolving Credit Commitment
then in effect,  then the Borrower shall immediately,  without notice or demand,
make a payment to the Lender in respect of the Advances in an amount  sufficient
to cause the  outstanding  principal  amount of  Advances to be equal to or less
than the Revolving Credit Commitment then in effect.

                  (e)  Unless  sooner  due and  payable by reason of an Event of
Default  or Sale  having  occurred,  the  Borrower  shall pay in full all of the
Obligations to the Lender in respect of all Advances on or prior to the Maturity
Date.

                  (f) All Advances  shall be  evidenced  by a secured  Revolving
Credit Note of the Borrower payable to the order of the Lender.

                  (g) The Borrower  may, at its option,  terminate the Revolving
Credit Commitment at any time upon ten (10) Business Days' prior written notice,
and paying to the Lender, on the date fixed for termination,  an amount equal to
the sum of (i) all outstanding  principal and accrued  interest of the Advances,
and (ii) prorated  accrued  Commitment  Fees. In the event that,  simultaneously
with such  termination  and  payment,  the  Borrower  enters into a  replacement
revolving  credit  facility,  the Lender  shall,  upon request of the  Borrower,
subordinate  its  liens  and  security  interests  in  the  Borrower's  and  the
Subsidiaries'  Accounts and inventory  pursuant to a subordination  agreement in
form and substance reasonably satisfactory to the Lender.

         SECTION 2.02. TERM LOAN.

                  (a) Subject at all times to all of the terms and conditions of
this  Agreement,  the Lender hereby agrees to extend to the Borrower a Term Loan
in the  principal  amount of  $9,500,000.  The Term Loan shall be  borrowed in a
single  borrowing  on the Closing  Date,  and any  principal  amounts  repaid in
respect of the Term Loan may not be reborrowed.

                  (b) The Term Loan shall be  repayable  in full on the Maturity
Date.  The  Borrower  shall be  required  to  prepay  the Term  Loan (i) in full
simultaneously  with the  consummation of any Sale, and (ii) in whole or in part
from  time to time  (A) in the  event  and to the  extent  of 50% of any and all
Qualified  Proceeds  received  by the  Borrower  from  time to time,  and (B) as
provided in Section 2.04 below.  Any  prepayment  required  under the  foregoing
clause (A) shall be due and payable as and when the amount of Qualified Proceeds
is determined (i.e.,  upon receipt of such Qualified  Proceeds in the event that
no acquisition transaction is then pending, or thirty (30) days after receipt of
such Qualified Proceeds to the extent that such Qualified Proceeds have not been
applied to the purchase price and/or related expenses of a consummated  business
acquisition).

                  (c)  The  Borrower  shall  pay  the  Lender  interest  on  the
principal  balance of the Term Loan at the  rate(s)  per annum as in effect from
time to time in accordance  with the Term Note.  Such interest  shall be payable
quarterly in arrears  commencing June 30, 2007, on the last


                                       15
<PAGE>


day of each calendar quarter thereafter,  and on the Maturity Date, and shall be
computed on the daily unpaid balance of the Term Loan,  based on a three hundred
sixty (360) day year,  counting the actual number of days elapsed.  The Borrower
hereby  authorizes  the Lender to charge the  Borrower's  revolving  credit loan
accounts for all such interest  and/or for any or all principal  amounts due and
payable in respect of the Term Loans;  PROVIDED,  HOWEVER, that the Lender shall
be under no  obligation  to make any such  charge  to the  Borrower's  revolving
credit loan accounts  (including,  without limitation,  if there is insufficient
Availability at the time such interest and/or principal is due and payable).

                  (d) The Term Loan shall be evidenced by a secured Term Note of
the Borrower payable to the order of the Lender.

         SECTION 2.03. FEES AND PREMIUMS; LENDER SHARES.

                  (a) The  Borrower  shall pay the  Closing Fee to the Lender on
the Closing  Date.  The Closing Fee shall be deemed  fully earned on the Closing
Date and shall not be refundable in whole or in part and shall not be subject to
reduction or set-off under any circumstances.

                  (b) The Borrower  shall further pay to the Lender,  in respect
of the Revolving Credit Commitment:

                           (i) in advance on the  Closing  Date and on the first
         (1st)  Business  Day of each  calendar  month prior to (A) the Maturity
         Date, or (B) the earlier termination of the Revolving Credit Commitment
         and  payment  of  the  Obligations  thereon  in  accordance  with  this
         Agreement, a collateral monitoring and unused commitment/administrative
         fee in the amount of $5,000 per month or portion thereof; and

                           (ii) on May 31 of each year  commencing May 31, 2008,
         and upon any  early  termination  of the  Revolving  Credit  Commitment
         (appropriately  prorated in such latter case), an annual Commitment Fee
         in the amount of $50,000.

                  (c) In the event of any  prepayment  of all or any  portion of
the Term Loan other than pursuant to Sections  2.04(b)(i) or 2.04(b)(iii) below,
in  addition  to the  payment  of the  subject  principal  amount and all unpaid
accrued interest thereon,  the Borrower shall be required to pay to the Lender a
prepayment  premium  in an amount  equal to one (1%)  percent  of the  principal
amount being prepaid.

                  (d) On the Closing Date,  the Lender shall  purchase,  and the
Borrower  shall sell and issue to the Lender,  an aggregate  of 1,500,000  fully
paid and  nonassessable  shares of Common Stock for aggregate  purchase price of
$1,500.  The Lender  hereby  acknowledges  that such  Lender  Shares  constitute
"restricted  securities"  under the Act, and  represents and warrants that it is
acquiring such Lender Shares for its own account for investment,  and not with a
view to the  resale or  distribution  thereof  in  violation  of any  applicable
securities laws.

                  (e)  Payments  received  in respect of the  Obligations  after
12:00  Noon on any day  shall be deemed to be  received  on the next  succeeding
Business  Day,  and if any  payment is received  other than by wire  transfer of
immediately available funds, such payment shall be


                                       16
<PAGE>


subject to three (3) Business  Days'  clearance  prior to being  credited to the
Obligations for interest calculation purposes.

                  (f) In the event that the Lender  notifies the  Borrower  that
the Lender is ready,  willing  and able to fund the Loans on  substantially  the
terms of this  Agreement  and the Closing Date has not occurred  within  fifteen
(15) days thereafter other than due to the fault of the Lender,  then the Lender
may, at any time thereafter until the Closing Date,  terminate this Agreement by
written notice to the Borrower,  in which event the Borrower  shall  immediately
pay to the Lender (i) an amount equal to all  out-of-pocket  costs,  charges and
expenses  (up to an  aggregate  maximum of  $75,000)  incurred  by the Lender in
respect  of the  transactions  contemplated  by  this  Agreement,  and  (ii)  an
additional fee in the amount of $250,000. This Section 2.03(f) shall survive any
termination of this Agreement.

         SECTION 2.04. USE OF PROCEEDS.

                  (a) The  Borrower  shall  utilize the proceeds of the Advances
solely  for  (i)  repaying   outstanding   principal  and  accrued  interest  on
Indebtedness currently owed by the Borrower to Mark Dyne in the aggregate amount
of approximately $1,000,000,  (ii) repaying up to $3,000,000 in principal amount
of  Convertible  Debentures,  (iii) paying accrued  interest on the  Convertible
Debentures, and (iv) working capital and other general corporate purposes of the
Borrower.

                  (b) The Borrower  shall  utilize the proceeds of the Term Loan
solely for the purpose of repaying the Convertible Debentures, provided that, if
all  holders  of the  Convertible  Debentures  have  not  agreed,  prior  to and
effective on the Closing Date, to waive the prepayment penalties provided in the
Convertible Debentures, then:

                           (i) On the  Closing  Date,  the  proceeds of the Term
         Loan  shall  be  placed  in a  segregated  bank  account  (the  "ESCROW
         ACCOUNT") at a commercial bank  reasonably  satisfactory to the Lender,
         which shall have entered into a Control Agreement  pursuant to which no
         transactions  in or withdrawals or other  dispositions  of funds in the
         Escrow  Account may be made without the written  consent of the Lender.
         The funds in the Escrow Account (including any interest earned thereon)
         may be withdrawn  (and the Lender shall give its written  authorization
         for such withdrawal) and applied to the payment of interest on the Term
         Loan from time to time as and when same  becomes due and payable and to
         the  payment of the  Convertible  Debentures  at the earlier of (A) the
         maturity date of the  Convertible  Debentures,  or (B) such time as the
         holders of the Convertible Debentures will accept prepayment thereof in
         full  without  any  prepayment  penalty.  To the  extent  that,  on the
         maturity date of the  Convertible  Debentures,  the funds in the Escrow
         Account are not utilized to pay the Convertible  Debentures,  or sooner
         in the event and to the extent that,  at any time or from time to time,
         the funds in the Escrow  Account shall be greater than the  outstanding
         principal and unpaid accrued  interest of the  Convertible  Debentures,
         funds  shall be  withdrawn  from the Escrow  Account and applied to the
         prepayment of the Term Loan.

                           (ii)  Anything  contained  in the  Term  Note  to the
         contrary  notwithstanding,  the interest rate applicable to the portion
         of the  proceeds of the Term


                                       17
<PAGE>


         Loan held in the Escrow Account from time to time shall be equal to the
         interest  income  earned on the funds on deposit in the Escrow  Account
         (and, for purposes of this Section  2.04(b)(ii),  any withdrawals  from
         the Escrow  Account shall be deemed made from the principal  originally
         deposited  in the Escrow  Account,  until all such  principal  has been
         withdrawn from the Escrow Account).

                           (iii) In the event and to the extent that the holders
         of the  Convertible  Debentures  hereafter  elect to and do convert the
         Convertible Debentures (or any portion or portions thereof) into Common
         Stock,  then (A) an amount equal to the principal amount of Convertible
         Debentures  that  are  converted   shall,   simultaneously   with  such
         conversion,  be withdrawn  from the Escrow Account and used to prepay a
         like portion of the Term Loan, and (B) upon each such  prepayment,  the
         Lender  shall  return to the  Borrower a ratable  portion of the Lender
         Shares and Warrants based on the principal  amount prepaid as a portion
         of the aggregate $14,000,000 of maximum lending commitments  hereunder.
         By way of example, if an aggregate of $4,000,000 in principal amount of
         Convertible  Debentures were converted,  $4,000,000 of the principal of
         the Term Loan would  thereupon  be  prepaid  out of funds in the Escrow
         Account,  and  simultaneously  with such  prepayment,  four fourteenths
         ((4)/14th)  of the  Lender  Shares  (428,571  Lender  Shares)  and four
         fourteenths  ((4)/14th)  of each Warrant  would be  cancelled  (and the
         Borrower  shall  promptly  (x) if  required,  issue  replacement  stock
         certificates  for the  uncancelled  portion  of any  stock  certificate
         theretofore  representing  any cancelled  Lender Shares,  and (y) issue
         replacement  Warrants for the unexercised  and uncancelled  portions of
         the original Warrants). The Lender hereby agrees that it will not sell,
         transfer or dispose of Lender Shares or Warrants, or exercise Warrants,
         to such an extent that the Lender ceases to hold a sufficient number of
         Lender  Shares and Warrants to satisfy any potential  future  surrender
         obligation under this Section 2.04(b)(iii).

                           (iv)  Nothing  herein  contained  shall be  deemed to
         abrogate or impair the Lender's right to withdraw funds from the Escrow
         Account for  application  to the  Obligations  upon the  occurrence and
         during the continuance of any Event of Default.

         SECTION 2.05. FURTHER OBLIGATIONS.  With respect to all Obligations for
which  the  interest  rate  is not  otherwise  specified  herein  (whether  such
Obligations  arise hereunder,  pursuant to the Notes or Security  Documents,  or
otherwise),  such Obligations  shall bear interest at the rate(s) in effect from
time to time pursuant to the Revolving Credit Note.

         SECTION 2.06.  APPLICATION OF PAYMENTS. All amounts paid to or received
by the Lender in respect of the Loans from  whatever  source  (whether  from the
Borrower,  any Subsidiary  pursuant to the Guaranty  Agreement,  any realization
upon any  Collateral,  or otherwise)  shall,  unless  otherwise  directed by the
Borrower  with  respect to any  particular  payment  (unless an Event of Default
shall then be continuing, in which event the Lender may disregard the Borrower's
direction),  be applied (a) first, to reimburse the Lender for all out-of-pocket
costs and expenses  incurred by the Lender which are  reimbursable to the Lender
in  accordance  with this  Agreement,  the Notes  and/or  any of the other  Loan
Documents,  (b) next, to any accrued but unpaid fees or prepayment premiums, and
amounts payable under Section 2.2(c) of the Registration  Rights Agreement,  (c)
next, to unpaid  accrued  interest on the Term Loan, (d) next, to unpaid accrued
interest on the  Advances,  (e) next, to the  outstanding  principal of the Term
Loan, to the extent


                                       18
<PAGE>


then due and payable,  (f) next, to the  outstanding  principal of the Advances,
and (g) finally, to the payment of any other outstanding Obligations;  and after
payment in full of the  Obligations,  any further amounts paid to or received by
the Lender in respect of the Loans  shall be paid over to the  Borrower  or such
other Person(s) as may be legally entitled thereto.

         SECTION 2.07.  SALE.  Anything  elsewhere  contained in this  Agreement
and/or  the  Notes  to  the  contrary  notwithstanding,   the  Revolving  Credit
Commitment shall terminate and all Obligations shall become  immediately due and
payable,  without  requirement of any notice or demand, upon the consummation of
any Sale.

         SECTION 2.08. OBLIGATIONS UNCONDITIONAL.

                  (a) The  payment  and  performance  of all  Obligations  shall
constitute the absolute and unconditional obligations of the Borrower, and shall
be independent of any defense or rights of set-off,  recoupment or  counterclaim
which the  Borrower  might  otherwise  have  against  the Lender.  All  payments
required by this Agreement and/or the Notes shall be paid free of any deductions
or  withholdings  for any  taxes  (but  only  for the  original  Lender  and any
investment funds under common  management with such Lender) or other amounts and
without abatement,  diminution or set-off. If the Borrower is required by law to
make such a deduction  or  withholding  from a payment  hereunder,  the Borrower
shall pay to the Lender such  additional  amount as is necessary to ensure that,
after the making of such  deduction or  withholding,  the Lender  receives (free
from any liability in respect of any such  deduction or  withholding)  a net sum
equal to the sum  which it  would  have  received  and so  retained  had no such
deduction or  withholding  been made or required to be made.  The Borrower shall
(i) pay the full amount of any deduction or withholding, which it is required to
make by-law,  to the  relevant  authority  within the payment  period set by the
relevant law, and (ii) promptly after any such payment, deliver to the Lender an
original (or certified copy) official  receipt issued by the relevant  authority
in respect of the amount withheld or deducted or, if the relevant authority does
not issue such official  receipts,  such other evidence of payment of the amount
withheld or deducted as is reasonably acceptable to the Lender.

                  (b) If,  at any time and from time to time  after the  Closing
Date, (i) any change in any existing law, regulation,  treaty or directive or in
the interpretation or application thereof, (ii) any new law, regulation,  treaty
or directive enacted or application  thereof,  or (iii) compliance by the Lender
with any request or directive  (whether or not having the force of law) from any
governmental  authority  (A)  subjects  the  Lender  to any tax,  levy,  impost,
deduction, assessment, charge or withholding of any kind whatsoever with respect
to any Loan Document, or changes the basis of taxation of payments to the Lender
of any amount  payable  thereunder  (except for net income  taxes,  or franchise
taxes imposed in lieu of net income taxes,  imposed generally by federal,  state
or local taxing authorities with respect to interest or commitment fees or other
fees  payable  hereunder or changes in the rate of tax on the overall net income
of the Lender or its members),  or (B) imposes on the Lender any other condition
or increased cost in connection with the  transactions  contemplated  thereby or
participations  therein,  and the result of any of the  foregoing is to increase
the cost to the Lender of making or continuing  any Loan or to reduce any amount
receivable hereunder, then, in any such case, the Borrower shall promptly pay to
the Lender any  additional  amounts  necessary to compensate  the Lender,  on an
after-tax basis, for such additional cost or reduced amount as determined by the
Lender. If the Lender becomes


                                       19
<PAGE>


entitled to claim any additional  amounts pursuant to this Section 2.08(b),  the
Lender  shall  promptly  notify the Borrower of the event by reason of which the
Lender  has  become so  entitled,  and each such  notice of  additional  amounts
payable pursuant to this Section 2.08(b) submitted by the Lender to the Borrower
shall, absent manifest error, be final, conclusive and binding for all purposes.

         SECTION 2.09.  REVERSAL OF PAYMENTS.  To the extent that any payment or
payments  made to or received by the Lender  pursuant to this  Agreement  or any
other Loan Document are subsequently  invalidated,  declared to be fraudulent or
preferential,  set aside,  or required to be repaid to any trustee,  receiver or
other person under any state or federal  bankruptcy or other such law,  then, to
the extent thereof, such amounts shall be revived as Obligations and continue in
full force and effect  hereunder  as if such  payment or  payments  had not been
received by the Lender.

         SECTION 2.10. OFFERING TO HOLDERS OF CONVERTIBLE DEBENTURES. Within the
time periods provided in Section 8 of the Subscription Agreements,  the Borrower
shall offer to the holders of the  Convertible  Debentures  the  opportunity  to
purchase  participations  in the  Loans,  the Lender  Shares  and the  Warrants,
pursuant to participation  agreements in form and substance  satisfactory to the
Lender; PROVIDED, however, that in no event shall such participations offered to
the holders of the Convertible  Debentures  exceed 49% of the Loans,  the Lender
Shares or the Warrants.  If any of such holders accepts such offer, the Borrower
shall,  upon tender of the  certificates  representing the Lender Shares and the
Warrants,  reissue such Lender Shares and Warrants to the Lender and the subject
participants   in  the  amounts   designated  by  the  Lender  based  upon  such
participations.  Thereafter,  in the event that any of the Lender  Shares or the
Warrants are required to be surrendered  pursuant to Section 2.04(b)(iii) above,
the  Borrower  shall  look  solely to the  participants  for the return of their
proportionate shares of such to-be-surrendered Lender Shares and Warrants.

III.     REPRESENTATIONS AND WARRANTIES

         As of  the  Closing  Date  and  on  each  Borrowing  Date  (unless  the
representation  and warranty  refers to a specific  date),  the Borrower  hereby
makes the following  representations  and warranties to the Lender, all of which
representations  and warranties  shall survive the Closing Date, the delivery of
the Notes and the making of the Loans,  shall be continuing in nature so long as
any Obligations are outstanding or the Revolving  Credit  Commitment  remains in
effect, and are as follows:

         SECTION 3.01. FINANCIAL MATTERS.

                  (a) The  Borrower has  heretofore  furnished to the Lender (i)
the  audited  consolidated   financial  statements  (including  balance  sheets,
statements  of income and  statements  of cash  flows) of the  Borrower  and its
Subsidiaries  as at December  31, 2005 and 2006,  and for the Fiscal  Years then
ended, and (ii) the unaudited  consolidated financial statements of the Borrower
and its  Subsidiaries  as of March 31,  2007 and for the three (3)  months  then
ended (collectively, the "FINANCIAL STATEMENTS").

                  (b)  The  Financial  Statements  (i)  have  been  prepared  in
accordance  with  GAAP  and  Regulation  S-X  promulgated  under  the  Act  on a
consistent basis for all periods


                                       20
<PAGE>


(subject, in the case of unaudited  statements,  to the absence of full footnote
disclosures,  and to normal non-material audit  adjustments),  (ii) are complete
and correct in all  material  respects,  (iii) fairly  present the  consolidated
financial  condition of the Borrower and its  Subsidiaries as of said dates, and
the results of their operations for the periods stated, (iv) contain and reflect
all necessary adjustments and accruals for a fair presentation of the Borrower's
and its Subsidiaries' consolidated financial condition and results of operations
as of the dates of and for the periods covered by such Financial Statements, and
(v) make full and adequate  provision,  subject to and in accordance  with GAAP,
for the various assets and liabilities (including, without limitation,  deferred
revenues)  of the  Borrower,  fixed  or  contingent,  and the  results  of their
operations  and  transactions  in their  accounts,  as of the  dates and for the
periods referred to therein.

                  (c)  Except as set forth in  SCHEDULE  3.01 of the  Disclosure
Schedule, neither the Borrower nor any of its Subsidiaries have any liabilities,
obligations or commitments of any kind or nature  whatsoever,  whether absolute,
accrued, contingent or otherwise (collectively "LIABILITIES AND CONTINGENCIES"),
including,  without  limitation,  Liabilities and Contingencies under employment
agreements and with respect to any "earn-outs",  stock  appreciation  rights, or
related  compensation  obligations,  except:  (i) Liabilities and  Contingencies
disclosed in the Financial Statements or footnotes thereto, (ii) Liabilities and
Contingencies  incurred in the ordinary  course of business and consistent  with
past practice since the date of the most recent Financial  Statements,  or (iii)
those Liabilities and Contingencies which are not required to be disclosed under
GAAP. The reserves,  if any, reflected on the balance sheet included in the most
recent Financial Statements are appropriate and reasonable. Neither the Borrower
nor  any  of  its  Subsidiaries   have  any  Indebtedness  for  money  borrowed,
outstanding   obligations  for  the  purchase  price  of  property,   contingent
obligations  or  liabilities  for taxes,  or any  unusual  forward or  long-term
commitments, except as specifically set forth in SCHEDULE 3.01 of the Disclosure
Schedule.

                  (d) Since the date of the most  recent  Financial  Statements,
except as set forth in SCHEDULE 3.01 of the Disclosure Schedule,  there has been
no material  adverse  change in the working  capital,  condition  (financial  or
otherwise), assets, liabilities,  reserves, business, management,  operations or
prospects  of  the  Borrower  or any of  its  Subsidiaries,  including,  without
limitation, the following:

                           (i)  there  has  been  no  material   change  in  any
         assumptions underlying, or in any methods of calculating, any bad debt,
         contingency   or  other  reserve   relating  to  the  Borrower  or  any
         Subsidiary;

                           (ii) there have been (A) no material  write-downs  in
         the value of any  inventory  of, and there have been no  write-offs  as
         uncollectible of any notes,  accounts  receivable or other  receivables
         of, the Borrower or any  Subsidiary  other than  write-offs of accounts
         receivable reserved in full as of the date of the most recent financial
         statements delivered to the Lender, and (B) no reserves established for
         the uncollectibility of any notes, Accounts or other receivables of the
         Borrower  or any  Subsidiary  except to the extent  that same have been
         disclosed  to the Lender in writing and would not,  individually  or in
         the aggregate,  cause the outstanding  Advances to exceed the Revolving
         Credit Commitment;


                                       21
<PAGE>


                           (iii) no debts  have  been  cancelled,  no  claims or
         rights of  substantial  value  have been  waived and no  properties  or
         assets  (real,  personal or mixed,  tangible or  intangible)  have been
         sold,  transferred,  or  otherwise  disposed of by the  Borrower or any
         Subsidiary  except in the ordinary  course of business  and  consistent
         with past practice;

                           (iv)  there  has  been no  change  in any  method  of
         accounting  or  accounting  practice  utilized  by the  Borrower or any
         Subsidiary;

                           (v) no  material  casualty,  loss or damage  has been
         suffered by the Borrower or any Subsidiary,  regardless of whether such
         casualty, loss or damage is or was covered by insurance;

                           (vi)  Any  announced   changes  in  the  policies  or
         practices  of any  customer,  supplier or referral  source  which would
         reasonably be expected to have a Material Adverse Effect;

                           (vii)  Any   incurrence   of  (A)  any  liability  or
         obligation  outside  of the  ordinary  course of  business,  or (B) any
         Indebtedness other than Permitted Indebtedness;

                           (viii) Any  declaration,  setting aside or payment of
         any dividend or  distribution  or any other  payment of any kind by the
         Borrower to or in respect of any equity securities of the Borrower; and

                           (ix) No action  described in this Section 3.01(d) has
         been agreed to be taken by the Borrower or any Subsidiary.

                  (e)  Subsequent  to January 1, 2007,  neither the Borrower nor
any of the Subsidiaries has effected any borrowing or sale transaction under the
Factoring Agreement.

                  (f) The Borrower and its  Subsidiaries  have in place adequate
systems of internal controls and disclosure  controls and procedures  sufficient
to provide reasonable assurance that (i) transactions are executed in accordance
with  management's  general or specific  authorizations,  (ii)  transactions are
recorded  as  necessary  to  permit  preparation  of  financial   statements  in
accordance  with GAAP and to  maintain  asset  accountability,  (iii)  access to
assets is permitted  only in accordance  with  management's  general or specific
authorization,  (iv) the recorded accountability for assets is compared with the
existing  assets at reasonable  intervals and  appropriate  action is taken with
respect to any differences,  and (v) the Borrower and its management are able to
obtain timely and accurate information regarding the Business Operations and all
material  transactions  relating to the  Borrower and the  Subsidiaries;  and no
material  deficiency  exists with respect to the Borrower's or any  Subsidiary's
systems of internal controls.

                  (g)  All of  the  SEC  Reports,  as of  the  respective  dates
thereof, complied in all material respects, as applicable,  with the Act and the
Exchange Act.


                                       22
<PAGE>


         SECTION 3.02. ORGANIZATION; CORPORATE EXISTENCE.

                  (a) The Borrower (i) is a corporation duly organized,  validly
existing and in good standing under the laws of the State of Delaware,  (ii) has
all requisite  corporate  power and authority to own its properties and to carry
on its business as now  conducted  and as proposed  hereafter  to be  conducted,
(iii) is qualified to do business as a foreign  corporation in each jurisdiction
in which the failure of the  Borrower to be so  qualified  would have a Material
Adverse  Effect,  and (iv) has all  requisite  corporate  power and authority to
execute  and  deliver,  and  perform  all of its  obligations  under,  the  Loan
Documents.  True and complete  copies of the Organic  Documents of the Borrower,
together with all amendments thereto to the date hereof,  have been furnished to
the Lender.

                  (b) On the date of this  Agreement,  the  outstanding  capital
stock of the  Borrower,  the  number  and  amount  of all  outstanding  options,
warrants,  convertible  securities,  subscriptions  and other  rights to acquire
capital  stock  of the  Borrower,  and  the  number  of  shares  reserved  under
outstanding  option plans or the like,  are as set forth in SCHEDULE 3.02 of the
Disclosure  Schedule.  All of such outstanding  capital stock is validly issued,
fully paid and  nonassessable.  Except as set forth in such  SCHEDULE  3.02,  no
holders of any such securities have any registration rights in respect thereof.

                  (c)  SCHEDULE  3.02 of the  Disclosure  Schedule  further sets
forth,  with respect to each Subsidiary on the date of this  Agreement,  (i) its
proper legal name, (ii) its jurisdiction of  incorporation  or formation,  (iii)
the  jurisdictions  in which it is qualified to do business as a foreign entity,
(iv) the number of shares of  capital  stock,  equity  securities  or  ownership
interests  outstanding  (all  of  which  are  validly  issued,  fully  paid  and
nonassessable),  and (v) the owner(s) of such outstanding  capital stock, equity
securities or other  ownership  interests.  Each of the  Subsidiaries  (A) is an
entity duly organized,  validly  existing and in good standing under the laws of
the jurisdiction of its incorporation or formation,  (B) has all requisite power
and  authority  to own  its  properties  and to  carry  on its  business  as now
conducted and as proposed hereafter to be conducted, and to execute and deliver,
and perform all of its  obligations  under,  the Loan Documents to which it is a
party,  and (C) is not  required  to be  qualified  to do  business as a foreign
entity in any jurisdiction in which it is not so qualified and the failure to be
so qualified  would  reasonably be expected to have a Material  Adverse  Effect.
True and complete copies of the Organic  Documents of each Subsidiary,  together
with all  amendments  thereto to the date  hereof,  have been  furnished  to the
Lender.

         SECTION 3.03. AUTHORIZATION.

                  (a) The  execution,  delivery and  performance by the Borrower
and the  Subsidiaries of their respective  obligations  under the Loan Documents
have been duly  authorized by all requisite  corporate and other action and will
not,  either  prior to or as a result of the  consummation  of the  transactions
contemplated by this Agreement: (i) violate any provision of Applicable Law, any
order of any court or other agency of  government,  any provision of the Organic
Documents  of the  Borrower  or any  Subsidiary,  or  any  Contract,  indenture,
agreement or other  instrument to which the Borrower or any of the  Subsidiaries
is a party,  or by which the Borrower or any of the  Subsidiaries  or any of its
assets or properties are bound, or (ii) be in conflict with,  result in a breach
of,  or  constitute  (after  the  giving  of  notice or lapse of time or both) a
default under,  or, except as may be provided in the Loan  Documents,  result in
the creation or imposition of any Lien of any nature  whatsoever upon any of the
property or assets of


                                       23
<PAGE>


the  Borrower  or  any of the  Subsidiaries  pursuant  to,  any  such  Contract,
indenture, agreement or other instrument.

                  (b) This Agreement and the other Loan Documents have been duly
executed and delivered by the Borrower and its Subsidiaries  party thereto,  and
constitute   the  valid  and  binding   obligations  of  the  Borrower  and  its
Subsidiaries   party  thereto,   enforceable   against  the  Borrower  and  such
Subsidiaries in accordance  with their  respective  terms,  except to the extent
that  enforceability may be limited by bankruptcy,  insolvency,  reorganization,
moretorium, fraudulent transfer or other similar laws now or hereafter in effect
relating to creditors' rights generally, and by general principles of equity.

                  (c)  Neither  the  Borrower  nor  any of the  Subsidiaries  is
required to obtain any Government Approval, consent or authorization from, or to
file any  declaration or statement  with, any  governmental  instrumentality  or
agency in  connection  with or as a  condition  to the  execution,  delivery  or
performance of any of the Loan Documents.

                  (d) Without  limitation of Sections  3.03(a)  through  3.03(c)
above,  the  issuance  of the  Warrants  has been  authorized  by all  requisite
corporate  action of the Borrower,  and such issuance does not conflict with any
shareholders' agreement,  preemptive rights,  limitation under or requirement of
Organic  Documents,  or other  agreement or  commitment  of the  Borrower.  Upon
exercise  of the  Warrants in  accordance  with the terms  thereof,  the Warrant
Shares (as such term is defined in the Warrants) will be validly  issued,  fully
paid and nonassessable.

         SECTION 3.04.  LITIGATION.  Except as disclosed on SCHEDULE 3.04 of the
Disclosure Schedule,  there is no action, suit or proceeding at law or in equity
or by or before any governmental instrumentality or other agency now pending or,
to the knowledge of the Borrower,  threatened  against or affecting the Borrower
or  any of  the  Subsidiaries  or any of  their  respective  assets,  which,  if
adversely determined,  would have a Material Adverse Effect. The Borrower has no
Knowledge of any state of facts,  events,  conditions or circumstances which are
reasonably likely to give rise to, or would properly  constitute  grounds for or
the basis  of,  any  suit,  action,  arbitration,  proceeding  or  investigation
(including,  without limitation, any unfair labor practice charges, interference
with union organizing  activities,  or other labor or employment claims) against
or with respect to the Borrower or any Subsidiary.

         SECTION 3.05. MATERIAL CONTRACTS.  Except as disclosed on SCHEDULE 3.05
of the Disclosure Schedule,  neither the Borrower nor any of the Subsidiaries is
(a) a party to any  Contract,  agreement or instrument or subject to any charter
or  other  corporate  or  organizational  restriction  which  has  had or  could
reasonably  be expected to have a Material  Adverse  Effect,  (b) subject to any
liability  or  obligation  under  or  relating  to  any  collective   bargaining
agreement,  or (c) in default in the  performance,  observance or fulfillment of
any of the  obligations,  covenants or  conditions  contained  in any  Contract,
agreement or  instrument to which it is a party or by which any of its assets or
properties is bound, which default, individually or in the aggregate, would have
or could reasonably be expected to have a Material Adverse Effect.

         SECTION  3.06.  TITLE  TO  PROPERTIES.  The  Borrower  and  each of the
Subsidiaries has good title to all of its properties and assets,  free and clear
of all mortgages, security interests, restrictions,  encumbrances or other Liens
of any kind,  except for  restrictions  on the nature of use


                                       24
<PAGE>


thereof imposed by Applicable Law, and except for Permitted Liens, none of which
materially interfere with the use and enjoyment of such properties and assets in
the  normal  course  of the  Business  Operations  as  presently  conducted,  or
materially  impair the value of such  properties  and assets for the  purpose of
such business.

         SECTION 3.07. REAL PROPERTY.  SCHEDULE 3.07 of the Disclosure  Schedule
sets forth a correct and complete  lists of all (i) Owned Real  Properties,  and
(ii) Leased Real Properties.  The Borrower owns good and marketable title to all
Owned Real Properties. The Borrower has a valid lessee's interest in each Leased
Real  Property  currently  leased or  occupied by the  Borrower  and neither the
Borrower  nor,  to the  Borrower's  Knowledge,  any other party  thereto,  is in
material  breach or violation of any  requirements  of any such lease.  All Real
Properties  currently owned or occupied by the Borrower or any Subsidiary are in
good  condition  (reasonable  wear and tear  excepted)  and are adequate for the
current and proposed  businesses  of the Borrower and its  Subsidiaries.  To the
Borrower's  Knowledge,  its use of the Real  Properties in the normal conduct of
the Business  Operations  does not violate any  applicable  building,  zoning or
other law,  ordinance  or  regulation  affecting  such Real  Properties,  and no
covenants,  easements,  rights-of-way  or other such conditions of record impair
the Borrower's use of the Real  Properties in the normal conduct of the Business
Operations.

         SECTION  3.08.  MACHINERY  AND  EQUIPMENT.  The machinery and equipment
owned and/or used by the Borrower and the Subsidiaries is, as to each individual
material  item of machinery and  equipment,  and in the aggregate as to all such
equipment,  in good and usable  condition and in a state of good maintenance and
repair  (reasonable  wear and tear  excepted),  and  adequate for its use in the
Business Operations.

         SECTION 3.09.  CAPITALIZATION.  Except as set forth in SCHEDULE 3.02 of
the Disclosure  Schedule and for new Subsidiaries  which may hereafter be formed
or acquired in compliance with this Agreement,  the Borrower does not,  directly
or  indirectly,  own any capital stock of or any form of equity  interest in any
other Person.

         SECTION 3.10. SOLVENCY.  After giving effect to the Loans and the other
transactions  contemplated  hereby, the borrowings made and/or to be made by the
Borrower under this Agreement do not and will not render the Borrower  insolvent
or with unreasonably small capital for its business;  the fair saleable value of
all of the assets and  properties of the Borrower  does now, and will,  upon the
funding of the Loans contemplated hereby,  exceed the aggregate  liabilities and
Indebtedness of the Borrower (including contingent liabilities); the Borrower is
not  contemplating  either the  filing of a petition  under any state or federal
bankruptcy  or  insolvency  law, or the  liquidation  of all or any  substantial
portion of its assets or  property;  the Borrower has no knowledge of any Person
contemplating  the filing of any such  petition  against the  Borrower;  and the
Borrower  reasonably  anticipates  that it will be able to pay its debts as they
mature.

         SECTION 3.11. NO INVESTMENT COMPANY. The Borrower is not an "investment
company" or a company  "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.

         SECTION 3.12. MARGIN SECURITIES.  The Borrower does not own or have any
present  intention of  acquiring  any "margin  security"  or any "margin  stock"
within the meaning of


                                       25
<PAGE>


Regulations G, T, U or X of the Board of Governors of the Federal Reserve System
(herein called "margin  security" and "margin  stock").  None of the proceeds of
the Loans will be used, directly or indirectly, for the purpose of purchasing or
carrying,  or for the purpose of reducing or retiring any Indebtedness which was
originally incurred to purchase or carry, any margin security or margin stock or
for any other  purpose  which might  constitute  the  transactions  contemplated
hereby a "purpose  credit" within the meaning of said  Regulations G, T, U or X,
or cause  this  Agreement  to  violate  any  other  regulation  of the  Board of
Governors of the Federal  Reserve  System or the  Exchange  Act, or any rules or
regulations promulgated under such statutes.

         SECTION 3.13. TAXES.

                  (a) All  federal,  state and local tax returns and tax reports
required  to be filed by the  Borrower  and/or any  Subsidiary  have been timely
filed with the appropriate  governmental  agencies in all jurisdictions in which
such returns and reports are required to be filed,  and all of such tax returns,
tax reports and other filings are correct and complete in all material respects.
All federal, state and local income, franchise, sales, use, property, excise, ad
valorem, value-added, payroll and other taxes (including interest, penalties and
additions to tax and including  estimated tax installments  where required to be
filed and paid) due from or with respect to the  Borrower  and the  Subsidiaries
have been fully paid, and appropriate  accruals have been made on the Borrower's
books for taxes not yet due and  payable.  All taxes and other  assessments  and
levies which the Borrower  and/or any  Subsidiary is required by law to withhold
or to collect have been duly withheld and collected,  and have been paid over to
the proper governmental authorities to the extent due and payable. Except as set
forth in SCHEDULE 3.13 of the Disclosure  Schedule,  there are no outstanding or
pending claims,  deficiencies  or assessments  for taxes,  interest or penalties
with  respect to any taxable  period of the Borrower or any  Subsidiary,  and no
outstanding tax Liens.

                  (b) Except as  disclosed  in SCHEDULE  3.13 of the  Disclosure
Schedule,  the  Borrower has no  Knowledge  and has not  received  notice of any
pending  audit with  respect to any  federal,  state or local tax returns of the
Borrower or any Subsidiary,  and no waivers of statutes of limitations have been
given or requested  with respect to any tax years or tax filings of the Borrower
or any Subsidiary.

         SECTION  3.14.  ERISA.  Except  as set  forth in  SCHEDULE  3.14 of the
Disclosure  Schedule,  neither  the  Borrower  nor any  ERISA  Affiliate  of the
Borrower  maintains  or has any  obligation  to make  any  contributions  to any
pension,   profit   sharing  or  other  similar  plan   providing  for  deferred
compensation to any employee.  With respect to any such plan(s) as may now exist
or may hereafter be  established  by the Borrower or any ERISA  Affiliate of the
Borrower,  and which  constitutes an "employee  pension benefit plan" within the
meaning of Section  3(2) of ERISA,  except as set forth on SCHEDULE  3.14 of the
Disclosure  Schedule:  (a) the Borrower or the subject ERISA  Affiliate has paid
and shall cause to be paid when due all amounts  necessary  to fund such plan(s)
in  accordance  with its terms,  (b) except for normal  premiums  payable by the
Borrower to the Pension Benefit Guaranty Corporation  ("PBGC"),  the Borrower or
the subject  ERISA  Affiliate  has not taken and shall not take any action which
could result in any liability to the PBGC, or any of its  successors or assigns,
(c) the present value of all accrued  benefits  thereunder shall not at any time
exceed  the  value of the  assets  of such  plan(s)  allocable  to such  accrued
benefits,  (d) there have not been and there shall not be any transactions  such
as would cause the


                                       26
<PAGE>


imposition of any tax or penalty under Section 4975 of the Code or under Section
502 of ERISA,  which would adversely affect the funded benefits  attributable to
the Borrower or the subject  ERISA  Affiliate,  (e) there has not been and there
shall not be any  termination  or  partial  termination  thereof  (other  than a
partial termination resulting solely from a reduction in the number of employees
of the Borrower or an ERISA  Affiliate of the Borrower,  which  reduction is not
anticipated by the Borrower),  and there has not been and there shall not be any
"reportable  event" (as such term is defined in Section  4043(b) of ERISA) on or
after the  effective  date of Section  4043(b) of ERISA with respect to any such
plan(s) subject to Title IV of ERISA,  (f) no "accumulated  funding  deficiency"
(as  defined in  Section  412 of the Code) has been or shall be  incurred  on or
after the effective  date of Section 412 of the Code, (g) such plan(s) have been
and shall be determined to be  "qualified"  within the meaning of Section 401(a)
of the Code,  and have been and shall be duly  administered  in compliance  with
ERISA  and the Code,  and (h) the  Borrower  is not  aware of any  fact,  event,
condition or cause which might adversely affect the qualified status thereof. As
respects any "multi-employer  plan" (as such term is defined in Section 3(37) of
ERISA) to which the Borrower or any ERISA Affiliate thereof has heretofore been,
is now, or may hereafter be required to make contributions, the Borrower or such
ERISA Affiliate has made and shall make all required  contributions thereto, and
there  has not been and  shall  not be any  "complete  withdrawal"  or  "partial
withdrawal" (as such terms are respectively defined in Sections 4203 and 4205 of
ERISA) therefrom on the part of the Borrower or such ERISA Affiliate.

         SECTION 3.15. INTELLECTUAL PROPERTY.

                  (a) The  Borrower and the  Subsidiaries  own or have the valid
right to use all material patents,  trademarks,  copyrights,  software, computer
programs,   equipment  designs,  network  designs,   equipment   configurations,
technology  and  other  intellectual  property  used,  marketed  and sold in the
Business Operations,  and the Borrower and the Subsidiaries are in compliance in
all  material  respects  with all  licenses,  user  agreements  and  other  such
agreements  regarding  the use of  intellectual  property  used in the  Business
Operations;  and the Borrower has no  Knowledge of or received  notice  claiming
that any such intellectual property infringes upon or violates the rights of any
other Person.

                  (b) SCHEDULE 3.15(B) of the Disclosure Schedule sets forth all
material  Intellectual  Property  owned  by the  Borrower  and its  Subsidiaries
("OWNED  INTELLECTUAL  PROPERTY"),  including  the  name,  if  any,  and a brief
description  thereof.  Except  as set  forth in such  SCHEDULE  3.15(B),  to the
Knowledge fo the Borrower, either the Borrower or one of its Subsidiaries holds,
good, valid and indefeasible title to all Owned Intellectual Property,  free and
clear of any liens or  encumbrances  of any kind,  except for:  (i) any lien for
current  taxes not yet due and  payable,  and (ii) liens that have arisen in the
ordinary course of business and that do not  (individually  or in the aggregate)
materially  detract from the value of the assets  subject  thereto or materially
impair the operations of the Borrower and its Subsidiaries.

                  (c) SCHEDULE  3.15(C) of the  Disclosure  Schedule sets forth:
(i) all material  Intellectual  Property licensed by the Borrowers or any of its
Subsidiaries  from third  parties and used in the conduct of the business of the
Borrower and its Subsidiaries  ("LICENSED INTELLECTUAL


                                       27
<PAGE>


PROPERTY"),  including a brief  description  thereof;  (ii) with  respect to any
Owned  Intellectual  Property that is the subject of any registration or pending
application  in  any  jurisdiction,   the  names  of  the   jurisdictions,   any
registration and/or application serial numbers,  and the current status thereof;
(iii) a brief  description  of all  material  licenses,  sublicenses,  and other
agreements  pursuant to which the Borrower (or any of its  Subsidiaries)  or any
sublicensee  of the  Borrower  (or any of its  Subsidiaries)  has granted to any
third party the right to use any of the Owned  Intellectual  Property;  (iv) all
other  material  consents,  indemnifications,  forbearances  to sue,  settlement
agreements and licensing or  cross-licensing  arrangements to which the Borrower
or any  of its  Subsidiaries  is a  party  relating  to the  Owned  Intellectual
Property; and (v) any ongoing royalty or payment obligations with respect to the
Licensed Intellectual Property.

                  (d) To the  Knowledge  of the  Borrower,  the Borrower and its
Subsidiaries  have a valid  right to use,  license,  and  otherwise  exploit all
Licensed Intellectual  Property,  and any rights thereunder will not be affected
by the Borrower and its  Subsidiaries  entering into this  Agreement,  the other
Loan  Documents and the  agreements  and  transactions  contemplated  hereby and
thereby.  Except as set forth in SCHEDULE  3.15(D) of the  Disclosure  Schedule,
neither the Borrower nor any of its  Subsidiaries is under any obligation to pay
royalties or other payments in connection with any license, sublicense, or other
agreement,  nor  restricted  from  assigning  its right under any  sublicense or
agreement respecting the Licensed Intellectual  Property,  nor will the Borrower
or any of its  Subsidiaries  otherwise  be,  as a result  of the  execution  and
delivery of this Agreement, the other Loan Documents or the performance of their
obligations  hereunder and thereunder,  in breach of any license,  sublicense or
other agreement relating to the Licensed Intellectual Property.

                  (e) To the Knowledge of the Borrower,  each of the  Borrower's
and its  Subsidiaries'  rights in all of the  Owned  Intellectual  Property  are
valid, subsisting,  and enforceable.  None of the Owned Intellectual Property or
any  registrations  therefor  have been  cancelled  or  adjudicated  invalid  or
unenforceable,  or are  subject  any  outstanding  order,  judgment,  or  decree
restricting  its use or adversely  affecting or reflecting the Borrower's or any
of its Subsidiaries' rights thereto. To the knowledge of the Borrower, all Owned
Intellectual  Property  that  is  the  subject  of  a  registration  or  pending
application is valid, subsisting, unexpired, and in proper form, and all renewal
fees and other  maintenance fees that have fallen due on or prior to the Closing
Date have been paid. Either the Borrower or its applicable Subsidiary has timely
made all filings and payments with the appropriate intellectual property offices
required  to  maintain  in  subsistence  all Owned  Intellectual  Property.  All
documentation   necessary  to  confirm  and  effect  the   Borrower's   and  its
Subsidiaries' ownership of and rights in any Owned Intellectual Property that is
the subject of a registration or pending application acquired by the Borrower or
any of its  Subsidiaries  from third parties has been filed in the United States
Patent and Trademark Office and the United States Copyright Office,  and any and
all  other  relevant   intellectual  property  offices  and  agencies  in  other
jurisdictions.  No Owned  Intellectual  Property  is the subject of any legal or
governmental proceeding before any governmental, registration or other authority
in any jurisdiction, including any office action or other form of preliminary or
final refusal of registration.


                                       28
<PAGE>


                  (f) The consummation of the transactions  contemplated  hereby
will not  materially  alter or impair any Owned  Intellectual  Property.  To the
Knowledge  of the  Borrower,  no Owned  Intellectual  Property  has  been  used,
divulged,  disclosed or  appropriated to the detriment of the Borrower or any of
its  Subsidiaries  for the benefit of any third party;  and, to the Knowledge of
the Borrower, no employee or agent of the Company or any of its Subsidiaries has
misappropriated  any  material  trade  secrets  or other  material  confidential
information  of any third party in the course of the  performance  of his or her
duties  as an  employee  of the  Borrower  or any  of its  Subsidiaries.  To the
Knowledge of the Borrower, (i) none of the Owned Intellectual Property infringes
on any Intellectual Property owned or used by any other Person; (ii) none of the
products  that  are  or  have  been  designed,  created,  developed,  assembled,
manufactured  or sold by the Borrower or any of its  Subsidiaries is infringing,
misappropriating,  or making any unlawful use of any Intellectual Property owned
by any other Person,  and the Borrower and its Subsidiaries  have all rights and
licenses  reasonably  necessary  in order to make,  have made,  use or sell such
products,  (iii) no other Person is infringing,  misappropriating  or making any
unlawful use of, and no Intellectual  Property owned or used by any other Person
infringes on any Owned Intellectual  Property, and (iv) there is no claim, suit,
action or proceeding  pending or threatened or asserted  against the Borrower or
any of its  Subsidiaries:  (A)  alleging  any  conflict or  infringement  by the
Borrower or any of its Subsidiaries of any other Person's  intellectual property
or  proprietary  rights;  or  (B)  challenging  the  Borrower's  or  any  of its
Subsidiaries'  ownership or use of, or the validity or enforceability of, any of
the Owned Intellectual Property or the Licensed Intellectual Property.

         SECTION 3.16.  COMPLIANCE WITH LAWS. The Borrower and the  Subsidiaries
are  in  compliance  with  all  occupational  safety,  health,  wage  and  hour,
employment  discrimination,  environmental,  flammability,  labeling  and  other
Applicable Law which are material to the Business Operations,  except where such
non-compliance  would not,  individually  or in the  aggregate,  have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is aware of any state or
facts,  events,  conditions or occurrences which may now or hereafter constitute
or result in a violation  of any  Applicable  Law, or which may give rise to the
assertion of any such  violation,  which could have a Material  Adverse  Effect.
Neither the Borrower nor any Subsidiary  has received  written notice of default
or  violation,  nor is the Borrower or any  Subsidiary  in default or violation,
with  respect  to any  judgment,  order,  writ,  injunction,  decree,  demand or
assessment issued by any court or any federal,  state, local, municipal or other
governmental agency, board, commission,  bureau,  instrumentality or department,
domestic  or  foreign,   relating  to  any  aspect  of  the  Borrower's  or  any
Subsidiaries' business,  affairs, properties or assets. Neither the Borrower nor
any  Subsidiary  has received  written notice of or been charged with, or is, to
the Borrower's Knowledge,  under investigation with respect to, any violation of
any  provision of any  Applicable  Law,  which  violation  would have a Material
Adverse Effect.

         SECTION 3.17.  LICENSES AND PERMITS.  The Borrower and each  Subsidiary
has all federal,  state and local licenses and permits required to be maintained
in  connection  with  and  material  to the  Business  Operations,  and all such
licenses  and permits are valid and in full force and effect.  The  Borrower and
each Subsidiary has complied with the  requirements of such licenses and permits
in all  material  respects,  and  has  received  no  notice  of any  pending  or
threatened proceedings for the suspension, termination, revocation or limitation
thereof.  There is no circumstance or condition Known to the Borrower that would
cause or permit  any of such  licenses  or  permits  to be  voided,  revoked  or
withdrawn.


                                       29
<PAGE>


         SECTION 3.18. INSURANCE. SCHEDULE 3.18 of the Disclosure Schedule lists
all  insurance  coverages  maintained  by the  Borrower  on  the  date  of  this
Agreement,  including the names of insurers, policy limits and deductibles.  The
Borrower has not received  written notice of cancellation or intent not to renew
any of such policies,  and there has not occurred, and there does not exist, any
condition (other than general industry-wide  conditions) such as would cause any
of such  insurers  to  cancel  any of such  insurance  coverages,  or  would  be
reasonably  likely to materially  increase the premiums  charged to the Borrower
for coverages consistent with the scope and amounts of coverages as in effect on
the date hereof.

         SECTION 3.19. ENVIRONMENTAL LAWS.

                  (a) The  Borrower  and each  Subsidiary  has  complied  in all
material  respects  with all  Environmental  Laws  relating to its  business and
properties,  and to the  Knowledge  of the  Borrower  there  exist no  Hazardous
Substances  in  amounts  in  violation  of  applicable   Environmental  Laws  or
underground  storage tanks on any of the Real  Properties the existence of which
would have a Material  Adverse Effect,  except those that are stored and used in
compliance with Applicable Laws.

                  (b) Neither  the  Borrower  nor any  Subsidiary  has  received
notice of any pending or  threatened  litigation  or  administrative  proceeding
which in any  instance  (i)  asserts  or alleges  any  violation  of  applicable
Environmental  Laws on the part of the Borrower or any Subsidiary,  (ii) asserts
or alleges that the Borrower or any  Subsidiary  is required to clean up, remove
or  otherwise  take  remedial  or other  response  action  due to the  disposal,
depositing,  discharge,  leaking or other release of any Hazardous Substances or
materials,  or (iii)  asserts or alleges that the Borrower or any  Subsidiary is
required to pay all or any  portion of the costs of any past,  present or future
cleanup,  removal or remedial or other response action which arises out of or is
related to the disposal, depositing,  discharge, leaking or other release of any
hazardous  substances  or materials by the  Borrower or any  Subsidiary.  To the
Borrower's Knowledge,  neither the Borrower nor any Subsidiary is subject to any
judgment,   decree,  order  or  citation  related  to  or  arising  out  of  any
Environmental  Laws. To the Borrower's  Knowledge,  neither the Borrower nor any
Subsidiary  has been named or listed as a potentially  responsible  party by any
governmental body or agency in any matter arising under any Environmental  Laws.
Neither  the  Borrower  nor any  Subsidiary  is a  participant  in, nor does the
Borrower have Knowledge of, any governmental  investigation involving any of the
Real Properties.

                  (c)  Neither  the  Borrower  or  any  Subsidiary  nor,  to the
Borrower's Knowledge, any other person, firm, corporation or governmental entity
has caused or  permitted  any  Hazardous  Substances  or other  materials  to be
stored,  deposited,  treated, recycled or disposed of on, under or at any of the
Real Properties  which  materials,  if known to be present,  would reasonably be
expected to require or authorize cleanup, removal or other remedial action under
any applicable Environmental Laws.

                  (d) As used in this  Section  3.19 and in Section  5.08 below,
the following terms have the following meanings:

                  "ENVIRONMENTAL  LAWS"  include all federal,  state,  and local
laws,  rules,  regulations,  ordinances,  permits,  orders,  and consent decrees
agreed to by the Borrower or any Subsidiary


                                       30
<PAGE>


relating to health, safety, and environmental matters applicable to the business
and  property  of the  Borrower  or any  Subsidiary.  Such laws and  regulations
include  but are not  limited to the  Resource  Conservation  and  Recovery  Act
("RCRA"), 42 U.S.C. ss.6901 et seq., as amended; the Comprehensive Environmental
Response,  Compensation and Liability Act ("CERCLA"), 42 U.S.C. ss.9601 et seq.,
as amended;  the Toxic  Substances  Control Act ("TSCA"),  15 U.S.C.  ss.2601 et
seq.,  as  amended;  and the Clean  Water Act,  33 U.S.C.  ss.1331  et seq.,  as
amended.

                  "HAZARDOUS  SUBSTANCES",  "RELEASE",  "RESPOND" and "RESPONSE"
shall have the  meanings  assigned  to them in  CERCLA,  42 U.S.C.  ss.9601,  as
amended.

                  "NOTICE"  means  any  actual  summons,  citation,   directive,
information request, notice of potential responsibility,  notice of violation or
deficiency,  order,  claim,  complaint,  investigation,   proceeding,  judgment,
letter,  or other  communication,  written  or  oral,  from  the  United  States
Environmental  Protection  Agency or other  federal,  state,  or local agency or
authority, or any other entity or individual,  public or private, concerning any
intentional  or  unintentional  act or omission  which  involves  management  of
Hazardous Substances in amounts in violation of Environmental Laws on or off any
Real Properties;  the imposition of any lien on any Real  Properties,  including
but not limited to liens asserted by government  entities in connection with any
Borrower's  or  Subsidiary's  response to the  presence or Release of  Hazardous
Substances  in amounts in  violation  of  Environmental  Laws;  and any  alleged
violation of or responsibility under any Environmental Laws.

         SECTION  3.20.  SENSITIVE  PAYMENTS.   Neither  the  Borrower  nor  any
Subsidiary  has (a)  made  any  contributions,  payments  or gifts to or for the
private use of any  governmental  official,  employee or agent where  either the
payment or the purpose of such  contribution,  payment or gift is illegal  under
the laws of the United States or the jurisdiction in which made, (b) established
or maintained any unrecorded  fund or asset for any purpose or made any false or
artificial  entries on its books,  (c) made any  payments to any person with the
intention  that any part of such  payment was to be used for any  purpose  other
than that described in the documents  supporting the payment,  or (d) engaged in
any  "trading  with the  enemy"  or other  transactions  violating  any rules or
regulations of the Office of Foreign  Assets Control or any similar laws,  rules
or regulations.

         SECTION  3.21.  FULL  DISCLOSURE.  No  statement  of  fact  made by the
Borrower in this Agreement or any other Loan Document,  in any SEC Report, or in
any information memorandum, business summary, agreement,  certificate,  schedule
or other written  statement  furnished by the Borrower or any  Subsidiary to the
Lender  pursuant  hereto,  contains or will  contain any untrue  statement  of a
material  fact,  or omits or will omit to state any material  fact  necessary to
make any  statements  contained  herein or therein  not  misleading.  Except for
matters  of a general  economic  or  political  nature  which do not  affect the
Borrower or any Subsidiary  uniquely,  there is no fact  presently  known to the
Borrower  which has not been  disclosed  to the  Lender,  which has had or would
reasonably be expected to have a Material Adverse Effect.

         SECTION 3.22. REAFFIRMATION. Each and every request by the Borrower for
an Advance  shall  constitute a  reaffirmation  of the truth and accuracy of the
Borrowers' and each  Subsidiary's  representations  and warranties  made in this
Agreement and the Security Documents on and as of the date of such request.


                                       31
<PAGE>


IV.      CONDITIONS OF MAKING THE LOANS

         A. The  obligation of the Lender to make the initial Loan hereunder and
to  consummate  the other  transactions  contemplated  hereby are subject to the
following conditions precedent:

         SECTION 4.01.  REPRESENTATIONS AND WARRANTIES.  The representations and
warranties set forth in Article III hereof and in the other Loan Documents shall
be true and correct on and as of the Closing Date.

         SECTION 4.02. LOAN  DOCUMENTS.  The Borrower and its  Subsidiaries  (as
applicable)  shall have duly executed and/or  delivered to the Lender all of the
following:

                  (a) The Notes;

                  (b) The Guaranty Agreement,  the Collateral  Agreement and any
and all other  Security  Documents  required by the Lender at the  Closing  Date
(including, without limitation, a Control Agreement or escrow agreement (in form
satisfactory to the Lender) in respect of the Escrow  Account,  and any Landlord
Waivers,  warehousemen's  waivers,  bailee  letters or consents  required by the
Lender);

                  (c) The Warrants;

                  (d) The Registration Rights Agreement;

                  (e) A certificate  or  certificates  of  insurance,  with loss
payable  endorsements,  evidencing  the  insurance  required by Section  5.01(d)
below;  PROVIDED,  HOWEVER,  that this condition precedent shall be deemed to be
satisfied with respect to foreign  insurance  coverages if the Borrower provides
reasonable evidence to the Lender of the existence and amounts of such insurance
on the Closing Date;

                  (f) A current Borrowing Base report in conformity with Section
5.04(d) below,  and a written request for the borrowing of the Term Loan and the
initial Advance;

                  (g) A certificate  of the Secretary or an Assistant  Secretary
of the  Borrower  and each  Subsidiary,  certifying  the vote of the  Boards  of
Directors  or  other  governing  body  of  the  Borrower  and  each  Subsidiary,
authorizing  and directing the execution and delivery of the Loan  Documents and
all further agreements,  instruments,  certificates and other documents pursuant
hereto and thereto;

                  (h) A certificate  of the Secretary or an Assistant  Secretary
of the Borrower and each Subsidiary, certifying the names of the officers of the
Borrower and each  Subsidiary who are authorized to execute and deliver the Loan
Documents  and  all  other  agreements,  instruments,   certificates  and  other
documents to be delivered  pursuant  hereto and thereto,  together with the true
signatures  of  such  officers.   The  Lender  may  conclusively  rely  on  such
certificate  until  the  Lender  shall  receive  any  further  such  certificate
canceling or amending the prior certificate and submitting the signatures of the
officers named in such further certificate;


                                       32
<PAGE>


                  (i) Certified copies of the Organic  Documents of the Borrower
and  each  Subsidiary,  and a  certificate  of the  Secretary  of State or other
appropriate  official of the  jurisdiction of  incorporation of the Borrower and
each  Subsidiary  and of each  jurisdiction  in  which  the  Borrower  and  each
Subsidiary  is  qualified  to  do  business  as  a  foreign  corporation,  dated
reasonably  prior  to the  Closing  Date,  stating  that the  Borrower  and each
Subsidiary   is  duly  formed  or  qualified   and  in  good  standing  in  such
jurisdiction;  PROVIDED,  HOWEVER,  that with respect to any Foreign Subsidiary,
(i) the  delivery  of  uncertified  copies  of its  Organic  Documents  shall be
satisfactory,  and (ii) no certificate of good standing need be delivered if the
subject jurisdiction does not issue such certificates or comparable documents;

                  (j)  Such  other   agreements,   instruments,   documents  and
certificates  (including,  without  limitation,  satisfactory  lien and judgment
searches  respecting  the Borrower) as the Lender or its counsel may  reasonably
request.

         SECTION 4.03.  LENDER SHARES.  The Borrower shall have delivered to the
Lender  one or more  stock  certificates  representing,  in the  aggregate,  the
1,500,000 Lender Shares.

         SECTION 4.04. TERMINATION OF FACTORING AGREEMENT; DYNE REPAYMENT.

                  (a) The Borrower  shall have delivered to the Lender a written
agreement,  in  form  and  substance  reasonably  satisfactory  to  the  Lender,
evidencing  the  termination  of the Factoring  Agreement and the absence of any
continuing obligations thereunder.

                  (b) The Borrower  shall have delivered to the Lender a written
agreement,  executed  by Mark  Dyne in  favor  of the  Borrower  and in form and
substance reasonably satisfactory to the Lender,  confirming the amounts payable
to Mark  Dyne on the  Closing  Date in  respect  of the  Borrower's  outstanding
Indebtedness owed to Mark Dyne, and confirming that, upon receipt of such amount
(plus any  applicable  per diem  interest) by Mark Dyne on the Closing Date, all
liens  and  security  interests  held by Mark  Dyne in or  upon  any  assets  or
properties  of the  Borrower and its  Subsidiaries  shall be released and may be
terminated of record.

         SECTION 4.05.  LEGAL OPINION.  The Lender shall have received a written
opinion of Stubbs  Alderton & Markiles,  LLP,  counsel for the  Borrower and the
Subsidiaries, dated the Closing Date, satisfactory to the Lender and its counsel
in scope and substance.

         SECTION 4.06. FEES AND REIMBURSEMENTS.  The Borrower shall have paid to
the Lender the Closing Fee and the initial  Monitoring  Fee, and shall have paid
or reimbursed the Lender for its  reasonable  out-of-pocket  costs,  charges and
expenses  incurred  to the  Closing  Date (up to a maximum of  $75,000);  and in
connection  herewith,  the Borrower hereby irrevocably  authorizes the Lender to
charge such amounts as Advances to the Borrower's revolving credit loan account.
Failure of the Lender to effect any such  charge  shall not excuse the  Borrower
from its obligation to pay such amounts.

         SECTION 4.07.  FURTHER  MATTERS.  All legal  matters,  and the form and
substance of all documents,  incident to the  transactions  contemplated  hereby
shall be satisfactory to the Lender and its counsel.


                                       33
<PAGE>


         SECTION  4.08.  NO DEFAULT.  No Default or Event of Default  shall have
occurred and be continuing.

         B. The obligation of the Lender to make any Advances  subsequent to the
Closing Date is subject to (a) the  representations  and warranties set forth in
Article  III and in the other  Loan  Documents  being  true and  correct  in all
material  respects  (except  that,  to the  extent  that any  representation  or
warranty is already qualified by concepts of materiality and/or Material Adverse
Effect,  then such  representations  and warranties shall be true and correct in
all respects) on and as of the subject  Borrowing Date, (b) the Lender's receipt
of a current Borrowing Base report in conformity with Section 5.04(d) below, (c)
the execution and delivery of such further Security  Documents as the Lender may
have  reasonably  requested  pursuant  to  the  Security  Documents  theretofore
executed and  delivered,  and (d) there being no continuing  Default or Event of
Default.

V.       AFFIRMATIVE COVENANTS

         The Borrower hereby covenants and agrees that, from the date hereof and
until all Obligations (whether now existing or hereafter arising) have been paid
in full and the Revolving  Credit  Commitment  has been  terminated,  unless the
Lender shall otherwise  consent in writing,  the Borrower shall, and shall cause
each of its Subsidiaries to:

         SECTION  5.01.  CORPORATE  AND  INSURANCE.  Do or  cause to be done all
things necessary to at all times (a) preserve,  renew and keep in full force and
effect its corporate or other legal  existence,  rights,  licenses,  permits and
franchises,  (b) comply with the Loan  Documents  and any other  agreements  and
instruments  executed and delivered  hereunder and  thereunder  (to the extent a
party  thereto),  (c) maintain,  preserve and protect all of its  franchises and
material trade names,  and preserve all of its material  property used or useful
in the conduct of its business and keep the same in good repair,  working  order
and condition  (reasonable wear and tear excepted),  and from time to time make,
or cause to be made,  all  needed and proper  repairs,  renewals,  replacements,
betterments and improvements thereto, so that the Business Operations carried on
in  connection  therewith  may be properly and  advantageously  conducted at all
times, (d) maintain  insurance in amounts,  on such terms and against such risks
(including  fire and other hazards  insured  against by extended  coverage,  and
public  liability  insurance  covering  claims  for  personal  injury,  death or
property  damage) as are  customary for companies of similar size in the same or
similar  businesses and operating in the same or similar  locations,  as well as
all such other  insurance as is required by the  Collateral  Agreement,  each of
which  policies  (other  than  workers   compensation)  shall  be  issued  by  a
financially  sound and reputable insurer  reasonably  satisfactory to the Lender
and shall name the Lender as loss payee and  additional  insured as its interest
appears and provide for the Lender to receive  written  notice  thereof at least
thirty (30) days prior to any cancellation of the subject policy, and (e) comply
with all material  Contracts and material  obligations to which it is a party or
by which it is bound,  all benefit  plans which it  maintains  or is required to
contribute  to,  and  all  Applicable  Law   (including,   without   limitation,
Environmental Laws) material to its Business Operations, and all requirements of
its insurers, whether now in effect or hereafter enacted, promulgated or issued.
The  Borrower  will  provide  to the  Lender  a  certificate  of  the  foregoing
insurance,  promptly upon request; and, without limitation of the foregoing,  to
the extent that  certificates  of foreign  insurance  were not  delivered to the
Lender on the Closin


                                       34
<PAGE>


Date in  accordance  with Section  4.02(e)  above,  such  certificates  shall be
delivered to the Lender within sixty (60) days after the Closing Date.

         SECTION 5.02. PAYMENT OF TAXES. File, pay and discharge, or cause to be
paid and discharged, all material taxes, assessments and governmental charges or
levies  imposed upon the Borrower  and/or any  Subsidiary or upon its income and
profits or upon any of its property  (real,  personal or mixed) or upon any part
thereof,  before the same shall become in default,  as well as all lawful claims
for labor, materials,  supplies and otherwise,  which, if unpaid when due, might
become a Lien or  charge  upon  such  property  or any part  thereof;  PROVIDED,
HOWEVER,  that neither the Borrower nor any Subsidiary  shall be required to pay
and  discharge  or cause to be paid and  discharged  any such  tax,  assessment,
charge,  levy or claim so long as (a) the validity thereof shall be contested in
good faith by appropriate  proceedings and the Borrower or such Subsidiary shall
have set aside on its books adequate  reserves (to the extent  required by GAAP)
with respect to any such tax,  assessment,  charge,  levy or claim so contested,
and (b) payment with respect to any such tax, assessment,  charge, levy or claim
shall be made before any of the Borrower's or such  Subsidiary's  property shall
be seized or sold in satisfaction thereof.

         SECTION 5.03. NOTICES.  Give prompt written notice to the Lender of (a)
the filing by the Borrower of any SEC Reports,  (b) any  proceedings  instituted
against the Borrower or any  Subsidiary  in any federal or state court or before
any commission or other regulatory body, whether federal, state or local, which,
if adversely determined, could reasonably be expected to have a Material Adverse
Effect  (c)  occupancy  of any  new or  additional  Real  Property,  and (d) the
occurrence  of any material  casualty to any  Collateral,  any Material  Adverse
Effect, or any Default or Event of Default, and the action that the Borrower has
taken, is taking, or proposes to take with respect thereto.

         SECTION 5.04. PERIODIC REPORTS. Furnish to the Lender:

                  (a) Within  ninety  (90)  calendar  days after the end of each
Fiscal Year,  consolidated  balance sheets,  and consolidated and  consolidating
statements of income, statements of stockholders' equity, and statements of cash
flows  of the  Borrower  and  its  Subsidiaries,  together  with  footnotes  and
supporting schedules thereto,  certified (as to the consolidated  statements) by
independent certified public accountants selected by the Borrower and reasonably
satisfactory to the Lender,  showing the financial condition of the Borrower and
its  Subsidiaries at the close of such Fiscal Year and the results of operations
of the Borrower and its Subsidiaries during such Fiscal Year;

                  (b) Within  thirty  (30)  calendar  days after the end of each
calendar month (forty-five (45) calendar days in the case of the end of a fiscal
quarter),  consolidated (and, if specifically requested by the Lender reasonably
in advance,  consolidating)  unaudited balance sheets,  statements of income and
statements of cash flows of the Borrower and its Subsidiaries, in each case with
supporting  schedules  thereto,  prepared by the Borrower  and  certified by the
Borrower's Chairman, President, Chief Executive Officer, Chief Financial Officer
or Chief Accounting  Officer,  such balance sheets to be as of the close of such
calendar month and such  statements of income and statements of cash flows to be
for the period from the beginning of the then-current  Fiscal Year to the end of
such calendar month, together with comparative statements


                                       35
<PAGE>


of  income  and cash  flows  for the  corresponding  period  in the  immediately
preceding  Fiscal  Year,  in each  case  subject  to normal  audit and  year-end
adjustments;

                  (c)  Concurrently  with the delivery of each of the  financial
statements  required by Sections  5.04(a) and 5.04(b)  above,  a certificate  on
behalf of the  Borrower  (signed by the  Chairman,  President,  Chief  Executive
Officer,  Chief Financial Officer or Chief Accounting  Officer of the Borrower),
certifying  that he has examined the  provisions of this  Agreement and that, to
the best of his knowledge,  no Default or Event of Default  (including,  without
limitation,  under  Sections 6.16 and 6.17 below,  as  demonstrated  by detailed
calculations included in such certificate) has occurred and/or is continuing;

                  (d) On or  prior  to the  fifth  (5th)  calendar  day of  each
calendar  month,  a detailed  calculation of the Borrowing Base as of the end of
the  immediately  preceding  calendar  month,  in form and  substance,  and with
supporting  documentation  (including,   without  limitation,   receivables  and
payables agings as of the close of the immediately  preceding calendar month) as
may  reasonably  be required by the  Lender;  and, on or prior to the  twentieth
(20th)  calendar day of each  calendar  month,  a report on accounts  receivable
balances  of the  Borrower  and  its  Subsidiaries  as of the  fifteenth  (15th)
calendar day of such calendar month;

                  (e) As soon as approved by the  Borrower's  Board of Directors
(but in any event not later than  thirty (30) days after the  beginning  of each
Fiscal Year),  a budget and operating plan (on a  quarter-by-quarter  basis) for
such Fiscal Year, in such detail as may reasonably be required by the Lender;

                  (f) As and when  distributed to the  Borrower's  shareholders,
copies of all proxy materials,  reports and other information which the Borrower
provides to its  shareholders;  and as and when distributed to any other holders
of  Indebtedness  of the  Borrower or the  Subsidiaries,  copies of all reports,
statements and other information provided to such lenders; and

                  (g)  Promptly,  from  time to  time,  such  other  information
(including,  without  limitation,  receivables  and payables  agings,  and sales
reports)  regarding  the  Borrower's  or any  Subsidiary's  operations,  assets,
business, affairs and financial condition, as the Lender may reasonably request.

To the extent that the  financial  statements  required by Sections  5.04(a) and
5.04(b)  are  contained  in any SEC  Reports  filed by the  Borrower  within the
required time period  hereunder for the delivery of such  financial  statements,
then the Borrower  shall be deemed to have complied  with the subject  financial
statement  delivery  by  notifying  the Lender of the filing of the  subject SEC
Report.

To the extent that any report or other delivery required under this Section 5.04
or elsewhere in this Agreement will, at the time of anticipated  delivery to the
Lender,  contain any material non-public  information,  the Borrower will notify
the Lender  thereof as promptly  as  practicable  prior to the  delivery of such
report  (but  without  disclosing  the  specific  items of  material  non-public
information or the nature  thereof),  and if so requested by the Lender prior to
the required date of the information delivery hereunder,  the Borrower shall (x)
if reasonably practicable, redact such


                                       36
<PAGE>


material  non-public  information  from the subject report prior to the delivery
thereof to the Lender,  or (y) defer  delivery of such report until such time as
the Borrower has made public  disclosure of the subject material  information or
the Lender has affirmatively  requested  delivery of such report.  Absent timely
request  by the  Lender as  aforesaid,  the  Borrower  shall  make the  required
delivery to the Lender on a timely basis.

         SECTION 5.05. BOOKS AND RECORDS; INSPECTION. Maintain centralized books
and records regarding all of the Business Operations at the Borrower's principal
place of  business,  and  permit  agents  or  representatives  of the  Lender to
inspect,  at any time during normal business hours, upon reasonable  notice, and
without  undue  material  disruption  of  the  Business  Operations,  all of the
Borrower's  and its  Subsidiaries'  various  books and records,  to make copies,
abstracts and/or reproductions  thereof, and to discuss the business and affairs
of the Borrower and the  Subsidiaries  with the management of the Borrower;  and
the Lender shall maintain the confidentiality of any Confidential Information so
obtained,  as and to the extent required under Section 9.13 below, and shall not
trade in any  securities  of the  Borrower  utilizing  any of such  Confidential
Information.

         SECTION 5.06.  ACCOUNTING.  Maintain a standard system of accounting in
order to permit the preparation of financial  statements in accordance with GAAP
and Regulation S-X promulgated under the Act.

         SECTION  5.07.  REIMBURSEMENTS.  Pay or  reimburse  the Lender or other
appropriate  Persons  on demand for all  reasonable  costs,  expenses  and other
charges   incurred  or  payable  from  time  to  time  in  connection  with  the
transactions  contemplated  by this  Agreement,  any  waivers or  amendments  in
respect of any Loan  Documents  (whether or not completed or executed),  and any
"workout" or enforcement  action (whether or not  consummated or completed,  and
regardless  of the outcome  thereof),  including  but not limited to any and all
search  fees,  recording  fees,  costs  of  inspections,  reasonable  legal  and
accounting fees, and costs related to routine Exchange Act filings in respect of
the Lender's and its Affiliates' position in securities of the Borrower.

         SECTION  5.08.  ENVIRONMENTAL  RESPONSE.  In the event of any  material
discharge, spill, injection,  escape, emission,  disposal, leak or other Release
of Hazardous Substances in amounts in violation of applicable Environmental Laws
by the Borrower or any  Subsidiary on any Real  Property  owned or leased by the
Borrower  or any  Subsidiary,  which  is not  authorized  by a  permit  or other
approval  issued by the  appropriate  governmental  agencies and which  requires
notification  to or  the  filing  of  any  report  with  any  federal  or  state
governmental agency, the Borrower shall promptly: (a) notify the Lender; and (b)
comply with the notice  requirements of the Environmental  Protection Agency and
applicable  state  agencies,  and take all steps  necessary to promptly clean up
such discharge,  spill,  injection,  escape,  emission,  disposal, leak or other
Release in accordance  with all  applicable  Environmental  Laws and the Federal
National  Contingency Plan, and, if required,  receive a certification  from all
applicable state agencies or the Environmental Protection Agency, that such Real
Property has been cleaned up to the satisfaction of such agency(ies).

         SECTION  5.09.  MANAGEMENT.  Cause  Stephen  Forte  to  continue  to be
employed or to function as the Chief Executive Officer of the Borrower, unless a
successor is appointed within


                                       37
<PAGE>


sixty  (60) days  after  the  termination  of Mr.  Forte's  employment  and such
successor is reasonably satisfactory to the Lender.

         SECTION  5.10.  USE OF PROCEEDS.  Cause all proceeds of the Loans to be
utilized  solely in the manner and for the  purposes  set forth in Section  2.04
above.

         SECTION 5.11.  FUTURE  SUBSIDIARIES.  At any time and from time to time
when the  Borrower  or any of its  Subsidiaries  proposes to form or acquire any
Subsidiary  subsequent  to the Closing  Date,  the  Borrower  shall give written
notice thereof to the Lender reasonably in advance of (and in no event less than
fifteen (15) days prior to) the  formation or  acquisition  of such  Subsidiary,
accompanied  by true  and  complete  copies  of the  Organic  Documents  of such
Subsidiary and stating,  with respect to such  Subsidiary,  (a) its proper legal
name, (b) its jurisdiction of incorporation or formation,  (c) the jurisdictions
(if any) in which it is  qualified or is required to be qualified to do business
as a  foreign  entity,  (d) the  number  of  shares  of  capital  stock,  equity
securities or ownership interests outstanding, and (e) the record owners of such
outstanding capital stock, equity securities or other ownership  interests;  and
contemporaneously with the formation or acquisition of such new Subsidiary, such
new  Subsidiary  shall  be  deemed  to  have  made  and  joined  in  all  of the
representations  and  warranties  made by the Borrower in this Agreement and the
other Loan Documents (all of which shall be applicable to such new Subsidiary as
if named  therein),  and the Borrower shall cause such new Subsidiary to execute
and deliver to the Lender (i) a Guaranty  Agreement in substantially the form of
the Guaranty Agreement as then in effect (or a joinder agreement with respect to
the existing Guaranty Agreement in form and substance reasonably satisfactory to
the  Lender),  and  (ii)  a  Collateral  Agreement  (with  completed  perfection
certificate and other appropriate  Security Documents) in substantially the form
of the  Collateral  Agreement  as then in effect  (or a joinder  agreement  with
respect to the existing  Collateral  Agreement in form and substance  reasonably
satisfactory to the Lender) and other Security Documents as reasonably requested
by the Lender.

         SECTION 5.12.  LANDLORD WAIVERS.  To the extent requested by the Lender
from  time to time  subsequent  to the  Closing  Date,  use  their  commercially
reasonable efforts to obtain, within thirty (30) days after the Lender's request
therefor,  in form and substance reasonably  satisfactory to the Lender, any and
all bailee  waivers,  warehousemen's  waivers,  Landlord  Waivers  and/or access
agreements requested by the Lender in respect of locations where there is stored
or held Collateral  having an aggregate fair market value in excess of $100,000.
This  Section 5.12 shall not require the  Borrower or any  Subsidiary  to obtain
waivers or access agreements from vendors or suppliers  holding  Collateral only
for drop shipment to the Borrower's or any  Subsidiary's  customers on behalf of
the Borrower or any Subsidiary.

         SECTION 5.13. DEPOSIT ACCOUNTS.  Notify the Lender upon opening any new
bank account, and cause the subject bank or securities  intermediary promptly to
execute  and deliver to the Lender a Control  Agreement  in respect of such bank
account or securities account; and this Section 5.13 shall also be applicable to
any and all bank  accounts for which  Control  Agreements  have not been entered
into on the Closing  Date if (a) the funds in such bank account  exceed  $75,000
(or the  Dollar  equivalent),  or (ii) the funds held in the Bank  Accounts  for
which  Control  Agreements  are not in  place  exceed  $300,000  (or the  Dollar
equivalent)  in the  aggregate;  and  to the  extent  that  a  required  Control
Agreement  is not entered  into within  sixty (60) days after the Closing  Date,
then the subject  bank  account(s)  shall be promptly  closed and the funds held


                                       38
<PAGE>


therein  shall  be  transferred  to one or  more  accounts  at  another  banking
institution  which has executed and delivered a Control  Agreement in respect of
such account(s) in form and substance satisfactory to the Lender.

VI.      NEGATIVE COVENANTS

         The Borrower  hereby  covenants and agrees that,  until all Obligations
(whether  now  existing  or  hereafter  arising)  have been paid in full and the
Revolving  Credit  Commitment  has been  terminated,  unless  the  Lender  shall
otherwise  consent in writing,  the Borrower shall not, and shall not permit any
Subsidiary to, directly or indirectly:

         SECTION 6.01. INDEBTEDNESS.  Incur, create, assume, become or be liable
in any manner with respect to, or permit to exist, any Indebtedness, OTHER THAN:

                  (a) Indebtedness to the Lender pursuant to the Loan Documents;

                  (b) liabilities  with respect to trade  obligations,  accounts
payable, advances, royalty or other similar payments, operating leases and other
normal accruals incurred in the ordinary course of business,  or with respect to
which the Borrower or the subject  Subsidiary  is  contesting  in good faith the
amount or  validity  thereof by  appropriate  proceedings,  and then only to the
extent that the  Borrower or the subject  Subsidiary  has set aside on its books
adequate reserves therefor;

                  (c)  Indebtedness  existing on the date of this Agreement owed
to those Persons,  in those amounts and having those  maturities as set forth in
SCHEDULE 3.01 of the Disclosure Schedule;

                  (d) Capitalized Leases reflected in the Financial  Statements,
and  Capitalized   Leases  hereafter   entered  into  by  the  Borrower  or  its
Subsidiaries, subject to the limitations of Section 6.16 below;

                  (e) purchase money  Indebtedness  incurred in connection  with
the Borrower's or its  Subsidiaries'  acquisition of capital assets,  subject to
the limitations of Section 6.16 below;

                  (f) Subordinated  Debt in such amounts and upon such terms and
conditions  as shall  be  acceptable  to the  Lender  in its  sole and  absolute
discretion;

                  (g)  intercompany  Indebtedness  between the  Borrower and any
Wholly-Owned Subsidiary or between Wholly-Owned Subsidiaries; PROVIDED, HOWEVER,
that the aggregate intercompany Indebtedness owed by Foreign Subsidiaries to the
Borrower or any  Domestic  Subsidiary,  when  aggregated  with the amount of all
other  Investments in Foreign  Subsidiaries  (excluding any equipment  presently
owned by the Borrower or any Domestic Subsidiary which is hereafter  transferred
to any Foreign  Subsidiary)  and the face amount of all  Guarantees  made by the
Borrower  or its  Domestic  Subsidiaries  in respect of  obligations  of Foreign
Subsidiaries,  shall not at any time exceed the sum of the net such intercompany
Indebtedness on the Closing Date plus $1,800,000 (or the Dollar equivalent) (the
"FOREIGN  INVESTMENT   LIMITATION");   PROVIDED,   HOWEVER,   that  intercompany
Indebtedness  between  the  Borrower  or  any  Domestic  Subsidiary  and  A.S.G.
Stationary,  Inc.  and/or  Tag-It de Mexico,  S.A.  C.V.  shall be excluded from
intercompany


                                       39
<PAGE>


Indebtedness  for purposes of this  limitation,  and no increase in Indebtedness
and no further  advances to or  Investments in either such entity from and after
May 1, 2007 shall be permitted.

                  (h)  Guarantees  to the extent  permitted  pursuant to Section
6.03 below.

         SECTION 6.02. LIENS. Create,  incur, assume or suffer to exist any Lien
or other  encumbrance  of any nature  whatsoever  on any of its  assets,  now or
hereafter owned, other than:

                  (a) subject to Section 5.02 above,  Liens securing the payment
of  taxes  which  are  either  not yet due or the  validity  of  which  is being
contested in good faith by appropriate proceedings, and as to which the Borrower
or the subject Subsidiary shall have set aside on its books adequate reserves;

                  (b)  deposits   under  workers'   compensation,   unemployment
insurance  and  social  security  laws,  or to secure the  performance  of bids,
tenders,  contracts  (other than for the repayment of money borrowed) or leases,
or to secure  statutory  obligations  or surety  or appeal  bonds,  or to secure
indemnity,  performance  or  other  similar  bonds  in the  ordinary  course  of
business;

                  (c)  statutory  Liens of landlords  and Liens  imposed by law,
such as, carriers', warehousemen's,  materialmen's or mechanics' liens, incurred
by the  Borrower  or any  Subsidiary  in good  faith in the  ordinary  course of
business and  discharged  promptly  after same are incurred;  fully bonded Liens
arising out of a judgment or award against the Borrower or any  Subsidiary  with
respect to which the Borrower or such Subsidiary  shall currently be prosecuting
an appeal,  a stay of execution  pending such appeal  having been  secured;  and
Liens arising out of a judgment or award against the Borrower or any  Subsidiary
which are fully covered by insurance (subject to applicable deductibles) and for
which the relevant insurer has not denied or disclaimed coverage;

                  (d) other  Liens  incurred  in  connection  with  Indebtedness
expressly  permitted  pursuant to Section  6.01(d) and/or Section 6.01(e) above,
provided that such Liens do not extend to any assets or property  other than the
specific assets or properties acquired pursuant to such permitted Indebtedness;

                  (e)  encumbrances  consisting  of  easements,   rights-of-way,
survey exceptions and other similar restrictions on the use of Real Property, or
minor  irregularities in title thereto which do not materially impair the use of
such  property  in  the  operation  of the  business  of the  Borrower  and  its
Subsidiaries;

                  (f) Liens in existence on the date of this  Agreement,  as set
forth on SCHEDULE 6.02 of the Disclosure Schedule;

                  (g) Liens  arising  out of  judgments  or awards (i) which are
fully covered by insurance (subject to applicable deductibles) and for which the
relevant insurer has not denied or disclaimed coverage,  or (ii) with respect to
which the Borrower or the subject  Subsidiary  shall be prosecuting an appeal in
good faith and in respect of which a stay of execution shall have been issued;

                  (h) Liens in favor of the Lender; and


                                       40
<PAGE>


                  (i) extensions,  renewals or replacements of any Lien referred
to in clauses (a) through  (f) above,  provided  that same shall not extend such
Lien to any  additional  assets or effect any increase in any  principal  amount
secured thereby.

         SECTION 6.03. GUARANTEES. Guarantee, endorse or otherwise in any manner
become or be  responsible  for  obligations  of any  other  Person,  except  (a)
endorsements of negotiable  instruments for collection in the ordinary course of
business,  (b) subject to the Foreign Investment  Limitation,  Guarantees by the
Borrower of obligations of  Wholly-Owned  Subsidiaries in the ordinary course of
business.

         SECTION  6.04.  SALES  OF  ASSETS  AND  MANAGEMENT.  (a)  Sell,  lease,
transfer,  encumber  or  otherwise  dispose  of  any of  the  Borrower's  or any
Subsidiary's  properties,  assets, rights, licenses or franchises other than (i)
sales of inventory in the ordinary  course of  business,  (ii)  licenses,  joint
ventures and related  transactions  entered into,  modified or terminated in the
ordinary  course of  business,  (iii) the  disposition  of surplus  or  obsolete
personal   properties  in  the  ordinary  course  of  business,   including  the
disposition of the Owned Real Property located in Kings Mountain, North Carolina
for a gross sales price of not less than  $800,000,  or (b) permit any Affiliate
of the  Borrower  (other than a  Subsidiary  which is a party to the  Collateral
Agreement) to own or obtain any patent, patent application, copyright, copyright
application,  trademark,  trademark  application,  license,  or other intangible
asset  relating  to the  Business  Operations  except  in the  normal  course of
business  on terms and  conditions  no less  favorable  to the  Borrower  or any
Subsidiary  than those which could be  obtained in an arms'  length  transaction
with an unaffiliated third party.

         SECTION 6.05. SALE-LEASEBACK.  Enter into any arrangement,  directly or
indirectly, with any Person whereby the Borrower or any Subsidiary shall sell or
transfer any property  (real,  personal or mixed) used or useful in the Business
Operations,  whether now owned or hereafter  acquired,  and  thereafter  rent or
lease such property.

         SECTION 6.06.  INVESTMENTS;  ACQUISITIONS.  Make any  Investment in, or
otherwise acquire or hold securities  (including,  without  limitation,  capital
stock and evidences of Indebtedness)  of, or make loans or advances to, or enter
into any  arrangement for the purpose of providing funds or credit to, any other
Person (including any Affiliate), EXCEPT:

                  (a)  Investments  in  Wholly-Owned   Subsidiaries  which  have
complied with the requirements of Section 5.11 hereof  (subject,  in the case of
Foreign Subsidiaries, to the Foreign Investment Limitation);

                  (b)  advances  (to the extent  permitted  by  Applicable  Law,
including  federal  securities  laws)  to  employees  of  the  Borrower  or  any
Wholly-Owned Subsidiaries for normal business expenses not to exceed at any time
$10,000 in the aggregate;

                  (c)  Investments  of excess  cash  generated  in the  Business
Operations in Cash Equivalents; and

                  (d)  Investments  of  cash  in  overnight  deposits  or  other
customary cash management  Investments  with  commercial  banks or in commercial
paper satisfying the criteria for such banks or commercial paper as set forth in
the definition of Cash Equivalents.


                                       41
<PAGE>


         SECTION 6.07.  CORPORATE  FORM;  ACQUISITIONS.  Purchase or acquire any
Real Property or any  ownership  interest in any Real  Property;  or dissolve or
liquidate,  or consolidate or merge with or into, sell all or substantially  all
of  the  assets  of the  Borrower  or  any  Subsidiary  to,  or  acquire  all or
substantially all of the securities,  assets or properties of, any other Person,
except for (a)  consolidations  of a Subsidiary  with a Wholly-Owned  Subsidiary
(provided  that no  Domestic  Subsidiary  shall be  consolidated  with a Foreign
Subsidiary);  (b) mergers of a Wholly-Owned Subsidiary into the Borrower or into
a Wholly-Owned  Subsidiary (provided that no Domestic Subsidiary shall be merged
into any Foreign Subsidiary); or (c) sales to the Borrower or another Subsidiary
for fair value.

         SECTION 6.08. DIVIDENDS AND REDEMPTIONS. Directly or indirectly declare
or pay any dividends,  or make any distribution of cash or property, or both, to
any Person in respect of any of the shares of the capital  stock or other equity
securities  of the  Borrower or any other  Person,  or  directly  or  indirectly
redeem, purchase or otherwise acquire for consideration any securities or shares
of the capital  stock or other  equity  securities  of the Borrower or any other
Person;  PROVIDED,  that this  Section  6.08 shall not be deemed to prohibit the
payment of dividends or  distributions  by any  Subsidiary to the Borrower or to
any direct or indirect Wholly-Owned Domestic Subsidiary.

         SECTION  6.09.  COMPENSATION.  Directly  or  indirectly  pay  any  cash
compensation to any executive officers of the Borrower except in accordance with
the compensation levels disclosed in SCHEDULE 6.09 of the Disclosure Schedule or
as otherwise  approved by the  independent  members of the Board of Directors of
the  Borrower  but in no case in any  amount or  amounts  which  would  cause or
reasonably be expected to cause a Material Adverse Effect.

         SECTION 6.10. CHANGE OF BUSINESS. Directly or indirectly: (a) engage in
a  business  materially  different  from  the  general  nature  of the  Business
Operations  (i) as now being  conducted,  or (ii) as the same may  hereafter  be
reasonably expanded from time to time in like areas of business; (b) wind up the
Business Operations or cease substantially all of its normal Business Operations
for a period in excess of ten (10) consecutive  days; or (c) suffer any material
disruption,  interruption or  discontinuance of a material portion of its normal
Business Operations for a period in excess of ten (10) consecutive days.

         SECTION  6.11.  RECEIVABLES.  Sell or  assign  in any way any  accounts
receivable,  promissory  notes or trade  acceptances held by the Borrower or any
Subsidiary  with  or  without  recourse,   except  for  collections   (including
endorsements) in the ordinary course of business.

         SECTION 6.12. CERTAIN AMENDMENTS.  Agree, consent,  permit or otherwise
undertake  to amend  any of the terms or  provisions  of the  Borrower's  or any
Subsidiary's  Organic  Documents in a manner which may impair in any respect any
of the Lender's rights under any of the Loan Documents.

         SECTION  6.13.  AFFILIATE   TRANSACTIONS.   Enter  into  any  Contract,
agreement  or  transaction  with any  Affiliate  of the  Borrower  except (a) as
disclosed in SCHEDULE  6.13 of the  Disclosure  Schedule,  (b) for  intercompany
Indebtedness between the Borrower and any Wholly-Owned Subsidiary or between any
Wholly-Owned  Subsidiaries  (subject  to the  limitations  provided  in  Section
6.06(a) above),  or (c) in the normal course of business on terms and conditions
no less


                                       42
<PAGE>


favorable to the Borrower or any  Subsidiary  than those which could be obtained
in an arms' length transaction with an unaffiliated third party.

         SECTION 6.14. FISCAL YEAR. Amend its Fiscal Year.

         SECTION 6.15. SUBORDINATED DEBT; COLIN DYNE INDEBTEDNESS.

                  (a) Prepay any of the Indebtedness  listed in SCHEDULE 3.01 of
the Disclosure Schedule; or prepay, redeem or purchase any Subordinated Debt, or
make any payment on any  Subordinated  Debt,  in each case in  violation  of the
applicable subordination agreement.

                  (b) Make any  payment on any  Indebtedness  owed to Colin Dyne
except by means of dollar-for-dollar offset against amounts owed to the Borrower
or any Domestic Subsidiary by Colin Dyne.

         SECTION 6.16. CAPITAL EXPENDITURES. Make aggregate Capital Expenditures
(a) in excess of $500,000  during the period from the Closing  Date  through and
including  December 31, 2007,  (b) in excess of $750,000  during the Fiscal Year
ending  December 31, 2008, and (c) in excess of fifty (50%) percent of Free Cash
Flow in any Fiscal Year thereafter.

         SECTION 6.17.  COVERAGE TEST.  Permit,  as of the end of any quarter of
any Fiscal Year, EBITDA for the four (4) consecutive  fiscal quarters then ended
to exceed  principal and interest  payments by the Borrower and its Subsidiaries
for such four (4) fiscal quarter period (excluding  principal of the Convertible
Debentures and principal  payments made from a matched source where such matched
source  makes  the  payment);  PROVIDED,  HOWEVER,  that the  Lender  shall  not
accelerate  the  Obligations by reason of any  non-compliance  with this Section
6.17 unless and until  non-compliance  herewith  occurs as of the end of two (2)
consecutive fiscal quarters.

VII.     DEFAULTS

         SECTION  7.01.  EVENTS  OF  DEFAULT.  Each of the  following  events is
herein, and in the Notes, sometimes referred to as an Event of Default:

                  (a) if any  representation  or warranty  made herein or in any
other Loan Document, or in any certificate,  financial statement, Borrowing Base
report,  instrument or other written statement  furnished by the Borrower or any
Subsidiary in connection with this Agreement,  any other Loan Document or any of
the  borrowings  hereunder  shall be  false,  inaccurate  or  misleading  in any
material respect when made or when deemed made hereunder;

                  (b) any  default in the payment of any  principal  or interest
under any of the Notes or any other  Obligations  when the same shall be due and
payable, whether at the due date thereof or at a date required for prepayment or
by  acceleration or otherwise,  and the continuance of any such  non-payment (in
whole or in part) for a period of three (3) Business Days;

                  (c) any default in the due  observance or  performance  of any
covenant,  condition or agreement contained in any Section of Article VI hereof,
which,  if capable of being cured,  is not fully cured  within  thirty (30) days
after the occurrence thereof;


                                       43
<PAGE>


                  (d) any default in the due  observance or  performance  of any
covenant,  condition or agreement  to be observed or performed  under  Article V
hereof, or otherwise pursuant to the terms hereof or any other Loan Document and
not  addressed  in Sections  7.01(a),  (b) or (c), and the  continuance  of such
default  unremedied  for a period of thirty (30) days (five (5) Business Days in
the  case of  Section  5.01(d)  hereof)  after  written  notice  thereof  to the
Borrower,  or such other cure period as may be provided in the  applicable  Loan
Document;

                  (e) any uncured  default or event of default  with  respect to
any Indebtedness of the Borrower or any of the  Subsidiaries  (other than to the
Lender) in an amount in excess of  $250,000,  if the  effect of such  default or
event of  default is to permit the  holder,  with or without  notice or lapse of
time or both,  to  accelerate  the maturity of any such  Indebtedness  for money
borrowed or to cause such Indebtedness for money borrowed to become due prior to
the stated maturity thereof;

                  (f) if the Borrower or any Subsidiary  shall: (i) apply for or
consent to the appointment of a receiver, trustee, custodian or liquidator of it
or any of its  properties,  (ii) admit in writing its inability to pay its debts
as they mature,  (iii) make a general  assignment  for the benefit of creditors,
(iv) be  adjudicated  a bankrupt or  insolvent or be the subject of an order for
relief   under  Title  11  of  the  United   States  Code  or  any   bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation law
or statute of any other jurisdiction or foreign country, or (v) file a voluntary
petition in bankruptcy,  or a petition or an answer seeking reorganization or an
arrangement   with   creditors  or  to  take   advantage   or  any   bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or liquidation law
or statute, or an answer admitting the material  allegations of a petition filed
against it in any  proceeding  under any such law,  or (vi) take or permit to be
taken any action in  furtherance  of or for the purpose of effecting  any of the
foregoing;

                  (g) if any order, judgment or decree shall be entered, without
the application,  approval or consent of the Borrower or any Subsidiary,  by any
court of competent  jurisdiction,  approving a petition  seeking  liquidation or
reorganization  of the  Borrower or any  Subsidiary,  or  appointing a receiver,
trustee, custodian or liquidator of the Borrower or any Subsidiary, or of all or
any  substantial  part of its assets,  and such order,  judgment or decree shall
continue unstayed and in effect for any period of sixty (60) days;

                  (h) if  final  judgment(s)  or  administrative  order  for the
payment of money in an uninsured amount in excess of $50,000  individually or in
the aggregate shall be rendered against the Borrower and/or any Subsidiary,  and
the same shall  remain  undischarged  or  unbonded  for a period of thirty  (30)
consecutive days, during which execution shall not be effectively stayed;

                  (i) the  occurrence  of any levy upon or seizure or attachment
of, or any  uninsured  loss of or damage to, any property of the Borrower or any
Subsidiary having an aggregate fair value or repair cost (as the case may be) in
excess of $50,000  individually or in the aggregate,  and any such levy, seizure
or attachment  shall not be set aside,  bonded or discharged  within thirty (30)
days after the date thereof;


                                       44
<PAGE>


                  (j)  if any  Lien  purported  to be  created  by any  Security
Document shall cease to be a valid  perfected  first priority Lien (subject only
to any priority  accorded by law to Permitted Liens) on the assets or properties
covered thereby,  or the Borrower or any Subsidiary shall assert in writing that
any  Lien  purported  to be  created  by any  Security  Document  is not a valid
perfected  first priority lien (subject only to any priority  accorded by law to
Permitted  Liens,  and any priority  granted to a replacement  revolving  credit
lender with respect to Accounts and inventory as contemplated by Section 2.01(g)
above) on the assets or properties  purported to be covered  thereby;  or if any
Subsidiary  which is a Wholly-Owned  Subsidiary shall cease to be a Wholly-Owned
Subsidiary;

                  (k) if any of the Loan Documents  shall,  other than by reason
of the Lender's default, bankruptcy or insolvency, cease to be in full force and
effect (other than as a result of the discharge  thereof in accordance  with the
terms thereof or by written agreement of all parties thereto);

                  (l) if the Common  Stock  shall not be listed or traded on any
national  securities  exchange or any NASDAQ market, or shall cease to be listed
or quoted on the OTC  Bulletin  Board,  for any period in excess of thirty  (30)
consecutive days; or

                  (m) if the Borrower or any  Subsidiary  shall be indicted for,
convicted of or plead NOLO CONTENDERE to any criminal offense; or

                  (n) the occurrence of a Material Adverse Effect.

         SECTION 7.02.  REMEDIES.  Upon the  occurrence of any Event of Default,
and at all times thereafter during the continuance  thereof:  (a) the Notes, and
any and all other Obligations, shall, at the Lender's option (except in the case
of  Sections  7.01(f)  and  7.01(g)  hereof,   the  occurrence  of  which  shall
automatically  effect  acceleration,  regardless of any action or forbearance in
respect  of any  prior or  ongoing  Default  or Event of  Default  which  may be
inconsistent  with such  automatic  acceleration),  become  immediately  due and
payable, both as to principal,  interest and other charges, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived,
anything  contained herein or in the Notes or other evidence of such Obligations
to the  contrary  notwithstanding,  (b) all  outstanding  Obligations  under the
Notes, and all other outstanding Obligations, shall bear interest at the default
rates of interest  provided in the Notes,  (c) the Lender may file suit  against
the Borrower on the Notes and against the Borrower  and the  Subsidiaries  under
the other Loan Documents and/or seek specific  performance or injunctive  relief
thereunder  (whether  or not a remedy  exists  at law or is  adequate),  (d) the
Lender  shall have the right,  in  accordance  with the Security  Documents,  to
exercise any and all remedies in respect of such or all of the Collateral as the
Lender may determine in its discretion  (without any  requirement of marshalling
of assets or other  such  requirement,  all of which  are  hereby  waived by the
Borrower), and (e) the Revolving Credit Commitment shall, at the Lender's option
(except in the case of Sections  7.01(f) and 7/01(g)  hereof,  the occurrence of
which  shall  automatically  effect  termination,  regardless  of any  action or
forbearance in respect of any prior or ongoing Default or Event of Default which
may be inconsistent with such automatic termination),  be immediately terminated
or  reduced,  and the Lender  shall be under no further  obligation  to consider
making any further Advances.


                                       45
<PAGE>


VIII.    PARTICIPATING LENDERS; ASSIGNMENT.

         SECTION  8.01.  PARTICIPATIONS.  Anything  in  this  Agreement  to  the
contrary  notwithstanding,  the Lender  may,  at any time and from time to time,
without in any manner  affecting or impairing  the validity of any  Obligations,
transfer,  assign or grant  participating  interests  in the Loans as the Lender
shall  in  its  sole   discretion   determine,   to  such  other   Persons  (the
"PARTICIPANTS") as the Lender may determine. Notwithstanding the granting of any
such participating  interests:  (a) the Borrower shall look solely to the Lender
for all purposes of this Agreement and the transactions contemplated hereby, (b)
the  Borrower  shall at all times  have the right to rely  upon any  waivers  or
consents signed by the Lender as being binding upon all of the Participants, and
(c) all  communications in respect of this Agreement and such transactions shall
remain solely  between the Borrower and the Lender  (exclusive of  Participants)
hereunder.

         SECTION 8.02.  TRANSFER AND  ASSIGNMENT.  Anything in this Agreement to
the contrary notwithstanding, the Lender may, at any time and from time to time,
subject to Section 8.03 below,  without in any manner affecting or impairing the
validity  of any  Obligations,  transfer  and assign  all or any  portion of its
interest in this Agreement, the Notes and the other Loan Documents to any Person
(an "ASSIGNEE  LENDER") as the Lender may  determine.  Upon any such transfer or
assignment, the Assignee Lender shall be deemed to succeed (to the extent of the
interest  assigned) to the rights and obligations of the Lender for all purposes
of this  Agreement.  In the event of any transfer and assignment of the Lender's
entire interest in this  Agreement,  the Notes and the Security  Documents,  the
Lender  shall be replaced by the  Assignee  Lender as "Secured  Party" under the
Collateral Agreement and all other Security Documents.

         SECTION 8.03. RECORDATION OF ASSIGNMENT. In respect of any negotiation,
transfer or  assignment  of all or any portion of any Lender's  interest in this
Agreement, any Note and/or any other Loan Documents at any time and from time to
time, the following provisions shall be applicable:

                  (a) The  Borrower,  or any agent  appointed  by the  Borrower,
shall maintain a register (the  "REGISTER") in which there shall be recorded the
name and address of each Person holding any Note(s)  hereunder or any commitment
to lend  hereunder,  and the principal  amount payable to such Person under such
Person's  Note(s)  or  committed  by such  Person  under such  Person's  lending
commitment.  The Borrower  hereby  irrevocably  appoints the Lender  (and/or any
subsequent  Lender appointed by the Lender then maintaining the Register) as the
Borrower's agent for the purpose of maintaining the Register.

                  (b) In connection with any negotiation, transfer or assignment
as  aforesaid,  the  transferor/assignor   shall  deliver  to  the  Lender  then
maintaining the Register an assignment and assumption  agreement executed by the
transferor/assignor and the transferee/assignee,  setting forth the specifics of
the subject  transaction,  including but not limited to the amount and nature of
Obligations and/or lending  commitments being transferred or assigned (and being
assumed,  as  applicable),  and the proposed  effective date of such transfer or
assignment and the related assumption (if applicable).

                  (c)  Subject  to receipt of  completed  tax forms  (indicating
withholding  status,  or  exemption  from  withholding,  as  applicable,  of the
transferee/assignee)  reasonably  required  by


                                       46
<PAGE>


the Person then  maintaining  the  Register,  and (if  required by such  Person)
surrender of the negotiated,  transferred or assigned  Note(s) for reissuance by
the  Borrower,  such Person shall record the subject  transfer,  assignment  and
assumption  in the  Register.  Anything  contained  in any  Note or  other  Loan
Document to the contrary notwithstanding, no negotiation, transfer or assignment
shall be effective until it is recorded in the Register pursuant to this Section
8.03(c).  The entries in the Register  shall be  conclusive  and binding for all
purposes,  absent manifest  error;  and the Borrower and each Lender shall treat
each Person whose name is recorded in the Register as a Lender hereunder for all
purposes of this  Agreement.  The Register  shall be available for inspection by
the Borrower and each Lender at any  reasonable  time and from time to time upon
reasonable prior notice.

IX.      MISCELLANEOUS

         SECTION 9.01. SURVIVAL.  This Agreement and all covenants,  agreements,
representations  and warranties  made herein and in the  certificates  delivered
pursuant  hereto,  shall  survive  the making by the Lender of the Loans and the
execution  and delivery to the Lender of the Notes,  and shall  continue in full
force  and  effect  for so  long  as the  Notes  or any  other  Obligations  are
outstanding and unpaid or the Revolving Credit Commitment  remains  outstanding.
Whenever  in this  Agreement  any of the  parties  hereto is  referred  to, such
reference  shall be deemed to include the  successors  and permitted  assigns of
such  party;  and all  covenants,  promises  and  agreements  in this  Agreement
contained,  by or on behalf of the  Borrower  shall  inure to the benefit of the
successors and assigns of the Lender.

         SECTION 9.02. INDEMNIFICATION.  The Borrower shall indemnify the Lender
and its directors,  officers, employees, attorneys and agents against, and shall
hold the Lender and such  Persons  harmless  from,  any and all losses,  claims,
damages and liabilities and related expenses,  including reasonable counsel fees
and expenses,  incurred by the Lender or any such Person  arising out of, in any
way connected with, or as a result of: (a) the use of any of the proceeds of the
Loans made by the Lender to the Borrower; (b) this Agreement,  the ownership and
operation of the  Borrower's  and any  Subsidiary's  assets,  including all Real
Properties and improvements or any Contract,  the performance by the Borrower or
any  other  Person  of  their  respective   obligations   thereunder,   and  the
consummation  of the  transactions  contemplated  by  this  Agreement;  (c)  any
finder's fee,  brokerage  commission of other such obligation payable or alleged
to be  payable in respect of the  transactions  contemplated  by this  Agreement
which arises or is alleged to arise from any agreement, action or conduct of the
Borrower  or  any  of  its  Affiliates,   and/or  (d)  any  claim,   litigation,
investigation or proceeding relating to any of the foregoing, whether or not the
Lender or its directors,  officers, managers, employees, attorneys or agents are
a party  thereto;  PROVIDED  that  such  indemnity  shall  not apply to any such
losses,  claims,  damages,  liabilities or related expenses arising from (i) any
unexcused  breach by the Lender of any of its obligations  under this Agreement,
(ii) the willful misconduct or gross negligence of the Lender as determined by a
final,  non-appealable judgment of a court of competent  jurisdiction,  or (iii)
the breach of any  commitment  or legal  obligation  of the Lender to any Person
other  than the  Borrower  or its  Affiliates,  PROVIDED  that  such  breach  is
determined  pursuant  to a  final  and  nonappealable  decision  of a  court  of
competent  jurisdiction.  The foregoing  indemnity shall remain operative and in
full force and effect  regardless of the  expiration or any  termination of this
Agreement, the consummation of the transactions  contemplated by this Agreement,
the repayment of the Loans, the invalidity or unenforceability


                                       47
<PAGE>


of any term or provision of any Loan Document,  any investigation  made by or on
behalf of the  Lender,  and the content or  accuracy  of any  representation  or
warranty  made by the  Borrower  or any  Subsidiary  in any Loan  Document.  All
amounts due under this Section 9.02 shall be payable on written demand therefor.

         SECTION  9.03.  GOVERNING  LAW.  This  Agreement  and  the  other  Loan
Documents  shall  (irrespective  of where same are  executed and  delivered)  be
governed by and construed in  accordance  with the laws of the State of New York
(without giving effect to principles of conflicts of laws).

         SECTION 9.04. WAIVER AND AMENDMENT.  Neither any modification or waiver
of any provision of this Agreement,  the Notes, or any other Loan Document,  nor
any consent to any departure by the Borrower or any Subsidiary therefrom,  shall
in any event be  effective  unless the same  shall be set forth in writing  duly
signed or  acknowledged  by the Lender (or, in the event that there are multiple
Lenders at any time,  Lenders  holding a majority of the  outstanding  principal
balance of the Term Loan and the maximum  Revolving  Credit  Commitment) and all
parties  to such  Loan  Document,  and then  such  waiver  or  consent  shall be
effective only in the specific instance, and for the specific purpose, for which
given.  No notice to or demand on the Borrower in any instance shall entitle the
Borrower to any other or future  notice or demand in the same,  similar or other
circumstances.

         SECTION  9.05.  RESERVATION  OF  REMEDIES.  Neither any failure nor any
delay on the part of the  Lender in  exercising  any right,  power or  privilege
hereunder  or under the Notes or any other  Loan  Document  shall  operate  as a
waiver  thereof,  nor shall a single or partial  exercise  thereof  preclude any
other  or  future  exercise,  or the  exercise  of any  other  right,  power  or
privilege.

         SECTION  9.06.  NOTICES.  All  notices,  requests,  demands  and  other
communications  under  or in  respect  of  this  Agreement  or any  transactions
hereunder  shall be in writing  (which may  include  telegraphic  or  telecopied
communication)  and  shall  be  personally   delivered  or  mailed  (by  prepaid
registered  or  certified  mail,  return  receipt  requested),  sent by  prepaid
recognized  overnight courier service, or telegraphed or telecopied by facsimile
transmission  to the  applicable  party  at its  address  or  telecopier  number
indicated below.

                  If to the Lender:

                           Bluefin Capital, LLC
                           One North Clematis, Suite 300
                           West Palm Beach, FL 33401
                           Attention: Chief Financial Officer
                           Telecopier: (212) 829-5986

                  with a copy to:

                           Greenberg Traurig, LLP
                           200 Park Avenue
                           New York, New York  10166
                           Attention:  Shahe Sinanian, Esq.
                           Telecopier: (212) 801-6400


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<PAGE>


                  If to the Borrower:

                           Tag-It Pacific, Inc.
                           21900 Burbank Blvd., Suite 270
                           Woodland Hills, California  91367
                           Attention:  Lonnie D. Schell, CFO
                           Telecopier:  (818) 844-4110

                  with a copy to:

                           Stubbs Alderton & Markiles, LLP
                           15260 Ventura Boulevard, 20th Floor
                           Sherman Oaks, California 91403
                           Attention:  Jonathan R. Hodes, Esq.
                           Telecopier: (818) 474-8608

or, as to each party,  at such other  address or  telecopier  number as shall be
designated  by such party in a written  notice to the other party  delivered  as
aforesaid. All such notices, requests, demands and other communications shall be
deemed given (a) when  personally  delivered,  (b) three (3) Business Days after
being  deposited in the mails with postage  prepaid (by  registered or certified
mail, return receipt requested),  (c) one (1) Business Day after being delivered
to the  telegraph  company or  overnight  courier  service,  if prepaid and sent
overnight  delivery,  addressed  as  aforesaid  and with all charges  prepaid or
billed to the account of the sender, or (d) when sent by facsimile  transmission
to a telecopier number designated by such addressee.

         SECTION 9.07. BINDING EFFECT.  This Agreement shall be binding upon and
inure to the  benefit  of the  Borrower  and the  Lender  and  their  respective
successors  and assigns,  except that the  Borrower  shall not assign any of its
rights or obligations hereunder without the prior written consent of the Lender.

         SECTION  9.08.  CONSENT  TO  JURISDICTION;  WAIVER OF JURY  TRIAL.  The
Borrower hereby  consents to the  jurisdiction of all courts of the State of New
York and the United States District Court for the Southern District of New York,
as well as to the  jurisdiction  of all courts from which an appeal may be taken
from  such  courts,  for the  purpose  of any suit,  action or other  proceeding
arising out of or with respect to this Agreement,  any other Loan Document,  any
other  agreements,  instruments,  certificates  or other  documents  executed in
connection herewith or therewith, or any of the transactions contemplated hereby
or thereby, or any of the Borrower's or any Subsidiary's  obligations  hereunder
or  thereunder.   The  Borrower   hereby  waives  the  right  to  interpose  any
counterclaims (other than compulsory counterclaims) in any action brought by the
Lender  hereunder or in respect of any other Loan  Document,  provided that this
waiver shall not preclude the Borrower from pursuing any such claims by means of
separate  proceedings.   THE  BORROWER  HEREBY  EXPRESSLY  WAIVES  ANY  AND  ALL
OBJECTIONS WHICH IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS,  AND ALSO WAIVES
TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. The Lender may file a copy
of this Agreement as evidence of the foregoing waiver of right to jury trial.


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         SECTION 9.09. CERTAIN WAIVERS.  The Borrower and the Lender each hereby
waives any claims for  special,  consequential  or  punitive  damages in any way
arising out of or relating to this  Agreement,  any of the other Loan Documents,
or any breach hereof or thereof.

         SECTION 9.10. SEVERABILITY.  If any provision of this Agreement is held
invalid or  unenforceable,  either in its  entirety or by virtue of its scope or
application to given  circumstances,  such provision  shall  thereupon be deemed
modified only to the extent necessary to render same valid, or not applicable to
given  circumstances,  or excised  from this  Agreement,  as the  situation  may
require, and this Agreement shall be construed and enforced as if such provision
had been included herein as so modified in scope or application, or had not been
included herein, as the case may be.

         SECTION  9.11.  CAPTIONS.  The  Article  and  Section  headings in this
Agreement are included  herein for  convenience of reference only, and shall not
affect the construction or interpretation of any provision of this Agreement.

         SECTION 9.12. SOLE AND ENTIRE AGREEMENT. This Agreement, the Notes, the
other Loan Documents,  and the other agreements,  instruments,  certificates and
documents  referred to or described  herein and therein  constitute the sole and
entire agreement and understanding  between the parties hereto as to the subject
matter   hereof,   and  supersede   all  prior   discussions,   agreements   and
understandings  of every kind and nature  between the parties as to such subject
matter.

         SECTION  9.13.  CONFIDENTIALITY.  The  Lender  shall not  disclose  any
Confidential  Information to any Person, or use Confidential  Information except
in  connection  with the  administration  of this  Agreement  and the other Loan
Documents, without the prior written consent of the Borrower; PROVIDED, HOWEVER,
that nothing herein contained shall limit any disclosure of the tax structure of
the transactions  contemplated  hereby, or the disclosure of any information (a)
to the extent required by statute,  rule, regulation or judicial process, (b) to
counsel for the Lender,  (c) to bank  examiners,  auditors,  accountants  or, if
required  by law,  any  regulatory  authority,  (d) to the  officers,  partners,
managers,  directors,  employees,  agents and  advisors  (including  independent
auditors and counsel) of the Lender, (e) in connection with any litigation which
relates to this Agreement to which the Lender is a party, (f) to a subsidiary or
Affiliate of the Lender,  or (g) to any assignee or participant  (or prospective
assignee or  participant)  which  agrees to be bound by this Section  9.13,  AND
FURTHER provided,  that in no event shall the Lender be obligated or required to
return any materials  furnished by the Borrower.  The  obligations of the Lender
under this  Section  9.13 shall  supersede  and replace the  obligations  of the
Lender under any confidentiality  letter in respect of this financing previously
signed and delivered by the Lender to the Borrower. In no event shall the Lender
trade in any  securities of the Borrower  using  non-public  information  of the
Borrower.

         SECTION  9.14.  COUNTERPARTS;  FAX  SIGNATURES.  This  Agreement may be
executed in any number of  counterparts,  all of which shall  constitute one and
the same agreement.  This Agreement may be executed by fax  signatures,  each of
which shall be fully binding on the signing party.

               [The remainder of this page is intentionally blank]


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<PAGE>


         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly  executed  by their  duly  authorized  officer as of the day and year first
written above.


                           BLUEFIN CAPITAL, LLC

                           By:      /S/ LARRY E. LENIG, JR.
                              --------------------------------------------------
                                Name: Larry E. Lenig, Jr.
                                Title: Senior Partner/Portfolio Manager


                           TAG-IT PACIFIC, INC.

                           By:      /S/ LONNIE D. SCHNELL
                              --------------------------------------------------
                                Name: Lonnie D. Schnell
                                Title: Chief Financial Officer


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