EXHIBIT 10.37


         COLLATERAL  AGREEMENT,  dated as of June 27, 2007,  by and among TAG-IT
PACIFIC,  INC., a Delaware corporation (the "BORROWER"),  Tag-It Pacific,  Inc.,
Talon International, Inc., Tag-It, Inc., A.G.S. Stationary, inc., Tag-It Pacific
Limited,  Tag-It Pacific (HK) Ltd, Tagit de Mexico,  S.A. de C.V.,  Talon Zipper
(Shenzhen)  Company,  Ltd.  and Talon  International  Pvt.  Ltd, and any and all
Additional  Grantors who may become party to this Agreement (the Borrower,  such
other named entities,  and such Additional Grantors are hereinafter  referred to
each as a "GRANTOR" and  collectively as the  "GRANTORS"),  and BLUEFIN CAPITAL,
LLC (the  "SECURED  PARTY") as Lender under the  Revolving  Credit and Term Loan
Agreement of even date herewith (as same may be amended, modified,  supplemented
and/or  restated  from time to time,  the "LOAN  AGREEMENT")  by and between the
Borrower and the Secured Party.

                              STATEMENT OF PURPOSE

         Pursuant to the Loan  Agreement,  the  Secured  Party is making and may
hereafter  from  time  to time  make  Loans  to the  Borrower  in the  aggregate
principal  amount of up to $14,500,000 at any time  outstanding,  upon the terms
and subject to the conditions set forth therein.

         Pursuant to the terms of a Guaranty  Agreement  of even date  herewith,
the Grantors (other than the Borrower),  which are Subsidiaries of the Borrower,
have guaranteed the payment and performance of the Obligations of the Borrower.

         It is a condition  precedent to the  obligation of the Secured Party to
make the Loans to the Borrower  under the Loan Agreement that the Grantors shall
have executed and delivered this Agreement to the Secured Party.

         NOW, THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency  of which are hereby  acknowledged  by the  parties  hereto,  and to
induce the Secured Party to enter into the Loan  Agreement and make the Loans to
the Borrower  thereunder,  each Grantor hereby agrees with the Secured Party, as
follows:

                                    ARTICLE I

                                  DEFINED TERMS

         Section 1.1. TERMS DEFINED IN THE UNIFORM COMMERCIAL CODE.

                  (a) The following terms when used in this Agreement shall have
         the  meanings  assigned  to them in the UCC (as  defined in Section 1.2
         below) as in effect  from time to time:  "Account",  "Account  Debtor",
         "Authenticate",  "Certificated Security",  "Chattel Paper"; "Commercial
         Tort  Claim",  "Deposit  Account",  "Documents",   "Electronic  Chattel
         Paper", "Equipment",  "Farm Products" "Fixture",  "General Intangible",
         "Instrument",  "Inventory",  "Investment Company Security", "Investment
         Property",  "Issuer", "Letter of Credit Rights", "Proceeds",  "Record",
         "Registered   Organization",   "Security",   "Securities  Entitlement",


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         "Securities    Intermediary",    "Securities   Account",    "Supporting
         Obligation", "Tangible Chattel Paper", and "Uncertificated Security".

                  (b) Terms defined in the UCC and not otherwise  defined herein
         or in the Loan Agreement shall have the meaning  assigned in the UCC as
         in effect from time to time.

         Section  1.2.  DEFINITIONS.  The  following  terms  when  used  in this
Agreement shall have the meanings assigned to them below:

         "ADDITIONAL  GRANTOR"  means  each  Subsidiary  of the  Borrower  which
hereafter  becomes a Grantor pursuant to Section 7.15 hereof and Section 5.11 of
the Loan Agreement.

         "AGREEMENT"  means this  Collateral  Agreement,  as amended,  modified,
supplemented and/or restated from time to time.

         "APPLICABLE  INSOLVENCY  LAWS"  means  all  Applicable  Laws  governing
bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors,
dissolution,  insolvency,  fraudulent  transfers or conveyances or other similar
laws (including,  without  limitation,  11 U.S.C.  Sections 547, 548 and 550 and
other  "avoidance"  provisions of Title 11 of the United States Code, as amended
or supplemented).

         "ASSIGNMENT  OF CLAIMS ACT" means the  Assignment of Claims Act of 1940
(41 U.S.C.  Section 15, 31 U.S.C.  Section 3737,  and 31 U.S.C.  Section  3727),
including all amendments thereto and regulations promulgated thereunder.

         "COLLATERAL" has the meaning assigned thereto in Section 2.1.

         "COLLATERAL  ACCOUNT" means any collateral  account  established by the
Secured Party as provided in Section 5.2.

         "CONTROL" means the manner in which "control" is achieved under the UCC
with respect to any Collateral for which the UCC specifies a method of achieving
"control".

         "CONTROLLED  INTERMEDIARY"  has the meaning assigned thereto in Section
4.6(a).

         "COPYRIGHTS" means  collectively,  all of the following of any Grantor:
(a) all  copyrights,  rights and interests in copyrights,  works  protectable by
copyright, copyright registrations and copyright applications, (b) all reissues,
extensions,  continuations  (in  whole or in part)  and  renewals  of any of the
foregoing, (c) all income, royalties,  damages and payments now or hereafter due
and/or  payable  under  any of  the  foregoing  or  with  respect  to any of the
foregoing, including, without limitation, damages or payments for past or future
infringements  of any of the foregoing,  (d) the right to sue for past,  present
and  future  infringements  of  any  of  the  foregoing,   and  (e)  all  rights
corresponding to any of the foregoing.

         "COPYRIGHT  LICENSES" means any written agreement naming any Grantor as
licensor or licensee, granting any right under any Copyright, including, without
limitation,  the grant of rights to  manufacture,  distribute,  exploit and sell
materials derived from any Copyright.


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         "EFFECTIVE  ENDORSEMENT  AND  ASSIGNMENT"  means,  with  respect to any
specific  type of  Collateral,  all such  endorsements,  assignments  and  other
instruments of transfer  reasonably  requested by the Secured Party with respect
to the Security  Interest granted in such Collateral,  and in each case, in form
and substance satisfactory to the Secured Party.

         "EXCESS COLLATERAL" has the meaning assigned thereto in Section 4.6(c).

         "GOVERNMENT  CONTRACT"  means a contract  between  any  Grantor  and an
agency,  department  or  instrumentality  of the  United  States  or any  state,
municipal or local  Governmental  Authority  located in the United States or all
obligations of any such Governmental  Authority arising under any Account now or
hereafter owing by any such  Governmental  Authority,  as account debtor, to any
Grantor.

         "GRANTORS" has the meaning set forth in the preamble of this Agreement.

         "GUARANTORS"   has  the  meaning   assigned  thereto  in  the  Guaranty
Agreement.

         "GUARANTY  AGREEMENT"  has the  meaning  assigned  thereto  in the Loan
Agreement.

         "INTELLECTUAL PROPERTY" means collectively, all of the following of any
Grantor:  (a) all systems software,  applications  software and internet rights,
including,  without  limitation,  screen  displays and formats,  internet domain
names,  web sites  (including  web  links),  program  structures,  sequence  and
organization,   all   documentation  for  such  software,   including,   without
limitation,   user   manuals,   flowcharts,   programmer's   notes,   functional
specifications,  and  operations  manuals,  all formulas,  processes,  ideas and
know-how  embodied  in  any  of  the  foregoing,   and  all  program  materials,
flowcharts,  notes and outlines created in connection with any of the foregoing,
whether  or  not  patentable  or  copyrightable,   (b)  concepts,   discoveries,
improvements  and  ideas,  (c) any  useful  information  relating  to the  items
described  in clause (a) or (b),  including  know-how,  technology,  engineering
drawings,  reports,  design information,  trade secrets,  practices,  laboratory
notebooks,  specifications,  test  procedures,  maintenance  manuals,  research,
development,  manufacturing,  marketing, merchandising,  selling, purchasing and
accounting, (d) Patents and Patent Licenses,  Copyrights and Copyright Licenses,
Trademarks  and  Trademark  Licenses,  and (e) other  licenses to use any of the
items  described in the  foregoing  clauses  (a),  (b), (c) and (d) or any other
similar items of such Grantor necessary for the conduct of its business.

         "ISSUER" means any issuer of any Investment Property or Partnership/LLC
Interests (including, without limitation, any Issuer as defined in the UCC).

         "LOAN  AGREEMENT" has the meaning  assigned  thereto in the preamble of
this Agreement.

         "OBLIGATIONS" means, with respect to the Borrower, the meaning assigned
to such term in the Loan  Agreement,  and with  respect to each  Guarantor,  the
obligations of such Guarantor under the Guaranty Agreement,  and with respect to
all Grantors, all liabilities and obligations of the Grantors hereunder.


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         "PARTNERSHIP/LLC  INTERESTS"  means,  with respect to any Grantor,  the
entire  partnership,  membership interest or limited liability company interest,
as  applicable,  of such Grantor in each  partnership,  limited  partnership  or
limited liability company owned thereby,  including,  without  limitation,  such
Grantor's  capital account,  its interest as a partner or member, as applicable,
in the net cash flow, net profit and net loss, and items of income,  gain, loss,
deduction and credit of any such  partnership,  limited  partnership  or limited
liability company,  as applicable,  such Grantor's interest in all distributions
made or to be made by any  such  partnership,  limited  partnership  or  limited
liability company, as applicable,  to such Grantor and all of the other economic
rights,  titles  and  interests  of such  Grantor  as a partner  or  member,  as
applicable,  of any such partnership,  limited  partnership or limited liability
company,  as  applicable,  whether  set forth in the  partnership  agreement  or
membership agreement, as applicable, of such partnership, limited partnership or
limited liability company, as applicable, by separate agreement or otherwise.

         "PATENTS" means collectively,  all of the following of any Grantor: (a)
all patents,  rights and interests in patents,  patentable inventions and patent
applications, (b) all reissues, extensions,  continuations (in whole or in part)
and  renewals of any of the  foregoing,  (c) all income,  royalties,  damages or
payments now or hereafter due and/or  payable under any of the foregoing or with
respect  to any of the  foregoing,  including,  without  limitation,  damages or
payments for past or future infringements of any of the foregoing, (d) the right
to sue for past, present and future  infringements of any of the foregoing,  and
(e) all rights corresponding to any of the foregoing.

         "PATENT  LICENSE"  means all  agreements now or hereafter in existence,
whether  written or oral,  providing  for the grant by or to any  Grantor of any
right to manufacture, use or sell any invention covered in whole or in part by a
Patent.

         "PERFECTION  CERTIFICATE" means the perfection  certificate dated as of
the date hereof,  substantially  in the form of EXHIBIT A attached  hereto,  and
otherwise in form and  substance  satisfactory  to the Secured  Party,  and duly
certified by an officer, partner or member, as applicable, of each Grantor.

         "RESTRICTED  SECURITIES COLLATERAL" has the meaning assigned thereto in
Section 5.3(a) below.

         "SECURED  PARTY" has the meaning  assigned  thereto in the  preamble of
this Agreement.

         "SECURITIES  ACT"  means  the  Securities  Act of 1933,  including  all
amendments thereto and regulations promulgated thereunder.

         "SECURITY  INTERESTS"  means the liens and security  interests  granted
pursuant to Article II.

         "SUBSIDIARY  ISSUER"  means any Issuer of  Investment  Property  or any
Partnership/LLC  Interests,  which is a direct  or  indirect  Subsidiary  of any
Grantor.

         "TRADEMARKS" means  collectively,  all of the following of any Grantor:
(a) all trademarks,  rights and interests in trademarks,  trade names, corporate
names, company names,  business names,  fictitious business names, trade styles,
service marks, logos, other business identifiers,


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prints and labels on which any of the  foregoing  have  appeared or appear,  all
registrations  and  recordings  thereof,  and  all  applications  in  connection
therewith, (b) all reissues, extensions, continuations (in whole or in part) and
renewals  of any of the  foregoing,  (c)  all  income,  royalties,  damages  and
payments now or hereafter due and/or  payable under any of the foregoing or with
respect  to any of the  foregoing,  including,  without  limitation,  damages or
payments for past or future infringements of any of the foregoing, (d) the right
to sue for past, present and future  infringements of any of the foregoing,  and
(e) all rights corresponding to any of the foregoing.

         "TRADEMARK  LICENSE" means any agreement now or hereafter in existence,
whether  written or oral,  providing  for the grant by or to any  Grantor of any
right to use any Trademark.

         "UCC"  means the Uniform  Commercial  Code as in effect in the State of
New York, as amended or modified from time to time.

         "VEHICLES" means all cars, trucks, trailers, and other vehicles covered
by a certificate  of title under the laws of any state,  all tires and all other
appurtenances to any of the foregoing.

Section 1.3. OTHER DEFINITIONAL PROVISIONS.  Terms defined in the Loan Agreement
and not otherwise defined herein shall have the meanings assigned thereto in the
Loan Agreement. 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 and
Schedule  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.  Where the context  requires,  terms
relating  to the  Collateral  or any part  thereof,  when used in  relation to a
Grantor,  shall refer to such Grantor's Collateral or the relevant part thereof.
The word  "including"  and words of similar  import when used in this  Agreement
shall mean "including, without limitation," unless otherwise specified.

                                   ARTICLE II

                                SECURITY INTEREST

         Section 2.1. GRANT OF SECURITY INTEREST.

                  (a) Each  Grantor  hereby  grants,  pledges  and  collaterally
         assigns  to the  Secured  Party  a  security  interest  in all of  such
         Grantor's right, title and interest in the following property now owned
         or at any time  hereafter  acquired  by such  Grantor  or in which such
         Grantor  now has or at any time in the  future may  acquire  any right,
         title  or   interest,   and   wherever   located   or  deemed   located
         (collectively, the "COLLATERAL"), as collateral security for the prompt
         and complete  payment and  performance  when due (whether at the stated
         maturity, by acceleration or otherwise) of the Obligations:

                           (i) all Accounts;

                           (ii) all cash and currency;


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                           (iii) all Chattel Paper;

                           (iv) all Commercial Tort Claims;

                           (v) all Deposit Accounts;

                           (vi) all Documents;

                           (vii) all Equipment;

                           (viii) all Fixtures;

                           (ix)  all  General  Intangibles,  including  but  not
                  limited to all rights of the Borrower to indemnification under
                  the Acquisition Agreement;

                           (x) all Instruments;

                           (xi) all Intellectual Property;

                           (xii) all Inventory;

                           (xiii) all Investment Property;

                           (xiv) all Letter of Credit Rights;

                           (xv) all Vehicles;

                           (xvi)  all  other  personal  property  not  otherwise
                  described above;

                           (xvii)  all  books  and  records  pertaining  to  the
                  Collateral; and

                           (xviii)  to the extent not  otherwise  included,  all
                  Proceeds and products of any and all of the  foregoing and all
                  collateral  security  and  Supporting  Obligations  (as now or
                  hereafter defined in the UCC) given by any Person with respect
                  to any of the foregoing.

                  (b)  Notwithstanding  clause (a) of this  Section  2.1, to the
         extent  that,  at any time,  the grant of a  security  interest  in any
         contract rights would,  notwithstanding Sections 9-407 and 9-408 of the
         UCC or other  applicable  law,  cause a breach of the subject  Contract
         permitting  the  conterparty  thereto to terminate  such Contract under
         applicable  law, such contract rights shall not at such time be part of
         the Collateral (but the proceeds thereof and any supporting obligations
         therefor shall be part of the  Collateral).  Each Grantor shall use all
         commercially  reasonable  efforts to obtain any  necessary  consents or
         waivers  required  in order  for such  Grantor  to grant  the  Security
         Interests in any affected Contract.

         Section 2.2.  GRANTORS  REMAIN LIABLE.  Anything herein to the contrary
notwithstanding:  (a) each Grantor  shall remain  liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its  duties  and  obligations  thereunder  to the same  extent as if this
Agreement had not been executed, (b) the exercise by


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Secured Party of any of the rights  hereunder shall not release any Grantor from
any of its duties or obligations under the contracts and agreements  included in
the  Collateral,  (c) the Secured  Party shall have no  obligation  or liability
under the contracts and agreements  included in the Collateral by reason of this
Agreement,  nor shall the  Secured  Party be  obligated  to  perform  any of the
obligations or duties of any Grantor thereunder or to take any action to collect
or enforce any claim for payment assigned  hereunder,  and (d) the Secured Party
shall have no liability in contract or tort for any Grantor's acts or omissions.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

         To induce the  Secured  Party to enter into the Loan  Agreement  and to
make the Loans to the Borrower  thereunder,  each Grantor hereby  represents and
warrants to the Secured Party that:

         Section  3.1.  EXISTENCE.  Each  Grantor  is  duly  organized,  validly
existing  and in  good  standing  under  the  laws  of the  jurisdiction  of its
incorporation or formation,  has the requisite power and authority to own, lease
and  operate  its  properties  and to carry on its  business  as now  being  and
hereafter  proposed to be conducted and is duly  qualified and  authorized to do
business in each  jurisdiction  in which the character of its  properties or the
nature of its business requires such qualification and authorization  other than
in any such  jurisdiction  where failure to so qualify  would not  reasonably be
expected to have a Material Adverse Effect.

         Section 3.2. AUTHORIZATION OF AGREEMENT;  NO CONFLICT. Each Grantor has
the right,  power and authority  and has taken all necessary  corporate or other
organizational  action to authorize the execution,  delivery and performance of,
this Agreement.  This Agreement has been duly executed and delivered by the duly
authorized officers of each Grantor,  and this Agreement  constitutes the legal,
valid and binding obligation of the Grantors,  enforceable  against the Grantors
in  accordance  with its  terms,  except as such  enforcement  may be limited by
bankruptcy, insolvency,  reorganization,  moratorium or similar state or federal
debtor relief laws from time to time in effect which affect the  enforcement  of
creditors'  rights in general,  and general  limitations on the  availability of
equitable remedies.  The execution,  delivery and performance by the Grantors of
this  Agreement  will  not,  by the  passage  of time,  the  giving of notice or
otherwise,  violate any material provision of any Applicable Law or any Contract
material to the  business of any Grantor and will not result in the  creation or
imposition of any Lien, other than the Security Interests,  upon or with respect
to any property or revenues of any Grantor.

         Section 3.3. CONSENTS. No approval, consent,  exemption,  authorization
or other action by, or notice to, or filing with, any Governmental  Authority or
any other  Person is  necessary or required in  connection  with the  execution,
delivery or performance by, or enforcement against any Grantor or any Subsidiary
Issuer of this  Agreement,  except (i) as may be required by laws  affecting the
offering and sale of securities  generally,  (ii) filings with the United States
Copyright Office and/or the United States Patent and Trademark Office, and (iii)
filings under the UCC and/or the Assignment of Claims Act.

         Section 3.4.  PERFECTED  FIRST PRIORITY LIENS.  The Security  Interests
granted  pursuant to this Agreement (a) constitute  valid security  interests in
all of the Collateral in favor


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of the Secured Party, as collateral security for the Obligations, enforceable in
accordance  with the terms hereof  against all creditors of such Grantor and any
Persons  purporting to purchase any  Collateral  from such Grantor,  and (b) are
prior to all other  Liens on the  Collateral  in  existence  on the date  hereof
except to the  extent  of any  priority  accorded  under  Applicable  Law to any
Permitted Liens. Upon the filing of financing  statements in the jurisdiction of
formation of the respective  Grantors  reflected in the Perfection  Certificate,
and the filing of  appropriate  collateral  assignments  with the United  States
Copyright Office and the United States Patent and Trademark Office, the Security
Interests will be perfected first priority security  interests in all Collateral
in which a security  interest  can be  perfected  by means of  filing;  and upon
delivery to the Secured Party of the  certificates  representing  the Collateral
consisting of Certificated Securities,  the Security Interests will be perfected
first priority security interests in such Collateral.

         Section 3.5. TITLE; NO OTHER LIENS.  Except for the Security Interests,
each  Grantor  owns  each item of the  Collateral  free and clear of any and all
Liens or claims other than Permitted Liens. No financing statement under the UCC
of any state which names a Grantor as debtor or other public notice with respect
to all or any  part of the  Collateral  is on file or of  record  in any  public
office, except such as have been filed in favor of the Secured Party pursuant to
this Agreement or in connection  with Permitted  Liens.  No Collateral is in the
possession  or Control of any Person  asserting  any claim  thereto or  security
interest  therein,  except that (a) the Secured  Party or its  designee may have
possession  or Control of Collateral as  contemplated  hereby,  (b) a depositary
bank may have Control of a Deposit Account owned by a Grantor at such depositary
bank and a Securities  Intermediary  may have Control over a Securities  Account
owned by a Grantor at such Securities Intermediary,  in each case subject to the
terms of any Deposit  Account  control  agreement or Securities  Account control
agreement,  as applicable  and to the extent  required by Section 4, in favor of
the  Secured  Party,  and (c) a  bailee,  consignee  or  other  Person  may have
possession  of  Collateral as  contemplated  by, and so long as, the  applicable
Grantors  have  complied  to the  satisfaction  of the  Secured  Party  with the
applicable provisions of Section 4.

         Section 3.6. STATE OF  ORGANIZATION;  LOCATION OF INVENTORY,  EQUIPMENT
AND FIXTURES; OTHER INFORMATION.

                  (a) The exact  legal  name of each  Grantor is as set forth in
         the Perfection Certificate.

                  (b) Each Grantor is a Registered  Organization organized under
         the  laws  of the  jurisdiction  identified  for  such  Grantor  in the
         Perfection   Certificate.   The  taxpayer   identification  number  and
         Registered Organization number of each Grantor is as set forth for such
         Grantor in the Perfection Certificate.

                  (c) All  Collateral  consisting  of  Inventory,  Equipment and
         Fixtures  (whether  now owned or  hereafter  acquired)  is (or will be)
         located at the locations specified in the Perfection Certificate.

                  (d) The  mailing  address,  chief  place  of  business,  chief
         executive  office and office  where  each  Grantor  keeps its books and
         records  relating  to the  Accounts,  Documents,  General  Intangibles,
         Instruments  and  Investment  Property in which it has any  interest is
         located at the locations  specified for such Grantor in the  Perfection
         Certificate.  No Grantor has any other


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         places of  business.  No Grantor  does  business  or has done  business
         during the past five years under any trade name or fictitious  business
         name  except  as  disclosed   for  such   Grantor  in  the   Perfection
         Certificate.  Except as disclosed  in the  Perfection  Certificate,  no
         Grantor has acquired assets from any Person, other than assets acquired
         in the ordinary course of such Grantor's business, during the past five
         years.

         Section 3.7.  ACCOUNTS.  Each existing  Account  constitutes,  and each
hereafter  arising  Account  will  constitute,  the  legally  valid and  binding
obligation of the  applicable  Account  Debtor.  The amount  represented by each
Grantor to the Secured Party as owing by each Account Debtor is, or will be, the
correct  amount  actually  and  unconditionally  owing,  except for normal  cash
discounts and allowances in the ordinary course of business where applicable. No
Account  Debtor has any  defense,  set-off,  claim or  counterclaim  against any
Grantor  that  can  be  asserted  against  the  Secured  Party,  whether  in any
proceeding to enforce  Secured  Party's  rights in the  Collateral or otherwise,
except  defenses,  set-offs,  claims  or  counterclaims  that  are  not,  in the
aggregate,  material to the value of the Accounts.  None of the Accounts is, nor
will any hereafter  arising Account be,  evidenced by a promissory note or other
Instrument,  other than a check,  that has not been pledged and delivered to the
Secured Party in accordance with the terms hereof.

         Section 3.8.  CHATTEL  PAPER.  As of the date hereof,  to the Grantors'
knowledge, no Grantor holds any Chattel Paper.

         Section 3.9.  COMMERCIAL TORT CLAIMS. As of the date hereof, no Grantor
holds  any  Commercial  Tort  Claims  except  as  described  in  the  Perfection
Certificate;  and, upon becoming  aware at any time and from time to time of any
further  Commercial  Tort Claims,  the Grantors  shall notify the Secured  Party
thereof in accordance with Section 4.4.

         Section  3.10.  DEPOSIT  ACCOUNTS.  As of the date hereof,  all Deposit
Accounts (including, without limitation,  lockboxes and cash management accounts
that are Deposit  Accounts)  owned by any  Grantor are listed in the  Perfection
Certificate.

         Section 3.11.  INTELLECTUAL PROPERTY. None of the Intellectual Property
owned by any  Grantor  is the  subject of any  written  licensing  or  franchise
agreement  pursuant to which such Grantor is the licensor or franchisor,  except
as would not reasonably be expected to have a Material Adverse Effect.

         Section 3.12. INVENTORY.  Collateral consisting of Inventory is of good
and  merchantable  quality,  free  from  any  material  defects,  and  has  been
manufactured in accordance with the requirements of the Fair Labor Standards Act
and all other  Applicable  Law. To the knowledge of each  Grantor,  none of such
Inventory  is  subject  to any  licensing,  Patent,  Trademark,  trade  name  or
Copyright  with any Person that  restricts any Grantor's  ability to manufacture
and/or sell such Inventory.  The completion of the manufacturing process of such
Inventory by a Person other than the applicable Grantor would be permitted under
any  contract  to which  such  Grantor is a party or to which the  Inventory  is
subject.


                                       9
<PAGE>


         Section 3.13. INVESTMENT PROPERTY; PARTNERSHIP/LLC INTERESTS.

                  (a) As of the date hereof, all Investment Property (including,
         without  limitation,  Securities  Accounts and cash management accounts
         that are Investment  Property) and all Partnership/LLC  Interests owned
         by any Grantor is listed in the Perfection Certificate.

                  (b) All Investment Property and all Partnership/LLC  Interests
         issued by any  Subsidiary  Issuer to any Grantor (i) have been duly and
         validly  issued and, if applicable,  are fully paid and  nonassessable,
         (ii) are  beneficially  owned as of record by such  Grantor,  and (iii)
         constitute all the issued and outstanding  shares of all classes of the
         capital stock or equity  interest of such  Subsidiary  Issuer issued to
         such Grantor.

                  (c) None of the Partnership/LLC  Interests (i) are traded on a
         securities  exchange  or in  securities  markets,  (ii) by their  terms
         expressly provide that they are Securities governed by Article 8 of the
         UCC, or (iii) are Investment Company Securities.

         Section 3.14. INSTRUMENTS.  As of the date hereof, no Grantor holds any
Instruments  or is named a payee of any  promissory  note or other  evidence  of
indebtedness.

                                   ARTICLE IV

                                    COVENANTS

         Until the Obligations shall have been indefeasibly paid in full and the
Revolving Credit Commitment has been terminated,  unless express written consent
has been obtained from the Lender, the Grantors covenant and agree that:

         Section  4.1.  MAINTENANCE  OF  PERFECTED  SECURITY  INTEREST;  FURTHER
INFORMATION.

                  (a) Each Grantor shall maintain the Security  Interest created
         by this Agreement as a perfected Security Interests having at least the
         priority  described  in  Section  3.4 and shall  defend  such  Security
         Interest against the claims and demands of all Persons whomsoever.

                  (b) Each Grantor  will furnish to the Secured  Party from time
         to time statements and schedules further identifying and describing the
         assets  and  property  of  such  Grantor  and  such  other  reports  in
         connection  therewith as the Secured Party may reasonably request,  all
         in reasonable detail.

         Section 4.2. MAINTENANCE OF INSURANCE.

                  (a) Each Grantor will  maintain,  with  financially  sound and
         reputable  companies,  insurance  policies (i) insuring the  Collateral
         against  loss  by  fire,   explosion,   theft,  fraud  and  such  other
         casualties,  including  business  interruption,  as may  be  reasonably
         satisfactory  to the Secured Party in amounts and with  deductibles  at
         least as favorable  as those  generally  maintained  by  businesses  of
         similar  size engaged in similar  activities,  and (ii)  insuring  such
         Grantor and the Secured Party against liability for hazards,  risks and
         liability   to  persons  and  property   relating  to  the   Collateral
         (including,  without  limitation,   products  liability  coverage),  in
         amounts and with  deductibles at least as favorable as those  generally
         maintained by businesses of similar size


                                       10
<PAGE>


         engaged in similar  activities,  such  policies  to be in such form and
         having such coverage as may be reasonably satisfactory to the Lender.

                  (b) All such  insurance  (other  than  workers'  compensation)
         shall (i) name the Secured Party as loss payee (to the extent  covering
         risk of loss or  damage  to  tangible  property)  and as an  additional
         insured as its interests  may appear (to the extent  covering any other
         risk),  (ii) provide that no  cancellation  shall be effective until at
         least  thirty (30) days after  receipt by the Secured  Party of written
         notice  thereof,  and  (iii) be  reasonably  satisfactory  in all other
         respects to the Secured Party.

                  (c) Upon the request of the Secured Party,  each Grantor shall
         deliver to the  Secured  Party  periodic  information  from a reputable
         insurance  broker  with  respect to the  insurance  referred to in this
         Section 4.2.

         Section 4.3.  CHANGES IN LOCATIONS;  CHANGES IN NAME OR  STRUCTURE.  No
Grantor will, except upon fifteen (15) days' prior written notice to the Secured
Party  and  delivery  to the  Secured  Party  of (a)  all  additional  financing
statements  (executed if necessary for any particular  filing  jurisdiction) and
other  instruments  and documents  reasonably  requested by the Secured Party to
maintain the validity,  perfection and priority of the Security  Interests,  and
(b) if applicable, a written supplement to the Perfection Certificate:

                           (i) permit any Deposit  Account to be held by or at a
                  depositary  bank other than the depositary bank that held such
                  Deposit  Account  as of the date  hereof  as set  forth in the
                  Perfection Certificate;

                           (ii)  permit  any  of  the  Inventory,  Equipment  or
                  Fixtures to be kept at a location  other than those  listed in
                  the  Perfection  Certificate,  except as  otherwise  permitted
                  hereunder;

                           (iii)  permit any  Investment  Property  (other  than
                  Certificated   Securities   delivered  to  the  Secured  Party
                  pursuant  to  Section   4.5)  to  be  held  by  a   Securities
                  Intermediary;

                           (iv)  change its  organizational  form or  structure,
                  jurisdiction  of  organization  or the  location  of its chief
                  executive  office  from  that  identified  in  the  Perfection
                  Certificate; or

                           (v)  change  its name or  identity  to such an extent
                  that any  financing  statement  filed by the Secured  Party in
                  connection with this Agreement would become misleading.

         Section 4.4. REQUIRED NOTIFICATIONS. Each Grantor shall promptly notify
the  Secured  Party,  in  writing,  of: (a) any Lien  (other  than the  Security
Interests or Permitted  Liens) on any of the  Collateral,  (b) the occurrence of
any other event which could  reasonably  be expected to have a material  adverse
effect on the aggregate  value of the  Collateral or on the Security  Interests,
(c) any  Collateral  which,  to the  knowledge of such  Grantor,  constitutes  a
Government Contract, and (d) the acquisition or ownership by such Grantor of any
(i) Commercial Tort Claim,  (ii) Deposit Account,  or (iii) Investment  Property
after the date hereof.


                                       11
<PAGE>


         Section 4.5. DELIVERY  COVENANTS.  Each Grantor will deliver and pledge
to the Secured  Party all  Certificated  Securities,  Partnership/LLC  Interests
evidenced by a  certificate,  negotiable  Documents,  Instruments,  and Tangible
Chattel  Paper owned or held by such  Grantor,  in each case,  together  with an
Effective  Endorsement  and  Assignment  and  all  Supporting  Obligations,   as
applicable,  unless such  delivery  and pledge has been waived in writing by the
Secured Party.

         Section 4.6. CONTROL COVENANTS.

                  (a)  Each  Grantor  shall  instruct  (and  otherwise  use  its
         reasonable efforts) to cause (i) each depositary bank holding a Deposit
         Account owned by such Grantor,  and (ii) each  Securities  Intermediary
         holding any Investment  Property owned by such Grantor,  to execute and
         deliver a control  agreement,  sufficient  to provide the Secured Party
         with  Control of such  Deposit  Account  or  Investment  Property,  and
         otherwise in form and substance  satisfactory to the Secured Party (any
         such   depositary  bank  executing  and  delivering  any  such  control
         agreement,   a  "CONTROLLED   DEPOSITARY",   and  any  such  Securities
         Intermediary  executing and  delivering any such control  agreement,  a
         "CONTROLLED  INTERMEDIARY").  In the event any such  depositary bank or
         Securities  Intermediary  refuses to execute and deliver  such  control
         agreement,  the Secured Party, in its sole discretion,  may require the
         applicable Deposit Account and Investment Property to be transferred to
         the  Secured   Party  or  a   Controlled   Depositary   or   Controlled
         Intermediary, as applicable.

                  (b) Each Grantor  will,  promptly  upon request of the Secured
         Party,  take  such  actions  and  deliver  all such  agreements  as are
         requested  by the  Secured  Party to  provide  the  Secured  Party with
         Control of all Letter of Credit  Rights and  Electronic  Chattel  Paper
         owned or held by such  Grantor,  including,  without  limitation,  with
         respect to any such  Electronic  Chattel  Paper,  by having the Secured
         Party  identified  as the assignee of the  Record(s)  pertaining to the
         single authoritative copy thereof.

                  (c) If any  Collateral  (other  than  Collateral  specifically
         subject  to the  provisions  of  Section  4.6(a)  and  Section  4.6(b))
         exceeding in value $100,000 in the aggregate (such Collateral exceeding
         such amount, the "EXCESS  COLLATERAL") is at any time in the possession
         or control of any single consignee,  warehouseman, bailee (other than a
         carrier transporting Inventory to a purchaser in the ordinary course of
         business),  processor,  or any other third party,  such  Grantor  shall
         notify in writing such Person of the Security Interests created hereby,
         shall use its  reasonable  efforts  to  obtain  such  Person's  written
         agreement  in  writing  to hold all  such  Collateral  for the  Secured
         Party's account subject to the Secured Party's instructions, and shall,
         promptly upon request of the Secured Party,  cause such Person to issue
         and deliver to the Secured Party warehouse receipts, bills of lading or
         any  similar  documents  relating  to such  Collateral  to the  Secured
         Party's together with an Effective Endorsement and Assignment; provided
         that if such Grantor is not able to obtain such agreement and cause the
         delivery of such items, the Secured Party, in its sole discretion,  may
         require  such  Excess  Collateral  to  be  moved  to  another  location
         specified by the Secured Party. Further, each Grantor shall perfect and
         protect such Grantor's  ownership  interests in all Inventory exceeding
         $100,000 in the aggregate stored with a consignee  against creditors of
         the consignee by filing and maintaining  financing  statements  against
         the  consignee  reflecting  the  consignment  arrangement  filed in all
         appropriate  filing offices,  providing any written notices required to
         notify  any  prior  creditors  of  the  consignee  of  the  consignment
         arrangement,  and taking such other  actions as may be  appropriate  to
         perfect and


                                       12
<PAGE>


         protect such Grantor's interests in such Inventory under Section 2-326,
         Section 9-103, Section 9-324 and Section 9-505 of the UCC or otherwise.
         All such  financing  statements  filed  pursuant to this Section 4.6(c)
         shall be assigned, on the face thereof, to the Secured Party.

         Section 4.7. FILING COVENANTS. Pursuant to Section 9-509 of the UCC and
any other  Applicable Law, each Grantor  authorizes the Secured Party to file or
record  financing   statements  and  other  filing  or  recording  documents  or
instruments with respect to the Collateral without the signature of such Grantor
in such form and in such offices as the Secured Party determines  appropriate to
perfect the Security  Interests of the Secured Party under this Agreement.  Such
financing statements may describe the Collateral in the same manner as described
herein or may contain an indication or description of Collateral  that describes
such  property in any other manner as the Secured  Party may  determine,  in its
sole discretion, is necessary,  advisable or prudent to ensure the perfection of
the Security  Interest in the  Collateral  granted  herein,  including,  without
limitation, describing such property as "all assets" or "all personal property."
Further,  a  photographic  or  other  reproduction  of this  Agreement  shall be
sufficient  as a financing  statement or other  filing or recording  document or
instrument  for filing or recording  in any  jurisdiction.  Each Grantor  hereby
authorizes,  ratifies and confirms all financing  statements and other filing or
recording  documents or instruments  filed by Secured Party prior to the date of
this Agreement.

         Section 4.8. ACCOUNTS.

                  (a) Other than in the ordinary  course of business  consistent
         with its past practice,  no Grantor will (i) grant any extension of the
         time of payment of any Account,  (ii)  compromise or settle any Account
         for  less  than the full  amount  thereof,  (iii)  release,  wholly  or
         partially,  any  Account  Debtor,  (iv)  allow any  credit or  discount
         whatsoever  on any  Account,  or (v)  amend,  supplement  or modify any
         Account in any manner that could adversely affect the value thereof.

                  (b) Each Grantor  will deliver to the Secured  Party a copy of
         each material demand,  notice or document received by such Grantor that
         questions  or calls into doubt the  validity or  enforceability  of any
         material Account.

                  (c) The Secured Party shall have the right,  upon prior notice
         to the Borrower  (provided that no such notice shall be required during
         the  continuance  of any  Default  or Event of  Default),  to make test
         verifications of the Accounts in any manner and through any medium that
         it reasonably considers  advisable,  and each Grantor shall furnish all
         such  assistance  and  information  as the Secured Party may require in
         connection with such test  verifications.  At any time and from time to
         time, upon the Secured Party's reasonable request and at the expense of
         the relevant  Grantor,  such  Grantor  shall cause  independent  public
         accountants or others  satisfactory  to the Secured Party to furnish to
         the  Secured  Party  reports  showing  reconciliations,  aging and test
         verifications of, and trial balances for, the Accounts.

                  (d) Upon  request of the Secured  Party at any time after five
         (5) days' notice to the Borrower and for good reason  (provided that no
         such notice or reason shall be required  during the  continuance of any
         Default or Event of  Default),  each  Grantor  shall  direct is Account
         Debtors to remit all  payments on Accounts  owing to such  Grantor from
         time to time to a lockbox


                                       13
<PAGE>


         maintained  in the name or under the Control of the  Secured  Party and
         swept  on a  regular  basis  into a  Deposit  Account  at a  Controlled
         Depositary or the Collateral Account.

         Section 4.9. INTELLECTUAL PROPERTY.

                  (a) Within  thirty (30) days after the close of each  calendar
         quarter (or more  frequently  if  reasonably  requested  by the Secured
         Party),  each Grantor shall give written notice to the Secured Party of
         the  existence of any new  registered  Intellectual  Property  owned or
         claimed to be owned by such  Grantor,  which notice shall set forth the
         particulars  thereof  (including  the  name  or  title  of the  subject
         Intellectual  Property, the filing office in which any filings may have
         been made in  respect  thereof,  and the filing  date and  registration
         number of each such  filing);  and each such Grantor  shall execute and
         deliver to the Secured Party,  for filing,  any and all such collateral
         assignments  as the Secured  Party may  reasonably  request in order to
         confirm  and/or  perfect the Security  Interests  in such  Intellectual
         Property.

                  (b) If deemed by the Grantors,  in their  reasonable  business
         judgment, to be necessary or beneficial for use in their business, each
         Grantor  (either itself or through  licensees) (i) will continue to use
         each  registered  Trademark  (owned by such  Grantor) and Trademark for
         which an application (owned by such Grantor) is pending,  to the extent
         reasonably necessary to maintain such Trademark in full force free from
         any claim of abandonment for non-use,  (ii) will maintain  products and
         services  offered  under  such  Trademark  at  a  level   substantially
         consistent  with the quality of such  products  and  services as of the
         date  hereof,  (iii)  will not (and will not  permit  any  licensee  or
         sublicensee  thereof  to) do any  act or  knowingly  omit to do any act
         whereby  such  Trademark   could   reasonably  be  expected  to  become
         invalidated  or  impaired  in any way,  (iv)  will  not do any act,  or
         knowingly  omit to do any act,  whereby any issued Patent owned by such
         Grantor would reasonably be expected to become forfeited,  abandoned or
         dedicated to the public, (v) will not (and will not permit any licensee
         or  sublicensee  thereof to) do any act or knowingly omit to do any act
         whereby any registered Copyright owned by such Grantor or Copyright for
         which  an   application  is  pending  (owned  by  such  Grantor)  could
         reasonably be expected to become invalidated or otherwise impaired, and
         (vi) will not (either  itself or through  licensees) do any act whereby
         any material portion of the Copyrights may fall into the public domain.

                  (c) Each Grantor will notify the Secured Party  promptly if it
         knows,  or has reason to know,  that any  application  or  registration
         relating to any material  Intellectual  Property  owned by such Grantor
         may become  forfeited,  abandoned or dedicated to the public, or of any
         adverse  determination or development  (including,  without limitation,
         the  institution of, or any such  determination  or development in, any
         proceeding in the United States Patent and Trademark Office, the United
         States  Copyright  Office  or any  court or  tribunal  in any  country)
         regarding such Grantor's ownership of, or the validity of, any material
         Intellectual  Property owned by such Grantor or such Grantor's right to
         register the same or to own and maintain the same.

                  (d)  Whenever  such  Grantor,  either by itself or through any
         agent,  employee,  licensee or designee,  shall file an application for
         the  registration of any  Intellectual  Property with the United States
         Patent and Trademark Office,  the United States Copyright Office or any
         similar  office  or  agency  in any  other  country  or  any  political
         subdivision  thereof,  such  Grantor  shall  report  such filing to the
         Secured  Party within thirty (30) days after the last day of the fiscal


                                       14
<PAGE>


         quarter in which such filing occurs. Upon request of the Secured Party,
         such Grantor shall execute and deliver, and have recorded,  any and all
         agreements, instruments, documents, and papers as the Secured Party may
         reasonably request to evidence the Secured Party's security interest in
         any  material  Copyright,  Patent or  Trademark  and the  goodwill  and
         General  Intangibles  of such Grantor  relating  thereto or represented
         thereby.

                  (e) Each Grantor  will,  if deemed by the  Grantors,  in their
         reasonable business judgment,  to be necessary or beneficial for use in
         their business,  take all commercially  reasonable and necessary steps,
         at such Grantor's sole cost and expense, including, without limitation,
         in any proceeding before the United States Patent and Trademark Office,
         the United States  Copyright  Office or any similar office or agency in
         any other country or any political subdivision thereof, to maintain and
         pursue each application (and to obtain the relevant  registration)  and
         to maintain each  registration of the material  Intellectual  Property,
         including,  without  limitation,  filing of  applications  for renewal,
         affidavits of use and affidavits of incontestability.

                  (f) In the event that any material Intellectual Property owned
         by a Grantor is infringed, misappropriated or diluted by a third party,
         the  applicable  Grantor  shall  (i) at such  Grantor's  sole  cost and
         expense,  take such  actions  as such  Grantor  shall  reasonably  deem
         appropriate  under  the  circumstances  to  protect  such  Intellectual
         Property,  and  (ii)  if  such  Intellectual  Property  is of  material
         economic  value,  promptly  notify the Secured Party after it learns of
         such infringement, misappropriation or dilution.

         Section 4.10. INVESTMENT PROPERTY; PARTNERSHIP/LLC INTERESTS.

                  (a)  Without  the prior  written  consent  of the  Lender,  no
         Grantor  will (i) vote to enable,  or take any other  action to permit,
         any   Subsidiary   Issuer  to  issue   any   Investment   Property   or
         Partnership/LLC  Interests,  except  for  those  additional  Investment
         Property  or  Partnership/LLC  Interests  that will be  subject  to the
         Security Interest granted herein in favor of the Secured Party, or (ii)
         enter  into any  agreement  or  undertaking  restricting  the  right or
         ability  of such  Grantor  or the  Secured  Party  to sell,  assign  or
         transfer  any  Investment  Property  or  Partnership/LLC  Interests  or
         Proceeds  thereof.  The  Grantors  will  defend  the  right,  title and
         interest of the Secured  Party in and to any  Investment  Property  and
         Partnership/LLC Interests against the claims and demands of all Persons
         whomsoever.

                  (b) If any Grantor  shall become  entitled to receive or shall
         receive (i) any Certificated Securities (including, without limitation,
         any  certificate  representing a stock  dividend or a  distribution  in
         connection with any reclassification,  increase or reduction of capital
         or any  certificate  issued  in  connection  with any  reorganization),
         option or rights in respect of the  ownership  interests of any Issuer,
         whether in addition to, in  substitution  of, as a conversion of, or in
         exchange for, any Investment Property, or otherwise in respect thereof,
         or (ii) any sums paid upon or in  respect  of any  Investment  Property
         upon the  liquidation or dissolution of any Issuer,  such Grantor shall
         accept  the same as the agent of the  Secured  Party,  hold the same in
         trust  for the  Secured  Party,  segregated  from  other  funds of such
         Grantor,  and  promptly  deliver  the  same  to the  Secured  Party  in
         accordance with the terms hereof.


                                       15
<PAGE>


                  Section 4.11. EQUIPMENT.  Each Grantor will maintain each item
         of Equipment in good working order and condition  (reasonable  wear and
         tear  and   obsolescence   excepted),   and  in  accordance   with  any
         manufacturer's  manual and/or  recommendations,  and will as quickly as
         practicable provide all maintenance,  service and repairs necessary for
         such purpose and will promptly furnish to the Secured Party a statement
         respecting any material loss or damage to any of the Equipment.

                  Section 4.12. VEHICLES.  Upon the request of the Secured Party
         at any  time  and  from  time to  time,  any and all  applications  for
         certificates of title or ownership indicating the Secured Party's first
         priority Lien on the Vehicle covered by such certificate, and any other
         necessary  documentation,  shall  be  filed  in  each  office  in  each
         jurisdiction which the Secured Party shall deem reasonably advisable to
         perfect its Liens on the Vehicles.  Prior thereto,  each certificate of
         title or ownership  relating to each Vehicle shall be maintained by the
         applicable  Grantor in accordance  with  Applicable  Law to reflect the
         ownership interest of such Grantor.

                  Section  4.13.  FURTHER  ASSURANCES.  Upon the  request of the
         Secured  Party and at the sole  expense of the  Grantors,  each Grantor
         will  promptly and duly execute and deliver,  and have  recorded,  such
         further  instruments and documents and take such further actions as the
         Secured  Party may  reasonably  request for the purpose of obtaining or
         preserving  the full  benefits of this  Agreement and of the rights and
         powers  herein  granted,   including,   without  limitation,   (a)  the
         collateral  assignment of any Contract,  (b) with respect to Government
         Contracts,  collateral  assignment agreements and notices of collateral
         assignment,  in form and substance  satisfactory  to the Secured Party,
         duly executed by the subject  Grantor in compliance with the Assignment
         of  Claims  Act  (or  analogous  state  Applicable  Law),  and  (c) all
         applications,  certificates,  instruments, registration statements, and
         all other documents and papers the Secured Party may reasonably request
         and as may be required by law in  connection  with the obtaining of any
         consent, approval, registration, qualification, or authorization of any
         Person deemed  necessary or appropriate  for the effective  exercise of
         any rights under this Agreement.

                                    ARTICLE V

                               REMEDIAL PROVISIONS

         Section 5.1. GENERAL  REMEDIES.  If an Event of Default shall occur and
be continuing,  the Secured Party may exercise,  in addition to all other rights
and remedies  granted to it in this  Agreement  and in any other  instrument  or
agreement  securing,  evidencing or relating to the Obligations,  all rights and
remedies of a secured party under the UCC or any other  Applicable Law.  Without
limiting the generality of the foregoing,  the Secured Party,  without demand of
performance or other demand,  presentment,  protest,  advertisement or notice of
any kind  (except any notice  required by law  referred to below) to or upon any
Grantor  or  any  other  Person  (all  and  each  of  which  demands,  defenses,
advertisements  and  notices  are  hereby  waived),  may in  such  circumstances
forthwith collect, receive,  appropriate and realize upon the Collateral, or any
part thereof,  and/or may forthwith sell, lease,  assign, give option or options
to purchase,  or  otherwise  dispose of and deliver the  Collateral  or any part
thereof (or  contract  to do any of the  foregoing),  in one or more  parcels at
public or private sale or sales,  at any exchange,  broker's  board or office of
the Secured  Party or elsewhere  upon such terms and  conditions  as it may deem
advisable  and at such prices as it may deem best,  for cash or on credit or for
future


                                       16
<PAGE>


delivery  without  assumption of any credit risk. The Secured Party may disclaim
any warranties of title, possession and quiet enjoyment. The Secured Party shall
have the right upon any such public sale or sales,  and, to the extent permitted
by law,  upon any such private sale or sales,  to purchase the whole or any part
of the  Collateral  so sold,  free of any right or equity of  redemption  in any
Grantor,  which  right or equity is hereby  waived and  released.  Each  Grantor
further agrees,  at the Secured Party's request,  to assemble the Collateral and
make it available to the Secured  Party at places which the Secured  Party shall
reasonably  select,  whether at such  Grantor's  premises or  elsewhere.  To the
extent permitted by Applicable Law, each Grantor waives all claims,  damages and
demands it may acquire  against the Secured Party arising out of the exercise by
it of any rights  hereunder  except to the extent any such claims,  damages,  or
demands  result solely from the gross  negligence  or willful  misconduct of the
Secured  Party.  If any  notice  of a  proposed  sale or  other  disposition  of
Collateral shall be required by law, such notice shall be deemed  reasonable and
proper if given at least ten (10) days before such sale or other disposition.

         Section 5.2. SPECIFIC REMEDIES.

                  (a) The  Secured  Party  hereby  authorizes  each  Grantor  to
         collect its Accounts,  under the Secured Party's direction and control;
         provided  that,  the  Secured  Party  may  curtail  or  terminate  such
         authority at any time after the occurrence  and during the  continuance
         of an Event of Default.

                  (b) Upon the occurrence and during the continuance of an Event
         of Default:

                           (i) the Secured  Party may  communicate  with Account
                  Debtors of any Account subject to a Security Interest and upon
                  the request of the Secured  Party,  each Grantor  shall notify
                  (such notice to be in form and substance  satisfactory  to the
                  Secured  Party)  its  Account   Debtors  and  parties  to  the
                  Contracts  subject to a Security  Interest  that such Accounts
                  and the Contracts have been assigned to the Secured Party;

                           (ii) each Grantor shall forward to the Secured Party,
                  on the last  Business Day of each week (or more  frequently if
                  requested by the Secured Party),  deposit slips related to all
                  cash,  money,  checks or any other  similar  items of  payment
                  received by the Grantor during such week, and, if requested by
                  the Secured Party,  copies of such checks or any other similar
                  items  of  payment,  together  with a  statement  showing  the
                  application of all payments on the Collateral during such week
                  and a  collection  report  with  regard  thereto,  in form and
                  substance satisfactory to the Secured Party.

                           (iii)  whenever any Grantor  shall  receive any cash,
                  money,  checks or any other similar items of payment  relating
                  to any Collateral  (including any Proceeds of any Collateral),
                  such Grantor agrees that it will,  within one (1) Business Day
                  of such  receipt,  deposit all such items of payment  into the
                  Collateral  Account or in a Deposit  Account  at a  Controlled
                  Depositary;  and until such Grantor  shall  deposit such cash,
                  money,  checks or any other  similar  items of  payment in the
                  Collateral  Account or in a Deposit  Account  at a  Controlled
                  Depositary,  such Grantor shall hold such cash, money,  checks
                  or any other similar items of payment in trust for the Secured
                  Party and as property of the Secured Party,  separate from the
                  other funds of such Grantor,  and the Secured Party shall have
                  the


                                       17
<PAGE>


                  right to  transfer  or direct the  transfer  of the balance of
                  each  Deposit  Account  to the  Collateral  Account.  All such
                  Collateral and Proceeds of Collateral  received by the Secured
                  Party  hereunder  shall  be held by the  Secured  Party in the
                  Collateral   Account  as  collateral   security  for  all  the
                  Obligations  and shall not  constitute  payment  thereof until
                  applied as provided in Section 5.4.

                           (iv)  the  Secured  Party  shall  have  the  right to
                  receive any and all cash dividends,  payments or distributions
                  made in respect of any Investment  Property or Partnership/LLC
                  Interests or other  Proceeds paid in respect of any Investment
                  Property or Partnership/LLC  Interests,  and any or all of any
                  Investment  Property  or  Partnership/LLC  Interests  shall be
                  registered  in the name of the Secured  Party or its  nominee,
                  and the Secured Party or its nominee may  thereafter  exercise
                  (A) all voting,  corporate and other rights pertaining to such
                  Investment  Property  or  Partnership/LLC  Interests,  at  any
                  meeting of  shareholders,  partners or members of the relevant
                  Issuers,  and (B) any and all rights of  conversion,  exchange
                  and subscription  and any other rights,  privileges or options
                  pertaining  to such  Investment  Property  or  Partnership/LLC
                  Interests as if it were the absolute owner thereof (including,
                  without  limitation,  the right to exchange at its  discretion
                  any  and all of the  Investment  Property  or  Partnership/LLC
                  Interests  upon  the  merger,  consolidation,  reorganization,
                  recapitalization or other fundamental change in the corporate,
                  partnership  or  company  structure  of any Issuer or upon the
                  exercise  by any  Grantor or the  Secured  Party of any right,
                  privilege or option pertaining to such Investment  Property or
                  Partnership/LLC  Interests,  and in connection therewith,  the
                  right to deposit  and  deliver  any and all of the  Investment
                  Property  or  Partnership/LLC  Interests  with any  committee,
                  depositary,  transfer  agent,  registrar  or other  designated
                  agency upon such terms and conditions as the Secured Party may
                  determine),  all  without  liability  except  to  account  for
                  property  actually received by it; but the Secured Party shall
                  have  no duty to any  Grantor  to  exercise  any  such  right,
                  privilege  or  option  and  the  Secured  Party  shall  not be
                  responsible  for any failure to do so or delay in so doing. In
                  furtherance  thereof,   each  Grantor  hereby  authorizes  and
                  instructs   each  Issuer  with   respect  to  any   Collateral
                  consisting   of   Investment   Property  and   Partnership/LLC
                  Interests  to (i) comply with any  instruction  received by it
                  from the  Secured  Party in writing  that (A)  states  that an
                  Event of Default has  occurred and is  continuing,  and (B) is
                  otherwise  in  accordance  with the  terms of this  Agreement,
                  without any other or further  instructions  from such Grantor,
                  and  each  Grantor  agrees  that  each  Issuer  shall be fully
                  protected  in so  complying,  and  (ii)  except  as  otherwise
                  expressly  permitted hereby, pay any dividends,  distributions
                  or other payments with respect to any  Investment  Property or
                  Partnership/LLC Interests directly to the Secured Party; and

                           (v) the Secured Party shall be entitled to (but shall
                  not be  required  to):  (A)  proceed  to  perform  any and all
                  obligations of the  applicable  Grantor under any Contract and
                  exercise  all rights of such  Grantor  thereunder  as fully as
                  such  Grantor  itself  could,  (B) do all other acts which the
                  Secured  Party may deem  necessary  or proper to  protect  its
                  Security  Interest granted  hereunder,  provided such acts are
                  not inconsistent with or in violation of the terms of the Loan
                  Agreement or Applicable Law, and (C) sell, assign or otherwise
                  transfer  any  Contract  constituting   Collateral,   subject,
                  however,  to the prior  approval  of each other  party to such
                  Contract, to the extent required under the Contract.


                                       18
<PAGE>


                  (c) Unless an Event of  Default  shall  have  occurred  and be
         continuing  and the  Secured  Party  shall  have  given  notice  to the
         relevant  Grantor  of  the  Secured  Party's  intent  to  exercise  its
         corresponding  rights pursuant to Section 5.2(b), each Grantor shall be
         permitted   to  receive   all  cash   dividends,   payments   or  other
         distributions   made  in  respect  of  any   Investment   Property  and
         Partnership/LLC  Interests,  in each case paid in the normal  course of
         business of the relevant Issuer and consistent  with past practice,  to
         the extent permitted in the Loan Agreement,  and to exercise all voting
         and other corporate,  company or partnership rights with respect to any
         Investment  Property and  Partnership/LLC  Interests;  provided that no
         vote shall be cast or other  corporate,  company or  partnership  right
         exercised  or  other  action  taken  which,   in  the  Secured  Party's
         reasonable judgment,  would impair the Collateral or which would result
         in a  Default  or Event of  Default  under  any  provision  of the Loan
         Agreement, this Agreement or any other Loan Document.

         Section 5.3. PRIVATE SALE.

                  (a) Each  Grantor  recognizes  that the  Secured  Party may be
         unable to effect a public sale of any or all  Collateral  consisting of
         Securities  which  have  not  been  registered  for  resale  under  the
         Securities  Act  ("RESTRICTED  SECURITIES  COLLATERAL"),  by  reason of
         certain  prohibitions  contained in the  Securities  Act and applicable
         state  securities laws or otherwise,  and may be compelled to resort to
         one or more private sales  thereof to a restricted  group of purchasers
         which will be obliged to agree,  among other  things,  to acquire  such
         securities  for their own account for investment and not with a view to
         the  distribution  or resale  thereof.  Each Grantor  acknowledges  and
         agrees that any such  private sale may result in prices and other terms
         less   favorable   than  if  such   sale   were  a  public   sale  and,
         notwithstanding  such circumstances,  agrees that any such private sale
         shall  not by  reason  thereof  be  deemed  not to have  been made in a
         commercially  reasonable  manner.  The Secured  Party shall be under no
         obligation  to  delay  a  sale  of any  of  the  Restricted  Securities
         Collateral  for the  period  of time  necessary  to permit  the  Issuer
         thereof  to  register  such   securities  for  public  sale  under  the
         Securities Act, or under applicable state securities laws, even if such
         Issuer would agree to do so.

                  (b) Each Grantor agrees to use its best efforts to do or cause
         to be done all such other acts as may be necessary to make such sale or
         sales of all or any  portion of the  Restricted  Securities  Collateral
         valid and binding and in compliance  with any and all other  Applicable
         Laws.

         Section  5.4.  APPLICATION  OF  PROCEEDS.  At such  intervals as may be
agreed upon by the  Borrower and the Secured  Party,  or, if an Event of Default
shall have occurred and be continuing, at any time at the Lender's election, the
Secured Party may apply all or any part of the Collateral or any Proceeds of the
Collateral in payment in whole or in part of the  Obligations  (after  deducting
all reasonable costs and expenses of every kind incurred in connection therewith
or incidental to the care or  safekeeping of any of the Collateral or in any way
relating  to the  Collateral  or the  rights  of the  Secured  Party  hereunder,
including, without limitation,  reasonable attorneys' fees and disbursements) in
accordance with Section 2.06 of the Loan Agreement. Any balance of such Proceeds
remaining  after  payment in full of the  Obligations  shall be paid over to the
Grantors, or to whomever else may be lawfully entitled to receive the same. Only
after (a) the payment by the Secured  Party of any other amount  required by any
provision of law, including, without limitation, Section 9-610 and Section 9-615
of the UCC,  and (b) the payment in full of


                                       19
<PAGE>


the Obligations, shall the Secured Party account for the surplus, if any, to any
Grantor, or to whomever else may be lawfully entitled to receive the same.

         Section 5.5.  WAIVER,  DEFICIENCY.  Each Grantor hereby waives,  to the
extent  permitted by  Applicable  Law, all rights of  redemption,  appraisement,
valuation,  stay,  extension or  moratorium  now or hereafter in force under any
Applicable Law in order to prevent or delay the enforcement of this Agreement or
the absolute sale of the Collateral or any portion  thereof.  Each Grantor shall
remain  liable  for  any  deficiency  if the  proceeds  of  any  sale  or  other
disposition of the Collateral are  insufficient  to pay its  Obligations and the
fees and disbursements of any attorneys employed by the Secured Party to collect
such deficiency.

                                   ARTICLE VI

                                THE SECURED PARTY

         Section 6.1. SECURED PARTY'S APPOINTMENT AS ATTORNEY-IN-FACT.

                  (a) Each Grantor hereby  irrevocably  constitutes and appoints
         the Secured Party and any officer or agent thereof,  with full power of
         substitution,  as  its  true  and  lawful  attorney-in-fact  with  full
         irrevocable  power and authority in the place and stead of such Grantor
         and in the name of such Grantor or in its own name,  for the purpose of
         carrying  out  the  terms  of  this  Agreement,  to  take  any  and all
         appropriate action and to execute any and all documents and instruments
         which may be necessary or desirable to accomplish  the purposes of this
         Agreement,  and, without limiting the generality of the foregoing, each
         Grantor  hereby gives the Secured Party the power and right,  on behalf
         of such Grantor, without notice to or assent by such Grantor, to do any
         or all of the following upon the occurrence and during the  continuance
         of an Event of Default:

                           (i) in the name of such  Grantor or its own name,  or
                  otherwise,  take  possession  of and  indorse  and collect any
                  checks,  drafts,  notes,  acceptances or other instruments for
                  the  payment  of  moneys  due under any  Account  or  Contract
                  subject to a Security  Interest  or with  respect to any other
                  Collateral  and file any  claim or take any  other  action  or
                  proceeding  in any court of law or equity or otherwise  deemed
                  appropriate by the Secured Party for the purpose of collecting
                  any and all such  moneys  due under any  Account  or  Contract
                  subject to a Security  Interest  or with  respect to any other
                  Collateral whenever payable;

                           (ii)  in  the  case  of  any  Intellectual  Property,
                  execute  and  deliver,   and  have   recorded,   any  and  all
                  agreements,  instruments,  documents and papers as the Secured
                  Party may request to evidence  the  Secured  Party's  security
                  interest in such  Intellectual  Property  and the goodwill and
                  General  Intangibles  of  such  Grantor  relating  thereto  or
                  represented thereby;

                           (iii) pay or  discharge  taxes  and  Liens  levied or
                  placed on or  threatened  against the  Collateral,  effect any
                  repairs  or any  insurance  called  for by the  terms  of this
                  Agreement and pay all or any part of the premiums therefor and
                  the costs thereof,


                                       20
<PAGE>


                           (iv) execute,  in  connection  with any sale provided
                  for in this Agreement, any endorsements,  assignments or other
                  instruments  of  conveyance  or transfer  with  respect to the
                  Collateral; and

                           (v) (A) direct any party liable for any payment under
                  any of the  Collateral  to make  payment of any and all moneys
                  due or to become due thereunder  directly to the Secured Party
                  or as the Secured Party shall  direct;  (B) ask or demand for,
                  collect,  and receive  payment of and receipt for, any and all
                  moneys,  claims and other  amounts due or to become due at any
                  time in respect of or arising out of any Collateral;  (C) sign
                  and indorse any invoices,  freight or express bills,  bills of
                  lading, storage or warehouse receipts, drafts against debtors,
                  assignments,  verifications,  notices and other  documents  in
                  connection  with  any  of the  Collateral;  (D)  commence  and
                  prosecute  any  suits,  actions  or  proceedings  at law or in
                  equity in any court of competent  jurisdiction  to collect the
                  Collateral  or any  portion  thereof  and to enforce any other
                  right in  respect  of any  Collateral;  (E)  defend  any suit,
                  action or proceeding brought against such Grantor with respect
                  to any Collateral;  (F) settle,  compromise or adjust any such
                  suit, action or proceeding and, in connection therewith,  give
                  such  discharges  or releases  as the  Secured  Party may deem
                  appropriate;  (G) assign any  Copyright,  Patent or  Trademark
                  (along  with the  goodwill  of the  business to which any such
                  Copyright,  Patent or  Trademark  pertains),  for such term or
                  terms, on such conditions,  and in such manner, as the Secured
                  Party  shall  in  its  sole  discretion  determine;   and  (H)
                  generally,  sell, transfer, pledge and make any agreement with
                  respect to or  otherwise  deal with any of the  Collateral  as
                  fully and  completely  as though  the  Secured  Party were the
                  absolute  owner  thereof  for all  purposes,  and  do,  at the
                  Secured  Party's  option and such  Grantor's  expense,  at any
                  time,  or from  time to time,  all acts and  things  which the
                  Secured Party deems necessary to protect,  preserve or realize
                  upon the Collateral and the Secured Party's Security Interests
                  therein  and to effect  the intent of this  Agreement,  all as
                  fully and effectively as such Grantor might do.

                  (b) If any Grantor  fails to perform or comply with any of its
         agreements  contained  herein,  the Secured Party,  at its option,  but
         without any  obligation  so to do, may perform or comply,  or otherwise
         cause performance or compliance, with such agreement in accordance with
         the provisions of Section 6.1(a).

                  (c) The expenses of the Secured  Party  incurred in connection
         with actions  taken  pursuant to the terms of this  Agreement  shall be
         deemed to be Advances under the Loan Agreement and shall, together with
         interest thereon at the rate(s) in effect from time to time pursuant to
         the  Revolving  Credit  Note,  from the date of payment by the  Secured
         Party  to the  date  reimbursed  by the  Grantors,  be  payable  by the
         Grantors to the Secured Party on demand.

                  (d) Each Grantor hereby ratifies all that said attorneys shall
         lawfully  do or cause to be done by virtue  hereof in  accordance  with
         Section 6.1(a).  All powers,  authorizations  and agencies contained in
         this Agreement are coupled with an interest and are  irrevocable  until
         this Agreement is terminated and the Security  Interests created hereby
         are released.

         Section 6.2. DUTY OF SECURED PARTY.  The Secured Party's sole duty with
respect to the custody,  safekeeping and physical preservation of the Collateral
in its possession, under


                                       21
<PAGE>


Section  9-207 of the UCC or  otherwise,  shall  be to deal  with it in the same
manner as the Secured  Party deals with  similar  property  for its own account.
Neither the  Secured  Party nor any of its  officers,  directors,  employees  or
agents shall be liable for failure to demand, collect or realize upon any of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise  dispose of any  Collateral  upon the request of any Grantor or any
other  Person  or to  take  any  other  action  whatsoever  with  regard  to the
Collateral  or any part  thereof.  The powers  conferred  on the  Secured  Party
hereunder are solely to protect the Secured Party's  interests in the Collateral
and shall  not  impose  any duty upon the  Secured  Party to  exercise  any such
powers. The Secured Party shall be accountable only for amounts that it actually
receives as a result of the exercise of such  powers,  and neither it nor any of
its officers, directors, employees or agents shall be responsible to any Grantor
for any act or failure to act hereunder,  except for their own gross  negligence
or willful misconduct.

                                   ARTICLE VII

                                  MISCELLANEOUS

         Section 7.1. AMENDMENTS IN WRITING.  None of the terms or provisions of
this Agreement may be waived, amended, supplemented or otherwise modified except
in accordance with Section 9.04 of the Loan Agreement.

         Section 7.2. NOTICES. All notices,  requests and demands to or upon the
Secured Party or any Grantor  hereunder shall be effected in the manner provided
for in Section 9.06 of the Loan Agreement.

         Section 7.3. NO WAIVER BY COURSE OF CONDUCT,  CUMULATIVE REMEDIES.  The
Secured Party shall not by any act (except by a written  instrument  pursuant to
Section 7.1), delay, indulgence,  omission or otherwise be deemed to have waived
any right or remedy  hereunder or to have  acquiesced in any Default or Event of
Default. No failure to exercise,  nor any delay in exercising on the part of the
Secured Party, any right, power or privilege hereunder shall operate as a waiver
thereof.  No  single  or  partial  exercise  of any  right,  power or  privilege
hereunder shall preclude any other or further  exercise  thereof or the exercise
of any other right,  power or  privilege.  A waiver by the Secured  Party of any
right or remedy hereunder on any one occasion shall not be construed as a bar to
any right or remedy which the Secured Party would  otherwise  have on any future
occasion.  The  rights and  remedies  herein  provided  are  cumulative,  may be
exercised  singly or  concurrently  and are not exclusive of any other rights or
remedies provided by law.

         Section 7.4. ENFORCEMENT EXPENSES, INDEMNIFICATION.

                  (a) Each Grantor  agrees to pay or reimburse the Secured Party
         on demand for all of its  reasonable  costs and  expenses  incurred  in
         connection with enforcing or preserving any rights under this Agreement
         and  the  other  Loan  Documents  (including,  without  limitation,  in
         connection with any workout, restructuring, bankruptcy or other similar
         proceeding),  including,  without  limitation,  the reasonable fees and
         disbursements of counsel to the Secured Party.


                                       22
<PAGE>


                  (b) Each Grantor  agrees to pay, and to save the Secured Party
         harmless  from, any and all  liabilities  with respect to, or resulting
         from any delay in  paying,  any and all stamp,  excise,  sales or other
         taxes which may be payable or  determined to be payable with respect to
         any of the  Collateral  or in connection  with any of the  transactions
         contemplated  by this Agreement (but not including  franchise  taxes or
         taxes based on net income of the Secured Party).

                  (c) Each Grantor  agrees to pay, and to save the Secured Party
         harmless from any and all liabilities,  obligations,  losses,  damages,
         penalties,  costs and expenses in connection  with actions,  judgments,
         suits,  costs,   expenses  or  disbursements  of  any  kind  or  nature
         whatsoever  with  respect  to  the  execution,  delivery,  enforcement,
         performance  and  administration  of this  Agreement  to the extent any
         Grantor would be required to do so pursuant to Section 9.02 of the Loan
         Agreement.

                  (d) The agreements in this Section 7.4 shall survive repayment
         of the  Obligations  and the  termination of this Agreement  and/or any
         other Loan Documents.

         Section 7.5. WAIVER OF JURY TRIAL; PRESERVATION OF REMEDIES.

                  (a) EACH  GRANTOR  HEREBY  IRREVOCABLY  WAIVES ITS RIGHTS TO A
         JURY  TRIAL  WITH  RESPECT  TO ANY  ACTION,  CLAIM OR OTHER  PROCEEDING
         ARISING  OUT OF ANY  DISPUTE IN  CONNECTION  WITH THIS  AGREEMENT,  ANY
         RIGHTS OR OBLIGATIONS HEREUNDER,  OR THE PERFORMANCE OF SUCH RIGHTS AND
         OBLIGATIONS.

                  (b) The parties hereto preserve,  without diminution,  certain
         remedies that such Persons may employ or exercise freely, either alone,
         in  conjunction  with or during a dispute.  Each such Person shall have
         and  hereby  reserves  the  right to  proceed  in any  court of  proper
         jurisdiction  or by self-help to exercise or  prosecute  the  following
         remedies,  as applicable:  (i) all rights to foreclose against any real
         or personal  property or other  security by  exercising a power of sale
         granted in the Loan  Documents or under  Applicable  Law or by judicial
         foreclosure and sale,  including a proceeding to confirm the sale, (ii)
         all rights of self-help  including peaceful  occupation of property and
         collection  of rents,  set-off,  and peaceful  possession  of property,
         (iii) obtaining  provisional or ancillary remedies including injunctive
         relief, sequestration, garnishment, attachment, appointment of receiver
         and in  filing  an  involuntary  bankruptcy  proceeding,  and (iv) when
         applicable, a judgment by confession of judgment. Preservation of these
         remedies  does not limit the power of an  arbitrator  to grant  similar
         remedies that may be requested by a party in a dispute.

         Section 7.6.  SUCCESSORS AND ASSIGNS.  This Agreement  shall be binding
upon the  successors  and assigns of each Grantor and shall inure to the benefit
of each  Grantor  (and shall bind all Persons  who become  bound as a Grantor to
this Agreement),  the Secured Party and their successors and assigns;  PROVIDED,
that  no  Grantor  may  assign,  transfer  or  delegate  any  of its  rights  or
obligations  under  this  Agreement  without  the prior  written  consent of all
holders of Obligations.

         Section 7.7. SET-OFF.  Each Grantor hereby  irrevocably  authorizes the
Secured Party at any time and from time to time, without notice to such Grantor,
any  such  notice  being


                                       23
<PAGE>


expressly  waived by each Grantor,  to set off and appropriate and apply any and
all deposits (general or special, time or demand,  provisional or final), in any
currency,  and any other credits,  indebtedness or claims,  in any currency,  in
each case  whether  direct or  indirect,  absolute  or  contingent,  matured  or
unmatured,  at any time held or owing by the Secured  Party (or any agent of the
Secured Party) to or for the credit or the account of such Grantor,  or any part
thereof in such amounts as the Secured  Party may elect,  against and on account
of the  obligations  and  liabilities  of  such  Grantor  to the  Secured  Party
hereunder  and  claims of every  nature and  description  of the  Secured  Party
against such Grantor, in any currency, whether arising hereunder, under the Loan
Agreement, any other Loan Document or otherwise, as the Secured Party may elect,
whether or not the Secured  Party has made any demand for  payment and  although
such  obligations,  liabilities  and claims may be contingent or unmatured.  The
Secured  Party shall  notify such  Grantor  promptly of any such set-off and the
application made by the Secured Party of the proceeds  thereof;  PROVIDED,  that
the failure to give such notice shall not affect the validity of such setoff and
application.  The rights of the  Secured  Party  under this  Section  7.7 are in
addition to other  rights and remedies  (including,  without  limitation,  other
rights of set-off) which the Secured Party may have.

         Section 7.8.  COUNTERPARTS.  This  Agreement  may be executed by one or
more of the parties to this  Agreement  on any number of  separate  counterparts
(including by telecopy),  and all of said  counterparts  taken together shall be
deemed to constitute one and the same instrument.

         Section 7.9.  SEVERABILITY.  Any provision of this  Agreement  which is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be  ineffective  only to the  extent  of such  prohibition  or  unenforceability
without invalidating the remainder of such provision or the remaining provisions
hereof or thereof or affecting the validity or  enforceability of such provision
in any other jurisdiction.

         Section  7.10.  SECTION  HEADINGS.  The Section  headings  used in this
Agreement  are for  convenience  of  reference  only and are not to  affect  the
construction hereof or be taken into consideration in the interpretation hereof.

         Section 7.11.  INTEGRATION.  This  Agreement and the other  agreements,
instruments  and  documents  referred to herein  represent  the agreement of the
Grantors  and the Secured  Party with respect to the subject  matter  hereof and
thereof, and there are no promises, undertakings,  representations or warranties
by the Secured Party relative to subject matter hereof and thereof not expressly
set forth or  referred  to herein or in the other  agreements,  instruments  and
documents referred to herein.

         Section  7.12.  GOVERNING  LAW.  This  Agreement  shall be governed by,
construed, interpreted and enforced in accordance with, the laws of the State of
New York,  without  giving effect to principles of conflicts of laws;  PROVIDED,
HOWEVER,  that to the extent that the laws of any other jurisdiction  govern the
perfection  of  the  Security  Interests  in  any  Collateral  located  in  such
jurisdiction or owned by a Grantor located in such  jurisdiction,  then the laws
of that jurisdiction shall govern as respects such perfection,  and the Grantors
shall comply therewith to the same extent as herein provided with respect to the
UCC and other New York law.


                                       24
<PAGE>


         Section 7.13. CONSENT TO JURISDICTION.  Each Grantor hereby irrevocably
consents to the personal jurisdiction of all state and federal courts located in
New York, New York, in any action,  claim or other proceeding arising out of any
dispute in connection with this Agreement, the Loan Agreement, the Notes and the
other Loan Documents, any rights or obligations hereunder or thereunder,  or the
performance  of such rights and  obligations.  Each Grantor  hereby  irrevocably
consents  to the  service of a summons and  complaint  and other  process in any
action, claim or proceeding brought by the Secured Party in connection with this
Agreement, the Loan Agreement, the Notes or the other Loan Documents, any rights
or obligations  hereunder or thereunder,  or the  performance of such rights and
obligations,  on behalf of itself or its  property,  by  registered or certified
mail, return receipt  requested,  in the manner specified in Section 9.06 of the
Loan  Agreement.  Nothing in this  Section  7.13  shall  affect the right of the
Secured Party to serve legal process in any other manner permitted by Applicable
Law or affect the right of the Secured  Party to bring any action or  proceeding
against any Grantor or its properties in the courts of any other jurisdictions.

         Section 7.14. ACKNOWLEDGEMENTS.

                  (a)  Each  Grantor  hereby  acknowledges  that (i) it has been
         advised by counsel in the  negotiation,  execution and delivery of this
         Agreement, (ii) the Secured Party has no fiduciary relationship with or
         duty to any  Grantor  arising  out of or in  connection  with  the Loan
         Agreement,  this Agreement or any of the other Loan Documents,  and the
         relationship  between  the  Grantors  (on the one hand) and the Secured
         Party (on the other hand) in connection herewith or therewith is solely
         that of debtor  and  creditor,  and (iii) no joint  venture  is created
         hereby or otherwise exists by virtue of the  transactions  contemplated
         hereby.

                  (b) Each Issuer party to this Agreement  acknowledges  receipt
         of a copy of this  Agreement  and  agrees  to be bound  thereby  and to
         comply with the terms thereof  insofar as such terms are  applicable to
         it. Each Issuer  agrees to provide such notices to the Secured Party as
         may be  necessary  to  give  full  effect  to the  provisions  of  this
         Agreement.

         Section 7.15. ADDITIONAL GRANTORS. Each Subsidiary of the Borrower that
is required to become a party to this Agreement  pursuant to Section 5.11 of the
Loan  Agreement  shall become a Grantor for all purposes of this  Agreement upon
execution  and  delivery  by such  Subsidiary  of a  joinder  agreement  (with a
Perfection  Certificate and/or other appropriate disclosure schedules respecting
such  Additional  Grantor)  in form and  substance  satisfactory  to the Secured
Party.

         Section 7.16. RELEASES.

                  (a)  At  such  time  as  the   Obligations   shall  have  been
         indefeasibly  paid in full and the Revolving Credit Commitment has been
         terminated,  the  Collateral  shall be released  from the Liens created
         hereby,  and this  Agreement  and all  obligations  (other  than  those
         expressly stated to survive such  termination) of the Secured Party and
         each Grantor  hereunder shall  terminate,  all without  delivery of any
         instrument or  performance  of any act by any party,  and all rights to
         the  Collateral  shall revert to the Grantors.  At the request and sole
         expense of any  Grantor  following  any such  termination,  the Secured
         Party shall deliver to such Grantor any Collateral held by the


                                       25
<PAGE>


         Secured Party  hereunder,  and execute and deliver to such Grantor such
         documents as such Grantor  shall  reasonably  request to evidence  such
         termination.

                  (b) If any of the  Collateral  shall be sold,  transferred  or
         otherwise disposed of by any Grantor in a transaction  permitted by the
         Loan Agreement, then the Secured Party, at the request and sole expense
         of such Grantor, shall execute and deliver to such Grantor all releases
         or other documents reasonably necessary or desirable for the release of
         the Liens created hereby on such Collateral.

                           [Signature Page to Follow]


                                       26
<PAGE>


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

                                    TAG-IT PACIFIC, INC.,
                                    a Delaware corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TALON INTERNATIONAL, INC.,
                                    a Delaware corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TAG-IT, INC.,
                                    a California corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    A.G.S. STATIONARY,  INC., a
                                    California corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TAG-IT PACIFIC LIMITED,
                                    a Hong Kong corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TAG-IT PACIFIC (HK) LTD.,
                                    a British Virgin Islands corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                       27
<PAGE>


                                    TAGIT de MEXICO, S.A. de C.V.

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TALON ZIPPER (SHENZHEN) COMPANY, LTD.,
                                    a Chinese corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    TALON INTERNATIONAL PVT. LTD.,
                                    an Indian corporation

                                    By:  /s/ Lonnie D. Schnell
                                        ----------------------------------------
                                         Name:  Lonnie D. Schnell
                                         Title: Chief Financial Officer


                                    BLUEFIN CAPITAL, LLC

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


                                       28