Document:

Exhibit 10.1

                           LOAN AND SECURITY AGREEMENT

                                      among

                              WILTON FUNDING, LLC,

                                    as Lender

                                       and

                         THE ALLIED DEFENSE GROUP, INC.

                                       and

                    CERTAIN OF its subsidiaries named herein,

                                  as Borrowers

                            Dated as of May 28, 2004

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                                TABLE OF CONTENTS

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1        DEFINITIONS...........................................................1
     1.1      General Definitions..............................................1
     1.2      Index to Other Definitions......................................13
     1.3      Accounting Terms................................................14
     1.4      Others Defined in New York Uniform Commercial Code..............14

2        LOAN AND FEES........................................................14
     2.1      Loan............................................................14
     2.2      Loan Advances...................................................14
     2.3      Payment of Principal and Interest; Default Rate.................15
     2.4      Voluntary Prepayments; Termination of the Commitments...........16
     2.5      Use of Funds....................................................17
     2.6      Loan Fees.......................................................17
     2.7      Borrowers' Loan Account.........................................17
     2.8      Statements......................................................18
     2.9      Termination of Agreement........................................18
     2.1      Loan............................................................18

3        WARRANTS.............................................................19

4        CONDITIONS TO LOAN ADVANCES..........................................19
     4.1      Approval of Lender's Counsel....................................19
     4.2      Compliance......................................................19
     4.3      Documentation for the Initial Advance...........................19
     4.4      Documentation for Initial Working Capital Advance or
                Acquisition Advance...........................................19
     4.5      Delivery of Financial Statements, Projections, Compliance
                Certificate and Appraisals....................................20
     4.6      Completion of Forensic Accounting Due Diligence
                Reports and Background Checks.................................20
     4.7      Closing of Each Permitted Acquisition...........................20
     4.8      Additional Documentation for Acquisition Advances...............21
     4.9      Funding by Fund Lender..........................................23

5        SECURITY.............................................................24
     5.1      Security Interests and Liens....................................24
     5.2      Endorsement by Lender...........................................25
     5.3      Delivery of Warehouse Receipts to Lender........................25
     5.4      Preservation of Collateral and Perfection of
                Security Interests............................................25
     5.5      Loss of Value of Collateral.....................................26
     5.6      Collection of Accounts; Power of Attorney.......................26
     5.7      Account Covenants...............................................26
     5.8      Account Records and Verification Rights.........................26

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     5.9      Notice to Account Debtors.......................................27
     5.10     Inventory Records...............................................27
     5.11     Special Collateral..............................................27
     5.12     Remittance of Proceeds to Lender................................27
     5.13     Safekeeping of Collateral.......................................27
     5.14     Sales and Use of Collateral.....................................28
     5.15     Margin Accounts.................................................28
     5.16     Real Property...................................................28
     5.17     Title Insurance.................................................29

6        WARRANTIES.............................................................
     6.1      Litigation and Proceedings......................................29
     6.2      Other Agreements................................................29
     6.3      Licenses, Patents, Copyrights, Trademarks and Trade Names.......30
     6.4      Collateral......................................................30
     6.5      Location of Assets; Chief Executive Office......................30
     6.6      Tax Liabilities.................................................30
     6.7      Indebtedness and Producer Payables..............................31
     6.8      Other Names.......................................................
     6.9      Affiliates......................................................31
     6.10     Environmental Matters...........................................31
     6.11     Existence; Organization.........................................31
     6.12     Authority.......................................................32
     6.13     Binding Effect..................................................32
     6.14     Correctness of Financial Statements.............................33
     6.15     Employee Controversies..........................................33
     6.16     Compliance with Laws and Regulations............................33

     6.18     Inventory Warranties............................................33
     6.19     Solvency........................................................34
     6.20     Pension Reform Act..............................................34
     6.21     Margin Security.................................................34
     6.22     Investment Company Act Not Applicable...........................34
     6.23     Public Utility Holding Company Act Not Applicable...............34
     6.24     Full Disclosure.................................................34
     6.25     Intellectual Property...........................................35
     6.26     Government Contracts............................................35
     6.27     SEC Filings and Reports.........................................35
     6.28     Compliance with Sarbanes-Oxley Act..............................36
     6.29     Projections and Pro Forma Financial Statements..................36
     6.30     Purchase Agreements and Subordinated Debenture
                Purchase Agreement Representations............................37
     6.31     Survival of Warranties..........................................37

7        AFFIRMATIVE COVENANTS................................................37
     7.1      Financial and Other Information.................................37
     7.2      Conduct of Business.............................................39

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     7.3      Maintenance of Properties.......................................39
     7.4      Borrowers' Liability Insurance..................................39
     7.5      Borrowers' Property Insurance...................................40
     7.6      Financial Covenants and Ratios..................................41
     7.7      Benefit Plans...................................................41
     7.8      Notice of Suit, Adverse Change in Business or Default...........41
     7.9      Use of Proceeds.................................................42
     7.10     Books and Records...............................................42
     7.11     Compliance with Material Agreements.............................42
     7.12     Board and Stockholder Meetings and Actions......................42

8        NEGATIVE COVENANTS.....................................................
     8.1      Encumbrances....................................................43
     8.2      Consolidations, Mergers or Acquisitions.........................44
     8.3      Deposits, Investments, Advances or Loans........................44
     8.4      Indebtedness....................................................44
     8.5      Guarantees and Other Contingent Obligations.....................44
     8.6      Disposition of Property.........................................45
     8.7      Capital Expenditure Limitations.................................45
     8.8      Affiliate Transactions..........................................45
     8.9      Distributions in Respect of Equity; Prepayment of Debt..........45
     8.10     Amendment of Organizational Documents; Subsidiaries.............45
     8.11     Use of Names or Trademarks......................................46
     8.12     Amendment of Subordinated Loan Documents........................46
     8.13     Unconditional Purchase Obligations..............................46
     8.14     Inconsistent Agreements.........................................46
     8.15     Fiscal Year.....................................................47

9        DEFAULT AND RIGHTS AND REMEDIES......................................47
     9.1      Liabilities.....................................................47
     9.2      Rights and Remedies.............................................47
     9.3      Waiver of Demand................................................48
     9.4      Waiver of Notice................................................48
     9.5      Verification of Borrowing Notices...............................49

10       MISCELLANEOUS........................................................49
     10.1     Timing of Payments..............................................49
     10.2     Attorneys' Fees and Costs.......................................49
     10.3     Expenditures by Lender..........................................50
     10.4     Lender's Costs and Expenses as Additional Liabilities...........50
     10.5     Claims and Taxes................................................50
     10.6     Custody and Preservation of Collateral..........................51
     10.7     Inspection......................................................51
     10.8     Examination of Banking Records..................................51
     10.9     Governmental Reports............................................51
     10.10    Reliance by Lender..............................................51
     10.11    Parties.........................................................52

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     10.12    Applicable Law; Severability....................................52
     10.13    SUBMISSION TO JURISDICTION; WAIVER OF BOND AND TRIAL BY
                JURY..........................................................52
     10.14    Application of Payments; Waiver.................................52
     10.15    Marshaling; Payments Set Aside..................................53
     10.16    Section Titles..................................................53
     10.17    Continuing Effect...............................................53
     10.18    No Waiver.......................................................53
     10.19    Notices.........................................................53
     10.20    [Reserved.].....................................................55
     10.21    Taxes...........................................................55
     10.22    Assignment and Participation....................................56
     10.23    Maximum Interest................................................57
     10.24    Additional Advances.............................................57
     10.25    Loan Agreement Controls.........................................57
     10.26    Confidentiality.................................................57
     10.27    Independence of Covenants.......................................58
     10.28    Amendments and Waivers..........................................58
     10.29    Counterparts and Facsimile Signatures...........................58
     10.30    Set-off.........................................................58
     10.31    Binding Effect..................................................58
     10.32    FINAL AGREEMENT.................................................59

Exhibit 2A        Form of Promissory Note
Exhibit 3A        Form of Warrant Agreement
Exhibit 4A        List of Closing Documents for Initial Advance
Exhibit 4B        List of Closing Documents for Initial Working
                    Capital Advance/Acquisition Advance
Exhibit 4C        List of Closing Documents for each Acquisition Advance
Exhibit 5A        Form of Master Pledge Agreement
Exhibit 5B        Form of Belgian Share Pledge Agreement
Exhibit 5C        Form of Deposit Account Security Agreement
Exhibit 6A        Disclosure Schedule
Exhibit 7A        Compliance Certificate

                                      -iv-
<PAGE>

                           LOAN AND SECURITY AGREEMENT

      THIS LOAN AND  SECURITY  AGREEMENT  (as amended,  modified,  supplemented,
renewed or restated from time to time,  the  "Agreement")  is made as of May 28,
2004, by and among The Allied Defense Group,  Inc., a Delaware  corporation (the
"Company"),   News/Sports  Microwave  Rental,  Inc.,  a  California  corporation
("Microwave Rental"),  Titan Dynamics Systems, Inc., a Texas corporation ("Titan
Dynamics Systems"), SeaSpace Corporation, a California corporation ("SeaSpace"),
MECAR  USA,  INC.,  a  Delaware   corporation  ("MECAR  USA"),  ALLIED  RESEARCH
CORPORATION  LIMITED, a company formed under the laws of England and Wales ("ARC
Ltd."), ENERGA CORPORATION,  a Maryland corporation ("Energa"),  and Arc Europe,
S.A., a Belgium company ("ARC Europe"), as borrowers (individually, a "Borrower"
and collectively,  the "Borrowers"), and Wilton Funding, LLC, a Delaware limited
liability company, as lender (the "Lender").

                                    Recitals

      A.  Borrowers and Lender are entering into this Agreement to set forth the
terms and conditions  pursuant to which Lender will make to Borrowers term loans
in an aggregate amount of up to $18,000,000.

      B.  Borrowers  and Lender  desire to  establish  the  security for and the
conditions under which each of the above-described loans will be established.

                                    Agreement

      NOW,  THEREFORE,  in  consideration  of the foregoing and of the terms and
conditions  contained  in this  Agreement,  and for any loans or  extensions  of
credit or other financial  accommodations at any time made to or for the benefit
of Borrowers (or any of them) by Lender, Borrowers and Lender agree as follows:

      1 DEFINITIONS.

      1.1 General Definitions. When used herein, the following capitalized terms
shall have the meanings indicated, whether used in the singular or the plural:

      "Accounts" of a Domestic Borrower shall mean all present and future rights
(including,  without  limitation,  rights  under any  Margin  Accounts)  of such
Borrower to payment for  Inventory or other Goods sold or leased or for services
rendered,  which  rights are not  evidenced  by  Instruments  or Chattel  Paper,
regardless of whether such rights have been earned by performance  and any other
"accounts" (as defined in the Code).

      "Account  Debtor"  shall mean any Person that is  obligated on or under an
Account or a General Intangible.

<PAGE>

      "Adjusted Pro Forma EBITDA", for any specified fiscal year of the Company,
shall mean the sum of (a) the consolidated  EBITDA of the Domestic  Subsidiaries
and the VSK Group for such fiscal year  (assuming for purposes of Section 4.5(b)
that, with respect to any proposed  Acquisition  Advance,  the applicable Target
Company  became a Domestic  Subsidiary  as of the first day of such fiscal year)
plus (b) two-thirds of the total  dividends and management fees (if any) paid by
MECAR to the Company  during  such fiscal year in excess of (i) with  respect to
fiscal  year 2003 or 2004,  $3,000,000,  (ii) with  respect to fiscal year 2005,
$3,100,000  and (iii) with respect to each  subsequent  fiscal year,  the Dollar
amount  applicable  to the  immediately  preceding  fiscal  year plus  $100,000;
provided,  however, that if (i) the amount of debt evidenced by the MECAR Credit
Agreement  or  performance  guarantee  credit  facilities  of MECAR is increased
without the prior written consent of Lender, (ii) MECAR's product sales contract
backlog  falls below  $70,000,000  at any time after the  Closing  Date or (iii)
MECAR's gross profit margin for any rolling  calendar  twelve month period falls
below 20%, then Lender, in its sole discretion,  may thereafter exclude item (b)
above from the calculation of Adjusted Pro Forma EBITDA.

      "Affiliate" shall mean any Person other than a Borrower: (a) that directly
or indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with, any Borrower; (b) that directly or beneficially
owns or holds  ten  percent  (10%) or more of any  class  of the  voting  equity
interest of any  Borrower;  (c) ten percent  (10%) or more of the voting  equity
interest of which is owned directly or beneficially or held by any Borrower;  or
(d) that is a director, officer, agent or employee of any Borrower.

      "Belgian  Automation" shall mean Belgian Automation Units, N.V., a Belgium
company.

      "Boards"  shall  mean,  collectively,  the boards of  directors  (or their
applicable equivalents) of the Loan Parties.

      "Borrower  Senior Funded Debt" shall mean, for any date of  determination,
Senior Funded Debt as of such date minus any and all liabilities and obligations
of ARC Ltd.,  ARC Europe and MECAR to the extent the same are included in Senior
Funded Debt as of such date.

      "Business Day" shall mean any day of the year on which commercial banks in
New York, New York are not required or authorized to close.

      "Capital  Expenditures" shall mean all expenditures (by the expenditure of
cash or the  incurrence of  indebtedness)  during any  measuring  period for any
fixed assets or improvements  or for  replacements,  substitutions  or additions
thereto  that have a useful life of more than one year and that are  required to
be capitalized under GAAP.

      "Change  of  Control"  means (i) an event or series of events by which any
Person or Persons or entity or entities,  or Person(s) and/or entity(ies) acting
in concert as a partnership  or other group (a "Group of Persons")  shall,  as a
result  of  a  tender  or  exchange  offer,  open  market  purchases,  privately
negotiated  purchases,  merger,  consolidation  or  otherwise,  have  become the
beneficial  owner  (within  the  meaning  of Rule  13d-3  promulgated  under the
Securities Exchange Act

                                      -2-
<PAGE>

of 1934,  as amended),  of 50% or more of the Voting Power of the Company;  (ii)
the  Company is merged  with or into  another  corporation  with the effect that
immediately  after such transaction the stockholders of the Company  immediately
prior to such transaction hold less than a majority of the combined Voting Power
of the person  surviving the  transaction;  (iii) the direct or indirect,  sale,
lease,  exchange or other transfer of all or substantially  all of the assets of
the Company  and its  Subsidiaries  to any  Person(s),  entity(ies)  or Group of
Persons;  (iv) the Company  shall fail to maintain  the  quotation of its Common
Shares on the American Stock Exchange, the New York Stock Exchange or the NASDAQ
National Market; or (v) the Company shall engage in or be the subject of a "Rule
13e-3 transaction", as such term is defined in Rule 13-e(a)(3) promulgated under
the Securities Exchange Act of 1934, as amended.

      "Close  Affiliate"  shall  mean an  Affiliate  that is owned in part or in
whole, directly or indirectly, by any Borrower.

      "Closing Date" shall mean the date of this Agreement.

      "Collateral"  shall mean any and all real or  personal  property  in which
Lender may at any time have a lien or  security  interest  under or  pursuant to
Section 5.1 or otherwise to secure the Liabilities.

      "Common Shares" is defined in the Warrant Agreement.

      "Default"  shall mean the  occurrence or existence of: (a) an event which,
through the passage of time or the service of notice or both, would (assuming no
action is taken by any  Borrower  or any other  Person to cure the same)  mature
into a Matured  Default;  or (b) an event which requires  neither the passage of
time nor the service of notice to mature into a Matured Default.

      "Documents" shall mean any and all warehouse receipts,  bills of lading or
similar  Documents of title  relating to Goods in which any Borrower at any time
has an interest and any other "documents" (as defined in the Code).

      "Dollars"  and "$" shall mean  lawful  currency  of the  United  States of
America.

      "Domestic Borrower" shall mean the Company or a Domestic Subsidiary.

         "Domestic   Senior   Leverage  Ratio"  shall  mean,  for  any  date  of
determination, the ratio of (a) the Domestic Borrowers' Senior Funded Debt as of
such date  (excluding any Senior Funded Debt which is not a direct  liability of
any  Domestic  Borrower  and  which  has not  been  guaranteed  by any  Domestic
Borrower)  divided by (b) the Domestic  Borrower's EBITDA for the then preceding
four fiscal  quarters  (excluding the EBITDA of the Foreign  Subsidiaries).  The
Domestic  Senior  Leverage  Ratio shall be  calculated,  in a manner  reasonably
acceptable to Lender, using the amounts set forth in the Company's consolidating
financial statements delivered by Borrowers to Lender pursuant to Section 7.1.

                                      -3-
<PAGE>

      "Domestic  Subsidiaries" shall mean collectively  Microwave Rental,  Titan
Dynamics  Systems,  SeaSpace,  MECAR  USA,  Energa  and any other  wholly  owned
Subsidiaries  of the  Company  that may  hereafter  become  Borrowers  under the
Financing Agreements, provided that such Subsidiaries are incorporated or formed
under  the  laws  of  a  jurisdiction  of  the  United  States  of  America  and
substantially  all of the assets and operations of such Subsidiaries are located
in the United States of America.

      "Draw Period" shall mean the period  commencing on the date of the Initial
Advance and continuing through and including November 28, 2005.

      "EBITDA"  of a Person  shall  mean,  during any  period of  determination,
without duplication, the consolidated net income of such Person before provision
for income taxes,  interest  expense  (including  without  limitation,  implicit
interest  expense on capitalized  leases),  depreciation  expense,  amortization
expense  and other  non-cash  expenses  or  charges,  excluding  (to the  extent
included): (a) non-operating gains (including without limitation,  extraordinary
or nonrecurring gains, gains from discontinuance of operations and gains arising
from the sale of assets other than Inventory) during the applicable  period; and
(b) similar non-operating losses during such period.

      "Excess Sale  Proceeds"  shall mean,  during any period of  determination,
Borrowers'  aggregate  proceeds  from the sale of assets (other than the sale of
Inventory in the ordinary  course of  business),  which is not used by Borrowers
for the  replacement  of the assets sold, in excess of $100,000 in the aggregate
in any fiscal year of the Company.

      "Equipment"  of a  Borrower  shall  mean  any and all  Goods,  other  than
Inventory (including without limitation,  equipment,  machinery, motor vehicles,
implements,  tools,  parts and  accessories)  that are at any time owned by such
Borrower, together with any and all accessions,  parts and appurtenances and any
other "equipment" (as defined in the Code).

      "Financing   Agreements"  shall  mean  all  agreements,   instruments  and
documents,  including  without  limitation,  this  Agreement,  the Note, the Fee
Agreement,  the Master Pledge  Agreement,  the Foreign  Pledge  Agreements,  the
Landlord Waivers, the Deposit Account Security Agreement, the Control Agreement,
the Warrant Agreement,  the Warrants, the Subordination  Agreement and all other
security  agreements,  loan agreements,  notes,  letter of credit  applications,
guarantees, mortgages, deeds of trust, subordination agreements, pledges, powers
of  attorney,  consents,  assignments,  contracts,  notices,  leases,  financing
statements  and all other written matter at any time executed by or on behalf of
any Borrower or any guarantor of any of the Liabilities and delivered to Lender,
together  with  all  amendments,   modifications  and  supplements  thereto  and
restatements  thereof and all  agreements  and documents  referred to therein or
contemplated thereby.

      "Foreign Borrowers" shall mean collectively ARC Ltd. and ARC Europe.

      "Foreign  Subsidiaries"  shall mean  collectively  ARC Ltd.,  ARC  Europe,
MECAR,  Sedachim,  Hendrickx,  the VSK Group and any other  Subsidiaries  of the
Company that are not Domestic Subsidiaries.

                                      -4-
<PAGE>

      "GAAP" shall mean generally  accepted  accounting  principles set forth in
the  opinions  and  pronouncements  of the  Accounting  Principles  Board of the
American   Institute  of  Certified   Public   Accountants  and  statements  and
pronouncements  of the Financial  Accounting  Standards  Board, or in such other
statements by such other entity as may be in general use by significant segments
of the accounting  profession,  which are applicable to the  circumstances as of
the date of determination.

      "General  Intangibles"  of a Borrower  shall  mean all of such  Borrower's
present and future  right,  title and  interest in and to any  customer  deposit
accounts,  deposits, rights related to prepaid expenses, chose in action, causes
of action and all other  intangible  personal  property of every kind and nature
(other  than  Accounts),  including  without  limitation,  Payment  Intangibles,
beneficial interests in trusts, corporate or other business records, inventions,
designs, patents, patent applications,  trademarks,  trade names, trade secrets,
goodwill,  registrations,  copyrights, licenses, franchises, customer lists, tax
refunds,  tax refund  claims,  customs  claims,  guarantee  claims,  obligations
payable to such  Borrower  for equity  interests  or other  claims  against  any
stockholders, rights to any government subsidy, set aside, diversion, deficiency
or disaster payment or payment in kind,  brands and brand  registrations,  water
rights,  contracts,  leasehold  interests in real and personal  property and any
security  interests  or other  security  held by or granted to such  Borrower to
secure  payment  by any  Account  Debtor of any of the  Accounts,  and any other
"general intangibles" (as defined in the Code).

      "Government"  means  the  United  States  of  America  and any  agency  or
instrumentality thereof.

      "Government Contract" means any prime contract,  basic ordering agreement,
letter  contract,  purchase  order,  task order or  delivery  order of any kind,
including all additions and supplements  thereto,  amendments and  modifications
thereof, and options thereunder between a Borrower and the Government.

      "Governmental  Authority"  shall mean the United  States of  America,  any
nation or government,  any state or other political  subdivision thereof and any
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to  government,  including  without  limitation,  any
arbitration panel, any court, any commission,  any agency or any instrumentality
of the foregoing.

      "Governmental  Requirement"  shall mean any material law,  statute,  code,
ordinance,  order, rule, regulation,  judgment, decree,  injunction,  franchise,
permit, certificate, license, authorization or other directive or requirement of
any federal, state, county, municipal,  parish, provincial or other Governmental
Authority  or any  department,  commission,  board,  court,  agency or any other
instrumentality  of any of them  (including  any of the foregoing that relate to
environmental standards or controls and occupational safety and health standards
or controls).

      "Hendrickx" shall mean Hendrickx N.V., a Belgium company.

                                      -5-
<PAGE>

      "Highest  Lawful  Rate" shall mean,  with  respect to Lender,  the maximum
non-usurious interest rate, if any, that at any time or from time to time may be
contracted for, taken,  reserved,  charged, or received with respect to the Note
or on other amounts, if any, payable to Lender pursuant to this Agreement or any
other Financing  Agreement,  under laws applicable to Lender which are presently
in effect,  or, to the extent allowed by law, under such  applicable  laws which
may  hereafter  be in  effect  and  which  allow a higher  maximum  non-usurious
interest rate than applicable laws now allow.

      "IDCS" shall mean IDCS, N.V., a Belgium company.

      "Immediately  Available Funds" shall mean funds with good value on the day
and in the city in which payment is received.

      "Inventory"  of a Domestic  Borrower  shall  mean any and all Goods  which
shall  at any time  constitute  "inventory"  (as  defined  in the  Code) of such
Borrower,  wherever located (including without limitation,  Goods in transit and
Goods in the possession of third  parties),  or which from time to time are held
for sale, lease or consumption in such Borrower's business,  furnished under any
contract  of  service  or  held as raw  materials,  work  in  process,  finished
inventory or supplies (including without  limitation,  packaging and/or shipping
materials).

      "IRC" shall mean the Internal Revenue Code of 1986, as amended,  as at any
time in effect,  together with all regulations and rulings thereof or thereunder
issued by the Internal Revenue Service.

      "Liabilities"  shall  mean  any  and  all  liabilities,   obligations  and
indebtedness  of  Borrowers  or any of them to Lender of any and every  kind and
nature,  at any time owing,  arising,  due or payable and  howsoever  evidenced,
created,  incurred,  acquired  or owing,  whether  primary,  secondary,  direct,
contingent,  fixed or  otherwise  and  whether  arising or  existing  under this
Agreement or any of the other Financing Agreements or by operation of law.

      "Loan" is defined in Section 2.1.

      "Loan  Parties"  shall  mean  collectively  Borrowers  and  each of  their
respective Subsidiaries.

      "Margin Accounts" shall mean, collectively, all Commodity Accounts and all
Commodity Contracts.

      "Material  Adverse Effect" shall mean (i) a material adverse effect on the
business, properties, operations, financial condition, prospects, liabilities or
capitalization of Borrowers taken as a whole, (ii) a material  impairment of the
legal ability of any Borrower to perform its obligations under this Agreement or
any of the  other  Financing  Agreements  in any  material  respects  or (iii) a
material impairment of the rights and remedies of Lender under this Agreement or
any of the other Financing  Agreements,  including without limitation impairment
or  unenforceability  of the  perfection  or priority of any security  interest,
mortgage, pledge, lien or other encumbrance held by Lender.

                                      -6-
<PAGE>

      "Matured  Default"  shall mean the  occurrence  or existence of any one or
more of the  following  events:  (a) any  Borrower  fails  to pay any  principal
pursuant to any of the Financing  Agreements at the time such principal  becomes
due or is declared due; (b) any Borrower  fails to pay any interest  pursuant to
any of the  Financing  Agreements on or before five (5) days after such interest
becomes  due or is  declared  due  or  any  Borrower  fails  to  pay  any of the
Liabilities (other than principal and interest) on or before ten (10) days after
such  Liabilities  become due or are declared  due;  (c) any  Borrower  fails or
neglects to perform, keep or observe any of the covenants,  conditions, promises
or  agreements  contained in Sections  8.1,  8.2, 8.4 or 8.12;  (d) any Borrower
fails or neglects to perform, keep or observe any of the covenants,  conditions,
promises  or  agreements  contained  in this  Agreement  or in any of the  other
Financing  Agreements  (other than those  covenants,  conditions,  promises  and
agreements  referred to or covered in (a), (b), and (c) above), and such failure
or neglect  continues  for more than  thirty  (30) days  after  such  failure or
neglect first occurs, provided, however, that such grace period shall not apply,
and a Matured Default shall be deemed to have occurred and to exist  immediately
if such  failure or neglect may not, in Lender's  reasonable  determination,  be
cured by Borrowers during such thirty (30) day grace period; (e) any warranty or
representation  at any time made by or on behalf of any  Borrower in  connection
with  this  Agreement  or any of the  other  Financing  Agreements  is untrue or
incorrect in any material  respect,  or any  schedule,  certificate,  statement,
report, financial data, notice, or writing furnished at any time by or on behalf
of any Borrower to Lender is untrue or incorrect in any material  respect on the
date as of which the facts set forth  therein  are  stated or  certified;  (f) a
judgment  in excess of  $100,000  is  rendered  against  any  Borrower  and such
judgment  remains  unsatisfied  or  un-discharged  and in effect for thirty (30)
consecutive days without a stay of enforcement or execution,  provided, however,
that this clause (f) shall not apply to any judgment for which such  Borrower is
fully  insured and with respect to which the insurer has  admitted  liability in
writing  for such  judgment;  (g) all or any part of the assets of any  Borrower
come within the possession of any receiver,  trustee,  custodian or assignee for
the benefit of creditors; (h) a proceeding under any bankruptcy, reorganization,
arrangement of debt,  insolvency,  readjustment of debt or  receivership  law or
statute is filed  against any  Borrower  and such  proceeding  is not  dismissed
within  sixty (60) days of the date of its  filing,  or a  proceeding  under any
bankruptcy,  reorganization,  arrangement of debt,  insolvency,  readjustment of
debt or  receivership  law or statute is filed by any Borrower,  or any Borrower
makes an assignment for the benefit of creditors;  (i) any Borrower  voluntarily
or involuntarily dissolves or is dissolved, terminates or is terminated or dies;
(j) any Borrower is enjoined,  restrained,  or in any way prevented by the order
of any court or any administrative or regulatory agency or by the termination or
expiration of any permit or license, from conducting all or any material part of
any  Borrower's  business  affairs for more than five (5) days; (k) any Borrower
fails to make any payment due or otherwise  defaults on any other obligation for
borrowed  money in excess of $100,000  and the effect of such failure or default
is to cause or permit the holder of such  obligation  or a trustee to cause such
obligation  to become due prior to its date of  maturity;  (l)  Lender  makes an
expenditure  under Section 10.3 which expenditure is not reimbursed by Borrowers
within ten (10) days after demand  therefore by Lender;  (m) the occurrence of a
non-curable  breach or default or a matured default under any other agreement at
any time in existence  between any Borrower and Lender;  (n) a Change of Control
occurs;  (o) any Borrower  shall receive  notification  of any of the following,
which, in the reasonable opinion of Lender, has or could have a Material Adverse
Effect: (i) a notice of suspension of progress payments, a cure

                                      -7-
<PAGE>

notice,  a show-cause  notice or any notice of whole or partial  termination for
default, alleged default or convenience pertaining to any Government Contract or
any subcontract  between any Borrower and a prime  contractor of the Government,
(ii)  notice  that  any  Borrower  has  materially   breached  or  violated  any
regulation,  statute,  certification,   representation,   clause,  provision  or
requirement  with  respect to (A) any  Government  Contract  or any  subcontract
between any Borrower and a prime  contractor  of the  Government or (B) any bid,
quotation  or  proposal  submitted  by any  Borrower  to the  Government  or any
prospective prime contractor of the Government,  (iii) a negative  determination
of responsibility issued against any Borrower with respect to any bid, quotation
or proposal submitted by any Borrower to the Government or any prospective prime
contractor of the Government, or (iv) notice of any Borrower's facility security
clearance or the security clearance of any key employee of any Borrower has been
revoked or  suspended;  (p) any Borrower  shall suffer a debarment or suspension
from contracting or  subcontracting  with the Government;  (q) there shall occur
and  be  continuing  any  "Event  of  Default"  under  and  as  defined  in  the
Subordinated  Debenture Purchase Agreement;  (r) any security interest,  pledge,
lien, levy,  assessment,  attachment,  seizure,  writ, distress warrant or other
encumbrance  of any nature  whatsoever  shall be created,  incurred,  assumed or
suffered  to exist on or with  regard  to any  shares  of  capital  stock of any
Subsidiary  of  the  Company  (including,   without   limitation,   any  Foreign
Subsidiary)  other than those in favor of Lender  (other  than the shares of any
current and future  Subsidiary  of VSK  Electronics);  or (s) the Master  Pledge
Agreement or any Foreign  Pledge  Agreement or any  material  provision  thereof
shall cease to be in full force and effect as to the pledge of the shares of any
Subsidiary  of the  Company  (other  than the  shares of any  current  or future
Subsidiary  of  VSK  Electronics),   which  are  not  being  pledged  to  Lender
thereunder),  or any Person acting on behalf of the Company or any Subsidiary or
Affiliate thereof shall deny,  disaffirm or challenge the  enforceability of any
such pledge or any material  obligations  of any Loan Party  thereunder,  or any
Loan Party  shall  default in the due  performance  or  observance  of any term,
covenant or agreement  on its part to be  performed or observed  pursuant to the
Master Pledge  Agreement or any Foreign Pledge  Agreement and such default shall
continue beyond any grace period specifically applicable thereto.

      "Maturity  Date" shall mean, as  applicable,  the earlier of: (a) November
28, 2010; or (b) the termination in whole of the Working Capital  Commitment and
the Acquisition  Commitment by Borrowers and the payment and/or  satisfaction in
full of the Liabilities pursuant to Section 2.4.

      "MECAR Credit  Agreement"  shall mean that certain Credit  Agreement among
MECAR, as borrower, and WafaBank,  Deutsche Bank, Commerzbank AG, CBC Banque and
Fortis Banque, as amended, modified, supplemented, renewed or restated from time
to time.

      "MECAR Loan Documents" shall mean the MECAR Credit Agreement and all other
agreements,  documents and instruments  evidencing or securing the loans made to
MECAR thereunder.

      "Net  Worth"  shall mean the sum of (i) the total of capital  stock  (less
treasury  stock),  paid in surplus,  general  contingency  reserves and retained
earnings  (deficit)  of the  Company  on a  consolidated  basis,  determined  in
accordance with GAAP, after eliminating all amounts properly

                                      -8-
<PAGE>

attributable to minority interests,  if any, in the stock and surplus, plus (ii)
the then aggregate outstanding  principal balance of the Subordinated  Debenture
and any other  indebtedness  for  borrowed  money  that is  subordinated  to the
Liabilities  upon  terms  and  conditions  acceptable  to  Lender  in  its  sole
discretion  minus (iii) the amounts of accumulated  other  comprehensive  income
(loss) set forth on the Company's consolidated balance sheet.

      "Note" is defined in Section 2.1.

      "Permitted  Acquisition"  shall  mean (a) the  acquisition  by one or more
Domestic  Subsidiaries of (i) all or substantially all of the assets of a Target
Company  or (ii) all of the  outstanding  shares  of  capital  stock of a Target
Company,  if the same is a corporation,  or all of the partnership or membership
interests  of the  Target  Company,  if the  same is a  partnership  or  limited
liability  company,  as  applicable,  or  (b)  the  merger  of a  Borrower  or a
newly-formed  (direct or indirect)  acquisition  subsidiary of a Borrower with a
Target Company,  in each case which  acquisition or merger  satisfies all of the
following conditions:

            (A) the  Target  Company  is a U.S.  domiciled  entity  engaged in a
      Permitted Business;

            (B) one or more  Borrowers and the Target  Company and/or the owners
      thereof,  as  applicable,  shall have  executed  and  delivered  a written
      Purchase  Agreement,  a correct and complete copy of which shall have been
      delivered  to Lender,  together  with all other  documents  required to be
      provided to Lender  under the  provisions  of Sections 4.7 and 4.8 of this
      Agreement;

            (C) the sum of the  Purchase  Price  payable  under  the  applicable
      Purchase  Agreement  plus  the  aggregate  purchase  price  of  all  prior
      Permitted  Acquisitions  financed,  in whole or in  part,  by  Acquisition
      Advances shall not exceed $50,000,000;

            (D) all of the assets of the Target Company and, if applicable,  the
      stock or other equity  interests  of the Target  Company to be acquired by
      Borrowers  shall be free and clear of all liens  and  encumbrances,  other
      than those in favor of Lender or otherwise  permitted  under the Financing
      Agreements;

            (E) the dollar  amount of goodwill  that shall be  reflected  on the
      Company's consolidated balance sheet as a result of the proposed Permitted
      Acquisition shall not exceed fifty percent (50%) of the Purchase Price for
      such Permitted Acquisition;

            (F) the sum of the  Purchase  Price for such  Permitted  Acquisition
      plus  all  related  fees  and  expenses  paid  or  payable   (directly  or
      indirectly)  by any Borrower shall not exceed the product of (i) seven (7)
      multiplied  by (ii) the EBITDA of the Target  Company  for the twelve (12)
      month  period  ending on the date on which the  Permitted  Acquisition  is
      consummated  (subject  to  such  adjustments  (if  any)  as may be made by
      Borrowers with the written approval of Lender);

                                      -9-
<PAGE>

            (G) the consummation of the proposed  Permitted  Acquisition and the
      satisfaction of the conditions  hereunder to Lender's  requirement to make
      the related  Acquisition Advance to finance the same shall not result in a
      Default or Matured Default;

            (H) upon completion of any proposed  Permitted  Acquisition  that is
      structured as a merger, the surviving corporation of the merger shall be a
      Borrower (or immediately  upon  consummation of the Permitted  Acquisition
      become an additional Borrower) hereunder and under the Note;

            (I) if the applicable  Purchase  Agreement or any related agreement,
      document or instrument  executed by any Borrower in  connection  therewith
      provides  for any earnout or other  contingent  liability  payments by any
      Borrower  or the  execution  and  delivery  of  any  promissory  notes  or
      guaranties by any Borrower,  then the beneficiaries  and/or holders of any
      such  obligations of such Borrowers shall agree to subordinate the payment
      and  performance  of such  obligations to the  Liabilities  upon terms and
      conditions acceptable to Lender; and

            (J) upon completion of the proposed Permitted Acquisition,  Borrower
      that is the  survivor  of the  merger  with  the  Target  Company  or that
      acquires  the  assets  of the  Target  Company  or the stock  thereof,  as
      applicable,  shall have granted Lender a  first-priority,  perfected lien,
      mortgage  and security  interest in all of its real and personal  property
      and the equityholders of such Borrower (other than the stockholders of the
      Company)  shall  have  pledged  and  granted  to Lender a  first-priority,
      perfected  security  interest  in all of the  shares of  capital  stock or
      partnership or membership interests, as applicable,  of such Borrower, all
      as required under Section 4 of this Agreement.

      "Person"  shall mean any  individual,  sole  proprietorship,  partnership,
limited liability company, joint venture,  trust,  unincorporated  organization,
association,  corporation,  institution,  entity,  party or government  (whether
national,  federal,  state,  provincial,  county,  city, municipal or otherwise,
including without limitation,  any  instrumentality,  division,  agency, body or
department thereof).

      "Producer  Payables"  of a  Borrower  shall  mean all  amounts at any time
payable by such Borrower for the purchase of Inventory.

      "Property" of a Borrower  shall mean those  premises  owned or operated by
such Borrower.

      "Purchase  Agreement" for a Permitted  Acquisition shall mean the asset or
stock purchase agreement or merger agreement,  as applicable,  setting forth the
terms and conditions pursuant to which one or more Borrowers shall complete such
Permitted  Acquisition,  which  terms and  conditions  shall be  reasonable  and
customary for a transaction of the type proposed therein.

      "Purchase Price" for a Permitted  Acquisition shall mean the Dollar amount
of the total  consideration  paid or payable by the  acquiror  under the related
Purchase Agreement.

                                      -10-
<PAGE>

      "SEC" shall mean the  Securities  and  Exchange  Commission,  or any other
Federal agency at the time administering the Securities Act.

      "Sedachim"  shall  mean  Sedachim  Sales  International  S.A.,  a  Belgium
company.

      "Senior  Funded  Debt"  shall  mean,  for any date of  determination,  the
Company's consolidated total liabilities, as they would normally be shown on the
consolidated balance sheet of the Company,  (i) minus the outstanding  principal
balance of the Subordinated  Debenture included therein;  (ii) minus liabilities
(other than of the type referred to in the following  subsections  (iii) through
(v)) which do not  accrue  interest;  (iii)  plus the face  amount of letters of
credit issued and  outstanding for the account of the Company (to the extent not
included  therein);  (iv) plus capital and synthetic  lease  obligations (to the
extent not included  therein);  (v) plus guaranty or surety  obligations  of the
Company with respect to the  indebtedness of any third person (to the extent not
included therein).

      "Senior  Leverage  Ratio" shall mean, for any date of  determination,  the
ratio  of the  Company's  (a)  Senior  Funded  Debt as of such  date  minus  the
aggregate  Dollar amount of unrestricted  cash and cash equivalents of Borrowers
as of such  date  divided  by (b)  EBITDA  for the then  preceding  four  fiscal
quarters.

      "Servicer"   shall  mean  Patriot  Capital   Funding,   Inc.,  a  Delaware
corporation.

      "Subordinated  Debenture" shall mean the Company's  Convertible  Debenture
Series A, dated as of June 28, 2002, in the aggregate  original principal amount
of  $7,500,000  that  was  sold  to  the  Subordinated  Lender  pursuant  to the
Subordinated  Debenture Purchase Agreement and any subsequent  subordinated debt
that  might  replace  such  convertible  debenture  or, in the  event  that such
debenture is converted into Common Shares,  any  additional  subordinated  debt,
provided  that in each case the same is  subordinated  to the  Liabilities  upon
terms and conditions approved in writing by Lender in its sole discretion.

      "Subordinated  Debenture  Purchase  Agreement"  shall  mean  that  certain
Purchase  Agreement  dated as of June  28,  2002  between  the  Company  and the
Subordinated Lender.

      "Subordinated Debt" shall mean any obligation or indebtedness for borrowed
money (other than the Liabilities), including those under capitalized leases and
under the  Subordinated  Loan Documents (or any refinancing  thereof approved in
writing by Lender),  of any Loan Party, which is subordinated to the Liabilities
on specific  terms and conditions  satisfactory  to, and approved in writing by,
the Lender, excluding, however, any indebtedness incurred by ARC Europe, the VSK
Group, MECAR and/or any of their respective Subsidiaries.

      "Subordinated  Lender" shall mean Riverview Group, LLC, a Delaware limited
liability   company,   and  its  successors  and  assigns  and  any  replacement
Subordinated Lender permitted hereunder.

                                      -11-
<PAGE>

      "Subordinated  Loan  Documents"  shall  mean the  Subordinated  Debenture,
Subordinated  Debenture Purchase Agreement,  Subordinated Warrant,  Subordinated
Registration   Rights  Agreement  and  all  other   agreements,   documents  and
instruments related thereto.

      "Subordinated  Registration  Rights  Agreement"  shall  mean that  certain
Registration  Rights Agreement dated as of June 28, 2002 between the Company and
the Subordinated Lender.

      "Subordinated  Warrant"  shall mean that  certain  Common  Stock  Purchase
Warrant  dated as of June 28,  2002  issued by the  Company to the  Subordinated
Lender,  pursuant to which the Subordinated  Lender is entitled,  upon the terms
and subject to the conditions  set forth therein,  to subscribe for and purchase
from the Company  15,000  Common  Shares of the Company at an exercise  price of
$28.75 per share.

      "Subsidiary"  of a corporation  shall mean any  corporation  of which more
than 50% of the outstanding shares of capital stock having ordinary voting power
to elect a majority of the board of directors of such corporation is directly or
indirectly  owned  by such  corporation  or by such  corporation  and any of its
Subsidiaries taken together.

      "Target  Company"  shall  mean  a  corporation,   partnership  or  limited
liability  company (or a division or an identified  business and assets thereof)
that one or more of  Borrowers  proposes  to  purchase  pursuant  to a Permitted
Acquisition.

      "Tele  Technique  Generale"  shall mean Tele Technique  Generale,  S.A., a
Belgium company.

      "Unused   Commitment"   shall  mean,   as  of  the   applicable   date  of
determination, the total unused amount of the Working Capital Commitment and the
Acquisition Commitment as of such date.

      "Vigitec" shall mean Vigitec S.A., a Belgium company.

      "Voting  Power" of any Person means the  aggregate  number of votes of all
classes of capital stock (or other  securities) of such Person which  ordinarily
has voting power for the election of the board of directors or their equivalents
of such Person.

      "VSK Electronics" shall mean VSK Electronics N.V., a Belgium company.

      "VSK Group" shall mean  collectively  VSK Electronics and its wholly owned
subsidiaries, Tele Technique Generale, IDCS, Belgian Automation and Vigitec, and
any additional Subsidiaries of any member of the VSK Group formed after the date
hereof in accordance with the provisions of Section 8.10(b).

      "Wachovia  Bank"  means  Wachovia  Bank,  National  Association,  and  its
successors and permitted assigns.

      "Warrants" is defined in the Warrant Agreement.

                                      -12-
<PAGE>

      1.2  Index  to  Other   Definitions.   When  used  herein,  the  following
capitalized  terms shall have the meanings  given in the  indicated  portions of
this Agreement:

      Term                                                   Location
      ----                                                   --------

      Acquisition Advance and Acquisition Advances           Section 2.2(c)
      Acquisition Commitment                                 Section 2.2(c)
      Acquisition Documents                                  Section 4.8(c)
      Additional Cash Collateral                             Section 4.4
      Agreement                                              introduction
      Assignee                                               Section 10.22(a)
      Belgian Share Pledge Agreements                        Section 5.1(b)
      Benefit Plans                                          Section 6.20
      Borrower and Borrowers                                 introduction
      Broker                                                 Section 5.15
      Code                                                   Section 1.4
      Collateral Assignee                                    Section 10.22(d)
      Company                                                introduction
      Compliance Certificate                                 Section 7.1(c)
      Company's SEC Reports                                  Section 6.27
      Control Agreement                                      Section 5.1(d)
      Default Rate                                           Section 2.3(c)(ii)
      Deposit Account Security Agreement                     Section 5.1(d)
      Environmental Laws                                     Section 6.10
      ERISA                                                  Section 6.20
      Excess                                                 Section 10.23
      Existing Leases                                        Section 6.5
      Fee Agreement                                          Section 2.6(b)
      Foreign Pledge Agreements                              Section 5.1(b)
      Fund Credit Agreement                                  Section 4.9
      Fund Lender                                            Section 4.9
      Interest Payment Date                                  Section 2.3(c)(i)
      Initial Advance                                        Section 2.2(a)
      Landlord Waiver and Landlord Waivers                   Section 5.1(c)
      Lender                                                 introduction
      Loan                                                   Section 2.1
      Loan Account                                           Section 2.7
      Loan Advance                                           Section 2.2
      Master Pledge Agreement                                Section 5.1(b)
      New Lease                                              Section 7.3
      Note                                                   Section 2.1
      Permitted Business                                     Section 4.7(a)
      Pro Forma Balance Sheet                                Section 4.8(d)(ii)
      Projections                                            Section 4.8(d)(iii)
      Required Acquisition Funding Amount                    Section 2.4

                                      -13-
<PAGE>

      Term                                                   Location
      ----                                                   --------

      Sarbanes-Oxley Act                                     Section 6.28
      Subordination Agreement                                Section 4.4
      Supplemental Disclosure Schedule                       Section 4.8(e)
      Taxes                                                  Section 10.21(a)
      Target Company Financial Statements                    Section 4.8(d)(i)
      Warrant Agreement                                      Article 3
      Working Capital Advance and
        Working Capital Advances                             Section 2.2(b)
      Working Capital Commitment                             Section 2.2(b)

      1.3 Accounting  Terms.  Any accounting  terms used in this Agreement which
are  not  specifically  defined  in  this  Agreement  shall  have  the  meanings
customarily  given them in accordance with GAAP, as  consistently  applied as of
the date of this Agreement.

      1.4 Others  Defined in New York Uniform  Commercial  Code. All other terms
contained  in  this  Agreement  (which  are  not  specifically  defined  in this
Agreement)  shall have the meanings set forth in the Uniform  Commercial Code of
New  York  ("Code")  to the  extent  the  same  are  used  or  defined  therein,
specifically  including,  but  not  limited  to the  following:  Chattel  Paper,
Commercial  Tort  Claims,  Commodity  Accounts,   Commodity  Contracts,  Deposit
Accounts,  Goods,  Investment  Property,  Instruments,  Letter of Credit Rights,
Money, Payment Intangibles, Securities Accounts and Tangible Chattel Paper.

      2 LOAN AND FEES.

      2.1 Loan.  Lender hereby agrees on the terms and subject to the conditions
of this  Agreement to lend to Borrowers the maximum sum of Eighteen  Million and
00/100 Dollars ($18,000,000.00) (the "Loan"). The Loan shall be evidenced by and
repayable  in  accordance  with the terms of a  promissory  note of Borrowers to
Lender in the form attached as Exhibit 2A (the "Note").

      2.2 Loan  Advances.  Subject  to all of the terms and  conditions  of this
Agreement (including, without limitation, the conditions set forth in Section 4)
and the other Financing  Agreements,  Lender agrees to make advances of the Loan
("Loan  Advances") to Borrowers from time to time upon their request therefor in
accordance  with the  provisions of this Section 2.2. Each request for a Working
Capital  Advance  shall be in a minimum  amount of Two  Hundred  Fifty  Thousand
Dollars  ($250,000);  each  request  for an  Acquisition  Advance  shall be in a
minimum  amount of One  Million  Dollars  ($1,000,000);  and each  request for a
Working  Capital  Advance  or an  Acquisition  Advance  shall be in an  integral
multiple of One Hundred Thousand Dollars ($100,000). In no event shall Lender be
required  to make more than two (2) Loan  Advances  during any  thirty  (30) day
period.  Amounts  representing  Loan Advances that have been repaid by Borrowers
may not be reborrowed.

            (a) Initial Advance.  On the Closing Date,  Lender shall make a Loan
Advance  to  Borrowers  in the amount of  $2,000,000  (the  "Initial  Advance").
Borrowers shall use the proceeds from the Initial Advance solely for the working
capital and general  corporate  purposes of  Borrowers,  to fund the Account (as
defined in the Deposit Account Security

                                      -14-
<PAGE>

Agreement)  as  required  under the Deposit  Account  Security  Agreement  or to
finance Permitted Acquisitions and for no other purpose.

            (b) Working Capital Advances.  Lender agrees to make additional Loan
Advances  (individually,  a "Working  Capital  Advance"  and  collectively,  the
"Working  Capital  Advances") to Borrowers  from time to time on any one or more
Business  Days from and after the making of the Initial  Advance and  continuing
through  and  including  the  last  Business  Day of the Draw  Period,  upon the
Company's  written  (including  facsimile) notice given by the Company to Lender
not later than 11:00 a.m. (local time of Lender) on the third (3rd) Business Day
prior to the date of any such Loan Advance,  up to an aggregate principal amount
not  exceeding  Three  Million  Dollars   ($3,000,000)   (the  "Working  Capital
Commitment");  provided, however, that if and to the extent Acquisition Advances
are made in excess of $13,000,000, such excess amounts shall be deemed to reduce
the unused  portion of the Working  Capital  Commitment.  Borrowers  may use the
proceeds  from  Working  Capital  Advances  solely for the  working  capital and
general corporate purposes of Borrowers,  including, without limitation, Capital
Expenditures of Borrowers to the extent permitted under this Agreement.

            (c)  Acquisition  Advances.  Lender agrees to make  additional  Loan
Advances   (individually,   an  "Acquisition  Advance"  and  collectively,   the
"Acquisition  Advances")  to  Borrowers  from  time  to  time on any one or more
Business  Days from and after the making of the Initial  Advance and  continuing
through  and  including  the  last  Business  Day of the Draw  Period,  upon the
Company's  written  (including  facsimile) notice given by the Company to Lender
not later than 11:00 a.m. (local time of Lender) on the fifth (5th) Business Day
prior to the date of any such Loan Advance,  up to an aggregate principal amount
(the  "Acquisition  Commitment")  not exceeding the sum of (i) Thirteen  Million
Dollars  ($13,000,000)  plus (ii) any then used  portion of the Working  Capital
Commitment.  Borrowers shall use the proceeds of Acquisition  Advances solely to
finance Permitted Acquisitions and for no other purpose.

      2.3 Payment of Principal and Interest; Default Rate.

            (a)  Principal  Payments.  Except  as  otherwise  provided  in  this
Agreement,  the principal amount  outstanding under the Note shall be payable in
monthly  installments as follows:  (i) fifty-nine (59) equal consecutive monthly
installments  of  principal,  each in an amount equal to the quotient of (A) the
principal  amount of the Loan  outstanding  and unpaid as of the last day of the
Draw Period divided by (B) fifty-nine (59), shall be due and payable on December
1, 2005 and continuing on each Interest Payment Date thereafter to and including
November 1, 2010;  and (ii) any and all remaining  principal  outstanding on the
Maturity Date shall be due and payable on the Maturity Date.

            (b) Mandatory  Prepayments.  On or before the tenth (10th) day after
the receipt thereof, Borrowers shall pay Lender as a prepayment of the principal
amount outstanding under the Note an amount equal to any Excess Sale Proceeds.

            (c) Interest.  Borrowers shall pay interest on the unpaid  principal
amount of each Loan  Advance  made by Lender from the date of such Loan  Advance
until such principal amount shall be paid in full, at the times and at the rates
per annum set forth below:

                                      -15-
<PAGE>

            (i) So long as no Matured  Default has occurred or is continuing,  a
      fixed rate per annum equal to eleven and one-half percent (11.5%), payable
      monthly in arrears on the first day of each month  commencing July 1, 2004
      (each,  an "Interest  Payment  Date"),  and on the Maturity Date,  without
      prior demand by Lender.

            (ii) After the  occurrence  of a Matured  Default and for so long as
      such Matured Default is continuing,  Lender may notify  Borrowers that any
      and all amounts due hereunder, under the Note or under any other Financing
      Agreement,  whether for  principal,  interest (to the extent  permitted by
      applicable law), fees,  expenses or otherwise,  shall bear interest,  from
      the date of such notice by Lender and for so long as such Matured  Default
      continues,  payable on demand,  at a rate per annum (the  "Default  Rate")
      equal to the lesser of (i) fourteen  percent (14.0%) per annum or (ii) the
      Highest Lawful Rate.

            (iii) All  computations  of interest  pursuant  to this  Section 2.3
      shall be made by Lender with respect to Loan  Advances,  on the basis of a
      year of 360 days,  unless the foregoing  would result in a rate  exceeding
      the Highest Lawful Rate, in which case such computations shall be based on
      a year of 365 or 366 days,  as the case may be.  Interest  with respect to
      Loan Advances,  whether based on a year of 360, 365 or 366 days,  shall be
      charged  for the  actual  number  of days  (including  the  first  day but
      excluding the last day) occurring in the period for which such interest is
      payable.  Each  determination  by  Lender  of an  interest  rate  shall be
      conclusive and binding for all purposes,  absent  manifest  error.  In the
      event any Governmental  Authority subjects Lender to any new or additional
      charge,  fee,  withholding  or tax of any kind  with  respect  to any Loan
      Advances hereunder or changes the method of taxation of such Loan Advances
      or, if and to the extent applicable to Lender or its assignee, changes the
      reserve  or  deposit  requirements   applicable  to  such  Loan  Advances,
      Borrowers shall pay to Lender such  additional  amounts as will compensate
      Lender for such costs or lost income  resulting  therefrom  as  reasonably
      determined by Lender.

      2.4 Voluntary Prepayments;  Termination of the Commitments.  Borrowers may
at any time prepay the outstanding  principal amount of the Loan, in either case
in whole or in part, in accordance with this Section 2.4. The Company shall give
prior written notice of any such prepayment to Lender,  which notice shall state
the proposed  date of such  prepayment  (which shall be a Business  Day) and the
aggregate amount of the prepayment,  which shall be a minimum amount of $100,000
and an integral  multiple of  $100,000,  and which  notice shall be delivered to
Lender  not later than  11:00  a.m.  (local  time of Lender) on a day that is at
least three (3) Business Days prior to the date of the proposed prepayment.  All
prepayments  of the Loan made after the first  anniversary  of the Closing  Date
shall be without premium or penalty.  Subject to the following paragraph of this
Section 2.4 and the provisions of Section 4.9, if Borrowers make any prepayments
of the Loan prior to the first  anniversary of the Closing Date,  then Borrowers
shall pay Lender a prepayment premium in an amount equal to five percent (5%) of
the principal amount prepaid. All notices of prepayment shall be irrevocable and
the payment amount specified in each such notice shall be due and payable on the
prepayment  date  described  in such  notice.  Any  prepayment  made  after  the
expiration of the Draw Period shall be applied

                                      -16-
<PAGE>

against  scheduled  principal  payments in the inverse  order of their due date.
Interest  accrued  to the date of payment  shall be due and  payable on the next
following Interest Payment Date unless the Note is paid in full, in which event,
accrued interest shall become due and payable on the payment date.

      Notwithstanding  the  foregoing  provisions  of  this  Section  2.4 to the
contrary,  if (i) Borrowers enter into a letter of intent for the acquisition of
a Target Company  pursuant to a Permitted  Acquisition  and in order to complete
such  acquisition  Borrowers  require a senior loan in an amount (the  "Required
Acquisition  Funding  Amount")  in  excess  of the then  unused  portion  of the
Acquisition  Commitment,  and (ii) within sixty (60) days after Lender's receipt
of a copy of an  executed  letter  of  intent  with  respect  to  such  proposed
acquisition,  Lender  gives  Borrowers  written  notice  that  Lender  (and  its
co-lenders  and/or  participants,  as applicable) is not willing or is unable to
increase the amount of the  Acquisition  Commitment so as to permit the same and
to make an  Acquisition  Advance  to  Borrowers  in the  required  amount,  then
notwithstanding  any other  provision of this Agreement to the contrary,  within
one hundred  fifty (150) days after  Borrowers'  receipt of such written  notice
from  Lender,  Borrowers  shall  have the right and option to prepay in full the
entire outstanding  principal balance of the Note, any accrued,  unpaid interest
thereon and all other  Liabilities,  without any prepayment  premium or penalty,
and upon such  payment,  Lender shall have no  obligation  hereunder to make any
further Loan  Advances to any Borrower and the Working  Capital  Commitment  and
Acquisition Commitment shall be irrevocably terminated. The parties hereto agree
that, in addition to any other rights Lender may have hereunder,  Lender and its
successors  and  assigns  shall  have the  right to sell and  assign  all or any
portion of its interest in the Loan or  participation  rights  therein to one or
more other lenders in connection  with any proposed  increase in the Acquisition
Commitment necessary to fund any Required Acquisition Funding Amount.

      2.5 Use of Funds.  The  Initial  Advance,  Working  Capital  Advances  and
Acquisition  Advances  shall be used  solely for the  purposes  permitted  under
Sections  2.2(a),  (b)  and  (c),  respectively,   and  for  no  other  purposes
whatsoever.

      2.6 Fee Agreement. On or prior to the date hereof,  Borrowers and Servicer
have  entered into a certain Fee  Agreement  pursuant to which  Borrowers  have,
jointly  and  severally,  agreed  to pay  certain  fees to  Servicer  (the  "Fee
Agreement").  Such fees represent  compensation for services  rendered and to be
rendered separate and apart from the lending of money or the provision of credit
and do not constitute  compensation  for the use,  detention,  or forbearance of
money, and the obligation of Borrowers to pay such fees shall be in addition to,
and not in lieu of, the  obligation  of  Borrowers to pay  interest,  other fees
described in this Agreement, and expenses otherwise described in this Agreement.
Such fees shall be  payable  when due in Dollars  and in  Immediately  Available
Funds and shall be non-refundable.

      2.7 Borrowers'  Loan Account.  Lender shall maintain a loan account ("Loan
Account") on its books in which shall be recorded: (a) all Loan Advances made by
Lender  to  Borrowers  pursuant  to this  Agreement;  (b) all  payments  made by
Borrowers;  and (c) all other appropriate debits and credits as provided in this
Agreement,  including  without  limitation,  all  receipts  of cash  proceeds of
collateral, fees, charges, expenses and interest. All entries in Borrowers' Loan
Account shall be made in accordance with Lender's customary accounting

                                      -17-
<PAGE>

practices  as in effect from time to time.  Borrowers,  jointly  and  severally,
promise to pay the amount reflected as owing by and under their Loan Account and
all other  obligations  hereunder as such amounts become due or are declared due
pursuant to the terms of this Agreement.

      2.8 Statements.  All Loan Advances to Borrowers,  and all other debits and
credits  provided for in this  Agreement,  shall be evidenced by entries made by
Lender in its internal data control systems showing the date,  amount and reason
for each such debit or credit.  Until such time as Lender shall have rendered to
Borrowers written statements of account, the balance in Borrowers' Loan Account,
as set forth on Lender's most recent printout,  shall be rebuttable  presumptive
evidence of the amounts due and owing Lender by Borrowers.  On or about the last
day of each calendar month,  Lender shall mail or email to Borrowers a statement
setting  forth  the  balance  of  Borrowers'  Loan  Account,  including  without
limitation, principal, interest, expenses and fees. Each such statement shall be
subject to subsequent  adjustment by Lender but shall, absent manifest errors or
omissions,  be presumed  correct and binding upon Borrowers and shall constitute
an account stated unless,  within sixty (60) days after receipt of any statement
from Lender,  Borrowers shall deliver to Lender written objection specifying the
error or errors, if any, contained in such statement.

      2.9  Termination of Agreement.  Subject to and in accordance  with Section
9.1,  Lender shall have the right,  without  notice to  Borrowers,  to terminate
Lender's   commitments  to  make  Loan  Advances   pursuant  to  this  Agreement
immediately upon a Matured  Default.  In addition,  Lender's  commitment to make
Loan Advances pursuant to this Agreement shall be deemed immediately terminated,
without notice to Borrowers, on the last day of the Draw Period. Borrowers shall
have the right to irrevocably and permanently  terminate Lender's commitments to
make Loan Advances pursuant to this Agreement immediately upon providing written
notice thereof to Lender. In the event Lender's commitment to make Loan Advances
pursuant to this Agreement is terminated,  the remainder of this Agreement shall
remain in full force and effect  until the  payment in full of the  Liabilities.
Notwithstanding  the  foregoing,  in the  event  that  a  proceeding  under  any
bankruptcy,  reorganization,  arrangement of debt,  insolvency,  readjustment of
debt or receivership law or statute is filed by or against any Borrower,  or any
Borrower makes an assignment for the benefit of creditors,  this Agreement shall
be deemed to be terminated immediately, and all the Liabilities shall be due and
payable,  without  presentment,  demand,  protest or further  notice  (including
without  limitation,  notice of intent to accelerate and notice of acceleration)
of any kind, all of which are expressly waived by Borrowers,  provided, however,
that in the event a proceeding  against any  Borrower is dismissed  within sixty
(60) days of the date of its filing  then this  Agreement  shall be deemed to be
reinstated  as of the date the order of  dismissal  becomes  final and Lender is
given notice thereof.

      2.10  Limitation of Liability of Foreign  Borrowers.  Notwithstanding  any
other provision of this Agreement, the Note or the other Financing Agreements to
the  contrary,  and  notwithstanding  any breach by any Foreign  Borrower of any
representation, warranty, covenant or agreement contained herein or in any other
Financing Agreement, liability of each Foreign Borrower hereunder or pursuant to
any of the other  Financing  Agreements  shall be  limited to the sum of (i) the
amount  of Loan  Advances  made to  such  Foreign  Borrower  or any,  direct  or
indirect,  Subsidiary thereof plus (ii) to the extent not included in (i) above,
the aggregate amount of any loans, payments,  capital contributions,  dividends,
distributions or other asset transfers,

                                      -18-
<PAGE>

directly or indirectly,  made after the date hereof by any Domestic  Borrower to
such Foreign Borrower or any, direct or indirect, Subsidiary thereof.

      3 WARRANTS.

      On the Closing  Date,  the  Company and Lender  shall enter into a Warrant
Agreement,   the  form  of  which  is  attached  as  Exhibit  3A  (the  "Warrant
Agreement"),  pursuant  to which the Company  shall issue to Lender  Warrants to
purchase  Common Shares of the Company in connection  with and as a condition of
the making of the Loan by Lender to Borrowers.

      4 CONDITIONS TO LOAN ADVANCES.

      Notwithstanding  any other  provisions  to the contrary  contained in this
Agreement,  the making of each Loan Advance provided for in this Agreement shall
be conditioned upon the following:

      4.1 Approval of Lender's Counsel.  Legal matters, if any, relating to such
Loan Advance  shall have been reviewed by and shall be  satisfactory  to counsel
for Lender.

      4.2  Compliance.  All  representations  and  warranties  contained in this
Agreement shall be true on and as of the date of the making of such Loan Advance
as if such  representations and warranties had been made on and as of such date,
and no Default or Matured Default shall have occurred and be continuing or shall
exist.

      4.3 Documentation for Initial Advance.  Prior to the making of the Initial
Advance,  Borrowers  shall have executed  and/or  delivered to Lender all of the
documents  listed  on the List of  Closing  Documents  for the  Initial  Advance
attached as Exhibit 4A.

      4.4  Documentation  for Initial  Working  Capital  Advance or  Acquisition
Advance.  Prior to the making of any  additional  Loan Advance after the Initial
Advance,  Borrowers  shall have executed  and/or  delivered to Lender all of the
documents  listed  on the List of  Closing  Documents  for the  Initial  Working
Capital Advance/Acquisition Advance attached as Exhibit 4B. Such documents shall
include, without limitation, (i) all documents reasonably requested by Lender to
evidence  and effect the pledge to Lender of all of the shares of capital  stock
of ARC Ltd.,  ARC Europe,  MECAR and VSK  Electronics  and (ii) a  subordination
agreement  between  Lender  and  the  Subordinated  Lender,  duly  executed  and
delivered by an authorized  officer of the  Subordinated  Lender and in form and
content  acceptable  to  Lender  in  its  sole  discretion  (the  "Subordination
Agreement").  Notwithstanding the foregoing, in lieu of causing the Subordinated
Lender to execute  and  deliver  the  Subordination  Agreement,  the Company may
deposit into the Account (as defined in the Deposit Account Security  Agreement)
additional cash in an amount equal to the then  outstanding  principal amount of
the  Subordinated  Debenture,  together  with an  amount  sufficient  to pay all
accrued and unpaid interest thereon and all interest that will accrue thereafter
through the maturity date thereof (the  "Additional  Cash  Collateral").  If the
Company  deposits the Additional Cash Collateral into the Account,  then (i) the
amount of the Collateral Requirement (as defined in the Deposit Account Security
Agreement)  that otherwise  would apply shall be increased by such amount,  (ii)
the Additional Cash Collateral

                                      -19-
<PAGE>

shall be  additional  collateral  for the  Liabilities  and shall  remain in the
Account  subject  to the  provisions  of this  Section  4.4 and the terms of the
Deposit Account  Control  Agreement until the earlier of (A) the payment in full
of the  Subordinated  Debt or (B) the payment in full of the Liabilities and the
termination of the Lender's obligation hereunder to extend further credit to the
Borrowers,  and (iii) upon receipt of the Company's written request from time to
time, Lender shall permit  disbursements of the Additional Cash Collateral to be
made from the  Account to the  Subordinated  Lender to pay  regularly  scheduled
principal  and interest  payments due and payable  under the  Subordinated  Loan
Documents so long as no Matured  Default  shall have  occurred or would occur as
the result of the making of any such payment.

      4.5 Delivery of Financial Statements,  Projections, Compliance Certificate
and Appraisals.

            (a) Prior to the making of the Initial  Advance,  the Company  shall
have  delivered to Lender each of the  following:  (i) the audited  consolidated
financial  statements of the Company for the preceding three fiscal years of the
Company; and (ii) projected consolidated income statements, consolidated balance
sheets and  consolidated  cash flow  statements for the two (2) year period from
the date hereof.

            (b) Prior to the making of each Loan Advance, the Company shall have
delivered  to Lender a  calculation  certified by the chief  financial  officer,
president or a vice president of the Company demonstrating that the ratio of (i)
the sum of (A) Borrower  Senior Funded Debt as of the expected date of such Loan
Advance  (assuming  that such Loan  Advance  has been made) minus (B) the Dollar
amount as of such date of the  Collateral  (as  defined in the  Deposit  Account
Security  Agreement)  pledged by the Company to Lender under the Deposit Account
Security  Agreement  divided by (ii)  Adjusted Pro Forma EBITDA for the four (4)
fiscal  quarters  of the Company  ending as of the last day of the prior  fiscal
quarter  (assuming  in the  case of a  proposed  Acquisition  Advance  that  the
applicable  Target Company  became a Domestic  Subsidiary as of the first day of
such period,  as provided in the  definition  of Adjusted Pro Forma EBITDA) does
not exceed 3.00 to 1.0.

      4.6 Completion of Forensic Accounting Due Diligence Reports and Background
Checks. Prior to the making of the Initial Advance, Lender, or one or more third
parties acceptable to Lender,  shall have conducted and completed (i) a forensic
accounting  due  diligence  review of the  assets  and  business  operations  of
Borrowers and (ii) a background  check of certain  senior  managers of Borrowers
selected  by  Lender,  all  with  results  satisfactory  to  Lender  in its sole
discretion.

      4.7  Closing of Each  Permitted  Acquisition.  Prior to the making of each
Acquisition  Advance,  the Company shall have  delivered to Lender  satisfactory
evidence that the proposed  acquisition is a Permitted  Acquisition,  including,
without limitation, evidence that:

            (a) the Target  Company is  primarily  engaged in one or more of the
following lines of business (each, a "Permitted  Business"):  (i) the production
and/or sale of ammunition and weapon systems; (ii) the manufacture, distribution
or service of  security  products  for  industry  and/or  Government;  (iii) the
development and/or sale of battlefield effects simulators;

                                      -20-
<PAGE>

(iv) the development  and/or sale of environmental  security or safety products;
(v)  the  provision  of  engineering,  software  and/or  information  technology
solutions to government  and/or  industrial  customers (it being  understood and
agreed  however  that,   following  the  completion  of  the  initial  Permitted
Acquisition of a Permitted Business described in this clause (v), any additional
businesses  described  in this  clause  (v)  acquired  by  Borrowers  must  sell
substantially  the same types of  products  and/or  services  as such  initially
acquired  Permitted  Business  or  products  and  services   reasonably  related
thereto);  or (vi) such  other  businesses  ancillary  or  related to any of the
foregoing  that may be  approved  from time to time in  writing by Lender in its
sole discretion;

            (b) all conditions to the closing and consummation of the applicable
Purchase Agreement have been satisfied,  or will  simultaneously with the making
of the related Acquisition Advance be satisfied;

            (c) all conveyance documents under such Purchase Agreement conveying
interests in real property (including fixtures),  certificate of title property,
registered patents, registered copyrights,  registered trademarks and registered
trade  names  have been,  or will be not later  than five (5) days  after  their
delivery, properly recorded;

            (d) the sum of (i) the Purchase  Price  payable  under such Purchase
Agreement  plus  (ii)  the  aggregate  purchase  price  of all  prior  Permitted
Acquisitions  financed  in whole  or in part by  Acquisition  Advances  does not
exceed $50,000,000;

            (e)  the  assets  and/or  stock  or  other  equity   interests,   as
applicable,  proposed  to be  acquired  by  the  purchaser  under  the  Purchase
Agreement  shall be free and  clear of all liens and  encumbrances,  other  than
those in favor of Lender or otherwise permitted under the Financing Agreements;

            (f) the Dollar  amount of  goodwill  that will be  reflected  on the
Company's  consolidated  balance  sheet as a result  of the  proposed  Permitted
Acquisition  will not  exceed  50% of the  Purchase  Price  for  such  Permitted
Acquisition;

            (g) the sum of the  Purchase  Price for such  Permitted  Acquisition
plus all related fees and expenses paid or payable by Borrowers  will not exceed
the product of (i) seven (7)  multiplied  by (ii) the adjusted  trailing  twelve
(12) months EBITDA of the Target Company  (subject to such  adjustments (if any)
as may be made by Borrowers with the written approval of Lender); and

            (h) the proposed Permitted  Acquisition will not result in a Default
or Matured Default.

      4.8 Additional Documentation for Acquisition Advances.

            (a) Upon the  execution  and  delivery  of a letter of intent  for a
proposed  Permitted  Acquisition of a Target Company,  the Company shall provide
Lender an executed copy thereof.

                                      -21-
<PAGE>

            (b) The Borrowers  shall promptly  provide Lender with copies of all
drafts of any Acquisition Documents for any Permitted Acquisition.

            (c)  At  least  five  (5)  days  prior  to the  disbursement  of any
Acquisition  Advance,  the  Company  shall  deliver  to  Lender  a  copy  of the
applicable Purchase Agreement,  including all exhibits and schedules thereto and
copies of all material agreements, documents and instruments contemplated by the
parties  thereto  to be  executed  and/or  delivered  at or  prior  to,  or as a
condition precedent to, the closing of such Permitted Acquisition (collectively,
the "Acquisition Documents").

            (d) At least ten (10) Business Days prior to the disbursement of any
Acquisition Advance, the Company shall deliver to Lender the following documents
related to the applicable proposed Permitted Acquisition of a Target Company:

                  (i)  copies  of  consolidated  financial  statements  for such
            Target Company for each of the three (3) most recent fiscal years of
            the Target Company and for the most current interim period for which
            such  financial  statements are then  available  (collectively,  the
            "Target Company Financial Statements");

                  (ii) a pro forma consolidated and consolidating  balance sheet
            of the Company (each, a "Pro Forma Balance Sheet") setting forth the
            assets and liabilities of the Company and its  Subsidiaries on a pro
            forma consolidated and consolidating basis after taking into account
            the consummation of the transactions  contemplated in the applicable
            Acquisition  Documents  as of  the  date  of the  applicable  Target
            Company Financial Statements;

                  (iii)  copies of the latest  projections  of the  consolidated
            income and cash flows of the  Company and its  Subsidiaries  for the
            next  succeeding two (2) years taking into account the  consummation
            of  the  transactions  contemplated  in the  applicable  Acquisition
            Documents ("Projections");

                  (iv)  copies of the  organizational  documents  of such Target
            Company and each of its Subsidiaries;

                  (v) copies of any offering  memoranda or  circulars,  business
            plans or other  materials  prepared  by the  Target  Company  or its
            owners,  representatives,  agents,  advisors or affiliates that have
            been provided to any Borrower or any of its representatives,  agents
            or advisors in connection with such Permitted Acquisition; and

                  (vi)   copies   of  any   budgets,   forecasts,   projections,
            appraisals,  valuations, due diligence memoranda, studies or reports
            relating  to the Target  Company,  any of its  assets,  liabilities,
            businesses or operations, or the proposed Permitted Acquisition that
            are in the  possession  or  control  of any  Borrower  or any of its
            representatives, agents or advisors.

                                      -22-
<PAGE>

            (e) At  least  fifteen  (15)  days  prior  to  the  making  of  each
Acquisition  Advance,  in addition  to the  documents  required to be  delivered
pursuant to the  provisions  of  Sections  4.8(a)  through (d) and Section  4.7,
Borrowers  shall have executed and/or  delivered and, as applicable,  caused the
Target Company, the other parties to the applicable Purchase Agreement, each new
Subsidiary  (if any)  and  their  respective  owners,  representatives,  agents,
advisors or affiliates to have delivered,  to Lender (i) a schedule updating the
Disclosure Schedule attached as Exhibit 6A with respect to the applicable Target
Company  and  the  Permitted  Acquisition,  assuming  that  the  same  had  been
consummated as of the date thereof (each, a "Supplemental Disclosure Schedule"),
and (ii) all of the other documents listed on the List of Closing  Documents for
each  Acquisition  Advance  attached  as  Exhibit  4C. An  additional  condition
precedent to Lender's  obligation to make each Acquisition Advance shall be that
neither any Supplemental  Disclosure  Schedule nor any provision of any Purchase
Agreement  or any  exhibit  or  schedule  thereto  shall  disclose  any  fact or
circumstance that, either alone or in conjunction with all other known facts and
circumstances, could reasonably be expected to have a Material Adverse Effect.

      4.9 Funding by Fund Lender.  Borrowers hereby  acknowledge and agree that:
(i) Lender and a certain third party disclosed to Borrowers ("Fund Lender") have
entered into a certain Credit Agreement dated February 11, 2003, as amended (the
"Fund Credit Agreement"),  for the purpose of providing Lender with financing to
make certain loans and other investments permitted  thereunder;  (ii) Lender may
obtain  funds to make  Loan  Advances  from  borrowings  under  the Fund  Credit
Agreement;  and (iii) Lender's obligation hereunder to make each Loan Advance to
Borrowers is  conditional  upon and subject to the prior  receipt by Lender from
Fund Lender of sufficient funds to make such Loan Advance.  Upon the termination
of the Fund Credit  Agreement  for any reason and  Lender's  failure to promptly
obtain adequate  alternative  financing for the then Unused  Commitment,  Lender
shall promptly give Borrowers written notice thereof and, in such event,  Lender
shall  have no  further  obligation  to make any  additional  Loan  Advances  to
Borrowers  hereunder and each of the Company and Lender shall have the right and
option,  exercisable  upon  written  notice  thereof  to  the  other  party,  to
irrevocably terminate the Working Capital Commitment and the Acquisition Advance
Commitment.  In addition,  if Lender  determines that it is or will be unable to
fund any Loan Advance  requested by Borrowers in accordance  with the provisions
of this Agreement as a result of Fund Lender's  inability or  unwillingness  for
any reason to provide financing  therefor to Lender,  then Lender shall promptly
give Borrowers written notice thereof,  whereupon Borrowers shall have the right
and option,  exercisable upon ten (10) days' prior written notice thereof to the
Company at any time after  Borrowers'  receipt of  Lender's  notice and prior to
such time (if any) as Lender obtains sufficient replacement financing, to prepay
in full the Liabilities without any fee or penalty and irrevocably terminate the
Working Capital Commitment and the Acquisition Commitment. Lender represents and
warrants  to  Borrowers  that (i)  Lender is  permitted  under  the Fund  Credit
Agreement  to enter  into  this  Agreement;  and (ii)  subject  to the terms and
conditions of the Fund Credit Agreement,  Lender has adequate  committed capital
from Fund Lender to cover its funding obligations hereunder.  Upon the Company's
reasonable  request  from time to time,  Lender  shall  provide  Borrowers  with
written  notice that, to Lender's  actual  knowledge,  Lender  continues to have
continued access to adequate committed  capital.  Lender shall provide Borrowers
prompt  written  notice of any event which  would cause it to have  insufficient
committed capital to cover its funding obligations hereunder.

                                      -23-
<PAGE>

      5 SECURITY.

      5.1 Security Interests and Liens. To secure the payment and performance of
the Liabilities:

      (a)  Personal  Property.  Each of the Domestic  Borrowers  has granted and
hereby grants to Lender a continuing  security  interest in and to the following
property and interests in property of such Domestic Borrower,  whether now owned
or  existing or  hereafter  acquired or arising  and  wheresoever  located:  all
Accounts, Inventory, Equipment, Goods, General Intangibles, Payment Intangibles,
Commercial Tort Claims, Deposit Accounts, Margin Accounts,  Securities Accounts,
Investment Property,  Instruments,  Letter of Credit Rights, Documents,  Chattel
Paper,  Tangible Chattel Paper, Money, all accessions to, substitutions for, and
all  replacements,  products and proceeds of the  foregoing  (including  without
limitation,  proceeds of insurance policies insuring any of the foregoing),  all
books  and  records  pertaining  to  any  of the  foregoing  (including  without
limitation, customer lists, credit files, computer programs, printouts and other
computer materials and records),  and all insurance policies insuring any of the
foregoing.

      (b) Master Pledge Agreement. Pursuant to the execution and delivery of the
Pledge  Agreement  in the  form  attached  as  Exhibit  5A (the  "Master  Pledge
Agreement"),  each  Borrower  shall  pledge  and  grant to  Lender a  continuing
security  interest  in all  of the  shares  of  capital  stock  of  each  of its
Subsidiaries and all of the partnership  interests and limited liability company
membership  interests  owned  at  any  time  by  such  Borrower  or  any  of its
Subsidiaries  (other than current and future  Subsidiaries of VSK  Electronics);
provided,  however, that with respect to the pledge of any shares of any Foreign
Subsidiary,  Borrower  that owns such shares  shall  execute and deliver (or, as
applicable,   cause  its   Subsidiaries  to  execute  and  deliver)  such  other
agreements,  documents and  instruments  as may be necessary or desirable in the
opinion of Lender and its counsel to evidence  and effect such pledge  under the
laws of the  jurisdiction  in which  the  issuer  of such  shares  is  organized
(collectively,  the "Foreign Pledge Agreements") including,  without limitation,
with  respect to the pledge of shares of any  Belgian  company,  a Share  Pledge
Agreement in the form attached as Exhibit 5B  (collectively,  the "Belgian Share
Pledge Agreements").

      (c) Landlord  Waivers.  Upon the request of Lender from time to time, each
Domestic  Borrower shall use its  reasonable  best efforts to cause the landlord
under each Existing Lease to execute and deliver to Lender a landlord waiver and
consent  between  such  landlord  and  Lender  in form  and  content  reasonably
acceptable  to Lender  waiving  such  landlord's  lien on the  inventory,  trade
fixtures  and other assets of such  Borrower  and  granting  Lender the right to
enter upon the  premises and to remove such assets  following a Matured  Default
(individually,  a "Landlord Waiver" and collectively,  the "Landlord  Waivers").
Within five (5) days after  entering into any New Lease,  Borrowers  shall cause
the landlord under such New Lease to deliver such a Landlord Waiver to Lender.

      (d) Deposit Account Security Agreement.  The Company, by a certain Deposit
Account Security  Agreement of even date herewith between the Company and Lender
in the form

                                      -24-
<PAGE>

attached as Exhibit 5C (the "Deposit Account Security  Agreement") and a certain
Deposit Account Control Agreement of even date herewith among Wachovia Bank, the
Company  and  Lender  (the  "Control   Agreement")  and  by  other   instruments
contemplated  thereby,  shall,  as  provided  in the  Deposit  Account  Security
Agreement, assign and grant to Lender a first perfected security interest in all
the collateral described in the Deposit Account Security Agreement.

      5.2  Endorsement  by Lender.  Each  Domestic  Borrower  authorizes  Lender
(following a Matured  Default) to endorse,  in such  Borrower's  name, any item,
however received by Lender,  representing payment on or other proceeds of any of
the Collateral.

      5.3  Delivery  of  Warehouse  Receipts  to  Lender.  In the event that any
Inventory  becomes  the  subject  of a  negotiable  or  nonnegotiable  warehouse
receipt,  said warehouse receipt shall be promptly delivered to Lender with such
endorsements  and  assignments  as are necessary to vest title and possession in
Lender.  Provided  that a Matured  Default  does not then exist and would not be
created thereby,  Lender shall return such warehouse receipts to the appropriate
Domestic  Borrower(s)  within  two  (2)  Business  Days of the  request  of such
Domestic Borrower(s) therefor, but only for purposes of negotiation, delivery or
exchange in the ordinary  course of the business of such  Domestic  Borrower(s),
and provided,  however, that Domestic Borrowers shall comply with such terms and
conditions  deemed  appropriate  by Lender to secure the return to Lender of the
proceeds of such  warehouse  receipts,  where such  return of proceeds  would be
required in accordance with Domestic Borrowers'  obligations to Lender under the
Financing Agreements.

      5.4 Preservation of Collateral and Perfection of Security Interests.

            (a) Each Borrower shall execute and deliver to Lender,  concurrently
with the execution of this  Agreement and at any time  hereafter,  all documents
(and pay the cost of filing or recording the same in all public  offices  deemed
necessary by Lender),  as Lender may request,  in a form satisfactory to Lender,
to perfect and keep perfected the security interest in the Collateral granted by
such Borrower to Lender and otherwise to protect and preserve the Collateral and
Lender's security  interests.  Lender is hereby  irrevocably  authorized to file
(and sign on behalf of such Borrower,  if necessary) UCC or effective  financing
statements (or such other equivalent  documents as may be necessary or desirable
under  any  applicable  foreign  law)  on the  Collateral  at the  time  of this
Agreement  or from  time to time  hereafter.  Borrowers  further  agree  that an
electronic, carbon, photographic, or other reproduction of a financing statement
is sufficient as a financing statement.

            (b) Upon Lender's  request from time to time after the occurrence of
a Default or Matured  Default,  Domestic  Borrowers  shall use their  reasonable
efforts to cause  each  financial  institution  at which any  Domestic  Borrower
maintains  any  lockbox,  deposit  account or other  similar  account to deliver
promptly to Lender a writing, in form and substance  satisfactory to Lender, (i)
acknowledging  and consenting to the security interest of Lender in such lockbox
or account and all cash,  checks,  drafts and other  instruments or writings for
the payment of money from time to time therein,  (ii)  confirming such financial
institution's agreement to follow the instructions of Lender with respect to all
such cash,  checks,  drafts and other instruments or writings for the payment of
money following receipt from Lender of notice of the occurrence of

                                      -25-
<PAGE>

any Matured  Default and (iii) waiving all rights of setoff and banker's lien on
all items  held in any such  lockbox  or  account  (other  than with  respect to
payment of fees and expenses for account services).

      5.5 Loss of Value of Collateral. Borrowers shall immediately notify Lender
of any material loss or decrease in the value of the Collateral.

      5.6  Collection  of  Accounts;  Power of  Attorney.  Upon and  during  the
occurrence of a Matured  Default,  Domestic  Borrowers,  jointly and  severally,
agree,  upon Lender's demand,  to establish a lockbox into which Account Debtors
shall make payments.  Upon a Matured Default,  Domestic  Borrowers,  jointly and
severally,  designate,  make,  constitute  and  appoint  Lender (and all Persons
designated   by   Lender)   as  each   Domestic   Borrower's   true  and  lawful
attorney-in-fact,  with power, in each such Borrower's or Lender's name, to: (a)
demand payment of Accounts; (b) enforce payment of Accounts by legal proceedings
or otherwise;  (c) exercise all of such Domestic  Borrower's rights and remedies
with respect to  proceedings  brought to collect an Account;  (d) sell or assign
any Account upon such terms, for such amount and at such time or times as Lender
deems advisable;  (e) settle, adjust,  compromise,  extend or renew any Account;
(f)  discharge  and release any  Account;  (g) take control in any manner of any
item of payment or  proceeds of any  Account;  (h)  prepare,  file and sign such
Domestic  Borrower's  name upon any items of payment or proceeds and deposit the
same to  Lender's  account on  account  of the  Liabilities;  (i)  endorse  such
Domestic Borrower's name upon any Chattel Paper, Document, Instrument,  invoice,
warehouse receipt,  bill of lading, or similar Document or agreement relating to
any Account or any other Collateral;  (j) sign such Domestic  Borrower's name on
any verification of Accounts and notices to Account Debtors;  (k) prepare,  file
and sign such  Domestic  Borrower's  name on any proof of claim in bankruptcy or
similar  proceeding  against any Account Debtor;  and (l) do all acts and things
which are necessary, in Lender's sole discretion, to sell, transfer or otherwise
obtain the proceeds of any  Collateral  or  otherwise  to fulfill such  Domestic
Borrower's obligations under this Agreement.  The foregoing power of attorney is
coupled with an interest and is therefore irrevocable.

      5.7 Account  Covenants.  Each Domestic  Borrower shall:  (a) promptly upon
such Borrower's  learning thereof,  inform Lender,  in writing,  of any material
delay in such Borrower's  performance of any of such  Borrower's  obligations to
any Account Debtor or of any assertion of any claims,  offsets or  counterclaims
by any  Account  Debtor in excess of  $250,000;  (b) not  permit or agree to any
extension,  compromise or settlement or make any change or  modification  of any
kind or nature in excess of $250,000  with  respect to any  Account  without the
prior  written  consent  of  Lender,  which  consent  shall not be  unreasonably
withheld; and (c) promptly upon such Borrower's learning thereof, furnish to and
inform  Lender of all material  adverse  information  relating to the  financial
condition of any Account Debtor if Accounts  attributable to such Account Debtor
aggregate in excess of $250,000.

      5.8  Account  Records  and  Verification  Rights.  Borrowers,  jointly and
severally,  represent and warrant to and covenant with Lender that each Borrower
now keeps and at all times shall keep correct and accurate  records  relating to
the Accounts and the financial and payment records of the Account  Debtors,  all
of which records shall be available  upon demand  during such  Borrower's  usual
business hours to any of Lender's officers, employees or agents.

                                      -26-
<PAGE>

Any of Lender's officers,  employees or agents shall have the right at any time,
in  Lender's  name,  in the name of a  fictional  nominee  or in the name of any
Borrower,  to verify the  validity,  amount or any other matter  relating to any
Accounts, by mail, telephone,  telegraph or otherwise.  Borrowers shall promptly
notify  Lender of any  amounts  that are in dispute  for any reason in excess of
$250,000 which are due and owing from an Account Debtor.

      5.9 Notice to Account  Debtors.  Lender may, at any time or times upon and
during the  occurrence  of a Matured  Default,  and without  prior notice to any
Borrower, notify any or all Account Debtors that the Accounts have been assigned
to Lender and that Lender has been granted a security  interest  therein and may
direct  any or all  Account  Debtors  to make all  payments  upon  the  Accounts
directly to Lender or to a lockbox to be  established  pursuant to Section  5.6.
Lender shall furnish Borrowers with a copy of such notice.

      5.10 Inventory Records.  Borrowers,  jointly and severally,  represent and
warrant to and  covenant  with  Lender that each  Borrower  now keeps and at all
times shall keep correct and accurate records itemizing and describing the kind,
type,  quality and  quantity of  Inventory,  such  Borrower's  costs and selling
prices of Inventory and daily  withdrawals  and  additions of Inventory,  all of
which records shall be available on demand during such Borrower's usual business
hours to any of Lender's officers, employees or agents.

      5.11 Special Collateral.  Immediately upon any Domestic Borrower's receipt
thereof and upon request by Lender,  such Borrower shall (except as provided for
in  Section  5.3 with  regard  to  warehouse  receipts)  deliver  or cause to be
delivered to Lender,  with such endorsements and assignments as are necessary to
vest  title and  possession  in  Lender,  all  Chattel  Paper,  Instruments  and
Documents  which such  Borrower now owns or which such  Borrower may at any time
acquire.  Each Domestic  Borrower shall promptly mark all copies of such Chattel
Paper,  Instruments  and  Documents  to show that they are  subject to  Lender's
security interest.

      5.12  Remittance  of Proceeds to Lender.  Except as otherwise  provided in
Section 5.6, in the event any proceeds of any Collateral (other than proceeds of
Inventory or Accounts  Receivable  received in the ordinary  course of business)
shall  come  into the  possession  of any  Borrower  (or any of such  Borrower's
directors, officers, managers, employees, agents or any Persons acting for or in
concert with any Borrower)  following the occurrence of a Matured Default,  such
Borrower or such Person shall  receive,  as the sole and  exclusive  property of
Lender, and as trustee for Lender,  all monies,  checks,  notes,  drafts and all
other payments for and/or other  proceeds of  Collateral,  and no later than the
first  Business Day following  receipt,  such Borrower  shall remit the same (or
cause the same to be  remitted),  in kind,  to Lender or to such agent or agents
(at such agent's or agents' designated address or addresses) as are appointed by
Lender for that purpose,  to be applied to the  Liabilities  pursuant to Section
10.14.

      5.13  Safekeeping of Collateral.  Lender shall not be responsible for: (a)
the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c)
any diminution in the value of the Collateral;  or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency or any other Person relating to
the Collateral.  All risk of loss, damage, destruction or diminution in value of
the Collateral shall be borne by Borrowers.

                                      -27-
<PAGE>

      5.14 Sales and Use of  Collateral.  Except as set forth in this Section or
as otherwise consented to by Lender in writing, no Domestic Borrower shall sell,
lease,  transfer or otherwise dispose of any Collateral.  So long as there shall
not have occurred and be continuing a Matured Default, (a) Inventory may be sold
by each Borrower in the ordinary course of such Borrower's  business,  but shall
not  otherwise  be taken or removed  from such  Borrower's  premises or approved
third  party  locations,  except for raw  materials  or work in process  for the
purpose  of  conversion  into  finished  Goods  and (b) each  Borrower  may sell
Collateral  that is obsolete or no longer used or useful in Borrower's  business
and having a value not in excess of $250,000 in the  aggregate.  Upon and during
the  occurrence  of a Matured  Default  and if Lender so notifies  Borrowers  in
writing,  neither  Inventory nor any other  Collateral shall be sold or taken or
removed from any Borrower's  premises or approved third party locations,  except
with the  prior  written  consent  of  Lender  and  upon  payment  of an  amount
equivalent to the value of the Collateral to be sold or removed, such amounts to
be paid to Lender to be applied upon the Liabilities. So long as there shall not
have occurred a Matured Default,  Collateral may be used by each Borrower in the
ordinary  course of such  Borrower's  business,  subject to Lender's  continuing
security  interest.  Upon and during the occurrence of a Matured  Default and if
Lender so notifies  Borrowers  in writing,  Collateral  shall not be used except
with the prior written consent of Lender.

      5.15 Margin  Accounts.  As of the date of this Agreement,  no Borrower has
established  any Margin  Accounts.  Unless  Lender  shall  otherwise  consent in
writing,  all Margin Accounts established by any Domestic Borrower shall be kept
with a broker acceptable to Lender and approved in writing by Lender ("Broker").
Domestic Borrowers, jointly and severally, represent and warrant to Lender that:
(a) with regard to any Margin  Accounts  established  by any Domestic  Borrower,
such Borrower is the owner, free and clear of all liens,  security interests and
encumbrances,  except  for those in favor of Lender  or  Broker,  of any and all
Margin  Accounts  which are  listed  in any  financial  statements  or books and
records of such Borrower as being the property of such Borrower;  and (b) except
as otherwise  permitted  by this  Agreement,  no Borrower  owns any open futures
positions which are not either covered by existing,  unsold Inventory or covered
by reciprocal  contracts for future delivery of the product by reliable sellers,
or directly  related to Inventory  which such Borrower  plans to purchase in the
ordinary course of such Borrower's business.  With regard to any Margin Accounts
established by any Domestic Borrower, such Borrower, the Broker and Lender shall
execute an  Assignment  of Commodity  Accounts  and  Commodity  Contracts,  in a
standard form  reasonably  acceptable to Lender and the Broker.  All of Lender's
rights under such Assignment of Commodity Accounts and Commodity Contracts shall
be in addition to Lender's rights  hereunder.  Domestic  Borrowers,  jointly and
severally,  warrant that any such Margin  Accounts  shall be used solely for the
hedging  of the  applicable  Borrower's  investments  in  Inventory  and not for
speculative purposes.

      5.16 Real Property.  Domestic  Borrowers shall give Lender at least thirty
(30) days' prior written  notice of any  interests in real property  acquired by
any Borrower after the Closing Date  (including,  without  limitation,  any real
property  interests  acquired by any Domestic Borrower or any Subsidiary thereof
through a  Permitted  Acquisition).  Upon  Lender's  request  from time to time,
Domestic  Borrowers shall promptly execute and deliver such mortgages,  deeds of
trust,  leasehold  mortgages and other  agreements,  documents  and  instruments
reasonably

                                      -28-
<PAGE>

requested  by  Lender  to grant in favor of  Lender a  first-priority  perfected
mortgage  lien on and  security  interest  in any such real  property.  Domestic
Borrowers  shall  pay all  costs  associated  with  the  recording  of any  such
mortgage,  deed of trust,  leasehold  mortgage or other  agreement,  document or
instrument,   together  with  any  subsequent   amendments  thereto,   with  the
appropriate authorities, and shall take all other actions requested by Lender in
order to vest in Lender a perfected  lien on the interest in each such parcel of
real  property  described  therein,   subject  to  no  other  liens,  claims  or
encumbrances, except those expressly acknowledged thereby.

      5.17 Title  Insurance.  With respect to any real  property  referred to in
Section 5.16,  Domestic Borrowers shall cooperate with Lender to obtain delivery
to  Lender  of a  policy  of  title  insurance,  insuring  Lender's  mortgagee's
interests,  which  cooperation shall be deemed to include,  without  limitation,
doing  all  things  necessary  to  satisfy  the  requirements  set  forth in any
applicable  title  insurance  commitment  or other  requirements  of the  issuer
thereof (including,  without limitation, the payment of premiums).  Lender shall
have no obligation to make any further Loan Advances  hereunder unless and until
all  requirements  set forth in any such  title  insurance  commitment  or other
requirements  of the issuer thereof have been  satisfied.  Lender shall have the
right to  request  such  title  insurance  commitment  updates  at such times as
Lender, in its sole discretion, shall deem appropriate, and shall have the right
to instruct the issuer of the title  insurance  commitment to set forth as added
requirements  such things as would be necessary to eliminate added exceptions to
coverage.  In the  event  Lender  reasonably  determines  that a policy of title
insurance  will not be  issued  in  accordance  with any  such  title  insurance
commitment  by  reason  of any  Domestic  Borrower's  failure  to  cooperate  as
aforesaid, then Lender shall have the right to terminate this Agreement pursuant
to Section 2.9 and  Domestic  Borrowers  shall  remain,  jointly and  severally,
obligated  to Lender for all  Liabilities  incurred to date  thereof  (including
without limitation, all fees and cost reimbursements provided for herein).

      6 WARRANTIES.

      Borrowers, jointly and severally, represent and warrant to Lender that:

      6.1 Litigation and  Proceedings.  Except as set forth on part 1 of Exhibit
6A, no judgments are outstanding against any Loan Party, nor is there pending or
threatened any  litigation,  contested  claim,  or  governmental  proceeding by,
against  or with  respect  to any Loan  Party as of the date of this  Agreement.
After the Closing Date, no judgments  shall be  outstanding  at any time against
any Loan  Party,  nor  shall  there be  pending  or  threatened  at any time any
litigation,  contested  claim,  or  governmental  proceeding by, against or with
respect  to any Loan  Party,  except for  judgments  and  pending or  threatened
litigation,  contested  claims and  governmental  proceedings  which do not (and
could not reasonably be expected to) have a Material Adverse Effect.

      6.2 Other Agreements. Except as set forth on part 2 of Exhibit 6A, no Loan
Party is in default  under any  contract,  lease or commitment to which any Loan
Party is a party or by which any Loan Party is bound  except  those which do not
(and  could not  reasonably  be  expected  to) have a Material  Adverse  Effect.
Borrowers  know of no  dispute,  except  as set forth on part 2 of  Exhibit  6A,
relating to any contract,  lease,  or commitment  except those which do not (and
could not reasonably be expected to) have a Material Adverse Effect.

                                      -29-
<PAGE>

      6.3 Licenses,  Patents,  Copyrights,  Trademarks  and Trade Names.  All of
Borrowers' licenses, patents, copyrights,  trademarks and trade names and all of
Borrowers'  applications  for any  registrations of any of the foregoing are set
forth on part 3 of Exhibit 6A as updated from time to time by  Borrowers.  There
is no action, proceeding, claim or complaint pending or threatened to be brought
against any Borrower by any Person which might jeopardize any of such Borrower's
interest in any of the  foregoing  licenses,  patents,  copyrights,  trademarks,
trade names or applications  except those which do not (and could not reasonably
be expected to) have a Material Adverse Effect.

      6.4  Collateral.  Except as permitted  under Section 8.1 and except as set
forth on part 4 of Exhibit  6A, all of the  Collateral  is free and clear of all
security  interests,  liens,  claims  and  encumbrances.  No  Goods  held by any
Borrower on consignment or under sale or return  contracts have been represented
to be Inventory and no amounts receivable by any Borrower in respect of the sale
of such Goods  (except  markups or  commissions  which have been fully earned by
such Borrower) have been represented to be Accounts. All Producer Payables which
are owing to suppliers of any of the  Collateral  have been paid when due, other
than those being  contested  in good faith by the  applicable  Borrower,  and no
Person to whom such  Producer  Payables  are owed has  demanded  turnover of any
Collateral or proceeds thereof.  Each Borrower has adequate  procedures in place
to  insure  that  Collateral  purchased  by such  Borrower  is free of  security
interests in favor of Persons  other than Lender and other  creditors  permitted
under the provisions of this Agreement. Each Borrower shall furnish, at Lender's
request,  the names and  addresses  of all Persons who supply  Inventory to such
Borrower or who deliver Goods to such Borrower on  consignment  or under sale or
return contracts.

      6.5 Location of Assets; Chief Executive Office. The chief executive office
of each Borrower is located at the address  indicated in part 5(a) of Exhibit 6A
as updated from time to time by Borrowers, and such Borrower's assets (including
without  limitation,  Inventory and  Equipment) are all located in the locations
set  forth on part  5(b) of  Exhibit  6A as  updated  from  time to time by such
Borrower.  Part 5(b) of Exhibit 6A lists all real property owned by any Borrower
(if any) and all real property  leased by any Borrower,  together with all lease
agreements  related  thereto  ("Existing  Leases").  As of the Closing Date, the
books and records of each Borrower, and all of each Borrower's Chattel Paper and
records of account are located at the chief  executive  office of such Borrower.
If any Borrower shall intend to make any change in any of such  locations,  such
Borrower shall notify Lender at least thirty (30) days prior to such change.

      6.6 Tax Liabilities.  Each Borrower has filed all federal, state and local
tax reports and returns  required by any law or  regulation  to be filed by such
Borrower and has either duly paid all taxes,  duties and charges indicated to be
due on the basis of such returns and reports or has made adequate  provision for
the payment  thereof,  and the  assessment of any material  amount of additional
taxes in excess of those  paid and  reported  is not  reasonably  expected.  The
reserves for taxes  reflected on the  Company's  consolidated  balance sheet are
adequate in amount for the payment of all  liabilities for all taxes (whether or
not disputed) of Borrowers accrued through the date of such balance sheet. There
are no material  unresolved  questions or claims concerning any tax liability of
any Borrower, except as described on part 6 of Exhibit 6A.

                                      -30-
<PAGE>

      6.7  Indebtedness  and Producer  Payables.  Except as contemplated by this
Agreement,  as  disclosed  on  part 7 of  Exhibit  6A and  as  disclosed  on the
financial  statements  identified  in Section  6.14, no Loan Party has any other
indebtedness,  contingent obligations or liabilities, outstanding bonds, letters
of credit or acceptances to any other Person or loan  commitments from any other
Person,  other than accounts  payable and  obligations  under  operating  leases
incurred in the ordinary course of business.

      6.8 Other Names.  No Borrower has,  during the  preceding  five (5) years,
been known by or used any names other than those  disclosed on part 8 of Exhibit
6A.

      6.9  Affiliates.  No  Loan  Party  has  any  Affiliates,  other  than  its
directors,  officers, agents and employees and those Persons disclosed on part 9
of  Exhibit  6A as  updated  from  time  to  time by  Borrowers,  and the  legal
relationships of each Loan Party to each such Affiliate are generally  described
thereon.

      6.10 Environmental Matters.  Except as disclosed on part 10 of Exhibit 6A,
(a) no Borrower  has received  any notice to the effect,  or has any  knowledge,
that  the  Property  or its  operations  are not in  compliance  with any of the
requirements of applicable federal,  state and local  environmental,  health and
safety statutes and regulations ("Environmental Laws") or are the subject of any
federal or state investigation  evaluating whether any remedial action is needed
to respond to a release of any toxic or hazardous  waste or  substance  into the
environment,  which  noncompliance  or  remedial  action  could  have a Material
Adverse Effect; (b) there have been no releases of hazardous materials at, on or
under the  Property  that,  singly or in the  aggregate  could  have a  Material
Adverse Effect; (c) there are no underground storage tanks, active or abandoned,
including without  limitation  petroleum storage tanks, on or under the Property
that,  singly or in the aggregate could have a Material  Adverse Effect;  (d) no
Borrower has directly transported or directly arranged for the transportation of
any hazardous  material to any location  which is listed or proposed for listing
on the National  Priorities List pursuant to CERCLA or on any similar state list
or which is the subject of federal,  state or local enforcement actions or other
investigations  which may lead to material  claims  against any Borrower for any
remedial work, damage to natural resources or personal injury, including without
limitation, claims under CERCLA; and (e) no conditions exist at, on or under the
Property which, with the giving of notice,  would rise to any material liability
under any Environmental Laws.

      6.11 Existence; Organization.

            (a) Each  Borrower is an entity as described in the preamble of this
Agreement,   duly  organized  and  in  good  standing  under  the  laws  of  the
jurisdiction  in which it is organized and is duly  qualified to do business and
is in good standing in each jurisdiction in which it is "doing business", except
for those  jurisdictions  in which the  failure so to qualify  would not, in the
aggregate, have a Material Adverse Effect.

            (b) The Company  owns  beneficially  and of record all of the issued
and outstanding  shares of capital stock of ARC Ltd.,  Microwave  Rental,  Titan
Dynamics Systems, SeaSpace, MECAR USA and Energa.

                                      -31-
<PAGE>

            (c) The Company  owns  beneficially  and of record 51% of the issued
and outstanding shares of capital stock of ARC Europe;  Energa owns beneficially
and of record 1% of the issued and  outstanding  shares of capital  stock of ARC
Europe;  and the  remaining  48% of such  shares are owned  beneficially  and of
record by ARC Ltd.

            (d) ARC Europe owns  beneficially  and of record 99.9% of the issued
and outstanding  shares of capital stock of MECAR,  Sedachim,  Hendrickx and VSK
Electronics.  Sedachim  owns  beneficially  and of record 0.1% of the issued and
outstanding  shares of capital stock of MECAR. Arc Europe owns  beneficially and
of record  0.1% of the issued  and  outstanding  shares of capital  stock of VSK
Electronics. Michele Nihoul owns beneficially and of record 1% of the issued and
outstanding  shares of  capital  stock of  Sedachim  and 0.1% of the  issued and
outstanding shares of capital stock of Hendrickx.

            (e) VSK  Electronics  owns  beneficially  and of  record  all of the
issued and  outstanding  shares of  capital  stock of  Belgian  Automation.  VSK
Electronics owns  beneficially and of record 99.9% of the issued and outstanding
shares of capital  stock of each of IDCS and  Vigitec  and 99% of the issued and
outstanding  shares  of  capital  stock  of  Tele  Technique  Generale.  Belgian
Automation  owns  beneficially  and of record 0.1% of the issued and outstanding
shares of  capital  stock of each of  Vigitec  and IDCS and 1% of the issued and
outstanding shares of capital stock of Tele Technique Generale.

      6.12  Authority.  The  execution  and  delivery  by each  Borrower of this
Agreement and all of the other Financing  Agreements and the performance of each
Borrower's  obligations  hereunder  and  thereunder:  (a) are  within  such Loan
Party's powers; (b) are duly authorized by such Loan Party's board of directors,
managers or  partners  (as  applicable)  and, if  necessary,  such Loan  Party's
stockholders  and/or  other  securityholders  (and  their  respective  governing
boards,   members  or  governing  persons,  as  applicable);   (c)  are  not  in
contravention  of the  terms  of such  Loan  Party's  governing  agreements  and
documents;  (d) are not in  contravention of any law or laws, or of the terms of
any indenture, agreement or undertaking to which any Loan Party is a party or by
which any Loan Party or any of such Loan Party's  property is bound;  (e) do not
require any consent,  registration or approval of any Governmental  Authority or
of any other Person,  except such  consents or approvals as have been  obtained;
(f) do not contravene any contractual  restriction or  Governmental  Requirement
binding  upon any Loan  Party;  and (g) will  not,  except  as  contemplated  or
permitted  by this  Agreement,  result in the  imposition  of any lien,  charge,
security  interest or encumbrance  upon any property of any Loan Party under any
existing indenture,  mortgage,  deed of trust, loan or credit agreement or other
material  agreement or instrument to which any Loan Party is a party or by which
any Loan Party or any of such Loan  Party's  property  may be bound or affected.
Each Borrower shall deliver to Lender, upon Lender's request therefor, a written
opinion of counsel as to the  matters  described  in the  foregoing  clauses (a)
through (g).

      6.13  Binding  Effect.  This  Agreement  and  all of the  other  Financing
Agreements set forth the legal,  valid and binding  obligations of Borrowers and
are enforceable against Borrowers in accordance with their respective terms.

                                      -32-
<PAGE>

      6.14  Correctness  of  Financial  Statements.   The  financial  statements
delivered  from  time  to  time  by  Borrowers  to  Lender  (including,  without
limitation,  any and all Target Company Financial Statements) present fairly the
financial  condition  of  the  applicable   Borrowers  (or  Target  Company,  as
applicable),  and have  been  prepared  in  accordance  with  GAAP  consistently
applied.  Since the date of the most recent  financial  statements  delivered to
Lender,  there  has  been no  materially  adverse  change  in the  condition  or
operation of Borrowers, taken as a whole.

      6.15  Employee  Controversies.  There  are  no  controversies  pending  or
threatened between any Borrower or any of such Borrower's employees,  other than
employee  grievances arising in the ordinary course of such Borrower's  business
or which do not (and  could  not  reasonably  be  expected  to) have a  Material
Adverse Effect.

      6.16  Compliance  with  Laws  and  Regulations.  Each  Loan  Party  is  in
compliance  with  all  Governmental   Requirements   relating  to  the  business
operations  and  the  assets  of  each  Loan  Party,   except  for  Governmental
Requirements,  the violation of which would not have a Material  Adverse Effect.
To  Borrowers'  knowledge,  no Loan  Party  or  Affiliate  thereof  has sold any
ammunition,  weapons  systems or other  products or  services  to any  terrorist
organization or for use by any terrorist organization.

      6.17 Account Warranties.

            (a) Except as disclosed to Lender from time to time in writing,  all
Accounts  of  Borrowers  which  are  reflected  on  the  Company's  consolidated
financial statements delivered to Lender pursuant to Section 7.1 are genuine, in
all respects what they purport to be, have not been reduced to any judgment, are
evidenced  by not  more  than  one  executed  original  agreement,  contract  or
document,  and  represent  undisputed,   bona  fide  transactions  completed  in
accordance with the terms and conditions of any related document.

            (b) The  Accounts  have not been sold or pledged to any Person other
than Lender.

            (c) Except as disclosed  to Lender from time to time in writing,  no
Borrower has any  knowledge of any fact or  circumstance  which would impair the
validity or  collectibility  of any of the Accounts  that in the  aggregate  are
material in amount.

      6.18 Inventory Warranties.

            (a) Except for Goods covered by Documents  that have been  delivered
to  Lender,  and except as  promptly  disclosed  to Lender  from time to time in
writing, all Inventory is located on the premises described in Section 6.5 or is
in transit.

            (b)  Except as  promptly  disclosed  to Lender  from time to time in
writing, all Inventory shall be of good and merchantable  quality, free from any
defects which might affect the market value of such Inventory.

                                      -33-
<PAGE>

      6.19 Solvency. Each Borrower is solvent, able to pay such Borrower's debts
generally  as such debts  mature,  and has capital  sufficient  to carry on such
Borrower's  business  and all  businesses  in which  such  Borrower  is about to
engage.  The saleable value of each Borrower's total assets at a fair valuation,
and at a present fair  saleable  value,  is greater than the amount of such Loan
Party's total obligations to all Persons. No Borrower will be rendered insolvent
by the execution or delivery of this Agreement or of any of the other  Financing
Agreements or by the transactions contemplated hereunder or thereunder.

      6.20 Pension  Reform Act. No events,  including  without  limitation,  any
"reportable  event" or "prohibited  transactions," as those terms are defined in
the Employee  Retirement  Income Security Act of 1974 as the same may be amended
from time to time ("ERISA"),  other than "reportable  events" for which a waiver
or extension applies under ERISA Regulations  Sections  4043.20-35 have occurred
in connection with any type of plan, arrangement, association or fund covered by
ERISA in which any personnel of any Domestic  Borrower or an Affiliate  which is
under  common  control  with  any  Domestic  Borrower  (within  the  meaning  of
applicable  provisions of the IRC) participate  ("Benefit  Plans").  The Benefit
Plans are otherwise in material  compliance  with all  applicable  provisions of
ERISA and the IRC and meet the minimum funding standards of ERISA and the IRC.

      6.21 Margin Security. No Borrower owns any margin security and none of the
loans advanced hereunder shall be used for the purpose of purchasing or carrying
any  margin   securities  or  for  the  purpose  of  reducing  or  retiring  any
indebtedness which was originally  incurred to purchase any margin securities or
for any other  purpose not  permitted by  Regulations  T, U or X of the Board of
Governors of the Federal Reserve System.

      6.22 Investment Company Act Not Applicable.  No Borrower is an "investment
company",  or a company  "controlled"  by an  "investment  company",  within the
meaning of the Investment Company Act of 1940, as amended.

      6.23 Public Utility Holding  Company Act Not Applicable.  No Borrower is a
"holding  company",  or a  "subsidiary  company" of a "holding  company",  or an
"affiliate" of a "holding company", or an affiliate of a "subsidiary company" of
a "holding  company",  or a "public  utility",  as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended.

      6.24 Full  Disclosure.  All  factual  information  taken as a whole in the
materials furnished by or on behalf of any Borrower to Lender for purposes of or
in connection with the  transactions  contemplated  under this Agreement and the
other Financing Agreements,  does not contain any untrue statement of a material
fact or omit to  state  any  material  fact  necessary  to keep  the  statements
contained  therein from being  misleading as of the date of this Agreement,  and
thereafter as supplemented by information provided to Lender in writing pursuant
to this Agreement.  The financial  projections  and other financial  information
furnished to Lender and by Borrowers and to be delivered  under this  Agreement,
were prepared in good faith on the basis of  information  and  assumptions  that
each Borrower believed to be reasonable as of the date of such information.

                                      -34-
<PAGE>

      6.25 Intellectual Property.  Each Loan Party owns or possesses (or will be
licensed or otherwise have the full right to use) all intellectual property that
is necessary for the operation of its business,  without any known conflict with
the  rights  of  others.  No  product  of any  Loan  Party  infringes  upon  any
intellectual  property  owned by any other Person and no claim or  litigation is
pending or (to the  knowledge of any Borrower)  threatened  against or affecting
such Person,  contesting its right to sell or to use any product or material, in
any case which could have a Material  Adverse  Effect.  There is no violation by
any Loan  Party of any right of any Loan  Party  with  respect  to any  material
patent, trademark,  trade name, service mark, copyright or license owned or used
by any Loan Party.

      6.26 Government Contracts.

            (a) No Borrower  has a  Government  Contract,  on which  delivery or
performance is currently in a materially  unsatisfactory or delinquent status or
behind  schedule  or which any  Borrower  knows,  or has  reason  to know  after
reasonable  investigation,  will be in a materially unsatisfactory or delinquent
status or behind schedule in the future.

            (b) No  Borrower  is  currently  debarred  or  suspended  from doing
business  with the  Government,  and no  Borrower  knows of any facts that would
warrant the  institution  of debarment  or  suspension  proceedings  against any
Borrower in the future.

            (c) No show cause notices, cure notices or default terminations have
been issued against any Borrower on any Government  Contract  awarded within the
past five (5) years.

            (d) No negative  determinations of  responsibility  have been issued
against any Borrower with respect to any bid, quotation or proposal submitted by
Borrower to the Government or any prospective prime contractor of the Government
within the past three (3) years.

            (e) No Borrower has any knowledge of any facts or circumstances that
could reasonably be expected to lead to a disallowance of costs, incurred by any
Borrower and allocated to any Government Contract, in excess of $250,000.

            (f) To the  best  of  each  Borrower's  knowledge,  no  Borrower  is
currently under  administrative,  civil or criminal  investigation or indictment
with respect to any alleged irregularity, misstatement or omission arising under
or in any way relating to any  Government  Contracts or any bids,  quotations or
proposals, past or present, submitted to the Government or any prospective prime
contractor  of the  Government,  and no Borrower  has any  knowledge of any such
irregularities,  misstatements or omissions that could reasonably be expected to
lead to an administrative,  civil or criminal investigation or indictment of any
Borrower.

            (g) No Borrower has ever been denied a security clearance.

      6.27 SEC Filings and  Reports.  The Company has  previously  delivered  to
Lender true and complete  copies of: (i) its Annual  Report on Form 10-K for the
fiscal years ended December 31, 2001, 2002 and 2003, respectively, as filed with
the SEC; (ii) Proxy Statements

                                      -35-
<PAGE>

related  to all  meetings  of the  Company's  stockholders  (whether  annual  or
special) during 2001, 2002 and 2003; and (iii) all other reports, statements and
registration  statements  (including  current  reports on Form 8-K and quarterly
reports  on  Form  10-Q)  filed  by it with  the SEC  since  December  31,  1999
(collectively,  together with the SEC filings required to be delivered after the
Closing Date by the Company to Lender under Section  7.1(e),  the "Company's SEC
Reports").  As of their  respective  filing dates, the Company's SEC Reports did
not or, as applicable, will not, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein,  in light of the circumstances  under
which they were made,  not  misleading.  The audited and unaudited  consolidated
financial  statements of the Company  included in the Company's SEC Reports have
been or, as applicable,  will be,  prepared in accordance with GAAP applied on a
consistent  basis  (except as stated in such  financial  statements)  and fairly
present in all material  respects the financial  position of the Company and its
consolidated  Subsidiaries  as of the dates  thereof  and the  results  of their
operations and changes in financial position of the Company and its consolidated
Subsidiaries for the periods then ended,  subject,  in the case of the unaudited
financial  statements,  to normal year-end audit  adjustments which shall not be
materially adverse.

      6.28  Compliance  with  Sarbanes-Oxley  Act.  The  Company  has  taken all
necessary actions to ensure that, at all times, it has been and will continue to
be in compliance  with all applicable  provisions of the  Sarbanes-Oxley  Act of
2002 (the  "Sarbanes-Oxley  Act")  that are then in effect  and the  Company  is
actively  taking  steps  to  ensure  that it will be in  compliance  with  other
applicable provisions of the Sarbanes-Oxley Act not currently in effect upon and
at all times after the effectiveness of such provisions.

      6.29 Projections and Pro Forma Financial Statements.

            (a) Each Pro Forma Balance Sheet hereafter delivered by Borrowers to
Lender  shall be  prepared  in  accordance  with GAAP and fairly  present in all
material   respects  the  assets  and   liabilities   of  the  Company  and  its
Subsidiaries,  reflecting the consummation of the  transactions  contemplated in
the  applicable  Acquisition  Documents and based on the  assumptions  set forth
therein as of the date  thereof.  Such balance sheet shall contain all pro forma
adjustments necessary in order to fairly reflect such assumption.

            (b)  With  respect  to  each  Permitted  Acquisition,   the  related
Projections  required to be delivered  hereunder by Borrowers to Lender shall be
based  on  underlying  assumptions  of  Borrowers  which,  to the  knowledge  of
Borrowers,  shall  provide  a  reasonable  basis for the  projections  contained
therein.  Such Projections shall be prepared on the basis of the assumptions set
forth therein,  which  assumptions will be, to the knowledge of Borrowers,  fair
and reasonable in light of the historical financial performance of Borrowers and
the applicable Target Company and of current and reasonably foreseeable business
conditions,  as of the date hereof, and shall reflect the reasonable estimate of
Borrowers,  as of the date  thereof,  of the  results  of  operations  and other
information projected therein.

                                      -36-
<PAGE>

      6.30 Purchase  Agreements and Subordinated  Debenture  Purchase  Agreement
Representations.

            (a) The transactions  contemplated by each Purchase  Agreement shall
be  consummated  substantially  in  accordance  with the  respective  terms  and
conditions  thereof,  except  for  waivers  of  conditions  consented  to by the
applicable Borrowers in writing. Each Purchase Agreement shall not be altered or
amended or any condition  thereof  waived in a manner  adverse to the applicable
Borrowers without their prior written consent.

            (b) To the knowledge of Borrowers,  each of the  representations and
warranties made by the other parties  thereto in each Purchase  Agreement on the
dates referenced therein shall be true and correct.

            (c) On the Closing Date, each of the  representations and warranties
made in the Subordinated  Debenture  Purchase  Agreement by the Company are true
and  correct  except  for  representations  and  warranties  that  relate  to  a
particular date and, with regard to such  representations  and  warranties,  the
same were true and correct as of such date.  On the Closing  Date, no default or
event  of  default  shall  exist  under  the  Subordinated   Debenture  Purchase
Agreement,  the Subordinated  Debenture or the other Subordinated Loan Documents
after giving effect to the consummation of the transactions  contemplated hereby
and in the other Financing Agreements.

      6.31 Survival of Warranties.  All representations and warranties contained
in this  Agreement or any of the other  Financing  Agreements  shall survive the
execution and delivery of this Agreement and, except for changes in the ordinary
course of business  which are not  prohibited by this  Agreement,  shall be true
from the date of this Agreement until the Liabilities  shall be paid in full and
Lender shall cease to be committed to make Loan Advances under this Agreement.

      7 AFFIRMATIVE COVENANTS.

      Borrowers,  jointly and severally,  covenant and agree that so long as any
Liabilities  remain  outstanding,  and  (even if there  shall be no  Liabilities
outstanding)  so long as Lender  remains  committed to make Loan Advances  under
this Agreement:

      7.1  Financial  and  Other  Information.  Except  as  otherwise  expressly
provided for in this Agreement,  each Borrower shall keep proper books of record
and  account in which full and true  entries  will be made of all  dealings  and
transactions  of or in relation  to the  business  and affairs of such  Borrower
(including, without limitation, all costs incurred, invoices submitted, payments
received and other  transactions  under Government  Contracts in accordance with
the  applicable  Government  cost  accounting  standards  and  regulations),  in
accordance with GAAP consistently  applied,  and each Borrower shall cause to be
furnished to Lender,  from time to time and in a form acceptable to Lender, such
information as Lender may reasonably request,  including without limitation, the
following:

      (a) as soon as  practicable  and in any event  within one  hundred  twenty
(120)  days  after  the end of each  fiscal  year of the  Company,  (i)  audited
consolidated and unaudited

                                      -37-
<PAGE>

consolidating  statements  of  income,  retained  earnings  and cash flow of the
Company for each year, and an audited  consolidated and unaudited  consolidating
balance  sheet of the  Company  for such year,  setting  forth in each case,  in
comparative  form,  corresponding  figures as of the end of the preceding fiscal
year, all in reasonable detail and satisfactory in scope to Lender and certified
to the Company by such  independent  public  accountants  as are selected by the
Company and reasonably  satisfactory to Lender,  whose opinion shall be in scope
and substance satisfactory to Lender; and (ii) a budget of the Company, detailed
by calendar quarter, covering the one year period from the fiscal year end;

      (b) as soon as practicable  and in any event within  forty-five  (45) days
after the end of each  quarterly  accounting  period in each  fiscal year of the
Company: (i) unaudited  consolidated and consolidating  statements of income and
retained  earnings of the Company for such  quarterly  period and for the period
from the beginning of the then current  fiscal year to the end of such quarterly
period,  and an unaudited  consolidated and  consolidating  balance sheet of the
Company as of the end of such quarterly  period,  setting forth in each case, in
comparative form, figures for the corresponding  periods in the preceding fiscal
year, all in reasonable  detail and certified as accurate by the chief financial
officer of the  Company,  subject  to changes  resulting  from  normal  year end
adjustments,  and (ii)  copies  of all  operating  statements  for such  quarter
prepared by the Company for its  internal  use,  including  without  limitation,
statements of cash flow, purchases and sales of Inventory and other Goods;

      (c) as soon as practicable  and in any event within  forty-five  (45) days
after the end of each  quarterly  accounting  period in each  fiscal year of the
Company, a compliance  certificate of the chief financial officer of the Company
in the form attached as Exhibit 7A ("Compliance Certificate");

      (d) promptly after any Borrower's receipt thereof:

            (i) a decision of a Government contracting officer or auditor of the
prime contractor disallowing costs aggregating more than $250,000 allocated to a
Government Contract or a subcontract under a prime contract with the Government;

            (ii)  notice  that  any   Borrower  has  breached  or  violated  any
regulation,  statute,  certification,   representation,   clause,  provision  or
requirement  with  respect  to (A)  any  Government  Contract  or (B)  any  bid,
quotation  or  proposal  submitted  by such  Borrower to the  Government  or any
prospective prime contractor of the Government;

            (iii) a negative  determination of responsibility issued against any
Borrower  with  respect to any bid,  quotation  or  proposal  submitted  by such
Borrower  to  the  Government  or  any  prospective   prime  contractor  of  the
Government;

            (iv) notice that any Borrower's  facility security  clearance or the
security  clearance  of any key  employee  of such  Borrower  has been or may be
revoked or suspended; and

            (v) facts with respect to any alleged irregularity,  misstatement or
omission,  arising under or in any way relating to any  Government  Contracts or
any bids, quotations or

                                      -38-
<PAGE>

proposals, past or present, submitted to the Government or any prospective prime
contractor of the Government,  that could  reasonably be expected to lead to (A)
any  administrative,  civil  or  criminal  investigation  or  indictment  of any
Borrower or any of its employees,  (B) the formal questioning or disallowance of
any costs  submitted  for payment by such  Borrower  (C) the  recoupment  of any
payments previously made to any Borrower, (D) the assessment of any penalties or
damages of any kind against any Borrower or (E) the  suspension or disbarment of
such Borrower;

      (e) within one (1) Business Day after the filing thereof, copies of all of
the  Company's  SEC Reports that are filed by the Company with the SEC after the
Closing Date; provided,  however, that in lieu of delivering to Lender copies of
any of the same that are  available to the public on the SEC's  Electronic  Data
Gathering  and Retrieval  System  (EDGAR),  the Company may provide  Lender with
written notice of the type of filing made and the date thereof; and

      (f) promptly after delivery thereof, copies of all other communications by
the Company with its stockholders.

      7.2 Conduct of Business.  Except as contemplated  by this Agreement,  each
Borrower shall: (a) maintain its existence and maintain in full force and effect
all licenses,  bonds,  franchises,  leases, patents,  contracts and other rights
necessary  to the  conduct  of its  business;  (b)  continue  in,  and limit its
operations to, the same general line of business as that presently  conducted by
it; (c) comply with all Governmental Requirements,  except for such Governmental
Requirements the violation of which would not, in the aggregate, have a Material
Adverse  Effect;  and  (d)  otherwise  do  all  things  necessary  to  make  the
Representations and Warranties set forth in Section 6 of this Agreement true and
correct at all times.

      7.3  Maintenance of Properties.  Each Borrower shall keep its real estate,
leaseholds,  equipment  and other  fixed  assets in good  condition,  repair and
working  order,  normal wear and tear  excepted,  and shall not allow any of the
Collateral  to be moved from the  locations  set forth in Section  6.5 (or to be
placed on  consignment)  without the written  consent of Lender,  which  consent
shall not be  unreasonably  withheld.  Each Borrower shall keep the Inventory in
good and merchantable condition and shall, as applicable, shelter, store, secure
and  otherwise  maintain the  Inventory in  accordance  with the  standards  and
practices  adhered  to  generally  by  others  in the  same  businesses  as such
Borrower.  At least  thirty (30) days prior to entering  into any  agreement  to
lease any additional  real property (a "New Lease") or any agreement to purchase
or acquire fee simple title to any  additional  real property,  Borrowers  shall
give Lender written notice thereof  together with the copies of all  agreements,
documents  and  instruments  proposed  to be  entered  into by any  Borrower  in
connection therewith.

      7.4 Borrowers'  Liability  Insurance.  Borrowers shall maintain,  at their
expense,  such liability insurance  (including as applicable  commercial general
liability  insurance,  products liability  insurance and workman's  compensation
insurance) as is ordinarily maintained by other companies in similar businesses,
provided,  however,  that in no event shall such liability insurance provide for
coverage less than  $1,000,000 per occurrence for personal injury and $1,000,000
per occurrence for property damage.  Borrowers'  liability insurance may provide
for

                                      -39-
<PAGE>

a  deductible  of not more than  $10,000 per  occurrence.  All such  policies of
insurance shall be in form and with insurers reasonably acceptable to Lender and
copies thereof, together with all amendments and schedules, shall be provided to
Lender within ten (10) days of Borrowers'  receipt of the same.  Lender shall be
shown as an additional named insured party under all such insurance policies.

      7.5 Borrowers' Property  Insurance.  Borrowers shall bear the full risk of
loss from any cause of any nature  whatsoever in respect to the  Collateral.  At
Borrowers'  own cost and  expense,  Borrowers  shall keep all  Collateral  fully
insured, with carriers, and in amounts acceptable to Lender, against the hazards
of fire, theft, collision, spoilage, hail, those covered by extended or all risk
coverage insurance and such others as may be required by Lender. Borrowers shall
cause to be  delivered  to Lender  the  insurance  policies  therefor  or proper
certificates  evidencing  the  same.  Such  policies  shall  provide,  in manner
satisfactory to Lender, that any losses in excess of $50,000 under such policies
shall be payable first to Lender, for the ratable benefit of Lender, as Lender's
interest may appear.  Each such policy shall include a provision for thirty (30)
days' prior written notice to Lender of any  cancellation or expiration and show
Lender,  as agent for the  benefit of  Lender,  as  mortgagee  and loss payee as
provided  in  a  form  of  loss  payable   endorsement  in  form  and  substance
satisfactory to Lender. In the event of any loss in excess of $50,000 covered by
any such  policy,  the carrier  named in such policy is directed by Borrowers to
make payment for such loss to Lender, for the ratable benefit of Lender, and not
to any  Borrower.  In the event of any loss in excess of $50,000  covered by any
such  insurance  policies  or so long as any  Default  or  Matured  Default  has
occurred and is continuing, each Borrower makes, constitutes and appoints Lender
(and all Persons  designated by Lender) as such Borrower's true and lawful agent
and  attorney-in-fact,  with power to make,  settle or adjust  claims under such
policies of insurance (provided,  however,  that so long as there shall not have
occurred a Matured  Default,  Lender  shall  consult  with the Company  prior to
finally  making,  settling or adjusting  claims under such policies of insurance
and will not settle such claims  without the  Company's  consent,  which consent
will not be unreasonably  withheld).  The foregoing power of attorney is coupled
with an interest  and is  therefore  irrevocable.  If payment as a result of any
insurance losses shall be paid by check,  draft or other  Instrument  payable to
any  Borrower,  or to any  Borrower and Lender  jointly,  and such payment is in
excess  of  $50,000  or a  Default  or  Matured  Default  has  occurred  and  is
continuing,  Lender may  endorse  the name of each  applicable  Borrower on such
check,  draft or other  Instrument,  and may do such other  things as Lender may
deem  advisable  to reduce the same to cash.  Subject to the  provisions  of the
Leasehold  Mortgages referred to in Section 5.1, all loss recoveries received by
Lender on account of any such insurance may be applied and credited by Lender to
the Liabilities.  Insurance  proceeds that are not applied to the Liabilities or
used for  property  replacement  shall be paid to  Borrowers  as directed by the
Company. In the event it is reasonably determined by Lender that a deficiency in
the ability of Borrowers to repay the  Liabilities  exists after  application or
use of insurance  proceeds,  then such deficiency (but only up to the amount, if
any by which  the  value of the  property,  the loss of which  resulted  in such
insurance recovery,  exceeds the insurance proceeds received by Lender) shall be
paid by  Borrowers  to  Lender  on  demand.  If any  Borrower  fails to  procure
insurance as provided in this Agreement,  or to keep the same in force, or fails
to perform any of such Borrower's other obligations hereunder,  then Lender may,
at the option of Lender,  and without obligation to do so, obtain such insurance
and pay the premium  thereon for the account of such Borrower,  or make whatever
other payments

                                      -40-
<PAGE>

Lender may deem  appropriate to protect  Lender's  security for the Liabilities.
Any such  payments  shall be  additional  Liabilities  of  Borrowers  to Lender,
payable on demand and secured by the  Collateral.  To the extent the  provisions
relating to insurance in any  Leasehold  Mortgage or any Mortgage are  different
from the  provisions  relating to insurance in this Section 7.5, the  provisions
relating to insurance in such Leasehold Mortgage and/or Mortgage, as applicable,
shall be controlling with respect to the Property covered thereby.

      7.6 Financial  Covenants and Ratios. The Company shall maintain at the end
of each fiscal quarter commencing with the fiscal quarter ending March 31, 2004:

      (a) Minimum  EBITDA.  EBITDA for the four (4) fiscal quarters ending March
31, 2004 of not less than  $14,000,000;  EBITDA for the four (4) fiscal quarters
ending June 30, 2004 of not less than  $14,000,000;  prior to the  completion of
Borrowers' initial Permitted  Acquisition after the date hereof,  EBITDA for the
then  preceding  four  fiscal  quarters  of  not  less  than  $15,000,000;   and
thereafter,  EBITDA for then  preceding  four  fiscal  quarters of not less than
$19,000,000.

      (b) Senior  Leverage  Ratio. A Senior  Leverage Ratio as of the end of any
fiscal quarter ending after December 31, 2003 of not more than 1.50:1.

      (c)  Minimum  Net  Worth.  A Net  Worth  of not  less  than the sum of (i)
$77,000,000  plus (ii) 50% of the  Company's  consolidated  Net  Income  for the
period from January 1, 2004 through the applicable date of  determination  (with
no deduction for any fiscal year in which the Company's Net Income is negative).

      (d) Maximum Subordinated Debt. Consolidated  Subordinated Debt of not more
than $17,500,000.

      7.7 Benefit Plans.  Each Domestic  Borrower shall:  (a) keep in full force
and effect any and all Benefit  Plans which are  presently  in existence or may,
from time to time,  come into existence  under ERISA,  unless such Benefit Plans
can be terminated without material liability to such Borrower in connection with
such termination (as distinguished from any continuing funding obligation);  (b)
make  contributions  to all  Benefit  Plans in a timely  manner and in an amount
sufficient  to comply  with the  requirements  of  ERISA;  (c)  comply  with all
requirements of ERISA which relate to such Benefit Plans;  and (d) notify Lender
immediately  upon  receipt  by  any  Domestic  Borrower  of  any  notice  of the
institution of any proceeding or other action relating to any Benefit Plans that
would reasonably be expected to have a Material Adverse Effect.

      7.8 Notice of Suit,  Adverse Change in Business or Default.  Each Borrower
shall,  as soon as  possible,  and in any event  within five (5) days after such
Borrower  learns of the  following,  give  written  notice to Lender of: (a) any
proceeding  being  instituted  or threatened to be instituted by or against such
Borrower in any federal,  state, local or foreign court or before any commission
or other  regulatory body (federal,  state,  local or foreign) for which claimed
damages  exceed  $100,000;  (b) any adverse  change in the  business,  assets or
condition,  financial or  otherwise,  of such  Borrower  resulting in a Material
Adverse Effect; and (c) the occurrence of any Default.

                                      -41-
<PAGE>

      7.9 Use of  Proceeds.  Borrowers  shall  use  Loan  Advances  only for the
purposes stated in Section 2.5 and for no other purpose.

      7.10 Books and  Records.  Each  Borrower  shall  maintain  proper books of
record and account in accordance with GAAP  consistently  applied in which true,
full and  correct  entries  will be made of all their  respective  dealings  and
business affairs. If any changes in accounting principles are hereafter required
or permitted by GAAP and are adopted by any Borrower with the concurrence of its
independent  certified  public  accountants and such changes in GAAP result in a
change  in  the  method  of  calculation  or  the  interpretation  of any of the
financial  covenants,  standards  or terms  found in  Section  7.6 or any  other
provision  of this  Agreement,  Borrowers  and  Lender  agree to amend  any such
affected  terms and  provisions  so as to reflect  such changes in GAAP with the
result that the criteria for evaluating  Borrowers' financial condition shall be
the same  after  such  changes  in GAAP as if such  changes in GAAP had not been
made.

      7.11 Compliance with Material Agreements. Each Borrower will comply in all
material  respects  with  all  Debts,  Obligations,   agreements,  covenants  or
conditions  contained  in any  bond,  debenture,  notice  or other  evidence  of
indebtedness  or in  any  material  contract,  Government  contract,  indenture,
mortgage,  loan agreement,  franchise  agreement,  joint venture,  lease, rental
agreement  and other  agreements  binding  it or  affecting  its  properties  or
business.

      7.12 Board and Stockholders' Meetings and Actions.

      (a) Except for regular or general stockholders'  meetings held exclusively
for routine corporate  household purposes (being the approval of annual accounts
and the appointment or discharge of directors and auditors, but not including in
particular the declaration of dividends), Borrowers shall provide, and cause all
Loan Parties to timely provide,  Lender copies of the following documents within
the time periods specified below:

            (i) any  convening  notice  or agenda  of any  meeting  of the Board
and/or  stockholders  of any Loan Party  (which  documents  shall be provided to
Lender  at  the  same  time  as  they  are  provided  to  the  directors  and/or
stockholders,  as applicable, but in no event later than seven (7) days prior to
the applicable meeting);

            (ii) minutes of each meeting  referenced in clause (i), above (which
minutes shall be provided to Lender  within  fifteen (15) days after the holding
of the relevant meeting); and

            (iii)  any  written   actions   taken  by  any  such   directors  or
stockholders  in lieu of a meeting)  (which written actions shall be provided to
Lender at least two (2) days prior to the execution of the same).

      (b) Without the prior written consent of Lender,  none of the Loan Parties
shall,  and  Borrowers  shall  cause the Loan  Parties  not to,  consent  to any
amendment,  supplement or modification of any terms or provisions  contained in,
or applicable to the bylaws of any of the

                                      -42-
<PAGE>

Loan Parties if the effect thereof could reasonably be expected to be adverse to
Lender hereunder.

      (c) Each Borrower  undertakes  not to allow any of the Loan Parties' Board
meetings or  stockholders'  meetings to deliberate  upon any items that have not
been specifically mentioned in a written notice or agenda theretofor provided to
Lender  in  accordance  with  Section  7.12(a)(i),  except as may  otherwise  be
required under applicable law.

      8 NEGATIVE COVENANTS.

      Borrowers,  jointly and severally,  covenant and agree that so long as any
Liabilities  remain  outstanding,  and  (even if there  shall be no  Liabilities
outstanding)  so long as Lender  remains  committed to make Loan Advances  under
this Agreement (unless Lender shall give Lender's prior written consent):

      8.1 Encumbrances.

            (a) Except for those  liens,  security  interests  and  encumbrances
presently  in existence  and  reflected in the  Company's  financial  statements
referred to in Section 6.14 and  disclosed  in Exhibit 6A under  Section 6.4, no
Domestic  Borrower shall create,  incur,  assume or suffer to exist any security
interest,   mortgage,   pledge,  lien,   capitalized  lease,  levy,  assessment,
attachment,  seizure, writ, distress warrant, or other encumbrance of any nature
whatsoever  on or  with  regard  to  any  of  such  Domestic  Borrower's  assets
(including,  without limitation,  any Collateral) other than: (a) liens securing
the  payment  of taxes,  either  not yet due or the  validity  of which is being
contested  in good  faith  by  appropriate  proceedings,  and as to  which  such
Domestic  Borrower shall, if appropriate under GAAP, have set aside on its books
and records  adequate  reserves;  (b) liens securing  deposits  under  workmen's
compensation, unemployment insurance, social security and other similar laws, or
securing  the  performance  of  bids,  tenders,  contracts  (other  than for the
repayment of borrowed money) or leases,  or securing  indemnity,  performance or
other similar bonds for the performance of bids, tenders,  contracts (other than
for  the  repayment  of  borrowed  money)  or  leases,  or  securing   statutory
obligations  or surety or appeal bonds,  or securing  indemnity,  performance or
other similar bonds in the ordinary course of such Domestic Borrower's business,
which are not past due; (c) liens and security  interests in favor of Lender for
the ratable benefit of Lender; (d) liens securing the interests of Broker in any
Margin Account;  (e) zoning  restrictions,  easements,  licenses,  covenants and
other restrictions  affecting the use of such Domestic Borrower's real property,
and other liens,  security  interests  and  encumbrances  on property  which are
subordinate  to the liens and security  interests of Lender and which do not, in
Lender's sole determination:  (i) materially impair the use of such property, or
(ii) materially lessen the value of such property for the purposes for which the
same is held  by  such  Domestic  Borrower;  and  (f)  purchase  money  security
interests  securing  amounts  relating to items of  equipment  or other  capital
assets (provided that no such purchase money security  interests shall extend to
or cover  other  property  of such  Domestic  Borrower  other  than the items of
equipment or other capital assets so acquired).

            (b) No Borrower shall create,  incur,  assume or suffer to exist, or
permit any of its Subsidiaries to create,  incur, assume or suffer to exist, any
security interest, pledge, lien, levy,

                                      -43-
<PAGE>

assessment,  attachment, seizure, writ, distress warrant or other encumbrance of
any nature  whatsoever  on or with regard to any shares of capital  stock of any
Subsidiary  of  the  Company  (including,   without   limitation,   any  Foreign
Subsidiary)  other than (i) liens,  security  interests  and pledges in favor of
Lender  and (ii)  liens on,  security  interests  in,  and  pledges of shares of
current and future Subsidiaries of VSK Electronics.  Borrowers shall give Lender
at least  thirty  (30)  days'  prior  written  notice of the grant to any Person
(other than Lender) of a lien on,  security  interest in or pledge of any shares
of any Subsidiary of VSK Electronics.

      8.2  Consolidations,  Mergers or Acquisitions.  No Domestic Borrower shall
recapitalize  or  consolidate  with,  merge with,  or  otherwise  acquire all or
substantially  all of the assets or properties  of any other Person,  other than
pursuant to a Permitted Acquisition.

      8.3 Deposits,  Investments,  Advances or Loans. No Domestic Borrower shall
make or permit to exist  deposits,  investments,  advances or loans  (other than
loans  existing on the date of the execution of this  Agreement and disclosed to
Lender in  writing on or prior to such  date) in or to  Affiliates  or any other
Person,  except:  (a) investments in short term direct obligations of the United
States  Government and other  Permitted  Investments  (as defined in the Deposit
Account  Security  Agreement);  (b)  investments in negotiable  certificates  of
deposit  issued  by  a  bank  satisfactory  to  Lender  in  Lender's  reasonable
determination,  made payable to the order of such Borrower or to bearer; and (c)
loans to officers,  directors,  employees or Affiliates as and when permitted by
Section 8.8.

      8.4  Indebtedness.  Except  for those  obligations  and that  indebtedness
presently  in existence  and  reflected in the  Company's  financial  statements
referred to in Section 6.14 or referred to in Section 6.7, no Domestic  Borrower
shall incur, create,  assume, become or be liable in any manner with respect to,
or permit to exist, any obligations or indebtedness, direct or indirect fixed or
contingent,  including  obligations under capitalized  leases,  except:  (a) the
Liabilities;  (b) consolidated Subordinated Debt of the Company of not more than
$17,500,000;  (c) obligations  secured by liens or security interests  permitted
under Section 8.1 or  contingent  obligations  permitted  under Section 8.5; (d)
unsecured or secured (per Section 8.1(f)) debt incurred  (including  obligations
incurred  under  capitalized  leases) to purchase  items of  equipment  or other
capital  assets up to the limits in each fiscal year of such  Domestic  Borrower
set forth in Section  8.7;  and (e) trade  obligations,  Producer  Payables  and
normal accruals in the ordinary course of such Domestic  Borrower's business not
yet due and  payable,  or with  respect  to  which  such  Domestic  Borrower  is
contesting  in  good  faith  the  amount  or  validity  thereof  by  appropriate
proceedings,  and then only to the extent that such  Domestic  Borrower  has set
aside  on  such  Domestic  Borrower's  books  adequate  reserves  therefor,   if
appropriate under GAAP.

      8.5 Guarantees and Other Contingent Obligations. Except as permitted under
Section 8.4, no Domestic  Borrower shall guarantee,  endorse or otherwise in any
way become or be responsible  for  obligations  of any other Person,  whether by
agreement to purchase the indebtedness of such Person or through the purchase of
Goods,  supplies or services, or maintenance of working capital or other balance
sheet  covenants  or  conditions,   or  by  way  of  stock   purchase,   capital
contribution,  advance  or loan for the  purpose  of paying or  discharging  any
indebtedness  or  obligation  of  such  Person  or  otherwise,  except:  (a) for
endorsements of negotiable  Instruments for collection in the ordinary course of
business; and (b) that any Loan

                                      -44-
<PAGE>

Party may indemnify its officers, directors and managers to the extent permitted
under the laws of the jurisdiction in which such Loan Party is organized.

      8.6  Disposition  of Property.  Except as permitted  by Section  5.14,  no
Domestic  Borrower shall sell,  lease,  transfer or otherwise  dispose of any of
such Borrower's properties, assets or rights.

      8.7 Capital  Expenditure  Limitations.  The Domestic  Borrowers  shall not
incur Capital  Expenditures  during any fiscal year of the Company in excess of:
(i)  $1,750,000  from the Closing  Date  through  December  31,  2004;  and (ii)
$750,000 during any fiscal year  thereafter;  provided,  however,  to the extent
that Capital  Expenditures  are less than that  allowed in a fiscal  year,  then
fifty percent (50%) of the difference shall be added to the limitation otherwise
applicable to the following  fiscal year; and provided,  further,  that upon any
Borrower's  consummation  of a Permitted  Acquisition,  the parties hereto shall
negotiate in good faith reasonable adjustments to the foregoing amounts

      8.8 Affiliate Transactions. Except for advances for travel and expenses to
a  Domestic  Borrower's  officers,  directors,  managers,  general  partners  or
employees  in the  ordinary  course of such  Borrower's  business,  no  Domestic
Borrower shall make any loans or other payments,  or transfer any assets, to any
Affiliate of any Borrower (other than to other Borrowers).  Without limiting the
foregoing, no Domestic Borrower shall, directly or indirectly, make any loans or
other payments,  or transfer any assets, to any Foreign  Subsidiary  without the
prior  written  consent of Lender in each  instance.  In  addition,  no Domestic
Borrower shall enter into or be a party to any  transaction or arrangement  with
any Affiliate of any Borrower (other than other  Borrowers)  including,  without
limitation,  the purchase from, sale to or exchange of property with, any merger
or  consolidation  with or into,  or the rendering of any service by or for, any
such party,  except  pursuant to the reasonable  requirements of such Borrower's
business and upon fair and  reasonable  terms no less favorable to such Borrower
than would be obtained in a comparable  arm's-length  transaction  with a Person
other than any such Affiliate.

      8.9  Distributions  in Respect of Equity;  Prepayment of Debt. No Domestic
Borrower shall directly or indirectly:  (a) make any distributions in respect of
or redeem any of such Borrower's  equity interests other than dividends or other
distributions  to other Borrowers or to pay income tax liabilities of the direct
and indirect holders of such Borrower's  equity interests on the income and gain
of such  Borrower  allocated  to such  holders;  or (b)  prepay  any  principal,
interest or other  payments on or in connection  with any  indebtedness  of such
Borrower other than the Liabilities.

      8.10 Amendment of Organizational Documents; Subsidiaries.

            (a) Except as otherwise  consented  to by Lender in writing,  (i) no
Borrower shall amend its  articles/certificate of incorporation or organization,
bylaws,  operating  agreement or partnership  agreement,  as applicable,  or any
other agreement,  instrument or document affecting such Borrower's organization,
management or governance,  (ii) no Domestic Borrower shall form any Subsidiaries
(other than  Subsidiaries  existing  as of the date hereof and any  Subsidiaries
formed in accordance with Section 8.10(b),  below),  and (iii) the Company shall
at

                                      -45-
<PAGE>

all times own, directly or indirectly,  one hundred percent (100%) of the issued
and  outstanding  shares of  capital  stock and other  equity  interests  of all
Foreign Subsidiaries.

            (b) Upon the creation of any additional Subsidiaries of any Borrower
permitted  hereunder,  such Borrower shall  immediately cause such Subsidiary to
execute and deliver to Lender an allonge to the Note and a joinder agreement, in
form and content  acceptable to Lender,  pursuant to which such Subsidiary shall
agree to (i) become an  additional  Borrower  thereunder  and  hereunder  and an
additional  Pledgee under the Master  Pledge  Agreement and (ii) be bound by the
terms and conditions hereof and thereof to the same extent as if such Subsidiary
were an original  party hereto and thereto.  In addition,  each  Borrower  shall
cause any such  additional  Subsidiary  to  immediately  deliver  to Lender  all
certificated  Ownership Interests (as defined in the Master Pledge Agreement) in
such additional  Subsidiary and stock powers or other transfer  instruments with
respect to such Ownership Interests endorsed in blank.

      8.11 Use of Names or  Trademarks.  No Borrower shall use any trademarks or
trade names other than those referred to in Section 6.8.  Except as set forth in
this Section  8.11,  no Borrower  shall use any  trademarks  or trade names with
respect to  Inventory  except for such  trademarks  or trade  names as have been
properly licensed to Lender for the ratable benefit of Lender. Each Borrower may
package  inventory  for sale to customers  using those  customers  trademarks or
trade names provided that: (a) the customer is  creditworthy,  in the reasonable
determination  of Lender;  and (b) the  inventory  so  packaged  is covered by a
purchase order from the customer (or is reasonably  expected by such Borrower to
be  covered by a purchase  order from the  customer  within ten (10) days of the
date the inventory is ready to be sold).

      8.12  Amendment  of  Subordinated  Loan  Documents.  Except  as  otherwise
specifically provided in the Subordination Agreement,  Borrowers shall not cause
or  permit,   directly  or  indirectly,   any  amendment,   waiver,  consent  or
modification  of the  Subordinated  Loan  Documents  without  the prior  written
consent of Lender; provided,  however, that the foregoing shall not preclude any
holder of the  Subordinated  Debenture  from  waiving any default by the Company
under  the  Subordinated   Debenture  Purchase  Agreement  or  the  Subordinated
Debenture or from waiving  compliance by the Company with any  provisions of the
Subordinated Debenture Purchase Agreement or the Subordinated Debenture.

      8.13 Unconditional Purchase Obligations.  No Domestic Borrower shall enter
into or be a party to any contract for the  purchase of  materials,  supplies or
other property or services if such contract  requires that payment be made by it
regardless of whether delivery is ever made of such materials, supplies or other
property or services.

      8.14 Inconsistent  Agreements.  No Borrower shall enter into any agreement
containing  any  provision  which  would  (a) be  violated  or  breached  by any
borrowing by Borrowers  hereunder or by the  performance  by Borrowers of any of
their obligations hereunder or under any other Financing Agreement, (b) prohibit
Domestic Borrowers from granting to Lender a lien, mortgage or security interest
on or in any of their  assets  or (c)  create  or  permit  to  exist  or  become
effective  any  encumbrance  or  restriction  on the  right of any  Borrower  or
Subsidiary  thereof  to (i) pay  dividends  or make  other  distribution  to any
Borrower or any Subsidiary of any Borrower, or pay any debt owed to any Domestic
Borrower or any Subsidiary

                                      -46-
<PAGE>

of any Borrower,  (ii) make loans or advances to any Borrower or (iii)  transfer
any of its assets or properties to any Borrower.

      8.15 Fiscal Year. No Borrower  shall change its fiscal year from being the
same as the calendar year.

      9 DEFAULT AND RIGHTS AND REMEDIES.

      9.1  Liabilities.  Upon a  Matured  Default,  Lender  may,  by  notice  to
Borrowers,  (i)  declare the  obligation  of Lender to make Loan  Advances,  the
Working  Capital  Commitment  and the  Acquisition  Commitment to be terminated,
whereupon  such  obligation of Lender,  the Working  Capital  Commitment and the
Acquisition Commitment shall terminate,  and (ii) declare all of the Liabilities
to be due and payable,  whereupon  the  Liabilities  shall become and be due and
payable,  without  presentment,  demand,  protest or further  notice  (including
without  limitation,  notice of intent to accelerate and notice of acceleration)
of any kind, all of which are expressly waived by Borrowers.

      9.2 Rights and Remedies. Upon the occurrence and during the continuance of
any  Matured  Default,  Lender  may  (subject  to the  provisions  of the  other
Financing Agreements) proceed to protect and enforce the rights of Lender as set
forth in this Section 9.2.

      (a) Rights and Remedies  Generally.  Lender may proceed by suit in equity,
by action at law or both,  whether for the specific  performance of any covenant
or agreement  contained in this Agreement or in any other Financing Agreement or
in aid of the  exercise  of any power  granted  in this  Agreement  or any other
Financing Agreement,  (i) to enforce the payment of the Liabilities,  or (ii) to
foreclose upon any liens, claims, security interests and/or encumbrances granted
pursuant to this  Agreement  and other  Financing  Agreements  in the manner set
forth therein;  it being intended that no remedy  conferred  herein or in any of
the other Financing  Agreements is to be exclusive of any other remedy, and each
and every remedy contained  herein or in any other Financing  Agreement shall be
cumulative  and shall be in addition to every other remedy given  hereunder  and
under the  other  Financing  Agreements,  or at any time  existing  at law or in
equity or by statute or  otherwise.  Lender shall have, in addition to any other
rights and remedies contained in this Agreement or in any of the other Financing
Agreements,  all of the rights and remedies of a secured party under the Code or
other  applicable  laws. In addition to all such rights and remedies,  the sale,
lease or other  disposition of all or any part of the Collateral by Lender after
a Matured Default,  may be for cash, credit or both, and Lender may purchase all
or any part of the  Collateral at public or, if permitted by law,  private sale,
and in lieu of actual payment of such purchase  price,  may setoff the amount of
such  purchase  price  against  the  Liabilities  then  owing.  Any sales of the
Collateral  may  involve the sale of portions  of the  Collateral  at  different
times, and at different  locations,  and may, at Lender's  option,  be held at a
site or sites different from the site at which all or any part of the Collateral
is located.  Any such sales, at Lender's  option,  may be in conjunction with or
separate from the  foreclosure of any mortgage on any  Collateral  consisting of
real property,  and may be adjourned  from time to time with or without  notice.
Lender  may,  in its sole  discretion,  cause  the  Collateral  to remain on the
applicable  Borrower's  premises,  at Borrowers' expense,  pending sale or other
disposition of the Collateral. Lender shall have the right to conduct such sales
on any

                                      -47-
<PAGE>

Borrower's  premises,  at Borrowers' expense, or elsewhere,  on such occasion or
occasions as Lender may see fit.

      (b) Entry upon Premises. Subject to any applicable security clearance of a
Governmental  Authority or any other  restrictions  under applicable law, Lender
shall have the right to enter upon the  premises of any Borrower at which any of
the Collateral is located (or is believed to be located)  without  incurring any
obligation to pay rent to any  Borrower,  or any other place or places where the
Collateral  is located (or is believed to be located)  and kept,  and remove the
Collateral  therefrom to the premises of Lender or any agent of Lender, for such
time as Lender may desire,  in order to  effectively  collect or  liquidate  the
Collateral,  or Lender may require Borrowers to assemble the Collateral and make
it available to Lender at a place or places to be  designated by Lender which is
reasonably  convenient to both  parties.  Each  Borrower  expressly  agrees that
Lender may, if necessary to gain  occupancy to the premises at which  Collateral
is  located  (or is  believed  to be  located),  without  further  notice to any
Borrower:  (a) hire any  Borrower's  employees  to  assist  in the  loading  and
transportation of such Collateral;  (b) utilize any Borrower's equipment for use
in such operation;  (c) cut or otherwise  temporarily  move or remove any barbed
wire or other fencing or similar  boundary-maintenance  devices; and (d) pick or
otherwise render inoperative any locks on any property not customarily inhabited
by people. Each Borrower agrees that any such actions authorized by this Section
shall be  authorized  and not a breach of the peace if Lender  takes  reasonable
efforts to safeguard all of such Borrower's property.

      (c) Sale or Other Disposition of Collateral by Lender. Any notice required
to be given by Lender of a sale,  lease or other  disposition  or other intended
action by Lender with respect to any of the Collateral which is deposited in the
United  States  mail,  postage  prepaid and duly  addressed to a Borrower at the
address  specified in Section  10.19,  at least ten (10)  business days prior to
such proposed action,  shall constitute fair and commercially  reasonable notice
to such  Borrower of any such action.  The net proceeds  realized by Lender upon
any such sale or other disposition, after deduction for the expense of retaking,
holding,  preparing for sale, selling or the like, and the reasonable legal fees
and expenses and other proper fees and expenses incurred by Lender in connection
therewith, shall be applied toward satisfaction of the Liabilities. Lender shall
account  to  Borrowers  for  any  surplus  realized  upon  such  sale  or  other
disposition,  and Borrowers shall remain, jointly and severally,  liable for any
deficiency. The commencement of any action, legal or equitable, or the rendering
of any judgment or decree for any deficiency, shall not affect Lender's security
interest in the Collateral until the Liabilities shall have been paid in full.

      9.3 Waiver of Demand. Each Borrower expressly waives demand,  presentment,
protest,  notice of  nonpayment,  notice of intent to  accelerate  and notice of
acceleration.  Each Borrower also waives the benefit of all valuation, appraisal
and exemption laws.

      9.4 Waiver of Notice.  Upon the occurrence  and during the  continuance of
any Matured Default,  each Borrower  waives,  to the fullest extent permitted by
applicable  law,  all  rights to notice  and  hearing  of any kind  prior to the
exercise  by Lender of  Lender's  rights to  repossess  the  Collateral  without
judicial process or to replevy, attach or levy upon the Collateral.

                                      -48-
<PAGE>

      9.5 Verification of Borrowing Notices.  The natural Person(s) signing this
Agreement on behalf of Borrowers,  or any natural Person  designated by them (or
any one of them)  shall  be  presumed  to have the  authority  to  request  Loan
Advances  under  this  Agreement.  Lender  shall  have  no duty  to  verify  the
authenticity  of the signature  appearing on any notice of  borrowing,  and with
respect to any oral  request for a Loan  Advance,  Lender  shall have no duty to
verify the  identity  of any Person  representing  himself as one of the natural
Persons authorized to make such request on behalf of any Borrower.  Lender shall
not incur any  liability  to any Borrower in acting upon any  telephonic  notice
referred  to above which  Lender  believes in good faith to have been given by a
duly  authorized  Person  authorized  to borrow on behalf of any Borrower or for
otherwise acting in good faith.

      10 MISCELLANEOUS.

      10.1 Timing of  Payments.  For  purposes of  determining  the  outstanding
balance of the Liabilities,  including without  limitation,  the computations of
interest  which may from time to time be owing to Lender,  the receipt by Lender
of any check or any other item of payment  whether  through a blocked account or
lockbox described in Section 5.6 or otherwise, shall not be treated as a payment
on  account  of the  Liabilities  until  such  check or other item of payment is
actually received by Lender and is paid to Lender in cash or a cash equivalent.

      10.2  Attorneys'  Fees and Costs. If at any time Lender employs counsel in
connection  with  protecting or  perfecting  Lender's  security  interest in the
Collateral or in connection  with any matters  contemplated by or arising out of
this Agreement, whether: (a) to commence, defend, or intervene in any litigation
or to file a petition,  complaint, answer, motion or other pleading; (b) to take
any other action in or with  respect to any suit or  proceeding  (bankruptcy  or
otherwise);  (c) to consult with officers of Lender to advise Lender or to draft
documents  for Lender in  connection  with any of the foregoing or in connection
with any  release of  Lender's  claims or  security  interests  or any  proposed
extension,  amendment or  refinancing  of the  Liabilities  or any proposed Loan
Advance or Permitted  Acquisition;  (d) to protect,  collect,  lease, sell, take
possession of, or liquidate any of the Collateral;  or (e) to attempt to enforce
or to enforce any security interest in any of the Collateral,  or to enforce any
rights of Lender to collect any of the Liabilities;  then in any of such events,
all of the  reasonable  attorneys'  fees  arising  from such  services,  and any
related expenses, costs and charges,  including without limitation,  all fees of
all  paralegals,  legal  assistants  and other staff  employed by such attorneys
whether outside Lender or in Lender's legal  department,  together with interest
at the highest  interest rate then payable by Borrowers  under this Agreement or
any other Financing Agreement, shall constitute additional Liabilities,  payable
on demand and secured by the Collateral.  In addition,  if a Matured Default has
occurred and is continuing,  and thereafter Lender employs counsel in connection
with, arising out of, or any way related to, protecting, exercising or enforcing
Lender's  interest in the  Collateral or this  Agreement or the other  Financing
Agreements or (f) to commence,  defend or intervene in any litigation or to file
a petition,  complaint,  answer, motion or other pleading; (g) to take any other
action in or with respect to any suit or proceeding  (bankruptcy  or otherwise);
(h) to protect,  collect,  lease,  sell, take possession of, or liquidate any of
the Collateral; or (i) to attempt to enforce or to enforce any security interest
in any of the  Collateral,  or to enforce any rights of Lender to collect any of
the Liabilities;  then in any of such events,  all of the reasonable  attorneys'
fees arising from such services, and any reasonable

                                      -49-
<PAGE>

expenses, costs and charges relating thereto,  including without limitation, all
reasonable fees of all paralegals,  legal assistants and other staff employed by
such attorneys whether outside Lender or in Lender's legal department,  together
with interest at the highest  interest rate then payable by Borrowers under this
Agreement  or  any  other  Financing  Agreement,   shall  constitute  additional
Liabilities,  payable on demand and secured by the Collateral. This Section 10.2
shall survive the termination of this Agreement.

      10.3  Expenditures by Lender. In the event that any Borrower shall fail to
pay taxes,  insurance,  assessments,  costs or expenses  which such Borrower is,
under any of the  terms  hereof  or of any of the  other  Financing  Agreements,
required  to pay,  or fails to keep the  Collateral  free  from  other  security
interests,  liens or encumbrances,  except as permitted  herein,  Lender may, in
Lender's sole discretion and without  obligation to do so, make expenditures for
any or all of such purposes, and the amount so expended,  together with interest
at the highest  interest rate then payable by Borrowers  under this Agreement or
any other Financing Agreement, shall constitute additional Liabilities,  payable
on demand and secured by the Collateral.

      10.4  Lender's  Costs and Expenses as  Additional  Liabilities.  Borrowers
shall reimburse  Lender for all expenses and fees paid or incurred in connection
with the  documentation,  negotiation and closing of the Loan, each Loan Advance
and  other  financial  accommodations  described  in this  Agreement  (including
without  limitation,  filing fees,  recording fees, document or recording taxes,
search fees, appraisal fees and expenses,  and the fees and expenses of Lender's
attorneys,  paralegals,  and  legal  assistants,  whether  outside  Lender or in
Lender's legal department, and whether such expenses and fees are incurred prior
to or after the Closing Date). Borrowers further,  jointly and severally,  agree
to reimburse  Lender for all expenses  and  reasonable  fees paid or incurred in
connection with the  documentation  of any renewal or extension of the Loan, any
Loan Advance, any additional financial accommodations,  or any other amendments,
modifications  or supplements to, or restatement  of, this Agreement.  All costs
and  expenses   incurred  by  Lender  with  respect  to  such   negotiation  and
documentation,  together with interest at the highest interest rate then payable
by  Borrowers  under this  Agreement  or any other  Financing  Agreement,  shall
constitute  additional  Liabilities,  payable  on  demand  and  secured  by  the
Collateral.

      10.5  Claims  and  Taxes.  Borrowers,  jointly  and  severally,  agree  to
indemnify and hold Lender harmless from and against any and all claims, demands,
liabilities,  losses, damages, penalties, costs, and expenses (including without
limitation,  reasonable  attorneys' fees) relating to, or in any way arising out
of the possession,  use,  operation or control of any of any Borrower's  assets,
which  agreement  to  indemnify  and hold  Lender  harmless  shall  survive  the
termination  of this  Agreement.  Borrowers  shall  pay or  cause to be paid all
license fees,  bonding premiums and related taxes and charges,  and shall pay or
cause  to be paid  all of each  Borrower's  real and  personal  property  taxes,
assessments  and  charges  and  all  of  each  Borrower's   franchise,   income,
unemployment,  use, excise, old age benefit, withholding,  sales and other taxes
and other governmental charges assessed against any Borrower,  or payable by any
Borrower,  at such  times and in such  manner as to  prevent  any  penalty  from
accruing  or any lien or  charge  from  attaching  to any  Borrower's  property,
provided,  however,  that each Borrower  shall have the right to contest in good
faith, by an appropriate proceeding promptly initiated and diligently conducted,
the  validity,  amount or  imposition  of any such tax, and upon such good faith
contest to delay or

                                      -50-
<PAGE>

refuse payment thereof,  if: (a) such Borrower  establishes adequate reserves to
cover  such  contested  taxes;  and (b) such  contest  does not have a  Material
Adverse Effect.

      10.6 Custody and  Preservation  of  Collateral.  Lender shall be deemed to
have exercised  reasonable  care in the custody and  preservation  of any of the
Collateral  in Lender's  possession if Lender takes such action for that purpose
as the Company  shall  request in writing,  but failure by Lender to comply with
any such request shall not of itself be deemed a failure to exercise  reasonable
care,  and no failure by Lender to preserve or protect any right with respect to
such  Collateral  against  prior  parties,  or to do any act with respect to the
preservation of such Collateral not so requested by the Company, shall of itself
be deemed a failure to exercise  reasonable  care in the custody or preservation
of such Collateral.

      10.7  Inspection.  Lender (by and through its officers and employees),  or
any Person  designated  by Lender in writing,  shall have the right from time to
time, to call at any Borrower's  place or places of business (or any other place
where  Collateral or any information as to Collateral is kept or located) during
reasonable  business hours,  and,  without  hindrance or delay, to: (a) inspect,
audit, check and make copies of and extracts from any Borrower's books, records,
journals, orders, receipts and any correspondence and other data relating to any
Borrower's  business  or  to  any  transactions  between  the  parties  to  this
Agreement;  (b) make such  verification  concerning the Collateral as Lender may
consider   reasonable  under  the   circumstances;   and  (c)  review  operating
procedures, review maintenance of property and discuss the affairs, finances and
business of any Borrower with any Borrower's officers, employees or directors.

      10.8  Examination  of  Banking  Records.  Each  Borrower  consents  to the
examination by Lender (by and through its officers and employees), or any Person
designated  by Lender in  writing,  whether or not there  shall have  occurred a
Default or a Matured Default, of any and all of such Borrower's banking records,
wherever  they may be found,  and  directs  any Person that may be in control or
possession of such records (including without  limitation,  any bank,  financial
institution,  accountant  or  lawyer)  to  provide  such  records  to Lender and
Lender's officers,  employees and agents,  upon their request.  Such examination
may be conducted by Lender with or without  notice to Borrowers at the option of
Lender, any such notice being waived by Borrowers.

      10.9 Governmental Reports. Each Borrower shall furnish to Lender, upon the
reasonable  request  of  Lender,  copies  of  the  reports  of  examinations  or
inspections of any Borrower by all Governmental Authorities, and if any Borrower
fails to furnish such copies to Lender,  Borrowers authorize all such Government
Authorities  to furnish to Lender  copies of their  reports of  examinations  or
inspections of any Borrower.

      10.10 Reliance by Lender. All covenants,  agreements,  representations and
warranties made herein by Borrowers shall,  notwithstanding any investigation by
Lender, be deemed to be material to and to have been relied upon by Lender.

                                      -51-
<PAGE>

      10.11 Parties.  Whenever in this Agreement  there is reference made to any
of the parties, such reference shall be deemed to include,  wherever applicable,
a  reference  to the  respective  successors  and assigns of each  Borrower  and
Lender.

      10.12 Applicable Law;  Severability.  This Agreement shall be construed in
all respects in  accordance  with,  and  governed by, the laws and  decisions of
(without  regard to the conflict of laws  provisions)  the State of New York and
the laws,  regulations and decisions of the United States applicable to national
banks. Wherever possible,  each provision of this Agreement shall be interpreted
in such manner as to be  effective  and valid under  applicable  law, but if any
provision of this Agreement  shall be prohibited by or invalid under  applicable
law, such provision shall be ineffective  only to the extent of such prohibition
or  invalidity,  without  invalidating  the remainder of such  provisions or the
remaining provisions of this Agreement.

      10.13 SUBMISSION TO  JURISDICTION;  WAIVER OF BOND AND TRIAL BY JURY. WITH
RESPECT TO ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, DEMANDS, DEBTS,
DAMAGES, COSTS AND EXPENSES,  WHATSOEVER,  WHETHER BASED ON STATUTE, COMMON LAW,
PRINCIPLES  OF EQUITY OR  OTHERWISE,  ARISING OUT OF ANY MATTER,  THING OR EVENT
WHICH IS  DIRECTLY  OR  INDIRECTLY  RELATED  TO THIS  AGREEMENT,  EACH  BORROWER
CONSENTS TO THE  JURISDICTION  OF ANY LOCAL,  STATE,  OR FEDERAL  COURT  LOCATED
WITHIN  THE CITY OF NEW YORK,  NEW YORK AND  WAIVES  ANY  OBJECTION  WHICH  SUCH
BORROWER MAY HAVE BASED ON IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT
OF ANY PROCEEDING IN ANY SUCH COURT AND WAIVES  PERSONAL  SERVICE OF ANY AND ALL
PROCESS UPON SUCH  BORROWER,  AND  CONSENTS  THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY MAIL OR MESSENGER  DIRECTED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN
SECTION 10.19. SERVICE, SO MADE, SHALL BE DEEMED TO BE COMPLETE UPON THE EARLIER
OF ACTUAL  RECEIPT OR THREE (3) DAYS AFTER THE SAME SHALL HAVE BEEN  POSTED.  AT
THE OPTION OF LENDER,  EACH  BORROWER  WAIVES,  TO THE EXTENT  PERMITTED BY LAW,
TRIAL BY JURY,  AND WAIVES ANY BOND OR SURETY OR  SECURITY  UPON SUCH BOND WHICH
MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF LENDER.

      10.14  Application of Payments;  Waiver.  Payments made by Borrowers under
this  Agreement  shall  generally be applied first to any costs or fees owing by
Borrowers  to Lender,  shall be applied  second to any interest  payments  owing
hereunder  which are due and unpaid,  shall be applied third to any  outstanding
principal owing  hereunder,  and shall be applied fourth to interest accrued but
not yet due.  Unless  otherwise  specified  in this  Agreement,  prepayments  of
principal  made by  Borrowers  on the Loan shall be  applied to the most  remote
installment  then due (which  shall be deemed to  include,  as  applicable,  any
balloon  payment  due  at  maturity).  Notwithstanding  any  contrary  provision
contained in this Agreement or in any of the other  Financing  Agreements,  each
Borrower  irrevocably  waives the right to direct the application of any and all
payments at any time received by Lender from any Borrower or with respect to any
of the Collateral,  and each Borrower  irrevocably agrees that Lender shall have
the  continuing  exclusive  right  to apply  and  reapply  any and all  payments
received at any time,  whether  with  respect to the  Collateral  or  otherwise,
against the Liabilities, in such manner as Lender may

                                      -52-
<PAGE>

deem advisable,  notwithstanding  any entry by Lender upon any of Lender's books
and  records.  Provided,  however,  this  Section  10.14  shall not apply to any
transactions  unrelated to this  Agreement in which Lender or its Affiliates may
have accepted  deposits from,  lent money to, acted as trustee under  indentures
of, or generally  engaged in business with, any Borrower,  any of its respective
Affiliates  or any  Person who may do  business  with or own  securities  of any
Borrower or any such Affiliate.

      10.15 Marshaling;  Payments Set Aside. Lender shall be under no obligation
to marshal  any assets in favor of any  Borrower or against or in payment of any
or all of the  Liabilities.  To the extent that any Borrower  makes a payment or
payments to Lender or Lender  receives any payment or proceeds of the Collateral
for any Borrower's  benefit or enforces Lender's security interests or exercises
Lender's rights of setoff,  and such payment or payments or the proceeds of such
Collateral,   enforcement  or  setoff  or  any  part  thereof  are  subsequently
invalidated,  declared  to be  fraudulent  or  preferential,  set  aside  and/or
required  to be repaid to a  trustee,  receiver  or any  other  party  under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery,  the obligation or part thereof originally  intended to
be satisfied  shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.

      10.16 Section Titles. The section titles contained in this Agreement shall
be without  substantive  meaning or content of any kind whatsoever and are not a
part of the agreement between the parties.

      10.17 Continuing  Effect.  This Agreement,  Lender's security interests in
the Collateral, and all of the other Financing Agreements shall continue in full
force and effect so long as any Liabilities shall be owed to Lender and (even if
there shall be no Liabilities  outstanding) so long as Lender remains  committed
to make Loan Advances under this Agreement.

      10.18 No Waiver.  Lender's  failure,  at any time or times  hereafter,  to
require  strict  performance  by any Borrower of any provision of this Agreement
shall not waive,  affect or diminish  any right of Lender  thereafter  to demand
strict compliance and performance therewith.  Any suspension or waiver by Lender
of any  Default or Matured  Default  under  this  Agreement  or any of the other
Financing  Agreements,  shall not suspend,  waive or affect any other Default or
Matured Default under this Agreement or any of the other  Financing  Agreements,
whether the same is prior or subsequent  thereto and whether of the same or of a
different kind or character. None of the undertakings,  agreements,  warranties,
covenants and representations of Borrowers contained in this Agreement or any of
the other  Financing  Agreements  and no Default or Matured  Default  under this
Agreement or any of the other Financing Agreements, shall be deemed to have been
suspended  or waived by Lender  unless such  suspension  or waiver is in writing
signed by an officer of Lender and is  directed  to  Borrowers  specifying  such
suspension or waiver.

      10.19 Notices.  Except as otherwise  expressly provided herein, any notice
required or desired to be served,  given or delivered pursuant to this Agreement
shall  be  in  writing,  and  shall  be  sent  by  manual  delivery,   facsimile
transmission,   overnight  courier  or  United  States  mail  (postage  prepaid)
addressed to the party to be notified as follows:

                                      -53-
<PAGE>

            (a)   If to Lender at:

                           Wilton Funding, LLC
                           c/o Patriot Capital Funding, Inc.
                           61 Wilton Road, 2nd Floor
                           Westport, Connecticut  06880
                           Attn:  Timothy W. Hassler
                           Telephone:  (203) 227-7778
                           Facsimile:  (203) 221-8253

                  with copies to:

                           Squire, Sanders & Dempsey L.L.P.
                           1300 Huntington Center
                           41 South High Street
                           Columbus, Ohio  43215
                           Attn:  Anthony J. Sugar, Esq.
                           Telephone:  (614) 365-2725
                           Facsimile:  (614) 365-2499

            (b)   If to any Borrower at:

                           c/o The Allied Defense Group, Inc.
                           8000 Towers Crescent Drive, Suite 260
                           Vienna, Virginia  22182
                           Attn:  Charles A. Hasper, Chief Financial Officer
                           Telephone:  (703) 847-5268
                           Facsimile:  (703) 847-5334

                           and

                           Baxter, Baker, Sidle, Conn & Jones, P.A.
                           120 E. Baltimore Street
                           Baltimore, Maryland  21202
                           Attn:  James E. Baker, Jr., Esq.
                           Telephone:  (410) 385-8122
                           Facsimile:  (410) 230-3801

or, as to each party,  addressed to such other address as shall be designated by
such party in a written notice to the other  parties.  All such notices shall be
deemed  given on the date of  delivery  if  manually  delivered,  on the date of
sending if sent by facsimile  transmission,  on the first business day after the
date of sending if sent by overnight  courier,  or three (3) days after the date
of mailing if mailed.

                                      -54-
<PAGE>

      Notwithstanding any other provision hereof to the contrary,  each Borrower
has appointed the Company as its  representative to receive and give all notices
to or from such  Borrower,  and Lender shall have acted in accordance  with this
Agreement  in accepting  notices from and giving  notice to the Company as being
notices from or to such Borrower.

      10.20 [Reserved].

      10.21 Taxes.

      (a) Except as otherwise provided in Section 10.21(d), any and all payments
by any Borrower  hereunder or under the Note shall be made free and clear of and
without deduction for any and all present or future taxes,  deductions,  charges
or withholdings,  and all liabilities with respect  thereto,  including  without
limitation,  such  taxes,  deductions,   charges,  withholdings  or  liabilities
whatsoever  imposed,  assessed,  levied or collected by any taxing authority and
all (other than to the extent due to the gross negligence or willful  misconduct
of Lender)  interest,  penalties,  expenses or similar  liabilities with respect
thereto ("Taxes"), excluding, however, from the definition of Taxes, in the case
of Lender, taxes imposed on its income (including penalties and interest payable
in respect  thereof),  and franchise  taxes  imposed on it, by the  jurisdiction
under  the  laws of which  Lender  is  organized  or any  political  subdivision
thereof. If any Borrower shall be required by law to deduct any Taxes from or in
respect of any sum  payable  hereunder  or under the Note to Lender  (other than
payments for which taxes are withheld  pursuant to the last  sentence of Section
10.21(d)),  (i) the sum payable  shall be  increased as may be necessary so that
after  making  all  required  deductions  (including  deductions  applicable  to
additional  sums payable  under this Section  10.21)  Lender  receives an amount
equal to the sum it would have  received  had no such  deductions  been made and
(ii)  Borrowers  shall pay the full  amount  deducted to the  relevant  taxation
authority or other authority in accordance with applicable law, less any credits
due to Borrowers.

      (b) In addition,  each Borrower  agrees to pay any present or future stamp
or documentary  taxes or any other excise or property taxes,  charges or similar
levies which arise from any payment made hereunder or under the Note or from the
execution,  delivery or  registration  of, or  otherwise  with  respect to, this
Agreement or the Note (hereinafter included within the definition of "Taxes").

      (c) Each  Borrower  shall  indemnify  Lender for the full  amount of Taxes
(including without limitation,  any Taxes imposed by any jurisdiction on amounts
payable  under this  Section  10.21)  paid by Lender and any  liability  arising
therefrom or with respect  thereto,  whether or not such Taxes were correctly or
legally asserted.  This indemnification  shall be made within five (5) days from
the date Lender makes written demand therefor;  provided,  however,  that to the
extent  that  Lender is  reimbursed  for any  Taxes  that  were  incorrectly  or
illegally asserted with respect to any Borrower, Lender shall promptly return to
Borrowers the amount of such reimbursement net of any costs of recovery incurred
by  Lender,  together  with any  interest  that may have been paid by the taxing
jurisdiction  with respect  thereto,  to the extent Borrowers have actually paid
Lender with respect thereto.

                                      -55-
<PAGE>

      (d) Promptly after the date on which payment of any Taxes are due pursuant
to applicable  law, each Borrower  shall,  at the request of Lender,  furnish to
Lender evidence in form and substance satisfactory to Lender, that such Borrower
has met its obligations under this Section 10.21.

      (e)  Without  prejudice  to the  survival  of any other  agreement  of any
Borrower,  the agreement  and  obligations  of such  Borrower  contained in this
Section 10.21 shall survive the payment in full of the Liabilities.

      10.22 Assignment and Participation.

      (a)  After  the  Closing  Date,  Lender  may  assign  to any  Person  (the
"Assignee") all or a portion of its rights and obligations under this Agreement.

      (b) Lender may sell  participations to one or more banks or other entities
in or to all or a portion  of its rights and  obligations  under this  Agreement
(including,  without  limitation,  all  or a  portion  of  the  Working  Capital
Commitment,  the  Acquisition  Advance  Commitment  and  the  Note  held by it);
provided,   however,   that  (i)  Lender's   obligations  under  this  Agreement
(including,   without  limitation,   the  Working  Capital  Commitment  and  the
Acquisition  Advance Commitment to Borrowers  hereunder) shall remain unchanged,
(ii) Lender shall remain solely  responsible to the other parties hereto for the
performance  of such  obligations,  (iii)  Lender shall remain the holder of the
Note for all purposes of this Agreement, (iv) the sale of the participation will
not cause any  Borrower to incur any  additional  liability,  and (v)  Borrowers
shall  continue  to deal solely and  directly  with  Lender in  connection  with
Lender's  rights  and  obligations  under  this  Agreement,   provided  that  no
participant shall be entitled to recover under the above-described provisions an
amount in excess of the proportionate  share which such participant holds of the
original aggregate principal amount hereunder to which Lender would otherwise be
entitled.

      (c) Lender may, in  connection  with any  assignment or  participation  or
proposed assignment or participation pursuant to this Section 10.22, disclose to
the assignee or participant or proposed assignee or participant, any information
relating to any Borrower  furnished  to Lender by or on behalf of any  Borrower;
provided  that,  prior to any such  disclosure,  the assignee or  participant or
proposed  assignee  or  participant  shall  agree in  writing  to  preserve  the
confidentiality  of  any  confidential  information  relating  to  any  Borrower
received by it from Lender.

      (d) Lender may assign and pledge all or any of its  rights,  interests  or
other benefits  hereunder or in the Loan  (including,  without  limitation,  all
promissory notes, agreements, chattel paper, payment intangibles,  collateral or
security  interests or  instruments  held by it) as collateral  security to Fund
Lender  or any  other  unaffiliated  lender  of  Lender  (each  such  lender,  a
"Collateral  Assignee");  provided  that  unless  and  until  Borrowers  receive
notification from a Collateral Assignee of such assignment directing payments to
be made to such  Collateral  Assignee,  any payment  made by  Borrowers  for the
benefit of Lender in accordance with the terms of the Financing Agreements shall
satisfy Borrowers' obligations thereunder to the extent of such payment. No such
assignment and/or pledge shall release Lender from its obligations

                                      -56-
<PAGE>

hereunder. Nor shall any such assignment or pledge constitute an assumption by a
Collateral Assignee of Lender's  obligations and liabilities  hereunder or under
any promissory  note,  chattel paper or other  agreement  pledged or assigned to
such Collateral Assignee,  unless the terms of such assignment expressly provide
otherwise.

      10.23  Maximum  Interest.   No  agreements,   conditions,   provisions  or
stipulations  contained  in  this  Agreement  or in any of the  other  Financing
Agreements,  or any Default or Matured Default, or any exercise by Lender of the
right to accelerate the payment of the maturity of principal and interest, or to
exercise any option whatsoever,  contained in this Agreement or any of the other
Financing  Agreements,  or the  arising  of any  contingency  whatsoever,  shall
entitle  Lender  to  collect,  in any  event,  interest  exceeding  the  maximum
authorized by law, and in no event shall  Borrowers be obligated to pay interest
exceeding such rate, and all  agreements,  conditions or  stipulations,  if any,
which may in any event or contingency  whatsoever  operate to bind,  obligate or
compel Borrowers to pay a rate of interest exceeding the maximum allowed by law,
shall be without  binding  force or effect,  at law or in equity,  to the extent
only of the excess of interest over such maximum interest allowed by law. In the
event  any  interest  is  charged  in  excess  of  the  maximum  allowed  by law
("Excess"),  Borrowers  acknowledge  and stipulate that any such charge shall be
the result of an  accidental  and bona fide  error,  and such  Excess  shall be,
first,  applied to reduce the principal of any  Liabilities  due,  and,  second,
returned to Borrowers, it being the intention of the parties not to enter at any
time into a usurious or otherwise  illegal  relationship.  Borrowers  and Lender
both recognize  that, with  fluctuations of index rates and applicable  margins,
such an unintentional result could inadvertently occur. By the execution of this
Agreement, Borrowers covenant that: (a) the credit or return of any Excess shall
constitute the acceptance by Borrowers of such Excess;  and (b) Borrowers  shall
not seek or pursue any other remedy,  legal or equitable,  against Lender based,
in whole or in part, upon the charging or receiving of any interest in excess of
the maximum authorized by law. For the purpose of determining whether or not any
Excess has been contracted for,  charged or received by Lender,  all interest at
any time  contracted  for,  charged or received by Lender in connection with the
Liabilities  shall be amortized,  prorated,  allocated and spread in equal parts
during the entire term of this Agreement.

      10.24  Additional   Advances.   All  fees,   charges,   expenses,   costs,
expenditures,  obligations,  liabilities, losses, penalties and damages incurred
or  suffered  by  Lender  and for which  Borrowers  are  bound to  indemnify  or
reimburse  Lender under this Agreement may, at the option of Lender,  be paid by
Lender  initiated  Working  Capital  Advances  pursuant  to Section  2.1 if such
amounts remain unpaid for a period of ten (10) days after Lender has made demand
therefor.

      10.25  Loan   Agreement   Controls.   If  there  are  any   conflicts   or
inconsistencies  among this Agreement and any of the other Financing Agreements,
the provisions of this Agreement shall prevail and control.

      10.26 Confidentiality.  Lender agrees that it will use its best efforts to
keep  confidential,  in accordance  with its customary  procedures  for handling
confidential   information  and  in  accordance  with  safe  and  sound  lending
practices,  any  proprietary  information of Borrowers  identified in writing by
Borrowers identified as being proprietary and confidential;

                                      -57-
<PAGE>

provided  that  Lender may  disclose  any such  information  (a) to enable it to
comply with any  Governmental  Requirement  applicable  to it, (b) in connection
with the  defense  of any  litigation  or other  proceeding  brought  against it
arising out of the  transactions  contemplated  by this  Agreement and the other
Financing Agreements,  (c) in connection with the supervision and enforcement of
the rights and  remedies of Lender  under any  Financing  Agreement,  (d) to any
Collateral Assignee and (e) as set forth in Section 10.22.

      10.27  Independence  of Covenants.  All covenants under this Agreement and
the other Financing  Agreements shall be given  independent  effect so that if a
particular  action or condition is not permitted by any of such  covenants,  the
fact that it would be permitted by an exception  to, or be otherwise  within the
limitations of, another  covenant shall not avoid the occurrence of a Default or
a Matured Default if such action is taken or condition exists.

      10.28 Amendments and Waivers. Any term,  covenant,  agreement or condition
of this  Agreement  may be  amended  only by a  written  amendment  executed  by
Borrowers and, if the rights or duties of Lender are affected  thereby,  Lender,
or compliance  therewith only may be waived (either generally or in a particular
instance and either  retroactively  or  prospectively),  if Borrowers shall have
obtained  the consent in writing of Lender.  No such  amendment  or waiver shall
extend to or affect any obligation not expressly amended or waived.

      10.29  Counterparts and Facsimile  Signatures.  This Agreement,  any other
Financing Agreement and any subsequent  amendment to any of them may be executed
in  several  counterparts,  each of which  shall be  construed  together  as one
original.  Facsimile signatures on this Agreement, any other Financing Agreement
and any  subsequent  amendment  to any of them shall be  considered  as original
signatures.

      10.30  Set-off.  Each  Borrower  gives and  confirms  to Lender a right of
set-off of all moneys,  securities and other property of such Borrower  (whether
special,  general or limited) and the proceeds thereof, at any time delivered to
remain  with or in transit in any manner to  Lender,  its  correspondent  or its
agents from or for such  Borrower,  whether for  safekeeping,  custody,  pledge,
transmission, collection or otherwise or coming into possession of Lender in any
way, and also, any balance of any deposit  accounts and credits of such Borrower
with, and any and all claims of security for the payment of the Liabilities owed
by such Borrower to Lender,  contracted with or acquired by Lender, whether such
liabilities and obligations be joint, several,  absolute,  contingent,  secured,
unsecured, matured or unmatured, and each Borrower authorizes Lender at any time
or times, without prior notice, to apply such money, securities, other property,
proceeds,  balances,  credits of claims,  or any part of the foregoing,  to such
liabilities  in such  amounts as it may  select,  whether  such  Liabilities  be
contingent, unmatured or otherwise, and whether any collateral security therefor
is deemed adequate or not. The rights  described  herein shall be in addition to
any  collateral  security  described in any separate  agreement  executed by any
Borrower.

      10.31  Binding  Effect.  This  Agreement  and all of the  other  Financing
Agreements set forth the legal,  valid and binding  obligations of Borrowers and
Lender and are enforceable against Borrowers in accordance with their respective
terms.  Should more than one Person be a Borrower  under this  Agreement  or any
Note, the obligations of each such Person shall be joint

                                      -58-
<PAGE>

and  several.  Lender may  settle,  release,  compromise,  collect or  otherwise
liquidate the  obligations of any Borrower,  any guarantor of such  obligations,
and any security or collateral for such obligations or for any such guaranty, in
any manner, without affecting or impairing the obligations of any Borrower.

      10.32 FINAL  AGREEMENT.  THIS WRITTEN  AGREEMENT  AND THE OTHER  FINANCING
AGREEMENTS  REPRESENT  THE FINAL  AGREEMENT  BETWEEN  THE PARTIES AND MAY NOT BE
CONTRADICTED  BY  EVIDENCE  OF  PRIOR,   CONTEMPORANEOUS,   OR  SUBSEQUENT  ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL  AGREEMENTS  BETWEEN THE
PARTIES.

                                      -59-
<PAGE>

      IN WITNESS  WHEREOF,  this  Agreement has been duly executed as of the day
and year first above written.

                                   BORROWERS:
                                   ----------

                                   THE ALLIED DEFENSE GROUP, INC.,
                                     a Delaware corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   NEWS/SPORTS MICROWAVE RENTAL, INC.,
                                     a California corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   TITAN DYNAMICS SYSTEMS, INC.,
                                     a Texas corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   SEASPACE CORPORATION,
                                     a California corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                      -60-
<PAGE>

                                   MECAR USA, INC., a Delaware corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ALLIED RESEARCH CORPORATION
                                     LIMITED, a company formed under the laws of
                                     England and Wales

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ARC EUROPE, S.A., a Belgium company

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ENERGA CORPORATION, a Maryland
                                     corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   LENDER:
                                   -------

                                   WILTON FUNDING, LLC,
                                     a Delaware limited liability company

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                      -61-
<PAGE>

                                  Exhibit 2A to
                           Loan and Security Agreement

                             Form of Promissory Note

                                 [See attached]

<PAGE>

                                 PROMISSORY NOTE

$18,000,000                                                         May 28, 2004

      FOR VALUE RECEIVED, the undersigned (hereinafter  collectively referred to
as  "Borrowers"),  jointly and severally,  promise to pay to the order of WILTON
FUNDING,  LLC, a Delaware limited liability company (hereinafter  referred to as
"Lender"), or its successors and assigns, at such place as Lender may designate,
in lawful  money of the United  States of America and in  immediately  available
funds, the principal sum of EIGHTEEN MILLION and 00/100 Dollars ($18,000,000.00)
or so much thereof as may be advanced and be outstanding, together with interest
on any and all principal amounts  outstanding  calculated in accordance with the
provisions  set forth  below.  This Note is issued  under that  certain Loan and
Security  Agreement  dated  as of May 28,  2004  (as the  same  may be  amended,
replaced,  restated and/or supplemented from time to time, the "Loan Agreement")
among Borrowers and Lender.

      Capitalized  terms used and not  defined  herein  shall have the  meanings
given to such terms in the Loan Agreement.

      Borrowers  shall have the right to make  prepayments  of principal only in
accordance with the Loan Agreement.

      Borrowers shall pay interest on the unpaid  principal  amount of each Loan
Advance made by Lender from the date of such Loan Advance  until such  principal
amount shall be paid in full,  at the times and at the rates per annum set forth
in the Loan Agreement.

      The  unpaid  balance  of this  obligation  at any time  shall be the total
amounts advanced hereunder by Lender, together with accrued and unpaid interest,
less the amount of payments made hereon by or for  Borrowers,  which balance may
be endorsed hereon from time to time by Lender.

      In addition to the repayment requirements imposed upon Borrowers under the
Loan Agreement,  together with the agreements referred to therein, the principal
and  interest  owing  under  this Note  shall be due and  payable in full on the
Maturity Date, without presentment, demand, protest or further notice (including
without  limitation,  notice of intent to accelerate and notice of acceleration)
of any kind,  all of which are  expressly  waived by  Borrowers.  Time is of the
essence hereof.

      Interim payments made by Borrowers  pursuant to and in accordance with the
Loan Agreement shall be applied as provided therein.

      Should any Matured Default occur,  then all sums of principal and interest
outstanding  hereunder may be declared immediately due and payable in accordance
with the Loan Agreement, without presentment,  demand or notice of dishonor, all
of which are expressly

<PAGE>

waived,  and Lender shall have no  obligation  to make any further Loan Advances
pursuant to the Loan Agreement.

      The  obligations  of  Borrowers  to  Lender  hereunder  and under the Loan
Agreement are secured by the Collateral granted to Lender pursuant to and as set
forth in the Loan Agreement.

      Notwithstanding  any other  provision of this Note,  the Loan Agreement or
the other Financing  Agreements to the contrary,  and notwithstanding any breach
by any Foreign Borrower of any representation,  warranty,  covenant or agreement
contained in the Loan Agreement or in any other Financing  Agreement,  liability
of each Foreign  Borrower  hereunder  or pursuant to any of the other  Financing
Agreements  shall be limited to the sum of (i) the amount of Loan  Advances made
to such Foreign  Borrower or any,  direct or indirect,  Subsidiary  thereof plus
(ii) to the extent not included in (i) above, the aggregate amount of any loans,
payments,  capital  contributions,   dividends,  distributions  or  other  asset
transfers,  directly or  indirectly,  made after the date hereof by any Domestic
Borrower  to such  Foreign  Borrower  or any,  direct  or  indirect,  Subsidiary
thereof.

         This Note shall be construed in  accordance  with the laws of the State
of New York.

                                   THE ALLIED DEFENSE GROUP, INC.,
                                     a Delaware corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   NEWS/SPORTS MICROWAVE RENTAL, INC.,
                                     a California corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   TITAN DYNAMICS SYSTEMS, INC.,
                                     a Texas corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                      -2-
<PAGE>

                                   SEASPACE CORPORATION,
                                     a California corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   MECAR USA, INC., a Delaware corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ALLIED RESEARCH CORPORATION
                                     LIMITED, a company formed under the laws of
                                     England and Wales

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ARC EUROPE, S.A., a Belgium company

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                   ENERGA CORPORATION, a Maryland
                                     corporation

                                   By: _________________________________________
                                   Name:________________________________________
                                   Title:_______________________________________

                                      -3-
<PAGE>

                                  Exhibit 3A to
                           Loan and Security Agreement

                            Form of Warrant Agreement

                                 [See attached]

<PAGE>

================================================================================

                                Warrant Agreement

                                      among

                         THE ALLIED DEFENSE GROUP, INC.

                                       and

                               WILTON FUNDING, LLC

                            Dated as of May 28, 2004

================================================================================

<PAGE>

                                Table of Contents

Section                         Heading                                     Page
-------                         -------                                     ----

SECTION 1.  CERTAIN DEFINITIONS AND TERMS......................................1
     Section 1.1           Definitions.........................................1

SECTION 2.  AUTHORIZATION OF WARRANTS; ISSUANCE OF WARRANTS....................3

SECTION 3.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................4
     Section 3.1           Authorization, Etc..................................4
     Section 3.2           Private Offering by the Company.....................5
     Section 3.3           Authorized Capital Stock............................5

SECTION 4.  CLOSING        5

SECTION 5.  CONDITIONS TO CLOSING..............................................5

SECTION 6.  REPRESENTATIONS AND WARRANTIES.....................................6
     Section 6.1           Purchase for Investment.............................6
     Section 6.2           Source of Funds.....................................6

SECTION 7.  TRANSFER; REGISTRATION.............................................6
     Section 7.1           Restrictions on Transferability.....................6
     Section 7.2           Notice of Proposed Transfer; Registration Not
                             Required; Deemed Representation...................6
     Section 7.3           Required Registration...............................6
     Section 7.4           Conditions to Required Registration................12
     Section 7.5           Incidental Registrations...........................12
     Section 7.6           Underwritten Offerings.............................13
     Section 7.7           Expenses; Reliance.................................13
     Section 7.8           Indemnification and Contribution...................14
     Section 7.9           Additional Registration Rights.....................15
     Section 7.10          Restrictive Legends................................16
     Section 7.11          Miscellaneous......................................17

SECTION 8.  REDEMPTION OF WARRANTS AND/OR RESTRICTED SHARES...................17
     Section 8.1           Redemption.........................................17

SECTION 9.  LOST, STOLEN WARRANTS, ETC........................................17

SECTION 10.  PROTECTIVE PROVISIONS............................................17

SECTION 11.  INDEX AND CAPTIONS...............................................18

                                       -i-
<PAGE>

SECTION 12.  MISCELLANEOUS 18
     Section 12.1          Notices............................................18
     Section 12.2          Successors and Assigns.............................18
     Section 12.3          Severability.......................................18
     Section 12.4          Headings; Governing Law............................19
     Section 12.5          Amendment and Waiver...............................19

                                      -ii-
<PAGE>

                                WARRANT AGREEMENT

      This Warrant  Agreement (this  "Agreement") is made and entered into as of
May 28, 2004, among THE ALLIED DEFENSE GROUP, INC., a Delaware  corporation (the
"Company"),  and WILTON FUNDING,  LLC, a Delaware limited liability company (the
"Purchaser").

                                    Recitals

      Concurrently  with the execution and delivery hereof,  the Company will be
issuing (and agrees to issue  hereafter  upon  Purchaser's  making of additional
loans to Borrowers) its Warrants to purchase  Common Shares  (defined  below) of
the Company to the Purchaser in connection with and as a condition to the making
by the Purchaser to the Company and its  subsidiaries  of loans in the aggregate
principal amount of up to Eighteen Million Dollars  ($18,000,000)  (the "Loan"),
pursuant to a certain Loan and Security  Agreement  dated of even date  herewith
among the Company and certain of its  subsidiaries  named therein,  as borrowers
(collectively,  the  "Borrowers"),  and the  Purchaser,  as  lender  (the  "Loan
Agreement"). The Loan is evidenced by a promissory note of even date herewith in
the original  principal amount of $18,0000,000  issued by Borrowers to Purchaser
(the  "Note").  In  consideration  of the  acquisition  by the  Purchaser of the
Warrants  and the  making of the  Loan,  the  Company  is  willing  to offer the
Purchaser  the rights  described  hereinbelow,  including,  without  limitation,
registration  rights and rights of  indemnity  and other  rights and  privileges
relating to the Warrants,  the Warrant Shares and the Underlying  Shares, all as
more specifically set forth herein.

                                    Agreement

      Now,  Therefore,  for and in consideration of the foregoing and the mutual
covenants herein contained, the parties hereto agree as follows:

SECTION 1.  CERTAIN DEFINITIONS AND TERMS.

      Section 1.1 Definitions. Terms not otherwise defined herein shall have the
respective meanings assigned thereto in the Loan Agreement,  as in effect on the
Closing Date. As used herein, the following terms have the meanings indicated:

      "Agreement" is defined in the preamble of this Agreement.

      "Borrowers" is defined in the recitals hereto.

      "Closing" is defined in Section 4 hereof.

      "Code"  means the Internal  Revenue Code of 1986,  as amended from time to
time, and the rules and regulations promulgated thereunder from time to time.

<PAGE>

      "Commission"  shall mean the  Securities and Exchange  Commission,  or any
other Federal agency at the time administering the Securities Act.

      "Common Shares" shall mean the shares of Common Stock, $0.10 par value per
share, of the Company.

      "Company" is defined in the preamble of this Agreement.

      "Cutback Determination" is defined in Section 7.3(a) hereof.

      "Demand Registration" is defined in Section 7.3(a) hereof.

      "ERISA"  means the Employee  Retirement  Income  Security Act of 1974,  as
amended from time to time, and the rules and regulations  promulgated thereunder
from time to time in effect.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor statute.

      "Exchange  Act  Reporting  Company"  shall mean any  corporation  or other
entity which is subject to the reporting requirements of the Exchange Act.

      "Expiration Date" is defined in the Warrants.

      "Fully   Diluted   Outstanding   Shares"   shall  mean,  at  any  date  of
determination, the sum of (i) the number of outstanding Common Shares, plus (ii)
the number of Underlying  Shares plus (iii) the maximum  number of Common Shares
issuable in respect of Securities exchangeable or convertible into Common Shares
("Convertible Securities") and options and warrants to purchase Common Shares or
Convertible  Securities  outstanding  on such date (whether or not the rights to
convert, exchange or exercise thereunder are presently exercisable).

      "Holder" shall mean any beneficial  owner of (i) any Warrant Share or (ii)
any Warrant.

      "Incidental Cutback Determination" is defined in Section 7.5 hereof.

      "Liquidity  Event" shall mean a "Change of Control" as defined in the Loan
Agreement, as in effect on the Closing Date.

      "Loan" is defined in the recitals hereto.

      "Loan Advance Date" is defined in Section 2 hereof.

      "Loan Agreement" is defined in the recitals hereto.

      "Majority  Holders"  shall mean the  holders of a  majority  in  aggregate
number of the then  outstanding  Warrants and Warrant  Shares,  determined  on a
Common Share equivalent basis.

                                      -2-
<PAGE>

      "Note" is defined in the recitals hereto.

      "Person" shall mean an individual, partnership, limited liability company,
corporation,  trust or unincorporated organization, or a government or agency or
political subdivision thereof.

      "Purchaser" is defined in the preamble of this Agreement.

      "Related Party" shall mean, with respect to any Person,  (A) any Affiliate
of such Person, (B) any investment  manager,  investment advisor or partner,  or
any principal  thereof,  of such Person,  (C) any  investment  fund,  investment
account or investment  entity whose investment  manager,  investment  advisor or
general partner,  or any principal thereof, is such Person or a Related Party of
such Person.

      "Restricted  Shares"  shall mean the Common  Shares of the Company  issued
upon the exercise of any of the Warrants and evidenced by a certificate required
to bear the legend specified in Section 7.4 hereof.

      "Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor Federal statute, and the rules and regulations promulgated thereunder,
all as the same shall be in effect at the time.

      "Security"  or  "Securities"  shall  have the same  meaning  as in Section
2(a)(1) of the Securities Act.

      "Third Party Rights" is defined in Section 7.9 hereof.

      "Underlying  Shares" shall mean the Common Shares of the Company  issuable
upon exercise of any of the Warrants and any  references  contained  herein to a
Holder  or  Holders  of any  Underlying  Shares  shall be deemed to refer to the
Holder of the Warrants relating thereto.

      "Warrant  Shares"  shall mean Common  Shares  issued upon  exercise of the
Warrants.  As to any particular  Warrant  Shares,  such shares shall cease to be
Warrant  Shares  when  they  have  been (a)  effectively  registered  under  the
Securities  Act and  disposed of in  accordance  with a  registration  statement
covering  them or (b)  distributed  to the  public  through a broker,  dealer or
market  maker  pursuant  to Rule 144 under the  Securities  Act (or any  similar
provision then in force).

      "Warrants" is defined in Section 2 hereof.

SECTION 2. AUTHORIZATION OF WARRANTS; ISSUANCE OF WARRANTS.

      In consideration of, and as an inducement to, the Purchaser  entering into
the Loan Agreement and making the Loan, the Company shall authorize the issuance
and sale of, and the Company  agrees to deliver to the  Purchaser on the Closing
Date and on the making of each  subsequent  Loan Advance  (each, a "Loan Advance
Date"),  one or more  warrants (all  warrants  being  delivered to the Purchaser
being referred to collectively as the "Warrants") substantially

                                      -3-
<PAGE>

in the form attached  hereto as Exhibit A to purchase for the  consideration  of
$0.01 per  Warrant  Share an  aggregate  number of Common  Shares of the Company
equal to the product of (i) the  cumulative  Dollar amount of Loan Advances made
by the Purchaser to Borrowers on or before such Loan Advance Date  multiplied by
(ii) 0.002 Common  Shares per Dollar  (subject to adjustment as provided in said
Warrants).  Based on the foregoing formula for determining the number of Warrant
Shares,  upon the making of the Initial  Advance to  Borrowers  in the amount of
$2,000,000  on the  Closing  Date,  the  Company  shall issue and deliver to the
Purchaser a Warrant to purchase  4,000 Common Shares  (i.e.,  $2,000,000 x 0.002
shares per $1.00). As an additional example of the manner in which the foregoing
formula  is  intended  to be  applied,  if the  Purchaser  thereafter  makes  an
additional  Loan  Advance to  Borrowers  in the amount of  $1,500,000,  then the
Company shall issue and deliver to the Purchaser on the applicable  Loan Advance
Date a Warrant to purchase an additional 3,000 Common Shares (i.e., $1,500,000 x
0.002  shares per $1.00).  The number of shares that may be  purchased  upon the
exercise of the Warrants  held by the  Purchaser and the price per share are and
shall be subject to adjustment in the manner and on the terms and conditions set
forth in the Warrants.

      The rights,  powers and terms of and relating to the Common Shares will be
provided for in the Company's  Certificate of  Incorporation as in effect on the
Closing Date, as amended and  supplemented  from time to time in accordance with
the provisions  thereof to the extent  permitted hereby and under the provisions
of the Loan Agreement.  In addition, the Warrants and the Common Shares issuable
upon exercise thereof are subject to the terms and provisions  specified in this
Agreement.

      Subject to the terms and conditions of this  Agreement,  the Company shall
issue  and sell to the  Purchaser,  and the  Purchaser  shall  acquire  from the
Company,  (i) at the  Closing  provided  for in Section 4,  Warrants to purchase
4,000 Common Shares and (ii)  thereafter upon the making of each additional Loan
Advance,  Warrants to purchase the number of Common Shares determined based upon
the foregoing formula.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      As an inducement to the Purchaser to enter into and perform this Agreement
and the Loan  Agreement,  the  Company  hereby  represents  and  warrants to the
Purchaser as follows:

      Section 3.1 Authorization, Etc. The execution, delivery and performance of
this  Agreement,  and  the  issue  and  sale of the  Warrants,  have  been  duly
authorized by all  necessary  corporate  action on the part of the Company.  The
Warrants,  when executed and delivered at the Closing will constitute the legal,
valid and binding  obligations of the Company enforceable against the Company in
accordance with the terms hereof and thereof,  except as such enforceability may
be limited by (i) applicable bankruptcy, insolvency, reorganization,  moratorium
or other similar laws affecting the enforcement of creditors'  rights  generally
and (ii) general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).

                                      -4-
<PAGE>

      Section  3.2  Private  Offering  by the  Company.  Neither the Company nor
anyone acting on its behalf has offered the Warrants, or any similar Securities,
for sale to, or  solicited  any offer to buy any of the same from,  or otherwise
approached  or negotiated  in respect  thereof  with,  any Person other than the
Purchaser,  which has been offered  Warrants at a private  sale for  investment.
Neither the Company nor anyone acting on its behalf has taken, or will take, any
action  that  would  subject  the  issuance  or  sale  of  the  Warrants  to the
registration requirements of Section 5 of the Securities Act.

      Section 3.3  Authorized  Capital  Stock.  At the Closing,  the  authorized
capital stock of the Company will consist of 30,000,000  Common Shares, of which
5,553,729 shares will be issued and outstanding. Except as set forth on attached
Exhibit A hereto,  the Company does not have outstanding any warrants,  options,
convertible securities or other rights for the purchase or acquisition of shares
of its capital  stock other than the  Warrants  issued to the  Purchaser  at the
Closing.  The Board of Directors  of the Company has duly  reserved for issuance
upon exercise of the Warrants 36,000 Common Shares (representing less than 1% of
the Fully Diluted  Outstanding Shares as of the Closing Date). No stockholder of
the Company or of any other Person is entitled to preemptive  or similar  rights
with  respect to the Common  Shares  which are  issuable  upon  exercise  of the
Warrants  and, if and when issued upon  exercise of the  Warrants in  accordance
with the provisions thereof,  such shares will be validly issued, fully paid and
non-assessable shares.

      SECTION 4. CLOSING.

      The closing of the Loan and the sale and  purchase of the  Warrants  shall
occur at the offices of Squire,  Sanders & Dempsey L.L.P.,  350 Park Avenue, New
York, New York 10022-6022,  at 10:00 a.m., New York City time, at a closing (the
"Closing")  on May 28,  2004 or at such  other  place and time and on such other
Business  Day as may be agreed  upon by the Company  and the  Purchaser.  At the
Closing, (i) subject to the satisfaction of the applicable  conditions precedent
set forth in the Loan Agreement, the Purchaser shall make the Initial Advance to
Borrowers  and (ii) the  Company  shall  deliver  to the  Purchaser  the Note as
provided in the Loan  Agreement  and Warrants to purchase  4,000 Common  Shares,
such Warrants to be in the form of a single Warrant for the Purchaser registered
in the Purchaser's  name (or in the name of its nominee).  If at the Closing the
Company  shall fail to tender to the  Purchaser the Note as provided in the Loan
Agreement  or  Warrants as  provided  above in this  Section 4, or if any of the
conditions  specified  in  Section  5  shall  not  have  been  fulfilled  to its
satisfaction, then the Purchaser shall, at its sole election, be relieved of all
further obligations under this Agreement, without thereby waiving any rights the
Purchaser may have by reason of such failure or such nonfulfillment.

SECTION 5. CONDITIONS TO CLOSING.

      The  Purchaser's  obligation  to acquire  the  Warrants  is subject to the
fulfillment to the Purchaser's satisfaction,  prior to or at the Closing, of the
conditions to the Initial  Advance set forth in Section 4 of the Loan Agreement,
which conditions shall be and are hereby incorporated  herein by reference;  and
the Company's obligation to issue the Warrants is subject to the closing

                                      -5-
<PAGE>

of the  transactions  contemplated  by the Loan Agreement to occur in connection
with the Initial Advance.

SECTION 6. REPRESENTATIONS AND WARRANTIES.

      Section 6.1 Purchase for Investment.  The Purchaser  represents that it is
purchasing the Warrants for its own account or for one or more separate accounts
maintained  by the  Purchaser or for the account of one or more pension or trust
funds and not with a view to the public distribution thereof,  provided that the
disposition  of its  property  shall at all times be  within  its  control.  The
Purchaser  further  represents  that it is an  accredited  investor  within  the
meaning of Rule 501(a)  promulgated  under the  Securities  Act.  The  Purchaser
understands  that the Warrants have not been registered under the Securities Act
and  may  be  resold  only  if  registered  pursuant  to the  provisions  of the
Securities Act or if an exemption from  registration is available,  except under
circumstances  where neither such registration nor such an exemption is required
by law,  and that the Company is not  required  (except as  provided  herein) to
register the Warrants.

      Section 6.2 Source of Funds.  The Purchaser  represents that the source of
funds  to be used by it to pay the  purchase  price  of the  Warrants  does  not
include  assets of any  employee  benefit  plan,  within  the  meaning of 29 CFR
Section 2510.3-101, of the Company.

SECTION 7. TRANSFER; REGISTRATION.

      Section  7.1  Restrictions  on  Transferability.   The  Warrants  and  the
Restricted  Shares  shall  not  be  transferable   except  upon  the  conditions
hereinafter  specified,  which conditions are intended to insure compliance with
the provisions of the Securities Act and any applicable state securities laws.

      Section 7.2 Notice of Proposed Transfer; Registration Not Required; Deemed
Representation.  The  Holder  of  each  Warrant  or any  Restricted  Shares,  by
acceptance  thereof,  agrees to give prior written notice to the Company of such
Holder's  intention to transfer such Warrant (or the Underlying  Shares relating
thereto) or such  Restricted  Shares (or,  in each case,  any portion  thereof),
describing  briefly  the  manner and  circumstances  of the  proposed  transfer;
provided,  however, that no such notice shall be required for a transfer under a
registration made in accordance with the provisions of Section 7.3.

      Section 7.3 Required Registration.

            (a) At any time after the making of the Loan  Advance (if any) which
increases the outstanding principal balance of the Loan to at least $10,000,000,
the Holders of at least a majority of the aggregate then  outstanding  number of
Underlying Shares and Restricted  Shares may, upon written request,  require the
Company to effect the  registration (a "Demand  Registration")  or qualification
under  applicable  Federal or state  securities laws of such  Underlying  Shares
and/or  Restricted  Shares.  Upon receipt of such written  request,  the Company
shall  promptly  give written  notice to all Holders of Warrants and  Restricted
Shares of a proposed

                                      -6-
<PAGE>

registration or qualification,  and shall,  subject to the conditions of Section
7.4,  as  expeditiously  as  possible,  use its best  efforts to effect any such
registration or qualification of:

                  (i) such Underlying  Shares or such Restricted  Shares, or any
combination thereof; and

                  (ii) all other  Underlying  Shares  and  Restricted  Shares of
Holders of Warrants or Restricted Shares which shall have advised the Company in
writing within 30 days after the giving of such written notice by the Company of
their desire to have their Underlying  Shares or Restricted Shares registered or
qualified or exempted, with, or notification to or approval of, any governmental
authority  under any  Federal or state  securities  laws,  or  listing  with any
securities  exchange,  which  may be  required  to  permit  the  sale  or  other
disposition of any such Underlying Shares or Restricted Shares which the Holders
thereof  propose to make,  and the Company  will, if the  registration  does not
relate  to an  underwritten  distribution,  keep  effective  such  registration,
qualification,  exemption,  notification  or approval  for such period as may be
necessary  to effect such sales or  dispositions  up to a maximum  period of six
months after initial effectiveness.

      If the managing  underwriter  engaged in connection  with an  underwritten
public offering of such Securities  proposed for registration under this Section
7.3 determines in good faith and for valid business reasons that registration of
such Underlying  Shares or Restricted Shares would have an adverse effect on the
marketability  or the price of such offering (a "Cutback  Determination"),  such
managing   underwriter   shall  give  prompt  written  notice  of  such  Cutback
Determination to such requesting Holder or Holders.  In such event, the Company,
upon  written  notice to the  Holders of such  Underlying  Shares or  Restricted
Shares,  shall have the right to limit such Underlying Shares or such Restricted
Shares to be registered, if any, to the largest number which would not result in
such  adverse  effect  on  marketability  or the  price of such  offering  (such
limitation being applied to each such requesting  Holder of Underlying Shares or
Restricted  Shares pro rata in  respect of the number of shares  subject to such
request).  No Securities of any Person,  other than a Holder, may be included in
any registration pursuant to this Section 7.3 without the written consent of the
Holders of at least a majority of the Underlying Shares and/or Restricted Shares
participating in such offering.

            (b)  Registration  Procedures.  In  connection  with  the  Company's
obligations  with respect to a Demand  Registration  pursuant to Section  7.3(a)
hereof,  the  Company  shall  use its  best  efforts  to  effect  or  cause  the
registration or qualification of the Underlying  Shares and/or Restricted Shares
under the Securities Act and applicable state securities laws to permit the sale
of such  Underlying  Shares and/or  Restricted  Shares by the Holders thereof in
accordance  with  the  intended   method  of   distribution   thereof  (if  such
distribution is possible), and pursuant thereto, the Company shall:

                  (i) prepare and,  within 120 days after receipt of the request
pursuant to Section  7.3(a)  hereof,  file with the  Commission  a  registration
statement or registration  statements  with respect to a Demand  Registration on
any form  which may be  utilized  by the  Company  and which  shall  permit  the
disposition of the Underlying Shares and/or Restricted Shares in accordance with
the intended method or methods thereof, and use its best efforts to

                                      -7-
<PAGE>

cause such registration statement or registration statements to become effective
as expeditiously as possible;

                  (ii) prepare and file with the Commission  such amendments and
supplements  to  a  registration  statement  or  statements  hereunder  and  the
prospectus  used in  connection  therewith  as may be  necessary to maintain the
effectiveness of such registration statement for the applicable period specified
in  Section  7.3(a)  hereof,  and  comply  in all  material  respects  with  the
provisions of the  Securities  Act and  applicable  state  securities  laws with
respect to the  disposition  of all of the Underlying  Shares and/or  Restricted
Shares to be  included in such  registration  statement  during such  applicable
period in accordance  with the intended  methods of  disposition  by the Holders
thereof set forth in the registration statement;

                  (iii)  provide the  Holders of the  Underlying  Shares  and/or
Restricted Shares to be included in a registration  statement  hereunder and the
underwriters (which term, for purposes of this Agreement, shall include a Person
deemed  to be an  underwriter  within  the  meaning  of  Section  2(11)  of  the
Securities  Act),  if any, of the Common  Shares being sold and counsel for such
underwriters  and not more than one counsel for such  Holders  (selected  by the
Holders of at least a majority of the Underlying Shares and/or Restricted Shares
participating   in  such  offering)  the   opportunity  to  participate  in  the
preparation of such registration statement,  each prospectus included therein or
filed with the Commission,  and each amendment or supplement  thereto;  and make
available for inspection by such Persons such  financial and other  information,
books  and  records  of the  Company,  and  cause the  officers,  directors  and
employees  of  the  Company,  and  counsel  and  independent   certified  public
accountants  for  the  Company,  to  respond  to such  inquiries,  as  shall  be
reasonably  necessary,  in the opinion of the respective counsel to such Holders
and such underwriters,  to conduct a reasonable investigation within the meaning
of the Securities Act;

                  (iv) promptly notify the selling Holders of Underlying  Shares
and/or  Restricted Shares to be included in a registration  statement  hereunder
and the  managing  underwriters,  if any, of the  Securities  being sold and (if
requested  by any such  Person)  confirm  such advice in writing,  (1) when such
registration   statement,   the  prospectus  or  any  prospectus  supplement  or
post-effective  amendment has been filed, and, with respect to such registration
statement or any post-effective  amendment,  when the same has become effective,
(2) of any request by the  Commission  for  amendments  or  supplements  to such
registration  statement or the  prospectus  or for  additional  or  supplemental
information,  (3) of the issuance by the Commission of any stop order suspending
the  effectiveness  of such  registration  statement  or the  initiation  of any
proceedings  for  that  purpose,  (4) if at any  time  the  representations  and
warranties of the Company  contemplated by paragraph (xi) below cease to be true
and correct in all material  respects,  (5) of the receipt by the Company of any
notification  with  respect  to  the  suspension  of  the  qualification  of the
Underlying  Shares or  Restricted  Shares  for sale in any  jurisdiction  or the
initiation or threat of any proceeding for such purpose, or (6) at any time when
a  prospectus  is  required to be  delivered  under the  Securities  Act, of the
happening  of any  event  as a  result  of which  such  registration  statement,
prospectus, any prospectus supplement, or any document incorporated by reference
in any of the foregoing contains an untrue statement of a material fact or omits
to state any material  fact  required to be stated  therein or necessary to make
the  statements  therein  not  misleading  in  light of the  circumstances  then
existing;

                                      -8-
<PAGE>

                  (v) make  reasonable  efforts to obtain the  withdrawal of any
order suspending the effectiveness of a registration  statement hereunder or any
post-effective amendment thereto at the earliest practicable date;

                  (vi) if requested by the managing  underwriter or underwriters
or the Holders of at least a majority of the Underlying Shares and/or Restricted
Shares  being  sold,  promptly   incorporate  in  a  prospectus   supplement  or
post-effective  amendment  such  information  as such  managing  underwriter  or
underwriters,  if any, or such Holders of at least a majority of the  Underlying
Shares and/or  Restricted  Shares being sold specify should be included  therein
relating  to the  sale  of  the  Underlying  Shares  and/or  Restricted  Shares,
including,  without  limitation,  information  with  respect  to the  number  of
Underlying Shares and/or Restricted Shares being sold to such underwriters,  the
purchase price being paid therefor by such  underwriters and with respect to any
other terms of the underwritten (or best efforts  underwritten)  offering of the
Underlying Shares and/or  Restricted Shares to be sold in such offering,  except
to the  extent  that the  Company  is  advised  in a written  opinion of outside
counsel that the inclusion of such  information is reasonably  likely to violate
the federal  securities  laws; and make all required  filings of such prospectus
supplement  or  post-effective  amendment  promptly  after  notification  of the
matters to be  incorporated  in such  prospectus  supplement  or  post-effective
amendment;

                  (vii)  furnish  to each  Holder of  Underlying  Shares  and/or
Restricted Shares to be included in a registration  statement hereunder and each
underwriter,  if any, of the Securities being sold such number of copies of such
registration statement, each such amendment and supplement thereto (in each case
including all exhibits  thereto),  the prospectus  included in such registration
statement and such other documents as such Holder and  underwriter,  if any, may
reasonably  request in order to facilitate  the  disposition  of the  Underlying
Shares and/or  Restricted  Shares owned by such Holder;  the Company consents to
the use of the prospectus or any amendment or supplement  thereto by each of the
selling  Holders  of  Underlying   Shares  and/or   Restricted  Shares  and  the
underwriters in connection  with the offering and sale of the Underlying  Shares
and/or  Restricted  Shares  covered  by  the  prospectus  or any  supplement  or
amendment thereto;

                  (viii) use its best  efforts to (1)  register  or qualify  the
Underlying  Shares  and/or  Restricted  Shares to be included in a  registration
statement  hereunder  under such other  securities laws or Blue Sky laws of such
jurisdictions as any Holder of such Underlying  Shares and/or  Restricted Shares
and each  underwriter,  if any, of the  Securities  being sold shall  reasonably
request,  (2) keep such registrations or qualifications in effect for so long as
the  registration  statement  remains  in  effect  and (3) take any and all such
actions as may be  reasonably  necessary  or advisable to enable such Holder and
underwriter, if any, to consummate the disposition in such jurisdictions of such
Underlying  Shares  and/or  Restricted  Shares owned by such  Holder;  provided,
however,  that the  Company  shall not be required  for any such  purpose to (A)
qualify  generally to do business as a foreign  corporation in any  jurisdiction
wherein it would not  otherwise be required to qualify but for the  requirements
of this  paragraph  (viii) or (B)  consent to general  service of process in any
such jurisdiction;

                                      -9-
<PAGE>

                  (ix)  use its best  efforts  to  cause  all of the  Underlying
Shares  and/or  Restricted  Shares  that are to be  included  in a  registration
statement hereunder to be registered with or approved by such other governmental
agencies  or  authorities  as may be  necessary  by virtue of the  business  and
operations of the Company to enable the Holder or Holders  thereof to consummate
the disposition of such Underlying Shares and/or Restricted Shares;

                  (x) cooperate with the Holders of the Underlying Shares and/or
Restricted Shares to be included in a registration  statement  hereunder and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates  representing  Underlying  Shares and/or Restricted Shares to be
sold  and  not  bearing  any  restrictive  legends;  and,  in  the  case  of  an
underwritten offering, enable such Underlying Shares and/or Restricted Shares to
be  in  such  denominations  and  registered  in  such  names  as  the  managing
underwriters  may  request at least two  Business  Days prior to any sale of the
Underlying Shares and/or Restricted Shares;

                  (xi)  enter  into  such  customary  agreements  (including  an
underwriting  agreement,  in the event that the shares to be included  are to be
distributed  by means of an  underwritten  public  offering) and take such other
actions in  connection  therewith  as the  Holders of at least a majority of the
Underlying  Shares  and/or  Restricted  Shares to be included in a  registration
statement  hereunder shall reasonably request in order to expedite or facilitate
the disposition of such Underlying  Shares and/or  Restricted Shares and in such
connection, whether or not an underwriting agreement is entered into and whether
or  not  the   disposition   is  an   underwritten   offering,   (1)  make  such
representations,  warranties and  indemnities to the Holders of such  Underlying
Shares and/or Restricted Shares and the underwriters, if any, in form, substance
and scope as are  customarily  made in an underwritten  offering;  (2) obtain an
opinion of counsel to the Company in customary form and covering such matters of
the type  customarily  covered  by such  opinion  as the  Holders  of at least a
majority of the  Underlying  Shares and/or  Restricted  Shares to be included in
such  registration  statement  and  the  underwriters,  if any,  may  reasonably
request,  addressed  to the selling  Holders and the  underwriters,  if any, and
dated the date of the closing as specified in the  underwriting  agreement;  (3)
obtain a "cold  comfort" or  procedures  letter from the  independent  certified
public accountants of the Company addressed to the selling Holders of Underlying
Shares and/or Restricted Shares and to the underwriters,  if any, dated the date
of the closing, such letter to be in customary form and covering such matters of
the type customarily covered by such letter in an underwritten offering; and (4)
deliver such documents and  certificates  as may be reasonably  requested by the
Holders of at least a majority of the Underlying Shares and/or Restricted Shares
being sold and the managing  underwriters,  if any, to evidence  compliance with
clause (1) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company;

                  (xii)  otherwise  use its  best  efforts  to  comply  with all
applicable  rules and regulations of the  Commission,  and make available to its
security  holders,  as soon as  reasonably  practicable,  an earnings  statement
covering a period of at least twelve months which shall  satisfy the  provisions
of  Section  11(a)  of the  Securities  Act  and  Rule  158  of  the  Commission
thereunder;

                                      -10-
<PAGE>

                  (xiii)   provide  a  transfer  agent  and  registrar  for  all
Underlying  Shares  and/or   Restricted  Shares  registered   pursuant  to  such
registration  statement and a CUSIP number for all such Underlying Shares and/or
Restricted  Shares,  in each  case not  later  than the  effective  date of such
registration; and

                  (xiv)  use its  best  efforts  to have the  Underlying  Shares
and/or  Restricted  Shares  listed,  subject to notice,  on the  American  Stock
exchange,  The  Nasdaq  Stock  Market or other  applicable  national  securities
exchange as the Company shall determine to be appropriate.

      Upon the occurrence of any event contemplated by paragraph (iv) above, the
Company shall,  as soon as reasonably  practicable,  prepare and furnish to each
Holder  included  in such  registration  statement  and  underwriter,  if any, a
reasonable number of copies of a prospectus  supplemented or amended so that, as
thereafter delivered to the Purchaser of the Underlying Shares and/or Restricted
Shares, such prospectus shall not contain an untrue statement of a material fact
or omit to state a material fact  required to be stated  therein or necessary to
make the statements  therein not misleading in light of the  circumstances  then
existing.  Each Holder of Underlying Shares and/or Restricted Shares agrees that
upon receipt of any notice from the Company of the happening of any event of the
kind described in paragraph (iv) hereof, such Holder shall forthwith discontinue
the disposition of Underlying  Shares and/or  Restricted  Shares pursuant to the
registration  statement  applicable to such Underlying  Shares and/or Restricted
Shares  until  such  Holder  receives  copies of such  amended  or  supplemented
registration  statement or prospectus,  and, if so directed by the Company, such
Holder shall deliver to the Company (at the Company's expense) all copies, other
than permanent file copies,  then in such Holder's  possession of the prospectus
covering such Underlying  Shares and/or Restricted Shares at the time of receipt
of such notice.

      The Company may require each Holder of Underlying Shares and/or Restricted
Shares as to which any  registration is being effected to furnish to the Company
such  information  regarding such Holder and the distribution of such Underlying
Shares and/or  Restricted Shares as the Company may from time to time reasonably
request in writing in order to comply with the  Securities  Act.  Each Holder of
Underlying Shares and/or Restricted Shares as to which any registration is being
effected  agrees to  notify  the  Company  as  promptly  as  practicable  of any
inaccuracy or change in information  previously  furnished by such Holder to the
Company or of the  happening  of any event,  in either case as a result of which
any prospectus  relating to such registration  contains an untrue statement of a
material  fact  regarding  such Holder or the  distribution  of such  Underlying
Shares and/or  Restricted  Shares or omits to state any material fact  regarding
such Holder or the  distribution  of such  Underlying  Shares and/or  Restricted
Shares required to be stated therein or necessary to make the statements therein
not  misleading  in light of the  circumstances  then  existing,  and to furnish
promptly  to the  Company  any  additional  information  required to correct and
update any previously furnished  information or required so that such prospectus
shall  not  contain,  with  respect  to such  Holder or the  intended  method of
distribution  of such  Underlying  Shares and/or  Restricted  Shares,  an untrue
statement  of a material  fact or omit to state a material  fact  required to be
stated  therein or necessary to make the  statements  therein not  misleading in
light of the circumstances then existing.

                                      -11-
<PAGE>

      Section 7.4 Conditions to Required Registration.  The Company shall not be
required to register or effect any  registration or  qualification of Underlying
Shares and/or Restricted Shares pursuant to Section 7.3:

            (a) more than two (2) times,  provided that no registration shall be
included as a demand  registration  pursuant to this  Section  7.4(a) until such
time, if any, as the registration  statement filed in connection therewith shall
be  declared  effective;  provided  further  that no  registration  subject to a
Cutback  Determination  shall be included as a demand  registration  pursuant to
this Section 7.4(a);

            (b) unless there shall have elapsed after a previous registration of
Underlying  Shares and/or  Restricted Shares pursuant to Section 7.3, or after a
registration  of other shares in which the Holders of the  Underlying  Shares or
Restricted  Shares  could  participate  pursuant to Section 7.5, a period of 120
days or such longer period, not to exceed 180 days, as the managing  underwriter
in any such  registration  shall have determined to be necessary or desirable in
light of then current market conditions; and

            (c) unless the  request  therefor is to register at least 51% of the
aggregate  number of Underlying  Shares and  Restricted  Shares not  theretofore
registered pursuant to Section 7.3 or Section 7.5.

      Section 7.5 Incidental Registrations.  The Company agrees that at any time
it  proposes  to  register  any of its Common  Shares in a primary or  secondary
offering under the  Securities  Act (otherwise  than pursuant to Section 7.3) on
Form S-3 or any other form of  registration  statement  (other  than Form S-4 or
Form S-8) then available for the registration  under the Securities Act, it will
give timely written notice to all Holders of outstanding Warrants and Restricted
Shares of its  intention so to do and upon the written  request of the Holder of
any such  Warrants or Restricted  Shares,  given within 30 days after receipt of
any such notice from the Company, the Company will in each instance;  subject to
the next  paragraph  of this  Section  7.5,  use its best  efforts  to cause all
Underlying  Shares  or  Restricted  Shares  requested  to be  included  in  such
registration by any such requesting Holder to be registered under the Securities
Act and  registered or qualified  under any state  securities  laws,  all to the
extent necessary to permit the sale or other  disposition  thereof in the manner
stated  in  such  request  by  the  prospective  seller  of  the  Securities  so
registered.  Nothing in this  Section 7.5 shall be deemed to require the Company
to proceed with any  registration  of its Common  Shares after giving the notice
herein provided.  Registration pursuant to this Section 7.5 shall, to the extent
applicable,  be in  accordance  with,  and  subject  to the  provisions  of, the
"Registration Procedures" set forth in Section 7.3(b).

      If the managing  underwriter  engaged by the Company in connection with an
underwritten  public  offering of such Common Shares  proposed for  registration
under this Section 7.5 determines in good faith and for valid  business  reasons
that  registration of such Underlying  Shares or Restricted Shares would have an
adverse  effect  on  the  marketability  or  the  price  of  such  offering  (an
"Incidental Cutback Determination"), such managing underwriter shall give prompt
written  notice of such  Incidental  Cutback  Determination  to such  requesting
Holder or Holders. In such event the Company, upon written notice to the Holders
of such Underlying  Shares or Restricted  Shares,  shall have the right to limit
such Underlying Shares or such

                                      -12-
<PAGE>

Restricted  Shares to be  registered,  if any, to the largest number which would
not result in such adverse effect on marketability or the price of such offering
(such  limitation  being  applied to each such  requesting  Holder of Underlying
Shares or Restricted  Shares pro rata in respect of the number of shares subject
to such  request);  provided  that,  if Common Shares of the Company held by any
Person other than the Purchaser and its permitted transferees are to be included
in  such  underwritten   public  offering  pursuant  to  so-called  "demand"  or
"piggy-back"  rights given to such other Person, such reduction in the number of
Underlying Shares or Restricted Shares (treating all such shares as one class of
Securities  for this  purpose)  shall be only after the  exclusion of all equity
instruments  proposed to be included by such other Person  pursuant to so-called
"demand" or "piggy-back" rights.

      Section 7.6 Underwritten Offerings. If the intended method of distributing
the Underlying  Shares and/or Restricted Shares to be included in a registration
pursuant to Section 7.3 or Section 7.5 is an underwritten public offering,  then
the Company shall select the managing underwriter(s) for such offering,  subject
in the case of a registration  pursuant to Section 7.3 to the written consent of
the Holders of at least a majority of the  Underlying  Shares and/or  Restricted
Shares  to be  included  in  such  registration,  which  consent  shall  not  be
unreasonably withheld. Each Holder of Underlying Shares and/or Restricted Shares
to be included in a registration pursuant to Section 7.3 or Section 7.5 which is
an  underwritten  public  offering shall enter into an  underwriting  agreement,
custody  agreement  and  power  of  attorney  in  such  forms  as  the  managing
underwriter(s) and the Company shall reasonably request, which shall in no event
contain indemnity or contribution provisions inconsistent with the provisions of
Section 7.8, provided that in the case of a registration pursuant to Section 7.3
such  agreements and documents are in customary form and substance or reasonably
acceptable  to the  Holders  of a  majority  of said  Underlying  Shares  and/or
Restricted  Shares.  Each Holder of the  Warrants  or  Restricted  Shares  shall
refrain from selling Warrants or Restricted Shares for a period not to exceed 90
days from the date of the public offering or if such offering is an underwritten
distribution  such  longer  period,  not to  exceed  180 days,  as the  managing
underwriter  in such  registration  shall have  determined  to be  necessary  or
desirable in light of then current market  conditions,  any Underlying Shares or
Restricted Shares which are not included in registration pursuant to Section 7.3
or Section 7.5.

      Section 7.7 Expenses;  Reliance. The Company shall pay all expenses (other
than the expenses of underwriters),  including, without limitation, registration
fees,  qualification  fees,  legal expenses  (including the reasonable  fees and
expenses  of one counsel to the Holders of the  Warrants  or  Restricted  Shares
whose Underlying  Shares or Restricted  Shares are being  registered),  printing
expenses and the costs of special audits,  if any, and "cold comfort" letters in
connection with the  registration and  qualification,  notification or exemption
requested by any Holder or Holders of Warrants or Restricted  Shares pursuant to
Section 7.3 and Section 7.5. In addition,  the Company shall pay the expenses of
underwriters  (excluding  underwriting discounts and commissions,  but including
the reasonable fees and expenses of any necessary special experts) in connection
with the registration and qualification,  notification or exemption requested by
any Holder or Holders of Warrants or Restricted  Shares  pursuant to Section 7.3
and Section 7.5. The Holders of the Underlying  Shares and/or  Restricted Shares
shall be responsible for applicable  transfer taxes,  brokerage  commissions and
their pro rata share of the underwriting

                                      -13-
<PAGE>

discounts and commissions in connection with any  registration  requested by any
Holder or Holders of Warrants or  Restricted  Shares  pursuant to Section 7.3 or
Section 7.5.

      Section 7.8 Indemnification and Contribution.

            (a)   In   connection   with   any   registration,    qualification,
notification,  or exemption of Securities  under Section 7.3 or Section 7.5, the
Company hereby indemnifies each Holder of the Warrants, Underlying Shares and/or
Restricted Shares,  including each Person, if any, who controls each such Holder
within the  meaning of Section 15 of the  Securities  Act,  against  all losses,
claims, damages and liabilities (including, without limitation, any liability of
any  such  Holder  or  Person  to any  underwriter  participating  in  any  such
registration, qualification, notification or exemption) caused by any untrue, or
alleged  untrue,  statement of a material  fact  contained  in any  registration
statement or prospectus or notification or offering  circular (and as amended or
supplemented  if the Company shall have  furnished any amendments or supplements
thereto)  or any  preliminary  prospectus  or caused by any  omission or alleged
omission  to state  therein a material  fact  required  to be stated  therein or
necessary to make the statements therein not misleading,  except insofar as such
losses,  claims,  damages or liabilities  are caused by any untrue  statement or
alleged untrue  statement or omission or alleged omission based upon information
furnished  in writing to the Company by such Holder  expressly  for use therein,
and the Company and each officer, director and controlling Person of the Company
shall be indemnified by each Holder of the Underlying  Shares and/or  Restricted
Shares for all such losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement or omission or alleged omission based upon
information  furnished  in writing to the  Company by each such  Holder  thereof
expressly for any such use;  provided,  however,  that the liability of any such
Holder for  indemnification  under this  Section  7.8 shall not exceed the gross
proceeds  from  the  sale  of  such  Holder's  Warrants,  Underlying  Shares  or
Restricted Shares. The foregoing is subject to the condition that, insofar as it
relates to any untrue statement, alleged untrue statement or omission or alleged
omission made in any  preliminary  prospectus  but eliminated or remedied in the
final prospectus (or in any amendment or supplement  thereto),  the indemnity of
the  Company  shall not inure to the benefit of any  underwriter  or Holder from
whom the Person  asserting any loss,  claim or damage  purchased the  Underlying
Shares  and/or  Restricted  Shares  which were the  subject  thereof  (or to the
benefit of any Person who  controls  such  underwriter),  if a copy of the final
prospectus  (or such  amendment or supplement  thereto) was not sent or given to
such Person at or prior to the time such  action is  required by the  Securities
Act.

            (b) Promptly upon receipt by a party  indemnified under this Section
7.8 of notice of the commencement of any action against such  indemnified  party
in  respect  of which  indemnity  or  reimbursement  may be sought  against  any
indemnifying  party under this Section 7.8, such indemnified  party shall notify
the indemnifying  party in writing of the  commencement of such action,  but the
failure  so to  notify  the  indemnifying  party  shall  not  relieve  it of any
liability which it may have to any indemnified  party (i) under this Section 7.8
except to the extent that the  indemnifying  party is  materially  prejudiced by
such failure to notify,  or (ii)  otherwise than under this Section 7.8. In case
notice of commencement of any such action of shall be given to the  indemnifying
party as above provided, the indemnifying party shall be entitled to participate
in and, to the extent it may wish,  jointly  with any other  indemnifying  party

                                      -14-
<PAGE>

similarly  notified,  to assume the defense of such  action at its own  expense,
with  counsel  chosen by it and  satisfactory  to such  indemnified  party.  The
indemnified  party shall have the right to employ  separate  counsel in any such
action and participate in the defense thereof, and the fees and expenses of such
counsel shall be paid by the indemnified party.

            (c) If the indemnification provided for in this Section 7.8 from the
indemnifying  party is unavailable to an indemnified  party hereunder in respect
of  any  losses,  claims,  damages,   liabilities  or  expenses  to  which  such
indemnified  party would be otherwise  entitled under Section  7.8(a),  then the
indemnifying  party,  in lieu of  indemnifying  such  indemnified  party,  shall
contribute to the amount paid or payable by such  indemnified  party as a result
of such losses, claims,  damages,  liabilities or expenses in such proportion as
is  appropriate  to reflect the  relative  fault of the  indemnifying  party and
indemnified  parties in  connection  with the  actions  which  resulted  in such
losses, claims, damages,  liabilities or expenses, as well as any other relevant
equitable  considerations.  The relative  fault of such  indemnifying  party and
indemnified  parties  shall be  determined  by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information  supplied by, such indemnifying party or
indemnified  parties,  and the parties'  relative intent,  knowledge,  access to
information and  opportunity to correct or prevent such action.  The amount paid
or payable by a party as a result of the losses,  claims,  damages,  liabilities
and  expenses  referred  to above  shall be deemed to include any legal or other
fees or  expenses  reasonably  incurred  by such  party in  connection  with any
investigation  or  proceeding.  In  no  event  shall  any  Holder  of  Warrants,
Underlying  Shares or  Restricted  Shares be  required to  contribute  an amount
greater  than the dollar  amount of the  proceeds  received  by such Person with
respect to the sale of any Warrants, Underlying Shares or Restricted Shares.

      The  parties  hereto  agree  that it would  not be just and  equitable  if
contribution  pursuant  to this  Section  7.8(c)  were  determined  by pro  rata
allocation or by any other method of  allocation  which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent  misrepresentation (within the meaning of Section
11 (f) of the Securities Act) shall be entitled to contribution  from any Person
who was not guilty of such fraudulent misrepresentation.

            (d)  The  indemnification  and  contribution  provided  for in  this
Section 7.8 shall  survive,  with  respect to a Holder of  Underlying  Shares of
Restricted  Shares,  the transfer of Underlying  Shares or Restricted  Shares by
such  Holder and with  respect to a Holder of  Underlying  Shares or  Restricted
Shares,  shall remain in full force and effect  regardless of any  investigation
made by or on behalf of any indemnified party.

            (e) In connection with any  registration  pursuant to Section 7.3 or
Section  7.5,  the Company  agrees,  and each  Holder of Warrants or  Restricted
Shares  (other than any such Holder which shall have  executed  and  delivered a
counterpart  of this  Agreement) by acceptance of such  Warrants,  or Restricted
Shares, agrees that it will enter into an agreement containing substantially the
indemnification provisions of this Section 7.8.

                                      -15-
<PAGE>

      Section 7.9 Additional Registration Rights. The Company shall not grant to
any Person at any time after the date hereof the right to request the Company to
effect  the   registration  or  qualification  or  filing  for  exemption  under
applicable  Federal or state  securities  laws of any  Securities of the Company
unless the  agreement  or  agreements  providing  for such  rights  specifically
provide  that the  holders of such rights  ("Third  Party  Rights")  (i) may not
participate  in any  registration  requested  pursuant to Section 7.3 unless the
underwriters  of the  distribution  confirm that the inclusion of the Securities
proposed  to be included  pursuant  to said Third Party  Rights will not have an
adverse  effect on the  marketability  or price of the offering  pursuant to the
registration  under  Section  7.3 hereof and (ii) shall not  exercise  so-called
"demand" or "piggyback"  rights except on a junior and subordinate  basis to the
rights  granted under Section 7.5 hereof.  In addition to, and not in limitation
of, the foregoing, the Company shall not grant to any Person registration rights
which are more advantageous to such Person than the registration rights afforded
hereunder.

      Section 7.10 Restrictive  Legends.  Each Warrant initially issued and each
Warrant issued in exchange  therefor shall,  unless  otherwise  permitted by the
provisions  of this  Section  7.10,  bear on the face  thereof a legend  reading
substantially as follows:

            "This  Warrant and the Common Shares  issuable upon exercise  hereof
            have not been  registered or qualified for sale under the Securities
            Act of 1933, as amended, or any state securities laws and may not be
            offered for sale, sold or otherwise  transferred  unless such offer,
            sale  or  transfer  is  registered  or  qualified  pursuant  to  the
            registration  requirements of such Securities Act and any applicable
            state  securities  laws,  or is  preceded  by an  opinion of counsel
            addressed to The Allied Defense Group,  Inc. that such sale or other
            transfer is exempt  from all such  registration  requirements.  This
            Warrant and the Common  Shares  issuable  upon  exercise  hereof are
            subject  to the  terms  and  provisions  specified  in  the  Warrant
            Agreement dated as of May 28, 2004 between The Allied Defense Group,
            Inc. and Wilton Funding, LLC."

      Each  certificate for Common Shares of the Company  initially  issued upon
the  exercise  of any  Warrant  and each  certificate  for Common  Shares of the
Company  issued to a subsequent  transferee of such  certificate  shall,  unless
otherwise  permitted by the  provisions of this Section  7.10,  bear on the face
thereof a legend reading substantially as follows:

            "The shares represented by this certificate have not been registered
            under  the  Securities  Act  of  1933,  as  amended,  or  any  state
            securities laws and may not be sold or transferred in the absence of
            such  registration  unless  such sale or  transfer is preceded by an
            opinion of counsel  addressed to The Allied Defense Group, Inc. that
            such  sale  or  other   transfer  is  exempt  from  a   registration
            requirements  of said  Securities Act and any such state  securities
            laws  which may be  applicable  and are  subject to of the terms and
            provisions  specified in that certain Warrant  Agreement dated as of

                                      -16-
<PAGE>

            May 28,  2004  between The Allied  Defense  Group,  Inc.  and Wilton
            Funding, LLC."

      In the event that a registration  statement covering  Underlying Shares or
Restricted  Shares shall become effective under the Securities Act and under any
applicable  state securities laws or in the event that the Company shall receive
an opinion of its counsel (or, at the Company's election,  nationally recognized
counsel to a Holder) that,  in the opinion of such counsel,  such legend is not,
or is no longer, necessary or required (including,  without limitation,  because
of the availability of the exemptions  afforded by Rule 144 of the General Rules
and  Regulations of the  Commission),  the Company shall,  or shall instruct its
transfer  agents and  registrars  to,  remove such legend from the  Warrants and
certificates evidencing Restricted Shares or issue new Warrants and certificates
without such legend in lieu thereof.  Upon the written  request of the Holder or
Holders of any Warrants or any  Restricted  Shares,  the Company  covenants  and
agrees forthwith to request its counsel to render an opinion with respect to the
matters  covered by this  Section  7.10 and to bear all  reasonable  expenses in
connection with any opinion of counsel contemplated hereinabove.

      Section 7.11  Miscellaneous.  The Company  shall comply with all reporting
requirements  set  forth  or  referred  to in Rule  144  promulgated  under  the
Securities Act and shall do all such other things as may be reasonably necessary
to permit the expeditious sale at any time of any Warrants, Restricted Shares or
Underlying  Shares by the Holder  thereof in  accordance  with and to the extent
permitted by said Rule 144 or any other similar Rule or Rules promulgated by the
Commission from time to time.

SECTION 8. REDEMPTION OF WARRANTS AND/OR RESTRICTED SHARES.

      Section 8.1  Redemption.  The Warrants and  Underlying  Shares and Warrant
Shares are not and shall not be redeemable.

SECTION 9. LOST, STOLEN WARRANTS, ETC.

      In case any Warrant shall be  mutilated,  lost,  stolen or destroyed,  the
Company  shall  issue a new  Warrant of like date,  tenor and  denomination  and
deliver  the  same in  exchange  and  substitution  for and upon  surrender  and
cancellation  of the  mutilated  Warrant,  or in lieu  of the  lost,  stolen  or
destroyed Warrant,  upon receipt of evidence  satisfactory to the Company of the
loss,  theft or  destruction  of such  Warrant,  and upon  receipt of  indemnity
satisfactory to the Company (which, in the case of the Purchaser,  shall consist
of its  unsecured  agreement to indemnify  the Company for a loss in  connection
with such loss, theft or destruction of such Warrant).

                                      -17-
<PAGE>

SECTION 10. PROTECTIVE PROVISIONS.

      The Company will not, without the written consent of the Majority Holders:

                  (i) be bound by or subject  to (or  permit  the  Company to be
bound  by or  subject  to) any  debt or  other  agreement  (other  than the Loan
Agreement)  which  restricts  the right or ability of the Company to perform its
obligations hereunder or under the Warrants; or

                  (ii) amend the terms of the Common  Shares or otherwise  amend
or change its certificate of incorporation or bylaws (each as currently  amended
and/or  restated) in a manner which could  materially and adversely  affect this
Agreement,  the Warrants,  the Warrant Shares or the rights of any Holder of any
of the foregoing or violate any of the terms or provisions hereof or thereof.

SECTION 11. INDEX AND CAPTIONS.

      The index and the  descriptive  headings of the  various  sections of this
Agreement  are for  convenience  only  and  shall  not  affect  the  meaning  or
construction of the provisions hereof.

SECTION 12. MISCELLANEOUS

      Section  12.1  Notices.  All  notices  and  communications   provided  for
hereunder shall be in writing and sent (a) by telecopy if the sender on the same
day sends a confirming  copy of such notice by a recognized  overnight  delivery
service  (charges  prepaid),  or (b) by registered or certified mail with return
receipt requested (postage prepaid),  or (c) by a recognized  overnight delivery
service (specifying next business day delivery,  with charges prepaid). Any such
notice must be sent:

                  (i) if to the  Purchaser or its nominee,  to the  Purchaser at
the address specified for such communications in the Loan Agreement,  or at such
other address as the Purchaser shall have specified to the Company in writing;

                  (ii) if to a Holder (other than the Purchaser), to such Holder
at its or his  address  appearing  on the  records of the  Company or such other
address as such Holder shall have specified to the Company in writing; or

                  (iii) if to the Company,  at 8000 Towers Crescent Drive, Suite
260,  Vienna,  Virginia  22182  or to such  other  address  as the  Company  may
designate  to the Holders in writing.  Notices  under this  Section 12.1 will be
deemed given only when actually received.

      Section 12.2 Successors and Assigns.  This Agreement shall be binding upon
the Company  and its  respective  successors  and assigns and shall inure to the
benefit of the Purchasers and their successors and permitted assigns,  including
each successive Holder.

                                      -18-
<PAGE>

      Section  12.3  Severability.  Should  any part of this  Agreement  for any
reason be declared invalid or  unenforceable,  such decision will not affect the
validity or  enforceability  of any remaining  portion,  which remaining portion
will remain in force and effect as if this  Agreement had been executed with the
invalid or  unenforceable  portion thereof  eliminated and it is hereby declared
the intention of the parties  hereto that they would have executed the remaining
portion of this  Agreement  without  including  therein any such part or portion
which may, for any reason, be hereafter declared invalid or unenforceable.

      Section 12.4  Headings;  Governing  Law. The  descriptive  headings of the
several  sections of this Agreement are inserted for convenience only and do not
constitute a part of this  Agreement.  This  Agreement  shall be  construed  and
enforced in accordance with, and the rights of the parties shall be governed by,
the law of the State of New York excluding  choice-of-law  principles of the law
of such State that would require the  application  of the laws of a jurisdiction
other than such state.

      Section 12.5 Amendment and Waiver.  Except as otherwise  provided  herein,
the provisions of this Agreement and the Warrants may be amended and the Company
may take  any  action  herein  prohibited,  or omit to  perform  any act  herein
required to be  performed  by it, only if the  Company  has  obtained  the prior
written consent of the Majority Holders; provided that no such action may change
the number of shares or class of stock  obtainable upon exercise of each Warrant
or the  Exercise  Price  therefor  or the  provisions  of Section 8 without  the
consent of the holders of at least 75% of the Underlying  Shares and the Warrant
Shares.

                                      -19-
<PAGE>

      The execution hereof by the undersigned  shall constitute a contract as of
the date first above written  between the Company and the Purchaser for the uses
and purposes hereinabove set forth. This Agreement may be executed in any number
of  counterparts,  each executed  counterpart  constituting  an original but all
together only one agreement.

PURCHASER:                                     COMPANY:
----------                                     --------

WILTON FUNDING, LLC,                           THE ALLIED DEFENSE GROUP, INC.,
  a Delaware limited liability company           a Delaware corporation

By:_______________________________             By:______________________________
Name:_____________________________             Name:____________________________
Title:____________________________             Title:___________________________

                                      -20-
<PAGE>
                                    EXHIBIT A
                                 FORM OF WARRANT

                                     WARRANT

================================================================================

      This Warrant and the Common Shares issuable upon exercise hereof have not
been registered or qualified for sale under The Securities Act of 1933, as
amended, or any state securities laws and may not be offered for sale, sold or
otherwise transferred unlEss such offer, sale or transfer is registered or
qualified pursuant to the registration requirements of such Act and any
applicable state securities laws, or is preceded by an opinion of counsel
addressed to THE ALLIED DEFENSE GROUP, INC. that such sale or other transfer is
exempt from all such registration requirements.] This Warrant and the Common
Shares issuable upon exercise hereof are subject to the terms and provisions
specified in the Warrant Agreement dated as of MAY 28, 2004 BETWEEN THE ALLIED
DEFENSE GROUP, INC. AND WILTON FUNDING, LLC.

No.  [__________]

                               Warrant to Purchase

                                  Common Shares

                                       of

                         THE ALLIED DEFENSE GROUP, INC.

================================================================================

<PAGE>

                                Table of Contents
<TABLE>
<CAPTION>

Section                                Heading                                             Page
-------                                -------                                             ----

<S>                   <C>                                                                    <C>
SECTION 1.            EXERCISE OF WARRANT....................................................1

SECTION 2.            RESERVATION............................................................2

SECTION 3.            PROTECTION AGAINST DILUTION............................................2
     Section 3.1      Stock Dividends; Subdivision or Combination of Common Shares...........2
     Section 3.2      [Reserved].............................................................3
     Section 3.3      Adjustment of Per Share Warrant Price..................................3
     Section 3.4      Adjustments to be Made Successively....................................3
     Section 3.5      Consideration..........................................................3
     Section 3.6      Certificates...........................................................3

SECTION 4.            MERGERS, CONSOLIDATIONS, SALES.........................................3

SECTION 5.            DISSOLUTION OR LIQUIDATION.............................................4

SECTION 6.            NOTICE OF EXTRAORDINARY DIVIDENDS......................................4

SECTION 7.            FRACTIONAL SHARES......................................................5

SECTION 8.            FULLY PAID STOCK; TAXES................................................5

SECTION 9.            CLOSING OF TRANSFER BOOKS..............................................5

SECTION 10.           PARTIAL EXERCISE AND PARTIAL ASSIGNMENT................................5
     Section 10.1     Partial Exercise.......................................................5
     Section 10.2     Assignment.............................................................5

SECTION 11.           DEFINITIONS............................................................6

SECTION 12.           WARRANT HOLDER NOT STOCKHOLDER.........................................7

SECTION 13.           SEVERABILITY...........................................................7

SECTION 14            GOVERNING LAW..........................................................7
</TABLE>

<PAGE>

No.  [__________]

                               Warrant to Purchase

                                  Common Shares

                                       of

                         THE ALLIED DEFENSE GROUP, INC.

      This is to certify that, for value received and subject to the provisions
hereinafter set forth,

                       [________________________________]

                            or its permitted assigns,

is  entitled  to  purchase  from THE  ALLIED  DEFENSE  GROUP,  INC.,  a Delaware
corporation  (the  "Company"),  at any  time  and from  time to time  after  the
expiration  of the Draw  Period  (as  defined in the Loan  Agreement)  and on or
before  the  Expiration  Date,  [_____________]  Common  Shares  of the  Company
(representing approximately [___]% of the Fully Diluted Outstanding Shares as of
the date hereof),  subject to the terms,  provisions and conditions  hereinafter
set forth, at a price of $0.01 per Common Share, for an aggregate price equal to
$[________] (the "Aggregate Warrant Price").

      The  Aggregate  Warrant  Price of the Common  Shares  subject to  purchase
hereunder shall be equal to the product of the price per share multiplied by the
number of Common Shares initially purchasable  hereunder.  The Aggregate Warrant
Price is not subject to adjustment.  The price per share is, however, subject to
adjustment as hereinafter  provided (such price, or such price as last adjusted,
as the case may be, being herein referred to as the "per share Warrant  Price").
The  number of Common  Shares  purchasable  hereunder  is  likewise  subject  to
adjustment as hereinafter provided.

      The terms which are capitalized  herein shall have the meanings  specified
in Section 11 unless the context shall otherwise require.

SECTION 1. EXERCISE OF WARRANT.

      Subject to the  conditions  hereinafter  set forth,  this  Warrant  may be
exercised  in  whole or in part at any time  and  from  time to time  after  the
expiration  of the Draw  Period  and on or prior to the  Expiration  Date by the
surrender of this  Warrant  (with the  subscription  form at the end hereof duly
executed) at the principal office of the Company in Vienna, Virginia (or at such
other  office of the  Company as may be  designated  by the Company in a written
notice to the holder  hereof) and upon  payment to the Company of the  Aggregate
Warrant Price (or, if exercised in part,  upon payment of a  proportionate  part
thereof) for the shares so purchased,

<PAGE>

which payment shall be made, at the option of the holder hereof, (i) by the wire
transfer or other delivery to the Company of cash or other Immediately Available
Funds to the  Company  or (ii) by  authorizing  the  Company  to  withhold  from
issuance a number of Common Shares  issuable  hereunder which when multiplied by
the Current Market Price of such Common Shares is equal to the Aggregate Warrant
Price (or, if this Warrant is exercised in part, a  proportionate  part thereof)
(and such withheld shares shall no longer be issuable under this Warrant).

      If this  Warrant  is  exercised  in respect of less than all of the Common
Shares at the time purchasable hereunder, the holder hereof shall be entitled to
receive a new  Warrant  covering  the  number of shares in respect of which this
Warrant shall not have been exercised (adjusted in accordance with Section 3(b),
if applicable) and setting forth the Aggregate  Warrant Price applicable to such
shares.

      This  Warrant and all rights and  options  hereunder  shall  expire to the
extent that it has not been exercised on or before the Expiration Date.

      The Company shall pay all  reasonable  expenses,  stamp,  documentary  and
transfer  taxes and other charges  payable in connection  with the  preparation,
execution  and  delivery  of  stock  certificates   pursuant  to  this  Section,
regardless  of the  name or  names in which  such  stock  certificates  shall be
registered.

SECTION 2. RESERVATION.

      The Company will at all times  reserve and keep  available  such number of
authorized  Common Shares,  solely for the purpose of issue upon the exercise of
the rights  represented  by this Warrant as herein  provided  for, as may at any
time be issuable (based upon the number of Common Shares outstanding at any such
time on a fully diluted basis) upon the exercise of this Warrant.

SECTION 3. PROTECTION AGAINST DILUTION.

      The  provisions of this Section 3 do not and are expressly not intended to
permit or  contemplate  the issuance of equity  prohibited by the  provisions of
this Warrant or the Warrant Agreement, including, without limitation, Section 10
of the Warrant  Agreement.  The per share Warrant Price and the number of shares
deliverable  hereunder  shall be adjusted from time to time as  hereinafter  set
forth.

      Section 3.1. Stock Dividends; Subdivision or Combination of Common Shares.
In the event that the Company shall at any time after the Closing Date:

            (a)   make a distribution on the Common Shares in shares;

            (b)   split or subdivide the outstanding Common Shares; or

            (c)   combine the outstanding Common Shares into a smaller number of
                  shares,

                                      -2-
<PAGE>

this Warrant  shall  thereafter  entitle the holder hereof to own or receive the
aggregate  number and kind of shares that,  if this  Warrant had been  exercised
immediately  prior to such  time,  the  holder  hereof  would have owned or have
become entitled to receive by virtue of such distribution, split, subdivision or
combination.

      Section 3.2 [Reserved.]

      Section 3.3  Adjustment of Per Share Warrant Price.  Upon each  adjustment
pursuant to this Section 3 to the number of Common  Shares  issuable  under this
Warrant, the per share Warrant Price shall be adjusted to equal the product of:

         (a) the per share Warrant Price  immediately  prior to such adjustment;
multiplied by

         (b) a fraction of which:

            (i) the numerator is the number of Common Shares issuable under this
Warrant immediately prior to such adjustment; and

            (ii) the  denominator is the number of Common Shares  issuable under
this Warrant immediately after the adjustment.

      Section 3.4 Adjustments to be Made Successively.  Any adjustment  pursuant
to this  Section 3, shall be made  successively  whenever  an event  referred to
herein shall occur.

      Section 3.5  Consideration.  All grants or  issuances  of options or other
rights to acquire Common Shares (or securities  convertible into or exchangeable
for Common  Shares)  under or  pursuant  to a  management  stock  option,  stock
purchase or other  incentive  or employee  benefit  plan,  and all  issuances of
Common Shares (or securities convertible into or exchangeable for Common Shares)
under or  pursuant  to such a plan or upon  exercise  of such  options  or other
rights  (or  conversion  or  exchange  of  such   convertible  or   exchangeable
securities)  shall,  for purposes of Section  3(b),  be deemed to be granted and
issued for no consideration except to the extent cash is paid therefor.

      Section  3.6  Certificates.  Upon any  adjustment  of the number of shares
purchasable  upon  exercise  of this  Warrant  pursuant  to this  Section 3, the
Company  shall  promptly  but in any event within  twenty (20) days  thereafter,
cause to be given to the  holder of this  Warrant at its  address in  accordance
with the notice  provisions  contained in the Warrant  Agreement,  a certificate
signed by its  chairman,  chief  executive  officer or chief  financial  officer
setting forth the number of shares  purchasable upon exercise of this Warrant as
so adjusted and  describing in reasonable  detail the facts  accounting for such
adjustment and the method of calculation used.

SECTION 4. MERGERS, CONSOLIDATIONS, SALES.

         In the case of any  consolidation or merger of the Company with another
entity, or the sale of all or substantially all of its assets to another entity,
or any reorganization, recapitalization or

                                      -3-
<PAGE>

reclassification of the Common Shares or other equity securities of the Company,
then,  as a  condition  of such  consolidation,  merger,  sale,  reorganization,
recapitalization  or  reclassification,  lawful and adequate  provision shall be
made  whereby  the holder of this  Warrant  shall  thereafter  have the right to
receive upon the basis and upon the terms and conditions specified herein and in
lieu of the Common Shares immediately  theretofore  purchasable hereunder,  such
shares of stock,  securities or assets as may (by virtue of such  consolidation,
merger,  sale,  reorganization  or  reclassification)  be issued or payable with
respect to or in exchange for a number of outstanding Common Shares equal to the
number of Common Shares  immediately  theretofore so  purchasable  hereunder had
such   consolidation,   merger,   sale,   reorganization,   recapitalization  or
reclassification not taken place. In any such case, appropriate provisions shall
be made with  respect to the rights and  interests of the holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable,  as nearly
as may be, in relation to any shares of stock,  securities or assets  thereafter
deliverable upon exercise of this Warrant. The Company shall not effect any such
consolidation,  merger  or  sale,  unless  prior to or  simultaneously  with the
consummation thereof, the successor entity (if other than the Company) resulting
from such  consolidation  or merger or the entity  purchasing  such assets shall
assume by written  instrument  executed and mailed or delivered to the holder of
this  Warrant,  the  obligation  to deliver to such holder such shares of stock,
securities  or assets as, in  accordance  with the  foregoing  provisions,  such
holder may be entitled to receive.

SECTION 5. DISSOLUTION OR LIQUIDATION.

      In the event of any proposed  distribution of the assets of the Company in
dissolution or liquidation except under circumstances when the foregoing Section
4 shall be  applicable,  the Company shall mail notice  thereof to the holder of
this Warrant and shall make no distribution to stockholders until the expiration
of thirty (30) days from the date of mailing of the aforesaid notice and, in any
such case,  the holder of this Warrant may  exercise  the  purchase  rights with
respect to this  Warrant  within  thirty (30) days from the date of mailing such
notice and all rights  herein  granted not so exercised  within such thirty (30)
day period shall thereafter become null and void.

SECTION 6. NOTICE OF EXTRAORDINARY DIVIDENDS.

      If the Board of Directors of the Company  proposes to declare any dividend
or other  distribution  on its Common Shares,  except by way of a stock dividend
payable  on its  Common  Shares  and  except as  permitted  by Section 10 of the
Warrant  Agreement,  the Company shall mail notice thereof to the holder of this
Warrant as soon as possible (such notice being referred to as the  "Distribution
Notice").  The  Company  shall not fix a record date until the lapse of a 30-day
period beginning on the date of delivery of the Distribution  Notice. The holder
of this Warrant shall not participate in such dividend or other  distribution or
be  entitled to any rights on account or as a result  thereof  unless and to the
extent that this Warrant is exercised  prior to such record date. The provisions
of this  paragraph  shall not apply to  distributions  made in  connection  with
transactions covered by Section 4.

                                      -4-
<PAGE>

SECTION 7. FRACTIONAL SHARES.

      Fractional  shares shall not be issued upon the exercise of this  Warrant.
Any reference  contained herein or in the Warrant Agreement to Warrant Shares or
Common Shares shall be deemed to include whole shares only, it being  understood
and  agreed  that any  fractional  shares  shall be rounded up to the next whole
number.

SECTION 8. FULLY PAID STOCK; TAXES.

      The Company  covenants and agrees that the shares of stock  represented by
each and every certificate for its Common Shares to be delivered on the exercise
of the purchase  rights and the payment of the applicable  purchase price herein
provided  for  shall,  at the  time of such  delivery,  be  validly  issued  and
outstanding and be fully paid and  nonassessable.  The Company further covenants
and agrees  that it will pay when due and  payable any and all Federal and State
taxes (other than income  taxes) which may be payable in respect of this Warrant
or any Common  Shares or  certificates  therefor upon the exercise of the rights
herein and in the Warrant  Agreement  provided  for  pursuant to the  provisions
hereof and thereof.  The Company shall not, however,  be required to pay any tax
which may be payable  solely in respect of any  transfer  and  delivery of stock
certificates  in a name other than that of the holder  exercising  this Warrant,
and any such tax shall be paid by such holder at the time of presentation.

SECTION 9. CLOSING OF TRANSFER BOOKS.

      The right to  exercise  this  Warrant  shall not be  suspended  during any
period that the stock transfer books of the Company for its Common Shares may be
closed. The Company shall not be required,  however, to deliver  certificates of
its Common  Shares upon such  exercise  while such books are duly closed for any
purpose,  but the Company may postpone the delivery of the certificates for such
Common Shares until the opening of such books,  and they shall, in such case, be
delivered  forthwith  upon  the  opening  thereof,  or as  soon  as  practicable
thereafter.

SECTION 10. PARTIAL EXERCISE AND PARTIAL ASSIGNMENT.

      Section 10.1 Partial Exercise.  If this Warrant is exercised in part only,
the holder  hereof shall  surrender  this  Warrant upon such  exercise and shall
receive a new Warrant,  registered  in the name of the holder or its nominee and
setting  forth a new number of shares in respect of which this Warrant shall not
have been  exercised  as provided for in Section 1 and a new  Aggregate  Warrant
Price in the first paragraph of page one hereof,  which shall be proportionately
adjusted to reflect such partial exercise.

      Section  10.2  Assignment.  (a)  Subject  to the  conditions  set forth in
Section 10.2(b) hereof,  this Warrant may be assigned either in whole or in part
by surrender of this Warrant at the  principal  office of the Company in Vienna,
Virginia (with the assignment or, as the case may be, partial assignment form at
the end hereof duly  executed).  If this Warrant is being  assigned in whole and
the holder hereof  previously  has not  partially  exercised  this Warrant,  the
assignee shall receive a new Warrant (registered in the name of such assignee or
its nominee),  which new Warrant  shall cover the number of shares  assigned and
the Aggregate  Warrant Price applicable to

                                      -5-
<PAGE>

such  shares.  If this Warrant is being  assigned in part and the holder  hereof
previously has not partially  exercised this Warrant,  the assignor and assignee
shall each receive a new Warrant (which,  in the case of the assignee,  shall be
registered  in the name of the  assignee  or its  nominee),  each of  which  new
Warrants  shall  cover the  number of shares not so  assigned  and the number of
shares  so  assigned,   respectively,   and  in  each  case  setting  forth  the
proportionate Aggregate Warrant Price applicable to such shares. If this Warrant
is being  assigned  in whole and the  holder  hereof  previously  has  partially
exercised this Warrant,  the assignee shall receive a new Warrant (registered in
the name of such  assignee or its  nominee),  which new Warrant  shall cover the
number of shares so assigned and set forth the  proportionate  Aggregate Warrant
Price applicable to such assigned  shares.  If this Warrant is being assigned in
part and the holder hereof previously has partially exercised this Warrant,  the
assignor and assignee  shall each receive a new Warrant  (which,  in the case of
the  assignee,  shall be registered in the name of the assignee or its nominee),
each of which new Warrants  shall cover the number of shares not so assigned and
in respect of which no such  exercise  has been made in the case of the assignor
and the number of shares so  assigned in the case of the  assignee,  and in each
case setting forth the proportionate  Aggregate Warrant Price applicable to such
shares.

      (b) Neither this Warrant nor any Warrant  Shares may be sold,  assigned or
otherwise  transferred  except  in  accordance  with the  terms  of the  Warrant
Agreement.

SECTION 11. DEFINITIONS.

      Terms not  otherwise  defined  herein shall have the  respective  meanings
assigned thereto in the Warrant Agreement or the Loan Agreement,  as applicable.
In addition to the terms  defined  elsewhere  in this Warrant and in the Warrant
Agreement, the following terms have the following respective meanings:

      "Aggregate Warrant Price" shall mean, as of the date of any determination,
the amount then so designated on the first page of this Warrant.

      "Distribution Notice" is defined in Section 6 hereof.

      "Exempted  Securities"  shall mean (i) Warrants,  (ii) Warrant  Shares and
(iii) Common Shares issued as a dividend described in Section 3.1(a).

      "Exercise Date" shall mean a date on which this Warrant is exercised.

      "Expiration  Date" shall mean from and after 5:00 p.m.  New York City time
on May 28, 2012 (being the eighth anniversary of the Closing Date).

      "Warrant  Agreement" shall mean that certain Warrant Agreement dated as of
May 28, 2004 between the Company and Wilton Funding, LLC, as amended or modified
from time to time in accordance with the terms thereof.

                                      -6-
<PAGE>

SECTION 12. WARRANT HOLDER NOT STOCKHOLDER.

      This Warrant  does not confer upon the holder  hereof any right to vote or
to consent or to receive  notice as a  stockholder  of the Company,  as such, in
respect of any  matters  whatsoever,  or any other  rights or  liabilities  as a
stockholder, prior to the exercise hereof as hereinbefore provided.

SECTION 13. SEVERABILITY.

      Should  any part of this  Warrant  for any reason be  declared  invalid or
unenforceable,  such decision shall not affect the validity or enforceability of
any remaining portion,  which remaining portion shall remain in force and effect
as if this Warrant had been executed with the invalid or  unenforceable  portion
thereof  eliminated,  and it is hereby  declared  the  intention  of the parties
hereto that they would have executed and accepted the remaining  portion of this
Warrant without including therein any such part, parts or portion which may, for
any reason, be hereafter declared invalid or unenforceable.

SECTION 14. GOVERNING LAW.

      This Agreement shall be construed and enforced in accordance with, and the
right of the  parties  shall be  governed  by,  the law of the State of NEW YORK
(excluding  choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State).

      In Witness  Whereof,  the Company has caused this  Warrant to be signed by
its undersigned duly authorized officer and to be dated as of May 28, 2004.

                                                 THE ALLIED DEFENSE GROUP, INC.,
                                                   a Delaware corporation

                                                 By:____________________________
                                                 Name:__________________________
                                                 Title:_________________________

                                      -7-
<PAGE>

                                  SUBSCRIPTION

      _____________________________

      The  undersigned,  _______________________,  pursuant to the provisions of
the within Warrant,  hereby elects to purchase __________ Common Shares pursuant
to the attached Warrant.

                                                     Signature:_________________
                                                     Address:___________________

Dated:____________

 <PAGE>

                                   ASSIGNMENT

      For Value  Received  _________________________  hereby sells,  assigns and
transfers unto  ____________________ the within Warrant and all rights evidenced
thereby and does irrevocably constitute and appoint ________________,  attorney,
to transfer the said Warrant on the books of _______________________________.

                                                     Signature:_________________
                                                     Address:___________________

Dated:____________

<PAGE>

                               PARTIAL ASSIGNMENT

      For  Value  Received  ______________________  hereby  sells,  assigns  and
transfers unto __________________________ that portion of the within Warrant and
the rights evidenced thereby which will on the date hereof entitle the holder to
purchase   _______  Common  Shares  of   ____________________   and  irrevocably
constitutes and appoints  ________________________,  attorney,  to transfer that
part of the said Warrant on the books of ____________________________.

                                                     Signature:_________________
                                                     Address:___________________

Dated:____________

<PAGE>

                                  Exhibit 4A to
                           Loan and Security Agreement

                  List of Closing Documents for Initial Advance

1.    This Loan and Security Agreement

2.    Promissory Note

3.    Deposit  Account  Security  Agreement,  Control  Agreements and an account
      statement from the Wachovia Bank listing the Collateral pledged thereunder

4.    Pledge   Agreement  of  Domestic   Borrowers   together   with  any  stock
      certificates  that would be  "Collateral"  as defined therein and together
      with stock powers in blank for any such stock certificates

5.    Certified Directors' Resolutions for each Domestic Borrower

6.    Certificates of Good Standing for each Domestic Borrower

7.    Certified Articles and Bylaws for all Domestic Borrowers

8.    UCC  Searches  for each  Domestic  Borrower as requested by Lender and its
      counsel

9.    UCC-1 Financing  Statements for each Domestic  Borrower,  as determined by
      Lender and its counsel

10.   Payoff Letters,  mortgage and lien releases and UCC termination statements
      from any lien holder to be paid from proceeds of the Initial Advance

11.   Bailee Letters (for locations as indicated on Exhibit 3B)

12.   A General Opinion of Legal Counsel for each Domestic Borrower

13.   [Intentionally Omitted]

14.   Updated  or  additional   Certificates   of  Insurance  and  Loss  Payable
      Endorsements

15.   Fee Agreement

16.   Warrant Agreement

17. Warrant to Purchase Common Stock of The Allied Defense Group, Inc.

                                      -1-
<PAGE>

                                  Exhibit 4B to
                           Loan and Security Agreement

                  List of Closing Documents for Initial Working
                      Capital Advance/Acquisition Advance

1.    Foreign Pledge Agreements for all shares of capital stock of ARC Ltd., ARC
      Europe, MECAR and VSK Electronics

2.    Certified  Directors'  Resolutions for ARC Ltd., ARC Europe, MECAR and VSK
      Electronics

3.    Certificates  of Good Standing (or their foreign  equivalent,  if any) for
      each Foreign Subsidiary

4.    Certified  Articles and Bylaws (or their foreign  equivalent,  if any) for
      each Foreign Subsidiary

5.    Incumbency  Certificate for each Foreign Subsidiary that is a party to any
      Financing Agreement

6.    Legal  opinions of foreign  counsel  relating to the Foreign  Subsidiaries
      that are parties to any Financing Agreement in form and content acceptable
      to Lender and its counsel

7.    Subordination Agreement with Subordinated Lender

                                      -1-
<PAGE>

                                  Exhibit 4C to
                           Loan and Security Agreement

             List of Closing Documents for Each Acquisition Advance

A.    Due Diligence - At Least 5 Days Prior to Closing

      1.    Purchase Agreement

      2.    Exhibits and Schedules to Purchase  Agreement and other  Acquisition
            Documents

B.    Due Diligence - At Least 10 Business Days Prior to Closing

      1.    Organizational Documents of Target Company

      2.    Financial Statements of Target Company

                  - last three fiscal years

                  - current interim period

      3.    Pro  Forma  Balance  Sheet  required  under  Section  4.8(d)(ii)

      4.    Projections required under Section 4.8(d)(iii)

      5.    Offering Memoranda and Circulars, Business Plans and Other Materials
            Provided  by the  Target  Company  or its  owners,  representatives,
            agents, advisors or affiliates

      6.    Budgets,  Forecasts,   Projections,   Appraisals,   Valuations,  Due
            Diligence  Memoranda,  Studies  and  Reports  relating to the Target
            Company, any of its assets,  liabilities,  businesses or operations,
            or the proposed Permitted Acquisition

C.    Other Due Diligence - At Least 15 Days Prior to Closing

      1.    Any  additional   items  noted  under  (A),  above,  or  amendments,
            modifications or supplements thereto

      2.    Employment Agreements

      3.    Lease Agreements

      4.    Government Contracts

      5.    Other Material Contracts

      6.    Intellectual Property

      7.    Other Special Collateral

      8.    Real Estate Title Insurance Commitments and Surveys

      9.    Environmental Reports

      10.   UCC,  Tax,  Judgment and Other Lien Searches

      11.   Other Due Diligence Materials (as requested by Lender)

      12.   Supplemental Disclosure Schedule

                                      -1-
<PAGE>

D.    Permitted Acquisition Closing Documents

      1.    Bill of Sale; Deeds;  Certificates of Title;  Intellectual  Property
            Assignments;  Assignment  of  Intangible  Property;  Certificate  of
            Merger; Stock Certificates; Stock Powers; Etc. (as applicable)

      2.    Closing Statement

      3.    Wire Transfer Instructions

      4.    Cross-Receipts

      5.    Buyer's Closing Certificate

      6.    Seller's Closing Certificate

      7.    Opinion of Buyer's Counsel (including express provisions  permitting
            Lender,  its successors and assigns and any subsequent holder of the
            Note or any Warrants to rely on the same)

      8.    Opinion of Seller's Counsel (including express provisions permitting
            Lender,  its successors and assigns and any subsequent holder of the
            Note or any Warrants to rely on the same)

      9.    Buyer's Certified Director Resolutions and Incumbency Certificate

      10.   Seller's Certified Director Resolutions and Incumbency Certificate

      11.   Seller's/Target Company's Good Standing Certificate(s)

      12.   Buyer's Good Standing Certificate

      13.   Seller's/Target  Company's  Certified  Articles of Incorporation and
            Bylaws

      14.   Buyer's Certified Articles of Incorporation and Bylaws

      15.   Third Party and Government Consents

      16.   Transfer of Licenses and Permits

      17.   Other Closing Deliveries

      18.   Payoff Letters from Lien Holders and UCC Termination Statements

D.    Acquisition Advance Closing Documents

      1.    Request for Acquisition Advance

      2.    Joinder Agreement Executed by Target Company and its Subsidiaries

      3.    Allonge to Note Executed by Target Company and its Subsidiaries

      4.    Stock Certificates and Blank Stock Powers for Target Company and its
            Subsidiaries

      5.    UCC Financing Statements for Target Company and its Subsidiaries

      6.    Mortgages

      7.    Leasehold Mortgages

      8.    Landlord Waivers

      9.    Filings with U.S. Patent and Trademark Office

      10.   Pro Forma Compliance Certificate

      11.   Updated Disclosure Schedule of Borrowers to Loan Agreement (Schedule
            6A)

      12.   Funding of Acquisition Advance by Fund Lender

      13.   Copies of Company's SEC Filings Related to Permitted Acquisitions

                                       -2-
<PAGE>

                                  Exhibit 5A to
                           Loan and Security Agreement

                            Form of Pledge Agreement

                                 [See attached]

<PAGE>

                                PLEDGE AGREEMENT

      THIS PLEDGE  AGREEMENT  (this  "Agreement"),  dated as of May 28, 2004, is
made by THE ALLIED  DEFENSE  GROUP,  INC., a Delaware  corporation,  NEWS/SPORTS
MICROWAVE RENTAL, INC., a California corporation,  TITAN DYNAMICS SYSTEMS, INC.,
a Texas  corporation,  SEASPACE  CORPORATION,  a California  corporation,  MECAR
U.S.A.,  INC.,  a  Delaware  corporation,  and  ENERGA  CORPORATION,  a Maryland
corporation,  as pledgors  (individually,  a  "Pledgor"  and  collectively,  the
"Pledgors"),  in favor of WILTON  FUNDING,  LLC,  a Delaware  limited  liability
company, as pledgee (the "Pledgee").

                                    RECITALS:

      A.  Pursuant to that certain Loan and Security  Agreement (as the same may
be amended, restated, substituted,  supplemented or otherwise modified from time
to time,  the "Loan  Agreement")  dated as of the date  hereof  among  Pledgors,
Pledgee and the other parties named  therein,  the Pledgee has agreed to lend to
the Pledgors the maximum sum of $18,000,000 (the "Loan").  The Loan is evidenced
by a master promissory note of the Pledgors (the "Note").

      B. In order  to  induce  Pledgee  to enter  into the Loan  Agreement,  the
Pledgors have agreed to enter into this Agreement.

      NOW  THEREFORE,  for good and  valuable  consideration,  the  receipt  and
sufficiency  of which are  hereby  acknowledged,  the  parties  hereto  agree as
follows:

      1. Definitions and  Interpretation of Agreement.  In addition to the terms
defined elsewhere in this Agreement, the following terms shall have the meanings
indicated for purposes of this Agreement (such meanings to be equally applicable
to both the singular and plural forms of the terms defined).  Capitalized  terms
not otherwise defined herein shall have the meaning ascribed thereto in the Loan
Agreement.

      "Agreement" means this Pledge Agreement, as it may be amended, modified or
supplemented  from time to time in accordance  with its terms,  which shall be a
Financing Agreement (as defined in the Loan Agreement).

      "Default"  means the  occurrence  of any of the  following  events:  (i) a
"Matured  Default" as defined in the Loan  Agreement;  or (ii) any Pledgor shall
breach in any  material  respect  any  warranty  contained  herein or  otherwise
default in any material  respect in the  observance or performance of any of the
covenants, terms, conditions or agreements on the part of such Pledgor contained
herein  and the  failure  to cure the same  within  thirty  (30) days  following
written notice thereof.

      "Ownership  Interest"  means any  shares of stock  (common,  preferred  or
otherwise)  in  a  corporation,  membership  interests  in a  limited  liability
company,  partnership interests in a general or limited partnership or any other
unit of ownership interest in any other incorporated or unincorporated entity.

<PAGE>

      "Uniform  Commercial Code" means the Uniform  Commercial Code as in effect
in the State of New York from time to time.

      A Section is, unless otherwise stated, a reference to a section hereof, as
the case may be.  Section  captions used in this  Agreement are for  convenience
only,  and  shall not  affect  the  construction  of this  Agreement.  The words
"hereof,"  "herein,"  "hereto" and "hereunder" and words of similar purport when
used in this  Agreement  shall refer to this Agreement as a whole and not to any
particular  provision of this Agreement.  Unless otherwise defined therein,  all
terms defined in this Agreement shall have the defined meanings when used in any
certificate or other documents made or delivered pursuant hereto.

      2. Pledge.  To secure the prompt and complete  payment and  performance of
the  Liabilities  when due and, as  applicable,  the  obligations of any Pledgee
under  any  guaranty  thereof,  each  Pledgor  pledges,  hypothecates,  assigns,
transfers,  sets over and delivers  unto the Pledgee and grants to the Pledgee a
continuing security interest in and to the following  (hereinafter  collectively
called the "Collateral"):

            (a) all of the Ownership  Interests now held and hereafter  acquired
by  such  Pledgor  in  any  of  the  Pledgors,  and  each  of  their  respective
Subsidiaries (other than current and future Subsidiaries of VSK Electronics), at
any time, including,  without limitation, those Ownership Interests set forth on
Schedule 2(a) attached hereto, and any certificates  representing such Ownership
Interests, all of the right, title and interest of such Pledgor in, to and under
its respective  percentage  interest,  shares or units as an owner of any of the
Pledgors,  and each of their  respective  Subsidiaries  (other than  current and
future Subsidiaries of VSK Electronics),  and all investment property in respect
of such  Ownership  Interests,  including,  without  limitation,  such Pledgor's
interests in (or allocations of) the profits, losses, income, gains, deductions,
credits  or similar  items of any of the  Pledgors,  or any of their  respective
Subsidiaries  (other than current and future  Subsidiaries of VSK  Electronics),
and the right to receive  dividends or distributions of any of the Pledgors,  or
any of their respective Subsidiaries (other than current and future Subsidiaries
of VSK Electronics),  cash, other property, assets, and all options and warrants
for the purchase of Ownership Interests, all of such Pledgor's rights, title and
interests  to receive  payments of  principal  and  interest on any loans and/or
other  extensions  of credit  made by such  Pledgor  or its  affiliates  to such
Pledgors, all of such Pledgor's voting rights, whether now existing or hereafter
arising,  whether  arising  under  the  terms  of  the  articles,   bylaws,  the
certificate of formation,  the limited liability company agreement or any of the
other organization  documents of the Pledgors, at law or in equity, or otherwise
and any and  all of the  proceeds  thereof  (all  of said  Ownership  Interests,
certificates  and warrants  being  hereinafter  collectively  referred to as the
"Pledged  Interests"),  and all  distributions,  cash,  instruments,  investment
property and other property from time to time received,  receivable or otherwise
distributed  in  respect  of,  or in  exchange  for,  any or all of the  Pledged
Interests;

            (b) all other  property  hereafter  delivered to the Pledgee by such
Pledgor  in  substitution  for or in  addition  to any  of  the  foregoing,  all
certificates and instruments  representing or evidencing such other property and
all cash, securities, interest, dividends, rights and other property at any time
and from time to time received,  receivable or otherwise  distributed in respect
of or in exchange for any or all thereof; and

                                      -2-
<PAGE>

            (c) all products and proceeds of all of the foregoing;

      TO HAVE AND TO HOLD the  Collateral,  together  with all  rights,  titles,
interests,  privileges and preferences  appertaining or incidental thereto, unto
the Pledgee forever,  subject,  however, to the terms,  covenants and conditions
hereafter set forth.

      Notwithstanding the foregoing to the contrary,  each Pledgor hereby agrees
to execute and deliver or cause its  Subsidiaries  to execute  and  deliver,  to
Pledgee,  upon its  request  from  time to time,  (i) a  separate  Share  Pledge
Agreement in the form attached as Exhibit 5B to the Loan  Agreement with respect
to the  pledge of  shares of any  Subsidiary  of the  Company  that is a Belgian
company (other than current and future Subsidiaries of VSK Electronics) (each, a
"Belgian Share Pledge Agreement") and (ii) a separate Deed of Charge over Shares
in a form  acceptable  to  Pledgee  with  respect to the pledge of shares of any
Subsidiary of the Company that is a company formed under the laws of England and
Wales (each, a "UK Share Pledge Agreement"). In the case of any conflict between
this  Agreement and any such Belgian  Share Pledge  Agreement or UK Share Pledge
Agreement,  the  provisions of such Belgian  Share Pledge  Agreement or UK Share
Pledge Agreement, as applicable, shall take priority over the provisions of this
Agreement.

      3. Representations, Warranties and Covenants.

            (a) The Pledgors,  jointly and  severally,  represent and warrant to
the  Pledgee  that:   (i)  the  Pledgors  have  delivered  to  the  Pledgee  all
certificated  Ownership Interests and stock powers or other transfer instruments
with respect to each such certificated  Ownership  Interests  endorsed in blank;
(ii) the Pledgee has a valid,  perfected security interest in the Collateral and
the  proceeds  thereof  free of all liens,  claims  and rights of third  parties
whatsoever; (iii) all documentary, stamp or other similar taxes or fees owing in
connection with the issuance,  transfer  and/or pledge of the Pledged  Interests
have been paid and will hereafter be paid by the Pledgors as such become due and
payable;  (iv) each Pledgor is the lawful owner of the Collateral  pledged by it
hereunder,  with  full  right to  deliver,  pledge,  assign  and  transfer  such
Collateral to the Pledgee hereunder;  (v) the Collateral  represents all of each
Pledgor's  interest in the Pledgors  (other than the  Company),  or any of their
respective Subsidiaries, as applicable, and there are no equity interests in the
Pledgors, or any of their respective  Subsidiaries,  as applicable,  held by any
other  person;  and (vi) the  execution  and delivery of this  Agreement and the
performance by the Pledgors of their  obligations  hereunder do not and will not
contravene or conflict  with any  provision of law or of any  agreement  binding
upon or  applicable  to it or the  Collateral  and this  Agreement is its legal,
valid and binding  obligation,  enforceable  against it in  accordance  with its
terms  and  except  as  such   enforceability  may  be  limited  by  bankruptcy,
insolvency,  reorganization,  moratorium  or other  similar laws relating to the
enforcement of creditors' or secured  creditors' rights generally and subject to
the qualification  that general equitable  principles may limit the availability
of   enforcement  of  certain   remedies,   including  the  remedy  of  specific
performance.

            (b) So  long  as any of the  Liabilities  remain  outstanding,  each
Pledgor shall, unless the Pledgee shall otherwise consent in writing: (i) at its
sole expense, promptly deliver to the Pledgee, from time to time upon request of
the Pledgee, such certificates and other documents,  reasonably  satisfactory in
form and substance to the Pledgee, with respect to the

                                      -3-
<PAGE>

Collateral as the Pledgee may reasonably request,  to preserve and protect,  and
to enable the Pledgee to enforce,  its rights and remedies hereunder;  (ii) note
in the books and  records  of such  Pledgor  the  security  interest  granted to
Pledgee  pursuant  to this  Agreement;  (iii)  not  sell,  assign,  exchange  or
otherwise  transfer any of its rights to any of the Collateral;  (iv) not create
or suffer to exist any lien, security interest or other charge,  claim, right or
encumbrance  against, in or with respect to any of the Collateral except for the
pledge  hereunder and the lien and security  interest  created  hereby;  (v) not
enter into any agreement or permit to exist any restriction  with respect to any
of its right,  title and interest in or to the  Collateral  other than  pursuant
hereto;  and (vi) not take or fail to take any action  which would in any manner
impair the  enforceability of the Pledgee's lien and security interest in any of
the Collateral.

      4. Certain Permitted Activities.

            (a) The Pledgee may, from time to time,  and in accordance  with the
Loan Agreement, without notice to the Pledgors, take any or all of the following
actions:  (i)  retain or obtain a lien  upon,  or a  security  interest  in, any
property to secure the Liabilities or any obligation  hereunder;  (ii) retain or
obtain the primary or  secondary  obligation  of any obligor or  obligors,  with
respect to any of the Liabilities or any obligation  hereunder;  (iii) extend or
renew for any period  (whether or not longer than the original  period) or alter
or exchange any of the  Liabilities,  or release or compromise any obligation of
the Pledgors or any  obligation  of any nature of any other obligor with respect
to any of the  Liabilities;  (iv)  release or fail to  perfect  its lien upon or
security interest in, or impair,  surrender,  release or permit any substitution
or exchange for, all or any part of any property securing any of the Liabilities
or any obligation hereunder,  or create, extend or renew for any period (whether
or not  longer  than the  original  period)  or  release,  compromise,  alter or
exchange any  obligations  of any nature of any obligor with respect to any such
property; and (v) during the continuance of a Default following reasonable prior
written  notice  to  the  Pledgors,   resort  to  the  Collateral  (without  any
marshalling) for payment of any of the  Liabilities,  whether or not the Pledgee
(A) shall have resorted to any other property securing any of the Liabilities or
any obligation  hereunder or (B) shall have proceeded  against any other obligor
primarily or secondarily  obligated with respect to any of the Liabilities  (all
of the  actions  referred  to in  preceding  clauses  (A) and (B)  being  hereby
expressly waived by the Pledgors).

            (b) The Pledgee shall have no right to vote the Pledged Interests or
other  Collateral or give consents,  waivers or ratifications in respect thereof
prior to the occurrence of a Default.  During the continuance of a Default, each
Pledgor  shall have the right to vote any and all of its Pledged  Interests  and
other  Collateral  pledged by them  hereunder  and give  consents,  waivers  and
ratifications  in respect  thereof unless and until it receives  notice from the
Pledgee  that such right has been  terminated.  Upon such  notice,  each Pledgor
hereby grants to the Pledgee or its nominee,  an  irrevocable  proxy to exercise
all voting and  corporate  rights  relating  to the Pledged  Interests.  In such
event,  upon the request of the Pledgee,  each Pledgor  agrees to deliver to the
Pledgee,  such  further  evidence  of such  irrevocable  proxy  or such  further
irrevocable proxies to vote the Pledged Interests as the Pledgee may request.

            (c) Upon  notice  from  the  Pledgee  to the  Pledgors,  during  the
existence  of a Default and so long as that  Default  continues,  all rights and
powers that each  Pledgor is entitled  to exercise  pursuant to Section  4(b) of
this Agreement,  and all rights of such Pledgor to receive

                                      -4-
<PAGE>

and  retain  dividends,  interest  and  payments  pursuant  to Section 5 of this
Agreement,  shall  immediately  cease,  and all such  rights  and  powers  shall
automatically  become  vested in the  Pledgee,  which  shall  have,  during  the
continuance  of the Default,  the sole and exclusive  authority to exercise such
rights and powers, in accordance with the Loan Agreement (including the right to
become a stockholder,  member or partner, as applicable,  of the Pledgors (other
than the Company), or any of their respective Subsidiaries,  as the case may be)
and to  receive  such  dividends,  interest  and  payments.  All  money or other
property, paid or delivered to the Pledgee pursuant to this subsection, shall be
additional Collateral, hereunder.

            (d) Each Pledgor agrees to deliver (properly endorsed when required)
to the Pledgee,  after a Default shall have  occurred,  promptly upon request of
the Pledgee,  such documents as may be necessary for the Pledgee to exercise its
rights  under  Section  4(c) with  respect to the  Pledged  Interests  and other
Collateral then or previously owned by such Pledgor.

      5.  Dividends,  Distributions,  etc. In case any  distribution  of capital
shall be made on or in respect  of the  Pledged  Interests  or any  tangible  or
intangible  property  shall be  distributed  upon or with respect to the Pledged
Interests,  the property so distributed shall be delivered to Pledgee to be held
by it as additional Pledged Interests. All sums of money and property so paid or
distributed  in respect of the Pledged  Interests  which are received by Pledgor
shall,  until  paid or  delivered  to  Pledgee,  be held by  Pledgor in trust as
additional Pledged Collateral. Upon a Default, and while the same is continuing,
and in accordance with the Loan Agreement,  each Pledgor shall  immediately upon
demand  by  Pledgee,  deliver  to the  Pledgee  all  dividends,  and  all  other
distributions  and payments made on or in respect of the Collateral any time and
from time to time.

      6. Default.

            (a) Upon the  occurrence of a Default,  and in  accordance  with the
Loan  Agreement,  the  Pledgee  may  exercise  from time to time any  rights and
remedies  available  to it  under  the  Uniform  Commercial  Code  or  otherwise
available to it,  including,  without  limitation,  sale,  assignment,  or other
disposal of the Collateral in exchange for cash or credit.  If any  notification
of intended  disposition  of any of the  Collateral  is  required  by law,  such
notification, if mailed, shall be deemed reasonably and properly given if mailed
at least ten (10) days before such  disposition,  postage prepaid,  addressed to
the  Pledgors at any  address of the  Pledgors  appearing  on the records of the
Pledgee.  Any  proceeds of any  disposition  of  Collateral  shall be applied as
provided in Section 7 hereof.  No rights and  remedies of the Pledgee  expressed
hereunder  are intended to be exclusive of any other right or remedy,  but every
such right or remedy shall be  cumulative  and shall be in addition to all other
rights and remedies  herein  conferred,  or conferred upon the Pledgee under any
other  agreement or instrument  relating to any of the  Liabilities  or security
therefor or now or  hereafter  existing  at law or in equity or by  statute.  No
delay on the part of the Pledgee in the  exercise  of any right or remedy  shall
operate as a waiver thereof, and no single or partial exercise by the Pledgee of
any right or remedy  shall  preclude  other or further  exercise  thereof or the
exercise  of any other  right or  remedy.  No action  of the  Pledgee  permitted
hereunder  shall  impair  or affect  the  rights  of the  Pledgee  in and to the
Collateral.

                                      -5-
<PAGE>

            (b)  (i)  The  Pledgors  agree  that,  in  any  sale  of  any of the
      Collateral  when a Default  shall have  occurred  and be  continuing,  the
      Pledgee is authorized  to comply with any  limitation  or  restriction  in
      connection  with such sale as is necessary in order to avoid any violation
      of applicable law  (including,  without  limitation,  compliance with such
      procedures  as  may  restrict  the  number  of  prospective   bidders  and
      purchasers,  require that such  prospective  bidders and  purchasers  have
      certain   qualifications,   and  restrict  such  prospective  bidders  and
      purchasers  to  persons  who  will  represent  and  agree  that  they  are
      purchasing for their own account for investment and not with a view to the
      distribution  or resale  of such  Collateral),  or in order to obtain  any
      required  approval  of the sale or of the  purchaser  by any  governmental
      regulatory authority or official, and the Pledgors further agree that such
      compliance shall not result in such sale being considered or deemed not to
      have been made in a commercially  reasonable manner, nor shall the Pledgee
      be liable nor accountable to the Pledgors for any discount  allowed by the
      reason of the fact that such  Collateral  is sold in  compliance  with any
      such limitation or restriction.  At any sale made pursuant to this Section
      6, the Pledgee may bid for or purchase the Pledged  Interests and may make
      payment on account  thereof by using any claim then due and payable to the
      Pledgee from the Pledgors as a credit against the purchase price,  and the
      Pledgee may,  upon  compliance  with the terms of sale,  hold,  retain and
      dispose of such Pledged  Interests  without further  accountability to the
      Pledgors therefor.

                        (ii) Pledgors further agree,  after a Default shall have
      occurred and be continuing,  and upon written request from the Pledgee, to
      (A) deliver to the Pledgee such information in the Pledgors' possession or
      control as the  Pledgee  shall  reasonably  request for  inclusion  in any
      registration  statement,  prospectus  or  offering  memorandum  or in  any
      preliminary prospectus or preliminary offering memorandum or any amendment
      or  supplement  to  any  thereof  or in  any  other  writing  prepared  in
      connection  with the offer,  sale or resale of all or any  portion of such
      Pledged Interests or other Collateral, which information shall not contain
      any untrue  statement of a material  fact or omit to state a material fact
      required  to  be  stated  or  necessary  to  make  such   information  not
      misleading,  and (B) do or cause to be done all such other acts and things
      as may be  necessary  to make  such  offer,  sale or  resale of all or any
      portion of such Pledged  Interests or other  Collateral  valid and binding
      and in compliance with any and all applicable laws,  regulations,  orders,
      writs, injunctions,  decrees or awards of any and all courts,  arbitrators
      or governmental agencies or instrumentalities, domestic or foreign, having
      jurisdiction over any such offer, sale or resale.

            Without limiting the foregoing paragraph,  if the Pledgee decides to
      exercise  its right to sell all or any of the Pledged  Interests  or other
      Collateral,  upon written request,  the Pledgors shall furnish or cause to
      be  furnished  to the  Pledgee  all such  information  as the  Pledgee may
      request in order to qualify such Pledged  Interests or other Collateral as
      exempt  securities,  or the sale or resale of such  Pledged  Interests  or
      other  Collateral  as  exempt   transactions,   under  federal  and  state
      securities  laws. To the extent it is within their  control,  the Pledgors
      agree to allow the Pledgee and any underwriter  access at reasonable times
      and places to the books,  records and premises of the Pledgors,  or any of
      their respective Subsidiaries,  as applicable;  the Pledgors further agree
      to assist the Pledgee, any underwriter,  any agent of any thereof, and any
      counsel,  accountant  or other  expert  for any  thereof,  in  inspection,
      evaluation, and any other "due diligence" action of

                                      -6-
<PAGE>

      or with respect to any such books, records and premises;  and the Pledgors
      further agree to cause any independent public accountant for the Pledgors,
      or any of their  respective  Subsidiaries,  as  applicable,  to  furnish a
      letter to the Pledgee and  underwriters  in  customary  form and  covering
      matters of the type  customarily  covered by  letters of  accountants  for
      issuers to underwriters.

            (c) Except for payments made by the Pledgors in accordance  with the
Loan Agreement, all items or amounts, which are received by the Pledgee from the
Pledgors or any other party on account of partial or full  payment or  otherwise
as  proceeds  of any of the  Collateral  shall be  deposited  to the credit of a
deposit account (the "Assignee Deposit Account") of the Pledgors maintained at a
bank  selected  by the  Pledgee in its sole  discretion,  and  "controlled"  (as
defined in the Uniform Commercial Code) by the Pledgee,  as security for payment
of the Liabilities. During the continuance of a Default, the Pledgors shall have
no right to withdraw any funds deposited in the Assignee  Deposit  Account.  The
Pledgee may, from time to time, in its discretion, and shall upon request of the
Pledgors  made not more  than  once in any  week,  apply  all or any of the then
balance,  representing  collected  funds, in the Assignee  Deposit  Account,  in
accordance  with Section 7 hereof,  and the Pledgee may,  from time to time,  in
accordance  with the Loan  Agreement,  release all or any of such balance to the
Pledgors.

            The Pledgee is authorized  to endorse,  in the name of the Pledgors,
any item,  howsoever  received by the  Pledgee,  representing  any payment on or
other proceeds of any of the Collateral.

      7.  Application of Proceeds.  The proceeds of the sale of Collateral  sold
pursuant to the terms of Section 6 hereof, or, after a Default, the cash held as
Collateral hereunder,  whether or not deposited in the Assignee Deposit Account,
shall be applied by the Pledgee as follows:

      First:  to the  Liabilities in accordance  with the provisions of the Loan
      Agreement;

      Second: the balance, if any, of such proceeds shall be held by the Pledgee
      until this Agreement  shall  terminate  pursuant to Section 14, and if any
      proceeds shall then remain, such proceeds shall be paid to the Pledgors or
      such  other  person  as may be  entitled  thereto,  their  successors  and
      assigns, or as a court of competent jurisdiction in any pending proceeding
      may direct.

      8. Nature of  Liabilities.  The  Pledgors  acknowledge  and agree that the
Pledgors  shall  be  liable  for the  Liabilities.  The  Pledgors,  jointly  and
severally, represent and warrant to the Pledgee at all times that the loans made
under  the Loan  Agreement  to the  Pledgors  directly  or  indirectly  confer a
material benefit on the Pledgors.

      9. No Marshalling.  To the extent the Pledgee holds a security interest in
other  assets or  interests  of the  Pledgors,  nothing  contained  herein shall
require  the  Pledgee to proceed  against  any  security  interest in any of the
assets or interests of the Pledgors  prior to enforcing  its rights  against the
Collateral.

      10. Indemnity. The Pledgors shall indemnify,  defend and hold harmless the
Pledgee,  its agents,  officers  and  employees,  and every  attorney  appointed
pursuant  to this  Agreement  (a) in respect  of all  liabilities  and  expenses
incurred  by them in good  faith  in the execution,

                                      -7-
<PAGE>

enforcement or purported  execution of any rights,  powers or discretions vested
in them pursuant to this Agreement, and (b) for any losses arising in connection
with the  exercise  or  purported  exercise of any of their  rights,  powers and
discretions  hereunder  except  that  the  Pledgee,  its  agents,  officers  and
employees  and each attorney  will be liable for any  liabilities,  expenses and
losses  which  arise  as a result  of  their  own  willful  misconduct  or gross
negligence.

      11.  Filing as a Financing  Statement.  The Pledgee shall be authorized to
execute and file such Uniform  Commercial  Code  financing  statements and other
documents (in all public offices  reasonably  deemed necessary or appropriate by
the Pledgee),  and the Pledgors shall do such other acts and things,  all as the
Pledgee  may from time to time  request,  to  establish  and  maintain  a valid,
perfected  security  interest  in the  Collateral  to secure the  payment of the
Liabilities.

      12. Notices.

            (a) All  notices,  requests  and other  communications  to any party
hereunder  shall be in writing  (including  electronic  transmission,  facsimile
transmission  or similar  writing) and shall be given to such party:  (a) in the
case of the  Pledgors or the  Pledgee,  at its address or  facsimile  number set
forth in Section 10.19 of the Loan  Agreement;  or (b) in the case of any party,
at such other address or facsimile  number as such party may  hereafter  specify
for the purpose by notice to the Pledgee and the Pledgors in accordance with the
provisions  of  this  Section  12(a).   Each  such  notice,   request  or  other
communication  shall be effective (i) if given by facsimile  transmission,  when
transmitted  to the  facsimile  number  specified  in  the  Loan  Agreement  and
confirmation  of receipt is received,  (ii) if given by mail,  seventy-two  (72)
hours  after such  communication  is  deposited  in the mails  with first  class
postage prepaid,  addressed as aforesaid,  or (iii) if given by any other means,
when  delivered  (or, in the case of electronic  transmission,  received) at the
address specified in this Section.

            (b) The  Pledgors  and the  Pledgee  may each change the address for
service of notice upon it by a notice in writing to the other parties hereto.

      13. Amendments.  No amendment,  modification or waiver of, or consent with
respect to, any  provision  of this  Agreement  shall in any event be  effective
unless the same shall be in writing and signed and  delivered by the Pledgee and
Pledgors. Any waiver of any provision of this Agreement,  and any consent to any
departure by the  Pledgors  from the terms of any  provision of this  Agreement,
shall be effective  only in the specific  instance and for the specific  purpose
for which given.

      14.  Termination  of  Agreement.  The  Pledgors  agree that  their  pledge
hereunder  shall,  unless  sooner  terminated  by the Pledgee  (notwithstanding,
without  limitation,  that at any time or from time to time all  Liabilities may
have been  indefeasibly  paid in full)  terminate only when (i) the  Liabilities
(including,  without  limitation,  any and all  extensions  or  renewals  of any
thereof,  any and all interest on any thereof, and any and all expenses incurred
by the  Pledgee in seeking to collect any of the  Liabilities  and to collect or
enforce any rights under the  Collateral)  have been satisfied in full, (ii) all
other  obligations  of the Pledgors  hereunder  and  thereunder  have been fully
performed  and (iii) the Pledgee  shall have no further  obligation to extend an
additional  credit to any Pledgor,  at which time the Pledgee shall reassign and
redeliver (or cause

                                      -8-
<PAGE>

to be reassigned and redelivered) to the Pledgors,  or to such Person or Persons
as such the Pledgors  shall  designate,  such of the Collateral (if any) pledged
hereunder by the  Pledgors as shall not have been sold or  otherwise  applied by
the  Pledgee  pursuant  to the  terms  hereof  and  shall  still  be  held by it
hereunder,  together with  appropriate  instruments of reassignment and release.
Any such  reassignment  pursuant to the  foregoing  provisions  shall be without
recourse upon, or representation or warranty by, the Pledgee.

      15.  Severability.  Any  provision  in this  Agreement  that is held to be
inoperative,  unenforceable,  or invalid in any  jurisdiction  shall, as to that
jurisdiction,  be inoperative,  unenforceable,  or invalid without affecting the
remaining provisions in that jurisdiction or the operation,  enforceability,  or
validity  of that  provision  in any  other  jurisdiction,  and to this  end the
provisions of this Agreement are declared to be severable.

      16.  Successors  and Assigns.  The terms and  provisions of this Agreement
shall be binding  upon and inure to the benefit of the  Pledgors and the Pledgee
and their  respective  successors  and  permitted  assigns,  except that (a) the
Pledgors  shall not have the right to assign their rights or  obligations  under
this  Agreement and (b) any assignment by the Pledgee must be made in compliance
of the Loan Agreement.

      17. Choice of Law. This  Agreement  shall be construed in accordance  with
the internal laws  (without  regard to the conflict of laws  provisions)  of the
State of New York.

      18. WAIVER OF JURY TRIAL.  THE PLEDGORS AND THE PLEDGEE HEREBY WAIVE TRIAL
BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER  SOUNDING IN TORT,  CONTRACT OR  OTHERWISE)  IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED  WITH THIS  AGREEMENT OR THE  RELATIONSHIP  ESTABLISHED
HEREUNDER.

      19. CONSENT TO JURISDICTION. THE PLEDGORS HEREBY IRREVOCABLY SUBMIT TO THE
EXCLUSIVE  JURISDICTION  OF ANY UNITED  STATES  FEDERAL OR NEW YORK STATE  COURT
SITTING IN NEW YORK,  NEW YORK IN ANY  ACTION OR  PROCEEDING  ARISING  OUT OF OR
RELATING TO THIS AGREEMENT AND THE PLEDGORS  HEREBY  IRREVOCABLY  AGREE THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR  PROCEEDING  MAY BE HEARD AND  DETERMINED IN
ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE
AS TO THE VENUE OF ANY SUCH SUIT,  ACTION OR PROCEEDING  BROUGHT IN SUCH A COURT
OR THAT SUCH COURT IS AN  INCONVENIENT  FORUM.  NOTHING  HEREIN  SHALL LIMIT THE
RIGHT OF THE PLEDGEE OR ANY PURCHASER TO BRING PROCEEDINGS  AGAINST THE PLEDGORS
IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE PLEDGORS
AGAINST  THE PLEDGEE OR ANY  PURCHASER  OR ANY  AFFILIATE  OF THE PLEDGEE OR ANY
PURCHASER INVOLVING,  DIRECTLY OR INDIRECTLY,  ANY MATTER IN ANY WAY ARISING OUT
OF,  RELATED TO, OR  CONNECTED  WITH THIS  AGREEMENT  SHALL BE BROUGHT ONLY IN A
COURT IN NEW YORK, NEW YORK.

                                      -9-
<PAGE>

      20.  Counterparts.  This  Agreement  may  be  executed  in any  number  of
counterparts,  all of which, taken together shall constitute one agreement,  and
any of the  parties  hereto may  execute  this  Agreement  by  signing  any such
counterpart.  This  Agreement  shall be effective upon execution by the Pledgors
and the Pledgee.

      21. Miscellaneous.

            (a) Except as provided herein,  the Pledgors hereby expressly waive:
(i) notice of the  acceptance by the Pledgee of this  Agreement,  (ii) notice of
the existence or creation or non-payment of all or any of the Liabilities, (iii)
presentment,  demand,  notice  of  dishonor,  protest,  and  all  other  notices
whatsoever,  and (iv) all  diligence in defense,  collection or protection of or
realization upon the Liabilities,  any obligation hereunder, or any security for
or guaranty of any of the foregoing.

            (b) No action of the Pledgee  permitted  hereunder  shall in any way
affect or impair the rights of the Pledgee and the  obligations  of the Pledgors
under  this  Agreement.  The  Pledgors  hereby  acknowledge  that  there  are no
conditions to the effectiveness of this Agreement.

            (c) All  obligations  of the  Pledgors  and  rights  of the  Pledgee
expressed in this  Agreement  shall be in addition to and not in  limitation  of
those provided in applicable law or in any other written instrument or agreement
relating to any of the Liabilities.

      22. Joint and Several.  Each Pledgor  hereby  acknowledges  and agrees the
liabilities  and  obligations of each such Pledgor created under or arising with
respect  to this  Agreement  shall be the  joint  and  several  liabilities  and
obligations of all such Pledgors.

                                      -10-
<PAGE>

      IN WITNESS  WHEREOF,  this  Agreement has been duly executed as of the day
and year first above written.

                                         PLEDGORS:

                                         THE ALLIED DEFENSE GROUP, INC.,
                                           a Delaware corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         NEWS/SPORTS MICROWAVE RENTAL, INC.,
                                           a California corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         TITAN DYNAMICS SYSTEMS, INC.,
                                           a Texas corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         SEASPACE CORPORATION,
                                           a California corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         MECAR USA, INC., a Delaware corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -11-
<PAGE>

                                         ENERGA CORPORATION, a Maryland
                                           corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         PLEDGEE:

                                         WILTON FUNDING, LLC,
                                           a Delaware limited liability company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -12-
<PAGE>

                            ACKNOWLEDGMENT OF PLEDGE

      Each of the undersigned  (collectively,  the "Company")  acknowledges this
Pledge  Agreement,  consents to the pledge of the Pledged  Interests,  and shall
duly make a notation in its books and records that the Pledged Interests and all
Ownership  and other  Interests  in the  Company now or  hereafter  owned by the
Pledgors and all proceeds  thereof (the  "Collateral")  have been pledged to the
Pledgee and that the Pledgee has a security interest therein.

      In addition,  the Company agrees to comply  exclusively with  instructions
originated by the Pledgee in accordance  with the Loan  Agreement and the Pledge
Agreement  with  respect to the Pledged  Interests  and the  Collateral  without
further consent of the Pledgors.  The Company  acknowledges  that the Pledgee or
any  purchaser  of the  Pledged  Interests  may become the owner of the  Pledged
Interests  if the Pledgee  exercises  its rights and  remedies  under the Pledge
Agreement  or the  Loan  Agreement  or both,  and the  Company  consents  to the
admission  of the Pledgee  and/or such  purchaser  as a  stockholder,  member or
partner, as applicable of the Company in such event.

                                         NEWS/SPORTS MICROWAVE RENTAL, INC.,
                                           a California corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         SEASPACE CORPORATION,
                                           a California corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         TITAN DYNAMICS SYSTEMS, INC.,
                                           a Texas corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -13-
<PAGE>

                                         MECAR U.S.A., INC.,
                                           a Delaware corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         ALLIED RESEARCH CORPORATION
                                         LIMITED, a company formed under the
                                           laws of England and Wales

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         ENERGA CORPORATION,
                                           a Maryland corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         ARC EUROPE, S.A.,
                                           a Belgium company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         MECAR S.A.,
                                           a Belgium company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -14-
<PAGE>

                                         HENDRICKX N.V.,
                                           a Belgium company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         SEDACHIM SALES INTERNATIONAL S.A.,
                                           a Belgium company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -15-
<PAGE>

                                Schedule 2(a) to
                                Pledge Agreement

                               Ownership Interests

<TABLE>
<CAPTION>
                                                                                                                   Ownership
            Pledgor                                      Corporation                       No. of Shares           Percentage
            -------                                      -----------                       -------------           ----------
<S>                                           <C>                                                 <C>                  <C>
The Allied Defense Group, Inc.                News/Sports Microwave Rental, Inc.                  100                  100%
The Allied Defense Group, Inc.                SeaSpace Corporation                                100                  100%
The Allied Defense Group, Inc.                Titan Dynamics Systems, Inc.                    100,000                  100%
The Allied Defense Group, Inc.                MECAR USA, Inc.                                     100                  100%
The Allied Defense Group, Inc.                Allied Research Corporation Limited                  --                  100%
The Allied Defense Group, Inc.                Energa Corporation                                  100                  100%
The Allied Defense Group, Inc.                ARC Europe S.A.                                  49,204                   51%
Allied Research Corporation Limited           ARC Europe S.A.                                  46,911                   48%
Energa Corporation                            ARC Europe S.A.                                      35                    1%
ARC Europe S.A.                               MECAR S.A.                                       28,074                 99.9%
Sedachim Sales International S.A.             MECAR S.A.                                            1                  0.1%
ARC Europe S.A.                               VSK Electronics N.V.                             13,523                  100%
ARC Europe S.A.                               Hendrickx N.V.                                    2,999                 99.9%
ARC Europe S.A.                               Sedachim Sales International S.A.                   249                   99%
Michele Nihoul                                Sedachim Sales International S.A.                     1                    1%
Michele Nihoul                                Hendrickx N.V.                                        1                  0.1%
</TABLE>

                                      -16-
<PAGE>

                                  Exhibit 5B to
                           Loan and Security Agreement

                     Form of Belgian Share Pledge Agreement

                                 [See attached]

<PAGE>

                            ___________________, 2004

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

                             SHARE PLEDGE AGREEMENT

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

                                     between

                                    [PLEDGOR]

                                   as Pledgor

                                       and

                              WILTON FUNDING L.L.C.

                                   as Pledgee

                            Squire, Sanders & Dempsey
                              Louizalaan 165, 13-14
                                  1050 Brussels
                                     Belgium

                                      -1-
<PAGE>

                                Table of contents

ARTICLE 1   DEFINITIONS.....................................................   4

ARTICLE 2   PLEDGE..........................................................   5

ARTICLE 3   FURTHER PLEDGES.................................................   5

ARTICLE 4   PERFECTION......................................................   5

ARTICLE 5   REPRESENTATIONS AND WARRANTIES..................................   6

ARTICLE 6   CONTINUING COVENANTS OF THE PLEDGOR.............................   7

ARTICLE 7   RIGHTS ATTACHING TO THE SHARES..................................   8

ARTICLE 8   CONTINUING SECURITY AND OTHER MATTERS...........................   9

ARTICLE 9   POWERS OF PLEDGEE...............................................  10

ARTICLE 10  ATTORNEY........................................................  11

ARTICLE 11  DURATION AND DISCHARGE..........................................  11

ARTICLE 12  LIABILITY TO PERFORM............................................  12

ARTICLE 13  GENERAL.........................................................  12

ARTICLE 14  GOVERNING LAW AND JURISDICTION..................................  13

                                      -2-
<PAGE>

                             SHARE PLEDGE AGREEMENT

BETWEEN:

1.    [PLEDGOR],  a [Belgian]  company with its registered  office at [ADDRESS],
      Enterprise Number [NUMBER], Commercial Court of [PLACE],
      represented by                                  ,
      hereinafter referred to as the "Pledgor"

2.    [COMPANY],  a Belgian  company with its  registered  office at  [ADDRESS],
      Enterprise Number [NUMBER], Commercial Court of [PLACE] (the "Company");

AND:

3.    [WILTON FUNDING LLC], a limited liability company organized under the laws
      of Delaware with its registered office at [REGISTERED OFFICE],
      represented by                                  ,
      hereinafter referred to as the "Pledgee"

WHEREAS:

(A)   Pursuant to a Loan and Security  Agreement dated as of May 14, 2004 by and
      among amongst  others the Pledgor and the Pledgee  (including all annexes,
      exhibits,  and  schedules  thereto,  and as from  time  to  time  amended,
      restated,  supplemented  or  otherwise  modified  (the "Loan and  Security
      Agreement"),  the  Pledgee  has  agreed to make a term loan to The  Allied
      Defense Group, Inc., a Delaware corporation ("Allied"), and certain of its
      direct and indirect  subsidiaries,  upon the satisfaction of certain terms
      and conditions.

(B)   The Pledgor  owns  [AMOUNT]  registered  shares  numbered 1 up through and
      including   [AMOUNT]  (the   "Shares")  in  the  capital  of  the  Company
      representing [__]% of the share capital of the Company.

(C)   It is a condition precedent under the Loan and Security Agreement that the
      Pledgor enters into this Share Pledge Agreement (the "Agreement").

(D)   The  Pledgor  and the  Pledgee  wish to create a pledge in  respect of one
      hundred  percent  (100%) of the shares of the Company owned by the Pledgor
      (the "Pledged Shares") under the following terms:

                                      -3-
<PAGE>

THE PARTIES HAVE AGREED AS FOLLOWS:

ARTICLE 1 DEFINITIONS

In this Agreement, unless the context otherwise requires:

"Future Shares"         means (1) any  additional  shares in the  capital of the
                        Company (other than the Shares), including shares in the
                        capital  of the  Company  acquired  by the  Pledgor as a
                        result of the  exercise  of options  or other  rights to
                        purchase such additional shares,  that the Pledgor would
                        subscribe  to or  acquire  in the future and (2) all the
                        securities  that would be substituted for the Shares for
                        any reason whatsoever.

"Security Interests"    means any mortgage,  pledge,  lien, usufruct (usufruit),
                        charge, assignment, hypothecation or any other agreement
                        or arrangement having the effect of conferring security.

"Secured Liabilities"   means (1) all Liabilities and all other  obligations and
                        liabilities  of the  Pledgor  pursuant  to the  Loan and
                        Security  Agreement now or hereafter  existing hereunder
                        and under the Loan and Security  Agreement and the other
                        Financing Agreements to which the Pledgor is a party, in
                        whatsoever manner in any currency or currencies, whether
                        present  or  future,   actual  or  contingent,   whether
                        incurred  solely or  jointly  with any other  person and
                        whether  as  principal  or  surety   together  with  all
                        interests  accruing and all costs,  changes and expenses
                        incurred in connection  therewith;  (2) all  obligations
                        and  liabilities  referred to under (1) above  that,  by
                        succession to rights under any title  whatsoever,  would
                        be continued or assumed by the legal  successors of each
                        Pledgor  by  reason  of,  among  other  things,  merger,
                        splitting, contribution of a complete entity or business
                        division,   assignment,   novation  or   subrogation  of
                        contract  or  debt or  whatever  other  reason;  (3) all
                        present and future  obligations  and  liabilities of the
                        Pledgor   (whether  actual  or  contingent  and  whether
                        incurred  solely or jointly  with any other person or in
                        any other capacity  whatsoever) by reason of any present
                        or  future   loan   granted  by  the   Pledgee  (or  its
                        successor),  including but not

                                      -4-
<PAGE>

                        limited  to   assignments   by  way  of   novation   and
                        amendments,  increases and  refinancings of the Loan and
                        Security Agreement.

Unless  the  context  otherwise  requires  or unless  otherwise  defined in this
Agreement,  words and  expressions  defined in the Loan and  Security  Agreement
shall have the same meaning when used in this Agreement.

In this Agreement, each reference to a document will be deemed to be a reference
to such document as amended and/or  supplemented by the parties to such document
from time to time.

ARTICLE 2 PLEDGE

2.1   The Pledgor hereby grants to the Pledgee,  which accepts,  a pledge on all
      the Pledged  Shares  (including in each case, all present or future rights
      relating thereto or arising thereout),  in accordance with the Belgian Law
      of 5 May  1872 on  commercial  pledges  in  order to  secure  all  Secured
      Liabilities.

2.2   The  Pledged  Shares are in  registered  from and the  Pledgor  shall not,
      without the Pledgee's prior written consent,  permit the conversion of the
      Pledged Shares into bearer shares.

ARTICLE 3 FURTHER PLEDGES

If the Pledgor acquires in any manner any Future Shares, it undertakes to pledge
such Future  Shares  under the same terms and  conditions  as  mentioned in this
Agreement. The Pledgor shall take all such further action that may be reasonably
necessary  or  appropriate  to confirm and perfect such  pledge,  including  the
recording of the pledge on such Future Shares in the  shareholders'  register of
the Company.

The Pledgor  hereby  irrevocably  appoints the Pledgee to be its attorney in its
name and on its behalf to execute any  documents  which the  Pledgee  reasonably
considers necessary for perfecting its title to or for vesting the pledge on the
Future Shares.

The Pledgor shall comply with the  requirements  of this Article 3  concurrently
with the subscription to, or purchase of Future Shares.

ARTICLE 4 PERFECTION

4.1   The Pledgor shall  arrange for the following  notice to be recorded in the
      shareholders'  register of the Company and signed therein on behalf of the
      Pledgor and the Pledgee  simultaneously  with the  execution  hereof,  and
      shall procure that a registered share certificate representing the Pledged
      Shares,  bearing the same notice and  accompanied  with a photocopy of the
      pages of the shareholders' register, shall be duly issued and delivered to
      the Pledgee:

                                      -5-
<PAGE>

            "[NUMBER OF PLEDGED SHARES] aandelen op naam nr. [NUMMER] tot en met
            [NUMMER] zijn in pand aan  [AANVULLEN] op basis van een Share Pledge
            Agreement dd. ________________."

            OR [if the Company is not located in Flanders]

            "[NUMBER OF PLEDGED SHARES] actions  nominatifs nr. [NUMMER] jusqu'a
            [NUMMER]  ont ete donne en gage a  [AANVULLEN]  sur base d'un  Share
            Pledge Agreement en date du __________________."

4.2   The Pledgor hereby  appoints as its special  attorneys  [NAME] and [NAME],
      and the Pledgee hereby appoints as its special  attorneys  Anthony Van der
      Hauwaert  and each other lawyer of Squire,  Sanders & Dempsey,  Louizalaan
      165, 1050 Brussels (Belgium),  in each case with power to act alone and to
      substitute,  for the purpose of recording the second rank pledge  pursuant
      to this Agreement in the Company's shareholders' register.

4.3   The  Pledgor  shall,  upon  execution  of this  Agreement,  deliver to the
      Pledgee an  acknowledgement  by the  Company of the pledge of the  Pledged
      Shares, in the form of Schedule 1 hereto.

ARTICLE 5 REPRESENTATIONS AND WARRANTIES

The Pledgor  represents  and warrants to the Pledgee  that,  on the date of this
Agreement and on each other date on which the  representations and warranties of
the Loan and Security Agreement are deemed repeated:

(a)   The Pledgor is a corporation duly  incorporated and validly existing under
      the laws of [Belgium] and is not in liquidation,  with power to enter into
      this  Agreement  and to exercise  its rights and  perform its  obligations
      hereunder  and all  corporate  and other action  required to authorise its
      execution and the performance of this Agreement has been duly taken.

(b)   The  Company  is a societe  anonyme  duly  incorporated  under the laws of
      Belgium, validly existing and not in liquidation, and has the power to own
      its assets and conduct its business as currently conducted.

(c)   On the date hereof,  the capital of the Company is represented by [NUMBER]
      identical  registered  shares.  There are no profit shares or other shares
      which do not represent  the capital of the Company in  existence,  nor any
      warrant,  convertible  bond or other right whatsoever to acquire shares in
      the Company.

(d)   The  Pledgor  owns the Shares  free and clear of any  Security  Interests.
      There are no limitations, whether pursuant to the bylaws of the Company or
      to any agreement,  to the transferability of the Shares or to the exercise
      of the voting rights attached thereto.

(e)   The Shares are  validly  issued  and fully  paid up. The  Company  has not
      declared  any  dividends in respect of the Shares that are still unpaid on
      the date hereof.

                                      -6-
<PAGE>

(f)   This Agreement does not breach any contractual or other obligation binding
      upon the Pledgor and the Company.

(g)   This Agreement  constitutes  legally binding  obligations for the Pledgor,
      enforceable in accordance with its terms,  and creates those  encumbrances
      it purports to create.

(h)   There is no business  pledge  (gage sur fonds de commerce) in existence on
      the  business of the Pledgor nor any mandate  with a view to the  creation
      thereof. [This clause to be deleted for VSK Electronics only.]

(i)   The Pledgor has  satisfied  itself that the  benefits it expects to derive
      from the Loan and Security Agreement are an adequate  consideration for it
      to grant this pledge.

ARTICLE 6 CONTINUING COVENANTS OF THE PLEDGOR

The Pledgor:

(a)   shall  not  create  or  permit to  subsist  any  other  pledge,  charge or
      encumbrance  in respect  of the  Shares and the Future  Shares or any part
      thereof or interest  therein  (irrespective  of whether ranking behind the
      pledge created hereby);

(b)   shall not sell,  transfer or otherwise dispose of the Shares or the Future
      Shares or any part  thereof or interest  therein or attempt or agree to do
      so;

(c)   shall not permit the Company to make any alteration to, or reorganise, the
      share capital of the Company or to cancel,  reduce,  redeem,  or put under
      option any share capital or other  securities  convertible or exchangeable
      into shares or other securities;

(d)   shall  procure  that  no  executory  seizure   (uitvoerend   beslag/saisie
      execution)  is made on its  shares,  and  that  any  conservatory  seizure
      (bewarend  beslag/saisie  conservatoire)  is lifted  within 90 days of its
      first being made;

(e)   shall  cooperate  with the Pledgee and sign or cause to be signed all such
      further documents and take all such further action as the Pledgee may from
      time to time  reasonably  request to perfect and protect the pledge of the
      Pledged  Shares and the Future Shares and to carry out the  provisions and
      purposes of this Agreement;

(f)   shall notify the Pledgee  promptly of any change in the shareholding in or
      the capital contributions to the Company;

(g)   shall not do or cause or permit to be done  anything  which will, or could
      be reasonably be expected to,  materially  adversely affect this pledge or
      the rights of the Pledgee  hereunder  or which in any way is  inconsistent
      with or materially  depreciates,  jeopardises or otherwise prejudices this
      pledge.

                                      -7-
<PAGE>

ARTICLE 7 RIGHTS ATTACHING TO THE SHARES

7.1.  Voting Rights

(a)   The Pledgor shall exercise their voting rights in respect of the Shares in
      a manner consistent with the interests of the Pledgee. In particular,  and
      unless  agreed  otherwise by the Pledgee,  the Pledgor shall cast its vote
      against  any  proposal  for the  liquidation,  merger or  split-up  of the
      Company.

(b)   If there occurs any Default (that has not been waived in  accordance  with
      the  terms  of the  Loan  and  Security  Agreement)  and as  long  as such
      situation  shall be continuing in the opinion of the Pledgee,  the Pledgor
      shall  cast the votes  and all other  rights  attaching  to the  Shares in
      accordance with the Pledgee's instructions, if any, which instructions the
      Pledgor shall timely seek. The Pledgee's  instructions shall be reasonable
      and not in violation of any duties,  fiduciary or other, which the Pledgor
      may have as holder of the Shares.

(c)   Except for general  shareholders'  meetings held  exclusively  for routine
      corporate  household  purposes  (being the approval of annual accounts and
      the  appointment  of or  discharge  to  directors  and  auditors,  but not
      including in particular the  declaration of dividends),  the Pledgor shall
      forthwith give the Pledgee a copy of any convening notice or agenda of the
      general shareholders meetings of the Company. The Pledgor will transmit to
      the Pledgee copies of the minutes of the Company's  shareholders' meetings
      at the latest fifteen days after the holding of the relevant shareholder's
      meeting.

(d)   Unless agreed  otherwise by the Pledgee,  the Pledgor  shall  exercise all
      subscription  rights to which the  Pledged  Shares  may be  entitled.  The
      shares that the Pledgor would subscribe to pursuant to the exercise of any
      such right,  shall be part of the Future  Shares and pledged in accordance
      with Article 2.

(e)   The Pledgor shall forthwith pay up any contribution duly called in respect
      of the Pledged Shares.

(f)   Without the prior  written  consent of the  Pledgee,  the Pledgor will not
      consent  to any  amendment,  supplement  or  modification  of any terms or
      provisions contained in, or applicable to the bylaws of the Company if the
      effect  thereof could  reasonably be expected to be adverse to the Pledgee
      hereunder or under the Loan and Security Agreement.

(g)   The Pledgor undertakes not to allow the Company's shareholder's meeting to
      deliberate upon items which would not have been mentioned in the notice or
      on the agenda communicated to the Pledgee.

7.2   Dividends and Other Cash Returns

(a)   Any return on the Pledged  Shares,  irrespective of whether in the form of
      dividends,  bonus shares,  scripts or otherwise,  other than  repayment of
      capital shall be paid  directly to the

                                      -8-
<PAGE>

      Pledgor until the  occurrence of a Default.  If a Default  occurs that has
      not been  waived in  accordance  with the  terms of the Loan and  Security
      Agreement and as long as such Default shall be continuing  and upon notice
      to the Pledgor, the returns shall be exclusively paid to the Pledgee which
      shall apply the same towards satisfaction of the Secured Liabilities.

(b)   If the event that any return on the Pledged Shares which,  pursuant to the
      above paragraphs is to be paid or delivered to the Pledgee,  shall entitle
      the Pledgor to a tax credit for account of withholding  taxes, the Pledgor
      shall,  forthwith upon the declaration of such return,  pay to the Pledgee
      for the account of the Pledgee an amount equivalent to such tax credit and
      such  amount  shall be  deemed  a return  on the  Pledged  Shares  for the
      purposes of this Article 7.

(c)   This  Agreement  shall  not  in  any  way be  affected  by  any  stamping,
      regrouping,  splitting or renewal of the Pledged Shares, or by any similar
      operation,  and the securities  resulting from any such operation shall be
      part of the Pledged Shares and of this Agreement.

ARTICLE 8 CONTINUING SECURITY AND OTHER MATTERS

8.1   Continuing Security

      The pledge created by this Agreement:

(a)   shall be a continuing security for the Secured  Liabilities,  shall remain
      in force  until  released  in  accordance  with  Article  11, and shall in
      particular not be discharged by reason of the  circumstance  that there is
      at any time no obligation currently owing from the Pledgor to the Pledgee;

(b)   shall be in  addition  to and shall not  prejudice  or affect,  and may be
      enforced  by the Pledge  without  prior  recourse  to, any other  Security
      Interest or remedy;

(c)   shall not be satisfied by any intermediate  payment or satisfaction of any
      part of the Secured Liabilities or by any settlement of accounts;

(d)   shall not be discharged by the entry of any Secured  Liabilities  into any
      current account;  in which case this pledge shall secure any,  provisional
      or final  balance  of such  current  account up to the amount in which the
      Secured Liabilities were entered therein;

(e)   shall  not in any way be  prejudiced  or  affected  by any  change  in the
      constitution  or status of the Company or any other person or by any legal
      limitation,  disability, incapacity or other circumstances relating to the
      Company  or  any  other   person,   by  any   invalidity,   illegality  or
      unenforceability  of the  obligations  of any Pledgor or any other person,
      and the Company agrees to keep the Pledgee fully  indemnified  against any
      loss suffered as a result of any failure by the Company or any other party
      to perform any such obligation or purported obligation.

                                      -9-
<PAGE>

8.2 No Subrogation

Until the release of this pledge  pursuant to Article 11, the Pledgor  shall not
by virtue of any payment made,  security  realised or monies received  hereunder
for  or on the  account  of the  Secured  Liabilities  of  any  other  party  be
subrogated to any rights, security or monies held, received or receivable by the
Pledgee or be entitled to any right of contribution or indemnity.

8.3 Preservation of Security in the Event of Novation

In accordance with article 1278 of the Belgian Civil Code and without  prejudice
to the scope of the Secured Liabilities,  the Pledgor and the Pledgee agree that
in the event of novation of all or any part of the  Secured  Liabilities  or the
change  or  replacement  of the  Pledgee,  this  Agreement  will be  maintained,
automatically  without any further  formality or consent,  to secure the Secured
Liabilities  as novated and in favour of the Pledgee or, as the case may be, the
new Pledgee(s).

8.4 Waiver of Specific Rights

The Pledgor waives, to the extent  applicable,  the benefit of articles 2037 and
1285,  second  paragraph  of the  Belgian  Civil Code.  The Pledgor  waives any,
benefit  of  discussion  or  division.  None  of the  references  made  to  such
provisions  of the Belgian  Civil Code shall be  construed  as imposing a surety
obligation as "caution personnelle/ persoonlijke borgtocht" on the Pledgor.

ARTICLE 9 POWERS OF PLEDGEE

9.1 Event of Default

At any time on or after a Default  that has not been waived in  accordance  with
the terms of the Loan and Security Agreement:

(a)   the  Pledgee  may,  after  having  sent  notice  to the  Pledgor,  request
      authorisation  from the court to sell the Pledged  Shares,  in  accordance
      with the Law of 5 May 1872 on commercial pledges;

(b)   any payments which may be received or receivable by the Pledgee in respect
      of the  pledged  Pledged  Shares may be applied by it as though  they were
      proceeds of sale; and

(c)   the Pledgee may exercise all rights and remedies it possesses, and may act
      generally  in relation  to the  Pledged  Shares in such manner as it shall
      reasonably determine.

9.2 Application of Proceeds

(a)   Subject to any  limitations  under the Loan and  Security  Agreement,  all
      monies  received by the Pledgee after the security has become  enforceable
      shall  be  applied  towards   satisfaction  of  the  Secured  Liabilities,
      including any costs and expenses of the Pledgee  without  prejudice to the
      rights of the Pledgee to recover any shortfall from the Pledgor.

                                      -10-
<PAGE>

(b)   Should the proceeds of the sale of the Pledged  Shares be greater than the
      outstanding amount of the Secured  Liabilities,  the Pledgee shall as soon
      as reasonably  practicable pay to the Pledgor any such excess,  subject to
      any limitations under [the Guaranty or] the Loan and Security Agreement.

9.3 Indemnity

The Pledgor  shall fully  indemnify  the  Pledgee and every  attorney  appointed
pursuant hereto in respect of all liabilities and reasonable  expenses  incurred
by it,  in the  execution  of any  rights,  powers or  discretions  vested in it
pursuant  hereto,  except  to the  extent  that they are  determined  in a final
non-appealable  judgement by a court of competent  jurisdiction to have resulted
from the from the gross negligence or willful misconduct of the Pledgee.

9.4 Liability of the Pledgee

The Pledgee  shall not be liable for any acts,  losses or  omissions  including,
without  limitation,  acts,  losses or omissions with respect to the exercise of
any of its rights, powers and discretions  hereunder,  except to the extent that
they are determined in a final non-appealable  judgement by a court of competent
jurisdiction  to have  resulted  from the from the gross  negligence  or willful
misconduct of the Pledgee.  The Pledgee shall be under no obligation to take any
steps  necessary to preserve any rights in the Pledged  Shares against any other
parties but may do so at its option,  and all  expenses  incurred in  connection
therewith  shall be for the  account  of the  Pledgor  and  shall be part of the
Secured Liabilities.

ARTICLE 10 ATTORNEY

Subject to  fulfillment  of the relevant  provisions of Belgian law, the Pledgor
hereby  irrevocably  appoints  the Pledgee to be its attorney in its name and on
its behalf to execute  any  documents  which the  Pledgee  reasonably  considers
necessary  for  perfecting  title to or for  vesting  the pledge on the  Pledged
Shares  and the  Future  Shares  and to do all such  acts and  things  as may be
necessary,  for the full  exercise of the powers  hereby  conferred,  including,
after a Default has  occurred  that has not been waived in  accordance  with the
terms of the Loan  and  Security  Agreement,  any sale or other  disposition  or
realisation of the Pledged Shares and Future Shares and the Pledgor ratifies and
confirms, and agrees to ratify and confirm any agreement, assurance, instrument,
act or thing which any such attorney may lawfully execute or do.

ARTICLE 11 DURATION AND DISCHARGE

11.1  The present  Agreement will remain in full force and effect until full and
      complete  performance  of the Secured  Liabilities.  This pledge  shall be
      discharged by, and only by, the express written release thereof granted by
      the Pledgee.

11.2  The Pledgee shall, at the Pledgors' cost, grant an express release of this
      pledge no earlier than the latest date of the  following:  (i) all Secured
      Liabilities shall have been finally discharged and there is no possibility
      of any further  Secured  Liability  coming or re-entering  into existence;
      (ii) the Loan and Security  Agreement has been  terminated;  and (iii) all
      other conditions of the present Agreement have been satisfied. The Pledgee
      shall

                                      -11-
<PAGE>

      inform the Company of such  release,  and shall provide the Pledgor with a
      power of attorney in favour of the agent designated by the Pledgor for the
      purpose of  recording  the  release of the pledge in the  Company's  share
      register.

11.3  Any  release of this pledge  shall be null and void and without  effect if
      any payment  received by the Pledgee and applied  towards  satisfaction of
      all or part of the Secured  Liabilities (a) is avoided or declared invalid
      as against  the  creditors  of the maker of such  payment,  or (b) becomes
      repayable by the Pledgee to a third party,  or (c) proves not to have been
      effectively  received  by the  Pledgee.  In this case the  Pledge  will be
      entitled  to renew the  inscription  of this  pledge in the  shareholders'
      register of the Company.

ARTICLE 12 LIABILITY TO PERFORM

The Pledgor  shall remain liable to observe and perform all its  obligations  in
respect of their  Pledged  Shares and any Future  Shares,  and the Pledgee shall
have no obligations or liability of any kind in connection  therewith other than
the duties of the Pledgee.

ARTICLE 13 GENERAL

13.1 Notices

All notices or other  communications  under or in connection with this Agreement
shall be given in  accordance  with the  provisions of Section 10.19 of the Loan
and Security Agreement.

In addition, a copy of all notices to the Pledgee shall be sent to:

      Squire, Sanders & Dempsey L.L.P.
      Louizalaan 165, 13-14
      1050 Brussels- Belgium
      Attn: Anthony Van der Hauwaert
      Telephone: +32 (0) 2 627 11 11
      Facsimile: +32 (0) 2 627 11 00

13.2  Expenses

Any and all  costs,  internal  charges  and  out-of-pocket  expenses  (including
attorney's disbursements and fees and time charges of attorneys for the Pledgee,
which attorneys may be employees of the Pledgee,  and of any expert and agents),
which Pledgee may incur in connection  with this  Agreement,  in particular with
regard to the  establishment  and  perfection of this pledge and the granting of
any release,  shall be borne by the Pledgor.  The Pledgor  shall on first demand
reimburse  the Pledgee for any such costs,  charges and  expenses,  and the same
shall be part of the Secured Liabilities.

13.3 No Waiver

No failure or delay by the Pledgee to exercise any right,  power or remedy under
this Agreement shall operate as a waiver thereof nor shall any single or partial
exercise or waiver of any right,

                                      -12-
<PAGE>

power or remedy.  The remedies provided in this Agreement are cumulative and are
not exclusive of any remedies provided by law.

13.4 Severability

Each of the provisions of this Agreement is several and distinct from the others
and if at any time one or more of such  provisions is or becomes invalid illegal
or  unenforceable  the validity,  legality and  enforceability  of the remaining
provisions hereof shall not in any way be affected or impaired thereby.

In case of any such  illegality,  invalidity  or  unenforceability,  the parties
shall  negotiate in good faith with a view to agree on the  replacement  of such
provision by a provision  which is legal,  valid and enforceable and which is to
the extent  practicable  in  accordance  with the intents  and  purposes of this
Agreement and which in its economic  effect comes as close as practicable to the
provision being replaced.

13.5 Delegation of Powers

The Pledgee shall be entitled, at any time and as often as may be expedient,  to
delegate all or any of the powers and discretion vested in it by, this Agreement
in such  manner,  upon such  terms  and to such  person  as the  Pledgee  in its
absolute discretion may think fit.

13.6 Benefit of this Agreement

This  Agreement  shall be binding  on, and inure for the benefit of, the Pledgor
and the Pledgee.

13.7 Assignment

The Pledgor may not assign or transfer  any of its rights or  obligations  under
this  Agreement  without  the prior  written and  express  authorisation  of the
Pledgee.

13.8 Evidence of the Secured Liabilities

A  certificate  by the Pledgee as to the amount and the terms and  conditions of
the Secured Liabilities shall be prima facie evidence of the matters to which it
relates.

13.9 Other Security

This pledge  shall not impair the other  personal  or  collateral  security  the
Pledgee has or in the future will have.  The Pledgor  expressly  agrees that the
pledge established by means of this Agreement and the other elements of security
established or to be established to cover the Secured Liabilities by this pledge
shall supplement each other until settlement in full of the Secured Liabilities.

13.10 Priority [only when there is a main pledge agreement]

                                      -13-
<PAGE>

In case of any conflict  between this Agreement and the [Main Pledge  Agreement]
the provisions of this Agreement shall take priority over the provisions of such
[Main Pledge Agreement].

ARTICLE 14 GOVERNING LAW AND JURISDICTION

14.1  This Agreement  shall be governed by and  interpreted  in accordance  with
      Belgian law.

14.2  All disputes  arising in connection  with this Agreement  shall be settled
      exclusively by the courts of Brussels,  without prejudice to the rights of
      the  Pledgee to take legal  action  before  any other  court of  competent
      jurisdiction.

Done in  Brussels,  on  _____________  2004 in  [four]  originals,  of which one
original will be attached to the Company's  shareholders'  register.  Each party
acknowledges receipt of its own original.

For the Pledgee,                           For the Pledgor,

_____________________________________      _____________________________________
Name:                                      Name:
Title:                                     Title:

For the Company,
_____________________________________
Name:
Title:

                                      -14-
<PAGE>

SCHEDULE 1 - ACKNOWLEDGEMENT

[Letterhead of [COMPANY]]

To: Pledgee

[DATE]

Dear Sir or Madam,

We, [COMPANY],  with registered office at [ADDRESS],  Enterprise Number [NUMBER]
Commercial Court of [PLACE] (the "Company"), refer to the Share Pledge Agreement
to be executed on or about the date of this  declaration,  between  [PLEDGOR] as
Pledgor and [PLEDGEE] as Pledgee,  in respect of [NUMBER]  shares in the Company
(the "Pledged Shares"), and hereby declare and acknowledge that:

1.    we have not  received  notice of and are not aware of any  transfer of the
      Pledged Shares by the Pledgor;

2.    we have not received notice of and are not aware of any other pledges over
      the Pledged  Shares  other than the pledge  created  pursuant to the Share
      Pledge Agreement; and

3.    we  acknowledge  the pledge of the Pledged Shares by the Pledgor in favour
      of the Pledgee.

Yours faithfully,

[COMPANY]

_____________________________________      _____________________________________
Name:                                      Name:
Title:                                     Title:

                                      -15-
<PAGE>

                                  Exhibit 5C to
                           Loan and Security Agreement

                   Form of Deposit Account Security Agreement

                                 [See attached]

<PAGE>

                       DEPOSIT ACCOUNT SECURITY AGREEMENT

      This DEPOSIT ACCOUNT SECURITY AGREEMENT (the "Security Agreement") is made
and entered into as of May 28, 2004,  by and between The Allied  Defense  Group,
Inc.,  a  Delaware  corporation  (the  "Pledgor"),  and Wilton  Funding,  LLC, a
Delaware  limited  liability  company  with its  principal  offices  located  in
Westport, Connecticut (the "Lender").

                                   Background

      The  following  is a mutual  statement  by the parties of certain  factual
matters which form the basis of this Security Agreement.

      A. Loans.  Pledgor  and the other  Borrowers  named in the Loan  Agreement
(defined  below),  and Lender  have  entered  into a certain  Loan and  Security
Agreement of even date herewith (as the same may be hereafter amended, restated,
modified or supplemented  from time to time, the "Loan  Agreement")  pursuant to
which Lender has agreed to lend to Borrowers term loans in the aggregate maximum
sum of up to  $18,000,000  (the  "Loan").  The Loan  shall be  evidenced  by and
repayable  in  accordance  with the terms of a  promissory  note of Borrowers to
Lender (as the same may be hereafter amended, restated, modified or supplemented
from  time to  time,  the  "Note").  Capitalized  terms  used  in this  Security
Agreement that are not otherwise defined herein shall have the meanings ascribed
to them in the Loan Agreement.

      B. Pledge of Securities Account.  Lender is willing to enter into the Loan
Agreement  upon the  condition  that (i)  Pledgor  deposit  cash in the  deposit
account   maintained  in  the  name  of  Pledgor  by  Wachovia  Bank,   National
Association,   as  depositary  bank  (the  "Bank"),  and  given  Account  Number
2000021008254  by the Bank (together with any successor or replacement  account,
the  "Account") and (ii) Pledgor  pledge,  assign and grant to Lender a security
interest in the Account and all funds and other items  deposited in, credited to
or held for deposit or credit to, the  Account,  as security  for the  following
obligations  (collectively,  the "Secured Obligations"):  (i) the payment of the
Note, (ii) the payment of any and all liabilities,  obligations and indebtedness
of Borrowers  or any of them to Lender of any and every kind and nature,  at any
time owing, arising, due or payable and howsoever evidenced,  created, incurred,
acquired or owing,  whether primary,  secondary,  direct,  contingent,  fixed or
otherwise and whether arising or existing under the Loan Agreement or any of the
other  Financing  Agreements,   (iii)  the  performance  by  Borrowers  of,  and
compliance  with,  all of the terms,  covenants,  conditions,  stipulations  and
agreements  contained in this Security Agreement,  the Loan Agreement,  the Note
and the Financing  Agreements,  (iv) the repayment of (a) any amounts Lender may
advance or spend for the maintenance or preservation of the Collateral  (defined
below) and (b) any other  expenditures that Lender may make under the provisions
of this Security  Agreement or for the benefit of Pledgor,  (v) all amounts owed
under  any  modification,  renewals  or  extensions  of  any  of  the  foregoing
obligations,  and (vi) any of the  foregoing  that arises  after the filing of a
petition  by  or  against  Pledgor  under  the  Bankruptcy  Code,  even  if  the
obligations do not accrue because of the automatic  stay under  Bankruptcy  Code
ss.362 or otherwise.

<PAGE>

                             Statement of Agreement

            For good and valuable consideration,  the receipt and sufficiency of
which is hereby acknowledged, the parties hereto covenant and agree as follows:

                                    ARTICLE I

                                SECURITY INTEREST

      Section 1.1. Grant of Security Interest.  Pledgor hereby assigns to Lender
and grants a security interest in all of Pledgor's right,  title and interest in
and to the Account and in and to the following:

            (a) any  checks,  drafts,  instruments,  cash and other items at any
      time received for deposit in the Account;

            (b) any wire  transfers of funds,  automated  clearing house ("ACH")
      entries,  credits from merchant  card  transactions  and other  electronic
      funds  transfers  or other funds  deposited  in,  credited to, or held for
      deposit in or credit to, the Account, either now or in the future;

            (c) all  books  and  records  relating  thereto,  whether  presently
      existing or hereafter created;

            (d) all of the existing and future proceeds of any of the foregoing,
      or any other  disposition of the foregoing,  including but not limited to,
      any interest payment or other  distribution of cash or property in respect
      thereof; and

            (e) any existing and future  rights  incidental  to the ownership of
      any of the foregoing

(all of the foregoing referred to herein as the "Collateral").

      Pledgor grants to Lender a further security interest in the Collateral and
in the Account interest to the extent that the Account is property separate from
the Collateral.

      Section 1.2. Secured Obligations. The security interest granted by Pledgor
to Lender  herein  secures  all of  Borrowers'  obligations  arising  out of the
Secured  Obligations,  and  extends  to  any  renewal,  refinancing,  refunding,
extension, restatement or modification of any Secured Obligations on one or more
occasions  and to any interest  that  accrues on any of the Secured  Obligations
before or after the bankruptcy of any Borrower.

      Section 1.3.  Control  Agreement.  Simultaneously  with the  execution and
delivery of this  Security  Agreement,  the Bank has  executed  and  delivered a
certain Deposit  Account  Control  Agreement of even date herewith (the "Control
Agreement")  for the purpose of,  among other  things,  perfecting  the security
interest granted by Pledgor to Lender herein.

      Section 1.4. [Reserved].

                                      -2-
<PAGE>

      Section  1.5.  Duty of Lender.  If Lender takes  possession  of any of the
Collateral, the duty of Lender with respect to the Collateral shall be solely to
use reasonable  care in the physical  custody  thereof,  and Lender shall not be
under any obligation to take any action with respect to any of the Collateral or
to  preserve  rights  against  prior  parties.  The powers  conferred  on Lender
hereunder are solely to protect its interest in the Collateral and do not impose
any duty upon it to exercise any such  powers.  Pledgor is not looking to Lender
to provide it with investment advice.  Lender shall have no duty to ascertain or
take any action with respect to any matters concerning any Collateral whether or
not  Lender has or is deemed to have  knowledge  of such  matters,  or as to the
taking  of  any  necessary  steps  to  preserve  any  rights  pertaining  to any
Collateral.  Lender shall have no duty to exercise  reasonable  care to preserve
the value of any of the Collateral.

      Section 1.6. Subsequent Changes Affecting Collateral. Pledgor acknowledges
that it has made  its own  arrangements  for  keeping  informed  of  changes  or
potential changes affecting the Collateral and Pledgor agrees that Lender has no
responsibility  to inform  Pledgor of such  matters  or to take any action  with
respect thereto.

      Section 1.7.  Return of  Collateral.  Subject to the provisions of Section
4.4 of the Loan Agreement and Section 1.9 hereof,  the security interest granted
to Lender  hereunder  shall not  terminate  and Lender  shall not be required to
return the Collateral to Pledgor or to terminate its security  interest therein,
including  notifying  the Bank,  unless and until the  earliest  to occur of the
following:

            (i) (a) the  Secured  Obligations  shall  have  been  fully  paid or
      performed  and Lender has no obligation  to extend  further  credit to any
      Borrower, (b) all of Pledgor's obligations hereunder shall have been fully
      paid or performed,  (c) the  obligations of Borrowers  under the Financing
      Agreements  shall have been discharged or released,  and (d) Pledgor shall
      have  reimbursed  Lender for any  reasonable  expenses  of  returning  the
      Collateral and filing any termination  statements and other instruments as
      are required to be filed in any offices under applicable laws; or

            (ii) with respect to any four (4) consecutive fiscal quarters of the
      Company  commencing  on or after January 1, 2005,  the Company's  Domestic
      Senior Leverage Ratio (as defined in the Loan Agreement) for each trailing
      twelve (12) month period ending on the last day of each such quarter shall
      have been less than 2.5:1.0 at the end of each of such  quarters and prior
      to such time, no Event of Default  shall have occurred  hereunder or under
      the Loan Agreement or any of the Financing Agreements;  provided, however,
      that  in  accordance  with  the  provisions  of  Section  4.4 of the  Loan
      Agreement,  Lender's  security interest in the Additional Cash Collateral,
      if any,  shall  continue  and such funds shall  continue to be held in the
      Account  (subject to  disbursement  as provided in Section 4.4 of the Loan
      Agreement) notwithstanding the satisfaction of the conditions set forth in
      this clause (ii).

      Pledgor  shall cause its  Quarterly  Compliance  Certificate  delivered to
Lender pursuant to Section 7.1(c) of the Loan Agreement to include a calculation
of its Domestic  Senior Leverage Ratio for the trailing twelve (12) month period
as of the end of each applicable quarter.

                                      -3-
<PAGE>

      Section 1.8. Tax Reporting.  All items of income,  gain,  expense and loss
recognized in the Account shall be reported to the Internal  Revenue Service and
all  state  and  local   taxing   authorities   under  the  name  and   taxpayer
identification number of Pledgor.

      Section 1.9.  Collateral  Requirement.  Pledgor  represents,  warrants and
covenants that, at all times during the term hereof, the sum of the cash held in
the Account shall not be less than the  applicable  amount set forth below based
upon the outstanding  principal balance of the Loan as of the applicable date of
determination (the "Collateral Requirement"):

Outstanding Principal Balance of the Loan       Required Cash Balance of Account
-----------------------------------------       --------------------------------

          $0.01 - $5,000,000.00                            $2,000,000
     $5,000,000.01 - $6,000,000.00                         $2,750,000
     $6,000,000.01 - $7,000,000.00                         $3,500,000
     $7,000,000.01 - $8,000,000.00                         $4,250,000
     $8,000,000.01 - $9,000,000.00                         $5,000,000
    $9,000,000.01 - $10,000,000.00                         $5,750,000
    $10,000,000.01 - $18,000,000.00                        $6,000,000

; provided, however, that if the outstanding principal balance of the Loan as of
the end of any  fiscal  quarter of the  Pledgor  exceeds  $10,000,000,  then the
Collateral  Requirement  shall be  increased by an amount equal to the lesser of
(a) the amount by which the outstanding principal balance of the Loan as of such
date exceeds  $10,000,000 and (b) amount (if any) by which  $13,000,000  exceeds
the VSK Group  Equity Value  (defined  below) as of such date.  In addition,  if
Pledgor elects to deposit the  Additional  Cash  Collateral  into the Account in
accordance  with the provisions of Section 4.4 of the Loan  Agreement,  then the
Collateral  Requirement  shall be  increased  by the  amount of such  additional
deposit and the security interest granted hereunder in such funds shall continue
and such funds shall continue to be held in the Account until the earlier of (A)
the payment in full of the  Subordinated  Debt or (B) the payment in full of the
Liabilities  and the  termination  of the  Lender's  obligation  under  the Loan
Agreement to extend further credit to the Borrowers.

      As used herein,  "VSK Group Equity Value" as of any date of  determination
shall  mean the sum of (i) the  product  of (a) five (5)  multiplied  by (b) the
consolidated  EBITDA of the VSK Group for the prior four (4) fiscal  quarters of
the VSK Group plus (ii) the  consolidated  amount of unrestricted  cash and cash
equivalents  of the VSK Group as of such date minus  (iii) the VSK Group  Funded
Debt (defined below) as of such date, all as determined in accordance with GAAP.
"VSK Group Funded Debt" means,  for any date of  determination,  the VSK Group's
consolidated  total  liabilities,  as  they  would  normally  be  shown  on  the
consolidated  balance  sheet of the VSK Group,  (i) if VSK  Electronics  has not
theretofor  granted  to any  Person  (other  than  Lender)  a lien on,  security
interest in or pledge of any shares of any Subsidiary of VSK Electronics,  minus
liabilities  (other than of the type  referred to in the  following  subsections
(ii) through  (iv)) which do not accrue  interest,  (ii) plus the face amount of
letters of credit  issued and  outstanding  for the account of any member of the
VSK Group (to the extent not included therein), (iii) plus capital and synthetic
lease  obligations (to the extent not included  therein),  (iv) plus guaranty or
surety  obligations  of  any  member  of  the  VSK  Group  with  respect  to the
indebtedness of any other person (to the extent not included therein),  (v) plus
liabilities owed to

                                      -4-
<PAGE>

any other Foreign Subsidiaries  (including,  without limitation,  those which do
not accrue interest), all as determined in accordance with GAAP.

      Pledgor  shall cause its  Quarterly  Compliance  Certificate  delivered to
Lender pursuant to Section 7.1(c) of the Loan Agreement to include a calculation
of the Collateral Requirement and the VSK Group Equity Value.

      If at any time the cash balance of the Account falls below the  Collateral
Requirement,  Pledgor  shall,  within  five  Business  Days after its receipt of
written notice thereof from Lender,  deposit in the Account additional cash such
that the sum of the cash held in the Account  equals or exceeds  the  Collateral
Requirement.

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

Pledgor hereby represents and warrants to Lender as follows:

      Section  2.1.  Enforceability.  This  Security  Agreement  and the Control
Agreement have been duly executed and delivered by Pledgor, constitute Pledgor's
valid and legally  binding  obligations  and are  enforceable in accordance with
their respective terms against Pledgor.

      Section 2.2. No Conflict. The execution,  delivery and performance of this
Security Agreement and the Control Agreement, the grant of the security interest
in  the  Collateral   hereunder  and  the   consummation  of  the   transactions
contemplated  hereby and thereby will not,  with or without the giving of notice
or the lapse of time,  (a) violate any material law  applicable to Pledgor;  (b)
violate any judgment,  writ,  injunction  or order of any court or  governmental
body or officer  applicable  to Pledgor;  (c) violate or result in the breach of
any material  agreement to which Pledgor is a party or by which any of Pledgor's
properties, including the Collateral is bound; or (d) violate any restriction on
the transfer of any of the Collateral.

      Section 2.3. No Consents. No consent,  approval,  license, permit or other
authorization of any third party (other than the Bank) or any governmental  body
or officer is required for the valid and lawful  execution  and delivery of this
Security  Agreement and the Control  Agreement,  the creation and  perfection of
Lender's security interest in the Collateral or the valid and lawful exercise by
Lender of remedies  available to it under this Security  Agreement,  the Control
Agreement  or  applicable  law or of the rights  granted to it in this  Security
Agreement or the Control Agreement.

      Section  2.4.  Account.  Pledgor has  provided  Lender with a complete and
accurate  statement of the cash credited to the Account as of the date hereof, a
copy of which is attached hereto as Exhibit A.

      Section  2.5.  Security  Interest.  Pledgor  is  the  sole  owner  of  the
Collateral free and clear of all liens,  encumbrances  and adverse claims (other
than those created by this Security  Agreement),  has the unrestricted  right to
grant the  security  interest  provided  for herein to Lender and has granted to
Lender a valid and perfected first priority  security interest in the Collateral
free of all liens, encumbrances, transfer restrictions and adverse claims.

                                      -5-
<PAGE>

                                   ARTICLE III

                                    COVENANTS

      Pledgor hereby covenants and agrees with Lender that Pledgor shall:

      Section 3.1.  Defend Title.  Defend  Pledgor's title to the Collateral and
the  security  interest  of Lender  therein  against  the  claims of any  person
claiming  rights in the Collateral  against or through  Pledgor and maintain and
preserve such security interest so long as this Security  Agreement shall remain
in effect.

      Section 3.2. No Withdrawals or Transfer.  Without Lender's  specific prior
written  consent,  neither withdraw the Collateral from the Account nor sell nor
offer to sell nor otherwise transfer nor encumber any portion of the Collateral.

      Section 3.3.  Control and Customer  Agreements.  Neither attempt to modify
nor attempt to terminate the Control  Agreement,  the commercial deposit account
agreement  between  Pledgor  and the Bank or any other  agreement  with the Bank
relating to the Account.

      Section 3.4. Further Assurances.

      (a) At  Pledgor's  expense,  do such  further acts and execute and deliver
such additional conveyances, certificates, instruments, legal opinions and other
assurances  as Lender may at any time  request or require to protect,  assure or
enforce  its  interests,  rights and  remedies  under this  Security  Agreement.
Pledgor  hereby  authorizes  Lender  to file with the  appropriate  governmental
offices  in  the  State  of   Delaware,   and/or  any  other   state(s)   and/or
jurisdiction(s)  reasonably  desired by Lender,  one or more Uniform  Commercial
Code ("UCC") financing  statements  describing the Collateral,  or amendments or
continuations  thereof whenever necessary to continue the perfection of Lender's
security interest hereunder and whenever desired by Lender.

      (b)  Promptly  deliver  any  certificate  or  instrument  constituting  or
representing  any of the  Collateral,  it may obtain  possession of from time to
time,  to the Bank for credit to the Account,  forthwith  duly indorsed in blank
without restriction.

      (c) Promptly deliver to Lender any  endorsements or instruments  which may
be necessary or convenient to transfer any Collateral which is registered in the
name of,  payable  to the order of, or  specially  indorsed  to  Pledgor  or its
securities or to one of their respective nominees.

      Section 3.5.  Name and Address.  Notify  Lender of any change of Pledgor's
name or the address of  Pledgor's  principal  place of business at least  thirty
(30) days prior to any such change.

      Section  3.6.  Statements.  Send or  cause  the  Bank to send to  Lender a
monthly (or such shorter  period as Lender may  reasonably  require from time to
time)  statement of the Account in reasonable  detail as of a date not more than
three (3)  business  days  prior to the date of  delivery,  and a  complete  and
accurate  copy  of  every  other  statement,   confirmation,   notice  or  other
communication  concerning  the  Collateral  that the Bank sends to Pledgor.  All
information  furnished  by Pledgor  concerning  the  Collateral  or otherwise in
connection with this Security  Agreement is, or shall be at the time the same is
furnished, accurate, correct and complete in all material respects.

                                      -6-
<PAGE>

      Section 3.7. Advice. Advise Lender promptly,  completely,  accurately,  in
writing and in reasonable  detail (a) of any material  encumbrance upon or claim
asserted against any of the Collateral of which Pledgor is aware; and (b) of the
occurrence of any event of which Pledgor is aware, other than changes in general
market conditions adequately reported in the general news media, that would have
a material adverse effect upon the aggregate value of the Collateral or upon the
security interest of Lender.

                                   ARTICLE IV

                                    DEFAULT

      Section  4.1.  Events  of  Default.  An Event of  Default  shall  mean the
occurrence of one or more of the following described events:

      (a) If  Borrowers  fail to pay or perform,  as the case may be, any of the
Secured Obligations when the same become due and payable or performable,  as the
case may be, after the expiration of any applicable  cure or notice  provisions;
or

      (b) If at any time the sum of the cash held in the Account falls below the
Collateral Requirement; or

      (c) If an event of default occurs under any of the Financing Agreements or
any other  agreement  between  Lender and Borrowers  after the expiration of any
applicable cure or notice provisions; or

      (d) If any lien,  interest,  charge and/or  encumbrance is created in, on,
and/or with respect to the Collateral or the Account or any part thereof,  or if
any levy,  seizure,  or attachment of the  Collateral or the Account or any part
thereof occurs; or

      (e)  If  any  sale,  attempted  sale,  or  any  other  disposition  of the
Collateral  or the Account or any interest in either  occurs,  without the prior
written consent of Lender; or

      (f) If the  Collateral or the Account  should become the subject matter of
litigation  which  might,  in the  opinion  of  Lender,  result  in  substantial
impairment  or loss of the  security  intended to be  provided by this  Security
Agreement; or

      (g) If any of the  following  shall  occur by or to  Pledgor:  any general
assignment  for the benefit of creditors;  the filing of any petition for relief
under the provisions of the Bankruptcy Code or the Bankruptcy Act, or for relief
under any insolvency law, either  voluntarily or  involuntarily;  or the merger,
consolidation  or  appointment  of a  receiver  of any part of the  property  of
Pledgor; or

      (h) If Pledgor  fails to perform any  obligation  or violates any covenant
contained in this Security Agreement, other than those referred to in paragraphs
(a) or (b) above, and such failure or violation continues for a period of thirty
(30) days after Lender requests Pledgor to remedy such failure or violation; or

                                      -7-
<PAGE>

      (i) If either or both of Pledgor or the Bank, respectively,  shall fail to
perform any  obligation or shall  violate any covenant  contained in the Control
Agreement, including the acknowledgement attached thereto; or

      (j) If any  representation  or warranty  made by Pledgor in this  Security
Agreement,  the Control Agreement or any information  contained in any financial
statement  or other  document  delivered  to Lender  by or on behalf of  Pledgor
contains any untrue  statement  of a material  fact or omits to state a material
fact  necessary to make the  statements  therein not  misleading in light of the
circumstances in which they were made; or Pledgor shall be in default and Lender
shall have, in addition to any other remedies  available to it under Section 4.2
below and under the law or any  agreement,  the rights and remedies of a secured
party under Article 9 of the UCC.

      Section 4.2. Remedies.

      (a) If an Event of Default has occurred and is continuing,  Lender may, in
its discretion,  take one or more of the following actions: (i) deliver a notice
of exclusive  control under the Control  Agreement to the Bank and upon any such
notice  shall be  entitled  directly or as the agent of Pledgor to do any of the
following: (A) sell the Collateral at public or private sale, and dispose of the
proceeds of such sale, all in accordance  with the  requirements  of the Uniform
Commercial  Code or other law  regulating  such sale; (B) recover the reasonable
expenses of preparing the Collateral for sale and for selling the Collateral, or
for  collecting  any  amounts  due under any of the  Collateral,  and other like
expenses,  together with court costs and reasonable  attorneys' fees incurred in
realizing  upon the  Collateral  or enforcing  any  provision  of this  Security
Agreement;  (C)  notify  the  issuers  of any  securities  that  are part of the
Collateral, makers of any notes or bonds that are part of the Collateral, or any
other obligors on any other part of the Collateral, and require such obligors to
make payment  directly to Lender whether or not Pledgor was  theretofore  making
collections on any of the Collateral; (D) endorse, receive and give receipt for,
all  dividends,  interest,  principal  payments  and other sums now or hereafter
payable on, or on account of, the  Collateral,  and proceed against the obligors
on any of the  Collateral  by any legal or  equitable  means in its own name and
with or without  the  consent  or  assistance  of Pledgor to the same  extent as
Pledgor  could  have if this  Security  Agreement  had not  been  entered  into,
provided that Pledgor shall assist Lender in bringing or maintaining any suit to
enforce any obligations evidenced by any of the Collateral; and provided further
that in connection therewith,  Lender may make any compromise or settlement with
respect to the Collateral that Lender deems desirable or proper;  and (E) retain
the Collateral and become the owner  thereof,  in accordance  with the UCC; (ii)
cause the Account to be reregistered in its sole name or transfer the Account to
another bank in its sole name;  (iii) remove any Collateral from the Account and
deposit such Collateral in another deposit account in its name or in the name of
its agent or nominee or any of their nominees; (iv) take immediate possession of
any  Collateral  not in the  possession of the Bank without  requirement  of any
notice,  demand or legal  process;  (v) sell the Collateral at public or private
sale,  and dispose of the proceeds of any such sale in accordance  with the UCC;
(vi) recover the  reasonable  expenses of selling the  Collateral or the Account
and other like  expenses,  together with court costs and  reasonable  attorneys'
fees  incurred in realizing on the  Collateral  or the Account or enforcing  any
provision of this Security Agreement; (vii) proceed by appropriate legal process
to enforce any provision of this  Security  Agreement or in aid of the execution
of power of sale, or for  foreclosure of the security  interest of Lender or for
the sale of the Collateral or of the Account under the judgment or decree of any
court;  (viii)  exchange  certificates  representing  any of the  Collateral for
certificates  of larger or  smaller  denominations,  or reduce the

                                      -8-
<PAGE>

same to cash; (ix) exercise any voting,  conversion,  registration,  purchase or
other rights of a holder of any of the Collateral and any reasonable  expense of
such exercise  shall be deemed to be an expense of preserving  the value of such
Collateral for the purposes of Section 5.1 below;  or (x) collect,  including by
legal action,  any notes,  checks or other  instruments for the payment of money
included in the  Collateral  and  compromise  or settle with any obligor of such
instruments.

      (b) If notice of the time and place of any public  sale of the  Collateral
or the time  after  which any  private  sale or other  intended  disposition  is
required by the UCC,  Pledgor  acknowledges  that five (5) days  advance  notice
thereof will be a reasonable  notice.  Lender shall not be obligated to make any
sale of Collateral  regardless  of notice of sale having been given.  Lender may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor,  and such sale may, without further notice, be made at
the time and place to which it was so adjourned.

      (c) If, under the UCC, Lender may purchase any part of the Collateral,  it
may in payment of any part of the purchase price thereof, cancel any part of the
Secured Obligations.

      (d) If any of the Collateral is sold on credit or for future delivery,  it
need not be retained by Lender until the purchase price is paid and Lender shall
incur no liability if the purchaser fails to take up or pay for such collateral.
In case of any such failure, such collateral may be sold again.

      (e) Pledgor shall execute and deliver to the  purchasers of the Collateral
all  instruments and other documents  necessary or proper to sell,  convey,  and
transfer title to such  Collateral and, if approval of any sale of Collateral by
any governmental body or officer is required, Pledgor shall prepare or cooperate
fully in the preparation of and cause to be filed with such governmental body or
officer all  necessary  or proper  applications,  reports,  and forms and do all
other things necessary or proper to expeditiously obtain such approval.

      (f) Any cash held by Lender as  Collateral  and all cash  proceeds  of any
sale  of,  collection  from,  or other  realization  upon all or any part of the
Collateral  may, in the  discretion  of Lender,  be held by Lender as collateral
for, or then or at any time  thereafter be applied (after payment of any amounts
payable to Lender pursuant to Article 5 below) in whole or in part against,  all
or any part of the Secured  Obligations  in such order as Lender may elect.  Any
surplus of such cash or cash proceeds held by Lender and remaining after payment
in full of all of Lender's expenses hereunder and the Secured  Obligations shall
be paid over to Pledgor or to whomever may be lawfully  entitled to receive such
surplus.

      (g) Upon Lender's  giving notice of exclusive  control,  Lender shall have
the rights and  obligations of a secure party in possession of collateral  under
the Uniform  Commercial  Code with respect to the  Collateral and shall have the
right to take  actions  with  respect  to the  Collateral  as set  forth in this
Security Agreement.

      Section 4.3.  Appointment of Lender as Agent.  Pledgor hereby appoints and
constitutes   Lender,   its   successors   and   assigns,   as  its   agent  and
attorney-in-fact for the purpose of carrying out the provisions of this Security
Agreement  and  taking  any  action or  executing  any  instrument  that  Lender
considers  necessary or  convenient  for such  purpose,  including  the power to
indorse and deliver checks, notes and other instruments for the payment of money
in the name of and on behalf

                                      -9-
<PAGE>

of  Pledgor,  and to  execute  and file in the name of and on behalf of  Pledgor
financing  statements (which may be photocopies of this Security  Agreement) and
continuations and amendments to financing statements in the State of Delaware or
elsewhere.  This  appointment is coupled with an interest and is irrevocable and
will not be affected by the  bankruptcy  of Pledgor nor by the lapse of time. If
Pledgor fails to perform any act required by this Security Agreement, Lender may
perform  such act in the name of and on behalf  of  Pledgor  and at its  expense
which shall be  chargeable  to Pledgor  under  Article 5 below.  Pledgor  hereby
consents  and agrees that the issuers of or  obligors on the  Collateral  or any
other person  shall be entitled to accept the  provisions  hereof as  conclusive
evidence  of the  rights  of  Lender to effect  any  transfer  pursuant  to this
Security  Agreement and the authority granted to Lender herein,  notwithstanding
any other notice or direction to the contrary  heretofore or hereafter  given by
Pledgor, or any other person, to any of such parties.

                                    ARTICLE V

                                    EXPENSES

      Section 5.1.  Payment.  Pledgor  agrees that it will forthwith upon demand
pay to Lender:

      (a) the amount of any taxes which Lender may have been  required to pay by
reason of holding the Collateral or to free any of the Collateral from any lien,
encumbrance or adverse claim thereon, and

      (b) the amount of any and all reasonable out-of-pocket expenses, including
the reasonable fees and disbursements of counsel and of any brokers,  investment
brokers,  appraisers or other experts,  that Lender may incur in connection with
(i) the administration or enforcement of this Security Agreement, including such
expenses  as are  incurred  to  preserve  the  value of the  Collateral  and the
validity, perfection, rank and value of Lender's security interest therein, (ii)
the collection,  sale or other  disposition of any of the Collateral,  (iii) the
exercise by Lender of any of the rights conferred upon it hereunder, or (iv) any
action or proceeding  to enforce its rights under this Security  Agreement or in
pursuit  of  any  nonjudicial  remedy  hereunder   including  the  sale  of  the
Collateral.

      Any such amount not paid on demand  shall bear  interest  (computed on the
basis of the number of days  elapsed  over a year of three  hundred  sixty (360)
days) at the default rate of interest provided for in the Financing Agreements.

      Section 5.2.  Indemnity.  Pledgor shall indemnify Lender and its managers,
members,  officers,  employees,  agents  and  attorneys  against,  and hold them
harmless from, any liability, cost or expense, including the reasonable fees and
disbursements  of  their  legal  counsel,  incurred  by any of  them  under  the
corporate  or  securities  laws  applicable  to holding  or  selling  any of the
Collateral,   except  for  liability,   cost  or  expense  arising  out  of  the
recklessness or willful misconduct of the indemnified parties.

      Section 5.3. Discharge of Liens. At its option, ten (10) days after notice
to Pledgor,  Lender may pay and discharge taxes,  liens,  security  interests or
other  encumbrances on the Collateral.  Pledgor agrees to reimburse Lender under
Section  5.1 above  for any  payment  made or any  expense  incurred  (including
reasonable attorneys' fees) by Lender pursuant to the foregoing authorization.

                                      -10-
<PAGE>

                                   ARTICLE VI

                                  MISCELLANEOUS

      Section 6.1. Entire Agreement.  This Security Agreement, the schedules and
exhibits hereto, and the agreements and instruments  required to be executed and
delivered hereunder and the Financing  Agreements set forth the entire agreement
of the parties  with  respect to the subject  matter  hereof and  supersede  and
discharge  all  prior  agreements  (written  or oral) and  negotiations  and all
contemporaneous oral agreements concerning such subject matter and negotiations.
There are no oral  conditions  precedent to the  effectiveness  of this Security
Agreement.

      Section 6.2. Non-Waiver. Neither the failure of nor any delay by any party
to  this  Security  Agreement  to  enforce  any  right  hereunder  or to  demand
compliance  with its terms is a waiver of any right  hereunder.  No action taken
pursuant to this Security  Agreement on one or more occasions is a waiver of any
right  hereunder or  constitutes a course of dealing that modifies this Security
Agreement.

      Section 6.3. Waivers. No waiver of any right or remedy under this Security
Agreement shall be binding on any party unless it is in writing and is signed by
the party to be charged. No such waiver of any right or remedy under any term of
this Security  Agreement shall in any event be deemed to apply to any subsequent
default under the same or any other term contained herein.

      Section 6.4. Amendments. No amendment, modification or termination of this
Security  Agreement shall be binding on any party hereto unless it is in writing
and is signed by the party to be charged.

      Section  6.5.  Severability.  Wherever  possible,  each  provision of this
Security  Agreement  shall be  interpreted in such manner as to be effective and
valid under  applicable  law, but if any  provision of this  Security  Agreement
shall be prohibited by or invalid under  applicable law, such provision shall be
ineffective  only to the  extent  of such  prohibition  or  invalidity,  without
invalidating  the remainder of such  provisions  or the remaining  provisions of
this Security Agreement

      Section 6.6.  Successors.  The terms of this Security  Agreement  shall be
binding upon Pledgor, its successors and assigns, and shall inure to the benefit
of Lender,  its corporate  successors  and any holder,  owner or assignee of any
rights in any of the Financing  Agreements  and will be  enforceable  by them as
their interest may appear.

      Section  6.7.  Third  Parties.  Nothing  herein  expressed  or  implied is
intended or shall be construed to give any person other than the parties  hereto
any rights or remedies under this Security Agreement.

      Section  6.8.  Saturdays,   Sundays  and  Holidays.  Where  this  Security
Agreement  authorizes  or requires a payment or  performance  on a Business Day,
such  payment  or  performance  shall be deemed to be timely if made on the next
succeeding Business Day.

      Section  6.9.  Rules  of  Construction;   Definitions.  In  this  Security
Agreement,  words in the singular  number include the plural,  and in the plural
include the singular, words of the masculine

                                      -11-
<PAGE>

gender  include the  feminine  and the neuter,  and when the sense so  indicates
words of the  neuter  gender  may  refer  to any  gender  and the  word  "or" is
disjunctive  but not exclusive.  The captions and section  numbers  appearing in
this Security  Agreement are inserted only as a matter of  convenience.  They do
not define,  limit or  describe  the scope or intent of the  provisions  of this
Security Agreement.

      Section 6.10. Notices.  Except as otherwise expressly provided herein, any
notice  required or desired to be served,  given or  delivered  pursuant to this
Security  Agreement shall be in writing,  and shall be sent by manual  delivery,
facsimile  transmission,  overnight  courier  or  United  States  mail  (postage
prepaid) addressed to the party to be notified as follows:

      If to Lender, to:                 Wilton Funding, LLC
                                        c/o Patriot Capital Funding, Inc.
                                        61 Wilton Road, 2nd Floor
                                        Westport, Connecticut  06880
                                        Attn: Timothy W. Hassler
                                        Facsimile: (203) 221-8253

             with a copy to:            Squire, Sanders & Dempsey L.L.P.
                                        1300 Huntington Center
                                        41 South High Street
                                        Columbus, Ohio  43215
                                        Attn:  Anthony J. Sugar, Esq.
                                        Facsimile: (614) 365-2499

      If to Pledgor:                    The Allied Defense Group, Inc.
                                        8000 Towers Crescent Drive, Suite 260
                                        Vienna, Virginia  22182
                                        Attn: Charles A. Hasper, Chief
                                              Financial Officer
                                        Facsimile: (703) 847-5334

             with a copy to:            Baxter, Baker, Sidle, Conn & Jones, P.A.
                                        120 E. Baltimore Street
                                        Baltimore, Maryland  21202
                                        Attn: James E. Baker, Jr., Esq.
                                        Facsimile: (410) 230-3801

or, as to each party,  addressed to such other address as shall be designated by
such party in a written notice to the other  parties.  All such notices shall be
deemed  given on the date of  delivery  if  manually  delivered,  on the date of
sending if sent by facsimile  transmission,  on the first business day after the
date of sending if sent by overnight  courier,  or three (3) days after the date
of mailing if mailed.

      Section 6.11. Counterparts. This Security Agreement may be executed in any
number  of  counterparts,  all of  which  shall  constitute  one  and  the  same
instrument,  and any party hereto may execute this Security Agreement by signing
and delivering one or more counterparts. Facsimile

                                      -12-
<PAGE>

signatures on this Security Agreement and any subsequent  amendment hereto shall
be considered as original signatures.

      Section 6.12. Governing Law; etc.

      (a) Choice of Law.  This  Security  Agreement  shall be  construed  in all
respects in accordance with, and governed by, the laws and decisions of (without
regard to the conflict of laws  provisions)  the State of New York and the laws,
regulations and decisions of the United States applicable to national banks.

      (b) Consent to Jurisdiction.  WITH RESPECT TO ANY AND ALL ACTIONS,  CAUSES
OF  ACTION,  SUITS,  CLAIMS,   DEMANDS,  DEBTS,  DAMAGES,  COSTS  AND  EXPENSES,
WHATSOEVER,  WHETHER  BASED ON  STATUTE,  COMMON  LAW,  PRINCIPLES  OF EQUITY OR
OTHERWISE,  ARISING  OUT OF ANY  MATTER,  THING OR EVENT  WHICH IS  DIRECTLY  OR
INDIRECTLY RELATED TO THIS SECURITY AGREEMENT,  THE CONTROL AGREEMENT AND/OR ONE
OR MORE OF THE OTHER FINANCING AGREEMENTS,  PLEDGOR CONSENTS TO THE JURISDICTION
OF ANY LOCAL,  STATE,  OR FEDERAL COURT LOCATED WITHIN THE CITY OF NEW YORK, NEW
YORK AND WAIVES ANY OBJECTION  WHICH PLEDGOR MAY HAVE BASED ON IMPROPER VENUE OR
FORUM NON  CONVENIENS  TO THE  CONDUCT OF ANY  PROCEEDING  IN ANY SUCH COURT AND
WAIVES PERSONAL  SERVICE OF ANY AND ALL PROCESS UPON PLEDGOR,  AND CONSENTS THAT
ALL SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER  DIRECTED TO PLEDGOR AT
THE ADDRESS SET FORTH IN SECTION 6.10.  SERVICE,  SO MADE, SHALL BE DEEMED TO BE
COMPLETE  UPON THE  EARLIER  OF ACTUAL  RECEIPT OR THREE (3) DAYS AFTER THE SAME
SHALL HAVE BEEN  POSTED.  PLEDGOR  ALSO  AGREES  THAT IT SHALL NOT  COMMENCE  OR
MAINTAIN  ANY  ACTION IN ANY COURT OR  ADMINISTRATIVE  AGENCY OR OTHER  TRIBUNAL
OTHER THAN ANY LOCAL,  STATE,  OR FEDERAL COURT  LOCATED  WITHIN THE CITY OF NEW
YORK, NEW YORK WITH RESPECT TO THIS SECURITY  AGREEMENT,  THE CONTROL AGREEMENT,
OR ANY OF THE OTHER FINANCING  AGREEMENTS,  ANY OF THE TRANSACTIONS PROVIDED FOR
OR  CONTEMPLATED  IN ANY OF THE  FINANCING  AGREEMENTS OR ANY CAUSE OR ACTION OR
ALLEGED CAUSE OF ACTION  ARISING OUT OF OR IN CONNECTION  WITH ANY  RELATIONSHIP
BETWEEN LENDER, PLEDGOR OR ANY BORROWER THAT MAY EXIST FROM TIME TO TIME. AT THE
OPTION OF LENDER, PLEDGOR WAIVES, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY,
AND WAIVES ANY BOND OR SURETY OR SECURITY  UPON SUCH BOND WHICH  MIGHT,  BUT FOR
THIS WAIVER, BE REQUIRED OF LENDER.

      Section  6.13.  Acknowledgement.  Pledgor  acknowledges  that  Pledgor has
received a copy of this Security Agreement and each of the Financing Agreements,
as fully executed by the parties thereto.  Pledgor acknowledges that Pledgor (a)
HAS READ THIS  SECURITY  AGREEMENT  AND THE OTHER  FINANCING  AGREEMENTS  OR HAS
CAUSED SUCH DOCUMENTS TO BE EXAMINED BY PLEDGOR'S  REPRESENTATIVES  OR ADVISORS;
(b) is thoroughly  familiar with the transactions  contemplated in this Security
Agreement and the other Financing Agreements; and (c) has had the opportunity to
ask such questions to  representatives  of Lender and the other  Borrowers,  and
receive answers thereto, concerning the terms and conditions of the

                                      -13-
<PAGE>

transactions  contemplated  in this Security  Agreement and the other  Financing
Agreements as Pledgor deems necessary in connection  with Pledgor's  decision to
enter  into this  Security  Agreement.  Pledgor  represents  that this  Security
Agreement and the Financing  Agreements  have been examined on behalf of Pledgor
by its  representatives  or  advisors,  and that  those  representatives  and/or
advisors have explained this Security Agreement and the Financing Agreements and
their legal, business and financial  implications to Pledgor to the satisfaction
of Pledgor.

                                      -14-
<PAGE>

      IN WITNESS WHEREOF,  the parties hereto, by their officers  thereunto duly
authorized,  as applicable,  have executed and delivered this Security Agreement
as of the day and year first above written.

                                         PLEDGOR:
                                         THE ALLIED DEFENSE GROUP, INC.,
                                           a Delaware corporation

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                         LENDER:
                                         WILTON FUNDING, LLC,
                                           a Delaware limited liability company

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

                                      -15-
<PAGE>

                                    EXHIBIT A

                                Account Statement

                                 [See attached]

<PAGE>

                                  Exhibit 6A to
                           Loan and Security Agreement

                               Disclosure Schedule

Part 1:     Judgments, Litigation, Claims and Proceedings

            The  first  two  (2)  paragraphs  of  Note L to the  Company's  2003
            financial statements are incorporated herein by reference.

Part 2:     Defaults and Disputes

            Titan  has  been  advised  that it is in  default  of a  small  U.S.
            government pyrotechnics contract.

Part 3:     Licenses,   Patents,   Copyrights,   Trademarks,   Trade  Names  and
            Applications

                          Titan Dynamics Systems, Inc.

U.S. Patent No.                       Date of Issue
---------------                       -------------

5,235,127                             08-10-93
5,996,500                             12-07-99
6,205,927                             03-27-01
6,354,033                             03-12-02

                              Seaspace Corporation

U.S. Trademark                        Date of Issue
--------------                        -------------

"TeraScan" -                          03-14-89
Serial No. 73/724,609
Registration No. 1,529,448

"SeaSpace" -                          11-15-83
Serial No. 73/379,449
Registration No. 1,258,015

                       News/Sports Microwave Rental, Inc.

U.S. Patent No.                       Date of Issue
---------------                       -------------

6,046,706                             04-04-00

<PAGE>

Part 4:     Security Interests, Liens, Claims and Encumbrances

            None

Part 5:     Locations of Borrower's Assets

            (a)   The Allied Defense Group, Inc.
                  8000 Towers Crescent Drive, Suite 260
                  Vienna, Virginia  22182

                  News/Sport Microwave Rental, Inc.
                  2732 Via Orange Way, Suite A
                  Spring Valley, California  91978

                  Titan Dynamics Systems, Inc.
                  710 Willow Street
                  Marshall, Texas  75670

                  SeaSpace Corporation
                  12120 Kean Place
                  Poway, California  92064

                  VSK Electronics N.V.
                  Venetielaan, 39
                  B-8530 Harelbeke
                  Belgium

                  IDCS, N.V.
                  Industriezone "De Roode Berg"
                  Hellebeemden, 9
                  B-3500 Hasselt
                  Belgium

                  Tele Technique Generale S.A.
                  Zoning Industriel Ovest
                  B-6220 Heppignies
                  Belgium

                  Belgian Automation Units, N.V.
                  Venetielaan, 39
                  B-8530 Harelbeke
                  Belgium

                  MECAR USA, Inc.
                  710 Willow Street
                  Marshall, Texas  75670

<PAGE>

                  Vigitec S.A.
                  Waterranonkelstraat
                  Rue de la Grenouillette, 2C
                  B-1130 Brussels
                  Belgium

                  Allied Research Corporation Limited
                  P.O. Box 12
                  Harpenden
                  Hartsforshire A5L 5EL
                  United Kingdom

                  ARC Europe S.A.
                  Rue Grinfaux, 50
                  7181 Petit Roeulx lez Nivelles
                  Belgium

            (b)   All  locations  listed in Part 5(a) are leased  except for the
                  locations of the VSK Group which are owned facilities.

Part 6:     Tax Liability Claims

            None

Part 7:     Other Indebtedness

            None

Part 8:     Other Names Used by Borrower

            NS Microwave

Part 9:     Affiliates

            None except MECAR S.A. and its Subsidiaries

Part 10:    Environmental Matters

            None

<PAGE>

                                  Exhibit 7A to
                           Loan and Security Agreement

                             Compliance Certificate

                                 [See attached]

<PAGE>

                             Compliance Certificate

      Pursuant to Section 7.1 of the Loan and Security Agreement dated as of May
28, 2004 (as the same may be amended,  replaced,  restated or supplemented  from
time to time, the "Loan Agreement") by and among THE ALLIED DEFENSE GROUP, INC.,
a Delaware  corporation (the "Company"),  and certain of its subsidiaries  named
therein,  as borrowers  (collectively  referred to as  "Borrowers"),  and WILTON
FUNDING,  LLC, a Delaware limited liability  company,  as lender (referred to as
"Lender"), the undersigned certifies to Lender as follows:

1.    The consolidated financial statements of the Company, attached hereto, for
      the period ending  _______________________  (the "Financial  Statements"),
      have been prepared in accordance  with the  requirements of Section 7.1 of
      the Loan  Agreement and have been delivered on or before the date they are
      due.

2.    The  representations  and  warranties  contained  in Section 6 of the Loan
      Agreement  are true and  correct as of the date  hereof as though  made on
      this date.

3.    Borrowers  are in  compliance  with all of the  affirmative  and  negative
      covenants  set forth in  Section 7 and 8 of the Loan  Agreement  as of the
      date hereof.

4.    Specifically, as of the date of the Financial Statements:

      a.    The Company's  "EBITDA" (as defined in the Loan  Agreement)  for the
            four  fiscal  quarters  ending  March 31, 2004 is required to be not
            less than $14,000,000;  the Company's EBITDA for the four (4) fiscal
            quarters  ending  June 30,  2004 is  required  to be not  less  than
            $14,000,000; prior to the completion of Borrowers' initial Permitted
            Acquisition  after the Closing Date,  the  Company's  EBITDA for the
            then preceding four fiscal  quarters is required to be not less than
            $15,000,000; and thereafter, the Company's EBITDA for then preceding
            four  fiscal  quarters is required to be not less than not less than
            $19,000,000.  The  Company's  actual  EBITDA as so described for the
            most recent four fiscal quarters was $[_______________].

            In Compliance:    Yes ___      No ___

      b.    The  Company's  "Senior  Leverage  Ratio"  (as  defined  in the Loan
            Agreement) as of the end of any fiscal quarter ending after December
            31,  2003 is  required  to be not more than  1.50:1.  The  Company's
            actual Senior Leverage Ratio as of the end of the most recent fiscal
            quarter was __________________.

            In Compliance:    Yes ___      No ___

<PAGE>

      c.    The Company's  "Net Worth" (as defined in the Loan  Agreement) as of
            the end of any fiscal  quarter  ending  after  December  31, 2003 is
            required  not to be less than the sum of (i)  $77,000,000  plus (ii)
            50% of the  Company's  consolidated  Net Income for the period  from
            January 1, 2004 through the applicable date of  determination  (with
            no deduction  for any fiscal year in which the  Company's Net Income
            is negative).  The  Company's  actual Net Worth as of the end of the
            most recent fiscal quarter was $[_______________].

            In Compliance:    Yes ___      No ___

      d.    The Company is  prohibited  from  making  Capital  Expenditures  (as
            defined in the Loan Agreement)  (excluding  Capital  Expenditures of
            the Foreign  Subsidiairies)  during any fiscal year in excess of (i)
            $1,750,000 from the Closing Date through  December 31, 2004 and (ii)
            $750,000 during any fiscal year thereafter;  provided,  however,  to
            the extent that Capital Expenditures are less than that allowed in a
            fiscal  year,  then  50% of the  difference  shall  be  added to the
            limitation  otherwise  applicable to the following  fiscal year. The
            Company's  actual  fiscal  year-to-date   Capital  Expenditures  are
            $[__________].

            In Compliance:    Yes ___      No ___

      e.    The Company`s consolidated Subordinated Debt (as defined in the Loan
            Agreement) as of the end of any fiscal quarter ending after December
            31, 2003 is required to be not more than $17,500,000.  The Company's
            actual  consolidated  Subordinated  Debt as of the  end of the  most
            recent fiscal quarter was $[__________].

            In Compliance:    Yes ___      No ___

      f.    Pursuant to Section 1.7 of the Deposit Account  Security  Agreement,
            Lender is required to return to the Company the  collateral  subject
            to the  security  interest  created  thereby  if at any  time  after
            December 31, 2005 the Company's  Domestic  Senior Leverage Ratio (as
            defined in Loan Agreement) for the trailing twelve (12) month period
            was less than  2.5:1.0  at the end of each of the then four (4) most
            recent consecutive calendar quarters.  The Company's Domestic Senior
            Leverage Ratio for the trailing  twelve (12) month period at the end
            of each  of the  four  (4)  most  recent  calendar  quarters  was as
            follows:  ____:1.0 at  _____________;  ____:1.0  at  ______________;
            ____:1.0 at _______________; and ____:1.0 at ______________________.

            Return of Collateral Required:    Yes ___      No ___

<PAGE>

      g.    Pursuant to Section 1.9 of the Deposit Account  Security  Agreement,
            the market value of the Collateral (as defined  therein) must not at
            any  time  be less  than  the  Collateral  Requirement  (as  defined
            therein).  Attached hereto is a Statement of the Account (as defined
            therein) showing the market value of the Collateral as of the end of
            the most  recent  fiscal  quarter to be  $________.  The  Collateral
            Requirement as of such date was $________.

            In Compliance:    Yes ___      No ___

5.    All adjustments and calculations  related to the amounts set forth in each
      of 4.a. through 4.g. above are attached hereto.

Dated: _____________________, 200__

                                         ______________________________,

                                         a(n) _________________________

                                         By: ___________________________________
                                         Name: _________________________________
                                         Title: ________________________________

<PAGE>

Schedule 4.a.  EBITDA

Defined EBITDA Amounts (From ______ to ________)             $__________________
Calculation of Amount not Defined
  (From ______ to ________)
Net Income                                                   $__________________
Plus Provision For Income Taxes                              $__________________
Plus Interest Expense                                        $__________________
Plus Depreciation Expense                                    $__________________
Plus Amortization Expense                                    $__________________
Plus Other Non-cash Expenses or Charges                      $__________________
Minus Non-Operating Gains                                    $__________________
Plus Non-Operating Losses                                    $__________________
         EBITDA                                              $__________________

Schedule 4.b.  Senior Leverage Ratio

Total Liabilities                                            $__________________
Minus Subordinated Debt                                      $__________________
Minus Non-Interest Accruing Liabilities                      $__________________
Plus Issued and Outstanding Letters of Credit
   (if not included)                                         $__________________
Plus Capital and Synthetic Lease Obligations
   (if not included)                                         $__________________
Plus Third-Party Guaranty Obligations
   (if not included)                                         $__________________
         Senior Funded Debt                                  $__________________
Less Unrestricted Cash                                       $__________________
Divided by EBITDA                                            $__________________
         Senior Leverage Ratio

Schedule 4.c.  Net Worth

Capital Stock                                                $__________________
Minus Treasury Stock                                         $__________________
Paid in Surplus                                              $__________________
General Contingency Reserves                                 $__________________
Retained Earnings (Deficit)                                  $__________________
Minus Minority Interest                                      $__________________
Minus Accumulated other Comprehensive Income (Loss)          $__________________
         Net Worth                                           $__________________

Schedule 4.d.  Capital Expenditure Limitations

Listing of Capital Expenditures:

__________________                       $__________________
__________________                       $__________________
__________________                       $__________________
__________________                       $__________________
__________________                       $__________________

<PAGE>

__________________                       $__________________
__________________                       $__________________

Capital Expenditures (As Defined)        $__________________

Capital Expenditures Previous Fiscal Year
  (Beginning 200_)                                           $__________________
Carry Forward Amount                                         $__________________
Capital Expenditures Limit Plus Carry Forward Amount         $__________________
Long-Term Debt to Finance Capital Expenditures
  (Year to Date)                                             $__________________

Schedule 4.e.  Consolidated Subordinated Debt

Outstanding Principal Balance of Subordinated Notes          $__________________
Plus Other Subordinated Debt                                 $__________________
         Total Consolidated Subordinated Debt                $__________________

Schedule 4.f.  Domestic Senior Leverage Ratio

For Domestic Borrowers only:
Total Liabilities                                            $__________________
Minus Subordinated Debt                                      $__________________
Minus Non-Interest Accruing Liabilities                      $__________________
Plus Issued and Outstanding Letters of Credit
   (if not included)                                         $__________________
Plus Capital and Synthetic Lease Obligations
   (if not included)                                         $__________________
Plus Third-Party Guaranty Obligations
   (if not included)                                         $__________________
         Senior Funded Debt of Domestic Borrowers            $__________________
Divided by EBITDA of Domestic Borrowers                      $__________________
         Domestic Senior Leverage Ratio                      ___________________

Schedule 4.g.  Deposit Account Security Agreement

Outstanding Principal Amount of Loan                         $__________________
Initial Collateral Requirement (per Schedule in
   Section 1.9 of Deposit Account Security Agreement)        $__________________

For the VSK Group only:
Consolidated Total Liabilities                               $__________________
Plus Issued and Outstanding Letters of Credit
   (if not included)                                         $__________________
Plus Capital and Synthetic Lease Obligations
   (if not included)                                         $__________________
Plus Third-Party Guaranty Obligations (if not included)      $__________________
         VSK Group Funded Debt                               $__________________
Consolidated EBITDA for prior 4 fiscal quarters              $__________________

                                                                     x 5
                                                             ___________________

<PAGE>

Plus Consolidated Unrestricted Cash and Cash Equilavents     $__________________
Minus VSK Group Funded Debt                                  $__________________
         VSK Group Equity Value                              $__________________
(A): Amount by which $13,000,000 Exceeds VSK Group
       Equity Value                                          $__________________
(B): Amount (if any) by which Outstanding Principal
       Balance of Loan Exceeds $10,000,000                   $__________________
       Additional Collateral Requirement (lesser of
       (A) and (B))                                          $__________________
       Total Collateral Requirement                          $__________________<PAGE>

                                                                    EXHIBIT 10.7

                                 [QLOGIC(TM) LOGO]

August 4, 1995

Mr. Harshad K. Desai
28346 Chat Drive
Laguna Niguel, CA

Dear Mr. Desai:

You are currently employed as an officer of QLogic Corporation, a Delaware
corporation (the "Company" or "QLogic"). Because the Company wishes to assure
itself of both present and future continuity of management in the event of any
Change in Control (as defined below), as well as objectivity of management in
the event of a proposed Change in Control, you, and the Company are hereby
entering into the following agreements:

      1.    Severance Payment and Employee Benefits. If a Change in Control (as
defined below) shall occur after the date of this Agreement, you are then still
an employee of the Company, and at any time within two years after the Change in
Control and prior to your Normal Retirement Date (as defined below) your
employment is terminated by the Company without Cause (as defined below) or by
you because of a Demotion (as defined below):

            (a)   Severance Payment. The Company will pay to you within 15 days
after the date of termination of your employment (the "Termination Date") a
lump-sum severance payment (the "Severance Payment") equal to the present value
of two times the sum of your Annual Base Pay (as defined below) plus your Annual
Incentive Pay (as defined below); provided, however, that the Severance Payment
will be reduced by the aggregate amount of severance payments received by you
under any other severance policy, plan, program, or arrangement of the Company.
Such present value shall be determined as if an aggregate amount equal to two
times the sum of your Annual Base Pay plus your Annual Incentive Pay (minus, if
applicable, the aggregate amount of severance payments received by you under any
other severance policies, plan, program, or arrangement of the Company) would
otherwise have been paid to you in 24 equal monthly installments commencing one
month after the Termination Date, using a discount rate equal to the
then-applicable interest rate adopted by the Pension Benefit Guaranty
Corporation for purposes of benefit valuations in connection with
non-multiemployer pension plan terminations assuming the immediate commencement
of benefit payments, as set forth in Appendix B to Part 2619 of Title 29 of the
Code of Federal Regulations, or any successor appendix, schedule, rule or
regulation.

                  In lieu of a cash lump sum, you may, in your sole discretion,
elect to receive the Severance Payment in equal annual installments over five
years (or such lesser number of years as you may elect). Such installments shall
be paid to you on each anniversary of the Termination Date, beginning with the
first such anniversary and continuing on each such anniversary thereafter until
fully paid. Such election to receive the Severance Payment in installments may
be made and/or revoked by you at any time

<PAGE>

and from time to time prior to the termination of your employment by providing
written notice to the Secretary of QLogic of such election. Any such election by
you to receive the Severance Payment in installments that has been made and not
revoked prior to your termination shall, effective the date of such termination,
be irrevocable and binding on all parties hereto.

                  In the event that at the time of your termination there is not
in effect an election by you to receive the Severance Payment in installments,
such Severance Payment shall be paid to you in a single cash lump sum as
provided in the first paragraph of this subparagraph (a). In the event that you
have made an appropriate election to receive the Severance Payment in annual
installments, and you become entitled to such Severance Payment as provided in
this Agreement, then such Severance Payment, to the extent at any time unpaid
and/or deferred, shall be deemed to bear interest at the aforementioned discount
rate or, if less, the maximum rate permitted by law. Accrued interest shall be
due and payable together with each annual installment of the Severance Payment.

            (b)   Employee Benefits. The Company shall provide or arrange to
provide to you continuation of your Employee Benefits (as defined below) for two
years following the Termination Date; provided, however, that such Employee
Benefits will be reduced to the extent comparable benefits are actually received
by you (i) from another employer during such two-year period (and any such
benefits actually received by you shall be reported promptly by you to the
Company) or (ii) under any other policy, plan, program, or arrangement of the
Company.

                  Any or all of such Employee Benefits may be provided to you,
in the discretion of the Company, pursuant to policies or plans of the Company
which exist as of the Termination Date and/or pursuant to policies, plans, or
arrangements which are implemented or adopted by the Company on or after the
Termination Date, including those which are implemented or adopted by the
Company for your benefit only or for the benefit of you and selected other
employees or former employees of the Company. The Company, in its discretion,
may also fulfill its obligation to provide continuation of any or all of your
Employee Benefits in accordance with the foregoing by paying to you in cash from
time to time the minimum amount necessary to enable you to purchase a comparable
Employee Benefit from another benefit provider; provided, however, that this
cash alternative shall not be utilized by the Company if and to the extent
comparable Employee Benefits are not available to be purchased by you.

            (c ) Certain Payment Reductions.

                  (1)   For purposes of this subparagraph (c), (i) a Payment
shall mean any payment or distribution in the nature of compensation to or for
your benefit, whether paid or payable pursuant to this Agreement or otherwise;
(ii) Agreement Payment shall mean a Payment paid or payable pursuant to this
Agreement (determined without regard to this subparagraph (c)); (iii) Net After
Tax Receipt shall mean the Present Value of a Payment net of all taxes imposed
on you with respect thereto under Sections 1 and 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"), determined by applying the highest
marginal rate under Section 1 of the Code which applied to your taxable income
for the immediately preceding taxable year; (iv) "Present Value" shall mean such
value determined in accordance with Section 280G(d) (4) of the Code; and (v)
"Reduced Amount" shall mean the smallest aggregate amount of Payments which (a)
is less than the sum of all Payments (determined without regard to this
subparagraph (c)) and (b) results in aggregate Net After Tax Receipts which are
equal to or greater than the Net After Tax Receipts which would result if the
aggregate Payments were equal to the sum of all Payments (determined without
regard to this subparagraph (c)) or any other amount less than the sum of all
payments (determined without regard to this subparagraph (c)).

                                       2
<PAGE>

                  (2)   Anything in this Agreement to the contrary
notwithstanding, in the event QLogic's independent public accountants (the
"Accounting Firm") shall determine that receipt of all Payments would subject
you to tax under Section 4999 of the Code, it shall determine whether some
amount of Payments would meet the definition of a "Reduced Amount. " If the
Accounting Firm determines that there is a Reduced Amount, the aggregate
Agreement Payments shall be reduced to such Reduced Amount; provided, however,
that if the Reduced Amount exceeds the aggregate Agreement Payments, the
aggregate Payments shall, after the reduction of all Agreement Payments, be
reduced (but not below zero) in the amount of such excess.

                  (3)   If the Accounting Firm determines that aggregate
Agreement Payments or Payments, as the case may be, should be reduced to the
Reduced Amount, the Company shall promptly give you notice to that effect and a
copy of the detailed calculation thereof, and you may then elect, in your sole
discretion, which and how much of the Payments shall be eliminated or reduced
(as long as after such election the present value of the aggregate Payments
equals the Reduced Amount), and you shall advise the Company in writing of your
election within ten days of your receipt of notice. If no such election is made
by you within such ten-day period, the Company may elect which of the Agreement
Payments or Payments, as the case may be, shall be eliminated or reduced (as
long as after such election the present value of the aggregate Agreement
Payments or Payments, as the case may be, equals the Reduced Amount) and shall
notify you promptly of such election. All determinations made by the Accounting
Firm under this Paragraph 1 (c) shall be binding upon the Company and you and
shall be made within 60 days after a termination of your employment. As promptly
as practicable following such determination, the Company shall pay to or
distribute for your benefit such Payments as are then due to you under this
Agreement and shall promptly pay to or distribute for your benefit in the future
such Payments as become due to you under this Agreement.

                  (4)   While it is the intention of the Company and you to
reduce the amounts payable or distributable to you hereunder only if the
aggregate Net After Tax Receipts to you would thereby be increased, as a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
amounts will have been paid or distributed by the Company to or for your benefit
pursuant to this Agreement which should not have been so paid or distributed
("Overpayment") or that additional amounts which will have not been paid or
distributed by the Company to or for your benefit pursuant to this Agreement
could have been so paid or distributed ("Underpayment"), in each case,
consistent with the calculation of the Reduced Amount hereunder. In the event
that the Accounting Firm, based either upon the assertion of a deficiency by the
Internal Revenue Service against the Company or you which the Accounting Firm
believes has a high probability of success or controlling precedent or other
substantial authority, determines that an Overpayment has been made, any such
Overpayment paid or distributed by the Company to or for your benefit shall be
treated for all purposes as a loan to you which you shall repay to the Company
together with interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to
have been made and no amount shall be payable by you to the Company if and to
the extent such deemed loan and payment would not either reduce the amount on
which you are subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Accounting Firm, based
upon controlling precedent or other substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by the
Company to or for your benefit together with interest at the applicable federal
rate provided for under Section 7872(f)(2) of the Code.

                  (5)   The Company will bear the fees and expenses of the
Accounting Firm in making the determinations required by this Paragraph 1(c).

                                       3
<PAGE>

      2.    Accelerated Vesting of Stock Options. If a Change in Control shall
occur after the date of this Agreement and you are then still an employee of the
Company:

            (a)   Partial Acceleration. Upon the Change in Control, the vesting
of your right to exercise each QLogic Option (as defined below) held by you as
of the Change in Control based on the length of your continued employment
following the grant of such QLogic Option will be accelerated by one year so
that your right to exercise such QLogic Option after the Change in Control will
be determined as if such QLogic Option had been granted to you one year before
the actual date of grant of such QLogic Option; provided, however, that the term
and expiration date of, and any other restrictions on your right to exercise,
such QLogic Option shall not be affected by the Change in Control; provided
further, however, that, if the stock option agreement evidencing such QLogic
Option shall provide for acceleration of vesting of your right to exercise such
QLogic Option upon a Change in Control which is more favorable to you than the
foregoing provisions of this subparagraph (a), the acceleration provisions of
your stock option agreement shall apply and this subparagraph (a) shall be
disregarded.

            (b)   Full Acceleration. If, within two years after the Change in
Control and prior to your Normal Retirement Date, your employment with the
Company is terminated by the Company without Cause or by you because of a
Demotion, the vesting of your right to exercise each QLogic Option held by you
as of the Termination Date will be fully accelerated as of the Termination Date
so that you will have the right to exercise such QLogic Option in full at any
time during its remaining term.

      3.    No Mitigation. You shall not be obligated to seek employment or
otherwise mitigate the Severance Payment to you under this Agreement, nor shall
the Severance Payment be reduced by any compensation earned by you as a result
of your employment by another employer after the Termination Date.

      4.    Employment Rights. Nothing in this Agreement, expressed or implied,
shall obligate the Company or you to continue your employment with the Company
or limit the right of you or the Company to terminate your employment at any
time before or after a Change in Control. Notwithstanding the foregoing, if your
employment is terminated by the Company without Cause or by you because of a
Demotion after commencement by the Company of substantive discussions with any
third party which result in a Change in Control in which such third party has a
significant involvement within one year after commencement of such discussions
and prior to your Normal Retirement Date, your right to receive payments and
benefits under this Agreement will be determined as if your employment had
terminated immediately following the Change in Control.

      5.    Definitions. For purposes of this Agreement, the terms set forth
below are defined as follows:

            (a)   "Annual Base Pay" means an amount equal to the greatest of (i)
your annual fixed or base compensation as in effect immediately prior to a
Change in Control, (ii) your annual fixed or base compensation as in effect
immediately prior to commencement by the Company of substantive discussions with
any third party that results in a Change in Control in which such third party
has a significant involvement within one year after commencement of such
discussions, and (iii) your annual fixed or base compensation as in effect
immediately prior to the Termination Date.

                                       4
<PAGE>

            (b)   "Annual Incentive Pay" means an amount equal to the highest
annual average of the aggregate bonuses or incentive payments of cash
compensation in addition to fixed or base compensation paid to you for your
services in any two of the last three full fiscal years of the Company
immediately preceding the fiscal year of the Company in which the Change in
Control occurs (or such lesser number of full fiscal years during which you were
employed by the Company if less than three) or, if higher, the highest annual
average of the aggregate annual bonuses or incentive payments of cash
compensation paid to you for services in any two of the last three full fiscal
years of the Company immediately preceding the fiscal year of the Company in
which the Termination Date occurs (or such lesser number of full fiscal years
during which you were employed by the Company if less than three).

            (c)   "Cause" for termination of your employment by the Company will
exist if (i) you become permanently disabled and are unable to perform your
duties as an employee of the Company or (ii) you commit any of the following
acts and any of such acts shall be determined by the board of directors of the
Company to have been materially harmful to the Company at a meeting of the board
of directors called and held for such purpose (after reasonable notice to you
and an opportunity for you and your representative to make a presentation to the
board of directors): an act of fraud, embezzlement or theft in connection with
your duties or in the course of your employment with the Company; intentional
wrongful damage to property of the Company; intentional wrongful disclosure of
trade secrets or confidential information of the Company; or intentional
wrongful engagement in any Competitive Activity (as defined below) while you are
employed by the Company.

            (d)   "Change in Control" shall be deemed to have occurred only if
(i) QLogic is merged or consolidated or reorganized into or with another
corporation and less than 51 % of the combined voting power of the
then-outstanding securities of the surviving corporation immediately thereafter
is held in the aggregate by the holders of Voting Stock (as defined below) of
QLogic immediately prior to such transaction; (ii) QLogic sells or otherwise
transfers all or substantially all of its assets to any other corporation if
less than 51 % of the combined voting power of the then-outstanding voting
securities of such corporation immediately after such sale or transfer is held
in the aggregate by the holders of Voting Stock of the Company immediately prior
to such sale or transfer; (iii) the Company sells or otherwise transfers all or
substantially all of its assets to another corporation if less than 51% of the
Voting Stock of the transferee corporation immediately after such sale or
transfer is held in the aggregate by QLogic, the Company or the holders of
Voting Stock of QLogic immediately prior to such sale or transfer; (iv) there is
a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule or
report) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act") disclosing that any person has become the beneficial owner of securities
representing 33-1/3% or more of the combined voting power of the then-
outstanding securities entitled to vote generally in the election of directors
of QLogic (the "Voting Stock"); (v) QLogic shall file a report or proxy
statement with the Securities and Exchange Commission pursuant to the Exchange
Act disclosing in response to Item 1 of Form 8-K thereunder or Item 6(e) of
Schedule 14A thereunder (or any successor schedule or report) that a change in
control of QLogic has or may have occurred or will or may occur in the future
pursuant to any then-existing contract or transaction; or (vi) during any period
of two consecutive years, individuals who at the beginning of any such period
constitute the directors of QLogic cease for any reason to constitute at least a
majority thereof unless the election or the nomination for election by QLogic's
shareholders of each director of QLogic first elected during such period (y) was
approved by a vote of at least a majority of the directors of QLogic then still
in office who were directors of QLogic at the beginning of any such period and
(z) such election or nomination was not made in connection with an actual or
threatened election contest relating to the election of directors of QLogic, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act. Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely because QLogic,
an entity in which QLogic directly or indirectly beneficially

                                       5
<PAGE>

owns more than 50% of the voting securities, or any QLogic-sponsored employee
stock ownership plan or any other employee benefit plan of QLogic or any entity
holding shares of Voting Stock for or pursuant to the terms of any such plan
either files or becomes obligated to file a report or proxy statement under or
in response to Schedule 13D, or Schedule 14D-1, Item 1 of Form 8-K or Item 6(e)
of Schedule 14A (or any successor report or schedule) under the Exchange Act,
disclosing beneficial ownership by it of shares of Voting Stock of QLogic,
whether in excess of 33-1/3% or otherwise, or because QLogic reports that a
change in control of QLogic has or may have occurred or will or may occur in the
future by reason of such beneficial ownership.

            (e)   "Competitive Activity" means your participation, without the
consent of the board of directors of the Company, in the management of any
business enterprise if such enterprise engages in substantial and direct
competition with the Company and such enterprise's sales of any product or
service competitive with any product or service of the Company amounted to 10%
of such enterprise's net sales for its most recently completed fiscal year and
if the Company's consolidated net sales of such products or services amounted to
10% of the Company's consolidated net sales for its most recently completed
fiscal year. "Competitive Activity" shall not include (i) the mere ownership of
securities in any enterprise and exercise of rights appurtenant thereto or (ii)
participation in management of any enterprise or business operation thereof
other than in connection with competitive operation of such enterprise.

            (f)   "Demotion" will be deemed to have occurred if any of the
following changes with respect to your employment with the Company shall occur
during the two-year period immediately following a Change in Control and prior
to your Normal Retirement Date and not be remedied within 15 days after written
notice thereof from you to the Company: (i) a significant adverse change in the
nature or scope of the powers, functions, titles, working environment, frequency
or mode of business travel, responsibilities or duties in respect of the Company
which you had immediately prior to the Change in Control; (ii) a reduction of
your annual aggregate cash compensation below the sum of your annual fixed or
base compensation as in effect immediately prior to the Change in Control plus
the highest annual average of the aggregate bonuses or incentive payments of
cash compensation in addition to fixed or base compensation paid to you for your
services in any two of the last three full fiscal years of the Company
immediately preceding the fiscal year of the Company in which the Change in
Control occurred (or such lesser number of full fiscal years during which you
were employed by the Company if less than three); (iii) a reduction of the
Employee Benefits which you were receiving immediately prior to the Change in
Control below the comparable employee benefits provided by the Company to its
other executive officers from time to time; or (iv) relocation of the principal
executive offices of the Company to, or any requirement of you to have as your
principal location of work at, any place which is more than 50 miles from the
location thereof immediately prior to the Change in Control.

                  The parties acknowledge that, in the event of a Change in
Control, it may be mutually advantageous for you and your employer to discuss
and implement changes in your employment on a trial basis even though such
employment changes may constitute a "Demotion" under the terms of this
Agreement. Accordingly, any change with respect to your employment to which you
do not object will not constitute a Demotion; provided, however, that your
acceptance on a trial basis of a change which would otherwise constitute a
Demotion will not constitute a waiver of your right to object to such change
subsequently and to treat such change as a Demotion if it is not remedied within
15 days after written notice to the Company of your unwillingness to continue
accepting such change.

                                       6
<PAGE>

            (g)   "Employee Benefits" means benefits provided to you by the
Company immediately prior to a Change in Control, or, if greater, benefits
provided to you by the Company immediately prior to commencement by the Company
of substantive discussions with any third party which result in a Change in
Control in which such third party has a significant involvement within one year
after commencement of such discussions, or, if greater, benefits provided to you
by the Company immediately prior to the Termination Date, in each case under any
and all medical or health, life insurance, disability income, tax assistance, or
executive automobile benefit policies, plans, programs or arrangements in which
you are a participant at the applicable time.

           (h)   "QLogic Option" means each option to purchase shares of stock
of QLogic which is granted to you by QLogic prior to a Change in Control and
each option to purchase shares of stock of QLogic's successor (by purchase of
assets, merger, consolidation, reorganization or otherwise) which is granted to
you by such successor in connection with or after a Change in Control in
exchange or substitution for an option granted to you by QLogic prior to the
Change in Control.

            (i)   "Normal Retirement Date" means the date designated by the
Company for your normal retirement under any retirement policy or plan which is
applied to the Company's executive officers in a non-discriminatory manner or,
if no such policy or plan has been established, the date when you attain age 65.

      6.    Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.

      7.    Notice. For all purposes of this Agreement, all communications
provided for herein shall be in writing and shall be deemed to have been duly
given when delivered or five business days after having been mailed by United
States registered or certified mail, return receipt requested, postage prepaid,
addressed to the Company (to the attention of the Secretary of the Company) at
its principal executive office and to you at your principal residence, or to
such other address as either party may have furnished to the other in writing
and in accordance herewith, except that any notice of change of address shall be
effective only upon receipt.

      8.    Successors. This Agreement shall inure to the benefit of and be
binding upon the Company and their successors. In the event of a Change in
Control, any parent company, which directly or indirectly controls a majority of
the outstanding Voting Stock of the Company, or a successor to the Company (by
way of merger, consolidation, reorganization, sale of assets or otherwise)
shall, in the case of a successor, by an agreement in form and substance
reasonably satisfactory to you, expressly assume and agree to perform this
Agreement and, in the case of a parent company, by an agreement in form and
substance reasonably satisfactory to you, guarantee and agree to cause the
performance of this Agreement, in each case, in the same manner and to the same
extent as the Company would be required to perform if no Change in Control had
taken place.

      9.    Severability; Entire Agreement; Amendments. This Agreement sets
forth the entire understanding among us as to the subject matter hereof. There
are no terms, conditions, representations, warranties or covenants other than
those contained herein. No term or provision of this Agreement may be amended,
waived, released, discharged or modified in any respect except in writing,
signed by the appropriate party(s). No waiver of any breach or default shall
constitute a waiver of any other breach or default whether of the same or any
other covenant or condition. A delay or failure to assert rights or a breach of
this Agreement shall not be deemed to be a waiver of such rights either with
respect to that

                                       7
<PAGE>

breach or any subsequent breach. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.

      10. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws of such
state.

      11. Counterparts. This agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same agreement.

      12. Board Approval. The Company hereby represents that the execution,
delivery, and performance of this Agreement has been duly authorized by its
board of directors.

      13. Dispute Resolution. Any dispute between you and the Company arising
from or relating to this Agreement shall be resolved by arbitration in
accordance with the rules of the American Arbitration Association in Costa Mesa,
California. The prevailing party in any such arbitration shall be entitled to
recover his or its costs and reasonable attorneys fees.

      14. Late Payment Interest. Any payment which is not made to you when due
under this Agreement shall bear interest at the rate of 10% per annum from the
due date to the payment date.

                                            Very truly yours,

                                            QLOGIC CORPORATION,
                                            a Delaware Corporation

                                            /s/ Thomas R. Anderson
                                            -----------------------------------
                                            By: Thomas R. Anderson
                                                Vice President, and
                                                Chief Financial Officer

AGREED:

/s/ Harshad K. Desai     8/2/95
-------------------------------
Harshad K. Desai

                                        8

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