**Exhibit 10.1**
**TERM PROMISSORY NOTE**    **Columbus, Ohio****$189,298** **August 19, 2004**
     **FOR VALUE RECEIVED**, the undersigned, **TERAFORCE TECHNOLOGY CORPORATION**, aDelaware corporation, whose address is 1240 East Campbell Road, Richardson,Texas 75081 (the “Borrower”), hereby promises to pay to the order of **ZURICHAMERICAN INSURANCE COMPANY**whose address is One Liberty Plaza,53rd Floor, NewYork, New York 10006 (the “Lender”), on or before July 31, 2006 (the “MaturityDate”), the principal sum of One Hundred Eighty-Nine Thousand Two HundredNinety-Eight Dollars ($189,298) (the “Debt”), together with interest, all asprovided in Section 1 of this Note.
     **Section 1. The Debt.**Subject to and on the terms and conditions setforth in this Note, the Borrower shall repay the Debt as follows:
          1.1. **Principal.**The principal balance of this Note and any accrued andunpaid interest shall be due and payable in full on the Maturity Date.
          1.2. **Interest.**
                 1.2.1. The Debt shall bear interest on the outstanding principal amount,from the date hereof until the Maturity Date, at a fixed rate *per annum*equalto 7.00%. Interest on the Debt shall be paid by the Borrower (a) on the lastday of each calendar quarter, commencing September 30, 2004, (b) on theMaturity Date, and (c) thereafter on demand.
                 1.2.2. Whenever the unpaid principal amount of the Debt has become due andpayable, whether at the stated maturity thereof, by acceleration or otherwise,interest thereon, for each day until paid, shall be paid by the Borrower ondemand at a rate per annum equal to 12.00%.
                 1.2.3. All interest under this Note shall be computed on the basis of theactual days elapsed in a year of 360 days.
          1.3. **Prepayments; Payments.**
                 1.3.1. The Borrower shall have the right to make prepayments at any timeof the principal amount of the Debt, in whole or in part, without premium orpenalty.
                 1.3.2. The Borrower shall make all payments of principal and interestunder this Note to the Lender at its address above (or such other location asthe Lender may
 

 

direct) in immediately available funds. If any payment of principal orinterest on this Note shall become due on a weekend day or holiday, suchpayment shall be due and payable upon the next succeeding regular business dayand such extension of time shall in such case be included in computing interestin connection with such payment.
     **Section 2. Representations and Warranties.**The execution of this Note bythe Borrower shall be deemed to constitute the Borrower’s representation andwarranty to the Lender that (a) this Note is the legal, valid and bindingobligation of the Borrower, enforceable against the Borrower in accordance withits terms; (b) the execution and delivery of this Note by the Borrower does notand will not conflict with, violate or constitute a default under or breach ofany court or administrative order, decree or ruling, or any law, statute,ordinance or regulation, or any agreement, indenture, mortgage, deed of trust,guaranty, lease, note or other obligation or instrument binding upon theBorrower or any of its respective properties or assets; (c) Borrower hasobtained all consents, approvals and waivers necessary to execute and deliverthis Note and incur the Debt; and (d) neither this Note nor any otherstatement, assignment, agreement, instrument or certificate of the Borrowermade or delivered pursuant to or in connection with this Note contains anyuntrue statement of a material fact or omits to state a material fact requiredto be stated therein, in light of the circumstances under which they were made,or necessary to make the statements therein not misleading.
     **Section 3. Compliance with Laws.**On and after the date hereof and untilthe Debt shall have been repaid and discharged in full or otherwise satisfied,the Borrower shall comply with all applicable laws, including withoutlimitation all environmental laws.
     **Section 4. Security for Debt.**This Note is secured by and entitled tothe Warrant issued by Borrower in favor of the Lender dated as of the datehereof (the “Warrant”), as it may be further amended or modified from time totime. Nothing contained in this Note, the Warrant or in any other document orinstrument made in connection herewith, shall be deemed or construed to createa partnership, tenancy-in-common, joint tenancy, joint venture or co-ownershipby or between the Lender and the Borrower. The Lender shall not be in any wayresponsible for the debts, losses, obligations or duties of the Borrower.
     **Section 5. Events of Default.**The following are Events of Defaults:
          5.1. The Borrower fails to make a payment of interest on the Note when andas due.
          5.2. The Borrower fails to pay the principal of the Note when and as due.
          5.3. Any representation or warranty made by the Borrower in this Note orthe Warrant or any information contained in any certificate, report, financialstatement or other document delivered to the Lender by the Borrower containsany untrue statement of a material fact or omits to state a material factrequired by this Note or law to be stated therein or necessary to make thestatements therein, in light of the circumstances under which they were made,not misleading.
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          5.4. The Borrower fails to perform any of its obligations under or failsto comply with any covenant contained in the Note or the Warrant and suchfailure continues unremedied for a period of ten days.
          5.5. Any governmental body or officer or creditor of the Borrower seizes,takes possession of or collects (whether or not the Borrower resists oracquiesces in such seizure, taking or collection) any property of the Borrowerby any means, including, without limitation, execution, levy, sequestration,attachment, garnishment, replevin or self-help, unless such seizure, taking orcollection is vacated or the property is discharged within 30 days after theoccurrence thereof.
          5.6. One or more final judgments are entered against the Borrower for thepayment of money aggregating in excess of $50,000 and any one of such judgmentshas been outstanding for more than 30 days from the date of its entry and hasnot been discharged in full or stayed pending appeal.
          5.7. The Borrower:
                 5.7.1. makes an assignment for the benefit of creditors;
                 5.7.2. enters into any composition, compromise or arrangement with itscreditors;
                 5.7.3. generally does not pay its debts as such debts become due; or
                 5.7.4. conceals, removes, or permits to be concealed or removed, any partof its property, with intent to hinder, delay or defraud its creditors or anyof them, or makes or suffers a transfer of any of its property, fraudulentunder the provisions of any bankruptcy, fraudulent conveyance or similar law,or makes or suffers a transfer of its property to or for the benefit of acreditor at a time when other creditors similarly situated have not been paid.
          5.8. If:
                 5.8.1. a trustee, receiver, agent or custodian is appointed or authorizedto take charge of any property of the Borrower for the purpose of enforcing alien against such property or for the purpose of administering such propertyfor the benefit of the Borrower’s creditors;
                 5.8.2. an order (a) for relief against the Borrower is granted under Title11 of the United States Code or any similar law, (b) appointing a receiver,trustee, agent or custodian of the Borrower or any property of the Borrower or(c) providing for a composition, compromise or arrangement with the creditorsof the Borrower, is entered by any court or governmental body or officer;
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                 5.8.3. the Borrower files any pleading seeking (whether by formal actionor by the admission of the material allegations of a pleading or otherwise) anysuch appointment or order; or
                 5.8.4. (a) any action or proceeding seeking any such appointment or orderis commenced without the authority or consent of the Borrower and (b) (i) suchaction or proceeding is not dismissed within 30 days after its commencement or(ii) the Borrower does not diligently contest such action or proceeding.
          5.9. The Borrower fails to pay when and as due the principal of or anyinterest on any Indebtedness (as defined below), other than as evidenced bythis Note (assuming that all required notices have been properly given and allcorresponding grace periods, if any, have elapsed without cure by the Borrower)or any other event exists which, under the terms of any agreement or instrumentother than the Note, relates to any Indebtedness becoming, or becoming capableat such time of being declared, due and payable before it would otherwise havebeen due and payable. “Indebtedness” means, for the Borrower (a) allindebtedness or other obligations of the Borrower, for borrowed money or forthe deferred purchase price of property or services (except for unsecured tradepayables incurred in the ordinary course of business on normal and reasonableterms), (b) all indebtedness or other obligations of any other person forborrowed money or for the deferred purchase price of property or services, thepayment or collection of which the Borrower has guaranteed (except by reason ofendorsement for deposit or collection in the ordinary course of business) or inrespect of which the Borrower is liable, contingently or otherwise, including,without limitation, liable by way of agreement to purchase, to provide fundsfor payment, to supply funds to or otherwise to invest in such other person, orotherwise to assure a creditor against loss, (c) all indebtedness or otherobligations of any other person for borrowed money or for the deferred purchaseprice of property or services secured by (or for which the holder of suchindebtedness has an existing right, contingent or otherwise, to be secured by)any lien upon or in property (including, without limitation, accounts andcontract rights) owned by the Borrower whether or not the Borrower has assumedor become liable for the payment of such indebtedness or other obligations, (d)all direct or contingent obligations of the Borrower in respect of letters ofcredit and (e) all lease obligations which have been or should be, inaccordance with generally accepted accounting principles, capitalized on thebooks of the Borrower as lessee.
          5.10. A “Material Adverse Change” occurs. “Material Adverse Change” is:(a) a material adverse change in the business, operations, or condition(financial or otherwise) of the Borrower; or (b) a material impairment of theprospect of repayment of any portion of the Debt, Borrower’s ability to complywith its obligations under the Warrant or Lender’s ability to sell the sharesissued under the Warrant and satisfy the amount due hereunder.
     **Section 6. Default Remedies.**
          6.1. **Acceleration.**If an Event of Default exists, the outstanding unpaidprincipal balance of this Note, together with all interest accrued thereon andany unpaid fees, expenses or other amounts due to the Lender under this Note,is immediately due and payable, without presentment, demand, protest or noticeof any kind, all of which are hereby waived.
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          6.2. **Remedies Cumulative.**The Lender may exercise the remedies providedin the Warrant upon the occurrence of an Event of Default. No right or remedyconferred upon the Lender by this Note or legally available to the Lender if anEvent of Default exists is intended to be exclusive of any other right orremedy, and each such right or remedy is cumulative and in addition to everyother such right or remedy.
          6.3. **Force Majeure.**The existence of an Event of Default is not affectedby the reason for its occurrence, even if the Event of Default was not causedby a voluntary act of the Borrower or was caused by a natural disaster or forcemajeure.
          6.4. **Deficiency.**If Lender exercises its remedies under the Warrant andis unable to satisfy the entire amount due hereunder from the proceeds derivedfrom a sale of the shares under the Warrant, such exercise shall not precludeLender from collecting a deficiency from Borrower.
     **Section 7. Miscellaneous.**
          7.1. **Modifications and Waivers.**No modification or waiver of any term orprovision contained in this Note and no consent to any departure by theBorrower therefrom shall in any event be effective unless the same is inwriting and signed by the waiving party. Such waiver or consent shall beeffective only in the specific instance and for the purpose for which it isgiven.
          7.2. **Notices.**Except where specific provisions of this Note provide forsome other form of notice or require receipt as a condition of notice, anyconsent, waiver, notice, demand or other instrument required or permitted to begiven under this Note shall be deemed to have been properly received when inwriting and delivered in person or sent by certified or registered UnitedStates mail, return receipt requested, postage prepaid, addressed, if to theBorrower: 1240 East Campbell Road, Richardson, Texas 75081, Attention: RobertP. Capps, Executive Vice-President; and if to the Lender: Zurich AmericanInsurance Company, Attention: Specialty Claims — James Mandarino. Any partymay change its address for notices by notice in the manner set forth above.
          7.3. **Partial Invalidity.**If any term or provision of this Note or theapplication thereof to any person, firm or corporation or any circumstance,shall be invalid or unenforceable, the remainder of this Note, or theapplication of such term or provision to any person, firm or corporation or anycircumstances, other than those as to which it is held invalid, shall both beunaffected thereby and each term or provision of this Note shall be valid andbe enforced to the fullest extent permitted by law.
          7.4. **No Implied Rights or Waivers.**No notice to or demand on the Borrowerin any case shall entitle the Borrower to any other or further notice or demandin the same, similar or other circumstances. Neither any failure nor any delayon the part of the Lender in exercising any right, power or privilege hereundershall operate as a waiver thereof, nor shall a single or partial exercisethereof preclude any other or further exercise of the same or the exercise
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of any other right, power or privilege. The Borrower hereby waivespresentment, demand, notice, protest and all other demands and notices inconnection with the delivery, acceptance, performance, default or enforcementof this Note.
          7.5. **Successors and Assigns.**This Note shall be binding upon and inure tothe benefit of the respective heirs, successors and assigns of the Lender andthe Borrower; provided that the Borrower shall have no right to assign ortransfer its rights under this Note voluntarily or by operation of law withoutfirst obtaining the written consent of the Lender, and any attempted assignmentor transfer in the absence of such consent shall be void and of no effect.
          7.6. **Expenses.**All fees, costs and expenses, including reasonable feesand expenses of legal counsel, incurred by the Lender in connection with thepreparation and enforcement of this Note or any other instruments, documents,or agreements to be delivered pursuant hereto or in connection herewith, shallbe paid by the Borrower to the Lender on demand.
          7.7. **Survival of Provisions.**All covenants, agreements, representations,warranties and statements made in this Note or in any certificate, statement,or other instrument given pursuant to this Note shall survive the execution anddelivery to the Lender of this Note and the making of the Debt and shallcontinue in full force and effect so long as any obligation of the Borrowerunder this Note is outstanding and unpaid.
          7.8. **Captions.**The captions and section numbers appearing in this Noteare inserted only as a matter of convenience; they do not define, limit,construe or describe the scope or intent of the provisions of this Note.
          7.9. **Governing Law.**This Note shall be governed and construed by theprovisions hereof and in accordance with the laws of the State of Ohioapplicable to instruments to be performed in the State of Ohio without regardto choice of law principles.
          7.10. **Consent.**The Borrower hereby irrevocably and unconditionallyconsents to submit to the exclusive jurisdiction of the courts of the State ofOhio and of the United States of America located in the City of Columbus, Ohiofor any actions, suits or proceedings arising out of or relating to this Noteand the transactions contemplated hereby (and the Borrower agrees not tocommence any action, suit or proceeding relating thereto except in suchcourts), and further agrees that service of any process, summons, notice ordocument by U.S. certified or registered mail, return receipt requested, to theaddress set forth in Section 7.2 shall be effective service of process for anyaction, suit or proceeding brought against the Borrower in any such court. TheBorrower hereby irrevocably and unconditionally waives any objection to thelaying of venue of any action, suit or proceeding arising out of this Note, orthe transactions contemplated hereby, in the courts of the State of Ohio or theUnited States of America located in the City of Columbus, Ohio, and herebyfurther irrevocably and unconditionally waives and agrees not to plead or claimin any such court that any such action, suit or proceeding brought in any suchcourt has been brought in an inconvenient forum.
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          7.11. **Joint Preparation.**This Note is to be deemed to have been preparedjointly by the Borrower and the Lender, and any uncertainty or ambiguityexisting herein shall not be interpreted against either party, but shall beinterpreted according to the rules for the interpretation of arm’s lengthagreements.
          7.12. **Third Parties.**Nothing herein expressed or implied is intended orshall be construed to confer upon or give any person other than the partieshereto and their successors or assigns, any rights or remedies under or byreason of this Note.
          7.13. **Warrant of Attorney.**The Borrower hereby authorizes any attorney atlaw to appear for the Borrower in an action on this Note, at any time after thesame becomes due and payable, as herein provided, in any court of record in orof the State of Ohio, or elsewhere, to waive the issuing and service of processagainst the Borrower and to confess judgment in favor of the legal holder ofthis Note against the Borrower for the amount that may be due, with interest atthe rates herein mentioned and cost of suit, and to waive and release allerrors in said proceedings and judgment, and all petitions in error, and rightof appeal from the judgment rendered.
          7.14. **Waiver of Jury Trial.**THE LENDER AND THE BORROWER HEREBYVOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURYPARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OROTHERWISE, BETWEEN THE LENDER AND THE BORROWER ARISING OUT OF, IN CONNECTIONWITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEBORROWER AND THE LENDER IN CONNECTION WITH THIS NOTE, THE WARRANT, OR ANY OTHERAGREEMENT OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITHOR THE TRANSACTIONS RELATED HERETO OR THERETO. THIS PROVISION IS A MATERIALINDUCEMENT TO THE LENDER TO ENTER INTO THE FINANCING TRANSACTIONS WITH THEBORROWER. IT SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THELENDER’S ABILITY TO PURSUE ITS REMEDIES INCLUDING, BUT NOT LIMITED TO, ANYCONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN THIS NOTE, THEWARRANT OR ANY OTHER DOCUMENT RELATED HERETO OR THERETO.
     **Section 8. Use of Proceeds.**Borrower has directed Lender to pay theproceeds of this Note to the plaintiffs in those certain proceedings known asRalph R. Umsted, Jr. v. Intelect Network Technologies Company, et al., Case No.3-99CV2604-H, United States District Court, Northern District of Texas,pursuant to that certain Settlement and Release Agreement between Borrower andLender relating to such proceedings and the Directors and Officers Liabilityand Reimbursement Excess Policy No. DOC 294013801 previously issued by Lenderto Borrower. Borrower hereby authorizes and directs Lender to issue theproceeds of the Debt directly to such plaintiffs in accordance with the termsof such Settlement and Release Agreement.
     This Note was executed in Columbus, Ohio as of the date first writtenabove.
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**WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURTTRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOUWITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECTFROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FORRETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,OR ANY OTHER CAUSE.**      TERAFORCE TECHNOLOGY CORPORATION