Document:

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                                                                   Exhibit 10.43

                             SAILS PLEDGE AGREEMENT

                                   dated as of

                                 August 25, 1999

                                      among

                     SAFEGUARD SCIENTIFICS (DELAWARE), INC.,

                        CREDIT SUISSE FINANCIAL PRODUCTS

                                       and

        CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, as Collateral Agent
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                                TABLE OF CONTENTS

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SECTION 1. The Security Interests:...............................................................1

SECTION 2. Definitions:..........................................................................2

SECTION 3. Representations and Warranties of Pledgor:............................................4

SECTION 4. Representations, Warranties and Agreements of the Collateral Agent:...................6

SECTION 5. Certain Covenants of Pledgor..........................................................6

SECTION 6. Administration of the Collateral and Valuation of the Securities......................8

SECTION 7. Income and Voting Rights in Collateral................................................11

SECTION 8. Remedies upon Acceleration Events.....................................................12

SECTION 9. The Collateral Agent..................................................................15

SECTION 10. Miscellaneous........................................................................16

SECTION 11. Termination of Pledge Agreement......................................................18
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                                PLEDGE AGREEMENT

         THIS AGREEMENT is made as of this 25th day of August, 1999 among
SAFEGUARD SCIENTIFICS (DELAWARE), INC. ("PLEDGOR"), CREDIT SUISSE FIRST BOSTON,
NEW YORK BRANCH, as collateral agent (the "COLLATERAL AGENT") hereunder for the
benefit of CREDIT SUISSE FINANCIAL PRODUCTS ("SECURED PARTY"), and Secured
Party.

         WHEREAS, pursuant to the SAILS Mandatorily Exchangeable Securities
Contract (as amended from time to time, the "SECURITIES CONTRACT") dated as of
the date hereof among Pledgor, CSFP Capital, Inc., as Agent, and Secured Party,
Parent and Pledgor have jointly and severally agreed to sell and Secured Party
has agreed to purchase shares of common stock (the "COMMON STOCK") of Tellabs,
Inc., a Delaware corporation (the "ISSUER") (or security entitlements in respect
thereof), or cash in lieu thereof, subject to the terms and conditions of the
Securities Contract;

         WHEREAS, it is a condition to the obligations of Secured Party under
the Securities Contract that Pledgor, the Collateral Agent and Secured Party
enter into this Agreement and that Pledgor grant the pledge provided for herein;

         NOW, THEREFORE, in consideration of their mutual covenants contained
herein and to secure the performance by Parent and Pledgor of their obligations
under the Securities Contract and the observance and performance of the
covenants and agreements contained herein and in the Securities Contract, the
parties hereto, intending to be legally bound, hereby mutually covenant and
agree as follows:

         SECTION 1. The Security Interests. In order to secure the full and
punctual observance and performance of the covenants and agreements contained
herein and in the Securities Contract:

         (a) Pledgor hereby assigns and pledges to the Collateral Agent, as
agent of and for the benefit of Secured Party, and grants to the Collateral
Agent, as agent of and for the benefit of Secured Party, security interests in
and to, and a lien upon and right of set-off against, and transfers to the
Collateral Agent, as agent of and for the benefit of Secured Party, as and by
way of a security interest having priority over all other security interests,
with power of sale, all of its right, title and interest in and to (i) the
Pledged Items described in paragraph (b); (ii) all additions to and
substitutions for such Pledged Items (including, without limitation, any
securities, instruments or other property delivered or pledged pursuant to
Section 5(a) or 6(b)); (iii) all income, proceeds and collections received or to
be received, or derived or to be derived, now or any time hereafter (whether
before or after the commencement of any proceeding under applicable bankruptcy,
insolvency or similar law, by or against Pledgor, with respect to Pledgor) from
or in connection with the Pledged Items (including, without limitation, any
shares of capital stock issued by the Issuer in respect of any Common Stock (or
security entitlements in respect thereof) constituting Collateral or any cash,
securities or other property distributed in respect of or exchanged for any
Common Stock (or security entitlements in respect thereof) constituting
Collateral, or into which any such Common Stock (or security entitlements in
respect thereof) is converted, in connection with any

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Merger Event, and any security entitlements in respect of any of the foregoing);
and (iv) all powers and rights now owned or hereafter acquired under or with
respect to the Pledged Items (such Pledged Items, additions, substitutions,
proceeds, collections, powers and rights being herein collectively called the
"Collateral"). The Collateral Agent shall have all of the rights, remedies and
recourses with respect to the Collateral afforded a secured party by the UCC, in
addition to, and not in limitation of, the other rights, remedies and recourses
afforded to the Collateral Agent by this Agreement.

         (b) On or prior to the Payment Date, Pledgor shall deliver to the
Collateral Agent in pledge hereunder Eligible Collateral consisting of a number
of shares of Common Stock (or security entitlements in respect thereof) equal to
the Base Amount, in the manner provided in Section 6(c).

         (c) In the event that the Issuer at any time issues to Pledgor in
respect of any Common Stock (or security entitlements in respect thereof)
constituting Collateral hereunder any additional or substitute shares of capital
stock of any class (or any security entitlements in respect thereof), Pledgor
shall immediately pledge and deliver to the Collateral Agent in accordance with
Section 6(c) all such shares and security entitlements as additional Collateral
hereunder.

         (d) The Security Interests are granted as security only and shall not
subject the Collateral Agent or Secured Party to, or transfer or in any way
affect or modify, any obligation or liability of Pledgor or the Issuer with
respect to any of the Collateral or any transaction in connection therewith.

         SECTION 2. Definitions. Capitalized terms used and not otherwise
defined herein shall have the meanings ascribed to them in the Securities
Contract. As used herein, the following words and phrases shall have the
following meanings:

         "AUTHORIZED OFFICER" of Pledgor means any officer as to whom Pledgor
shall have delivered notice to the Collateral Agent that such officer is
authorized to act hereunder on behalf of Pledgor.

         "COLLATERAL" has the meaning provided in Section 1(a).

         "COLLATERAL AGENT" means the financial institution identified as such
in the preliminary paragraph hereof, or any successor appointed in accordance
with Section 9.

         "COLLATERAL EVENT OF DEFAULT" means, at any time, the occurrence of
either of the following: (A) failure of the Collateral to include, as Eligible
Collateral, at least the Maximum Deliverable Number of shares of Common Stock or
(B) failure at any time of the Security Interests to constitute valid and
perfected security interests in all of the Collateral, subject to no prior or
equal Lien, or assertion of such by either Parent or Pledgor in writing.

         "DEFAULT SETTLEMENT DATE" has the meaning provided in Section 8(a).

         "DIVIDEND PROCEEDS" has the meaning provided in Section 7(a).

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         "ELIGIBLE COLLATERAL" means Common Stock or security entitlements in
respect thereof, provided that Pledgor has good and marketable title thereto,
free of all Liens (other than the Security Interests) and Transfer Restrictions
(other than the Existing Transfer Restrictions) and that the Collateral Agent
has a valid, first priority perfected security interest therein, a first lien
thereon and control with respect thereto, and provided further that to the
extent the number of shares of Common Stock or security entitlements in respect
thereof pledged hereunder exceeds at any time the Maximum Deliverable Number
thereof, such excess shares shall not be Eligible Collateral.

         "EXISTING TRANSFER RESTRICTIONS" means Transfer Restrictions imposed by
Rule 145(c) under the Securities Act.

         "LOCATION" means, with respect to any party, the place such party is
"deemed located" within the meaning of Section 9-103(3)(d) of the UCC.

         "MAXIMUM DELIVERABLE NUMBER" means, on any date, a number of shares of
Common Stock or security entitlements in respect thereof equal to the Base
Amount on such date multiplied successively by each adjustment that shall have
been calculated on or prior to such date pursuant to Article 7 of the Securities
Contract.

         "OTHER LIENS" has the meaning specified in Section 4(e).

         "PLEDGED ITEMS" means, as of any date, any and all securities and
instruments delivered by Pledgor to be held by the Collateral Agent under this
Agreement as Collateral.

         "REHYPOTHECATION UNAVAILABILITY" shall be deemed to occur if at any
time any of the Eligible Collateral pledged hereunder is unavailable for
rehypothecation by the Collateral Agent pursuant to Section 6(i) (as a result of
Pledgor withholding consent to rehypothecate any such Eligible Collateral, as a
result of Parent or Pledgor causing the Collateral Agent to take possession of
such Collateral pursuant to the proviso to Section 6(i) or otherwise).

         "SECURITY INTERESTS" means the security interests in the Collateral
created hereby.

         "UCC" means the Uniform Commercial Code as in effect in the State of
New York.

         SECTION 3. Representations and Warranties of Pledgor. Pledgor hereby
represents and warrants to the Collateral Agent and Secured Party that:

         (a) Pledgor (i) acquired all of the Eligible Collateral delivered
pursuant to Section 1(b) on August 3, 1998, owns and, subject to the Collateral
Agent's right to rehypothecate Collateral pursuant to Section 6(i), at all times
prior to the release of the Collateral pursuant to the terms of this Agreement,
will own the Collateral free and clear of any Liens (other than the Security
Interests) or Transfer Restrictions (other than the Existing Transfer
Restrictions) and (ii) is not and will not become a party to or otherwise bound
by any agreement, other than this Agreement, that (x) restricts in any manner
the

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rights of any present or future owner of the Collateral with respect thereto or
(y) provides any person other than the Pledgor, the Collateral Agent, the
Secured Party or any securities intermediary through whom any Collateral is held
(but, in the case of any such securities intermediary, only with respect of
Collateral held through it) with control (as defined in Section 8-106 of the
UCC) with respect to any Collateral.

         (b) Other than financing statements or other similar or equivalent
documents or instruments with respect to the Security Interests, no financing
statement, security agreement or similar or equivalent document or instrument
covering all or any part of the Collateral is on file or of record in any
jurisdiction in which such filing or recording would be effective to perfect a
lien, security interest or other encumbrance of any kind on such Collateral.

         (c) All shares of Common Stock at any time pledged hereunder (or in
respect of which security entitlements are pledged hereunder) are and will be
issued by an issuer organized under the laws of the United States, any State
thereof or the District of Columbia and (i) certificated (and the certificate or
certificates in respect of such shares of Common Stock are and will be located
in the United States) and registered in the name of Pledgor or held through a
securities intermediary whose securities intermediary's jurisdiction (within the
meaning of Section 8-110(e) of the UCC) is located in the United States or (ii)
uncertificated and either registered in the name of Pledgor or held through a
securities intermediary whose securities intermediary's jurisdiction (within the
meaning of Section 8-110(e) of the UCC) is located in the United States.

         (d) Subject to the Collateral Agent's right to rehypothecate Collateral
pursuant to Section 6(i), upon (i) the delivery of certificates evidencing any
Common Stock to the Collateral Agent in accordance with Section 6(c)(A) or the
registration of uncertificated Common Stock in the name of the Collateral Agent
or its nominee in accordance with Section 6(c)(B), the Collateral Agent will
have, for the benefit of Secured Party, a valid and, as long as the Collateral
Agent retains possession of such certificates or such uncertificated Common
Stock remains so registered, perfected security interest therein, in respect of
which the Collateral Agent will have control, subject to no prior Lien and (ii)
the crediting of any Common Stock to a securities account of the Collateral
Agent in accordance with Section 6(c)(C), the Collateral Agent will have, for
the benefit of Secured Party, a valid and, so long as such Common Stock
continues to be credited to the account of the Collateral Agent with the
applicable securities intermediary, perfected security interest in a securities
entitlement in respect thereof, in respect of which the Collateral Agent will
have control subject to no prior Lien.

         (e) No registration, recordation or filing with any governmental body,
agency or official is required in connection with the execution and delivery of
this Agreement or necessary for the validity or enforceability hereof or for the
perfection or enforcement of the Security Interests.

         (f) Pledgor and Parent have not performed and will not perform any acts
that might prevent the Collateral Agent from enforcing any of the terms of this
Agreement or that might limit the Collateral Agent in any such enforcement.

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         (g) The Location of Pledgor is the address set forth in Section 10(d),
and under the Uniform Commercial Code as in effect in such Location, no local
filing is required to perfect a security interest in collateral consisting of
general intangibles.

         SECTION 4. Representations, Warranties and Agreements of the Collateral
Agent. The Collateral Agent represents and warrants to, and agrees with, Pledgor
and Secured Party that:

         (a) The Collateral Agent is a duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, and
has all powers and all material governmental licenses, authorizations, consents
and approvals required to enter into, and perform its obligations under, this
Agreement.

         (b) The execution, delivery and performance by the Collateral Agent of
this Agreement have been duly authorized by all necessary action on the part of
the Collateral Agent and do not and will not violate, contravene or constitute a
default under any provision of applicable law or regulation or of the
constitutive documents of the Collateral Agent or of any material agreement,
judgment, injunction, order, decree or other instrument binding upon the
Collateral Agent.

         (c) This Agreement constitutes a valid and binding agreement of the
Collateral Agent enforceable against the Collateral Agent in accordance with its
terms.

         (d) Subject to Sections 6(i) and 6(j), the Collateral Agent has not and
will not enter into any agreement pursuant to which any person other than the
Pledgor, the Collateral Agent, the Secured Party or any securities intermediary
through whom any Collateral is held (but in the case of any such securities
intermediary only in respect of Collateral held through it) has or will have
control (within the meaning of Section 8-106 of the UCC) with respect to any
Collateral.

         (e) The Collateral Agent hereby agrees that all liens, pledges and
other security interests of any kind or nature held by it (other than liens,
pledges and security interests arising hereunder) in any of the Collateral
securing any obligation to the Collateral Agent (either in such capacity or in
any other capacity) (collectively, "OTHER LIENS") shall be subordinate and
junior to the liens, pledges and security interests in the Collateral arising
hereunder and that the Collateral Agent will take no action to enforce any Other
Liens so long as any obligation under the Securities Contract or hereunder
(whether or not then due) should remain unsatisfied.

         SECTION 5. Certain Covenants of Pledgor. Pledgor agrees that, so long
as any of the obligations of Parent or Pledgor under the Securities Contract
remain outstanding:

         (a) Pledgor shall ensure at all times that a Collateral Event of
Default shall not occur, and shall pledge additional Collateral in the manner
described in Sections 6(b) and 6(c) as necessary to cause such requirement to be
met.

         (b) Pledgor shall, at the expense of either Parent or Pledgor and in
such manner and form as Secured Party or the Collateral Agent may require, give,
execute, deliver, file

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and record any financing statement, notice, instrument, document, agreement or
other papers that may be necessary or desirable in order to create, preserve,
perfect, substantiate or validate any security interest granted pursuant hereto
or to enable the Collateral Agent to exercise and enforce its rights and the
rights of Secured Party hereunder with respect to such security interest. To the
extent permitted by applicable law, Pledgor hereby authorizes the Collateral
Agent to execute and file, in the name of Pledgor or otherwise, UCC financing or
continuation statements (which may be carbon, photographic, photostatic or other
reproductions of this Agreement or of a financing statement relating to this
Agreement) that the Collateral Agent in its sole discretion may deem necessary
or appropriate to further perfect, or maintain the perfection of, the Security
Interests.

         (c) Pledgor shall warrant and defend its title to the Collateral,
subject to the rights of the Collateral Agent and Secured Party, against the
claims and demands of all persons. The Collateral Agent and Secured Party (or,
as they may agree, one of them) may elect, but without an obligation to do so,
to discharge any Lien of any third party on any of the Collateral.

         (d) Pledgor agrees that it shall not change (1) its name, identity or
corporate structure in any manner or (2) its Location, unless in either case (A)
it shall have given the Collateral Agent not less than 30 days' prior notice
thereof and (B) such change shall not cause any of the Security Interests to
become unperfected or subject any Collateral to any other Lien.

         (e) Pledgor agrees that it shall not (1) create or permit to exist any
Lien (other than the Security Interests) or any Transfer Restriction (other than
the Existing Transfer Restrictions) upon or with respect to the Collateral, (2)
sell or otherwise dispose of, or grant any option with respect to, any of the
Collateral or (3) enter into or consent to any agreement pursuant to which any
person other than the Pledgor, the Collateral Agent, the Secured Party and any
securities intermediary through whom any of the Collateral is held (but in the
case of any such securities intermediary only in respect of Collateral held
through it) has or will have control (within the meaning of Section 8- 106 of
the UCC) in respect of any Collateral.

         SECTION 6. Administration of the Collateral and Valuation of the
Securities. (a) The Collateral Agent shall determine on each Business Day
whether a Collateral Event of Default shall have occurred.

         (b) Pledgor may pledge additional Collateral hereunder at any time.
Concurrently with the delivery of any additional Eligible Collateral, Pledgor
shall deliver to the Collateral Agent a certificate of an Authorized Officer
Pledgor substantially in the form of Exhibit A hereto and dated the date of such
delivery, (A) identifying the additional items of Eligible Collateral being
pledged and (B) certifying that with respect to such items of additional
Eligible Collateral the representations and warranties contained in paragraphs
(a), (b), (c), (d) and (e) of Section 3 are true and correct with respect to
such Eligible Collateral on and as of the date thereof. Pledgor hereby covenants
and agrees to take all actions required under Section 6(c) and any other actions
necessary to create for

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the benefit of the Collateral Agent a valid, first priority, perfected security
interest in, and a first lien upon, such additional Eligible Collateral.

         (c) Any delivery of Common Stock (or security entitlement in respect
thereof) as Collateral to the Collateral Agent by Pledgor shall be effected (A)
in the case of Collateral consisting of certificated Common Stock registered in
the name of Pledgor, by delivery of certificates representing such Common Stock
to the Collateral Agent, accompanied by any required transfer tax stamps, and in
suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank, with signatures appropriately
guaranteed, all in form and substance satisfactory to the Collateral Agent, (B)
in the case of Collateral consisting of uncertificated Common Stock registered
in the name of Pledgor, by transmission by Pledgor of an instruction to the
issuer of such Common Stock instructing such issuer to register such Common
Stock in the name of the Collateral Agent or its nominee, accompanied by any
required transfer tax stamps, and the issuer's compliance with such instructions
or (C) in the case of Common Stock in respect of which security entitlements are
held by Pledgor through a securities intermediary, by the crediting of such
Common Stock, accompanied by any required transfer tax stamps, to a securities
account of the Collateral Agent at such securities intermediary or, at the
option of the Collateral Agent, at another securities intermediary satisfactory
to the Collateral Agent. Upon delivery of any such Pledged Item under this
Agreement, the Collateral Agent shall examine such Pledged Item and any
certificates delivered pursuant to Section 6(b) or otherwise pursuant to the
terms hereof in connection therewith to determine that they comply as to form
with the requirements for Eligible Collateral.

         (d) If on any Business Day the Collateral Agent determines that a
Collateral Event of Default shall have occurred, the Collateral Agent shall
promptly notify Parent and Pledgor of such determination by telephone call to
Parent and to an Authorized Officer of Pledgor followed by a written
confirmation of such call.

         (e) If on any Business Day the Collateral Agent determines that no
Acceleration Event or failure by Pledgor to meet any of its obligations under
Sections 5 or 6 hereof has occurred and is continuing, Pledgor may obtain the
release from the Security Interests of any Collateral upon delivery to the
Collateral Agent of a written notice from an Authorized Officer of Pledgor
indicating the items of Collateral to be released so long as, after such
release, no Collateral Event of Default shall have occurred.

         (f) On the Maturity Date, unless (i) Parent or Pledgor shall have
otherwise effected the deliveries required by Section 2.03(b) of the Securities
Contract or shall have delivered the Cash Settlement Amount to Secured Party in
lieu of shares of Common Stock (or security entitlements in respect thereof) in
accordance with Section 2.04 of the Securities Contract on the Maturity Date or
(ii) the Common Stock (or security entitlements in respect thereof) then held by
the Collateral Agent hereunder is not Free Stock, the Collateral Agent shall
deliver (and Pledgor hereby irrevocably instructs the Collateral Agent to
deliver, in whole or partial, as the case may be, satisfaction of Pledgor's
obligations to deliver shares of Common Stock (or security entitlements in
respect thereof) to Secured Party on the Maturity Date pursuant to the
Securities

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Contract) to Secured Party shares of Common Stock (or security entitlements in
respect thereof) then held by it hereunder representing the number of shares of
Common Stock (or security entitlements in respect thereof) required to be
delivered under the Securities Contract on the Maturity Date. Upon any such
delivery, Secured Party shall hold such shares of Common Stock (or security
entitlements in respect thereof) absolutely and free from any claim or right
whatsoever (including, without limitation, any claim or right of Pledgor).

         (g) The Collateral Agent may at any time or from time to time, in its
sole discretion, cause any or all of the Common Stock pledged hereunder (or in
respect of which security entitlements are pledged hereunder) registered in the
name of Pledgor or its nominee to be transferred of record into the name of the
Collateral Agent or its nominee. Pledgor shall promptly give to the Collateral
Agent copies of any notices or other communications received by Pledgor with
respect to Common Stock (or security entitlements in respect thereof) pledged
hereunder registered, or held through a securities intermediary, in the name of
Parent or its nominee, or Pledgor or its nominee and the Collateral Agent shall
promptly give to Pledgor copies of any notices and communications received by
the Collateral Agent with respect to Common Stock (or security entitlements in
respect thereof) pledged hereunder registered, or held through a securities
intermediary, in the name of the Collateral Agent or its nominee.

         (h) Pledgor agrees that either Parent or Pledgor shall forthwith upon
demand pay to the Collateral Agent:

                  (i) the amount of any taxes that the Collateral Agent or
         Secured Party may have been required to pay by reason of the Security
         Interests or to free any of the Collateral from any Lien thereon, and

                  (ii) the amount of any and all out-of-pocket expenses,
         including the fees and disbursements of counsel and of any other
         experts, that the Collateral Agent or Secured Party may incur in
         connection with (A) the enforcement of this Agreement, including such
         expenses as are incurred to preserve the value of the Collateral and
         the validity, perfection, rank and value of the Security Interests, (B)
         the collection, sale or other disposition of any of the Collateral, (C)
         the exercise by the Collateral Agent of any of the rights conferred
         upon it hereunder or (D) any Acceleration Event.

Any such amount not paid on demand shall bear interest (computed on the basis of
a year of 360 days and payable for the actual number of days elapsed) at a rate
per annum equal to the lesser of (i) Secured Party's cost of borrowing as
determined by the Calculation Agent or (ii) 5% plus the prime rate as published
from time to time in The Wall Street Journal, Eastern Edition.

         (i) Without limiting the rights and obligations of the parties under
this Agreement, the Collateral Agent shall, notwithstanding Section 9-207 of the
UCC, have the right, upon the consent of Pledgor (which consent need not be in
writing), to sell, lend, pledge, rehypothecate, assign, invest, use, commingle
or otherwise dispose of, or

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otherwise use in its business (collectively, "REHYPOTHECATE"), any Collateral it
holds, free from any claim or right of any nature whatsoever of Parent or
Pledgor, including any equity or right of redemption by Parent or Pledgor;
provided that the Collateral Agent will not lend any Collateral except pursuant
to arrangements that (i) give the Collateral Agent the right to take possession
of such Collateral (or substitute Collateral) upon five Business Days' notice,
and the Collateral Agent shall exercise such right upon notice from Parent,
Pledgor or Secured Party, and (ii) provide that the borrower of any Collateral
consisting of Common Stock shall pay or deliver to the Collateral Agent, for the
account of Pledgor, the amount of any dividends or distributions paid on the
borrowed Common Stock, and any such delivery or payment received by the
Collateral Agent shall become proceeds of the Collateral hereunder and (except
in the case of extraordinary dividends or distributions) shall be subject to
payment or delivery over to the Pledgor pursuant to Section 7(a).

         (j) Notwithstanding any other provision of this Agreement and Section
9-207 of the UCC, the Collateral Agent shall have the right to pledge the
Collateral to an affiliate of Secured Party in connection with hedging
transactions in respect of the Securities Contract entered into among Secured
Party and its affiliates in the ordinary course of business, which pledge shall
have no effect on the rights and obligations of Pledgor, the Collateral Agent or
Secured Party hereunder.

         SECTION 7. Income and Voting Rights in Collateral. (a) The Collateral
Agent shall have the right to receive and retain as Collateral hereunder (i) all
proceeds (other than interest, or dividends or distributions that are not
extraordinary dividends or distributions) of the Collateral and (ii) upon the
occurrence and during the continuance of an Acceleration Event, all proceeds of
the Collateral, including, without limitation, interest, or dividends or
distributions that are not extraordinary dividends or distributions ("DIVIDEND
PROCEEDS"), and Pledgor shall take all such action as the Collateral Agent shall
deem necessary or appropriate to give effect to such right. All such proceeds
that are received by Pledgor shall be received in trust for the benefit of the
Collateral Agent and Secured Party and, if the Collateral Agent so directs (but
only, in the case of Dividend Proceeds, upon the occurrence and during the
continuance of an Acceleration Event), shall be segregated from other funds of
Parent or Pledgor and shall, forthwith upon demand by the Collateral Agent (but
only, in the case of Dividend Proceeds, upon the occurrence and during the
continuance of an Acceleration Event), be paid over to the Collateral Agent as
Collateral in the same form as received (with any necessary endorsement). The
Collateral Agent shall pay or deliver over to Pledgor any proceeds of any
Collateral that the Collateral Agent receives but does not have the right to
retain hereunder. After all Acceleration Events have been cured, the Collateral
Agent's right to retain Dividend Proceeds under this Section 7(a) shall cease
and the Collateral Agent shall pay or deliver over to Pledgor any such
Collateral consisting of Dividend Proceeds retained by it during the continuance
of an Acceleration Event.

         (b) Unless an Acceleration Event shall have occurred and be continuing,
Pledgor shall have the right, from time to time, to vote and to give consents,
ratifications and waivers with respect to the Collateral (other than Collateral
that has been rehypothecated by the Collateral Agent pursuant to Section 6(i)),
and the Collateral Agent shall, upon

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receiving a written request from Parent or Pledgor accompanied by a certificate
of an Authorized Officer of Pledgor stating that no Acceleration Event has
occurred and is continuing, deliver to Pledgor or as specified in such request
such proxies, powers of attorney, consents, ratifications and waivers in respect
of any of the Collateral that is registered, or held through a securities
intermediary, in the name of the Collateral Agent or its nominee as shall be
specified in such request and shall be in form and substance satisfactory to the
Collateral Agent.

         (c) If an Acceleration Event shall have occurred and be continuing, the
Collateral Agent shall have the right, to the extent permitted by law, and
Pledgor shall take all such action as may be necessary or appropriate to give
effect to such right, to vote and to give consents, ratifications and waivers,
and to take any other action with respect to any or all of the Collateral with
the same force and effect as if the Collateral Agent were the absolute and sole
owner thereof.

         SECTION 8. Remedies upon Acceleration Events. (a) If any Acceleration
Event shall have occurred and be continuing, the Collateral Agent may exercise
on behalf of Secured Party all the rights of a secured party under the Uniform
Commercial Code (whether or not in effect in the jurisdiction where such rights
are exercised) and, in addition, without being required to give any notice,
except as herein provided or as may be required by mandatory provisions of law,
shall: (i) deliver all Collateral consisting of shares of Common Stock (or
security entitlements in respect thereof) (but not in excess of the number
thereof deliverable under the Securities Contract at such time) to Secured Party
on the date of the Acceleration Amount Notice relating to such Acceleration
Event (the "DEFAULT SETTLEMENT DATE") in satisfaction of Parent's and Pledgor's
obligations to deliver Common Stock (or security entitlements in respect
thereof) under the Securities Contract, whereupon Secured Party shall hold such
shares of Common Stock (or security entitlements in respect thereof) absolutely
free from any claim or right of whatsoever kind, including any equity or right
of redemption of Parent or Pledgor that may be waived or any other right or
claim of Parent or Pledgor, and Pledgor, to the extent permitted by law, hereby
specifically waives all rights of redemption, stay or appraisal that Pledgor or
Parent has or may have under any law now existing or hereafter adopted; and (ii)
if such delivery shall be insufficient to satisfy in full all of the obligations
of Parent and Pledgor under the Securities Contract or hereunder, sell all of
the remaining Collateral, or such lesser portion thereof as may be necessary to
generate proceeds sufficient to satisfy in full all of the obligations of Parent
or Pledgor under the Securities Contract or hereunder, at public or private sale
or at any broker's board or on any securities exchange, for cash, upon credit or
for future delivery, and at such price or prices as the Collateral Agent may
deem satisfactory. Pledgor covenants and agrees that it will execute and deliver
such documents and take such other action as the Collateral Agent deems
necessary or advisable in order that any such sale may be made in compliance
with law. Upon any such sale the Collateral Agent shall have the right to
deliver, assign and transfer to the buyer thereof the Collateral so sold. Each
buyer at any such sale shall hold the Collateral so sold absolutely and free
from any claim or right of whatsoever kind, including any equity or right of
redemption of Parent or Pledgor that may be waived or any other right or claim
of Parent or Pledgor, and Parent and Pledgor, to the extent permitted by law,
hereby specifically waive all rights of redemption, stay or appraisal that
Pledgor or Parent

                                       12
<PAGE>   13
has or may have under any law now existing or hereafter adopted. The notice (if
any) of such sale required by Section 9-504 of the UCC shall (1) in case of a
public sale, state the time and place fixed for such sale, (2) in case of sale
at a broker's board or on a securities exchange, state the board or exchange at
which such sale is to be made and the day on which the Collateral, or the
portion thereof so being sold, will first be offered for sale at such board or
exchange, and (3) in the case of a private sale, state the day after which such
sale may be consummated. Any such public sale shall be held at such time or
times within ordinary business hours and at such place or places as the
Collateral Agent may fix in the notice of such sale. At any such sale the
Collateral may be sold in one lot as an entirety or in separate parcels, as the
Collateral Agent may determine. The Collateral Agent shall not be obligated to
make any such sale pursuant to any such notice. The Collateral Agent may,
without notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and place
fixed for the sale, and such sale may be made at any time or place to which the
same may be so adjourned. In case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be
retained by the Collateral Agent until the selling price is paid by the buyer
thereof, but the Collateral Agent shall not incur any liability in case of the
failure of such buyer to take up and pay for the Collateral so sold and, in case
of any such failure, such Collateral may again be sold upon like notice. The
Collateral Agent, instead of exercising the power of sale herein conferred upon
it, may proceed by a suit or suits at law or in equity to foreclose the Security
Interests and sell the Collateral, or any portion thereof, under a judgment or
decree of a court or courts of competent jurisdiction.

         (b) Pledgor hereby irrevocably appoints the Collateral Agent its true
and lawful attorney, with full power of substitution, in the name of Pledgor,
the Collateral Agent or Secured Party or otherwise, for the sole use and benefit
of the Collateral Agent and Secured Party, but at the expense of either Parent
or Pledgor, to the extent permitted by law, to exercise, at any time and from
time to time while an Acceleration Event has occurred and is continuing, all or
any of the following powers with respect to all or any of the Collateral:

                  (i) to demand, sue for, collect, receive and give acquittance
         for any and all monies due or to become due upon or by virtue thereof,

                  (ii) to settle, compromise, compound, prosecute or defend any
         action or proceeding with respect thereto,

                  (iii) to sell, transfer, assign or otherwise deal in or with
         the same or the proceeds or avails thereof, as fully and effectually as
         if the Collateral Agent were the absolute owner thereof (including,
         without limitation, the giving of instructions and entitlement orders
         in respect thereof), and

                  (iv) to extend the time of payment of any or all thereof and
         to make any allowance and other adjustments with reference thereto;

                                       13
<PAGE>   14
provided that the Collateral Agent shall give Parent and Pledgor not less than
one day's prior written notice of the time and place of any sale or other
intended disposition of any of the Collateral, except any Collateral that
threatens to decline speedily in value, including, without limitation, equity
securities, or is of a type customarily sold on a recognized market. The
Collateral Agent and Pledgor agree that such notice constitutes "reasonable
notification" within the meaning of Section 9-504(3) of the UCC.

         (c) Upon any delivery or sale of all or any part of any Collateral made
either under the power of delivery or sale given hereunder or under judgment or
decree in any judicial proceedings for foreclosure or otherwise for the
enforcement of this Agreement, the Collateral Agent is hereby irrevocably
appointed the true and lawful attorney of Pledgor, in the name and stead of
Pledgor, to make all necessary deeds, bills of sale, instruments of assignment,
transfer or conveyance of the property, and all instructions and entitlement
orders in respect of the property thus delivered or sold. For that purpose the
Collateral Agent may execute all such documents, instruments, instructions and
entitlement orders. This power of attorney shall be deemed coupled with an
interest, and Pledgor hereby ratifies and confirms that which its attorney
acting under such power, or such attorney's successors or agents, shall lawfully
do by virtue of this Agreement. If so requested by the Collateral Agent, by
Secured Party or by any buyer of the Collateral or a portion thereof, Parent or
Pledgor shall further ratify and confirm any such delivery or sale by executing
and delivering to the Collateral Agent, to Secured Party or to such buyer or
buyers at the expense of Pledgor all proper deeds, bills of sale, instruments of
assignment, conveyance or transfer, releases, instructions and entitlement
orders as may be designated in any such request.

         (d) In the case of an Acceleration Event, the Collateral Agent may
proceed to realize upon the security interest in the Collateral against any one
or more of the types of Collateral, at any time, as the Collateral Agent shall
determine in its sole discretion subject to the foregoing provisions of this
Section 8. The proceeds of any sale of, or other realization upon, or other
receipt from, any of the Collateral shall be applied by the Collateral Agent in
the following order of priorities:

                  first, to the payment to the Collateral Agent of the expenses
         of such sale or other realization, including reasonable compensation to
         the Collateral Agent and its agents and counsel, and all expenses,
         liabilities and advances incurred or made by the Collateral Agent in
         connection therewith, including brokerage fees in connection with the
         sale by the Collateral Agent of any Collateral;

                  second, to the payment to Secured Party of an amount equal to
         the aggregate Market Value of a number of shares of Common Stock equal
         to (i) the number of shares of Common Stock (or security entitlements
         in respect thereof) that would be required to be delivered under
         Section 7.01 of the Securities Contract on the Default Settlement Date
         without giving effect to the proviso therein minus (ii) the number of
         shares of Common Stock (or security entitlements in respect thereof)
         delivered by the Collateral Agent to Secured Party on the Default
         Settlement Date as described in Section 8(a);

                                       14
<PAGE>   15
                  finally, if all of the obligations of Parent and Pledgor
         hereunder and under the Securities Contract have been fully discharged
         or sufficient funds have been set aside by the Collateral Agent at the
         request of Parent or Pledgor for the discharge thereof, any remaining
         proceeds shall be released to Pledgor.

                                       15
<PAGE>   16
         SECTION 9. The Collateral Agent. (a) Secured Party hereby irrevocably
appoints and authorizes the Collateral Agent to take such action as agent on its
behalf and to exercise such powers under this Agreement as are delegated to the
Collateral Agent by the terms hereof, together with all such powers as are
reasonably incidental thereto.

         (b) The obligations of the Collateral Agent hereunder are only those
expressly set forth in this Agreement.

         (c) The Collateral Agent may consult with legal counsel, independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel, accountants or experts.

         (d) Neither the Collateral Agent nor any of its directors, officers,
agents or employees shall be liable for any action taken or not taken by it in
connection with this Agreement (1) with the consent or at the request of Secured
Party or (2) in the absence of its own gross negligence or willful misconduct.
The Collateral Agent shall not incur any liability by acting in reliance upon
any notice, consent, certificate, statement, or other writing (which may be a
bank wire, telex or similar writing) believed by it to be genuine or to be
signed by the proper party or parties.

         (e) Pledgor shall indemnify the Collateral Agent against any cost,
expense (including counsel fees and disbursements), claim, demand, action, loss
or liability (except such as result from the Collateral Agent's gross negligence
or willful misconduct) that the Collateral Agent may suffer or incur in
connection with this Agreement or any action taken or omitted by the Collateral
Agent hereunder.

         (f) Beyond the exercise of reasonable care in the custody thereof, the
Collateral Agent shall have no duty as to any Collateral in its possession or
control or in the possession or control of any agent, bailee, clearing
corporation or securities intermediary or any income thereon or as to the
preservation of rights against prior parties or any other rights pertaining
thereto. The Collateral Agent shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral if the Collateral is accorded
treatment substantially equal to that which it accords its own property, and
shall not be liable or responsible for any loss or damage to any of the
Collateral, or for any diminution in the value thereof, by reason of the act or
omission of any agent, bailee, clearing corporation or securities intermediary
selected by the Collateral Agent in good faith (or selected by an agent, bailee,
clearing corporation or securities intermediary so selected by the Collateral
Agent or by any agent, bailee, clearing corporation or securities intermediary
selected in accordance with this parenthetical phrase).

         (g) Any corporation or association into which the Collateral Agent may
be converted or merged, or with which it may be consolidated, or to which it may
sell or transfer its agency business and assets as a whole or substantially as a
whole, or any corporation or association resulting from any such conversion,
sale, merger, consolidation or transfer to which it is a party, shall, subject
to the prior written consent of Secured Party, be and become a successor
Collateral Agent hereunder and vested with

                                       16
<PAGE>   17
all of the title to the Collateral and all of the powers, discretions,
immunities, privileges and other matters as was its predecessor without, except
as provided above, the execution or filing of any instrument or any further act,
deed or conveyance on the part of any of the parties hereto, anything herein to
the contrary notwithstanding.

         SECTION 10. Miscellaneous. (a) Whenever any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party. All the covenants and agreements herein contained by or
on behalf of Pledgor and the Collateral Agent shall bind, and inure to the
benefit of, their respective successors and assigns whether so expressed or not,
and shall be enforceable by and inure to the benefit of Secured Party and its
successors and assigns.

         (b) Any provision of this Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by Pledgor, the Collateral Agent and Secured Party or, in the case of
a waiver, by the party against whom the waiver is to be effective. No failure or
delay by either party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.

         (c) All notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if mailed or transmitted by any
standard forms of telecommunication. Notices to Pledgor shall be directed to it
at 800 The Safeguard Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087,
Telecopy No. (610) 293-0601, Attention: Chief Financial Officer; notices to the
Collateral Agent shall be directed to it at Five World Trade Center, New York,
New York 10048, Telecopy No. (212) 325-0728, Attention: Carl Paravati; notices
to Secured Party shall be directed to it in care of CSFP Capital, Inc., Eleven
Madison Avenue, New York, New York 10010, Telecopy No. (212) 325-8175,
Attention: Ricardo Harewood.

         (d) This Agreement shall in all respects be construed in accordance
with and governed by the laws of the State of New York without reference to
choice of law doctrine (provided that as to Pledged Items located in any
jurisdiction other than the State of New York, the Collateral Agent on behalf of
Secured Party shall, in addition to any rights under the laws of the State of
New York, have all of the rights to which a secured party is entitled under the
laws of such other jurisdiction) and each party hereto submits to the
jurisdiction of the Courts of the State of New York. The parties hereto hereby
agree that the Collateral Agent's jurisdiction, within the meaning of Section
8-110(e) of the UCC, insofar as it acts as a securities intermediary hereunder
or in respect hereof, is the State of New York. To the extent permitted by law,
the unenforceability or invalidity of any provision or provisions of this
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

                                       17
<PAGE>   18
         (e) EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

         (f) This Agreement may be executed, acknowledged and delivered in any
number of counterparts and all such counterparts taken together shall be deemed
to constitute one and the same agreement.

         SECTION 11. Termination of Pledge Agreement. This Agreement and the
rights hereby granted by Pledgor in the Collateral shall cease, terminate and be
void upon fulfillment of all of the obligations of Pledgor under the Securities
Contract and hereunder. Any Collateral remaining at the time of such termination
shall be fully released and discharged from the Security Interests and delivered
to Pledgor by the Collateral Agent, all at the request and expense of Pledgor.

         IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date and year first above written.

                                        PARENT:

                                        SAFEGUARD SCIENTIFICS, INC

                                        By: /s/ Michael W. Miles
                                           ------------------------------------
                                           Name: Michael W. Miles
                                           Title: Senior Vice President and CFO

                                        PLEDGOR:

                                        SAFEGUARD SCIENTIFICS (DELAWARE), INC.

                                        By: /s/ Michael W. Miles
                                           ------------------------------------
                                           Name: Michael W. Miles
                                           Title: Senior Vice President and CFO

                                        COLLATERAL AGENT:

                                        CREDIT SUISSE FIRST BOSTON,
                                          NEW YORK BRANCH
                                          as Collateral Agent

                                       18
<PAGE>   19
                                        By: /s/ James P. Moran
                                           ------------------------------------
                                           Name: James P. Moran
                                           Title: Director

                                        By: /s/ Douglas E. Maher
                                           ------------------------------------
                                           Name: Douglas E. Maher
                                           Title: Vice President

                                  Secured Party:
                                  Credit Suisse Financial Products

                                        By: /s/ Edmond Curtin
                                            -----------------------------------
                                            Name: Edmond Curtin
                                            Title: Director - Legal and
                                                   Compliance Department

                                        By: /s/ David Bonham
                                            -----------------------------------
                                            Name: David Bonham
                                            Title: Director - Legal and
                                                   Compliance Department

                                       19EXHIBIT 4.1

                              SECURED FLOATING RATE
                          CONVERTIBLE SUBORDINATED NOTE

                                       OF

                         LORACA ACQUISITION CORPORATION

                                   PAYABLE TO

                            -------------------------

                               February ____, 2000

<PAGE>

                                TABLE OF CONTENTS

1.       DEFINITIONS.................................................2
2.       PREPAYMENT..................................................4
         2.1.     Optional and Mandatory Prepayment..................4
         2.2.     Notice of Prepayment...............................4
3.       SUBORDINATION...............................................5
         3.1.     Principal and Interest.............................5
         3.2.     Distributions of Assets............................5
         3.3.     Modification of Senior Indebtedness................6
         3.4.     No Other Indebtedness Senior to Notes..............6
         3.5.     Subrogation........................................6
         3.6.     Unconditional Obligations..........................7
         3.7.     Judicial Determination.............................7
4.       CONVERSION..................................................7
         4.1.     Conversion to Common Stock.........................7
         4.2.     Exercise of Conversion Right.......................7
         4.3.     Deemed Date of Conversion..........................7
         4.4.     No Fractional Shares...............................8
5.       MERGER, ETC. OF LORACA......................................8
6.       COVENANTS OF CORPORATION....................................9
         6.1.     Maintenance of Business............................9
         6.2.     Reporting to Holder of the Senior Indebtedness.....9
         6.3.     Notice of Defaults, Etc............................9
         6.4.     Other Notes; Payments..............................9
         6.5.     Additional Secured Indebtedness...................10
7.       DEFAULT....................................................10
         7.1.     Events of Default.................................10

         7.2.     Remedies..........................................11

                                       i

<PAGE>

8.       CONSENT TO JURISDICTION; WAIVER OF IMMUNITIES
         AND RIGHT TO TRIAL BY JURY.................................12
         8.1.     Consent to Jurisdiction...........................12
         8.2.     Additional Service of Process.....................12
         8.3.     Waiver of Immunity................................12
9.       MISCELLANEOUS..............................................12
         9.1.     Interest Rate.....................................12
         9.2.     Notices...........................................13
         9.3.     Transfer..........................................14
         9.4.     Headings..........................................15
         9.5.     Security..........................................15
         9.6.     Governing Law.....................................15

                                       ii

<PAGE>

         THE SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN REGISTERED  UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY
         NOT BE REOFFERED, RESOLD, CONVERTED, PLEDGED, HYPOTHECATED, CONVEYED OR
         OTHERWISE  TRANSFERRED  UNTIL (i) SUCH  SECURITIES HAVE BEEN REGISTERED
         UNDER SUCH SECURITIES ACT AND ANY APPLICABLE  STATE  SECURITIES LAW, OR
         (ii)  PERMITTED   PURSUANT  TO  THE  PROVISIONS  OF  A  CERTAIN  MERGER
         AGREEMENT,  COPIES  OF  WHICH  ARE  ON  FILE  AT  THE  OFFICES  OF  THE
         CORPORATION.

               SECURED FLOATING RATE CONVERTIBLE SUBORDINATED NOTE

No. C-1  $_________.00

     LORACA ACQUISITION CORPORATION, a corporation duly organized under the laws
of the State of Washington ("Corporation"),  for value received, hereby promises
to  pay to  ____________________.,  or  registered  assigns  (collectively,  the
"Holder"),  the  principal  sum of  ______________________  and  No/100  Dollars
($_________) in twelve (12) equal  consecutive  monthly  payments of $_________,
with the first  payment of principal  due on August 1, 2001 and each  succeeding
payment being due on the first day of each month thereafter, and to pay interest
on such outstanding principal balance from the date hereof quarterly on April 1,
July 1, October 1, and January 1 of each year,  commencing  April 1, 2000,  at a
rate equal to the prime rate as published  in The Wall Street  Journal from time
to time (or if such  rate is not so  published,  then the  rate  published  by a
comparable national financial  publication) ("Stated Rate"), until the principal
hereof is paid or made  available  for  payment,  all as  hereinafter  provided.
Interest  for each year shall be  computed  based  upon a year of three  hundred
sixty (360) days. In the event the  Corporation  does not pay any installment of
principal or interest when due, such installment shall bear interest at the rate
of five and  one-half  percentage  points per annum in excess of the Stated Rate
("Default Rate")  commencing on the 15th day after the date that notice is given
by Holder to the  Corporation  of such failure to pay when due. In the event the
Holder  accelerates  the maturity date of this Note as provided in Section , the
entire unpaid  principal  balance of this  Convertible  Note,  together with all
accrued and unpaid interest on this Convertible Note, shall bear interest at the
Default Rate from the date of  acceleration  until the entire  unpaid  principal
balance of, and all accrued and unpaid  interest  on, this  Convertible  Note is
paid in full. Payments of the principal of and interest on this Convertible Note
will be made  to the  Holder  at the  close  of  business  on the  Business  Day
immediately  preceding  the date such  payment  is due by wire  transfer  to the

<PAGE>

account  designated  by the  Holder,  or, in  default  of such  designation,  by
certified check mailed to the address of the Holder as such address shall appear
in the records of the Corporation.

     1. DEFINITIONS. The following words and terms when used in this Convertible
Note  shall  have the  meanings  set forth  below,  unless  the  context  or use
indicates another or different  meaning or intent,  and such definitions and the
other words and terms in this  Convertible  Note shall be equally  applicable to
the singular and plural as well as the masculine,  feminine,  and neuter, as the
context requires.  Capitalized terms used herein, but not defined herein,  shall
have the meanings ascribed to them in the Merger Agreement.

     "Business Day" means each Monday, Tuesday, Wednesday,  Thursday, and Friday
which  is not a day on which  banking  institutions  in the  city of  Lexington,
Kentucky are authorized or obligated by law or executive order to close.

     "Closing  Price" means with respect to the Common Stock on any day, (i) the
last  reported  sales price  regular way or, in case no such reported sale takes
place on such day,  the average of the  reported  closing  bid and asked  prices
regular way, in either case on the New York Stock Exchange or the American Stock
Exchange,  or (ii) if the Common  Stock is not listed or  admitted to trading on
such  exchanges,  the last reported  sales price regular way, or in case no such
reported  sale takes place on such day, the average of the reported  closing bid
and asked prices regular way, on the principal national  securities  exchange on
which the Common Stock is listed or admitted to trading,  or (iii) if the Common
Stock is not listed or admitted to trading on any national securities  exchange,
the last reported  sales price regular way in the National  Market System of the
National Association of Securities Dealers, Inc., or (iv) if the Common Stock is
not listed or admitted  to trading on any  national  securities  exchange or the
National Market System,  the average of the last reported sale price on such day
on the  over-the-counter  Bulletin  Board,  or  (v) if  none  of the  above  are
applicable, the average of the bid and asked prices for such day as furnished by
any New York Stock Exchange member firm regularly  making a market in the Common
Stock  selected  for such  purpose  by the  Board of  Directors  of  Loraca or a
committee thereof.

     "Common Stock" means Loraca's common stock, $.001 par value.

     "Conversion  Price"  means the average of the  Closing  Price of the Common
Stock for the 20 consecutive  trading days ending on the fifth day preceding the
date of the  Conversion  Notice (in the form  attached  hereto as Exhibit A), as
adjusted in the Guaranty Agreement.

     "Convertible   Note"  means  this   Secured   Floating   Rate   Convertible
Subordinated Note.

                                       2
<PAGE>

     "Default" means any event or condition, the occurrence of which would, with
the  lapse of time or the  giving of  notice,  or both,  constitute  an Event of
Default under Section ___.

     "Encumbrance" shall mean any charge, claim, condition,  equitable interest,
lien, mortgage, option, pledge, security interest, or restriction of any kind.

     "Equity  Offering" means a private equity financing or a public offering of
equity by the Corporation.

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

     "Guaranty Agreement" means the agreement attached hereto as Exhibit B.

     "Loraca" means Loraca  International,  Inc., a Nevada corporation,  and the
parent corporation of the Corporation.

     "Mandatory  Prepayment  Amount"  means  an  amount  equal  to  23%  of  the
cumulative  amount  in  excess  of  $5,000,000  which is  raised  in all  Equity
Offerings which may occur during the period there is any  outstanding  principal
payable under this Convertible Note.

     Merger Agreement" means the Agreement and Plan of Merger, dated January __,
2000, among the Corporation,  Loraca,  the Holder,  and the holders of the other
Notes, relating to, among other things, the issuance of the Notes.

     "Notes" means the Secured Floating Rate Convertible  Subordinated  Notes of
the Corporation in the aggregate principal amount of $2,300,000.

     "Person"  means,   whether  or  not   capitalized,   a  natural  person,  a
partnership,  a corporation,  an association,  a trust, a joint venture, a joint
stock company, an unincorporated organization,  or a governmental entity, or any
department, agency, or political subdivision thereof.

     "Public  Offering"  means a public  offering  of equity  securities  of the
Corporation pursuant to an effective registration statement under the Securities
Act.

     "Senior  Indebtedness"  means the  principal  of and  premium,  if any, and
unpaid  interest  on, and fees and other  amounts  payable  with respect to, the
Corporation's  $________  credit  facility  ("Line  of  Credit")  with Bank One,
Lexington,  N.A., as agent for the banks from time to time participating therein
(as the same may be amended, modified, increased, extended and/or replaced), and
any refundings,  renewals,  extensions, or deferrals of such credit facility and
for the payment of which the  Corporation  is liable  directly or  indirectly by
guarantee,  letter of credit,  obligation to purchase or acquire,  or otherwise,

                                       3

<PAGE>

unless the terms of the instrument  evidencing such  indebtedness or pursuant to
which  such   indebtedness  is  outstanding   specifically   provide  that  such
indebtedness  is not superior in right of payment to the Notes.  Anything herein
to the contrary notwithstanding, Senior Indebtedness does not include (a) a note
or similar instrument given or any obligation  incurred or arising,  directly or
indirectly,  in  connection  with  the  acquisition  by the  Corporation  of any
business,  properties, or assets, including securities (provided,  however, that
Senior  Indebtedness  will always include any  acquisition  indebtedness  of the
Corporation  funded under the Line of Credit),  (b) any account payable or other
obligation  created or  assumed by the  Corporation  in the  ordinary  course of
business  in  connection  with the  obtaining  of  materials  or  services,  (c)
obligations under capital and other leases, and (d) the Notes.

     "Subsidiary"  means  (a) any  corporation  of  which  more  than 50% of the
outstanding  capital stock ordinarily  having voting power to elect the board of
directors of such corporation  (irrespective of whether at the time stock of any
other class or classes of such corporation shall have or might have voting power
by reason of the  happening  of any  contingency)  is at the time,  directly  or
indirectly,  owned by the  Corporation,  or (b) any  partnership  of  which  the
Corporation  owns or has the  right to  acquire  45% or more of the  outstanding
units of partnership interest or other interests of such partnership  ordinarily
having  voting  power  with  respect  to any  matter  concerning  the  business,
management, or operations of the partnership, including, without limitation, the
selection or removal of the general  partner of such  partnership or the sale or
other  disposition of all or any material part of the business or assets of such
partnership.

     "Technology  Security  Agreement" means the agreement of even date herewith
attached hereto as Exhibit D.

     2. PREPAYMENT.

     2.1. Optional and Mandatory Prepayment.  After giving notice as required in
Section __, the Corporation,  at its option, may prepay this Convertible Note at
any  time,  in whole or in part,  by  paying  the  Holder  the full  outstanding
principal  amount to be  prepaid,  together  with any  unpaid  interest  accrued
thereon to the date of such prepayment.  Subject to Sections 3, and after giving
notice as required in Section __, the Corporation  shall prepay this Convertible
Note,  at the  request  of the  Holder,  in an  amount  equal  to the  Mandatory
Prepayment Amount allocable to this Convertible Note.

     2.2. Notice of Prepayment.  Before the Corporation  shall authorize or take
steps to effect or make the prepayment,  in whole or in part, of any Convertible
Note the  Corporation  shall  cause to be mailed to the Holder at such  Holder's
last address as it shall appear in the records of the  Corporation,  at least 30
days prior to the  applicable  record or other  date  hereinafter  specified,  a
notice stating the date on which such prepayment is to be made, which date shall
be at least 30 days prior to the date such prepayment is to occur.

                                       4
<PAGE>

     3. SUBORDINATION.

     3.1. Principal and Interest.  The Corporation covenants and agrees, and the
Holder  likewise  covenants  and  agrees,  that no payment  shall be made by the
Corporation on account of principal of or interest on this Convertible  Note, or
otherwise,  if (a) there shall have  occurred  and be  continuing a default with
respect to the Senior  Indebtedness that would or would with the passage of time
permit the acceleration  thereof, or if there would be a default with respect to
the  Senior  Indebtedness  caused  by any  payment  on or with  respect  to this
Convertible  Note,  or (b) in the event any such  default  is the  subject  of a
judicial  proceeding,  unless and until such  default or Event of Default  shall
have  been  cured or  waived or shall  have  ceased  to exist or such  notice is
withdrawn or found by a court of competent jurisdiction to be invalid.

     3.2.  Distributions  of Assets.  Upon any  acceleration of the principal of
this  Convertible  Note or any payment by the  Corporation  or  distribution  of
assets of the Corporation of any kind or character,  whether in cash,  property,
or securities,  to creditors of the Corporation  upon any dissolution or winding
up or liquidation or  reorganization  of the Corporation,  whether  voluntary or
involuntary,  or in  bankruptcy,  insolvency,  receivership,  or  other  similar
proceedings, all amounts due or to become due upon all Senior Indebtedness shall
first be paid in full in money or money's  worth,  or payment  thereof  provided
for,  before any payment is made on account of the  principal  of or interest on
this  Convertible Note and upon such dissolution or winding up or liquidation or
reorganization, any payment by the Corporation, or distribution of assets of the
Corporation of any kind or character,  whether in cash, property, or securities,
to which the Holder would be entitled except for the provisions hereof, shall be
paid by the Corporation or by any receiver,  trustee in bankruptcy,  liquidating
trustee,  agent, or other person making such payment or distribution directly to
the   holder   of  the   Senior   Indebtedness   or  their   representative   or
representatives,  or to the trustee or trustees under any indenture  pursuant to
which any instruments  evidencing any Senior  Indebtedness may have been issued,
as their  respective  interests may appear,  to the extent  necessary to pay the
Senior  Indebtedness  in full in money or money's worth,  after giving effect to
any  concurrent  payment  or  distribution  to or for the  holder of the  Senior
Indebtedness, before any payment or distribution is made to the Holder.

     Notwithstanding  the  foregoing,  in  the  event  that  any  payment  of or
distribution of assets of the  Corporation of any kind or character,  whether in
cash, property, or securities, prohibited by the foregoing, shall be received by
the Holder  before all Senior  Indebtedness  is paid in full in money or money's
worth,  or  provision  is made for such  payment,  then and in such  event  such
payment or  distribution  shall be paid over or  delivered  to the holder of the
Senior Indebtedness or their representative or representatives,  for application
to the  payment  of all  Senior  Indebtedness  remaining  unpaid  to the  extent
necessary  to pay all Senior  Indebtedness  in full in money or  money's  worth,
after giving  effect to any  concurrent  payment or  distribution  to or for the

                                       5

<PAGE>

holder  of the  Senior  Indebtedness  (but  subject  to the  power of a court of
competent jurisdiction to make other equitable provision,  which shall have been
determined by such court to give effect to the rights  conferred herein upon the
Senior  Indebtedness  and the holders  thereof with respect to this  Convertible
Note or the Holder  hereof by a lawful plan or  reorganization  or  readjustment
under applicable bankruptcy law).

     3.3.  Modification  of  Senior  Indebtedness.  The  holder  of  the  Senior
Indebtedness  may, at any time and from time to time,  but only with the consent
of and notice to the Holder, without incurring  responsibility to the Holder and
without  impairing or releasing the  obligations  of the Holder to the holder of
the Senior  Indebtedness:  (a) change the manner,  place, or terms of payment or
change or extend the time of payment of, or renew or alter Senior  Indebtedness,
or  otherwise  amend  in  any  manner  Senior  Indebtedness  or  any  instrument
evidencing  the same or any agreement  under which such Senior  Indebtedness  is
outstanding;  (b) sell,  exchange,  release, or otherwise deal with any property
pledged,  mortgaged, or otherwise securing Senior Indebtedness;  (c) release any
person liable in any manner for the collection of Senior  Indebtedness;  and (d)
exercise or refrain from  exercising any rights against the  Corporation and any
other person; provided, the Corporation shall promptly give notice to the Holder
of each and every action of the holder of the Senior  Indebtedness  described in
this  Section , and,  further  provided,  the amount of the Senior  Indebtedness
outstanding  shall not at any time exceed the sum of $____________  [NOTE:  Same
amounts as listed on page 4].

     3.4.  No Other  Indebtedness  Senior to Notes.  The  Corporation  shall not
permit any of its  indebtedness  to be senior to the Notes other than the Senior
Indebtedness.

     3.5.  Subrogation.  Subject to the payment in full of all amounts  then due
(whether by acceleration of the maturity thereof or otherwise) on account of the
principal of,  premium,  if any, and interest on all Senior  Indebtedness at the
time outstanding,  the Holder shall be subrogated to the rights of the holder of
the Senior Indebtedness to receive payments or distributions of cash,  property,
or securities of the Corporation applicable to the Senior Indebtedness until the
principal of and interest on this  Convertible  Note shall be paid in full; and,
for the  purposes  of such  subrogation,  no payments  or  distributions  by the
Corporation to the holder of the Senior Indebtedness of any cash,  property,  or
securities  to which the Holder  would be  entitled  except  for the  provisions
hereof,  and no payments over pursuant to the provisions hereof to the holder of
the Senior  Indebtedness by the Holder,  shall, as between the Corporation,  its
creditors  other than  holder of the Senior  Indebtedness,  and the  Holder,  be
deemed  to be a  payment  by the  Corporation  to or on  account  of the  Senior
Indebtedness. It is understood that the foregoing provisions of this Convertible
Note are,  and are  intended  to be,  solely  for the  purpose of  defining  the
relative  rights  of the  Holder on the one hand and the  holder  of the  Senior
Indebtedness on the other hand.

                                       6
<PAGE>

     3.6. Unconditional Obligations.  Nothing contained in this Convertible Note
is intended to or shall impair,  as among the  Corporation,  its creditors other
than the holder of the Senior  Indebtedness,  and the Holder,  the obligation of
the Corporation,  which is absolute and unconditional,  to pay to the Holder the
principal  of and interest on this  Convertible  Note as and when the same shall
become due and payable in accordance  with its terms, or is intended to or shall
affect the relative rights of the Holder and creditors of the Corporation  other
than the holder of the Senior  Indebtedness,  nor shall anything  herein prevent
the Holder from  exercising all remedies  otherwise  permitted by applicable law
upon Default under this Convertible Note.

     3.7. Judicial Determination.  Upon any payment or distribution of assets of
the  Corporation  referred to herein,  the Holder shall be entitled to rely upon
any order or decree made by any court of  competent  jurisdiction  in which such
dissolution, winding up, liquidation, or reorganization proceedings are pending,
or certificate  of the receiver,  trustee in  bankruptcy,  liquidating  trustee,
agent,  or other person  making such payment or  distribution,  delivered to the
Holder,  for the purpose of ascertaining  the persons entitled to participate in
such distribution,  the holder of the Senior Indebtedness and other indebtedness
of the Corporation, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto.

     4. CONVERSION.

     4.1.  Conversion to Common Stock.  Subject to and upon  compliance with the
provisions of this  Convertible  Note,  the Holder is entitled,  at the Holder's
option,  at any  time on or  before  the  payment  in  full  of all  outstanding
principal  payable under this Convertible Note, to convert this Convertible Note
into fully paid and nonassessable shares of Common Stock at the Conversion Price
and as  provided  herein and in the  Guaranty  Agreement  of even date  herewith
between the Holder and Loraca.

     4.2.  Exercise of Conversion  Right. To exercise the conversion  privilege,
the  Holder  must  surrender  this  Convertible  Note  at  the  offices  of  the
Corporation in Seattle, Washington,  accompanied by notice to the Corporation at
such office,  that the Holder elects to convert all or part of this  Convertible
Note. Such notice shall be in substantially  the form attached hereto as Exhibit
A. All  accrued  but  unpaid  interest  through  the  Business  Day  immediately
preceding the date of such  conversion  with respect to the principal  amount of
this  Convertible Note being converted shall be payable upon the next succeeding
interest  payment date,  unless the entire  principal amount of this Convertible
Note is converted,  in which case all accrued but unpaid interest  thereon shall
be payable upon conversion.

     4.3. Deemed Date of Conversion.  This  Convertible  Note shall be deemed to
have been  converted  immediately  prior to the close of  business on the day of
surrender  of this  Convertible  Note  for  conversion  in  accordance  with the

                                       7
<PAGE>

foregoing provisions and at such time the rights of the Holder (as a noteholder)
shall  cease,  and the person or persons  entitled to receive  the Common  Stock
issuable  upon  conversion  shall be  treated  for all  purposes,  to the extent
permitted  by law, as the record  holder or holders of such  Common  Stock as of
such day. The  Convertible  Note delivered for conversion  shall be delivered to
the Corporation to be canceled.  In the event the entire  principal  balance due
hereunder  is  not  converted,  as  promptly  as  practicable  on or  after  the
conversion  date,  the  Corporation  shall issue a new  Convertible  Note to the
Holder for the then  outstanding  principal  balance due under this  Convertible
Note,  which new Convertible  Note shall be identical to this  Convertible  Note
except for the principal amount thereof.

     4.4. No Fractional  Shares.  No fractional  shares of Common Stock shall be
issued upon conversion of this Convertible Note. Any fractional shares of Common
Stock which would otherwise be issuable upon conversion of this Convertible Note
(or  specified  portions  thereof) will be paid in cash to the Holder or, in the
event less than the entire outstanding principal balance is converted,  added to
the principal balance of the new Convertible Note.

     5. MERGER, ETC. OF LORACA.

     In the event of any proposed (a) consolidation of Loraca with, or merger of
Loraca into, any other  corporation,  or (b) merger of another  corporation into
Loraca  (other  than a merger  which  does not  result in any  reclassification,
conversion, exchange, or cancellation of outstanding shares of Common Stock), or
(c) share exchange,  sale, or transfer of all or substantially all of the assets
of Loraca,  which would result in the shareholders of Loraca not controlling the
surviving entity  ("Merger")  Loraca shall give notice to Holder no less than 30
days prior to the closing of the proposed  Merger,  and shall  include with such
notice detailed information concerning the proposed Merger. Holder shall have 10
days to (a) give the Holder's consent to the Merger,  which consent shall not be
unreasonably  withheld, or (b) to declare the outstanding principal and interest
on this Convertible Note to be immediately due and payable.  Failure to give the
notice  shall be deemed a consent to the Merger.  If  Holder's  consent is given
Loraca shall require the  corporation  formed by or which  participates  in such
Merger,  to  execute  and  deliver  to  the  Holder  an  agreement   ("Successor
Agreement")  providing that the Holder shall have the right  thereafter,  during
the period there is any outstanding  principal due on this Convertible  Note, to
convert all or part of the outstanding  principal on this  Convertible Note into
the kind and amount of securities, cash, and other property receivable upon such
consolidation,  merger,  share  exchange,  sale,  or transfer by a holder of the
number of shares of Common  Stock into which  this  Convertible  Note might have
been converted  immediately prior to such Merger. Any Successor  Agreement shall
provide for adjustments to protect against dilution for events subsequent to the
effective date of such consolidation,  merger, share exchange, sale, or transfer
which shall be as nearly  equivalent as may be  practicable  to the  adjustments
provided  for  herein.  The above  provisions  of this  Convertible  Note  shall

                                       8
<PAGE>

similarly  apply to  successive  Mergers.  However,  for the avoidance of doubt,
notwithstanding  anything contained herein to the contrary,  no adjustment shall
be made to the  Conversion  Price  in the  event  of a  merger,  stock  or asset
transaction  or share  exchange  with any third party which does not result in a
reclassification,  conversion,  or  cancellation  of the  outstanding  shares of
Common Stock.

     6. COVENANTS OF CORPORATION.

     6.1.  Maintenance  of Business.  Corporation  shall maintain its existence,
rights and privileges.  Corporation  shall maintain its rights to do business in
each state  where it is  presently  conducting  business  and where it  conducts
business  after  the  date  hereof,  to  the  extent  commercially   reasonable.
Corporation  shall  maintain  its right and  privilege  to do business  with the
Federal  National  Mortgage   Association,   the  Government  National  Mortgage
Association,  the Federal  Housing  Authority,  the Federal  Home Loan  Mortgage
Corporation,  the Housing and Urban Development Department,  the Federal Housing
Authority and the Veterans Administration.  The Corporation shall not materially
change the nature of the  business  in which it is  presently  engaged if such a
change  would  be  materially  adverse  to  the  business,  operations,  assets,
liabilities, financial condition or prospects of the Corporation.

     6.2. Reporting to Holder of the Senior Indebtedness.  The Corporation shall
promptly  send to the  holders  of all Notes a copy of the  quarterly  and other
reports it sends to the holder of the Senior Indebtedness.

     6.3. Notice of Defaults,  Etc. The  Corporation  will deliver to the Holder
promptly,  but in any event within 10 Business  Days of  discovery  thereof by a
responsible officer of the Corporation,  notice of, and the steps being taken by
the Corporation  with respect to, any Default or any of the events  specified in
Section , whether or not there has been satisfied any  requirement  specified in
connection with such event in Section for the giving of notice,  or the lapse of
time, or the happening of any further  condition,  event,  or act.  Further,  in
addition  to  the  requirements  set  forth  in  the  preceding  sentence,   the
Corporation  shall  give  prompt  notice to the  Holder of any fact known to the
Corporation  which would  prohibit  the making of any payment of moneys to or by
the Corporation in respect of this Convertible Note.

     6.4. Other Notes;  Payments.  The Notes were issued under and in accordance
with,  are  subject  to the terms and  conditions  of,  and are in all  respects
equally and ratably entitled to the benefits of the Merger Agreement.  Until the
Corporation has paid in full all obligations owed to the Holder, the Corporation
agrees that if it makes any payment of the interest owed or principal amount on,
or any  distribution  of assets  of the  Corporation  of any kind or  character,
whether in cash,  property,  or  securities,  with respect to, any of the Notes,
then the Corporation  shall make a proportionate  payment or distribution to the
Holder.

                                       9
<PAGE>

     6.5. Additional Secured Indebtedness.  The Corporation shall not permit any
of its assets,  properties  or  interests  in  properties  ("Properties")  to be
subject  to any  Encumbrance  except  (a) the  Properties  securing  the  Senior
Indebtedness  and (b)  Encumbrances  incurred in connection with the acquisition
of, and securing, Properties acquired by the Corporation after the date hereof.

     7. DEFAULT.

     7.1.  Events of Default.  Any of the following shall be an Event of Default
under this Convertible Note:

     (a) Failure by the Corporation to pay when due any principal or interest on
this  Convertible  Note or any of the other Notes and such  failure has not been
remedied  within 45 days after  notice is received by the  Corporation  from the
Holder or the other holder(s) of the Note (or Notes).

     (b) Any material  representation  or warranty  made by the  Corporation  in
connection with this  Convertible Note or any of the other Notes shall have been
untrue, misleading, or incomplete in any material respect when made.

     (c) The  Corporation  violates or fails to observe,  or is in default  with
respect to, any  material  covenant or agreement  contained in this  Convertible
Note or any of the other Notes and such  violation  shall not have been cured or
remedied,  if subject to cure or remedy within such period, within 30 days after
notice  thereof  is  received  by the  Corporation  from the Holder or the other
holder(s) of the Note(s).

     (d) There is an Event of Default  under any of the Guaranty  Agreements  or
the  Technology  Security  Agreement  between Loraca and the Holder or any other
holder of the Notes.

     (e) The  Corporation  makes an assignment for the benefit of its creditors,
or admits in writing its  inability  to pay its debts  generally  as they become
due, or  consents to the  appointment  of a  receiver,  conservator,  custodian,
liquidator,  or trustee of the Corporation or any  Subsidiary,  or of all or any
part of the property of any of them.

     (f) The  Corporation  files a petition in voluntary  bankruptcy  or seeking
relief  under any  provision  of any  bankruptcy,  reorganization,  arrangement,
insolvency,  readjustment  of  debt,  dissolution,  or  liquidation  law  of any
jurisdiction,  whether now or hereafter in effect,  or consents to the filing of
any petition against it under any such law.

     (g) A  receiver,  conservator,  custodian,  liquidator,  or  trustee of the
Corporation,  or of all or any of the property of the Corporation,  is appointed
by court  order and such order  remains  in effect for more than 90 days;  or an
order for relief is entered  under the federal  bankruptcy  laws with respect to

                                       10
<PAGE>

the  Corporation;  or  any of  the  material  property  of  the  Corporation  is
sequestered  by court  order and such  order  remains in effect for more than 90
days;  or a petition is filed  against  the  Corporation  under the  bankruptcy,
reorganization,  arrangement,  insolvency, readjustment of debt, dissolution, or
liquidation law of any jurisdiction,  whether now or hereafter in effect, and is
not dismissed within 90 days after such filing.

     (h)  Any  order  is  entered  in any  proceeding  against  the  Corporation
decreeing the dissolution or split-up of the Corporation, and such order remains
unstayed and in effect for 90 days.

     (i) There  shall  occur a default or the  happening  of any event under the
Senior Indebtedness, and the holder of the Senior Indebtedness shall as a result
thereof  have the right to  accelerate  the maturity of in excess of $400,000 of
such Senior Indebtedness.

     7.2. Remedies.

     (a) If any Event of Default  described in Sections , , , or shall occur and
be continuing,  this  Convertible  Note and interest  accrued  thereon,  and all
liabilities  of  the  Corporation  hereunder,  shall  thereupon  become  and  be
immediately  due and payable without  presentment,  demand,  protest,  notice of
intent to accelerate, notice of acceleration, or other notice of any kind to the
Corporation, all of which are hereby waived. If any other Event of Default shall
occur and be continuing,  the Holder may, by notice to the Corporation,  declare
this Convertible Note and interest accrued hereupon,  and all liabilities of the
Corporation  hereunder,  to be immediately  due and payable,  and the same shall
become and be immediately due and payable without presentment,  demand, protest,
notice of intent to accelerate,  or other notice of any kind to the Corporation,
all of which are hereby waived.

     (b) In the  event  this  Convertible  Note is  placed  in the  hands  of an
attorney  for  collection  or for  enforcement,  or in the event that the Holder
incurs  any costs  incident  to the  collection  of any  indebtedness  evidenced
hereby,  the  Corporation  shall pay all reasonable  attorneys'  fees, all court
costs and the reasonable costs of any other collection  efforts.  Forbearance to
exercise  the remedies set forth herein with respect to any failure or breach of
the  Corporation  shall not  constitute  a waiver  by the  Holder of any of such
remedies.

     (c) From time to time, without affecting the obligations of the Corporation
or its legal  representatives,  successors,  or assigns  to pay the  outstanding
principal  balance of this  Convertible  Note and observe the  covenants  of the
Corporation contained herein and in the documents and instrument related hereto,
without  giving  notice to or obtaining the consent of the  Corporation,  or its
legal representatives,  successors or assigns, and without liability on the part
of the Holder, the Holder may, at the option of the Holder,  extend the time for

                                       11

<PAGE>

payment of said outstanding  principal  balance or any part thereof,  reduce the
payments  thereon,  release anyone liable on any of said  outstanding  principal
balance, accept a renewal of this Convertible Note, modify the terms and time of
payment  of said  outstanding  principal  balance  or join in any  extension  or
subordination agreement, and agree in writing with the Corporation to modify the
rate of interest or period of  amortization of this  Convertible  Note or change
the  amount of the  payments  hereunder.  No one or more of such  actions  shall
constitute a novation or otherwise affect or impair the  indebtedness  evidenced
hereby.

     8.  CONSENT TO  JURISDICTION;  WAIVER OF  IMMUNITIES  AND RIGHT TO TRIAL BY
JURY.

     8.1. Consent to Jurisdiction.  Any suit,  action or proceeding  against the
Corporation with respect to this Convertible Note or any judgment entered by any
court in respect  thereof,  may be brought in the courts of the  Commonwealth of
Kentucky,  located in Fayette County or in the United States  District Court for
the Eastern District of Kentucky as the Holder, in the Holder's sole discretion,
may elect and the Corporation  hereby submits to the non-exclusive  jurisdiction
of such courts for the purpose of any such suit,  action or  proceeding  in said
court if  given in  writing  in  accordance  with  the  terms of  Section  . The
Corporation  hereby  irrevocably  waives  any  objections  which  it may  now or
hereafter have to the laying of venue of any suit, action or proceeding  arising
out of or relating to this Convertible Note brought in the courts located in the
Commonwealth of Kentucky,  Fayette County or in the United States District Court
for the Eastern District of Kentucky,  and hereby further irrevocably waives any
claim that any such  suit,  action or  proceeding  brought in any such court has
been brought in an inconvenient forum.

     8.2.  Additional  Service of Process.  Nothing in this Section shall affect
the right of the Holder to serve legal process in any other manner  permitted by
law or affect the right of the Holder to bring any action or proceeding  against
the Corporation or its property in the courts of any other jurisdictions.

     8.3.  Waiver  of  Immunity.  To the  extent  that  the  Corporation  has or
hereafter  may acquire any immunity from  jurisdiction  of any court or from any
legal process (whether through service or notice,  attachment prior to judgment,
attachment in aid of execution,  execution or otherwise)  with respect to itself
or its property,  the  Corporation  hereby  irrevocably  waives such immunity in
respect of its obligations under this Convertible Note.

     9. MISCELLANEOUS.

     9.1.  Interest Rate.  Regardless of any other provision of this Convertible
Note or in any documents  guaranteeing  or securing  payment hereof or otherwise
relating  hereto,  no Holder of this  Convertible Note shall ever be entitled to
receive,  collect,  reserve,  or  apply as  interest  on the  principal  of this

                                       12

<PAGE>

Convertible Note any amount in excess of the maximum rate of interest  allowable
under  applicable law or  regulations,  as amended or enacted from time to time,
and if any Holder of this Convertible Note ever receives,  collects,  or applies
as interest hereon any such excess, such amount that would be excessive interest
shall be deemed a partial  prepayment of principal and shall be treated as such,
and if the principal is paid in full,  any remaining  excess shall  forthwith be
paid to the Corporation.  In determining whether the interest paid or payable on
the principal  outstanding  under this Convertible Note exceeds the maximum rate
of interest  allowable  under  applicable  law, the  Corporation  and the Holder
shall, to the maximum extent  permitted under  applicable law, (a)  characterize
any  non-principal  payment  as an  expense,  fee,  or  premium  rather  than as
interest,  (b) exclude  voluntary  prepayments and the effects thereof,  and (c)
spread the total  amount of interest  throughout  the entire  contemplated  term
hereof; provided, however, that if the indebtedness evidenced hereby is paid and
performed  in full  prior  to the end of the full  actual  period  of  existence
thereof, and if the interest received for the actual period of existence thereof
exceeds the maximum rate of interest  allowable under applicable law, the Holder
shall  either  apply or refund to the  Corporation  the amount of such excess as
herein  provided,  and in such  event the  Holder  shall not be  subject  to any
penalties  provided  by any  laws  for  contracting  for,  charging,  reserving,
collecting,  or  receiving  interest in excess of the  maximum  rate of interest
allowable under applicable law.

     9.2. Notices. All notices,  requests,  consents,  claims, demands and other
communications  hereunder  shall be in writing  and shall be deemed to have been
duly given if (a) mailed (registered or certified mail, postage prepaid,  return
receipt requested) or (b) personally  delivered against a written receipt or (c)
delivered to a reputable  express  messenger  (such as Federal  Express,  United
Parcel Service or DHL Courier) as follows:

                  If to Holder:             ________________
                                            ________________
                                            ________________
                                            ________________

         With a copy (which shall not
         constitute notice) to:             ________________
                                            ________________
                                            ________________
                                            ________________

                  If to Corporation:        Loraca Acquisition Corporation.
                                            c/o Loraca International, Inc.
                                            6 CenterPointe Drive, Suite 360
                                            Lake Oswego, Oregon 97035
                                            Attn:  Bernard A. Guy

                                       13
<PAGE>

         With a copy (which shall not
         constitute notice) to:             Mark T. Lee
                                            Gray Cary Ware & Freidenrich
                                            4365 Executive Drive, Suite 1600
                                            San Diego, CA  92121

or to such  other  address  as any party  may have  furnished  to the  others in
writing in accordance  herewith,  except that notices of change of address shall
only be effective upon receipt.

     9.3. Transfer.

     (a) In the event of prepayment or  conversion of this  Convertible  Note in
part only, a new Convertible  Note for the unpaid or unconverted  portion hereof
will  be  issued  in the  name  or  names  requested  by  the  Holder  upon  the
cancellation hereof.

     (b) The transfer of this  Convertible  Note is  registrable on the books of
the  Corporation  upon surrender of this  Convertible  Note for  registration of
transfer at the offices of the Corporation in Seattle, Washington, duly endorsed
by, or accompanied by a written  instrument of transfer in form  satisfactory to
the Corporation  duly executed by, the Holder or its attorney duly authorized in
writing,  and  thereupon  one  or  more  new  Convertible  Notes  of  authorized
denominations,  and for the same aggregate  principal amount,  will be issued to
the designated transferee or transferees.

     (c) Prior to the due presentment of this  Convertible Note for registration
or transfer,  the  Corporation  and any agent of the  Corporation  may treat the
person in whose name this Convertible Note is registered as the owner hereof for
all purposes,  whether or not this Convertible Note be overdue,  and neither the
Corporation nor any such agent shall be affected by notice to the contrary.

     (d)  Notwithstanding  any provision  herein to the  contrary,  neither this
Convertible Note nor the shares of Common Stock into which it is convertible may
be transferred or otherwise  assigned unless the Corporation is provided with an
opinion of counsel  reasonably  acceptable to the Corporation  (the  Corporation
acknowledges that Greenebaum, Doll & McDonald PLLC is acceptable), or such other
assurances as it may reasonably  require,  that such transfer or assignment does
not violate the  registration  provisions  of the  Securities  Act or applicable
state securities laws. In addition,  the Holder  understand and agrees that none
of the shares of Common Stock into which this  Convertible  Note is  convertible
have been or will be registered  under the Securities Act or the securities laws
of any state and that they may be sold or  otherwise  disposed of only in one or
more  transactions  registered  under the Securities Act and, where  applicable,

                                       14
<PAGE>

such laws or as to which an exemption from the registration  requirements of the
Securities  Act and,  where  applicable,  such laws are  available.  The  Holder
understands and agrees that each certificate representing shares of Common Stock
shall bear the following legend:

         "THE SHARES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
         UNDER THE SECURITIES  ACT OF 1933 OR THE  SECURITIES  LAWS OF ANY STATE
         AND MAY NOT BE SOLD OR  OTHERWISE  DISPOSED  OF EXCEPT  PURSUANT  TO AN
         EFFECTIVE  REGISTRATION  STATEMENT UNDER SUCH ACT AND APPLICABLE  STATE
         SECURITIES  LAWS  OR  AN  APPLICABLE   EXEMPTION  TO  THE  REGISTRATION
         REQUIREMENTS OF SUCH ACT OR SUCH LAWS."

     9.4. Headings.  The Section headings contained in this Convertible Note are
for  reference  purposes  only and shall not  affect in any way the  meaning  or
interpretations of this Convertible Note.

     9.5. Security.  Payments of principal and interest on this Convertible Note
are secured pursuant to the terms of the Technology Security Agreement.

     9.6.  Governing  Law.  This  Convertible  Note  shall  be  governed  by and
construed  and  enforced  in  accordance  with the laws of the  Commonwealth  of
Kentucky,  without  regard to its  conflict of law rules.  No party hereto shall
commence  any  litigation  against  another  party  hereto  arising  out of this
Convertible Note except in a court located in the Commonwealth of Kentucky.  All
parties hereby consent to jurisdiction over it by such a court.

     IN  WITNESS  WHEREOF,  this  Convertible  Note has been duly  executed  and
delivered by the duly  authorized  officer of the  Corporation on the date first
above written.

                                             LORACA ACQUISITION CORPORATION

                                             By:____________________________
                                             Title:_________________________

                                                       ("Corporation")

                                       15

<PAGE>

                                    EXHIBIT A

                            FORM OF CONVERSION NOTICE

TO LORACA ACQUISITION CORPORATION AND LORACA INTERNATIONAL, INC.:

     The undersigned Holder of the attached  Convertible Note hereby assigns the
Convertible Note to Loraca Acquisition Corporation and irrevocably exercises the
option to convert  such  Convertible  Note into shares of Common Stock of Loraca
International,  Inc. ("Loraca") in accordance with the terms of such Convertible
Note and the  Guaranty  Agreement  with  Loraca,  and directs that the shares of
Loraca's  Common Stock issuable and  deliverable  upon the  conversion,  and any
portion of the Convertible Note  representing  any unconverted  principal amount
thereof,  be issued and delivered to the  undersigned  Holder unless a different
name has been indicated  below.  The principal  amount of the  Convertible  Note
being converted is $____________ and the Conversion Rate is $_________.

                                             _________________________________

                                             Fill in for  registration of shares
                                             of  Common  Stock  and  Convertible
                                             Note if to be issued otherwise than
                                             to the registered Holder.

------------------------------
Name

------------------------------
Address

------------------------------
Please print name and address
 (including zip code number)

SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER

------------------------------

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