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                                                                    EXHIBIT 10.1


                                CREDIT AGREEMENT


              This credit agreement is made and entered into as of the 2nd day
of October, 1996, by and between U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION,
a national banking association ("U. S. Bank") and GARGOYLES, INC., a Washington
corporation ("Borrower"). Words and phrases with initial capitalized letters
have the meanings assigned in Article I of this Agreement.


                                    RECITALS:

              A. U. S. Bank is a national banking association with its principal
place of business in Seattle, Washington. Borrower is a corporation formed and
existing under the laws of the state of Washington and is engaged in the
business of designing, manufacturing, and marketing premium sunglasses and
related products.

              B. Borrower has requested U. S. Bank to extend to Borrower a
revolving line of credit in the amount of $10,000,000 and a nonrevolving
equipment line of credit in the amount of $5,000,000.

              C. U. S. Bank is ready, able, and willing to extend such credit
facilities to Borrower on the terms and conditions of this Agreement.

              NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:


II.                                DEFINITIONS

              1  Terms Defined. As used herein, the following terms have the
meanings set forth below:

              "Affiliate" means a Person that now or hereafter, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with Borrower. A Person shall be deemed to control a
corporation or partnership if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management of such corporation or
partnership, whether through the ownership of voting securities, by contract, or
otherwise.

              "Agreement" means this credit agreement and includes all
modifications of this Agreement.

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              "Applicable Law" means all applicable provisions and
requirements of all (a) constitutions, statutes, ordinances, rules, regulations,
standards, orders, and directives of any Governmental Bodies, (b) Governmental
Approvals, and (c) orders, decisions, decrees, judgments, injunctions, and writs
of all courts and arbitrators, whether such Applicable Laws presently exist, or
are modified, promulgated, or implemented after the date hereof.

              "Borrower" means Gargoyles, Inc., a Washington corporation, and
its successors.

              "Borrowing Notice" has the meaning set forth in Section 4.12(a)
herein.

              "Business Day" means any day except a Saturday, Sunday, or other
day on which national banks in the state of Washington are authorized or
required by law to close.

              "Capital Expenditures" means the aggregate amount of capital
expenditures of Borrower as determined in accordance with generally accepted
accounting principles, including leases that are or should be capitalized
pursuant to generally accepted accounting principles.

              "Capital Ratio" means the ratio of Borrower's Indebtedness (less
contingent liabilities that have not historically been reflected on Borrower's
balance sheet as a liability) to Tangible Net Worth.

              "Cash Flow" means Borrower's net income (after income taxes) for
the relevant period, subject to the following adjustments:

              (a) There shall be added to net income: (i) charges against income
         consisting of depreciation of real and personal property, amortization,
         write-off of goodwill, and other intangibles, (ii) increases in
         deferred tax accounts, and (iii) interest expense; and


              (b) There shall be deducted from net income: (i) revenues derived
         from sources other than continuing operations, such as net gains from
         sales of capital assets, restoration to contingency reserves,
         collection of proceeds of life insurance policies, write-up of assets,
         or gains from the sale, acquisition, or retirement of securities, (ii)
         cash paid by Borrower during the relevant period for Capital
         Expenditures, which cash does not constitute proceeds of loans made to
         Borrower, and (iii) dividends and distributions paid to Borrower's
         shareholders.

              "Claims" has the meaning set forth in Section 10.13 herein.

              "Collateral" means all the property, real or personal, tangible or
intangible, now owned or hereafter acquired, in which U. S. Bank has been or is
to be granted a security


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interest by Borrower or any other Person, to secure the Indebtedness of Borrower
to U. S. Bank.

              "Commitment Period" has the meaning set forth in Section 2.1
herein.

              "Debt Service" means, as of the last day of the relevant period,
the current portion of long-term debt (excluding the amount outstanding on the
Revolving Loan), plus interest expense for the relevant period.

              "Default" means any condition or event that constitutes an Event
of Default or with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.

              "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.

              "Equipment Line" has the meaning set forth in Section 3.1 herein
and includes all renewals, replacements, and amendments to the Equipment Line.

              "Equipment Loan" has the meaning set forth in Section 3.1 herein
and includes all renewals, replacements, and amendments to the respective
Equipment Loan.

              "Equipment Note" has the meaning set forth in Section 3.3 herein
and includes all renewals, replacements, and amendments to the respective
Equipment Note.

              "Event of Default" has the meaning set forth in Section 9.1
herein.

              "Funded Debt" means, as of the last day of the relevant period,
all of Borrower's long-term Indebtedness (excluding the amount outstanding on
the Revolving Loan), including the current portion thereof and including
capitalized leases.

              "Funded Debt Coverage Ratio" means the ratio of (a) Funded Debt to
(b) Cash Flow (calculated for purposes of this covenant before incomes taxes),
plus cash paid during the relevant period for Capital Expenditures and
dividends.

              "Funding" means any disbursement of the proceeds of the Revolving
Loan or any Equipment Loan, or the issuance or renewal of any Letter of Credit.

              "Governmental Approval" means any authorization, consent,
approval, certificate of compliance, license, permit, or exemption from,
contract with, registration or filing with, or report or notice to, any
Governmental Body required or permitted by Applicable Law.

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              "Governmental Body" means the government of the United States, any
state or any foreign country, or any governmental or regulatory official, body,
department, bureau, subdivision, agency, commission, court, arbitrator, or
authority, or any instrumentality thereof, whether federal, state, or local.

              "Hazardous Materials" means oil or petrochemical products, PCB's,
asbestos, urea formaldehyde, flammable explosives, radioactive materials,
hazardous wastes, toxic substances, or related materials including but not
limited to substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," or "toxic substances"
under any Hazardous Materials Laws.

              "Hazardous Materials Claims" means (a) enforcement, cleanup,
removal, or other regulatory actions instituted, completed, or threatened by any
Governmental Body pursuant to any applicable Hazardous Materials Laws; and (b)
claims made or threatened by any third party against Borrower or its property
relating to damage, contribution, cost recovery, compensation, loss, or injury
resulting from Hazardous Materials.

              "Hazardous Materials Laws" means all Applicable Laws pertaining to
Hazardous Materials.

              "H.S.C." means H.S.C., Inc., a Washington corporation, and its
successors.

              "IBOR Borrowing Rate" means (a) for the Revolving Loan, the IBOR
Rate plus 2 percent per annum, and (b) for the Equipment Loans, the IBOR Rate
plus 2.1 percent per annum.

              "IBOR Rate" means for any Interest Period, the rate per annum
equal to the arithmetic average (rounded upward to the nearest 1/16 of 1
percent) of the rates per annum determined by U. S. Bank as of the times
specified in Section 4.12(a) herein on the date two Business Days prior to the
first day of the applicable Interest Period as the rates offered to U. S. Bank
by three Eurodollar money market dealers in such Eurodollar market as may be
selected by U. S. Bank for U.S. dollar deposits to be delivered on the first day
of such Interest Period for the number of months therein; provided, however,
that U. S. Bank's IBOR Rate shall be adjusted to take into account the maximum
reserves required to be maintained for Eurocurrency liabilities by banks during
each such Interest Period as specified in Regulation D of the Board of Governors
of the Federal Reserve System or any successor regulation.

              "IBOR Rate Borrowing" means any Funding or any portion of the
applicable loan for which Borrower has elected the IBOR Borrowing Rate to apply.
The minimum amount of each IBOR Rate Borrowing shall be $1,000,000 and may only
be in integrals of $100,000 in excess thereof.


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              "Indebtedness" means all items that in accordance with generally
accepted accounting principles would be included in determining total
liabilities as shown on the liabilities side of the balance sheet as of the date
that "Indebtedness" is to be determined and in any event includes liabilities
secured by any mortgage, deed of trust, pledge, lien, or security interest on
property owned or acquired, whether or not such a liability has been assumed,
and the guaranties, endorsements (other than for collection in the ordinary
course of business), and other contingent obligations with regard to the
obligations of other Persons.

              "Interest Period" means (a) as to any IBOR Rate Borrowing under
the Revolving Loan, a period of one, two, or three months commencing on the date
the IBOR Borrowing Rate becomes applicable thereto, and (b) as to any IBOR Rate
Borrowing under the Equipment Loans, a period of three, six, or 12 months
commencing on the date the IBOR Borrowing Rate becomes applicable thereto;
provided however, that: (x) no Interest Period shall be selected which would
extend beyond the maturity date of the applicable loan; (y) any Interest Period
which would otherwise expire on a day which is not a Business Day, shall be
extended to the next succeeding Business Day, unless the result of such
extension would be to extend such Interest Period into another calendar month,
in which event the Interest Period shall end on the immediately preceding
Business Day; and (z) any Interest Period that begins on the last Business Day
of a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of a calendar month.

              "Letters of Credit" has the meaning set forth in Section 2.7
herein and includes all renewals, replacements, and amendments to the Letters of
Credit.

              "Loans" means the Revolving Loan and the Equipment Loans, as well
as all renewals, replacements, and modifications thereof.

              "Loan Documents" means this Agreement, the Notes, and the Security
Agreements, together with all other agreements, instruments, and documents
arising out of or relating to this Agreement or the Loans, and includes all
renewals, replacements, and amendments thereof.

              "Notes" means the Revolving Note and the Equipment Notes, as well
as all renewals, replacements, and amendments thereof.

              "Original Credit Agreement" means that certain credit agreement
dated as of March 22, 1995, and entered into between U. S. Bank and Borrower,
together with all amendments to such credit agreement.

              "Original Credit Agreement Amendment" means that certain third
amendment to credit agreement dated as of February 13, 1996, and entered into
between U. S. Bank and Borrower.

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              "Participant" means any financial institution to which U. S. Bank
sells a participation in any of the Loans.

              "Permitted Liens" has the meaning set forth in Section 7.2 herein.

              "Person" means any individual, partnership, joint venture, firm,
corporation, association, limited liability company, trust, or other enterprise
or any Governmental Body.

              "Plan" means an employee pension benefit plan that is covered by
ERISA or subject to the minimum funding standards under Section 412 of the
Internal Revenue Code of 1986 and is either (a) maintained by Borrower or any
Affiliate for employees of Borrower or any Affiliate or (b) maintained pursuant
to a collective bargaining agreement or any other arrangement under which more
than one employer makes contributions and to which Borrower or any Affiliate is
then making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions.

              "Prime Borrowing Rate" means (a) for the Revolving Loan, the Prime
Rate, and (b) for the Equipment Loans, the Prime Rate plus .25 percent per
annum.

              "Prime Rate" means that rate of interest announced by U. S. Bank
from time to time as its prime rate. The Prime Rate is not the lowest rate of
interest charged by U. S. Bank to any classification of U. S. Bank customers.
For purposes of this Agreement, each time the Prime Rate changes, a
contemporaneous change shall occur in the interest rate charged to Borrower on
any Loans then bearing interest at a rate indexed to the Prime Rate, effective
upon the announcement or publication of any such change in rate. U. S. Bank
shall not be obligated to notify Borrower of any change in the Prime Rate;
however, the Prime Rate is available upon inquiry of U. S. Bank.

              "Prime Rate Borrowing" means any Funding or portion of the
applicable loan pursuant to the terms of this Agreement that bears interest at
the Prime Borrowing Rate.

              "Revolving Loan" has the meaning set forth in Section 2.1 herein
and includes all renewals, replacements, and amendments of the Revolving Loan.

              "Revolving Note" has the meaning set forth in Section 2.3 herein
and includes all renewals, replacements, and amendments of the Revolving Note.

              "Security Agreements" has the meaning set forth in Section 5.2(a)
herein and includes all renewals, replacements, and amendments of the Security
Agreements. 

              "Tangible Net Worth" means Borrower's net worth determined in
accordance with generally accepted accounting principles, less (a) the amount of
all deferred charges; 

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(b) all intangible assets including but not limited to goodwill, licenses,
franchises, trademarks, trade names, service marks, patents, and copyrights; (c)
unamortized debt discount and expense; (d) the cost of capital stock of an
Affiliate; (e) any Indebtedness owing to Borrower by an Affiliate thereof,
unless such Indebtedness arose in connection with the sale or lease of goods or
property in the ordinary course of business or the performance of services in
the ordinary course of business and would otherwise constitute current assets in
accordance with generally accepted accounting principles; and (f) the amount of
any write-up in book value of the assets of Borrower resulting from any
revaluation of assets.

              "U. S. Bank" means U. S. Bank of Washington, National Association,
a national banking association, and its successors and assigns.

              "Working Capital" means Borrower's current assets, less Borrower's
current liabilities (including the amount outstanding on the Revolving Loan).

              2.   Accounting Terms. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with generally accepted accounting
principles consistently applied. Unless otherwise specified herein, all
financial figures and calculations shall be determined on a consolidated basis
in accordance with generally accepted accounting principles.

              3.   Rules of Construction. Unless the context otherwise requires,
the following rules of construction apply to the Loan Documents:

              (a)  Words in the singular include the plural and in the plural
include the singular.

              (b)  Provisions of the Loan Documents apply to successive events
and transactions.

              (c)  In the event of any inconsistency between the provisions of
this Agreement and the provisions of any of the other Loan Documents, the
provisions of this Agreement govern.

              4.   Incorporation of Recitals and Exhibits. The foregoing
recitals are incorporated into this Agreement by reference. All references to
"Exhibits" contained herein are references to exhibits attached hereto, the
terms and conditions of which are made a part hereof for all purposes.

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III.                             REVOLVING LOAN

              1    Loan Commitment.

              (a)  Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make Fundings to
Borrower from time to time during the period ending September 30, 1998
("Commitment Period"), but such Fundings (together with any outstanding Letters
of Credit) shall not exceed, in the aggregate principal amount at any one time
outstanding, $10,000,000 (the "Revolving Loan"). Borrower may borrow, repay, and
reborrow hereunder either the full amount of the Revolving Loan or any lesser
sum.

              (b)  Borrower agrees that for not fewer than 30 consecutive days
during each 12-month period beginning on October 1 of each year during the term
of the Revolving Loan (commencing October 1, 1996), the outstanding principal
balance of the Revolving Loan shall be $-0-.

              2    Use of Proceeds. The proceeds of the Revolving Loan shall be
used by Borrower for short-term general corporate purposes.

              3    Revolving Note. The Revolving Loan shall be evidenced by a
promissory note in the form attached hereto as Exhibit A (the "Revolving Note").

              4    Interest Rates. Each time Borrower requests a Funding, at any
time prior to the expiration of each Interest Period for any IBOR Rate
Borrowing, and at any other time with respect to Prime Rate Borrowings, so long
as there exists no Event of Default, Borrower may elect either the Prime
Borrowing Rate or the IBOR Borrowing Rate to apply to such Funding, such
existing IBOR Rate Borrowing at the end of the Interest Period, or such existing
Prime Rate Borrowing. In the event Borrower does not specify an interest rate
election as provided for herein for a requested Funding or prior to the end of
any Interest Period with respect to an existing IBOR Rate Borrowing, then such
Funding or existing IBOR Rate Borrowing at the expiration of such Interest
Period shall be deemed to constitute a Prime Rate Borrowing.

              5    Repayment.

              (a)  Commencing on the first day of the first month following the
initial Funding under the Revolving Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on all Prime Rate Borrowings under the Revolving Loan.

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              (b)  Borrower shall pay U. S. Bank an amount equal to all accrued
interest on all IBOR Rate Borrowings under the Revolving Loan on the last day of
each respective Interest Period.

              (c)  Borrower shall pay U. S. Bank all outstanding principal,
accrued interest, and other charges with respect to the Revolving Loan on the
last day of the Commitment Period.

              6    Unused Portion Fee. Borrower agrees to pay U. S. Bank a fee 
for the Revolving Loan in an amount equal to .25 percent per annum of the
average unused portion of the Revolving Loan. Such fee shall accrue from and
include the date of this Agreement throughout the term of the Revolving Loan and
shall be payable quarterly in arrears on the last day of February, May, August,
and November, and on any day that the Revolving Loan is paid in full and U. S.
Bank's commitment to make further Fundings under the Revolving Loan has expired
or terminated. Computations of such fee shall be based on an 360-day year for
the actual number of days elapsed.

              7    Letters of Credit.

              (a)  Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower in forms acceptable to U. S. Bank from time to time during the
Commitment Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of outstanding
Letters of Credit shall not exceed, at any one time, $1,500,000. The maximum
aggregate amount of outstanding Letters of Credit plus the aggregate outstanding
amount of principal and interest on the Revolving Loan shall not exceed, at any
one time, $10,000,000.

              (b)  Prior to issuing any Letter of Credit, Borrower shall execute
and deliver to U. S. Bank a letter of credit application in U. S. Bank's then
customary form, and such other documents as U. S. Bank customarily requests in
connection with the issuance of letters of credit at that time.

              (c)  Borrower shall pay to U. S. Bank a fee for the issuance of
each Letter of Credit in an amount equal to U. S. Bank's standard fee at the
time of issuance, plus U. S. Bank's customary fees and handling charges. Such
fees may be paid to U. S. Bank by U. S. Bank's making a Funding under the
Revolving Loan.

              (d)  Any draws on Letters of Credit issued by U. S. Bank pursuant
to the terms of this Agreement shall be paid by Borrower immediately upon
receipt of notice from U. S. Bank of such draw. So long as Borrower meets the
conditions to Fundings under the Loans, draws on Letters of Credit may be paid
from Fundings under the Revolving Loan. In

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the event Borrower fails to make such immediate repayment, U. S. Bank shall be
authorized to consider any such draws as Fundings under the Revolving Loan. In
the event Borrower is in Default under the terms of this Agreement on the date
of any such draw, such draw will nevertheless constitute a Funding on the
Revolving Loan and shall not constitute a waiver of any of U. S. Bank's rights
hereunder or under any of the other Loan Documents. In the event that any
Letters of Credit are outstanding upon the expiration of the Commitment Period
for the Revolving Loan, Borrower shall, upon U. S. Bank's request, deposit with
U. S. Bank in a special demand deposit account set up by Borrower, an amount of
cash necessary to cover all outstanding Letters of Credit. Borrower hereby
grants U. S. Bank a security interest in any such demand deposit account and
gives U. S. Bank the authority to debit such account upon a draw on outstanding
Letters of Credit in an amount equal to the amount paid by U. S. Bank to the
beneficiaries of such Letters of Credit. In the event Borrower does not
establish such an account, or in the event the amount of funds in such account
are insufficient to satisfy the obligations of U. S. Bank under all outstanding
Letters of Credit, then all payments made by U. S. Bank under such Letters of
Credit shall automatically constitute Fundings under the Revolving Loan,
notwithstanding the fact that the Commitment Period for the Revolving Loan has
expired. U. S. Bank shall maintain possession of the Revolving Note until all
Letters of Credit have either expired, been canceled, or been paid by U. S. Bank
and U. S. Bank has been reimbursed in full.


IV.                              EQUIPMENT LINE

              1    Loan Commitment. Subject to and upon the terms and conditions
set forth herein and in reliance upon the representations, warranties, and
covenants of Borrower contained herein or made pursuant hereto, U. S. Bank will
make available to Borrower a $5,000,000 equipment nonrevolving line of credit
during the Commitment Period ("Equipment Line"). Each individual Funding under
the Equipment Line shall constitute a separate loan ("Equipment Loan"). The
aggregate principal amount of all Equipment Loans shall not exceed $5,000,000.

              2    Use of Proceeds. The proceeds of the Equipment Line shall be
used by Borrower solely to provide financing for equipment acquisitions.

              3    Equipment Note. Each Equipment Loan shall be evidenced by a
promissory note in the form attached hereto as Exhibit B (the "Equipment Note").

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              4    Interest Rates. Each time Borrower requests a Funding, at any
time prior to the expiration of each Interest Period for any IBOR Rate
Borrowing, and at any other time with respect to Prime Rate Borrowings, so long
as there exists no Event of Default, Borrower may elect either the Prime
Borrowing Rate or the IBOR Borrowing Rate to apply to such Funding, such
existing IBOR Rate Borrowing at the end of the Interest Period, or such existing
Prime Rate Borrowing. In the event Borrower does not specify an interest rate
election as provided for herein for a requested Funding or prior to the end of
any Interest Period with respect to an existing IBOR Rate Borrowing, then such
Funding or existing IBOR Rate Borrowing at the expiration of such Interest
Period shall be deemed to constitute a Prime Rate Borrowing.

              5    Repayment.

              (a)  Commencing on the first day of the first month following the
Funding of each Equipment Loan and on the first day of each month thereafter,
Borrower shall pay U. S. Bank an amount equal to all accrued interest on all
Prime Rate Borrowings under such Equipment Loan.

              (b)  Borrower shall pay U. S. Bank an amount equal to all accrued
interest on all IBOR Rate Borrowings under each Equipment Loan on the last day
of each respective Interest Period; provided, however, that if any Interest
Period is longer than three months, Borrower shall also pay U. S. Bank an amount
equal to all accrued interest on such IBOR Rate Borrowing on the last day of
each three-month period during such Interest Period.

              (c)  On March 31, June 30, September 30, and December 31 of each
year during the term of each Equipment Loan, Borrower shall pay to U. S. Bank an
amount equal to one twentieth of the initial principal amount of each Equipment
Loan, commencing on the first such date subsequent to the Funding of such
Equipment Loan.

              (d)  Borrower shall pay U. S. Bank all outstanding principal,
accrued interest, and other charges with respect to each Equipment Loan five
years from the date of each respective Equipment Note, but in any case, no later
than September 30, 2003.

              6    Equipment Line Fees.

              (a)  Concurrently with the execution of this Agreement, Borrower
shall pay to U. S. Bank a nonrefundable fee for the Equipment Line in the amount
of $25,000.

              (b)  On October 1 of each year, commencing October 1, 1997,
Borrower shall pay U. S. Bank a nonrefundable fee for the Equipment Loans in an
amount equal to .125 percent of the outstanding principal balance of Equipment
Loans as of the date such fee is payable.


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              7    Limitation On Advances. The initial principal amount of each
Equipment Loan shall not exceed an amount equal to 80 percent of the cost of
equipment financed by the proceeds of such Equipment Loan.



V.                 GENERAL PROVISIONS APPLICABLE TO THE LOANS

              1    Manner of Payment. All sums payable to U. S. Bank pursuant to
this Agreement shall be paid directly to U. S. Bank in immediately available
United States funds. Whenever any payment to be made hereunder or on any of the
Notes becomes due and payable on a day that is not a Business Day, such payment
may be made on the next succeeding Business Day and such extension of time shall
in such case be included in computing interest on such payment.

              2    Statements. U. S. Bank shall send Borrower statements of all
amounts due hereunder; the statements shall be considered correct and
conclusively binding, absent manifest error, on Borrower unless Borrower
notifies U. S. Bank to the contrary within 30 days of receipt of any statement
that Borrower claims to be incorrect. Borrower agrees that accounting entries
made by U. S. Bank with respect to Borrower's loan accounts shall constitute
evidence of all Fundings made under and payments made on any of the Loans.
Without limiting the methods by which U. S. Bank may otherwise be entitled by
Applicable Law to make demand for payment of the Loans upon Borrower, Borrower
agrees that any statement, invoice, or payment notice from U. S. Bank to
Borrower with respect to any principal or interest obligation of Borrower to U.
S. Bank shall be deemed to be a demand for payment in accordance with the terms
of such statement, invoice, or payment notice. Under no circumstances shall a
demand by U. S. Bank for partial payment of principal or interest or both be
construed as a waiver by U. S. Bank of its right thereafter to demand and
receive payment (in part or in full) of any remaining principal or interest
obligation.

              3    Book Entry Loan Account. U. S. Bank shall establish a book 
entry loan account for each of the Loans in which U. S. Bank will make debit
entries of all Fundings pursuant to the terms of this Agreement. U. S. Bank will
also record in the applicable loan account, in accordance with customary banking
practices, all interest and other charges, expenses, and other items properly
chargeable to Borrower, if any, together with all payments made by Borrower on
account of the Indebtedness evidenced by Borrower's respective loan accounts and
all other sums credited to the respective loan accounts. The debit balance of
Borrower's respective loan accounts shall reflect the amount of Borrower's
Indebtedness to U. S. Bank from time to time by reason of advances, charges,
payments, or credits.

              4    Computations of Interest. All computations of interest shall
be based on a 360-day year for the actual number of days elapsed.


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              5    Default Interest. Upon the occurrence and during the 
continuance of any Event of Default, U. S. Bank may, at its option, raise the
interest rate charged on the Loans to a rate of up to the applicable Loan rate
plus 4 percent per annum from the date of the occurrence of the Event of Default
until the Event of Default is cured or waived by U. S. Bank or, absent cure or
waiver, until the Loans are repaid in full.

              6    Maximum Interest Rate. Notwithstanding any provision 
contained herein or in the Notes, the total liability of Borrower for payment of
interest pursuant hereto, including late charges, shall not exceed the maximum
amount of interest permitted by Applicable Law to be charged, collected, or
received from Borrower; and if any payments by Borrower include interest in
excess of that maximum amount, U. S. Bank shall apply the excess first to reduce
the unpaid balance of the Loans, then to reduce the balance of any other
Indebtedness of Borrower to U. S. Bank. If there is no such Indebtedness, the
excess shall be returned to Borrower.

              7    Late Charge. If any payment of principal or interest required
under any of the Loans is 15 days or more past due, Borrower will be charged a
late charge of 5 percent of the delinquent payment or $5, whichever is greater,
for each such late payment. The 15 day period provided for herein shall not be
construed as a waiver of any Default or Event of Default resulting from any late
payment under any of the Loans.

              8    Prepayments. Prepayments of all or any portion of Prime Rate
Borrowings shall not be subject to a prepayment charge. In the event Borrower
prepays all or any portion of any IBOR Rate Borrowing prior to the expiration of
the applicable Interest Period, Borrower shall pay to U. S. Bank a yield
maintenance charge in an amount calculated pursuant to the formula set forth in
Exhibit C. All prepayments shall be applied to the Loans being prepaid in the
inverse order of maturity.

              9    Extensions, Renewals, and Modifications. Any extensions, 
renewals, and modifications of the Loans shall be governed by the terms and
conditions of this Agreement and the other Loan Documents unless otherwise
agreed to in writing by U. S. Bank and Borrower.

              10   Basis for Determining Interest Rate Inadequate or Illegal 

              (a)  U. S. Bank's obligation to maintain IBOR Rate Borrowings 
shall be suspended upon U. S. Bank's giving notice to Borrower that it shall be
against Applicable Law or impossible for U. S. Bank to maintain IBOR Rate
Borrowings until U. S. Bank notifies Borrower that the circumstances giving rise
to the suspension no longer exist.

              (b)  After the date of this Agreement, if adoption of any
Applicable Law or any change therein or any change in the interpretation or
administration thereof by any Governmental Body, central bank, or comparable
agency charged with the interpretation or 

                                      -13-
<PAGE>   14
administration thereof, or if compliance by U. S. Bank with any request or
directive (whether or not having the force of Applicable Law) of any such
Governmental Body, central bank, or comparable agency makes it against
Applicable Law or impossible for U. S. Bank to maintain IBOR Rate Borrowings,
U.S. Bank shall immediately give notice thereof to Borrower.

              (c)  Upon notice to Borrower provided for in Section 4.10(a) or 
(b) herein, all IBOR Rate Borrowings shall automatically convert to Prime Rate
Borrowings.

              (d)  If U. S. Bank notifies Borrower that the circumstances giving
rise to the suspension of IBOR Rate Borrowings no longer apply, then the
interest rate election set forth in Sections 2.4 and 3.4 shall again be
effective on the date U. S. Bank provides such notice to Borrower.

              11   Interest Cost. If the revision of Regulation D announced by 
the Board of Governors of the Federal Reserve Board, or if the adoption of any
Applicable Law or any change therein or any change in the interpretation or
administration thereof by any Governmental Body, central bank, or comparable
agency charged with the interpretation or administration thereof, or if
compliance by U. S. Bank with any request or directive (whether or not having
the force of Applicable Law) of any such Governmental Body, central bank, or
comparable agency:

              (a)  Shall subject U. S. Bank to any tax, duty, or other charge
resulting from all or any portion of the Loans bearing interest at the IBOR
Borrowing Rate, or shall change the basis of taxation of payments to U. S. Bank
of the principal of or interest on the Loans, or any portion thereof, with
interest accruing at the IBOR Borrowing Rate or any other amount due under this
Agreement with regard to the Loans with interest bearing at the IBOR Borrowing
Rate (except for changes in the rate of tax on the overall net income of U. S.
Bank imposed by the jurisdiction in which U. S. Bank's principal executive
office lies); or

              (b)  Shall impose or modify any reserve (including but not limited
to any reserve imposed by the Board of Governors of the Federal Reserve System),
special deposit, or similar requirement against assets of, deposits with, or for
the account of, or credit extended by U. S. Bank or shall impose on U. S. Bank
any other condition affecting the IBOR Rate Borrowings under the Loans;

and the result of any of the foregoing is to increase the cost to U. S. Bank of
maintaining the IBOR Rate Borrowings or to reduce the return of U. S. Bank under
this Agreement; then, from time to time, within ten days after demand by U. S.
Bank, Borrower shall pay to U. S. Bank such additional amount or amounts as will
compensate U. S. Bank for such increase in cost or reduction in return.

                                      -14-
<PAGE>   15
              12   Fundings

              (a)  Borrower shall give U. S. Bank notice (either in writing or
orally) for each Prime Rate Borrowing and shall give U. S. Bank two Business
Days prior written notice for each IBOR Rate Borrowing (between 8 a.m. and 12
noon Seattle, Washington time). Each such notice ("Borrowing Notice") shall be
given by Douglas Hauff, Steven Kingma, Kimberly Eiring, or Michele Maulden, each
of whom is authorized to request Fundings and direct disposition of any such
Fundings until written notice by Borrower of the revocation of such authority is
received by U. S. Bank. The Borrowing Notice shall specify (i) the amount of the
requested Funding, (ii) the interest option chosen by Borrower, (iii) for IBOR
Rate Borrowings, the Interest Period, and (iv) whether Borrower is requesting a
new Funding at the IBOR Borrowing Rate or conversion of any portion of the Prime
Rate Borrowing to an IBOR Rate Borrowing. Each Borrowing Notice shall be
effective upon receipt, except that notices received by U. S. Bank after 12
noon, Seattle time, on a Business Day shall be deemed to be received on the
immediately succeeding Business Day.

              (b)  Borrower acknowledges that U. S. Bank cannot effectively
determine whether a particular request for a Funding is valid, authorized, or
authentic. It is nevertheless important to Borrower that it has the privilege of
making requests for Fundings in accordance with Section 4.12(a) hereof.
Therefore, to induce U. S. Bank to lend funds in response to such requests and
in consideration for U. S. Bank's agreement to receive and consider such
requests, Borrower assumes all risk of the validity, authenticity, and
authorization of such requests, whether or not the individual making such
requests has authority to request Fundings and whether or not the aggregate sum
owing exceeds the maximum principal amount referred to above. U. S. Bank shall
not be responsible under principles of contract, tort, or otherwise for the
amount of an unauthorized or invalid Funding; rather, Borrower agrees to repay
any sums with interest as provided herein.



VI.            CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS

              1    Conditions Precedent for Initial Funding. U. S. Bank shall
not be required to make the initial Funding under any of the Loans unless or
until the following conditions have been fulfilled to the satisfaction of U. S.
Bank:

              (a)  U. S. Bank shall have received this Agreement and the
Revolving Note, duly executed and delivered by the respective parties thereto.

              (b)  U. S. Bank shall have received from counsel for Borrower, an
opinion addressed to U. S. Bank and dated as of the date of this Agreement, in
the form attached hereto as Exhibit D.

                                      -15-
<PAGE>   16
              (c)  No Default or Event of Default hereunder shall exist, and 
after having given effect to the requested Funding, no Default or Event of
Default shall exist.

              (d)  All representations and warranties of Borrower contained 
herein or otherwise made in writing in connection herewith shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of the
initial Funding.

              (e)  All corporate proceedings of Borrower shall be satisfactory
in form and substance to U. S. Bank, and U. S. Bank shall have received all
information and copies of all documents, including records of all corporate
proceedings, that U. S. Bank has requested in connection therewith, such
documents where appropriate to be certified by proper corporate authorities or
Governmental Bodies. Borrower shall provide U. S. Bank with the following
documents prior to or upon the execution of this Agreement:

                   (i)     Copies of the articles of incorporation of Borrower,
         together with all amendments thereto, certified by Borrower to be true
         and complete;

                   (ii)    A certificate of authority for Borrower in the state
         of Washington, dated within 30 days of the date of the execution of
         this Agreement; and

                   (iii)   A certified resolution of the directors and 
         incumbency certificate from Borrower in the form attached hereto as
         Exhibit E.

              (f)  U. S. Bank shall have received a Borrowing Notice from 
Borrower for the initial Funding requested under the Revolving Loan.

              (g)  The revolving loan, the term loan, the acquisition loan, and
the equipment loans provided for under the Original Credit Agreement and the
Original Credit Agreement Amendment shall have been paid in full.

              (h)  Borrower shall have paid all loan fees due and payable 
pursuant to the Original Credit Agreement through the date that such loans are
paid in full, including without limitation, the unused portion fee provided for
in the Original Credit Agreement and the $10,000 loan fee payable on September
30, 1996, in connection with the increase in the acquisition loan provided for
in the Original Credit Agreement Amendment.

              (i)  U. S. Bank shall have received evidence reasonable deemed
satisfactory to U. S. Bank that Borrower has received a minimum of $20,000,000
in net proceeds from the initial public offering of Borrower's stock.


                                      -16-
<PAGE>   17
              2    Conditions Precedent to Initial Funding Under the Equipment 
Line. The obligation of U. S. Bank to make the initial Funding under the
Equipment Line is subject to the fulfillment, to the satisfaction of U. S. Bank,
of the following:

              (a)  U. S. Bank shall have received, duly executed and delivered
by Borrower and H.S.C., respectively, a security agreement in the forms attached
hereto as Exhibits F-1 and F-2 ("Security Agreements"), granting to U. S. Bank a
first priority and exclusive security interest in the equipment of Borrower and
H.S.C., now owned or hereafter acquired.
                                   
              (b)  U. S. Bank shall have received, duly executed and delivered 
by Borrower and H.S.C., such financing statements and other documents deemed
necessary by U. S. Bank to perfect the security interests granted to U. S. Bank.
                                   
              (c)  U. S. Bank shall have received such evidence deemed necessary
by U. S. Bank that U. S. Bank's security interests in the Collateral constitute
first priority and exclusive security interests, except as otherwise provided
herein.
                                   
              (d)  U. S. Bank shall have received insurance certificates and
lender loss payable endorsements on casualty/property loss insurance in forms
satisfactory to U. S. Bank to the effect set forth in Section 6.5 hereof.
                                   
              (e)  U. S. Bank shall have received:
                                   
                   (i)   Copies of the articles of incorporation of H.S.C.,
         together with all amendments thereto, certified by Borrower to be true
         and complete;
                                    
                   (ii)  A certificate of authority for H.S.C. in the state of
         Washington, dated within 30 days of the date of the execution of this
         Agreement; and
                                   
                   (iii) A certified resolution of the directors and incumbency
         certificate from H.S.C. in a form reasonably acceptable to U. S. Bank.
                                   
              3    Conditions Precedent to Each Funding Under the Equipment 
Line. The obligation of U. S. Bank to make any Funding (including the initial
Funding) under the Equipment Line is subject to the fulfillment, to the
satisfaction of U. S. Bank, of the following:
                                       
              (a)  U. S. Bank shall have received an Equipment Note and
Borrowing Notice with respect to the requested Funding, duly executed and
delivered by Borrower.

                                      -17-
<PAGE>   18
              (b)  U. S. Bank shall have received copies of invoices or other
evidence deemed satisfactory to U. S. Bank reflecting that the amount of the
requested Funding does not exceed 80 percent of the purchase price of the
equipment to be purchased with the requested Funding.
                                        
              4    Conditions Precedent to Each Subsequent Funding. The 
obligation of U. S. Bank to make any Funding subsequent to the initial Funding
hereunder is subject to the fulfillment, to the satisfaction of U. S. Bank, of
the following:
                                       
              (a)  The conditions set forth in Section 5.1 shall have been
previously satisfied, and U. S. Bank shall have received evidence satisfactory
to U. S. Bank of satisfaction thereof.
                                        
              (b)  U. S. Bank shall have received a Borrowing Notice for each
requested Funding under the Revolving Loan.
                                        
              (c)  There shall be executed and delivered to U. S. Bank such
further instruments, agreements, and documents, as may be reasonably necessary
or proper in the opinion of U. S. Bank to confirm the obligations of Borrower to
U. S. Bank hereunder, the grant of security therefor, and the proper use of the
proceeds of all Fundings.
                                        
              (d)  The representations and warranties of Borrower in Article 
VIII herein shall be true on the date of each Funding with the same force and
effect as if made on and as of that date.
                                        
              (e)  No Default or Event of Default shall exist, and after having
given effect to the requested Funding, no Default or Event of Default shall
exist.
                                        
              (f)  To the extent not previously delivered, all other documents,
agreements, and instruments from or with respect to Borrower or any other Person
that may be called for hereunder shall be duly executed and delivered to U. S.
Bank, including but not limited to all documents, agreements, and instruments
deemed necessary by U. S. Bank to perfect its security interest in Collateral
acquired after the date of this Agreement. For the purposes of this Agreement,
the waiver of delivery of any document, agreement, or instrument from or with
respect to Borrower or any other Person does not constitute a continuing waiver
with respect to the obligation to fulfill the conditions precedent to each
Funding hereunder.
                                        

VII.                          AFFIRMATIVE COVENANTS

              Borrower hereby covenants and agrees that so long as this
Agreement is in effect, and until the Loans, together with interest thereon, and
all other obligations incurred hereunder are paid or satisfied in full, Borrower
shall:

                                      -18-
<PAGE>   19
              1    Financial Data. Keep its books of account in accordance with
generally accepted accounting principles, consistently applied, and furnish to
U. S. Bank:

              (a)  As soon as practicable and in any event within 45 days after
the close of each fiscal quarter of Borrower, the following unaudited financial
statements of Borrower for each such month, all in reasonable detail, in
comparative form to historical and budgeted financial statements, and certified
by Borrower to be true and correct: balance sheet, statement of income, and
statement of cash flows. There shall be included in such financial statements a
calculation of the financial covenants provided for in Article VII herein.

              (b)  As soon as practicable and in any event within 120 days after
the close of each fiscal year of Borrower, the following financial statements of
Borrower, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Borrower's current independent certified public accountant or such other
independent certified public accountants selected by Borrower and satisfactory
to U. S. Bank: balance sheet, statement of income, and statement of cash flows.
Borrower shall provide U. S. Bank with a copy of its independent certified
public accountants' management letter or other similar report or correspondence
to Borrower.

              (c)  As soon as practicable and in any event within 45 days after
the close of each fiscal quarter of Borrower, a certificate signed by Borrower,
stating that during such period no Default or Event of Default existed or if any
such Default or Event of Default existed, specifying the nature thereof, the
period of existence thereof, and what action Borrower proposes to take or has
taken with respect thereto, and that during such period Borrower was in
compliance with all of the financial covenants set forth in Article VII herein;
and promptly upon the occurrence of any Default or Event of Default, a
certificate signed by Borrower, specifying the nature thereof, the period of
existence thereof, and what action Borrower proposes to take or has taken with
respect thereto.

              (d)  As soon as practicable and in any event within 45 days after
the close of fiscal quarter of Borrower, accounts receivable and accounts
payable agings for each such month in a form and in such detail as is acceptable
to U. S. Bank.

              (e)  Upon request by U. S. Bank, copies of all reports relative to
the operations of Borrower and its Affiliates filed with any Governmental Body.

              (f)  As soon as practicable and in any event within 30 days of the
end of each fiscal year, a statement projecting all capital expenditures to be
made or committed to during the following fiscal year of Borrower.


                                      -19-
<PAGE>   20
              (g)  As soon as practicable and in any event within 30 days of the
end of each fiscal year, a five-year projection of the financial operations of
Borrower in a form and in such detail as is acceptable to U. S. Bank.

              (h)  With reasonable promptness, such other information regarding
the business, operations, and financial condition of Borrower as U. S. Bank may
from time to time reasonably request.

              2    Licenses and Permits. Maintain all Governmental Approvals and
all related or other material agreements necessary for Borrower to operate its
business, as it now exists or as it may be modified or expanded. Borrower will
at all times comply with all Applicable Laws relating to the operations,
facilities, or activities of Borrower.

              3    Maintenance of Properties. Keep Borrower's properties in good
repair and in good working order and condition, in a manner consistent with past
practices and comparable to industry standards; from time to time make all
appropriate and proper repairs, renewals, replacements, additions, and
improvements thereto; and keep all equipment that may now or in the future be
subject to compliance with any Applicable Laws in full compliance with such
Applicable Laws.

              4    Payment of Charges. Duly pay and discharge all material (a)
taxes, assessments, levies, and any other charges of Governmental Bodies imposed
on or against Borrower or its property or assets, or upon any property leased by
Borrower, prior to the date on which penalties attached thereto, unless and to
the extent only that such taxes, assessments, levies, and any other charges of
Governmental Bodies, after written notice thereof having been given to U. S.
Bank, are being contested in good faith and by appropriate proceedings, (b)
claims allowed by Applicable Laws, whether for labor, materials, rentals, or
anything else, which could, if unpaid, become a lien or charge upon Borrower's
property or assets or the outstanding capital stock of Borrower or adversely
affect the facilities or operations of Borrower, (unless and to the extent only
that the validity thereof is being contested in good faith and by appropriate
proceedings after written notice thereof has been given to U. S. Bank); (c)
trade bills in accordance with the terms thereof or generally prevailing
industry standards; and (d) other Indebtedness heretofore or hereafter incurred
or assumed by Borrower, unless such Indebtedness be renewed or extended. In the
event any charge is being contested by Borrower as allowed above, Borrower shall
establish adequate reserves against possible liability therefor.

              5    Insurance.

              (a)  Maintain insurance upon Borrower's properties and business in
accordance with prevailing industry standards. Prior to or concurrently with the
initial Funding under the Equipment Line, Borrower shall cause each insurance
policy issued in connection therewith to provide and shall cause the insurer
issuing such policy to certify to 

                                      -20-
<PAGE>   21
U. S. Bank that (i) if such insurance is proposed to be canceled for any reason
whatsoever, such insurer will promptly notify U. S. Bank, and such cancellation
or change shall not be effective as to U. S. Bank for 30 days after receipt by
U. S. Bank of such notice, unless the effect of the change is to extend or
increase coverage under the policy; (ii) U. S. Bank will have the right at its
election to remedy any default in the payment of premiums within 30 days of
notice from the insurer of the default; and (iii) loss payments from
casualty/property loss insurance related to Borrower's equipment in excess of
$50,000 in each instance will be payable jointly to the Borrower and U. S. Bank
as secured party or otherwise as its interest may appear.

              (b)  From time to time upon request by U. S. Bank, promptly 
furnish or cause to be furnished to U. S. Bank evidence, in form and substance
satisfactory to U. S. Bank, of the maintenance of all insurance, indemnities, or
bonds required by this Section 6.5 or by any license, lease, or other agreement
to be maintained, including but not limited to such originals or copies as U. S.
Bank may request of policies, certificates of insurance, riders, assignments,
and endorsements relating to the insurance and proof of premium payments.

              6    Maintenance of Records. Keep at all times books of account 
and other records in which full, true, and correct entries will be made of all
dealings or transactions in relation to the business and affairs of Borrower.

              7    Inspection. Allow any representative of U. S. Bank to visit 
and inspect any of the properties of Borrower, to examine the books of account
and other records and files of Borrower, to make copies thereof, and to discuss
the affairs, business, finances, and accounts of Borrower with its officers,
employees, and accountants, all at such reasonable times and as often as U. S.
Bank may desire. This right of inspection shall specifically include U. S.
Bank's collateral and financial examinations.

              8    Hazardous Substances.

              (a)  Borrower hereby covenants and agrees that so long as any
Indebtedness of Borrower to U. S. Bank is outstanding:

                   (i)   Borrower will not permit its property or any portion
         thereof to be a site for the storage, use, generation, manufacture,
         disposal or transportation of Hazardous Materials in violation of
         Hazardous Materials Laws;

                   (ii)  Borrower will not permit any Hazardous Materials to be
         disposed of off its property other than in properly licensed disposal
         sites;

                                      -21-
<PAGE>   22
                   (iii) Borrower, at Borrower's sole cost and expense, will
         keep and maintain its property and each portion thereof in compliance
         with and shall not cause or permit its property or any portion thereof
         to be in violation of any Hazardous Materials Laws; and

                   (iv)  Borrower will immediately advise U. S. Bank in writing
         of any Hazardous Material Claim.

              (b)  Borrower agrees to indemnify U. S. Bank and hold U. S. Bank
harmless from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and costs and
expenses (including attorney fees), arising directly or indirectly from or out
of or in any way connected with (i) the accuracy of the representations
contained in Section 8.18 herein; (ii) any activities on its property during
Borrower's ownership, possession, or control of its property which directly or
indirectly results in its property or any other property becoming contaminated
with Hazardous Materials; (iii) the discovery of Hazardous Materials on its
property; (iv) the cleanup of Hazardous Materials from its property; and (v) the
discovery of Hazardous Materials or the cleanup of Hazardous Materials from
adjacent or other property that has become contaminated as a result of any
activity on Borrower's property. As between Borrower and U. S. Bank, Borrower
acknowledges that it will be solely responsible for all costs and expenses
relating to the cleanup of Hazardous Materials from its property or from any
other properties that become contaminated with Hazardous Materials as a result
of activities on or the contamination of its property.

              (c)  Borrower's obligations under this Section 6.8 are
unconditional and shall not be limited by any nonrecourse or other limitations
of liability provided for in the Loan Documents. The representations,
warranties, and covenants of Borrower set forth in this Section 6.8 and Section 
8.18 herein (including but not limited to the indemnity provided for in Section 
6.8(b) above) shall survive the closing and repayment of the Loans to U. S.
Bank; and, to the extent permitted by Applicable Laws and Hazardous Materials
Laws, shall survive the transfer of its property by foreclosure proceedings
(whether judicial or nonjudicial), deed in lieu of foreclosure, or otherwise.
Borrower acknowledges and agrees that its covenants and obligations hereunder
are separate and distinct from its obligations under the Loans and the Loan
Documents.

              9    Corporate Existence. Maintain and preserve the corporate
existence of Borrower.

              10   Notice of Disputes and Other Matters. Promptly give written
notice to U. S. Bank of:

              (a) Any citation, order to show cause, or other legal process or
order that could have a material adverse effect on Borrower, directing Borrower
to become a party to or 

                                      -22-
<PAGE>   23
to appear at any proceeding or hearing by or before any Governmental Body that
has granted to Borrower any Governmental Approval, and include with such notice
a copy of any such citation, order to show cause, or other legal process or
order;

              (b)  Any (i) refusal, denial, threatened denial, or failure by any
Governmental Body to grant, issue, renew, or extend any material Governmental
Approval; (ii) proposed or actual revocation, termination, or modification
(whether favorable or adverse) of any Governmental Approval by any Governmental
Body; (iii) dispute or other action with regard to any Governmental Approval by
any Governmental Body; (iv) notice from any Governmental Body of the imposition
of any material fines or penalties or forfeitures; or (v) threats or notice with
respect to any of the foregoing or with respect to any proceeding or hearing
that might result in any of the foregoing;

              (c)  Any dispute concerning or any threatened nonrenewal or
modification of any material lease for real or personal property to which
Borrower is a party; or

              (d)  Any actions, proceedings, or claims of which Borrower may
have notice that may be commenced or asserted against Borrower in which the
amount involved is $200,000 or more and is not fully covered by insurance or
which, if not solely a claim for monetary damages, could, if adversely
determined, have a material adverse effect on Borrower.

              11   Exchange of Note. Upon receipt of a written notice of loss,
theft, destruction, or mutilation of a Note, and upon surrendering such Note for
cancellation if mutilated, execute and deliver a new Note or a Note of like
tenor in lieu of such lost, stolen, destroyed, or mutilated Note. Any Note
issued pursuant to this Section 6.11 shall be dated so that neither gain nor
loss of interest shall result therefrom.

              12   Maintenance of Liens. At all times maintain the liens and
security interests provided under or pursuant to this Agreement as valid and
perfected first liens and security interests on the property and assets intended
to be covered thereby. Except as contemplated under Section 7.2, Borrower shall
take all action requested by U. S. Bank necessary to assure that U. S. Bank has
valid and exclusive liens and security interests in all Collateral.

              13   Other Agreements. Comply with all covenants and agreements
set forth in or required pursuant to any of the other Loan Documents.

              14   After-Acquired Collateral. Without the need for any request
by U. S. Bank, execute and deliver to U. S. Bank appropriate instruments in
order to effectuate the proper granting and perfection of a first priority
security interest in all equipment hereafter acquired by Borrower to U. S. Bank
concurrently with the acquisition thereof.

                                      -23-
<PAGE>   24
              15   Further Assurances. Within ten days of request by U. S. Bank,
duly execute and deliver or cause to be duly executed and delivered to U. S.
Bank such further instruments, agreements, and documents and do or cause to be
done such further acts as may be necessary or proper in the opinion of U. S.
Bank to carry out more effectively the provisions and purpose of this Agreement
and the other Loan Documents.

              16   Acquisition Loan Fees

              (a)  As consideration for the acquisition loan advanced to
Borrower in accordance with the provisions of the Original Credit Agreement
Amendment, Borrower shall pay to U. S. Bank a nonrefundable loan fee in the
amount of $211,875 on December 31, 1996.

              (b)  In the event that the acquisition loan advanced to Borrower
in accordance with the provisions of the Original Credit Agreement Amendment is
not paid in full on or before October 7, 1996, then Borrower shall pay U. S.
Bank additional nonrefundable loan fees in the amount of (i) $7,000, plus (ii)
an amount equal to 1 percent of the outstanding principal balance of such
acquisition loan (up to a maximum of $4,000,000) as of September 30, 1996.


VIII.                          NEGATIVE COVENANTS

              Borrower covenants and agrees that until all the Loans, together
with interest thereon, and all other obligations incurred hereunder are paid or
satisfied in full, Borrower shall not, without the prior written consent of
U.S. Bank:

              1    Dividends and Distributions. During the existence of any
Event of Default or in the event that the proposed payment would result in the
existence of an Event of Default, declare or pay any cash distributions or
dividends or return any capital to any of Borrower's shareholders; authorize or
make any distribution, payment, or delivery of property or cash to any of
Borrower's shareholders; redeem, retire, purchase, or otherwise acquire,
directly or indirectly, for consideration, any shares or other interests of
Borrower now or hereafter outstanding; or set aside any funds for any of the
foregoing purposes.

              2    Liens. Contract, create, incur, assume, or suffer to exist
any mortgage, pledge, lien, or other charge or encumbrance of any kind
(including but not limited to the charge upon property purchased under
conditional sales or other title retention agreements) upon or grant any
interest in any of its property or assets whether now owned or hereafter
acquired, except (a) liens granted pursuant to this Agreement; (b) liens in
connection with worker's compensation, unemployment insurance, or other social
security obligations; (c) good faith deposits in connection with bids, tenders,
contracts, or leases or deposits to secure public statutory obligations; (d)
mechanic's, carrier's, repairmen's, or other like liens in the ordinary



                                      -24-
<PAGE>   25
course of business with respect to obligations that are not overdue or that are
being contested in good faith and for which appropriate reserves have been
established or for which deposits to obtain the release of such liens have been
made; (e) liens for taxes, assessments, levies, or charges of Governmental
Bodies imposed upon Borrower or its property, operations, income, products, or
profits that are not at the time due or payable or for which, if the validity
thereof is being contested in good faith by legal or administrative proceedings,
appropriate reserves have been established; (f) encumbrances consisting of
zoning regulations, easements, rights-of-way, survey exceptions, and other
similar restrictions on the use of real property or minor irregularities in
title thereto that do not materially impair the use of such property in the
operation of the business of Borrower; (g) liens arising out of judgments or
awards with regard to which Borrower shall be prosecuting an appeal in good
faith and for which a stay of execution has been issued and appropriate reserves
established; (h) purchase money liens on equipment acquired by Borrower; and (i)
the currently existing liens listed on Exhibit G hereto. The liens described in
clauses (a) through (i) herein are called the "Permitted Liens."

              3    Advances and Loans. Use any proceeds of the Loans to lend 
money or make credit available (other than in the ordinary course of business to
customers) to any Person.

              4    Acquisitions. Acquire, purchase, or make any commitment to
acquire or purchase a controlling interest in the stock or other equity interest
of any Person or all or a substantial portion of the assets of any Person unless
Borrower has previously delivered to U. S. Bank evidence reasonably deemed
satisfactory to U. S. Bank reflecting that upon consummation of any such
proposed transaction, Borrower will be and thereafter will continue to be in
compliance with the financial covenants set forth in Sections 7.10 through 7.14
herein.

              5    Consolidation, Merger, and Sale of Assets. Wind up, 
liquidate, or dissolve Borrower's affairs or enter into any transaction of
merger or consolidation with any Person; convey, sell, lease, or otherwise
dispose of (or agree to do any of the foregoing at any time) any of its material
licenses, contracts, or permits; sell all or a substantial part of its property
or assets or sell any part of its property or assets necessary or desirable for
the conduct of its business as now generally conducted or as proposed to be
conducted; sell any of its notes receivable, installment or conditional sales
agreements, or accounts receivable; purchase, lease, or otherwise acquire all or
a substantial part of the property or assets of any other Person.

              6    Type of Business. Enter into any business which is 
substantially different from or not connected with the business in which
Borrower is presently engaged or make any substantial change in the nature of
its business or operations.

              7    Change of Chief Executive Office or Name. Change (a) the
chief executive office of Borrower, (b) Borrower's name, or (c) the location of
any of the Collateral; or adopt or use any trade name without (x) prior written
notice to U. S. Bank and



                                      -25-
<PAGE>   26
(y) the execution, delivery, and filing (and payment of filing fees and taxes)
of all such documents as may be necessary or advisable in the opinion of U. S.
Bank to continue to perfect and protect the liens and security interests in the
Collateral.

              8    Control. Enter into any agreement (other than employment
agreements) with any Person that confers upon such Person the right or authority
to control or direct a major portion of the business or assets of Borrower.

              9    Pension Plan. Terminate or partially terminate any Plan now
existing or hereafter established for Borrower or its Affiliates or withdraw
from participation therein under circumstances that result or could result in
liability to the Pension Benefit Guaranty Corporation, to the fund by which the
Plan is funded, or to the employees (or their beneficiaries) for whom the Plan
is or shall be maintained; or permit any other event or circumstance to occur
that results or could result in liability to the Pension Benefit Guaranty
Corporation or a violation of ERISA.

              10   Tangible Net Worth. At any time during the terms of the 
Loans, permit Tangible Net Worth to be less than (a) $15,000,000.

              11   Working Capital. As of the last day of each fiscal quarter of
Borrower, permit Working Capital to be less than $10,000,000.

              12   Debt Service Coverage. Permit the ratio of Cash Flow to Debt
Service to be less than 1.5:1.0 as of the last day of each fiscal quarter of
Borrower for the trailing four quarters then ended.

              13   Funded Debt Coverage Ratio. Permit the Funded Debt Coverage
Ratio to be greater than 2.0:1.0 as of the last day of each fiscal quarter of
Borrower for the trailing four quarters then ended.

              14   Capital Ratio. Permit the Capital Ratio to be greater than
 .75:1.00 at any time during the terms of the Loans.


IX.                      REPRESENTATIONS AND WARRANTIES

              In order to induce U. S. Bank to enter into this Agreement and to
make the Loans as herein provided, Borrower hereby makes the following
representations, covenants, and warranties, all of which shall survive the
execution and delivery of this Agreement and shall not be affected or waived by
any inspection or examination made by or on behalf of U. S. Bank:



                                      -26-
<PAGE>   27
              1    Corporate Status. Borrower is a corporation organized and
validly existing under the laws of the state of Washington. Borrower has the
power and authority to own its property and assets and to transact the business
in which it is engaged or presently proposes to engage. Borrower is qualified to
do business in all states except where the failure to be qualified could not
have a material adverse effect on Borrower.

              2    Power and Authority. Borrower has the power to execute, 
deliver, and carry out the terms and provisions of this Agreement and each of
the Loan Documents and has taken all necessary action to authorize the
execution, delivery, and performance of this Agreement and the other Loan
Documents, the borrowings hereunder, and the making and delivery of the Notes
and all Loan Documents delivered hereunder. This Agreement constitutes and the
Notes and other Loan Documents and instruments issued or to be issued hereunder,
when executed and delivered pursuant hereto, constitute or will constitute the
authorized, valid, and legally binding obligations of Borrower enforceable in
accordance with their respective terms.

              3    No Violation of Agreements. Borrower is not in default under
any material provision of any agreement to which it is a party or in violation
of any Applicable Laws. The execution and delivery of this Agreement, the Notes,
the other Loan Documents, and the instruments incidental hereto; the
consummation of the transactions herein or therein contemplated; and compliance
with the terms and provisions hereof or thereof (a) will not violate any
material Applicable Law and (b) will not conflict or be inconsistent with;
result in any breach of any of the material terms, covenants, conditions, or
provisions of; constitute a default under; or result in the creation or
imposition of (or the obligation to impose) any lien, charge, or encumbrance
upon any of the property or assets of Borrower pursuant to the terms of: any
material Governmental Approval, mortgage, deed of trust, lease, agreement, or
other instrument to which Borrower is a party, by which Borrower may be bound,
or to which Borrower may be subject, and (c) will not violate any of the
provisions of the articles of incorporation of Borrower. No Governmental
Approval is necessary (x) for the execution of this Agreement, the making of the
Notes, or the assumption and performance of this Agreement or the Notes by
Borrower or (y) for the consummation by Borrower of the transactions
contemplated by this Agreement including but not limited to the grant of the
security interests to U. S. Bank.

              4    Recording and Enforceability. Neither the articles of
incorporation, bylaws, or other applicable corporate documents of Borrower nor
other agreements require recording, filing, registration, notice, or other
similar action in order to insure the legality, validity, binding effect, or
enforceability against all Persons of this Agreement, the Notes, or other Loan
Documents executed or to be executed hereunder, other than filings that may be
required under the Uniform Commercial Code.

              5    Litigation. There are no actions, suits, or proceedings 
pending or threatened against or affecting Borrower before any Governmental Body
that could have a


                                      -27-
<PAGE>   28
material adverse effect on Borrower or the Collateral. Borrower is not in
default under any material provision of any Applicable Law or Governmental
Approval of any Governmental Body which could have a material adverse effect on
Borrower or on the Collateral.

              6    Good Title to Properties. Borrower has good and marketable 
title to, or a valid leasehold interest in, its property and assets, subject to
no liens, mortgages, pledges, encumbrances, or charges of any kind, except those
permitted under the provisions of Section 7.2 of this Agreement.

              7    Licenses and Permits. All Governmental Approvals with respect
to the business of Borrower were to Borrower's knowledge duly and validly issued
by the respective Governmental Bodies, are in full force and effect, and are to
Borrower's knowledge valid and enforceable in accordance with their terms. With
regard to such Governmental Approvals, no fact or circumstance exists that
constitutes or, with the passage of time or the giving of notice or both, would
constitute a material default under any thereof, or permit the grantor thereof
to cancel or terminate the rights thereunder, except upon the expiration of the
full term thereof. Borrower presently holds all material Governmental Approvals
as are necessary or advisable in connection with the conduct of its business as
now conducted and as presently proposed to be conducted.

              8    No Burdensome Agreements. Borrower is not a party to any
agreement or instrument or subject to any restrictions that now have or, as far
as can be foreseen, could have a material adverse effect on Borrower.

              9    Properties in Good Condition. All the material properties of
Borrower are, and all material properties to be added in connection with any
contemplated expansion will be in good repair and good working order and
condition in a manner consistent with past practices of Borrower, and comparable
to industry standards and are and will be in compliance with all Applicable
Laws.

              10   Financial Statements. The (a) audited financial statements of
Borrower dated December 31, 1995, and all schedules and notes included in such
financial statements and (b) unaudited financial statements of Borrower that
have heretofore been delivered to U. S. Bank are true and correct in all
material respects and present fairly (i) the financial position of Borrower as
of the date of said statements and (ii) the results of operations of Borrower
for the periods covered thereby; and there are not any significant liabilities
that should have been reflected in the financial statements or the notes thereto
under generally accepted accounting principles, contingent or otherwise,
including liabilities for taxes or any unusual forward or long-term commitments,
that are not disclosed or reserved against in the statements referred to above
or in the notes thereto or that are not disclosed herein. All such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied. There has been no material adverse change
(including but not limited to any such change occasioned by accident, act of
God, war, fire, flood, explosion, 


                                      -28-
<PAGE>   29
strike or other labor dispute, or orders or action by any Governmental Body or
public utility) in the operations, business, property, assets, or condition
(financial or otherwise) of Borrower since June 30, 1996.

              11   Outstanding Indebtedness. Other than current trade payables,
Borrower has no Indebtedness, including but not limited to Indebtedness to
Affiliates, that is not listed on Borrower's unaudited financial statements
dated June 30, 1996.

              12   Taxes. Borrower has duly filed all tax returns and reports
required by Applicable Law to be filed; and all taxes, assessments, levies,
fees, and other charges of Governmental Bodies upon Borrower or upon its assets
that are due and payable have been paid (except as otherwise permitted in this
Agreement).

              13   License Fees. Borrower has paid all fees and charges that 
have become due for any Governmental Approval for its business or has made
adequate provisions for any such fees and charges that have accrued.

              14   Trademarks, Patents, Etc. Borrower possesses all necessary
trademarks, trade names, service marks, copyrights, patents, patent rights, and
licenses to conduct its businesses as now and as proposed to be conducted,
without conflict with the rights or claimed rights of others.

              15   Disclosure. To the best of Borrower's knowledge, the exhibits
hereto, the financial information and statements referred to in Section 8.10
herein, any certificate, statement, report or other document furnished to U. S.
Bank by Borrower or any other Person in connection herewith or in connection
with any transaction contemplated hereby, and this Agreement, do not contain any
untrue statements of material fact or omit to state any material fact necessary
in order to make the statements contained therein or herein not misleading.

              16   Regulations U and X. Borrower does not own and no part of the
proceeds hereof will be used to purchase or carry any margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System)
or to extend credit to others for the purpose of purchasing or carrying any
margin stock. Borrower is not engaged principally or as one of its important
activities in the business of extending credit for the purpose of purchasing or
carrying any margin stock. If requested by U. S. Bank, Borrower will furnish to
U. S. Bank a statement in conformity with the requirements of Federal Reserve
Form U-1 referred to in said Regulation. No part of the proceeds of the Loans
will be used for any purpose that violates or is inconsistent with the
provisions of Regulation X of said Board of Governors.

              17   Names. Neither Borrower nor any of its predecessors
operate or do business or during the past five years have operated or done
business under a fictitious, trade, or assumed name.



                                      -29-
<PAGE>   30
              18   Condition of Property. Except as otherwise disclosed to U. S.
Bank, Borrower hereby represents and warrants to U. S. Bank that as of the date
hereof and continuing hereafter, Borrower's property (both owned and leased) and
each portion thereof (a) are not and to the best knowledge of Borrower after due
investigation have not been a site for the use, generation, manufacture,
storage, disposal, or transportation of any Hazardous Material; (b) are
presently in compliance with all Hazardous Materials Laws; and (c) are not being
used and to the best knowledge of Borrower after due investigation have not been
used in any manner that has resulted in or will result in Hazardous Materials
being spilled or disposed of on any adjacent or other property.

              19   Pension Plans. No "reportable event" as defined in Section 
4043(b) of Title IV of ERISA has occurred and is continuing with respect to any
plan maintained for employees of Borrower or any Affiliate. In addition, each of
the plans maintained for the employees of Borrower and its Affiliates are in
compliance with the requirements of ERISA, including the minimum funding
requirements.


X.                         EVENTS OF DEFAULT; REMEDIES

              1    Events of Default. "Event of Default," wherever used herein,
means any one of the following events (whatever the reason for the Event of
Default, whether it shall relate to one or more of the parties hereto, and
whether it shall be voluntary or involuntary or be pursuant to or affected by
operation of Applicable Law):

              (a)  If Borrower fails to pay the principal of or any installment
of interest on any of the Notes, when and as the same becomes due and payable,
whether at scheduled maturity, by acceleration, or otherwise; or

              (b)  If any Indebtedness of Borrower for money borrowed or credit
extended becomes or is declared due and payable (after any applicable grace
period) prior to the stated maturity thereof or is not paid as and when it
becomes due and payable, or if any event occurs which constitutes an event of
default under any instrument, agreement, or evidence of Indebtedness relating to
any such obligation of Borrower; or

              (c)  If Borrower fails to pay or perform (after any applicable
grace period) any obligation or Indebtedness to others in excess of $25,000
(other than as set forth in Section 9.1(b) herein), whether now or hereafter
incurred; or

              (d)  If any representation or warranty (i) made by Borrower in
this Agreement or (ii) made by Borrower or any other Person in any document,
certificate, or statement furnished pursuant to this Agreement or in connection
herewith, is false or misleading in any material respect; or



                                      -30-
<PAGE>   31
              (e)  If Borrower fails to observe or perform any term, covenant,
or agreement to be performed or observed pursuant to Article VI and VII herein;
or

              (f)  If Borrower fails to observe or perform (not otherwise
specified in this Article IX) any term, covenant, or agreement to be performed
or observed pursuant to the provisions of this Agreement, the other Loan
Documents, or any other agreement incidental hereto and such default is not
cured within 30 days; or

              (g)  If Borrower fails to perform any of its obligations under any
of the Loan Documents not otherwise specified in this Article IX, or if the
validity of any of such documents has been disaffirmed by or on behalf of any of
the parties thereto other than U. S. Bank and such default is not cured within
30 days; or

              (h)  If custody or control of any substantial part of the property
of Borrower is assumed by any Governmental Body or if any Governmental Body
takes any final action, the effect of which would be to have a material adverse
effect on Borrower; or

              (i)  If Borrower suspends or discontinues its business, or if
Borrower makes an assignment for the benefit of creditors or a composition with
creditors, is unable or admits in writing its inability to pay its debts as they
mature, files a petition in bankruptcy, becomes insolvent (howsoever such
insolvency may be evidenced), is adjudicated insolvent or bankrupt, petitions or
applies to any tribunal for the appointment of any receiver, liquidator, or
trustee of or for it or any substantial part of its property or assets,
commences any proceeding relating to it under any Applicable Law of any
jurisdiction whether now or hereafter in effect relating to bankruptcy,
reorganization, arrangement, readjustment of debt, receivership, dissolution, or
liquidation; or if there is commenced against Borrower any such proceeding that
remains undismissed for a period of 60 days or more, or an order, judgment, or
decree approving the petition in any such proceeding is entered; or if Borrower
by any act or failure to act indicates its consent to, approval of, or
acquiescence in, any such proceeding or any appointment of any receiver,
liquidator, or trustee of or for it or for any substantial part of its property
or assets, suffers any such appointment to continue undischarged or unstayed for
a period of 60 days or more, or takes any corporate action for the purpose of
effecting any of the foregoing; or if any court of competent jurisdiction
assumes jurisdiction with respect to any such proceeding, or if a receiver or a
trustee or other officer or representative of a court or of creditors, or if any
Governmental Body, under color of legal authority, takes and holds possession of
any substantial part of the property or assets of Borrower; or

              (j)  If there is any refusal or failure by any Governmental Body
to issue, renew, or extend any lease or Governmental Approval with respect to
the operation of the business of Borrower, or any denial, forfeiture or
revocation by any Governmental Body of any Governmental Approval that could have
a material adverse effect on Borrower; or

                                      -31-
<PAGE>   32
              (k)  If any of the events described in Section 6.10 herein occur 
or are threatened and, in U. S. Bank's reasonable judgment, such event
jeopardizes or could reasonably be expected to jeopardize repayment of any of
the Notes; or

              (l)  If any material adverse change in the business or financial
condition of Borrower occurs, or if any event that materially increases U. S.
Bank's risk or materially impairs the Collateral occurs.

              2    Acceleration; Remedies. Upon the occurrence of any Event of
Default or at any time thereafter, if any Event of Default is then continuing,
U. S. Bank may, by written notice to Borrower, declare the entire unpaid
principal balance or any portion of the principal balance of all or any of the
Notes and interest accrued thereon to be immediately due and payable by the
maker thereof; and such principal and interest shall thereupon become and be
immediately due and payable, without presentation, demand, protest, notice of
protest, or other notice of dishonor of any kind, all of which are hereby
expressly waived by Borrower. U. S. Bank may proceed to protect and enforce its
rights hereunder or realize on any or all security granted pursuant hereto in
any manner or order it deems expedient without regard to any equitable
principles of marshaling or otherwise. All rights and remedies given by this
Agreement, the Notes, and the other Loan Documents are cumulative and not
exclusive of any thereof or of any other rights or remedies available to U. S.
Bank; no course of dealing between Borrower and U. S. Bank or any delay or
omission in exercising any right or remedy; shall operate as a waiver of any
right or remedy; and every right and remedy may be exercised from time to time
and as often as deemed appropriate by U. S. Bank.


XI.                               MISCELLANEOUS

              1    Notices. All notices, requests, consents, demands, approvals,
and other communications hereunder shall be deemed to have been duly given,
made, or served if made in writing and delivered personally, sent via facsimile,
or mailed by first class mail, postage prepaid, to the respective parties to
this Agreement as follows:

              (a)  If to Borrower:

                   Gargoyles, Inc.
                   5866 S. 194th Street
                   Kent, Washington 98032
                   Attention:  Steven R. Kingma
                   Facsimile No.:  (206) 872-3267


                                      -32-
<PAGE>   33
              (a)  If to U. S. Bank:

                   U. S. Bank of Washington, National Association
                   1420 Fifth Avenue, Tenth Floor
                   Seattle, Washington  98101
                   Attention:  Gerald L. Sorensen
                   Facsimile No.:  (206) 344-3737

The designation of the persons to be so notified or the address of such persons
for the purposes of such notice may be changed from time to time by similar
notice in writing, except that any communication with respect to a change of
address shall be deemed to be given or made when received by the party to whom
such communication was sent.

              2    Payment of Expenses. Whether or not the transactions hereby
contemplated are consummated, Borrower shall pay on demand all costs and
expenses of U. S. Bank incurred in connection with the preparation, negotiation,
execution, and delivery of the Loan Documents, as well as any amendments,
modifications, consents, or waivers relating thereto, including, without
limitation, reasonable attorney fees, appraisal fees, title insurance fees, and
recording fees. In addition, if there shall occur any Default or Event of
Default, U. S. Bank shall be entitled to recover any costs and expenses incurred
in connection with the preservation of rights under, and enforcement of, the
Loan Documents, whether or not any lawsuit or arbitration proceeding is
commenced, in all such cases, including, without limitation, reasonable attorney
fees and costs (including the allocated fees of internal counsel). Costs and
expenses as referred to above, shall include, without limitation, a reasonable
hourly rate for collection personnel, whether employed in-house or otherwise,
overhead costs as reasonably allocated to the collection effort, and all other
expenses actually incurred. Reasonable attorney fees shall include, without
limitation, attorney fees and costs incurred in connection with any bankruptcy
case or other insolvency proceeding commenced by or against Borrower or any
Person granting a security interest in any item of Collateral, including all
fees incurred in connection with (a) moving from relief from the automatic stay,
to convert or dismiss the case or proceeding, or to appoint a trustee or
examiner, or (b) proposing or opposing confirmation of a plan of reorganization
or liquidation, in any case without regarding to the identity of the prevailing
party.

              3    Setoff. Borrower hereby pledges and gives to U. S. Bank, and
any Participant, a lien and security interest in for the amount of all past,
present, and future Indebtedness of Borrower to U. S. Bank the balance of any
deposit account maintained by Borrower at U. S. Bank or any Participant. In the
case of Borrower's Default hereunder, Borrower hereby authorizes U. S. Bank or
any such Participant at U. S. Bank's sole option, at any time and from time to
time, to apply to the payment of all or any portion of the Loans or other
Indebtedness of Borrower to U. S. Bank, any deposit balance or balances now or
hereafter in the possession of U. S. Bank or such Participant that belong to or
are owed to Borrower.

                                      -33-
<PAGE>   34
              4    Waiver of Setoff. In the event that U. S. Bank sells all or
any portion of the Loans to any Participant, Borrower hereby waives the right to
interpose any setoff, counterclaim, or cross-claim (other than compulsory
counterclaims or cross-claims) in connection with any litigation or dispute
under this Agreement, regardless of the nature of such setoff, counterclaim, or
cross-claim.

              5    Fees and Commissions. Borrower agrees to indemnify U. S. Bank
and hold it harmless with regard to any commissions, fees, judgments, or
expenses of any nature and kind that U. S. Bank may become liable to pay by
reason of any claims by or on behalf of brokers, finders, or agents in
connection with any act or failure to act by Borrower or any litigation or
similar proceeding arising from such claims. Borrower states that it is aware of
no valid basis for any such claims.

              6    No Waiver. No failure or delay on the part of U. S. Bank or
the holder of any of the Notes in exercising any right, power, or privilege
hereunder and no course of dealing between Borrower and U. S. Bank or the holder
of any of the Notes shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power, or privilege hereunder preclude any other
or further exercise thereof or the exercise of any right, power, or privilege.
The rights and remedies herein expressly provided are cumulative and not
exclusive of any rights or remedies that U. S. Bank or any subsequent holder of
any of the Notes would otherwise have. No notice to or demand on Borrower in any
case shall entitle Borrower to any other or further notice or demand in similar
or other circumstances or shall constitute a waiver of the right of U. S. Bank
to any other or further action in any circumstances without notice or demand.

              7    Entire Agreement and Amendments. This Agreement represents
the entire agreement between the parties hereto with respect to the Loans and
the transactions contemplated hereunder and, except as expressly provided
herein, shall not be affected by reference to any other documents. This
Agreement, or any provision hereof, may not be changed, waived, discharged, or
terminated orally, but only by an instrument in writing, signed by the party
against whom enforcement of the change, waiver, discharge, or termination is
sought.

              8    Benefit of Agreement. This Agreement is binding upon and 
inures to the benefit of Borrower and U. S. Bank and their successors and
assigns and all subsequent holders of any of the Notes or any portion thereof.
Borrower expressly acknowledges that U. S. Bank is not prohibited or restricted
from assigning rights or participations hereunder or any portion thereof to
another Person. Borrower, however, is precluded from assigning any of its
respective rights or delegating any of its obligations hereunder or under any of
the other agreements between Borrower and U. S. Bank without the prior written
consent of U. S. Bank.

                                      -34-
<PAGE>   35
              9    Severability. If any provision of this Agreement or any of
the Loan Documents is held invalid under any Applicable Laws, such invalidity
shall not affect any other provision of this Agreement that can be given an
effect without the invalid provision, and, to this end, the provisions hereof
are severable.

              10   Descriptive Headings. The descriptive headings of the several
sections of this Agreement are inserted for convenience only and do not affect
the meaning or construction of any of the provisions hereof.

              11   Governing Law. This Agreement and the rights and obligations
of the parties hereunder and under the other Loan Documents shall be construed
in accordance with and shall be governed by the laws of the state of Washington
without regard to the choice of law rules thereof.

              12   Consent to Jurisdiction, Service, and VenueConsent to
Jurisdiction, Service, and Venue. For the purpose of enforcing payment of any of
the Notes, performance of the obligations under any of the Notes, any
arbitration award under the other Loan Documents, or otherwise in connection
herewith, Borrower hereby consents to the jurisdiction and venue of the courts
of the state of Washington or of any federal court located in such state
including but not limited to the Superior Court of Washington for King County
and the United States District Court for the Western District of Washington.
Borrower hereby waives the right to contest the jurisdiction and venue of courts
located in King County, Washington, on the ground of inconvenience or otherwise
and waives any right to bring any action or proceeding against U. S. Bank in any
court outside King County, Washington. The provisions of this section do not
limit or otherwise affect the right of U. S. Bank to institute and conduct
action in any other appropriate manner, jurisdiction, or court.

              13   Arbitration.

              (a) Either Borrower or U. S. Bank may require that all disputes,
claims, counterclaims, and defenses, including those based on or arising from
any alleged tort ("Claims") relating in any way to the Loans be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.

              (b) This provision is void if the Loans, at the time of the
proposed submission to arbitration, are secured by real property located outside
of Oregon or Washington or if the effect of the arbitration procedure (as
opposed to any Claims of Borrower) would be to materially impair U. S. Bank's
ability to realize on any Collateral pursuant to an arbitration ruling favorable
to U. S. Bank.


                                      -35-
<PAGE>   36
              (c)  If arbitration occurs and each party's Claim is less than
$100,000, one neutral arbitrator will decide all issues; if either party's Claim
is more than $100,000, three neutral arbitrators will decide all issues. All
arbitrators will be active Washington State Bar members in good standing. All
arbitration hearings will be held in Seattle, Washington. In addition to all
other powers, the arbitrator or arbitrators shall have the exclusive right to
determine all issues of arbitrability and shall have the authority to issue
subpoenas. Judgment on any arbitration award may be entered in any court with
jurisdiction.

              (d)  If either party institutes any judicial proceeding relating
to the Loans, that action shall not be a waiver of the right to submit any Claim
to arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.

              (e)  This arbitration clause cannot be modified or waived by
either party except in writing, which writing must refer to this arbitration
clause and be signed by Borrower and U. S. Bank.

              14   Counterparts. This Agreement and each of the Loan Documents
may be executed in one or more counterparts, each of which shall constitute an
original agreement, but all of which together shall constitute one and the same
instrument.

              15   Termination of Original Credit Agreement. Upon execution of
this Agreement and the other Loan Documents by the parties hereto and thereto,
and upon satisfaction of the conditions precedent to the initial Funding under
the Loans as set forth in Section 5.1 herein, the Original Credit Agreement
shall terminate and shall be superseded by this Agreement.

              16   Statutory Notice. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.

                                      -36-
<PAGE>   37
              IN WITNESS WHEREOF, Borrower and U. S. Bank have caused this
Agreement to be duly executed by the respective, duly authorized signatories as
of the date first above written.


                                       GARGOYLES, INC.



                                       By               STEVE KINGMA
                                             -----------------------------------

                                       Title       Chief Financial Officer
                                             -----------------------------------



                                       By                DOUG HAUFF
                                             -----------------------------------

                                       Title       Chief Financial Officer
                                             -----------------------------------



                                       U. S. BANK OF WASHINGTON,
                                           NATIONAL ASSOCIATION



                                       By           GERALD L. SORENSEN
                                             -----------------------------------

                                       Title
                                             -----------------------------------



                                      -37-