Document:

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                                                                    EXHIBIT 10.1

                                                                    June 1, 2002

Interlink Electronics, Inc.
546 Flynn Road
Camarillo, CA 93012

Gentlemen:

     This letter is to confirm that WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank"), subject to all terms and conditions contained herein, has agreed to
make available the credit described below to INTERLINK ELECTRONICS, INC.
("Borrower"):

     1.     A revolving line of credit under which Bank will make advances to
Borrower from time to time up to and including June 1, 2004, not to exceed at
any time the maximum principal amount of Five Million Dollars ($5,000,000.00)
("Line of Credit"), the proceeds of which shall be used to finance Borrower's
working capital requirements. Although this letter permits Borrower to engage in
Permitted Acquisitions (as defined below), the proceeds of advances under the
Line of Credit shall not be used to finance such acquisitions.

     2.     A commitment under which Bank will make advances to Borrower from
time to time up to and including June 30, 2003, not to exceed the aggregate
principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term
Commitment"), the proceeds of which shall be used to finance Borrower's purchase
of new and/or used equipment and which shall be converted on July 1, 2003, to a
term loan, as described more fully below.

     3.     A term loan in the principal amount of Three Hundred Fifty-three
Thousand Nine Hundred Ten And 85/100 Dollars ($353,910.85) ("Term Loan"), the
proceeds of which shall be used to refinance Borrower's existing loan with Bank.
Bank's commitment to grant the Term Loan shall terminate on July 20, 2002.

I.   CREDIT TERMS:

     1.     LINE OF CREDIT:

     (a)    Line of Credit Note. Borrower's obligation to repay advances under
the Line of Credit shall be evidenced by a promissory note substantially in the
form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which
are incorporated herein by this reference.

     (b)    Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue standby
and/or sight commercial letters of credit for the account of Borrower to finance
the purchase of raw materials (each, a "Letter of Credit" and collectively,
"Letters of Credit"); provided however, that the form and substance of each
Letter of Credit shall be subject to approval by Bank, in its sole discretion;
and provided further, that the aggregate undrawn amount of all outstanding
Letters of Credit shall not at any time exceed Two Million Dollars
($2,000,000.00). Each Letter of Credit shall be issued for a term not to exceed
one hundred twenty (120) days, as designated by Borrower; provided

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Interlink Electronics, Inc.
June 1, 2002
Page 2

however, that no Letter of Credit shall have an expiration date subsequent to
the maturity date of the Line of Credit. The undrawn amount of all Letters of
Credit shall be reserved under the Line of Credit and shall not be available for
borrowings thereunder. Each Letter of Credit shall be subject to the additional
terms and conditions of the Letter of Credit Agreement and related documents, if
any, required by Bank in connection with the issuance thereof. Each draft paid
by Bank under a Letter of Credit shall be deemed an advance under the Line of
Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this letter applicable to such advances; provided however, that if
advances under the Line of Credit are not available, for any reason, at the time
any draft is paid by Bank, then Borrower shall immediately pay to Bank the full
amount of such draft, together with interest thereon from the date such amount
is paid by Bank to the date such amount is fully repaid by Borrower, at the rate
of interest applicable to advances under the Line of Credit. In such event
Borrower agrees that Bank, in its sole discretion, may debit any demand deposit
account maintained by Borrower with Bank for the amount of any such draft.

     (c)    Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.

     2.     TERM COMMITMENT:

     (a)    Term Commitment Note. Borrower's obligation to repay advances under
the Term Commitment shall be evidenced by a promissory note substantially in the
form of Exhibit B attached hereto ("Term Commitment Note"), all terms of which
are incorporated herein by this reference.

     (b)    Limitation on Borrowings. Each advance under the Loan Commitment
shall be available to a maximum of eighty percent (80%) of the cost of each item
of new equipment purchased and seventy-five percent (75%) of the cost of each
item of used equipment purchased with the proceeds there of, as evidenced by the
seller's invoice.

     (c)    Borrowing and Repayment. Borrower may from time to time during the
period in which Bank will make advances under the Term Commitment borrow and
partially or wholly repay its outstanding borrowings, provided that amounts
repaid may not be reborrowed, subject to all the limitations, terms and
conditions contained herein; provided however, that the total outstanding
borrowings under the Term Commitment shall not at any time exceed the maximum
principal amount available thereunder, as set forth above. The principal amount
of the Term Commitment shall be repaid in accordance with the provisions of the
Term Commitment Note.

     (d)    Prepayment. Borrower may prepay principal on the Term Commitment
solely in accordance with the provisions of the Term Commitment Note.

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Interlink Electronics, Inc.
June 1, 2002
Page 3

     3.     TERM LOAN:

     (a)    Term Note. Borrower's obligation to repay the Term Loan shall be
evidenced by a promissory note substantially in the form of Exhibit C attached
hereto ("Term Note"), all terms of which are incorporated herein by this
reference.

     (b)    Repayment. The principal amount of the Term Loan shall be repaid in
accordance with the provisions of the Term Note.

     (c)    Prepayment. Borrower may prepay principal on the Term Loan solely in
accordance with the provisions of the Term Note.

     4.     COLLATERAL:

     As security for all indebtedness of Borrower to Bank subject hereto,
Borrower hereby grants to Bank security interests of first priority in all
Borrower's accounts receivable and other rights to payment, general intangibles,
deposit accounts, documents, instruments, Brokerage Account No. 12561247,
inventory and equipment, including but not limited to its interest in any
Subsidiary (as defined below).

     All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.

II.  INTEREST/FEES:

     1.     Interest. The outstanding principal balance of each credit subject
hereto shall bear interest at the rate of interest set forth in each promissory
note or other instrument executed in connection therewith.

     2.     Computation and Payment. Interest shall be computed on the basis of
a 360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in each promissory note or other instrument required hereby.

     3.     Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one-eighth quarter percent (0.125%) per annum (computed on the basis of a
360-day year, actual days elapsed) on the average daily unused amount of the
Line of Credit, which fee shall be calculated on a quarterly basis by Bank and
shall be due and payable by Borrower in arrears on each March 31, June 30,
September 30 and December 31

     4.     Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation of each draft
under any Letter of Credit and upon the occurrence of any other activity with
respect to any Letter of Credit (including without

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June 1, 2002
Page 4

limitation, the transfer, amendment or cancellation of any Letter of Credit)
determined in accordance with Bank's standard fees and charges then in effect
for such activity.

     5.     Collection of Payments. Borrower authorizes Bank to collect all
principal, interest and fees due under each credit subject hereto by charging
Borrower's deposit account number 4796-018083 with Bank, or any other deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such deposit account to pay all such sums
when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.

III. REPRESENTATIONS AND WARRANTIES:

     Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this letter and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this letter.

     1.     Legal Status. Borrower is a corporation, duly organized and existing
and in good standing under the laws of the state of Delaware, and is qualified
or licensed to do business in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower. Borrower owns one hundred
percent (100%) of the stock of Interlink Electronics Asia Pacific, a Hong Kong
corporation (the "Hong Kong Subsidiary"). Borrower owns eighty percent (80%) of
the stock of Interlink Electronics, K.K., a Japanese company (the "Existing
Japanese Subsidiary"). As used herein, the term "Subsidiary" shall mean any
corporation or other entity of which at least a majority of the securities or
other ownership interests having ordinary voting power for the election of
directors or other persons performing similar functions are owned directly or
indirectly by Borrower and/or by one or more of Borrower's Subsidiaries. As used
herein, the term "Subsidiaries" shall mean each Subsidiary. As of the date of
this Agreement the only Subsidiaries of Borrower are the Hong Kong Subsidiary
and the Existing Japanese Subsidiary. Each Subsidiary is duly organized and
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation, as the case may be, and is qualified or licensed to
do business (and is in good standing as a foreign corporation, if applicable) in
all jurisdictions in which such qualification or licensing is required or in
which the failure to so qualify or to be so licensed could have a material
adverse effect on it.

     2.     Authorization and Validity. This letter and each promissory note,
contract, instrument and other document deemed necessary by Bank to evidence any
extension of credit to Borrower pursuant to the terms and conditions hereof, or
now or at any time hereafter required by or delivered to Bank in connection with
this letter (collectively, the "Loan Documents") have been duly authorized, and
upon their execution and delivery in accordance with the provisions hereof will
constitute legal, valid and binding agreements and obligations of Borrower or
the party which executes the same, enforceable in accordance with their
respective terms.

     3.     No Violation. The execution, delivery and performance by Borrower of
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any

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Interlink Electronics, Inc.
June 1, 2002
Page 5

provision of the Articles of Incorporation or By-Laws of Borrower, or result in
a breach of or constitute a default under any contract, obligation, indenture or
other instrument to which Borrower is a party or by which Borrower may be bound.

     4.     Litigation. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings by
or before any governmental authority, arbitrator, court or administrative agency
which could have a material adverse effect on the financial condition or
operation of Borrower or any Subsidiary other than those disclosed by Borrower
to Bank in writing prior to the date hereof.

     5.     Correctness of Financial Statement. The financial statement of
Borrower dated March 31, 2002, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower and its Subsidiary, (b)
discloses all liabilities of Borrower and its Subsidiary that are required to be
reflected or reserved against under generally accepted accounting principles,
whether liquidated or unliquidated, fixed or contingent, and (c) has been
prepared in accordance with generally accepted accounting principles
consistently applied. Since the date of such financial statement there has been
no material adverse change in the condition or operation of Borrower or its
Subsidiary, nor has Borrower or the its Subsidiary mortgaged, pledged, granted a
security interest in or otherwise encumbered any of their assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing or under
this letter.

     6.     Income Tax Returns. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.

     7.     No Subordination. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this letter to any other obligation of Borrower.

     8.     Permits, Franchises. Borrower and each Subsidiary possess, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and all rights to trademarks, trade names, patents and fictitious
names, if any, necessary to enable them to conduct the businesses in which they
are now engaged in compliance with applicable law.

     9.     ERISA. Borrower and each Subsidiary are in compliance in all
material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended or recodified from time to time
("ERISA"); neither Borrower nor any Subsidiary have not violated any provision
of any defined employee pension benefit plan (as defined in ERISA) maintained or
contributed to by Borrower or any Subsidiary (each, a "Plan"); no Reportable
Event, as defined in ERISA, has occurred and is continuing with respect to any
Plan initiated by Borrower; Borrower has met its minimum funding requirements
under ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.

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Interlink Electronics, Inc.
June 1, 2002
Page 6

     10.    Other Obligations. Neither Borrower nor any Subsidiary is in default
on any obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.

     11.    Environmental Matters. Except as disclosed by Borrower to Bank in
writing prior to the date hereof, Borrower and each Subsidiary are in compliance
in all material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's or any
Subsidiary's operations and/or properties, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource
Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control
Act, as any of the same may be amended, modified or supplemented from time to
time. None of the operations of Borrower or any Subsidiary is the subject of any
federal or state investigation evaluating whether any remedial action involving
a material expenditure is needed to respond to a release of any toxic or
hazardous waste or substance into the environment. Neither Borrower nor any
Subsidiary has any material contingent liability in connection with any release
of any toxic or hazardous waste or substance into the environment.

IV.  CONDITIONS:

     1.     Conditions of Initial Extension of Credit. The obligation of Bank to
extend any credit contemplated by this letter is subject to fulfillment to
Bank's satisfaction of all of the following conditions:

     (a)    Documentation. Bank shall have received each of the Loan Documents,
duly executed and in form and substance satisfactory to Bank.

     (b)    Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any Subsidiary, nor any material decline, as determined by Bank, in
the market value of any collateral required hereunder or a substantial or
material portion of the assets of Borrower or any Subsidiary.

     (c)    Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's and each Subsidiary's property, in form,
substance, amounts, covering risks and issued by companies satisfactory to Bank,
and where required by Bank, with loss payable endorsements in favor of Bank.

     2.     Conditions of Each Extension of Credit. The obligation of Bank to
make each extension of credit requested by Borrower hereunder shall be subject
to the fulfillment to Bank's satisfaction of each of the following conditions:

     (a)    Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this letter and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
default hereunder, and no condition, event or act which with the giving of
notice or

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Interlink Electronics, Inc.
June 1, 2002
Page 7

the passage of time or both would constitute such a default, shall have occurred
and be continuing or shall exist.

     (b)    Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

V.   COVENANTS:

     Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:

     1.     Punctual Payment. Punctually pay all principal, interest, fees or
other liabilities due under any of the Loan Documents at the times and place and
in the manner specified therein, and immediately upon demand by Bank, the amount
by which the outstanding principal balance of any credit subject hereto at any
time exceeds any limitation on borrowings applicable thereto.

     2.     Accounting Records. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same and inspect the
properties of Borrower and any Subsidiary.

     3.     Financial Statements. Provide to Bank all of the following, in form
and detail satisfactory to Bank:

     (a)    not later than 120 days after and as of the end of each fiscal year,
a 10K report filed with the Securities Exchange Commission of Borrower, prepared
by an independent certified public accountant acceptable to Bank, to include
balance sheet, income statement, statement of cash flows, management report,
auditor's report, schedules of consolidations and all supporting schedules and
footnotes;

     (b)    not later than 90 days after and as of the end of each fiscal
quarter, a 10Q report filed with the Securities Exchange Commission of Borrower,
prepared by an independent certified public accountant acceptable to Bank, to
include balance sheet, income statement, statement of cash flows, management
report, auditor's report, schedules of consolidations and all supporting
schedules and footnotes; and

     (c)    from time to time such other information as Bank may reasonably
request pertaining to Borrower and/or any Subsidiary.

     4.     Compliance. Preserve and maintain, and cause each Subsidiary to
preserve and maintain, all licenses, permits, governmental approvals, rights,
privileges and franchises necessary for the conduct of each of their businesses
and comply with the provisions of all documents pursuant to which each of them
is organized and/or which govern their continued

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Interlink Electronics, Inc.
June 1, 2002
Page 8

existence and with the requirements of all laws, rules, regulations and orders
of a governmental agency applicable to each of them and/or each of their
businesses.

     5.     Insurance. Maintain and keep in force, and cause each Subsidiary to
maintain and keep in force, insurance of the types and in amounts customarily
carried in similar lines of business, including but not limited to fire,
extended coverage, public liability, flood, property damage and workers'
compensation, with all such insurance carried with companies and in amounts
satisfactory to Bank, and deliver to Bank from time to time at Bank's request
schedules setting forth all insurance then in effect.

     6.     Facilities. Keep all properties useful or necessary to Borrower's
and each Subsidiary's business in good repair and condition, and from time to
time make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.

     7.     Taxes and Other Liabilities. Pay and discharge when due, and cause
each Subsidiary to pay and discharge when due, any and all indebtedness,
obligations, assessments and taxes, both real or personal, including without
limitation federal and state income taxes and state and local property taxes and
assessments, except (a) such as they may in good faith contest or as to which a
bona fide dispute may arise, and (b) for which Borrower has made provision, to
Bank's satisfaction, for eventual payment thereof in the event Borrower or any
Subsidiary is obligated to make such payment.

     8.     Litigation. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower or any Subsidiary with a claim
in excess of $100,000.00.

     9.     Capital Expenditures. Not make any additional investment in fixed
assets in any fiscal year in excess of an aggregate of $1,500,000.00.

     10.    Lease Expenditures. Not incur operating lease expense in any fiscal
year in excess of an aggregate of $500,000.00.

     11.    Other Indebtedness. Not create, incur, assume or permit to exist,
nor permit any Subsidiary to create, incur, assume or permit to exist, any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except for (a) the liabilities of Borrower and any Subsidiary
to Bank, (b) any other liabilities of Borrower and any Subsidiary existing as
of, and disclosed by Borrower to Bank prior to, the date hereof, (c) borrowings
hereafter by Borrower or any Subsidiary from any lender other than Bank or
Borrower, including but not limited to purchase money borrowings, so long as
such outstanding borrowings which arise hereafter at no time exceed
$3,500,000.00 in the aggregate for Borrower and Subsidiaries combined.

     12.    Merger, Consolidation, Transfer of Assets. Not merge into or
consolidate with any other entity, nor permit any Subsidiary to merge into or
consolidate with any other entity, except for the merger of any wholly-owned
Subsidiary of Borrower into Borrower (with Borrower as the survivor), the merger
of any wholly-owned Subsidiary of Borrower into any other wholly-owned
Subsidiary of Borrower, or the merger of any corporation into Borrower (with
Borrower as the

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Page 9

survivor) or into any wholly-owned Subsidiary of Borrower (with such Subsidiary
as the survivor) as part of a Permitted Acquisition (as defined below); nor
make, nor permit any Subsidiary to make, any substantial change in the nature of
Borrower's or any Subsidiary's business as conducted as of the date hereof; nor
acquire, nor permit any Subsidiary to acquire, all or substantially all of the
assets of any other entity except for mergers which are permitted hereunder and
Permitted Acquisitions; nor sell, lease, transfer or otherwise dispose of, nor
permit any Subsidiary to sell, lease, transfer or otherwise dispose of, all or a
substantial or material portion of Borrower's or any Subsidiary's assets except
in the ordinary course of business.

     As used herein, "Permitted Acquisitions" means any acquisition by Borrower
or any wholly-owned Subsidiary of Borrower of (a) all or substantially all of
the operating assets of any person or entity, or (b) all or substantially all of
the stock of any corporation; provided, however, that all of the following
conditions are satisfied:

     (i)    The assets, entity or line of business which is acquired is in a
substantially similar line of business as that of Borrower or any of its
Subsidiaries as their businesses are conducted on the date of this Agreement.

     (ii)   The acquisition is consummated in compliance with applicable law.

     (iii)  There is no Event of Default, nor any act, condition or event which
with the giving of notice or the passage of time or both would constitute an
Event of Default, and no such Event of Default or potential Event of Default
would result after giving effect to the acquisition.

     (iv)   Borrower gives Bank with at least sixty (60) days prior notice of
the acquisition;

     (v)    Borrower furnishes Bank with copies of such documents and with such
information pertaining to the acquisition as Bank may require, including without
limitation copies of any acquisition agreement and formation documents of any
acquired company.

     13.    Guaranties. Not guarantee or become liable, nor permit any
Subsidiary to guarantee or become liable, in any way as surety, endorser (other
than as endorser of negotiable instruments for deposit or collection in the
ordinary course of business), accommodation endorser or otherwise for, nor
pledge or hypothecate, nor permit any Subsidiary to pledge or hypothecate, any
assets as security for, any liabilities or obligations of any other person or
entity, except for (a) any of the foregoing in favor of Bank, and (b) any of the
foregoing existing as of, and disclosed by Borrower to Bank prior to, the date
hereof.

     14.    Loans, Advances, Investments. Not make any loans or advances to or
investments in any person or entity, except for (a) any of the foregoing
existing as of, and disclosed by Borrower to Bank prior to, the date hereof, (b)
loans hereafter by Borrower to any Subsidiary so long as outstanding loans by
Borrower to Subsidiaries, whether such loans presently exist or arise hereafter,
at no time exceed $500,000.00 in the aggregate for all Subsidiaries combined,
(c) investments by Borrower hereafter in cash and cash equivalents, and (d)
Permitted Acquisitions.

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Interlink Electronics, Inc.
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Page 10

     15.    Dividends, Distributions. Not declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.

     16.    Pledge of Assets. Not mortgage, pledge, grant or permit to exist,
nor permit any Subsidiary to mortgage, pledge, grant or permit to exist, a
security interest in, or lien upon, all or any portion of Borrower's or any
Subsidiary's assets now owned or hereafter acquired, except for (a) any of the
foregoing in favor of Bank, (b) any of the foregoing which are existing as of,
and disclosed to Bank in writing prior to, the date hereof, (b) purchase money
security interests in equipment which are granted hereafter to secure purchase
money borrowings from lenders other than Bank or Borrower so long as such
borrowings are permitted under (and within the limits of) paragraph 12 above,
(c) security interests granted hereafter by the Existing Japanese Subsidiary in
its assets to secure its borrowings from lenders other than Bank so long as such
borrowings are permitted under (and within the limits of) paragraph 11 above.

VI.  DEFAULT, REMEDIES:

     1.     Default, Remedies. Upon the violation of any term or condition of
any of the Loan Documents, or upon the occurrence of any default or defined
event of default under any of the Loan Documents: (a) all indebtedness of
Borrower under each of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Bank's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are expressly waived by Borrower; (b) the obligation, if any, of Bank
to extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any credit
subject hereto and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies of
Bank may be exercised at any time by Bank and from time to time after the
occurrence of any such breach or default, are cumulative and not exclusive, and
shall be in addition to any other rights, powers or remedies provided by law or
equity.

     2.     No Waiver. No delay, failure or discontinuance of Bank in exercising
any right, power or remedy under any of the Loan Documents shall affect or
operate as a waiver of such right, power or remedy; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind by Bank of
any breach of or default under any of the Loan Documents must be in writing and
shall be effective only to the extent set forth in such writing.

     3.     Additional Events of Default. In addition to such "Events of
Default" as are defined in the Notes, the occurrence of any of the following
shall also constitute an "Event of Default" under the Notes:

     (a)    The filing of a petition by or against any Subsidiary under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time

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Interlink Electronics, Inc.
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Page 11

to time, or under any similar or other law relating to bankruptcy, insolvency,
reorganization or other relief for debtors; the appointment of a receiver,
trustee, custodian or liquidator of or for any part of the assets or property of
any Subsidiary any Subsidiary becomes insolvent, makes a general assignment for
the benefit of creditors or is generally not paying its debts as they become
due.

     (b)    The dissolution or liquidation of any Subsidiary.

     (c)    Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Subsidiary has incurred any obligation for
borrowed money, any purchase obligation, or any other liability of any kind to
any person or entity, including Bank.

     (d)    Any financial statement provided by any Subsidiary to Bank proves to
be incorrect, false or misleading in any material respect.

     (e)    Any sale or transfer of all or a substantial or material part of the
assets of any Subsidiary other than in the ordinary course of its business.

VII. MISCELLANEOUS:

     1.     Notices. All notice, requests and demands which any party is
required or may desire to give to any other party under any provision of this
letter must be in writing delivered to each party at its address first set forth
above, or to such other address as any party may designate by written notice to
all other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

     2.     Costs, Expenses and Attorneys' Fees. Borrower shall pay to Bank
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
letter and the other Loan Documents, Bank's continued administration hereof and
thereof, and the preparation of amendments and waivers hereto and thereto, (b)
the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower
or any other person or entity.

     3.     Successors, Assignment. This letter shall be binding upon and inure
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without Bank's prior written consent.
Bank reserves the right to sell, assign, transfer, negotiate

<PAGE>

Interlink Electronics, Inc.
June 1, 2002
Page 12

or grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith Bank may
disclose all documents and information which Bank now has or hereafter may
acquire relating to any credit subject hereto, Borrower or its business, or any
collateral required hereunder.

     4.     Entire Agreement; Amendment. This letter and the other Loan
Documents constitute the entire agreement between Borrower and Bank with respect
to each credit subject hereto and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This letter may be amended or modified only in writing signed by each
party hereto.

     5.     No Third Party Beneficiaries. This letter is made and entered into
for the sole protection and benefit of the parties hereto and their respective
permitted successors and assigns, and no other person or entity shall be a third
party beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this letter or any other of the Loan Documents to which it is
not a party.

     6.     Severability of Provisions. If any provision of this letter shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
letter.

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

     8.     Arbitration.

     (a)    Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan Documents which are the subject of
this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.

     (b)    Governing Rules. Any arbitration proceeding will (i) proceed in a
location in California selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration

<PAGE>

Interlink Electronics, Inc.
June 1, 2002
Page 15

     Your acknowledgment of this letter shall constitute acceptance of the
foregoing terms and conditions. Bank's commitment to extend any credit to
Borrower pursuant to the terms of this letter shall terminate on August 1, 2002,
unless this letter is acknowledged by Borrower and returned to Bank on or before
that date.

                                              Sincerely,

                                              WELLS FARGO BANK,
                                               NATIONAL ASSOCIATION

                                              By: /s/ John E. Ray
                                                  --------------------
                                                  John E. Ray
                                                  Vice President

Acknowledged and accepted as of 7/23/02:

INTERLINK ELECTRONICS, INC.

By: /s/ Paul D. Meyer
   ------------------------------------

Title: CFO
      ---------------------------------

<PAGE>

                                    EXHIBIT A

WELLS FARGO BANK                                   REVOLVING LINE OF CREDIT NOTE

$5,000,000.00                                         Woodland Hills, California
                                                                    June 1, 2002

     FOR VALUE RECEIVED, the undersigned Interlink Electronics, Inc.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Warner Ranch RCBO, 6001 Topanga Cyn Blvd
Ste 205, Woodland Hills, CA 91367, or at such other place as the holder hereof
may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of $5,000,000.00, or so much
thereof as may be advanced and be outstanding, with interest thereon, to be
computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

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

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

     (b)    "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1, 2, 3, 6 or 12 months, as designated by Borrower, during which
all or a portion of the outstanding principal balance of this Note bears
interest determined in relation to LIBOR; provided however, that no Fixed Rate
Term may be selected, for a principal amount less than $100,000.00; and provided
further, that no Fixed Rate Term shall extend beyond the scheduled maturity date
hereof. If any Fixed Rate Term would end on a day which is not a Business Day,
then such Fixed Rate Term shall be extended to the next succeeding Business Day.

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

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

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

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

INTEREST:

Revolving line of Credit Note (05/01)                                     Page 1
02693, #3792917406

<PAGE>

     (a)    Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be 2.00000%
above LIBOR in effect on the first day of the applicable Fixed Rate Term. When
interest is determined in relation to the Prime Rate, each change in the rate of
interest hereunder shall become effective on the date each Prime Rate change is
announced within Bank. With respect to each LIBOR selection option selected
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

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

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

     (d)    Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each month, commencing July 1, 2002.

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

BORROWING AND REPAYMENT:

     (a)    Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and

Revolving line of Credit Note (05/01)                                     Page 2
02693, #3792917406

<PAGE>

conditions of this Note and of any document executed in connection with or
governing this Note; provided however, that the total outstanding borrowings
under this Note shall not at any time exceed the principal amount stated above.
The unpaid principal balance of this obligation at any time shall be the total
amounts advanced hereunder by the holder hereof less the amount of principal
payments made hereon by or for any Borrower, which balance may be endorsed
hereon from time to time by the holder. The outstanding principal balance of
this Note shall be due and payable in full on June 1, 2004.

     (b)    Advances. Advances hereunder, to the total amount of the principal
sum available hereunder, may be made by the holder at the oral or written
request of (i) Paul Meyer or Sharon McCracken, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any deposit account of any Borrower, which advances,
when so deposited, shall be conclusively presumed to have been made to or for
the benefit of each Borrower regardless of the fact that persons other than
those authorized to request advances may have authority to draw against such
account. The holder shall have no obligation to determine whether any person
requesting an advance is or has been authorized by any Borrower.

     (c)    Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

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

     (b)    LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of $100,000.00; provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal balance
thereof. In consideration of Bank providing this prepayment option to Borrower,
or if any such portion of this Note shall become due and payable at any time
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is
the sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:

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

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

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

Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum 2.000% above the Prime
Rate in effect from time to time (computed on

Revolving line of Credit Note (05/01)                                     Page 3
02693, #3792917406

<PAGE>

the basis of a 360-day year, actual days elapsed). Each change in the rate of
interest on any such past due prepayment fee shall become effective on the date
each Prime Rate change is announced within Bank.

EVENTS OF DEFAULT:

     The occurrence of any of the following shall constitute an "Event of
Default" under this Note:

     (a)    The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.

     (b)    The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.

     (c)    The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.

     (d)    Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.

     (e)    Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.

     (f)    Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.

     (g)    Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.

MISCELLANEOUS:

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

Revolving line of Credit Note (05/01)                                     Page 4
02693, #3792917406

<PAGE>

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

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

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

Revolving line of Credit Note (05/01)                                     Page 5
02693, #3792917406

<PAGE>

                                    EXHIBIT B

                              TERM COMMITMENT NOTE

$500,000.00                                           Woodland Hills, California
                                                                    June 1, 2002

     FOR VALUE RECEIVED, the undersigned INTERLINK ELECTRONICS, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 6001 Topanga Canyon Boulevard, Suite 205,
Woodland Hills, California, or at such other place as the holder hereof may
designate, in lawful money of the United States of America and in immediately
available funds, the principal sum of Five Hundred Thousand Dollars
($500,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

DEFINITIONS:

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

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

     (b)    "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2), three (3), six (6) or twelve (12) months, as
designated by Borrower, during which all or a portion of the outstanding
principal balance of this Note bears interest determined in relation to LIBOR;
provided however, that no Fixed Rate Term may be selected for a principal amount
less than One Hundred Thousand Dollars ($100,000.00); and provided further, that
no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If
any Fixed Rate Term would end on a day which is not a Business Day, then such
Fixed Rate Term shall be extended to the next succeeding Business Day.

     (c)    "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:

           LIBOR =               Base LIBOR
                   ---------------------------------------
                      100% - LIBOR Reserve Percentage

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

          (ii)  "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency

                                       -1-

<PAGE>

Liabilities" (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted by Bank for expected changes in such reserve percentage
during the applicable Fixed Rate Term.

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

 INTEREST:

     (a)    Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be two and
one-half percent (2.5%) above LIBOR in effect on the first day of the applicable
Fixed Rate Term. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With respect to each LIBOR selection
hereunder, Bank is hereby authorized to note the date, principal amount,
interest rate and Fixed Rate Term applicable thereto and any payments made
thereon on Bank's books and records (either manually or by electronic entry)
and/or on any schedule attached to this Note, which notations shall be prima
facie evidence of the accuracy of the information noted.

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

     (c)    Taxes and Regulatory Costs. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (i) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any domestic or foreign
governmental authority and related in any

                                       -2-

<PAGE>

manner to LIBOR, and (ii) future, supplemental, emergency or other changes in
the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit
Insurance Corporation, or similar requirements or costs imposed by any domestic
or foreign governmental authority or resulting from compliance by Bank with any
request or directive (whether or not having the force of law) from any central
bank or other governmental authority and related in any manner to LIBOR to the
extent they are not included in the calculation of LIBOR. In determining which
of the foregoing are attributable to any LIBOR option available to Borrower
hereunder, any reasonable allocation made by Bank among its operations shall be
conclusive and binding upon Borrower.

     (d)    Payment of Interest. Interest accrued on this Note shall be payable
on the first day of each month, commencing August 1, 2002.

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

BORROWING AND REPAYMENT:

     (a)    Borrowing. Borrower may from time to time from the date hereof
through and including June 30, 2003, borrow and partially or wholly repay its
outstanding borrowings, subject to all of the limitations, terms and conditions
of this Note and of any document executed in connection with or governing this
Note; provided however, that amounts repaid may not be reborrowed; and provided
further, that the total borrowings under this Note shall not exceed the
principal amount stated above. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for Borrower, which
balance may be endorsed hereon from time to time by the holder.

     (b)    Repayment. The principal balance outstanding under this Note on June
30, 2003 shall be payable on the first day of each month in installments each
equal to one-forty-eighth (1/48) of such principal balance, commencing July 1,
2003, and continuing up to and including May 1, 2007, with a final installment
consisting of all remaining unpaid principal due and payable in full on June 1,
2007.

     (c)    Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Paul Meyer or Sharon McCraken, either one acting alone, who are authorized
to request advances and direct the disposition of any advances until written
notice of the revocation of such authority is received by the holder at the
office designated above, or (ii) any person, with respect to advances deposited
to the credit of any deposit account of Borrower, which advances, when so
deposited, shall be conclusively presumed to have been made to or for the
benefit of Borrower regardless of the fact that persons other than those
authorized to request advances may have authority to draw against such account.
The holder shall have no obligation to determine whether any person requesting
an advance is or has been authorized by Borrower.

     (d)  Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this

                                       -3-

<PAGE>

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

PREPAYMENT:

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

     (b)    LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however,
that if the outstanding principal balance of such portion of this Note is less
than said amount, the minimum prepayment amount shall be the entire outstanding
principal balance thereof. In consideration of Bank providing this prepayment
option to Borrower, or if any such portion of this Note shall become due and
payable at any time prior to the last day of the Fixed Rate Term applicable
thereto by acceleration or otherwise, Borrower shall pay to Bank immediately
upon demand a fee which is the sum of the discounted monthly differences for
each month from the month of prepayment through the month in which such Fixed
Rate Term matures, calculated as follows for each such month:

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

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

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

Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.

EVENTS OF DEFAULT:

     The occurrence of any of the following shall constitute an "Event of
Default" under this Note:

                                       -4-

<PAGE>

     (a)    The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.

     (b)    The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.

     (c)    The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.

     (d)    Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.

     (e)    Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.

     (f)    Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.

     (g)    Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.

MISCELLANEOUS:

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

                                       -5-

<PAGE>

contested matter or motion brought by Bank or any other person) relating to
Borrower or any other person or entity.

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

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

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

                                       -6-

<PAGE>

                                    EXHIBIT C

WELLS FARGO BANK                                                       TERM NOTE

$353,910.85                                           Woodland Hills, California
                                                                    June 1, 2002

     FOR VALUE RECEIVED, the undersigned Interlink Electronics, Inc.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at Warner Ranch RCBO, 6001 Topanga Cyn Blvd
Ste 205, Woodland Hills, CA 91367, or at such other place as the holder hereof
may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of $353,910.85, with interest
thereon as set forth herein.

DEFINITIONS:

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

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

     (b)    "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1,2, 3, 6 or 12 months, as designated by Borrower, during which
all or a portion of the outstanding principal balance of this Note bears
interest determined in relation to LIBOR; provided however, that no Fixed Rate
Term may be selected for a principal amount less than $100,000.00; and provided
further, that no Fixed Rate Term shall extend beyond the scheduled maturity date
hereof. If any Fixed Rate Term would end on a day which is not a Business Day,
then such Fixed Rate Term shall be extended to the next succeeding Business Day.

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

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

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

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

INTEREST:

     (a)    Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in

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02693, #3792917406

<PAGE>

effect from time to time, or (ii) at a fixed rate per annum determined by Bank
to be 2.25000% above LIBOR in effect on the first day of the applicable Fixed
Rate Term. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With respect to each LIBOR selection
option selected hereunder. Bank is hereby authorized to note the date, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.

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

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

     (d)    Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each month, commencing July 1, 2002.

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

REPAYMENT AND PREPAYMENT:

     (a)    Repayment. Principal shall be payable on the 1st day of each month
in installments of $7,373.14 each, commencing July 1, 2002, and continuing up to
and including May 1, 2006, with a final installment consisting of all remaining
unpaid principal due and payable in full on June 1, 2006.

Term Note-Principal/lnterest Separate (05/01)                             Page 2
02693, #3792917406

<PAGE>

     (b)    Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

     (c)    Prepayment.

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

     LIBOR. Borrower may prepay principal on any portion of this Note which
bears interest determined in relation to LIBOR at any time and in the minimum
amount of $100,000.00; provided however, that if the outstanding principal
balance of such portion of this Note is less than said amount, the minimum
prepayment amount shall be the entire outstanding principal balance thereof. In
consideration of Bank providing this prepayment option to Borrower, or if any
such portion of this Note shall become due and payable at any time prior to the
last day of the Fixed Rate Term applicable thereto by acceleration or otherwise,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of the
discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:

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

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

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

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

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

EVENTS OF DEFAULT:

     The occurrence of any of the following shall constitute an "Event of
Default" under this Note:

     (a)    The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.

     (b)    The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the

Term Note-Principal/lnterest Separate (05/01)                             Page 3
02693, #3792917406

<PAGE>

appointment of a receiver, trustee, custodian or liquidator of or for any part
of the assets or property of any Borrower or Third Party Obligor; any Borrower
or Third Party Obligor becomes insolvent, makes a general assignment for the
benefit of creditors or is generally not paying its debts as they become due; or
any attachment or like levy on any property of any Borrower or Third Party
Obligor.

     (c)    The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.

     (d)    Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.

     (e)    Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.

     (f)    Any sale or transfer of all or a substantial or material part of the
assets of any Borrower or Third Party Obligor other than in the ordinary course
of its business.

     (g)    Any violation or breach of any provision of, or any defined event of
default under, any addendum to this Note or any loan agreement, guaranty,
security agreement, deed of trust, mortgage or other document executed in
connection with or securing this Note.

MISCELLANEOUS:

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

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

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

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

Term Note-Principal/lnterest Separate (05/01)                             Page 4
02693, #3792917406Prepared by R.R. Donnelley Financial -- Employment Agreement - Lloyd McAdams

  EXHIBIT 10.7
 EMPLOYMENT AGREEMENT
           THIS EMPLOYMENT AGREEMENT (“Agreement”), effective as of the 1st day of January 2002, is entered into by and between Joseph Lloyd McAdams (the
“Executive”) and Anworth Mortgage Advisory Corporation, a California corporation (the “Company”).
           The Company desires
to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on
such terms and conditions.
           In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and
do hereby agree as follows:
           1.     Employment.  The Company does hereby employ the Executive
as President, Chairman of the Board and Chief Executive Officer of the Company, and the Executive does hereby accept and agree to such employment.  The Executive’s duties as President, Chairman of the Board and Chief Executive Officer
shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company.  The Executive shall devote such time, energy and skill to the performance of
his duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company’s business.  Furthermore, the Executive shall exercise due diligence and care in the
performance of his duties for the Company under this Agreement.
           2.     Term of
Agreement.  The term (“Term”) of this Agreement shall commence as of the date hereof and shall continue through December 31, 2004, unless sooner terminated as provided herein or renewed pursuant to the terms of Section 7
hereof.
           3.     Appointment to Board of Directors. During the Executive’s
employment by the Company, the Executive shall serve as a member of the Board of Directors of the Company.
           4.     Compensation.
                          (a)     Base Salary.  The Company shall
pay the Executive a base salary of One Hundred Twenty Thousand Dollars ($120,000) per year, subject to annual increases as set forth in the next sentence (the “Base Salary”).  The Company shall review the Base Salary annually and
shall increase (but not decrease) the Base Salary each calendar year beginning January 1, 2003, by the greater of (i) the percentage increase, if any, in the cost of living index by reference to the Consumer Price Index in the Los Angeles
Metropolitan Area, as provided for the last day of such annual period by the Bureau of Labor Statistics of the United States Department of Labor, or (ii) a greater percentage increase than that set forth in subsection (i) above, as determined by
the
  

  
  Company’s Board of Directors.  The Base Salary shall be payable in equal installments twice monthly consistent with
the Company’s regular business practice.
                          (b)     Discretionary Bonus.  The
Executive shall be eligible to receive an additional incentive performance bonus based upon a percentage of his Base Salary.  Any such bonus awarded to the Executive shall be payable in the amount, in the manner, and at the time determined by
the Company’s Board of Directors in its sole and absolute discretion.
                          (c)     Expense Reimbursement.  The
Company shall reimburse the Executive for reasonable and necessary business and entertainment expenses incurred by him in connection with the performance of his duties hereunder, including, but not limited to, expenses for business development,
travel, meals and accommodations and related expenditures.  The Company shall reimburse the Executive for all such expenses upon presentation by the Executive, from time to time, of an itemized written accounting of such
expenditures.
                          (d)     Benefits.  The Company shall
provide the Executive with the following benefits during the Term and any renewals thereof:
                                   (i)  
   Participation in Benefit Plans and Policies.  The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance,
medical coverage, education, or other retirement or employee benefits available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans.  The Company shall make commercially
reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees.
                                   (ii)  
   Vacation.  The Executive shall be entitled to (i) four (4) weeks of paid vacation per calendar year for the first two years of service to the Company following the execution of this Agreement, and
(ii) five (5) weeks of paid vacation per calendar year for the next two years of service to the Company, with such vacation to be scheduled and taken in accordance with the Company’s standard vacation policies.  After four (4)
years of service to the Company following execution of this Agreement, the Executive shall be entitled to such number of weeks of paid vacation per calendar year as determined by the Board of Directors of the Company after review of industry
standards, but shall in no event be entitled to fewer than five (5) weeks of paid vacation per calendar year.
           5.     Termination of Employment.
                          (a)     Termination Events.  The
Executive’s employment shall terminate prior to the expiration of the Term (and any renewals thereof) upon the happening of any of the following events:
 -2-

   
                                    (i)  
   Voluntary.  Voluntary termination by the Executive at any time during the Term upon written notice to the Company not less than ninety (90) days in advance of such termination;
                                   (ii)  
   Death.  The death of the Executive;
                                   (iii)  
   For Cause.  For “cause” by the Company, defined as any of the following:
                                     
        (a)     The Executive is convicted of, or pleads nolo contendere to, a felony involving fraud, embezzlement or misappropriation;
                                     
        (b)     The Executive materially breaches the terms of this Agreement by failing to substantially perform the reasonable and lawful duties of his employment, which breach
continues for a period of sixty (60) days following written notice thereof from the Company, specifying in detail the Executive’s breach hereunder;
                                     
        (c)     The Executive has committed an act of recklessness or willful misconduct against the Company resulting in a substantial economic or financial harm to the
Company.
                                   Any determination of
“cause” as used in this Section 5(a)(iii) shall be made only in good faith by an affirmative majority vote of the Board of Directors (not counting the Executive) of the Company.
                        
           (iv)     Disability.  The Executive has become so physically or mentally incapacitated or disabled as to be absent from the full-time
performance of his duties hereunder for a period of one hundred eighty (180) consecutive calendar days and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of
his duties.  During any period prior to such termination during which the Executive is absent from the full-time performance of his duties with the Company due to disability, the Company shall continue to pay the Executive his Base Salary at
the rate in effect at the commencement of such period of disability.
                                   (v)  
   Without Cause.  Without cause by the Company at any time during the Term upon written notice to the Executive not less than thirty (30) days in advance of such termination; or
                                   (vi)  
   By The Executive For Good Reason.  The Executive may terminate this Agreement pursuant to this subsection (vi) at any time upon written notice to the Company for “good reason” upon the occurrence of any of the
following events without the express written consent of the Executive:
                                     
        (a)     the Company’s material breach of any of the provisions of this Agreement;
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        (b)     the relocation of the Company’s headquarters to a location more than one hundred (100) miles from the Company’s current headquarters in Santa Monica,
California;
                                     
        (c)     a reduction in the Executive’s compensation (including without limitation, Base Salary or the benefits set forth above);
                                     
        (d)     the assignment to the Executive of a lower position in the organization in terms of his title, responsibility, authority or status, or the level of management to
which the Executive reports, unless agreed to in writing by the Executive.
                          (b)     Obligations After Voluntary
Termination; Death; Disability; For Cause Termination.  Except as set forth in this Section 5(b), in the event that the Executive’s employment is terminated pursuant to Sections 5.1(a)(i), 5.1(a)(ii), 5.1(a)(iii) or 5.1(a)(iv) herein,
neither the Company nor the Executive shall have any remaining duties or obligations hereunder, except that on the date of termination of employment (“Termination Date”), the Company shall pay to the Executive or his
representatives:
                           
         (i)     all Base Salary compensation as is due pursuant to Section 4(a) herein, prorated through the Termination Date;
                                   (ii) 
    all discretionary bonus compensation as is due pursuant to Section 4(b) herein;
                                   (iii)  
   all expense reimbursements due and owing the Executive through the Termination Date under Section 4(c) herein, including reimbursements for reasonable and necessary business expenses incurred prior to the Termination Date, as long
as the Executive submits a written accounting of such expenses in accordance with Section 4(c) herein within forty-five (45) days of the Termination Date; and
                                   (iv) 
    all benefits due the Executive, including benefits under insurance, group health and retirement benefit plans pursuant to Section 4(d) hereof, and vacation cash-out, if any, in accordance with the Company’s standard
policy, through the Termination Date.
                          (c)     Obligations After Termination Without
Cause or Termination by The Executive For Good Reason; Non-Renewal.  Except as set forth in Section 6 and as set forth in this Section 5(c), in the event that the Executive’s employment is terminated pursuant to Section 5(a)(v) or
5(a)(vi) herein or this Agreement is not renewed pursuant to the provisions of Section 7 herein, neither the Company nor the Executive shall have any remaining duties or obligations hereunder, except that on the Termination Date, the Company shall
pay to the Executive or his representatives:
                                   (i)  
   all Base Salary compensation as is due pursuant to Section 4(a) herein, prorated through the Termination Date;
                                   (ii)  
   all discretionary bonus as is due pursuant to Section 4(b) herein;
 -4-

   
                                    (iii) 
    a lump sum payment of an amount equal to three (3) years of the Executive’s then-current Base Salary;
                                   (iv) 
    payment of COBRA medical insurance coverage for the Executive and his immediate family for eighteen (18) months following the Termination Date;
                                   (v) 
    immediate vesting of all pension benefits;
                                   (vi) 
    all expense reimbursements due and owing the Executive through the Termination Date under Section 4(c) herein, including reimbursements for reasonable and necessary business expenses incurred prior to the Termination Date,
as long as the Executive submits a written accounting of such expenses in accordance with Section 4(c) herein within forty-five (45) days of the Termination Date; and
                                   (vii) 
    all benefits due the Executive, including benefits under insurance, group health and retirement benefit plans pursuant to Section 4(d) hereof, and vacation cash-out, if any, in accordance with the Company’s standard
policy, through the Termination Date.
                          (d)     No Mitigation; No
Offset.  The parties hereto agree that the Executive shall not be required to mitigate damages in respect of any termination benefit or payment due under this Agreement or in respect of any damage award as a result of the Company’s
breach of this Agreement, nor shall any such benefit or award be offset by any future compensation or income received by the Executive from any other source.  The Company shall not have the right to offset against its obligations hereunder or
against any such damage award any amounts payable by the Executive to Company for any reason.
                          (e)     Provision of Benefits. 
Should the continuation of any benefits to be provided to the Executive following the termination of the Executive’s employment hereunder be unavailable under the Company’s benefit plans for any reason, the Company shall pay for the
Executive to receive such benefits under substantially similar plans from similar third-party providers.
           6.     Dispute Relating To The Executive’s Termination Of Employment For Good Reason.  If the Executive
resigns his employment with the Company alleging in good faith as the basis for such resignation any of the “Good Reasons” specified in Section 5(a)(vi), and if the Company disputes the Executive’s right to the payment under
Section 5(c), the Company shall continue to pay the Executive compensation (including, but not limited to, his Base Salary) in effect at the date the Executive provided notice of such resignation, and the Company shall continue the Executive as
a participant in all compensation, benefit and insurance plans in which the Executive was then a participant, until the earlier of (i) the date that all payments due and owing under this Agreement have been paid, or (ii) the date the
dispute is finally resolved, either by mutual written agreement of the parties or by arbitration in accordance with Section 8.  For the purposes of this Section, the Company shall bear the burden of proving that the grounds for
the
 -5-

   
  Executive’s resignation do not fall within the scope of Section 5(a)(vi), and there shall be a rebuttable
presumption that the Executive alleged such grounds in good faith.
           7.     Renewal.  If this
Agreement has not terminated pursuant to the provisions of Section 5, the Term shall be automatically renewed for successive one-year periods commencing on each anniversary date of the original Term, unless either party provides the other with
written notice of its intent to terminate the Agreement given not less than six (6) months prior to the end of the Term, or any renewals thereof as provided for herein.  In the event of non-renewal of this Agreement by the Company, the Company
shall pay the Executive the amounts set forth under Section 5(c) herein as if this Agreement had been terminated by the Company without cause.
           8.     Arbitration.  The Company and the Executive agree that any controversy, dispute, or claim between them
relating to or arising under this Agreement or relating to or arising from the Executive’s hiring, employment, or termination with the Company (including, without limitation, any claims for harassment, discrimination, or retaliation under Title
VII of the United States Code, 29 U.S.C. § 2002e, et. seq., the Americans With Disabilities Act, the Age Discrimination in Employment Act, or the California Fair Employment and Housing Act, or any equivalent provision of the statutory or
common law of any state), shall be submitted to final and binding arbitration, to be held in the County of Los Angeles in accordance with and pursuant to the rules of the American Arbitration Association (“AAA”) then in force or any
successor rules except as set forth below.  The award of the arbitrator shall be final and binding upon the parties and may be entered as a judgment in any California court of competent jurisdiction, and the parties hereby consent to the
jurisdiction of the courts of the State of California.  The prevailing party in any arbitration hereunder shall be entitled to an award of all reasonable fees and costs of counsel incurred by such party in connection with such
arbitration.
           9.      Assignment.  This Agreement is personal in nature and neither of the
parties hereto shall, without the written consent of the other, assign or otherwise transfer this Agreement or its obligations, duties and rights under this Agreement; provided, however, that in the event of the merger, consolidation, transfer or
sale of all or substantially all of the assets of the Company, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all of the promises,
covenants, duties and obligations of the Company hereunder.
           10.     Miscellaneous.
                          (a)     Entire Agreement;
Modification.  This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement
that are not set forth otherwise herein.  This Agreement supersedes any and all prior agreements, written or oral, between the Executive and the Company.  No modification of this Agreement shall be valid unless made in writing and signed
by the parties hereto.
 -6-

   
                           (b)     Severable Provisions. 
The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions of the Agreement shall nevertheless be binding and
enforceable.
                          (c)     Governing Law.  This
Agreement shall be governed and construed in accordance with the laws of the State of California.
                          (d)     Notices.  All notices
and other communications under this Agreement shall be in writing and mailed, telecopied, or delivered by hand or by a nationally recognized courier service guaranteeing overnight delivery to a party, at the following address (or to such other
address as such party may have specified by notice given to the other party pursuant to this provision):

	  
 	 If to the Executive, to:
 
	  
 	  
 
	  
 	 Mr. Lloyd McAdams
 1299 Ocean Avenue
 Suite 200
 Santa Monica, CA 90401
 Telephone: (310) 393-1424
 Facsimile: (310) 434-0100
 
	  
 	  
 
	  
 	 If to the Company, to:
 
	  
 	  
 
	  
 	 Anworth Mortgage Advisory Corporation
 1299 Ocean Avenue
 2nd Floor
 Santa Monica, CA 90401
 Telephone:  (310) 393-0115
 Facsimile:  (310)
434-0100
 Attention:  President
 

 All such notices and communications shall, when mailed, telecopied, or delivered, be effective three days after deposit in the United
States mail, telecopied with confirmation of receipt, or delivered by hand to the addressee or one day after delivery to the courier service.
                          (e)     Counterparts.  This
Agreement may be executed in more than one counterpart, each of which shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument.
 -7-

   
                           IN WITNESS WHEREOF, this Employment Agreement is executed as of the day and
year first above written.

	 Executive
 	 Anworth Mortgage Advisory Corporation
 
	  
 	  
 
	  
 	  
 
	  /s/ Joseph Lloyd McAdams
 	 By:
 	      /s/ Heather U. Baines
 
	 
 	  
 	 
 
	 Joseph Lloyd McAdams
 	 Name:
 	 Heather U. Baines
 
	  
 	 Title:
 	 Executive Vice President
 

 -8-

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